Q1 2022 Union Pacific Corp Earnings Call
At this time, all participants are in listen only mode.
A brief question and answer session will follow the today's formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
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.
Thank you Mr. Fritz you may now begin thank.
Thank you, Rob and good morning, and welcome to Union Pacific's first 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.
Before we discuss our first quarter results I want to reflect on Russia's invasion of Ukraine.
The people of Ukraine had their lives turned upside down in the U P family is holding them close in our thoughts and in our Hearts.
We've leveraged our resources to help with a $500000 donation from our foundation and by matching two to one our employees gifts to select charities that provide direct aid.
Also want to recognize the union Pacific team for more than their generosity. They are a team dedicated to serving our customers, but recently our service product has not met our customer's expectations you will hear from Eric We have an action plan in place to recover and it is starting to yield benefits I'm confident in our long term.
<unk> ability to grow while providing our customers a reliable service product and they've proven time and again no matter the challenge our employees rise to the occasion.
Turning to our first quarter results. This morning Union Pacific is reporting 2022 first quarter net income of $1 $6 billion or $2.57 per share. This compares to first quarter 2021 results of $1 $3 billion or $2 per share our first quarter operating rate.
So a 59, 4% improved 70 basis points versus 2021 business development and a robust demand environment drove 4% volume growth in the quarter, coupled with strong pricing gains and a positive business mix. However, our service challenges are contributing to higher court.
Costs in the quarter.
That performance is also having a real impact on our customers and their ability to serve their markets, we must improve to realize the volume growth. We expect this year and into the future. So let me turn it over to Kenny first for an update on the business environment.
Thank you Lance and good morning.
First quarter volume was up 4% compare to a year ago.
Solid gains in both our bulk and industrial segments were more than offset by.
A decline in our premium business group from continued global supply chain disruption right.
Freight revenue was up 17% driven by higher fuel surcharges and strong pricing gains and a positive mix.
Take a closer look at each of these business groups.
Starting with ball revenue for the quarter was up 21% compared to last year, driven by a 12% increase in volume and an 8% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains.
Coal and renewable carloads grew 29% year over year, driven by continued favorable natural gas prices and to new contract wins that started on January 1st.
Grain and grain products were up 1% and volume due to the increased biofuels production, partially offset by fewer grain shipment from longer shuttled cycle time.
Fertilizer carloads were up 2% year over year due to strong agricultural demand.
Lastly, increased shipment of import beer and canned goods were the main driver of the 4% increase in food and refrigerator.
Moving on to industrial.
Industrial revenue was up 16% for the quarter driven by an 11% increase in volume average revenue per car also improved 5%, primarily driven by higher fuel surcharges and core pricing gains.
Energy and specialized shipments were down 6% compare to 2021, driven by fewer petroleum shipments.
Volume for fourth product grew 7% year over year, primarily driven by strength in both lumber shipment fine paper.
Despite rising interest rates housing starts continue to be strong coupled with the man of corrugated boxes and scrap paper.
Industrial chemicals, and plastics shipments were up 14% year over year due to the increased demand and a favorable comp from last year golf storm that impacted production.
Metals and minerals volume continues to deliver robust year over year growth Volte.
Volume was up 25% compared to last year, primarily driven by growth in the construction materials strong steel demand and an increase in frac sand shipments.
In addition, we had a favorable comp in our construction market from last year, a storm that I mentioned earlier.
Turning to premium revenue for the quarter was up 14% on a 3% decrease in volume versus last year.
Average revenue per car increased by 17% due to higher fuel surcharge revenue core pricing gains and a positive mix and traffic.
Automotive volume was up 6% driven by an increase in the auto part as demand recovers.
Shipments were finished vehicles were down 3% as a result of ongoing semiconductor shortages.
Intermodal volume was down 5% driven by continued international supply chain disruption.
Over domestic volume was up in the quarter aided by business development wins tight truck capacity and continued strength in parcel shipment.
Now moving on to our outlook for the rest of 2020 two.
At a micro level, we will be closely watching our markets to see how rising inflation and the global event in both China, and Ukraine will impact our overall volume, but as it stands now here is how we view the outlook across our business lines.
With our bulk commodities, we expect fertilizer to grow due to solid market demand, especially on the export side.
For coal, we anticipate continued favorable natural gas prices to extend through the year, but when it comes to how much of that demand. We can capture that will depend on how quickly we recover our service level.
We are optimistic on growth with grain products from biofuel demand and business development wins.
Our grain we have a tough comp to last year as exports were strong.
You know like coal, although we expect cycle times to improve it is dependent on our service recovery.
Moving onto industrial market, we continue to be encouraged by the strength of a forecast for industrial production.
This will positively impact many of our markets like metal.
Customer expansions and business development wins will drive growth in our industrial chemicals and plastics commodity group.
We do not expect to see petroleum shipments return to 2021 level.
And lastly for premium we expect domestic intermodal to continued its benefit from inventory restocking retail sell shrimp tight truck supply and our business development when international.
International intermodal is more uncertain when possible effect from ongoing supply chain challenges and pandemic shut down in China.
For automotive, while we do expect the supply of semiconductor chip to improve throughout 2022.
Recent events in China, and Ukraine may disrupt the supply chain for certain key components.
We are keeping an eye on whether this will have an impact on production and staying in close contact with our customers.
As I wrap up I want to share a few insights on how the commercial team is navigating the current service challenges.
First all of our discussions have been centered around what actions, we can take to improve service.
Eric will provide insight on the levers we're pulling that are in our control.
Likewise, the commercial team is asking our customers to help reduce railcar inventory.
While those conversations have been difficult I'm encouraged by the high level of engagement and transparency, we're having with our customers with that I'll turn it over to Eric to review our operational performance.
Thanks, Kenny and good morning, as I will discuss in greater detail in a few minutes our services not to a level that meets expectations and we acknowledge the impact that deteriorated service levels are having on our customers.
We are implementing plans to restore network fluidity and build a safer more reliable and resilient network.
Safety results have been mixed to start the year as we implement enhancements to our safety programs through partnerships and guidance from our external safety consultant.
We remain focused on achieving world class safety performance, we value the health and the safety of our employees a bubble and want all employees to return home safely each day.
Now, let's review our key performance metrics for the quarter starting on slide nine.
Freight car velocity and the related trip plan compliance measures were lower relative to 2021 coming into the year. The network was in a more fluid state seeing improvements in operating metrics and crew availability from reduced COVID-19 infections.
In late February however, while the network was still fragile episodic events challenged the team and our service product.
This led to both decreased velocity and an increase in freight car inventory, particularly private cars as resources were added to counteract sluggish service and meet growing customer demands.
Turning now to slide 10.
Although the overall network performance muted most of our efficiency metrics, we continue to operate a more efficient rail network compared to pre <unk> levels.
Locomotive productivity declined 6% compared to first quarter 2021, due to locomotive utilization during the quarter to assist in recovering the network. We also brought additional units online further impacting our productivity results.
