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. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may now begin.

Thank you and good morning, everybody. Welcome to Union Pacific's third quarter earnings conference call. With me here today in Omaha are Eric Butler, Executive Vice President of Marketing and Sales; Cameron Scott, Executive Vice President of Operations; and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting net income of $1.3 billion for the third quarter of 2015. This equates to $1.50 per share, which is down 2% compared to the third quarter of 2014. Total volumes decreased about 6% in the quarter, more than offsetting another quarter of solid core pricing gains. Carload volume declined in five of our six commodity groups with coal down the most at 15%. Automotive was the one commodity group with a year-over-year increase in the quarter with carloads up 5% versus 2014. On the cost side, we made significant progress aligning our resources to current demand. And I am pleased to report a quarterly record operating ratio of 60.3%. Going forward we will be intently focused on generating further productivity improvements. In addition, developing new business remains an important part of our strategy, whether we grow existing markets, develop new business with existing customers or find new market opportunities our commercial team is constantly filling the business development pipeline. I'm encouraged with the progress we have made as the men and women of Union Pacific worked tirelessly and safely to serve our customers and deliver value to our shareholders. With that, I'll turn it over to Eric.

Thanks, Lance, and good morning. In the third quarter, our volume was down 6.5%, with gains in automotive more than offset by declines in the other business groups. We generated core pricing gains of 3.5%, but it was not enough to offset decreased fuel surcharge and mix headwinds, as average revenue per car declined 4% in the quarter. Overall, the declines in volume and lower average revenue per car drove a 10% reduction in freight revenue. Let's take a closer look at each of the six business groups. Ag products revenue was down 4% on a 3% volume reduction and a 1% decrease in average revenue per car. Grain volume was down 11% in the third quarter. The strong US dollar and high worldwide inventories reduced grain exports by 32%. Slightly stronger domestic grain shipments partially offset the export decline. Grain products volume increased 1% for the quarter. July and August saw the largest domestic soybean meal crush on record, resulting in a 17% increase in soybean meal shipments. Partially offsetting this was a 4% decline in ethanol shipments driven by strong 2014 comps of higher production and shipments. Food and refrigerator product volumes were flat for the quarter as strength in import sugar and barley were offset by declines in frozen meat and potato shipments. Automotive revenue was flat in the third quarter as a 5% increase in volume was offset by a 5% reduction in average revenue per car. Finished vehicle shipments were up 5% this quarter, driven by continued strength in consumer demand. The seasonally adjusted annual rate for North American automotive sales was 17.8 million vehicles in the third quarter, up 6% from last year. In auto parts, volume grew 5% driven primarily by increased vehicle production. Chemicals revenue was down 6% for the quarter on…

Thank you Eric, and good morning. Starting with our safety performance, our year-to-date reportable personal injury rates improved 12% versus 2014 to a record low of 0.92. While we continue to make significant improvements, we won’t be satisfied until we reach our goal of 0% incidents, getting everyone of our employees home safely at the end of each day. With respect to rail equipment incidents or derailments, our reportable rate increased 17% to 3.56, driven by an increase in yard and industry reportables. While our reportable rate has taken a step back this year, we are confident that our strategy aimed at eliminating human factor incidents and hardening our infrastructure will put us back on a path of long-term improvement. In public safety, our grade crossing incident rate increased slightly versus 2014 to 2.25. We continue to focus on driving improvement by reinforcing public awareness through channels including public safety campaigns and community partnerships. Moving onto network performance, our operating metrics showed a step function improvement in the third quarter with net work velocity reaching levels not achieved since 2013. While weather conditions in the quarter were more favorable from an operating standpoint, year-over-year volume swings and business mix shifts continue to create a dynamic operating environment. However, the men and women at Union Pacific proved up to the challenge, diligently leveraging the strength of our franchise that serve our customers proudly. In regards to service, one of the key metrics we use to track our performance is our service delivery index. The measure, which gauges how well we are meeting overall customer commitments improved 8% versus the third quarter of last year. We also generated improvement in our local service product to customers with a 95.3% industry [Indiscernible], which measures the delivery or [polling] of a car to or…

Thanks and good morning. Let's start with a recap of our third quarter results. Operating revenue was just under $5.6 billion in the quarter, down 10% versus last year. A decline in volume and lower fuel surcharge revenue, along with negative business mix more than offset another quarter of solid core pricing. Operating expenses totaled just under $3.4 billion, decreasing 13% when compared to last year. Drivers of this expense decline were significantly lower fuel expense, along with volume-related reductions and productivity improvements. The net result was a 5% decrease in operating income to $2.2 billion. Below the line, other income totaled $30 million, up from $20 million in 2014. Interest expense of $157 million was up 9% compared to the previous year, driven by increased debt issuance during the last 12 months. Income tax expense decreased about 7% to $781 million, driven primarily by reduced pretax earnings. Net income decreased 5% versus last year, while the outstanding share balance declined 3% as a result of our continued share repurchase activity. These results combined to produce quarterly earnings of $1.50 per share, down 2% versus last year. Now, turning to our top line, freight revenue of $5.2 billion was down 10% versus last year. Volume declined about 6%, and fuel surcharge revenue was down $407 million when compared to 2014. All in, we estimate the net impact of lower fuel price was a $0.05 headwind to earnings in the third quarter versus last year, and this includes the net impact from both the fuel surcharges and lower diesel fuel costs. And as we expected on our last earnings call, business mix was a negative contributor to freight revenue for the third quarter. The primary drivers of this mix shift were significant declines in Frac sand, steel shipments, and bulk grains,…

Thanks, Rob. As you have heard from the team, we have made great progress in meeting this year's challenges. Our operating metrics have improved to more efficient levels, and our resources are now more closely in line with demand. We will continue our unrelenting focus on operating safely and providing a quality service product for our customers. We will also continue to grow existing business and to establish new markets. Even so, as Rob said, there are some question marks as we finish 2015 and head towards next year. One uncertainty, of course, is the extension of the positive train control deadline. We continue to believe that Congress will do the right thing for our country and our customers and will vote to extend the deadline. Beyond that, energy prices, the consumer economy, grain markets, the strength of the US dollar, all will be key to future demand. Over the long term, we are well positioned to safely provide our customers with excellent service, while delivering strong value to our shareholders. So with that, let's open up the line for your questions.

