Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Good morning. So this is Tom Wadewitz. This is the second session of the day at UBS Industrials and Transports Conference, second session on transport track. It's a pleasure for me to have Union Pacific with us. We have Jennifer Hamann, the CFO; and we have Kenny Rocker, the Head of Marketing and Chief Marketing Officer; Brad Stock, I think, is making things happen with us as well. So thanks to all 3 of you for joining us. Jennifer, I'm going to hand it to you, and then I think you've got some slides and Kenny as well, and then we'll go to the fireside. So thank you for joining us.

All right. Great. Well, thanks, Tom, and good morning to you. Good morning to everybody. There are slides that accompany our prepared comments this morning, and they're going to be shown in the video chat, but they can also be found on our investor website next to the webcast for the event. And of course, before we start, I do want to remind everybody that we will be making some forward-looking statements today. Those statements are subject to risks and uncertainties. So please refer to the UP website and SEC filings for additional information about our risk factors. So if you turn to Slide 3, this is a snapshot of our current network operations. And as you can see, following the weather events in February and March, our productivity and service products have improved but not to the levels that we expect. There continue to be impacts from the disruptive supply chains, particularly within the intermodal space, which, when coupled with the continued volume strength, are challenging both our service and efficiency today. Terminal fluidity and cycle times across the network, though, are improving. Our service reliable -- reliability, as measured by trip plan compliance, has also come up off the lows of earlier this year but still improved from further gains. Locomotive and workforce productivity remains strong as we use our resources more efficiently, and train length remains solid, with both April and May coming in around 9,400 feet. As you will hear from Kenny in a moment, we have a great opportunity to capture new business. And demand is strong, but it's imperative that we make continued improvement to our service product to meet our customer needs. Kenny?

Yes. So thanks, Jennifer, and good morning. So starting on Slide 4. Looking at the second quarter volumes as of June 2, on the slide, we're showing both the year-over-year and the sequential changes. The comparison versus 2020, up 26%, is obviously influenced by the onset of the pandemic and last year's economic shutdowns. Comparing to the first quarter volume, volumes are 7% -- are up 7% on a 7-day average, which is a more meaningful number as it reflects both the recovery from first quarter weather events as well as continuing economic shrink. Looking at it a little deeper by business team, both lines are seeing a sequential improvement in our coal, fertilizer and beverage business. Industrial has made some sequential improvements in rock and metal ores. Industrial chemicals and plastics have recovered to levels seen prior to the weather impact. In sum, overall in industrial, there are encouraging signs but still progress to be made. Premium continues to be driven by very strong intermodal shipments. Restocking and e-commerce continue to drive the demand we see in that business. Automotive remains significantly impacted by the semiconductor chip shortage, with increasing signs it could now persist into the third quarter. Moving on to Slide 5. We hit hard on our commercial growth initiatives at Investor Day to demonstrate how we plan to outperform the market over the next 3 years. Some of you have asked, what's different now? And what gives us confidence that we can achieve a positive volume growth forecast that we laid out? Today, I want to be clear on how we plan to do it. Our growth plan is focused on 4 key cohorts: grow with PSR, transform the sales culture, advance the customer experience, expand our network reach. First, let's talk about growing PSR. We will continue leveraging our PSR-driven, improved service product and lower cost structure to win new business. Our enhanced service product is opening up new markets where we can compete head on with trucks. We are taking advantage of it in markets like renewable diesel, where our reliable manifest service product provides a consistent supply of inbound feedstocks to producers as well as handling our outbound products. The second pillar is transforming our sales culture. We have removed layers in our organization, invested in new technology tools and changed the compensation structure of our team to support the hunter mentality to win new business. But it can't just be marketing sales and changes. The entire company needs to transform this mindset and truly warrant it for growth. The third pillar is advancing the customer experience, and that's where we are in close collaboration with our new CIO, Rahul Jalali. We are meeting with customers to better understand the barriers to do business with at UP. Rahul is also transforming his technology team to be product development focused in order to improve the customer experience. The final pillar, and where I plan to spend a little bit more time today, is expand our network reach. This is where we can unleash the great strength of our UP franchise with our improved service product to reach more customers. One way that we do that is to integrate deeper within supply chains to participate in new markets. For example, in the beverage markets, we have aligned with Constellation to convert more of their business to rail, and we are excited to participate in the emerging seltzer market. Our Loup subsidiary continues to integrate deeper into the auto parts market, given their strong relationships with OEMs. Recently, Ford awarded Loup the opportunity to move inbound auto parts for the launch of their new 2022 Bronco at their Michigan assembly plant. Expanding our network reach also includes developing new locations on UP to serve our customers. This includes the use of our focus sites program, which currently features over 25 shovel-ready sites on our rail network. One premier site is Prime Pointe, the 3,000-acre industrial park just south of Dallas. Prime Pointe is strategically located close to major interstates and adjacent to our Dallas Intermodal Terminal. One great example of leveraging Prime Pointe is a collaboration we made with KTN to design the Dallas to Dock product, which provides plastic producers optionality for their export product. KTN recently completed an expansion of their warehouse space and additional packaging lines that doubles its capacity. Prime Pointe is a great speed to market solution for our customers, but we have others across the network as well. Finally, we also expand our network reach through the development of new service offerings. In January, we launched our Twin Cities Intermodal Terminal, filling the gap of direct intermodal service to the growing market in the Midwest. More recently, we announced 3 additional exciting ventures. First is our collaboration with Savage to construct Idaho's first intermodal rail terminal at our rail yard in Pocatello. The terminal provides match-back opportunities to use westbound empty containers to export hay and other agricultural commodities through the Pacific Northwest. The terminal is expected to be operational later this month. Second is our new Global 4 grain transload facility in Chicago, which is designed to increase the competitiveness of our international intermodal market segment. We expect to begin operations early in the fourth quarter, just in time for fall harvest. And this new facility creates the most competitive grain export program in the Chicago marketplace. With colocation, we are creating a more efficient supply chain model, eliminating train as the containerized loading takes place directly at Global 4. Turning to Slide 6. Finally, we are very excited by our new Inland Empire Intermodal Terminal, positioning Union Pacific directly in the heart of this massive import distribution region in Southern California. Today, there are roughly 2 million imports trucked from the ports of L.A. and Long Beach into the Inland Empire. Conservatively, we expect the Inland Empire Intermodal market size to be around 1.5 million units [ annually ]. Later this month, we introduced our pop-up ramp, capable of producing 45,000 lifts within our West Colton yard. We will begin our first intermodal presence in this region. We will continue to increase our footprint as we demonstrate our commitment to our intermodal and take -- intermodal network and take advantage of Union Pacific's franchise to serve new markets. So with that, I'll turn it back over to Jennifer to wrap it all up.

