Greetings and welcome to the Union Pacific Second Quarter Earnings Call. 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 are Kenny Rocker, Executive Vice President of Marketing and Sales; Eric Gehringer, Executive Vice President of Operations; and Jennifer Hamann, 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.

Thanks, Lance. This morning, the Board of Directors announced that Jim Vena will be appointed the next Chief Executive Officer of Union Pacific. The Board has also appointed Jim to the Board of Directors. Jim brings a strong rail operations background at Union Pacific with over 40 years of experience. This includes two successful years as our Chief Operating Officer from 2019 to 2020. 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 14, and we look forward to welcoming him back to Union Pacific. The Board 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 Vena. Whited will report to Vena, and her responsibilities will include the strategy, workforce resources, sustainability, law, corporate relations, and government affairs functions. In addition to these management changes, the Board is appointing two new Board members: Doyle Simons, former President and Chief Executive Officer of Weyerhaeuser; and John Wiehoff, 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 by splitting the role of company CEO and Board Chair. With my election, the 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. The 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 set 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 has set our company up for great success for the years to come. Thank you, Lance. And I'll turn it back over to you.

Thanks, 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 2023 second quarter net income of $1.6 billion or $2.57 per share. This compares to 2022 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 2022 primarily driven by lower revenue, inflationary pressures, and the previously disclosed one-time ratification bonus payment. 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 rightsizing 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 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 bulk. 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 feedstocks, 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 improved by June. In addition, drought conditions from the prior growing season negatively impacted both fresh and canned shipments. 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. With 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 in 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 challenged industrial production levels and reduced housing demand. Metals and minerals volumes continue to deliver year-over-year growth. Volume was up 2% compared 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 revenues. Automotive volumes were positively driven by continued strength in 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 goods. International shipments were down due to decreased imports on the West Coast. So turning to Slide 7. Here is 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 the inventories have been restocked, but extreme heat is driving up near-term demand and starting to push up natural gas prices. We expect near-term grain shipment to be challenged with tighter U.S. grain supply impacting volumes. However, with improved operations and recent rain improving new crop supply forecasts, 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 continue to capture new business as production expands. Moving on to industrial. The forecast for industrial production is down in the back half of 2023. Demand for forest products will also remain below 2022 levels. And despite some good business development wins on the metal side, it has been offset by a weaker-than-expected market. However, we expect to see continued strength in construction with new business wins. And 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. However, on the international side, we continue to outpace the U.S. West Coast import market as customers shift more business to IPI. For automotive, we expect growth to continue driven by strong OEM production and high shippable ground count. To wrap up, it's hard to say when the economy will begin 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 closing deals. With that, I'll turn it over to Eric to review our operational performance.

