Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Welcome to the next session in the New York Stock Exchange and BofA conference here in London. Thank you for taking the time to join us. I'm Ken Hoexter, BofA's Airfreight & Surface Transportation and Shipping analyst. With us from Union Pacific, we've got Jim Vena, CEO; Jen Hamann, Chief Financial Officer; Brad Stock from Investor Relations. So with that, I'm going to go ahead and turn it over to Jim, maybe for 2-, 3-minute intro. We'll talk about what's going on lately. Jen, I don't know if you want to add in as well and then I'll jump into some Q&A. So I'll turn it over to Jim.

Perfect. Thanks, Ken and good afternoon, everyone. So I always get told I have to make sure I read this, so let me read it word for word. I'd like to remind everyone that we will be making some forward-looking statements. These statements are subject to risk and uncertainties, so please refer to the UP website and SEC filings for additional information about our risk factors. And nice to have both Brad and Jennifer here with me. So it's great. So since my first day on the railroad, it's been fairly simple, what we want to -- and our vision and our strategy and what we want to deliver is all about safety, service and operational excellence. We think if we do those 3 big buckets properly it'll lead to growth as we move forward. So for us, real important. And growth is necessary for us to deliver on the vision of what we have for the company. And I think over the last 10 months, you will see clearly that we've made great strides on that. And starting with safety, our safety metrics is foundational. In both, we've seen improvements of over 15% in our safety metrics, both in the incidents and people being injured on the job. So at the end of the day, we're starting to go in the right direction. On the service side, we have metrics as high as we've had in a long time. So the service metrics are where they need to be to be able to have the proper conversation with our customers. So we're very happy with that. And we've shown, with the challenges that have been sent to us and we've faced in this recent quarter, that we've been able to be resilient and recover from them. So we've had major weather events in the southeast part of our network through Texas and Louisiana. And right now, as we're talking right now, we're having some weather events in the northeast part of our railroad. But very comfortable that we've been able to recover quick and we've been able to recover so that we get back to regular service in a quick manner. We've also rolled out new services. We call our fastest trains, Z trains. I have no idea. Most railroads should start with A being your fastest and Z being your slowest but we do it backwards. So Z is the fastest and we've rolled out 2 services recently. So we have a new L.A. to Chicago service that cuts 2 days off of our service, way it used to be. So that gives us a better position to compete against truck traffic in those lanes and we think that's important. And of course, we have, with partnership with Canadian National Railways and the FXE out of Mexico, we put in last fall, a Z train service that went into Chicago and into the eastern part of Canada and that's been running and we see the benefits of that. So very important to us. On the operational excellence piece, efficiency and being resourced properly and using our network is very important. And we've seen by being able to take touch points out of -- the number of times we touch a railcar from when it's given to us and also the amount of cars that we can deliver on each train, those are 2 key metrics and there's a lot of them. Like, I see in the more than 50, 60 metrics that I can peruse in about 3 minutes to tell you, because they're -- we mark them as red or green, it's either good or bad and we go through that very easily. But key metrics for us that we talk publicly is how efficient we are. So train size is important to us and also the number of touches. And we've seen improvements this quarter that continues to do what we have. On the business development, our marketing group has done a good job of going out there and selling the railroad and what's possible and what we can deliver. And I think you'll also see as we move ahead long term and short term, how we are able to move the railroad forward. So railroad growth is tied to volume. So we look at that and we'll see exactly where we end up and I don't want to get ahead to talk about this quarter. But for us, a win is, is to be able to increase our revenue. Anybody that looks at our carloads very closely will see the mix difference that's happened. So we have a substantial drop in the number of coal loads but we've been able to make it up with some of the rest of it. So at the end of the day, we'll see where the quarter ends with only a few days left but I'm very comfortable that we're doing the right thing. And on the pricing side, we think that we have the capability to price properly. And when we look at the value we give customers, our customers, one can move a lot of beer in railcars and I thought I'd use it as an example. It's appropriate in the summertime. So 1 railcar will handle 108,000 bottles of beer. And that -- those 108,000 bottles will be in 1 railcar. If you're in the U.S. at Dodger or Yankee Stadium or probably here in one of the football stadiums here, I think it will give a beer to every person easily in -- from 1 railcar. So the value is quite high and we think that the part of the supply chain we are makes sense for us to price properly and be able to sell. And if we have our service at the right level, we'll be able to deliver. So that's a quick rundown of who we are, where we're faced right now and some of the challenges. If I can just summarize before I turn it over to Jennifer. We knew that in the short term, we were going to have inflationary pressure that the world has seen, every industry has seen, from inflationary, from inputs plus wage pressure and we felt the same thing. But we are taking steps and it will take us maybe a little longer than -- because not all our contracts come up in a short period of time. But within a couple of years, we'll see a clear, able -- capability to be able to mitigate those both by having an efficient railroad and by pricing at the right level. And with that, let me pass it over to Jennifer.

