Union Pacific Q1 2022 Earnings Report

Union Pacific EPS Results

• Actual EPS: $2.57
• Consensus EPS: $2.55
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $2.00

Union Pacific Revenue Results

• Actual Revenue: $5.86 billion
• Expected Revenue: $5.76 billion
• Beat/Miss: Beat by +$100.84 million
• YoY Revenue Growth: +17.20%

Union Pacific Announcement Details

• Quarter: Q1 2022
• Date: 4/21/2022
• Time: Before Market Opens

Union Pacific (NYSE:UNP) is a leading transportation and logistics company based in Omaha, Nebraska. Founded in 1862, the company has a rich history of serving customers across North America with safe, reliable and efficient rail transportation solutions. Union Pacific operates in two business segments: Railroad and Premium Operations.

The Railroad segment comprises the company's core operations, including freight transportation and logistics services. The Premium Operations segment includes Union Pacific's subsidiary, Union Pacific Distribution Services, which provides transportation and logistics services to customers across multiple industries.

With over 32,000 miles of rail network across 23 states, Union Pacific connects major markets and communities across North America. The company is committed to sustainability and has set ambitious goals to reduce emissions and increase the use of alternative fuels.

Union Pacific has consistently performed in the transportation and logistics industry, delivering strong financial results over the past few years. It is also important to mention that Union Pacific's debt levels have been relatively stable over the past few years. For several years, the company has maintained a healthy cash position between 1 - 3 billion dollars. 

Union Pacific operates in the transportation and logistics industry, which is highly competitive and regulated. The industry has seen significant changes in recent years, including the growth of e-commerce and the increasing demand for sustainable transportation solutions.

Union Pacific faces competition from other railroads, trucking companies and intermodal transportation providers. The company also competes with alternative modes of transportation, such as air and sea freight. Regulatory and political issues, such as changes in trade policies and environmental regulations, can impact the industry and create challenges for Union Pacific.

Despite these challenges, Union Pacific has maintained its market position and continues to invest in technology and innovation to improve its services and meet the evolving needs of its customers.

Union Pacific's leadership team is led by Lance Fritz, who has been the company's Chairman, President and CEO since 2015. Fritz joined Union Pacific in 2000 and has held several leadership roles. The management team also includes other experienced executives who bring diverse skills and expertise to the company.

Union Pacific has several growth opportunities in the transportation and logistics industry. The company has invested in technology and innovation to improve its services and increase efficiency. For example, Union Pacific has implemented Precision Scheduled Railroading (PSR), a new operating model that has enhanced train speeds and reduced costs.

The company also has opportunities for growth in new markets and industries. Union Pacific's subsidiary, UPDS, provides transportation and logistics services to customers across multiple industries, including automotive, chemicals and agriculture. The company could expand its services into other sectors and markets to drive growth.

Union Pacific faces several risks and challenges in the transportation and logistics industry. Changes in consumer preferences and competitive pressures can impact the company's revenue and profitability. The shift towards e-commerce and the increasing demand for sustainable transportation solutions could also create challenges for Union Pacific.

Union Pacific also faces risks related to its operations and infrastructure. The company's rail network is subject to weather and natural disasters, which can disrupt operations and impact the company's financial performance. Union Pacific also faces cybersecurity and data privacy risks, which could impact the company's operations and reputation.

Union Pacific Q1 2021 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to Union Pacific's First Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may now begin.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Thank you, Rob and good morning, and welcome to Union Pacific's first quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales, Eric Gehringer, Executive Vice President of Operations, and Jennifer Hamann, 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, have had their lives turned upside down and the UP family is holding them close in our thoughts on in our hearts. We've leveraged our resources to help with the $500,000 donation from our foundation and by matching two to one our employees gifts to select charities that provide direct aid.

I also want to recognize the Union Pacific team for more than their generosity. They were a team dedicated to serving our customers. But recently our service product has not met our customers' 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 ability to grow while providing our customers a reliable service product. As they've proven time and again no matter of 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 ratio of 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 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.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Thank you, Lance, and good morning. First quarter volume was up 4% compared 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, freight revenue was up 17% driven by higher fuel surcharges strong pricing gains and a positive mix. Let's take a closer look at each of these business group. Starting with Bulk, 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 two new contract wins that started on January 1st. Grain and grain products were up 1% in volume due to the increased biofuels production, partially offset by fewer grain shipments from longer shuttle cycle time. Fertilizer carloads were up 2% year-over-year due to strong agricultural demand. And lastly, increased shipments of import beer and can goods were the main driver of the 4% increase in food and refrigerated.

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% compared to 2021 driven by fewer petroleum shipment. Volume for forest products grew 7% year-over-year primarily driven by strength in both lumber shipment and paper. Despite rising interest rates housing starts continue to be strong coupled with demand of corrugated boxes and scrap paper. Industrial chemicals and plastic shipments were up 14% year-over-year due to the increased demand and a favorable comp from last year. Gulf storm the impact of production. Metals and minerals volumes continues to deliver robust year-over-year growth, 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 storm that I mentioned early.

