Greetings, and welcome to Union Pacific's Third 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. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin.

Good morning, Rob, beautiful morning in Omaha, nice fall day. So good morning, and thank you for joining us today to discuss Union Pacific's third quarter results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Hamann, our Executive Vice President of Marketing and Sales, Kenny Rocker, and our Executive Vice President of Operations, Eric Gehringer. As you'll hear from the team, our third quarter results do an excellent job of capturing the progress we've made under our strategy to lead the industry in safety, service, and operational excellence. And you're seeing how that leads to financial success. I'm very pleased with where we sit today compared to where we started a little over a year ago. Now let's discuss third quarter results, starting on Slide number 3. This morning, Union Pacific reported 2024 third quarter net income of $1.7 billion, a 9% improvement, and earnings per share of $2.75, a 10% improvement. Third quarter operating revenue gained 3% of strong volumes, and core pricing gains were impacted by our business mix and less fuel surcharge revenue. Excluding fuel, freight revenue increased 5% versus 2023. Reported expenses year-over-year improved 2%, while fuel prices were a driver. The team did an excellent job generating productivity to control costs as we successfully handled a 6% increase in volume. Our third quarter operating ratio of 60.3% improved 310 basis points versus last year, further demonstrating our ability to be operationally excellent while maintaining a resource buffer to handle unforeseen events. It was another really good quarter. I'm pleased with how we flexed to handle the 33% increase in international intermodal volume during the quarter while improving service metrics across our network. And yes, that mix of business pressured margins a bit. But at the end of the day, it's about operating as efficiently as possible to drive increases in net income and free cash flow. As Jennifer will walk you through, we did an excellent job of delivering in those areas. It's another proof point that our strategy is working. I'll let the team walk you through the quarter in more detail and then come back for a wrap-up before we go to questions and answers. So we'll start with the third quarter financials. Jennifer, over to you.

Thank you, Jim, and good morning. Let's begin on Slide 5 with a walk down of our third quarter income statement, where operating revenue of $6.1 billion increased 3% versus 2023 on a 6% volume increase and third quarter freight revenue totaled $5.8 billion, up 4% compared to last year. Breaking down the freight revenue components, increased volume in the quarter added 550 basis points. Strong core pricing gains were more than offset by business mix, reducing freight revenue by 75 basis points. As I mentioned at Investor Day, International Intermodal's average revenue per car is significantly lower than our system average. Fuel surcharge revenue of $635 million was flat versus last year as lower fuel prices impacted freight revenue by 75 basis points. Other revenue declined $73 million or 18%, driven by several factors: lower access oils resulting from the second quarter intermodal equipment sales reduced demand for auto part shipments at our subsidiary, the ongoing transfer of metro operations, and a one-time contract settlement of $12 million during the quarter all contributed to the decrease. As a reminder, there are cost savings across our expense lines associated with the ongoing revenue impact from the equipment sales and metro transfer. Switching then to expenses, third quarter operating expense of $3.7 billion improved 2%, driven by strong productivity and lower fuel prices that more than offset volume-related expenses. Compensation and benefits expense increased 2% versus last year as wage inflation, including the July 1st, 4.5% increase and volume costs were partially offset by 5% lower workforce levels and record workforce productivity. Trained service employees were flat year-over-year, as we used our buffer resources to handle increased quarterly volume. All other workforce areas decreased 8%, reflecting our continued focus on operational excellence. Cost per employee in the third quarter increased 8% due to higher incentive compensation as well as additional wage inflation related to the work-rest labor agreements. Purchased services and material expenses improved 4% as costs to maintain a lower active locomotive fleet, and decreased subsidiary drayage expenses were partially offset by inflation and volume-related expenses. Fuel expenses in the quarter declined 13% on a 17% decrease in fuel prices from $3.12 to $2.60 per gallon. Our fuel consumption rate increased 1%, related to significant growth in less fuel-efficient intermodal traffic, which offset year-over-year productivity gains. Finally, other expenses improved by 6%, reflecting the impact of write-offs in 2023 that more than offset inflation and volume costs. The result of solid revenue growth and strong cost control was third quarter operating income of $2.4 billion, up 11% versus 2023. Below the line, other income decreased $19 million from lower real estate income, while interest expenses declined 6% or $20 million on lower average debt levels. Income tax expenses increased 23%, driven by higher pre-tax income and state income tax reductions in 2023. The third quarter net income of $1.7 billion, increased 9% versus 2023, which when combined with a lower average share count resulted in double-digit earnings per share growth to $2.75. Our quarterly operating ratio of 60.3% improved 310 basis points year-over-year with nearly half of that coming from core operational improvement. As we discussed in Dallas at our Investor Day, the operating ratio is an outcome of our strategy and not the goal. Our goal is to grow earnings and generate more cash for our shareholders, which we achieved even as our revenue growth and margins were impacted by mix. Looking now at cash, shareholder returns, and the balance sheet on Slide 6. Year-to-date cash from operations totaled $6.7 billion, up $700 million versus last year. Our cash flow conversion rate improved to 83%, and free cash flow has almost doubled versus 2023, up over $900 million. These improvements are driven by 2023 labor agreement payments and growth in operating income, partially offset by higher cash taxes. Year-to-date, our shareholders have received $3.2 billion through dividends and share repurchases, including third quarter repurchases of $738 million. Finally, our adjusted debt-to-EBITDA ratio finished the quarter at 2.7x, as we maintain a strong balance sheet and remain A-rated by our three credit rating agencies. Wrapping up on Slide 7, with just over two months left in the year, the majority of the 2024 story has been written and it's been a good one. We are executing on the fundamentals of railroading, which is critical to achieving the full financial potential of this franchise. We are affirming our prior 2024 guidance, most importantly that we will continue to improve profitability through our strategy of safety, service, and operational excellence. Pricing dollars will exceed our inflation dollars. We will purchase $1.5 billion of shares and invest roughly $3.4 billion of capital, and our capital allocation strategy is unchanged. We also are going to put a slightly finer point on how we expect to close the year. At this time, we'd expect fourth quarter results to closely mirror the third quarter while improving on a year-over-year basis. This level of performance will mark our fifth consecutive quarter of year-over-year gains, again demonstrating the positive results of our strategy. Throughout the year, we've shown our ability to pivot and flex to handle the various challenges of railroading, from weather of all types to the significant West Coast traffic spike, and we navigated them successfully, improving service while maintaining cost discipline. We continue to generate strong pricing and productivity, positioning us well to finish 2024 with momentum and on a path to achieve the long-term targets we laid out last month. I'll now turn it over to Kenny to provide an update on the business environment.

