Q3 2019 Earnings Call
Greetings welcome to the Union Pacific third quarter earnings Conference call.
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Brief question answer session will follow the formal presentation.
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A reminder, this conference is being recorded the slides for today's presentation are available on Union Pacific's web site.
It's now my pleasure to introduce your host Mr. Lance Fritz Chairman, President and CEO for Union Pacific Mr. Fritz you may begin.
Robin Good morning, everybody and welcome to Union Pacific's third quarter earnings Conference call.
With me today in Omaha arc, any rocker executive Vice President of marketing and sales Jim's at all Chief operating Officer, and Rob Knight, Our Chief Financial Officer, I've also asked Jennifer Haim and our newly appointed Chief Financial Officer effective January Onest to join us for the Q and a portion of the call.
Before I get started today I want to take a moment and think Rob for his service and contributions to Union Pacific over his 40 year career, particularly the last 16 years as CFO .
It's been a critical member of our senior team and was instrumental in driving Union Pacific's financial success, we wish him all the best in this upcoming well deserved retirement and thank you very much Rob.
And also would like to welcome Jennifer to the CFO role, she and Robert doing a great job working through the transition and I'm confident that Jennifer is the right choice to lead our financial initiatives into the future.
This morning Union Pacific is reporting 2019 third quarter net income of $1.6 billion or $2.22. A share. This represents a 3% increase in earnings per share in a 2% decrease in net income compared to 2018, our quarterly operating ratio came in at a 59 dot five.
Percent at 2.2 percentage point improvement compared to the third quarter of 2018. Once again. This represents an all time record quarterly operating ratio, beating our previous low established last quarter, that's quite an achievement. When you consider the fall off in volume during the quarter.
We're continuing to drive productivity through our GP, five and zero and unified plant 2020 efforts, which are also producing a safe reliable and consistent service product for our customers. The work our employees are doing as part of unified plant 2020 is foundational to the company success and there were additional improve.
When opportunities going forward for both our customers and our shareholders with that I'll turn it over to Kenny to provide more details on our results.
Thank you land and good morning.
Third quarter, our volume was down 8% of gains in our industrial business group were more than offset by declines in AG products premium and energy.
At the same time, we generate a positive that core pricing up 2.5% in the quarter as we continue to price our service product to the value of represent in the marketplace, while ensuring it generates an appropriate return.
Great revenue was down 7% driven by the decrease in volume, partially offset by a 1% improvement and average revenue per car.
Let's take a closer look at the performance of each business group.
Starting off with AG product revenue for the quarter was down 1% on a 2% decrease in volume and a 2% improvement in average revenue per car.
Rank carloads were down 3%, primarily driven by continued reduction in export grain shipments.
Partially offsetting the grain declines with strength in wheat.
Looking for Green product was flat at sustained demand for Biofuels and supporting product was offset by reduced exports.
We're realizing that's all for color carloads were down 5%, primarily due to soft global demand for potash.
Moving on the energy revenue was down 20% as volumes declined 15%, coupled with a 5% decrease in average revenue per car related to negative mix with the law for long haul sand volumes.
San Carlos were down 45% largely due to the impact of local fan.
Coal and coal volume was down 17% due to the softer market conditions, resulting from lower natural gas prices and we export demand.
In addition contract changes I'm retirement also impact impact of volume in the quarter.
However, on a positive no favorable crude oil price right drove an increase in crude oil shipment, which was the primary driver for the 18% increase in petroleum LPG and renewable Carlo for the quarter.
Industrial revenue was down 1% on a 2% increase in volume and a 3% decrease in average revenue per car due to negative mix with increased shorter haul business.
Construction carloads increased 16%, primarily driven by strong market the man and the solid rock shipment.
Plastic volume increased 7% due to higher production.
Fourth product volume decreased 11% driven by softness in the lumber on paper market.
Turning to the premium revenue for the quarter was down 9% on a 11% decrease in volume while average revenue per car improved by 2%.
Domestic intermodal volume declined 11%, primarily driven by an abundant trucks supply coupled with softer demand during the quarter.
International Intermodal volume was down 12% during the quarter.
Let them weak market conditions related to trade uncertainty alkali entaire and challenging year over year comparison, driven by accelerated shipment seek into aboard terror in September 2018.
And finally finished vehicle shipments were down 4% for the quarter third quarter U.S. auto field were down approximately 2% from 2018.
On light vehicle and ask you being sales did not fully offset declining car demand.
Looking ahead for the breadth of 29 thing.
Brad product, we anticipate continued strength.
In advanced Biofuels shipment and associated feedstock due to an increase in demand, which will help offset challenges and the ethanol marketplace.
We also expect stronger beer shipments along with long term penetration growth across multiple segments of our food and refrigerated business.
Furthermore, with the recent outlook with China to take more AG products, we hope to see some really as those exports were though however, we will continue to keep a watch why on warranty earth within our AG market.
For energy.
We expect favorable crude oil price.
The drop positive result for petroleum products.
Local sand supply will continue to impact volume, although the comps should improve over the long term.
We also expect coal to experience continued challenges with barn throughout the balance of the year and weather conditions will always be a key factor for coal demand.
Looking at industrial we anticipate an increase in plastic shipment driven largely by plant expansions coming online later this year, coupled with continued strength in the construction of market in the south.
But we continue to watch how that aren't going to projected softness in the overall market.
And lastly for premium the light you have vehicles. They all four cap or 2019, a 16.8 million units down about 2% from 2018.
Although we remain encouraged by the tentative agreement between general Motors and their auto worker.
The all keeping a close watch on it and the associated volume impact.
Domestic intermodal volume that sequentially strengthening but when compared to 2018. It is expected to be impacted by truck competition in the fourth quarter.
In addition.
We expect international intermodal to return to normal seasonal flow, but faced tough year over year comparisons due to accelerated shipment speak into aboard tariff increases in 2018.
And now I'll turn it over to Jim.
Thank you Kenny well, we finally had a clean quarter from a weather perspective, and I think our results speak volumes or what is possible.
Our operating metrics continue to improve as it was all we are seeing a better service bought it for a customers. Furthermore, I couldnt be more proud of how the team has responded to the challenge of Rightsizing, our cost structure in the face a decline in volumes, while driving significant productivity.
For example crew starts were down 15% in the quarter and outpaced the 8% decline in carloads we experience.
Along with our unified planned 2020 actions drove an all time quarterly operating ratio of 59.5%, which truly was a remarkable achievement.
While we are continuing to drive productivity. These gains are overshadowed if we aren't simplicity asleep improving safety or isn't an experience has not improved but we are committed to getting better as always safety remains job one at Union Pacific.
Let the turned over to slide 11.
I'd now like to update you on our six key performance indicators, we continue to see substantial year over year improvement in our metrics in fact earlier this year I said, we would.
Blow by some of our goals and we're doing just that so a direct result of our relentless focus on improving network efficiency and service reliability as part of unified planned 2020.
Renewed improvement in asset utilization and fewer car classifications led to a 20% improvement in freight car terminal dwell in a 10% improvement in freight car velocity compared to the third quarter 2018, well trained speak for the third quarter as a whole decreased 1% the 23.7 miles per hour compared to 2018, we turned the corner.
