Q4 2021 Union Pacific Corp Earnings Call

Greetings and welcome to the Union Pacific fourth quarter earnings call at.

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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 begin.

Thank you, Rob and good morning, and welcome to Union Pacific's fourth quarter earnings Conference call with me today in Omaha, Kenny Rocker Executive Vice President of marketing and sales, Eric Gehringer Executive Vice President of operations, and Jennifer Hayman, Our Chief Financial Officer.

As we wrap up 2021, I want to start with a thank you to the Union Pacific team. This past year has been anything but easy as we dealt with massive weather events wildfires supply chain congestion and continued impacts from the pandemic through all of those challenges our employees did the hard work necessary to deliver a wreck.

<unk> financial year, I am so grateful for our team's strength in their determination that give me confidence that our best days are truly lie ahead.

Turning to our fourth quarter results. This morning Union Pacific is reporting 2021 fourth quarter net income of $1 $7 billion or $2.66 per share. This compares to adjusted fourth quarter 2020 results of $1 $6 billion or $2 36 per share you'll note.

That 'twenty 'twenty reported results included an impairment charge related to our Brazos yard investment.

Our fourth quarter operating ratio of 57, 4% deteriorated 180 basis points versus 2000, twenty's adjusted or largely driven by the headwind from fuel prices for.

For the full year, we achieved a record 57, 2% operating ratio an improvement of 130 basis points versus 2020 adjusted results.

And as Jennifer will lay out in a few minutes. We're on track to achieve our full year operating ratio that starts with a 55 in 2022, even with the challenges of the past year, we set fourth quarter and full year records for operating income and net income.

The comparison to 2019 further demonstrates the achievements of the team over the past two years as you'll hear in greater detail from Eric our fourth quarter safety and service performance did not meet expectations.

I am pleased however that as we exit the year our network is healing, reflecting back 2021 was a difficult year in many ways, but through our commitment to P. S R and delivering for our customers. We navigated each obstacle and are now better for having dealt with them. During 'twenty 'twenty. One we took significant steps to advance our E. S. P F.

It's capped off by the release of our initial climate action plan in December there's plan lays out a framework to achieve our 2030 greenhouse gas emission reduction targets and includes a commitment to net zero by 2050, and we are the only U S railroad to do so.

One element of our plan is to produce overall fuel consumption and we made continued progress last year.

Our full year fuel consumption rate improved 1% for a new record level. This represents the third consecutive year, we improved our fuel consumption rate on a year over year basis, and it helped our customers eliminate $22 9 million metric tons of greenhouse gas emissions by using rail versus truck so well.

Get started with Kenny for an update on the business environment.

Thank you Lance and good morning, fourth quarter volume was down 4% compared to a year ago.

In our industrial and bulk segments were more than offset by a decline in our premium business grew from continued global supply chain disruption.

However, freight revenue was up 10% driven by higher fuel surcharges.

Positive mix and strong pricing gains.

Let's take a closer look at each of the business groups.

Starting with ball revenue for the quarter was up 16% compared to 2020, driven by a 5% increase in volume and a 10% increase in average revenue per car, reflecting higher fuel surcharges positive mix and strong core pricing gains.

<unk> and renewable carloads grew 13% year over year.

Our efforts to switch customers to index based contract are supporting domestic coal demand as a result of higher natural gas prices.

The sequential decline was due impart to software demand from milder weather in the fourth quarter.

The harvest for grain and grain products drove a 15% sequential improvement.

Our shipments were down 1% compared to 'twenty 'twenty due to reduced grain exports shipments to the Gulf.

Weaker grain shipments were partially offset by our business development efforts and strong demand for biofuel BARDA.

Budweiser carloads were up 9% year over year due to strong agricultural demand and increased X.

Potash shipment.

Moving on to industrial industrial revenue was improved by 14% for the quarter.

Driven by an 8% increase in volume average revenue per car also improved 6%, primarily driven by higher fuel surcharges and core pricing gains.

Energy and specialized shipments were flat compared to 2020 <unk>.

Our demand for LPG and soda ash was offset by fewer project related waste shipments and petroleum products.

Volume before its product grew 7% year over year, primarily driven by demand for brown paper used in corrugated boxes and scrap paper.

Industrial chemicals, and plastics shipments were up 6% year over year due to strengthening demand and business plan.

Metals and minerals volume continues to be a bright spot.

Volume was up 18% compared to 2020, primarily driven by our business development efforts along with strong steel demand.

In addition demand recovery for construction materials and favorable comps for Frac sand and contributed to strong year over year growth.

Turning to premium revenue for the quarter was up 1% on a 14% decrease in volume versus 'twenty 'twenty.

Average revenue per car increased by 17% due to higher fuel surcharge core pricing gains and a positive mix of traffic.

Automotive volume was down 10% in the quarter due to semiconductor related parts shortages and associate at plants shut down.

Sequentially, we thought 10% increase versus the third quarter due to improved semiconductor availability.

Intermodal volume was down 15% driven by continued international intermodal supply chain disruptions impacting the quarter as ocean carriers and beat the old shifted more freight support support.

Sequentially intermodal volume was down 10% versus the third quarter as global supply chains remain challenged.

Now looking ahead to 2022 here are the economic indicators that correlate closely with our bit.

You see that industrial production is currently forecasted to grow at 4.8% in 2022 .

We also recognized that we will face continued challenges in our energy related markets.

But despite those hurdles we continue to build upon our solid strategy.

The third grow and win together.

This strategy enables us to outperform the market with a reliable service and continued focus on enhancing the customer experience.

So as we began 2022 I'm excited and bullish for the opportunities we have in front of us.

Where our bulk commodities, we are optimistic about the growth in most of our markets due to favorable market conditions and business development win.

Well, Florida, Lither, we anticipate incremental growth with strong market demand and the long term deal with Canpotex, where we have expanded terminal capacity to handle more volume with longer train.

Coach at the year over year growth based on the expectation of continued favorable natural gas prices.

Additionally plant retirement is forecasted in 2022 will be offset by two new contract win that started on January 1st.

For grain, we have tough comps versus 2021 as exports have been strong for the last couple of year. However.

However in grain products, we are leading the market in biofuel development by secure and opportunities on both sides of the house, the inbound feedstock and the outbound finish biofuels.

Moving to our industrial markets, we continue to be encouraged by the strength of the forecast for industrial production. This will positively impact many of our markets like metal.

Customer expansions and business development wins will grow will drive growth in our industrial chemicals and plastics commodity group.

However, as we moved through the year, we expect lumber shipments to be adversely impacted by the current forecast for housing starts.

And lastly for premium we expect strong uplift for both our automotive and intermodal businesses.

Automotive sales are forecasted to increase from 15 million units in 2021 to $15 4 million in 2020 to do the vehicle inventory restocking effort.

Plus with the convert finished vehicles and auto parts shipments from over the road will further strengthen <unk> automotive business does.

Messick intermodal will benefit from retail inventory restocking continued strength in retail sales and tight truck supply.

We're seeing slow improvement on our international volume.

But we also remain cognizant of the continued labor shortages that are impacting the global supply chain.

Setting aside those forces outside of our control, we continue to create our own <unk>.

<unk> to grow.

We are focused on expanding our reach into new market than the industry.

We're growing our footprint in the twin city than inland Empire Intermodal terminal. This quarter. We will also have a new product offering with our AD trends both site at global for.

And the Knight Swift business when that started this month positions us for robust growth in 2022.

But just to be clear, we're not only investing on the intermodal side, we're making significant investments to support growth on the carload side too.

We've recently purchased to transpose sites and strong economic growth areas like the inland Empire and Phoenix as.

As we forge ahead with our aggressive commercial strategy, we're accelerating growth beyond this year, the future looks bright heading into 'twenty 'twenty three as we just announced that U P will be the primary intermodal rail carrier in the west for Schneider. This new business will startup in January 20th twenty-three.

I'm proud of our commercial team.

They are intensely focused on working with our customers to find creative solutions to win in the marketplace.

We are anxious to build upon this momentum and grow with our customers with that I'll turn it over to Eric to review our operational performance.