Thank you, Jennifer, and good morning. As Jennifer mentioned, we had a solid third quarter. Freight revenues totaled $5.8 billion for the quarter, which was up 5%, excluding fuel surcharges, due to increased volume and strong core pricing gains. Let's jump right in and talk about the key drivers for each of our business groups. Starting with our bulk segment, revenue for the quarter was up 2%, compared to last year on a 3% decrease in volume and a 5% increase in average revenue per car based on a positive mix in traffic and solid core pricing gains. Coal continued to face difficult market conditions in the quarter, resulting from reduced coal demand due to high inventory levels and competition from low natural gas prices. Grain products volumes increased for the quarter due to business development wins and new facilities supporting renewable diesel and associated byproducts, as we highlighted last month at our Investor Day. Lastly, export grain business was up for the quarter, primarily driven by corn and wheat. We continue to win business moving to Mexico, as their domestic consumption outpaces production. Moving to industrial, revenue for the quarter was up 3% on a 2% decrease in volume. Average revenue per car increased by 5% due to strong core pricing gains and a positive mix in traffic. Petroleum shipments increased for the quarter due to strong business development efforts in various markets like asphalt and lube oil. Petrochemicals volumes continued to grow due to domestic demand in plastics and new business wins in our industrial chemicals market. However, those gains were more than offset by the softer demand for rock against last year's record shipment. Premium revenue for the quarter was up 7% on a 14% increase in volume and a 6% decrease in average revenue per car, reflecting increased international intermodal shipments, lower fuel surcharges, and truck market pressures. Automotive volumes were down due to unplanned production adjustments, partially offset by business wins with Volkswagen and General Motors. Intermodal volumes continue to remain strong. Our international intermodal volume was up 33%, significantly outpacing growth seen in West Coast imports. Import strength also drove increased domestic volume, which we were able to capitalize on due to our diverse IMC network. Now turning to Slide 10, here is our outlook for the balance of 2024 for the key markets we serve. Starting with bulk, coal is expected to remain challenged, as inventories remain high, and we see competition from low natural gas prices. Moving to grain, we are optimistic due to a strong supply in UP's franchise areas, and we have secured additional new facilities that will ensure domestic growth, generating long-term ratable grain demand. We expect ongoing strength in the Mexico export market as the UP continues to increase its share south of the border. Additionally, we expect continued growth in the grain products tied to renewable fuels and their associated feedstocks. The team is focused on capturing business as production continues to ramp up at new facilities brought online, such as Bartlett's crush facility in Cherryvale, Kansas. Turning to industrial, as we mentioned earlier, we expect the rock market will not match last year's record volume. For petroleum, we have tougher comps but are building on our success with business development. Petrochemicals are expected to outperform the market, based on the strength of our Gulf Coast franchise, and we are excited to see incremental volume from Shintech's expansion at Plaquemines, Louisiana. Wrapping up with premium, on the intermodal side, the surge of West Coast import volumes will continue to drive for both our international and domestic markets for the remainder of the year. In automotive, we are seeing softness in the market, which will be partially offset by business development wins. In summary, I'm proud of the commercial team. We're going to see the strongest volume year since 2029. Our diverse portfolio allows us to see positive momentum, and our resource buffer puts us in a great position to manage increased volumes on the West Coast. The team is focused on our key growth markets, collaborating with our customers and the operating team to find innovative solutions to grow and win together. With that, I'll turn it over to Eric to review our operational performance.

