Union Pacific - Q3 2024
October 24, 2024
Transcript
Operator (participant)
Greetings, and welcome to Union Pacific's Q3 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin.
Jim Vena (CEO)
Morning, Rob. Beautiful morning in Omaha. Nice fall day, so good morning, and thank you for joining us today to discuss Union Pacific's Q3 results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Hamann, our Executive Vice President of Marketing and Sales, Kenny Rocker, and our Executive Vice President of Operations, Eric Gehringer. As you'll hear from the team, our Q3 results do an excellent job of capturing the progress we've made under our strategy to lead the industry in safety, service, and operational excellence, and you're seeing how that leads to financial success. I'm very pleased with where we sit today compared to where we started a little over a year ago. Now let's discuss Q3 results, starting on slide number three.
This morning, Union Pacific reported 2024 Q3 net income of $1.7 billion and 9% improvement, and earnings per share of $2.75, a 10% improvement. Q3 operating revenue gained 3% as strong volumes and core pricing gains were impacted by our business mix and less fuel surcharge revenue. Excluding fuel, freight revenue increased 5% versus 2023. Reported expenses year over year improved 2%. While fuel prices were a driver, the team did an excellent job generating productivity to control costs as we successfully handled a 6% increase in volume. Our Q3 operating ratio of 60.3% improved 310 basis points versus last year, further demonstrating our ability to be operationally excellent while maintaining a resource buffer to handle unforeseen events.
Look, it was another really good quarter. I'm pleased with how we flexed to handle the 33% increase in international intermodal volume during the quarter, while improving service metrics across our network. And yes, that mix of business pressured margins a bit, but at the end of the day, it's about operating as efficiently as possible to drive increases in net income and free cash flow. And as Jennifer will walk you through, we did an excellent job of delivering in those areas. It's another proof point that our strategy is working. I'll let the team walk you through the quarter in more detail, then come back for a wrap-up before we go to question and answers. So we'll start with the Q3 financials. Jennifer, over to you.
Jennifer Hamann (EVP and CFO)
Thank you, Jim, and good morning. Let's begin on slide five with a walk-down of our Q3 income statement, where operating revenue of $6.1 billion increased 3% versus 2023 on a 6% volume increase. And Q3 freight revenue totaled $5.8 billion, up 4% compared to last year. Breaking down the freight revenue components, increased volume in the quarter added 550 basis points. Strong core pricing gains were more than offset by business mix, reducing freight revenue 75 basis points. As I mentioned at Investor Day, international intermodal's average revenue per car is significantly lower than our system average. And lastly, fuel surcharge revenue of $635 million was flat versus last year, as lower fuel prices impacted freight revenue 75 basis points.
Wrapping up the top line, other revenue declined $73 million, or 18%, driven by several factors. Lower accessorials, resulting from the Q2 intermodal equipment sale, reduced demand for auto parts shipments at our subsidiary, the ongoing transfer of metro operations, and a one-time contract settlement of $12 million during the quarter all contributed to the decrease. As a reminder, there are cost savings across our expense lines associated with the ongoing revenue impacts from the equipment sale and metro transfer. Switching then to expenses, Q3 operating expense of $3.7 billion improved 2%, driven by strong productivity and lower fuel prices that more than offset volume-related expenses. There are more details in the appendix, but let me highlight some of the performance drivers.
Compensation and benefits expense increased 2% versus last year, as wage inflation, including the July first, 4.5% increase and volume costs, were partially offset by 5% lower workforce levels and record workforce productivity. Train service employees were flat year over year, as we used our buffer resources to handle increased quarterly volume. All other workforce areas decreased 8%, reflecting our continued focus on operational excellence. Cost per employee in the Q3 increased 8% as a result of higher incentive compensation, as well as additional wage inflation related to the work-rest labor agreements. Purchase services and material expense improved 4%, as costs to maintain a lower active locomotive fleet and decreased subsidiary drayage expenses were partially offset by inflation and volume-related expenses.
Fuel expense in the quarter declined 13% on a 17% decrease in fuel prices from $3.12 to $2.60 per gallon. Our fuel consumption rate increased 1%, related to the significant growth in less fuel-efficient intermodal traffic, which offset our year-over-year productivity gains. Finally, other expense was better by 6%, reflecting the impact of write-offs in 2023 that more than offset inflation and volume costs. The result of solid revenue growth and strong cost control, with Q3 operating income of $2.4 billion, up 11% versus 2023. Below the line, other income decreased $19 million from lower real estate income, while interest expense declined 6% or $20 million on lower average debt levels. Income tax expense increased 23%, driven by higher pretax income and state income tax reductions in 2023.
Q3 net income of $1.7 billion increased 9% versus 2023, which, when combined with a lower average share count, resulted in double-digit earnings per share growth to $2.75. Our quarterly operating ratio of 60.3% improved 310 basis points year over year, with nearly half of that coming from core operational improvement. As we discussed in Dallas at our Investor Day, operating ratio is an outcome of our strategy and not the goal. Our goal is to grow earnings and generate more cash for our shareholders, which we achieved even as our revenue growth and margins were impacted by mix. Looking now at cash shareholder returns in the balance sheet on slide six, year-to-date cash from operations totaled $6.7 billion, up $700 million versus last year.
Our cash flow conversion rate improved to 83%, and free cash flow has almost doubled versus 2023, up over $900 million. These improvements are driven by 2023 labor agreement payments and growth in operating income, partially offset by higher cash taxes. Year to date, our shareholders have received $3.2 billion through dividends and share repurchases, including Q3 repurchases of $738 million. Finally, our Adjusted Debt to EBITDA ratio finished the quarter at 2.7 times, as we maintain a strong balance sheet and remain A-rated by our three credit rating agencies. Wrapping up on slide seven, with just over two months left in the year, the majority of 2024's story has been written, and it's been a good one.