All right. Thanks, Jim. Again, I want to express our thanks for the opportunity to be here in London and speak to some of the investors that we don't get to see as often. I'm just going to give a little bit more detail around some of the volume comments that Jim made. In terms of our second quarter volume, right now, our volumes are basically flat and they've been challenged similar to how they were in the first quarter. And a primary challenge is with our coal volumes. So flat volumes with coal being down almost 25% year-over-year. Although we are starting to see a nice, what I'll call, seasonal pickup in coal as we enter, in the U.S., the hot summer months, as well as we've seen natural gas prices come up a little bit. And in fact, if you looked at it from early April until now, our weekly coal carloadings have actually increased about 4,000 a week. If you take coal out of the picture, our quarterly volumes would actually be up about 3%. So we're seeing very strong growth within our international intermodal space. Those volumes are up about 17%. We've also seen good growth in our petrochemicals and industrial chemical franchises, as well as finished vehicles. Those gains have been partially offset by rock and construction materials. So Jim mentioned some of the weather across Texas, that certainly had an impact on those rock loadings as well as slowed some of the construction projects. Now with this volume picture, the way it's played out, that has an impact on our overall mix dynamic. When you think about the average revenue per car, it's turned a bit negative for us here, both on a year-over-year as well as a sequential basis. And that really does reflect back on that strong pickup on the international intermodal side. One thing I want to be very clear, though, is to differentiate between price and mix. Those are 2 different concepts. So when I talk about negative mix, that absolutely does not mean negative price. In fact, just the opposite. Kenny and his team are doing a very nice job delivering on strong core pricing gains that really reflect the value that we provide to our customers. And then from an operating ratio perspective, I would like to give just a little bit of context for the quarter. If you look at history, our railroad typically has its worst margins in the first quarter. We have winter weather, it's usually our lowest volumes and you have some of those beginning of the year costs, such as payroll taxes. Margins then improve through the year with the best quarters generally being your second or third quarter. If you look back, however, over the last 3 quarters since Jim's come on board, we've actually been changing that narrative in what, I'll call, outpacing history, showing sequential operating improvement over the last 2 quarters. So we reported a 63.4% operating ratio in the third quarter of 2023. We actually showed sequential improvement into the fourth quarter at a 60.9% and then again showed sequential improvement into the first quarter of 60.7%. So that's really remarkable progress and it really speaks to the focus that Jim has brought to the organization, as well as the team's focus and commitment to improve. Now, of course, every quarter has its pluses and its minuses. And the second quarter of 2024 certainly has had, I'd say, probably a little bit more minuses than pluses. So it's been more challenge for us than the first. But having said that, we are still pushing to achieve what would be our third consecutive quarter of sequential operating ratio improvement. If we can do that, certainly, I would say the magnitude of the improvement would not be what we would put on par with, call it, historical trends. But I think it's very important to point out that on a year-over-year basis, which is the more, say, normal marker for us, we do expect to have strong operating ratio improvement. So overall, I think the team really is doing a great job of controlling the controllables as we execute on our strategy to be the best in the industry. I don't know if you want to close that out at all, Jim? Or...

How much time do we have, Ken? Maybe I'll talk for another 10 minutes.

No, it's yours.

We're good?

I mean you basically answered the first 10 questions I prepared. So I appreciate that.

You know what, it's wonderful to be in London. It really is. So thanks for hosting us here.

So maybe just digging into that for a bit, right? You talked about the volumes trending flattish quarter-to-date, slightly better than we were targeting. Maybe dig into that, just the differentiation of what you're talking about with coal. We're actually starting to see that rebound now. How do you think that sets up; one, how do you see the macro backdrop and how do you see that moving forward as we exit the quarter?

Well, I mean, it's not going to move us to the point where you're going to flip from down 25% to positive. It's just taking some of that negative off a little bit. And that will obviously depends somewhat on how the summer plays out. If we continue to have the hot weather, we have been putting sets back in service. So I think you could see us continue to be having loadings at about the level we're at today a bit -- may be improving a bit, which is a positive. And natural gas prices, they've been floating up and down a bit but it's up a little bit from where it has been. So that's a positive for us as well.