Thank you, Kenny, and good morning. Moving to Slide 12. As I mentioned at our Investor Day in September, we always believe there's a better way to do things, even the things we're doing well today. That culture has manifested itself in our results, as we continue to make great progress in our safety, service performance, and efficiency metrics. Starting with safety, we remain intensely focused on our four-pillar strategy to prevent injuries and drive down derailments. As a result, year-to-date both derailment and personal injury rates improved year-over-year. While we are not there yet, we are clearly on the path to become the safest railroad. Freight car velocity improved 5% to 210 miles per day compared to third quarter 2023. Throughout the last several weeks, we have maintained a freight car velocity near 220 miles per day. A favorable business mix coupled with continued improvements in terminal dwell has driven the performance. Notably, we achieved a third quarter record in terminal dwell, a 5% improvement versus last year. Intermodal and manifest service performance indexes saw a 1 and 5 point improvement year-over-year respectively. The team took quick action throughout the quarter to deploy buffer resources and adjust trip plans, minimizing the impact of a 33% surge in international intermodal shipments. These swift actions not only allowed us to effectively absorb the increased volumes, but also mitigated the impact on our broader network. Now let’s review our key efficiency metrics on Slide 13. The more productive we are, the better we put ourselves in a position to compete, and you can see we did that in the third quarter. Locomotive productivity improved 5% compared to third quarter 2023. While increased fluidity of the network has enabled our performance, the team also continued its focus on reducing locomotive dwell. In fact, this quarter our locomotive dwell results tied for the best-ever quarterly performance, a 5% year-over-year improvement. Workforce productivity, which includes all employees, improved 12% versus 2023. Impressively, both the month of September and the third quarter marked all-time records for their respective periods. Our continued work to leverage technology and automate operations across our transportation, mechanical, and engineering teams is paying dividends. Not only is it driving efficiencies, but it's also improving the safety of how we work. Train length was flat for the third quarter. After experiencing the impacts of Hurricane Beryl in July, we've made steady sequential improvement throughout the quarter and ended September with a monthly record over 9,600 feet. These improvements are a direct result of targeted transportation plan changes and capital investments, such as siding extensions and technology. While we have made great strides this year to improve train length, there are still opportunities to safely improve, as we strive to generate mainline capacity for current and future growth. Great work by the team, as they efficiently leverage our buffer resources to handle the influx in volumes. However, as I opened with, there is always opportunity to get better, and I'm confident the team will continue pushing in our pursuit of industry-leading safety, service, and operational excellence. Jim?

Thank you, Eric. Turning to Slide 15. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. First, as you heard from Jennifer, we did a great job of adding volume to our network in an efficient manner. Given the margin profile of that volume, it was imperative that we did so. We also continue to generate strong pricing that reflects the value we're creating for our customers. Kenny provided an overview of third quarter volumes and laid out thoughts for the remainder of the year. The team is making no excuses and going after every available carload. While international intermodal gets a lot of attention these days, there are plenty of additional markets where the team is winning to bring new customers to the railroad over the short-term and long-term. Lastly, Eric updated our progress to improve safety, service, and operational excellence. Year-to-date, our safety metrics continue to show great improvement, but they are just the initial steps toward being industry-leading. On the service front, the operating team did a great job of improving service while we handled more business. That was possible due to the efficiency of our network and our ability to maximize asset utilization. While the business of railroading can be unpredictable, it's the fundamentals of how you operate the company anticipating and reacting to change that ultimately matters. I'm very pleased with where we sit today. When I joined the company, I said we had pressures that were going to take us a couple of years to get by some of the inflationary pressures. But as you heard at our Investor Day last month, we have the right team and the right strategy to take this company to new heights. This is just the beginning of the journey. So with that, we're excited, we're ready, and we're ready to take your questions. Rob?