Thank you. [Operator Instructions] Our first question is from the line of David Vernon with Bernstein Research. Please go ahead with your question.

Hi, good morning and thanks for taking the question. Rob or Eric could you help us frame the – how challenging coal could be next year from a volume outlook if we were to assume kind of normal demand patterns, gas prices kind of staying where they are, are we looking at similar declines as we saw this year or something smaller than that?

As we said David, coal demand really depends on a couple of major factors. One the competitiveness against natural gas, and so what the outlook for natural gas pricing is, and certainly the weather and certainly export markets will have an impact on the coal market. Now at this point if you look at natural gas futures, there is no discernible improvement in that natural gas pricing. So you would assume natural gas will remain very competitive versus coal. I don't think you would project any improvement of coal market share against natural gas pricing and the weather is always an open factor.

But deterioration, would you expect – are there things that about your retirements on your fleet or new builds anywhere in the network that will give you some cause for saying that there is going to be material deterioration assuming the competitiveness remains unchanged?

So, again the main driver is kind of the competitiveness of coal. I think you should also look at the current inventories. The inventories as we mentioned are about 20 days above historical five-year average levels. They are actually about 30 days above last year third quarter levels. So you can assume that there would be some desire of utilities to manage those inventories down to a more normal level.

Okay, great. And then maybe just one quick follow-up on the pricing, obviously we heard a little bit from one of your interchange partners down in the Central South making some discussions on rates to maybe incentivize some coal burn. How do you guys think about that, are you guys changing your thinking about that given the change in competitiveness right now of coal and natural gas?

We don't about specific customer issues or specific commercial issues with customers. Our strategy has not changed. We think we have a strong value proposition. We are going to price to the value proposition to generate a return for our company. Our strategy has not changed.

Thank you.

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

Great. Good morning. Lance and team, great job on the operating ratio, but now that you are kind of at this 60 level, you maybe talk a little bit about what projects you still have that can improve, obviously we saw tremendous improvement in the velocity during the quarter, is that something that you still see can return to even a couple of year ago levels and there is more room to get that into the 50s, and maybe just talk about what projects you have underway that can keep improving that into the next few years?

Sure Ken. Before I turn it over to Cameron for a little more technicolor, like we have answered historically, there are just almost limitless opportunities for us to continue to improve the business. What you saw in the quarter and what we have reported for an average quarterly fluidity reflected in velocity has been accelerating through the quarter. So as we are stepping into the fourth quarter we feel pretty bullish about the ability to continue to make gain. And the other thing to think aboutfrom a service perspective is while the fluidity of the network at this moment in time looks like it has that any previous period from the standpoint of very good. There are still opportunities in specific service products that we can continue to make strides on. So Cameron, I will give it to you to talk a little bit more specifically about projects for productivity.

We continue to see opportunities in a number of different areas, including variable cost control, train length growth, terminal productivity, see greater fuel efficiency, and engineering and mechanically – efficiency initiative to help squeeze out as much productivity as possible. And we are gaining traction in all of these areas as Rob mentioned.

Great. I appreciate the insight. If I could just have a quick follow-up on the [fuel] pricing, you mentioned that it decelerated to 3.5% from 4%, is that due to more truck competition, I don’t know, Eric, if you mentioned it, I don’t know if their pricing contract's down or what's driving that, but maybe you can dwell into that a little bit.

Ken, this is Rob. Let me jump on that. A couple of points. One, how we calculate price, very proud of it. That is, we only count what actually moves. So, we calculate the yield, the price. So, the point being, volume has an impact clearly on our reported price. Anything I would say is our attitude. Our focus has not changed at all in terms of our commitment and understanding to drive price as a key contributor to what we've been able to achieve up to this point and it will be a key contributor as we move forward, continuing to get that solid core pricing. And I wouldn’t read too much, frankly, into the change from the second quarter to third quarter, because there is volume issues, there is the legacy that we called out. And there is some round, we always round the numbers in terms of what we report here. So, there's not as big of a gap if you will from the second to third as you might otherwise think. Again, our commitment and our focus on pricing is unchanged.

I appreciate the comment and insight. Thanks, guys.

Thanks, Ken.

Thank you. Your next question is from the line of Jason Seidl with Cowen and Company. Please go ahead with your question.

Now, thank you, and good morning everyone. You guys talked a little bit about some of the east coast business not falling back to not all there at least flowing back to the west coast ports. Do you think it's now permanently based on the east now, do you think peoples change their supply their supply chains?

This is Eric, Jason. Now, we do not. Frankly, as we said last quarter and I think the previous quarter, we do think that ultimately the cheapest best fastest supply chain will win and that still is west coast ports. There are still probably a couple 3% points of share that migrated over to the east coast ports during the port strike that has not migrated back. We think some of that is just some short term risk management, some hedging for the market and retail inventories. But we fully expect that the shortest quickest, most economic supply chain wins in the end and that's the west coast.

Okay. Now, that's great color. And Rob, just a quick question on pricing. I think you mentioned that about half a point was due to the legacy mix brought forward, just had. So, as we certain looking out to 16, should start just basing our assumptions on about 3% core pricing?

