Q2 2023 Union Pacific Corp Earnings Call
Brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.
At this time, it's now my pleasure to introduce your host Mr. Lance Fritz Chairman, President and CEO for Union Pacific.
Mr. Fritz you may begin.
Thank you, Rob and good morning, and welcome to Union Pacific's second 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. We're also joined by our newly elected independent chair of the board of directors.
Mike Mccarthy, who will take a couple of minutes to address the announcements. We made this morning regarding my successor, and our board Mike the floor is yours.
Lance.
This morning, the board of Directors announced that Jim Vena will be appointed the next Chief Executive Officer of Union Pacific.
<unk> has also appointed Jim to the board of Directors Jim.
Jim brings a strong rail operations background to Union Pacific with over 40 years of experience. This includes two successful years as our chief operating officer from 2019 to 'twenty 'twenty.
After a comprehensive search process. It was clear Jim's track record of operating excellence was unparalleled and he was the right candidate for the job Jim will start as CEO on August 14th.
Look forward to welcoming him back to Union Pacific.
<unk> also announced that Beth whited will be appointed President of Union Pacific Beth has over 35 years of experience at our company and has held leadership roles across multiple departments recently, she has led our strategy sustainability and workforce resource teams with great success.
Going forward.
The operations finance marketing and sales supply chain and technology functions will report directly to Vienna.
Why did we will report the Vienna and her responsibilities will include the strategy work force resources sustainability, La corporate relations and government affairs functions.
In addition to these management changes the board has appointed two new board members.
Simon's former President and Chief Executive Officer of wire Houser, and John we off former chairman President and CEO of C. H Robinson.
Both bring to our board a wealth of skill sets, including operational expertise from leading large industrial public companies.
As Lance indicated as part of these changes we are adopting a corporate governance best practice.
Splitting the role of company CEO and board chair with my election to independent Chair Director Sheri Edison will take over leadership of the corporate governance nominating and sustainability Committee.
In addition, the board has created a new committee safety and service quality, which will have responsibility to review evaluate and monitor compliance with safety programs and provide oversight of the company's service performance.
Record Jean Luc will lead this committee.
Board is very pleased to make these announcements today, which represent a continued commitment to board refreshment to ensure that we have the right mix of skills and experience to oversee the company. We are confident that these new appointments at Union Pacific up for long term value creation.
Before I turn it back over to Lance I would like to thank him for his leadership these past eight years.
His accomplishments are many and over the next few weeks, we will properly celebrate them. Most importantly, though his leadership is set our company up for great success for the years to come. Thank you Lance and I'll turn it back over to you.
Mike We appreciate your leadership throughout the process and I'm pleased to welcome back Jim to Union Pacific and I'm confident that the company has the right leaders to advance the hard work that's underway now, let's turn to the business of the call and second quarter results. This morning Union Pacific reported in 2023 seconds.
Net income of $1 $6 billion or $2 57 per share. This compares to 2020 to second quarter net income of $1 $8 billion or $2 93 per share our second quarter operating ratio of 63% was up 280 basis points versus two.
22, primarily driven by lower revenue inflationary pressures and the previously disclosed one time ratification bonus payments throughout the quarter, we provided our customers with a more consistent and reliable service product, while generally meeting the demand that was available to us Eric will discuss.
In more detail the progress we've made but the bottom line is that the actions we've taken to strengthen our crew resources are improving the railroad. We also acted during the quarter to increase the efficiency of our network by right sizing our locomotive fleet using crews more efficiently and making sequential improvements in train length.
We finished the quarter with our resources better aligned with current volumes.
As you'll hear from Kenny while several of our markets showed growth consumer facing markets remained soft and drove the volume decline. However, the strength of our business development efforts enabled us to mitigate the macro impact and outperform our peers. So let me turn it over to Kenny to provide more color on the business.
This environment.
Thank you Lance and good morning for the second quarter volume was down 2% driven by weak market conditions in our premium and bulk business groups.
Freight revenue declined 5% driven by lower fuel surcharges and a 2% decrease in volume. However, we generated solid core pricing gains in the quarter to help offset some of those challenges.
Let's take a closer look at each of these business groups.
Starting with ball revenue for the quarter was down 3% compared to last year, driven by a 2% decrease in average revenue per car due to lower fuel surcharges and a 1% decline in volume.
Grain and grain products volume was up 1% due to increased demand and business wins for renewable diesel beef dogs, coupled with strong shipments of domestic grain.
A soft U S export grain market, partially offset these gains.
Fertilizer carloads decreased by 9% in the quarter due to an outage at a customer facility that reduced export potash shipments.
Food and refrigerated volume was down 8% due to reduced beer imports early in the quarter, but those shipments eventually improve by June in addition, drought conditions from the prior growing season negatively impacted both fresh and canned shipments.
And lastly, coal and renewables volume was flat year over year.
Low natural gas prices and reduced electricity demand from mild weather negatively impacted shipments, but that was offset by a favorable comparison to 2022.
Well, if our service improvements and additional resources. We are currently meeting available demand.
Moving on to industrial.
Industrial revenue was flat for the quarter driven by a 1% improvement in volume offset by a 1% decline in average revenue per car.
Core pricing gains in the quarter were offset by lower fuel surcharges and a negative mix and volume.
Industrial chemicals, and plastics volume was up 2% year over year, driven by increased plastic shipments, partially offset by lower industrial chemical shipments due to challenge industrial production levels and reduce housing demand.
Metals and minerals volumes continued to deliver year over year growth volume was up 2% compare to last year, primarily driven by growth in construction materials and increased frac sand shipments along with new business development wins.
Forest products volume declined 13% year over year, driven by challenging market conditions in housing and repair and remodel coupled with lower corrugated box demand.
However, energy and specialized shipments were up 2% versus last year, driven by strong business development and increased demand for LPG and petroleum products.
Turning to premium revenue for the quarter was down 11% on a 4% decrease in volume compared to last year.
Average revenue per car decreased by 8%, reflecting lower fuel surcharge revenue.
Automotive volumes were positively driven by continued shrimp and OEM production and inventory replenishment for finished vehicles and auto parts.
Domestic intermodal wins were offset by a weak freight and parcel market driven by higher inventory.
And the shift in consumer behavior as people spend more towards services than good.
International shipments were down due to a decrease imports on the west coast.
So turning to slide seven here's our outlook for the rest of 2023 as we see it today.
Starting with our bulk commodities.
There is uncertainty in our second half coal outlook as inventories have been restocked, but extreme heat is driving up near term demand.
Starting to push up natural gas prices.
We expect near term grain shipment to be challenge with tighter U S grain supply impacting volumes.
With improve operations and recent rain and proven new crop supply forecast, we remain optimistic about our opportunity to move incremental grain carloads in the fourth quarter.