The first question today will be coming from the line of Ken Hoexter with Bank of America.

Good morning, Jim and team. Thank you for the question. I guess, two things. One, can you just clarify, when you talk consistent with last quarter, are you talking on an operating ratio level? Are you talking on a revenue or operating income level? Just want to clarify that. And then, I guess, Kenny, it seems coal has taken a big step down lately. Can you talk about the puts and takes about what's built into the full-year target that you're targeting there?

I'll start with that then, Ken. Thanks for the question. Yes, I mean, when we say consistent, and we say results, we're being pretty broad there. But, yes, as we look at what's going to happen in the fourth quarter, we see the outcomes being very similar across all of those categories in terms of our fourth quarter results. So consistent is consistent.

Yes. On the coal side, no surprises with coal. We'd expect what you're seeing in the public numbers, those volumes to continue through the rest of the year. That's why I made a point to focus on if you look at that bulk line, doing everything we can to counter some of those challenges on the coal side with renewable fuels and with the grain network.

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

Good morning, guys. I guess I just maybe wanted to understand a little bit about how you think about the intermodal outlook and maybe how that influences that comment around the fourth quarter. So we came off of what has been a remarkable sort of preloaded peak season potentially in the third quarter, particularly for international. Do you see the mix start to change a little bit, but maybe sort that into a little bit of the drivers of that consistency in the fourth quarter? It would be helpful.

Yes. I'll start with that, Chris, and then Kenny can weigh in relative to the volume. We believe the mix pressures are going to continue into the fourth quarter. You also see just kind of that normal seasonality. You have a little bit lower volume, you've got the holidays, tend to have a little bit of weather. One thing that I think folks need to pay attention to is fuel on a year-over-year basis and even sequentially because you have a much different dynamic from fuel. We think our fuel surcharge is probably going to be $200 million or so less in the fourth quarter. When you're looking at how it contributed positively in the third quarter and as a drag on fourth quarter, there's a lot of puts and takes there that I think you need to pay attention to that I think help maybe fill in some of those blanks as well as just the mix impact. Kenny?

Yes. On a year-over-year basis, I think we could expect international intermodal to be elevated. Although, as we go throughout the quarter, you can see that in some of the numbers now, you're seeing it start to step down a little bit. One of the things that I just want to highlight again is the preparedness for the team to be able to accept and anticipate that 33% increase. So we're very encouraged by that.

Our next question is from the line of Walter Spracklin with RBC Capital Markets.

Yes, thanks. Good morning, everyone. Jim, in your prepared remarks, you alluded to margins that perhaps weren't what you were hoping. Is that to say that prior margin improvement that you achieved in your first few years ago is not possible in the current environment or is it just taking longer? And I'm curious whether your mention of an industry-leading OR. Do you think that is in effect for next year? In other words, can you have an industry-leading OR as early as next year?

I think we have an industry-leading OR for the last number of quarters, including this one. I'm pretty safe to say that. Walter, let's back up a little bit. People are in different positions from where and what we started. I remember back in 2019 where I joined, we parked over 1,000 locomotives, closer to 1,500. We adjusted the number of people needed to operate the railroad, and those were big changes that we made. I think I was here, and then I went on sabbatical and now I'm back. Am I done? Absolutely not. But it's a lot different place to start where I came back 13 or 14 months ago than it was if I had come if we were in the same situation as 2019. We will be the best margin operating ratio company this year and I don't see any reason for us not to continue that. We will look at ways to improve. Now inflationary pressure, and I've said it from the very first call I was on, it's not going to be an easy one to get over. We are pushing price, but we also have to be cognizant that our customers have to see value in that. They have to understand that we're giving them a product that allows them to win in the marketplace. We've done that with the revenue coming in, and pricing higher than what inflation is. I see exactly what we laid out in our Investor Day. We see EPS growth high single-digits to low double-digits. We have the opportunity with the cash that we're providing that if we don't come up with another use for that we can buy back $4 billion to $5 billion worth of shares. We are absolutely in line to set operating ratio improvement at Union Pacific. So that's the way I see it, Walter. Hopefully I answered your question.

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

Good morning. This is Andre on for Jordan. Thanks for taking my question. With headcount down 5% year-over-year and carload growth up nicely at 6%, you achieved strong incremental margins in the quarter both year-over-year and sequentially. Could you just talk a little bit more about the productivity opportunity set that you guys are taking and the actions there and how that sets up for 2025, incremental if industrial production can actually accelerate from here?