Thanks, Kenny and good morning, 2021 proved to be a challenging year operationally as we saw ripe range of events impact our network from wildfires the supply chain congestion the team leverage their collective strengths to find solutions to keep trains moving we exited the year in a more fluid state recognizing additional improvement is still imperative.

Taking a look at our key performance metrics for the quarter on slide 10.

Compared to fourth quarter 2020, our operating metrics deteriorated.

Although we improved most of our metrics sequentially from third quarter.

Freight car velocity was impacted by reduced crew availability due to an increase in COVID-19 infections, and providing time off for vaccinations.

[noise] through reducing our re crew rate recalling remaining furloughed employees streamlining processes to onboard cruise and increasing crew vaccination rates our crew availability improved throughout the quarter.

Our intermodal trip plan compliance of 78% is a decline from last year. However is a 12 point sequential improvement from third quarter results. This sequential improvement is evidenced that our intermodal assets are balanced and we are poised for growth.

Our manifest and auto trip plan compliance results of 58% represented a decline both year over year and sequentially crew availability had a greater impact on our manifest network. The December manifest and auto trip plan compliance results of 62% indicate we are trending in a positive direction and we are building on these gains to start the year.

Sure.

Efforts during the quarter focused on the southeastern portion of our network and we successfully returned manifest operations to a fluid state. Our bulk operations. However are not currently to a level that meets expectations. We are focused on driving improvement to this network as we did to the manifest network.

Turning to slide 11, our efficiency metrics remained strong in the quarter. Although some results were muted by the crew availability and lower volumes.

Locomotive productivity declined 9% compared to fourth quarter 2020, due to higher locomotive resources to assist with recovery efforts in the southeastern portion of the network.

Fourth quarter record workforce productivity improved 1% to 1046 daily miles per FTE.

Recognizing the importance of balancing strong crew utilization and planning for the future. We are focused on effectively managing crew levels were in the marketplace hiring although we have been challenged in certain locations.

Working with our partners in workforce resources to expand our reach we are developing creative programs and campaigns like our second chance program to attract new employees to Union Pacific.

Train length increased 2% from a year ago to over 9300 feet enabled by the completion of 15 signings during the year, although our ability to grow train length in the fourth quarter was impeded by lower volumes in the intermodal business. We did deliver train length improvement in other business lines, including a 4% improvement in our <unk>.

First train length.

Utilizing the strong foundation built with the adoption of P. S are the team is ready to handle the expected growth in this and future years.

Turning to slide 12, with respect to our capital spending P. S. R allows us to efficiently operate the railroad in a less capital intensive manner.

We continue to exercise discipline, while still delivering value to our shareholders capital spending will remain in line with our long term guidance of less than 15% of revenue.

For 2022 we are targeting capital spending of $3 $3 billion pending final approval by our board of directors the.

The increase in capital spending is driven by targeted freight car acquisitions investments in growth related capital projects to drive more carloads to the network and finally slightly higher material and labor inflation cost.

Approximately 80% of our planned capital spending will go towards replacement of our existing infrastructure. This spending will renew older assets harden, our infrastructure and allow us to continue to operate safely.

We are continuing to support intermodal volume growth, starting with investments in certain ramps to efficiently handle volumes from new and existing intermodal customers, including the Schneider business when that Kenny highlighted.

We are also expanding the twin cities from a pop up to a full scale intermodal terminal and adding additional capacity to the inland Empire pop up intermodal terminal.

And finally, we will wrap up the multi year project to install a wide span gantry cranes that are G for intermodal terminal in Chicago, bringing additional capacity to a key intermodal market.

We will also continue modernizing our locomotive fleet by upgrading approximately 120 older assets. These modernizations not only improve the reliability of the asset, but each unit has a 5% more fuel efficient and emits approximately 53% less carbon emissions.

Lastly, we will continue to invest in capacity projects that drive productivity and improve our network efficiency. We plan to complete approximately 20 signings. This year focused in the southern portion of our network to further support our train length initiatives.

Wrapping up on slide 13, entering 2022 we are enhancing our safety programs. We've engaged an external safety partner to focus on advanced risk identification and mitigation coupled with enriched behavioral safety programs. Our goal is to be the first railroad to reach World class safety performance as there is no.

Nothing more important than making sure every employee returns home safely.

With the robust market demand and strong volume outlook, Kenny describe I have complete confidence that the operating team will be able to safely meet the growth needs of our customers.

The operating team is focused on continuous performance improvement of the railroad to drive customer centric growth, while remaining judicious in our allocation of resources.

While 2021 did not always bring optimal operating conditions by working together and remaining agile we answered each challenge and lay the foundation for continued success this year and beyond.

With that I will turn it over to Jennifer to review our financial performance.

Thanks, Eric and good morning, starting off with the income statement on slide 15, whereas Lance mentioned earlier, we've adjusted 'twenty 'twenty results to exclude the Brazos impairment charge throughout my remarks today I will be comparing 2021 to 'twenty 'twenty adjusted results.

Operating revenue in the quarter totaled $5 $7 billion up 12% versus 'twenty 'twenty, Despite a 4% year over year volume decline.

Operating expense increased 15% to $3 $3 billion I'll provide more detail in a moment, but excluding the impact of higher fuel prices expenses were up 7% in the quarter.

Together, we are reporting record fourth quarter operating income of $2 $4 billion, a 7% increase versus 2020.

Other income of $83 million is up 26% driven by a $36 million gain on the sale of the technology investment.

Interest expense was up 6% as increased average debt levels were partially offset by a lower effective interest rate.

Net income of $1 $7 billion increased 8%, which when combined with our strong share repurchase program led to a 13% increase in earnings per share to $2.66.

Our 57, 4% fourth quarter operating ratio increased 180 basis points, reflecting 100 basis point negative impact of higher fuel prices as well as reduced operational efficiency.

As we did throughout 2021, we're also comparing our results to 2019.

Against that fourth quarter comparison, we generated 16% higher operating income on 1% less volume clearly demonstrating the ongoing price discipline and operational efficiency, we've achieved over the past two years.

Looking more closely at fourth quarter revenue Slide 16 provides a breakdown of our freight revenue, which totaled $5 $3 billion in the fourth quarter up 10% compared to 2020.

Volume was down 400 basis points driven by the factors Kenny described earlier positive business next coupled with a strong pricing actions that yielded dollars exceeding our inflation drove 725 basis points in total improvement lower intermodal volume combined with higher industrial shipments drove the positive mix.

Fuel surcharge revenue of $522 million increased freight revenue 700 basis points as our fuel surcharge programs continued to chase rising fuel prices.

Now, let's move on to Slide 17, which provides a summary of our fourth quarter operating expenses.

As I just mentioned the primary driver of the increase was feel expense up 80% as a result of the 74% increase in fuel prices our fuel consumption rate was flat compared to 2020 as a favorable business mix was offset by negative productivity.

Looking further at the expense lines compensation and benefits expense was up 5% versus 2024.

Fourth quarter workforce levels increased 1% as flat management engineering, and mechanical Workforces were offset by a 3% growth in our train and engine crews. This increase reflects our actions to recall furloughed employees as well as bringing on new hires to manage utilization challenges and importantly in preparation for growth.

Cost per employee increased 4% as a result of wage inflation as well as higher re crew overtime and borrow out costs, partially offset by last year's $37 million of employee Covid bonus.

Purchased services and materials expense was up 9% in part due to the comparison to favorable interline settlements in 2020, as well as increased locomotive maintenance Kuban usage and purchase transportation.

Equipment and other rents was up 5% driven by lower T T X equity income.

Other expense increased 29% in the quarter driven by higher personal injury expense associated primarily with two adverse outcomes as well as increased freight loss and damage and state and local taxes.

As we look to 2022 overall workforce levels are expected to increase with volume, although not one for one as we continue to drive productivity cost per employee in 2022 should increase in the low single digits as productivity, partially offsets inflation dupree.

Depreciation expense will be up around 2% versus 2021 well, we expect the other expense line to be relatively flat year over year.

Purchase services and materials expense is a bit more of a wildcard, but will be impacted by inflationary pressure as well as the expected recovery in autos volumes. Finally, we expect our annual effective tax rate to be around 24%.