First quarter workforce productivity improved 5% to a record 1056 daily miles per FTE.
We continue to hire for growth and normal attrition throughout the network in 2020 . One we graduated over 250, new transportation employees with almost 400 employees graduated to date in 2022.
We have a strong training pipeline of roughly 500 employees as we work closer towards our goal of Onboarding around 1400 employees. This year.
We have however been challenged across the northern region at several locations to meet our hiring targets and we continue to work with our workforce resources partners to increase our hiring pools in those locations.
Train length is essentially flat compared to one year ago, while continued soft international intermodal volumes present, a headwind to train length initiatives. We continue to advance train length for coal and manifest trains, which both grew compared to first quarter 2021.
These productivity efforts are key to enabling us to recover the network and deliver a better service product for our customers.
Turning to slide 11, and a discussion on our path forward.
This chart illustrates the current state of operations, our operating car inventory levels rose over 20% since the beginning of the year, while our seven day volume levels remained relatively flat week to week. We are at an inflection point and more critical action as needed our terminals remains fluid and our focus on improving over the road opera.
<unk> and reducing the number of active trains on the network will ease mainline congestion to.
To accomplish this we are taking actions on all fronts by selectively increasing network resources collaborating with our unions adjusting transportation plans and working proactively with customers to reduce the private car inventory buildup.
The entire team is dedicated to returning the network to a more fluid operating state looking beyond some of today's issues. Our goal is to build a more resilient and consistent network to meet the growth needs of our customers with that I will turn it over to Jennifer to review our financial performance.
Thanks, Eric and good morning, let me start with a look at the first quarter operating ratio and earnings per share on slide 13.
As you heard from Lance Union Pacific is reporting first quarter earnings per share of $2 57.
And our quarterly operating ratio of 59, 4% 70 basis points of improvement.
Comparing year over year first quarter results, you'll recall the winter storm year, a significantly impacted 2021 so in.
2022 we have the positive effect to our operating ratio of 160 basis points and 16 cents to earnings per share.
Rising fuel prices throughout the quarter the lag in our fuel surcharge programs and widening spreads between W. T I and highway diesel fuel prices negatively impacted our quarterly ratio by 80 basis points, while adding 12 cents per share.
Our results were a 10 basis point drag to the operating ratio, but contributed 29 cents to EPS. These core results are indicative of those operator operational inefficiencies in the quarter as well as the strong top line growth we delivered.
Looking now at our first quarter income statement on slide 14.
Operating revenue totaled $5 9 billion up 17% versus 'twenty, and 'twenty, one and 4% year over year volume growth.
Operating expense increased 16% to $3 $5 billion, excluding the impact of higher fuel prices expenses were up 7% in the quarter.
First quarter operating income was a record at $2 $4 billion, a 19% increase versus last year adjusted for fuel price first quarter incremental margins totaled 56%.
Expectations for full year Incrementals are unchanged in the mid sixties, which is the lower end of our Investor day guidance.
Interest expense increased 6% compared to 2021, reflecting increased debt levels, partially offset by a lower effective interest rate.
Income taxes increased 18% due to higher pretax income, partially offset by a lower effective tax rate.
We now estimate the full year effective tax rate to be around 23, 5% as several states have lowered or are expected to lower rates.
Net income of $1 $6 billion increased 22% versus 2021, which when combined with share repurchases resulted in earnings per share up 29% to $2 57.
Looking more closely at first quarter revenue Slide 15 provides a breakdown of our freight revenue, which totaled $5 $4 billion up 17% versus 2021 .
Broad based volume growth supported by successful business development efforts as Kenny discussed contributed 425 basis points.
Fuel surcharge revenue of $635 million increased freight revenue 800 basis points as the higher surcharge revenue reflects the significant surge in diesel fuel prices.
The robust demand environment continues to support actions that yield price dollars that exceed inflation dollars. These gains combined with a positive business mix to drive 475 basis points of freight revenue growth.
Lower intermodal volume combined with higher industrial shipments drove the positive mix.
Now, let's move on to Slide 16, which provides a summary of our first quarter operating expenses.
As noted earlier the primary driver of the increased expense was still up 74% on a 59% increase in fuel prices and 9% higher gross ton miles.
Our fuel consumption rate was relatively flat compared to 2021 as a favorable business mix was offset by negative productivity.
Looking further at the expense lines compensation and benefits expense was up 7% versus 2021 first quarter workforce levels increased 1% as a 2% increase in our train and engine crews were partially offset by flat management engineering and mechanical Workforces as you heard from Eric we continue to hire into our transportation.
Kraft to support network recovery efforts and prepare for future growth.
Cost per employee increased 6% as a result of wage inflation as well as higher re crew overtime and viral out costs related to network inefficiencies, partially offset by last year's weather related expenses.
Given the current operational challenges, we now expect cost per employee to remain elevated into the second quarter.
Services and material expense was up 14% driven by inflation higher volume related purchase transportation expense associated with our lube subsidiary and costs to maintain active locomotive fleet.
Equipment and other rents was up 1% driven by lower T T X equity income.
Other expense increased 5% in the quarter, driven by higher state and local taxes and increased business travel.
Turning to slide 17, and our cash flows.
From operations in the first quarter increased to $2 $2 billion from $2 billion in 2020 , one a 14% increase our.
Our cash conversion rate was 85% and free cash flow of 657 million declined $146 million. This includes $312 million of increased cash capital spending and 93 million in higher dividend the cash capital investment reflects both payments from elevated fourth quarter spending.
As well as our normalized start to our 2022 program.
In the quarter, we returned $3 5 billion to shareholders through dividends and share repurchases. This includes the $2 $2 billion accelerated share repurchase program executed in February and we finished the first quarter with an adjusted debt to EBITDA ratio of two eight times as we continue to maintain a strong investment grade credit rating.
Wrapping up on slide 18, I want to start by recognizing that several things have changed since we provided guidance in January from fuel prices to our operational performance as we sit here today those pressures make achievement of around a 55, 5% operating ratio unlikely however, assuming some stabilization of appeal and recovery in <unk>.
Service product will still look to achieve our long term goal and then O R that starts with a 55 this year.
Shortly we are affirming our previously provided 2022 targets for volume price and incremental margins are.
Our cash and capital plans also our unchanged capital spending remains at $3 3 billion for the year well within our long term guidance of below 15% of revenue and we remain committed to an industry, leading dividend payout ratio and share repurchases in line with 2021 .
Before I turn it back to Lance I would like to express my appreciation to the Union Pacific team.
Working in an outdoor factory is always a challenge, but especially so during winter our employees, though are undeterred and their desire to safely serve our customers, while delivering another quarter of solid financial results.
Thank you.
With that I'll turn it back to Lynn and thank you Jennifer.
As Eric mentioned, we've had an uneven start to the year with safety, but we're not deterred were in the process of implementing changes to our safety programs. As a result of our work with experienced safety consultants I'm confident these changes will be a catalyst for world class safety performance as you heard from Kenny demand remains robust as our customers see growth.