Thanks, Kenny. So turning to Slide 7. As we stated in our first quarter earnings, the slow start to the year has not dampened our expectation to demonstrate improvement across all 3 performance drivers in 2021: volume, price and productivity. Sitting here today, we're still very confident in our full year growth target of around 6%. And as a reminder, that 6% outlook is a net number as it reflects the 2 percentage point combined impact of lost whole volumes as well as the year-over-year decline its other energy shipments, such as crude oil and frac sand. The volume strength we've seen in the second quarter, and as Kenny just discussed, is very encouraging, although we are still watching, as he mentioned, that semiconductor shortage, which is now carrying into the third quarter. Our guidance around full year pricing, productivity and operating ratio improvement closer to the 200 side of that 150 to 200 basis points guidance range all remain intact. I do have a couple below the line items that I want to highlight for you quickly that will primarily impact the second quarter. First, we issued an 8-K on May 27, recognizing increased tax gains of $50 million and other income in the quarter from the sale of Burnham Yard in Colorado. In addition, the states of Nebraska, Oklahoma and Idaho have lowered their corporate income tax rates, which, combined, result in approximately $45 million reduction in deferred taxes in the second quarter. This will lower our quarterly effective tax rate to around 22.5%, and our full year 2021 rate will be closer to 23%. The impact to earnings per share in the quarter from both the land sale and the tax rate changes is $0.12. Our capital spending plan remains at $2.9 billion for the year, well within our long-term guidance of below 15% of revenue as we generate capacity with our PSR focus. And we will remain our commitment to our industry-leading dividend payout ratio as well as strong share repurchases. We's plan, as I said previously, to return approximately $6 billion to shareholders in 2021 through share repurchases, and that includes our recently announced $2 billion ASR. So with that, Tom, we'll turn it back over to you to start the Q&A.

