Union Pacific Corp

NYSE:UNP

Earnings Call Analysis

Union Pacific's Strong Q3: Growth, Efficiency, and Positive Outlook

Union Pacific's Q3 results showcase a robust performance, with net income reaching $1.7 billion—up 9% from last year—and earnings per share increasing to $2.75, a 10% rise. Operating revenue grew 3% to $6.1 billion, driven by a 6% increase in volume. The company successfully managed a 33% surge in international intermodal volume while enhancing service metrics. Looking ahead, Union Pacific maintains its 2024 guidance, projecting continued profitability improvement, a share buyback of $1.5 billion, and a planned capital investment of $3.4 billion. The management is optimistic that pricing will exceed inflation costs, supporting healthier margins.

Solid Third Quarter Performance

Union Pacific reported a net income of $1.7 billion for the third quarter of 2024, marking a 9% improvement from the previous year. Earnings per share rose by 10% to $2.75. Operating revenue reached $6.1 billion, a 3% increase compared to 2023, buoyed by a 6% rise in freight volumes. While overall freight revenue was up 4%, it was influenced by business mix changes and lower fuel surcharge revenues.

Cost Control and Operating Efficiency

Total expenses showed a modest year-over-year improvement of 2%, owing in part to lower fuel prices. Notably, fuel expenses declined by 13% per gallon as prices dropped from $3.12 to $2.60. The operating ratio, an essential measure of efficiency, improved significantly by 310 basis points to 60.3%, demonstrating Union Pacific's focus on operational excellence amid rising volumes.

Key Segments Driving Revenue Growth

The bulk freight segment had a 2% increase in revenue, despite a 3% decrease in volume, primarily due to favorable pricing and traffic mix. The industrial segment also saw a 3% revenue rise and strong pricing contributed to overall performance, although challenges in coal volume weighed on this segment. The intermodal segment thrived, boasting a remarkable 33% increase in international volumes.

Guiding for Future Growth

Union Pacific reasserted its guidance for 2024, expecting to enhance profitability through strategic pricing, assuming it will exceed inflation rates. The company plans to repurchase $1.5 billion worth of shares and invest approximately $3.4 billion in capital expenditures. For the fourth quarter, results are anticipated to closely mirror those from the third quarter, with further year-over-year improvements.

Plans for Shareholder Returns and Debt Management

In the year-to-date period, Union Pacific returned $3.2 billion to shareholders through dividends and share repurchases, including $738 million in the latest quarter. The adjusted debt-to-EBITDA ratio remained strong at 2.7x, highlighting effective debt management alongside robust cash flow generation.

Challenges Ahead: Market Dynamics and Price Pressures

While the company feels positive about continued growth in major sectors like grain and intermodal, coal demand remains uncertain due to heightened inventory levels and competition from natural gas. Pricing strategies will be crucial as they navigate mixed customer responses in a fluctuating market, especially with softening demands in some areas.

Strong Focus on Operational Excellence

Union Pacific's leaders emphasized ongoing efforts to improve safety, service, and productivity. Workforce productivity was up 12% year-over-year, and the company aims to maintain effective resource management in the face of varying business conditions. Such enhancements not only secure current operational success but lay the groundwork for long-term growth.

Conclusion: A Strategic Path Forward

In summary, Union Pacific's performance reflects a well-executed strategy to foster revenue growth while ensuring efficient operations. With positive momentum heading into 2025 and a robust framework for financial returns, the company appears well-positioned to navigate future market challenges and capitalize on available opportunities.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Union Pacific's Third Quarter Earnings Call. [Operator Instructions] 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.

[Vincenzo Vena, executive]

Rob, beautiful morning in Omaha, nice fall day. So good morning, and thank you for joining us today to discuss Union Pacific's Third Quarter Results. I'm joined in Omaha, by our Chief Financial Officer, Jennifer Hamann, our Executive Vice President of Marketing and Sales; Kenny Rocker, and our Executive Vice President of Operations, Eric Gehringer. As you'll hear from the team, our third quarter results do an excellent job of capturing the progress we've made under our strategy to lead the industry in safety, service and operational excellence. And you're seeing how that leads to financial success. I'm very pleased with where we sit today compared to where we started a little over a year ago.