<unk> in their businesses. However, we recognize that for growth to be sustainable we need a reliable and resilient service product that our customers can depend on our strategy begins with serve and it is the foundation for achieving long term success for all stakeholders, improving our service product has our full and undivided attention.
Current challenges aside we remain enthusiastic about the opportunities that exist this year to win with all of our stakeholders and I am confident that 2022 will be a very successful year wrapping up with tomorrow being Earth day, it feels appropriate to highlight an action we took during the first quarter to protect our planet and.
Advanced our journey to net zero emissions by 2050 in January we announced plans to purchase 20 battery electric locomotives for use in yard operations, creating the worlds largest carrier one battle battery fleet and freight service. These locomotives do not use diesel fuel intimate zero emissions.
We anticipate the first units will arrive on site in late 'twenty to 'twenty three with complete delivery by 'twenty 'twenty four with this step Union Pacific remains a leader on our nation's path to a sustainable future.
So with that let's open up the line for your questions.
Thank you well now be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Fresh start to hear like to remove your question from the queue.
So just as you are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Due to the number of analysts joining us on the call today, we will be limiting everyone to one question to accommodate as many participants as possible.
Thank you and our first question today will be coming from the line of Ken <unk> with Bank of America. Please proceed with your question.
Great Good morning.
Just kind of following up on on the on your outlook.
Obviously, it has a lot to do with with enhancing hiring to improve the service maybe you can talk a little bit about how do you scale that up Lance what what programs you can do to kind of meet some of these targets and I guess, Kenny the breath of the letter and constraints on the company's limiting their their assets you know maybe talk about what you know how that.
Frees up the fluidity of the network as well. Thanks, yeah. Thanks for the questions. Ken So I'll start in terms of hiring or hiring pipeline right now is pretty much fully charged at 500 will be graduating something over 100 each month.
That'll help us get healthy it's not like we need all 1400, right now, but I would what I would love to be able to add another couple of hundred into the network, where we need them right now that would really help us move our inventory through the pipeline get it pushed up against our customers where they would like it.
So we're in the middle of doing that.
When Eric mentioned, some difficult areas, particularly in the northern tier call it from.
West of Chicago, all the way through Wyoming and into the Pacific Northwest. We're trying a couple of unique things. There are one of the things that's showing really great promise is something called a second chance firing.
It's is where we take cadres of individuals.
Individuals who've made bad life decisions, but are really no longer a threat to society or themselves and we work with a partner in the community to vet them and then take the best from that group and bring him onboard we've already gone through our first hiring class who are in the middle of training down in Houston.
And we've expanded that second chance firing programme now to Chicago L. A north Platte.
And it looks like it has great promise in those communities as well. So so there's a number of things we're doing both to make our jobs more attractive to find bigger pools of talent and to develop talent. So that it's ready to be in the railroad and at the same time, we reduced our training program.
From a timeframe perspective, not a content perspective down to about 14 weeks, maybe 17, if we have a little bit more training to do with particular areas. So we're doing everything we can to get the pipeline charged and get them out.
Yeah, Hey can you.
You know, we sent out a letter to all of our customers and so that gave us a commercially an opportunity to have a conversation with all of our customers and make them aware of what we're trying to accomplish.
I want to thank our commercial team and thank our customers for having those engaging conversations we work with Eric team to ensure we had.
Really good data driven conversation with the customer that could give us the best opportunity to reduce the railcar inventory.
And so we've done that trust me there there've been some difficult conversation, but I'll tell you I've been very encouraged with the initial response from our customers in there.
Willingness to reduce their railcar inventory so well.
We'll continue to have those discussions will continue to engage them and be transparent and utilize data.
Okay. Thanks.
Yep.
Our next question comes from the line of Jon Chapell with Evercore. Please proceed with your question.
Thank you good morning, everyone.
Eric we've kind of been hit over the head with labor Labor Labor is the biggest issue and when we look at the amount of people youre looking to add.
Relative to the size of your workforce, it's really not that large so what are some of the other capacity constraints that are on the network right now and it feels like you exited <unk> maybe in a bit of a worst situation that you entered <unk> and how quickly can you remedy those non labor issues to kind of help us complement.
Additional head count and get you out of the situation a lot quickly a lot quicker.
Yeah, John Thank you for the question and to your point right. Now we have 1400 people plan for hiring this year, we're on pace to do that and we feel like based on how we forecast not only the volume we have now but also the growth that that's exactly how many we need to hire now when you think about recovery in the system. I mean, that's bullet number one you've got to charge the pipeline and as Lance said, we've done that.
I go then beyond that I focus on the crews that we have today and are we being judicious with the use of those crews you heard jennifer's state we have opportunities in things like re crew and over time those are at the forefront of our efforts right now third I go down to locomotives as you look at the locomotive fleet on the Union Pacific right now we have the appropriate amount of locomotives on the system we have.
Opportunities to use them more productively, but they were the right number of locomotives then I go down to the transportation plan changes that we've made those changes have been very specific and targeted towards eliminating the excess inventory off of the system and then finally, we close out with where Kenny started working with our customers and partnership with them to reduce private.
Car inventory.
Faster, we do all five of those John some of which are already been done the faster we recover the system and that's what everyone is focused on right now.
Okay. Thank you Eric.
Our next question comes from the line of Brendan Machlinski with Barclays. Please proceed with your question.
Hey, good morning, everyone and thanks for taking the question.
Lance or Eric I guess can you talk to the fluidity of the situation and you know L. A long beach and has that improved in any drastically.
Let me get started and then I'll ask Eric to to add a little detail. We are encouraging our international Ocean shipping partners to put more of their international boxes on our railroad to ship inland as Kenny mentioned that that ratio is still.
Lower than it's been historically and they're all working towards adding more of that back into our network, but where we stand ready the boxes that are pointed at us on dock or not dwelling and and.
Excessive amount of time.
And we'd love to have more of those come onto the railroad and Brian when we look at that at a specific terminal perspective, Lance is exactly right. We not only have a dwell right, where we needed to be its a solid performance, especially relative to last year and we also have excess capacity in those terminals. So as we continue to get more volume we can handle that.
Now, we still want to be ready for that so we have continue to put excess resources in and at the ready status. So they're not active but they are available in the L. A basin. So as those surges comes we can handle them efficiently.
Thank you.
Thank you Brenda.
Our next question comes from the line of Tom White of its with UBS. Please proceed with your question.
Yes, good morning.
I guess I wanted to try to understand a little bit what you know what happened. It seemed like you know Lance you you even going back to the May analyst meeting last year, you talked about growth and you really you know I think executed well against that strategy, but it seems like you know now you're almost I don't want to see you're surprised by the growth, but you know there are.
Obviously, you've been difficulty handling it so is there like a surprise on the attrition side.
You know I know railroading is an outdoor sport. So sometimes you get a setback and it takes a while to recover but I just and then also I feel like your commentary on labor not that long ago was that you had enough flavor. So I guess I just wanted to I guess try to see what what might have happened and then you know how much of that is ongoing.
