Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

All right. Great. Good afternoon, everybody. I'm Ken Hoexter, BofA's air freight and surface transportation and shipping analyst. We're happy to moderate today's session with Union Pacific at the New York Stock Exchange's London Conference at BofA's London headquarters here. From the company, we have CEO, Jim Vena, Chief Financial Officer, Jan Hamann; and also in attendance in the audience is Diana Prauner from Investor Relations. I'm going to moderate today's session. So with that, we have about 45 minutes. So let's just jump in. Jim and Jen, let me turn it over to you. I know you have a few slides to get started with us here, and then I'll jump in with some questions.

Well, listen, thank you very much, Ken. I'd love to just frame exactly where we are a little bit and then let's open it up for questions. So I'm not going to spend a lot of time, and I'm going to pass it over to Jennifer, who's here with me today. I love having her with me. And of course, we're going to make some forward-looking statements. So please refer to the UP website and SEC filings for any additional. And why don't I -- you know what, usually I speak too much. So I'm going to pass it over to Jennifer right now and let her start with where we are.

I'll give a quick summary of where we're at quarter-to-date, year-to-date. And it's a great new story too because as we started out the year, we continue to be very strong in terms of both our operational performance, the service that we're providing to our customers, supporting what I would say is decent customer demand. Our volumes are up 2%. With that, though, we're keeping our freight car velocities up. It's over 230 miles a day and our terminal dwell is staying under kind of that key mark of 20 hours. We've been consistently in that 19, kind of, an hour mark. And that's really a great paradigm for us to be continuing to prove to our customers where we're growing volumes and at the same time, improving our service product. Digging into volumes a little bit more. As I mentioned, volume up 2% for the quarter. If you look at that across our 3 business teams, premium's up 3%. So strong growth in our domestic product, very positive built on by -- and supported by our service product. International Intermodal does continue to be off year-over-year. What you're seeing happen here in the second quarter, if you remember what happened second quarter of 2025, is when some of the tariff announcements first came out, and we kind of had a bathtub of that where pretty strong volumes in April, pretty sharp drop in May. And then the last part of June, as we move into July, we saw the volumes come back up again. So we're entering into a period where we're going to have a little bit of a tougher comp, get through July, and then we should be a bit more normalized. Finished vehicles are also for us here quarter-to-date, about 2%, which is another positive in that premium column. Industrial, up 3%. I consider industrial kind of a heart and soul of the UP franchise, continue to have strong business development efforts there. Industrial chems and plastics up 4%. Metals & Minerals were up 3% versus last year, continuing to see good demand in the South from a construction standpoint. And then if you look at bulk down 1%, that's actually something that's switched on us here in the second quarter, where you've got coal down about 14% on a year-over-year basis. And it had been up double digits the last several quarters. Part of that is we are now lapping where we have won some business starting in the second quarter of 2025. Also, we're in that cooling season where a -- little bit of a shoulder season. We've had some plans down for maintenance and lower natural gas prices. So let's put a little bit of pressure on the coal business, although as we were talking earlier, Ken, we are starting to see some more sets come into service. So we're going to look for that to pick up as we move into the peak cooling seasons of 2026. But then grain and grain products have been up solidly about 12% quarter-to-date. So nice diversity there in our product mix in the growth in our business that we really do like to see. A couple of other things I'll say quick before I turn it over to Jim, is if you think about fuel, when we started the quarter, we were paying about $4 a gallon for diesel. That increased some in May. Now within the last couple of weeks, it started to come down a little bit, but right now, we're thinking we're probably going to average about $3.90 a gallon for the second quarter, maybe give or take a $0.05 there. But prices -- the spot prices have come down. So that's helpful and we'll see how that plays out into the rest of the year. Of course, we're much more fuel efficient than trucks. So that's still a net positive for us. And then the last thing I'll mention before I turn it over to Jim is kind of a modeling item is we're expecting about $35 million in merger costs for the second quarter. That's a little bit higher than what we had been thinking of. But with all the work that we've been doing in terms of the STB filing and refiling and providing more information, that's putting a little pressure on some of those costs. Jim?

