Q3 2022 Union Pacific Corp Earnings Call
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It's now my pleasure to introduce your host Mr. Lance Fritz Chairman, President and CEO for Union Pacific.
Thank you Mr. Fritz you may now begin.
Thank you, Rob and good morning, and welcome to Union Pacific's third quarter earnings Conference call with me today in Omaha, Kenny Rocker Executive Vice President of marketing and sales, Eric Garringer Executive Vice President of operations, and Jennifer Hayman, Our Chief Financial Officer before discussing results for the quarter I wanted to thank our employees for.
Their tireless efforts over the past several months to improve service levels.
Also note the dedicated service of our craft professionals throughout the recent very lengthy labor negotiation the new agreements based on the presidential Emergency Board recommendations reward our employees for their hard work and with roughly half of our unions ratifying agreements. We are looking forward to complete this process.
And move forward.
Now turning to our third quarter results. This morning Union Pacific is reporting 2022 third quarter net income of $1 $9 billion or $3.05 per share. These results include the impact of the $114 million charge for prior period estimates related to the new labor agreements.
Excluding that charge adjusted net income is $2 billion or $3 19 per share. This compares to third quarter 2020 run results of $1 $7 billion or $2.57 per share or adjusted third quarter operating ratio of 58, 2% is 100 and.
Cindy basis points higher than 'twenty, 'twenty, one costs related to higher inflation and ongoing network inefficiencies were offset by fuel surcharge revenue volume growth and strong core pricing gains to produce adjusted operating income growth of 13%, we made real progress during the quarter to increase <unk>.
Work fluidity, and better meet customer demand and as you'll hear from the team we're continuing to take steps in the fourth quarter to better meet that demand and drive cost from the network well the year hasn't played out as originally planned our volumes have outpaced our peers demonstrating the growth mindset that we're instilling within our organization.
So with that let me turn it over to Kenny for an update on the business environment.
Thank you Lance and good morning, third quarter volume was up 3% compared to a year ago with carloads increased across all three of our business segments.
Although overall volume was up we undoubtedly less demand on the table as we continue to improve service across the network.
Freight revenue was up 18% driven by higher fuel surcharges and strong pricing gains.
Let's take a closer look at each of these business groups.
Starting with ball revenue for the quarter was up 16% compared to last year, driven by a 14% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains.
Volume was up 2% year over year.
Poland renewable carloads grew 5% year over year, driven by continued favorable natural gas prices in two contract wins that started on January 1st.
Grain and grain products volume was up 3% with strong domestic feed grain and increased biofuel shipments for renewable diesel.
Fertilizer carloads were down 7% year over year due to reduced shipments of export and domestic consuming potash.
Lastly, food and refrigerated volume remained flat in the quarter.
Moving on to industrial industrial revenue was up 15% for the quarter driven by a 4% increase in volume and an 11% improvement in average revenue per car due to higher fuel surcharges and core pricing gains.
Energy and specialized shipments were down 3% compared with 2021, driven by your petroleum shipments primarily due to regulatory changes in the Mexico market.
Volume for fourth product was down 2% year over year, primarily driven by lower demand for corrugated boxes.
It was partially offset by positive year over year lumber shipments.
Industrial chemicals, and plastics shipments were up 8% compared to 2021 due to new business wins customer expansion and market demand.
Metals and minerals volumes continued to deliver robust year over year growth.
Volume was up 7% compare to last year, primarily driven by an increase in frac sand shipments growth in construction materials and metals business development.
Turning to premium revenue for the quarter was up 25% on a 3% increase in volume.
Average revenue per car increased 21% due primarily to higher fuel surcharge revenue and core pricing gains.
Automotive volume was up 19% driven by strength in production and inventory replenishment.
Finished vehicles increased by 33% and auto parts increased by 11% against the software comparison from last year.
Intermodal volume was flat domestic intermodal was down 3% due to softening demand driven by a 16% decline in parcel shipment, however, international volume shrimp and by 4% from Ocean carriers shifting more freight inland terminal.
Now moving to our outlook for the rest of 2022.
At a macro level, we will be closely watching our markets to see how inflation and interest rate.
Impact our overall volume, but here is where we sit today with our market.
Let's start out with our bulk commodities, we expect biofuel shipments for renewable diesel to continue to grow due to solid market demand and business development win.
For coal, we anticipate continued favorable natural gas prices to generate demand for both domestic and export shipment.
However, the opportunity to capture demand is dependent on the available resources.
And our outlook for grain is also dependent on our service recovery Bye.
But as we've mentioned before we have a tough comp in the fourth quarter as exports were strong last year.
Moving on to industrial forecast for industrial production is decelerating and demand is softening and forest products. However, we expect construction to be a positive due to a strong project demand in the south.
Lastly for premium we are closely monitoring domestic intermodal demand and spot truck rates fall and inventories decline, we expect parcel in truckload demand to remain golf as consumer preferences have shifted more to experience. It first is good.
We're also watching the international markets closely but we expect to be positive in the fourth quarter due to easier comps.
And we expect growth in automotive to be driven by improving supply for park and inventory replenishment.
Overall, we still foresee a favorable demand environment for the fourth quarter crew availability continues to improve which will help us capture more growth and support our business development wins, we had in the 2023.
With that I'll turn it over to Eric to review our operational performance.
Thanks, Kenny and good morning, turning to slide nine our year to date safety results are demonstrating meaningful and sustained improvement compared to 2021 sei.
Safety impacts every facet of our business our employees, our customers and our shareholders.
While our safety management system is promoting the right culture. Our number one priority remains returning every employee home safely at the end of the day.
Taking a look at our current network performance on slide 10.
Our operating metrics steadily improved through the third quarter aided by improving crew availability from hiring initiatives lower re crew rate and improve crew utilization.
Our hiring and training pipeline is strong to date. We have graduated 890 employees and have an additional 518 currently in training all expected to graduate by January of 2023.
We have now hired 1408, new transportation employees exceeding our goal for the year.
Freight car velocity is approaching 200 miles per day up from its low in April even more encouraging the improvement came while moving 10000 more weekly carloads.
By utilizing approximately 250 borrowed out employees and adding new graduates to some of our challenged crew locations, we have been able to add more coal and green sets back into the network.
We also reduced our weaker rates from a peak of 11% in April to now around 7%.
Exiting the third quarter. The network is in a more solid and fluid state than earlier in the year.
Going forward, we are building upon these improved results to drive excess cost from the network now.
Now, let's review our key performance metrics for the quarter, starting on slide 11, which remain challenged when compared to 2021, even considering the relatively easy comparison from last year's wildfire and weather events. However, both freight car velocity and manifest and auto trip plan compliance strengthened sequentially.
From last quarter's results.
Intermodal trip plan compliance was flat sequentially and remains impacted by persistent supply chain challenges, resulting in elevated chassis Street times and container ramp dwell.
We continue to make progress at the West coast ports as the number of stacked containers declined.