In addition, we expect our forecast for biofuel shipments of renewable diesel and their associated feedstocks to remain strong we see solid market demand and continued to capture new business as production expands.
Moving on to industrial.
The forecast for industrial production is down in the back half of 'twenty twenty-three dim.
Demand for Forest products will also remain below 2022 levels and despite some good business development wins on the metals side, it is being offset by a weaker than expected market.
However, we expect to see continued strength in construction with new business wins.
Finally for premium we expect challenges in the intermodal market from continued inventory destocking inflationary pressures and ongoing shift in consumer spending from goods to services.
On the international side, we continue to outpace U S West coast import market as customers shift more business to I P. I.
For automotive, we expect growth to continue driven by strong OEM production and high Shippable ground count.
So to wrap up it's hard to say when the economy will began to recover in certain sectors, but our diverse portfolio allows us to see positive momentum in many of our commodities.
The team remains focused on winning new business and has a strong pipeline of opportunities with a great track record for clothing deal well.
With that I'll turn it over to Eric to review our operational performance.
Thank you Kenny and good morning, starting on slide nine as always safety remains job number one at Union Pacific and we are committed to ensuring the safety of our employees our customers and the communities that we serve.
Freight rail is the safest way to transport goods overland and Union Pacific is doing its part to be even safer through ongoing investments in our network employees technology and communities.
As evidenced by our safety performance, which continues to show improvement.
Through the first half of the year, our reportable derailment rate and personal injury rates. Both improved a direct result of our enhanced training programs and strong safety culture of ownership and personal accountability.
Now, let's review our key performance metrics for the quarter starting on slide 10.
This quarter through the team's hard work, we made improvements both year over year and sequentially across the key metrics that drive the customer experience.
Car velocity improved 8% to 202 miles per day compared to the second quarter 2022.
This improved fluidity and resiliency was on display as we exceeded 200 daily car miles for 10 consecutive weeks during the quarter.
While the current business mix is a headwind there remain opportunities for continued improvement.
Trip plan compliance is sizable 17, an eight point year over year improvement in intermodal and manifest and auto T. P. C respectfully.
Improved network fluidity, as evidenced by faster freight car velocity train velocity and lower terminal dwell drove those improvements.
Turning to slide 11 to review our network efficiency metrics.
With the demand picture weaker the team is taking action to rightsize resources to align with current volumes. For example, beginning in April we took actions to remove locomotives from our active fleet storing around 200 units through the quarter.
While there is still room for progress locomotive productivity improved 2%, both sequentially and year over year, even as our gross ton miles declined 1%.
Although greater crew availability is supporting solid service metrics the impact of our hiring can be seen in our workforce productivity.
To date, we have graduated approximately 1200 T E N Y employees and have a strong pipeline of nearly 775 in training.
These higher workforce levels, coupled with weaker volumes resulted in a 5% decline in workforce productivity.
However, with more crew resources, we were able to lower recruiting rates and reduce our bar routes by roughly half during the quarter.
We continue to drive productivity with train length as evidenced by our sequential improvement of 2%.
<unk> down 1% year over year. This is good progress when you consider the headwinds soft intermodal volumes presented to our train length initiatives.
There are many more opportunities ahead for improved efficiency of our railroad.
From redeploying break persons to improving fuel efficiency growing train length and right sizing our locomotive fleet productivity to be captured.
Wrapping up on slide 12.
The well being and quality of life for our employees remains a top priority and we continuously collect feedback collaborate and look for solutions with our workforce. The historic agreements listed on slide 12 represent the results of our work together.
Let's talk through each one of them in detail.
Starting with paid sick leave we now have ratified or tentative agreements with all 13 of our labor unions on this important quality of life initiative. The employee benefit is evident as they receive more paid time off to take care of themselves and their families for the company. This definitely improved the attractiveness of our job, but it is a.
Additional labor expense that will need to be offset.
Next our crew consist agreement with Smart T. D provides greater scheduling flexibility and the ability to redeploy break or switch persons to work either in or outside the yard.
More specifically for our employees. It provides an expedited path for brake persons to become conductors and ultimately engineers if they so desire for.
For the company it allows us to now reduce break persons where the work does not require the third person, allowing us to partially offset short term hiring demand. It also sets the stage to establish ground based enhanced utility positions with fixed days off and greater certainty about their weekly assignments through scheduled shift work.
Finally T E N Y work rest provides engineers and conductors what they more predictable work schedule, which enhances the quality of life for our employees and their families.
Currently we have a ratified agreement with our engineers that provides an 11 days on four days off work schedule and we are currently negotiating work rests with our conductors.
For the company. This enables the railroad to better manage staffing levels as we receive a more predictable available workforce that reduces labor and failure cost, which combined support more consistent and reliable service, enabling long term growth.
We also believe it will improve our retention rate, reducing hiring expenses and lost productivity.
Now these agreements come with a cost, which Jennifer will detail more later as we implement them, we expect a larger training pipeline in the near term as well as elevated workforce levels in the future when fully implemented our current forecast is an additional 400 to 600 employees.
Ultimately the long term benefit of these agreements as the positive impact on our employees and the service we provide for our customers.
That enhanced service product will allow us to win in the marketplace. So to close I would like to express my appreciation to both our customers for their support and the marketing and sales team for their continuous work to capture available demand and win in the new bid win new business with that I will turn it over to Jennifer to review our financial performance.
And good morning, let me start with a look at the walk down of our second quarter operating ratio and earnings per share on slide 14, we've outlined the major drivers.
At June 13th 8-K, we disclosed a one time ratification payment related to our smart T D break person agreement.
That $67 million bonus increased our operating ratio 110 basis points and reduced our E. P. S nine cents.
Falling fuel prices during the quarter and the lag on our fuel surcharge recovery program positively impacted our operating ratio 200 basis points.
Enforced N C D E P S.
While improved operations generally allowed us to meet demand during the quarter that demand was softer and the combination of an elevated training pipeline inflation and negative mix all impacted our core results.
Though the line we met two of seven cents E. P. S reduction from lower Nebraska State tax rates in 2023 as we've noted in that same June 8-K, and our large 2022 real estate sale.
Looking now at our second quarter income statement on slide 15, operating revenue totaled $6 billion down 5% versus last year on a 2% year over year volume decline included in that is a $34 million reduction in alpha soils related to lower intermodal volume and faster equipment turns operating expense.
At $3 $8 billion was flat, resulting in second quarter operating income of $2.2 billion, which is down 12% versus last year.
Other income decreased $70 million driven by the 2022 real estate sale I mentioned earlier.
<unk> expense increased 7%, reflecting higher debt levels.
Net income of $1 $6 billion declined 14% versus 'twenty, 'twenty, two which when combined with share repurchases resulted in a 12% decrease in earnings per share to $2.57.