We are executing on the fundamentals of railroading, which is critical to achieving the full financial potential of this franchise. We are affirming our prior 2024 guidance, most importantly, that we will continue to improve profitability through our strategy of safety, service, and operational excellence. Pricing dollars will exceed our inflation dollars. We will purchase $1.5 billion of shares and invest roughly $3.4 billion of capital, and our capital allocation strategy is unchanged. We also are going to put a slightly finer point on how we expect to close the year. At this time, we'd expect Q4 results to closely mirror the Q3, while improving on a year-over-year basis. This level of performance will mark our fifth consecutive quarter of year-over-year gains, again, demonstrating the positive results of our strategy.
Throughout the year, we've shown our ability to pivot and flex to handle the various challenges of railroading, from weather of all types to the significant West Coast traffic spike, and we navigated them successfully, improving service while maintaining cost discipline. We continue to generate strong pricing and productivity, positioning us well to finish twenty twenty-four with momentum and on a path to achieve the long-term targets we laid out last month. I'll now turn it over to Kenny to provide an update on the business environment. Kenny?
Kenny Rocker (EVP of Marketing and Sales)
Thank you, Jennifer, and good morning. As Jennifer mentioned, we had a solid Q3. Freight revenues totaled $5.8 billion for the quarter, which was up 5%, excluding fuel surcharges, due to increased volume and strong core pricing gains. Let's jump right in and talk about the key drivers for each of our business groups. Starting with our bulk segment, revenue for the quarter was up 2% compared to last year on a 3% decrease in volume and a 5% increase in average revenue per car, based on a positive mix in traffic and solid core pricing gains. Coal continued to face difficult market conditions in the quarter, resulting from reduced coal demand due to high inventory levels and competition from low natural gas prices.
Grain products volumes increased for the quarter due to business development wins and new facilities supporting renewable diesel and associated byproducts, as we highlighted last month at our Investor Day. Lastly, export grain business was up for the quarter, primarily driven by corn and wheat. We continue to win business moving to Mexico as their domestic consumption outpaces production. Moving to industrial, revenue for the quarter was up 3% for the quarter on a 2% decrease in volume. Average revenue per car increased by 5% due to strong core pricing gains and a positive mix in traffic. Petroleum shipments increased for the quarter due to strong business development efforts in various markets, like asphalt and lube oil. Petrochemicals volumes continued to grow due to domestic demand in plastics and new business wins in our industrial chemicals markets.
However, those gains were more than offset by the softer demand for rock against last year's record shipments. Premium revenue for the quarter was up 7% on a 14% increase in volume and a 6% decrease in average revenue per car, reflecting increased international intermodal shipments, lower fuel surcharges, and truck market pressures. Automotive volumes were down due to unplanned production adjustments, partially offset by business wins with Volkswagen and General Motors. Intermodal volumes continue to remain strong. Our international intermodal volume was up 33%, significantly outpacing growth seen in West Coast imports. Import strength also drove increased domestic volume, which we were able to capitalize on due to our diverse IMC network. Now, turning to slide 10, here is our outlook for the balance of 2024 for the key markets we serve.
Starting with bulk, coal is expected to remain challenged as inventories remain high, and we see competition from low natural gas prices. Moving to grain, we are optimistic due to a strong supply in UP's franchise areas, and we have secured additional new facilities that will ensure domestic growth, generating long-term ratable grain demand. We expect ongoing strength in the Mexico export market as the UP continues to increase its share south of the border. Additionally, we expect continued growth in the grain products tied to renewable fuels and their associated feedstocks. The team is focused on capturing business as production continues to ramp up at new facilities brought online, such as Bartlett's crush facility in Cherryvale, Kansas. Turning to industrial, as we've mentioned earlier, we expect the rock market will not match last year's record volume.
For petroleum, we have tougher comps, but are building on our success with business development. Petrochemicals is expected to outperform the market based on the strength of our Gulf Coast franchise, and we are excited to see incremental volume from Shintech's expansion at Plaquemine, Louisiana and wrapping up with premium, on the intermodal side, the surge of West Coast import volume will continue to drive for both our international and domestic markets for the remainder of the year. In automotive, we are seeing softness in the market, which will be partially offset by business development wins. In summary, I'm proud of the commercial team. We're going to see the strongest volume year since twenty twenty-nine. Our diverse portfolio allows us to see positive momentum, and our resource buffer puts us in a great position to manage increased volumes on the West Coast.
The team is focused on our key growth markets, collaborating with our customers and the operating team to find innovative solutions to grow and win together, and with that, I'll turn it over to Eric to review our operational performance.
Eric Gehringer (EVP of Operations)
Thank you, Kenny, and good morning. Moving to slide 12, as I mentioned at our Investor Day in September, we always believe there's a better way to do things, even the things we're doing well today, and that culture has manifested itself in our results as we continue to make great progress in our safety, service, performance, and efficiency metrics. Starting with safety, we remain intensely focused on our four pillar strategy to prevent injuries and drive down derailments. As a result, year to date, both derailment and personal injury rates improved year over year. While we are not there yet, we are clearly on the path to become the safest railroad. Freight car velocity improved 5% to 210 miles per day compared to Q3 2023.