Great to pass it off to me with a negative, I thought you give me a positive at the end. This is a positive really -- there's a couple of positives that are really important for us to think about where we are at time and place today. Okay, the first one is the team led by Eric Gehringer, the team led by Kenny, our Chief Marketing Officer and the entire team at UP. They're focused in driving the railroad and not losing sight that every day, we have to have a safe railroad. We have to operate at the highest level, and we have to make sure that the service that we sold to our customers at a high level, and you can see that in the slide before. So that's the foundation of who we are and we can't lose that. And even with the length of time we've been in this process already, the focus is right on. The rest of it, on Slide 4, if you take a look at it, huge milestone is when the STB accepted the merger application. Yes, they've asked for more information. But at the end of the day, the 12-month procedural clock started, it's pretty clear that we've gone to the next step and we'll provide the information. We always knew that the STB was going to be asking for more information as we went through this process, and we told them that we'd be more than willing to give them the information. There's no big secrets. We see exactly what the benefits are. So how are we going to give the information at this time. We think instead of waiting right till the end until July 27, we will probably do it in 2 batches, piece in early July. Some of the things as soon as we complete them, we'll give them that information. And then the next batch will be closer to the end of July. But hopefully, it's before our quarterly release that we do so we can have a discussion about what we have to give them. So overall, very comfortable with where we are and what we've done this point. And it's great that we see what how the process is going to go out. Now let's talk about exactly some of the things that are in the application and for some of you that maybe have missed it. We're talking about removing over 2 million truckloads off of the road, huge benefit for America. We are absolutely sure that we deliver $3.5 billion of savings and those are savings because of touch points and how we operate the railroad. So those things are clear foundation that we have identified when we've gone through with the experts we've hired and what we've done to analyze what's possible and what's better for America. And we know we'll improve safety. Any time you remove touch points on cars where people have to touch something, you actually -- if you remove that, you end up with a safer network without doing very much other than that. So we'll continue to invest for safety, both from a technology standpoint, on training and people, but really important that when you remove touch points, okay, you do end up with a safer railroad. So let's just real quick, Ken, and I know you probably have some questions, so I won't get into it complete in depth, but real high level. And does our merger enhance growth competition? Absolutely. A seamless railroad that operates from -- through the country and one end of the country to the other on the extreme automatically makes that product better on service because you remove a touch point. And on top of that, it makes it seamless and faster. The customer gains and that they can actually save on the cost of equipment, cost of inventory, cost of doing business with multiple rail roads, number of people in the back shop. And listen, that is enhancement of competition. And the rest in the industry have to -- when they wake up, they'll have to decide how they're going to compete against that new service that is better for all the customers and shippers in the U.S. And I hate to tell you, and that's why they're complaining so much is there's only one way to do that. If you can't match service and you can't match the number of what you're doing, the only thing you can do is drop price. And that's what they're worried about. Otherwise, they wouldn't be complaining. So at the end of the day, we think that with all the pages, over 7,000 pages that we put in, over 2,000 letters of support across the spectrum of customers, starting with customers, with customers that are actually single point customers for us that don't have an option at origin plus regulators I guess -- sorry, not regulators, politicians, I wish some of the regulators would give us a letter, but they didn't. So overall, very comfortable where we are. We love it, Ken. And for me, personally, it takes too long. But at the end of the day, we knew the process was going to be the process, and this is where we are. We're quite happy.

So I mean, you just answered the first question I had, right, which is kind of talk about the latest thoughts on the merger. I don't know if there's anything you want to round out in terms of the latest thoughts, but I'll go run it to the second, which is given your application got approved to begin the process, but then the process was put in advance by the STB as they wait for more info when you just talked about maybe the 2 batches, it seemed like they were going at the crux of your argument. Is it in the public interest? And does it increase the state of competition? You threw out a couple of things there. Is that -- what does that signal in terms of the STB coming out with those specific requests? What does that signal to you in terms of the process?

Well, Ken, anybody who's looked at how STB goes through the big decisions and we've had some decisions that have taken them a long time to make, and we've had some decisions that are better. And we have been a chair there that said he's going to go through and make sure he looks at things factually, we're very comfortable. They want some information we give it to them. And are they listening to some of our competitors, sure. And should they, of course, from my side, I would say, it's always hard to look why would you listen to a competitor, but I understand the competitor could have a different viewpoint. But the process has started now and the process needs to go through. And at the end of the day, then they have to decide whether there's anything that they need to add or look at any concessions or how we move ahead. So this needs to get done. Is this good under the rules of the STB on whether it's good for the public interest. I think it's good for the public interest when you remove a couple of million trucks off of the road. I think it's good for the public interest when you have people in Chicago and you can take out hundreds of trucks running to go from one railroad to the next. I think it's good in the public interest to be able to make the movement of goods within the U.S. much more competitive against the world so that you can move seamlessly from the east, the lumber from the east to the west or from copper from the west to the east or steel from the east side of the Mississippi to West. Is it good for the country to say that we're going to give options to people today that don't use railroad because in a 500- or 800-mile haul, they have to go from 1 railroad, hand it off to another one to go somewhere else. And Ken, I'm absolutely sure. I know you're from New York. It's pretty simple for people that aren't railroaders. I'm absolutely sure you took a connection flight. You went to Amsterdam first. You changed carriers and you came to London. Absolutely not. You came direct -- it probably cost you less money and especially the money that you get paid because of the money that you saved all that time wasted at the airport. So that's what we're talking about. It's very simple, it is excellent for our customers. And competitive-wise -- and I know I'm going for a long time, but competitive-wise, we've seen already when we announced the merger, people started to look at how they could work together to be able to enhance the movement of their goods. And that's what they've done. The problem with a non-merger, those things usually break apart. As soon as somebody starts having a problem with assets or people or what their network pressure is, they break off those deals and go away because they're not -- there's no penalty to them. So listen, I'm very excited. I'm telling you, the more I see what we're doing and Jennifer and I and Diana are aligned, okay? Not -- and listen, Jennifer would tell me if I was wrong, and Diana would, for sure, okay, tell me, then you're missing this, the story, we're not telling it right. This is much more compelling now than it even was when we started this merger.