September and saw year over year improvement and the trend has continued into October as I've mentioned in the past our train speeds continue to be affected by additional daily work events being performed as part of unified planned 2020, well. These work events are helping us increase train size and drive asset utilization, there's an opportunity execute these work events, even more efficiently and drive.
Faster train speeds.
Turning to slide 12, continuing or a trend from the second quarter locomotive productivity improved 18% versus last year as efforts. They use the fleet more efficiently enabled us to park units as of September Thirtyth, we had around 2600 locomotive stored driven by a 13% decrease in our workforce levels were.
The increased 4% year over year.
Addition to improving productivity delivering a great service product is of equal importance to the team car tripling compliance improved 10 points year over year, driven by increased freight car velocity and lower terminal dwell, while we're pleased with our progress we do expect their service product to improve going forward that we're already seeing sequential improvement in October .
Slide 13 highlights some of the recent network changes we have made as part of into pipeline 2020 by shifting classification work to surrounding terminals were able to reduce operations at our Rosebel hump yard, resulting in increased car velocity for associated manifests business. In addition, we reduced switching operations at our yard and that was as Andrea Louisiana The word.
To a more efficient terminal in Livonea. We also stopped pumping cars at NEP yard in Kansas City. As a result, we will now build overhead blocks that drive cars deeper into the network and leverage existing flat switching terminals in the Kansas City complex going forward, we will continue to look for ways to reduce car touches.
Which undoubtedly lead to additional terminal rationalization opportunities on our network.
Currently one of our main areas of focus is to utilize our existing network capacity and we're making excellent progress on this front as illustrated by the train length graph on the right by putting more product on fewer trains we have increased train length across our system over a thousand feet or 15% since January of this year.
We have specific initiatives up against the Sunset Central and North South corridor is on our network and they are paying big dividends earlier. This year, we discussed investing capital in a sunset corridor for siding extensions to support productivity initiatives through a collaborative team effort that work was completed in record time as a result, I'm pleased to.
The report to train length in the Sunset quarter as increased 18% since January 2019. Furthermore, operational changes in our north South corridor between Chicago in South, Texas have driven tightly linked up over 21% since the start of the year looking forward I expect to see continued improvement in train length through a combination of transportation plane.
Hi, changes and targeted capital investments to wrap up on slide 14, we've made a number of changes to our operations in the last year and results have been outstanding. However, there's still a lot of opportunities ahead of us to further improve safety asset utilization and network efficiency as we move forward look for us to continue pushing the envelope and.
Taking bold steps as we transform our operation running a safe reliable and efficient railroad for both our customers and our shareholders as non negotiable and our team is committed to making that happen and with that I'll turn it over the Rob for the last time.
Thanks, Jim and good morning.
They were reporting third quarter earnings per share of $2.22 in a 2.2 points of year over year improvement in our operating ratio to 59.5%.
This represents an all time best quarterly operating ratio for Union Pacific and the second consecutive quarter, where the sub 60% operating ratio.
Once again, a testament to the great work, we're doing which you 55 and zero in the unified planned 2020.
Our quarterly results were affected by some one timers, so before jumping into the details let me set the stage.
An increased frequency of rail equipment incidents resulted in approximately $25 million of added operating expenses in the quarter.
These excess costs were clean up destroyed equipment and damage freight resulted in a half a point negative impact or operating ratio in subtracted two cents EPS compared to third quarter of 2018.
The combined impact of lower fuel price in our fuel surcharge lag had a favorable impact for the quarter of 0.9 points on the operating ratio, adding four cents.
Compared to 2018, the good news is that despite lower volumes, we drove core margin improvement of almost two points compared to this third quarter of last year.
Now, let's recap where third quarter results.
Operating revenue was $5.5 billion in the quarter down 7% versus last year. The primary driver was 8% decrease in volume.
Operating expense totaled $3.3 billion down 10% from 2018.
Operating income totaled $2.2 billion, a 2% decrease compared to last year.
Below the line other income was $53 million up 10% from 2018, driven by lower benefit plan costs and increased rental income, partially offset by higher environmental costs.
Interest expense of $266 million was up 10% compared to the previous year. This reflects the impact of a higher total debt balance.
Income tax expense decreased 4% to $466 million or effective tax rate for the third quarter was 23.1% and for the full year, we expect our annual effective tax rate to be around 23.5%.
Net income totaled $1.6 billion down 2% versus last year, while the outstanding share balance decreased 5% as result of our continued share repurchases.
As I noted earlier these results combined to produce third quarter earnings per share of $2 in 22 cents and an operating ratio 59.5%.
Freight revenue of $5.1 billion was down 7% versus last year.
Fuel surcharge revenue totaled $393 million down $89 million compared to 2018.
This is mix had almost a one point negative impact on freight revenue in the third quarter driven by increased shorter haul rock business and decreased agricultural product volumes, along with reduced sand car loadings somewhat offset by fewer intermodal shipments.
Core price was 2.5% in the third quarter similar to the pricing that we achieved in the first half of 2019, although the reported yields are slightly lower this is not indicative of any quarterly pricing actions as you've heard me say many times before.
Her to get credit for price under our methodology, which we believe is right way to calculate price you have to move the volumes in the third quarter the fall off in volumes negatively impacted our price yield.
Having said that beginning with our fourth quarter results, we will no longer report detailed pricing numbers.
We are making this change solely for commercial reasons as Union Pacific is the only class one railroad to publicly report GTL pricing results, which we now believe disadvantages us in the marketplace.
This should not be read in any way as union Pacific, becoming less disciplined or less focused on pricing of course price will continue to play a key role in achieving our financial goals and our guidance is unchanged and rest assured we will continue to yield pricing dollars above our rail inflation.
And costs.
Slide 19 provides a summary of our core or operating expenses for the quarter.
Compensation and benefits expense decreased 10% to $1.1 billion versus 2018.
The decrease was primarily driven by a reduction in total force levels, which were down 13%. We're about 5700 50 ease in the third quarter versus last year productivity initiatives, along with lower volumes resulted in a 13% decrease.
GE and why workforce, while our management engineering and mechanical Workforces together declined 15%.
Fuel expense totaled $504 million down, 24% compared to 2018 due to lower diesel fuel prices and fewer gallons consumed.
Average diesel fuel prices decreased 12% versus last year to $2, a nine cents per gallon in our consumption rate improved 3% through more efficient operations.
The services and materials expense was down 9% compared to the third quarter of 2018 at $574 million. The primary drivers of the decrease in the quarter were reduced mechanical repair costs and less contract services and materials, partially offset by reduced foreign car repairs for news.
Slide 20.
Depreciation expense was $557 million up 2% compared to 2018 for the full year 2019, we still expect depreciation expense will be up 1% to 2%.
Two equipment and other rents this expense totaled $236 million in the quarter, which is down 13% when compared to 2018.
Decrease was primarily driven by lower equipment lease expense and less volume related costs.
Other expense was down 3% compared to the third quarter of 2018 at $277 million driven by lower environmental expenses.
Additionally, offset by an increase in costs associated with damage freight and destroyed equipment.
The full year 2019, we expect other expense to be up low single digits compared to 2018.
Productivity savings you look from our GBP five in zero initiatives and unified plan 2020 totaled approximately $170 million in the quarter, which was partially offset by an additional costs that I mentioned in my opening remarks as a result net productivity for the third quarter was $145 million with year to date net productivity.