Nice try.

You can't [blame the guy]?

No, I get it. I mean, clearly we are saying that you can assume that the legacy is not going to continue, but in terms of what happens underneath or beyond legacy, we haven’t given a precise number of guidance, other than our commitment to core real core pricing gains above inflation. And we're not changing our attitude or focus there. What the number actually ends up being, stay tuned.

Sounds good. Guys, I appreciate the time as always.

Thank you.

Thank you. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. You been, I was going to ask a couple of questions on price and I guess is understanding, you are saying you're not changing your approach, but the market can change. And so, I'm wondering whether you perceive that what we heard about from just you and presumably another competitor taking a rate down on call. Do you think that the market is changing in terms of more broadly than that or would you say look there are targeted action that you really shouldn’t read into broadly. Because I think you're clear on what you're doing, but the market matters as well. I just want to -- what do we think on whether the market is really going to change or not?

Tom, this is Lance. Historically, we've always focused on providing an excellent product and then charging for the value that that product represents to our customer base. We faced markets that are very difficult, different headwinds and we faced very robust markets and that philosophy doesn't change. So, we are in a very competitive business. We compete aggressively for the business that we enjoy. And at the same time we expect to receive a price that represents the value that we provide and it has to be reinvestable. All that's real, and all that continues to be real as we look into the future.

Is it fair, I guess, if we look at you versus the market or competitor how you want to characterize that? Over the last several years, it's probably you've been a little bit willing to give up some volume, I think there were some contract moved away from you in coal in 20 -- I think 2013 and 2014. And so, you say well that's an example of being formant pricing being willing to give up a little volume. Is it fair to say that then your behavior and that willingness to give up a little volume to keep prices, is that way we should view you saying we're continuing with the same thing?

Tom, I wouldn’t change my answer to you at all. We expect to be paid for the value that we represent and we expect to be able to reinvest in our business.

Right, okay. Thanks for the time.

Our next question is coming from the line of Rob Salmon with Deutsche Bank. Please go ahead with your question.

Thanks. To get back off of Kens' earlier question on the productivity front. It was very impressive that you guys were able to pretty much extent train length across the network and environment where volumes were down about 6%. Can you give us a sense of what sort of siding constraints you guys are have across the network and the opportunity to expand that further?

Both of the train side as you saw there, equates at about 6000 feet and almost 90% of our network is 7200 feet capable. So, we really don’t have any siding constraints and it is up to us to maximize train length and meet customer commitments. So, well, we have a lot of opportunity in that category going forward.

Yes. I would add, it's very dependent on the lanes around the network. We still do have targeted capital investment that's oriented towards siding length extensions and being able to increase maximum train length on a particular route over and above what you see as average train length here. So, there are always or right now there are opportunities for us to continue to invest targeted capital to make that happen but we're a far way away from being at our average train length threatening our current siding length.

Thanks, really. I appreciate that color. With regard to PTC, Lance, you had briefly alluded to it in the prepared comments. Can you give us a sense of what the impact across the network would be if Congress doesn't extend it, and any lessons that you learned from the massive uptick in volume we saw on 2014 that you could deploy. Because to me, reading the announcement, the press release you guys had put out on the topic, it would impact a substantial amount of the network.

Yes. So, Rob, what we've announced, well we said that we would do is there is not an extension. And again, I'm very optimistic that Congress will be prudent and well, has an extension before we have to take any action. But what we've said is around Thanksgiving, in order to remove TIH from our railroad, we would have to start imposing an embargo. And that would be impactful. That means we'd have to stop allowing interchange product onto us of those commodities as well as start working with customers, try to figure out a way for them to ship it an alternative lines. Also we said as we approached the end of the year, we would start working with our Amtrak as well as the commuter agencies that we host to stop passenger traffic. Both of them would be very bad for the U.S. economy and for commuters. The TIH includes commodities like chlorine, that's used to clean drinking water. It includes products that go into fertilizer and other manufacturing processes. So, that would all have an impact on the U.S. economy. And then you can imagine in a place like Chicago, if the commuter lines were to stop running January 1, what commutes would be like for the 300,000 people a day that rely on those commuter lines.

Thanks so much for the time.

Our next question is from the line of Tom Kim with Goldman Sachs. Please go ahead with your question.

Hi, good morning guys. Nice quarter. With regard to the cost side, obviously we're seeing them come down year-and-year but also importantly sequentially. I'm trying to get a sense of like the pace of declines we should be anticipating for the -- the fourth quarter? Do you think the run rate we've seen in Q3, is it a reasonable Q-on-Q?

Rob.

Yes. Tom. I wouldn't take the run rate because we're satisfied that we make great progress, but that was a pretty steep successful decline from the second quarter which we're very proud of. And all I would say to you is we are going to control the things that we can control and as Cam has mentioned we got continuing opportunities while we make great progress, right sizing and realigning the organization; we are not done yet. We're going to continue to take initiatives to squeeze that out and be as effective as we possibly can. So, the run rate probably will be different but the success of our -- continue to be realigned and look for every opportunities we can to further that productivity initiative will continue.

Okay that's helpful, thank you. And then -- hearing. And that chuck is our increasingly competitive with the rails. And there is the common suggesting with pricing down for the TL that are potentially conceiving less share. Obviously, that's more of a certainly a remote open. But I'm just wondering with regard to the rest of your book of business, how much could you sort of size up would be potentially at risk of diversion to trucking. I mean, my sense to that be relatively limited but I just would love to hear your thoughts on that.