Yes. And the railroad though, Ken, is -- are we ready for it, if we have to go up by 5%, 10% or 15% or 20% in the coal? Yes, we are. It was built for a lot more. The capacity is there in those lanes. So would be pretty easy for us to ramp up if we had to.

Okay. Jen, you noted mix was an overhang in the quarter. Maybe delve into that a bit. Because I just want to understand, I think the simple thought is intermodal volumes up, coal volumes down and -- or you were indicating even within categories, the difference with aggregates and another, maybe you can talk about mix a little bit because I know we're going to we're going to get a lot of questions after your comments there.

Yes. So when you think about international intermodal, I mean, it's good business for us. We like the business. But it has, if not almost the lowest, some of the lowest average revenue per car of any of the business that we haul. So when you move that and you see that up 17% and you're just thinking about how that contributes to revenue, it's just something that people need to make sure they keep into account. Particularly when you think about some of our industrial business, which is our carload business, our highest in aggregate average revenue per car business, those loadings are actually down year-over-year. And so that's really that mix dynamic that we're wanting people to understand and make sure that they're thinking about.

The other comment that caught my attention was you talked about pricing costs over time, right and it takes you time to offset inflationary costs. One, where do you see inflation now? But secondly, it sounded like, Jim, you were mentioning kind of it takes time. "Hey, give us time to catch up." Is that just because, let's say, the average contract is 3 years, so if inflation moved a little faster, taking 1.5 years to at least get half of them covered, now you start getting ahead of inflation, is that kind of a time frame you think about?

The way we look at it is, we're taking the action that we have to take because our customers understand it. It's not like they don't understand it. But if you have a contract that still got 2 years left with the specific clauses on what the increase is, it's limited. Usually, you agreed a certain amount but nobody thought the inflation was going to run that high. So we have to wait for that contract to come and open up. So that's what it is. It's the capability for us to change that mechanism in the contracts, is going to have to wait for them to open up. And yes, we have seen a decrease in the amount of inflationary pressure comparing to what we saw before. So some input costs are a little bit better. And we're tackling that 2 ways, Ken and what's really important is, is we're looking at every way that we can become more efficient and use less assets and less expense on that side.

And so then is the core pricing, Jen, you were mentioning, it's doing well? Are we seeing that accelerate in terms of the pure pricing to offset that inflationary [indiscernible]

I think we commented at the beginning of the year that if we look at it just on a dollar-for-dollar basis, it's just how we talk to it that we don't expect to be able to fully offset the margin impact of inflation with our pricing. We will still, on a pure dollar for dollar basis, our prices will exceed our inflation dollars. But just mathematically, when you put those 2 things together, it's -- the OR formula, it's not going to be able to improve it or contribute positively to it on a year-over-year basis.

And that's where, if you're talking about continued improvement, then that's where your cost is [indiscernible]. Okay. Great.

I'm an operating guy. I'm pretty simple. We are going to bring in more dollars. But when you put it in the formula, the OR effect is not going to be positive at this point. So what? I like that idea that we're able to price. And as we move ahead, we price up to the right level and bring the dollars above what our inflationary spend is on the revenue side. That's what's really important to me.

So Jim, you talked about the railroad running well, right? So right now, the velocity metrics wouldn't suggest that, right? And you were just talking about a lot of different things on the network that are going on. Maybe you could boil it down into us, why are we not seeing the improved service levels on a high-level basis? And what are you looking at that tells you a different story, given all these idiosyncratic events?

So of course, we put -- we make some numbers public but we don't make a lot of numbers public. So if I -- if you were looking at it, if you were the Chief Operating Officer this morning and you woke up and you said, is Vena going to call me and ask me what the heck are we doing, I might be calling, yes. But at the end of the day, if you look at it, the majority of the network is running at record pace. So we see that in our northern part of our railroad, the West Coast part, north-south. We've had number of weather events that have slowed down our network in the southeast piece. So when you look at that and you add that in -- and we don't shut down, if we run into weather and the customers release the car, on car velocity, we just keep it running. Others might think of, Vena, you should be shutting those down, say it's an event you can't control. That's not the way I look at it. The customer sees an impact, so we should keep track of that and then see how fast we can recover. So that's what it is, Ken. I think the railroad is running very well in a large piece of the railroad. And in other places, we are -- we need to spend more money to recover faster. We have more crews and we have more that we have to do to recover. So we're just getting over and in a good shape in the southeast part and all of a sudden, we get 9 inches of rain in North Dakota and we're worried about flooding now. And we have 1 subdivision shut down in the northeast part of the railroad. At least it's not on our core route, the east-west main. But still, it impacts us. It slows us down, slows the metrics down and makes us look like we're not quite operating as well. So I'm very happy with the numbers that I've seen in the last couple of weeks after we recovered.