Thank you, Kenny, and good morning. Starting on Slide 9, safety continues to be our top priority at Union Pacific, as we are dedicated to protecting the safety of our employees, customers, and the communities we serve. Freight rail is the safest method for transporting goods over land, and Union Pacific is enhancing safety through ongoing investments in our network, employees, technology, and communities. Our improved safety performance reflects these efforts, with reductions in both our reportable derailment and personal injury rates in the first half of the year, thanks to our improved training programs and a strong culture of safety and accountability. Now let's go over our key performance metrics for the quarter, starting on Slide 10. This quarter, due to the team's hard work, we saw year-over-year and sequential improvements in key metrics that enhance the customer experience. Freight car velocity increased by 8% to 202 miles per day compared to the second quarter of 2022. This enhanced fluidity and resilience was evident as we achieved over 200 daily car miles for 10 consecutive weeks during the quarter. Although our current business mix poses challenges, there are still opportunities for further improvement. Trip plan compliance showed significant improvements of 17 and 8 points year-over-year in intermodal and manifest and auto TPC respectively. Improved network fluidity, marked by faster freight car and train velocity along with reduced terminal dwell time, contributed to these gains. Turning to Slide 11 for our network efficiency metrics, with demand slowing, our team is taking steps to align resources with current volumes. For instance, since April, we've taken actions to reduce the number of locomotives in our active fleet, storing around 200 units this quarter. Despite the decline in our gross ton miles by 1%, locomotive productivity improved by 2% both sequentially and year-over-year. Although we have strong crew availability contributing to good service metrics, our hiring actions are reflected in our workforce productivity, which has decreased by 5% due to increased workforce levels and lower volumes. Nevertheless, more crew resources allowed us to cut recrew rates and lower borrow-outs by roughly half during the quarter. We continue to improve productivity through longer train lengths, with a 2% sequential increase. Although train lengths are down 1% year-over-year, this represents good progress considering the challenges from soft intermodal market conditions. There remain numerous opportunities ahead for enhancing the efficiency of our railroad, such as redeploying staff, improving fuel efficiency, increasing train lengths, and optimizing our locomotive fleet. In conclusion, on Slide 12, our employees' well-being and quality of life are priorities for us, and we consistently gather feedback, collaborate, and seek solutions with our workforce. The historic agreements listed on Slide 12 are the results of these collaborative efforts. Let's go through each one in detail, starting with paid sick leave. We have ratified our tentative agreements with all 13 of our labor unions on this crucial quality-of-life initiative, which gives employees more paid time off for their health and family needs. While this enhances the attractiveness of our jobs, it will also increase labor costs that we'll need to manage. Next, our crew consent agreement with SMART-TD offers more scheduling flexibility and enables the redeployment of brake or switch personnel for work inside or outside the yard. Specifically, this provides a quicker path for brake persons to advance to conductors and eventually engineers if they choose. For the company, it allows for reductions in brake persons when a third person is not required, helping to offset some of our short-term hiring demands. Furthermore, it lays the groundwork for establishing ground-based positions with fixed days off and more predictable weekly assignments through scheduled shifts. Lastly, TE&Y work rest arrangements provide engineers and conductors with more predictable work schedules, enhancing their quality of life and that of their families. Currently, we have a ratified agreement with engineers providing an 11 days on, 4 days off work schedule, and we’re negotiating similar arrangements with conductors. This arrangement helps the railroad manage staffing levels better as it leads to a more predictable and available workforce, reducing labor and failure costs, and supporting consistent and reliable service for long-term growth. We believe this will also improve our employee retention rate, decreasing hiring costs and lost productivity. These agreements will incur costs, which Jennifer will elaborate on later. As we implement them, we anticipate a larger training pipeline in the near term and elevated workforce levels going forward. When fully implemented, we forecast an additional 400 to 600 employees. Ultimately, the long-term benefits of these agreements will positively impact our employees and the service we provide our customers, enhancing our value proposition in the marketplace. I would like to express my gratitude to our customers for their support and to the marketing and sales team for their ongoing efforts to capture available demand and secure new business. I will now turn it over to Jennifer to discuss our financial performance.

Thanks, Eric, 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, where we've outlined the major drivers. In the June 13 8-K, we disclosed a one-time ratification payment related to our SMART-TD brake person agreement. That $67 million bonus increased our operating ratio by 110 basis points and reduced our EPS by $0.09. Falling fuel prices during the quarter and the lag on our fuel surcharge recovery programs positively impacted our operating ratio by 200 basis points and added $0.04 to EPS. 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. Below the line, we net to a $0.07 EPS reduction from lower Nebraska State tax rates in 2023, as was noted in that same June 8-K, and a 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 accessorials related to lower intermodal volume and faster equipment turns. Operating expense of $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. Interest expense increased 7%, reflecting higher debt levels. Net income of $1.6 billion declined 14% versus 2022, 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 2022. Lower year-over-year volume reduced revenue by 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 by 425 basis points. The combination of price and mix in the quarter increased freight revenue by 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. Mix in the quarter remained negative as fewer lumber shipments and more short-haul rock shipments outweighed the positive impact of lower intermodal. Turning now to Slide 17 and a 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 brake person agreement. Second quarter workforce levels increased to 4%. Although total transportation employees were up 7%, the active TE&Y workforce is only up 1%, which is a result of our robust hiring and elevated training pipeline. Excluding the impact of the one-time 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. Purchased 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 and other rents were up 8%, reflecting higher lease expenses for new freight cars secured to support business volumes and lower equity income, slightly offset by lower car hire as we improve cycle times and move less volume. Other expense 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 agreements. 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 2022 levels at 2.9x as we continue to be A-rated by our 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 remain 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 estimates, 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 both on the operating ratio and EPS front. Assuming fuel prices remain relatively stable, this will likely represent a negative second half impact of around $0.50 per share. Eric provided some great context on our labor agreements. And although they clearly come with some upfront cost, 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 2023, 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 brake 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 costly borrow-out positions, as well as reduce our current hiring needs. Implementation of the BLET work rest agreement will start over the next month or so with completion likely in 2024. For this year, we estimate the work rest 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-TD, and we are still working through some technology and logistics before we start the rollout. And while we certainly expect better availability, better service, and more flexibility with our crew boards, providing more access to time off likely adds employees and expense. 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 our 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 UP drives 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 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, reaching historic labor agreements around paid sick leave, crew redeployment, and scheduled work. These agreements drive employee engagement and productivity to produce a better service product for our customers. As I wrap up my time as CEO of Union Pacific, I'd like to express my deep appreciation to the Board and shareholders of UP 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 all along the way. Union Pacific is truly a special place. It's full of hard-working, dedicated railroaders who embrace the daily task of Building America. It's been my greatest honor to lead this team. 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.