Looking now at our efficiency results on Slide 18, we took a step back in the quarter and did not meet our original or revised productivity targets, finishing the year with $195 million of net productivity higher casualty expenses increased costs associated with network operations and reduced volume leverage cumulatively drove the productivity loss for the.

Full year, we achieved improvements in all areas led by locomotive and workforce productivity initiatives.

These gains were partially offset by roughly $55 million of whether an incident related headwinds in 2020 one.

While these results are clearly not what we expect of ourselves we view the productivity as deferred not lost similarly fourth quarter incremental margins were muted at 27% for the full year or 77% incremental margins are more indicative of our capabilities, particularly given the positive business mix in 2020 one.

The ability to efficiently add volume to our network is the foundation for delivering strong shareholder value going forward.

Moving to slide 19 will review full court or excuse me full year 2021 with earnings per share of $9.95 at 21% increase versus adjusted 2020 results.

Revenue was up 12% on 4% volume growth increased fuel surcharges strong pricing gains and a positive business mix record operating income increased 15% to $9 $3 billion.

Even with a 140 basis point headwind from rising fuel prices, our full year operating ratio of 57.2% improved 130 basis points versus adjusted 2020.

Our improvement in 2020 , one marks the fifth consecutive year of operating ratio gains for Union Pacific demonstrating our ability to drive efficiency, even during a difficult year and a further comparison of our results to 2019 shows that the hurdles of the past two years has not slowed our momentum.

Turning now to cash and returns on slide 20 full year cash from operations increased approximately 500 million to $9 billion, a 6% increase from 2020.

The first priority for our cash is our capital investments, which finished 2021 just over $3 billion or roughly 14% of revenue.

Our cash flow conversion rate was a strong 93% and free cash flow after dividends increased $285 million or 9% compared to 2020, our dividend payout ratio for 2021 was 43% in line with our 45% target as we rewarded shareholders with 210% dividend increases during the year.

Distributing a total of $2 $8 billion to shareholders. We also return cash to our owners through strong share repurchases buying back a total of 33 million common shares or 3% and an all in cost of $7.3 billion, which includes $1 4 billion in the fourth quarter.

In total between dividends and share repurchases, we returned $10 $1 billion to our owners in 2020 , one demonstrating our ongoing commitment to deliver significant shareholder value.

Now looking at the strength of our balance sheet on slide 21, we finished the year and an adjusted debt to EBITDA ratio of two seven times consistent with our resolve to maintain strong investment grade credit ratings at year end, our Moody's rating would be double a one and a minus from both S&P and Fitch our all in adjusted debt balance on December 31 31.

Increased over $2 billion from year end 2020, as we continue to utilize our strong balance sheet and earnings growth to reward shareholders. Finally, our return on invested capital came in at a record $16, 4% bouncing back more than two points from a challenging 2020 and increased one four points from 2019.

The reduced capital intensity associated with running a P. S. Our operation is seeing clearly in this performance and positions us for growth in the years ahead.

So wrapping up with a look to 2022 on slide 22, let me start by pointing you back to our May Investor day, and the three year targets, we laid out those targets remain intact and are the building blocks of our view to 2022 with.

With volumes, we stated we would outpace industrial production through our business development.

<unk> development efforts, which are going strong as Kenny mentioned the current forecast for 2022 industrial production is four 8% to outperform that forecast, we have new business wins like Knight Swift as well as anticipated recovery of autos and international intermodal. We also expect to have the added benefit of coal volume growth.

As you'll recall, we originally anticipated coal to be a half point headwind over the next three years, but with current natural gas prices and recent business wins that business should actually provide a tailwind in 2020 two.

Looking at the cadence of volumes through the year. The first half should be led by bulk in industrial in the second half, we look for a stronger year over year gains and for it to be more premium driven as supply chain and chip shortages improve.

For first quarter volumes, specifically, we're anticipating carloads will track below full year 2022 growth expectations as we experienced immediate post holiday rebound likely impacted by rising COVID-19 infection rates plus continued soft international intermodal volumes with a strong overall demand environment and our disciplined pricing approach.

Which we expect to yield pricing dollars in excess of inflation dollars embedded in that guidance is our expectation that all in inflation for the year will be elevated a little north of 3%.

At our Investor day, we targeted the incremental margins in the mid to upper 60% range for 'twenty 'twenty. Two we would expect to be at the low end of that range given the significant mix shift to intermodal growth.

The combination of growing volumes pricing above inflation and strong incremental margins should lead to the achievement of our long term goal of a 55% operating ratio.

In a little finer point to it we would expect to achieve around a 55, 5% operating ratio for full year 2022 .

Turning to cash and capital you heard our plan to invest around $3 $3 billion of capital for the year well within our long term guidance of less than 15% of revenue.

Strong top line growth, increasing profitability and ongoing capital discipline should result in a cash conversion rate near 100%. This strong cash generation allows us to continue rewarding our owners with an industry, leading dividend payout and strong share repurchases, which we expect will be in line with 2021 levels.

Before I turn it back to Lance to wrap up I'd like to express my appreciation to the Union Pacific team, what they achieved over the past year is truly remarkable and Union Pacific success begins and ends with our people so with that I'll turn it back to Lance. Thank you Jennifer wrapping up on slide 24, with a look at our drivers for success in 2022 as you can.

Heard from Eric It's imperative that we make progress on safety, while there are positive signs in the underlying metrics. The overall results need to improve safety is at the center of everything we do at Union Pacific as we strive toward our goal of World class performance overall, the networks, improving but with work to be done we have work streams.

Aimed at keeping a healthy pipeline of crews in place and we're in the marketplace hiring for growth. In addition, we have numerous initiatives to improve the quality of our service our long term growth opportunities are dependent on a reliable service product.

As you heard from Kenny our growth outlook for 2022 is terrific the growth mentality. We're instilling on the entire team is manifesting itself in new customer wins, while we continue to build stronger books with our long term partners, we have an opportunity to offer an enhanced customer experience and new transportation solutions for our customers.

While helping them achieve their sustainability goals 2021 represented another milestone in our company's history and 2022 is poised to be even better.

We'll be celebrating our 160 at the anniversary with what we expect to be our best financial year ever and take further steps on our ESG journey, we have great momentum as we strive for operational excellence grow with our customers and as we win together with all of our stakeholders. So with that let's open up the line for your questions.

Thank you well now be conducting a question and answer session.

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Due to the number of analysts joining us on the call today well be living in everyone to one primary question and one follow up question to accommodate as many participants as possible.

Thank you and our first question will come from the line of Chris Wetherbee with Citigroup.

Hey, good morning, guys.

Maybe we can start on the volume outlook and I think the expectation to grow above industrial production. I guess, you know Jennifer you talked a little bit about the cadence maybe being a little bit softer in the first half and accelerating into the second half I guess, maybe a couple of questions. Here I guess first first quarter do you think you can end up having volumes up in the quarter and then.

In terms of some of the business wins and the other opportunities out there or do you think that there is enough to be able to see that acceleration I think over the last couple of quarters, we've been a little bit disappointed in general across the rail industry of your ability to grow volume at a more accelerated pace I just want to go a little bit color on sort of how you think about the building blocks to get to that sort of a 4.8 or better for the.

Full year.

Good Yeah, I'll I'll start and then turn it over to Kenny, but youre thinking either right, Chris and we do expect our volumes to grow in the first quarter, but again, we see a kind of and you laid it out first half second half our first half is going to be led by bulk in industrial we certainly embedded in your expectation for stronger growth in the second half.

Is the recovery in the supply chains and that includes the chip shortages.

So that is our expectation for the year and we feel very bullish about that and I'll, let Kenny I talked to you about that a little bit more about Chris are worth in and that's pretty slow here.

We're seeing slow marginal growth from where we were in the fourth quarter till now on our international intermodal volumes and so where we're looking at that every day I'll tell you that famous true about the automotive business and I talked about the fact that sequentially from third to fourth quarter. We saw you know that 10% improvement.

We're expecting that to increase and and that's what you're seeing in the back half of the year. We also feel good about a couple of business wins on the cold side that'll help us from.

From a carload perspective.

Okay. That's helpful. Thank you.

Yep. Thank you Chris.

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

Oh, Yeah, Hey, Thanks, guys I appreciate the time.

Wanted to focus a little bit on the outlook in the supply chain congestion.