Now setting at $375 million. This is remarkable outcome. When you think about the challenges that we have overcome such as unprecedented flooding and a weak volume environment. In fact, we continue to gain traction with our productivity initiatives and are confident that we will still deliver at least $500 million of now.
Net productivity in 2019.
Looking at our cash flow cash from operations for the first three quarters totaled $6.3 billion down slightly compared to last year.
Free cash flow before dividends totaled $3.8 billion, resulting in free cash flow conversion rate equal to 83% of net income for the first three quarters of 2019.
Taking a look at adjusted debt levels. The all in adjusted debt balance totaled $28 billion at the end of the third quarter up $2.9 billion since year end 2018.
We finished the third quarter within adjusted debt to EBITDA ratio of 2.6 times as we previously guided our target for debt to EBITDA is up to 2.7 times.
Dividend payments for the first three quarters total more than $1.9 billion up $209 million from 2018. This includes the effect of 10% dividend increases in both the first quarter and third quarter of this year.
During the third quarter, we repurchased 6.4 million shares at a cost of $1.1 billion.
We also received 3.2 million shares in the third quarter associated with the close out of the 2.5 billion dollar accelerated share repurchase program that we initiated in February .
The between dividend payments and share repurchases, we returned $7.1 billion to our shareholders in the first three quarters of this year.
Looking out to the remainder of 2019 with the current softness in rail volumes and the underlying economic uncertainty in the marketplace, we expect fourth quarter volumes to decline year over year at a similar level to what we experienced in the third quarter.
Clearly, we would love to have additional volume with the more consistent and reliable service products, we are poised to grow our business.
Going forward, we will continue to price or service to the value that it represents in the marketplace, while ensuring that it generates an appropriate return we remain confident that the dollars we yield from our pricing initiatives will again, well exceed our rail inflation costs in 2019.
With respect to capital investments, we now expect full year 2019 spending to be around $3.1 billion were about $100 million less than our previously announced 3.2 billion dollar plan. Although we are continuing to invest in projects that support the unified plan 2020 productivity initiatives Weve.
Scaled back some of our growth capital spend in light of current business volumes.
As it relates to our workforce.
Wrong productivity initiatives into a lesser degree lower volumes have resulted in a 9% year to date reduction.
For the balance of the year, we expect continued combination of operating efficiency gains and lower business levels should result in fourth quarter force levels to be down at least 15% versus 2018 as a result full year force levels should be down slightly more than 10%, which positions us nice.
Going into 2020 importantly, with improving margins in the second half of the year, our guidance of a sub 61% operating ratio in 2019 on a full year basis remains intact. Despite the fall off in volumes.
Furthermore, an early look at next year's productivity lineup gives us confidence with our ability to achieve an operating ratio below 60% for 2020 .
As you have heard me say many times before we have to play the hand that we are dealt when it comes to volumes, but let me assure.
Our commitment to achieving our financial targets.
Unwavering and we are moving aggressively to improve regardless of the economic environment.
Before I turn it back to Lance if you're going to Doles me for just one minute.
As we've said this is my final earnings call and I want to think all the men and women of Union Pacific for the dramatic improvements in safety service and financial results over the best 16 years.
I'm very proud that we have improved our operating ratio 28 points, increasing our market cap by over $100 billion over that time and I am confident that the team will continue to drive great results as we drive to 55 operating ratio.
I have never felt better about the path that we are all and operationally and I also know that Jennifer will be an outstanding CFO .
Finally, I would like to thank everyone listening today for all the professionalism and support that you have given me and Union Pacific and I wish you all the best with that I'll turn it back to Lance.
Thank you Rob.
As discussed today lead delivered solid third quarter financial results and we've made tremendous strides to improve our productivity and service product as part of unified plan 2020.
For the remainder of 2019, we look forward to building on our successes and we provide a highly consistent and reliable service product for our customers. Although there are some unknowns looking ahead at the economy confidence in our operational capabilities as Rob just mentioned has never been greater as always we're committed to operating a safe.
Railroad for our employees and the communities, we serve and we have some work to do there we remain squarely focused on driving long term shareholder value by appropriately investing in the railroad and returning excess cash to our shareholders through dividends and share repurchases.
With that let's open up the line for your questions.
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Due to the number of analysts joining us on the call today will be limiting everyone to one primary question and one follow up question to accommodate has many participants as possible.
Thank you and our first question comes from Justin Long with Stephens. Please proceed with your question.
Thanks, Good morning, and I'll start with that congrats.
And Jennifer on the announcement.
Maybe to start on headcount if we just look at the guidance for the fourth quarter and take the exit rate this year and hold that steady.
Seems to imply another 6% redemption or so in the head count in 2020, if you just holding flat sequentially throughout next year I know it somewhat volume dependent but should we be thinking about a 6% reduction in the head count at a minimum for next year and can you just speak to the opportune.
Beyond that level as you continue to implement PSR.
Justin This is Rob.
We haven't finalized our 2020 plan and so volume will obviously have a role and what the headcount actually ends up being but.
Confident that and we're hopeful that volume as a positive and we will grow that very efficiently from a productivity standpoint, having said that you're right. We're exiting at a very efficient level, we're gaining momentum with the precision rail unified plan 2020 initiatives that Jim talked about so directionally I think you're thinking about it right I mean, we're not guiding to that number but that directionally is.
Exactly what we're thinking.
Okay, and then maybe second lien more of a near term question.
Last couple of years, we've seen the O R stay fairly flat sequentially third quarter to fourth quarter should we be thinking about the o. are staying flattish sequentially. In Fourq you have this year as well or is there something that caused the divergence from that trend we've seen the past couple of years.
We're not giving quarterly guidance on that but I think directionally also there you're thinking about it right and I gave you sort of early look at what we expect to see on the volume front, which that would be similar decline in the fourth quarter that we saw in the third quarter. So there is nothing nothing unusual outside of that we're obviously going to continue to implement the unified planned 2020 initiatives do is as good as.
We can but youre thinking about it directionally right.
Okay, Great. That's helpful. Thanks for the time.
Thank you Justin.
Next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, good morning, and congrats to Robin Jonathan crops, Great work all of you wish you all the best in your retirement.
I guess I wanted to come back to the head count dynamic.
Certainly and 15% reduction in the fourth quarter is dramatic in a big big number I.
I guess, when you think about sort of when you're setting a target for 10% decline earlier this year relative to what we've seen from a volume perspective, you can make an argument that obviously volume has disappointed I guess, so how do you feel.
I'll turn the balance between your resources and what we're seeing from a volume perspective is there opportunity coming out. This question I guess slightly similarly to just kind of a little bit different.
Can you kind of getting a little bit more aggressive on the head count as we kind of go through this for Q1, Q hopefully bottoming in volume.
Yes, Chris this is lance without putting a really fine point on it.
The short answer is.
Largely us right, we we have been a.
A little disappointed in the topline versus what we were hoping to see when we came into the year.
As a result, we've adjusted head count.
More aggressively to match that drop and volume you see that happening in the third quarter as we had head count lower than volume.
And I expect we'll continue that.