Now looking more closely at our second quarter revenue Slide 16 provides a breakdown of our freight revenue, which totaled $5 $6 billion down 5% versus 2020 to lower year over year volume reduced revenue 175 basis points.
Total fuel surcharge revenue of $707 million was $269 million less versus last year.
The impact of falling fuel prices as well as the lag in our surcharge programs reduced freight revenues 425 basis points.
The combination of price and mix in the quarter increased freight revenue of 150 basis points. This gain reflects the strong pricing we secured while also recognizing some headwinds from certain coal and intermodal contracts, where the pricing is more reflective of current market conditions mixed in the quarter remained negative as fewer lumber shipment.
And more short haul rock shipments outweighed the positive impact of lower intermodal.
Turning now to slide 17, and I look at second quarter, operating expenses, which totaled $3 $8 billion compensation and benefits expense increased $177 million versus 2022 with nearly 40% of that amount, reflecting the break person agreement.
Second quarter workforce levels increased 4%.
Although total transportation employees were up 7% the active T. N Y workforce is only up 1%, which is a result of our robust hiring and elevated training pipeline.
Excluding the impact of the onetime bonus payment cost per employee increased 5% in the second quarter, and we expect it to be up 3% to 4% for the full year.
Both second quarter and full year cost per employee reflect the impact of that larger training pipeline as well as better crew efficiency, which are partially offsetting wage inflation I'll provide more details on the impact of our new agreements here in just a bit.
Fuel expense in the quarter increased 29% on a 29% decrease in fuel prices.
Services and materials expense increased 5% driven by inflation, partially offset by decreased subsidiary drayage expense and more moderate locomotive repair expenses as we stored locomotives in the quarter equipment.
Equipment and other rents was up 8%, reflecting higher lease expense for new freight car secured to support business volumes and lower equity income slightly offset by lower car hire as we improve cycle times and moved less volume.
Other expenses grew 6% primarily related to increased environmental remediation accruals as well as persistently elevated casualty costs.
Turning to slide 18, and our cash flows cash from operations in the first half of 2023 decreased to $3 $9 billion from $4 2 billion in 2022. The primary driver was $445 million of payments related to Labor Union agreement. These payments also impacted free cash flow and our cash flow conversion rate.
Year to date, we returned $2 $3 billion to shareholders through dividends and share repurchases.
And we finished the second quarter with an adjusted debt to EBITDA ratio.
To 200, excuse me to 2022 levels at two nine times as we continue to be a rated by all three credit agencies wrapping up on slide 19.
As you've heard from the team. We're pleased that the service product is enabling us to meet available demand. Unfortunately, as you heard from Kenny consumer facing markets like intermodal and lumber remains soft.
Additionally, the outlook for coal has weakened since the start of the year, but with some near term opportunities given the extreme heat.
Although we still expect to outpace industrial production in certain markets weak demand for consumer goods has pushed our full year volume outlook below current industrial production estimate which are slightly positive.
Unchanged is our expectation to generate pricing dollars in excess of inflation dollars to date, we've made great progress repricing, our business to reflect the impact of higher inflation and that momentum will continue.
As it relates to fuel prices I should point out that the tailwind. We've experienced these past 24 months is now expected to shift to a headwind.
On the operating ratio and E. P S front assuming.
Assuming fuel prices remain relatively stable this will likely represent a negative second half impact of around 50 cents per share.
Eric provided some great context on our labor agreements.
And although they clearly come with some upfront costs, we see opportunities as well.
Starting with the sick leave agreements our current forecast is that they will add roughly $50 million to labor expense in the second half of 'twenty twenty-three, which is reflected in the cost per crew numbers I quoted earlier.
We view these costs as added inflationary pressures that we will reflect in our pricing.
For the right person agreement, we've already seen the impact of that upfront payment. Our expected payback period is roughly two years as it allows us to redeploy crew personnel save on constantly borrow out position as well as reduce our current hiring needs.
Implementation of the B L. A T work West agreement will start over the next month or so with completion likely in 'twenty 'twenty four.
For this year, we estimate the work with implementation will cost upwards of $20 million.
The challenge in putting a finer point on that estimate is both timing and forecasting employee behavior. We don't yet have an agreement with smart T. D and we are still working through some technology and logistics before we start the rollout.
And while we certainly expect better ABL availability better service and more flexibility with our crew board, providing more access to time off likely adds employees and extend the exact math depends on how employees utilize this greater flexibility as well as how we translate better predictability into increased levels of productivity.
And service that ultimately drive profitable growth on a railroad.
Looking at our 2023 capital allocation our capital plan remains $3 6 billion. We also plan to maintain our current dividend of $1 30 per quarter as reflected in our dividend announcement. This morning.
However, we have paused share repurchases and don't expect to be back in the market for the remainder of 2023, while there's no change to our long term capital allocation strategy, which is first dollar into the business industry, leading dividend payment and excess cash to shares we recognize our cash flows are impacted in the current environment with.
Volumes and costs.
Wrapping up we are well positioned to operate a better railroad in the second half of 2023 and for the long term our strong fundamentals are unchanged and will allow us to generate significant value for our owners as team U P drive service growth and improved profitability, so with that I'll turn it back to Lance. Thank you Jennifer as you've heard from the team the <unk>.
First half of this year has been about laying a foundation for future success key to that foundation is safety and the quality of life of our employees and I'm pleased with the progress we've been making on both those fronts as you heard from Eric We continue to make the railroad safer while improvements in our safety metrics are critical.
More encouraging are the positive strides, we're making in our safety culture. The team has great momentum across our safety programs, which gives me great pride as I step away.
I'm also encouraged by the progress we've made to address quality of life issues with our craft professionals.
<unk> historic labor agreements around paid sick leave crew redeployment and scheduled work these agreements drive employee engagement and productivity to Bruce a better service product for our customers.
As I wrap up time as CEO of Union Pacific I'd like to express my deep appreciation to the board and shareholders of U P for giving me the privilege of leading the company for the past eight years I'm proud of how the team has positioned union Pacific to thrive for the years ahead and I'm pleased to say that we provided great value.
<unk> all along the way.
Union Pacific is truly a special place it's full of hardworking dedicated railroad or <unk>, who embraced the daily task of building America. It's been my greatest honor to lead this team there.
Their commitment to be the best for our communities our customers our investors and for each other is remarkable.
160, plus years of success began and continues with our exceptional employees.
I can't wait to see what they accomplish next.
And on behalf of the employees of Union Pacific, Let me offer our gratitude and appreciation for your leadership, we wish nothing but the best for you and your family as you embark on the next chapter.
Before we begin Q&A I'd like to lay out a couple of guidelines for the call in the interest of time and to accommodate everyone. Please limit yourself to one question and one question only second we understand that there's great interest in the leadership changes that were announced this morning.
And we look forward to those discussions whoever today's call is to discuss our quarterly results. So please focus your questions on the business of the earnings call. So with that Rob we are ready for your first question.