What happens if.

The congestion doesn't recover as quickly as possible where should we see some of the impacts and sort of what markers are you looking for on the supply chain. You know as you go to adjust the outlook potentially as we move throughout the year.

Yeah. Jason. This is this is lance you know we built the 2022 plan not on perfection right. So we've kind of built into the plan and expectation that for instance in the intermodal international intermodal supply chain, there's a slow but steady recovery some of the markers that we're looking at that need to wear.

Cover to be back to normal and fluid still involves street time for things like chassis and boxes. Our intermodal ramps are fluid right now they are in great shape, we need to see our international intermodal customers go back to more.

Ipi business that is allowing the international box to go inland and then turned back around preferably with an export.

I'll turn it over to Kenny and Eric for a little more detail yeah Lance.

Yes, you hit it right on the head I mean, we're talking to our customers.

Daily about that conversion from port to port to the inland.

Ramps that we have.

We have seen that that has slowly are currently occurring now remember we've got a backlog of ships out there on the water. So that's got to get sorted out the same thing we're gonna be keeping an eye on as a at a lot of these inland ramp how the warehouses are doing and are they able to process a lot of that business. That's.

At all so it's gonna be a flow.

Gradual increase to us, but we're talking to our customer then we expect more improvement as we go throughout the year and I think it's alright, well, Jason just to reflect on on this year and what happened with premium volumes in the second half of the year. They were softer and so we're certainly looking for that to be stronger in the back half of 2022.

Oh I got my fingers crossed for you guys or my follow up is gonna be on pricing you mentioned, Jennifer I think you're going to be above inflation, which are putting around 3%.

Talk to you a little bit about the contracts that you are repricing now and sort of how well above your cost inflation are the new contracts versus your base business.

Yeah, I'll I'll take that Jennifer we've got a favorable pricing environment.

I'm going to talk about call. It our domestic intermodal business, we're about 10, 15% and on a lot of the bids that we're looking at.

And again, if they are favorable pricing environment will have to see how that plays out in the second half of the year right now it looks good but we're gonna be looking at a quarter by quarter.

But great environment to be repricing clarification, there Kenny when you said were 10 or 15% and you're you're talking about the total number of bids that are going to be an owner of it but we're looking at right and then just to clarify and Jason I know you know this but when we talk about pricing above inflation at $10. So we expect to yield pricing dollars.

In excess of our inflation dollars.

Right.

Okay I appreciate the time as always guys.

I am Jason.

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

Thanks, Good morning, everyone.

Kenny I wanted to ask about some of these new business wins in intermodal.

Which is obviously a credit to you and the team I know this is Ben.

Good for you guys for a while now.

I am pleased that are coming online, obviously, you have assets behind them and I'm just trying to understand if that represents a mix up opportunity for the company within intermodal.

You participate in and pools and as a result.

I think you guys have a higher degree of asset light channel partners and your direct competitor. So if you could just talk about the mix within mix.

Mixed within intermodal.

Business comes online over the next couple of years this year and next year.

Yeah, you know first of all before I get to the new players, we feel really good about our long term partner and and we look at them as a industry leader Shirl clearly, we're bringing on Knight Swift. This year. They are a strong industry later and then in the future we will.

Bring on Schneider, we look at that as a great value to the B C. O. We believe that that's going to go off and then I'm a lot of Optionality to grow clearly Ah. That's the impetus there to offer more options are it's going to also give eric and opportunity to densify.

Lot of network and really execute on a lot of intermodal excellence initiatives that he has.

As we as we look at our own IMC that we have out there and our own equipment.

You know that we're doubling down on investing there, but we invest in and almost 6000 chassis.

We're bringing on G. P. S. So we.

We felt like we got a great mixture to offer a though both private asset players that are on our network and also the ones that will be utilizing our equipment.

Okay and then just for my follow up Jennifer you haven't got a incremental margin question yet so.

I know you're waiting for that I wanted to circle back on the 50 550, our guidance for this year.

Trying to understand the puts and takes there because on one hand, you've got a great pricing opportunity ahead of you, it's showing up in the yields and I would I would assume more so over the course of 2022, but you also have some of these large new business wins on the intermodal side, which has less revenue intensity attached to it. So I just I'm just trying to understand if you could talk about some of the puts and takes.

That underlie the margin guidance for 2022, and would you kind of characterize it as conservative given the pricing opportunity or is it kind of well balanced between pricing and mix issue.

For the airplanes.

Yeah, Matt Thanks for that and I knew I could count on you for the for the margin question, but you know we feel very bullish about our opportunities in 2022 and feel very good about being able to hit that long established operating ratio target of 55, and 55 and a half obviously is right smack.

Dab in the middle of that Fairway, you know there will be cost pressures, we know that higher inflationary environment, we know that we need to bring on some some more employees and so you're going to see our head count go up a little bit not at a one for one with volume, but we will be bringing on new employees and so theres hiring and training costs and then.

And you know just just running the network more fluidly, which we're off to a great start here as we come into 'twenty 'twenty. Two so feel good about it I'm you know I'm not going to give a characterization one way or the other but we're we're very excited about the long term potential and this is is 2022 it's just going to be another building block on on that progression.

As we become more and more profitable and provide a better service product to more and more customers.

Alright, Thank you for the time appreciate it.

Yeah. Thank you. Thank you.

Our next question comes from the line of Ken Hicks shirt with Bank of America. Please proceed with your question.

Hey, great good morning.

You do a great job on the quarter I'm Kidding you noted.

Some significant wins your two coal plant wins, you won a night.

Night, and and Schneider is business, we normally see a tipping point of Burlington, Northern chasing to win back business when when it gets out of whack I think back to the middle of the two thousands when when they were coal contracts that would always go back and forth. So I just want to understand what what kind of competitive market you have when you have consistent sizable.

Wins that that we should expect.

Yeah, Thanks for that and good to hear from you. So you know pointing back to May that Investor day, we set all our targets and we want to execute on those targets first of all.

The end of the day truckers are true competition and so we're exhausting all efforts to go out and win against crop now we've talked quite a bit about that the intermodal piece. We're doing the same thing on the carload side, there's still a lot of opportunity. There. So we view the competition is truck and we're gonna be pretty dog at the <unk>.

All over there it's about trying to convert as much truck business as we can yeah, Kenny what what I'm really excited about 2022 and beyond.

Isn't the one time conversion of business from somebody else to us. It's the fact that those businesses are very well run.

And our existing long term partner is exceptionally well run and hub and their growth engines in and of themselves for years to come that that's what really that's what really turns me off.

So just a quick follow up on kind of you.

And are you seeing some slowing domestic movement I just want to understand if you can clarify what you were talking about within that and then Lance any thoughts I mean, obviously a lot of press on on security on the yard is is this something that's just more prices is something youre getting increasingly concerned about giving your boxes are sitting.

On stores.

Yeah, Let's let me start on the security side, and then Kenny will turn it back over to you. So there's been a lot of coverage about some thefts that are occurring in the L. A basin specifically are that that is a I'll I'll call that a relatively unique situation, where something that used to be a nuisance calls.

Two years ago, you know our members in a in a neighborhood would see trained not moving and might take advantage of trying to pop open a box and see what's inside.

That's more organized and we have our arms around it we've increased our our own police presence, we're working with the L. A P. D in that area. We're working with the state who is also getting involved we're actively working to get the the district attorney in the area of Spooled up and interested in.

The cases.

So I think at this point, we've got our arms around it we've cleaned up the area and we're gonna be enhancing security in the area to to your point, we're gonna put physical security barriers in place, it's unfortunate because they won't be they won't be necessarily pretty but it will it will protect our property and more importantly.

It'll protect our employees. So that's probably the the biggest concern I've heard throughout this whole time frame, we we hate impacting our customers, we really can't stomach.

Stomach, putting our employees at risk.

On the international intermodal thought again, we're seeing a slow uptick in to those units come onto our network on the domestic intermodal side are we typically feel a little bit of a I'll call. It law Paul.

After the Christmas break we thought last year it happened a little bit lighter because the parcel nothing that's concerning US you heard my comments around.

The business that we're competing for early on in the price environment. There. So fundamentally we've we still feel optimistic about domestic intermodal.