Turning to slide 12 to review our network efficiency metrics during the third quarter as performance improved we were able to remove in stage locomotives across the network to improve overall fleet utilization as a result locomotive productivity did improve sequentially. Although it remains below last year's metric.
Entering the fourth quarter as we continued to improve train speed and other measures locomotive productivity will continue to strengthen as well.
Third quarter workforce productivity was flat as both the labor force in car miles increased.
Train length improved 1% compared to third quarter 'twenty 'twenty. One is the team utilized longer trains to handle increasing volumes. We now anticipate completing an additional four sidings in 2022 on top of the 20th sidings in our original plan.
This will bring the total signings completed since 2019 to 80.
These sidings are a key enabler of our ability to effectively use our resources and drive productivity.
Wrapping up on slide 13, I'm encouraged by the progress we've made but our work is not yet done using our P. S. Our principles, we will further improve our service product and build a more resilient network our trajectory to this point reflects the great team, we have a union Pacific and my Thanks goes out to everyone for their efforts and dedication.
To finish 2022 we remain focused on further reducing excess inventory safely improving operational efficiency and using our crews and locomotives even more effectively.
Ultimately as is always the goal we need to run the network and manage our assets in a more than volume variable manner.
To that point, we are storing excess international intermodal railcars as the expected levels of volume did not materialize, while at the same time to capture demand in other areas, we are bringing cars out of storage.
Additionally to support bulk demand, we will continue hiring programs incent additional barto to employees to crew challenged locations and our northern region.
As we wrap up the year and I look forward I am confident that the foundation. We are building will provide a better service product for our customers.
With that I will turn it over to Jennifer to review our financial performance.
Thanks, Eric and good morning, I'm going to start on slide 15, with a walk down of our third quarter operating ratio and earnings per share.
Our reported operating ratio of 59, 9% and earnings per share of $3 and five include a $114 million change in estimate related to the presidential emergency board recommendation and subsequent ratified and tentative labor agreement.
At a high level, the $114 million charge negatively impacted third quarter operating ratio by 170 basis points and D. E. P S 514th.
For more granular information on the charge please refer to the appendix slide at the back of the presentation deck.
It's important to note, however that while our general wage accruals weren't far off the P. E. B recommendation, we did not accrue for the 1000 and annual bonus payments.
Our results in the quarter continued to reflect inflation and network inefficiencies as our operating ratio was unfavorably impacted 310 basis points, but contributed 20 to EPS.
Importantly, we did make sequential core improvement in our operating ratio of 40 basis points versus the second quarter.
Decreasing fuel prices in the quarter and the roughly two months lag in our fuel surcharge program favorably impacted our quarterly operating ratio by 70 basis points and added 37 cents to EPS.
Finally third quarter result, also include the favorable comparison to last year's weather and wildfires that which adds 50 basis points to L. R and five cents to E. P. S.
Looking now at our third quarter income statement on slide 16, where we provide both reported and adjusted numbers that exclude the impact of the labor charge throughout my remarks, I will speak to the adjusted results.
Revenue totaled $6 $6 billion up 18% versus 2021 on 3% year over year volume growth as we have seen throughout the year higher fuel prices are the primary contributor to higher operating expenses, which increased 22% to $3 $8 billion, excluding the impact of higher fuel prices our expenses were up.
10% in the quarter.
Third quarter, adjusted operating income totaled $2 $7 billion, a 13% increase versus 2021.
Other income increased $86 million, driven by higher real estate income, including a $35 million gain on sale and pension benefit.
Income tax expense increased 13% as a result of higher pretax income, partially offset by corporate income tax rate reductions in three of our operating states as.
As a result of those changes we now expect our full year tax rate to be around 23% I.
Adjusted net income of $2 billion increased 18% versus 2021 and adjusted earnings per share was up 24% to $3 19.
Operating revenue operating income net income and earnings per share were all quarterly records looking more closely at third quarter freight revenue Slide 17 provides a breakdown, which totaled $6 $1 billion up 18% versus 2021 year over year volume gains supported by our business development efforts and sequentially improving.
Operational fluidity increased freight revenue of 325 basis points.
Fuel surcharge revenue impacted revenue 13 points, reflecting the impact of higher year over year diesel prices and the two month lag in our recovery program total fuel surcharge revenue was $1.2 billion in the quarter.
Strong pricing gains when combined with a slightly negative business mix drove 200 basis points of freight revenue growth lower petroleum shipments combined with higher rock and auto parts shipments contributed to the negative mix.
From a price standpoint, we have now lapped the positive benefit from coal contracts index to natural gas prices. So the year over year benefit is minimal and as we experienced in the second quarter network Fluidity limited the upside for both price and mix setting these headwinds.
Besides we are confident that we will yield price dollars that exceed inflation dollars, even with the higher inflationary hurdles than expected at the start of the year.
Moving on to Slide 18, which provides a summary of our third quarter. Adjusted operating expenses were the primary driver again this quarter was fuel up 71% on a 67% increase in fuel prices, while we saw fuel prices come down some in the quarter. Our average quarterly fuel price was $3.96 per gallon only seven.
Slower than second quarters average price our fuel consumption rate achieved an all time quarterly record in the quarter, improving 1% versus 2021 as a result of productivity gains and a more fuel efficient business next.
Looking closer at the other expense lines adjusted compensation and benefits expense was up 12% versus 'twenty 'twenty. One. This includes an additional $19 million related to this quarter's accrual for wage increases and annual bonus.
Total third quarter workforce levels increased 3%.
Management engineering, and mechanical Workforces grew 3%, while train and engine crews were up 5%, primarily reflecting year over year increases in our training pipeline as you heard from Eric We have now exceeded our 2022 hiring golf car.
Cost per employee came in higher than anticipated up 8%, primarily driven by wage inflation. We also experienced continued cost pressures related to network inefficiencies with higher overtime and borrow outcast.
For the fourth quarter, we expect the year over year increase to be around 7% in line with tentative and ratified wage increases purchased services and materials expense remained elevated up 23% driven by higher cost to maintain a larger active locomotive fleet volume related purchase transportation expense associated with our lives.
Aerie and inflation.
Equipment and other rents decreased 1% driven by higher equity income that more than offset increased car hire expenses.
Other expense grew 18% in the quarter a bit higher than we anticipated as a result of increased casualty expenses associated with freight loss and damage and personal injury for the fourth quarter. We expect other expense to be flat versus 'twenty 'twenty. One as we are anticipating the receipt of an insurance settlement for last year's bridge fire overall.
And cost inefficiencies offset the benefits of volume leverage and resulted in fuel adjusted incremental margins of just 2%, although not the results. We know we can achieve it still reflects positive progress from the second quarter and provides us with momentum as we wrap up 2022.
Turning to slide 19, and our cash flows cash from operations through the third quarter increased 9% to $7 $1 billion are comparable cash flow conversion rate was 80% and free cash flow totaled $2 1 billion.
Although this is a decrease of $517 million versus 'twenty 'twenty. One. It includes 745 million of increased cash capital spending and $317 million in higher dividends.