Jim you want to add a little Technicolor in terms of some of the opportunity do you see in the operations. So I think the numbers speak for themselves Lance I think the team did a great job of taken into account, where the volume ended up this quarter and what we were able to react and we're going to do the same thing we're going to react.
On any volume hopefully the volume goes up but at the end of that will react and the right away and we see a sequential drop and the number of people that we have as we move forward against the flatline business model.
Okay. Okay.
Thats helpful. I appreciate that.
Can you talk a little bit about the topline in yields specifically I guess from.
From yield standpoint.
Sequential deterioration here can you talk a little bit about sort of the competitive pricing environment that you're dealing with in your market and then maybe some of the mix dynamics that are kind of working their way through if there's any predictability to the net mix as we look out the fourq Youre, maybe one could you sort of highlight that.
Those kind of dynamics around yields would be very helpful. Before I turn it over to a Kenny I just want to remind everybody. Rob said this that we calculate yield in the most conservative way and so when you get a 10% or an 8% drop and volume in the quarter.
It has a real significant impact on our ability to generate yield and and Rob again had said very specifically that there was nothing specific in the quarter that drove yield sequentially.
Decline, just a little bit, but with that can you want to talk about the pricing environment that you're in right now.
So first of all just want to give a shout out to Jim listen the operating team for creating an environment, where we can price.
So a really strong service product out there so our commercial payments on a really good job.
Keep in pricing discipline and a line in our price.
With that service offerings.
Improving havent thought all those things areas of very competitive trucking environment. That's out there I think all of you all are aware of what's taken place on the marketplace and we complete compete daily with a number of rail carriers in North America, but I think the important thing for you to here is that.
We're going to maintain pricing discipline, especially as our service product is improving and as that service product improve we also expect that to help us growth.
Lets touch on mix, Yeah, Chris as you know, we don't give guidance on mix and the reason for that is we have such a diverse product mix that we have mix within mix you've heard me say that many times, having said that the challenges and perhaps to some of the surprise in the third quarter mix was I think largely explained by.
The increase in the shorter haul rock shipments that we that we called out I mean intermodal I think everybody gets that most of the other moves like AG. It really kind of gets that the shorter haul rock shipments that that increased I think were made perhaps a little bit surprised to to some on the mix, having said that I see no reason why the fourth quarter wouldn't you would be materially different from.
We saw in the third quarter again, I'm, a stay away from specific mix guidance, but directionally I would envision it looking similar.
Okay. Okay. That's helpful. I appreciate it thanks very much.
The next question comes from the line as Tom Wadewitz. Yes. Please proceed with your question.
Yes, good morning, and Rob Yes also congratulations we see the best pleasure working with you over the years and congratulations to you as well Jennifer.
The let's see the volume trend I mean, obviously, there's a lot of moving parts and the weakness in volume, but I think it's notable that theres, a pretty big Delta in volume performance for.
Yeah Pacific versus Burlington Northern.
And just wanted to see if you could shed some light on what might be driving that in particular.
Referring to the intermodal where it looks like kind of four week moving average are down about 13% begins down about two and there's a pretty wide gap in the call side as well. So just wondering if you could offer some thoughts on what's driving that and whether you think that might change over the next couple of quarters Denny Yeah. I'll tell you that we would have appreciated.
Our economy to help people.
People more opportunity, but the fact that.
The service product on the intermodal side.
Actually strengthen anything is something that we appreciate and yes, we've seen a lot of.
Competition out there from both the trucking side and as always we compete with the Western rail carriers in the North American rail carriers. So that has Ah that's going to be around four and we'll continue to paint compete there one thing that I would add time is.
We are very happy with our service product.
And the trend that it's on so it's currently a very good service product and it's showing itself to be reliable and consistent and I think it's going to continue to improve so from that basis. We're in a great place to compete for business, having said that we're also continuing to be.
Very very disciplined on our price. So we're not trying to chase market share, we're not trying to chase a market down against loose truck and so we'll just compete based on the service that we provide will price for that and as the economy strengthens which it will at some point.
And as truck capacity tightens up which will at some point, we're in a great place to take advantage of that.
Okay, just I guess follow up on that a little bit further our our their contracts shifts and the.
Intermodal and coal side that might account for part of that and I guess in terms of the PSR impact sometimes you make big changes to as an example in Chicago the terminals, you're using and you can cause some initial disruption to the customer, but then obviously you you hope to run better in the future, but is there an impact from contracts are kind of and if so just.
Option from PSR.
Yes, Chris I'll I'll take that a mix of questions. The short answer is.
In terms of design of our network in the intermodal space. There has been you know small single digit impact on intermodal volume from rationalizing a low volume lanes low density lanes that made sense in the book of business. It still makes sense and when you aggregate that back up to the entire railroad.
It's really largely an asterisk.
When you when you get into the other parts of your question about contracts, we don't talk specifically about customers, but I, but but we did call out both in the first quarter and I think Kenny mentioned that again this quarter that.
We did have a coal contract change hands, that's impacting this year to a degree.
And we haven't talked about any other contracts besides.
Okay, great. Thanks for the time.
The next questions from Atlanta, Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks morning, guys. So wanted to ask a couple on the on the cost side come for employee a little higher than we thought any any thoughts on how to model that going forward and rail inflation next year, and then purchased services were flat sequentially, given the weak volumes and PSR.
Would've thought there'd be some opportunity there may be can you talk about the opportunity that's left on purchase services costs.
Yes got this Rob let me, let me take the cost per employee.
The inflate the Delta if you will as to why it was up above what we would expect in terms of the inflation was really some of the overtime, which.
A lot of changes more on operations with the overtime is something that.
Inflate that cost per employee up a little bit as we look to 2020.
And again, we haven't finalized or planning assumptions, you out, but I would say, it's probably overall inflation for 2020 is going to be in the neighborhood of 2% with labor probably in the two and a half ish range again.
And on the.
Purchase services.
I guess I wouldn't call out anything unique there obviously as we pursue the.
Unify plants when 20 initiatives will be opportunities, we think for us to continue to.
Rationalizing bees officials, we can on that line as well.
Okay and then.
We've got the sub 60, our guidance for next year.
Rob Rob there, Jennifer or maybe Jim if you want to comment in the streets already well ahead of that given the macro does that seem reasonable or and then maybe asking it a little bit differently. So when we've looked at past instances of rail is doing PSR, you've seen better margin improvement in the second year than the first year does that.
Seem like a reasonable way to think about it or not.
Now let me, let me start Scott and then I'll hand, it over to Robyn and Jim. So the bottom line for next year is where we've got guidance out there sub 60, but we've constantly said we're going to be as sub sub 60, as we possibly can be as we enter next year, we've got good momentum.
Right, if we can get a little cooperation from the economy that would be very helpful.
We've had some puts and takes this year, we discuss those through the quarter. So we know we know what those are.
But we're going to we're going to get as sub of 60 as we possibly can.
And with that I'll turn it over to Robin Jim to filling yes got I would just add to that that we as you know every step on the ladder of efficiency that we had over the years, we've always tried to get through safely and efficiently as quickly as we can and frankly, we have so obviously that's similar to the numbers that we have out there I feel as I said in my comments I feel.