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 in traffic. Automotive volume was up 6% driven by an increase in auto parts, as demand recovers. Shipments for finished vehicles were down 3% as a result of ongoing semiconductor shortages. Intermodal volume was down 5% driven by continued international supply chain disruption, however, 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 2022. At a micro level, we will be closely watching our markets to see how rising inflation and the global events 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. Starting 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 expand 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. For grain we have a tough comp to last year, as exports were strong. And like coal although we expect cycle time to improve it is dependent on our service recovery. Moving on to 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 metals. 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 2021 level. And lastly for premium, we expect domestic intermodal to continued its benefit from inventory restocking, retail sales strength, tight truck supply and our business development wins. International intermodal is more uncertain with possible effects from ongoing supply chain challenges and pandemic shutdown 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 component. We are keeping an eye on whether this will have an impact on production and stand 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.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Thanks. Kenny and good morning. As I will discuss in greater detail in a few minutes our service is not to a level that meets expectations. And we acknowledge the impact the 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 above all, and what all employees to return home safely each day.

Now let's review our key performance metrics for the quarter, starting on Slide 9. 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 seen improvements in operating metrics and crew availability from reduced COVID infections. In late February, however, while the network was still fragile episodic events challenge 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-PSR 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 1,056 daily miles per FTE. We continue to hire for growth and normal attrition throughout the network. In 2021 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 on-boarding around 1,200 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 link 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 7 day volume levels remained relatively flat week-to-week. We are at an inflection point and more critical action is needed. Our terminals remain fluid and our focus on improving over-the-road operations and reducing the number of active trains on the network will ease main line congestion. 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.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

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 a quarterly operating ratio of 59.4% 70 basis points of improvement. Comparing year-over-year first quarter results you'll recall that Winter Storm Uri significantly impacted 2021. So in 2022, we have the positive effect to our operating ratio of 160 basis points and $0.16 earnings per share. Rising fuel prices throughout the quarter the lag on our fuel surcharge programs, and widening spreads between WTI and highway diesel fuel prices negatively impacted our quarterly ratio by 80 basis point while adding $0.12 per share.

Core results were a 10 basis point drag to the operating ratio, but contributed $0.29 to EPS. These core results are indicative of both 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 2021 on 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-60s, 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 pre-tax 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 of 800 basis point, 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 the 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 expense. As noted earlier, the primary driver of the increased expense was fuel up 17% 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 craft 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 recruit over time and borrow 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. Purchased services and material expense was up 14% driven by inflation, higher volume related purchase transportation expense associated with our loop subsidiary and cost to maintain a lot for active locomotive fleet. Equipment and other rents was up 1% driven by lower TTX 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, cash from operations in the first quarter increased to $2.2 billion from $2 billion in 2021, a 14% increase. 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 dividends. The cash capital investment reflects both payments from elevated fourth quarter spending, as well as a 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 2.8 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 in fuel and recovery in our service product we'll still look to achieve our long-term goal of an OR that starts with a 55% this year. Importantly, we are affirming our previously provided 2022 targets for volume, price and incremental margin.

Our cash and capital plans also are 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'd 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 Lance.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

And thank you, Jennifer. As Eric mentioned, we've had an uneven start to the year with safety, but we're not deterred. We're 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 opportunities 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 advance our journey to net zero emissions by 2050. In January, we announced plants to purchase 20 battery-electric locomotives for use in the yard operations, creating the world's largest carrier-owned battle -- battery fleet in freight service. These locomotives, do not use diesel fuel and emit zero emissions.

We anticipate the first units will arrive on site in late 2023 with complete delivery by 2024. 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.

Questions and Answers

[Operator]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question today will be coming from the line of Ken Hoexter with Bank of America. Please proceed with your question.

[Ken Hoexter, Analyst at Bank of America Merrill Lynch]

Great. Good morning. Just kind of following up on the -- on your outlook. Obviously has a lot to do with enhancing hiring to improve the service. Maybe you can talk a little bit about how do you scale that up. Lance, what programs, you can do to kind of meet some of these targets? And I guess Kenny, the breadth of the letter and constraints on the companies limiting their assets. Maybe talk about what, how that frees up the fluidity of the network as well. Thanks.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, thanks for the questions. Ken. So I'll start in terms of hiring our hiring pipeline right now is pretty much fully charged at 500 will be graduating something over 100 each month that will help us to get healthy. It's not like we need all 1,400 right now, but I, 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, and so we're in the middle of doing that.

When Eric mentioned some difficult areas particularly in the northern tier call it from Western Chicago all the way through, Wyoming and into the Pacific Northwest, we're trying to a couple of unique things there. One of the things that's showing really great promise is something called second transpiring. It's where we take categories of individuals who have 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 them on board. 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 transpiring program now to Chicago, LA, North Platte. And it looks like it has great promise in those communities as well.

So there, 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've 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 trying to do in particular areas. So we're doing everything we can to get the pipeline charged and get them out. Kenny?