With the increased capital spending to date, we now expect full year 2022 capital to be around $3 $4 billion up slightly from our prior guidance, but well within our overall guidance of less than 15% of revenue year to date shareholders have received $7.9 billion through dividends and share repurchases. This.
Level of cash return demonstrates our firm commitment to rewarding shareholders with strong returns related to share repurchases. We now expect to buy back roughly $6 5 billion in 2022, although we repurchase shares at a strong pace in the third quarter and expect that to continue for the remainder of the year, we have been impacted by higher than anticipated infill.
[noise] scenario pressures and service costs Lastly, we finished the third quarter with a comparable adjusted debt to EBITDA ratio of two eight times as we continue to maintain a strong investment grade credit rating in fact during the quarter. We received an upgrade from Moody's to <unk> three and we are now a rated across all three credit agencies.
Also during the quarter, we issued $1 9 billion in debt, which included 600 million of Green bonds are first such issuance.
Wrapping up on slide 20, with a little over two months left in the year. We are focused on building upon the positive momentum in the third quarter.
The operating team is executing on its plan to improve operating performance and capture additional unmet customer demand.
As you heard from Kenny However markets are softening a bit and that is resulting in a slight reduction in our overall volume expectations now more in the range of 3% growth for full year 2022 with more clarity on the impact from the new labor agreements are operating ratio outlook also has changed we now expect our reported full year operating ratio to.
Be around 60% as we close out 2022 attention is quickly turning to 'twenty twenty-three well, we are not yet ready to share our outlook. It is important to reiterate our long term view our focus on generating strong cash returns and improving ROIC remains unchanged and we are firmly committed to achieving the goals.
Stablish at our May 2021, Investor day, other 55% operating ratio and incremental margins in the mid to upper sixties.
Since establishing those targets and even achieving them in a few quarters. The environment has changed with higher inflation and a weaker economic outlook. The road to achieving those milestones now is a bit longer but our roadmap to success is still the same supported by our great employees and the foundation of <unk> strong and diverse franchise, we were leveraged by.
Pricing and productivity to achieve those goals with that I'll turn it back to Lance.
Thank you Jennifer as you heard from Eric our year to date safety metrics have shown good sustainable improvement, which is very encouraging.
However, the most important metric is for all of our employees to go home safely every day, we remain relentless in pursuit of that ultimate and most important goal.
On the sustainability front during the quarter, we announced a 1 billion dollar agreement with web Tech to modernize 600 locomotives over the next three years. This is a key investment as we work to reduce our carbon footprint and meet our 2030 S. B T. I targets. This investment also supports what our customers need as each modernize.
Locomotive is significantly more reliable this is true game changing for Union Pacific.
As we close out 2022 we look to capitalize on the demand available to us as we sequentially improve operational efficiency and although we're still putting together our 'twenty 'twenty three plan, we like our positioning relative to the industry, considering our great customer wins like Schneider expected strong coal demand and a pause.
Out of impact to our construction business associated with the infrastructure Bill also want to reiterate Jennifer's point about our long term view, we are committed to achieving a 55% operating ratio and mid to high Sixty's incremental margins. These goals are achievable and as we safely and efficiently improve operations.
Our customers our employees, our communities and our shareholders will all win together.
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, we have living everyone to one question to accommodate as many as possible.
And our first question is from the line of Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question.
So I know you said, it's still too early to talk more about 'twenty 'twenty three but just given the importance of volume growth and visibility to that can you. Maybe just wanted you to go through some of the areas. They are a little bit more confidence and visibility at this point and also can you touch on the impact of the stronger dollar as it relates to the various end markets because of that.
It has been disruptive in the past for Ya.
And then Lance any update on the.
The negotiation process, considering one of the unions.
Projected the contract and I believe the National Rail Conference also rejected their counter offer last night and update on thoughts ahead and timing that would be appreciated there. Thank you.
Thanks, Brian .
I'll start with a look at the labor negotiation and then we'll turn it over to Kenny for talking about 'twenty 'twenty three growth.
Potential so when we look at our the overall negotiation. We've got are on U P property five unions on the industry six unions that have ratified that's about half the unions. We've got four that are out for ratification vote still and then we've got the B M. W. D. That's rejected their ratification.
And early in our back into negotiation a couple of things to note. We've got an agreed upon status quo or are maintained of status quo with B M. W. Wall, we're negotiating out what they take back to their membership.
And one of the reasons, maybe we think the predominant reason for that original vote not to be ratified.
Is that the P. B recommended both wages and they also for the B M. W. E recommended a change in their compensation for traveled to the Worksite because about 40% sometimes more of that work team goes to away from home work sites works for seven days.
And then it comes back so a change in that travel allowance and a change in the per diem, while there are away from home.
That negotiation on U P property, just finished up last week and so as the as the members were ratifying. The boat there was a section of it that they really didnt have clarity to we think that clarity makes that vote more straight forward and so that's that that's part of the negotiation that's how.
Opening is exactly what's going to be embedded in the agreement when it goes back out for ratification ultimately.
I remain confident that we're going to get are temporary agreements ratified and be able to avoid a strike.
It's still a possibility, but I don't think it's a probability.
So I hope I'll start off a little backwards here and take the currency question first.
Lance and I just came back from Asia here recently, and we saw the evidence of what you're talking about we're really looking at how the consumer is going to spend their money. We're seeing some evidence that they're spending more on the services right now than the good we're seeing that show up in the parcel shipment and so.
We're going to just watch that pretty closely week to week.
So I talked a little bit about some of the markets that we feel very bullish on obviously coal is one of them, Eric and his team and our commercial leaders have done a really good job of being agile and put resources incremental resources.
To capture that business on our biofuel markets you know if any margin market board, we feel good about the order book.
Of customers that are coming on we're going to bring on two new plants here in the next call. It three to six months, which is very encouraging for us.
Grain is going to be a tough comp, but we'll see how that plays out.
On the industrial side.
You know housing markets within our lumber shipment.
[noise] taper off a little bit one of the things that I'd tell you about industrial is on the construction products side, our rock shipments are still relatively strong in Philadelphia positive for our metals business has been strong a lot of the rebar goes into construction material for highway.
The roles. So that's encouraging for a lot of the other sheet and coil is helping all of the automotive business, which is also I talked about that being up automotive is up a deal of supply are at their facilities are low they were about 32 days some of the Oems that we've talked to their deal.
The pipe or inventory at their dealership is in the single digit them and the team that's going to be a positive for.
The rest of the quarter I mentioned that is a little bit earlier on the international intermodal side.
It'll be a positive for us we've got a easier comp and then we're going to keep an eye on again domestic as we're moving through.
Alright, thank you.
Our next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.
Yeah, Hey, thanks, good morning.
I guess, maybe I wanted to clarify a point on a full year operating ratio. So I just wanted to make sure I think you said reported 60 for the full year. So does that include the $114 million that sort of excluded from the adjusted third quarter. I guess, that's my first question I'm, just sort of piggybacking on that as you think about the sequential progression.