So I want to come back and revisit that in a second. But I want to kind of just follow up on some of the fresh news that Jen is talking about in terms of the operating improvement, right? So normally, in 1Q to 2Q, you'd post a 120-basis point improvement, right? And so from first quarter to second -- or fourth quarter to first quarter, as you mentioned, you improved from 60.9% to 60.7%, that goes against the normal 180 basis point deterioration that you would normally see.

And I'd even say going from third quarter to fourth quarter and showing the kind of OR improvement we showed there, 2.5 points sequentially, that goes against trend as well. And so when I look at it from the third quarter of last year until now, we've taken almost 3 points off the OR against what would be those normal sequential patterns.

Yes. And that -- so that, I'm trying to understand then the impact going forward because you were suggesting, yes, we could see if things fall into the, I guess, the right path that you can get improvement sequentially. It won't be as big as you normally do, which then means that first quarter step down is even more impressive, right, that you can keep continuing at that level. So maybe you can talk to us about the weather impacts and other things that hurt you against that so we can see what kind of improvement you can get going forward.

So a couple of things just to remind you about the first quarter. So the biggest thing is that we had, what, about 0.5 point -- 50 basis point from a couple of onetime items that helped out our operating ratio in Q1 that's not repeating in Q2. And then weather is the other thing. We had a very mild first quarter. It's actually -- we've had more weather events here in the second quarter than we did in the first quarter, which is unusual. So those are just the things that I think are important for folks to keep in mind from a modeling perspective. It has nothing to do long term with how well the railroad is running and the great opportunities that we have but just so that people understand just some of those dynamics that play out quarter-to-quarter.

Okay. Great. So you mentioned kind of car miles per day, is how you look at things in terms of operating efficiency. And so we took a dip down on the car miles per day, given some of these events, what can the rail operate? And I guess within that, how much equipment is sideline now? Is it locomotives, cars parked? Just want to think about what kind of capacity you have available so you can handle the growth and we'll talk about the history of growth.

Yes. And I think I got to be clear with -- I try to make it simple so that people will look at 1 metric or a couple of metrics, is that -- I don't need people to study the railroad as much as I do. So I like car velocity because it's the best number to give you a clear indication of how the railroad is operating. And that's very important, better than train speed, better than anything else. So -- but I look at car velocity, I look at -- of course, I look at revenue first. I'll have to be honest. First thing I look at is revenue every morning. But after that, car velocity, dwell time in the terminal, cars handled by employee. I could keep on going for about 5 minutes and give you everything that I look at very quickly. And that's an important guide. And then you split up the regions, the 2 big divisions that we have in the company, to see how they're doing. And they're fair sized, those 2 are -- carry a lot of business and a lot of impact to us revenue-wise. So when you see 1 area and you can understand why you slowed down, then that's good. If you don't understand why you slowed down, then you have a real problem and you have to fix it and you have a different issue and I'm pretty comfortable where we are. And then as far as capacity is, the railroad's built -- than -- other than they may be in a very few small areas, we will continue to invest like we have because of the -- what we see in growth in new plants coming in place over the next couple of years that we have to get ahead. And a lot of that is in that crescent from New Orleans to Brownsville, through Houston, Corpus Christi, all the way down. And we also have invested in a new facility, intermodal facility in Phoenix because of the size of the community. And what we see and our shippers say, they want service into Phoenix, so we're providing that. We know we're going to invest in Kansas City to grow that footprint. But the overall railroad is built already for more railcars. And as far as assets, listen, if anybody wants to buy locomotives, come and see us. I think we got 500 of them parked and ready to go. We only use about 3,400 of them, high horsepower on the road at one time. So we got an extra 500 and I think we have another 1,000 that we could turn on in a couple of days to get them going. So asset wise, we're in good shape. People wise, we're in good shape. Railroad capacity-wise, we're in good shape. So it's a good place to be.

So Jen, I think I might have overlooked it before but we talked about inflation. Did you -- is there a number that you're looking at now versus 1 year ago, 2 years ago? Have we seen that pull off relative to your...

