Union Pacific Corporation (UNP) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Union Pacific Second Quarter Earnings Call. At this time, all participants' lines will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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's now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Mr. Fritz, you may now begin.

Thank you, and good morning, everybody, and welcome to Union Pacific's second quarter earnings conference call. With me her today in Omaha are Beth Whited, Chief Marketing Officer; Cameron Scott, our Chief Operating Officer; and Rob Knight, our Chief Financial Officer. This morning Union Pacific is reporting net income of $1.5 billion for the second quarter of 2018 or $1.98 per share. That is an all time quarterly record for Union Pacific even without the benefit from corporate tax reform. This represents an increase of 29% and 37% respectively when compared to 2017. Total volume increased 4% in the quarter compared to 2017. Premium and Industrial carloadings both increased 6%, while agricultural products and energy volumes were both down 1%. The quarterly operating ratio came in at 63.0%, which was up 1.1 points from the second quarter of 2017. Higher fuel prices had a 1.1 point negative impact on the operating ratio. Strong top line growth was offset by an increase in volume related costs and higher spending due to lingering network inefficiencies. Network performance improved significantly for the first two months coming out of the first quarter. However, service interruptions from a tunnel outage on our Western region and challenges caused by localized train crew shortages created graded a significant headwind in the month of June. The tunnel disruption is now behind us and operations should continue to improve, as graduates from the training pipeline enter productive train service in the coming months. I am confident that we have the right plans in place to drive improvement in our operation and a better service experience for our customers. The team will give you more of the details on the second quarter starting with Beth.

Thank you, Lance, and good morning. For the second quarter our volume was up 4% driven by strength in our Industrial and Premium business groups with offsets in both agricultural and energy. We generated positive net core pricing at 2% in the quarter with continued pricing pressure in our coal and international intermodal markets. The increase in volume and the 4% improvement in average revenue per car drove an 8% increase in freight revenue. With that let's take a closer look at the performance of each business group. Ag products revenue was up 5% as the 1% volume decrease was more than offset by a 6% average revenue per car increase. Grain carloads were down 4% driven by weakness in wheat due to a low quality crop and reduced US competitiveness in a world export market. This was partially offset by strong corn and soybean shipments both domestically and for export. Grain products carloads were up 6% due to continued demand for ethanol exports and other biofuels, coupled with strength in animal feed products as a substitute for soybean meal. Fertilizer and sulfur experienced a 5% decrease in shipments as a result of new local production capacity. Energy revenue increased 5% for the quarter on a 1% decrease in volume and a 6% increase in average revenue per car. Coal and coke volume were down 10% driven primarily by a contract change and retirement, coupled with lower natural gas prices. Natural gas prices fell 10% versus the second quarter 2017 and PRB coal inventories continue to be below the 5 year average. Sand carloads were up 24% due to increased crude production from major shale formations and favorable crude oil prices. Furthermore, the favorable crude oil price spread also driven increased in crude oil shipments, which was the primary driver for the 19% increase in petroleum LPG and renewable carloads for the quarter. Industrial revenue was up 8% on a 6% increase in volume and a 2% increase in average revenue per car during the quarter. Construction carloads increased 8%, primarily driven by rock and cement due to pent up demand and dry weather in the south. Metals volume increased 18% for the quarter driven by strong pipe demand in West Texas and Oklahoma for shale drilling. In addition, strong industrial production drove growth in various other commodities, including industrial chemicals, plastics and forest products. Premium revenue was up 14% with a 6% increase in volume and 8% increase in average revenue per car. Domestic intermodal volume increased 7%, driven by continued strength in parcel and stronger demand from tight truck capacity. We also saw an acceleration in price per load in this segment during the quarter. Auto parts volume growth was driven by over the road conversions and growth in light truck demand which minimize the impact of lower overall production levels. International intermodal volume was up 7%, as new ocean carrier business win began to ramp up in the second quarter. Finished vehicle shipments were up 1% due to stronger second quarter sales increased, production at UP serve plant and strong production and shipments from Mexico. As we look ahead at the second half of 2018, our Ag products group will continue to face challenges in the export grain market from high global supplies, foreign tariffs and a low protein wheat crop. However, we are seeing positive indications in a market due to crop uncertainty in South America. We anticipate continued strength in ethanol exports driven by value as an octane and oxygen enhancer. We also expect growth in food & beverage shipments due to Cold Connect penetration tightening truck capacity and continued strength in Import Beer. For energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. But tougher year over year frac sand comparisons coupled with an emerging local sand supply will continue to generate a level of uncertainty. We expect coal to continue to experience headwinds in the third quarter with natural gas prices. And as always, for coal, weather conditions will be a key factor for demand. For industrial, we anticipate upside in plastics as production levels increase, as well as continued strength in industrial production driving growth in several commodities. For premium, over the road conversions from continued tightening and truck capacity will present new opportunities for domestic and auto parts growth. Despite challenges within the international intermodal market we anticipate year-over-year grow for the remainder of the year resulting from new business opportunities. The US light vehicle sales forecast for 2018 is 16.9 million units down about 2% from 2017. However, production shift in some new import business will create some opportunities to offset the weaker market demand. With that, I'll turn it over to Cameron for an update on our operating performance.