As good as I have ever failed in my career about where we are operationally. So the things that I feel like we can control to get to that sub 60, I feel extremely good about so the variable right now as I look to 2020 is really the economy and as we sit right here today, we're certainly hopeful and thinking that the.
Volume will be on the maybe a slightly on the positive side the ledger, but that's still an unknown at this point. So I think thats really the big variable as to how sub sub can be on that sub 60 guidance for next year.
The only thing I can add I think the Atlanta, and rather than a great job of given the macro view of it operationally we're just starting.
I think theres lots to do I think I've been here for nine months couple of days ago I.
I think with the team has been able to deliver and you see it in the metrics that are real key I think I.
I don't think I know next year is going to be a great year operationally will take whatever business hopefully, it's an increase in business Kenny substantial increase and will show what this team can do and if not we react to it properly I see lots the headway.
And I'm excited what I see coming forward for the end of this year next year.
Jim can I just clarify one thing with you. So you used in the beginning of the are you laid out a 10% labor productivity target, we're getting a lot of head count out, but because volumes are down so much like we are getting maybe half of that on the labor productivity. So does that imply that theres a big opportunity left next year, we thinking about that right.
I think we're headed in the in the right direction, where it comes and you're thinking right. We are the more we can put.
Yes train starts put more product on the trains, making more efficient adjust our yards just like we did in Kansas City, We drive productivity better we'll see that improve as we move ahead, Scott So nothing wrong with the Liam Nathan.
Okay. Thank you guys.
Our next question comes from the line of Ravi Shankar with Morgan Stanley . Please proceed with your question.
Thanks for everyone.
Rob Good luck environment and congratulations Shen from me as well.
So it was pretty and then you guys said that.
No no announced.
Core price setting that now makes every class one rail that doesn't discussed price.
That's a pretty dramatic change from five or six years ago, where that was going to key do the rail kind of bull case and the investment thesis.
Why do you think that's changed I mean does that because.
It's just gotten more competitive we get price is it because if a a government regulatory environment.
Why have you seen that shift do you think.
I can't speak for other railroads I can speak for us and that is bye.
Publishing a yield number every quarter.
We we work against ourselves commercially I mean in the simplest way.
When Kenny is talking to a customer and trying to maximize that price discussion.
Our conservative yield calculation frequently works against us in that conversation, it's as simple as that for us but Rob.
Robbie I would just bad Atlanta nailed it but I would add.
As I said in my comments, you're right. It is a shift.
But I think as like exit the company I also have never felt better about the understanding and value of.
Of understanding the impact that pricing has on our financials and you combine that with the continually improving service product. There's no doubt in my mind that Kenny and the marketing team, we understand that it's our objective to drive as positive a price and earn the adequate returns that we can't in the marketplace. So right.
Sure I guess the point is rest assured that because we think commercially it's not to our advantage me talking as precisely as we have about price don't interpret that to mean that were not aggressively going after pricing opportunities, which we think are still there and we're going aggressively pursue that.
Got it just a follow up a lot something you said earlier that you guys vacate not chasing share and you know going off from William over price.
Just given some of the the volume Delta this quarter in between you and you achieve reasons competitor.
You feel like there are some of that going on in the marketplace.
Our marketplace as we relate to you every quarter it remains very competitive and it remains competitive specifically in the intermodal space not just against rail competition, but specifically against truck competition trucks are pretty darn loose right now, which means a capacity is readily available and.
Widely reported that truck pricing has been dropping so we're looking forward to seeing a bottom of that and then an upturn and I anticipate that that will occur I don't know win but you see truck orders substantially down you see production starting to turn negative and that all bodes well for for competition.
As we look forward.
The best way to combat that is an improved service product and that's where we're getting right now.
Thank you. Thank you.
Our next question comes from the line of Brian Ossenbeck with JP Morgan. Please proceed with your questions.
Hey, good morning, Thanks for taking question.
Congrats Rob.
And Jennifer.
Just going back to the volume side for a minute we have easier comps here in 2020.
What do you feel okay about the absolute activity levels and maybe some of the key areas to talk about you just mentioned truck habit seem a little given the length of haul I'm a little surprised at that.
Such factors as you can help.
Expand on that and then why we've talked about.
And for a long time.
Continues to go down just wanted to see when you mentioned that long term comps get easier is there still big shifts in local sand is coming up.
Your next headwinds as well.
So first of all the little premature for us.
Talk about the plan for the following year, but yes, I would expect though.
We will be on a slightly positive side of the leisure.
As we look towards the future and the fact that we've got a good service product really help US now when you look at the Sam business.
Yeah that local fan penetration has been with US now or get 18 month I will tell you that I winning back that those comparisons to a low over time, so maybe not the immediate near term, but over the longer term. It's certainly should those comparisons should get easier for.
And then follow up on the trucking.
I feel like you didn't get.
As much benefit.
Hi, so little surprised to hear that overhang here.
In the markets.
Yes, we're keeping.
And I on the trucking market.
Over the last couple of months and even over the last couple of weeks.
In it from up a little bit where off a little keeping an eye on what will happen in terms of.
Peak season out there because there isn't going to play.
Between our domestic business in the international business.
Right now we really appreciate more help from the overall economy.
Got it and then just one quick one for for Lance.
Can you just give us your view.
<unk> view on.
Regulatory.
Firemen.
In DC UNESCO feels like it's a little more active.
Activist from that perspective, but we've certainly seen lot of movement in a few different areas.
We have that labor negotiations, starting at which I appreciate you probably can't say too much on that.
But just one since there's a lot coming between now and the end of year, there's going to kick off here I just wanted to get your thoughts on those topics merger.
Sure. So so let's take them in two pieces I'll start with the regulatory environment. So the STB is poised to be fully staffed with five board members.
In the not too distant future and they've already started getting more active on a on a host of items that they're pursuing either old items on the docket that just weren't handled over the course of the last five years and in some cases new items. Our posture is where we're continually engaged with the STB to help.
Them understand or what are some of the negative impacts could be of some of the regulations that are being considered.
Also help them understand that.
Each regulation can really be taken on its own it forms of mosaic of regulatory impact and the endgame for the railroads for the STB is to make sure that the railroads are healthy and can continue to invest capital.
In the railroads, so that we have a robust infrastructure to support the United States.
So we constantly are having dialogue and communication about current state of the railroad how good the service product is what we're working on and what the risks are of some of the regulatory regulations that are being considered.
In terms of our.
Negotiation with labor.
You did see that there was a lawsuit filed.
Against the smart TV that was to compel that specific union to negotiate a on a crew consist.
Or at least consider that through arbitration.
As a negotiating item.
That it was it's a technical matter and I, you know I look forward to that being addressed through the courts.
The end of the current moratorium is November one so sometime around that time frame.
Onions are free to put demands on on the railroad management teams and railroad management's free to put demands for negotiating on unions I anticipate that is going to happen I anticipate is going to be a robust negotiating.
Season, and I look forward to that and I look forward to being able to work with our unions to continue to position Union Pacific.
As a competitive.
A strong supporter of the U.S. economy.
Okay. Thank you and I appreciate that yep.
Next question is from the line this Amit Malhotra with Deutsche Bank. Please proceed with your questions.
Thanks, Good morning, I just wanted to ask.
