Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Well, good morning, everyone. I'm Justin Long with Stephens, cover the rail and transportation equipment supplier sectors at -- for a firm. I want to welcome everyone to the Nashville conference since we're the first presentation of the day. I think that I need to give thanks to our corporate access team that's led by Alicia Parson. They've done a tremendous job planning this event in person. I know we all have Zoom fatigue and we're excited to be here in person in Nashville. So thanks for being here with us, excited for the next few days. Kicking off our track today is Union Pacific. So to my left here is Jennifer Hamann, CFO. I'm going to turn it over to Jennifer to make some prepared remarks. And then after that, we'll get into Q&A. This is a fireside chat format. I'll lead off with a few questions and then open it up to the audience if there's any questions out there. You could be thinking of those now. So Jennifer, thanks for being here, and I'll kick it to you.

All right. Well, thank you very much, Justin, and good morning to everyone. I was just telling Justin a little bit ago it's just great to see everybody live. I think there's some enthusiasm to be back together again. So really appreciate the invitation. The slides that I have we'll be referencing today that have been passed on in the room can also be found on our investor website next to the event webcast. So if you want to access those from your laptop, you can. But on Slide 2, I do need to remind everyone that I will be making some forward-looking statements, and 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 we'll kick things off on Slide 3. As I look back over the 11 months of 2021 that are in the books today, it's been a pretty challenging year for our operating team and their agility certainly has been tested from winter storm Uri and the Northern California wildfires to all the supply chain disruptions. Even our volume drivers are turning out quite differently than our outlook that we gave back in January. And unfortunately, those challenges are reflected in our metrics that are shown on Slide 3. Our freight car velocity and freight car terminal dwell trail last year's metrics and have lowered our trip plan compliance measures, which we know directly impacts our customers. Looking at the network today, actions taken to help alleviate global supply chain congestion have largely restored our intermodal service product back to a fluid position and we're eager to add volumes to that network. However, we still have some work to do in our bulk and manifest products. Our crew availability is stressed due to the impact of COVID and the vaccine mandate and the just general sluggishness in our service product. We did make some gains over the Thanksgiving holiday weekend, which is good, but our work really isn't done there. We want to maintain those gains and build on them so that we can exit 2021 in a stronger positon that enables us to capitalize on the growth that we see ahead in 2022. Our core PSR principles give us confidence that we can accomplish these tasks. If you turn now to Slide 4, here's an update on our current volumes in the fourth quarter. We're showing you both year-over-year and sequential 7-day carload comparisons as both are really important to understand what is happening in the markets that we serve. Compared to last year, fourth quarter volumes are down 5%, driven by a 15% decrease in premium, partially offset by gains in both industrial and bulk. Sequentially, our volumes have declined 2% on a 7-day basis. In our premium markets, year-over-year volume continues to be impacted by global supply chain congestion and the semiconductor chip shortages. Sequentially, premium is down 4%, driven primarily by lower international volume as the ocean carriers continue to shift their business to transload at local West Coast warehouses in an effort to reduce turn times and make the most of their container assets. Our bulk business is up 6% versus last year and 3% sequentially. Natural gas prices are driving demand for more coal shipments and at the same time, strong grain harvest is increasing grain shipments sequentially in the fourth quarter. Finally, industrial is up 7% versus 2020 and down 1% sequentially. We have seen relatively consistent volumes across most industrial market segments, and we're encouraged by the steady demand in those sectors, such as steel, industrial chemicals, plastics and forest products. Turning