Q3 2020 Union Pacific Corp Earnings Call

Greetings and welcome to Union Pacific Third quarter 2020 conference call at this.

At this time all participants are in a listen only mode.

Brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during todays conference. Please press star zero on 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's now my pleasure to introduce your host Mr. Lance Fritz Chairman, President and CEO for Union Pacific. Thank you.

Thank you Mr. Fritz you may now begin.

Thank you Rob and good morning, everybody welcome to Union Pacific's third quarter earnings Conference call with me today in Omaha are Jim <unk>, Chief operating Officer, Kenny Rocker Executive Vice President of marketing and sales and Jennifer Hayman, Chief Financial Officer as I'm sure you.

As I'm sure you all saw on Tuesday, we announced transition that will take place in our operating Department Jim.

And then I will be transitioning his responsibilities over to Eric Garinger at the beginning of the year, while staying on until the end of June as a senior advisor.

Excited to have Eric lead or operating department into the future. Eric has a track record of success at our company and we'll push the team to continue to think boldly as we pursue operational excellence.

I want to express my deep appreciation to Jim for the leadership he brought to Union Pacific Jim accomplished everything I could have hoped for and more.

He brought up level of Ics expertise and speed of decision, making that has been critical to our transformation I'm very pleased that he is going to continue working closely with Eric and the rest of the team over the next several months to guidance through a smooth transition while seeing some key projects to completion. Thank you.

Thank you very much Jim.

Before discussing our third quarter results I want to knowledge the work of our dedicated employees as we continue to operate our railroad through the pandemic the women and men of Union Pacific are doing an excellent job keeping themselves and their families save as a result, they are able to provide our customers with a service product that is fluid and on into.

We're up to our rail network continues to operate at a very high level, reflecting the talent commitment and resilience of our Union Pacific team.

Moving to the third quarter results. This morning Union Pacific is reporting 2023rd quarter net income of $1.4 billion or $2.01 per share. This compares to $1.6 billion or $2.22 per share in the third quarter of 2019.

Our quarterly operating ratio came in at 58.7%, an all time quarterly record and an 80 basis point improvement compared to the third quarter of 2019, despite moving 4% fewer carloads, our third quarter results represent another step in our company's transformation, we demonstrated our ability to.

Well just to a sharp rebound in volume, while continuing to provide a safe efficient and reliable service product to our customers.

The results, we're delivering both operationally and financially deepen our conviction that the changes we're making to transform our railroad are on track and on target so with that I'll turn it over to Jim to provide an operations update.

Thanks, Lance and good morning, everyone. We had an impressive quarter to turn in the results you see today, we have to watch our asset utilization closely as we dealt with a sharp volume increase following the equally sharp volume decline, though the second quarter as we continue to navigate the pandemic and we've had some significant weather events in this quarter as well in the face of those.

Challenges the team delivered strong productivity gains to the tune of $205 million and a total of $610 million year to date all in all a very strong quarter for the entire operating team turned.

Turning to slide four I'd like to update you on our key performance indicators driven by the team's relentless focus on asset utilization and reducing card touches freight car velocity and freight car terminal dwell both improved 3%. These improvements along with increased train lengths, which we'll talk more about on the next slide demonstrate how our operating model.

All is striking the right balance between service and efficiency.

We continue to adjust our transportation plan to run a more efficient network that requires fewer locomotives in the third quarter, we achieved a quarterly record and locomotive productivity, an 11% improvement versus last year.

Which is all the more impressive when you consider the mix challenge of trading coal and sand volumes for intermodal volumes workforce productivity also a quarterly record improved 13% from third quarter 2019 productivity improvements were led by the train and engine workforce down 22% versus last year, which significantly outpaced the 4%.

Volume decline.

Our manifest service remains strong during the quarter drive at a five point improvement in transplant compliance for manifest and autos.

Intermodal trip plan compliance decreased in the quarter, reflecting the impact seen across the entire intermodal supply chain from the sharp West coast volume increase although we positioned the equipment near the Alley basin in anticipation of a surge the resulting in balances following the first wave of the freight as well as the sharp uptake in demand for both P and why and terminal.

Employees took a few weeks to work through the network, but the team responded quickly with resources and transportation plan changes, enabling us to exit the quarter with intermodal trip plan compliance back in the low to mid Eightys.

Our results have been strong this year and we expect to see continued improvement in the fourth quarter.

Slide five highlights some of our recent network changes our focus on increasing train length and handling traffic efficiently remains strong we were able to absorb the majority of the sequential volume increase by adding traffic to our existing train that work.

Compared to the fourth quarter 2018, when we first began implementing a version of precision schedule railroading, we've increased train length across our system by 28% or 1900 50 feet to approximately 9000 feet third quarter of 2020.

Weve completed 28, 15000 foot sidings through the third quarter, allowing longer trains the run in both directions and reduced the number of train starts we plan to have another eight side. It's completed by the end of 2020.

We recently curtailed operations at the east comp in our North Platte, Nebraska yard. This location was unique in that it previously that two homes going forward the cars will either be processed at the still active west comp.

Or flat switched the redesign of our operations in Chicago and Houston remains on track Chicago Intermodal consolidation is set to be complete by year end.

We are also making progress in Houston to consolidate or intermodal facilities into one location to expand switching capability and improve our ability to run longer trains out of the Inglewood yard final.

Finally, we continue to make organizational changes to better align resources and responsibilities during the quarter. We took an additional workforce reduction in the operating department and also integrated intermodal operations into the transportation Department we.

We will continue to seek efficiency in all facets of what we do and there remain many more opportunities ahead of us to run.

To wrap up we remain committed to protecting our employees health and safety and provides strong service to our customers. We will continue to make structural changes to improve operational performance and efficiency the changes.

We are making in Chicago, and Houston will drive continued improvements in our intermodal service product, allowing us to be more competitive in those markets. We have made great progress in transforming our operations to this point our focus is unwavering.

As we will continue to improve safety service asset utilization and network efficiency in order to provide customers with a service product that is competitive it provides value before.

Before I turn it over to Kenny I want to make a few comments on Tuesdays announcement announcement I'm very proud of what we've accomplished during my time at Union Pacific really the results speak for themselves Weve got the.

We've got the leadership team and culture in a great place to continue to flourish and Eric is the right person to lead the team is a very talented railroader and brings a great skill set to the position I know he will continue to challenge the team to be relentless in their pursuit of efficiency.

I'm going to stick around for a bit longer to make sure the transition as smooth in some key projects are completed I'm very confident that this team won't back off on the progress. We've made we're making to produce an industry best product for our customers with that I'll turn it over to Kenny to provide an update on the business environment. Thank you.

Thank you Jim and good morning for the third quarter, our volume was down 4%, primarily due to declines in our industrial and bulk business group. The decrease in volume coupled with a 7% decline in average revenue per car drove freight revenue to be down 11% in the quarter weak economic conditions related.

Took the pandemic continue to impact multiple market segments.

It was partially offset by stronger demand and the premium group so.

Let's take a closer look at how the third quarter performed for each of our business group.

Starting with bulk revenue for the quarter was down 12%.

On a 9% decrease in volume and a 3% decrease in average revenue per car.

Coal and renewable carloads were down 21% as a result of weaker market conditions from low natural gas prices and soft export demand.

Volume for grain and grain product was up 3% from an increased demand of export grain, partially offset by pandemic reduce them.

Man for ethanol.

Fertilizer and software carloads were up 4% due to the stronger export potash slightly offset by lower production of phosphate rock.

Finally, food and refrigerator volume was flat strong beverage shipments were offset by softer food service and restaurant demand.

Moving onto industrial industry.

Industrial revenue declined 18% from a 16% decrease in volume.

Average revenue per car also declined 2% due to a lower fuel surcharge and negative mix.

Energy and specialized shipments decreased 20%, primarily driven by reduced petroleum shipments due to low oil prices coupled with weak demand.