Firstly about the profit a potential as you know volumes and revenue get better you know some of the huge progress you've made the on the cost side is obviously being masked a little bit by the revenue environment. So just in that context, when we do get back to revenue growth hopefully as soon as possible probably next year.
And all of that incremental revenue dropped to the bottom line just help us think about the costs in the business, whether structural or variable and how those which of those would have to increase once revenue growth kind of moves from negative to positive.
But this Rob I think you're spot on I mean, we'd love nothing more than to see the volume of B as positive as possible and there are obviously are some direct volume variable costs that would come on board with that but at a very productive level, but I think you hit the nail the head and that is we are well positioned now as.
Volume does return for the incremental more margins to be impressive because theres no. I mean, we won't have the add back the costs that we've been able to.
Right size and achieved through the unified planned 2020, so the efficiencies and the incremental margins.
To your point from the incremental volume that comes on board should be extremely efficient.
That's a that's where that work that the operating team has been doing on train size really pays off and when we talk about train size opportunity into the future volume growth is just going to be our friend.
Right and that's a good segue into my next question or follow up question.
On the operating stats you know the train length progress has been really impressive if it gets like 8000 feet or maybe a little bit more now.
What I didn't know if its Christian freelancer, Jim, but what's the upper limit there I mean can you get to 10000, how quickly can you increase that and have you made enough and I know you made a bunch of investments.
Allocated some capital towards extending sightings earlier. This year is that all done where now you can continue to grow that just just talk about how quickly you can continue to grow that because the progress there's obviously been impressive.
Well, thanks for the feedback commit and listen the teams done a great job you don't change from a 7000 foot railroad to 8000 foot railroad in nine months without touching a lot of places we have a great network. So that's what's nice about a business comes which it's going to town, we drive more but to the bottom line because of costs are not going to go up.
One the one in fact the.
The very interested to see what happens when the business goes up next year. Second is is we will invest we found some places in this network that we need to invest and we'll invest to make sure same as we've done on the sunset the increase a train size and be more fluid and have less cleans running with the more product on it.
Upper limit I don't get.
It's a traffic mix dependent on what kind of traffic you have lifts and traffic that the is very tough the build trains with just because of origin destination and others. We have the possibility to be able to increase them. So I continue to see improvement I know what the other railroads that the capability of doing one that I worked out so I think we'll blow by.
That number that they've had to.
The without an issue next year as we build this infrastructure even better.
There is one last thing to note here and it's it's lost on a lot of people. It's a benefit of the train design that we've gotten unified planned 2020 and that is much more of our.
Our volume is running in mixed manifest traffic now you know Kenny talks about it from the perspective of that's enabling us to win business that we used to pass on because it wasn't conducive to a unique boutique train will in the old days of 40 or 45% of our network was in a manifest world that.
Numbers looking more like two thirds in three quarters, which means.
I am can grow in across different segments, and we can leverage in the train size, whereas that opportunity to do that historically was probably a little more limited.
That's a big benefit of the unified plan 2020.
That's helpful.
Okay. That's it from me Rob Congrats I Hope you don't Miss these calls and our questions too much. Thanks, so much [laughter] actually I will miss it.
Our next question is from line of Jordan, Algeria with Goldman Sachs. Please proceed with your correct.
Yes, Hi morning.
A question for you I know the networks in good shape from the incremental margin next year volume snap back.
Yep.
A question, though on the head count front can you gear up quickly or would you need to gear up quickly given how much reduction you've had.
So they can ensure the operations from that perspective will run smoothly.
Yeah, I'm going at the highest level say, yes, we've changed the number of things that make our ability to be more agile on both the upside and downside, but on the upside our time to hire and train and bring out accrue conductor.
Has been cut dramatically, we're actually looking forward in the next time, we have to add conductors to to exercise that new muscle.
Jim there some other things we've been doing what what are your thoughts.
Lance I think you hit it right all right on the they'll but bottom line is as I don't think we have the increase we have an increase in business. We are not going to increase on a same percentages will go up we're going to become more efficient it helps us become even more efficient I think we've shown what we can do this quarter. When you have this kind of adjustment in volume and for us that dropped 50.
700, fts in the third quarter shows that we've got the capability to make the right adjustments when the business level is and a lot of that cut was.
Because of the efficiencies and we've built into the system. So I'm looking forward to what happens.
Next few months and into next year and I'm very excited about it I think the numbers will dictate a great result for this company moving forward.
Thanks, and then just a quick follow up on intermodal, we keep hearing that service is much better from various folks out there on on the rails you guys as well Intermodally. So when you talk to your customers I mean as it truly a price spread between.
What you offer versus trucks.
That's going to get the needle move back to positive volumes and and if so what sort of.
Take a length of haul what sort of spread versus trucks percentage wise, let's say.
Gives us a shipper to move the volume to rail, especially given the servicing and one of the discounts narrowed to now if you have any input on that thanks.
Yes, you're right on that service has improved and our customers are realizing that and that'll take awhile I mean, we're talking about a few months now where our services related turned the corner from a weather event.
<unk> rates of now more their life and.
20% from the highs where they were over 25% last year.
In terms of ban.
The press.
In terms of where we need the ban that delta, we've always said that we'd like to be.
From the contract that race anywhere from 10% to 15% lower than the contract that rate.
And so we'll continue to see what happens in the marketplace going forward.
Jordan This is lance to two points one the truck capacity overcapacity of trucks supply.
Really needs to get adjusted for for.
Those spot rates and contract rates to start going back up and then the second thing to note is.
Our our service product consistent reliable over a period of time, we'll start convincing customers who have historically split their book of business, but would have benefited by putting more on rail to put more on rail. So so over time.
Ill theoretically I think we should see more opportunity.
As opposed to less even in status quo, even in the status quo environment I think the important thing is that we're already seeing wins. The commercial team is already putting together from wins out there that are specific to you pay 2020.
And so we expect station is that that will continue as we move for in the next year.
Great. Thank you.
The next questions from the line of can extra with Bank of America Merrill Lynch. Please proceed with your question.
Greg Good morning, and Rob obviously, congrats and really enjoyed working with you throughout the years and to Gen. On your new new role of finding a way to talk to analysts again.
Just a great call so far on the big picture, but maybe Kenny if I could just drill down maybe little near term here looks like we started off the quarter, even worse than the run rate that you're highlighting that the fourth quarter should look like third quarter, particularly at energy and premium which are down 18%, 13% with the.
Quarter, now down 11%, so a bit worse than third quarter is there anything you'd put that on flood snow anything you look to turnaround on easier comps as we move forward.
Yeah, you know if you if you.
Look at it clearly we have some tough comp.
I think we all remember some of the pull ahead that we were phase.
On the intermodal odd, especially when our international intermodal and clearly natural gases in a different place than it was around the same time last year. So structurally those are two fundamental.
Issues that are there.
Well continue to off though keep an eye on what's going on in our.
And automotive industry.
Our Detroit team is working with GM and although we did see a.
Significant impact in the third quarter, we're gonna be.
Working with them and all the auto player, let's see the impact that has happened early on in the fourth quarter.
Okay, but but the just I guess I understand that the pull ahead would would make it even tougher comps.
So you're saying that was maybe an earlier quarter events. So it gets easier as the quarter rolls out.
No what I'm, saying is that.
Though both comps are impacting what you're thinking in terms of that they also that were down.
