Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to our ESG and Growth Conference. And our first presentation today is with Union Pacific. So we are delighted to have with us Jennifer Hamann, Executive Vice President and CFO of Union Pacific, and Brad Stock as well in the background. He oversees Investor Relations. So Union Pacific has an exciting outlook here with the company transitioning into PSR implementation with now greater focus being placed on business development and commercial opportunities, which we think will support high incremental margin and earnings and cash flow going forward. Also, UNP released yesterday a Climate Action Plan, which is a strong framework, I think, supporting not only the progress on the ESG front, but also business development opportunity, I think, as we move forward. So Jennifer will kick us off with some introductory remarks here, and we will then start our Q&A session. Jennifer, please take it away.

Okay. Well, thanks, Fadi, and good morning. So starting off on Slide 2. The slides that are going to accompany my prepared comments this morning can be found on our investor web page, next to the event webcast. Before we start, we'd like to remind everyone that I 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 we move on to Slide 3, yesterday, as Fadi mentioned, we took a great step forward on our ESG journey with the release of our initial Climate Action Plan. At the heart of our Climate Action Plan is more detail around how we plan to achieve the science-based target that we set earlier this year to reduce greenhouse gas emissions. In addition, we are increasing our disclosure transparency with a commitment to adopt TCFD and the SASB frameworks. This plan is part of the overall ESG strategy that we rolled out in our Investor Day in May and with our 2020 Building America Report. Our approach to ESG issues which we're calling Building a Sustainable Future 2030 demonstrates our commitment to all aspects of sustainability. It's built on 4 areas of concentration that you see on this slide: investing in our workforce, driving sustainable solutions, championing the environmental solution -- excuse me, championing environmental stewardship and strengthening our communities. Our approach is designed to address the evolving needs of all of our stakeholders going forward. This approach to environmental, social and governance issues is enhanced by the new release of our Climate Action Plan. During yesterday's release, we expanded on these areas of concentration, but today I'm going to focus my comments on the championing environmental stewardship piece and the new Climate Action Plan. Our plan, if we move then to Slide 4, supports UP's broader strategy of serve, grow, win together that we unveiled back in May. As I walk through this plan, I will lay out how each of these 4 strategic values plays a role in our plans to reduce UP's carbon footprint. If you turn now to Slide 5, in February, we announced our target to reduce absolute Scope 1 and Scope 2 greenhouse gas emissions 26% by 2030 from a 2018 base year. The target boundary includes biogenetic emissions and renewables from bioenergy feedstocks and has been validated by the Science Based Target initiative, otherwise known as SBTi. Our SBTi group target is in line with what climate scientists say is needed to meet the Paris Agreement goals, limiting global warming to well below 2 degrees above preindustrial levels. We also are aware of the recent findings of Intergovernmental Panel on Climate Change regarding the more urgent actions necessary to address climate change. We will revalidate our target in 2025 or sooner to ensure that we are in fact on the right path and aligned with the most current science. One item I want to highlight here, though, is that by having an absolute emissions goal as well as our stated goals to grow our business, this really raises the bar and is different from our rail peers. We are committed to growth, converting more traffic from truck to rail. But within that, coupling that with an absolute greenhouse gas emissions goal, that means that we're also committing to offsetting that additional greenhouse gas emissions that we'll create through our business growth. Let's turn to Slide 6 then to discuss the serve component of our strategy. The first step of achieving the goal of reducing locomotive emissions is improving operational efficiency and lowering fuel consumption by modernizing our locomotive fleet and implementing energy management technology. Locomotive operations represents our greatest source of greenhouse gas emissions. So this is where we are devoting the majority of our time and attention and capital. Our implementation of PSR supports the progress that we have already made in this area. Fuel consumption improvement is not a new focus of Union Pacific, and we've really been at this for years, starting with the training of our crews about fuel conservation techniques and installing start-stop technology on our locomotives. Over the last 10 years, we have reduced our fuel consumption rate by 4% during a time in which our business mix actually shifted to less fuel-efficient commodities. Implementing PSR, however, has allowed us to take that focus to the next level. We have improved our fuel consumption rate each of the past 2 years. And in the third quarter of this year, we achieved a record low quarterly fuel consumption rate. Our PSR principle of increasing train length drives locomotive productivity improvements, which result in fewer locomotives needed to handle the same amount of freight. We're also making investments to modernize our fleet to improve reliability and fuel efficiency. Since 2010, we have purchased 1,300 new locomotives or roughly 20% of our fleet, while at the same time, retiring around 2,500 older, less fuel-efficient [indiscernible] Through our modernization programs, we will modernize approximately 100 units in this year 2021, with plans for another 120 or so units by the end of 2022. Each modernization results in about a 53% reduction in emissions and an additional 5% reduction in fuel consumption per