Additionally, throughout the last several weeks, we have maintained a freight car velocity near 220 miles per day. A favorable business mix, coupled with continued improvements in terminal dwell, has driven the performance. Notably, we achieved a Q3 record in terminal dwell, a 5% improvement versus last year. Intermodal and manifest service performance index saw a 1.5-point improvement year over year, respectively. As demonstrated by our results, the team took quick action throughout the quarter to deploy buffer resources and adjust trip plans, minimizing the impact of a 33% surge in international intermodal shipments. These swift actions not only allowed us to effectively absorb the increased volumes, but also mitigated the impact on our broader network. Now let's review our key efficiency metrics on slide 13.
In addition to our service product, the team remains hyper-focused on driving productivity throughout the network. The more productive we are, the better we put ourselves in a position to compete, and you can see we did that in the Q3. Locomotive productivity improved 5% compared to Q3 2023. While increased fluidity of the network has enabled our performance, the team also continued its focus on reducing locomotive dwell. In fact, this quarter, our locomotive dwell results tied for the best ever quarterly performance, a 5% year-over-year improvement. Workforce productivity, which includes all employees, improved 12% versus 2023. Impressively, both the month of September and Q3 marked all-time records for their respective periods. Our continued work to leverage technology and automate operations across our transportation, mechanical, and engineering team is paying dividends.
Not only is it driving efficiencies, but it's also improving the safety of how we work. Train length was flat for Q3. After experiencing the impacts of Hurricane Beryl in July, we made steady sequential improvement throughout the quarter and ended September with a monthly record over 9,600 feet. These improvements are a direct result of targeted transportation plan changes and capital investments, such as siding extensions and technology. While we have made great strides this year to improve train length, there are still opportunities to safely improve as we strive to generate mainline capacity for current and future growth. To wrap up, great work by the team as they efficiently leverage our buffer resources to handle the influx in volumes.
However, as I opened with, there is always opportunity to get better, and I'm confident the team will continue pushing in our pursuit of industry-leading safety, service, and operational excellence. Jim?
Jim Vena (CEO)
Thank you, Eric. Turning to slide 15, before we get to your questions, I'd like to quickly summarize what you've heard from our team. First, as you heard from Jennifer, we did a great job of adding volume to our network in an efficient manner, and given the margin profile of that volume, it was imperative that we did so. We also continue to generate strong pricing that reflects the value we're creating for our customers. Again, imperative to mitigate the mix dynamic in the quarter. Kenny gave an overview of Q3 volumes and laid out thoughts for the remainder of the year. The team is making no excuses and going after every available carload.
While international intermodal gets a lot of attention these days, there are plenty of additional markets where the team is winning to bring new customers to the railroad over the short term and long term. Lastly, Eric updated our progress to improve safety, service, and operational excellence. Year to date, our safety metrics continue to show great improvement, but they're just the initial steps toward being industry-leading. On the service front, the operating team did a great job of improving service while we handled more business. That was possible due to the efficiency of our network and our ability to maximize asset utilization. While the business of railroading can be unpredictable, it's the fundamentals of how you operate the company, anticipating and reacting to change, that ultimately matters. I said it earlier, and I'll say it again, I'm very pleased with where we sit today.
When I joined the company, I said we had pressures that were gonna take us a couple of years to get by some of the inflationary pressures. But as you heard at our Investor Day last month, we have the right team and the right strategy to take this company to new heights. This is just the beginning of the journey. So with that, we're excited, we're ready, and we're ready to take your questions. Rob?
Operator (participant)
Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question today, please press star one on your telephone keypad, and a confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we'll be limiting everyone to one question to accommodate as many participants as possible. Thank you. And the first question today will be coming from the line of Ken Hoexter, Bank of America. Please proceed with your question.
Jim Vena (CEO)
Morning, Ken.
Ken Hoexter (Managing Director)
Hey, good morning, Jim, and team. Thank you for the question. I guess two things. One, can you just clarify, when you talk consistent with last quarter, are you talking on an operating ratio level? Are you talking on a revenue or op income level? Just wanna clarify that. And then I guess, Kenny, it seems coal has taken a big step down lately. Can you talk about what puts and takes about what's built into the full year target that you're targeting there? Thanks.
Jennifer Hamann (EVP and CFO)
I'll start with that then, Ken. Thanks for the question. Yeah, I mean, when we say consistent, and we say results, we're being pretty broad there. But yeah, I mean, I think we see as we look at what's gonna happen in Q4, we see the outcomes being very similar across all of those categories in terms of our Q4 results. So, consistent is consistent.
Jim Vena (CEO)
You know, on the coal side, no surprises with coal. We'd expect what you're seeing in the public numbers, those volumes, to continue through the rest of the year. You know, that's why I made a point to focus on, if you look at that bulk line, doing everything we can to counter some of those challenges on the coal side with renewable fuels and with the grain network. Thanks, Ken.
Ken Hoexter (Managing Director)
Thanks, guys.
Operator (participant)
Thank you. The next question is from the line of Chris Wetherbee with Wells Fargo. Please proceed with your question.
Christian Wetherbee (Managing Director)
Yeah. Hey, thanks. Good morning, guys. So I guess I just maybe wanted to understand a little bit about how you think about the intermodal outlook and maybe how that influences that comment around the Q4. So we came off of what has been a remarkable sort of preloaded peak season, potentially in the Q3, particularly for international. Do you see the mix start to change a little bit? But maybe sort of work that into a little bit of the drivers of that consistency in the Q4. It would be helpful.
Jennifer Hamann (EVP and CFO)
Yeah, I'll start with that, Chris, and then, Kenny can weigh in relative to volume. I mean, we believe the mix pressures are going to continue into the Q4. You also see just kind of that normal seasonality. You have a little bit lower volume, you've got the holidays, tend to have a little bit of weather, so there's those things. The other thing that I think folks need to pay attention to is fuel on a year-over-year basis, and even sequentially, because you have a much different dynamic from fuel. We think our fuel surcharge is probably gonna be $200 million or so less in the Q4.