Thanks, Beth. And good morning. Starting with safety performance, our reportable personal injury rate was 0.76 flat compared to the first half of last year. With regards to rail equipment incidents and derailments, our reportable rate improved 3% to 2.93. In Public Safety a Grade crossing incident rate increased 19% versus 2017 to 2071. While this is disappointing from a year-over-year standpoint, we did show incremental improvement from first quarter to second quarter. We’re optimistic that our continued partnership with communities will improve over Public Safety numbers. Moving onto network performance. As reported to the AAR, velocity declined 3% and terminal dwell increased 4% compared to the second quarter of 2017. During the first two months of the quarter, we made excellent progress working through our operational challenges, improving our network fluidity and associated service metrics. The tunnel on I-5 corridor in Oregon collapsed in late May, filling it with dirt and rock, which required extensive repairs. Traffic was rerouted through Salt Lake City incurring additional transit time of 4 to 5 days which negatively impacted our network performance. With the tunnel disruption now behind us service metrics are starting to rebound and we should continue to see further improvement going forward. The tunnel outage meant more cars spending additional time on the network thus consuming greater locomotive and crew resources. From a locomotive perspective, our surge capacity gave us the flexibility to meet both the network challenges and an increased demand. At quarter end, we had about 200 high horsepower road units and storage. Going forward, we are confident we have ample resources to continue improving service and keep pace with demand. On the TE&Y front, a PNW reroutes, peak vacation season and holidays made June a challenging month. But we continue to maintain a strong recruiting pipeline to meet current and future TE&Y requirements. Our TE&Y workforce is at 8% when compared to the second quarter of 2017, primarily driven by an increase of approximately 900 employees in the training pipeline. We graduated about 225 individuals in July and plan to graduate approximately 250 trainees per month in August and September. While crew supply has been fairly tight this summer, it should improve later in the quarter as we realize the benefits of our recruiting and hiring initiatives. Although we have made substantial improvements in our operations, we are not where we need to be on achieving productivity. As we right size our resources, we had significant opportunity to reduce train crew costs and maintenance spending associated with the larger locomotive fleet. We will also refocus our efforts on driving fuel efficiency across our network. Train size performance however continues to be a great spot. We achieved best ever results in our grain category and a second quarter record in our manifest network. In productivity and other areas like renewable capital projects remain strong. While setback - while setback happen they have not stopped us from working hard as we can to bring service back to normal levels. As service improves we will continue to optimize our network and adjust resources accordingly. Our goal is to generate solid productivity savings and operational efficiencies that provide an excellent service experience for our customers, while driving margin improvement. With that, I'll turn it over to Rob.

Thanks and good morning. Let's start with a recap of our second quarter results. Operating revenue was $5.7 billion in the quarter, up 8% versus last year. Positive core price increased fuel surcharge revenue and a 4% increase in volume were the primary drivers of revenue growth for the quarter. Operating expense totaled $3.6 billion, up 10% from 2017. Operating income totaled $2.1 billion, a 5% increase from last year. Below the line, other income was $42 million compared to $50 million in 2017. Interest expense of $203 million was up 13% compared to the previous year, and this reflects the impact of a higher total debt balance partially offset by a lower effective interest rates. Income tax expense decreased 39% to $429 million. The decrease was primarily driven by a lower tax rate as a result of corporate tax reform and was partially offset by higher pre-tax earnings. Our effective tax rate was 22.1%, which came in lower than what we were anticipating. Tax rate reductions were enacted in two states during the second quarter, resulting in a reduction in our state income tax liability. For the full-year, we expect our effective tax rate to be closer to 24%. Net income, totaled $1.5 billion, up 29% versus last year while the outstanding share balance declined 5% as a result of our continued share repurchase activity. These results combined to produce an all time quarterly record earnings per share of $1.98. The operating ratio was 63%, which was up 1.1 percentage points from the second quarter last year. The combined impact of fuel price and our fuel surcharge lag had a 1.1 point negative impact on the operating ratio in the quarter compared to 2017. And fuel had a neutral impact on earnings per share year-over-year. Freight revenue of $5.3 billion was up 8% versus last year. Fuel surcharge revenue totaled $412 million, up $178 million when compared to 2017 and up $59 million versus the first quarter. The negative business mix impact on freight revenue in the second quarter was almost a full point. Growth in sand volumes was offset by an increase in lower average revenue per car intermodal shipments. Core price was 2% in the second quarter. Coal and international intermodal continue to be a challenge from a pricing perspective. However if we set coal and international intermodal aside, our core price increased to 3% in the quarter. For the full year, we still expect the total dollars that we generate from our pricing actions will well exceed our rail inflation costs. Turning now to operating expense, slide 19 provides a summary of our operating expenses for the quarter. Compensation and benefits expense increased 3% to $1.2 billion versus 2017. The increase was driven primarily by volume related costs, network inefficiencies and increased TE&Y training expenses, partially offset by lower management costs as a result of our workforce reduction program that we initiated last year. For the full year, we still expect labor and overall inflation to be under 2%. Total workforce levels were flat in the second quarter versus last year. This was driven primarily by a 10% decrease in employees associated with our capital projects. Employees not associated with capital projects were up around 1%, driven primarily by an increase in the TE&Y training pipeline. Offsetting a portion of this increase was a decrease of more than 500 management employees. Fuel expense totaled $643 million, up 48% when compared to last year. Higher diesel fuel prices and a 4% increase in gross ton miles were the primary drivers of the increase in fuel expense for the quarter, compared to the second quarter of last year, our average fuel price increased 36% to $2.30 per gallon. Our fuel consumption rate also increased during the quarter by about 6%. While there were some adverse impact from mix the predominant driver of the increased C rate was the service related challenges that we experienced. Purchased services and materials expense increased 6% to $630 million. The increase was primarily driven by volume related cost, higher freight car repair expense and increased locomotive repair costs associated with maintaining a larger active locomotive fleet. Turning now to slide 20. Depreciation expense was $546 million up 4%, compared to 2017. The increase is primarily driven by a higher depreciable asset base. For the full year 2018, we estimate that depreciation expense will increase about 5%. Moving to equipment and other rents. This expense totaled $265 million in the quarter, which is down 3% when compared to 2017. The decrease was primarily driven by lower locomotive and freight car lease expenses and higher equity income mainly driven by the lower Federal Tax Rate implemented in 2018. These decreases were partially offset by higher car rent expense due to volume growth and slower network velocity. Other expenses came in at $248 million up 13% versus last year. The primary driver was an increase in property taxes and other expenses partially offset by decrease in personal injury expense and reduced casualty cost. For the full year 2018, we expect other expense to be up about 10% compared to 2017 excluding any unusual items. On the productivity side. Productivity savings yielded from our G55 + 0 initiatives were entirely offset by additional costs as a result of the continued operational challenges. We estimate the impact of these operational challenges totaled about $65 million in the quarter. The $65 million of additional costs were spread somewhat evenly across cost categories of comps - comp and benefits, purchased services, fuel and to a lesser extent equipment rents. Looking ahead as Cam just mentioned, we will be focused on eliminating network cost inefficiencies as quickly as possible so that we can once again begin generating your productivity savings we need to drive margin improvement. Looking at our cash flow. Cash from operations to the first half totaled $4 billion, up about 17% when compared to last year. Higher net income and lower federal tax payments were partially offset by payments made to our agreement workforce in the first quarter. Taking a look at adjusted debt levels. The all in adjusted debt balance totaled $25.4 billion at the end of the second quarter up about $5.9 billion since year end 2017. This includes the most recent $6 billion debt offering that we concluded in early June. We finished the second quarter with an adjusted debt to EBITDA ratio of about 2.4 times. As we mentioned in our Investor Day, our new target for a debt to EBITDA is up to 2.7, which we will achieve over time. Dividend payments for the first half totaled $1.1 billion up from $980 million in 2017. This includes the effect of a 10% dividend increase in the fourth quarter of 2017 and an additional 10% increase which occurred in the first quarter of this year. We repurchased a total of 42.5 million shares during the first half of 2018 including 33.2 million shares in the second quarter. This total includes the initial 19.9 million shares received as part of a $3.6 billion accelerated share repurchase program that we began in June. We expect to receive additional shares under the terms of the ASR, as the program reaches completion later this year. Between dividend payments and share repurchases we returned $7.8 billion to our shareholders in the first half of this year. Looking ahead to the second half of the year, we are raising our volume guidance and now expect full-year volumes to be up in the low to mid-single digit range. With positive full-year volume and positive core price, we should continue to see solid top line improvement for the remainder of the year. On the expense side of the equation, we're working hard to improve our operations and eliminate inefficiency costs within the network. And we still expect to achieve an improved full-year operating ratio in 2018. So with that, I'll turn it back to Lance.