Yes. I think if you look at what's going on currently in the trucking environment, the lower fuel cost is allowing trucks to be more competitive vis-a-vis rail just by virtue of that fact. Long term trucks still have the same systemic long term issue that they've always had in terms of driver shortages, some of the productivity headwinds that they have with some of the CSA regulations, the road congestion, etcetera. So, we are still very confident of our ability to drive truck conversions which we demonstrated even in the third quarter in earning a model business. Certainly trucks are great competitor and there is some competitive impact that we always, [indiscernible] and effort. We are still positive about the position that we are in as a rail and driving conversions from truck to rail.

And case and point, you grew domestic intermodal in the third quarter by 1%.

Right.

Outside of intermodal, is it much of a threat or something we should be thinking about?

Trucks are always a competitor. We feel very good about our value proposition and our ability to compete.

Thanks very much.

Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead with your question.

Hey, thanks. Good morning guys.

Good morning.

So, Rob, why don’t you just follow-up your comment about head count in the fourth quarter being down about 1%. Could that imply a slight sequential increase from the third quarter average, even though ended the third quarter a lot lower than the average. I guess I'm just not throughout follow the down 1%. Are you adding head count back in the fourth quarter?

No. Scott, I just got to take you back. Remember, we had previously guided that we thought we would finish the year flattish with 2014, I think was roughly 48,000 number. What we're saying now given the confidence we have in the progress we've made today is we expect to end the year with the number being down a percent or so. So, I think compared to where we are now, it's flattish but a good volume and other initiatives will dictate exactly where that number lands but okay that's the map.

Yes. Our job going forward, Scott, is -- Cameron, continued stay focused on getting the housing order from an operating craft head count. We are also in the process of getting our housing order on a non-agreement perspective. Right, we talked about that in an announcement late in the third quarter. And we've got an opportunity in capital head count particularly in light of Rob's discussion that capital is likely to be down next year. As we exit this year, we got an opportunity to make adjustments there.

Okay. And then, Rob, you said a couple of times I think 4% labor inflation. What does next year look like?

We haven't finished our planning first next year, Scott, on a number of initiatives. But I think it's safe to say that the labor inflation will be lower than it was this year. Remember, this year we had the double wage, we had other issues that push the labor inflation full year up closer to that we had 5% to 6% in the first half of the year. So, I think it's competent, we're competent, says it's going to be lower than that. Exactly where that number lands at this point in time, again stay tuned.

Okay, great. And just, last just a quick thing on the CapEx. Is your comment that it's going to come down but we may not be able to get it down all the way to 16% of revenue or a lots on table, we could get it even lower than 16%, we just don't know.

Yes. What I'm saying there is the absolute number we would expect to come down, but it may not be in that 16 to 17 guidance range, yet, because remember this year because of the fall-off in the revenue, driven largely by the fall-off in the fuel surcharge revenue. And as you know and others know, we don't set our capital plan based on revenue. It's just the kind of guiding marker that we provide to you. So, it's possible that we'll quite make it all the way down to that 16 to 17 depending on how the revenue number looks as we work through our planning process and that's what I am suggesting.

Okay, great. Thank you guys.

Thank you.

Our next question comes from the line of Allison Landry with Credit Suisse group. Please go ahead with your question.

Good morning. So, I know there has been a lot of questions on price, but thinking about core prices of inflation, I was wondering if you could give us the sense of what overall rail inflation is currently running at?

Yes. Allison, this Rob. I mean, this year overall inflation again largely driven by that discussion I just had with the labor line is probably in the above three'ish, so maybe slightly higher than three, full year this year. Again, Allison, as you know, we don't set, again that's another marker similar to my discussion on capital. We don't set our pricing based on any one particular period inflation expectation. That's just a marker that we expect to continue to achieve above, that can be lumpy from one quarter to the next or one period to the next. But to answer your question, inflation overall was three-plus'ish this year.

Okay, that's helpful. And then thinking about intermodal, how much of the decline in the segment stems from your main competitor taking some share back as its network recovers and do you expect a further bleed in the fourth quarter given that the end has opened the northern region and added some new expedited intermodal service from Chicago to the PNW?

Yes. So, Allison, as we mentioned, the decline in our intermodal space was really in the international and the mobile space. And there is really a number of different dynamics that are going on in that. One is not to complete remigration if you will from east coast to west coast so that that is progressing. One is as you know in the liner steam ship business there is a number of different dynamics going on there with the different alliances and different entities deciding what lanes they're going to put their ships in. And certainly, kind of the suggested softness in China and other parts of the Asian and them all having the impact on that. So, those are really the drivers in terms of our domestic intermodal franchise. As we mentioned, we grew. This will be the seventh consecutive year of record of volumes. We feel great about our franchise, the position of our franchise and the strength of our franchise.

Okay. So, just to be clear on your answer, BN has not taken any of the share back that you may have gained last year or that's just not a significant factor?

So, as we talked at earlier earnings releases, we did have, I think Rob said a percent to 2% share benefit last year from business with the difficulties at our competitors, we fully expected that to migrate back and elsewhere in a couple of areas, those were intermodal, those were in grain, those were in coal, and we have NRC and those migrate back and backwards aligned with our expectations.

Okay, great. Thank you, very much.

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

Thanks, and good morning.

Good morning.

Maybe just a follow up on intermodal again. I know right now you're facing headwind from tough international comps, there is uncertainty in the retail space. So, I was just wondering bigger picture, when do you feel this business can get back to more of a GDP or a GDP plus growth environment versus the declines we've seen year-to-date?