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah, hey, Ken, you know, we've send out a letter to all of our customers. And so that gave us 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 the customers for having those engaging conversations. We work with Eric's team to ensure we had really good data-driven conversations with the customers that could give us the best opportunity to reduce the railcar inventory, and so we've done that.

Trust me, there have been some difficult conversations. But I'll tell you, I've been very encouraged with the initial response from our customers and their willingness to reduce their rail car inventory. So we'll continue to have those discussions we'll continue to engage them and be transparent and utilize data.

[Ken Hoexter, Analyst at Bank of America Merrill Lynch]

Thanks, Ken and thanks Mike.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah.

[Operator]

Our next question comes from the line of Jon Chappell with Evercore. Please proceed with your question.

[Jonathan Chappell, Analyst at Evercore ISI]

Thank you. Good morning, everyone. Eric, we've kind of been hit over the head with labor, labor, labor, it's the biggest issue. And when we look at the amount of people you're 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? It feels like you exited 1Q maybe in a bit of a worse situation that you entered 1Q. And how quickly can you remedy those non-labor issues to kind of help complement the additional headcount and get you out of the situation a lot quickly, a lot quicker?

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah, John. Thank you for the question. And to your point right now, we have 1,400 people planed for higher in 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 and I focus on the crews that we have today. And our we'd be in judicious with the use of those crews. You heard Jennifer state, we have opportunities and 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 productivity, but there are 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 we're Kenny started working with our customers in partnership with them to reduce private car inventory. The faster we do all 5 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.

[Jonathan Chappell, Analyst at Evercore ISI]

Okay, thank you, Eric.

[Operator]

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

[Brandon Oglenski, Analyst at Barclays]

Hey, good morning everyone, and thanks for taking the question. Lance or Eric, I guess, can you talk to the fluidity situation and LA Long Beach and has that improved in any drastic way?

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

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 ratio is still lower than it's been historically and they're all working towards adding more of that back into our network, but we stand ready. The boxes that are pointed at us on dock or not dwelling in excessive amount of time, and we'd love to have more of those come out of the railroad.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

And when we look at that a specific terminal perspective. Lance is exactly right, we not only have dwell right where we need it to be at the solid performance especially relative to last year, but we also have excess capacity in those terminals. So 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 and at the ready status. So they are not active, but there are available in the LA Basin. So as those surges comes we can handle them efficiently.

[Brandon Oglenski, Analyst at Barclays]

Thank you.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Thank you, Brandon.

[Operator]

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

[Tom Wadewitz, Analyst at UBS Securities]

Yeah, good morning. I guess I'd I want to try to understand a little bit what you know what happened. It seemed like you know, Lance, you even go back to the May Analyst Meeting last year you talked about growth and you really I think executed well against that strategy, but it seems like now you're almost, I don't want to say you're surprised by the growth, but there obviously have been difficulty handling it.

So is there like a surprise in the attrition side? I know rail-roadings and outdoor sports is 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 labor. So I guess I just want to, I guess, trying to see what might have happened. And then how much of that is ongoing in particular with attrition? Is that, is that the issue is that ongoing. Thank you.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

That's a great question, Tom. And let me unpack that for you. Good. Let's say starting in the back half of last year coming into this year. We talked about in the back half of last year really struggling with crew availability, which was mostly we thought a COVID related. We just have not really done a great job in anticipating what COVID would do to crew availability and we kept kind of struggling with having 3, 4, 5 800 TE&Y unavailable to us at any given time. But we thought that 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's 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. Now, we knew we were fragile but we thought we could navigate as we brought crews on board. What happened is, we were more fragile I think that we gave, then we give ourselves credit for. So in the back half of February we started getting somebody 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 it. 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 is customers see a slowdown they put in more freight car inventory so that they get their need 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 and car inventory on us, then 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 key plan is oriented towards doing that. So that's exactly where we are and 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 incremental improvement week after week after week as we're doing that. Eric, is there anything you want to add to that?

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

I think you've covered it exactly right. Where we'd be most focused on those leading indicators of terminal dwell 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 week after week.

[Tom Wadewitz, Analyst at UBS Securities]

Is there a timeframe for when it will be kind of fixed in your view? I guess it's third quarter you're saying?

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

No we haven't guided to a specific timeline I would reinforce the fact that as we see the hiring pipeline we're getting about 100 every single month. Those 100 crews are incredibly important to the recovery, that's 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.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, Tom, I would point you back to the, to the KPIs that Eric mentioned. You will see the recovery happen, you'll 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.

[Tom Wadewitz, Analyst at UBS Securities]

Okay. Thanks for the time.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah. Thank you, Tom.