to Slide 5. While the game plan that we drew up at the beginning of 2021 isn't turning out exactly as we had planned and it's been frustrated in part by the current supply chain and operational issues, our enthusiasm and belief in UP's ability to win and grow with our customers is undeterred. Our growth plans are rooted in leveraging our network efficiencies to deliver a more reliable service product and win new business, most notably from trucks. A lower cost structure opens markets for us and a more reliable service product opens new markets for our customers to compete. We continue to make investments that support these new products from our new pop-up intermodal terminals in the Twin Cities and the Inland Empire in Southern California to our grain reload facility in Chicago, we are expanding our reach to serve new customers and help existing customers grow. Lastly, we expect to convert more business from truck to rail with our customers as they work to reduce their carbon footprint. Rail is 3 to 4x more fuel-efficient than trucks and taking freight from the highways is one of the ways that UP supports ESG initiatives and enable sustainable growth across our supply chain. To that end, if you turn to Slide 6, along with enabling our customers to win with their ESG and sustainability initiatives, Union Pacific continues to make strides towards our own goals in reducing our carbon footprint. We're taking another step forward next week with the release of our initial climate action plan. On Monday, December 6, at 8:00 a.m. Eastern Time, we will release our initial plan, and we're going to follow that up with a conference call at 8:45 a.m. Eastern Time to discuss further and answer questions. The plan will lay out details of how we expect to achieve our stated goal of reducing greenhouse gas emissions on an absolute basis by 26% by the year 2030. We recognize the importance that all stakeholders have and are placing on this global initiative, and we plan to be an industry leader. As a 159-year-old company, we obviously know a thing or 2 about sustainability, and we're excited to begin the conversation on our next chapter, and we hope you're able to tune in next week. If you turn then to Slide 7, with just a month left in the year, the final picture for 2021 is crystallizing. Unfortunately, the volume picture has not bounced back at the level we anticipated as those international intermodal volumes remain historically low. For context, our international volumes in October were below 100,000 car loadings. That's a level we have not seen since February of 2015. We had expected a rebound in rail-bound containers by this point in the quarter, but it now seems that those volumes are still at least a few weeks away. Although our bulk and industrial volumes remain robust, we now see full year volumes coming in up around 4% versus 2020. Operational challenges and our volume picture are having a negative impact on productivity as well. We're working hard to maintain year-to-date productivity gains. However, we're losing a little bit of ground there and now see a full year number of around $250 million. And with this updated volume and productivity forecast, as well as the continued volatility but upward pressure generally with our fuel prices, we now expect margin improvement in the neighborhood of 150 basis points. While this is at the low end of the target that we established back in January, we should note that we did not forecast the fuel prices providing an estimated 150 basis points of headwind either. Importantly, the results still show that UP is going to be producing its most profitable year ever in 2021, and we're setting the stage for an even better 2022. Wrapping things up then on Slide 8. In 2021, UP is driving strong returns to our shareholders through our growing cash generation. Year-to-date through the third quarter, our cash flow conversion rate is a very solid 95%, and we've returned $7.9 billion to shareholders through dividends and share repurchases. Actions taken during the year include increasing our industry-leading dividend by 10% in May and repurchasing 27.5 million shares for a total of $5.9 billion. We believe these are strong achievements and demonstrate our commitment to returning great value to our owners. And as we laid out in our Investor Day in May, this really is just the beginning for UP. We are committed to delivering for all of UP stakeholders and we're excited about what's ahead. So with that, Justin, we'll open it up to Q&A.