Fourth product volume was flat.

Growth in lumber shipment from improved housing starts and repair and remodel offset declines in paper shipment.

Industrial chemicals, and plastics shipments declined by 9% due to the pandemic related impact on both global and domestic demand.

Industrial chemicals volume has the largest reduction these carloads are closely tied to industrial production.

Metals and minerals volume decreased by 22% due to reduce and shipment associated with the decline in oil prices and a third plus and local fan.

Rock shipments were also reduced due to the pandemic related impact on demand and project delays.

Turning now to premium.

Revenue for the quarter was down 1% on a 5% increase in volume.

Average revenue per car declined by 6%, reflecting a lower mix from increased intermodal shipment.

Automotive volume was down 9% for the quarter.

At the beginning of the quarter, most north American manufacturing plant have resumed production, but our run rates were about 15% below 2019.

Production volumes that'll increase throughout the third quarter as dealers restock inventories.

Intermodal volume decreased by 9% year over year, driven by strength in domestic truckload parcel shipments as well as onboard a new international business.

Despite the pandemic sales for most retailers increased throughout the quarter.

And not only did we see the footprint of E. Commerce. They all have total us retail sales growth year over year, but more importantly, we saw a volume increase as a result of key business wins.

As we enter the fourth quarter you can see on slide 11 that our overall volume is currently up 4% year over year base.

Based on these run rate, we'd expect year over year fourth quarter volumes to be up low single digits.

We expect premium volumes to remain strong similar to current run rate for the remainder of the year.

Strength in E. Commerce is likely to continue and volumes will be balls are bought inventory restocking as we enter our peak holiday shopping season, coupled with recent business development plan.

Or bulk the coal market remains challenged as high inventory and weather conditions continue to be.

I continue to be factors.

However, we have a positive outlook for export grain due to China's continue purchases.

Additionally, we expect to see continued strength in beer shipment and we could see modest growth in our food and refrigerated line, if food service and restaurant demand improve.

And lastly for industrial the potential for crude by rail remains largely uncertain of all.

If oil prices remain depressed.

And we anticipate continued year over year decline.

But on a positive note we are anticipating lower sequential quarterly improvement for most of our other markets.

Outlook for housing starts remain positive.

And our improved service product is opening up new markets for us like from short haul business that wouldn't have been thought attractive to us in the past.

This is just one example of how worth their focus on things we can't control.

The team has done a fabulous job executing on our marketing initiatives to win new business and as Jim stated earlier, our service product continues to improve which help our customers compete in the marketplace with that.

With that I'll turn it over to Jennifer Who's going to talk about our financial performance.

Thank you Kenny and good morning as.

You heard from Lance earlier Union Pacific is reporting third quarter earnings per share of $2.01 and a quarterly operating ratio of 58.7% and all time quarterly record and our first sub 59 quarter looking at.

Looking at our quarterly income statement operating revenue totaled $4.9 billion down 11% versus last year on a 4% year over year volume decline Demmons.

Demonstrating our consistent ability to adjust costs with volume operating expenses decreased 12% to $2.9 billion.

Taken together, we are reporting third quarter operating income of $2 billion, a 9% decrease versus 2019.

Other income of 37 million was down $16 million versus last year as a result of lower interest income as well as less rental income.

Interest expense increased 11% due to increased debt levels and costs associated with our recent debt exchange income tax expenses lower down 12% as a result of lower pre tax quarterly income.

Net income of $1.4 billion declined 12% versus last year, which combined with share repurchases led to a 9% decrease in earnings per share to $2 in one sense as I just mentioned, our 58.7% operating ratio was 80 basis points better year over year lower fuel prices had a 100 basis point positive impact on the operating rate.

Ill, while fuel surcharge lag negatively impacted earnings per share by three cents.

Turning now to slide 14.

The breakdown of our freight revenue totaling $4.6 billion down 11% versus 2019, the primary contributor to the year over year decline was a 4% decrease in car loading a substantial improvement from the second quarter, but still in negative territory lower diesel fuel prices down 35% year over year.

Impacted revenue by three and a half point.

Positive core pricing gains were more than offset by business mix, reducing revenue three and a quarter point, although we continue to yield pricing dollars in excess of inflation revenues were impacted by moving more business at a lower average revenue per car something we commonly refer to as negative mix.

A 9% increase in intermodal combined with industrial volume declines, which included the continued falloff in sand and crude carloads were strong contributors to that negative mix.

Now, let's move on to Slide 15, which provides a summary of our third quarter operating expenses.

As you heard Jim discussed we did a great job operationally in the quarter adjusting to that sharp rebound in traffic and at the same time, we're very effective controlling cost you look at.

If you look at the individual expense line comp and benefits expense decreased 11% year over year, as we offset wage inflation and higher severance costs through lower horse power.

Third quarter workforce levels declined 18% or about 6500 full time equivalents versus last year, while sequentially, increasing by fewer than 100, our train and engine workforce continues to be more than volume variable down, 22%, while management engineering and mechanical workforce is together decreased.

14% with a portion of those reductions related to fewer capital employed.

Quarterly fuel expense decreased 40% as a result of a significantly lower diesel fuel prices and lower volume third.

Third quarter consumption rate increased slightly versus 2019, reflecting the mix impact that running fewer heavy haul bulk shipments.

Purchased services and materials expense declined 11% in the quarter as we continue to use our locomotive fleet more productively. In addition, our lip subsidiary incurred less drayage expense versus last year with fewer auto shipment.

Equipment and other rents fell 8% in the quarter. Despite mixed pressure in this category related to increased intermodal shipments.

However, freight car and locomotive productivity efforts more than offset that headwind driving car hire savings and lower lease expense.

Other expense was our only cost category that increase year over year up 8% in the quarter, driven by $17 million higher state and local taxes.

We still expect this cost category to be up around 5% on a full year basis in line with prior guidance.

Looking now on productivity.

As discussed during our second quarter call. The game plan was to leverage sequential volumes against our smaller cost structure, while maintaining a high level of service and based on our results I'd say, we did just that we continued our trend of generating strong net productivity with the third quarter coming in at $205 million.

Operating departments continued progress on train length initiative balanced with an improved service product and more efficient use of our workforce and locomotives led those productivity gain. In addition, all areas of the company continued to control spending as well as look for ways to do more with less.

Our year to date net productivity at $610 million already exceed both our expectations for 2020 as well as the impressive $590 million and net productivity, we achieved for the full year 2019.

As we look to the fourth quarter understanding that we do have a difficult comparison against last year's fourth quarter. We now expect full year 2020, net productivity to exceed $700 million or 1.3 billion over the last two years. This.

This strong productivity is evident in our record quarterly operating ratio of 58.7%.

Using the same barometer as past quarters for evaluating cost variability year over year third quarter expenses were 180% volume variable on a fuel adjusted basis sequentially.

Sequentially third quarter volumes increased 19% from the second quarter fuel adjusted operating expenses only increased 11%.

Moving on to cash and liquidity throughout the COVID-19 pandemic Union Pacific has been in a position of strength with our cash generation liquidity and balance sheet.

Year to date cash from operations decreased only 4% versus 20 $19 billion to $6 billion. Despite a 12% decrease in net income free.

Free cash flow after capital investments totaled nearly $3.7 billion, resulting in a 93% cash conversion rate.

After payment of our industry, leading quarterly dividend cash on hand at the end of the third quarter was $2.6 billion as volumes have remained relatively steady in the 160007 day Carloading range. We are moving to redeploy some of that cash we resumed share repurchases in early October and announced our plan.

It's for a 500 million par call on debt due in early 2021 week.

We also plan to pay off an additional 300 million of incremental debt. We assumed earlier this year for added liquidity.