It's come down a little bit. I mean, certainly, you go back the last couple of years, we were in the 5% to 6% kind of range. This year, we said around...

It's around 5%. But I think you're still 4.5% to 5%.

Around 5% or so, yes. So -- but -- and don't forget, we have the last wage increase for this round goes in effect July 1 and that's 4.5%.

And then you get to start the negotiations all over again?

We do.

Yes. So Jim, bigger picture. We're going to step back for a second. We hit a lot of stuff on the quarter and what's going on now. But you kind of addressed a little bit of this with the coal discussion and the different products. But you're still running fewer carloads today than you were 6, 9 years ago, right? So if you're talking about 155,000, 165,000 cars a week, you were doing 170,000 maybe 6 to 9 years ago. What -- is that solely coal? Why are the rails not able to capture that business? Maybe you can talk about the wins that you've had and with -- when coal starts to decelerate and decline, then we can start to see some of the growth? Or is there anything else?

Well, let me talk about us. I'm not -- I'm going to let everybody else talk about themselves. We have a huge drop in the amount of coal business that we've had. And we used to make excuses internally and we'd always start the discussion with, "Oh my god, coal's down and that's the reason." We have a new perspective in life. The perspective in life is, so what? We know where coal is, now it makes up a smaller amount of our total business, so that helps. And we think that, hopefully, the slowdown is going to be less than what it has been for the last few years. Our job is to grow the business and use the network that we have to our advantage. So let's start and go around the horn a little bit. I think if you start in the U.S. Midwest, there is a whole biodiesel industry that's ramping up. And that will -- take and add-on to the ethanol and the corn and the soybean business that we already have and we think that will help us grow and it will grow. We'll have input and output for some of those products that we see. We see still growth in that crescent that I talked about earlier on, people investing in products that come out of the whole petrochemical industry and what's happening. We see growth because of population growth in places like Texas and Arizona and -- to name 2 of the largest ones. But we see population growth that will help us being able to do that. With our service level, I can keep on going, Ken and like go after a whole bunch of it. I think with what we're able to sell in and out of Mexico and those 6 gateways that we have in Mexico give us the best access into the U.S. across the country, not just in the west but across into the east and north and the northwest. And nobody can move out of Mexico to give as many products single line haul. We own 26% of the FXE and we're working -- and we're getting better as working as 1 railroad operationally so that we can be more fluid and more efficient moving products north and south. We do that. And I'm not going to discount the intermodal. We want to grow in intermodal. So we need to be able to and that's why we put in -- we talk about being a 70-mile an hour railroad. We can move containers and trailers from the West Coast to Dallas, which is close to 2,000 miles, we do that under 48 hours. So we're operating trains to go close to 1,000 miles a day, which is way faster than our 200 miles average that we come in at. If we do that, we're able to then show that we are 70% more greenhouse gas efficient than by truck and we can grow our business into those markets. So it's across the spectrum of the business that we have, Ken and that's what's nice about our network. I'm really excited over what it looks like in 2 or 3 years. And you know what, if I could and I got to stop the rest of them from saying it, we got to quit making coal as an excuse. Their job is to grow the business and make sure we have growth, both in revenue and in carloads. It's not to tell me that we have a problem that coal is down 3%, again, like that's not the way we need to think about it. That's not a win.

I think that's really important for investors and I think that's what they want to see. I think that's what they want to hear, is that there's actually growth at the railroad. So good luck on that. I want to...

It's not going to be good luck, it's hard work. If it was luck, I'm a lucky guy. It's good luck. This is, we're going to go do that because it's hard work and we're going to go deliver again.

Awesome. So to take that step further though, you mentioned Mexico and the opportunity in Mexico. And I want to understand a couple of things; one, how do you see the growth? And you were kind of giving time frame differences from the West Coast to the Midwest, maybe talk about what the advantages are versus your competitor who now has a single-line network running from Mexico through the Midwest? But also kind of the concept of near-shoring, we hear a lot about that. Are you seeing that yet? Are we starting to see a pickup? And then -- I'll start with that and then I'll jump in.

You know what, I want to show you a little bit about who we are and how we're aligned and how we all think the same. I usually answer that question. Jennifer, it's yours.