Thank you.
I'd like to ask a question at this time. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue do.
You May press star two if you'd like to remove your question from the queue.
Participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question today will come from the line of Allison Pontiac with Wells Fargo. Please proceed with your question Hi, Good morning.
I just wanted to talk through intermodal I know, there's obviously consumer weakness there but is that she is the I guess the piece of the decline moderating for you some and I guess with what did they improve service that you're starting to see in that interest you know back on the West Coast Port should we start to see or expect to see some of it is business wins start to make celebrate for you.
Just any color just thinking that maybe intermodal starts to perform better for you in the face of even the consumer declines. Thanks.
Yeah, Good morning Allison.
You look at it all.
Well, let you know, we're really staring down at you know consumer spending and it's been flat.
Last few months, maybe several months, but its differentiated as you look at good versus services, we're clearly seeing and I talked about it in my opening remarks.
Left on the goods and more on the services the other.
The thing that we're watching is just what's happening with demand and we're looking at that in terms of some of our contract rates with better flattened out in the spot rates that have inched up a little bit are the fact that we have a really strong intermodal service product is a benefit for all four.
We are encouraged that the company I'm encouraged of our commercial leader that even though the imports have been down 23% year to date, we're only down a couple percentage points in.
In talking to our customers. We also believe that there'll be shifting a little bit more back to the west coast Port.
To be a gradual shift that'll be a little bit more throughout 2023, and probably in the 'twenty 'twenty four but clearly we're.
We're positioned here for the upside.
Perfect. Thank you.
Alison.
Our next question is from the line of Jon Chapell with Evercore ISI.
Thank you and good morning, I'm not sure. If this is for Jennifer Kenny, but Jennifer you mentioned in your comments you are making great progress in repricing business.
Scenario headwinds that you're facing can you give us an idea as to one and you know kind of where you stand in repricing. The book of business. So a lot of these new labor deals and to get to this in his talking macro backdrop. How these conversations are going and your confidence in your ability to fully offset the costs.
Yeah, John Thanks for that question I'll start and then ill pitch it to Kenny So just as a reminder, when you think about our book of business call. It 25% or so is it spot rates you've got another call it 30% to 35% or so that is a one year or less and duration types of contracts the arrangement and the rest of them are multiyear.
Our deal. So there is a cadence to which we're able to touch actively all of all of our business any way to maybe talk about them.
John the commercial team has done an excellent job articulating the need for some of the inflationary pressures.
Even if you want to call it the labor in a pre.
Or is that are there and really in serving our service product along with those discussions now candidly in a very pragmatic way our customers empathize with that they are taking the same price increases in their market. So so they understand what we're what we need to accomplish there is a tremendous amount of a REIT.
Sources that were committed.
Committed too on the Capex side, which will help out with a consistent and reliable service. So we feel very good there for confidence and pricing above inflation and making sure we cover those costs.
Alright, Thank you Bill.
Thanks, John .
Our next question is from Chris Wetherbee with Citi.
Yeah, Hey, thanks, good luck.
Congrats Lance on the next stage of our of your career here I guess wanted to take a minute and talk a little bit about.
Resources, and where you think you are I know, Eric you talked about pulling some cost levers that are around locomotives other assets, but Jennifer.
Should we expect with head count as we move forward and you know sort of winter you appropriately staffed or what you think the volume outlook may be not just for this quarter, but maybe in the next several quarters.
Yes.
Eric talk about how he feels about crew staffing levels, but just overall in terms of our head count you know, we think as you look to the back half of the year, it's probably going to be I'll call. It flattish or so from where we're at right. Now you know continuing to hire and train and make sure that we've got a good robust pipeline so that we're able to.
Serve our customers appropriately, but just from an absolute FTE basis, that's kind of how we see things in the back half.
And just picking up from there Chris clearly what you've seen in our performances that we have reduced the amount of hiring than we had been doing right now.
They're very connected with Kenny is and then the outlook both for the fourth quarter as well as 2024, and we're going to continue to adjust as we have to what that demand is it's the same way I view the locomotive work that was accomplished during the quarter.
Same store.
200 locomotives and if you actually look for now in this month were actually above 200, we're trading at the exact same way so you're the man that's out there plenty of resource base Accordingly.
We should be crystal clear as well Jennifer in there Chris So there's still work to be done when we look into the third and fourth quarter, Eric outlines some of it in his prepared comments, but.
We are not yet volume variable with what we're seeing in the marketplace. We took a step towards that in the second quarter, we gotta keep taken steps in the third and fourth.
Okay. That's helpful. Thank you.
Yeah.
The next question is from the line of Justin long with Stephens.
Thanks, and good morning, and my Congrats from my end as well I wanted to ask a question about the outlook for the second half you mentioned fuel being a headwind and in addition to that the labor cost do you think EPS in the second half will be lower than the first half.
And then maybe Jennifer you could comment on the run rate for these labor related cost as we move into 2024 I'm. Just curious if we can take this $50 million to $70 million and annualize it or if that is expected to change.
Jennifer why don't I start, we're not going to provide some incremental or new guidance as regards earnings into the back half.
But Jennifer you did a good job of outlining what the headwinds are and why don't we why don't we unpack that a little bit yeah. I mean, certainly the the one headwind. We did size for you is the 50 cent impact there's a negative year over year impact, we expect to see on EPS from fuel and in the third and fourth quarters in terms of moving into 2024.
So if you think about that $50 million from the sick leave agreements that I mentioned you know most of those agreements are really effective in the second half we had our non ops that started a little bit in the first half. So I think you can think about that as being something that will carryover and repeat itself in the first half of 'twenty 'twenty four beyond that in terms of the implementation.
The work for US, we're really reluctant to and really it would be difficult for us to size that more precisely because it is going to depend on the timing of how we roll that out as well as the employee behavior that we see with that and so that's something that we'll just keep you updated but want to make sure you do understand that there will be a bit of a headwind, but as we get greater.
Clarity of that as we go through our rollout and start that rollout and obviously, we still need to get smart T D done as well.
You know we will be in conversation about that so just and I think as we look into the back half of this year improving productivity.
The hiring pipeline tones down a little bit, but we're still hiring at a probably looks like year over year about equal I think is what Jennifer was saying.
Not sure what's going on in the marketplace. So we got a we got a we got to do everything we can to capture all of the business. That's available to US and then fuel is going to be a real headwind in the back half are offsetting that we get a tailwind from implementing the brake person agreement and as we implement the work rest scourge.
Oh I.
I am confident that generates both productivity and service product improvement the issue is timing and magnitude.
Yeah.
Got it thanks.
Our next question is from the line of Brendan Glinski with Barclays. Please proceed with your question.
Good morning, and thanks for taking my question.
Congrats on a career here and I guess you know.