From a balance sheet perspective, we finished the quarter and an adjusted debt to EBITDA ratio of 2.9 times as we continue to maintain strong investment grade credit ratings from both standard and Poor's and Moody's as.

As we said before navigating through this pandemic has reinforced our conviction that maintaining a solid investment grade credit rating is critical and is an essential element to our commitment to provide strong cash returns to our owners, which totaled nearly 5 billion at the end of September.

Turning now to our outlook you heard can you talk about the positive drivers, we see in the marketplace and our expectation that fourth quarter volumes will be our first quarter with positive year over year growth in two years.

Even this improved outlook, we now expect a full full year volumes to be down 7% or so.

As I pointed out earlier, we expect productivity to exceed $700 million for the full year 2020, and our long standing pricing guidance is unchanged. We expect the total dollars generated from our pricing actions to exceed rail inflation costs. We are committed to making sure each piece of business. We move is earning an adequate.

Return and that we are being compensated for the value we are delivering in the marketplace.

Our expectation for volume price and productivity should produce a record 2020 operating ratio. In fact, we now expect the full year 2020 operating ratio to improve by roughly a point and start with a five well.

Well of course, we've charted in 2020 is certainly much different than expected when we laid out our original target being able to achieve a sub 60 operating ratio in the heart of the pandemic is an impressive accomplishments for the entire Union Pacific team.

In terms of cash generation and capital allocation full year capital expenditures are still projected to come in around $2.9 billion as we make good progress on our renewal and productivity investments. We will continue providing strong cash returns to our owners through our dividend and share repurchases.

And longer term capital expenditures remain projected to be below 15% of revenue a dividend payout ratio of 40% to 45% of earnings and ultimately achieving that 55% operating ratio remain the vision and objectives for our company.

Wrapping up I'd like to express my appreciation to our exceptional employees the job they've done this year to work safely stay nimble and provide a quality service product for our customers. While also improving productivity is truly remarkable our goal of operating the safest most efficient and most reliable railroad in North America is clearly achievable.

So knowing we have the best people in the business.

With that I'll turn it back to land.

Thank you Jennifer our first priority has been and will always be safety, we have a continuous focus on improvement and I'm confident the team has the right plan and is taking the right actions to make Union Pacific a safer railroad going forward our.

Our service some financial results demonstrate the transformation of our company, we are a more efficient and a more reliable railroad that is driving value for our customers on the way to achieving operational excellence our in house.

Our enhanced service product, coupled with a lower cost structure and innovative new services is opening up new markets and opportunities with our customers and as you heard from Kenny today. The team is winning by converting more business to rail our customers are reducing their carbon footprint to the tune of an estimated 16 million metric ton.

Tons of greenhouse gas emissions, so far this year as we move together toward a more sustainable future are up.

Our optimism for the future has never been greater as Union Pacific is well positioned for future long term growth and excellent returns.

So with that let's open up the line for your questions.

Thank you.

We'll now be conducting a question and answer session.

If I had to ask a question. Please press star one on your telephone keypad and the confirmation tone indicate your line is in the question queue.

May press star two relate to move your questions from the queue for please.

For participants using speaker equipment can be necessary to pick up your handset before pressing the star keys.

In the interest of time, and so that we can accommodate as many analysts as possible. We would ask everyone to please limit themselves to one question.

Thank you and our first question is from the line of Ken Hoexter with Bank of America.

Great Good morning, and Jim Great job the last few years and good luck in the future.

Maybe for Lance or or Jim I guess, just starting off keeping your employees down 18% with with volumes accelerating a great job in the quarter and great job on the ARPU, but you saw some intermodal struggles as as you mentioned, maybe you could talk a little bit about the incremental margins going forward and your thought on the pace of expense returns as you move into 21.

Just given Jen just talked about the kind of inflection into positive volumes for the first time in a while thanks, Jay you want to talk about the expense side and then we will convert into the the go forward margins. Okay. So.

So thanks again I appreciate the.

The question and thanks for saying the good good two years not quite two years, but we got a little bit of work left to do so and looking forward to the next a few.

A few months to really get this place going even better so.

So.

The intermodal and the expense side I think we showed in the in the quarter or how we can handle the business and be smart about how we handle the business. It is if we need to win we need to be able to look at things on a full supply chain view and that's what we did and everybody knew that you cannot.

Easily react without really disrupting the entire network when it comes to the intermodal.

All of them that increased substantially but I think the speed that we reacted and where our metrics are after was a was a great move.

<unk> expense will continue on a unit basis to be less purely because of the capital investments. We've made in the in the network and the efficiency, we turn our locomotives way quicker, we turn our crews quicker we turn our cars quicker we handle the though inspections quicker we do so many things faster, though will continue to build on that.

So I don't see it I whatever business comes on I think we still will be able to improve our efficiency across the board.

Building off that can from an incremental margin or go forward margin perspective of course, we continue to expect that we're going to improve our margins the capital investments that Jim just outlined are going to be a support and we're also looking with kidneys team at an end to end view of our intermodal.

Product, whether its international intermodal or domestic intermodal and those both give us an opportunity to to margin up whether it's by efficiency in the chain or an opportunity for a better pricing.

Great. Thanks section Yep. Thanks.

Our next question is from the line of Justin Long with Stephens. Please proceed with your question.

Thanks, and good morning.

And I'll Echo the congrats and wanted to ask about the announced transition I think a lot of investors are wondering if this means the heavy lifting on TSR and productivity gains is complete so could you just address that do you disagree with that view.

And if so can you talk about why now is the right time to make this transition versus sticking around for another year or two.

Okay, well listen I. Appreciate the question. So let me let me take it back to when I came on at Union Pacific Lance and I sat down and we talked about the what we needed to do and how I could help the team and.

Thank you Pete to drive the productivity that they already had in mind that wasn't I think everybody to union Pacific realize that listen there is an opportunity to become more efficient and be able to have a great service product and win in the marketplace. So those goals were there and I was really it was refreshing to hear Lance.

And Rob we're all in the same room together talk about how we wanted to become the leader in the industry. When it came to efficiency operational efficiency and service excellence. So you build on that I committed when I came on the 18 to 24 months I could have stayed longer I could have stayed shorter there was nothing that was tying me in.

The company, but.

But my job was to build the foundation of a couple of.

Operational group that understood what was possible and what we can deliver and I think that's what I've done and I'm very comfortable that.

Eric is the right person to lead it.

Let's just put this write down to busy Jim then I don't know he's not Jim Bene and Im not though if you compare me too. So some of the other people that have led companies operationally I'm not the same person I think we've.

I think we've done a great job of not causing a lot of pain to our customers.

Other situations people have done that so weve been measured Eric the right Guy He's got the right background. He's got the right skill level I like the way his mind works.

These things quick so I'm very confident that we've got the right, but below that and im disappointed in that weve because of cold and we could not get the gift of everybody in the CR team operationally.

Whether it's Tom in the North or David June auto in the CIO or John Turner, very bright person, okay or its not carry we've got a team of Railroaders and.

As you all know I'd been railroad for a while that I'm very confident they understand what we're doing.

And well they will deliver now I'm going to be around and I'll be honest, if they make a slip up I don't care, whether I'm going or not I will be folded them, okay, and asking them, what the heck, they're doing and I'll keep the heat on it the worst thing, we can do and the and the true measure of a lead or is that when you depart.

The team understands what's supposed to happen and you go out there and deliver two more points on that one is as I spent a lot of time with people at different levels in the company and I've spent probably.

20 days in the last.

Three months, putting on sessions with frontline supervisors to try to drive the decision, making have the right culture and I'll continue to do that until the end of the year and some into the into the new year. So I'm very confident that we've got the right team and let me answer that last piece what's left.

Well locomotives are going to be way more productive our train length I see 10000 feet. Okay, I see our car freight velocity up another five or 10%. So I think that we are just starting the Mecca.