Eric. Let me take a stab at that. The longer term, we feel very strong, very bullish on the intermodal product in general that in the long run is going to be driven in large part by U.S. consumers and consuming both international product as well as domestic product. It's also predicated on our ability to have a service product that can penetrate against a truck. And all of those secular dynamics are set up positively for the long run. In terms of dislocations that are happening in the short term, it's hard to time things out. It is very dependent on what happens in the U.S. economy, what the jobs pictures look like what the earning picture for consumers look like, what the U.S. dollar is doing. Adds then to all that, we're focused on controlling what we can control which is an excellent service product. We got the best franchise from a domestic and international intermodal perspective in the U.S. and that will serve us well over the long run.

Okay, great. And maybe then just follow-up on that. Looking at your intermodal business today, I know it varies by lane but what's the average discount for intermodal versus truck in your network today. And longer term, where do you think that percentage could go without causing a significant slowdown in intermodal volume growth?

Yes. We've said historically, a 15% to 20% as a rough we look on, would be part of our core strategy of course, to minimize that as we increase our value proposition.

Okay, great. I will leave it to that. Thanks for the time.

Yes, thank you.

Our next question is from the line of Alex Saraci with Morgan Stanley. Please proceed with your questions.

Hi, good morning. Thanks for taking my question. So, you guys have obviously made a lot of progress on aligning the resources in light of the softer volumes. And I know the volume outlook is uncertain in a lot of areas right now and it's tough to actually point to where and what might drive an acceleration. But should volumes actually start beginning to surprise to the upside in 2016 for whatever reason? How do we think about your ability to kind of leverage the resources you have right now and do you feel like there is a lot of operating leverage in the business in where your resources are currently or would you anticipate you have to kind of add back pretty aggressively. I know it's kind of depends on what the volumes actually translate but how do we just sort of think about the operating leverage intermodal if volumes actually do surprise the upside?

Alex, we would welcome nothing more than a surprise on the upside in terms of volume next year. And we are well positioned to be able to absorb that into the existing network. Cameron has got adequate locomotives and crews ready all around the network to be able to handle an uptick. The fluidity in the network would be able to absorb it rapidly. He and the operating team have done a great job in terms of getting the terminal and yard productivity up, and we will be able to bring in cars readily into that environment and handle it fluidly. And between Eric and Cameron and the rest of the team, they've done a stupendous job on stabilizing our train plan and making sure that it's robust enough to be able to handle some incremental growth. So, that would have significant leverage for us and we'd welcome it.

Okay, that makes sense. And then just my second question here on, you suggested that there are some headwinds in the fourth quarter and that earnings per share would probably be down on a year-over-year basis. Can we kind of can you help us think directionally relative to the kind of 2% decline you saw in the third quarter? Can we expect another similar low single digit decline in the fourth quarter or probably a bit of a worse year-over-year move there, given some of the puts and takes?

Alex, this is Rob. What I am calling out there, I mean, we'll see how the world actually plays out in terms of volume. But as we look at this point, we're not giving precise earnings guidance. It does look like we're going to have a bigger headwind in the fourth quarter on mix year-over-year and the reason for that is last year's mix actually was quite favorable. And if you look at the business, we were running sand fairly strong, coal was relatively strong, Ag was a pretty positive mix player. And those are things that we just don't see repeating in the fourth quarter. In addition, as I called out, we see a headwind year-over-year in fuel because last year's fourth quarter we got the benefit of about a nickel of the timing of fuel the fourth quarter last year which we don't see that reporting repeating again this year. So, I am calling out that year-over-year, it does look to us like the fourth quarter does have some bigger challenges than frankly the third quarter did.

Okay, that makes sense. Thanks very much for the time.

Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Hey, thanks, good morning. I want to talk a little bit about the coal network and the outlook for next year. Obviously, still some challenges particularly market share relative to natural gas. When you think about the network, one of your eastern competitors has started to make some changes in terms of the network, that's a little bit more structural in nature. I guess I'm just curious from your perspective how you think about that as you look out to 2016 and maybe beyond, given the coal outlook. Are there things that need to be done there or things you could do to potentially improve that the value proposition there?

Chris, before I hand it over to Cameron for a little more technic color, the thing to note about our coal network is it's largely run on a shared network. So, we have made fundamental adjustments in resources that reflect coal being down. You see that in our adjustment to [T&Y] craft, the locomotives, it's also embedded in some of the cars that we've stored. And we're constantly looking at our assets as they are currently deployed to make sure they fit the demand profile for commodity like coal. Cameron?

You are exactly right, Lance. And our coal network is truly built out. So, for us it's really more of how we manage the tangible assets around locomotives and crews and we'll continue to do that. Having said that, we'll continue to study the assets around our coal network and react appropriately.

Okay, that's helpful color, I appreciate it. And then, Rob, just coming back to you on the buyback just for a second. Obviously, you talked about it not being a run rate in the third quarter and that makes complete sense to me, I guess. If you could help us maybe think about how you might be opportunistic going forward, I guess I just want to get maybe a rough sense of maybe how you view that proposition as you think about this quarter and next is in terms of the buyback and the run rate we should be expecting?

Yes. I mean, Chris, I mean, you probably could. Right, my answer here and everyone would say, I mean, we're not giving precise guidance, because in terms of what we're in buyback. Because if we don't do that, I mean, we certainly value and understand the value of a continued buyback program. And we kind of walked our talk there. And as we've always said, we will be opportunistic in the marketplace, based on factors like the price of the stock. So, all those are factors in terms of how it will look as we play out into the next several quarters. We will continue to take the same mindset if you will, in terms of how we approach the opportunity and approach how many shares we actually do buyback.

Okay, that makes sense. Thanks very much guys, I appreciate it.

Our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Yes, good morning guys. I want to ask another one on the coal here. How much of the mid team's volume decline that you're tracking towards for this year? Would you attribute to the year-over-year decline in natural gas prices?