Absolutely, Andre. Let's start by level-setting on what we did. You should think about locomotive dwell. In my prepared comments, I mentioned we've tied our best quarterly results that we've ever had before. Workforce productivity, 12% monthly, and quarterly record. Train Length, September, best month ever in the history of Union Pacific and certainly a quarterly record in Q2. As we look at that, productivity is not new for us. Since 2019, we've driven approximately $1.4 billion in productivity, and you're going to see us continue to find opportunities. We work on it every single day. Let's talk about what some of those are. When I start talking about workforce, I always break it down for my team. It's fundamentals, it's agreements, and it's technology. On the fundamentals, I still see opportunities for us to be able to improve our recur rate. We've done improvement. There's still more opportunity there. When you look at the number of people that we use in our yard and local, you heard Jim talk about the inflationary pressures of a 4% wage increase to start the year and a 4.5% at July 1st. Yet, if you look at our wages that we're paying, we've managed to offset some of that inflation through productivity. That's technology, that's process. You're going to continue to see us do that. Fuel is still a big opportunity for us. Whether you're talking about process or whether you're talking about technology, it's a huge expense for us and it's one we got to continue to work through. Our work with EMS, which is Energy Management, our work on how we think about filling our locomotives, where do we fill the most locomotives at the lowest cost, we've driven that compliance now north of 90%, where we started the year significantly lower. The list goes on and on. When I say we work on it every day, I really mean that. It's safety, it's service, it's productivity.

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

Hi. Thanks for the time. Eric, I had a question for you on the intermodal train speeds. The data we're looking at from the outside looking in, those numbers are trending kind of as low as they've been. We've seen some issues on dwell at the West Coast ports as well. How do I reconcile some of those external data points with the performance that you guys are driving in the results today in terms of talking about the best ever TrainLink and best ever improvements in intermodal customer service? I'm just trying to square that circle because it's come up in a couple of client conversations.

Yes. Thank you for the question, David. Here's how I reconcile it. It tells you that 220 is not as good as we can be because, to your point, we've seen dramatic improvements in both the manifest and bulk side, and we've seen improvements on some lanes in intermodal. We've continued to work to be able to improve that. Now, let's be frank, a 33% increase in international intermodal without advance notice, if any advance notice, I'm very proud of what the team has accomplished to handle that. Now what do we have to continue to do to build back that intermodal speed that you're talking about? Well, it's the things we're doing right now. So when we talk about deploying our buffer resources, that's taking the form of locomotives and cars into the LA Basin. We've staged our trains across the system so that we take every train, excuse me, every car that we can into the ports and we take every car that they can give us back. We work closely with CSX and NS to ensure that our interchange points remain fluid. These are the things we need to continue to execute. I expect in short order that intermodal speed will turn the other way and will continue to add on top of the excellent performance we have already.

David, I need to sort of add on a little bit from what Eric said. I followed up with both LA and Long Beach Board here earlier this week and we both came to the same conclusion. No one told us first or second quarter that we were going to see a 33% increase, and it was an event that happened because of East Coast port issues and the Canadian issues. The big question is, how did we handle it? When something happens that is thrown on you, you start moving intermodal equipment, and you don't get the same speed and you don't get the same velocity. We knew we were not going to be able to maintain that. But let's see where the success is or failure by the supply chain. Ships are not being held out at LA and Long Beach. They are arriving and going on the way they normally do with that kind of increase in business. As for the fluidity of our terminals, we're in great shape. We've been able to turn the containers and the customers have done a fantastic job of pulling those containers off and delivering. The only place that we'd love is if we had been able to plan it; we'd have faster velocity if we could have been told that it was coming and seen it a little sooner so we could place cars in the right place, work on the terminals we have at the West Coast a little differently and be able to speed it up. I'm proud. I think the customers have seen what LA and Long Beach can do and it will be part of their decision-making as they move ahead to say can LA and Long Beach handle an increase in business? I think it can, and we've proven that point. It's a success story for us. I love the story. I love that you look at our metrics real good, and I’m sure you’ve seen that we are running over 220 miles per day for our cars, and that's what's really important to us as we keep the place fluid. Thank you very much. Great question, David.

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

Hi, Jim. This is Mike Triano on for Tom. If we look at workforce productivity and locomotive productivity, they're both up mid-single digits through September, and they've been a driver of OR improvement this year despite the volume and the mix headwinds. If we look out to next year, the volume backdrop is still kind of murky, but volumes are kind of flat to up. Do you think you can get another mid-single digits improvement in those productivity metrics?