I know you guys wanted to ask about the quarter, but just looking back plants over your course of being at Union Pacific You know what do you think went really right and what do you think maybe could have been done better to keep track you know, maybe what potentially more volume growth looking back and maybe looking forward. What do you think are the biggest challenges or opportunities for the industry, maybe not even just UN P.
No. The technology is it regulation is the M&A.
Would love to get your thoughts yeah, Brandon. Thank you for that question and we will try to keep this to be the only question on that so I'll try to make the answer a fulsome in terms of what am I proud of what I think we got right is a team one is I love the team that we've assembled.
World Class I love the work that we've done on sustainability I Love. The fact that we were an inclusive workforce you can see it in our board you can see it on our management team are I like the progress that we've made on safety, we've got more to do there.
And I love, the fact that we transitioned from.
Our previous transportation model and and way of running the railroad to a P. S. Our model that's a better service product for our customers in terms of what we needed to do better we were not consistent and reliable through my eight and a half years of serving as the as the chairman President and C. O N E.
That needs to be remedied as we look into the future that's exactly what we need to continue to do we've got a strategy serve grow win together that's built off the foundation of consistent and reliable service I am confident where we're oriented organized and capable of doing that we've got a <unk>.
Moving to our customers because brand and our customers tell us as we demonstrate reliability theres more of their order book available to us plus there's more market participants that'll start doing business with us that's the unlock for growth and growth is the unlock for significant value creation in the future.
Sure for everybody for all of our stakeholders.
Thank you Lance Yep.
Yep. Thank you.
Our next question is from the line of Ravi Shankar with Morgan Stanley . Please proceed with your question.
Oh, great. Thanks, everyone and again for me as well congrats on a great career are just on the on the volume guide itself. A can you confirm just how much that kind of volume outlook did move because you did.
You're not going to be kind of below our raised benchmark. So I'm just trying to get a sense of kind of how much that did move and also is industrial production. The right benchmark for Ya Gotta. What are you building. The long term just given the consumer exposure here or do you have to look at some combination of IP cause you to be.
Definitely want to start that yeah, I can start it. So you know you raise a good point Ravi I mean, we do think looking backwards certainly that industrial production has been a better gauge, but youre right. We have great franchise diversity, which which we've talked to and Kenny mentioned too and with the growing intermodal portfolio. There are certainly components of that but its really driven.
Consumer spending and a lot of that consumer spending comes from industrial production. So you know it's hard to to really separate from that but you know in terms of what's changed from from where we started the year. You know certainly coal is is something that with natural gas prices falling as it did in late January early February that's certainly.
Took a big chunk of that demand away from US now you've heard us talk about the heat and you're seeing that you're seeing maybe a little bit of an inflection in natural gas prices. So we're watching that you know the other piece, though is on that consumer side, you know onboarding, our new intermodal customer coming into the year, we expected that to be a big tailwind.
Due to our volumes and just the way that that consumer spending and consumer goods purchases has dropped that's just had a really outsized impact all I'll say is that you know we're looking at consumer spending by the week.
And I feel very encouraged that we have.
Onboard it over the last couple of years a couple of transformative.
<unk> customers onto our domestic intermodal on.
That work and so as we see that movement move up we're going to be in a great position and so that's encouraging for us as a company.
Very good thank you.
Thank you Ravi.
Our next question is from the line of Brian Awesome Beck with J P. Morgan. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
First just wanted to follow up on the pricing to the labor inflation do you think getting rages enough to offset this cost you would need to get some productivity benefits from the work rest the brake brakeman, and then possibly even utility role.
And then just for Kenny can you just comment more about price mix, you mentioned, specifically the coal and intermodal pricing, we're resetting lower in the quarter does that continue throughout the rest of the year. If you can give some parameters in terms of how to think about that mix in the back half. Thank you Denny what why don't I start with the what about the agreements and getting price and productivity out of them.
The short answer Brian is.
We are confident that we can continue to price above inflation. We've just seen a few agreements like paid sick leave add to the inflation in our comp and benefits and Kenny's team is tasked now to get out there and make sure that we recoup that in terms of productivity. The brake person agreement is just a clear.
Path on productivity, we can reduce three people to two people on crews, where we don't need three people and we can either.
Redeploy them or lower our hiring demands so that that clearly just in that one example, there are other examples like in work rest, Brian will be able to get productivity out of that today, there's a there's a percentage of our workforce when they're called.
Take a train they are not available to us and we don't know that before we call them and that creates failure cost and disruption in the network.
I'm going to presume and and I think the experience where we're crest schedules are in place that unpredictability dropped dramatically when that happens, we get better utilization of our of our assets and we lower failure cost in the network. So the only question for US is order of magnitude and we.
When as we implement.
So yeah a.
Couple of things here.
Let's just take hold for first so yeah, and you've heard US talk about this we do have a couple of mechanisms that are in place that allow us and our customers to be competitive.
Natural gas prices you know one of the things that we have seen out there is the fact that there has been a.
Slight uptick in terms of demand based on the extreme heat that we've seen we've seen that also impact.
Again in the near term you know natural gas prices out there. So we're seeing more demand out there we're working closely with Eric and his team.
We speak to them more sets in that more inventory into the network and we're looking at the forward curves and you just see how long that will last so we're always looking at that and we're looking at that by the week.
Switching to domestic intermodal on the pricing side, you know we like the fact that we have our customers that are competitive in the marketplace.
We're competitive against truck.
Some of those mechanisms will will go up as things tightened as I'm doing a look market by where we are now might move down a little bit but the key is to make sure that we can capture the volume against truck and make sure that we're competitive.
Alright, Thanks, Kenny Congratulations claims.
Thank you Brian .
Our next question is from the line of Felicia with BMO capital. Please proceed with your question.
Yes. Good morning, Thank you congratulation marriage.
Question on the opportunity for volume.
If you think about it.
Zero GDP environment over the next say 12 months.
What can service improvement deliver in terms of gross where or maybe some of the vertical do you think that you can make a difference and in the service level and ultimately go.
To see.
Do you have some critical opportunities to grow the business.
Yeah. Thanks for the question.
Just walk through you know if you look at our outlook slide in our supplement that with a few more specifics you know on our bio diesel renewable diesel.
Market, we've got seven different facilities on us we're going to land another facility here by the end of the year, we're very encouraged by that.
Key part of our growth strategy, and we mentioned that a couple of years ago. During the Investor day, very proud of our commercial team for securing that.
Construction you know our rock business. For example, those are areas, where Eric team is just delivering great service and that's showing up in terms of carloads were you know, adding a few more thoughts there.
We're seeing more carloads that are coming on because of that and some of that is market related is there's just more infrastructure that's out there.
You talk about the service product, we look at auto parts, you know come in and out of Mexico, We've seen a pretty fast.