And in particular with attrition is that you know is that the issue is that ongoing thank you.
That's a great question, Tom and let me unpack that for you, let's say starting in the back half of last year coming into this year. You know we've talked about in the back half of last year are really struggling with crew availability, which was mostly we thought COVID-19 related we just had not really done it.
Great job in anticipating what Covid would due to crew availability and we kept kind of struggling with having three or four or five 800 T N Y unavailable to us at any given time.
But we've thought about our hiring pipeline had been charged up to a point, where as we were entering 2022, we'd be able to handle the volumes and that looked like that was proving out to be the case. When we spoke to you all in January .
Our operating metrics were improving we were coming out of the holiday and we actually felt pretty good about where we were and now we know we were fragile, but we thought we could navigate as we brought the crews onboard what happened is we went more fragile I think than we gave then we give ourselves credit for it so in the back half of February we.
Started getting some body blows from what normally happens in winter, usually we have enough excess resources to be able to bring them to bear and clean out of it. This time around we did and as a result, we started getting behind inventory inventory built up and it's for the exact reasons that make all the sense in the world as customers see has slowed.
Down they put in more freight car inventory, so that they get their needs satisfied.
And that then it turns into a kind of a self reinforcing negative.
Cycle, and that's where we are right now so right now we're in a place where we've got more train in car inventory on us than we should have given the volumes and we've got to work that off and what Eric was talking about is making sure that we use our crews wisely, our power wisely and our T plan is oriented towards doing that.
So that's exactly where we are and it's going to it's going to take us a while to work out of it we're going to work out of it through the second quarter and into the third quarter and my anticipation as we see integral and improvement week after week after week as we're doing that.
Eric is there anything you want to add to that I think you've covered it exactly right, where we'd be most focused on those leading indicators of terminal dwell and car velocity train velocity and operating inventory and that's what we report publicly so whatever you can continue to see that progress that we'll be making a week after week.
Is there a timeframe for when it will be kind of fixed in your view I guess, that's third quarter, you're saying.
Well, we haven't guided to a specific timeline I would reinforce the fact that as we see the the hiring pipeline. We're getting about 100 crews every single month. Those hundred crews are incredibly important to the recovery, but so are the other four things that I listed so what you should know is right now everyone is focused on that and they're focused on how do we do that as quickly as possible.
Yeah, Tom I would I would point you back to the to the Kpis that Eric mentioned, you will see the recovery happens youll see it in car velocity that we publish every week, you'll see it in terminal dwell that we publish every week.
And you'll see it in overall inventory.
Okay. Thanks for the time Yep. Thank you Tom.
Our next question is from the line of Justin Long with Stephens. Please proceed with your questions.
Thanks, and good morning.
I wanted to ask about the or guidance.
There's a lot going on in the network operationally, but if I go back to prior pandemic levels seasonally you saw about 200 basis points of or improvement sequentially in the second quarter. When we think about your full year guidance would it be fair to say that it assumes a similar level.
The seasonality in the second quarter with the progression to the mid fifties in the back half of the year. Just curious if you can help us think through that quarterly or cadence assumed in the guidance.
Yeah, [noise] excuse me, thanks Duston for that question.
I believe you are thinking about it correctly. It really is going to be we we've gotta make improvement sequentially in the second quarter, and then really leverage that back half as we see stronger volume growth and and have have greater operational fluidity to be able to hit hit those targets, obviously feel worse.
I mean, some moderation there.
That's really the operational performance and the leverage to that volume growth that we know is there the robust demand that Kenny talked about I think that's very important now I also have to acknowledge the second quarter of last year was our best quarter ever as a company and so that's going to be a very tough comparison for us.
And in fact, you know.
I would be remiss to say that we think we're going to see improvement in the second quarter, but sequentially.
The year over year basis, but sequentially, we should improve and that will lead to greater improvement in the back half.
And support the guidance that you gave overall, which is a five five Dod X yeah for the year.
And volumes for the second quarter do you think there'll be.
On a year over year basis.
You know, that's really going to depend on the pace of the recovery and and but I do think you know when we talked about volumes for the year again.
First half was going to be driven by the bulk in industrial in the second half was going to be driven by them more of that intermodal recovery in automotive recovery well I think that's still largely the case and you heard Kenny talk about the fact that there are some I'll say, a little bit of headwinds or potential headwinds in terms of the international intermodal and automotive recur.
Covered with what happened in Ukraine in China, but you also have stronger natural gas prices into the back half of the year. So that's going to.
Support that cold. So I still think you have that dynamic of a stronger second half overall in volume than you do in the first half and in terms of Q2, you know, where we just need to to really get the network fluid and trying to move as much demand is there.
Got it thanks for the time you bet.
Thank you. Our next question is from the line of Scott Wolfe Scott.
You know me Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, good morning.
Jennifer pricing and mix decelerated, a decent amount from Q4 any thoughts is that price or does that mix in any any thoughts on how to forecast that and then just on the on the operating ratio I know you're raising it worsening whatever by 40 basis points, but I got to think that fuels more.
And then a 40 basis point headwind to what you thought at the beginning of the year or so.
Is it I know, we've got service issues, we're talking about but it almost feels like underlying guidance on on margin ex fuel or underlying earnings guidance is actually going to be better than what you thought previously am I thinking about that right.
Yeah. So let me hit your first question there.
In terms of sequentially so.
The pricing environment continues to be very robust. There. There is really you know that demand environment is there, but you do have sequentially. The mix is negative going from fourth quarter to first quarter, and that's really mix within mix. So yes bulk in industrial are up.
Modal or the premium piece is still down but you when you look at where the growth was on the bulk side you know it really was call very strong coal growth, but when you look at the Rx relative to the other components of bulk Ah coal has the lowest dark so you've got that mix. It then makes impact and you have a similar story within the industrial side. When you look at where the growth was.
And industrial.
Strong you know across the board with the exception of petroleum, but some of the strongest growth in metal and that also has your your lowest average revenue per car within that group. So that is the story in terms of the yield sequentially. When you look to the L. R.
Fuel is is certainly a headwind.
But we see that headwind lessening through the year from an L or impact and so you know.
We are are looking at both the fuel and the operational performance, but the volume leverage and that's the piece that I think maybe I need to stress. The most with you all and that's the piece that's within our control and the piece that we're working very diligently on them when we see stronger volumes coming in the second half being able to leverage those very well with perhaps a little bit.
Better mix, if you continue to have that industrial growth coming in a little bit stronger I think that's how you get to the revised or guidance.
Okay, just so I understand that point about fuel are you assuming the fuel price comes down or just that you catch up on the surcharge and so that the <unk> impact is just naturally less as the year goes on it's the latter that you say there it's really a stabilization in the fuel price and so we're catching up.
And feel was going up a little bit in the second half of last year. So it's taking those two things together Scott.
Thank you guys appreciate it thank.
Thank you.
Our next question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Yeah, Hi, just sort of Big picture question, obviously, you and others put P. S. R N P S. Our methodology.