All right. Great. Well, thanks, Jennifer.

Maybe I'll follow up on the updated guidance, first of all. So volume guidance tweaked down along with productivity and the OR. It sounds like international intermodal was the main driver to that. But anything else beyond that, that drove the reduction?

Well, as I noted, it is the sluggishness in our services playing a role in that as well, which certainly impacts some of the costs, some of the productivity. And to the extent that it slowed some of our car cycles, it does have a little bit of an impact on carloadings, but international intermodal certainly has been a significant drag. And just that ongoing, I'll call it, malaise in the supply chain that's impacting the auto's volumes as well.

Okay. And at one point, you did say that the intermodal network is more fluid today. So when I look at these quarter-to-date metrics from a service perspective, I would guess that where we are right now is maybe a little bit better than where we started the quarter. But could you give us some perspective on where the service metrics are today?

Yes. So what we show on the slides is through October year-to-date. And so if you looked at November, I don't think it would probably change those things in total that much, but we are coming out of the Thanksgiving holiday in a pretty strong position. We've made significant improvements in our inventory reduction. We're seeing velocity tick back up a little bit. We're seeing the number of trains that we're holding. Our dwell times are coming down as well. So -- and that's really what I was stressing, is we want to hold on to those gains and build on them here through the month of December.

Okay. Great. And I'll maybe ask one more and then open it up if there's questions in the audience. But on productivity, so you started this year expecting around $500 million, now closer to $250 million. I think the message on the last earnings call is this productivity wouldn't be lost. It would just be delayed. So is that still the view? And should we be thinking about 2022 maybe having a more outsized productivity opportunity because of the challenges of this year?

Yes. So I mean, we certainly would say the productivity is not lost. So the opportunities that we had in line of sight that was going to drive that $500 million still very much exists on our network today. And so if you talked to Eric or any members of our operating team, they would still be able to very clearly articulate to you where we need to gain the productivity. We still certainly have opportunities with train length, with locomotive productivity, fuel consumption, which ties in obviously very directly to our ESG efforts are another big area of opportunity for us and just overall crew utilization. And that's really where we're losing a little bit of our productivity today is on that crew side. When you slow down the network, you stress the crew base a little bit and that's where our utilization really has some opportunities to improve. As we look into 2022, and we're not -- I'm not going to give any guidance today, I'll resist that temptation. But certainly, we have those opportunities going into next year and are very bullish about what we see ahead.

Okay. And then I think the message on the last call was the expectations for 2022 haven't changed because of some of these near-term challenges. Just from a very high level, is that still a fair statement?

Oh, yes. And I'd even extend that to -- when we did our Investor Day in May, and we laid out our targets over the next 3 years, 2022 to 2024, there's nothing in there that we would change today. Those are all still very much intact, and we feel very good about those numbers.

Okay. Great. I'll open it up. Question here.

With the intact international business down because the lines don't want the boxes to leave, shouldn't you see an increase in the substitute of both UMAX and the EMP product? Because if they're getting transloaded, they should be getting transloaded into your rail boxes. So you shouldn't proceed at that?

No, that's a great question. I appreciate that. So what happens -- and you're right, in the kind of the description of what happens. But if you think about it, when those ships are coming overseas, we have our contracts directly with the steamship carriers. And so if it's going to come intact inland in an intermodal box, we have those contracts and we know that in terms of the ships that are coming off the port. If it goes into a warehouse and then gets transloaded, it's going to come out in a 53 container, but it could be an EMP or UMAX. It could be any other IMC. And so you've now just opened up the competitive aperture for that. Plus, our EMP and UMAX boxes, and I think we've said this, that is capacity constrained. And chassis are the primary constraint there. We still actually have containers that are stacked today because we don't have the chassis available. So that's why you're not seeing that trade-off in terms of, "Oh, it's just going to move from a 40 foot to a 53 foot. Does that help?

It does, but there are other questions, but that's okay.

You mentioned on, I think, 150 basis points headwind from fuel and you're still looking for 110 basis points. So outside of fuel, and I think you've touched a little bit on productivity and things in labor disruptions and supply chain trends, do you have a sense of how much headwind this year you have from an OR perspective from everything about fuel? Could you quantify that? Could you give us a sense of what year-on-year improvement we can see from just easy lifting of these headwinds in this year?

Yes, I don't have an exact number for you in my head. I mean, if I go back and I think about -- and obviously, I would encourage you to do this, I think every quarter, we have laid out kind of an OR walk down that shows you kind of what our core productivity has been, what our fuel impact has been. And in there, we've also quantified some of the impact from winter storm Uri. I think that was 1 point or so. I apologize, I shouldn't speculate because I don't remember the exact number, but I know we laid out what that impact was from winter storm Uri. And I know we also laid out what the impact was in the third quarter from the wildfires and the bridge outage that we had. So you can get a pretty good idea, I think, from looking at that. Certainly, it's taken away some of the upside in terms of the productivity that we've been able to gather. What's gone better for us, though, I would say, because I think maybe the next question or a follow-up question is, well, you're still doing pretty well. What didn't you expect to happen that's gone in our favor this year? The mix of our business has been much more favorable than we would have expected. And the pricing environment has continued to improve through the year. We were certainly expecting to move a lot more intermodal than what we have been moving this year. And instead, we've seen grain stay strong, stronger than we thought coming into the year. We've seen a rebound in coal volumes, and the industrial market has come back very strong as well.

And just a follow-up on the pricing on that just in terms of how receptive are the clients or customers to price in terms of they know what you're facing. You don't want to [ goad ] them, but can you just describe the pricing environment in general and the outlook, if you have one this year?