It sounds like you know yields probably decelerate just given what's going on with fuel.
Can you talk a little bit about sort of a cost.
Dynamic maybe moving forward it seems like maybe a big bigger than normal seasonal step up in the operating ratio in the fourth quarter versus the third of course, you can just sort of elaborate a little bit on that that'd be helpful.
Sure Kristen. Thanks for that question you did hear right that to the 60% is the reported operating ratio. So that does include the impact of the P. B the $114 million that we took the charge for relative to the change in estimates as well as the ongoing impact which as I mentioned in my remarks was 19.
Million in the third quarter and will be you know likely a similar amount in the fourth quarter. So we absolutely do have that cost inflation are you also I think referenced feel that is going to flip on us we believe from third quarter to fourth quarter, where it was a tailwind for us in the third quarter that looks back to a headwind.
Of a decent amount we think now in in the fourth quarter. So that's going to be an impact and of course Mick.
You know it was a little bit negative for us here in the third quarter, that's probably going to look a little bit worse as we move into the fourth quarter, So kind of putting all those things together accumulatively you know on a sequential basis, we are expecting the operating ratio to deteriorate. Some even as we're bringing more volume on and still working to take <unk>.
That's out of the network, but we have those headwinds and as you know with those inflationary things in particular, well, we're very confident we're going to offset that with price. There is some timing there.
Okay. That's helpful. Thank you.
Mhm.
Our next question is from the line of Jason Seidl with Cowen and company. Please proceed with your question.
Thank you Robert or Atlanta team Oh, good morning wanted to focus a little bit on the intermodal side and break it up between both domestic and international on the domestic side, you, obviously called out sort of weakening truck market are going to be a little bit of a challenge how should we think about that going forward in terms of the yields and on the animal.
On the international side, how should we think about what we've seen is a big shift from the west coast to East coast, how much of that traffic shift do you think it will be permanent in the long term.
Danny.
I'll start off with the international intermodal.
And just kind of walk you through it.
First of all one of the things that is encouraging to us is that we're seeing the percentage.
Of traffic that goes onto the west coast and move to our inland facilities.
And so again that means that less of that product is being transported on the west coast. So that as a positive to us that's encouraging to us we're pushing up a I'll call it product and solution up again with our customers in that.
Light.
For example, our K T and Dallas to dock facility last quarter had its highest volume of westbound.
Traffic there.
Also we opened up our global for AG reload.
The facility in August so those are things that we're doing to make the product a lot more encouraging so keep that in mind as you're thinking about the west coast versus the east coast than on the domestic side again, I'd mentioned and called out the fact that you're on our parcel business. We're looking at that are fairly close with where kind of heading into the lab.
A part of the year, we have seen the inventory.
Rise a little bit we that is reflected in our some of our inland terminals are to a very small degree.
We've seen the spot rates are lower but we haven't seen that in the contract rate, we'll know more about that as we head into a bid season, which is in call. It December 4th.
Yeah and I.
Jason I, just add one thing and that is where we're encouraged by the movement of the international boxes between ports and inland right. That's fluid it looks pretty good we've taken some of the box count down off of the ports that's approaching back to normal we still have an issue with trying to get boxes.
Off the inland ramps and processed through warehouses, there, there's a lot of inventory sitting in warehouses right now and our U S. Consumer is going to have to chew through that for us to be able to get.
Street times in and box dwell on the destination side back to normal.
Okay, and any and the comments that I made about our yields if if we do see a bleed and the contract rates on the truckload side Kenny how.
Should we think about pressure on intermodal yields as we look to 'twenty three.
So you know first of all I think again, it's just a little too soon to tell hey, I'm not ready to concede that all the tightness that Lance just talk about might not show up in firming prices on the contract side. So.
It's just a little too soon to call that out.
Okay was there enough through the bid doubtless, there's a headwind there through the bid season, and we'll have to just see how it plays out.
Okay I appreciate the time as always gentlemen.
Thanks, Jason.
Our next question somebody from the line of Jon Chapell with Evercore ISI. Please proceed with your question.
Thank you good morning, Eric.
Eric do you spend most of this year probably been much of last year, you know trying to bring on resources, mostly labor, but all these resources that you needed for fluidity and productivity et cetera, now you feel like you're getting close if not there into a slowing demand backdrop. So as you look about going forward do you have the flexibility and the nimble.
Now that you've had in prior cycles to maybe manage some of those resources down if demand is weaker than you expect or do you need to keep the network a bit more over resource in the short term given these challenges that you've had and maybe even more intense scrutiny from the regulator.
Yeah I appreciate that question John without a doubt as we've demonstrated in multiple times. Unfortunately, we have the ability to bring down our resources in line with volume and all my prepared comments I made a point to point out that we want to be more than volume variable. So that playbook is known and we've demonstrated in efficiency and in being able to do that now.
We think about that and we think about the last year and a half to your point right. There are three things that we continue to be focused on our ability to hire and no matter. What the market is remains critical as part of that we continue to work on how we think about making our jobs, even more attractive to the population. So no matter what the market is we can attract the talent that we need.
At the same time as we look at resources and continuing to be able to balance them to your point you will see us as we've had in the past reestablish he wants which is a way for us to have a little bit of a buffer it's not thousands of people. It's a couple of hundred people to be able to react both on the upside and the downside. So we have that.
The book, we clearly demonstrated our ability to execute it yeah. We continue to take lessons, we're learning to make that playbook even stronger.
Great. Thanks, Eric.
Next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Good morning, guys. Thanks for taking the time, Eric you mentioned in the slides that you're getting ahead of your 1400 hiring goals for <unk> T. This year can you think can you help us think about you know how much more hiring we need to do to kind of maintain a the the the service levels, where you need to be like what what are you. What are you thinking about in terms of head count for next year obviously.
So you don't have the volume plans and everything else, but are we still in the process of catching up from a headcount perspective for where you need to resource the network or are you forget to 1400 are we there.
David Great question. So you know to reiterate we set out the year to start hiring 1400 people you heard in my prepared comments that we've done that now admittedly a third of the 1400 have been hired and they're in the training pipeline. So we won't see the benefit of having them towards until the end of the year between now and the end of the year really as we think about looking.
And our hiring demand as you pointed out and as Kenny highlighted there are obviously questions about the markets will stay close to those will use the same process that we've employed in the past to ensure that we don't fall short of hiring and at the same time as we look we're really focused on attrition you have a couple of questions that are outstanding with regards to the.
Implications of the ratification with some population of our employees and we're going to react to that accordingly, So it's really about the markets what do we need to be staffed to for that and contending with attrition.
It is it is it right to think that there's a little bit of buffer you need to add in there for some of those those agreements around extra pay pay time off just having having some people more people on staff is that something that's also sort of contemplated in your hiring outlook or is that.
How do we think about that from a productivity standpoint.
It's contemplated and it always has been contemplated certainly inside the agreements that are still out for ratification. There are questions around additional time off and we'll adjust accordingly for the I think the more important part of that and how do we think about that it was program and making sure that again, it's a it's a couple of hundred people and it's a viable and it's something that we can really.