Thank you, Lance. 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. However, 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.

Our first question today will come from Allison Poliniak with Wells Fargo.

I want to discuss intermodal. I know there is consumer weakness in that area, but is the pace of the decline starting to stabilize for you? Also, with the improved service you're seeing at the West Coast port, can we expect some of those business wins to begin accelerating for you? I'm curious if intermodal might start performing better despite the consumer decline.

Allison, you look at it, I'll let you know, we're really staring down at consumer spending. And it's been flat the last few months, maybe several months. But it's differentiated as you look at goods versus services, we're clearly seeing, and I talked about it in my opening remarks, less on the goods and more on the services. The other thing that we're looking at is just what's happening with demand, and we're looking at that in terms of some of the contract rates would better flatten out in the spot rates that have inched up a little bit. The fact that we have a really strong intermodal service product is a benefit for us. We're encouraged as a company, I'm encouraged as the commercial leader that even though the imports have been down 23% year-to-date, we're only down a couple of percentage points. And talking to our customers, we also believe that they will be shifting a little bit more back to the West Coast port. That's going to be a gradual shift. That will be a little bit more throughout 2023 and probably into 2024. But clearly, we're positioned here for the upside.

Our next question is from the line of Jon Chappell with Evercore ISI.

I'm not sure if this is for Jennifer or Kenny. But Jennifer, you mentioned in your comments you're making great progress in repricing business to some of these inflationary headwinds that you're facing. Can you give us an idea as to, one, kind of where you stand in repricing the book of business to a lot of these new labor deals? And kind of just in a softer macro backdrop, how these conversations are going and your confidence in your ability to fully offset the cost?

Yes, Jon, thanks for that question. I'll start and then pitch it to Kenny. So just as a reminder, when you think about our book of business, call it, 25% or so is spot rates. You've got another, call it, 30%, 35% or so that is one year or less in duration types of contracts or arrangements, and the rest then are multiyear deals. So there is a cadence to which we're able to touch actively all of our business. Kenny, do you want to maybe talk about the market?

Yes. Jon, 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 priors that are there and really inserting 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 markets. So they understand what we need to accomplish. There's a tremendous amount of resources that were committed to on the CapEx side, which will help out with consistent and reliable service. So we feel very good. There's full confidence and price and above inflation in making sure we cover those costs.

Our next question is from the line of Chris Wetherbee with Citi.

Congrats, Lance, on the next stage of your career here. I guess I wanted to take a minute and talk a little bit about sort of resources and where you think you are. I know, Eric, you talked about pulling some cost levers that were around locomotives and other assets. But Jennifer, what should we expect with headcount as we move forward? And sort of when are you appropriately staffed for what you think the volume outlook might be, not just for this quarter but maybe the next several quarters?

Yes. So I'll maybe let Eric talk about how he feels about crew staffing levels. But just overall, in terms of our headcount, 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. We're 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.

Yes. And just picking up from there, Chris. Clearly, what you've seen in our performance is that we have reduced the amount of hiring that we've been doing now. We stay very connected with Kenny as in his 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. And the team stored 200 locomotives. And if you actually look for now and this month, we're actually above 200. We're treating it the exact same way. So the demand that's out there, find your resource base accordingly.

We should be crystal clear as well, Jennifer and Eric, Chris, that there's still work to be done. When we look into the third and fourth quarter, Eric outlined 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 got to keep taking steps in the third and fourth.

The next question is from the line of Justin Long with Stephens.

Lance, 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 costs 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 unpack that a little bit?