Yes. I'm not going to provide a pricing outlook for next year. And I guess we should maybe be repeating the questions. I'm guessing the audience can't -- the people who are listening virtually can't hear the question. So the question was about the pricing dynamic and kind of outlook and just being able to pass on higher prices. I mean, Inflation is obviously in the news everywhere, and it's affecting everyone. And whether it's inflation in fuel prices, inflation in labor costs, materials, it's somewhat across the board. What we deliver to our customers is a value proposition based on our service. And so that's really the conversation that we're having with them is about what we can help them do to stay competitive in their markets to grow their business and to provide them with a reliable and safe transportation product. It's never easy. No one ever opens their arms wide and embraces the price increase. But it's a contract between us and the customer in terms of what we're looking to deliver for them, and they understand the competitive pressure. So it's an active dialogue. It's an active debate. But we obviously are very committed to making sure that each piece of business that we move is profitable and price is a component of that.

Go ahead.

This is [indiscernible]. I just wanted to stay on the mix question. And just given some of the favorability you have with less international intermodal or merchant bulk, I guess I'm a little bit surprised that the margin guidance, whether it maintains -- since the incrementals on that business are a lot stronger, I was just wondering like is that incremental being offset somewhere by some of these operational issues you're having? And then import to next year, as that international intermodal comes back, how do you think about the profitability vis-a-vis the rest of the year, mobile network and the rest of the business?

So the question was about questioning the reduction in the guidance just because of the change in the mix of business, thinking that, that should have maybe been more favorable and then looking to next year? And is that going to change the outlook. Let me talk to the last part first. Again, we're not going to talk specifically to 2022. But our guidance that we laid out in terms of we did put a stake in the ground, I'll say, for 2022 that we're going to get to a 55.0x operating ratio, we very much are firmly committed to that and very much believe and expect to achieve that, and we'll talk more about that in January. Going back to this year, there are cost pressures in terms of the operational performance. That is a factor. There are the cost pressures from fuel. And then with just less volume overall, you do lose some of that leverage that we were otherwise expecting to be able to drive.

And maybe just specifically on the intermodal piece. Like how does that changing mix of less international intermodal like sort of play into how you think about profitability in [ intermodals ]?

Well, I mean, international is just obviously one piece of the intermodal pie. We've talked about -- and I think you're asking this question more prospectively, for 2022 to 2024 with our growth targets, growing above industrial production. We said that we expect a large portion of that growth to come from intermodal. Mostly domestic intermodal, but certainly international intermodal would be a piece of that as well. We know that that's a very competitive business. I think everybody knows that on a relative basis, the intermodal business does not have quite the margin profile, but that's our opportunity. And so we know that we have opportunities to improve how we run our ramps, how we run our service product in the intermodal business. And so those are things that we've already, I would say, kind of baked in and taken into account when we think about that longer-term guidance.

And just to follow up on that, Jennifer, and then we'll go to a question in the back. The 2022 volume outlook, is that guidance to grow consolidated volumes above industrial production? I just wanted to clarify that point.

Yes, that is. Yes, on a total basis.

Okay. Great. Question in the back.

Yes. This is something that's sort of follow-up on this intermodal. Like it's sort of been an area for some time and intermodal hasn't really increased for the half of the year. But what is it that specifically gives you confidence that you can sort of begin to [indiscernible] in '22 that didn't happen in '21 [indiscernible]?

Yes. No, thanks for that question. And the question is about intermodal growth. We've talked for a long time about intermodal growth. You could probably expand that to say volume growth, but intermodal growth for sure, what's going to change or what has changed. And I think it's a number of things. I'll start first with PSR and our adoption of PSR. It does give us a more reliable network. It gives us a better service product and we know that we have to have a stronger service product to be truck competitive and to win more business and bring more business to the railroad. And in my earlier remarks, I said that the intermodal business is much more fluid today, and we would certainly welcome the addition of traffic to that network today. The other piece, I think, that's very important is the ESG narrative. We know that a customer's easiest way, and I call it the easy button, that they can use to improve their carbon footprint is simply to shift more business from truck to rail. Now we have to give them the service product to be able to support that, and we understand that. But that's a dynamic that has not been present that we certainly see ahead for us. And we're already seeing proof statements. I think everybody is familiar with the win that we have coming into 2022 with Knight-Swift. That's a big achievement for us, and we're very pleased to be able to welcome them to our network and feel very bullish about that opportunity. And that, like I said, is a proof statement for us in terms of being able to build on that intermodal growth profile.