We're sticking to our guidance for next year, which I think that's it. We've set it out; we thought about it; it's very definitive about what we want to deliver next year. Unless the economy implodes in the United States, we're very comfortable that we're going to be able to deliver that. I’m very proud that you get that kind of productivity number that we delivered this last quarter, and we don’t see any reason for us not to be able to take a look at what we’re doing on the railroad to continue to improve productivity. We know that we’re carrying extra people because of some of the collective agreements that we still have to implement from the last round. We’re being very prudent on that side, but you could see on the non-operating side what we’ve been able to do to still operate the railroad in a very efficient manner. We do that every day, take a look at it, and I’m very comfortable that we’re headed the right way. Jennifer, anything to add?

No. I just would reiterate and it's really kind of what Eric talked about too. When we look at all the areas of expense and on the capital side, we have areas to improve our productivity and we have action plans against that for the rest of this year and going into 2025 and beyond. That's what really gives us the confidence to say there's certainly great runway ahead of us and we're very confident in our ability to perform.

The next question is from the line of Daniel Imbro with Stephens.

Yes. Hi, good morning, everybody. Thanks for taking the questions. Maybe wanted to ask a broader one, just from a competitive standpoint. I know it's hard to know, but your western peers have been more vocal, but wanted to improve it. I'm curious if you're noticing anything different when you're out there bidding on business or going head-to-head with them in the market. And then, in your prepared remarks, you mentioned merchandise pricing was positive. Just curious how you're seeing core merchandise pricing out there in the market, if it's changing at all? Thanks.

If you look at the size of the pie, we're really competing against truck. We're putting together a service product to go out there and compete against truck, to a lesser degree against barge. So we're doing what we can do to go out there and grow and win share and focus on Union Pacific and what we can control. That's that. The second part of your question, I'm proud of the team to be able to go out and lead with the capital investments that we put into the network for our customers, to lead with the inflationary pressures that we can have, the buffer resource that Jim and Eric talked about, and now we talked a little bit about the velocity. We tie it all to the service and we're aligning those pricing with the service product that's there. Yes, the team has been able to go out there and secure some strong pricing on that merchandise business of the freight.

Kenny, the only thing I would add is this, and I think it's a valid point to make. I want the entire industry to operate very efficiently. I want the entire industry to be able to operate in a manner that allows us all to grow. We interchange a lot of traffic, not quite 50%, but around 40% touches another railroad, whether it's a short line or one of the other railroads in the United States. The more we can all be efficient when we interchange traffic, when we move it across the Mississippi, when we move it with our western competitors. We love to compete, but there's a lot of traffic; if we're both efficient we get to be able to move that from other modes of transportation. I've worked with people, and I smiled last night thinking about how many people that I've worked with that are at other railroads, whether it's CPKC, now even Burlington Northern Santa Fe, whether it's CSX or whether it's Norfolk Southern. So, we come from a culture that we all have worked together that we operate railroads in an efficient manner and we move ahead to grow. I'm not speaking for the rest of them; I'm speaking for us at Union Pacific. Given all that, listen, I can control what we do, not what everybody else does. I'm very comfortable with where we are and what we can do in the kind of business mix that we have. You could see this last quarter and what we've been able to deliver and what we see moving forward. I'm excited. I think the industry is in a better place now than it was ten years ago, and five years ago, and certainly better than we were in 2022. It's a wonderful place to be, and we'll continue to get better. That little competition with all the people you know is the best thing you can have. Nothing better than beating all the people that you know, and that's what we want to do.

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

Good morning, Jim. Kenny, I was going to ask this anyway, so maybe a pretty well-timed follow-up to the last one. So the up 5% in both bulk and industrial obviously points to your pricing. Jim says that customers have to see value in the service and you're seeing that. But with inflation conceptually coming down a little bit, the volume headwinds remaining, to keep that type of pricing momentum despite the good service, do you need a little bit of help from the volume side, from the macro, from demand to continue to push price? Or at a certain point is that kind of capped out without getting some volume tailwind?

Yes. The macro is the macro, and those are things that are out of our control, Jon. We focus on the network. We focus on the service that Eric is providing us, the investments we're making, and we link that to the value of the pricing. We're very crystal clear in how we articulate to our customers. We see it as something that will certainly continue to happen.

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

Good morning. Thanks for taking the question. Jim, maybe just to come back to one of the initial comments you had earlier here, and then also something you said when you first came on board. Just to take a little while to get over the labor challenges that you sort of inherited on the network. Obviously, we've seen mix in coal not help and then just the broader inflationary trend. Could you offer any sort of context in terms of what the timing should be, if it's going to be gradual or if there's some step change that we could be thinking of, as we look more broadly to getting over some of these hurdles and probably to a better place than what you started off with?