Yes. The one challenge we anticipate is a $0.50 negative impact on EPS due to fuel costs in the third and fourth quarters. Looking ahead to 2024, the $50 million from the sick leave agreements, which took effect mainly in the second half, will likely carry over into the first half of 2024. Regarding the implementation of work rest, it's difficult to provide precise estimates because it will depend on the rollout timing and employee behavior. We will keep you updated on this as the rollout progresses. However, it is important to note that this will be a bit of a challenge. As we gain more clarity through the rollout and finalize SMART-TD, we will continue to discuss this.

So Justin, 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. It 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 to do everything we can to capture all the business that's available to us. And then fuel is going to be a real headwind in the back half. Offsetting that, we get a tailwind from implementing the brake person agreement. And as we implement the work rest schedule, I am confident that generates both productivity and service product improvement. The issue is timing and magnitude.

Our next question is from the line of Brandon Oglenski with Barclays.

Lance, congrats on your career here. And I guess, I know you guys want to ask about the quarter, but just looking back, Lance, over your course of being at Union Pacific, what do you think went really right? And what do you think maybe could have been done better to keep track maybe with 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 UNP? The technology, is it regulation, is it M&A? Would love to get your thoughts.

Yes, Brandon, thank you for that question. And we'll try to keep this to be the only question on that. So I'll try to make the answer fulsome. In terms of what am I proud of, what did I think we got right as a team, one is I love the team that we've assembled. It's world-class. I love the work that we've done on sustainability. I love the fact that we are an inclusive workforce. You can see it in our Board. You can see it on our management team. 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 way of running the railroad to a PSR 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 8.5 years of serving as the Chairman, President, and COO. And 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 we're oriented, organized, and capable of doing that. We've got to prove it to our customers. Because Brandon, our customers tell us, as we demonstrate reliability, there's more of their order book available to us, plus there's more market participants that will start doing business with us. That's the unlock for growth. And growth is the unlock for significant value creation in the future for everybody, for all of our stakeholders.

Our next question is from the line of Ravi Shankar with Morgan Stanley.

Congratulations, Lance, on a remarkable career. Regarding the volume guidance, could you clarify how much the outlook has shifted? It seems you are now below a raised benchmark. I'm trying to understand the extent of that change. Additionally, is industrial production the appropriate benchmark for measuring your long-term volume growth, especially considering the consumer exposure? Or should we be looking at a combination of industrial production and GDP?

Jennifer, do you want to start that?

Yes, I can start it. So you raised a good point, Ravi. I mean we do think looking backwards certainly that industrial production has been a better gauge. But you're right, we have great franchise diversity, which we've talked to and Kenny mentioned too. And with the growing intermodal portfolio, there are certainly components of that. But it's really driven by consumer spending, and a lot of that consumer spend on industrial production. So it's hard to really separate from that. But in terms of what's changed from where we started the year, certainly, coal is something that with natural gas prices falling as it did late January, early February, that 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 inflection in natural gas prices. So we're watching that. The other piece, though, is on that consumer side. Onboarding a new intermodal customer coming into the year, we expected that to be a big tailwind 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 we're looking at consumer spending by the week. And I feel very encouraged that we have onboarded over the last couple of years a couple of transformative customers onto our domestic intermodal network. And so as we see that movement move up, we're in a great position. And so that's encouraging for us as a company.

Our next question is from the line of Brian Ossenbeck with JPMorgan.

First, just wanted to follow up on price to the labor inflation. Do you think getting rate is enough to offset those costs? Do you need to get some productivity benefits from the work rest, the brake men and then possibly, even the utility rule? And then just for Kenny, can you just comment more about price/mix? You mentioned specifically the coal and intermodal pricing was resetting lower in the quarter. Does that continue throughout the rest of the year? You can give some parameters in terms of how to think about that plus mix in the back half.

Kenny, let me start by discussing the agreements and how we can achieve pricing and productivity from them. The short answer is that we believe we can maintain pricing above inflation. We've encountered a few agreements, such as paid sick leave, that have added to inflation in our compensation and benefits. Kenny's team is now focused on ensuring we recover those costs. Regarding productivity, the agreement with brake personnel clearly outlines a path forward. We can reduce the number of crew members from three to two in situations where three are not necessary, allowing us to either redeploy them or decrease our hiring needs. This is just one example; we have other initiatives, like work rest, where we expect to gain productivity. Currently, a portion of our workforce is unavailable when called to take a train, which leads to costs and disruptions in the network that we can't predict ahead of time. In places where work rest schedules are in effect, that unpredictability decreases significantly. This improvement allows us to utilize our assets better and reduces costs caused by failures in the network. So, our main consideration is the scale of impact and timing as we roll this out.