Great. Thanks, Jennifer. So why don't I start with -- I've got a couple for Kenny, I think, just on the markets. I know you offered some helpful comments. Which markets have been -- have seen a pretty strong sequential lift and seem to be really at a strong level? And then which markets do you think are maybe delayed still a bit by supply chain that would have further room to ramp up as we look forward?

So our premium business, and when I say premium, I'm referring to our intermodal business, has been pretty strong, both sequentially and year-over-year. When we talk about intermodal, I'm referring to our international intermodal business, which you know has been pretty strong, the domestic business and, I'll call it, parts of what really is the e-commerce sector. Our grain business has been very, very strong. I'm not sure we've seen grain volumes at this level in the second quarter just in recent times at least. And then there's still a lot of skepticism out as if I think of things we're concerned about from a market perspective on the semiconductor issues. Back in March, I would have said I thought it would have cleared up 6 weeks from then and I would at the same thing in April. Now we believe that we should get to close to a normalized pattern sometime at the beginning of the third quarter, but that's still kind of a wait-and-see scenario.

So when you think about that semiconductor impact, is that really just kind of auto supply chain and finished vehicles? Or is that hitting you in other segments as well?

We're not able to see the impact in the other segments. There's going to be some impact, but I'm referring to both the finished vehicles and the auto parts sector. That's where we see it up front and center.

So do you have visibility to further ramp in the third quarter or that kind of remains to be seen in terms of how the chip issue plays out?

So we sat down with customers here recently, Tom, and they told us that they would expect that, that reduction will come on around that time. Again, there's skepticism there because they've mentioned that before. But clearly, that's the most current feedback that we've received from our customers.

Okay. What about in other areas? I think you had some comments on plastics and industrial chemicals going to the pre-February weather level. I think that's what you said. What about the kind of ramp in industrial economy and further ramp in those segments? Is that something that you'd say, oh, there's a lot of kind of running room for that segment or for other industrial segments? Or how do you think about where we're at there? And what could happen looking forward?

Yes. So a couple of things. It's been encouraging to see that the production rates have come back up from when they had the issues -- with the weather issues back in February and even in March. So we are seeing that ramp up. We're seeing that on the industrial chemicals side also, a lot of the feedstocks that go into the plastics that we're making. And then we're also still bullish long term on plastics and petrochem markets. We still have a number of plants that are still going to come online this year and over the next couple of years.

So is it reasonable to think that kind of cyclical dynamic would give you some further lift in some of those industrial categories in the second half, kind of a sequential lift?

Yes. I think we said they will have some modest improvement as we move on throughout the year.

Okay. How do we think about the coal business? I know it's a headwind this year. Obviously, it's kind of longer-term secular decline, not much you can really do about that. But if you say, well, where coal is at, at the present time, does it kind of fit that level in third quarter, fourth quarter? Or how do you think about that on kind of a near-term basis?

Yes. So just being transparent here, and we've talked about it on the earnings call, we had a contract loss that has impacted us. We're going to continue to look at natural gas prices. We've been talking to our customers. Our customers, even with some of the weather issues that occurred earlier in the year where it's pretty cold, there's still some pretty large stockpiles that are out there that they have to work off. So it's going to continue to be a headwind for us throughout the rest of the year.

From an absolute basis, though, you think it's kind of stable? Or you think it kind of falls off further?

It's going to continue to decline. We don't see anything structurally that would change that. Maybe there are some things that happened that impacts the [ scope ] of that decline, but it's going to continue to structurally decline.

Yes. If you're talking about just this year, Tom, that's -- our guidance of the 1% headwind, that's really kind of how to think about it overall. And we wouldn't change that at this point.

Yes. Okay. Okay. Great. What about grain? Grain has been running so strongly. You run into tougher comps in the second half. Is it kind of realistic to think that maybe grain's down as you look at, I don't know if it's third quarter, fourth quarter? Or would you say maybe there's a chance we keep growing this even against tougher comps?

So you probably know this but we're starting our order book for the second half now, so we have some visibility to the second half. But boy, it's still too soon, as we sit here in June, to say how the second half will play out. We have some pretty high comps to hurdle in the second half of last year, so it's just too soon.

Okay. Let's see. On the pricing trend and how you think about pricing, I mean, the rails have had a great pricing story. I'm trying to remember back when Jennifer, if you and I talked about the pricing story when you were in Investor Relations, it's a while back.