I appreciate that yeah, I just want a clarification on that thanks, Kenny Thanks, Mike.

Yep, Thank you Kent.

Thank you as a reminder to accommodate as many as possible. Please ask one question.

Our next question is coming from the line of Brian <unk> with J P. Morgan. Please proceed with your question.

Hey, good morning, Thanks for taking the questions and maybe one more on the intermodal if you can't eat what we've talked about this port support for a little while now you know what's what's the driver behind that and I guess, what would get unstuck and back to your network is that why you feel like you need to add a little bit more trains, though does it just seems like the.

Next are pretty good for the liners to to make the quick turns and that might be a headwind here on your international intermodal for a for a little while and I guess just to give you my other follow up maybe for Eric can you just talk about what's left to improve on the network you mentioned some.

Some of the challenge isn't in the southeast and a little bit of improvement, but still book needs to to get back on track what are the few factors you're looking to put in place there and how far are you along in implementing those right now.

You can't eat up the first question was about port to Port.

I talked about it a little bit we are seeing more customers. Each week that are turning on more business to go inland till the ramp.

Gonna take awhile I talked about the fact that we've got a lot of.

Ship still out on the water, it's encouraging to see that they're talking about doing it but we're also seeing it show up in our carloads were looking at that on a week to week basis, Eric ramps are clean.

We've got the equipment, we've got the capacity we're prepare for so we want our customers to bring it all you got good match back programs too that that takes some of the expense of moving and empty container back west and turn it into a revenue stream. We're excited about the you know our program that we have a global for comment on it.

We've seen uplift in <unk>.

From Dallas Dallas, the dog. So a number of products that are out there that are going to be of value to those international customers.

And then Brian on your question around crew availability you know you mentioned the southeastern portion of the railroad that's exactly right. When we walked into the quarter that was one of the challenges that lie ahead of us was to be able to recover the manifest network in the South East portion for my comments, we've done that.

Brought back the fluidity that we expect which reduces the stress in our crew base now as I think about it as a whole system, though and you think about crew availability really got three components to that so the first one is COVID-19 and as we think about coal, but it's not just the people who unfortunately are at home because they're either positive or they've been quarantine, but.

Also people who have to be vaccinated.

And if you think about the fourth quarter relative to earlier in the year. The fourth quarter was with significantly more impactful to us in that way than earlier in the year.

The next part is the utilization of our crew base and as I look back over the third quarter and coming into the fourth quarter completing the fourth quarter.

We've reduced our re crew rate by a third and that's incredibly important because that provides us flexibility in our crew base to continue to meet growth demands.

And then finally as we as I talked a little bit about you know the other part of crew availability is ensuring that we're out in the marketplace hiring for attrition and for growth and as you heard Jennifer mentioned, where we're not hiring one for one we're hiring for that growth and so it's a.

<unk> market in certain geographic locations, but what we have is the workforce resource department that has certainly a stretch themselves into all sorts of different campaigns and initiatives to help us continue to hire to our demand and I'm very encouraged for it.

Alright, Thanks, Kenny and Eric appreciate it.

Thank you Brian Thank you.

Our next question is from the line of Jon Chapell with Evercore ISI. Please proceed with your question.

Thank you and good morning, everyone.

They're sticking with you it sounds like a lot of the issues with the Kpis and the productivity or you know somewhat anomalous I mean these are labor availability things are hopefully very temporary and more related to six short term sickness and structural and hopefully the supply chain uses as well when we spoke in October you were very often.

Mistakes after deferred productivity gains from 'twenty, one would fall into 'twenty. Two in addition to what you had already that plan for 'twenty two.

Think about it now you know given that it's still kind of challenging fourth quarter and start to once you are you confident you can get all of the deferrals into 'twenty two and is that early 'twenty through 'twenty, two or does some of the plan for 'twenty two 'twenty three as well.

Yeah, John Thanks for that question, it's an excellent question and I'm gonna be really clear with it I believe all of it is just deferred I believe we've set ourselves up coming out of 2021 and the beginning of 2022 to be able to capitalize on exactly what we said and to your point. Some of those are events that impact us word transitory some of them like COVID-19 .

We may still see that impact what you have here as a team that's committed to being able to capture that deferred our productivity and that's exactly what we're poised to do in 'twenty two.

It does it does it slip at all maybe one half versus second half versus what you might have thought in October just because.

Had this omni crown variant that that's made things a little bit more choppy.

Well I think if my Crystal ball was that clear I would tell you that but probably like you Jon I mean, we we have to go through and planning for those contingencies. If it if the impact comes down we've got to make sure we're ready to capitalize on the potential for more productivity. If the impact of Covid goes up you'll see us flex to that as best as we possibly can our our goal is first to ensure that.

Our employees are safe and they're taking that time off if they are positive followed by making sure that when they're here collectively we're being as productive as we possibly can while we're also being excessively sake.

Got it thank you.

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

Hey, Thanks, good morning.

Kenny when I take the the contract wins with Knight and <unk> and Cole and I don't know if canpotex is new or not how much volume from those contracts is there is that a point of volume two points of volume or any color there and then Jennifer.

Just any thoughts on mix for the year I'm I'm guessing based on your volume comments positive first half, but negative second half, but would you think full year mixes.

Positive negative based on the volume outlook.

Yeah, Hey, good morning, Scott. Thanks for the question. Unfortunately, I'm not going to size of the ball game for you I can tell you that we're excited about it and the arrogance prepare to.

To handle that business and.

We think that there is a long term strategic value in having you know and Knight Swift on our line. This year and then eventually long term will.

To be able to provide our b C O with a lot of options and it gives us the opportunity to really build up our network and go after that truck business, but we're pretty excited about it but bottom line. It support fundamentally supports the guidance. We gave at the Investor day in May which is something like 3% growth for averaging for the next three years.

Above industrial production, so you're you're well positioned to be able to deliver that and now that number by 4.8.

This year, we knew that again continuing to come out of the pandemic you were going to have stronger industrial production in the earlier part of that three year range. So you know the business Windsor and and just Kenny's team going out and hustling is what gives us that that upside to industrial production to your mix question, Scott I do believe our base.

Our expectations are particularly with the premium business being stronger in the second half that we will have on a full year basis, a mix headwind, but I think if youre looking at it correctly when I look at the drivers for growth in the first half being more industrial and bulk loaded you know it should look a little different than the first half and then the full year.

Thank you.

Our next question, taking the line others.

I'm sorry, our next question is from the line of Ravi Shanker with Morgan Stanley .

Thanks morning, everyone. So theres been some renewed commentary at the federal level about Oh.

Whether fairly are not pointing the finger a little bit about the rails and shipping company is for kind of the lack of competition. There are kind of being drivers of the congestion and inflation and everything else kind of.

With respect to whether that's true or not gonna have can you just share kind of what do you expect what are your conversations with the STB like Nowadays are gonna do you see any progress towards risk sprinkled switching possible or kind of what are you seeing the outcome of that perception might be and just a follow up Jennifer thanks for the detail on the the driver.

Were off 2022 volume growth between end markets I apologize that I missed it but I didn't show you mentioned domestic intermodal is one of the drivers of the upside to industrial production growth. So.

Just to kind of tie up all the intermodal commentary on the call. So far like do you expect domestic intermodal does he snapped back you know if when congestion eases and the truck market continues to get better. Thank you.

Do you want to handle that I was going to say.

I'll do the cleanup firstly.

And then you can talk on the regulatory side Atlanta, you know I did reference the Knight Swift business. When that's domestic intermodal that's part of what's driving the plus for us relative to industrial production and then just when you look at and again some of the supply chain issues, which impacted both international and domestic intermodal as we see those resolving themselves.

In the back half of the year, we would we would look to see strong performance there.

Yeah, and Ravi as regards our conversation with the S. T V.

Notwithstanding whatever perception is held at a at a federal level regarding our participation and in the current supply chain congestion.

Factually, we are open and ready for business, we talked openly that on this call about some of the operating challenges we faced in the fourth quarter exiting the year, we're on better footing and that you will see that better footing demonstrated you know are a in our public numbers you've already seen some of that at the very beginning of the year and that continues to improve.

In terms of the regulatory environment, we are actively engaged in D. S. T V.