Thank you, Rob. As we discussed today, we delivered record second quarter earnings per share driven by strong volumes and solid top line revenue growth. While I'm disappointed we did not drop more of that revenue growth to the bottom line, I am encouraged by the strength of the economy and the positive impact on the most of our business segments. Looking to the remainder of the year, we expect the strong business environment to continue while we regain our productivity momentum and improve the value proposition for all of our stakeholders. So with that, let's open up the line for your questions.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom Wadewitz with UBS.

Yes. Good morning. I wanted to ask you about the - I guess, obviously, the tunnel impact and there was some constraints on crew. And you identified that $65 million, how would you think about that number in the second half. I mean it seems like the velocities improved in the last couple of weeks and you've got a better crew position. Does number come down a lot in third quarter or is that kind of a gradual thing where you still have meaningful, I guess, service costs in third quarter?

Tom, this is Lance. So I'll start and then let Rob kind of put details around it. So you got that exactly right. What we said was coming into the second quarter, we were making good progress on improving the service levels, decreasing congestion and starting to move some of those costs out. We had that incident on the I-5 that was very impactful, particularly when it comes to a network that was already a little bit fragile. As are exiting the second quarter coming into the third, we're getting our feedback under us. We see improvement. I don't see any reason absent some other catastrophic event that we don't get right back on the path and start making those same kinds of improvements. Rob?

Yes, I would just add, Tom, it won't go away in the third quarter. There will be some lingering costs but yes, we are all about reducing those aggressively and dramatically, and if you just do the math for us to improve our operating ratio year-over-year, that implies that we will make good progress on the productivity front in both the third and fourth quarter.

Okay, that's helpful. I appreciate it. On the pricing topic, I mean I guess excluding, I think, international intermodal and coal. I think there was a little tick up to the 3% you identified, but when you look at the total core price at 2%, I think this is the fourth quarter in a row you've been at that level. I would have expected more of a pick up in that. How do you think we ought to look at that going forward? Is that something that just kind of stay - stuck at 2% and that's just kind of the coal international intermodal headwind continue or do you think it's reasonable to expect that kind of a total coal price to pick up if we look at the next two quarters?

Well Tom, its Beth. The coal and international intermodal headwinds continue but we're really encouraged by what we see in the truck markets. ELD definitely had an impact. Capacity is kind of tight across all modes of transportation which is giving us good opportunity to price into that. And just as a reminder we get to touch about a third of it every year and we're halfway through the year so -- and we are like I said encouraged, so.

So it sounds like realistic to - obviously you don't forecast the price it's going to do, but realistic to expect some improvement in kind of broader price momentum?

You are right. We really don't predict what pricing is going to do. Like I said we're encouraged by what we see out there, but we do still have some headwinds that we're still dealing with.

Right, okay. Thank you for the time.

The next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hi. Thanks good morning. I appreciate you taking the question. I guess going back to the operating ratio. Can you quantify what the actual impact was in the quarter from the crews? I guess more specifically the tunnel collapse could have shown some improvement from that just having a hard time getting to run rate into second half that would give you full year improvements on 2018?

Yes. Let me take a shot at that Brian. The tunnel and direct cost was about $6 million to deal with that about half OE have capital. So just kind of size the tunnel itself. But it had clearly a residual impact on the efficiency of the network. And so breaking out exactly what impact the tunnel head beyond the direct cost is really kind of a difficult task. It definitely contributed to the inefficiencies much broader across our network that led to the $65 million of cost. In terms of what we have to get them without giving a precise number we clearly have to get and can expect to get back on the drag. Again as I said earlier there'll be some lingering costs in the third quarter but we're aggressively going to reduce from the $65 million daily cost that we had in the second quarter and that's what is going to take to improve the operating ratio year-over-year.

Okay. And just a follow-up, As Lance mentioned network is a little bit fragile. So I guess it's time for another PTC update. I'm just want to see how that was trending and on the labor side this is I guess second call we've heard call out on vacations potential headwind on the crew side. So - market's tight overall. I just wanted to get to your sense as to the pipeline being full enough to kind of finally get over the hump here when it comes to gaining crews need the most.

Cam do you want to handle the PTC and a little bit about crews?

On the crew pipeline as you say you will see the numbers on what the plan to enter into workforce for August and September. That pipeline looks very solid for the remainder of the year. So as Lance mentioned we do not see a crew issue going forward. It will solidify. On the PTC front our unattended breaking ratio is dropping. That's very positive. And we have initiatives to continue dropping that ratio. Total stops are about the same at this point as we bring more trains on board to that new technology. So net it's about the same. But the good news is we're making very positive progress on the stop ratio.

Okay. Thanks for the details. Appreciate it.

Our next question is from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Hey, great. Good morning.

Good morning.