The mechanisms the measures the culture is all there to succeed I am not worried about it and I am going to keep my Union Pacific stock I'm, not going to go out there and sell it because I'm very confident that we're going to do the right thing so just.

So Justin I hope, but long answer and I apologize, but I just wanted to make sure I put it on the table.

That's very helpful very helpful insights I appreciate the time.

Thanks, Justin.

The next question comes from the line of Brian Ossenbeck with Jpmorgan. Please proceed with your question.

Hey, good morning, Thanks for taking the question Jim Congratulations on the last two years.

Two years, maybe one more for you.

Before you get out into the new role includes keeping an eye on things from from Afar.

Looking all the buckets of productivity and the success you've had including this quarter. It is slowing down a little bit, but one area, where we haven't seen as much improvement as really young on fuel economy, you've got record train lengths that are going up you got locomotive productivity. That's at all time high newer fleet.

I know mix is an issue green and topography using issue, but some of your peers have been able to move the needle a bit more on that front and we haven't quite seen that yet from your peak in fact.

In fact going up a little bit in terms of consumption. This quarter. So maybe you can help.

Centralizer, even quantify what that opportunity looks like and if that's one of the big buckets, you see left for the team as you step.

As you step more into an advisory role. Thank you Dave So let me answer it backwards, yes, it's a bucket that we see and it is a substantial bucket on the expense side that we think.

I think that we've got the right plan and the number you see if you Peel back the mix issue. This last quarter, we had the over 4% improvement in our fuel use on a GTM basis. If you look at if you look underneath now thats masked with the change in the type of trends that were running and the volume, but I'm very comfortable.

The we have the right process in place to continue to drop I don't think were going to get 4% every quarter, but the best way to look at it is if we put more on the same number of trains with the same number of locomotives that we had before and that's what we're doing on an average of EPS.

There is a number of horsepower per train and were able to build the trains to what our capacity is we will continue to see that fuel productivity number improved are we.

Are we going to be the best in the industry no. There's some advantages for railroad railroad I used to work at their mainline grade is pretty is is weight is about a half of ours. So we're going to burn a little more fuel to get over some of those mountains getting out to the west coast, but at the end of the day, we have a lot of advantages on on how we can.

Turning to use the fuel and we've spent money on technology continue to so that the locomotives and the locomotive engineers are better understanding how they operate and I see us continuing to get that the mix turns you know Eric.

Eric is probably going to get maybe a mix turned down the road and everybody will say he's brilliant on saving fuel so [laughter], so I'm very comfortable.

As mentioned I believe that formed.

Thanks, Jim.

Welcome.

Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Thanks, Good morning.

I'm just thinking of.

Thinking about the fact that volumes are recovering in addition to that the higher productivity goal that you're now looking for this year.

Just as you think forward.

Would you expect that.

To see a step function improvement we all are on 2021 as as volleyball allow you to have more fully realized the benefits of PSR.

So maybe just some thoughts on that I can appreciate even more next year guidance, but I'm also if you can if you can quickly address.

At what point do you can you can achieve that 55 L.R. Thank you yeah, I'll start and ask Jennifer to back me up Allison This is lance and good morning.

So the moving parts as we look into next year, we do expect volumes to be better of course, the it won't be hard to do that against the pandemic.

And it's hard for us to gauge exactly how much better.

But but that will be a help a proto.

Productivity is going to continue that'll be a help we haven't we haven't nailed down that target, but it's going to be healthy and we've got plenty of initiatives moving into next year that will keep a shoulder into mixes real big question Mark.

I I don't see a.

Much reason to change our our current mix experience until the industrial economy really starts recovering.

A little bit a little bit quicker and more with more strength than we've seen so far.

Post our trough in May so that's that's the biggest question Mark I think that'll dictate just how much margin improvement we were able to obtain next year, Jeff Yeah Allison. Thanks for the question.

Heard us say many times the drivers of our performance or what Lance just laid out its volume productivity and then the price piece.

So we're encouraged by what you're seeing in the truck markets today and with the service product that we've got out there and all the work that Ken and his team are doing but we're still working through our plans for 2021, but we.

But we have every expectation that we've got a great roadmap ahead of us where we can continue to improve we'll give you obviously more detail around that when we talk to you in January and our hope is a you know sometime next year to be able to gather everyone has we were hoping to do in a in the fall of this year and with a little more certainty on what's going on with the economy and the pandemic.

Be able to lay out for you guys kind of a multi year plan that we see for ourselves and how we look to continue to make improvements and go to the 55 L.R.

Okay.

That's helpful. Thank you yep.

Yep. Thanks.

Next question is from the line of Jason Seidl with Cowen and company. Please proceed with your question.

Thank you operator, good morning, Lance and GE and GE.

Congratulations on the return of the 2.0 there so.

One point here is going to come.

I want to concentrate everyone a little bit on the.

Mix on intermodal because clearly the surge to the west coast has been somewhat aided by by restocking efforts on her that are likely to continue at least near term.

Sure, but at some point that will abate. So how should we think about the mix between international business and more domestic business for 2021 and the impacts on the Ark.

Denny.

Yes. Thanks.

Thanks for that question Jason.

First of all I'll, just say that.

Controlling what we can control, we're going to go out there and win as much business as we can.

All those markets and this year we.

This year, we've been able to do that we've been able to grow.

E Commerce business, we've got a great service product that Jim and the team have provided us.

On the international side, we talked about an international win and even on our domestic truckload side, we've been able to go out there and win new business, we have seen a little bit more of our international business trends loaded into some of the web.

Some of the West Coast Port.

That just means that we have to compete on a domestic thought which is that we've been able to do so regardless of how that product comes in we've answered a lot of technology with our customers to go out and win business, where there's a pie the see the business coming from Asia, whether with our TR business to give good great visibility to our customers.

On when their business will move we feel.

We feel like we've got a really strong domestic product.

Domestic product to go out there and compete.

And we've also won quite a bit on the international side.

Replicating.

If it does slow down should we expect a change in the arc for 2021 on the road.

On the restocking so.

What.

Down Jason.

So the restocking efforts that we've seen and all the the massive surge that the west coast Port slate.

Yes, so Jason this is lance I get what you're asking so a part of what we're seeing in domestic strength is.

Is a restocking because we can see that in the data as well right inventory.

It is relatively down sales are up and the inventory sales ratio is below where I think retailers traditionally would like it to be so as we look into next year. Some amount of that destocking, probably drops off a bit it's hard to say just exactly what happens in impact on mix and overall arc.

'cause that's occurring one thing that is likely to occur as we go into next year would be the surcharges dropping off in the a la basin and up in the P. NW, but those are really asterisks right now in terms of the overall yield that we're reporting they are helpful, but very marginal.

Only thing I'll add to that is if you look at the data.

The retail self have actually improved sequentially. So there is a pool element to the demand and the inventory that they sit today there are lower than they were in 2019. So there are still more inventory and then you think about that ecommerce business I believe that there is a structural change out.

There are a with the consumer preferences that they're going to be more E. Commerce, there that fits very nicely with our service product parcel business is a very attractive to US yeah. I mean, we're just starting to get into the bid season for next year, Jason and I think maybe that's part of your question too in terms of you know that truck market stays tight.

We think thats, a great opportunity for us, particularly with the service product that we've got the offer right now.

Okay, well listen fantastic I appreciate the time as always everyone Yep. Thank you.

Thank you Jay Thank you.

The next question's from the line of Brent and then let's see with Barclays. Please proceed with your question.

Hey, good morning, everyone and thank you for taking my question.

Lance I guess.

In response to a previous question about intermodal you said well, we're going to look to margin up in the future, but it's interesting here because if I look north of the border. Since you guys Pizza volumes go back more than a decade, we've seen greater than like 80% expansion in intermodal volume on the Canadian networks or at least one of your key.