Fast and upcoming war growing E V. A producer that we're growing with on the auto part side that we're excited about we've secured a.
Our new automotive OEM on airline back in the spring that is brought business to us that same OEM will be bringing on business in the first quarter. So we're pretty excited there and then kind of last but not least I'll just say that overall the team has been engaged on bringing new.
Business in different ways, we have a new industrial park, that's gonna be landing on them and the Buckeye, Arizona area. So that's great and we've got a customer that will be doing well.
Were you reusable plastic so just if you think about the ESG connection so we can create our own busy.
Business development with the service that I mentioned with Eric and we're excited about it and it's proven Kenny Youre. Your BD pipeline is up what.
If if if up around 20% to 25%. So the team is just doing a fabulous job going out there and expand in the market that's been a that's in a down.
Market and where they were pumped up about it that's good.
And I'm surprised you didn't mentioned intermodal being one of the airports that are either so we're just getting better at this.
Because of the truck market competitiveness right now.
Hey, you need a little bit of support there or is there more to it than not.
Okay, well, you're going to get me wound up the day. So first of all we talked about a couple you know transformative wins that we feel good about our.
I'll tell you as a management team, bringing on inland Empire, which is a new product, bringing on a new port Houston service product that Eric has given us with five new line, bringing on twin cities, absolutely. We feel good about domestic intermodal at some point you need the demand to be there.
We're hearing me say is that we're prepared as that demand comes on and we're adding new products, we're adding new services, we're adding new customers. We're excited kenney at the risk of making this drag on too long you should mentioned Falcon premium too.
[laughter] so.
Let me back up and just say you.
No theres been a lot of debate out there in the marketplace.
And we feel very good about the service product that we have with alcon premium on a broader sense. There are other class ones associated with that so it's not just one class one is the <unk>.
Other class ones that we're interacting with two that we feel good about.
We've got a shorter route structure, we've got a better schedule, we've got the relationship with the customers Eric and his team are continuously improving that service product. So we're encourage how that looked in the future.
Thank you.
Thanks Patty.
The next question is from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Thanks, Hi, everyone Lance Congrats all your success wish you the best.
I guess, Eric and Jennifer I know borrow outs have been pretty.
And I think last time, we checked you had like 250 borrow outs.
And the network can you just give us an update on that.
Feels like maybe that's an opportunity over the next six to nine months and just generally in terms of non fuel cost.
It feels like the network is running a little bit heavy hum.
Non fuel costs.
I know, there's obviously cost inflation and labor inflation intermediates, correct Socratic things, but you know us as maybe the volume comes back and you can become much more volume variable is there an opportunity to kind of hold the line on the non fuel cost structure.
Given some of the positive things that you can do on the borrow outs and kind of other other cost items that are to be more starboard right now.
Yeah. Thank you for the question, let's back up in time as we came into the year and think about our first quarter earnings report, we were talking about barro Alto in the context of while we were making great progress in our hiring we still have pockets of the system, specifically about seven locations, where we're utilizing bar, while it's because of the difficulty to higher now.
No.
Any given year, there's some level of borrower to used even in just dealing with seasonality for example, the grain harvest that comes in the fall.
If you look at the quarter. When we report it is that we've taken our borrow out count down by 50% approximately.
Now that is a prompt process that continues as we look for volume to continue to grow and we have those as options, but as we're looking every week to your point to control our costs. Those are ones that we adjust literally on a weekly basis. There may be a place as we fast forward three months four months six months, where you may use them.
And very small numbers, but our goal is to reduce our borrowings as quickly as we possibly can.
As far as the non fuel cost and it follows the same recipe that we've shared before one we just finished talking about it which is how we think about our labor costs and ensuring that we're being conscious of that to you go to your next expensive cost well at least outside of fuel as youre going to look at your locomotive fleet. The reduction that we've made in the quarter is a strong move in the right.
Our action the reduction we've even made in July as another strong move on top of that and we'll look forward to reporting to that in future quarters. So all eyes on we want to grow the business and we need to be volume variable until we see more of that growth coming and I need just to build on what Eric is saying there is you know if you look across all of our cost categories.
Depreciation aside we know we have opportunities within all of those to be more efficient.
You know as we continue to improve cycle times that has a very direct flow through in terms of our car hire expenses I'm on the purchase services and materials side.
You know Eric mentioned the locomotives, but there's other opportunities we have in there to work on our costs and even causing benefits with some of the headwinds that we know we have there's opportunities to be more productive and use that crew base more efficiently.
And you know to your point volume can certainly be a friend when it comes to to the cost structure, but I think the fact that you've seen us make some progress as volumes are going down and you saw us build train length, even as volumes came down and in particular intermodal volume those are the things that we're going to keep working on here.
Well always but certainly in the back half of the year are to continue to drive better efficiency and get better alignment between the resources and the cost structure and the volumes that we're moving.
Yeah, Okay makes sense. Thank you very much appreciate it.
Thank you.
Our next question is from the line of basketball majors with Susquehanna. Please proceed with your question.
Lance as you wrap up your eight years as you piece Chairman President and C. D O. A how do you expect the push and pull of the thing your decision, making process between marketing operations and HR change with those roles split between three people and Beth elevated from just leaving the HR and sustainability.
The effort into that newly Standalone president position. Thanks.
Yeah basketball and thanks for the question first you got to note Jim Vena as our CEO . He runs the company that reports to Jim.
So I don't anticipate any meaningful dislocations or pushed pool created by org structure, but having said that there are some natural tension a creative tension in the business all the time, there's creative tension between the operating team and the commercial team there can be creative tension between the team there.
Is controlling versus the team that's spending.
You know just you can name any number.
The most important thing is we've got a fabulous.
Operating executive joining us as our CEO has got a great track record and he's going to be laser focused on making sure that were provided providing the best service product to our customers. So that we can translate it into growth.
He's going to do a very good job of making sure. The team works together, we're working well together today I anticipate we'll be working well together a month from now and beth's role is going to be making sure that she is supporting all of that effort effectively through workforce resources through the work, we do with communities through the work we do in D C.
I anticipate better not worse as we move forward.
Thank you.
Yep, Thank you basketball.
The next question is from the line of Ken <unk> with Bank of America.
Hey, great good morning Congrats.
Congrats Atlanta team and the board on the next steps in and on naming Jim as CEO I'm. So so many moving parts with the labor agreements. Obviously Gen ran through some of the cost side from the pay increases last year to what you're now adding on after the the main contracts maybe can you take a minute walk us through some of the benefits that you see.
And I presume these are all union Pacific add ons.
Differentiate what is U P add on versus the industry.
And then just thoughts on your outlook I think you removed the operating ratio from your your target is is there a thought on the scale that you want to put together on on costs or are we just leaving that off altogether.
Yeah. So I'll start off can so when we did our 8-K in June we took the operating ratio improvement off the table for the year and that hasn't changed.