And on that point, Jennifer, Kenny has been very excited about some of the new business wins here in 2021, and I'm sure there's more in 2022. Is there a way to help us kind of think through that impact as we get into next year and beyond, like what the target is for outgrowing IDP and how new business wins factor into that? And you've been public about the Knight-Swift agreement. But any other wins that we should be factoring in next year?

Yes. At our Investor Day, I think we laid out a number of different markets and areas where we're winning new business. If you think about the biofuels market, that's a great market that is going to expand, we believe, tremendously over the coming years and we've been making some really good wins in that space. We've been making wins in the electric vehicle space. You think about the steel markets. I think you've heard us talk about the fact that we had a new steel mill open on our lines, one of the first new mills that's opened on our lines, we think, in close to 100 years. So just a tremendous dynamic there. So that's where we see a lot of the bullishness is new customers signing plants on our lines, new markets that are coming to us, and just kind of that overall customer dynamic. And the marketing team, I think, as you also know, is taking a very aggressive posture to go out and sell this lower-cost service product that we have in the marketplace. That in and of itself opens more opportunities and more doors for us.

So do you feel like you can continue to win share from truck in the current service environment, just given the cost dynamics to focus on ESG? Or in order to see an acceleration in truckload conversions, do we need to see the service product improve meaningfully from where it is today?

Well, again, I'll separate it a little bit in terms of the intermodal service product today is running fairly well. We would like to do 2 things there, I would say, continue to improve it a little bit and get it in a more consistent space. And that's the piece that we probably have the most room to gain, is in that consistency. The customer only remembers you is as good as your last load, so to speak. And so we need to make sure that, that memory is a long one of consistent on-time arrivals.

Okay. Any other questions in the audience? One over here.

You mentioned the term, vaccine mandate. Do you see any -- what's the company's stand there? What's the risk associated with that into 2022 from a worker?

Yes. No, the question is about the vaccine mandate and the risk that presents to us. We have announced to our employees, in keeping with the federal mandate, we are a federal contractor. And so that's the scope that we are under, is as a federal contractor needing to have all of our workers vaccinated. We started a process, I think, late October-ish where we started communicating with our employees and giving them a mechanism with which to report their vaccination status, also providing some time off, some compensation for people who became vaccinated. And so we're tracking that very closely. I think through -- like before the Thanksgiving holiday, we were probably in the 60% to 65% kind of range. So we obviously have some room to go there. The federal government has continued to kind of, I'll say, push the ball out a little bit in terms of their deadlines. It's something that we are watching very closely. We know that crude supply is critical. I think everyone -- and you hear that in just in general, talk about the labor markets and the impact that the vaccination can have on the labor supply in general, and we would share some of those same concerns, which is why we're taking a very active role with our employee base to educate them, to give them every opportunity that we can, to help them get vaccinated. We've had clinics at our various locations to help folks get vaccinated, but it's something we're watching very carefully.

And on the labor situation in general, outside of the vaccine mandate, does it feel like it's getting better, sequentially worse, about the same? What are you seeing in the fourth quarter?

Yes. I mean I think it's really for us, it's about utilization of our crews. I think if we were running a little bit more fluid network and if the crews were more available, either because of not taking time off to get the vaccination or just having COVID, we feel pretty good about the absolute numbers. It's really the utilization. We are hiring in preparation for 2022. I'd say the market is tighter. There's no doubt about that. But we still have very good paying jobs, great benefits and a lot of opportunities for folks. And so it means we're maybe working a little bit harder than we have in the past to hire, but we are still able to fill our classes.

Okay. And if the problem is mainly crew utilization, as we think about volumes next year outpacing IDP, do you need to increase headcount meaningfully in order to handle that? Or if the network becomes more fluid and utilization of crews improves, can you hold headcount relatively steady as we get into next year?