Jen, Jim started off with something interesting. He started off with the fact of the $3.5 billion synergy. Maybe from what you've laid out, maybe you could readdress the target time frame? Has anything changed from your original agreement in terms of the synergies? Or how we should think about them? How do you think about the time frame in terms of getting back to your target, whether it's operating ratio target or ROI targets post merger? What's the kind of time frame on those?

Okay. We got several questions.

Absolutely. I am used to squeezing them all into one question.

You can give more time if you can space them out.

What he told us we have 4 questions but each with 15 parts. You want me to write it down?

You may need to remind me on a couple, but I'll see how I can do here. So the $3.5 billion, that's not a synergy target. That's what we believe is going to be annual savings to our customers, to the shipping public when you just look at the differential in price between truck and rail. So that's that 2 million trucks coming off the highway, moving to rail and it's a very simple calculation. And quite frankly, it's probably understated when you think about the admissions and the safety and all those things.

Truck prices [indiscernible].

Oh, yes, yes, exactly. And think about fuel surcharges where those have gone. So that's the $3.5 billion. So then you look at our synergy targets that we have. They have changed, I would say, a little bit over the time period from when we first announced the merger to making the revised application, but not a whole lot. I mean we have continued to refine the analysis and each time that we do that, we basically come back to the same place. So on the revenue side, you're talking about $1.8 billion net EBITDA synergies on the top line. So that's that -- again, that's the truckload conversions, that's also growth that we're seeing in the manifest auto world, some of the watershed traffic. So that's on the top line. When you think about the cost piece, we're looking at about $1 billion of cost synergies, and that's really across the board. Certainly, it's being able to be more efficient with how we're doing our train handling, it's being more efficient from a purchasing standpoint. It's been more efficient from a back-office standpoint. All of those things that bring costs into our network, we believe that we can go through and be more efficient. Technology will be a big enabler of that. So then you think about the capital that it will take us to unlock this. We said it's about $2 billion. About half of that is what I'll say, is infrastructure capital. So I think sidings, yard improvements, those types of things. The other half will be the technology that we'll need to do to be able to integrate our networks. We also do think that there's going to be about -- I think it's $133 million of capital synergies that we'll be able to unlock through this. So those are all the net benefits that we expect to unlock from the transaction in terms of where we think it's going to take us to take the debt back down after we make the payment for the Norfolk Southern, we still think it's going to be in year 2, towards the end of year 2 is when we believe we'll be able to have gotten our leverage back into a place where we're back in the market repurchasing shares. And so it's just shy of $12 billion of kind of annual free cash flow that we're going to be kicking off as we get through it. And we've talked about this, too, in terms of a 3-year implementation time period. So in the first 3 years, this is where we expect to get to by the end of year 3.

It's interesting because now we talked about the time frame. And Jim, you were talking in your opening comments about the time frame, I think we were talking on the slide about that. Given the advance, you still see this clock is starting based on the set. Do you want to expand on that a little bit because I thought that was a really interest income.

Well, this again -- there is a statute for the STB that was given to them by Congress, and it's pretty clear. It says that once you accept it's 12 months. That's what we would expect them to...

So just once the application, which has been accepted officially. So despite them saying we're putting in the bank to collect more information, your view is that 12-month clock as now started based on that 829.

That's correct. For them to gather all the evidence that you need to then take the time and there's a specific amount of time for them to get the decision and that's 90 days.

And it's after the 12 months. So that's a 15-month process, it can't be paused by this desire for an advance on their part.