Hi on.
David I think it's important to remember and Eric said that we still expect that we can be volume variable even with those agreements. So we're gonna see volumes exceed whichever you know what happens in the economy, you won't see head count grow to the same at 100 per cent. The one one last thing to note David We got a step a little carefully here what we've committed.
And we've started and been in negotiation with some of our crafts. The unscheduled jobs, specifically to try to find ways to get scheduled time off part of the P. B and this negotiation address that but it's it's a far bigger issue that needs to be addressed on property in job design.
That's underway, we think there's a path to do that without a substantial or kind of a meaningful impact on overall head count requirement because what we're trying to do is we're trying to make availability of employees flat across the week right. So you don't get spikes in and crew availability.
Lay offs and the way you do that is you make time off predictable and we think that tradeoff is feasible. We think it's absolutely going to be happening. We don't think there was a large impact on unemployment through that and it could actually give us better crew availability, 100% that gives us opportunity.
Alright, Thanks, a lot for the added color guys Yep. Thank you.
Our next question is from the line of Ravi Shankar with Morgan Stanley . Please proceed with your question.
Thanks, Good morning, everyone.
So I get that you're obviously, it's too early to give us to enjoy the three gardens out of thing and then you did reiterate your commitment to the long term targets are but I just wanted to get a sense of with all of the moving parts. You see right. Now are you confident that you guys can get pricing over inflation next year with kind of higher and inflation and Bud.
And then in pressure on the topline from what's going on in the macro.
Yeah, Ravi short answer yes, a longer answer there are a lot of moving parts are there going to be some headwinds into next year inflation is quite real but as we look at rolling up a budget and starting or really at the tail end of putting our plan together for sure we were confident.
We can get pricing above inflation.
Great. Thank you.
Yeah.
Yeah.
Our next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question.
Hi, good morning.
I wanted to go back to your comment that you put out there about leaving demand on the table.
Maybe help us understand or quantify what you think that had been wise and then you know as you're talking to potential new customers. You know has the service challenges that you guys space. This year impacting some of that conversion to new accounts, just any thoughts there.
Yeah, a couple of things one is I'll tell you Allison that's hard to quantify.
Clearly we saw you know.
Weaker September mid September .
Probably lasted for a couple of weeks a dip in our carloads, probably more noticeable in our premium network than it was in our carload network. So you know Allison I can't give you a number but we can tell are where it's at right. Most likely we left stuff on the table and coal it's probably some left on the table and go.
Wayne I think that's where allison's looking for yeah on our I'd say, mostly in our bulk markets I mean or unit train market. So if you look at our coal business is a little bit in our grain business.
Probably on our on our fertilizer business.
And there was a little bit more demand in our rock network, So primarily associated with our unit train business, which.
Consumed quite a bit of a cruise and in resources and Allison I think it's safe to say that there was less than that in the third quarter than the second quarter and as we're entering in the fourth quarter Theres less again, so the whole idea is in for all unmet demand to go away right. There's at some point when you're running the business. It's good.
To have people want you that you don't have resources for the the issue is making sure that it's not performance based that we're not leaving demand on the table because we weren't performing so fill the the thing I'm encouraged by and Eric talked about this is that we did add more resources and we have added more fit than where I put it.
More resources up against that we do have more crews coming off so I'm more encouraged now we're in a better place last you talked about it back in the third but we're in a better place today and we're working closely together that's all in the unit train that where what you don't see is that our commercial team is working closely with operating on a carload play on.
Carload side. So if we are seeing a little bit of softening.
On the lumber side, we're supplementing a little bit of boxcar in Cabo Hopper the capture areas, where we do see the demand are the other part of that I think you talk about just overall new customer.
Coming into the network or our customer base.
With some of the same challenges that we did in terms of hiring and getting some of the resources. So they understand that they realized that that was a I'll call. It a short term challenge for us, we're bringing on more resources to give them confidence, we're putting more capital for the growth and so that gives us a lot of.
A lot of good things to articulate to our customers as we're talking about our preparedness in the future.
Great. Thank you.
Okay.
Our next question is coming from the line of Ken <unk> with Bank of America. Please proceed with your question.
Hey, great. Good morning, it looks like we're opening up a little rough morning here, but you know thinking about your volume outlook with with falling demand, but improving fluidity.
You win share in that environment, particularly given the rapidly loosening trucking environment I guess I'm more speaking on intermodal Kenny you know it looks like your your volume target for the fourth quarter is down to maybe 7% given that full year, 3% target and then how do you win share. If your trip plan compliance is still 58 to 62 per.
I mean, it just seems like after P. S. R. We should've been able to bounce back I get the employees are still coming on but.
Just given that differential and then John can you just clarify some comments you made on the real estate gain in pension just to clarify what was maybe one time versus ongoing.
Yeah, Ken let me start with that and then we'll give it to Kenny so on the real estate side, we called out that we had a sale with them I don't think I said this in my remarks, but that we had a real estate sale that impacted other income we said that that real estate income was $35 million the pension benefit that was actually.
<unk>, probably about call it 14 $15 million higher year over year, that's something that we have seen them through most of the year and May you know, maybe not quite to that magnitude, but shouldn't continue into the fourth quarter to a degree but the real estate piece is the one that I would consider more one time ish.
Yeah. So you know I've mentioned this a little bit earlier on our premium side. It really is a mixed bag as we look at it we expect our international intermodal business to be up in the in the fourth quarter.
Domestic intermodal, we're gonna be looking at that closely I talked about the the shift in preferences now I want to mix up fourth quarter in 2023.
Looking into 2023, we've made it clear we've got another large private asset customer comment on base, which is a positive for how do you win in this type of market. If all the investments that we're making we feel good about the increase ramp capacity that we're putting on we feel great about that.
But we're pushing up against the intermodal network in terms of you know precision gate technology, which will be great for our the driver experience that there are quite a bit of investment.
Our line of road, that's over there in terms of.
Siding that will be like that we are putting quite a bit of investment up against that intermodal network to be prepared to compete and grow with it as we look into the future and part of Ken. Your question is as predicated.
I expected it or snap back quicker given P. S. R. What why isn't your trip plan compliance better on premium and on your manifest side and the short answer is they continue to improve as we see car velocity, which is now approaching the 200 number last couple of days that continues to improve and what <unk>.
You saw posted for second Q and three Q is much better now in print as we're entering <unk>.
But is that what gets you to the eighties from the 50 Sixty's is that is it the employees is at the speed what what's what gets you back to where you were running.
So that's the biggest opportunity we have is really the congestion that we saw them in working through Atlanta pointed out earlier in the conversation regarding the west sports and the fluidity. There that translates if you look into our velocity gains throughout this quarter, a big portion of those but on the intermodal side when I look on a daily basis that are able arrival.
Foreman at terminals as well as our departure those are both improving those are contributors to increase T. P. C. Yes. Additional people are helping in certain particular markets, but it really is about the fundamentals and I see them improving week over week.