And when you're looking at how it contributed positively in the Q3 and as a drag on Q4, there's a lot of puts and takes there that I think you need to pay attention to, that I think help maybe fill in some of those blanks as well as just the mix impact. Kenny?
Jim Vena (CEO)
Yeah, on a year-over-year basis, I think we could expect international intermodal to be elevated. Although, as we go throughout the quarter, and you can see that in some of the numbers now, you're seeing it start to step down a little bit. One of the things that I just wanna highlight again is the preparedness for the team to be able to accept and anticipate that 33% increase, and so we're very encouraged by that.
Christian Wetherbee (Managing Director)
Thank you.
Operator (participant)
Our next question is from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your questions.
Walter Spracklin (Director of Cdn Research and Co-Head Global Industrials Research)
Yeah, thanks. Good morning, everyone. So, Jim, in your prepared remarks, you kind of alluded to margins that perhaps weren't what you were hoping. Is that to say that, you know, kind of the prior margin improvement that you achieved in your first, you know, few years ago is not possible in the current environment, or is it just taking longer? And I think, and I'm just curious whether your mention of an industry-leading OR, do you think that is in effect for next year? In other words, can you have an industry-leading OR as early as next year?
Jim Vena (CEO)
I think we have an industry-leading OR for the last number of quarters, including this one. I think we're the last ones to report, and I'm pretty safe to say that. Walter, let's back up a little bit. People are in different positions of where and when we started. I remember back in two thousand and nineteen, where I joined, we parked thousand-plus locomotives, closer to fifteen hundred. We adjusted the number of people it took to operate the railroad, and those were big changes, and we did those already. I think I was here, and then I went on sabbatical, and now I'm back. Am I done? Absolutely not.
But it's a lot different place to start where I came back 13, 14 months ago than it was if we were in the same situation as 2019. We will be the best margin operating ratio company this year, and I don't see any reason for us not to continue that, and we will look at ways. Now, inflationary pressure, and I said it from the very first call I was on, is. It's not gonna be an easy one to get over. We are pushing price, but also being cognizant that the customers have to see value in that.
They have to understand that we're giving them a product that allows them to win in the marketplace, and we've done that with pricing higher, with the revenue coming in and pricing higher than what inflation is. So what I see is exactly what we laid out in our Investor Day. We see EPS growth, high single digit to low double digit. We have the opportunity with the cash that we're providing, that if we don't come up with another use for it, we can buy back $4 -5 billion worth of shares. And we are absolutely online to set operating ratio improvement at the Union Pacific. So that's the way I see it, Walter. Hopefully, I answered your question.
Walter Spracklin (Director of Cdn Research and Co-Head Global Industrials Research)
Absolutely. Thanks, Jim.
Jim Vena (CEO)
You're welcome. Have a good one.
Operator (participant)
Our next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed with your questions.
Good morning. This is Andre on for Jordan. Thanks for taking my question. With headcount down 5% year over year and cargo growth up nicely at 6%, you achieved strong incremental margins in the quarter, both year over year and sequentially. Could you just talk a little bit more about the productivity opportunity set that you guys are taking and the actions there and how that sets up for 2025, incrementals, if industrial production can actually accelerate from here?
Eric Gehringer (EVP of Operations)
Absolutely, Andre. And let's start by level setting on what we did. So you start thinking about locomotive dwell. In my prepared comments, I talked about we've tied the best quarterly results that we've ever had before. Workforce productivity, 12%, monthly and quarterly record, train length, September, best month ever in the history of Union Pacific, and certainly a quarterly record in Q2. But as we look at that, productivity is not new for us. Since 2019, we've driven approximately $1.4 billion in productivity, and you're gonna see us continue to find opportunities. We work on it every single day. So let's talk about what some of those are. When I start talking about workforce, I always break it down for my team. It's fundamentals, it's agreements, it's technology.
On the fundamentals, I still see opportunities for us to be able to improve our recruit rate. We've done improvement. There's still more opportunity there. When you look at the number of people that we use in our yard and local, you heard Jim talk about the inflationary pressures of a 4% wage increase to start the year and a 4.5% on July first. Yet, if you look at our wages that we're paying, we've actually been able to offset some of that inflation through productivity. That's technology, that's process. You're gonna continue to see us do that. Fuel is gonna still be a big opportunity for us. Whether you're talking about process or whether you're talking about technology, it's a huge expense for us, and it's one we got to continue to work through.
So our work with EMS, which is energy management, our work on how we think about filling our locomotives, where do we fill the most locomotives at the lowest cost? We've driven that compliance now north of 90%, where we started the year significantly lower. That's still an opportunity for us, and I'll tell you, the list goes on and on and on. When I say we work on it every day, I really mean that. It's safety, it's service, it's productivity.
Jim Vena (CEO)
Thanks, Andre.
Thank you.
Operator (participant)
Our next question is from the line of David Vernon with Bernstein. Please proceed with your questions.
Eric Gehringer (EVP of Operations)
Morning, David.
Operator (participant)
Mr. Vernon, perhaps your line is muted. We're not able to hear you.
David Vernon (Managing Director and Senior Analyst)
Oh, hello. Yep. Hi, hi. Thanks for the time. Sorry about that. I was just trying to get off mute. So, Eric, I had a question for you on the intermodal train speeds. You know, the data we're looking at from the outside looking in, those numbers are trending kind of as low as they've been. We've seen some issues on dwell at the West Coast ports as well. So, you know, how do I reconcile some of those external data points with the performance that you guys are driving, you know, in the results today in terms of talking about, you know, the best ever train links, just best ever improvements in intermodal customer service?