Well, listen, I don't know, I follow the law. So that's what the statute says and that's what we're going to do. Otherwise, Ken, then we don't have to follow the statute either that talks about public interest. If we have to do the things that are in the statute that we think that the STB wants then I would expect the STB to follow the statute when it comes to the length of time.

Jen, just on -- throughout the CapEx commitments, you did recently changed some of the CapEx commitments. I think some of them were adjusted downward right, a little bit, little tweaks. Was there anything that got changed? Was it sidings or just say, as you thought about the merger, what you're going to need.

I'll answer that. Bottom line is people get all excited about that, we don't look at capital on an annual basis. And you can tweak it up and down and you think if this is the way the business looks like, this is what we're going to do. It was a small tweak down, but don't take that into it. We're going to have the capability just like Union Pacific does today that if we have to invest more in our railroad, capital for our plant or capital for growth, we'll do that. And that's what we look at first. The end of the day, we will never ever stop investing in our railroad to keep it safe and operate at a high level. That's not what we're going to do. We're investing in rebuild locomotives, modernization locomotives, and we'll continue to do that again. So that was just a tweak as you go through and look at exactly what the flow of the business that we see and I'm sure there's going to be a small change again as we get closer to the merger acceptance.

Yes. And a little bit of a change in the mix of business, more intermodal, a little bit less manifest so that changed in that.

So let's talk about some of the commentary out there from the marketplace, right? And I guess this is coming from the other railroads. So it's not necessarily -- I don't know if you think this impacts the process, right? We've heard your Western peers say the document is still unclear, undeveloped, merger deficiency remain. It reduces competition, one of the Canadians said he has a right to freeze it and submit a credible case, inadequate market share. I mean so many of these commentaries kind of go at the crux of the concept of competition and increasing. What's your view in Toronto? What do you think the end game? Is this just trying to get more things out of this? Do you think it's delaying the process, but it sounds like you just said the process is now on a clock. So what's the takeaways from the contract?

Well, listen, I think history will tell you that it's pretty black and white that a competitor has a view that's internal for their benefit and not for the process or the company that's doing something that might impact them. So said better, easier, real simple. I'm a businessman. I'm a capitalist. And a competitor of mine was doing something stupid. I won't say a word. I would let them do that because I'm going to win in the marketplace and get more business or increase my price better. So the Canadians, no, ifs, ands, or buts and both railroads in the U.S. and one is much more vocal than the other. They look at this and what they're worried about is, is they're going holy cow, how do we compete against the railroad that's going to go across the country, and they're real worried about that. And of course, without that, they throw out that 7,000 pages isn't enough. Well, I don't know, I just finished reading War And Peace again. I guess we need to add a whole bunch more pages. It doesn't make a particle of sense. And we were very clear with the STB. If you need more information, then ask us and we'll give it to you because we want them to go through. We know this is a compelling case. So that's what I think about the competitors. The customers, we have some associations and other groups that are saying, listen, we're against this. And we think once they go through and truly understand what we're doing, the customers that pay the bill that actually pay the freight will see the benefit and how it improves their capability to compete. People miss this that are not in the railroad business, you can have a single point of origin on Burlington Northern Santa Fe. But just because you have a single point of origin and if that product is soybeans, there's a single point of origin and others on Union Pacific, and we are competing against the world in moving that product, not just that single point and we actually want that single point to succeed and be able to move the traffic. So when people look at everything, and let's take this merger -- that's what I love about having 45 minutes, Ken. I'm going to fill a lot of it, is we will continue to have a strong competitor in the West. We are competing against Berkshire owned BNSF. Last time I looked, they're $1 trillion company valuation with $400 billion in the bank. They can just about do whatever they want. And remember, they're a neighbor of ours in Omaha. So they have the capability to do a lot if they want to. But every day, the customer is going to see BNSF there and UP competing for the business at origin and destination. In the East, we're going to have the UP and CSX. And I give Steve Angel, a lot of credit. I see some of the things he's doing. He's doing a wonderful job of preparing that company for what comes next. And make it as efficient as possible to compete. So that doesn't change. That foundation is already there. And on top of that, because we're going to be faster, more seamless, how Burlington Northern Santa Fe has to play the game that's going to become better, how CSX has to become better or offer better price and for sure, the Canadians that both come basically down a few states in the middle are going to have to compete better. I've always -- I got to have a little bit of fun. I love it that in Canada, it's okay for them to have 2 railroads to go across the entire country. And I can -- maybe you can remind me because you talk to them all the time. They haven't sent me a Christmas gift this year or a Christmas card or anything else. I don't know why. We used to give cards for each other, but I did send it to them. But bottom line is, are they talking about splitting in Winnipeg because they need more competition in Canada or they have a hard time managing it, I don't think so. Jennifer, anything you want to add or that was a mouthfull.