So you mentioned the upside to your outlook on the revenue side, but Beth mentioned some tariffs impacts on the agriculture. Just wanted to see Beth are you starting to see that spread in any sort of way as they have expanded the tariffs. And kind of maybe Lance your thoughts on impact on the trade. I know you made some comments on the conference recently. Maybe you can expand on that a little bit.

Sure. I'll start Ken and then let Beth talk specifically about our markets. So the concern is that tariffs are just basically going to be a tax, whether it's on U.S. consumption or US products going overseas. And generally, that's going to reduce the amount of demand. We haven't necessarily seen that wholesale and I'll ask Beth to kind of fill in the blanks in detail. But it's pretty early. Those things just went into effect. We have seen some very specific impacts on us. But they are pretty granular, right. Inbound on some rail that we buy from Japan. There was a substantial 25% tariff on the last boat that was received. And then we've seen some other discrete impacts on customers. But Beth do you want to fill in the blanks?

Yes. So when we talk about agriculture, we aren't really seeing the impacts yet, because of the crop uncertainty in South America that I referenced. So I think this year, the Ag business looks okay in the United States. But I think where we're more concerned is in the longer term, what the impacts will be. And really the other impacts on steel, for example, have kind of a net neutral for us. But anyway to Lance's point, the longer term trade, free trade impacts are the thing we're really keeping an eye on.

Great. And just a follow-up for Rob, if I can. Given the increased expenses, it sounds like with some Lance's comments about the tight network. Do you think the – are we still at a $3.3 billion CapEx or the increase that given the outages? And then just a number question, I guess on your buyback yet, $5.5 billion in buyback 33.2 million shares that will be $166 a share. I presume that's not corrected up, because you still have shares coming from the accelerated buyback.

Yes, Ken. On the capital, we're not into planning on increasing to capital. We think the 3.3-ish has discovered for what we need to do to address the issues that we currently have upon us. On the buyback, yes, that's exactly right. The math that you just did is missing the remaining call it 20% that will be delivered later this year of shares that are a part of that ASR.

Thanks for the input. Appreciate it. Thanks for time.

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

Hey. Good morning, everyone. Thanks for taking my questions. So Beth, we've been talking about pricing pressure in international intermodal for quite some time. So I'm wondering if you could hash-out the new contract win that you called out there because you did see some volume acceleration finally. And how do you put that into context of this pricing pressure? I think we've been hearing about now for maybe two years.

So we were doing business with call it two-thirds of the alliance of ONE prior to them combining, and so when we won the rest of that business that's obviously given us that volume boost. The market is still, I would call it in some - its not exactly in disarray, but there still remains a lot of pressure in that particular market, and we're subsequently seeing quite a bit of pricing pressure in that market. Not only I guess there's different kinds of - there's different kinds of competition right. There's direct competition with other railroads. There's competition with trucks and then there's competition with other ports. And so all of those things bring different levels of competitive pricing pressure to the market, and that's really what we're dealing with.

Well, I guess, coming out of your Analyst Day a month or so ago we got the message from you guys that you don't want to just grow for growth sake and you want to make sure you're bringing on the right price. So I guess that was I was giving out, are you happy with the price of the new contract that's coming on? And I think you also said you can only reprice maybe a one third of your intermodal business. So should we also believe that there's just not a lot of escalators on those contracts either that you can recoup inflation?

Okay. So we -- I agree with you. We're interested in growing both price and volume. And we are intently focused on making sure that we receive the value that our capacity is worth when we do both of those things. So as we look forward what you see is we've kind of got two books of business if you will in intermodal right? You've got the international intermodal business which is generally in more like the three to 5 year contracts that have some sort of an escalator in them that at the time we did the deal we're quite comfortable with. And then you've got the domestic market that tends to reprice annually, and that domestic market tends to be very truck competitive and that's where we really feel pretty good about what we're seeing in terms of the tightening truck capacity and our ability to get pricing.

Okay. Thank you.

Our next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.

Thanks, operator. Thanks for taking my questions, guys. Rob on the core pricing growth. That 3% ex coal international intermodal that you highlighted any help on where that was on an apples-to-apples basis maybe in early 2015, so we can just give a sense of where we are in the pricing cycle so to speak, X those kind of specific headwinds and how much room there is versus the prior peak? Thanks.

Yes. I don't have that number off hand. I will tell you that mix would come into play. But I would just tell you that three is up from roughly 2.75 earlier this year. So we're feeling good about that number. When you added all in I don't have a reference to 2015.

I mean, okay. Just a quick follow-up to that. Do you think based on the pricing environment that you see today on the volume environment obviously getting a little better? Do you think the trajectory of core pricing should be up or do you think kind of given the guys calculated kind of flat at these levels are better way to think about it?

Well, I would just reiterate what Beth said earlier. We're not going to give the precise answer that you're asking. But as Beth said earlier we’re feeling pretty good about the environment and that if were able to achieve real pricing going forward that will show up in our yield calculation.

Okay. I thought I tried anyways. I appreciate it.

I get it.

Let me ask one more. To be fair this might come across a little bit of a tough question and it's not some meant to be that way. It just comes across that way. But it's obviously on the OR. If you add back the $65 million headwind in the quarter the profitability of the business is still several hundred basis points lower than what CSX reported in the second quarter when arguably I would say Union Pacific has some structural advantages with respect to returns just given the geographic difference. So I understand obviously this is a tough question, but Lance, is there a sense of urgency that's been elevated. If you can just help us think about how your views may be evolving in light of what's happening in the east and how you're managing the railroad either from a customer negotiation standpoint or from a customer standpoint? I appreciate it. Thank you.

Sure. Notwithstanding what any other railroad is doing, you can see our elevated sense of urgency and focus and determination when, our headline quote for a quarter where we just generated our record earnings per share and record income is and it could have been better, because it could have been better. To your point, we called out $65 million in costs in the network that really shielded us from generating much more attractive productivity. We demonstrated we know how to do that. We had underlying productivity that was being generated in the quarter, and it's frustrating that we weren't able to drop more of that top line to the bottom line. So as we talked through and shared with you or the team at our Investor Day, we are laser-focused on getting the network right. We're learning from anyone that we can in terms of better ways to run the network, better ways to generate productivity and efficiency. We've got all of those projects teed up, lined up. It's hard to make them pay off in an environment where you're basically over-resourced and trying to get the service product back up. We are doing that. That will happen and we will take those excess costs out, which is why we're so confident that we're able to hit that 60 operating ratio in 2020 because we see the underlying strength of the business, top lines growing. Price is attractive. We've got plenty of productivity opportunity and we know how to get at it. We just got to get rid of these excess costs in the network as we bring our service product back up.