Editors, it's been roughly flat for you guys over that same time period, I know you've gone through a lot of mixed shift in the network, but what can you tell your investors is the strategy here is to continue to focus on margin above growth or I keep hearing you guys talk about a service product that's competitive.

Now the time to focus a lot more on topline and what strategies can you take can you be more proactive, but the ports because we've definitely seen a shift from us west coast.

Up north to Canada, Yeah, Brandon. Thank you and that's a that's a great series of questions. So so the fundamental difference today versus 10 years ago is our service product is much much better it's much more reliable we're actually doing what we say we're going to do.

And we can see that very clearly in our K P eyes, when we break out the premium the intermodal and automotive.

Car trip plan compliance.

And over 10 years that metric has actually gotten harder to achieve so were measuring ourselves through a harder metric and it's much higher in terms of absolute performance customers experienced that so the item number. One is we are positioned to be able to win business item number two is we are not.

Monolithic in terms of our focus we want to grow we know that growth volume is going to be a really important lever as we continue to improve our operating ratio going forward and so is price and so is efficiency.

And we think we can achieve all at the same time and item number three brand and little bit of a proof statement that has been completely masked by the pandemic and its impact on the economy is in the last bid cycle in the last bid season, we were successful at winning business.

We increased our penetration through the B C O cycle on their bid season, and Kenny mentioned, one we increased our exposure in the parcel world and we've done it across a number of other retailers. So as we look forward brand and you've got it exactly right. We are positioned to be able to grow and we're holding ourselves accountable.

Countable for greater growth than we've experienced in the last 10 years, we should be able to achieve that only the only thing I'll add to that also is that the team has done a great job of inserting.

Product into our supply chain for whether a match backs and Dallas Weather's Relo out of the Midwest, We're doing everything we can to make it thinking for our customers.

We've worked with the port to get them really strong standard to get out of the port working with Jones team I've talked about the technology on the Ipi five where we're working with our largest.

International carrier, so that we can have visibility to when they come in and instill confidence and trust in our service. So we're taking a active very proactive approach to.

To win in the market.

Thank you.

Yes. Thank you.

The next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, Thanks, Good morning, guys. So Jennifer comp for employee was up 8% I think you mentioned some severance can you quantify that and just give us some color on how to think about comparability going forward just because it was it was a.

A bunch higher than we thought and then can I just get one clarification Lance you made a comment about intermodal and end to end I'm not sure what that means and maybe what that what that should mean for the AMC relationship. Thank you sure.

Sure I'll take that after Jennifer.

Sure on the comp per employee side.

You are right I mentioned, we have wage inflation.

Certainly that's part of it we did have severance or not going to quantify that but that is something that we don't expect to see in the fourth quarter. Jim mentioned, some further head count reductions that were made on the operating side of the world. So there was some severance involved with that we also did have some higher cost per crew in the quarter. When you think about some of our weather challenges and the fact that.

We are staying quite lean from a head count perspective, and so we're working the crude a little bit harder so little bit higher overtime cost there going into the fourth quarter, we're going to still stay pretty lean a as you still you know there's little uncertainty around the the economy, you've got the holiday season coming up so I would expect that we're going to keep that crew base pretty lean.

You may see some elevated costs.

Cost per crew, you're going to continue to have the wage inflation in fourq is that you will not have a the severance on a sequential basis.

Yeah, and Scott you are key.

Your question on what did I mean by end to end in the domestic intermodal world. That's not an announcement of us going retail. So let me be crystal clear about that but it is an indication that a in a room and a recognition that the the service product that wins in the marketplace.

Ah looks transparent to a customer from end to end and needs to be simplified and much easier to deal with and we are working with our I am season are in our.

Significant AMC partners to make that happen and that needs to look like one point of contact consistency across the entire supply chain and Theres just a whole lot of work that's going into that that I wanted to make sure wasn't lost in this call.

Thank you.

[music].

The next question is from the line of Chris Wetherbee with Citigroup.

Hey, Thanks, good morning, and congrats Jim Great job on the two years at the firm I guess I wanted to ask a question about sort of capital returns to shareholders I know theres going to be some focus on debt pay down in the fourth quarter kind of curious Jennifer how you think about that impacting potential buybacks.

In the near term then sort of bigger picture do you think that there's an opportunity to kind of push a little harder on the buybacks as you go into next year and sort of cash flow comes up with earnings power just some thoughts around that would be helpful.

Sure Chris Thanks.

You know in terms of fourth quarter.

Came in or ended the quarter I should say in a cash balance of 2.6 billion that we've typically.

Ran closer to $1 billion billion and a half in terms of cash balances. We've obviously been more conservative with that over the last couple of quarters with the pandemic and uncertainty things feel like their evening out a little bit although.

You see the same news idea were cases are searching in different parts of the country and so we're going to be careful with that but we think fourth quarter is a good time for us to start redeploying some of that cash with interest rates being as low as they are it's doing very little for us sitting in the in the bank right. Now so we want to put some of that back to work, we're doing that through shares as well as pay.

Paying off some debt that has a little bit higher coupon a little higher costs for us. So we think that's the right economic thing to do and as we look into 2021 again in January we'll talk more fulsomely about what our plans are not just for how we see the year playing out but how were going to deploy cash, but we think certainly our job is.

Is twofold and generate the cash through through business and efficiency and then deploy it back to our shareholders. I think we've got a good track record of doing that and rewarding our shareholders and we plan to continue that.

Okay got it thank you thanks.

Thanks.

The next question's from the line of Entre with Deutsche Bank.

With Deutsche Bank. Please proceed with your question.

Thanks, operator, good morning, everybody Jim Congrats on another successful tenure.

Everybody on this call.

Just a quick question is there anything limit.

Limiting you.

Turning another girl.

We quickly.

Open to that when you do leave you and if you can address that and then.

And Jennifer we've been talking about the potential for incremental.

Now in terms of how good they could be when the revenue growth turns positive.

I just don't think we saw it to the extent that we would have in the third quarter, especially when you look at the sequential movements in.

<unk> expenses.

Obviously, a very challenging congestion perspective, which made it may have something to do with it.

You could just answer.

The quarter kind of meet your expectations.

Revenue growth.

That are worth maybe calling out that are specific to the congestion that we all know about that occurred.

Thank you.

You want to start [laughter] I think I wanted you to start [laughter] you pretty good. Thank you very much and just slipped about five questions in there that was pretty good I love. It so you've got written Dr. Jennifer.

So.

Listen I am 62 years old, but feel great I'm not looking further than what I have the responsibility right now going forward, but all I would tell you is listen we're going to elect a president.

President that's either 74 or 78, so I'm still young guy and the.

Ill leave it at that.

And in terms of the margins and that you know we did still have volumes down down 4% in the quarter and as I look at it going from Twoq to Threeq you you know I would say that our margins improved sequentially incrementally.

In the 60% kind of range. So I think that shows you there's power in the model and as we look and see volumes go positive I think that that's.

Thats the thing to focus on and the fact with that we think we'll be able to have very strong incrementals, where there's some cost headwinds in the quarter. There always are we called out the ones that we thought were most important.

There was there was some severance costs, you've got a little that are associated with some of the mix impact Atlanta said in that mix impact probably isn't going to change too much but we're doing everything we can to improve the fluidity of the network improve how efficiently we handle that business and that's a real opportunity. So I'd say less in terms of.

You know big challenges more in terms of we see continued opportunity yeah. Amir. This is this is lance so we're not disappointed at all with our incremental margins in the quarter and we also think.

There's continued opportunity to be even better than that.

All right. Thank you guys appreciate it.

Next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks morning, everyone.

I have a three part question, but on one topic. So I guess that guidance is one question [laughter] just on I know, we've discussed intermodal a fair bet, but just a couple of more follow ups there florist can.

Can you just give us some color on how your customers are kind of kicking what's happening right now I mean, clearly a lot of it is unprecedented but at the same time are they upset about the surcharges and the service issues or are they understanding second if you do.