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But needless to say, rails have had a good pricing story for a long period of time. I think what we're seeing in transport today is a remarkable pricing story, whether it's container -- international container shipping, truckload, LTL, everything. How do we think about the impact to rail pricing from that? I mean it seems like there could be kind of a delay in the way that flows through and also kind of a moderation, and you don't see rail pricing down so you're not going to see rail pricing up 15% -- 12%, 15% like we're seeing in the truckload market this year. But how do we kind of translate that just outstanding pricing environment for transport overall into how we think about rail pricing this year and next year?

Yes. I'll maybe start, and, Kenny, you can provide some commentary. I mean I think you're right, Tom, especially when you phrase it in terms of you don't see with rails -- you haven't seen with us kind of those big spikes up and down. Part of that is because we have a pretty large percentage of our book of business that's under multiyear contracts, call it, 45% or so. We got about 25% that's tariffs. So that's the spot business that we do have the ability to touch. And then there's 35% or so that's 1-year types of contracts. And so that's the piece that we have the most -- we also have some real-time pricing available. And you've heard Kenny talk about -- I'll let him talk some more about the fact that when we went through the domestic intermodal bid season, we did see some good opportunities. But to your kind of earlier comment, that gives us a little bit more. We don't have the high highs. We don't have the low lows. We're a little bit more steady. But I do think within that, the environment is solidifying, and you're going to see some of that start to probably show itself in the back half of 2021. And so of that should carry forward into 2022, depending on kind of how long that truck market pricing stays elevated. But...

So I'll start off with a few comments, Tom. First of all, we were very pleased and encouraged with the pricing environment on the intermodal side. Our prices reflected what you saw in the marketplace. There were some areas like coming out of the West Coast where, again, our pricing was right in line with what you're seeing out there in the marketplace in terms of the low to mid-double-digit increases. Not only on the intermodal side, but there are a few public tariffs that we have in place where we have taken midyear increases, modest, but still yet, midyear increases. So it's not just an intermodal story. There are some markets also that have been what I -- I wouldn't call hot like paper that is going into e-commerce or lumber that's going in the home centers or housing markets. There are areas where we're still getting more uplift. And then finally, I'd be remiss if I didn't say this, we talk about that new compensation plan in our sales organization. It's under -- our commercial team is underway. As much as growth is a part of it, there's a component of pricing that's included in there. So there's still discipline in how we price.

What are the most notable changes in that sales compensation plan kind of current versus what it used to be?

I want to take that from a broader sense. First of all, we've removed a lot of layers. We were with a large customer a couple of weeks ago, and they remarked on how fast and decisive we were in making decisions to grow this story. We removed layers. With the compensation plan, without getting into a lot of details, all I can tell you is that it has our team excited, and they want to go out and exceed their goals so that they can achieve the plan. And it just means that we're spending more time talking to our customers about how we can grow their business umbrella and come up with solutions even for some that may be moving to nonrail destinations. So it's really about how we're spending our time and what we're spending our time on.

Right. Okay. And the -- I guess, the output of that, you expect to be like kind of a greater focus on volume, a greater focus on profitability or just greater efficiency of your sales force overall?

No. Absolutely. The end game is definitely greater focus on volume and the profitability. We want to do both, but volume growth is imperative for us.

Okay. What about the pricing? I mean I think obviously, intermodal is most directly competitive with truck. Is there fairly broad in terms of the lift to pricing in carload, I think you kind of alluded to some maybe midyear increases? Is that kind of a broad favorable impact to carload pricing? Or is that fairly narrow and just in terms of the current tightness in the market?

It depends on the markets. I mean in those markets where we're seeing some pretty strong demand, Tom, we're going out and taking a little bit more price to provide the service product that's out there and a lot of the resources that we're putting out there in terms of, call it, equipment or service offerings.

Do you think that's enough to -- I mean, I know your revenue per car numbers have a lot of moving parts. Fuel has been higher, so you'd probably get some lift on fuel surcharge per car, length of haul, what -- if you're doing hazardous materials or regular plastic pellets or whatever. So a lot of moving parts. But do you think those price actions are something we would be able to -- would be visible in revenue per car performance if you look to second half?