Well, I'm not giving you an exact volume head count or volume number for next year, so I'm not going to give you a crew count either. We will not grow crews as fast as we grow volumes. I mean, we feel very confident in being able to continue to be very productive with our crew base. And I think at a high level, you're thinking about it correctly. We generate crews as we operate more fluidly. And as people come through the vaccination process and the COVID process, that creates greater availability as well. So those are certainly things that can play a positive dynamic for us. And it's always a little bit location specific, too. And I think you're aware, we hire crews for a certain region. And so if you're hiring crews and you're seeing growth in another area, that makes it a little tougher to move people around to be in the exact right spot.

Makes sense. On the network congestion, do you feel like we're kind of past the peak? Is the worst behind us on that front? And the million-dollar question is when the entire network will get back to kind of normal fluidity. So what's your best guess on that?

I don't have a great guess on that, but it's improving today. I think it's -- we made some, like I said, really good gains over the Thanksgiving holiday. Those are always good times for us to kind of sweep out older cars, get some of the trains moving that had been laid down. So I think we're in a good spot there. I think we're in a good spot to be able to continue to make some traction through the month of December and then head into 2022 in a pretty good spot. And we know we need to be running well. Again, we've got a new big customer coming online day 1 in 2022. And so we're absolutely focused on being ready for that and feel very confident about that.

Okay. Great. Any other questions in the audience? Maybe one on pricing. You mentioned that earlier as an upside driver this year, along with mix. But could you just remind us of how your -- the cadence of your pricing renewals going forward? And does it feel like this is an environment where the pace of year-over-year increases can continue to accelerate as we get into 2022?

So just as a reminder, if you look at our book of business, about 45% of our book is multiyear contracts. About 25% is tariff or spot business and then the remaining 30% are 1 year or less in duration. And so that tells you we've got, call it, 55% that we're able to touch in any given year. And then you've also got some portion of the multiyear contracts that are rolling off. And they have escalators in them as well. So that's how you should think about the portfolio. In terms of cadence of renewals. The beginning of the year is always a pretty active time. This is also an active time in terms of the intermodal renewals. Those generally don't kick in intel, the third and fourth quarters of the coming year, so 2022. But we're seeing good uptake there, the demand environment. I think everybody that's looking out, I don't think anybody is calling to a near-term solution to some of the supply chain congestion issues. And so while that's frustrating from potentially a volume growth perspective, that does create a pretty solid price environment.

Okay. Great. And if you look at the difference between rail contractual pricing and truck contractual pricing right now, what does that percentage look like just given the strength we've seen in the truckload market and the pricing environment there?

You probably have a better idea about some of those deltas than I do.

I have a guess.

I think -- and it depends on the market. It depends on the length of haul. There's a number of drivers. But I think those gaps have typically ranged in probably the 15% to 25% kind of range. I don't know that that's changed dramatically over this year.

Okay. Question here.

Just the KSU and the merger there and just the rail environment appetite for consolidation, competitive dynamics within Burlington. What's been -- what's the competitive landscape in and around the rail?

Sure. So the question is about competitive dynamic within the rail industry kind of in general. Very strong competitive dynamic, the Burlington Northern is long time been a great competitor of ours and continues to be. See no real change in that posture. In terms of the merger environment, I think the STB is certainly, they've got their schedule set out for the CP-KSU. That seems to be moving forward by all accounts. I think also it seems like from any of the statements that you've heard from Chairman Oberman and others, there's not a lot of appetite for further consolidation in the industry. That would be my read of it today. That always can change because it changes as the STB changes, as administrations change, all of those things. But as we sit here today, if I were to bet, I'd say CP-KSU, that, that happens and that you don't see further rail consolidation.

So on that point, Jennifer, we put out a note earlier this year on the potential combination of Union Pacific and Ferromex buying out your -- the remaining ownership position. So sorry for all the questions you got about that. But I thought it was an interesting idea. And I know you can't say anything too formal about that. But I'm just curious from kind of a strategic perspective, if that's something that could be on the table, particularly given the fact that CP-KCS just got approval from the Mexican regulators for this deal and the potential competitive threats that, that deal could present.