I'm just trying to square that circle because it's come up in a couple of client conversations. Thank you.
Eric Gehringer (EVP of Operations)
Yeah, thank you for the question, David. Here's how I reconcile it. It tells you that 220 is not as good as we can be, because to your point, we've seen dramatic improvements in both the manifest and bulk side. And while we've seen improvements on some lanes in intermodal, we've continued to work to be able to improve that. Now, let's be really frank, 33% increase in international intermodal without much advance notice, if any advance notice, I'm very proud of what the team has accomplished to be able to handle that. Now, what do we have to continue to do to build back that intermodal speed that you're talking about? Well, it's the things we're doing right now. So when we talk about deploying our buffer resources, that's taken the form of locomotives and cars into the LA Basin.
We've staged our trains across the system so that we take every train, excuse me, every car that we can into the ports, and we take every car that they can give us back. We work closely with the CSX and the NS to ensure that our interchange points remain fluid. These are the things we need to continue to execute as we continue to capture that volume, and I expect in short order, that that intermodal speed will turn the other way, and that'll continue to add on top of the excellent performance we have already.
Jim Vena (CEO)
So David, I need to just sort of add on a little bit from what Eric said. So I followed up with both LA and Long Beach port here earlier this week, and we both came to the same conclusion. No one told us first or Q2 that we were gonna see a 33% increase, and it was an event that happened because of East Coast ports issues, the Canadian issues. The big question is, how did we handle it? And you know that when something happens that is thrown on you, you start moving intermodal equipment, and you don't get the same speed, and you don't get the same velocity, and we knew we were not gonna be able to maintain that.
But let's see where the success is or failure by the supply chain. Ships are not being held out at LA Long Beach. They are arriving and going on the way they normally do with that kind of increase in business. As far as the fluidity of our terminals, we're in great shape. We've been able to turn the containers, and the customers have done a fantastic job of pulling those containers off and delivering.
The only place that we'd love it if we had been able to plan it is we'd have faster velocity if we could have been told that it was coming and seen it a little sooner, so we could place cars in the right place, work on the terminals we have at the West Coast a little differently and be able to speed it up. I'm very proud. I think the customers have seen what LA Long Beach can do, and I think that they, it'll be part of their decision-making as they move ahead to say, "Can LA Long Beach handle an increase in business?" I think it can, and we've proven that point. It's a heck of a success story for us, and I love the story.
I love that you look at our metrics real good, and I'm sure that you've seen that that we're running over two hundred and twenty miles per day for our cars, and that's what's real important to us, is we keep the place fluid. So thank you very much. Great question, David.
David Vernon (Managing Director and Senior Analyst)
Thank you.
Operator (participant)
Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your questions.
Jim Vena (CEO)
Morning, Tom.
Michael Triano (Equity Research Associate)
Hey, Jim, this is, this is Mike Triano on for Tom.
Jim Vena (CEO)
Okay.
Michael Triano (Equity Research Associate)
So if we look at the workforce productivity and locomotive productivity, they're both up mid-single digits through September, and they've been a driver of OR improvement this year, despite the volume and the mixed headwinds. If we look out to next year, you know, the volume backdrop is still kind of murky, but you know, volumes are kind of flat to up. Do you think you can get another mid-single digit improvement in those productivity metrics?
Jim Vena (CEO)
We're sticking to our guidance for next year, you know, which I think that's what we set it out, we thought about it. It's very, very definitive about what we want to deliver next year. So unless the economy implodes in the United States, we're very comfortable that it's that we're gonna be able to deliver that. So I'm very proud of when you get that kind of productivity number that we delivered this last quarter, and we don't see any reason for us not to be able to take a look at what we're doing on the railroad to continue to improve productivity.
We know that we're carrying extra people because of some of the collective agreements that we still have to implement from the last round, so we're being very prudent on that side. But you could see on the non-operating side, what we've been able to do to still operate the railroad in a very efficient manner. So we do that every day, take a look at it, and I'm very comfortable that we're headed the right way. Jennifer, anything to add?
Jennifer Hamann (EVP and CFO)
No, I just would reiterate, and it's really kind of what Eric talked about, too. When we look at all the areas of expense and on the capital side, we have areas to improve our productivity, and we have action plans against that for the rest of this year and going into 2025 and beyond. So that's what really gives us the confidence to say, you know, there's certainly great runway ahead of us, and we're very confident in our ability to perform.
Jim Vena (CEO)
Yeah. Listen, thanks for the question, and say hi to Tom for me. Thank you.
Michael Triano (Equity Research Associate)
Will do.
Operator (participant)
The next question is from the line of Daniel Imbro with Stephens. Please proceed with your question.
Daniel Imbro (Managing Director)
Yeah. Hey, good morning, everybody. Thanks for taking our questions.
Jim Vena (CEO)
Morning.
Daniel Imbro (Managing Director)
Maybe wanted to ask a broader one, just from a competitive standpoint. I know it's hard to know, but your Western peers have been more vocal about wanting to improve it, though they are. I'm curious if you're noticing anything different when you're out there bidding on business or going head-to-head with them in the market. And then, in your prepared remarks, you mentioned merchandise pricing was positive. Just curious how you're seeing core merchandise pricing out there in the market, if it's changing at all? Thanks.
Kenny Rocker (EVP of Marketing and Sales)
Yeah, you know, if you look at the size of the pie, we're really competing against truck. We're putting together a service product to go out there and compete against truck, against sourcing, to a lesser degree, against barge. So we're doing what we can do to go out there and grow and win share and focus on Union Pacific and what we can control. So that's that. The second part of your question, look, I'm proud of the team to be able to go out and lead with the capital investments that we put into the network for our customers, to lead with the inflationary pressures, that we can have the buffer resource that Jim and Eric talked about. And now, we talked a little bit about the velocity.