Into play and I know things are a bit unprecedented but do long term broader adjustment to how you think about precision scheduled railroading need to take place in.
Is the resiliency after going through all that a surprise to the negative to you overall thanks.
Yes, Jordan Thanks for asking that question. So unequivocally P. S. R has been a benefit to the railroad even in our current environment, Let's go back to what it means it means we try to touch cars, the fewest amount of times necessary to satisfy demand for our customers and the customer need. So we don't do waste work.
That by itself allows us to have excess capacity in both the terminals and in our line of road that we can use for other purposes. We also try to deconstruct our specialized networks, where it makes sense. So that we can have shared trains that are that are advancing cars more rapidly.
Linda it would otherwise.
Unequivocally when you look even at the way we're operating right now when we have gotten into trouble prior to P. S. R. R operation would be worse demonstrably worse.
And we've proven through the last three years that when we get into trouble.
In the P. S. Saar environment, we can get out of trouble more readily now what what's happening right now is I'll I'll I'll blame it on us and shame on US we got to a place where we did not have the crew availability for when something went wrong to be able to override scores for a short period of time and get it out of the network.
And you know that's a that's a tough it's not a lesson, it's a tough situation to be in because we've already learned that lesson.
As we look forward, we have to do is make sure that our business planning processes for resources are rock solid and that we do a better job of making sure that our network and our resources and our plan is a tightly coordinated with customers and their need.
And get them matched up and match them up over a time frame that that is the same as how we can add resources for growth.
So yeah. The unequivocally P. S. R is remaining the way to go.
It is helping us manage the business right now and that's not why we got into trouble.
Thank you Yep.
Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Hi, everybody Jennifer.
That's 65% incremental margin target for this year is that compare or is that ex fuel or headline because I'm trying to understand if it's comparable to the 56 you did.
In the quarter or the 45, you did including kind of on a headline basis.
No. That's that's a good clarifying question on that when we talk to the Incrementals were always talking about it in terms of normalizing for that fuel price. So that's comparable to the 56 that we reported here in the in the first quarter. Okay. Okay. So yeah, that's what I thought and so the.
The implication is I mean, it's going to depend on what revenue growth is but the implication is that you guys are going to do a 53 to 55 O R. Cumulatively over two to three <unk> and <unk>, which is a big step up in the context of kind of do the ongoing service issues one thing I wanted to clarify.
The fuel surcharge, obviously, it was up 20% sequentially, but I assume youre going to take a very big step up in the second quarter or some of the March increase and then maybe even subsequently third quarter. So I'm just trying to figure out the confidence around the next three quarters and how much of that bridge so to speak of that step function.
The improvement is absolutely just fuel surcharge revenue that comes on disproportionately the increase in fuel costs.
Yeah. So I mean, we do still see the price of fuel being a headwind in terms of our or as I talked to Scott, we see that lessening through the course of the year, but we don't see that Oh, our impact flipping and being a tailwind to our O arm. So you know your math that you said in terms of the.
The last you know.
Three quarters of the year in terms of our I don't know that I would necessarily agree with that that seems fairly aggressive but it is about seen a stability in the fuel prices, which does allow the fuel surcharge, obviously to catch up with it well and Jennifer We also just need to circle back there's one other predicate on.
That and that is we are improving the service product through the quarter and through the back half of the year.
And that goes back to the commentary about volume leverage Yep right.
If I could just sneak in one last one for me, which I think is an important question, obviously be NSF, who is making a bigger push into intermodal with its joint venture with wood with Hunt and Hunt obviously the largest.
I N C out there with a big asset behind them as a base behind them.
One of them a lot of intermodal business recently does that change your strategy in terms of what you need to do you need to invest.
In the intermodal service to compete with your direct competitor that seems to be going all in on really putting a decent amount of investments that play to win more business in intermodal.
Yeah, Amit I don't think it changes fundamentally our strategy in the domestic intermodal world. The BNS F. N J B Hunt have always been formidable competitors and what we've done.
By adding Knight Swift and Schneider, along with having X P O and in our long term partner hub.
Working with US is we've got channel partners that can grow very effectively.
Against that and when you combine that with our E. M. P. A new Max program for some of the smaller and midsized I am sees we are fielding a really talented very compelling story for BCE owes to use us. It is no surprise that the that our primary competitor.
Her in NSF in their primary partner in <unk>.
Our doubling down on how they approach the market and candidly that kind of competition between us our channel partners in them and their channel partners is fantastic for the users for the for the customers of of domestic intermodal.
Thank you very much I appreciate it.
Our next question is from the line of Chris Wetherbee with Citigroup.
With your question.
Hey, Thanks, good morning.
Maybe a question for Kenny or Lance I wanted to think about sort of the overall demand environment clearly I think theres business. That's available now that you're not capable of moving from a service perspective, so maybe a little bit of perspective on the amount of business that you may be turning away or sort of nearing as it stands right now and then thinking a bit bigger picture what do we think the outlook.
Is really for the rest of the year I guess, there's a question of you know overall consumer activity and the pace of demand as the rest of the year plays out so want to get a sense of what you're hearing from the customers in terms of expansion or contraction plans as they think about the rest of the year. Obviously, we're hopeful that as service comes back there will remain demand being relatively strong but wanted to get a sense of what you're hearing.
On the ground.
Kenny you want to handle that yeah. Thanks, Chris.
You know you set aside some of the macro things that went out and all of them were keeping an eye on the inflation rates are that are out there are obviously there have been some stop stop and start.
What COVID-19 disruptions in China, but when I look across each of our business teams.
If a very optimistic story you look at our coal business, we talk about the two when none of US would have predicted that natural gas prices are as high as they are and are going to sustain where they are our grain business has been very strong last year was very strong I would tell you. The upside there is on the biofuel market.
And the growing product area, which is great and then you know as we look throughout the rest of the year, we expect that our export fertilizer demand will stay there on the industrial side really same store I mean, we've got some big.
Development wins, but we also just got some you know structural things that are helping us all metals has been a very strong there've been some expansions on the plastic side. Both markets are still recovering and have been very strong well keep an eye on how the start the inventories are still.
Though there still a backlog of houses that need to be built so our lumber and our paper business has been strong and then on the premium side.
You know our auto parts and finished vehicles business.
Steel is not where it should be if improving we talked with some customers.
Car dealership inventories are around you know 'twenty four 'twenty five day, when we see that improving as we move throughout the year on our international intermodal side are the amount that's gone Ipi has improved or improved in the first quarter. We had some customer then here recently.
We're expecting them to turn on more of that volume so the.
The things that we can't control, we feel really.
Good about domestic intermodal has been off as I mentioned in my commentary so from what we can control we feel good about we just got to keep an eye on some of these other things that are out of our control and kidney I went up I'm going to brag on to your team for a moment you youre doing really tremendous work on business development on pure business development the singles and doubles.
Where we bring on a customer we grow with an existing customer through service enhancement and enhancing the overall customer experience even in the context of the service issues that we're facing right now from a service product perspective behind the scenes. The overall customer experience, we continue to invest in that.