[Operator]

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

[Justin Long, Analyst at Stephens]

Thanks, and good morning. I wanted to ask about the OR guidance. Obviously, there is 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 of seasonality in the second quarter with the progression to the mid '50s in the back half of the year. Just curious if you can help us think through that quarterly OR cadence assume in the guidance.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Yeah. Excuse me. Thanks, Justin for the question. I believe you are thinking about it correctly. It really is going to be -- we've got to make improvement sequentially in the second quarter and then really leverage that back half as we see stronger volume growth, and have greater operational fluidity to be able to hit those targets. Obviously, fuel, we're assuming some moderation there but that's really the operational performance in the leverage to that volume growth that we know is there the robust demand that Kenny talked about. I think that's very important 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 I would be remiss to say that we think we're going to see improvement in the second quarter, but sequentially on a year-over-year basis. But sequentially we should improve and that will lead to greater improvement in the back half.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

And support the guidance that you gave overall, which is a 55.X.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Yeah.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

For the year.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Yeah.

[Justin Long, Analyst at Stephens]

And volumes for the second quarter. Do you think they'll be up on a year-over-year basis?

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

You know that's really going to depend on the pace of the recovery. And, but I do think when we talked about volumes for the year. Again, the first half was going to be driven by the bulk and industrial and the second half was going to be driven by more of that intermodal recovery and 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 recovery with what's 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 growth.

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, we just need to really get the network fluid and try to move as much demand as is there.

[Justin Long, Analyst at Stephens]

Got it. Thanks for the time.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

You bet.

[Operator]

Thank you. Our next question is from the line of Scott Wolf, excuse me, Scott Group of Wolfe Research. Please proceed with your question.

[Scott Group, Analyst at Wolfe Research]

Hey, thanks, good morning. Jennifer, pricing and mix decelerated a decent amount from Q4. Any thoughts, is that price or is that mix? And any thoughts on how to forecast that? And then just on the operating ratio. I know you're raising it worsening it whatever by 40 basis points, but I got to think that fuels more than a 40 basis point headwind to what you thought at the beginning of the year. So is it. I know we've got service issues we're talking them, but it almost feels like underlying guidance 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?

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Yeah. So let me hit your first question there, Scott in terms of sequentially. So the pricing environment continues to be very robust. There is really that demand environment, is there, but you do you have sequentially the mix is negative going from 4th quarter to first quarter. And that's really mix within mix. So yes, bulk and industrial are up intermodal or the premium piece is still down. But when you look at where the growth was, on the bulk side really was coal very strong coal growth. But when you look at the arcs relative to the other components of bulk, coal has the lowest arc. So you've got that mix within mix impact and you have a similar story within the Industrial side, when you look at where the growth was an industrial strong across the board with the exception of petroleum, but some of the strongest growth in metal and that also has 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 OR fuel is certainly a headwind, but we see that headwind less name through the year from an OR impact. And so we 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 in the piece that we're working very diligently on. 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 our guidance.

[Scott Group, Analyst at Wolfe Research]

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 the of our impact is just naturally less as the year goes on?

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

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.

[Scott Group, Analyst at Wolfe Research]

Thank you, guys. Appreciate it.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

You bet.

[Operator]

Thank you. Our next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Yeah, hi. Just sort of big picture question. Obviously, you and others put PSR and PSR methodology into play and I know things are a bit unprecedented. But do long-term broader adjustments to how do you think about precision scheduled railroading need to take place? And is the resiliency after going through all that a surprise to the negative to you overall? Thanks.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yes, Jordan. Thanks for asking that question. So unequivocally PSR 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 advancing cars more rapidly that would otherwise.

Unequivocally when you look even at the way we're operating right now when we have gotten into trouble prior to PSR operation would be worse. The month probably worse, and we've proven through the last 3 years, that when we did into trouble in the PSR environment we can get out of trouble more readily. Now what's happening right now is I'll blame it on us. 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 over resource for a short period of time and get it out of the network. And that's a tough it's not a lesson, it's a tough situation to be and because we've already learned that lesson.

So as we look forward, what 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 tightly coordinated with customers and their need and get a matched up, and match them up over a timeframe that is the same as how we can add resources for growth. So yeah, the unequivocally PSR is remaining the way to go. It is helping us manage the business right now, and that's not why we got into trouble.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Thank you.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah.

[Operator]

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

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks. Hi, everybody. Jennifer, that 60% incremental margin target for this year. Is that compare? 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?

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

No, that's a good clarifying question Amit. When we talk to the incrementals we're 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 first quarter.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Okay. So, yeah, that's what I thought. And so, 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 53 to 55 OR cumulatively over 2Q, 3Q and 4Q, which is a big step up in the context of kind of these ongoing service issues. One thing I wanted to clarify, is the fuel surcharge, obviously it was up 20% sequentially, but I assume you're going to take a very big step-up in the second quarter 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 improvements.