We tie it all to the service, and we're aligning those pricing with the service product that's there. So yes, the team has been able to go out there and secure some strong pricing on that merchandise business of the freight.
Jim Vena (CEO)
Kenny, the only thing I would add is this, and I think it's a valid point to make. I want the entire industry to operate very efficiently. I want the entire industry to be able to operate in a manner that allows us all to grow. We interchange a lot of traffic. Not quite 50%, but around 40% touches another railroad, whether it's a short line or one of the other railroads in the United States. So the more we can all be efficient when we interchange traffic, when we move it across the Mississippi, when we move it with our Western competitor. So we love to compete, but there's a lot of traffic that we, if we're both efficient on, we get to be able to move that from other modes of transportation.
Now, I've worked with people, I was smiling last night when I was thinking about this, how many people that I've worked with that are at other railroads, whether it's CPKC, now even, Burlington Northern Santa Fe, whether it's, CSX or whether it's Norfolk Southern, so we come from a culture, all of us, that have worked together, that we operate railroads in an efficient manner, and we move ahead so that we want-- all of us want growth, and I'm not speaking for the rest of them, I'm speaking for us at Union Pacific. Now, given all that, listen, I can control what we do, not what everybody else does, and I'm very comfortable with, where we are and what we can do and the kind of business mix that we have.
And you could see at this last quarter and what we've been able to deliver and what we see moving forward. So I'm excited. I think, the industry's in a better place now than it was, ten years ago and five years ago, and I'm sure better than we were in 2022. So it's a wonderful place to be, and we'll even continue to get better. And a little competition with all the people you know is, the best thing you can have. Nothing better than beating all the people that you know, and, that's what we wanna do.
Daniel Imbro (Managing Director)
Understood. Thanks, Jim. Thanks, Kenny.
Kenny Rocker (EVP of Marketing and Sales)
You're welcome.
Jim Vena (CEO)
Yeah.
Operator (participant)
Our next question is from the line of Jon Chappell with Evercore ISI. Please just use your question.
Jim Vena (CEO)
Morning, John.
Jonathan Chappell (Senior Managing Director)
Thank you. Good morning. Morning, Jim. Kenny, I was going to ask this anyway, it may be a pretty well-timed follow-up to the last one. So the ARC up 5% in both bulk and industrial, obviously points to your pricing. Jim says that, you know, customers have to see value in the service, and you're seeing that. But with inflation conceptually coming down a little bit, the volume headwinds remaining, to keep that type of pricing momentum despite the good service, do you need a little bit of help from the volume side, from the macro, from demand, to continue to push price? Or at a certain point, does that kind of cap out without getting some volume tailwinds?
Kenny Rocker (EVP of Marketing and Sales)
Yeah, so you know, the macro is the macro, and those are things that are out of our control, John. We focus on the network, we focus on the service that Eric is providing us, the investments we're making, and, you know, we link that to the value of the pricing, and we're very crystal clear in how we articulate to our customers. So, the way we look at it, we see it as something that will definitely continue to happen.
Jonathan Chappell (Senior Managing Director)
Okay. Thanks, Kenny.
Jim Vena (CEO)
Thank you very much, John.
Operator (participant)
Our next question is from the line of Brian Ossenbeck with J.P. Morgan. Please proceed with your question.
Jim Vena (CEO)
Morning, Brian.
Brian Ossenbeck (Managing Director)
Hey, good morning. Thanks for taking the question. So, Jim, maybe just to come back to the, one of the initial comments you had earlier here, and then also something you said when you first came on board, just to take a little while to get over the labor challenges that you sort of inherited on the network. Obviously, we've seen mix and coal not help, and then just the broader inflationary trends. So maybe just to help level set things a little bit, you said it's going to take a while.
Can you offer any sort of context in terms of, you know, what the timing should be, if it's going to be gradual, or if there's some step change that we could be thinking of as we look, excuse me, more broadly to getting over some of these hurdles and, and probably to a better place than what you started off with? Thanks.
Jim Vena (CEO)
Yeah, Brian, thanks for the question. So if we, I don't like to look backwards too much, but I think we've done a great job at Union Pacific, all 30,000 of us, to be able to deliver where we are comparatively to everybody else. Now, growth is real important to us, and we've done a great job of providing service at a high level. And remember, service is what we sold the customer, not other measures that are out there to talk about what service is we measure individually to every one of our customers about what level of service that we sold them. So we put that in the mix, and we've had inflationary pressure.
That's why we, we're very clear on what our three-year expectation is, Brian, of what our results should be and what we think we can deliver. So I'm very comfortable where we are. And I think we'll see improvements in our operating ratio. We'll see improvements over time, over our net income and improvements in our EPS that drives that drives value for our shareholders. So very comfortable. This was always at the very start, I said it was going to be a couple of years. It's still a couple of years. It was not going to be easy, and it's not easy to get to overcome some of the things, but I think we've done a good job with pricing growth. And coal, coal is coal, but coal is down 20%.
At the end of the day, if it wasn't down 20%, but that's not the way I look at the world. There's always challenges. If there was no challenges, then I would have stayed retired and enjoyed myself in Scottsdale, Arizona, this morning, going for a hike to Camelback. I'm here because I think there's something to do, and we can get this company moving forward. So I'm very excited, Brian. Thanks for the question.
Brian Ossenbeck (Managing Director)
I appreciate it, Jim. Thank you.
Operator (participant)
Our next question is from the line of Ben Nolan with Stifel. Please proceed with your question.