If you do get higher volumes once this normalizes, but offset by adding more resources and fewer surcharges.

What does that mean for the profitability of the intermodal business heading into next year and third.

I'm not sure if you actually said this at all but what is the timeline for resolution for the network issues.

Well the revenue dropped off a little bit what timeline for resolution for the network issues on the intermodal side I'm not sure if you actually quantified that.

I'll start that off Jim you jump in if you got any questions and.

You know when we walked into the third quarter the entire supply chain was constrained its not a real issue.

You got the terminals Youve got the port.

That you've got the Drake here as everyone was constrained what we did immediately was got together the team would operate in and then concurrently engage our customers and we did a number of things you brought up a few we adjusted our rate the transactional rate and our surcharges that make sure that we could protect.

<unk> customer, though are with us year round. We also in third at some new processes in place. So we gave our customers.

New guidelines, but when they go to bring their container there, we sat down and talk with our customers about you know container dwell and and and.

And chassis do dwell I've talked about this a little bit earlier, we had 30 that much technology as we could a jump in and getting a higher percentage of our customer.

Two our RCR function, so that they could have greater visibility to when the.

Containers with move we work with our dray carries inserted technology. There. So they have really crystal clear time from when they can drop off or pick up a a container so.

As we stand today real time, we feel really good about where we are.

Yes. It was it was bumpy earlier in the quarter I think our customers really appreciate how we have worked with them.

Up to this point what I.

What I would also tell you is that as we are working with them to a third more efficiency and rigor around those processes.

It's opened up more opportunities for if I feel very bullish about the fact that.

That you know what what Jim is doing with the train service, what our terminals are going where Hamilton as much as possible, but we can still through efficiency and adding in a a little bit more equipment get more volume out of it. So we are feeling pretty bullish.

Bullish about it.

Robbie if I could maybe I misunderstood the piece about the.

The boat how fluid the railroad is the railroad is as fluid as it ever has been we do not have a capacity issue. In fact, we are spending money to actually make it more efficient consolidation in Chicago that I talked about in the prepared before was clear to say, we want to consolidate two two big terminal.

Oh, and one smaller one in Chicago from six so that we can turn the cars faster give the customer a better serve us be able to turn it we see what the opportunity is and we also see what's happened the north of the border and we think that the compete and to win will be in a price discussion is to have a.

Low cost we operate our trains very efficiently we operate a fast we turn the cars quick no one in North America move moves up in speed across their network with the premium business as fast as we do right now. So we can give the best service product to people, whether you're going from L.A. over to.

Texas, and we're going to be as fast as anybody in the Chicago market. So that's what it's all about we think that if we have the right service. We've got the capacity. We know we have we spent on making the savings longer. So that we can run more efficient trains when our train miles are down which means that in the 20% range.

That means that Weve opened up that much capacity on top of the capacity we had before so I'll tell ya.

We have got this thing coming together properly more efficient terminals more efficient the visibility with our customers at the ports and working with the ports. So that we have an efficient product there moved the containers out quicker the domestic product to make speed and consistency that the customer wants I'll tell you I'm very comfortable that the.

Where we're headed and we'll just continue to improve it and Ravi Let me touch base on your margin question right. Because you had a question about what's going to happen to margins on intermodal product you look forward.

No in the long run and in the intermediate run what Jim just outlined is a big driver of the margin on on that product line, which is the efficiency of the service product and that service reliability that sets us up for pricing through Kenny and our expectation with all of our product lines is.

That over time, we're going to continue to have an opportunity to improve its margin. So I don't look forward and and get a concern as volume grows that costs are going to overrun. Some other aspect of that product. We're in great. Yeah, and you mentioned the surcharges to and I think it's important to point out the surcharges are really a net in the overall scheme of things and so.

So you know we go through peak season, we remove surcharges that that's not going to have an impact on our margins.

Great. Thanks for the great detail and Jim Thanks for everything and good luck for the next phase.

Thank you very much road.

The next question comes from the line of Jon Chappell with Evercore. Please proceed with your question.

Thank you good morning, everyone.

Our next una fatigue makes it difficult to come to one but I'm going to try my best here anyway.

Anyway.

We've talked a lot about mix and yield and I think conceptually it makes sense. When you think about the growth of intermodal and some of the headwinds in the bulk categories, but do you guys break out very clearly how does the sequential pace within commodity and when we looked at like grain and food and refrigerated and calls and fertilizers, the sequential step downs than even bigger than in.

Some of the lower mix businesses, so what's kind.

What's kind of behind that and what does it take to reverse that negative trend in the higher yield both segments.

We're right there now and we are all segments some of the commodities that you're talking about we feel really good.

We feel really good about grain and walking into the quarter. The man that's out there and the demand that should move.

In the quarter and I'll call. It the near term, we should see more of that if you look at the other industrial commodities.

I made the comment that they are improving sequentially now we can help with that we can go on in that business development wins on top of that and that's what the team is focused on our marketing team has just done a great job of going out there with data analysis and looking at where we should be running where we should look at.

Prospecting, where that leaves, our where to reconnect with customers or small receiver that weve often myself team have done a really good proactive.

On how much business, we are doing with them. So the markets are coming back slowly sequentially, which will help and we're going to accelerate that by going out there and win business.

Okay, great. Thank you Kenny.

The next question is from the line of Walter Spracklin with RBC capital markets. Please proceed with your question yes.

Yes, thanks, very much good morning, everyone and Jim you answered all my questions about your departure, just just to say congrats and good luck to you as well.

Good.

Yes, essentially moving to the county I guess.

You mentioned about stickiness to the customer and and looking at to get some fluidity into the port.

One of your peers in Canada is started to do look proactively around using their land as a way to enhance shore entice that stickiness about leasing land to a customer adjacent to facilities as one of those approaches. It do you have opportunities sets like that when you look at your land portfolio.

So that you could use that as a as a sales rep into twoq.

To gain share in a in a more sticky way and in a way that kind of.

Get some of that traffic congestion out of the port over to Transload.

Facility more inland something a lot of.

Yeah. Thanks, Thanks for that question the short answer is yes.

And that's not something new for US I don't want you to think that we haven't done that we've been assessing our land looking on our land.

I won't go into detail, but where we are and how we think about it longer term, but I can tell you that.

We would expect to take advantage of the resources and near the Port.

Great case in point, Kenny and we've talked about this for years now is Dallas to dock and the development that's happening around the Dallas Intermodal terminal, which Walter is literally a thousands of acre.

Thousands of acres that in your mind think a couple of thousand acres that we are developing and have developed in concert.

With a with a property developer that is rail centric in its perspective, there's opportunities like that that we either have in the hopper have already executed or are beginning developed development plans for.

Any timeframe of when that could be converted to it to a to a deal.

Well Im sure no specifics, but I would expect virtually every year, we will have some aspect of that kind of business development occurring.

They're now correct theres opportunities to go forward and certainly as you've heard US talk Walter as we have been consolidated facilities I mean, we're generating more opportunities along those lines. When you think about our footprint in the land profile that we have to work with customers to further grow right.

Makes sense thanks for the color.

Thanks Walter.

The next question is from the line of Tom Wadewitz with you guys. Please proceed with your question.

Yes, good morning, Sam.

I know you talked about this a little bit. So this isn't too redundant, but I think it is something that investors and.

I think people were surprised on the chain. So Jim I was wondering if you could maybe offer any personal perspective on the change I mean, I think about it you don't sound like you're overly tired or and enthused about railroading. So.

It does it just seems surprising that you're leaving so I don't know if there's any personal color you can add to that and whether there is a board component I mean, you talked to the board about this and kind of say hey.

Why should I stay or whatever whats the path. So just wanted a little more perspective on that.

Sticking with the two parts team for Kenny can you offer any thoughts on you piece franchise sensitivity to a homebuilding area just kind of how much traffic is sensitive to that so just a small add on to that thank you.