Yes. I mean I think we've talked about the fact that we do think our yield should inflect positively in the second half. And I think you'll see that reflected in revenue per unit. Fuel will certainly be part of that. As you know, fuel prices are much higher year-over-year right now.

Right. Is fuel a notable headwind in the second quarter? I think we had CN right -- prior to you, and they talked about they have currency with Canadian dollar. Obviously, that's not something for you. But they did also mention the move up in fuel as admin in the quarter. Is that -- I assume that's true for you. Is that something meaningful to consider or kind of modest in the scheme of things?

No. I mean it's continued to move up. Our fuel surcharges, as you know, have about a 2-month lag on them. And so it has continued to move up in kind of -- it's fairly, I'll say, flattish going March to April. But then kind of April and May, it started to move up again. And May into June, it's moved up again. So there is a little bit of catch-up that's going to have to occur there, and that will continue to have an impact on us from an operating ratio standpoint.

Right. Okay. I've got a couple of questions that have come in from the Q&A box here. And so let me try a few of those. So I've got one that's -- how long do you think the industrial expansion can continue in terms of years? And kind of any commentary on that? So is this something you maybe have visibility into 2022 or multiyear? How do you think about that in terms of industrial expansion?

Yes. I mean I'll just start at a high level. When you look at -- and we talked about this at the Investor Day. If you look at kind of what Global Insight's forecasts are, it's for industrial production over the next 3 years to be up, I think, about 2.8% or so. So -- and I don't think that's varied a whole lot since that time period. And I don't know, Kenny, if you're getting any signals from customers that would say otherwise?

Just thinking about that, no. I mean I think that's pretty in line. That's still a pretty robust, solid number over a 3-year period.

Yes. You bet.

Okay. So you're optimistic on industrial economy multiyear?

Yes.

Okay. I had, I guess, another question that's kind of maybe pretty high-level one, but I suppose an interesting question. Just what would your pitch be in terms of Union Pacific compared to other railroads? I guess 3 of the 6 have some kind of M&A component today that's driving a different dynamic. But if you said Union Pacific versus CSX and Norfolk Southern, what do you think from an investor perspective why should someone own UNP versus the other 2? Or what might be different about the UNP strategy or franchise or opportunity?

Yes. I mean I think it really goes back to what we talked about at our Investor Day, Tom, in terms of what we think sets us apart, has set us apart. When you look back over the last many years, we have outperformed our peers across a variety of metrics but, importantly, in terms of the cash returns that we have delivered to shareholders. We have been very deliberate about that, and we have -- we've met our expectations there that we laid out, but for a little bit of a shortfall relative to the $20 million of share repurchase target that we put out in 2018. And that was really pandemic related, and I think we only came up short by, call it, a couple of billion dollars. So those industry-leading cash returns, I think, first and foremost, are kind of the headline. That's what's happened in the past. But more importantly, that's what we think is going to happen in the future. We have a strong plan to get there, and that's driven in large part by the growth that Kenny and his team are going to produce. Eric and his team are going to continue to improve that very efficiently. And so industry-leading margins, I think that's critical. So when you put growth that we, as a company, have not seen before historically, so when you talk about 3% growth CAGR with industry-leading margins, that's a very powerful story, and that's going to reach our great cash when you think about how we're going to continue to stay very disciplined from a capital standpoint. We're investing for growth. We're going to support Kenny's team, both with the capacity that we generated through PSR, much less capital intensive in terms of that future growth profile and then cash that we're going to be able to do some great things with, including industry-leading dividend and share repurchases. So I think nothing but upside going forward for UP, and I think we're going to lead the league in all of those metrics.

Great. Yes. That's helpful. That's very clear framework. I had another question that came in, and I think this is really along the lines of the intermodal system. You -- I think you put in place some significant surcharges on your container pool business. And I think, as I understood it, last year, that was done to protect capacity for committed customers. And it looks like you're doing something similar. How do we -- first off, do I understand that right? Or is there also significant revenue generation from those surcharges? And then what does that mean for capacity? Does that mean that the system is just not -- the outlook is not that good for more capacity or fluidity in the next few months?