Now let's discuss third quarter results, starting on Slide #3. This morning, Union Pacific reported 2024 third quarter net income of $1.7 billion, a 9% improvement and earnings per share of $2.75, a 10% improvement. Third quarter operating revenue gained 3% of strong volumes and core pricing gains were impacted by our business mix and less fuel surcharge revenue. Excluding fuel, freight revenue increased 5% versus 2023. Reported expenses year-over-year improved 2%, while fuel prices were a driver. The team did an excellent job generating productivity to control costs as we successfully handled a 6% increase in volume.

Our third quarter operating ratio of 60.3 percentage 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 flex 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 and then come back for a wrap up before we go to question and answers. So we'll start with the third quarter financials. Jennifer, over to you.

[Jennifer Hamann, executive]

Thank you, Jim, and good morning. Let's begin on Slide 5 with a walk down of our third quarter income statement, where operating revenue of $6.1 billion increased 3% versus 2023 on a 6% volume increase and third quarter freight revenue totaled $5.8 billion, up 4% compared to last year. Breaking down the freight revenue components, increased volume in the quarter added 550 basis points. Strong core pricing gains were more than offset by business mix, reducing freight revenue 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 access oils resulting from the second quarter intermodal equipment sales reduced demand for auto part shipments at our subsidiary, the ongoing transfer of metro operations and a onetime contract settlement of $12 million during the quarter all contributed to the decrease.

As a reminder, there are cost savings across our expense lines associated with the ongoing revenue impact from the equipment sales and metro transfer. Switching then to expenses, third quarter operating expense of $3.7 billion improved 2%, driven by strong productivity and lower fuel prices that more than offset volume-related expenses. 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 1, 4.5% increase and volume costs were partially offset by 5% lower workforce levels and record workforce productivity. Trained service employees were flat year-over-year as we used our buffer resources to handle increased quarterly volume. All other workforce areas decreased 8%, reflecting our continued focus on operational excellence.

Cost per employee in the third quarter increased 8% as a result of higher incentive compensation as well as additional wage inflation related to the workforce labor agreements. Purchased services and material expense improved 4% as cost 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 third quarter operating income of $2.4 billion up 11% versus 2023. Below the line, other income decreased $19 million from lower real estate income, while interest expense declined 6% or $20 million on lower average debt levels. Income tax increased 23%, driven by higher pretax income and state income tax reductions in 2023. Third quarter net income of $1.7 billion increased 9% versus 2023, which when combined with a lower average share count resulted in double-digit earnings per share growth to $2.75. Our quarterly operating ratio of 60.3% improved 310 basis points year-over-year with nearly half of that coming from core operational improvement.

As we discussed in Dallas at our Investor Day, 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 on the balance sheet on Slide 6. Year-to-date, cash from operations totaled $6.7 billion, up $700 million versus last year. Our cash flow conversion rate improved to 83% and free cash flow has almost doubled versus 2023, up over $900 million. These improvements are driven by 2023 labor agreement payments and growth in operating income, partially offset by higher cash taxes.

Year-to-date, our shareholders have received $3.2 billion through dividends and share repurchases, including third quarter repurchases of $738 million. Finally, our adjusted debt-to-EBITDA ratio finished the quarter at 2.7x as we maintain a strong balance sheet and remain a rated by our 3 credit rating agencies. So wrapping up on Slide 7, with just over 2 months left in the year, the majority of 2024 story has been written, and it's been a good one. We are executing on the fundamentals of railroading, which is critical to achieving the full financial potential of this franchise. We are affirming our prior 2024 guidance, most importantly, that we will continue to improve profitability through our strategy of safety, service and operational excellence, pricing dollars will exceed our inflation dollars. We will purchase $1.5 billion of shares and invest roughly $3.4 billion of capital and our capital allocation strategy is unchanged. We also are going to put a slightly finer point on how we expect to close the year. At this time, we'd expect fourth quarter results to closely mirror the third quarter, while improving on a year-over-year basis.

This level of performance will mark our fifth consecutive quarter of year-over-year gains, again, demonstrating the positive results of our strategy. Throughout the year, we've shown our ability to pivot and flex to handle the various challenges of Railroading from weather of all types to the significant West Coast traffic spike, and we navigated them successfully, improving service while maintaining cost discipline. We continue to generate strong pricing and productivity positioning us well to finish 2024 with momentum and on a path to achieve the long-term targets we laid out last month.