unit. Technology plays a significant role as well as the investments in energy management systems, or EMS, are also driving improvement. EMS has been implemented in about 2/3 of our active road fleet with a target of full implementation by 2025. We estimate that EMS will reduce our absolute greenhouse gas emissions by 4% by 2025. If we turn now to [indiscernible] to Slide 7. Here, we show that our strategic plan to grow the railroad also goes hand-in-hand with our sustainability goals. Rail is the most fuel-efficient way that we have freight over land, positioning us to provide lower carbon solutions to our customers and helping them reach their emissions reduction targets. With rail being the most environmentally responsible transportation solution, Union Pacific captured emerging markets and explore circular supply chains with our safe and reliable service product. We are aligning ourselves with customers in exciting new markets like electric vehicles, renewable diesel fuel and recyclable products. We're also working closely with customers such as Phillips 66, Valero, AGP and Gavilon as well as others across both the ag and petrochemical markets, and we will be a trusted partner to help further develop that renewable fuel market. We're poised to take advantage of the opportunities presented by a low-carbon economy. We're also engaged with our customers to understand their sustainability goals. Our carbon-saving calculator allows customers to determine savings for rail versus truck. But what's more valuable to our customers are the year-end statements that we send to them that quantifies their reduction in emissions by using Union Pacific. Rail offers an ability to provide answers and sustainable solutions to tough questions that no other mode of transportation can offer. If you turn to Slide 8, our ability to first lead and then beat our 2030 SBTi target will likely come from a combination of current and future technology, increasing our use of low-carbon fuels, experimenting with alternative propulsion methods and exploring nature-based solutions will all drive the decarbonization of our footprint. What's exciting is that we have a path today to win through the use of biofuels. In fact, biofuels represent the most advanced and promising avenue to date in helping us meet our science-based targets. Our goal is to increase the percentage of low-carbon fuels consumed to 10% of our total consumption by 2025 and then push that number to 20% by 2030. This, combined with our efforts to improve our operational efficiency, should enable us to meet our current science-based target. And while biofuels might sound like a pretty straightforward solution, there are still obstacles to overcome. In August we announced that Progress Rail approved the use of up to 20% of biodiesel blend in the vast majority of EMD locomotives. This was an increase from 5% blend previously. EMD locomotives represent about 40% of our existing fleet. So the next step is getting similar approvals from our other locomotive OEMs. Beyond the OEM agreements is the supply issue. Today's production model of biodiesel is insufficient to meet the demand needs, which are growing almost daily. Biofuels also represent a win-win as it's a key area of growth for our railroad. Our commercial team is actively cultivating this market to move the needed feedstock into production facilities as well as the outbound product. Union Pacific is poised to be a leader in this booming market. Beyond biofuels and current technology, we are leveraging our experience with low-emission switcher locomotive technology to develop specifications for battery electric locomotives to deploy in yard operations. We believe this is the ideal place to start given the built-in infrastructure, the desire to improve air quality and noise reduction around yards and the horsepower required for those movements. This is really just the start because we understand that the next step of the journey beyond 2030 will require alternative propulsion methods. If you turn to Slide 9, the final piece of our strategy is to engage all of our stakeholders to develop and advance rail and climate policies. Addressing climate change can't be done in a vacuum. Through coordination with our rail peers and AAR as well as the broader business community, Union Pacific will help lead the movement towards a more sustainable future. We also are engaging our workforce in a new and meaningful way. We were the first railroad to establish an employee-led business resource group focused on environmental sustainability. We're calling it Planet Tracks. And although we just launched it in early November, it already has 450 employees enrolled. That indicates the importance of sustainability to our employees. We're excited to see all stakeholders move forward together toward a better future. I'll wrap up here then on Slide 10. This shows the goals and actions that we're laying out in a summarized way, and it really puts together the commitment that Union Pacific is making to be an ESG leader. While we've discussed many of these items, I do want to highlight a couple of important changes. First, in terms of governance, we will be conducting our first climate scenario analysis next year. You'll also note that we plan to hold the management team accountable for ESG progress by making it part of our key performance indicators on our executive compensation scorecard. Finally, a key component of yesterday's Climate Action Plan release was our commitment to the target of net zero by 2050. As Lance commented yesterday, we must walk before we run, so the 26% reduction by 2030 is our first priority. However, we know we need to start planning and investing today in a net-zero future and to ensure that all of our stakeholders understand the depth and breadth of our commitment to that target. As a 159-year-old company, we do know a little bit about sustainability at Union Pacific. And with the actions we're taking today, we're ready to do our part to make the world a better place for this generation and future generations. So with that, Fadi, I'll turn it back over to you for some Q&A.