Great I appreciate the time, thanks, guys yep. Thank.
Thank you Ken.
Our next question is coming from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, Good morning, Jennifer the three tiered or for Q O R or deterioration is that relative to the reported or the adjusted and then just bigger picture you reiterated this year pricing in excess of inflation, but with that positive price and positive volume margins are going to be down.
About 300 basis points. This year, so maybe just sort of help connect those two comments and then maybe more importantly, just.
What what's your confidence of oven, improving the or next year relative to this 60 or we're seeing.
Thousand 22.
Yeah, I can so when the comments about our fourth quarter is really talking about the adjusted so adjusted year to 58, two we see some sequential deterioration on that adjusted basis not on a reported basis. So so that's a good clarification. Thanks for that in terms of 2023 again still.
Putting the plan together and a lot of moving pieces in part I'm, probably the biggest part of that is really what what's the economy getting they'd be doing but we know that we have opportunities to grow you've heard Kenny talk about that you've heard Lance mentioned that we also know that we have continued price opportunities and we feel very confident in our ability to price above the inflation.
In dollars and you heard Eric talk about the fact that we have certainly the opportunity to improve our overall efficiency, so putting all of those things together.
As we sit here today not going to give you obviously any numbers, but we are confident that we will be able to achieve margin improvement going from 'twenty to 'twenty two to 2020 three.
And then maybe just ask it differently, if we got positive price and positive volume of certain where we're giving up three points of margin what were the causes of that three points that maybe could go away next year.
Well, maybe not I don't know well I mean, you know just in this quarter. We'll just talk about this quarter, we had 310 basis points of margin deterioration in terms of the service inefficiencies and inflation. So that right. There is is your 300 points and so to the extent that we can do better offsetting that don't have an IND.
Placement number for next year, yet certainly going to be impacted by the higher wages. You know this year's inflation, while we came into the year thinking inflation was probably going to be around 3% and that'd be higher than what we've seen historically, it's probably going to be closer to 5%. So.
And it's it's accelerated obviously as we've gotten here in the back half of the year and had some of these wage settlements. So it takes a bit to catch up to that with some of our pricing and as we approach approaching the market, but we are confident in our ability to do that.
Okay. Thank you guys.
Thank you.
The next question is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.
Thanks, very much and good morning.
Interest in the intermodal business I was hoping you could give us some perspective on how the Onboarding of Knight Swift has progressed year to date and the extent to which those partners may have left opportunity on the table in the first year based on supply chain congestion and whether you think that represents a tailwind as you look ahead to 2020.
Thanks.
We have been very encourage I think Knight Swift would also agree the onboarding has gone very well.
Both companies if they very close to each other.
Sure are there there have been some supply chain challenges, but chassis dwell was not where it should be it.
I actually stay pretty elevated for some time now so there there could be some.
Volume tailwind as that.
Kind of loosens up as we move into the future, but I can tell you that.
Onboarding them has gone very well and I'd use the word seamless.
Thank you.
Yep, Thank you Cherilyn.
Our next question comes from the line of Ari Rosa with Credit Suisse. Please proceed with your question.
Yeah.
Great. Good morning, So Lindsay you talked about the path to getting to a 55 O. R. I was hoping you could just elaborate on that a little bit and do you think that's primarily driven by price or are there further efficiency gains.
Do you guys think you can realize to get to get there.
And then on the pricing point, obviously, the the labor negotiations have been very public I wanted to know to what extent, that's kind of influence discussions with customers on how much yield you might be able to get as you think about 2023.
Yeah, Okay Ari so the path to 55 is it was really pretty plain it hasn't changed.
This year, we ran into a rough patch we ran the network type we got into trouble on our crew availability and we're digging out of that we've made progress in the third quarter and will make another strong step to normal in the fourth quarter I anticipate we will.
Enter into the back half of 2022 you know in the 200 plus car velocity, where essentially there at this point and need to grow from there and then be normal going into 2023, which we anticipate is going to be the case as we do that there is for sure and opera.
Attunity to take excess cost out of the network now having said that.
We're fighting against pretty significant inflation, you see it in the P b, but it's across the board on our services and our inputs. We're gonna have to overcome that with price and we anticipate we will we're confident we will but that's not helpful. On the ore side right. So you've got a you got to create margin somewhere for us.
Gotta be incremental volume at this point incremental volume is going to be a more important part of the three legged stool into the future years, we're set up well to exceed what the what the industry is going to do we're doing that this year I think we're going to do that again next year and we're gonna have to make hay with it and that's what gives us confidence that we.
We're gonna be able to improve margins going into next year. That's that's the clear path to a 55 operating ratio and again I don't think we said it yet today, but reiterating leading the industry in terms of our margins. So Kenny Yeah. I mean, we've we said it at the management team, we're going to cover.
And with price, but just to get a little granular here, our commercial leaders have done a really good job.
Sitting now with customers make an adjustment to the rate.
Real time again real time discussion to reflect the inflation inflationary environment that we're seeing today and so we're articulating the why behind the need for those adjustments were right, especially in light of the capital that we're expanding and then also the fact that sequentially our service is improving.
Yeah.
Okay. Thanks for your thoughts.
Yep. Thank you Ari.
The next question is coming from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Thanks, Hi, everyone Jennifer.
Excuse me I just wanted to understand with respect to the walk from 'twenty two 'twenty three I understand there's a lot of macro and uncertainty, but you're you have the tentative agreement. So you should be able to obviously at least help us a little bit on what the what the what the incremental headwind is from the tenants.
And in 2023, it looks like I mean, the slide was very helpful. On the back of it looks like it's like $44 million a year is that the right way to think about kind of on day, one the incremental headwind in 2023, and then Kenny.
Want to understand so Lance just talked about getting to 200 car miles per day, there's still a huge gap given where fuel is obviously on the economics of moving something by rail.
As we think about kind of the near term volume the weekly volume trends, it's kind of stuck in the low to mid 160000.
<unk> 50 at the outset.
The cycle times get better because you know you were able to get to 200 or excuse me when we get to 200 plus is there more volume for you to move in the near term like can we see a corresponding step up immediately if we start getting to that 200 plus car miles per day.
Because of where the economics, if you can walk today. Thank you.
Okay. Thanks for that let me start and then we'll turn it over so the 'twenty. Two you referenced is for the first quarter and second quarter that was before the the wage increase that became effective July one and so the thing you have to remember is the way that the wage accruals of the wages work is it's a July one.
The increase effective July one we went from a I think it was three and a half to a 7% increase and so when I referenced in my comments $19 million was the the wage impact inflation, that's the third quarter impact similar amount in the fourth quarter those two impacts will carry into <unk>.
First and second quarter of next year, and then July of 'twenty 'twenty three it goes to a 4% increase so that's how you need to think about that so 7% increase first half 4% increase in the second half in terms of just the wage inflation piece relative to that so that makes sense.
Yeah, It makes sense, but I'm just trying to.