Benjamin Nolan (Managing Director)
Thanks a lot. So the Service Performance Index for both Intermodal and Manifest has been trending up higher. I'm just curious, if, if you think there's a point where, you know, if you arrive at a certain level or, or if at a certain range where you can really lean more heavily into pricing than maybe you already have, or, and maybe also just share gains versus competitors or versus, versus trucking. Is there, like, a magic number or at least a magic range where you feel like really, you know, you have a strong or much stronger competitive advantage?
Kenny Rocker (EVP of Marketing and Sales)
Yeah, Jim hit it a little bit earlier, and, you know, what do we sell to our customers, and how do we translate that into pricing and those discussions? No, there's not a magical number, but clearly, as the service improves, that gives us a better environment to maximize price. Same is true on growth, a more consistent, reliable product and better service product. We go in and we ask for more business when we're talking to customers. We ask to look at their truck files. We ask to look at, you know, talk to more of their receivers. So clearly, as we improve, and we've done a great job here in Q3 on the service product, it creates our own capacity, it creates our own opportunities, regardless of what happens in the macro environment.
Benjamin Nolan (Managing Director)
Do you think you're there now? Just as a follow-up.
Kenny Rocker (EVP of Marketing and Sales)
I hope not. I mean, we always want to improve as a management team, so no, we're going to always strive to improve. We- there's no time where we're going to yell out, "We arrived.
Benjamin Nolan (Managing Director)
Got you. All right, I appreciate it. Thank you.
Jim Vena (CEO)
Thanks for the question.
Operator (participant)
Next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Eric Morgan (Equity Research Analyst)
Hey, good morning. This is Eric Morgan, on for Brandon. Thanks for taking the question. I just wanted to come back to the mix discussion in Q4. I think you mentioned mix headwinds continuing in the quarter, maybe with some International Intermodal volume growth moderating somewhat, but can you just talk about some of the mix effects from other commodity groups outside of Intermodal, and in particular, maybe how you view margin contribution from coal would be helpful, I think. Thank you.
Jennifer Hamann (EVP and CFO)
I'm probably going to pass on that last part of your question, but if you just look at our business teams, you know, industrial is the group that has our highest average revenue per car, has very strong contributions to our bottom line, and that business has been down all year. Now, there's always mix within mix, but with the continued pressures in the industrial economy and the continued outlook that those volumes are down year over year, that's an impact, and that certainly contributes to the mix, in addition to obviously seeing the growth come in some of the lower average revenue per car kinds of businesses like the International Intermodal. On the bulk side, yeah, there's coal, set that aside. You know, grain, strong grain into Mexico, which is great for us.
We really enjoy that business, but it's a little bit shorter length of haul than if we're taking it to export out through the West Coast. So again, you have some of that what I'll call mix within mix. Kenny, I don't know if you want to add anything else?
Kenny Rocker (EVP of Marketing and Sales)
Yeah, I just want to say we're not going to apologize for accepting, you know, the increase.
Jennifer Hamann (EVP and CFO)
We love it.
Kenny Rocker (EVP of Marketing and Sales)
Yeah, we'd love the 33% increase. What I tell you is that the management team here did a good job of preparing for it. It's what we did with Phoenix to take trucks off the road, what we did to expand Inland Empire. All these things set us up for success for this unexpected amount of volume that's come on.
Jennifer Hamann (EVP and CFO)
Yeah, and that's really why it's so important, it goes back to Jim's point on the fundamentals. That's why we need to be just diligent about how we're using our resources, our workforce productivity, and how we run this railroad, so that we can absorb shocks from mix and still produce a very good quarterly result.
Eric Morgan (Equity Research Analyst)
Great. Thanks.
Jim Vena (CEO)
Thanks for the question.
Operator (participant)
Our next question is from the line of Stephanie Moore with Jefferies. Please just proceed with your question.
Jim Vena (CEO)
Good morning.
Stephanie Moore (Senior Analyst)
Hi, good morning. Thank you. You talked a lot about the strength in export grain to Mexico, but can you also talk a little bit more broadly about your Mexico business, how you see that going forward? And, you know, any thoughts on geopolitical administration changes as well would be helpful. Thank you.
Kenny Rocker (EVP of Marketing and Sales)
Yeah. First of all, I just want to step back as we're talking, you know, about our grain business and our grain network and differentiate renewable fuels and the actual facilities that we've landed there, that we've discussed. The same thing with our grain network, the facilities, meaning the 20-plus facilities that have come on, and the fact that Cherryvale, Kansas facility will help supply grain into Mexico. So let me just kind of, you know, break that apart and let you know how we look at it. But then, yes, broadly, as we look at, you know, Mexico, clearly there's a lot of opportunity with over-the-road trucks. There are some markets like finished vehicles and also auto parts. We have a strong service product coming out there.
What differentiates us, Stephanie, is again the fact that we have multiple partners that can get in that market. We have our own rail box that we can get into that market, and we have daily service into and out of Mexico, which we know we're the only one that has that. So clearly, again, strong growth area for us. We laid it out in Investor Day, and as far as the administration, we see that it's an environment that they're gonna be certainly pro-business and support the freight environment, so we're excited about that.
Thanks for the question.
Operator (participant)
Our next question is on the line of Scott Group with Wolfe Research. Please proceed with your question.
Kenny Rocker (EVP of Marketing and Sales)
Morning, Scott.
Scott Group (Managing Director and Senior Analyst)
Hey, hey, thanks. Good morning. Jennifer, any color on that comp per employee up 8% and how to think about that going forward? And then, I know someone else asked already about, like, what that sort of flat Q4 comment meant, but I just guess I'm not sure if that was. Still not sure if that was an earnings, a margin, a revenue comment, so I don't know. Any color. Thank you.