Thank you for the question, Brian. I prefer not to dwell on the past, but I believe we have performed exceptionally well at Union Pacific, with all 30,000 of us contributing to our current status compared to others. Growth is crucial for us, and we have successfully provided high-level service. It’s important to remember that the service we offer to our customers is what we market, rather than focusing solely on other metrics of service. We assess each customer’s service level individually, factoring that in despite inflationary pressures. This is why we are confident in our three-year outlook for our results and our expected delivery. I feel assured about our current position and anticipate improvements in our operating ratio, net income, and EPS, which will enhance shareholder value. I have maintained from the beginning that this would take a couple of years, and that remains the case. It won’t be easy, and overcoming certain challenges is not simple, but I believe we have executed well in terms of pricing growth. While coal has seen a 20% decrease, I maintain a broader perspective. Challenges are always present; if there were none, I would have chosen to remain retired and enjoy life in Scottsdale, Arizona. However, I am here because I see an opportunity to drive this company forward, and I am genuinely excited about that. Thank you for your question, Brian.

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

Thanks a lot. The service performance index for both intermodal and manifest has been trending up higher. I'm just curious if you think there's a point where if you arrive at a certain level or a certain range where you can really lean more heavily into pricing than maybe you already have or maybe also just share gains versus competitors or versus trucking. Is there a magic number or at least a magic range where you feel like you have a strong or much stronger competitive advantage?

Yes. Jim hit on it a little bit earlier. What do we sell to our customers and how do we translate that into pricing and those discussions? No, there's not a magical number. But clearly, as the service improves, that gives us a better environment to maximize price. The same goes for growth, more consistent, reliable product and better service product. We go in and ask for more business when we're talking to customers. We ask to look at their truck files. We ask to talk to more of their receivers. As we improve, and we've done a great job here in the third quarter on the service product, it creates our own capacity. It creates our own opportunities regardless of what happens in the macro environment. No, we won't ever wave a flag that we've arrived. We always have opportunities for improvement, and as a management team, we're going to strive for more.

Next question is from the line of Brandon Oglenski with Barclays.

Hi, good morning. This is Eric Morgan on for Brandon. Thanks for taking the question. I just wanted to come back to the mix discussion in the fourth quarter. I think you mentioned mix headwinds continuing in the quarter, maybe with some international intermodal volume growth moderating somewhat. But, can you just talk about some of the mix effects from other commodity groups outside of intermodal? In particular, maybe how you view margin contribution from coal would be helpful, I think.

I'm going to pass on that last part of your question. If you just look at our business teams, industrial is the group that has our highest average revenue per car, has very strong contributions to our bottom line, and that business has been down all year. There is always a mix within mix, but with the continued pressures in the industrial economy and the outlook that those volumes are down year-over-year, that's an impact and contributes to the mix, in addition to the growth coming in some of the lower average revenue per car kinds of businesses like international intermodal. On the Bulk side, yes, there's coal, set that aside. Grain, strong grain into Mexico, which is great for us. We enjoy that business. That's a little bit shorter length of haul than if we're taking it to export out through the West Coast. Again, you have some of that mix within mix. Kenny, I don't know if you want to add anything else?

Yes, I just want to say we're not going to apologize for accepting the increase. Yes, we'd love the 33% increase. What I'd tell you is that the management team here did a good job of preparing for it. That’s why we partnered with Phoenix to take trucks off the road, expanded Inland Empire. All these things set us up for success for this unexpected amount of volume that’s come on.

That's why it's crucial to focus on fundamentals. We need to be diligent about how we're using our resources, our workforce productivity, and how we run this railroad, so that we can absorb shocks from mix and still produce a very good quarterly result.

Our next question is from the line of Stephanie Moore with Jefferies.

You talked a lot about the strength in export grain to Mexico, but can you also talk a little bit more broadly about your Mexico business? How do you see that going forward? Any thoughts on geopolitical and administration changes as well would be helpful.