Yes, right as I'm taking a drink of water. Yes. So in terms of partnering with the FXE, we work very closely with them. Jim and I are both on their Board of Directors. We have an operating committee that meets to talk to them about key metrics, both on the southern side of the border and the northern side, because we do impact one another in terms of how we're interchanging traffic. And we talked about the capital investment needed both in Mexico and in the U.S. to be able to support the growth that's there. And the marketing teams meet separately to talk about areas where they can jointly develop new business. So that's all, I think, going very strongly. And there's still work to be done there because we know that there's more business to unlock. Particularly as you asked the question with the near shoring, so we work with the FXE, help them identify where there's candidates that are potentially looking at putting either new manufacturing plants or expansion of manufacturing plants within Mexico to be able to handle that increased traffic. One of the nearest-term opportunities there is really on the automotive side. Coming out of the union negotiations last year, lot of the other manufacturers are looking at ways to put more and more of their production into Mexico. And so making sure that there's good car supply there, making sure that we're very fluid at the border crossings, is all very important there.

So a big debate, especially as we get closer to election season is going to be the impact of tariffs, whether we're talking more on China or even stuff flowing through Mexico. What are your thoughts on that? I don't want to get too political but your thoughts on what does that mean for business, right? Does that mean we're likely to see what we saw in 2019, where we saw a decrease in freight flows? Or does it not?

I think all politicians and all people have become prudent. And you have to go through the election cycle and see what happens. People talk about things a lot in different ways when they're going through. Just the way I look at it is, we've been able to handle any regulation that has been thrown at the industry and Union Pacific specifically. So I don't see anything that concerns me other than, if people are prudent, I think we'll come to the right situation where it fulfills everything that other constituency have. But whatever happens, at Union Pacific, we'll deal with it and we'll deal with it in a smart way.

Certainly would deal a little differently, do you see a lot of the intermodal ramp-up that we're seeing now? Is that preshipping ahead of -- just because, if I look at Walmart and Target all taking down inventory levels and yet we're seeing a 23% increase at the West Coast ports. Does that mean we're getting a lot of preshipping? Is that -- I mean, that can't just be the Red Sea diversions?

Well, the discussions I've had with others and I won't be too specific, yes, it's a little bit of everything. It's a little bit of what's happening in the Suez. It's a little bit of what's happening -- a little bit, very small, with people looking at what's happening at the Panama Canal. And it's also looking at stocking and maybe restocking some products. But at the end of the day, that doesn't make it -- the consumer is still strong. The U.S. consumer is still spending money for the products that are coming in. So otherwise, we wouldn't see that, like that would be a different story, Ken.

Yes. Now the problem is, they're spending, they're spending it on higher-priced items, which means -- I mean, inflation, costs more, so less actual volumes what we're seeing. So let's switch it -- while we're on intermodal, one of your major customers at our conference talked about variable pricing they've been getting. And that ability is allowing them, because of what they're working on with you, to compete better against J.B. Hunt and Burlington Northern. So is this a new version of Union Pacific, maybe a little bit more cost variable to enable customers to win in the marketplace a little better and win particularly in intermodal?

Don't read more into it than -- this is not a price cut so that we can continue to price cut everywhere, so we think we can win in the marketplace because we think we have the right product to be able to. I'm not sure what they were talking about. I know what we've done. What we've done is, as we've said, maybe there's a few areas where we feel that the best way is to give them some flexibility to price. But they're very small and they have to make it up on the rest of the business. This is not a idea that we're going to drop the overall revenue that we get for that, for any 1 customer. But we're giving them a little more flexibility in a few lanes to be able to handle the differences in how they're competing. We want them to win. And some people will tell you that they're good on 15 of the lanes. And we have customers, intermodal customers, that have 55, 65 lanes. So it's not just 1 origin/destination. And they say, listen, the customer that we're dealing with, the actual shipper says, we need some help going into this one specific market because otherwise, you're pricing yourself out of it with where the rest of them are. And we give them that flexibility but they have to fix that on the other side. So this is not a total revenue drop. So that's how we look at it. Hopefully, I explained that because some people are mistaken that they would think that we just are giving pricing power to one of our handlers, that, we're not doing that. That's not the way to do it, if you think about it.

And can I presume that, that is given even to all 3 -- the new -- all 3 new -- or I guess 2 newer intermodal customers on your network? Or is it customer by customer?

Listen, we're cognizant that we have multiple companies that move traffic with us and partner with us -- multiple and we have to treat them fair. So this is not -- what we want is, we love the competition. We want them all to compete for the business. Best one, who has the best capacity, to be able to win and we want to make sure that we give them the opportunity to win. That's the way to look at it.