Jennifer Hamann (EVP and CFO)
Okay, Scott. So, we'll start with the comp per employee. So if you look at the 8% increase, call it rough numbers, half of that was from the July first wage increase. The other half is a combination of higher incentive comp year over year, as well as higher guarantee payments. That's really associated with the work rest agreements as we've cut over more hubs through the year and also graduated more T&E employees from training. So those are all the drivers that we see in there. And, you know, for 4Q, it's probably gonna look pretty similar, maybe even up a little bit more, as we continue to carry some of the extra resources to support the implementation of the work rest.
And so, you know, that's really why you've heard us stress the productivity piece today because we do have those inflationary pressures, and that's why that workforce productivity is just absolutely critical for us, as well as how we're approaching labor going forward and making sure that we are getting good agreements in place that can help us serve our customers in a very efficient manner while compensating our employees fairly. Going back to your other question about the consistent, you know, we said results. That's a fairly all-encompassing word, so you could call that any number of measures, but you know what the key ones are that you all look at: EPS, operating ratio, operating income. We think it's going to look very similar in 4Q versus 3Q.
Kenny Rocker (EVP of Marketing and Sales)
Thanks, Scott.
Scott Group (Managing Director and Senior Analyst)
Thank you, guys.
Operator (participant)
Our next question is from the line of Elliot Alper with TD Cowen. Please proceed with your question.
Elliot Alper (Analyst)
Great. Thank you. This is Elliot on for Jason Seidl. I believe this is the first quarter this year where your domestic intermodal volume outlook is positive. Can you talk about what you're seeing in the domestic intermodal market in Q4? And I know you already talked about kind of the mixed headwinds and international growth and fuel, but we see domestic intermodal growing into the quarter. Could that maybe partially offset intermodal rev per car in Q4? Just trying to gauge the magnitude. Thank you.
Kenny Rocker (EVP of Marketing and Sales)
So we, you know, we've been encouraged on the Domestic Intermodal front. You know, even as late as the Q2, we saw that line be positive. It's been positive in the Q3. Now, some of that has benefited from the International Intermodal side, and that's why I keep harping on these products that we have. You know, having a product like Inland Empire helps us capture some of that Domestic Intermodal, and we've seen some strong demand there. I'll tell you, as we look at it for Q4, again, we think we'll see a little bit more of a benefit for what's taking place on the International Intermodal side, and we'll see what happens as we continue throughout the quarter.
Elliot Alper (Analyst)
Thanks, Kenny.
Kenny Rocker (EVP of Marketing and Sales)
Thank you very much.
Operator (participant)
Our final question is from the line of Ari Rosa with Citigroup. Please proceed with your question.
Kenny Rocker (EVP of Marketing and Sales)
Ari, good morning.
Ari Rosa (Analyst)
Hi, good morning. What, what's that, Jim? I'm sorry.
Kenny Rocker (EVP of Marketing and Sales)
I said, good morning, and they put you last.
Ari Rosa (Analyst)
Yeah, I know. That's, you know, hey, it, it happens. It's okay. Thank you for fitting me in regardless. I just wanted to... I know some other people have spoken about this already, but I wanted to ask about this, the target to price above rail inflation. Could you give us color, just to be clear, is that something that's being achieved currently and that we can expect for twenty twenty-four? And then kind of given the looser capacity environment, would you say that you've kind of gotten more pushback from customers as you have those pricing discussions, or do you think service is sufficient currently to kind of compensate for whatever the loose truck environment might be doing, or the kind of the softer demand environment might be?
Kenny Rocker (EVP of Marketing and Sales)
Ari, good question. Kenny? Yeah. So I think you're talking specifically and only about domestic intermodal. You'll have to clear it up if you can. We've got, you know, and we've talked about this, we've got pricing mechanisms for our customers that are in place to keep them competitive. Again, I talked to you about the fact that, you know, Q2, Q3, we were up in domestic intermodal, so we look at that as a positive outcome for us. We've gone from a trucking environment, really, since 2022, that's really been stagnant to downward, and it's flattish now. We'll see what happens in the next few months, but we feel good about where we're positioned and the ability to, as it capacity tightens, we're gonna see more value on the pricing side.
Jim Vena (CEO)
Jennifer, do you want to talk about the inflation?
Jennifer Hamann (EVP and CFO)
No, absolutely. Absolutely. So, to that point, in terms of your question, absolutely, our pricing dollars today are exceeding our inflation dollars, and they have throughout this inflationary period, whether you're talking about 2024, even going back to 2023, 2022, we have been committed to that, and we have achieved that. I think the important point really is going forward, and we talked about this at Investor Day, is that not only will we continue to have our price dollars exceed our inflation dollars, that it will become accretive to our margins next year. I feel very bullish on that front.
Jim Vena (CEO)
Ari, good question. Why don't I just wrap it up real quick and then looking forward to the call in three months, and looking forward to finishing off this year just the way we set it up, and also delivering on what we said last year. If we look at what we've been able to deliver as a team, 10% increase in earnings per share, 11% up in operating income, nine% up in net income, productivity up 12%, those are all numbers that make us very comfortable of how we are operating the railroad and how we're driving business.
We think that if we get the service level, and it's very close where we are right now to the right level, then the discussion is, how do we work together with our customers to win in the marketplace and not worried about whether the service is holding them back from winning in the marketplace? With that, let me just close off by thanking everybody for joining us, this morning. I know there was competing calls, and, nice to have you guys all with us this morning, and looking forward to more discussions as we move ahead. Thank you very much.
Operator (participant)
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.