Yes. First of all, I just want to step back as we're talking about our grain business and our grain network and differentiate renewable fuels and the actual facilities that we've landed there. The same thing with our grain network, the facilities, meaning the 20-plus facilities that have come on and the fact that Cherryvale, Kansas facility will help supply grain into Mexico. So let me just kind of break that apart to let you know how we look at it. But then, yes, broadly, as we look at Mexico, clearly, there's a lot of opportunity with over-the-road trucks. There are some markets like finished vehicles and also auto parts. We have a strong service product coming out there. What differentiates us, Stephanie is the fact that we have multiple partners that can get in that market. We have our own rail box that we can get into that market, and we have daily service into and out of Mexico, which we know we're the only one that has that. So clearly, again, a strong growth area for us. We laid it out in Investor Day. As for the administration, we see an environment that is certainly pro-business in support of the freight environment, so we're excited about that.

Our next question is from the line of Scott Group with Wolfe Research.

Jennifer, can you provide some insight on the 8% increase in employee compensation and how we should view that moving forward? I know someone else has inquired about the flat Q4 comments. However, I'm still uncertain if that was related to earnings, margin, or revenue. Could you clarify?

Sure, Scott. Let's discuss the employee compensation. The 8% increase can be attributed to roughly half coming from the wage increase on July 1, while the other half results from higher year-over-year incentive compensation and increased guarantee payments. This is linked to the work-rest agreements as we expanded operations across more hubs this year and trained more TE&Y employees. For Q4, we anticipate a similar trend, possibly even more, as we maintain additional resources to support the work-rest implementation. This highlights the importance of productivity, especially given inflationary pressures, and how we manage our workforce going forward, ensuring we establish beneficial agreements that allow us to serve customers effectively while also compensating employees fairly. Regarding your question about consistent results, that term is broad and can refer to various metrics, but the key indicators you focus on—EPS, operating ratio, and operating income—are expected to show similar performance in Q4 compared to Q3.

Next question is from the line of Elliot Alper with TD Cowen.

This is Elliott on for Jason Seidl. I believe this is the first quarter this year where your domestic intermodal volume outlook is positive. Can you talk about what you're seeing in the domestic intermodal market in Q4? I know you already talked about the mix headwinds in international growth and fuel, but we see domestic intermodal growing into the quarter. Could that maybe partially offset intermodal revenue per car in Q4? Just trying to gauge the magnitude.

So we've been encouraged on the domestic intermodal front; even as late as the second quarter, we saw that line be positive. It's been positive in the third quarter. Now some of that has benefited from the international side. That’s why I keep harping on these products that we have; having a product like Inland Empire helps us capture some of that domestic intermodal, and we've seen strong demand there. As we look at it for the fourth quarter, again, we think we'll see a little bit more of a benefit for what's taking place on the international intermodal side, and we'll see what happens as we continue throughout the quarter.

Our final question is from the line of Ariel Rosa with Citigroup.

I know this has been discussed by others, but I wanted to inquire if the goal is to set prices above rail inflation. Could you clarify if this is currently being achieved and if we can anticipate this for 2024? Given the more relaxed capacity environment, have you experienced increased pushback from customers during pricing discussions? Or do you believe that your service levels are sufficient to offset any challenges posed by the relaxed truck environment or the softer demand situation?

Ari, good question. Kenny?

So I think you're talking specifically about domestic intermodal. We've got price mechanisms for our customers that are in place to keep them competitive. Again, I talked to you about the fact that second quarter, third quarter, we were up in domestic intermodal. We look at that as a positive outcome for us. We've gone from a trucking environment really since 2022, that's been stagnant to downward and it's flattish now. We'll see what happens in the next few months, but we feel good about where we're positioned and the ability as capacity tightens; we're going to see more value on the pricing side.

Jennifer, do you want to talk about the inflation?

Absolutely. To that point, in terms of your question, absolutely, our pricing dollars today are exceeding our inflation dollars, and they have throughout this inflationary period, whether you're talking about 2024, going back to 2023 or 2022. We have been committed to that and we have achieved that. I think the important point really is going forward, and we talked about this at Investor Day, is that not only will we continue to have our price dollars exceed our inflation dollars, but it will also become accretive to our margins next year. So I feel very bullish on that front.

Ari, good question. Why don't I just wrap it up real quick and then looking forward to the call in 3 months and looking forward to finishing off this year just the way we set it up and also delivering on what we said last year? If we look at what we've been able to deliver as a team, 10% increase in earnings per share, 11% up in operating income, 9% up in net income, productivity up 12%. Those are all numbers that make us comfortable in how we operate the railroad and how we're driving business. We think if we get the service level, and it's very close to where we are right now to the right level, the discussion is how do we work together with our customers to win in the marketplace and not worry about whether the service is holding them back from winning in the marketplace. So with that, let me just close off by thanking everybody for joining us this morning. I know there were competing calls, and it's nice to have you all with us this morning. Looking forward to more discussions as we move ahead. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time and have a wonderful day.