Certainly you heard us talk about some of the headwinds that we have them. So we are not you know with the addition of the labor expenses volumes, you know moving away from US and then obviously some some fuel headwinds are relative to L. A in the back half of the year. We don't expect year over year improvement you know are tasking kind of touched on it.
It's a little bit with the questions on the med is he gets better you know from where we sit today and I'm not going to forecast you know what our or is going to be in the back half of the year, but we're going to work really hard to improve each and every day and that's both in terms of being more productive with that cost structure as well as going out and selling in the mark.
That place and doing all we can to drive profitability on that side well, Eric do you want to and then the agreement side. So if we start with sick days you know the opportunity that that Lance mentioned in all of this reinforces we see the opportunity to improve the attractiveness of our jobs and as a result of that I can have a positive impact on how we do our hiring.
The break person deal clearly biggest opportunity there is to reduce break person labor in line with where the jobs are no longer needed. It also allows us to partially offset some of our hiring in the short term and of course, we get the benefit of establishing the ground based enhance utility position and as gender point for Jennifer pointed out the payback period on that is approximately two.
Two years and if you look right now we're about 60% the way through that implementation.
And then certainly on the 11 enforce scheduled work it really boils down to improved availability as Lance pointed out in the more efficiently managing our staff levels with more latitude on how we do that under this new agreement.
Thank you.
Yep. Thank you Ken.
The next question is from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, Good morning, and best of luck to you Lance Jennifer just wanted to just make sure I understood. The answer to that last question or are you. So relative to like the 62 adjusted award in Q2 or are you not you're just not giving any color or are you, saying, it's probably going to get worse.
The or second half versus that 62, I'm just not sure what you're trying to message there and then just Kenny.
C N last night, we've just talked about raising their expectations for the U S green upcoming U S grain harvests, just with some better rain recently and just your thoughts on how you think about the grain harvest in your territory going forward. Thank you.
Yeah, so going back to you know you're really asking a sequential question and you know.
Again, we had a 63 reported or if you're stripping out the brake person agreement you know that was one one points in the quarter.
If you look at what we have done historically as a company you tend to see some of your better margins than in the third quarter tends to go up a little bit then in the fourth quarter.
When you're just thinking about kind of that normal seasonality.
We are going to work to make sequential improvement I'm not telling you that we're making sequential improvement but that is it has it has to be ahead of us we have to work to improve.
The cost structure and we've already made some progress I think you certainly saw that I know, it's a little bit of a messy quarter with all that was going on in it but when you strip some of the noise out there was you know, particularly when you're comparing first quarter to the second quarter, we did make gains not year over year, but sequentially. We did make some gains there so.
I think that's the way to think about it into the back half of this year.
So Scott I would tell you we look at you know the weekly crop report.
And I you know call. It five maybe six weeks ago wasn't looking great and since then we've had rain in areas that we serve in and participate in so it's looking much better you heard in my comments that you know we think there is the opportunity for incremental grain in the fourth quarter.
And so we're steering that down and working with everything to make sure we can capture it.
Thank you guys.
Yep. Thank you Scott.
Next question is from the line of Walter <unk> with RBC. Please proceed with your question Hi.
Best of luck there Lance on the on the future.
Just a question here wrap up here on on coal I know you'd indicated that that was areas of discrepancy from where you were looking at before.
Really on the on the arc or the revenue per carload revenue per per T. M. That's taken a notable step down and I know your peers have talked a lot about you know you show. So I started about a 15% decline in in there rates on coal now a lot of that is tied to export met which is not in your in your mix but.
But you did see a similar type of step down in cents per T. M. Just wondering if that's something that you expect to continue.
For the foreseeable future, what's driving it what could make it change up or down from this point going forward.
Yeah. So Walter we did mention that in my prepared remarks that that was a bit of a headwind and you've heard us talk before that we do have a portion of our coal contracts that have some mechanisms that link that pricing to natural gas pricing and what's happened with natural gas pricing that certainly is flowing through in terms of some of the rates we.
Did that similar to intermodal in terms of keeping our competitiveness for those plants that are dispatching them into the grid keeping them competitive and were continuing to ship coal still profitable for us, but there is some pricing differentials. There. So it really depends on how you see the rest of the year playing out in terms of how that's.
Going to look, but if you just compare last year's Nat gas prices to where we're at that this year that tells you there's going to be some ongoing pressure there yeah. I think the differentiation there is sequential versus year over year and year over year is going to continue to see some pressure sequential probably we've seen as much pressure as we're gonna see show so it kind of flat from this point going forward.
Yeah.
You know it could be I mean, obviously, what natural gas prices sure yep. Okay. Thanks, very much yeah. Thank you Walter.
Your next question is from the line of Jason Seidl with TD Cowen. Please proceed with your question.
Hey, Thanks, operator first off Lance good luck in the future and congrats to both Jim and benefits are listening in.
Some quick things one wanted to look a little bit up regulation, you know we've seen that yet.
Right now is looking for a public comment period on train weights lengths wanted to know if you guys think this is sort of a precursor for more regulation from them in two maybe if you could talk a little bit about anything.
Anything anticipated on reciprocal switching and lastly, squeeze you didn't hear Jennifer When's. The last time, you guys didn't repurchase shares in the quarter.
Jennifer you want to go first and then I'll take the others. Yeah. So you know I would go back to second and third quarter of 2020, when the pandemic hit and there was such a drop in volumes, we paused our share repurchases then for at least a couple.
I'm pretty sure for the full second quarter part of the third part of the third quarter. I think is when we restarted that so you know we manage the share repurchase piece with our excess cash and that's always been the flexible part of our shareholder return and that's that's how we're managing it today, yeah, and Jennifer we've been crystal clear that we.
Our excess cash by using the capacity of our balance sheet and that capacity now has been largely used in it's all about growing cash from operations and operating income at this point exactly lands and you know obviously with some of the earnings pressures. We're facing this year, that's not giving us that incremental capacity and we've seen.
So Jason talking about what's going on in Congress and a D. S. T V. In Congress the rail Safety Act, we've been Crystal clear about things in there that we think are appropriate like there should be some additional regulation and laws regarding the.
The preparedness of emergency responders the information that's out there disposal. We believe the same is true on tank car standards. There, there's an opportunity to pull forward tank car standards improve.
Improvements.
And we also think there's room for a regulation to step into wayside detection we've.
Done a ton of things and wayside detection voluntarily it.
It is not a regulated and if it were to be regulated appropriately that that makes some sense theres. Some things in the rail safety Act that don't make sense like coupling train size with safety on our railroad a mainline and siding derailments are down 25% plus.
Train size is up 20% over the last call. It four years Theres just no correlation in our experience between safety and train size and likewise, there's no correlation anywhere.