Yes. So maybe level set on a couple of things. I think the approval that they've gotten from the Mexican authorities is preliminary. I don't think it's the final approval yet. In terms of just looking at our book of business in Mexico, it's about 11% of our volumes in total. And that's split pretty evenly between what we exchanged with the Kansas City Southern or what we exchanged with the FXE. So when you talk about the competitive dynamics of CP-KSU, you're talking about something that impacts something less than 6% of our business volumes. And I think fairly recently, CP even acknowledged that we have a better route structure into and out of Mexico. And so while we will compete very vigorously for that business, I think you've heard us say that we just want to make sure that we're treated equitably south of the border, and that's our primary concern. And so we're going to participate in the regulatory process but feel very good about our competitive posture there. In terms of the FXT, it's been a great partnership for us. We have a 26% ownership in them. We've had that since the late '90s, worked very closely with them. We have 3 board seats. I have 1 of those. And so it's a great working dynamic. They run a great railroad. I think Grupo Mexico, their primary owner also likes their ownership position at FXT. And so our long-term plans with the FXT is just to continue to grow that partnership and do business development and make sure that we work very collaboratively with them.

Okay. Any other questions in the audience? Well, one topic that's coming up a lot is inflation. So curious if you have any initial thoughts on just cost inflation as we get into 2022 relative to what we're seeing this year.

Yes. So at our Analyst Day, we talked about kind of our long-term view of rail inflation being around 2.25%. We're still working through some of the numbers here for 2022, but I think it's fair to say it's probably going to be something north of that. It feels like we're in a little bit higher environment, at least going into 2022, and we'll see how long that lasts. For us, a lot of it also impacts our capital spend when you think about the materials of the rail ties, those things. And that's where our productivity and our initiatives around our engineering work really plays a big role in being able to offset some of those material costs. But it's a real factor, certainly. And I know -- I think they've dropped the term transitory from inflation. So I think it's certainly here to stay for a while.

Okay. When we were talking about labor earlier, I think we were speaking mainly to your network, but clearly, in the transportation market, we're seeing labor constraints across the board. So warehouse labor is something that's come up a lot. Are you seeing improvement there as well? It sounded like over Thanksgiving, you made some progress on things. Just curious if that's getting any better.

Yes. I know that there are a large number of warehouse jobs available, certainly in the L.A. Basin, probably across the country. I think different things that you hear indicate that the labor market in general is getting a little better. And some of it, I think, from a warehouse standpoint, too, is you're certainly seeing a draw through the holiday season, people trying to move things out. I don't think we're anywhere back to where we need to be. I think there's -- we're a long way off from that. But you're reading things like the fact that the driver schools for truck drivers are getting a little bit better in terms of what's coming out of there. So just in general, it feels like it's a little bit better, but we've got a ways to go there, certainly.

Okay. Maybe a couple more for me. One on technology. Could you just speak to the technology spend for UP going forward? Is that kind of more of a -- is there more of an emphasis on that as we get into two, we're hearing a lot more about automation in the truckload space, autonomous trucks, et cetera. I'm sure the rail industry is feeling some competitive pressures from that. So kind of what's your focus on technology as we get into next year and beyond?

Yes. I think when you look at technology and technology covers a wide gamut of things, I think we always tend to think about it in terms of our iPads or computers, but there's technology in the rails and ties and the maintenance of our track and road beds. There's technology across the whole spectrum of railroading. There's really a lot of technology there. And it's been an important part. I think when we look forward, it's going to be a bigger and bigger component of what helps us drive and achieve some of our productivity initiatives that we have underway. From a spend perspective, we think -- tend to think of it in 2 buckets. We have the capital component of it, and then you've got the OE side. And we're going to be very supportive on both sides. I think you're familiar with the fact we have a new CIO that we hired from Walmart, Rahul Jalali, and he's coming in with a great focus. And coming from Walmart, coming from the retail space, he has a great focus on the customer and the need to be more customer centric. And that kind of goes back to the intermodal growth question from earlier. We know that we're -- as you're competing against people who are used to shipping with truck, they're used to a different customer experience than they maybe are receiving from us. So we need to really dig into that and make sure that we're giving better visibility to the containers since they are going across our network. We know that we need to be more user friendly. UPGo is an app that you've maybe heard us talk about before. It's for the truck drivers, the dray drivers that are coming onto and off of our ramps to pick up and drop off containers. Drivers want to be able to do that in a very fluid and seamless way and this app is helping them do that. Plus, we're piloting some new technology at our San Antonio Intermodal Terminal that we developed in-house that's helping speed the gate process as well. So spend wise, we may be upticking that a little bit. But again, that's all in the collective of what you see us talk about in terms of our overall financial picture. But I think it's an important part, and I think there's some really good things, exciting things on the front there.