Is that it's leads to fuel surcharge revenue that comes on disproportionately the increase in fuel costs.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

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 OR impact flipping and being it's tailwinds who our OR. So your math that you said in terms of the last three quarters of the year in terms of OR I don't know that I would necessarily agree with that. That seems fairly aggressive but it is about seeing a stability in the fuel prices which does allow the fuel surcharge, obviously to catch up a bit.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Well, and Jennifer. We also just need to circle back. There is 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.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Absolutely, and that goes back to the commentary about volume leverage.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Right. If I could just sneak in one last one for Lance, which I think is an important question. Obviously BNSF is making a bigger push into intermodal with its joint venture with Hunt. And Hunt, obviously the largest IMC out there with a big asset behind them asset base behind them. You guys have 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 this your direct competitor that seems to be going all-in on really putting a decent amount of investments of play to win more business in intermodal?

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, Amit. I don't think it changes fundamentally our strategy in the domestic intermodal world the BNSF and JB Hunt have always been formidable competitors. And what we've done by adding Knight Swift and Schneider along with having XPO and 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 EMP and UMAX program for some of the smaller and mid-sized IMCs we are fielding a really talented, very compelling story for BCOs to use us.

It is no surprise that our primary competitor in BNSF and their primary partner in Hunt are doubling down on how they approach the market. And candidly that kind of competition between us our channel partners and them and their channel partners is fantastic for the users for the customers of domestic intermodal.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much. Appreciate it.

[Operator]

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

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Thanks, good morning. Maybe a question for Kenny or Lance. I wanted to think about sort of the overall demand environment. Clearly, I think there's 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 are 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 is a question of 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.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah. Kenny, you want to handle that?

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah. Thanks, Fritz. If you set aside some of the macro things that were down in on, we're keeping an eye on the inflation rate that are out there. Obviously, there have been some stops and start with COVID disruptions in China, but when I look across each of our business teams, it's a very optimistic story. You look at our coal business we talked about the two wins none above 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'd tell you the upside there is on the biofuel market in the grain product area, which is great. And then as we look throughout the rest of the year, we expect that export fertilizer demand will stay there.

On the industrial side really same story. I mean, we've got some business development wins but we also just got some structural things that are helping us out. Metals has been very strong, there been some expansions on the plastic side both markets are still recovering and have been very strong. We'll keep an eye on how they start the inventories are still low there is 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. Our auto parts and finished vehicles business steel is not where it should be, it's improving. We talked to some customers, the car dealership inventories are around 24,25 date. We see that improvement as we move throughout the year.

On our international intermodal side the amount that's going IPI has improved or improved in the first quarter, we had some customers and here recently. We're expecting them to turn on more of that volume. So the things that we can control we feel really good about domestic intermodal has been up, 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.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

And Kenny I want to brag on your team for a moment. You're 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 and continue to make progress.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah. They up they're out there half and engaging the customer.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Thanks for it. Appreciate it.

[Operator]

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

[Ravi Shankar, Analyst at Morgan Stanley]

Thanks. Morning, everyone. I do want to follow-up on the, the domestic intermodal expectation into the back half, because kind of based on what you said about the competition with the BN, as well as expectations for the truck market to loosen in the back half of the year. I guess I'm a little bit of your right of what the pavement is the domestic intermodal side that we'll get that to accelerate in the back half of the year? So are the new contracts coming on kind of what gets that to go up? So that's question number one. And question number 2, is it can give us a little bit of a peak into the STB hearing in a few days going all the new spoken a lot about service challenges and everything you are doing right now, but what do you think it's going to be odd from that you're right.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Thank you. Kenny, why don't you handle the back half domestic intermodal question and I'll get to the STB after you've done.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah, thanks, Ravi, couple of questions there. And it sounds like demand and also the the pricing environment. We're about 40% almost close to halfway through our bid sessions. On the domestic side, and it's been favorable versus last year. Last year, but also a pretty strong solid year. Now the spot rates have gone down here recently. So, we've got to keep an eye on that. But I'll tell you the overall demand has not changed and so we're going to continue to look at that over the next few weeks as we're in those competitive bids.

Again we brought on the Knight Swift business, but we do have more volume that's coming on as we look at the back half of the year. The other thing is that we just need the supply chain to to work itself out. Chassis dwell is 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 the pie is much larger than the primary competitors than the West, and we've had so much investment as you look at the ramp in the Inland Empire, Twin cities, everything we're doing with GPS. We want to compete with trucks and that's what we're focused on.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah. And as we, as we improve the service product Kenny 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 a ESG perspective. Ravi, your question on the STB hearing, clearly the entire rail industry is in a place where 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 almost all about. We're well prepared for those conversations and to share with the STB how we're investing 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 knee jerk decisions in this environment. There is a, there are some things on their docket that 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's not much more complex than that right now.

[Ravi Shankar, Analyst at Morgan Stanley]

Sounds good. Thank you, both.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah. Thank you.

[Operator]

Our next question is from the line of Walter Spracklin with RBC. Please proceed with your question.