In the world between train crew size and safety that should be left to collect the bargaining and what technology enables.
So as we look at Congress, that's what we're thinking about as we look at the S. T be as we've said before we help them understand how the railroad industry works, how our reinvestment works.
And when it comes to reciprocal switch or forced open access we helped them understand that that that would have a real negative impact on our investment.
Investment it would not improve service product.
And they they should be very very careful as they think about whether or not that should be implemented and how to implement.
My name is Jennifer appreciate the thoughts.
Thanks, Jason.
Our next question is from the line of Tom one of its with UBS. Please proceed with your question.
Yeah. Good morning, and you know Lance wanted to wish you well and are in the next thing you do retirement whatever it is.
Let's see the I guess, one just clarification I think Kenny you commented earlier on intermodal yields or <unk> or are we expecting more sequential pressure on revenue per car.
In intermodal and <unk>.
So that just clarification and then the broader question really.
When we look at the industry.
Historically, there was opportunity from productivity and price to improve margin certainly you U P did that in a massive way over I don't know 15 years right.
But it just seems like there is this inflation in the cost base and you know pricing is good but not enough. So do you think it's fair to look forward and say look margin improvements really about volume and without volume you're you're maybe you have a tough time to improve the margin and I think that seem to be true maybe for industry not just for you Pete.
Don't know if you have thoughts on that and then maybe to clarify clarification on intermodal. Thank you yeah, Yeah, Tom Let me start with your you're a central question about the three legs of the stool, we've forever talked about we drive margin improvement through productivity price and the benefit of volume and to your point, we've leaned heavily on pro.
Activity in price historically, and we said we're in a transition where we're gonna have to lean more heavily on volume.
But that's not going to be the only leg of that three legged stool, Tom when you, it's still true what well.
Inflation got on Us quick.
The way, our our contracts and our business relationships are set.
It takes us a while to recoup that inflation through price Kenny's team has been crystal clear that they own the requirement to do that and they're following through but it's going to take a little while and on productivity like we just demonstrated that this quarter. We created a new agreement makes all the sense from the world. It came with a 70.
Roughly $70 million price tag immediately.
Implementing it is going to get the payback and will be paid back in about two years.
So theres, so Tom the opportunity for productivity price and volume to still drive margin improvement exist.
We're in kind of a unique environment right now regarding timing and we are for sure going to have to rely on volume more heavily going forward. Yeah. Just the short answer no we're not expecting a increased pricing pressures on that.
Modal side of the house.
Okay. So you think stable revenue per car three Q versus two.
That's how you should be thinking about it.
Okay, great. Thank you.
Thank you Tom.
Our next question is from the line of Ben Nolan with Stifel. Please proceed with your question.
Yeah. Thanks, So Kenny you mentioned, the Falcon express a little bit ago.
I am curious if you have any <unk>.
Early takes any how are things thus far are developing the way. They thought you would or you thought they would or.
Any any early indications that are of how you're.
<unk> it to play out over the back half of the year.
You know I think you're asking have we seen any success stories and yes, we've had some early wins.
Of course, the focus is over the road I mean, that's the size of the prize rail.
Rail is a very small part of that traffic that you know moving out of Mexico or in the Mexico.
As I also said as we continue to.
Improve the speed and consistency there we expect to make more inroads.
Okay, and so far as expected.
Yeah, I mean, we're we're getting more reception from customers that are open to opening their books and given up.
A shock for sure alright.
Alright I appreciate it thank you.
Thank you Ben.
Our next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Hey, good morning, guys and Lance congratulations and good luck.
So Eric.
Eric.
406 hundred heads that we need to add in for the part time off.
Our pay time off agreements how many of those people are going to be on property by the end of this year and then how should we think about reconciling that with the flat head count number from from <unk> are we making reductions in it operations or is it coming out of other areas. Thanks.
Yeah, So I'll actually jump in on that one so it is when you think about the 406 hundred incremental that we talked about from the labor agreements that's incremental from what we would've otherwise been staffing at a given volume level. So that is completely consistent with and taken into account with when we also say.
As we look at head count levels now to the end of the year. We think you know not a not a whole lot of change. So some jennifer it's for all agreement is for all agreements, which again, we're gonna be implementing over not just the back half of this year, but well into 2024, and we also pointed out that our commentary that that number is gonna be.
Impacted by the behavior of that comes from these agreements and we're not ready today to say exactly what that will look like we will continue to work through it though absolutely, but he had the back half of his question there.
Which was about offsets in the office, it's really havent changed from the ones that I answered a few moments ago. They really focus on the availability on the 11 and four and they focus on the brake person about actually removing break persons off of positions that are no longer needed.
So if you were to say like how much of the four to 600 is in this year versus coming into next year is it a quarter or is it half just is there a way to directionally sort of indicate where how much it's gonna be in this year.
You know again it does it does depend on what the behavior is but there will be some amount you know maybe maybe a quarter to half that that's probably not a bad estimate you know sick leave obviously that part we have fully done now so any any heads that we think that we need to add.
For that that's done obviously, we get offsets this year too with the brake person agreement mm. So there's there's a bit of a netting effect and then it really is pace and timing of of the BLA teamwork, Ras getting smart T D and of course, we will because it's really the training piece of it right. So.
We're going to need to from the L. T. We need to put more engineers in the training pipeline and with that you need to continue to hire some conductor. So there'll be some portion you know 50% might be at the Mac side I would say that.
Somewhere in there is a safe bet and Jennifer I think you had said this but your total guidance sequentially for the back half labor being flattish includes all that yes. It absolutely includes all of that.
Alright, thank you.
Thank you.
Our final question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Yeah, Hi morning.
More of an operational question curious.
Trip plan compliance, where do you think that needs to go both at the manifest and intermodal level, but specifically on on intermodal.
Is the way to think about modal conversion accelerating tied to a certain level of trip plan compliance for that and if so you know where the customers really take note and you start to see an acceleration of market share gains. Thanks.
Yeah, Jordan. So when you we've been very consistent and I Wonder if you think about the intermodal P. P. C. You're talking about a number that starts with an eight and when you're thinking about manifest and autos. It starts with the seven now that's highly informed and continues to be evolving we went through Uh huh.
Very large engagement with our customer base through kenny's team towards the back end of last year and that is informed this year and how we think about that more specifically two segments within those customers now that work continues become go to old do anyhow.
And we've read.
And as we've reinforced before we know that our customers are sensitive in fact very sensitive Georgia. That's why we're encouraged by the progress we've made and in no way are we saying that our services where it needs to be now it was a great step in the right direction, we've got more work to do.
Great. Thank you.
Yep, Thank you Jordan.
Yeah. Thank you. Thank you all for your questions and thank you for joining us on the call today. We appreciate your interest and your ownership in Union Pacific and I Hope you have a great rest of your day take care.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time.
Yeah.
Okay.