Okay. I'll leave it there. Thank you very much for answering my questions. Have a good day.

Your next we comes from the line of Scott Group with Wolfe Research. Please proceed with your questions.

Thanks. Good morning, guys. So first, can you just clarify what operating ratio you're using for the full-year 2017? And then, I just want to follow up on that last question sort of about CSX and comparison versus you. We've heard the last few quarters, you talk about, well, we're watching and seeing what other rails are doing and other companies are doing, but it sounds like what we heard today is a part of the six year is adding more head count. CSX just took 11% head count out. I mean, it's clearly working there. I guess, the question is, why aren't we talking about a real sort of change in strategy here to more sort of fully embrace sort of this precision railroading concept that seems to be working at? Maybe you said, again, we're earning from other things. Is there anything that you see that you're actually implementing that can give us some sort of confidence in the trajectory of the productivity and margin improvement?

Yes. Sure Scott. I'll take that and then I'll let Bob talk about what 2017 full year operating ratio we're using as a comparator. So we discussed this last quarter and also at Investor Day. There are a number of things that we're already doing that we've learned from somebody else whether it's the CSX or the CP, CN. One of them is we've reduced our low horsepower fleet by one-fourth over the course of the last three years. That has been a fundamental underlying productivity driver even as in 2015 and 2016 our volumes dropped at 12% 13%. We maintained operating ratio. So that's an example. We talked about the blend and balance pilot that we ran up in the Pacific Northwest that a fair portion of is still in place. We're right now in the process of continuing to blend and balance our network that is deconstruct specialized networks and reconstruct them as shared networks so that we can balance out our resource consumption whether it's crews and locomotives. The thing that's frustrating Scott isn't that there's no activity on good ideas to generate more productivity is that we really value the service product to our customers. And first and foremost we're going to give them an excellent service product. And we've got a very big broad franchise which is a strength of ours. We think in the end that's going to generate if you will winning in the marketplace to do that we've got to generate that excellent service product and experience. And we're not telling you that we need to add more crews over and above volume that much different. We're saying we've got to get our crews right so that we can get that service product back. That is happening as we speak. And even so in this quarter volume was up 4% and our crew bays was up mostly in the training pipeline and the active crew base that was basically flat. So we see productivity as being able to happen. We think it is merely masked right now. And yes there are other initiatives that we've got teed up that we can do and will do.

And Scott the comparison on the OR that we're using for 2017 full year is 62.8. So to your point we reported 63 OR the pension impact in 2017 was about 0.2. So adjusted is 62.8 we're comparing ourselves to. And by the way the pension impact for us this year would be negligible call it a 10th headwind for us. But again our commitment is to improve the OR year-over-year against the 62.8.

That's helpful. And can you just -- I just want to make sure I understand one point because you said you don't need to grow headcount as much as volume. I thought that any headcount was up 8% maybe you could just clarify what if that's a training thing or not.

Sure. It's all into training pipeline. I thank you understand that the training pipeline lasts about four or five months. And it's designed to basically backfill attrition and the TE&Y workforce. So we supercharged the training pipeline. And then as they graduate they're basically backfilling active employees who are retiring or trading out of the workforce. So our active workforce is basically flat to marginally up and that's what we anticipate. We will not grow the active workforce faster than we're growing volume.

Okay. Make sense. And then just last question, just pricing. I know you're not to forecast pricing. One of the things that some of rails are starting to give and it's helpful they're talking about contract renewals. Can you may be share where contract renewals are tracking, is it above at this 2% range maybe that'll be helpful.

Yes. I don't think we're going to start using that as a metric that we measure ourselves. We're pretty happy with the way we do it in terms of being conservative and seeing actual results before we start forecasting.

Okay. Thank you.

Okay.

The next question is from the line of David Vernon with Bernstein. Please proceed with your questions.

Hey. Good morning, guys. Switching gears for a second, the domestic intermodal pick up. Beth, could you talk a little bit about what you guys are doing to actually sort of take a little bit more share in that marketplace? And how we should expect those changes to kind of impact the longer term growth rate, like is this like a one-time contract win kind of thing, or is this actuals or a service design changes that you've been making?

In domestic intermodal?

Yes. You said – you guys said domestic was up in terms of volume, right?

Yes. Domestic is up in terms of volume. I would say, number one, we're doing a lot of things to go and build relationships directly with the BCOs to make sure that we're able to express the value that Union Pacific can provide. We have numerously more lanes of intermodal service than our competitor. And so we tried to raise the awareness of that with the BCO community. And as the truck tightening has occurred, what we've seen is a pretty significant return from that investment that we're making and ensuring BCOs know that what we can provide. So we are seeing new customers as well as stronger volumes from existing customers.

And as you think about the go-to-market strategy on that stuff, the business that you're growing in there, how would that compare on a pricing standpoint relative to the existing base? Is it kind of an attractive set of rates? I'm just wondering like the simple...

The way that we think about our business is that we always are striving to ensure that we're generating value and good margin that ultimately drives stronger return for the corporation.

All right. Thanks, guys.

The next question is from the line of Allison Landry with Credit Suisse. Please proceed with your questions.

Thanks. Good morning. So, of course, we know about intermodal with respect to the tight truck capacity and intermodal conversions. But curious to know, if you're either seeing or if you think this is an opportunity or if there's an opportunity to convert traffic from the highway in the merchandise segment?

Yes. I would say so. We're converting traffic from the highway into merchandise segment. One of the best examples I can give you is line pipe that's used for drilling that used to be a heavy truck market. Because it's relatively short-haul out of kind of the Houston Gulfport into the Permian and up into Oklahoma. But we've pretty really targeted business development effort at that and we've been able to convert a significant portion to rails. So we're excited about that. And we have a number of other initiatives across market, but that's maybe one of the best examples I could give you.

Okay. And do you think that given some of the dynamics that are happening right now with the driver shortage being worse than we've seen it historically. Does that create a bigger opportunity on the merchandise side?