Bascome, this is Eric. It varies. I would say the vast majority of the decline is in some way or the other attributable to natural gas prices. As you know, they are different high sell regions that we operate in and the impact of natural gas is different in those regions. But I would say vast majority is attributable at the end of the day to the competitiveness of coal with natural gas with one other factor and that's being our export coal market, just the worldwide export coal prices, that's also a factor.

Understood, I appreciate that. And just to follow-up, I know there is a lot of significant moving parts here, but say natural gas prices are flat next year, so you don't have that magnitude of a year-over-year headwind on that front and winter is normal. Just roughly speaking, what kind of 2016 coal volume outcome are you looking at here? I mean, is this the situation where you could be down double-digits again or is kind of mid-single digits more of what you guys are planning for?

Hey, Bascome, as I mentioned earlier, one of the other factors that is a factor is the current level of coal inventories that now at the end of the third quarter there are 30 days higher than where they were last year and 20 days higher than the average five year average. So, I would say is their expectation to assume utilities would work those down, not only maybe even to the averages or below the averages, but they're trying to be in inventory management mode.

Understood. I appreciate the time this morning. Thank you.

Thank you.

Our next question comes from the line of Brandon Oglenski with Barclays. Please go ahead with your question.

Yes good morning everyone and congrats on the good quarter here. I know cutting budget can be pretty difficult. So, Lance, by my calculation has been about 12 minutes since you got a question on pricing. So, I'm going to come back to it because I honestly think that's probably the biggest concern for your shareholders right now. But I just want to ask a more general question about the industry right now because it's kind of two parts here. If you look across the industrial landscape, we are definitely seeing deflationary pressure for a lot of your companies. Energy CapEx is likely to be down again next year and obviously commodity prices are a lot lower. So, it's just less value to extract from that supply chain when you think about it holistically. But then, secondly, I mean, the industry obviously has an issue here at PTC, we're late relative to while that was probably poorly written, but none the less in this environment where your customers are facing a lot challenges and we do have regulatory issues, how do we balance the reinvestment to service and the price equation such that we try to keep all the constituents happy?

That's an excellent question, Brandon; one that we are constantly working on. Our primary focus, first and foremost is a robust reliable excellent service product and in that context it's making that service product better than the alternatives. That puts us in a position to be able to secure a price premium. And that represents the value of that service product. So, long as we're in that position, then we can handle the rest of the pressure points appropriately. And when it comes to a regulation, our best defense in a regulatory environment is happy customers and customers that are getting an excellent service product. That won't stop the conflict around the pricing discussions that we have, it won't stop regulators from wanting to find ways to regulate us. But it will stop some of the pressure and that's our biggest defense when we focus on those.

I appreciate that. And is there risk here though that if we face further declines, which it feels like we are in the fourth quarter, that this whole process just takes a little bit slower pace in terms of where our margin improvement return improvement, just understanding that we have a lot of other pressures across the industrial landscape?

We are keenly focused on making sure we generate a really attractive return on our investing capital. Embedded in that is trying to make sure we continue to improve our margins. I think we've outlined today that there are ample opportunities to continue to make that happen. One of them is price, but it's only one of the mechanisms and that's what we're focused on.

I appreciate it.

Our next question's from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.

Thanks, very much and good morning. So, you cited a high retail inventory levels, the volume impediment for the last couple of quarters and I'm just curious how far along you think we are in drawing down those inventories and putting the inventory correction behind us?

Yes. We've actually only mentioned it this quarter and little bit last quarter. So, it really depends on the consumer. Consumer confidence does appear to be strong, it does appear to be a trend where consumers are paying down debt and spending on non-product things like data, internet, healthcare services, etcetera. I do think if you talk to a lot of the BCO's and the retailers, they do have an expectation that with consumer confidence remaining strong, there should be a pickup during the holiday season of sales but time will determine whether or not that happens.

Okay, that's helpful. And then just a very quick one on cost. You called out $50 million of inefficiencies last quarter which is down from a $100 million in the first quarter. And wondering what fell in the third quarter, if anything?

Cherilyn, this is Rob. Yes, we made good progress on that. Remember that marker that I was sharing with you in the first and second quarter was against the previous year and we feel very good about as Cam walked through. We feel very good about the quarter progress we made in better aligning our resources. Having said that, we are not done. I mean, that's last year it wasn't the end of the game. So, we still see opportunities for us to continue to squeeze out productivity initiatives on multiple fronts and we are going to continue to do that. But in answer to your direct question of compared to what I showed you last quarter on the year-over-year, we made very good progress in taking out those inefficiencies that we showed you in the second quarter.

Okay, thank you. That's my two.

Thank you, Cherilyn.

Our next question is coming from the line of John Barnes, RBC Capital Markets. Please go with your question.

Hey, thank you. And looking at the couple of the kind of car load outlooks on the positive side that you provided, I need the one they are starting to get a little bit of attention is the auto side. I know right now autos' continues to be very strong but with a soar that is at the historical kind of upper end of the range, any concern there that if you see a bit of a correction maybe a normalize level of production. And especially given the case you mentioned, we got retooling going on at a couple of Mexican facilities for GM and Chrysler. Is there any concern that you start to see maybe some of that growth in the auto sector slack off as we go into the new year?

Yes, John. I think that's a great question. Certainly as you mentioned, the SAAR's rate is kind of at a barn burner rate. The amount of debt associated with auto loans is that. I think the auto manufacturers would still be pretty bullish because of the features that they think they're providing to the consumer, and the average age of automobiles out there. But the sales rate is at a high number and so that by definition would indicate a little caution and concern. We don’t have too much concern about model changeovers. There is always model changeovers. We see that year-in year-out. We have the benefit of a very broad diverse autos franchise and somewhere there’s always that happening. So, we don’t see that as too big an issue, but certainly the sales rate, the amount debt associated with sales, you could say something there to watch out for.