The the workload from our perspective is probably an disorder. There's the C. P. K C. S transaction that we need to be engaged on we've got a fundamental concern there to make sure that our customers continue to enjoy a direct unfettered access to the commercial markets in Mexico and that the.

Real base in Mexico enjoys the access that we provide to the United States market, we enjoy about two thirds to 70% of that cross border traffic today.

And in in the context of this transaction, we want to make sure our customers continue to have that competitive option available to them.

Probably the second biggest item on our on our horizon at the STB is forced to access or open access.

There was a hearing on that coming up in March.

We continue to work with the STB to help them understand our perspective on the dynamics of the rail industry.

And how to look at that possible regulation from a perspective that allows us to continue to serve our customers exceptionally well and continued to invest in our railroad so that that service last for years to come.

And then finally, there's a been work on a final offer rate review at the STB, we've offered up with peer railroads and alternative to that and an alternative dispute resolution mechanism. It looks like it's a nice simplification for small rate cases, small shipper rate cases and.

At satisfies some of what we consider the big legal hair on the S. T. D's proposal to have somebody else take on the role of a of a rate mediation other than that you know our job at the STB is to provide an excellent.

Reliable service product and stay engaged so that they understand the industry from our perspective, if we do those two things I think we can navigate the docket that's in front of us.

In the coming year.

Great color. Thank you.

Yep. Thank you Robby.

Our next question is from the line of Tom why don't instead of UBS. Please proceed with your question.

Yeah. Good good morning all.

I'll give you both the questions upfront.

I guess, one you you've got a question earlier on kind of the momentum in contract wins, which is great to see you executing on your strategy that you laid out at the analyst meeting so kudos on that I Wonder if you can offer some kind of high level thoughts on price versus volume.

Presumably some of these bigger contract wins prices of consideration. So you know how do you think about the kind of price versus volume.

I'll focus maybe this year next year and you know is it is it a bit less on price and more on volume or just how you think about that.

And then the second question would be.

You know you've you're anticipating ramp in volume you're ready to go with the terminals.

In July 2021 you had this issue where there just wasn't enough drayage capacity. So you had a buildup of.

Of containers do you have visibility to drayage capacity.

Or control over that such that you wouldn't.

Run into that issue again in 'twenty two thank you.

Do you want to you you're probably good to handle maybe even both of those I mean, we're we're certainly price into the market and nothing has changed in our overall approach to the market are worth fell in a very strong reliable service product.

We're also backing that up with a lot of the capital that Eric and his team will be putting there.

Create a value proposition. So you know that that's that's our approach to the market. That's how we're going to win and that's how we're gonna grow that's how we talk to our a b C o's and and all the customers on our network to the second question about dray capacity, Yeah, we we certainly see.

Offline time, we see what word, but how much time the chassis or at all how much time are the containers are gone.

So not a very efficient network.

It needs to come down and as it comes out it's going to create more volume grow up more efficiency for us it'll be overall positive. So we're looking at that on a on a daily basis, yeah, Eric that looks better, but there's clearly still some work to be done there right. There's still work to be done there and you know as we talked nearly a year ago about our investor.

And day about intermodal being such an important growth engine for US. We also at the same time rolled out intermodal excellence and if you look at many of those initiatives, they're focused on assisting our customers on helping with the ability to be able to get quicker turn so as I think about the work we're doing at nearly every intermodal ramp around our game system in reducing the.

Amount of time to get in and get out that's helping them in that generating capacity. The work we've done on changing our U P go app to make whether it's for our existing customers or new customers and provide them greater opportunity to efficiently get through the ramp. So we're making sure that we're continuing to do our part to assist our customers to be able to generate that Quebec.

Asked me to Lance's point, there's opportunity on the other side, but together I think will work our way through it.

The only thing I'd add is that the the congestion issues that you're referencing in particular com were really around the international intermodal side and a lack of international chassis and dray drivers.

And you know some of our recent wins have been with on the domestic side with asset owners, who come with their own chassis and driver fleet that's true.

Great. Thank you.

Yep. Thank you Tom.

Our next question is from the line of basketball majors with Susquehanna. Please proceed with your question.

Yeah. Thanks for taking my questions here, just just one clarification and you've been reporting our T. M weekly for some time now or are your volume comments focused on our T EMS or carload and intermodal units and on.

On the volume outlook, a little more strategically can you talk about any particular places where the gap between your bottoms up conversations with your customers and sort of the tops down anchoring that you gave today seem to either diverging and magnitude or maybe conviction. Thank you.

So I'll start with that Baskin, a when we talk about volume and give you the volume guidance, we're talking about it on a carload basis. So that's consistent with how we had talked about it at the analyst day and so we're talking carloads Kenny you want to talk about it let me chime in on that checked on that first question or are on the second question the bottoms up versus <unk>.

Tops down Kenny.

You have unique relationships with the commercial side of a lot of and the buying side of a lot of our customers at the CEO level I'll tell you what what my counterparts tend to be focused on as consumers are flush balance sheets for consumers are good and they're financially healthy so as long as their confidence isn't ready.

They seem to be postured to continue to purchase through the year and the industrial economy, a lot of my industrial peers feel pretty pretty confident that their marketplaces look pretty good to them whether you're in the housing market you are in the construction market you're in some other aspect of our industrial economy.

So that at the very highest level kidney, that's what I hear yeah.

You're spot on and the only thing I would add is that you know we're not waiting around the things strategically about these growth areas from a geo perspective, and that's what you're seeing now with all the work that we're doing.

What Eric team in terms of inland Empire, and the growth there and the investments there the twin cities the growth there in the investment there.

You're going to see a little bit more volume in those areas than you did last year.

That's their normal also on the carload side. We're also thinking very strategically about areas that you can call. It high grow population you can call. It you know high warehousing.

When we see areas that are underpenetrated from a rail perspective, we're gonna be opportunistic and really invest towards those areas and that's what you're seeing with the trans load facility then in the inland Empire and Phoenix area.

Thank you.

Yep, Thank you bedroom.

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

Thanks, and good morning, I was wondering if you could share how much of a tailwind you're assuming from coal within our full year volume guidance and then also wanted to ask about labor availability on a sequential basis is it getting any better or is it getting worse and maybe you could just speak to your confidence in <unk>.

Growing head count to support that 5% plus volume growth outlook.

Yeah. Thanks, Joseph for the question you know, we're not going to get into that level of granularity, but we did think it was important to take knowledge that coal is changing the posture from what we thought it was when we talked to you back in may from a tailwind to a headwind in and we're going to leverage that absolutely as long as we can and the new business wins, certainly certainly help with that.

Talk about the crew availability and building off the previous call.

Conversation I mean, we're in the market, it's certainly into some point and some locations Justin is a challenging market and I think about you know looking throughout the year some.

Some of the different activities. We've taken on are meant to really differentiate us from other companies that are in the market as well as I think about not only employee referral programs and they get the word out more in our social media campaign.

Campaigns, but I also think about the efforts we've taken in the last year, where we're now talking to prospective employees that you know the day they come to the railroad is also the first day. They can start college with us and we offer that free of charge to them. So.

We're in the market and we're going to continue to put out a what we feel is a very strong value proposition to join Union Pacific well and Eric you mentioned, some self help on crew availability or you're a strong move on reducing the re crew rate by a third or more than that in essence freeze up some amount of our of our crew crew.

<unk> Board and you're just generally more productive now with unproductive crew starts like held away from home terminal well and we also saw in the fourth quarter is starting to we're starting to see the benefits of a high vaccination right across the company and being able to have people. They meant to be healthy we should talk about that are just in it.

<unk> pretty much invisible to the outside world, but our over three quarters of our workforce is fully vaccinated.

That's because we started early on complying with the federal vaccine mandate now we've paused because of the the pause mandated by by a court.

But we think that our employee population because of that high vaccination rate lasted through almost ran a little better than the communities that we serve we've we saw a spike in the number of our employees, who had to quarantine presumed positive or exposed but it was nothing like this.

Spike we saw in the communities that we serve.

That's helpful. Thanks for the time.

Yep. Thank you just.

Our next question is coming from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.

Yeah, Hi morning, I've just said.

Question, you know just thinking about the trip plan compliance around the manifest business, which obviously has been under pressure, although as you say.