I don't.

I think I want to go to Winnipeg and see the judge play. All right. So that's great wrapping up on the merger. I think that's a good run through the process, the time frame where you are your thoughts on kind of how the process is going. So let's jump to operations, right, how things are going. Jen, you mentioned volumes hitting at -- or I'll say volumes seem to be hitting at or near multiyear highs on a weekly basis, right? You're trending almost 170,000 carloads now on a regular basis, which I think not too long ago, you were down in the 150s, right? So you're now kind of running back at that premium full level. Talk about your view of -- on the market -- let's just start with the market backdrop -- broaden it a bit, right? How do you think the market is? Is this just a truck pricing is going through the roof, given capacity is coming out. That's the transition? Or when you started your opening comments, it was kind of really broad based on how do you think the backdrop is here?

Yes. I think that's an important point, Ken, is it is pretty broad-based, and that up 2% is with coal down 14%, which had been kind of one of the stabilizers in our volumes the last year or so. So I think that's a very positive commentary. It's also obviously supported by a very strong service product that we have and the strong business development efforts that Kenny and his team have put in not just to renew business with our customers, win new business with our customers, but also get them to put more facilities on our lines. We continue to have more customers either to go through plant expansions or decide to put facilities on our lines that we can then serve or as Jim mentioned, we're not afraid to build into places either. So customers see that we're wanting their business and that we're willing to support their business, and that's a very strong positive. I think we'll see how we get through the summer months. But the fact that, that industrial business is up 3%, I take is a strong positive. You've seen the ISM index improve some and some people are saying, well, is that just a short-term kind of restocking? Or is that actual demand? I think our sense is that you're starting to see some actual demand pickup there. And if we can see fuel prices come down and some of that pressure from an inflationary standpoint come out of the marketplace, I think that would be a further positive.

Yes. What about the -- also, I think, Jennifer, this is -- we have areas that are really growing in the U.S. that we serve in the western part, like whether it's in Texas and what's happening San Antonio towards the border, what's happening in Dallas, even in Houston and some of the products around there. Phoenix, there's still a lot of building going on in the Phoenix, lot of homes being built, multiple homes. So when we look at everything in the country, Denver, I can keep on going, Ken. So for us, sometimes the high-level number tells you at this. And then when you look in the area that Union Pacific today serves, we see some real strength. And the good part is the number of products that we move. Son of a ***, we do coal, but we also -- people are aware and running shoes with the swoosh, we're probably moving them, right? If you're -- there's actually some Apple products that work -- that come on us. I got to be careful. Anybody who's a crook has just heard me say that. There's things that we move that are part of the general economy.

You brought up San Antonio, I just had to say. That's the only reaction I have to San Antonio.

Like you are such a New York [indiscernible]. Like if it's a New York team, that's it. That's all there is to it. I love it. Good for you. I said the judge [indiscernible] that was for a split in the railroad.

So service levels seem to be running at or near multiyear highs, right? You're blending this volumes and the service levels. What's the driving factor? What's the biggest bottleneck to then improving further?

Let me answer that?

It's really hard. And it's -- when you're running in the high 90s, which we are 97, 98, 99, we've hit 100, and that's measured against the service we sold to our customers. You don't want it to get higher. It's impossible to get to 101. That means we gave them the car the day before. That's not the win. You want to be able to do it against what we agreed. And what's been able to do that is to have a buffer on the railroad on how many -- what capacity we have. And Ken, you've heard me say this before and Jennifer has already said it, we're running more business today than we did in 2019 when I came to Union Pacific, and we're running 24% less trains. And that capacity, we didn't take it out. So what we did was we were able to move it more efficiently on less trains. And that just beats capacity for not just the number of people on engineering. You can give them better track time so that they can do more ties when they do capital programs, and we can keep on going through. All those things are real important. So you fundamentally have that and we've spent $1 billion in our terminals to make them more efficient, plus the way the culture is and how things get done, and we're able to expand and have that buffer in the rail yards so that we can recover when weather events. Like I don't know if you guys know this, but we had a heck of a lot of rain and problems North of Texas in the Oklahoma area the last few days. And hopefully, you don't hear anything about it because that's the best thing. But at the end of the day, that's the way we look at it. Real important for us, but I'm happy with where we are.

So what's the most important? I think, Jen, you might have started with car miles per day. Is that the most important that you look at, Jim? Is it -- we used to -- we were taught to look at velocity and dwell, I guess those are public metrics that we go on. What do you look at as CEO as to say, yes, we're running both rounds.