And how much of a role will that play in this climate action plan? And maybe you can talk about that given the conference call that's scheduled for next week, and we'll obviously get details. But I thought it was an interesting decision to host a conference call. So maybe you could talk about why you decided to do that? And is this -- is the focus going to be strategic? Is it going to be around technology spend maybe to help get you to some of these targets? Are there going to be financial updates. What's the rough kind of agenda we should be expecting for next week?

Well, I can't preview it too much. That would ruin the...

Just the table of contents.

Just the table of contents? Okay. I'll give you the cliff notes. So I'll start with that last part in terms of financial targets. In no way will this change, again, the long-term targets that we laid out in May. That will not impact how we're thinking about our financial future. It does impact how we think about the sustainability, though, long term. And technology does play a role in that. Biofuels plays a role in that. There's a number of different things that -- and levers and there's things that, quite frankly, are yet to be developed that will play a role long, long term in being able to reach the company's targets there. But I think the important thing in terms of the question about why a conference call is we've done a number of things over the course of this year, last several years, in terms of sustainability report. You hear us talk about sustainability in our conference materials. We talked about it a little bit at the Investor Day. But we've never sat down and just talked about it holistically and really walked folks through each section of how we think about sustainability. This obviously is going to have a large focus on the climate action plan. But it really is an opportunity for us to kind of pull the different pieces that we have been talking about and really crystallize it for our investor base so that folks really understand in a holistic manner how we're thinking about sustainability and our future and the role that we play there.

Okay. Great. Last call for questions in the audience. Well, I thought a great way to end it would just be to ask about the economy headed into 2022 and your latest thoughts. It's really challenging to get a read on the demand environment. One pushback I get from investors sometimes is, do we really understand what demand looks like? Could it look better today just because of the capacity constraints? So I'd love to just get your thoughts on the macro environment going into next year.

Yes. I mean, when we look ahead to next year and we're looking at the same economic data that everybody else is, it's calling for a pretty decent year next year. I think the GDP and the IPI numbers are both 4% to 5% kind of range. So I'd say the global call is that you've got a strong economy in 2022. Some of that is potentially supported, I would argue, by the congestion issues that we've had this year that are just kind of elongating the tail of the inventory restocking, elongating the tail of being able to get back to whatever the new normal is going to be in terms of shipments and demand. So I think those are, while painful this year, I think we'll probably be a little bit of a tailwind going into next year. For us to have our automotive shipments down on a year-over-year basis versus 2020 when the factories were closed for, what, 4 to 6 weeks, it's pretty staggering when you think about that. And so certainly, pent-up demand for automobile purchases and that impacts our auto parts, that impacts plastics, that impacts steel. I mean, there's just a whole trickle-down impact from just that one industry sector that's been impacted by the supply chain. So I think there's a lot of good opportunities coming into 2022. This new Omicron variant that's rearing its head, we'll see what happens with that. And that's why I just, I think, kind of to your point, we have to be nimble and flexible. I think we've demonstrated a great ability to do that. We did that in 2020. We've done that again this year with the various things that have happened. And so we know whatever plan we put together for 2022, it's going to probably change and we just need to be nimble and able to react to that.

And it seems like there's a lot of up arrows as we get into next year, especially given the comps that we're going to be facing in 2022. Is there anything that you see as a potential down arrow?

Sitting here right now, it's hard to see that. But certainly, if something happens with the economy, that could be a down arrow, if the labor market tightens up again, maybe kind of going back to the question about the vaccine mandate, if that really drives workers out of the workspace, those are things that could certainly be headwinds. Right now, it doesn't feel like that's going to be the ultimate outcome, but we'll wait and see.

Okay. Well, Jennifer, we'll wrap it up there. Thank you so much for being here. Thanks, everyone, for joining and hope the conference goes well.

All right. Thanks, Justin. Appreciate it.

Thanks.