No. You're right on, Tom. I mean that's for our MCP program. So we are protecting those customers that made a commitment with us to stay with us all year. And we've done this before, and they increase throughout the year. In fact, the numbers and levels that they are now are still not at historical highs. I look at it as a positive for sure. I look at it that it means demand is very strong and that we are going to bring on more capacity. I talked about that Inland Empire capacity that's coming on. We have the Twin Cities Terminal. So I'm looking at it as a positive. We look at it as a positive to go out there and grow as much more volume as we can. The one thing that we'd change if we could is the amount of dwell that's out there in the marketplace. So we're seeing customers holding on to assets a little bit longer, maybe taking a little bit more time in the warehouses. But setting all that aside, the demand is strong, and it's a great environment to be in.

Yes. I mean -- and certainly, there is a bit of a revenue impact there, Tom, kind of on the margins, but we're really focusing. And as Kenny have alluded to, he's working with customers to really improve those turn times because that's what we all really want to see is some better fluidity and cycle times through that network because demand certainly is there for it.

Yes.

My understanding is that revenue impact is relatively small, is that right? Or is it...

Yes. That's -- yes.

Okay. What's within Union Pacific's control in that system fluidity issue? We listened to kind of J.B. Hunt presentations and talked about it, and it feels like there are different -- depending on who you're talking to, different constraints. But it does feel like it's not entirely within your control. In terms of warehouses, if they're short on labor, then the chassis, containers don't get turned, trailers don't get turned, all of that. What would you -- what are you doing from a UP perspective to -- is it more people in the terminals? Is it more containers in the container pools, more rail crews? What is it that UP is doing to drive that fluidity?

Yes. A number of things. One is Eric's team on the operating side has increased the number of trains that we moved in circle off the West Coast in our terminals. A few weeks ago, we actually sat down with a number of our international customers and just really talked to them about what they're doing to drive efficiency in their supply chain. So we're sitting down with our customers and working with their BCOs to say, "What can you do to turn?" So we're engaging our customers. They engage their customers. But we've also done some other things. We've also made more room in our terminals to look at containers that may not need to move immediately and store them somewhere else in our terminal. We've engaged our contractors. We spent considerable time with the ports. I've been on conference calls with them. I mean we were really engaging all the players within the pipeline. Even if we don't have control with them, doesn't mean we can't engage in. So we're going to continue to work on what we can control as our service product. And we're, like I mentioned, doing everything we can to make sure that it's consistent.

Yes. Because certainly, the more reliable and the more timely we're making that box available, the better chance we have with that customer kind of picking up that box on a timely basis. And so to the extent that they know a box availability is 10 a.m. and I can have a driver there and they know that, that's going to be efficient for them, that's going to help the whole process.

So are those actions something that you would expect to see sequential improvement in fluidity? Or is that kind of tough to have visibility to?

The way I would say is that it's allowed us to continue to capture a lot of the demand. So anytime you put more volume on your network, any time you can put more containers in the terminals and maybe put them somewhere, anytime you may come up with solutions like that, that allows you to at least keep the volume paces that's in front of you. Clearly, we still want to make sure we can get more efficiency but we also don't want to lose the volume demand that's in front of us.

Yes. But I think it's going to be a bit of a long slog, kind of to your question, Tom. I mean there doesn't seem to be, as you just -- or Kenny described, there's a lot of parties involved in this supply chain, and everybody has got a role to play, and everybody's hitting some constraints along the way. And so when you look ahead, I don't see this changing necessarily through the end of the year probably. It's going to be a bit slower. Do I think it can improve over that time period? Absolutely. But my guess in terms of getting back to what I'll call historical fluidity, that's probably a few months off and probably not until the beginning of next year.

Yes. And talking to our customers, that demand is going to be showing for sure, end of this year maybe, into a little bit in the first quarter of next year. We're going to be staring down back to school type demand here in the next several weeks. So the demand will be there.

Right. The -- let's see, when I think about the terminal footprint, and it's interesting, the approach in the pop-up terminals. It seems like a kind of innovative approach maybe versus what you would have done historically. How hard is it to convert those to permanent capacity? So if you get the uptake on those and you say this is a market that we really want to have a bigger facility. On those pop-ups, do you have the land -- surrounding land and it's just a matter of kind of, I guess, asking Jennifer for the money and then go spend it? Or is it -- are there...

That is [ something to propose ].

Yes. Right. I know how that works. So is that really the thing? Or are there kind of land constraints that make it a little bit of a longer process if you do want to put more terminal capacity in place?