We continue to make progress they're up they are out there hustling and engaging the customer.
Thanks for the color I appreciate it.
Yeah.
Our next question is from the line of Ravi Shankar with Morgan Stanley . Please proceed with your question.
Oh. Thanks, Good morning, everyone I did want to follow up on the domestic intermodal expectations are into the back half because it's kind of based on what you said about.
The competition with the B and as well as expectations for the truck market loosened in the back half of the U R.
Talking a little bit to figure out what the theme is on the domestic intermodal side that will get that to accelerate in the back half of the yard.
So I don't know.
Are there new contracts coming on kind of what gets that to go up. So that's question number one and question number two is if you can give us a little bit of a sneak peek into the STB hearings and a few days kind of although you guys have spoken a lot about the service challenges and everything you're doing right now, but what do you think is gonna be October hearing. Thank you Kenny why don't you have.
The back half domestic intermodal question and I'll get to the STB. After you're done yeah. Thanks, Robby a couple of questions there and it sounds like a demand and also the.
Pricing environment, where about 40%.
Almost close to half way through our bid.
Bed sessions on the domestic side and it's been favorable versus last year or last year was also a pretty.
Strong solid year now the spot rates have gone down here recently, but we've got to keep an eye on that but I'll tell you. The overall demand has not change and so we're going to continue to look at that over the next few weeks as where are those competitive bids again, we brought on about Knight Swift business, but we do have.
More volume that's coming on.
We look at the back half of the year. The other thing is that we just need the supply chain are two to work itself out chassis dwell was still not really where it should be dwell of containers is not really where it should be so we'll see some improvement there and then you made some comments about our primary competitor.
In the west and I want to Echo what Lance that you know the pie is much larger than the primary competitor than the west and we've had so much investment as you look at you know the ramp in the inland Empire twin cities everything we're doing with G. P. S. We want to compete with trucks and that's what we're focused on and as we as we.
Improve the service product Kinney get that reliable.
We're in great position to take more trucks off the highway it just makes all the sense in the world.
Including ESG perspective.
Ravi your question on the STB hearings clearly.
The entire rail industry is in a place where were as a collective not providing the kind of service that our customers demand.
The STB appropriately is hearing from customers and want to talk about it. That's what next week is all about we're well prepared for those conversations and to share with the STB, how we're investing and and planning to continue to improve and recover and then be stable going.
Forward and reliable and consistent.
And I think that's going to be a great opportunity to have that discussion.
We're going to encourage the STB not to make rash or a knee jerk decisions in this environment.
There's a there there are some things on their docket that Ah I would guess I would imagine somebody will advocate as solutions and from our perspective. This is all about getting our labor right getting getting utilization right, making sure. The other resources are ready and then executing it.
Not much more complex than that right now.
It sounds good thank you yep.
Yep. Thank you.
Our next question is from the line of Walter Spracklen with RBC. Please proceed with your question.
Thanks, very much good morning, everyone. So.
Once you you mentioned over resourcing or the ability to over resource and I guess my question is really if that is limited only to two your ability to ramp up labor.
Or are you looking at ways and do you do you feel like you need to look at ways to expand your capacity from a more modern infrastructure standpoint be it on on track and our locomotives and so on it. It just goes back to the STB you know some of the discussions chairman over and shoving about.
The lack of railroad ability to invest or the historical.
Our decision not to invest that is leading to a lack of available capacity and I Wonder how you would how would you respond to that and particularly if it's just a labor problem more or if if you need some more capacity and investment in your in your network as well.
Yeah, Walter we take great exception to anyone that points at our historic track record and says we're under investing in our railroad right. When you spend three $4 billion a year, that's not under investing and look at the statistics, you'll get the facts. If you go back four or five years, we would have eight or 900 trains on our network at any given time.
Today were overloaded by plan at 700 that number should really be 600, and our network has had incremental investment put into it.
That's what I mean by making sure we have excess resources, we've done that through the implementation of P. S are in terms of we have excess terminal capacity that we can use by having mothballed certain terminals that we no longer needed in the T plan. We've got plenty of line of road capacity that we can use and we continue to invest there.
So that we can continue to grow out.
You shouldn't see safety productivity and growth in targeted areas.
So when I'm talking like that I'm really talking about the more fungible resources like crews and locomotives and locomotives. We're in great shape right. We have a strategy, where we have at the ready locomotives positioned around the network. So that we can fire them up when they're needed and then put them back.
Once we've gotten out of the situation. So it is really to your point Walter it's really back down to cruise historically, we've had at sports alternative work and training service boards, where we would be able to have people not go into furlough, but go into kind of a quasi status, where they are still getting paid they're still getting resources from us there Ben.
<unk> package in its entirety and that allows us to call them back more quickly.
If something happens in a demand profile that we didn't expect we need to get back to a place where we've got those kinds of resources available to us and we're looking at all of those but job one that we talked about first and foremost is making sure we get crew utilization and crew availability in total.
Crewing right. So that we can handle the volume we've got in front of us and the growth that's coming.
I think that's a great answer and do you think that's resonating with with the STB or are you. You know what is your what is your sense that that that that answer will kind of give you. Some some at least some time to kind of prove you prove it out over the over the coming quarters and years, where do you see risk that they may take action to two.
Ah to force you to invest in capacity above and beyond all the capacity investments you just mentioned.
Walter I'm, an optimist and I'm hopeful that the facts, which support what I just talked about and speak to the STB and were effective at communicating that.
Thank you very much for the time appreciate it thank you.
Next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Sorry, I was on mute.
Two questions for you on the domestic intermodal side again, Eric.
Resourcing the network right now obviously, you know Kenny teams done a good job, bringing over some some fairly big accounts in 'twenty. Three will you have enough capacity by the end of the year can accommodate that or what else there'll be incremental growth required in.
Resources into 'twenty 'twenty three to accommodate that those intermodal share wins.
Yeah. So thank you for the question, David we will have the capacity to be able to host that additional volume.
<unk> been working through the Onboarding process. That's part of that process is to ensure that we're making the necessary investments and it's not always capital investments oftentimes. It's just process improvements for example, considering the fact of a nice lift in Schneider now having their own chassis and how do we think about that and optimize our terminals to account for that.
You know when I'm out on the railroad I see the output of those efforts when I see us.
Getting near completion on our G. Four gantry cranes are when I say, it's by an additional lift equipment.
The work that we're doing in the inland Empire in the twin cities intermodal terminal those are all in response, not just a nice lift in Schneider, but to the entire volume and growth that we see coming in and being ready for all of our customers will benefit from that.
Alright, Thanks for that and then maybe just as a quick follow up.
You know when we think about the 2030, 40% growth in the domestic container fleet, we're gonna be seeing over the next.
Couple of years, it sounds like a lot of private equipment is being added.
What do you guys think that your intermodal franchise is going to look like from an equipment perspective 345 years down. The road are you also going to be resourcing containers into the you Max in the E&P programs, where are you going to be allowing or channel partners to make those investments and trailing capacity. Thanks, Kenny you want to handle it yeah I mean.