[Walter Spracklin, Analyst at RBC Capital]

Thanks very much, and good morning everyone. So Lance, you mentioned over resourcing or the ability to over resource. And I guess my question is really, if that is limited only to your ability to ramp up labor or are you looking at ways. And do you feel like you need to look at ways to expand your capacity from a more an infrastructure standpoint, be it on track and locomotives and so on it. It just goes back to the STB some of the discussions chairman over is having about the lack of railroad ability to invest or the historical decision not to invest that is leading to the lack of available capacity. And I'm wondering how you would, how would you respond to that. And particularly if it's just a labor problem or if you need some more capacity and investment in your network as well.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, Walter. We take a great exception to anyone that points at our historic track record and says we're under investing in our railroad. When you spend $3 billion $4 billion a year that's not under investing. And look at the statistics, look at the facts. If you go back 4 or 5 years, we would have 800 or 900 trains on our network at any given time today we're 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 PSR in terms of we have excess terminal capacity that we can use by having mothballed certain terminals that we no longer needed in the key 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, efficiency, 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 locomotive we're in great shape. 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's really, to your point, Walter, it's really back down to cruise historically we've had OWTS Boards 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're still getting, they're still getting resources from us their benefits 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 and total crewing, right, so that we can handle the volume, we've got in front of us in the growth that's coming.

[Walter Spracklin, Analyst at RBC Capital]

I think that's a great answer. And do you think that's resonating with the STB or what is your sense that that that answer will kind of give you some at least some time to kind of prove it out over the coming quarters and years? Or do you see risk that they may take action to force you to invest in capacity above and beyond all the capacity investments you just mentioned?

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Walter, I'm an optimist. And I'm hopeful that the facts which support what I just talked about speak to the STB and we're effective at communicating that.

[Walter Spracklin, Analyst at RBC Capital]

Thank you very much for the time. Appreciate it.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah. Thank you.

[Operator]

Next question is from the line of as David Vernon with Bernstein. Please proceed with your question.

[David Vernon, Analyst at Sanford C. Bernstein]

Sorry, I mean, two questions for you on the domestic intermodal side again. Eric, is your resourcing network right now. Obviously can it seems done a good job bringing over some fairly big accounts in 2023? Will you have enough capacity by the end of the year to accommodate that or will there still be an incremental growth required in resource into 2023 to accommodate that, those intermodal share wins?

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah. So thank you for the question. David, we will have the capacity to be able to host that additional volume. As we've been working through 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 Knife Swift and Schneider now having their own chassis and how do we think about that and optimize our terminals to account for that.

When I'm on the railroad I see the output of those efforts. When I see us getting near completion on our G4 Gantry Crane when I see us buying 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 Knife Swift in Schneider, but to the entire volume and growth that we see coming and being ready for all of our customers to benefit from that.

[David Vernon, Analyst at Sanford C. Bernstein]

All right, thanks for that. And then maybe just as a quick follow-up. When we think about the 20%, 30%, 40% growth in the domestic container fleet we're going to 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 you're intermodal franchise is going to look like from an equipment perspective, 3, 4, 5 years down the road. Are you also going to be resourcing containers into the UMAX and the EMP programs or are you going to be allowing their channel partners to make those investments in trailing capacity? Thanks.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Kenny, you want to handle that?

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah, I mean, we feel really good about our strategy to go in and invest in our equipment that we have out there where EMP and UMAX. I talk about the GPS 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 we will engage them on their strategies, but clearly, we don't want to put any limits on anything that would inhibit growth.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

I would guess, Kenny, given the growth that we're seeing first through Knight-Swift then with Schneider and the continued growth of HUB. It's probably fair to say, the ratio of private versus EMP, UMAX on us grows towards the private side.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

That's fair. Yeah.

[David Vernon, Analyst at Sanford C. Bernstein]

All right, thank you guys.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah.

[Operator]

Our next question is from the line of Brian Ossenbeck with JP Morgan. Please proceed with your question.

[David Vernon, Analyst at Sanford C. Bernstein]

Hey, good morning. Thanks for taking the question. So clearly a lot depends on service improvement here in the next couple of quarters. Just wanted to get your sense Lance or Eric about just a risk to their plan. What are you really focused on what you really worried about? And then, Lance, you did mention a few things and how to get this more sustainable in the future, there always be labor and volume variability, but is there something else you feel like that UP or maybe the industry overall needs to get better at in terms of being able to manage these ebbs and flows a bit better and then being able to grow from there.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

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 some of the bumps in the night that you're, that you're planning for that you're mitigating. So in terms of how to be more resilient and robust. There is a lot of -- there's a lot to that question some of is 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 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 capital locomotive are not mandated and negotiate with our union partners on moving one of those people on to 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 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 it. It's, it's not obvious how that connects back into being more reliable, more resilient more consistent, but there is an obvious connection from our perspective. There is other things like that there are smaller that we need to do. I talked about AWTOS and getting back to a place where we have not excess manpower sitting around, but our labor force our craft professionals are more flexible to go to the where the work is and do the work when it's needed and still have an enhancement in their work life balance. So there's a lot of work that we have to do with our unions on property in negotiation and national in negotiation. And then just in how we design our boards and our key plan and our work overall. Eric, you want to handle that first part?