I'm, just maybe I'm lazy I just wanted to see if you can give us a number [laughter] I mean, it looks like if it's if it's 20 million Bucks.
Third quarter and fourth quarter, and then and then.
Another incremental I'm just it doesn't see it it's it looks like it's kind of like 50 to 60 million on a net incremental next year versus 2022.
Yeah, I mean, it's it's another call it $36 million to $38 million in the first half and then something a little bit less than that and in the second half of that's going to 4%. So you were thinking about it the right way, but that's again, that's that's wage inflation. We know that there continues to be a inflationary pressures, particularly in our purchase services cat.
Gary when you think about the labor that you know is contracted labor. So don't have the full year inflation number not ready to share that but you know, there's certainly wage inflation P. B inflation, but there will be inflation above that are again, 5% for this year I don't know that will be quite that next year, but it's going to be much higher than.
Then, our normal which or or higher than what we thought kind of back at our May analyst day, which was 2.25% we're well beyond that now yeah, Oh, yeah, Yeah, and there was a question in there about so so yeah, a met where you know as you can imagine we're looking at the economy and we're looking at our carloads.
Daily Weekly monthly, but you know as the velocity improved there are some areas that we see a.
The man out there I've mentioned coal I mentioned rock autos finished vehicles auto parts is another area where.
Where we see.
Quite a bit of demand that's out there and so are you on.
I think that there's still an opportunity for us to capture more volume in the near term.
Okay, all right very good. Thank you very much everybody yep. Thank you.
Our next question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Hi, This is Jordan your line is open for questions.
Okay. Our next question will be from the line of Ben Nolan with Stifel. Please proceed with your question.
Yeah, Thanks, Hey, guys.
I actually just to follow a little bit on the latter part of it I mean, it's a question there I'm just thinking about areas of the market that you were where you could pick up volume that maybe your.
Underserved at the moment and and thinking about the fourth quarter, specifically and we've heard a lot about how there's water level problems in the Mississippi and the bar just can't move around is it possible or do you have the capacity in the fourth quarter to maybe make up for that at all or is that something that could in the immediate term be a little bit of a day.
Aylwin for Ya.
Yeah.
I'll tell you we've been working with customers, we've been working closely with Eric.
The short answer is yeah.
We've been talking to our customers.
As you know this would be incremental volume to what we have today. So based on that we're working with our customers to make sure that the rates reflect this incremental volume.
Yes, I don't want to say.
Say that that's going to be a large amount of borrowing for us if we're going to take but what you need to hear is that we're working with customers.
Im looking at Eric we have a good plan to go out and capture some of that business, but again that that barge market. It's a huge.
The amount of.
Product that seems to be kind of messy place right now, yeah, and Kenny helping helping our owners understand this.
We ship in a normal year green to the river up North on the River and then it heads down the river that's a carload.
It's going to happen is the flow of those carloads is going to go all the way down to the Gulf.
And so it's a carload, but its a longer haul and for sure we see that demand showing up right now.
Great appreciate it thanks Yep.
Yep.
Our next question comes from the line of friend and of course. He was Barclays. Please proceed with your question.
Hey, good morning, everyone and thanks for taking my question I guess Lance you know the 55 or our target is proved pretty elusive for most carriers when they put it out there.
And you know just in hindsight here, we're looking at what's happened. The last couple of years, you know as you try to get resources out.
Service Falters and you can't move the volume that's out there is that the right metric, we should be focusing on anymore. I mean does it even make sense to target a 55 or maybe something higher with more resources, but better asset turns I mean, Jennifer did mentioned you know focusing on ROIC.
So I guess can you speak to that are you know over the longer term.
Yeah, Brandon and that's a fair question, but here's how we think about it.
We do believe that that 55 is achievable, we don't think it's sacrifices.
The service product for a number of different reasons, you look backward in the last two years.
As you know, there's just a lot of moving parts there that made that that created unique headwinds that bid us pretty hard this year. It was about us getting our resources wrong in terms of crew availability and for a number of reasons.
The pandemic being one of them early on it's a distant memory now because we you know we're kind of living as if life is normal but that had a real live impact on us from 'twenty one heading into 'twenty two when we first got behind now setting that aside you. Your fundamental question is absolutely spot on and we talked about this at investor.
Today, we said.
You know just merely focusing on and operating ratio number that isn't the right way to think about our business. We think more important to our business is long term sustainable incremental margins be.
Being the railroad with a leading margin we think we can do that our franchise sets us up for that and then growth right and that's what we that's what we fundamentally focused on it at Investor Day.
The reason why we have to speak to the 55 right now is candidly it was a.
Target, we put out for this year and we thought it was quite achievable. This year and then a whole lot of stuff happened that that made it a difficult. The other thing to note is we've achieved it in a couple of handful of quarters.
And that's not the goal is to nail it once and it can be done with it right. The goal is we think that the business is set long term to be able to handle that how things could change and you're pointing it out Brandon.
But they haven't changed yet to make US believe it's unachievable more important to US right. Now is continued progress get back on track of improving our margins and grow and that's what we're focused on when we go into next year. Yeah. It was really we think about it too in terms of setting yourself setting us up to be.
Imperative in the marketplace and win and that's what having that very solid competitive cost structure does for us and that gives kenny and his team the ability to go out there and win new business to leverage the costs that very efficient franchise 100 per cent and again I think we got to point. This out we are performing best at the top of the heap.
Amongst our peers today, and I think we're going to repeat that again next year.
In terms of growth.
Thank you and thank you Jennifer Yeah. Thank you Brandon that's a good question.
Yeah.
Our next question is from the line of Walter <unk> with RBC capital markets. Please proceed with your question Hey, Thanks, very much just keeping on the or a focus here I know you you underlying reported on that guidance and I can understand you kind of adjusting it for the third quarter given that you're putting in some prior period adjustments but.
Isn't the 60 or I mean that that's taking into effect.
Prior period under accounting for for Labor. So isn't 60, the right right number for this year it shouldn't be reported or or you know, it's not a number we should adjust.
I know I'm going to get that confusion and I know, it's going to it's all what I nipped in the Bud now it isn't that the right way to look at this as the 60 or is the real number for this year and not and not and shouldn't be adjusted is that right no I wouldn't agree with that because the 60 or include call. It 92 million and that's what's shown on that appendix slide.
For 'twenty, and 2020 'twenty, one and so that is those are our dollars that really pertained to prior years, where and again, it's primarily due to the bonus that we were under accrued so Ah well I wouldn't take the whole 114 million out and maybe that's to your point I do think $92 million is the piece that you need.
Need to think about them when you're thinking about repeatable Oh are.
Okay got it.
And then for next year I heard the word confident a lot I heard confident about price confident about efficiency.
But not confident enough to give the or guide for next year of 55, and I'm just like what I didn't hear you say confident but it was a volume outlook for next year given the uncertainty of the macro is that the only thing that's keeping you back from giving a 50 foot in other words, if if we see even modest growth next year is 55 achievable for.