So employees have been steady at about 31,000 employees. I believe you mentioned you expect a little sequential rise. Is that growth dependent? Is that contract? Is that seasonal? What's the thoughts on the outlook for employees from here?

Have we said volume rise in people?

I didn't think that we said it.

I was just checking with Jennifer, maybe she was speaking to somebody who [indiscernible].

No, I don't think so. I mean, I think we said that they're going to always stay fairly steady and maybe what you've heard is that we're holding a few more people because of the ongoing implementation of some of our work/rest agreements. That certainly continues to be the case. We've got the agreement with the Brotherhood of Locomotive Engineers, we're still working on an agreement with the SMART-TD. So we know that when those agreements are implemented and as we're rolling those out, it is requiring us to have more people to do the same amount of work. So that's a productivity hit that we know is out there that we're working to be smarter about and overcome. Because of that, just a little more employees than we would otherwise need.

So let me give you a little bit more underneath to look at. So when we started -- when I showed up at Union Pacific in 2019, we had 37,000 plus employees and we've substantially dropped that amount. We are probably on an efficiency -- if it was purely efficient, we're carrying some extra people because we have the 11 and 4, the scheduling, they still implement and we also have the sick benefit that was given last round that we have to take into account. So on a plus for a number of people. And we're not completed implementing all that. So we need to make sure that we're resilient. But on the other side, we've done a lot of work to be more efficient in the number of cars handled per employee, the size of our trains and everything else. And we see a time as we move ahead that, that headcount will continue to drop to where it naturally it should be. So we'll see that over the next couple of years.

Given the Canadians -- both Canadian rails are still engaged in negotiations with their engineers and conductors, are you seeing any movement in freight already -- freight diversion onto your network?

I think a small amount -- people who are -- people that need to react quick. But the Canadians originate a lot of traffic on their railroad -- grain, potash, fertilizers of all sorts. Pretty hard to move somewhere else other than -- unless they had another plant to be able to fulfill that. So we've seen a little bit but I wouldn't say it's significant for us overall.

So I guess, would you look at the negotiations with their conductor, which, [ arguing ] I'm not sure still over price. So is that kind of a look back at what you've already gone through in their marking to market? Or do you think, as you're now coming to the end of your contract, is that another preview of what we're going to see in the next round?

No, I think -- I have been involved in [ National ] negotiation for a number of years and people always say the last round was contentious. I have yet to go through around the negotiation with the railroad unions that are a little bit contentious. We all have -- we end up at the right place. It just takes us a while and a process to get there. So I think what would be helpful is an inflationary change. So it's not as difficult, the inflationary impact in the United States that would help us be able to negotiate at a different level than we did last time. And we were coming out of COVID and we had a hard time hiring people last time. So -- and right now, we're having no problem hiring people. We hire them where we need them with ease. People are coming to work for us. So all those things -- and add and change what is moving forward. I'm not sure what's -- I wouldn't comment on the negotiation in Canada and why and where they are. I'm sure -- I'm hoping that they get to a deal quick. I think it helps the whole industry. When the industry is fluid everywhere, it's helpful, more so than if we have a piece of the system that does not work. We interchange so much traffic to each other that it's important that they get a deal and move ahead.

Let's talk about financials, right? So Jen, your thoughts on leverage here. You've increased it a bit lately, right and what are your thoughts in this market, focus on debt repayment, thoughts on buybacks at these levels? Are you returning to the buyback? Maybe just give an overall view.

So I'll start on that last piece, Ken. So we did say in April that we were going to resume share repurchases in the second quarter and we have done that. We're going to start slowly and would look to ramp that through the year but we are back at it consistent with what we said back in April. In terms of the debt levels, so we did in the first quarter, which is why we didn't start buying back shares in the first quarter, we did repay about $1.3 billion in long-term debt. Now some of that we put in floating rate. But we're managing those debt levels. We feel very comfortable with where our current debt-to-EBITDA levels are at. And so I think our plan long term would be to continue to use the balance sheet as we create room on it through growth and earnings. Obviously, interest rates right now are a little bit more than what we're used to paying but we maybe got a little spoiled there in terms of what the rates were. If you look at our overall portfolio, I think we're just a tad under 4% in terms of what our average interest rate is at. So if we were to renew any long-term debt right now, it would certainly be at a rate that would be above that.

Okay. Jim, the STB is now at a split balance, right, with Chairman Oberman retiring. But he was able to kind of issue the reciprocal switching on his way out, literally on his way out the door. Is there anything on the docket now left, revenue adequacy, anything of major substance that we should look forward to?