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah. So, Brian as you think about the recovery and what are we doing to de-risk that. I first start off with just the basic fundamentals of 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 and especially with the impact of weather. Second 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 terminal. That's not the case right now. The case right now is that we have fluid terminals. Both our large terminals our serving yards and our locals getting to customers. That must stay that way. So the, 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 de-risking it.

If you look at another way, as we talked about cruise we're in the crew preserving mode right now. We want to make sure that every crew we call counts. One of the ways we do that is with train link. So if you go back all the way to January, we were sitting around 9,000 feet and a system average we added 200-feet to that in January another 200-feet in February and March another 150-feet year-to-date that's de-risking 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.

[Brian Ossenbeck, Analyst at JP Morgan Cazenove]

All right, thank you, Eric its very helpful. Lance, if you can just give us some quick thoughts on the CPKC merger. I think the responses back from CPR due tomorrow. So any updates on the concerns that UP is voiced and that would be helpful. Thank you.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, Brian, I would just reiterate what our concerns are. It 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.

Second, we need to maintain what we have today with the KCS and that is fair treatment, equal treatment at the border crossings on the bridge. And third, the KCS and CP have talked about a significant spike in converting truck to train and moving it on our trackage rights through Houston. Houston is a congested area. It's a, it's not congested in a bad way it's a high volume area that requires a lot of attention. If you introduce another 8 or 10 trains a day into that network in a rapid period without having the capital in place first, it will tilt 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 capital is spent in advance, so it doesn't crater Houston as a result.

[Brian Ossenbeck, Analyst at JP Morgan Cazenove]

Thank you, Lance. Appreciate it.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah. Thank you.

[Operator]

Our next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Hi, good morning. You had mentioned a number of notable steps obviously towards your sustainability targets. But as you're having conversations with new business development. I guess one is that being recognized. And then as a part of that is that becoming increasingly important in their decision to execute with UNP in towards an agreement? Just any part of that.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah. Thank you, Alison. Kenny, you want to take that?

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah. We have a number of customers that have always wanted to know where we are on ESG and sustainability component and we are seeing in the RFPs in the formal RFP more focus there. Those customers are typically in the Petrochem area or customers that have that are I'll call them consumer facing type customers. But we do know that in their methodology.

I'll tell you, the other thing is that our commercial team is sitting down with our customers and walking through the value that we provide by them moving Union Pacific and actually selling that. So, yeah, if more awareness on the customer part and more proactive engagement from our commercial team to fill that as part of our value proposition.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Great, thank you.

[Operator]

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

[Jason Seidl, Analyst at Cowen and Company]

Hey, thank you, operator. Lance and team good morning. Wanted to go back a little bit to the intermodal side. 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 bunch of black swan events over the last couple of years, now we got another one with China ports just with holding all these shipments coming in.

If they all come back to the ports at once I don't think a lot of people are confidence that they're going to be able to handle it. What's UP set up like into the summer? And how do you think you're going to handle that?

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Let me start and then I want to turn it over to Eric and Kenny to kind of add a bit more detail, but I want to 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 mean part in agreement with you that we are not yet in a place where labor and distribution centers and warehouses and dray truck companies is that a place where it could take an on-slot of significant volume in the international intermodal space. So that we still need more hiring and more labor available in local truck companies and dray companies and in distribution centers. But Kenny and Eric, what about us.

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah the. I mean, I think you hit it on the head, I'd say, and I'm looking at. Eric, as I say that we feel good about the condition of our intermodal network at that stands today. We've been working very closely with the customer to make sure that we have a really clear forecast of what's coming towards us. We've in third of technology where we can do that. But yes these toughness are out of China, we've got to keep an eye on it because there is going to be another slug of containers that are coming towards us.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

And one of our biggest opportunities that we've been leveraging really for now, almost a full year as we are active members on the White House working committee that allows us to interact with all the different stakeholders 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 and how do we have to think about resourcing for that. And we'll continue to be active in that because it continues to help the entire industry out on the West Coast.

[Jason Seidl, Analyst at Cowen and Company]

So if I had to sum that up an on-slot 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.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

That's fair.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Yeah. Absolutely fair.

[Jason Seidl, Analyst at Cowen and Company]

Okay. I want to follow-up real quick, Lance, getting back to the STB for a second. There was obviously hearings out there on reciprocal switching. 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 renewables switching it would come to the U.S.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

That's 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 is not a wholesale remedy to for instance remedy fix current supply chain problems. What forest open access would do is 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 exist in very limited areas where we've agreed with other railroads that a reciprocal switches needed or where the STB has mandated it through conditions on previous transactions. So we continue to work with the STB to help them understand our concerns. What, how it could help how it couldn't help and then get to a place where if there is action taken it's sensible.

[Jason Seidl, Analyst at Cowen and Company]

Thanks guys, I appreciate the time as always.

[Operator]

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

[Benjamin Nolan, Analyst at Stifel Nicolaus]

Thanks, sir. I'm just sort of a two-part question, maybe for Kenny first on the call. The ramp up that you guys have seen has been pretty remarkable, but you talked about higher natural gas prices incentivize being more curious. First, what is the ability, your ability to sort of continue to toggle up there? And then similarly, what's the ability of your customers to also toggle up?