We feel really good about our strategy to go in and invest in our equipment that we have out there where it's M. P. A new Max I talked about the G. P. S earlier, you've heard me talk about the chassis investment.
We see that we can win across the board, we can win with the private asset side and with the IMC community and we want to grow that pie and so that's how we're thinking about it.
As other private asset carriers are out there will engage them on their strategy, but clearly we don't want to put any limits on anything that would inhibit growth.
I would guess Kenny given the growth that we're seeing first through Knight Swift than with Schneider and the continued growth of hub, it's probably fair to say the ratio of privates versus E&P you Max on us grows towards the private side.
Fair Yep.
Alright, Thank you guys.
Yep.
Our next question is from the line of Brian Awesome Beck with J P. Morgan. She says she with your question.
Hey, good morning, Thanks for taking the question.
So clearly a lot depends on service improving here.
And in the next couple of quarters, just wanted to get your sense Lance or Eric about just the risks to their plan you know what what are you really focused on what do you really worried about and then Lance you did mentioned a few things and how to get this more sustainable in the future you know there always be a labor and volume variability, but is there something else you feel like that.
Or maybe the industry overall.
We need to get better at in terms of being able to manage these ebbs and flows in a bit better and then being able to to grow from there.
Well why don't I start with the back half of that question, Brian and then I'll turn it over to Eric on the front half in terms of you know some of the bumps in the night that you're that you're planning for that you're that you're.
Mitigating.
So in terms of how to how to be more resilient and robust there. There's a lot of there's a lot to that question.
Some of US are our direct control some of it has to be in partnership with our customers. So what's in our direct control we have to make sure that our jobs are more flexible.
And a more attractive and easier to hire into so one thing that we're in the middle of right now as an industry is trying to get to a place where two people in the cab of the locomotive are not mandated and negotiate with our with our Union partners on moving one of those people onto the ground that doesn't sound like much.
But that one person on the ground can turn into a shift job and stay at home as their as they're doing their work that's a huge lifestyle benefit to that person as opposed to going over the road staying away from home and then coming back and being called at potentially all hours of the day. So that's that you know.
It's it's it's not obvious how that connects back into being more resilient reliable more resilient more consistent but there is an obvious connection for from our perspective, there's other things like that that are smaller that we need to do I talked about bots and getting back to a place where we have not excess.
Manpower sitting around but.
Our labor force, our craft professionals or more flexible to go to where the work is and do the work when it's needed and still have an enhancement and they're in their work life balance.
So there's a lot of work that we have to deal with our unions on property and negotiation of national are in negotiation and then just in how we design our boards and our T plan and our work overall.
Eric do you want to handle that first part, yes, so Brian as you think about the recovery and what are we doing to derisk that.
First start off with just the basic fundamentals of you know we are coming out of winter, we're coming out of a period of time, where we have seen higher variability as we come into spring. It's a period of time in which we have been more consistent it, especially with the impact of weather.
And we've mentioned it a couple of times, but it's really the most important thing as we sit here right now if you look at previous times of service challenges. It's been in our terminals, we've been able to get the volume to the terminals, but then the volume in the terminals starts to slow a terminal that's not the case right now the case right now is that we have fluid terminals both.
Our large terminals are serving yards in our locals get into customers that must stay that way. So the with the way, we think about bringing trains into the terminals and landing them on time, but also properly space. So we can handle it. So we don't get a backlog. That's derisking that you know if you look at another way as we talked about crews now we're in the CRU preserving mode.
Right now we want to make sure that every crew we called counts one of the ways. We do that is with train length.
You go back all the way to January we were sitting around 9000 feet and our system average we added 200 feet to that in January another 200 feet in February and March and another 150 feet year to date, that's derisking. The recovery, that's ensuring that we're taking every opportunity we can to minimize the number of trains out on line of road.
So it's all activities like that and that's what the entire team is focused on.
Alright. Thank you Eric that's very helpful. Lance if you can just give us some quick thoughts on the C. P. Casey merger I think the responses back from CPE are due tomorrow. So any updates on the concerns that the U P. As voice to that would be helpful. Thank you, Brian I would just reiterate what our concerns are that it's really boils down to three things that.
We think we need remedies for the first is for our customers to continue to enjoy the kind of access they have to and from Mexico, we need certainty on price that's competitive from the border into Mexico, We think about that like prop rates.
We need to maintain what we have today with the case, yes, and that is fair treatment equal treatment at the border crossings on the bridge and third the case, yes, it and N C. P. I have talked about a significant spike in converting truck to train and moving it on <unk>.
<unk> rights through our Houston, Houston as a congested areas. It's a it's not congested in a bad way, it's a high volume area that requires a lot of attention.
You introduce another eight or 10 trains a day into that network in a rapid period without having the capital in place first it'll tell Houston and we can't accept that so we want to make sure that if they're going to execute that plan and it's going to increase the amount of train traffic through Houston the cash.
<unk> has spent in advance so it doesn't crater Houston as a result.
Thank you Matt appreciate it yeah. Thank you.
Yeah.
Our next question is from the line of Allison Pontiac with Wells Fargo. Please proceed with your question.
Hi, Good morning, you had mentioned a number of notable steps obviously towards your sustainability targets.
As you're having conversations with new business development I guess, one is that being recognized and then you know as part of that is that becoming increasingly important in their decision to execute with the Olympian towards an agreement just any thoughts there yeah. Thank you Alison Kenny you want to take that.
Have a number of customers that have always wanted to know a where we are on ESG and sustainability component and we are seeing in the RFP. Then the formal RFP are more focus there are those customers are typically in the Petro chem area or customers that have that are I'll call.
Consumer facing.
Type customers, but we do know that it's in their methodology I'll tell you. The other thing is that our commercial team is sitting down with our customers and walking through our the value that we provide by down move in Union Pacific and actually selling that so yeah. If if.
More awareness on the customer par and more proactive engagement from our commercial team to fill that it's part of our value proposition.
Great. Thank you.
Yeah.
Our next question is from the line of Jason Seidl with Cowen. Please proceed with your question.
Thank you operator, Lance and team. Good morning wanted to go back a little bit to the intermodal side. You know as you think about your base case scenario on the international side, what's in it in terms of potential clogging up with the supply chain again, we've talked to a bunch of people and there seems to be some worry here that we've had.
A black Swan events over the last couple of years now we've got another one with China ports, just withholding all the shipments coming in.
They all come back supports it once I don't think a lot of people have confidence that they're going to be able to handle it whats you piece set up like into the summer and how do you think you're going to handle that.
Let me start and then I'm going to turn it over to Eric and Kenny to to kind of add a bit more detail, but I want to have Jason focus in on the on the partner side with railroad.
What we need to depend on so that the network doesn't get overwhelmed I'm in heart in agreement with you that we are not yet in a place where labor in distribution centers and warehouses and dray.