I think it does. There's a few markets in particular where that's true. One of them is in the fresh and frozen space. The truck availability is really tightened there. There's a lot of demand for that in the east-west long-haul. And that's something that we're very focused on the. Lumber is another win where -- trucks had penetrated in some areas where we're now seeing people returning to rail and wanting more rail.

Okay. And I wanted to also ask about what you're seeing in terms of the network performance in the southern region specifically. I mean you've talked quite a bit about some of the pinch points down there. So just curious if you've seen any sequential improvement in the second quarter and the expectation for the second half.

Cameron?

The southern region, Allison has been performing very well in the second quarter. We do see volume coming online from some of the new plant expansions that Beth has mentioned in the past. And with some of our new inventory management tools, we've put in place we think the southern region will stay solid stepping into second half of the year.

Okay. Thank you.

Next question is from the line of Jason Seidl with Cowen. Please proceed with your question.

Thank you, operator. Good morning, team. Quick question. When I'm looking at your volume outlook in the second half and I'm comparing that to the first quarter numbers. It looks like automotive sales is the one that kind of flipped it went from a negative to a question mark. I was wondering if you can elaborate a little bit on that.

So in the second quarter we did see a little bit of strengthening in auto sales. I think you got in June like a 17.5 SAR which was pretty high compared to what we've been seeing in the earlier part of the year. A forecast that we've seen from the OEMs as well as from some of our business development efforts appear to make that more of a neutral for us where we thought it was a bit of a negative question mark earlier. I don't think we're going to see massive growth they are or anything but it feels a little stronger than it felt earlier in the year.

Okay. Fair enough. And Rob if I can go below the line as we look out for the other income line item, you sort of gave the guidance for other revenue. I don't know if I heard the other income because you have a pretty tough comp here coming up in 3Q for modeling purposes.

Yes, you're right Jason. Because last year you're calling out a good point. Last year's comp is difficult. We had some unusual transactions that we called out. I would say generally it could be lumpy and it's hard to predict. But I would say somewhere in the $30 million to $40 million quarter range is a reasonable range expectation for other income.

Okay. That’s good. I appreciate it. Then thank you for the time as always everyone.

All right, Jason.

The next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Good morning, everyone. You had petroleum products as a positive and market for you. Can you just give us a little more detail on how you are looking at the Permian opportunity? How attractive that can potentially be and kind of what you will need to see some of the producers before you get more active there?

So the Permian is an interesting place right now. We are definitely starting to see some reduction even in crude output because of the lack of take away capacity. So that's maybe the first time we've seen that in 18 months or so. And there is as you referenced an emergence opportunity to haul crude by rail out of there say over the next 18 months while the next pipelines get built. Like I said we do think it's a short-term situation. So we will not invest to support that. But as we have capacity in our network we are working closely with the producers to see what we can bring to rail. And I do expect we'll we some results from that in the third and fourth quarter.

Understood. And Lance, going back to the whole UNP versus CSX, if I may, I think there's tends to be a hyper focus on the OR as a stand-alone number without focusing on overall sustainable growth, and I think that you guys are growing volumes at a relatively decent pace compared to the whole railroad group. So can you remind us on your philosophy on volume growth versus OR and kind of how you determine which one you go after at any point in time, particularly at this point in the cycle?

Sure, and you are exactly right, Ravi, we care about a number of measures to demonstrate whether or not we're running the business well over the long term. The highest order is generating growing operating income and growing cash from operations. That's the source of being able to reward our shareholders, so that's what we focus on first and foremost and we actually had a pretty damn good first half in that context. Now having said that, there's a couple of key measures that we care about. One is ROIC, and that is, are we efficiently using resources and being wise with investor capital? And the other is OR, and that is, are we efficiently dropping top line to the bottom line. At this point, it's appropriate to focus on OR and say, we're disappointed with our ability to efficiently drop top line to the bottom line. That doesn't mean we can't do it. It means we didn't demonstrate doing that in the second quarter; we have all the confidence in the world that we're able to do that both over the long run and rectifying that here in the short term. Then the last thing I would talk about, Ravi, is we run the business for all four stakeholders, right, in the very long run building long-term enterprise value, we have to generate returns for the shareholders, build their confidence. We have to generate excellent experience with our customers so that they want to keep doing business with us. We have to help our employees feel fulfilled and connected to the work and our communities that we serve have to feel like we're a good partner, so that our social license to operate with them is healthy and strong. You hit it just right, Ravi. We think about all of that when we're running the business.

Helpful. Thank you.

Our next question comes from the line of Justin Long with Stephens. Please proceed with your questions.

Thanks. And good morning. Just to start with a couple of modeling questions, I was wondering if you have a ballpark expectation on the level of share buybacks you're planning to complete in the second half of this year? And then, on coal, I think I heard you mention a contract change. Any additional color you could provide on that and the impact?

Rob.

Justin, I would say that I don’t any more to tell you on the share buyback. I mean at this point the ASR that we did. The rest of opportunities would be opportunistic in the marketplace. And remember that we've set out a $20 billion buyback over the three year period or so but it's not going to be a straight line each quarter. So we'll be opportunistic.

And Beth?

So on the coal contract. We call that a couple of things. We have some retirements and we also have contract change. And those were about equivalent in size, in terms of millions of tons that we saw leaving us. I don't think we're going to give you any specifics on that. But I guess that's all I've got to say about it.

Could you speak to what coal volumes would've looked like X both of those items that headwind from the retirement of the contract change?

I would call the combination of the two less than 10%.

Okay. That's helpful. And then secondly, if you go back historically you've typically seen a sequential improvement in the OR during the third quarter. I think last year was on one of the rare exceptions. I am not asking for specific guidance but just directionally is there anything that would prevent you from seeing normal seasonality and a sequential improvement in the OR in the third quarter?

Justin, I would say you're right. It's difficult to draw any conclusion from that. But having said that we are as we've talked this morning we are feeling good about the environment. We raised our volume guidance for the whole year. You heard Beth talk about our confidence in terms of the market and what's happening in your pricing. And our focus on taking that inefficiency cost out aggressively. So without putting a guidance number for the third quarter OR we're going to aggressively do the best we can and we have to make progress immediately which we're focused on to improve the OR year-over-year.