So it doesn't.

It does and I appreciate the question the.

The board has been very supportive clear understanding of what I came in what the timeline was what I wanted to do our wanted to set it up and at what point I wanted to the move on I want to.

I wouldn't read there is absolutely nothing the relationship is great with the Lance relationship is great with the entire team. It's just it's a great time for me to move on and have a long term person set up and Eric is a long term person you see his age that he can drive this thing.

And I'm very comfortable this was a strong team like the people that are sitting here with me around the table I'm very impressed with the what can he has been able to perform he's going to bring the business into this company I just don't see we leverage the great. The facilities. We have it was a great question on the Walter asked us about what capability we have.

So this is a great time I think we've got a great network. We've got if not the best network pretty close to the best network in the entire industry, we leverage with a real efficient railroad we grow the business I just see this place keeping on moving ahead and I've done what I needed to do and the last one I have worked out a real clear sort of.

Helping to transition, which I will do with Eric and the entire team and I'm very comfortable that we've got the right team and listen Jennifer is top notch and the relationship last and I have had has been spectacular no an outsider coming into a company that's the storied history.

The U.P. has and they welcome me we worked together I can't be more comfortable with everybody that I've worked with in this company so Kenny.

So thanks for that question I'll tell you we're encouraged by the recent.

Numbers for housing starts here that came out earlier this week, what's more encouraging for our because of mix. So there is a stronger mix of thing or family housing starts in the multifamily housing authority, which worked out well for us.

As a franchise hey, we enjoy some pretty long haul shipment to Chicago down in the Texas.

We feel good about our strategy and ability to compete along the I five.

I think what people fail to realize or sometime methods. When we think about housing start we're just not thinking.

We're just not thinking about the lumber there's just so many other commodities that are behind you got for Matt you got PVC piping, you've got the wrong Scott.

I think for the carpet, though housing starts just really fuel a lot of things I got right now.

I forgot your eye off the octagon and roofing it.

It really fueled a lot of things without that Mary and create encouraging.

Macroeconomic change for it is there a way to ballpark it though is it like 10% of the book sensitive or 20 year whats the ballpark yes.

I think it's fair for us not to go in and try to range that out for you and just leave that the fact that we like the fact that it's improving and we take advantage of move and not just that lumber is moving into the house would everything associated with it.

Yeah, Okay. Thank you.

The next question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.

Yes, Hi, I just wanted to come back quickly to the grain question I know you said, you're encouraged but specifically on the export side, yeah, our standing as you know.

Commitments for both soybean and corn or are well above five year averages.

To China, and just can you maybe you could give some sense or scope of of the export grain franchise for you Peter.

And what sort of tailwind that could really be thanks.

Yeah, I've got myself in trouble trying to five for this growing market before but what I will confirm for you is that you're right in line, it's going to be right in there with the highs over the last five year, it's going to be a really strong market and so I can confirm that for you I won't size. It for you.

There is going to be a really strong marketplace and Kennedy Wilson will participate there, but without the p. and W will will participate there out the Gulf.

We've seen significant growth.

And those three areas I'm, adding back the call to it though the Pan W. The golf and Mexico. We have thing that's again emphasize on that significant growth from we've got high expectations for the quarter.

Great. Thank you.

<unk>.

The next question is from the line of David Ross with Stifel. Please proceed with your question.

Thank you and Jim now that you mentioned it could you just run for president.

[laughter].

Their consensus, but I wasn't board of the U.S., So I could not do it [laughter] otherwise I'd like it to at some time and let me tell you [laughter] I'd love to get you on the ballot is a better third option [laughter].

[laughter].

But going back to the improved efficiency of the network and the excess capacity that is generating for the U.P. specific in terms of railcar locomotive needs how much.

Do you think you can really grow volume wise before you need new railcars, new locomotives and and how much of that capacity have you actually taken out removed retired versus just keeping in storage for future growth.

Well, let me start and then maybe Jennifer you want to talk about how we're handling it but.

Sure we've got lots of locomotives I didnt, even mention at this time I think we've got the 3000 of them part. So we won't be needing locomotives. If we could sell some of them and I'll leave that to the Jennifer but we could do something to monetize them I think we would but pretty tough market.

On the railcar side dipped.

It depends on the mix of the traffic we have we have cars available cars part we've returned as many as we can to the to make us more efficient that way. So it's a mix on what we have that bad depending on where the business. That's the way I look at it if if we were done operationally then you could say boy if the business went up on one segment.

On the grain side, we'd have to go more than lease more cars to bring it in.

We will not we still have efficiency left to be able to if the business goes up X were going to be half of that on the cars that we have to put in to be able to handle that business and that's what I'm real comfortable with.

Yeah and on the freight car and locomotive side, David you know freight cars, we tend to own this isn't entirely to attend on the multi use kind of cars and so as you see changes in market.

I've seen the surgeon grain, we've been able to repurpose some cars that had been hauling thank fertilizer and move into an integrated service and obviously about CCAR. As you know can can move anything. So you know our freight car fleet, we feel good about where that's at and our ability to deploy it as we need to on the locomotive side. You know we look at the fleet by type.

You know we have a relatively young fleet kind of overall and we have opportunities to modernize that fleet and redeploy it and as the volumes come back up and we see that as an opportunity for us going forward I'll, obviously going to use that fleet as efficiently as possible, but weve got plans her for every locomotive we own and.

Rather it today or maybe tomorrow that the opportunity for us and that's what you've heard.

You've heard us talk a lot about growth and the growth of margins or the capital efficiency of our ability to grow going forward is tremendous when you think about the fact that we have the the freight car assets the locomotives and the track assets to put more business across and leverage that investment that we've already made is trump.

Then this opportunity for us so we look forward to taking advantage of.

Yes. Thank you.

<unk>.

The next question comes from the line of Cheryl Unread, born with TD Securities.

Good morning, Thanks for squeezing me in and Jim our best year.

Wanted to ask with the industry now operating based on kind of a similar philosophy do you think there is an opportunity to work together in a bit more creatively to develop new interchange tracker.

Oh, 100% Sherilyn and we're actively working that with every.

ER other class one railroad partner of of course, excluding BNSF, there, there's really not much opportunity to do that with them.

But you know what do you think about it in the context of historically, there's there's this watershed area and for US that typically is along the Mississippi River, where if if theres an origination on my side of the of the river. Its short haul for me to get it to and eastern carrier and a lot.

Of times, historically, that's not look terribly attractive but.

But when we're all thinking about our business the same way now and we're all eager to grow with our excellent service product.

We're all starting to think about you know just because it's a short haul on my side, if it generates an attractive relationship with a customer it gets more railroad penetration and there's opportunity on their side of the river to originate for us, we're making those trades and we're not doing it historically like we might have where in order to make.

The move attractive for me I'm going to move it out a route and put into a gateway where it doesn't make sense. So I get a little length to haul that's not happening anymore right were.

We're all thinking very clearly about best.

Best Okay.

Overall route structure, what's the price it takes to win.

Is that attractive in total and if it is lets do it and doing it collectively I'm wondering I don't know from Atlanta.

So to Lance's point, you're right, we're thinking about it as what we do have were one railroad.

And product development components associated with that not just service it could be something a little bit more than fair if it could be something.

Fifth a physical footprint, but there are obviously the equipment efficiency plays a part of it but on an annualized basis, how do we go out and win that truck traffic.

Out there that we haven't been able to count payment.

Lot of opportunity there sharyland.

Thank you.

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

Mr. Vernon your line is open for questions.

Sorry, I was on mute there so lance I wanted to come.

Come back to the question on domestic intermodal, we continue to hear from from shippers as well as some of the spicing partners that but the the ease of accessing the network. The service on the network is what it is and you guys reported good metrics there, but as you think about the friction cost of getting in and out of terminals on the intermodal that is kind of holding back.