Perhaps moving forward on that front, but just from a sensitivity standpoint, you know how critical is something like that metric is getting.

Closer to a normal level to producing the operating ratio that you guys are targeting like I'm, just trying to get a sense for.

How important is that for us to watch moving up and thinking a relation to your targets for margin right.

Yeah, I'll, maybe start and others may want to weigh in but you know when we look at the key metrics that are driving the cost profile, which which relates to certainly the operating ratio you know I'd look more at freight car velocity and terminal dwell numbers in terms of how efficiently we're handling the freight on the railroad.

And that also has an impact on you know the number of turns that we're getting on the cars that we can put up against the customers to get that next revenue load. So I I see trip plan compliance and intermodal trip plan compliance more as the outcome of the other things that we're doing in terms of moving the car and into operating the network more flu.

<unk> being more directly impactful to the LR yeah, Jennifer those those trip plan compliance numbers are really about can we serve customers in a manner, that's consistent with our commitment. So so that's about it over the period of time.

That needs to be reliable. So that we can continue to secure business and have happy customers, but in terms of hitting a high margin or a margin target.

That's about car velocity terminal dwell locomotive productivity and workforce productivity and train length I'd I'd throw in there as well.

Thank you.

Yep.

Our next question is from the line of Walter Franklin with RBC Capital markets. Please proceed with your question.

Thanks, very much good morning, everyone. So I just wanted to go back to the business wins and certainly that's a positive and I think we'll certainly be viewed as such but just wanted to ask the question. You know we did see a railroad one of your northern peers, a number of years ago growing.

Quite substantially winning share.

But when when faced with some capacity constraints that kind of led to a significant grid lock that debt kind of prevail for a couple of years. So given the capacity constraints that we have right now you're taking on new business, how what comfort level do you have that youre not going to run into some of those those issues over the next couple of years.

Even as supply chain global supply chain probably.

Problems ease hopefully in the coming months and quarters.

Walter we are highly confident we have a plan in place and an existing network to be able to absorb the growth that we've been talking about this morning and not be gridlocked.

A couple of cases in 0.1.

We've just onboard at Knight Swift over the course of the last <unk>.

Five weeks call. It four weeks six weeks and it's been flawless.

That was on the strength of a lot of coordination and planning between ourselves and that customer.

In order to make sure their drivers were well prepared that are that are ramps were efficient for their drivers that we had good.

Signage and our U P go app to make it a virtually seamless to get on and off.

So I know, we're gonna be able to plan and execute in the same way for future Onboarding. The other thing to note is we've uptick or capital, but there are some areas that we need to invest in.

That $600 million or so of commercial facilities and capacity historically, a lot of that spend would be targeted on productivity enhancement.

As we look into this year, a fair amount of that spend is being targeted towards enabling growth.

And so we've got a game plan and we've got the capital to be able to do it we're well in advance of needing to put the capital in the ground.

And so what's happening and that's where some of those investments that Lance referenced that were productivity investments. Initially when you think about siding extensions become investments that support the growth of the network and that's the capacity that's not being utilized in that manner. Today, and then think about our locomotives, which we still have a significant portion of our locomotive fleet.

Store today, so that that's the capacity that we have to bring to bear and will be.

That's great that's excellent color I appreciate that and then my follow up is more of a technology question.

I'm sure you've seen that parallel systems.

For autonomous and electric vehicles that would maximize the use of existing rail networks.

Your competitor weighed in on it just curious is that something we should even keep or.

Keep an eye on is it a real you know initiative and do you see it as is.

Possibly have it moving the needle for Union Pacific If it were applied going forward or are there some challenges associated with its implementation that are likely not not not not going to bring it to bear.

Walter we are interested in in the parallel systems technology, we are familiar with it and it is of interest its of its a keen interest in <unk>.

Candidly there are a lot there's a lot of hurdles in front of that technology for deployment, having said that it could potentially be a game changer, if it proves out to be effective.

And and workable, so I'd say keep your eye on it and we're keeping our eye on it and.

I don't think it's going to impact 'twenty, two or 'twenty, three or 24, but at some point it it could be a technology that has utility for the U S rail network.

It seems pretty exciting okay.

Appreciate the time and the answers.

Yeah. Thank you.

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

Thanks, and I appreciate it guys working man. So my first question I guess relates to just thinking about the Snyder. The Schneider win that you guys had when you're out pitching.

For new business like that I'm, just curious how you are positioning the the the value proposition for you guys is it is it more about the economics or is it service oriented or sort of how do you. How do you pitch the competitive advantage that you're providing your customers.

Danny you want that one yeah again, I'm really proud of the team we've got a strong leadership team in the premium side would carry a car shopper late in that but you know what we're doing is we're working out of a team and the first thing. We do is we talk about our service product we.

We talk about where our network is in the capacity.

Clearly, we had to put up some capital against that.

And some of investments against that to help you know those carriers, both customers get into and get out of our ramps we're very fluid.

We're still in all of those things are there are no part of it where we're changing our pricing strategy or approach.

So the market will let the players really fight it out on the field and let their own efficiencies went out.

So we're just selling our network, we've got a beautiful network that we've invested in and that's what we're about.

What works out.

Perfect. Thanks, Kim Ann and for my follow up quickly of Jennifer.

When you're talking about the 3% inflation was just curious how you're factoring fuel cost into our into that.

Great question, Ben we don't factor field costs into that because of our fuel surcharge programs and yes, there's a lag but we don't include field and we're talking about are our core inflation.

Perfect. Thanks.

Thank you thank you Ben.

Our next question is from the line of Chevron Radburn with TD Securities.

Please proceed with your question.

Thanks, very much and good morning.

Couple of questions on the operating side.

Wondering if you could talk about if you've seen an uptick in your labor attrition rate in some of your peers.

And how you're coping with that and then just at a higher level with regard to connectivity, providing a partial offset to inflation can you talk about how you're keeping that.

Our mindset is alive and well throughout the company, particularly as you bring on new employees.

Yeah. Thank you for those questions Cheryl Lynn and then the first answer is actually really straightforward.

Look at our five year average we are not seeing increased attrition in our agreement professionals.

Garden and your second question. So theres a lot of ways that we continue to reinforce P. S. R. But really our flagship method is really the one we've employed for the last well this will be the third year in a row, which is our operating excellence classes. This is an opportunity for our frontline leaders and the operating department all the way through exec.

He lives that are in the front lines to be not only with one another in groups of 60 to 80, but also to be with me and the leadership team as we continue to define our P. S. Our initiatives as we continue to evolve the railroad with more P. S. Our initiatives and their hearing it directly from US most importantly, they're getting the chance to ask questions and ensure that we have alignment.

And also present their opportunities back to us. So we'll continue to use communications as our single best tool followed by just a relentless focus on execution.

That's it for me thank you.

Thank you Shirley.

Our next question is from the line of Brendan close he with Barclays. Please proceed with your question.

Hey, good morning, I'm, sorry, I missed the first part of this call. So I don't mean to be duplicative in my question, but.

You know I'll answer Eric your trip plan compliance is down quite a bit and you know I realize there's a lot of other outside factors right now during the pandemic, but for better or worse. As this industry has a reputation you know when demand goes up or the economy heats up you know service you know volume goes up your service goes down.

How do you think about that in a longer term context. So if we just cut too far on the E. P. S. Our plan do we need to rethink labor and workforce levels and as you know the capex level today at the right level or does that even potentially need to be.

Evaluated looking forward. Thank you.

Brandon This is lance I'm I'm gonna start cause cause I've been crystal clear on this point with you know other audiences when I'm when I'm out talking.

<unk>.

If you look at our historic record here over the past handful of years through our transformation.

We've improved.

Our operating metrics when volume went down, particularly last year, and we improve them last year when volumes snapped back right. So there's no reason to for us to think empirically on Union Pacific volumes going to tank our ability to run the railroad, having said that what would hurt us.

<unk> in crew availability, primarily in the second half of the year was I think we did not adequately address in our planning.

The reality of Covid and a third into fourth wave.

Our planning profile said COVID-19 is going to be around but we're gonna get used to it it's gonna have a diminishing impact and we've got the resources necessary in that environment. We did not plan for was a vaccine mandate, we would have to give people time off to get vaccinated and waves, where we had.