Okay. That's helpful. I appreciate the time this morning.

Thank you.

Our next question is from the line of Matt Reustle with Goldman Sachs. Please proceed with your questions.

Good morning. Thanks for taking my question. Just one on higher fuel prices, I understand it's essentially EBIT neutral but it's been a pretty big drag on the OR year to date. So is that something you could offset in the back half of the year and is there an inherent fuel price assumption in your forecast for the back half of the year?

Let me take that Matt. I think you probably know I mean we have some 60 different types of fuel recovery mechanisms surcharge mechanisms. So they're kind of all different. But there's -- and there's generally speaking about a two month lag in terms of those catching up with the price of fuel. So in the long haul the fuel recovery mechanisms should neutralize over time. Certainly in the second quarter from an EPS standpoint it was neutral. Rising fuel prices even if we're recovering 100% at a specific point in time can have an impact negatively on the OR just because of the math of it. So I mean that's how it works. So we had to kind of leaves with that reality and our focus and we've done a good job over the years of minimizing the negative impact of rising fuel prices through these some 60 plus different fuel surcharge mechanisms.

Yes. I guess it has been a drag for the first half. I mean are you expecting that drag to continue into the second half? Because you mentioned it's just math but you're guiding to this improvement which seems like it's going to be fairly tough if you continue to see that weigh on margins on top of the ongoing network expenses that you have in the third quarter.

Well I would have to say I can't give you a number because it's contingent about what happens in the fuel prices.

Okay. Second question just on frac sand, you mentioned tougher comps coming into second half along with the impact of the local mines, in terms of those local mines have you seen any shifts in terms of the timing of those coming online and is a tight trucking market changing those dynamics at all? Have you been having those conversations with customers where you expect to see a material impact in the back half of the year? Is that shifting out to 2019? Any color and that is helpful.

Yes. So we have -- they did come up more slowly than we expected and they were delayed. However they seem to be now kind of hitting their stride. And I think some of it is a combination of supply and some of it's the slow down in production that's happening because of the lack of take away capacity. But June was the first month that we had this year where our frac sand into the Permian was lower than a year ago. And I would expect to see that continue as they gain more and more adoption, especially on the core smashes [ph], the local sand. So yes, it started to decline and it will continue. On the positive side, we've been able to develop and have seen good growth in all of the other shale price. The Eagle Ford came on strong in the second quarter. We're seeing nice growth in the Oklahoma shale and then Colorado. So we will, of course, continue our business development efforts. But the Permian is in decline, I would say.

Okay. That’s very helpful. Thanks.

The next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.

Yes. Thanks. Good morning. I wanted to ask Rob, just want the clarity first on the service related cost of $65 million. Is that cumulative or is that sort of second quarter it happens that really relative to the $40 million, you reported in the first quarter?

Yes, the $65 million of inefficiency cost in the second quarter was just the second quarter and that does compare to – I mean showed up differently. But it does compare to the $40 million inefficiency cost that we called out in the first quarter.

Yes, I think Chris when we talked about in the first quarter we said there was going to be a hangover effect even as we were anticipating improving service product in the network. And that's because we were putting those resources in through the first quarter. So there were more exiting the first quarter than entering the first quarter. So they just lingered longer than we anticipated.

Okay. And when you think about -- in that context when you think about the tunnel, which I know Rob you said it was $6 million, but had a bigger halo effect than that. Does that sort of capture the entire increment if you think 1Q to 2Q or is it just sort of the timing of those assets? Just wanted to get a sense we're actually seeing improvement there because it seems like maybe there's some incremental cost that weren’t in the first quarter but...

Yes, Chris, the way to think about that is, so we were building in these incremental costs through bring the service product back up. We anticipated as a service product was coming back up, which it was in the first two months of the quarter that we would be actively then taking those incremental resources out. The tunnel collapse forced us to keep them in. And basically keep them in longer in order to kind of maintain a service product because it was a pretty impactful location. Recall that in our network we've got big East West movements on the Sunset route in the Northern East West corridor. And then the other two big routes for us are Chicago down to Mexico in the I-5. And it's essentially shut down the I-5.

Okay. That's helpful. And then just final a quick follow-up for Beth on the core price, not to belabor the point here but you had the ex coal in international and intermodal number accelerate from 1Q to 2Q. But coal stayed the same all in. When you think about coal and international intermodal is it getting more negative or is it getting worse I should say from 1Q to 2Q or is there some other dynamic that impact that number?

I think you're making a safe assumption.

Okay. Thank you very much.

Our next question comes on line of Walter Spracklin with RBC. Please proceed with your questions.

Thanks very much. Good morning, everyone. I do want to come back to the pricing, but I don't want to exclude coal and international intermodal instead ask a more general question based on investor feedback I'm getting and that is rather than you give us guidance on price make the comment that I'm hearing that your ability to drive price because of the inclusion of international intermodal and coal combined with the competitive environment with BN might suggest that you can never achieve core pricing above and beyond or even half of what other railroads can achieve. If that's a statement correct me -- can you indicate where it might be wrong in terms of that emerging view in your pricing?

Yes. We need to correct that assumption or statement which is we can never achieve pricing the same as any other competitive railroad. Our dynamic and pricing is just that it's dynamic right? So the competitive forces change. They change over time. Sometimes they change quickly. Right now we love the environment that we're pricing into when it comes to truck competitive product. And there are some other markets that we're pricing into that are facing different pricing competitive dynamics. Those aren't set in stone. It's not like that's a law of nature. Those will and do shift. And I anticipate we're going to continue to price appropriately for the value that we represent and generating a really attractive return.

So is it just the basics of a cycle we're in where mix is not going your way but it is going the way of the others that are getting the 4% to 5% pricing? It's just a bad timing. Is that what you're saying?

What I'm saying is exactly what I just said which is we price for the value. We're pricing for an attractive return. We're pricing in a competitive dynamic. And those move a lot and it's generally a good market to be pricing in right now. The other thing I would say is -- remember exactly how we talked about price. We talked about yield and absolute yield dollars over total book of business. It's a nice conservative consistent way for us to measure ourselves in terms of yield that we're achieving and we're pretty optimistic as we look into the second quarter.