To a degree and I'm just wondering what can you as you get Pacific due over the next couple of years to solve that problem, you mentioned earlier that that going retail or.

Developing more retail capabilities as a part of the solution, but I'm just wondering how do we get out of this situation where when demand picks up you end up in a situation, where you got to fuel surcharges to keep traffic out of the yards. Yeah. Great question, David and I want to also be clear I didn't say that at some point the future retail isn't the answer.

Just wanted to make sure nobody thought it was announcing a new product on our call.

So technology plays a really big role in what you were just talking about your what you're talking about David is fundamentally ease of doing business and removing oh blockages that keep customers from using the rail intermodal product and to your point Kenny has mentioned this but.

For I T. R. One of those can be if you if you schedule a truck when you bid for truck you can get it scheduled at the time you want it where you want it and be very confident that it's going to show up for you to load or to empty.

We're reflecting the same kind of thing through I T.R.I.T. ours, basically a reservation system that allows domestic intermodal customers to know hey, I want to move this container from here to there and do a do you have availability on the day I want it. The answer is yes, I'm booked and I know I got it if the answer is no I know when I.

And get it and if it doesn't match my needs. It doesn't match my needs, but at least I have clarity and I don't make an assumption and then get angry when it doesn't happen. So that's one small example, we're also making it much easier for dray drivers when they come on to the ramp with you can go to be able to get through the gate quickly no exists.

Exactly where to park were to drop off from where to pick up and go so.

So they're getting a lot of help that way, we're helping to the viscose also by making sure we're tracking down chasses and keeping them productive in our terminal areas right. Sometimes chassis is get off property and they get lost or used for very different purposes that aren't bring.

Bringing business to and from the railroad so it so theres just.

Hundreds of different activity items in there that ultimately lead to a better customer experience. That's what I mean by that end to end experience Kenny you got anything else for them, though I mean, the fact that we're sitting down with our customers talking about these traffic talking about the container well given them really good data point managing with data.

Yeah good.

And is there anything in the terminal side itself from an automation standpoint, or or or better throughput capacity that they would also need to be addressed because it seems like every time the truck market gets tight we end up in the same kinda pig in the Python kinda problem.

So that's a great question right and part of that is yes, we can continue to be better and better as we are rebuilding g. for a we're introducing wide span gantry cranes, there that'll be part of being able to get a box on and off a well quickly part part of that also though is making sure we have.

Visibility deeper into the supply chain right now if stuff shows up with very little advance notice it's hard to.

Realign our rail resources to handle it to the Ics.

To the extent, we can get a week or even to Oh, we can we can realign our resources pretty quickly that gets back to I T. R. I tiara is most effective when a maximum number of customers are using it and they're using it as far out as they can and we're working really hard with our customer base to get that to be kind of normalized behavior.

All right. Thanks, a lot that's on that.

Thank you.

The next question comes from the line of Bascome majors with Susquehanna. Please proceed with your question.

Yes, yes.

Congrats on all the time you spend here and good luck with whatever snacks just wanted to just focus on you in the eight or nine months, you've got left here what are the one or two things you're absolutely feel like you must wrap up and you know what are the larger projects that are going to take.

That are going to take another couple of years or so under Eric's leadership, but that are really kind of focus to that transition.

Okay. You know short term listen we've had a lot of discussion about our intermodal service products, we see that as a growth area. So I'm going to concentrate on making sure. The end to end view ports domestic terminals, we make them as efficient as possible, we meet the interaction with the customer as clear as per.

Possible. So that we can react better I think we did a pretty good job of reacting to the big go the bump up in business, but I think we can be better want to concentrate on the relationship with the other railroads and how we interchange in how we move traffic back and forth to make it even cleaner than we are today, because I think we can both when it was a great question on how we're reacting.

With the other customers and listen the other than Ah locomotives asset utilization service productivity.

That's what I'm going to concentrate on in the next though and I'll, let Eric run it and that will make sure that the that were attune lined up together and finish that off so that's what I'm going to do in the next.

Six eight months.

Thank you.

Thank you appreciate it.

Next question comes from the line of Hydro Nathan with Daiwa. Please proceed with your question.

Hi, Thanks for squeezing me in here just any question on on Capex, how should we think about it for next year given.

Using an on going to be putting any locomotives, but are there any projects. Please.

Planned.

For next year it should.

Okay.

The puts and takes on the Capex side and and also if you could I know you mentioned the package business is it.

Very good business can you just kind of.

Go go through some of the economics of that business.

I'll take a capex Jennifer from a project perspective, there's nothing big that's unusual on the horizon.

We're sticking with our guidance Jennifer Yeah, I mean, the less than 15% of revenue is where we would plan to be again for next year and obviously, we'll talk more about that in January you know I know, we still have some siding projects that we plan to finish out some that will finish out yet this year and a little bit more of that work, but you know we continue to have a robust plan we'll monitor.

Nice locomotives will continued to make sure the infrastructure is in good shape. So I feel good about our ability to spend that capital to keep the railroad safe efficient and add the capacity is needed for customers well and one thing that we haven't talked about on this call is our new CIO coming over a stock.

Turning at the beginning of November and technology, we've talked about throughout the call as an important element of our overall service product and ability to grow and win business and I'm sure. He is going to have the help and we'll also have some capital elements, but I don't think it will be an unusually high spend no.

Yeah.

I don't have anything else.

He was asking about parcel parse positive parcel biz and Oh, Yeah, I mean part of it has been strong we've gone out there the market has grown but like I mentioned, we've gone out there and had some pretty strong win across the board on our parcel business.

Expanding beyond parcel because parcel businesses the per day, what I'll call service sensitive business I've been very proud of the team our low teens carreker Tropoli team, we've been able to with them service sensitive business with two large OEM.

All of this is truck traffic one of them as a new entrant to rail so and the product is both a short haul and long haul. So if you look at E Commerce and look at the service center for the market.

Team and behind that service products is relevant and done a great job on it.

Okay. Thank you.

Yes.

Thank you. Our final question today comes from Allison Poliniak with Wells Fargo. Please proceed with your question Hi, guys. Good morning, I, just want to make sure I understand the comments around new business opportunities and land and are you starting to see does accelerate and broaden here with the improved network and some of the efficiencies that you pull through.

Well and certainly understanding it's been an unusual year and those opportunities where you thought they would be at this point in your journey any thoughts there.

So the two you know changes there is a strong reliable service product.

But we haven't had in some time the other thing is a lower cost structure would also make.

A piece of the business more attractive that we haven't thing I made some comments around opening up new markets and gave some examples of long haul business just a few minutes ago, but we're off.

But we're also seeing the same thing with some short haul business short haul carload business, where again, if we can add.

Large pieces to existing train service or even small volume pieces to existing train service it drops to the bottom line, but those two things along.

Really enable our sales team and our marketing team to be very pointed and deliberate and having conversations with our customers about truck conversions.

Great and just you know that's opportunity its kind of now at this time of year journey. How you kind of thinking are they are they where they should be at this point are they a little better any thoughts there.

We have we certainly have room to grow there is opportunity for us to grow and we're excited and bullish on where we expect to be there and there is no part of this where we're ready to say that weve arrival or were done we've got a lot of room to grow here al Allison, We think war.

Sooner better that's what that's what Kenny here is all the time.

Great. Thank you guys.

Thank you we have retained or a question and answer session and I would now let's turn the floor back over to Mr. Lance Fritz for closing comments.

Thank you again, Rob and thanks, everyone for the questions. It was a really good session today I want to thank Jim again, I'm. So pleased we've got them for as long as we do we are going to.

We're going to put them to good use over the next eight months and we look forward to talking with all of you again in January to discuss our fourth quarter and full year 2020 results until then I wish you all good health. Please take care of yourself and take care. Thank you.

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