Yes. Again, the reason I like car velocity is it gives you a measure of how fast you're moving railcars from when the customer releases the car or you place the car back at another customer or a receiver. Anything else is a subset that you can optimize, okay? Somebody says train speed. Well, UP for a while there was not stopping trains to pick up railcars. They put a local on to go pick up 10 cars because they didn't want to impact their train speed. It didn't make a lot of sense to me. So we stopped for those 10 cars, right, because they can move them quicker and get them. So -- but every morning I get up, and I used to -- I go to bed at midnight and one of these days, it will change. But so far in my age, I still go to bed at midnight, get up to 06:00 in the morning. And when I get up in the morning, I look at revenue first, okay? What did we do? Where's the trend line? And then if I need to break it down, it's really easy. One click and I got the breakdown of 58 commodities and where it's coming, what the last 7 were last month, quarter-to-date, all that. I love that. So revenue is really important to us. Then I go to car velocity, and I'm telling you, and it's what's top of my list, and they're pissing me off with how well we're using our locomotives because I think we should have more of them ready to go than in the fleet. So Eric knows I've been all over them on that. So I look to make sure that we're headed at the right place. So it's a real easy scorecard. I don't know about everybody else on this call, but people want to tell you that when I give the UP, they told me they had scorecards that had green and orange and yellow and pink and watermelon and Guava and red and I said not quite that many. I exaggerate a little bit. But there was like 4 different colors. And I said, isn't it the way it should be? It's either green that you're delivering or red. That's what we do now. So it's real simple. Scorecard comes up. It's in color, simple guy like me from Omaha, I can read it real quick that way. And then it gives me some fun to be able to dig in first thing in the morning.

So I just learned you got 58 different commodities, and we only get 20. So sounds like you've got some learning to give us. I guess next one -- I'm going to blend 2 together here. So what kind of as customer sentiment seems to be picking up, I was going to get into Kenny and team in discussions for how that turns into a new rail business. But let's just blend that in with truck pricing now really breaking out of, kind of, historic bans on pricing, right? We're on a spot basis, right? We're taking out 2, 3 years of morass of excess capacity and seeing spot rates up at 220 per mile, right? So well above kind of the $1.65 we're at it for a decade. So what does that mean for intermodal business? What does it mean for the railroads to win business? I think we went maybe a few years where the rails were losing business a truck. And now it seems like we've got a stretch going here of winning back. What's your thoughts on that?

Well, we don't like to get too excited over a short period of time, but I like the trend line. And I like what it does for us, both on a revenue side and volume side. And that's the way we look at it and opportunity and we need to work hard as an industry and I said Union Pacific to keep that business. And it doesn't matter if there's a change a little bit in how that number is. And the best way to do that, Ken, is have real high service. If you could show customers that we can deliver, and it doesn't matter if it tightens up the spread. We'll take advantage of this as much as we can. And the nice part is we have the buffer of railroad to be able to do that. So we don't slow the place down too much, so I'm real happy where we are. That's the way I look at it. Jennifer?

Yes. I mean I think it's really going to be a chance for us to showcase the service product that we have, the capacity that we've added into our intermodal network. Since we won a couple of big contracts in 2022 and 2023 when the volumes are starting to go down, and we really haven't seen the benefit. I don't think fully of those contract wins. Now you see that business in intermodal.

[ Domestic ] intermodal.

Yes. Domestic.

Domestic intermodal. Okay. Truck companies with trucking legacy. All right. So that's great for intermodal on the domestic side, your latest thoughts on pricing here, right? So pricing, you've targeted price above inflation. We've heard lots of different things about how you position it in terms of on an absolute basis, on a dollar basis, how are things going now again, especially with truck pricing rising, your service levels or doing well? What's your thoughts on the pricing dynamic?

You have to price against where the market is. Like absolutely, our key goal is to increase price because inflation is happening to us, right? So you need to move ahead and bring more business in or do that. But at the end of the day, Ken, it's what does the market allow you to do? And the better we are at providing the customer a product that allows them to win in the marketplace, grow with us and make them more efficient so they save you have a different discussion on price. Kenny's job and his entire team is to know the market, price it properly. Now do I tell them? I'm joking, but I'm not joking. But the amount of money that we're being paid on movement of some of those commodities that we have, we don't take very much, and we should be able to improve that as long as the service is at a high level. That's how we think. Sometimes you're going to have to drop price because this is a worldwide economy that we're fighting. This is not just America. The Canadians want to move more lumber into the U.S. The Brazilians want to move more soybeans into Mexico. So it is complicated. And synthetic soda ash coming out of China is competing against soda ash exports that we have in Wyoming. So at the end of the day, it's complicated. But I think we've done a good job, and you can see that in our results, the price in a real smart way so that we can beat with inflation is driving towards us.