Well, I think the unique thing there, Tom, in both of the pop-ups that we're talking about, the one in Minneapolis and then the one in California, is that when we put the pop-up concept out there, we also did it with a longer-term plan behind that. So we didn't put up the pop-up and then say, okay, now if this works, let's figure out the long term. We really did it together. And so in Minneapolis, we do have land that's adjacent there that we can further expand that property in that footprint. In L.A., we're actually putting that pop-up in our West Colton terminal. So it's a site that we already have land. And so it's really more about shifting operations as part of PSR. Now I will say we actually did acquire a little bit of land adjacent to the West Colton terminal. It was just -- it was something that was available to us, and so we took advantage of that opportunity. But by and large, these are kind of existing footprints that we have the ability to grow into.

And it's a high-demand market where -- for that pop-up scenario. I mean that will be full as soon as we open up.

Okay. So it's not -- it sounds like it's not that hard to expand it further if you want to. There's not a land constraint.

No. We have those plans in place.

Okay. Let's see. How do we think about the -- I guess there's a lot of focus on potential -- the efforts of CN and KSU to get together. And it seems to me like I look at the UP network and you have a number of different strengths and franchises. But your Chicago -- your Texas to Chicago line is very efficient. I think it's the shortest route structure franchise line for you. But it seems like that would be somewhat -- you'd see increased competition if CN is able to buy KSU or even if CP was. How do you think about measures you can take to offset risk to the auto supply chain? CN could actually go to Michigan and Eastern Canada, and [ you'll go into ] Chicago. So I just -- I guess, I want to get your thoughts on whether you think that's meaningful risk or what you do to kind of protect against that.

Well, Tom -- and Kenny will jump in here, too. I mean we look at the competitive environment across a variety of fronts. And those are competitive dynamics that we compete against today, quite frankly. That business, when it gets to the border, it can stay on KCS and can interchange with CN or CP to go to the ultimate destination. But as you mentioned, we do have a great route structure between Texas and Chicago, and that's not going to change with the merger. And our service is very good there. We've got deep relationships with those automotive customers. And so we're going to continue to work with them and make sure that they see the value in the UP franchise.

Yes. And the only thing I'll add is that the value -- when Jennifer mentions value, we're talking about the customer experience. We're talking about the technology. We're talking about all the things that, from an ease of doing business perspective, we can leverage because we've been in those markets for a while now.

How much can you do contractually to protect that? Is that something where -- obviously, if you're serving -- and the auto customers, you have a nice network of, I guess, I forget the term. But the auto lots that you land trains in and then take them to the -- put them on the trucks to go to the dealers, so that's advantage. Obviously, CN or CP is not going to serve L.A. and Western destination markets. So you -- it's not like you don't have some cards to play. Is that a pretty significant factor in terms of kind of maybe retaining business with a given auto OEM on Texas to Chicago? Or how do you think about the different, I guess, sticky -- points of stickiness with customers that you have?

Yes. We have -- I think that's a good way to put it, Tom, that there are some things from a commercial strategy we could do that puts us in a very competitive situation. It wouldn't just be down one lane. There are also some things around the terminals, contracts, without getting into a lot of details, but we certainly feel like we have a number of actions that we could take to minimize our risk.

Right. Right. Okay. Let's see. If we go to the port congestion issue, L.A., Long Beach, I think there have been port issues across the, I don't know, probably across the globe. How much do you think that hurts you on your kind of longer-term growth from ports of L.A., Long Beach? Is that something of a concern to you? Or do you say, "Look, there's going to be growth coming in there, and we just do our best to capture it." And if there's further kind of share loss to Eastern ports or Canada that's -- it's part of a big enough growth for everybody to kind of do okay in that setting.

Yes. So we've worked with the ports pretty closely. I would say that they have reacted and put more resources in place. And so you have seen the backlog of ships that were out there waiting to get in, which is encouraging, and that's really a short-term solution that still we could improve upon. I think your question is more long term. We feel like, hey, if they get their framework together, their structure together and they put more resources in place, insert more in technology, we've been talking to them quite a bit about the technology piece so we can give more visibility. All those things are going to help the overall supply chain, meaning we're able to get to the containers quickly, move them to the inland terminals quickly. I'm encouraged by what we see and how they're responding, but we're still going to be asking them to do more.