So yes, a couple of things here. Let's just take hold for first up. Yes. 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 with natural gas prices. One of the things that we have seen out there is the fact that there has been a little 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 natural gas prices out there. So we're seeing more demand out there. We're working closely with Eric and his team as we speak to add more sets and add more inventory into the network. And we're looking at the 4 curves that 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. We like the fact that we have our customers that are competitive in the marketplace and that we're competitive against truck. Some of those mechanisms will go up, I think, tightened in a Loup market like where we are now, it 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.

Our next question is from the line of Fadi Chamoun with BMO Capital.

Congratulations, Lance. Question on the opportunity for volume. Like if you think about a zero GDP environment over the next, say, 12 months, what can service improvement deliver in terms of growth? Where are maybe some of the verticals you think that you can make a difference in the service level and ultimately start to see more idiosyncratic opportunities to grow the business?

Yes, Fadi, thank you for your question. Let's go through our outlook. If you look at our outlook slide, I'll provide some specifics on our biodiesel and renewable diesel market. We have seven facilities operational and are set to add another by the end of the year, which is a crucial part of our growth strategy. We are proud of our commercial team for securing this. In the construction and rock business, Eric's team is delivering excellent service, reflected in our increasing carloads. We're seeing more demand due to greater infrastructure availability. Regarding our service products, we are noticing significant growth with an emerging EV producer in the auto parts sector, which we're excited about. We have also secured a new automotive OEM this spring that has already started bringing business to us, and they will continue to increase their business in the first quarter. Overall, the team is actively engaged in attracting new business in various ways, including an upcoming industrial park in the Buckeye, Arizona area. Additionally, one of our customers will focus on reusable plastics, highlighting our ESG commitment. We’re enthusiastic about driving our business development forward with the services mentioned.

And it's proven, Kenny, your BD pipeline is up, what?

It's up around 20% to 25%. So the team is just doing a fabulous job going out there and expanding the market better.

And that's in a down volume market.

That's in a down market. And so I will say we're pumped up about it.

That's good.

Our next question is from the line of Jason Seidl with TD Cowen.

First off, Lance, good luck in the future, and congrats to both Jim and Beth if they're listening in. Some quick things. I wanted to look a little bit about regulation. We've seen the FRA now looking for a public comment period on train weights and lengths. Wanted to know if you guys think this is sort of a precursor for more regulation from them. And two, maybe if you could talk a little bit about anything anticipated on reciprocal switching. And lastly, squeezing in here, Jennifer, when was the last time you guys didn't repurchase shares in the quarter?

Jennifer, you want to go first, then I'll take the others?

Yes. I would refer back to the second and third quarters of 2020 when the pandemic caused a significant drop in volumes. We stopped our share repurchases during that time for at least part of the second quarter and part of the third quarter, when we then resumed them. We manage our share repurchase strategy using our excess cash, which has always been a flexible component of our shareholder returns, and that's our approach today.

Yes. And Jennifer, we've been crystal clear that we turbocharged our excess cash by using the capacity of our balance sheet. And that capacity now has been largely used, and it's all about growing cash from operations and operating income at this point.

Exactly, Lance. And obviously, with some of the earnings pressures we're facing this year, that's not giving us that incremental capacity we've seen.

So Jason, talking about what's going on in Congress and at the STB in Congress, the Rail Safety Act, we've been crystal clear about things in there that we think are appropriate. Like there should be additional regulation and laws regarding the preparedness of emergency responders, the information that's at their disposal. We believe the same is true on tank car standards. There's an opportunity to pull forward tank car standard improvements. And we also think there's room for regulation to step into wayside detection. We've done a ton of things in wayside detection voluntarily. It is not regulated. And if it were to be regulated appropriately, that makes some sense. There's some things in the Rail Safety Act that don't make sense like coupling train size with safety. On our railroad, mainline and siding derailments are down 25% plus, while train size is up 20% over the last, call it, four years. There's 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 collective bargaining and what technology enables. So as we look at Congress, that's what we're thinking about. As we look at the STB, as we've said before, we help them understand how the railroad industry works, how our reinvestment works. And when it comes to reciprocal switching or forced open access, we help them understand that, that would have a real negative impact on investment. It would not improve service product, and they should be very, very careful as they think about whether or not that should be implemented and how to implement it.