Truck companies is at a place where it could take an onslaught of significant volume in the international intermodal space. So that we still need more hiring in more labor available in local truck companies and dray companies and in distribution centers.
But kenny and Eric what about us.
Yeah. The I mean, you I think you hit it on the head I would say and I'm looking at Eric because I say that we feel good about the condition of our intermodal network as it stands today.
We've been working very closely with the customer if they can make sure that we have a really clear forecast of what's coming towards us.
We've been third of technology, where we can do that.
But yes, the softness art out of China, We've got to keep an eye on it because there is gonna be another slug of containers that are coming towards us in one of our biggest opportunities that we've been leveraging really for now almost a full years. We are active members in the White House working committee, but allows us to interact with all the different stay.
Holders on the west ports, and what is providing us is even better transparency into.
Different events that are happening up chain that it comes down to us that allows us to understand week, sometimes months out on how do we have to think about resourcing for that and will continue to be active in that cause it.
To help the entire industry out in the West coast.
Okay. So if I had to sum that up in an onslaught of freight would still be difficult to handle but now you guys have better visibility than you did let's say a year ago throughout the system.
That's fair Yeah, absolutely fair, Okay, I wanted to follow up real quick Lance getting back to the STB for a second you know there there was obviously hearings out there on reciprocal switching I'm you know I'm not going to make any prognostications on where that's going to go but just wanted to.
In terms of your exposure in terms of your total business what percent of your business would be exposed to reciprocal switching it would come to the U S.
You know thats hard to nail down and give you a number right now all I would say is.
We are concerned and deeply engaged with the STB to help them understand.
What reciprocal switching we'll call it forced open access could do and what it couldn't do it it is not a wholesale remedy to for instance.
Remedy fix.
Current supply chain problems right.
Forced open access would do is it would put switching in places where it isn't right now it would increase dwell time on freight cars and those are two things that we absolutely don't need now that's not to say that there can be a circumstance, where it might make sense for somebody and it already does.
Does exist in very limited areas, where we've agreed with other railroads that are reciprocal switches needed or where the STB has mandated it through conditions on on previous transactions. So.
So we continue to work with the STB to help them understand our concerns.
How it could help how it couldnt help and then get to a place where if there is action taken it sensible.
Thanks, guys appreciate the time as always.
Our next question is from the line of Ben Nolan Stifel. Please proceed with your question.
So I'm sort of a two part question maybe for Kenny at first.
On the call is the ramp up that you guys have seen has been pretty remarkable but you talked about higher natural gas prices.
Incentivizing more I was curious first what is the ability of your ability to sort of continue to toggle up there and then similarly with the ability of your customers to also toggle up and then.
On the petroleum side, I guess I was I'm, a little surprised that there's not more volume growth in that market given how much drilling activity. There is and everything else just domestically around are around the oil and gas side, maybe a little color on that.
Yeah, Thanks, a lot Oh.
Yeah I'm on the coal side again, you've got to two different things you've got some business development wins and you've also have.
The natural gas prices.
Certainly we didn't predict last year that the natural gas prices would be in that $7 range and as it stands here today I'll tell you I, if it's encouraging that it's that that forecast is throughout the rest of the year.
As we talk to our customers.
We don't see that they've made and a capital investment per se in terms of trying to get more of that out of the ground, but we do know that they have done quite a bit of hiring them to get more utility and get more product.
Product out and so we're working with them on that and we stay very connected with Eric <unk> from a forecast perspective.
And then yeah, I I I understand your perspective, with petroleum and and what you should think about it is just.
A part of that that's not here. This year is our crude oil business and the spread between Canada and call. It the golf where taxes are just not where it should be and so that's the impact that you're seeing there we do see to your point.
The drilling show up in other commodities, we're seeing a lot of drilling pipe O C. T. G. That's moving and I talked about the Frac sand there are some other industrial chemicals that go into the drilling process. The worst thing so that's where that's showing up on our railroad and Kenny it in that context.
The heat of that market doesn't look like it did the last Super strong cycle, we had in places like the Permian and the Eagle Ford there seems to be a little bit more discipline on capital spending and their slower and walking up production absolutely.
Alright, great I appreciate the color. Thank you.
Our next question comes from the line of Jeff Kauffman with vertical. Please proceed with your question.
Thank you very much and thanks for squeezing me in here.
You know a lot's been asked about short term and in service and short term disruptions Kenny I wanted to focus a little longer term.
Really on three things number one given the instability off the west coast, we've seen a lot of shippers to go to the east coast.
So the first part of this is you know how do you see that playing out and what are your customers telling it longer term and then secondly.
I know Lance was talking about the companys donation to the efforts in Ukraine.
But as we talk longer term are any of your customers approaching you and saying listen what's going on out there has changed our ability to move product around the globe, how can union Pacific help us in and then the topic of re shoring, which I know hasn't really happened to a large degree yet but in the long run I know a lot of customers are rethinking. This so maybe.
We talk about those three areas opportunities say over two to three or four year period for you.
Yeah.
Interesting that you bring that up on the international intermodal side.
It's hard to tell what's going to be a one what a one off versus a permanent change from a I'll call it directional ship.
Shipment of international intermodal we.
We have worked with an international carrier here, where we do have a move that's come in east to West and so we're excited about that move and again, we'll see what happens there from a permanent basis.
Yeah, I believe that some of our global disruptions will make our customers think about where they source from and we are hearing more conversations about near shoring. We have not seen those investments are really mirror those are conversations and then as you think that.
Last question was about the Ukraine, and and and and no fault there were always talking to our customers about solutions that we can provide them. So when you think about the fix a border access Mexico is clearly one I. Just gave you an example of going from east.
The west we still feel very good about our products moving off the west coast.
When we've got really solid.
Solid relationship from anything that wants to come out of Canada. So we're prepare we've got 600 million in investment on our intermodal network, but we're prepare for more growth.
Okay. That's all I have thanks, Thank you Jeff.
Thank you our final question today will come from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.
Thanks, very much and good morning, just a quick one for me.
We start to move towards the peak season was just hoping you could talk about the current state of the Chicago Gateway. Both in terms of your own terminals that also your interchanges the other rail and drayage capacity and so forth.
Sure.
So if we look at our.
Specifically to Chicago first but the same would be true as we look at Memphis and as we look at even our New Orleans right now are those all remain fluid from an intermodal perspective.
That doesn't mean that we don't work through challenges in day to day basis, as we work through interchange issues, but we have strong relationships with the other carriers, we worked through those issues and right now I'm very happy with where those terminals are if we were asking about one I'm. Most focused on it's just simply New Orleans, and it's always one that we're focused on the most because it's such a tight amount of true.
Jack and operations in a really small area, but otherwise no concerns at this point.
Thank you for the time.
Alright, Thank you Shirley.
Thank you. This concludes the question and answer session I'll now turn the call back over to Lance Fritz for closing comments alright.
Alright, Thank you Rob and thank you all for engaging with US This morning and for your questions. We're looking forward to talking with you again in July to discuss our second quarter results until then take care.
Thank you ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.
Yeah.