Hey, John. Regardless of what SAAR is. What we really are pleased with is the UP Automotive franchise. It’s outstanding, it gives us great access to Mexico, products produced in Mexico, gives us great access to the ports of products produced over season imported. And we have an excellent distribution system for finished vehicles on in the Western United States. We're in a very good place when it comes to the automotive franchise.

Yes, no doubt. I’m glad to see you taking advantage of that now. I just with a couple of the other pressure points out there and although having been kind of one of the bright spots I was getting a little nervous about. You need time to see a turnaround, maybe begin to return to normalization. That’s just the reason for the question. One follow-up on the buyback, Rob, you talked about opportunistic in and I’m just kind of curious, have you done buybacks overtime? Have you ever gone back in and you done a look at the success of your buyback program as maybe a program done a little bit more ratable per quarter a little bit kind of more consistent in terms of the absolute dollar spend or the absolute shares bought back versus maybe timing it a little bit and being more opportunistic in and if you ever looked at that and doesn't that guide you at all in terms of how you approach your buyback effort?

John, this probably will shock you, but we look at it every day and feel are very comfortable that what we have done to-date works for us. And we're not changing our approach or that how we look at it but I understand the point of your question, but rest assured, we look at what’s the right way to deal with this and we’re confident that we are doing the right thing.

Very good. All right, thanks for your time today.

Our next question comes from the line of Matt Troy with Nomura. Please go ahead with your questions.

Thank you. Just a housekeeping question. I noticed in your commentary about expenses specifically on comp and benefits. You did not reference and sent it comping crew. The other railroad, it’s been about tailwind to a two and a $0.2 to $0.6 per quarter. I’m just trying to think about forward modeling in fourth quarter, was there a positive impact that you just didn’t call out or is there potentially a larger crew up that we’d expect to see in the fourth quarter as we round the quarter in the yearend?

Yes, Matt, this is Rob. Yes. I mean, I don’t see any general -- not calling out that there would be any change in terms of the direction we've been and we haven’t changed our approach. And so I don’t anticipate of being any big swing in that.

Okay, thank you for that. And then just the second question would be on coal longer term. Obviously, the eastern rails have had to or and will have to continue to live under the threat of environmental regulations, which basically coin the question of viability of some of their sourcing basins as well as their customers. Some of the pushback we get from investors and union specific is hey those guys are kind of have to live through it to the next five years. It’s a long time ahead of us but just wanted to get a sense, have you at very high level looked at whether it’s plants being decommissioned, shutting down, or new gas-fired turbines coming online with your system. What potentially just could be vulnerable of your existing business as we look at over let's call it three to five years basis in terms of just sourcings which is just the viability of certain customers? Thanks.

Hey Matt, this is Eric. We look at that in depth continuously as part of our strategic and tactical analysis of our market. I would say that at a high level, coal continues to represent ongoing forward probably and necessary minimum third of electrical generation in the U.S. short of some new technology, I'll call it Star Trek technology just for short hand purposes. Coal, of necessity is going to be a part of the electrical generation of this country for the foreseeable future. And so I think you could perhaps the coal get to a minimum I'll call it a 30% market share but short of some really new generational technology and I think you'll right now for the foreseeable future that’s probably the minimum that will be.

Matt, this is Lance. So, I want to provide a little editorial comment as well. I think United States is blessed with the coal reserves that we are and our ability to generate electricity with coal, relatively cleanly, and it’s never been as clean as it is today. It would be a mistake from the U.S. economy perspective, our competitiveness globally to continue to regulate that out artificially. I think we have to work on continuous improvement with the emissions from coal fuel generation, but it would be a mistake to artificially retard that too much.

Understood. Thanks for the detail everyone.

The next question is from the line of Cleo Zagrean with Macquarie. Please go ahead with your question.

Good morning and thank you for your time. My first question also on price. Against very strong yield that fuelled this quarter, the relative weakness in automotive and intermodal; could you please comment on the driver there whether it is mainly mix or comparative dynamics and how you expect them to play out into next year? And specifically, do you expect domestic intermodal to grow more strongly than international, with potentially positive impact on price? Thank you.

Hey, Cleo. The numbers that you see in autos and intermodal from kind of in our yield standpoint is really hindered by the fuel cost surcharge reduction. That's more than a 100% of that impact.

And then, your second question was Mexico versus international on intermodal?

No. Just [indiscernible]. I simply added back an estimated 4% to 5% fuel impact through each of the price boat of ton-mile numbers that we see there and I appreciate that fuel impact would be different across safe categories. But so maybe then you could comment, is that are we missing something by seeing auto and intermodal as weakest in terms of yield but for mile year-on-year? And then my second question was whether domestic should grow faster, domestic overall than international next year and that's get some help to pricing overall from mix perspective. Thank you.

Quick -- Cleo, this is Rob. Let me take that first question. I would caution you not to just use straight line numbers on it because I think the piece to answer to your question what you're missing, I think what you're missing in that analysis is mix. Mix has an impact within each of the commodity groups in terms of what ends up being reported as average revenue per car on top of each of their individual impacts from the fuel surcharge. So, I would just caution you that there are differences within each commodity group.

Yes. And as you know we are not going to give guidance in terms of pricing in the future. We do think that the domestic intermodal market should continue to have strong pricing opportunities in 2000 and as we go into the future.

Okay, but faster or slower than international with all the noise we had this year?

There is a lot of input, a lot of ins and outs that happen. There are lots of dynamics as you know going on in the international intermodal market that are dynamics being driven by other countries and steam ship liner carriers. We feel good about our value proposition. We feel very good about our domestic intermodal franchise and our ability to get price on that.