Our next question is from the line of Tom Wadewitz with UBS.

Lance, I want to wish you well in your next endeavor, whether that's retirement or something else. I just need some clarification. Kenny, you mentioned earlier about intermodal yields in the third quarter. Are we expecting more sequential pressure on revenue per car in intermodal during that time? Also, looking at the industry as a whole, it seems there have historically been opportunities for productivity and pricing to enhance margins. UP certainly achieved significant margin improvements over the past 15 years. However, there appears to be inflation in costs, and while pricing is decent, it may not be sufficient. Do you think it's reasonable to suggest that margin improvement will largely depend on volume, and that without an increase in volume, it could be challenging to enhance margins? This seems to be a broader industry issue, not just for UP, and I'd like to hear your thoughts on that. And then, also regarding intermodal clarification.

Yes, let me begin by addressing your key question about the three factors that influence our margins. We have always emphasized that margin improvement comes from productivity, pricing, and the advantages of volume. Historically, we have relied heavily on productivity and pricing. However, we are currently in a transition where we will need to focus more on volume. That said, volume isn't the only factor in our strategy. While inflation has impacted us quickly, due to the nature of our contracts and business relationships, it takes time for us to recover that inflation through pricing. Kenny's team is fully aware of this responsibility and is actively working on it, but we will need some time. In terms of productivity, as we demonstrated this quarter, we have formed a new agreement that makes complete sense and will require an immediate investment of about $70 million. We anticipate that this will yield a payback within about two years. Therefore, there is still potential for productivity, pricing, and volume to enhance our margins. We are currently in a unique situation regarding timing, and we will certainly need to rely more on volume moving forward.

Yes. Just a short answer. No, we're not expecting increased pricing pressures on that intermodal side of the house.

Okay. So you think stable revenue per car 3Q versus 2?

That's how you should be thinking about it.

Our next question is from the line of Ben Nolan with Stifel.

Kenny, you recently mentioned the Falcon Express. I'm interested in your early thoughts on how things are developing. Are they progressing as you expected, or do you have any initial insights on how you foresee it evolving in the latter half of the year?

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 is a very small part of that traffic that's moving out of Mexico or into Mexico. As I also said, as we continue to improve the speed and consistency there, we expect to make more inroads.

Our next question is from the line of David Vernon with Bernstein.

Lance, congratulations and good luck. Eric, regarding the additional 400 to 600 staff we need to hire for part-time or paid time-off agreements, how many of those individuals will be on site by the end of this year? Additionally, how should we consider this in relation to the flat headcount from the second quarter? Are we reducing operations, or are these changes coming from other areas?

Yes. When considering the increase of 400 to 600 staff related to the labor agreements, that number reflects additional staffing needs beyond what we would typically have at a specific volume level. This aligns with our assessment of headcount levels from now until the end of the year, where we anticipate not seeing significant changes.

So Jennifer, it's for all agreements?

Yes. The offsets really haven't changed from the ones that I answered a few moments ago. They really focused on the availability on the 11 and 4 and they focus on the brake person about actually removing brake persons off of positions that are no longer needed.

Our final question is from the line of Jordan Alliger with Goldman Sachs.

More of an operational question. Curious, trip plan compliance, where do you think that needs to go both at the manifest intermodal level, but specifically on intermodal. Is the way to think about intermodal conversion accelerating tied to a certain level of trip plan compliance for that? And if so, where do customers really take note and you start to see an acceleration of market share gains?

Thank you for the question, Jordan. We've been very consistent in our approach. When considering the intermodal TPC, we're looking at a figure that begins with an 8, while for manifest and autos, it starts with a 7. This information is well-informed and continues to evolve. We conducted a significant engagement with our customer base through Kenny's team towards the end of last year, which has influenced our current thinking, particularly regarding specific segments within those customers. This work is ongoing because, as we've mentioned before, our customers are very sensitive to our service levels. We're encouraged by the progress we've made, but we’re not suggesting that our service has reached its desired level yet. It's a positive step forward, but we still have more work to accomplish.

Thank you, Jordan, and 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. Thank you.