I shouldn't -- the only thing I shouldn't take away is sometimes we have to drop price.

Listen, if anybody tells you that they're not, once in a while, okay, they want to walk away from a market then they're not doing their homework.

But back to the core, it is still to beat inflation, but inflation is now picking up a bit. We're up to 4%. Are we -- are we at that, I guess, historically 3.5%, 4.5%. Are we at that level, above that level?

No. We said coming into this year that we'd be able to yield price dollars on an absolute basis that exceed our inflation dollars, and we will.

Okay. And you will despite what's going on in the backdrop of inflation.

Yes. I mean fuel is not part of our inflation number because we have the surcharge, and that's separate.

That's just the timing pass-through of it when it goes through yes, and that's still a 2-month average?

It is, although when you look at the portfolio that we have that's in intermodal now, which is almost half of our business, those are on some more timely. So we probably don't have quite as much of a lag as we withstand.

Okay. I want to switch from domestic intermodal. You kind of talked about the wins and scaling of domestic -- international intermodal and that's about half the intermodal business, right?

We've not really oversized that, I don't think.

Okay. You didn't get it in your case. Are we seeing -- so we're talking about international? Are we seeing an early peak season build at this point based on what you're hearing from the West Coast ports or...

No. No, we're not.

Nothing. So just still steady as she goes from your outlook.

And remember, there was a lot of movement of products because of the whole tariff discussion last year.

Last year?

Last year and then more discussion about after some of the court hearings and everything else. So when you go through everything, no, we don't see -- there's no pull ahead at this point.

Okay. All right. So Jen, I thought you gave a good rundown on kind of pull down grain up. What else was it? Auto, surprisingly kind of strong right now, intermodal up well ahead of, I think, our targets as well. Any impact on mix that you want to highlight based on this or highlight -- don't forget, I know you just talked about forest products, they're down, they're profitable. Is there anything you'd highlight in that mix?

No. I mean, coal is a little bit on the lower side of the mix calculation, international, intermodal. You've heard us say that that's our lowest average revenue per car business, and that's down. So those would both be positives that their volumes are down relative to mix. Grain and grain products is a positive. Industrial kind of overall, although you've got a little short haul rock in there, is generally positive. So as we're looking at mix for the quarter, it's probably going to be on the positive side of the ledger.

Okay. Talk about employees. Jim, you're at 28,600 down about 5% year-over-year, down 500 sequentially. You don't need to be too specific, but thoughts on where do you go from here? If the industry is stabilizing the backdrop, do you need to -- do we see efficiency gains? Is it steady as she goes from here? Have you done kind of what you need to do on the employee basis? Maybe just thoughts on scalability.

Well, one thing we have not done is we have not gone through a furlough or removal or dismissal of employees. We've taken the action through people using attrition and deciding whether we need to fill the jobs or not. And we think that's really important with where we are. A few years ago, I would have given you a different answer. We needed to accelerate that, but I like where we are right now, and we're going to continue to do that. And what we found is as more technology comes into the system, we're better off and we can make decisions in a different way that is going to be able to use less people. And I'll give you an example is, it took us a long time to develop it, but the price that used to go out, everybody always thinks the trains, but we spend a lot of capital on renewal on our railroad, and we do millions of ties every year. But we just have to go out and put them on the ground piece by piece. It was my first job on the railroad was throwing them out of a gondola car and at least we mechanized it now, you could go use it. But now we've even taken the next step where we load them in a railcar and it spits them out exactly where you want them automatically. So there is a anybody handling them, and you can do it faster, better. That saves you on the number of people in the trains, the number of whether you have to run a train or not and whether you need to have people manage it. So we continue to see that benefit, use of technology to be able to do it better. I'll be honest, when I looked at it first time 5 years ago, I said son of a ***, I think this is a waste of capital. I wasn't sure the hardest thing was going to be, how do you load these ties into those slots to be able to get it, but I give our engineers credit. We're a pretty interesting company. We have some pretty smart engineers. You know that we built the first chairlift in the world at Sun Valley, Idaho, Union Pacific. You did not know that. Just give me a little tidbit. So go take a look at it. It was an engineer in Omaha. So UP was trying to get more people to ride the rails and they develop Sun Valley, Idaho and some engineer there said, boy, those rope poles and those things flattered at those getting people up to ski are crazy. So we actually developed a chair that moved on and it was the very first one. So we have people that are pretty smart that we hire.