I'll now turn it over to Kenny to provide an update on the business environment. Kenny?

[Kenny Rocker, executive]

Thank you, Jennifer, and good morning. As Jennifer mentioned, we had a solid third quarter. Freight revenues totaled $5.8 billion for the quarter, which was up 5% excluding fuel surcharges, due to increased volume and strong core pricing gains. Let's jump right in and talk about the key drivers for each of our business groups. Starting with our bulk segment revenue for the quarter was up 2% compared to last year on a 3% decrease in volume and a 5% increase in average revenue per car based on a positive mix in traffic and solid core pricing gains. Coal continue 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 volume 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.

Petrochemical volumes continued to grow due to domestic demand in plastics and new business wins in our industrial chemicals market. However, those gains were more than offset by the softer demand for Rock against last year's record 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 [indiscernible] crush facility in Cherryville Kansas.

Turning to Industrial. As we mentioned earlier, we expect the rock market will not match last year's record volume. For Petroleum, we have tougher comps, but are building on our success with business development. Petrochemicals 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 Paceman, 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 2029. Our diverse portfolio allows us to see positive momentum and our resource buffer puts us in a great position to manage increased volumes on the West Coast. The team is focused on our key growth markets, collaborating with our customers and the operating team to find innovative solutions to grow and win together.

And with that, I'll turn it over to Eric to review our operational performance.

[Eric Gehringer, executive]

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 4-pillar strategy to prevent injuries and drive down derailments. As a result, year-to-date, both derailment and personal injury rates improved year-over-year. While we are not there yet, we are clearly on the path to become the safest railroad.

Freight car velocity improved 5% to 210 miles per day compared to third quarter 2023. Additionally, throughout the last several weeks, we have maintained a freight car last near 220 miles per day. A favorable business mix, coupled with continued improvements in terminal dwell has driven the performance. Notably, we achieved a third quarter record in terminal dwell, a 5% improvement versus last year. Intermodal and manifest service performance index saw a 1 in 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 third quarter. Locomotive productivity improved 5% compared to third quarter 2023. While increased fluidity of the network has enabled our performance, the team also continued its focus on reducing locomotive dwell. In fact, this quarter, our locomotive dwell results tied for the best ever quarterly performance of 5% year-over-year improvement.

Workforce productivity, which includes all employees, improved 12% versus 2023, impressively both the month of September and the third quarter marked all-time records for their respective periods. Our continued work to leverage technology and automate operations across our transportation, mechanical and engineering team it's paying dividends. Not only is it driving efficiencies, but it's also improving the safety of how we work. Train length was flat for the third quarter. After experiencing the impacts of Hurricane Beryl in July, we 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?

[Vincenzo Vena, executive]

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 third quarter volumes and lay 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 towards 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 going to take us a couple of years to get by some of the inflationary pressures. But as you heard at our Investor Day last month, we have the right team and the right strategy to take this company to new heights. This is just the beginning of the journey.

So with that, we're excited. We're ready, and we're ready to take your questions. Rob?

[Operator]

[Operator Instructions] And the first question today will be coming from the line of Ken Hoexter with Bank of America.

[Ken Hoexter, analyst]

I guess 2 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 want to clarify that. And then I guess, Jenny, 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?

[Jennifer Hamann, executive]

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

[Kenny Rocker, executive]

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

[Operator]

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

[Chris Wetherbee, analyst]

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 fourth quarter. So we came off of what is a been a remarkable sort of preloaded peak season potentially in the third quarter, particularly for international. Do you see the mix start to change a little bit, like maybe sort of work that into a little bit of the drivers of that consistency in the fourth quarter, it would be helpful.

[Jennifer Hamann, executive]

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

[Kenny Rocker, executive]

Yes. 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 want to 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.

[Operator]

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

[Walter Spracklin, analyst]

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 kind of the prior margin improvement that you achieved in your first few years ago is not possible in the current environment? Or is it just taking longer, and I think -- and I'm just curious whether your mention of an industry-leading OR, do you think that, that is in effect for next year? In other words, can you have an industry-leading OR as early as next year? .