Yes. I mean I think they understand that it's a competitive dynamic that they have some ability to influence. We do, though, too and that's the match-backs that you hear us talk about in terms of making it more advantageous for our intermodal partners to bring their containers inland. And then we have a match-back opportunity, whether it's plastics in the Dallas area, grain, the G4 intermodal transload facility we're just putting in. And Kenny also mentioned the hay match-backs out of Idaho. So those are all things that can help make those port choices more attractive as well.

Right. Okay. Yes. That makes a lot of sense. I've got like 2 more from the audience here, and I think we've just got a couple of minutes left. So one here on the -- I guess, on the new business that -- Kenny, you've talked about new intermodal and new carload business. Is that business coming at a good margin that it's kind of strong incremental margin accretive to overall margin performance? Or when you do things to win new business, does it tend to be you do a little bit -- maybe you take business, which isn't as strong on the margin side? How do you think about that kind of margin impact to some of the new business you have coming in?

No. We are very encouraged with the margins, and we are winning this business on again. You got to make sure business -- some of it is parcel, which is a growth engine for us and a sweet spot for us, and then some on the domestic side. And again, we've been encouraged by the margins that we're bringing those on.

Yes. And that's all kind of encompassed in some of the guidance that we have out there, Tom, longer term in terms of the mid- to high 60% kind of incrementals. That's taking into account we're giving Kenny and team and their new business development opportunities, how that looks.

Okay. And then another question I had come in is relating to the gateways. I don't know that the investment community, that, broadly speaking, everybody is going to understand how the gateway process works, what's typical, how you do business with KSU today at Laredo, when CN talks about keeping gateways open and using Rule 11, what does that mean? Can you give us a little further understanding of how kind of gateways work? And if CN says, "We're going to keep the gateway open," I mean, what does that mean potentially?

You want to talk about the Rule 11 or...

Yes. I mean, basically, we just want to make sure we have a very competitive environment. Today, we have what we believe is a pretty transparent environment when we work on business development opportunities into and out of Mexico. And as we move forward, we want to make sure that, that same transparency and integrity is there as we get to know exactly what's going on south of the border with their rail structure. So those are -- that's what we talk about there. There are some other operational items that are there in terms of hours at the border and windows. But from a commercial perspective, that's what we're talking about there.

And you've heard us talk to -- or Lance talk about one of the things that we'll certainly be engaged on in the regulatory process that goes forward, whether it's CP or CN, is that equality at the border and being treated south of the border fairly as well. That is an important part of this for us.

Right. Okay. So I feel like I'd be remiss here if I didn't ask one PSR question in a 45-minute session here. So I know we're just over, but I'll give you the last question here. What -- how do we think about the PSR opportunity? I think at the analyst meeting, in the Q&A, you said, "Well, maybe we're like 70% there on PSR." I know that's hard to kind of say that there's an -- it's not an end point. But do you think that it's, let's say, train length expansion, is that driven by growth primarily? Is that just more execution of redoing train schedules and kind of the same element of PSR you've done the last few years? Or how do we think about kind of the elements of capturing that remaining opportunity on the cost side and the kind of broader PSR framework.

Well, I mean, volume certainly does help. And when you get more volume, that gives you more optionality, and that's going to help you drive train length. And when I say optionality, just in terms of train scheduling as well because our network operations team, led by John Turner, who spoke at our Investor Day, that's something they're continually looking at is the network, the train schedules or where there are opportunities to make adjustments and tweaks that continue to meet the customers' needs but help us grow train length. I think we talked about the combination tool that we use to identify where you could have 2 trains that are shorter in terms of their origin, but we have the opportunity [ along line road ] to combine them and run them longer for some portion of their journey. And certainly, the investments that we're making in the sides. That is where we have tremendous opportunities. We're able to put longer sidings in place to be able to build on the train so that we can have smooth meets and passes with those long trains. It's an investment that we made starting back in 2019. We did about 30 siding projects in 2020. We've got another 20 or so that are in flight for year 2021. So that's really another great enabler for longer trains.

Okay. Great. Well, with that, I think we should wrap things up. Jennifer, Kenny, Brad, thanks so much for all the insights. Thanks for joining us and spending time with us today.

Yes. Thank you, Tom, and good questions. Hope to see you in person sometime soon.

Yes. Likewise. Have a great day.

Thanks. You too.