No, I don't think so. I think the biggest change was the interswitching that was put out right now and we're getting ready on how to deal with that. And we have -- we are taking it on legally because we don't think it's actually, the way it's written, a benefit to our customers, service-wise. So we'll deal with that and we'll also deal with the regulation as we move ahead. And if you really stop and think about it, Ken, the STB and the railroads have the same goal, right? If you provide good service to the customers, then the STB is very comfortable that we're are doing our due diligence and are operating in a proper way. And that's what really counts. And if you see where our metrics are on service, I'm very comfortable that we move ahead without anything cropping up.

So I think we've gotten to the point where after the CPKC merger, there was a point where we're kind of done with mergers maybe for a decade, maybe forever on Class 1s, right? So your thoughts on the next phase would just be to increase the lines? Because you were talking about working with FXE, you can maybe with the operating committees get more efficient. You've also partnered now with somewhat with CN, right, in terms of moving it through Canada, compete against the CPKC. What about on the East Coast, are there things you're doing to increase the fluidity between West and East?

Absolutely. Every railroad actually has the same goal. And we understand when you think that you hand off or touch another railroad handles 40% of the business that we handle on our railroad, you need that, the more efficient you can be and the more you look at how you work those customers in the bulk railroads in an efficient manner and you collaborate on bringing on business that we're able to grow, Ken, makes a whole bunch of sense. We've done a lot of work with Tracy and Canadian National Railways, maybe because I know that railroad. I've spent 40 years over there. But we've actually even worked with CPKC. It makes sense in some quarters that we work together. You need to separate sometimes the places where you're competing and in places where, operationally, we're trying to be more efficient in how we interchange and how we move the traffic. And the same thing with these, the 2 railroads in the east. They're all well run. So I don't have an issue working with all of them and we compete hard when we have to compete. And then when we have to work together, it's important for us to do that.

Okay. So I think we hit on -- I guess, if I were to wrap up, right, let's say, I'll give you a chance to finish, right? We've just got a couple of minutes here. But if I think about -- quarterly, the volumes are flattish, right? A little bit better than we thought. Some maybe snapback in coal. And coal was up but maybe a little bit less. Pricing, hard for dollars to outpace inflationary cost, it just takes time to catch up as you were explaining. Timing of contracts, you'll get there, it just takes time to work through that. Yet, as Jen was highlighting, you've got other things that you're doing, you could potentially still see sequential operating ratio improvement, a little bit bigger year-over-year, which, it just won't be as big as the normal seasonality in terms of the OR improvement. The number is operating as efficient as possible where you're starting to rebound given the weather impacts in the quarter. What else would you want to wrap up with, I'm trying to summarize as I'm going here?

Well, let me summarize who the heck we are and what we're trying to do. Bottom line is, is we're changing culture inside. We want to be faster. We want to make decisions quicker. We want to drive decision-making to the right level. And that's really important. And we tell people and I tell people, that I want you to push the envelope a little bit. You want to get out there. And if you make a mistake, learn from it, admit it, let's move on. And the more we do that, we will be operationally more efficient and we'll also be on the marketing and sales and the procurement and everything else where we touch, dollars and cents will be better. That's real key. Don't be afraid to -- and look at what's possible instead of looking at what you think. Like we don't look at hump yards anymore or how efficient they are. Because somebody says that you used to be able to do this, okay and that's a big change. I tell them what is it that we built the place for? And if you do a proper engineering look at it, what can we do? And that's what's important and that's what we're trying to drive. So all that aside makes me very comfortable that we do those jobs right. We grow the business and we've seen the level that I think beats what the turndown is. We price properly and in the next couple of years, you will see us recover most of that even though our revenue is higher than what our inflationary dollar spend is, because OR is, at the end of the day, a result of everything you're doing. So we become a much more efficient railroad. We become a railroad that can react quicker. We provide great service to our customers in services what we sold them. If we do all those things, I'm very comfortable of where we take this thing in the next 2 or 3 years. And our balance sheet, you raised that. I love it. We're strong where we are. We started a share buyback, can't see any reason not to continue it. So anybody who's a long term -- if you're buying it for 3 days and looking at it, do whatever you want but if you're a long-term shareholder and you want to be a long-term shareholder of Union Pacific, great railroad, great franchise and great opportunity to grow. Truly looking forward to leading that with the 30,000 people that we have with us.

Thank you for the time. Appreciate it.

Thank you.