Okay. And then moving again back to the question on operating ratio. If I could reframe the question and simply ask, if you could maybe in broad categories why are you not at a better operating ratio today? If you were to look at the others and say why is Union Pacific not with the others in terms of operating ratio today? What would you point to as the main reasons?

So I'll start by saying we are actually better than the others although the CSX just produced a very good second quarter. So I'm not sure I want to go backwards to join the rest of the pack. But having said that, there are some very specific cost elements that are in the way right now that we are actively getting out of the way. And I'll let Cameron speak to those and what we're doing about it.

As velocity comes back to our network one particular area is the size of our locomotive fleet. And that has a positive impact in three different areas. Material to keep that fleet up and running, employee cost involved in working on those locomotives and then fuel usage as well to move the tonnage that we have on our network. So velocity returns would be very aggressive in rightsizing that fleet.

And correcting for those will give you a better generation toward a sub 60 and I know you saw the 55 OR target there. What gives us comfort that the 55 is achievable within a reasonable investment horizon?

Yes. So the $65 million that we called out is kind of excess recovery cost in the network this quarter. That's entirely over time and kind of inefficient use of crews, incremental cost of maintaining locomotives as Cameron just outlined, a sea rate that's both impacted by all the locomotive fleet as well as inefficient use for those locomotives. And then a handful of other Nits N Nats and which is mostly kind of like car hire for excess inventory. All of that is addressable. And when we remove that we have a much more attractive second quarter and not only that but that doesn't count the productivity initiatives that that's retarding from accelerating even further. So we're very confident in the 60 by 2020.

All right. Thank you very much.

Our next question is from the line of Ben Hartford with Robert W. Baird. Please proceed with your question.

Hey. Good morning, everyone. Rob, could you clarify what you expect the tax rate to be in the back half of the year?

Yes. For the full year, we're projecting its going to end up being around somewhere 24-ish. So I think it's reasonable to assume it's going to be around that 24 in the back half.

Okay. And in terms of just staying on the point about intermodal, what are -- could you size up UMAX and the MP fleet as it stands today? What are the expectations for that finishing this year and perhaps 2019? If we can have any sort of direction on that front.

Are you asking about the number of containers that we have?

Yes.

Boy, that's a stumper. I think it's around 40000 each, but I will confirm that back from Mike and make sure that we give the exact number. But it's something like that.

That's a present number?

That's a present number. We have some small additions we're making this year. But nothing that really moved the needle.

Okay. And that would be for both of those fleets?

They are roughly to same size.

Right. And then in terms of just small additions in both fleets in the back half of the year?

Small additions only in the EMP fleet.

The EMP. And any thoughts about '19 as we look and obviously rising truck load rates generally presume service improvements and an eye toward domestic intermodal being used in 2019? Any thought as it relates to capacity needs in '19 and potential additions to either those fleets?

We are currently looking at what we think we might need in 2019. We have some attractive business development opportunities as you suggest. But we haven't quite zeroed in on a number yet. And we do have some fallout as well. So we'll be looking to acquire containers. I don't think we know how many yet.

Okay. Is it possible that if you had positive let's say mid single digit type growth in domestic intermodal in 2019, are there enough opportunities to improve service and velocity such that net adds could possibly be flat in 2019 to both of those fleets?

We’re just really still in that evaluation process. I'm not sure what to tell you about that at this point. I think we'll get clearer as we get towards the end of the year.

Okay. Thank you.

The next question is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.

Thanks very much and good morning. I wanted to get you to comment on this year's peak season in a couple of respects. Firstly, one of the things that we're hearing anecdotally is that the peak season may have arrived early and potentially as early as June as BCO is try to get ahead of tariff. So just wondering if that's a dynamic you've been observing in your business.

I would not say that we think the peak is arriving early so much as I would say there's a strong demand because of tighter truck capacity. It still feels like there will be a peak that's kind of normal time period.

That's really encouraging Cherilyn right? From the standpoint of -- it's not like peak is happening now and then it's going to die off during normal peak. It feels like we've got strong volume entering what feels like it's going to be a normal peak which is really attractive.

Okay. And in terms of just your readiness operationally it sounds like you're feeling good. The only thing I wanted to ask about was it does sound like it could be a robust peak. Is there any reason to be concerned about the readiness of the Chicago Gateway in that context?

I don’t think so absent let's say product design changes that potentially goofed up the network. So if the network stays as designed right now amongst all the participants that interchange in Chicago Chicago's operating pretty well. Absent every once in a while there's a hiccup here or there. But I think in its current format with the benefits of the 12 years of create that have been invested Chicago should be okay. The one thing that keep your eye on is if anybody starts altering their plans around interchange for intermodal that could have an impact.

Great. That’s all from me. Thank you.

The next question is from the line of Bascome Majors with Susquehanna. Please proceed with your questions.

Yes. Thanks for taking my question here. In response to Allison’s question earlier you gave some anecdotal examples about share gain from truck into the merchandise business at kind of a micro level. I'm just curious do you guys track the opportunity and conversion impact at a macro level? Is this something that you think over the next year to really kind of adds points to either overall growth and merchandise growth in aggregate?

Beth?

We're certainly always watching what is moving out there in the transportation world and what we think is convertible to rail either from truck or barge or some other mode of transportation. So clearly we're using that as a business development tool all the time. What I would say is I think that those tend to be basis of some sort. They don't tend to be home runs those conversions. So we have to pile up a bunch of them to move the needle. But that's what we're here to do and the team's actively looking on that over time.

Okay. Well I appreciate that. And you also made some comments about feeling pretty good about the supply, demand balance and your pricing power in the domestic intermodal market looking out beyond this year. Do you think your pricing in the domestic business can be better this year than this year at this point just given how the market's progressing and we were able to price this year's numbers?

Well, I'm not sure how to answer that. I think if you keep having tight supply obviously that's going to allow everybody to be in an environment where you can achieve hopefully two things: volume growth and pricing growth. The way we calculate our numbers as people have told you is somewhat backward looking. So some of the impacts from the ability to get pricing that we're doing right now you're going to continue to see as you go out over the next several quarters.

Thank you for the time.

Thank you.

Thank you. This concludes the question and answer session. I will now turn the call back over to Lance Fritz for closing comments.

Thank you, Rob. And thank you all for joining us this morning and for your questions. We look forward to talking with you again after the end of the third quarter in October.

Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.