Okay, I appreciate that. And the second question relates to CapEx. Can you please remind us of the share that you consider discretionary versus maintenance or require renditions given shifts in the geography of demand and highlight for us those discretionary areas in which it appears prudent with step back this time? Thank you very much.

Cleo, we've historically said and I don't think it's changed much to kind of maintain what we've currently got is about $2 billion plus minus number and after that it's things like technology, PTC, capacity additions, commercial facilities, new equipment, etcetera.

Okay. And would you be willing to share any as if you're speaking to an engineer, what areas would you like to you think you see maybe prudent for as best candidate for retrenching next year?

As we are making our capital plans next year, we're just constantly evaluating both capital productivity in terms of dollar per unit that we put in the ground or buy and where exactly we're putting it. So, I won't make any commentary on exactly what those plans look like.

Okay, thank you.

The next question is coming from the line of Ben Hartford with Robert W. Baird. Please go ahead with your question.

Thanks, good morning. Rob, a quick question. I just wanted to use your perspective on the risks to continue to return on asset improvement for the rail line. You've done a great job doubling it over the past seven years. We talked a lot about pricing on this call but if you think about just the three simple factors to drive that higher going forward pricing volume growth and service improvement. In your mind, what is the biggest risk or a point of concern from your perspective as it relates to inhibiting continued ROA improvement for the rail lines of those three kind of fundamental inputs?

Yes. I mean you're exactly right, Ben. That the lever says you've heard us talking as you fully understand the levers that draw this from where we once where to where we are today are productivity which is driven by the service. That sort of has also enabled us to get the right place in the marketplace and volume is always our friend in that calculus. We are going to control those that we can best control. So, I would say, frankly, the biggest risk I see at this point is that which we have less control on and that's the economy and what that then gives us in terms of volume to play with. But as I've said many times and you've heard us say, we're not going to use the lack there of volume to slow us down on our initiatives to continue to make progress on that which we can control, but that's what we are going to continue to do as we have over the last decade.

Okay. That's helpful. Thanks.

The next question is from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your question.

Boy, you guys are popular. Congratulations. Question for Eric, kind of broader picture. As we look at the four areas that are kind of the biggest areas of the volume decline right now, so I will throw coal in there, metals, crude and frac, when are you hopeful that you will start to see positive year-to-year comparisons and then I have a follow-on related to that.

I think as we've been saying throughout the call, there is uncertainty about the going forward outlook in all of those and I am not sure our prediction will predict us any better than anyone else. Certainly the strong dollar is impacting our metal steel business, our domestic metal steel business, oil prices will be a direct factor in terms of the amount of drilling the amount of crude by rail and then the natural gas will be a direct driver in terms of the amount of coal. So, at those points, an ability to predict those items and that’s right, have any better ability than anybody else in the marketplace to do that.

Yes. I was just curious in your view, yes. All right. Let me just follow-up on that. The question was asked earlier, you're attacking the variable cost and you are getting a lot more momentum with that. And I think you mentioned we're not going to do much with the fixed cost in the coal network, but as you look at the railroad and how these business units have changed just over the last 12 months, where do you think there are opportunities to attack the fixed cost infrastructure beyond just taking down employees and taking down locomotives and assets dedicated to it?

Jeff, this is Lance.

Yes.

I don't think we said we're not going after fixed cost. We focused the commentary on some of the variable cost, but where we have opportunity to for instance reduce our CapEx or for instance reduce the physical footprint of shops that maintain locomotives or other areas like that. We're going to take advantage of those as well. I think what we were trying to impart is that our coal network is not isolated and independent from our overall network. And so it would be very hard to tease out individual physical assets hard assets that are completely dedicated to coal and isolated on their own.

Okay. So, hence the shared network term. Lance, thank you.

Okay.

Our next question is from the line of Don Brown with Avondale Partners. Please go ahead with your question.

Good morning, everyone. Real quick, and I kind of just trying to do some back of the envelope math here in -- look at what has been a 40% decline in fuel and as translated into essentially what is a 7.9% headwind in pricing, if I look at your reduction and yield realized and the core pricing of 3.5% that you stated. Would that imply that you would even if you were to go flat from the current levels that at least in the early part of next year you would have to -- he was looking at a 16% decline. I feel you'd have to achieve it essentially at 3.2% or higher core pricing in order for pricing realized to be flat?

Rob?

Don, you may have stumped me in terms of the actual numbers that you just worked through because I frankly wasn’t probably --.

Relatively speaking.

Yes. But I would just say that mix is clearly a factor in that, so just be careful in your analysis to factor that in.

Sure.

And again, all I would say about the pricing, is, we are going to continue to focus on driving value to our customers, continue to drive productivity and continue to drive price where we can in the marketplace. And we know that the underlying value of our service product to customers is a key component to that and it all kind of hangs together there. So, we're going to continue to focus on driving as much as we can on it.

Well, so, even with the best service available are you going to be able to go to customers whose volumes are down in the high single digit low double-digit range and as far and receive better than 3% pricing?

Don, this is Lance. There is never a conversation at our commercial team enters into with the customer on price; that's easy. It doesn't matter if their volumes' up or the volumes' down. So, clearly Eric and his team into the environment that we are in right now have secured what in the third quarter 3.5% coal price and then in the previous quarters as much as 4% coal price. Though none of that came easy or was a layout and I expect them to continue that good hard work into next year's securing an appropriate price for the value that we represent to our customers.

Fair enough, good luck.

Thank you.

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

Thank you very much, Rob. And thank you all for your questions and interest in Union Pacific, this morning. We look forward to talking with you again in January.

Ladies and gentlemen thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.