Okay Warner.
Just started.
Yeah, Hi, and then Jim.
Great slide on kind of they then newer movies and kind of continued rationalization or are there maybe your thoughts on additional yards or or is it incremental from this point forward as you've cleaned out the humps just trying to see if there any more step function improvement that you see as you move into into 2020.
I think a if you look at what we're trying to do.
It's a great question, because I look at it holistically for the whole company not just looking at numbers of what we're doing all we are trying to do is moved cars as fast as possible removed the touch points and give us better service product and that's what we're doing and this is a winning games. So we drop our operation we've become the most efficient railroad in North America.
We are able to then compete against everybody. So what I see out there is we just started we are truly baseball season spare time of the year.
Maybe not a theory Yankee fan right now, but a little tough, but at the end of that I think that we're early innings and we still have a lot. The do productivity wise in this company and stay tuned and we'll move ahead and I'll announce them as we are ready to do.
Alright, great I think the Yankees would say it's still early so thanks a lot.
[laughter] I was waiting for that I was waiting for that come back.
I appreciate the time guys. Thank you.
Our next question is from Atlanta, Allison Landry with Credit Suisse. Please proceed with your question.
Thanks, Good morning, and congrats you I'm to Robyn Jennifer maybe Jim just following up on your recent comments about productivity.
Could you maybe give us your initial thoughts on what this could look like in 2020 given that.
The improvement in the key metrics have have really accelerated on here recently and maybe without asking you to put a specific number on it is there a reason to think at least directionally directionally that it should be bigger than that 500 million.
Plus this year.
I'm not going to put a number on next year, let's let's wait to see what the what we where we end up with and where we want to put the placemark for next year, but operationally and what I see in this company and what I've seen from my history is that we will continue to improve our efficiency will be able to.
Draw more business on because we went in the marketplace with a better product we look at it and then well I'm going to try to make candies job easier you know moving forward. So I think it's a win win for US moving ahead and that's about as close as I'll get that given any numbers, okay fair enough and as you go through the.
The network rationalization process have you seen any meaningful opportunities for for a line sales.
Stay tuned I will just work through it as the business mix and what we look at but I think we've already got a pretty good plan of what we look at our network, but at this point.
Nothing to announce okay. Thank you welcome. Thank you.
The next question from the line of David Vernon with Bernstein. Please proceed with your questions.
Hey, good morning, Thanks for taking my take on time, Kenny wanted ask long term question about the energy franchise, obviously, you've got coolants and challenges right now.
Plus sign up on petroleum products I'd like to understand kind of what what what kind of flows near term are driving you.
Positive and what do you think is the risk that that positive could shift negative as you get into India.
20, and the pipeline complex gets closer to being built out up in the Bakken.
Yeah, So a longer term again, we think the comps for the fan.
It will improve we'll see what happens there.
On the crude oil side, we feel very optimistic about that market and I look at that as a couple to a few here type of opportunity and we're gearing up and we've got the resources out there and I think you've read where the government has increased the a curtailment. So we.
We're expecting more volume that come along.
Hey that predominantly Canadian origin stuff or is that also some stuff coming out of the Bakken.
That is the Canadian origin or that we're looking at until the golf.
Okay. So that's really what's driving the growth near term.
Correct, Okay, and then maybe just a quick follow up in the industrial products.
Sort of segment. The average ARPU came in a little bit softer you talk a little bit about what the mix dynamic is going on inside of that segment and what the outlook is there sort of where the next couple quarters.
Yes, so Rob talked about this a little bit earlier, and we really we've got some strong double digit growth on the construction products.
Our rock shipments have a shorter length of haul.
There you could possibly make the as you look at a lot of the Petrochem business. It's also a lot that move and five and interchange into the golf. So you've got a strong make their of growth.
That is not a longer haul, let's say some of the other pieces of business like our lumber that.
Yeah.
And we will that will that simply those sort of mix trends sort of continue for the foreseeable future. If you see any sort of.
Major shifts ahead or just kind of this this is the ships continuing that you know, we'd expect a bulk of petrochem and the construction products business too.
We continue to grow I think the economy will help us out what the housing market right now it's been pretty flat and again, that's awful trucks susceptible. So a stronger economy will help us compete better and the housing market and we'd we'd hope for a little bit more help with the overall far there.
All right. Thanks, guys.
Thank you.
It's from the line a friend isn't glinski with Barclays. Please proceed with your questions.
Hey, good morning, everyone and thanks for I get my question and Rob Congrats as well.
I was going to ask one, but just maybe longer term question. When you guys look at the intermodal business.
If we comp you relative to industry growth I think union Pacific has probably falling behind there over the last decade, but obviously you guys have improved returns and margins in that time period. So I guess looking forward with the new operating plan I mean is intermodal a now more attractive business than maybe it wasn't the past or.
You guys have been calling out for a couple of years here.
Competitive pressures mean is that more competition from north of the border that Jim might know very well or how do you think about it looking forward.
So, let's let's talk about the intermodal business broken into two pieces international and domestic.
They are both attractive our work on cost structure has made growth in both.
Attractive to us presuming, it's in the right price.
And from a domestic intermodal perspective, we've got a track record of growing domestic intermodal up until about the last call at 18 months and I think that has more to do with the flip on on truck capacity than almost anything else. Once once overcapacity happens in trucks Theres just a lot of.
Behavior that breaks out in the marketplace.
That makes it difficult to grow at an attractive return.
Our current cost structure has changed the playing field for us in terms of what's an attractive piece of business and our current service product has changed the playing field. So that customers look at us and think boy. They are a viable alternative to my trucks network. So both of those I think should should we look.
It is for us to get back on the path of growing domestic intermodal that that still needs to also occur in the context of truck capacity getting rightsized.
Internationally.
Theres no doubt that southern California ports have lost some market share both the Canada and to a smaller degrees east coast ports, and that's troubling and that that I think has less to do I know it has less to do with our service product from California ports to let's say places.
Like Chicago and more to do with the overall.
Cost an infrastructure of landing a box and paying fees at ports. So we're really trying to help the Puerto caliber of the ports in California, along that the west coast of the United States understand those dynamics and understand that it's a very competitive environment and the whole supply.
Chain has to be involved in in a winning that business back to the west coast Port.
Yeah.
Net debt our service product is being designed on a end to end game. So not just the transit over the road worried about what dray looks like around our facilities in Chicago, What's grounding looks like how quickly we can turn our equipment with stripping and reloading all that.
Moving in the right direction I think all that is going to create opportunity in the future we need to do that in partnership with our ports as well and we are.
Well I thought was only that's what have I guess plants in that regard I mean have you guys changed your marketing efforts.
On the intermodal side to address some of these challenges.
For sure we're having those conversations you've seen ours are.
Product design change, we de marketed and got out of low density lanes, we've changed the the.
The layout of our intermodal ramps in Chicago, So that they are much more focused and dedicated for instance, G. Four and Joliet on international G. Two and proviso on domestic.
Gee the yard center on North South and automotive parts and that's helping.
So yeah, I would I would say, we're addressing the marketplace in a different way to have a service product that wins and and it's a good luck in service product right now and and right now, it's basically up to the marketplace and Kenny team to make those matches happen and to get a essentially the truck.