Sure.
No hopefully what you heard from US is say that while we still absolutely have that goal the road to getting there is longer and it would be a pretty big stretch for us to go from again something less than 60 are you know when you take out the $92 million, but call. It a high 59 kind of O R T.
To get into that 55 range next year. That's that's not what we think that we can get to we certainly believe that we can get improvement in the level of that really is going to be dependent on how we see the macro environment shape up to a degree and that's where we're still putting the plan together, but that was what we were intending to communicate is we can still get to a 55.
But we're not going to be able to snap back into that range. We don't believe in 2023, and that's the swing factor as to why you feel confident enough that network fluidity and all of those issues will be cut.
Resolved next.
Next year that that won't be.
Really constraining factors all right yeah.
Yeah running the running the railroad normally quote unquote being a normal kind of operation next year, that's not a that's not a constraint the constraints are lots of incremental inflation.
Volume that's a that's a question mark as to exactly what it's going to look like.
So you've got that right next year is a normal railroad and basically back to squeezing out you know incremental efficiencies with a lot of inflation that we're gonna have to find to overcome.
Yeah, I was just going to say and as you know we don't have the access to reprice, 100% of our contracts next year and so there is a bit of timing there as we catch up on some of those contracts.
Payroll.
Makes sense, okay. Thank you very much I appreciate the time.
Yep.
Our next question is from the line of Jeff Kauffman with vertical Research partners. Please proceed with your question.
Thank you very much for squeezing me in John just a quick question that 114 million does that represent a accrual on all outstanding labor contracts, including the ones not yet ratified or is that only for the agreements that have been ratified to this point.
Yeah. Thanks for that clarification. It is for all of the agreements both ratified and tentative at this point because those are the deals that are literally on the table and that are are waiting ratification. So that's what we know to be able to take the accrual for.
Okay. That's my one thank you.
Thank you.
The next question is from the line of basketball matrix with Susquehanna. Please proceed with your question.
Jennifer when you look at the cost per employee trends are the 8% in the third quarter.
And the 7% I think you implied for the fourth quarter or pretty close to the union wage increase for the second half of this year that start on July 1st as we look into next year with 7% Union wage increases.
In the first half and 4% in the second half is there anything that you can do to maybe get to the realized cost for employee below that or is that actually a kind of a decent proxy for the kind of inflation that you'll feel per head next year. Thank you.
Yeah. Thanks for that question I mean, certainly that's the starting point, but as you heard US talk today, where we will look to and out would be something less than that because we know there's inefficiencies in that and that we're working to squeeze that out I referenced you know overtime and borrow out costs those are real headwinds to the overall cost structure.
Sure relative to our employee costs are well, we'll probably have borrow out for a while as we're working to catch up in some of these hard to hire areas. We would hope to be in a position to certainly slim that down and then ultimately eliminate that as well as be able to manage the overtime better.
Thank you.
Our next question is from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning, just to clarify that 2023 commentary are you still assuming that you'll be able to grow volumes next year and as we think about your comment around improving the or in 2023 is that predicated on that volume growth or do you feel like.
Even if volumes are flat or maybe even down a little bit that you can still improve the O R from that cost take out.
Work and efficiencies improve.
Yeah. Thanks for that question, Justin I mean, it's again no numbers being given here today, but we have some good tailwind and I think both Lance and Kenny has talked to you about in terms of volumes, we've got Schneider coming on you know.
A large piece of business we have.
Demand that we know we didn't move today on the coal markets. Some of our both markets. We know good construction demand going into next year from a rock standpoint. So our expectation is is to be able to outperform the market as we said back in our Investor day, and so you look at industrial production now I think you know forecast for 2020 three.
And the negative range, but even outperforming that can put us on the positive side of the ledger, but so that's how we're we're shaping things up right now not going to give you degrees and obviously, it's going to depend on on what really ultimately happens you know my crystal ball isn't quite that good yet to know exactly how the economy is going up there next year, but we.
Do like our setup going into the year and that's how we're thinking about about that at the moment.
Okay. Thanks.
Thank you Justin.
The next question is from the line of Tom out of it with UBS. Please proceed with your question.
Yeah.
Oh, Yeah. Good morning, I wanted to ask you a bit about our truckload pricing sensitivity I think there's generally a sense that you know given enough time railroads can can recover inflation with price, but you know you are looking to do that against the market. We're trusted truckload markets a lot more loose. So you know kind of how much of a barrier is that Q.
Accelerating your price.
And how much of the book do you think really insensitive to the truck market in terms of pricing I guess, the second one would just be.
Imports do you think I mean, it seems reasonable to think that import container imports might be down next year. If theyre down meaningfully can you still grow your intermodal or is that a pretty tight link just in terms of import activity and are in U N. P. Intermodal. Thank you yeah. So just again just trying.
To differentiate the two.
On the domestic side Youre right. There are still a few more question marks there.
As I stated a little bit earlier.
We're gonna get into our bids even here in December will find out a little bit more about where the markets are.
As I stated there still enough.
Pasty constraint.
That are out there in the supply chain on the domestic side that could firm up some of the pricing. We just have to see how that plays out on the international intermodal side.
It's still too soon to tell what will happen there I wanted to make sure that I really highlighted the fact that you know regardless of what's happening with the actual volume the percentage of our international rail volume has increased that's coming into the port So again last year.
There are you know we talked a little bit about the fact that we had a larger percentage of our customers trans load in on the West Coast Port today as we stand we can see that our customers are now moving more of that via rail. So that's a positive for yeah. Those moving parts are Kenny and Tom.
Our hard to discern exactly how they're going to play out it. It sure does look like inbound port container volume is going to be down in the certainly the early part of next year I mean, we're hearing enough markers of that but dipped.
Depending on what happens with our percentage that's coming inland.
It depends on what exactly we see right.
Right Okay.
Okay. Thank you.
Thank you. Our final question comes from the line of Jordan <unk> with Goldman Sachs. Please proceed with your question.
Yeah, Hi, sorry, I had some technical issues before but just a quick question on on the auto sector is that something that could deviate from the economy, just given dealer inventories at the what you know as we think through to next year, I mean will there need to be filled regardless to what happens to you know the consumer outlook. Thanks.
Yeah, I I, we certainly believe so there just.
A number of markers the points of what I talked about the you know supply the dealership.
It was very low much lower than the Oems want it to be the average age of a car out there now is 13 years old.
There's just a lot of pent up demand in terms of shippable non shippable, meaning the Oems have actually Purdue.
The cars and they haven't moved via rail Yeah, and then just the fact that again apart apply the semiconductor chip.
That's going to improve here and so based on those things.
We feel very bullish on that auto part and the finished vehicle side.
Thank you.
Yeah. Thank you Jordan.
Thank you. This concludes the question and answer session I'll now turn the call back over to Lance Fritz for closing comments.
You, Rob and thank you all for joining US this morning and for your questions. We look forward to talking with you again in January to discuss our fourth quarter and full year results until then please take care.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Yeah.