[Vincenzo Vena, executive]

Well, 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. So Walter, let's back up a little bit. people are in different positions of where and when we started. I remember back in 2019, where I joined, we parked 1,000-plus locomotives, closer to 1,500. We adjusted the number of people that took to operate the railroad. And those were big changes, and we did those already. And I think that was here. And then I went on Sabatical and now I'm back. And 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 I would have come -- if we were in the same situation as 2019.

We will be the best margin operating ratio company this year, and I don't see any reason for us not to continue that, 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 going to be an easy 1 to get over. We are pushing price but also being cognizant that the only get -- 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 that, we can buy back $4 billion to $5 billion versus shares. And we are absolutely online set operating ratio improvement at the Union Pacific. So that's the way I see it, Walter. Hopefully, I answered your question.

[Operator]

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

[Unknown Analyst]

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

[Eric Gehringer, executive]

Absolutely, Andre. 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 2Q. 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 going to 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 from 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 recrew 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 4.5% in July 1. 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 going to continue to see us do that. Fuel is going to 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.

[Operator]

Our next question is from the line of David Vernon with Bernstein. Mr. Vernon your line is muted, we're not able to hear you.

[David Vernon, analyst]

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

[Eric Gehringer, executive]

Yes. Thank you for the question, David. Here's how I reconcile it. It tells you that 220 is not as good as we can be. Because to your point, we've seen dramatic improvements in both the manifest and bulk side. And while we've seen improvements on some lanes and 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 advanced notice if any advanced 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 with 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 L.A. 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 card 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 will continue to add on top of the excellent performance we have already.

[Vincenzo Vena, executive]

So David, I need to just sort of add on a little bit from what Eric said. So I followed up with both L.A. and Long Beach board beer earlier this week. And we both came to the same conclusion. No one told us first or second quarter that we were going to see a 33% increase and it was an event that happened because of East Coast 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, then you don't get the same velocity. And we knew we were not going to be able to maintain that. But let's see where the success 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 have 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 will be part of their decision-making as they move ahead to say, can LA Long Beach handle an increase in business? And 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 we're running over 220 miles per day for our cars, and that's what's really important to us is we keep the place fluid. So thank you very much. Great question, David.

[Operator]

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

[Unknown Analyst]

Jim, this is Mike Triano on for Tom. 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 overall improvement this year despite the volume and the mix headwinds. If we look out to next year, the volume backdrop is still kind of murky, but volumes are kind of flat to up. Do you think you can get another mid-single-digit improvement in those productivity metrics?

[Vincenzo Vena, executive]

Well, we're sticking to our guidance for next year, which I think that's -- we set it out, we thought about it. It's a 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 we're going to 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 be to improve productivity. We know that we're carrying in 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 nonoperating 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, executive]

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 there's certainly great runway ahead of us, and we're very confident in our ability to perform.

[Operator]

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

[Daniel Imbro, analyst]

Maybe I wanted to ask a broader one. Just from a competitive standpoint, I know it's hard to know, but your Western peer has been more vocal but wanted to improve it there. I'm curious if you're noticing anything different when you're out there bidding on business, you're 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?

[Kenny Rocker, executive]

Yes. 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 that 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, and we talk 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.

[Vincenzo Vena, executive]

So 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 1 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 if I 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 Bernington 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 in the kind of business mix that we have. And you could see it 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 is in a better place now than it was 10 years ago and 5 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. 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 want to do.

[Operator]

Next question is from the line of Jon Chapell with Evercore ISI.

[Jonathan Chappell, analyst]

Ken, I was going to ask this anyway, maybe 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 customers have to see value in the service and you're seeing that. 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 open demand to continue to push price? Or at a certain point, does that kind of cap out without getting some volume tailwinds?

[Kenny Rocker, executive]

Yes. So the macro is the macro and those are things that are out of our control Jon, we focus on the network. We focus on the service that Eric is providing us, the investments we're making, and we link that to the value of the pricing, 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.

[Operator]

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

[Brian Ossenbeck, analyst]

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 going 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 what the timing should be if it's going to be gradual or if there's some step change that we could be thinking of as we look more broadly to getting over some of these hurdles and probably to a better place than what you started off with.

[Vincenzo Vena, executive]

Yes. 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 really 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 services 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 had inflationary pressure. That's why we were very clear on what our 3-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 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 is coal. Like coal is down 20%. At the end of the day, 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 that came back.

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.