Overcapacity backing into the right, but we've turned on things like the intermodal.
Reservation terminal reservation, so that our customers have really good visibility on which contain or which boxes are going to move on what day. So it takes out any confusion or ambiguity, there, which the customers love.
Thank you.
Next question comes from Atlanta, Walter Spracklin with RBC capital markets. Please proceed with your question. Thanks very much good morning, everyone.
Yeah, Congrats Rob Jennifer the new new roles in the new retirement.
Good luck.
I want to come back on the.
On your answer to the intermodal difference between you and be in.
What I see a company.
It is implementing PS or the way Jim's doing at Union Pacific.
Ripping out that level of workforce and locomotives. So on I would expect some service disruption and I would argue that.
These.
Declines relative to your closest peer would be per for the course here.
Is there any of that going on I mean that would suggest that the disruption on the decline is temporary and that when you are completed your PSR you can use it as a weapon rather than.
Cost reduction till you can use it as a share gain weapon and just stay tuned for more rather than your commentary about a real competitive environment. I mean that doesn't leave you know thats much more negative I think if you're you're pointing at a more competitive.
Or.
Competitor I guess.
It is a little less encouraging that if it was just due to temporary disruption on service any comments or less yeah. Walter So let me, let's put a little finer point on our on the answer that we gave a little while back.
Specific to intermodal specific to rationalizing our lanes that impact might be a couple of three percentage points.
So you're right, there's a bit of that and I would expect you know us to grow back through that.
But there is still a piece in that particular marketplace. That's both.
Truck overcapacity that has to get back in the box and it will those those always ebb and flow overtime and business cycles.
And I think those are the two big moving parts.
Okay, and then just following up on the pace Jim.
Yes, our adoption in the past we've always in order to be very fast very significant early on.
This quarter compared to Q2, so effectively flattish obviously, we were expecting a little bit better given you had a lot of flood impacts in the second quarter, hoping for a bit more of a improved third quarter relative to second quarter.
I don't want to answer it for you, but obviously prior PSR implementation generally has been done in a in a nice strong economy and growth environment is.
Is that the reason why we're seeing a bit more of a muted pace in the early execution or is there another reason.
One of the gone up intelligent Walter So 5700, fiftys, 13% drop versus volume eight train length up 16% dwell time dropped.
Great velocity up workforce productivity on a drop in business model better.
So if that's average.
Son of a gun I want to average again next quarter. Okay. That's the way I look at it I think.
We've got to be smart about it we don't want a blow up the place you know I could apart a thousand locomotives. The first day I showed up I'm not going to do that I think it's a it's a long game.
And I mean, I don't mean long by years, but it's a long game do it right.
Get the right product in this whole intermodal discussion. It's a great question and this is where we want to be we want to be where we have a very efficient railroad. We are able to open up new markets, we're able to beat the competition, which is other railroads and trust can bring more product then without dropping our price. So that's the game we're playing out.
I'm excited about it Walter and you are a tough your kids must take coming on what their with their or car.
You are a tough marker.
Appreciate the color. Thanks, [laughter] welcome [laughter].
Yes.
Our next questions from the line of Jason Seidl with Cowen and company. Please proceed with your questions.
Thank you operator.
Rob I have to offer one my congratulations on your retirement I think sitting in my chair for as long as I have I'm definitely jealous of seeing somebody retire.
Also it's been a pleasure to work with you over the years, you've been extremely generous with your time and always gracious with your responses.
Jennifer.
Welcome back all I could say, if you're going to work with us and once again, you must be a glut in for punishment.
Two quick questions here one.
Jim clearly there has been a lot of success here in PSR.
But you know train speeds or the one thing that I would call out that up a little bit surprised that I knew there are some puts and takes.
But relatively flat and the declining environment can you talk a little bit about that and what we should expect going forward and then I have one more follow.
Okay. So, let's let's talk about train speed people want to worry about train speed I look a car velocity, which is the end to end measure that the customer looks at its not just us subsection. So what we've done is as we've taken some of our trains that used to run through and being able to nonstop.
And then get end to end and we've had worked events will form we get them to add three or 4000 cars instead of running an extra trains. So at this point, we're working through that what I see moving forward is.
We will have the the fastest train velocity of anybody in the railroad network that we compare ourselves too. So we're working towards that and I expect some noise. Some more if I have a choice of increasing the track train speed by a 10th of 1% and run in the car velocity quicker and being able to drop.
Carl the number of cars I need by a 5000 I'll take the car drop in the car velocity over the train speed.
So that's where my mind is with it.
Okay Fair enough and my my last question, Rob I'm going to go to you for all time sake, you talked a little bit about rent expense.
Wrapping you mentioned volumes as one of the reasons that was off over 13% in the quarter given that volumes are going to be down on a similar fashion in Fourq would you expect rent expense to be about down the same in fourq use it wasn't threeq.
Without without a fine point on it I can't see any reason why directionally wouldn't look similar to third quarter.
Okay I appreciate the time as always.
Hi, Thanks, Jason.
Our next question is from Atlanta Foundation with BMO capital markets. Please proceed with your question.
Yes, good morning, and thanks for squeezing me in here.
Yes, Nishan, Rob and Jennifer.
On the announcement.
One question for Jim.
The operating ratio will will.
The pace than it is also influenced by some of the top line dynamic we'll see.
If I think in terms of actual progress.
On redesigning the operating.
Rationalizing the classification assets and all these kind a unified 2020 planning you're doing does less volume.
Help you get more things done and hopefully.
As we come out of that volume downturn, we can see.
Any stronger pay body, then we would have otherwise.
No that if in fact, a it's the other way the way I see it I would love to have increased in volume come on volume helps us in that though we're able to really run the place more efficiently.
And.
More cars come on on the same trends that we're operating on so I see volume as a helper helps us both topline and bottom line, but on top of that efficiency wise helps us even better so that's exactly what we want Betty.
Okay, and maybe one quick follow up I'm thankful that Jim if we do see next year.
Another challenging volume environment down mid single digit is there any constraint or any rosenwaks that would prevent you from.
Taking another 10% plus side of the headcount.
The negative but the answer is no.
We'll react and what they are the market gives us what the.
What the competition gives us and whats available for the economy. So we will react in the right way up or down and I'm, hoping that it's up and everything that we see is with the floods and everything we have we see a good you're starting next year. So.
Where we are fatty we're looking forward to volume presuming the economy stays healthy I would I would love to see a little bit of growth that would be that would be welcome, but whatever the economy as Rob says this is probably a fitting ending to the call rub says every time, we get together and that is a you know the economy is what the economy is we deal with.
The hand that were Dell and we don't use that as an excuse and we won't.
Okay, great. Thank you again.
Thank you. This concludes the question answer session I'll now turn the call back over to Lance Fritz for closing comments.
Thank you Rob and thank you all for your questions in closing we have made really good progress in the third quarter delivering them more consistent reliable service product with a fundamentally smaller cost structure and although I would much prefer a growth environment. Our operating performance gives us a lot of confidence that as volume returns to the network.
We're going to leverage it very efficiently and return even stronger results.
With that I look forward to talking with you again in January to discuss our fourth quarter and full year 2019 results. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude todays teleconference. You may now disconnect your lines and have a wonderful day.