And then on the petroleum side. I guess I'm a little surprised that there is not more volume growth in that market, given how much drilling activity there is and everything else, just domestically around around the oil and gas side, maybe a little color on that.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Yeah, I think the lot Ben. Yeah. On the coal side, again, you've got 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 it's encouraging that it's that forecast is throughout the rest of the year. As we talk to our customers we don't see that they've made any 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 to get more utility and get more product out.

And so we're working with them on that and we stay very connected with Eric's team from a forecast perspective. And then, yeah I understand your perspective where petroleum 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 those Brad between Canada and call it the for 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 and other commodities. We're seeing a lot of drilling pipe OCTG that's moving I talked about, the frac sand. There are some other industrial chemicals that go into the drilling process that we're seeing. So that's where that's showing up on our railroad.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

And Kenny 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 disciplined on capital spending and they're slower in walking up production.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Absolutely.

[Benjamin Nolan, Analyst at Stifel Nicolaus]

All right, great. I appreciate the color. Thank you.

[Operator]

Our next question comes from the line of Jeff Kauffman with Vertical. Please proceed with your question.

[Jeff Kauffman, Analyst at Vertical Research.]

Thank you very much and thanks for squeezing me in here. A lot's been asked about short-term and service and short-term disruptions. Kenny I want 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 go to the East Coast. So the first part of this is, how do you see that playing out? And what are your customers telling a longer term? And then secondly, I know Lance was talking about the company's 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 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 talk about those three areas opportunities say over 2, 3, 4-year period for UP?

[Kenny Rocker, Executive Vice President, Marketing & Sales at Union Pacific]

Yeah, it's interesting that you would bring that up on the international intermodal side. It's hard to tell what's going to be a one-off versus a permanent change from a, I'll call it directional shipments of international intermodal. We have work with an international carrier here where we do have a move that 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.

Yes, I believe that some of the global disruptions will make our customers think about where they source from and we are here and more conversation of about near shoring. We have not seen those investment to really mirror those conversations. And then as you I think the last question was about the Ukraine and no thoughts there, we're always talking to our customers about solutions that we can provide them. So when you think about the 6 border access Mexico is clearly one.

I just gave you an example of going from east to west, we still feel very good about our products moving off the West Coast and we've got really solid relationships from anything that wants to come out of Canada. So we're prepared. We've got $600 million in investment on our intermodal network so we're prepared for more growth.

[Jeff Kauffman, Analyst at Vertical Research.]

Okay, that's all I have. Thanks.

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Thank you, Jeff.

[Operator]

Thank you. Our final question today will come from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.

[Cherilyn Radbourne, Analyst at TD Securities]

Thanks very much, and good morning. Just a quick one for me. As we start to move towards 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 interchanges with the other rails and drayage capacity and so forth?

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

Sure. Yeah.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

Cherilyn. So if we look at our I'm going to speak specifically to Chicago, first, but the same would be true as we look at Memphis and as we look at even New Orleans. Right now those all remain fluid from an intermodal perspective. That doesn't mean that we don't work through challenges day-to-day basis as we work through interchange issues, but we have strong relationships with the other carriers. We work through those issues, and right now I'm very happy with where those terminals are. If we were asking about one 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 track and operations in a really small area. But otherwise, no concerns at this point.

[Jennifer Hamann, Executive Vice President and Chief Financial Officer at Union Pacific]

Thank you for the time.

[Eric Gehringer, Executive Vice President-Operations at Union Pacific]

All right, thank you, Cherilyn.

[Operator]

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

[Lance M. Fritz, Chairman, President and Chief Executive Officer at Union Pacific]

All right, 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.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Lance M. Fritz, Chairman, President and Chief Executive Officer
• Kenny Rocker, Executive Vice President, Marketing & Sales
• Eric Gehringer, Executive Vice President-Operations
• Jennifer Hamann, Executive Vice President and Chief Financial Officer

Analysts

• Ken Hoexter, Bank of America Merrill Lynch
• Jonathan Chappell, Evercore ISI
• Brandon Oglenski, Barclays PLC
• Tom Wadewitz, UBS Securities
• Justin Long, Stephens
• Scott Group, Wolfe Research
• Jordan Alliger, The Goldman Sachs Group, Inc.
• Amit Mehrotra, Deutsche Bank Aktiengesellschaft
• Chris Wetherbee, Smith Barney Citigroup
• Ravi Shankar, Morgan Stanley
• Walter Spracklin, RBC Capital
• David Vernon, Sanford C. Bernstein
• Brian Ossenbeck, JP Morgan Cazenove
• Allison Poliniak, Wells Fargo & Company
• Jason Seidl, Cowen and Company
• Benjamin Nolan, Stifel Nicolaus
• Jeff Kauffman, Vertical Research.
• Cherilyn Radbourne, TD Securities