Hundreds of U P employees unavailable to us on any given day.

Because of quarantine.

And.

I look at that and I think shame on us that that's a that's a risk factor that we did not adequately plan for and when I look into the future. We're going to just be a whole lot more relentless about and deliberate about the assumptions that we're building into our plans, having said that we're on the backside of getting that remedied in part through.

Being relentless on on how we utilized crews that are available to us and on the front side and making sure that we've got our boards staffed in a way.

That supports our crew consumption.

And you know at some point in the future of Covid is going to go away or it's going to be much much less impactful and I think at that point. We you know that's going to be a wonderful day, but until then we have to plan for it as a contingency and that's what we've got built in and I think I think we're gonna be demonstrating that to you early on in this year I see it in the statistics and you were.

You'll see it in the operating statistics it well.

Yeah.

Thank you.

Yep, Thank you Brandon.

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

Hey, good morning, guys, so so kenny or or Eric I guess the question for you on the intermodal growth that you're putting out there is this something that we should be estimating is as 100% incremental to the current base and whatever where growth forecasts. We're gonna put in there or are there. Some some customer losses. Some remixing of the business that you're planning to do I'm. Just wondering if we should be sort of thinking that this.

This comes in in the interval network is going to expand or are we going to be looking at this is as as only partially incremental growth.

No. This is a clearly incremental growth for us there.

Bait and switch are we.

You know change something are locked up in all of this is all incremental growth and we're working very closely with Eric <unk>, our team, Eric and I spent quite a bit of time talking about the intermodal network.

Yeah.

Alright, and then and then maybe just as a quick follow up.

Volume outlook Slide has a question Mark for international Intermodal I'm, just wondering is that a commentary on the congestion at the port.

Shipper preferences for expediting off the west coast or was that a commentary that says hey look after you saw the volume comes in warehouses are going to be full and we should see important growth start to slow and I'm just wondering what what what does it mean, you're buying that question Mark on the the volume outlook for international Yeah. Thanks for asking that clarifying question and Youre right. Its all.

All about as we're slowly coming out of you know the Christmas holidays.

I clearly believe that there are some natural time into this that we should see things work out I've said this during the last part of the year sometime in the middle of the year, but it's just going to be a gradual and slow.

<unk> increased the carloads on the international intermodal side, but the short answer is that's what you're seeing.

So that's more congestion than a macro comment.

Port congestion for sure as customers are now sending more to inland versus port Yeah, Yeah, I think where you're going with that David is there there's nothing about in market demand that we're building into the plan that says there's a collapse.

The American consumer buying imports.

Okay. Good. Thanks, Thanks, I just wanted to I wanted to make sure that wasn't.

A macro thing thanks, a lot guys and thanks for the time Yep.

Yep. Thank you.

Our next question is from the line of Hydro Nathan with Tyler. Please proceed with your question.

Hi, Thanks for taking my question just following up on the older part of the system stake you know so we haven't seen a lot of innovation, especially on the truck side.

And it's and it's coming not only from within the industry from outside the industry as well. So I'm just wondering with the real we haven't seen as much.

How do you how do you cultivate that how do you Oh good.

How do you kind of finance or fund it on me.

Two bringing debt outside innovation in the industry.

Yeah, Jeremy this is lance.

Maybe we're just not doing an adequate job of talking about it but our our new C I O and Rahul Jalali.

He is a exceptionally talented tech executive and.

And what he's got us doing is amplifying our internal development by speeding it up through minimally viable product.

Bye bye being product and platform centric and by deep and clear partnership with his internal customers. So that we can tease out more rapidly and more fulsome way.

What's the next step in our tech investment and how quickly can we bring it to market. There are so many examples of that we've talked a bit about some this morning. The U P go out for drivers on our ramps.

Intermodal vision are the mobile apps for our crew base U P vision, I mean, just on and on and on the.

The second way that that's happening is through.

Becoming much more open and embracing of external tech expertise, whether that's partnering up with Google whether that's partnering up with somebody like two simple there's any number of ways that we're that we're exercising those kinds of partnerships so that.

We can learn from and absorb their expertise into our business at Teck is touching every aspect of our business right now and in a in an accelerated and an accelerating manner and we're really really excited about that.

Okay. Thank you and just as a follow up and then if it was if I if I go back to the to the quarters, where you hit the 55% operating operating target volumes, we had about five 6%.

Let's say for two levels. So you said.

So.

But it looks like there are other things that is helping margins next do you see a REIT like not in productivity and in pricing to some extent so so.

I'm kind of trying to.

And understand how much so how much is the volume impact in that 50, 545% while at target and how much would how would these or the other.

Are there any initiatives.

Let me start Jennifer with with the the mantra that you and I talk about all the time.

Our our ability to generate attractive margins is built on a three legged stool.

We look for volume growth, which we get to leverage we look for productivity, which we can leverage through volume growth and we can find in other ways and we got to have pricing that supports that as well.

In 2022 we're going to see benefit from all three yeah and I think you know that's part of why we're talking more about incremental margins as well because of that focus on growth in new business opportunities that that's coming to us being able to move that really efficiently pricing it well and then dropping that to the bottom line.

Okay. So thanks, thanks, guys.

Yep you're welcome. Thank you. Thank you.

Thank you. Our final question today comes from the line of Jeff Kauffman with vertical Research partners. Please proceed with your question.

Thank you very much thanks for squeezing me in at the end here.

Jennifer and Atlanta, you address the question, what if congestion doesn't get better the system doesn't get more fluid and you mentioned that as part of your contingency like I'm going to ask it the other way what does it actually does because you know sometimes when growth bounces back too quickly the system can be challenged you talked about the hiring.

A cruise you talked about how your crew boards are going to ease up as you move through this but can you talk about.

It takes six to nine months right to train.

C N E crew.

What kind of planning you have to put in place if the volumes come in a couple of percentage points above what you're looking for it what kind of constraints would you be running into on the network.

That's a great question, Jeff and it's one that we scenario playing out for ourselves are periodically as we go through our planning cycles within the year first thing I would note is we've worked really hard to reduce the amount of time. It takes to get somebody off the street and to be qualified as a conductor I think we've got that knocked off.

There's something like 14 weeks.

And so it's so that's a substantial move in the right direction item number two is if if we see volume overwhelming our ability to satisfy it we've always got price as a lever that we can use that discourages some amount of that volume in and helps it to find a different home and then we've got a lot of.

Levers that we pull when it comes to managing the inventory, which is really the mechanism that bogs down the network. It's not the fact that more volume wants to move through the network.

Just that volume doesn't move fluidly and it builds up inventory and now we're using our capacity in a really unproductive way, we've got a ton of mechanisms that we've developed over the past three years to make sure that inventory if it comes on us it moves through and if there's too much coming on us for any.

One individual customer we work directly with that customer to get them back in the box.

Yeah, well Anthony you you hit all the key point is the only thing I'd add is you know it's less about the absolute volume number and it's also about where the volume comes on and then what products and so that's where I think the team did a great job in 2020 , one being agile around that you know we weren't expecting the chip shortages, we didn't expect the supply chain congestion.

And the coal volumes were or a blessing that came to us as well as increase on the grain side and so to be able to pivot quickly and be agile. That's why it's so critical that can't Ian and Eric are linked that they have in terms of talking about the trends talking about the plan and then executing to that.

And just a follow up to that I heard Kenny recently talk about the great resignation at the challenge with bringing back from the from the Furlough Board. So have you worked your way through most of the furlough boards have your arms around your ability to bring back employees or is that something that we're still probably going to be dealing with in the coming quarters.

Volume begin to come back.

No Jeff we've largely depleted those furloughed Laurence the folks that we have called back or in training classes now and we're really focusing in terms of incremental adds to our network from our crew base its going to be on the new higher side.

Okay. That's all I have congratulations and thank you.

Yeah. Thank you Jeff.

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

Thank you very much he did a wonderful job for us today again and thank you all for joining us today and for your questions. We're looking forward to talking with you again in April when we discuss our first quarter results until then I wish you all good health. Please take care. Thank you.

Thank you Mr. Fritz ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.

Yeah.

Yeah.