Good backdrop, right. So I want to talk about the operating ratio a bit here. I know we're running towards the end of our time. So you did a sub-60 last year at 59.3. Do you have an incremental target in your head of as you go forward, I guess, stand alone before we talk about merger, is it 100, 150 that you like to see productivity gains per year.

Ken, I've known you for a number of years. You've asked me that question of 500x and the answer is always the same. I don't guide on operating ratio. When you guide on operating ratio, you gave the wrong signal of the people that are out there trying to make the decisions in the company to do the right thing. Operating ratio is a result of everything you do on revenue, the price increase and the efficiency you have in the railroad. Do I -- our goal is to be the leader. I think we've done a pretty good job, think the nearest -- the last was 300 or 400. 400, right? That's where we'd like to keep them. But at the end of the day, it's tough every day to keep that operating ratio. It goes up a little bit, it goes up a little bit, but I like it when it stabilizes and it's driven by what we're doing.

Well, now you know I'm going to follow that up with Jen. So your volumes are trending above target. He just said volumes. Your price is kind of above inflation. If we look at the last 5 years, 1Q to 2Q sequential improvement has been about 150 basis points. So you posted a 59.9% in the first quarter. Can we see relative outperformance? Or I guess it's not a specific numbers question, but it's like are there other things we should take into consideration, whether it's incentive comp or fuel or anything else that we should be aware of?

Fuel is the only thing I'd add to you. I mean, you know what fuel can do to our operating ratio, it certainly pushes it up and that's something that we're absolutely going to see an impact in the second quarter. But from a core operations standpoint, we are going to improve.

Yes. Okay. Fuel effects?

Fuel price.

All right. I'm going to wrap up one for each of you. Jen, generating a lot of free cash flow in the interim deal, right? So what are your thoughts of -- is it just using the cash to pay down debt? Is there anything you do with that while the deal seems to be getting extended. Jim gave a good reason why it's not going to get extended. But I would say, even versus his birthday target it's gone out a little bit, right?

Yes, it's gone on a little bit. But so yes, we're going to continue to prioritize paying down debt as it comes due, and then we're doing all we can to maximize the yield that we have on that excess cash in the interim.

Jim, at the end of your tenure, how do you measure success for UP, whether it ...

Did you just say at the end of my tenure?

Well, I'm going to give you hang on whether it's the next 3 to 5 years, it could be 5 years, 10 years, I'm not going to pinpoint you upon...

DO you ask every person that comes with grey hair.

I don't know when the mountain is backing you again. I don't when you need to go?

I'm ready to go. Go ahead. It's a good question.

How do you measure success when you look back?

You know what always what you need to do, basically, I could go on for an hour about a whole bunch of specifics. You have to leave the place better than you got it. And if you can do that and hand it off and it's your job, and it's my job to have the right leaders ready to go. It's my job to make sure that the Board has a couple of people internal ready to go so that we don't have to go. I think it's a mistake on a company that's successful operationally, and we're in good shape that we need to go outside. So success for me will be the day I announce my retirement, unless they let me stay as the assistant CEO, okay? I just worry about operations and not do anything like this, but I don't think they will. But so bottom line is the day I walk out of that place in Omaha is when we announce the person, everybody is going to say, son of a ***, this person is going to do better than Jim Vena and he's going to take it to the next step. That's the win. And I'm ready for it. I really am.

All right. Wonderful. So if I try and wrap up just kind of what we've kind of run through here. Merger on the timeline, right, just given that the STB has statutory deadlines of the 12 months of 90 days despite the advance. You're going to submit your responses in 2 tranches, maybe one in early July, maybe one by the deadline. I think it's probably 27th, right? And then you've got good mix so far, our volumes up 2% quarter-to-date trending ahead of our target about 200 basis points. Coal is down, but you've got good grain, good autos, pricing still target ahead of inflation. Margins looking good, just watch fuel. Anything else you'd want us to make sure we walk away from today in terms of how things are trending and service -- I'm sorry, is the service is really hitting really good levels.

And safety. We're continuing to improve our safety record as well.

So listen, you've been doing this for a long time. So the story is pretty good, right?

I mean again, I started with the volume sitting multiyear highs. When you get that and your service levels are doing well, the benefit of...

And you can see the benefit of single-line railroad, right? Because if not, I'll buy you personally a first-class ticket, but you're going through Kuala Lumpur to get back to New York.

I think you've made it crystal clear about the benefits of the TransCon and not only why it's good for you, but why it is good for [indiscernible].

Yes. I love it. Listen, Ken, nice seeing you again.

Thank you so much. Thank you.