[Operator]

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

[Benjamin Nolan, analyst]

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

[Kenny Rocker, executive]

Yes. Jim hit it a little bit earlier in 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, more consistent reliable product and better service products. We go in and we ask for more business when we're talking to customers. We asked to look at their truck files. We asked to look at -- talk to more of their receivers. So clearly, as we improve, and we've done a great job here in the third quarter on the service product. It creates our own capacity. It creates our own opportunities regardless of what happens in the macro environment.

[Benjamin Nolan, analyst]

Do you think you're there now just as a follow-up .

[Kenny Rocker, executive]

I hope not. I mean, we always want to improve as a management team. So no, we're going to always strive to improve with there's no time where we're going to yell out we arrived.

[Operator]

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

[Eric Morgan, analyst]

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

[Jennifer Hamann, executive]

Probably going to pass on that last part of your question. But if you just look at our business teams, Industrial is a 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 the growth come in some of the lower average revenue per car kinds of businesses like the international intermodal. On the bulk side, yes, there's coal, set that aside. Grain, strong grain into Mexico, which is great for us. We really enjoy that business. But it's a little bit shorter length of holden 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, executive]

I just want to say, we're not going to apologize for accepting increase. Yes, we'd love the 33% increase. What I'd tell you is that the management team here did a good job of preparing for it. 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, executive]

Yes. 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 results. .

[Operator]

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

[Stephanie Benjamin Moore, analyst]

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

[Kenny Rocker, executive]

Yes. First of all, I just want to step back as we're talking about our grain business and our grain network and differentiate renewable fuels and the actual facilities that we've landed there 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 Cherry Ville Kansas facility will help supply grain into Mexico. So let me just kind of break that apart to let you know how we look at it. But then, yes, broadly, as we look at Mexico, Clearly, there's a lot of opportunity with over-the-road trucks. There are some markets like finished vehicles and also auto parts. We have a strong service product coming out there.

What differentiates us, Stephanie is, 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, a 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 going to be certainly pro business and support the freight environment, so we're excited about that.

[Operator]

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

[Scott Group, analyst]

Jennifer, any color on that comp for employees 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 made. But I just -- I guess I'm not sure if that was -- still not sure if that was an earnings or margin or revenue comment. So I don't know any color?

[Jennifer Hamann, executive]

Okay, Scott. So we'll start with the comp for employees. So if you look at the 8% increase, call it, rough numbers, half of that was from the July 1 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&Y employees training. So those are all the drivers that we see in there. And for 4Q, it's probably going to look pretty similar, maybe even up a little bit more as we continue to carry some of the extra resources support the implementation of the work rest. And so that's really why you've heard us stress the productivity piece today because we do have 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 -- we said results. That's a fairly all-encompassing words. 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.

[Operator]

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

[Elliot Alper, analyst]

This is Elliott on for Jason Seidl. I believe this is the first quarter this year where your domestic intermodal volume outlook is positive. Can you talk about what you're seeing in the domestic intermodal market in Q4. And I know you already talked about kind of the mix headwinds in 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.

[Kenny Rocker, executive]

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

[Operator]

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

[Ariel Rosa, analyst]

I just wanted to -- I know some other people have spoken about this already, but I wanted to ask about is 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 2024? 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 for whatever the loose truck environment might be doing or the kind of the softer demand environment might be? .

[Vincenzo Vena, executive]

Ari, good question. Kenny?

[Kenny Rocker, executive]

Yes. 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 -- and we've talked about this, we've got price mechanisms for our customers that are in place to keep them competitive. Again, I talked to you about the fact that second quarter, third quarter, we were up in domestic intermodal. 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 as it capacity tightens, we're going to see more value on the pricing side. .

[Vincenzo Vena, executive]

Jennifer, do you want to talk about the inflation.

[Jennifer Hamann, executive]

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, you've been going back 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. So I feel very bullish on that front.

[Vincenzo Vena, executive]

Ari, good question. Why don't I just wrap it up real quick and then looking forward to the call in 3 months and looking forward to finishing off this year just the way we set it up and also delivering on what we said last year. If we look at what we've been able to deliver as a team, 10% increase in earnings per share, 11% up in operating income, 9% up in net income, productivity, up 12%. Those are all numbers that make us 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 to 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 what the -- whether the service is holding them back from winning in the marketplace. So with that, let me just close off by thanking everybody for joining us this morning. I know there 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]

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.