Okay. Thank you, Jennifer, for this comprehensive review of this ESG, obviously, a very important topic. [Operator Instructions] So maybe just to kind of stay on the same topic, I have a couple of follow-ups from what you just went through. So when you think about -- I mean, obviously, locomotive is the biggest source of emission for the railroad. So when you think about the reduction target over the next 3 years, I guess, into 2025, 4 years, 2025, and then beyond that, what is coming from consuming less like from efficiency in the locomotive fleet and versus what is coming from consuming better or what you're calling basically moving to a fuel blend 5% to 10% and eventually 20%? Can you help us understand like the typical fuel efficiency gain that we have been seeing, if that continues, does that play a bigger role in the next few years?

I don't know if it plays a bigger role going forward, but it continues to play a role. I think Lance commented yesterday that we see ourselves continuing to drive sea rate improvement. I think he said it could be 1%, 2%, 3% a year. Certainly, we're going to have some challenges when you think about the business mix and the fuel efficiency related to that, as you see more intermodal growing on our railroad that tends to be a little bit less fuel efficient move for us. But certainly, that doesn't mean that it's going to offset our ability to improve just the core consumption. We mentioned that with our EMS technology that we're putting on, which we expect to have totally installed on our own fleet that's active and in use by 2025 then that's going to account for about a 4% reduction in our greenhouse gas emissions. So if you think about a 26% target, that's the part that's going to be driven at least in part by some of that technology probably later a little bit more from less fuel consumption, but it really tells you that the bulk of what we're looking to save from a greenhouse gas emissions is going to be driven by the blend changes.

Okay. And I guess there's a plan to kind of use more electric-powered locomotive in the yard initially. Is that plan -- it kicks off -- when does this plan basically kick off?

So we're in discussions with the OEMs right now about the specifications about what we believe is needed from a battery electric yard locomotive. And so our hope would be within the next probably couple of years that we would be able to start doing some pilot work in that area. But that's probably not going to be a big driver for our 2030 goal. We really see the use of alternative propulsion. That's probably what's workable. We're definitely going to need it to get to the 2050 goal, the net zero, but that's going to be a bigger factor, I would say, beyond 2030. Not to say that there probably won't be some in use by then. It really is going to depend on how quickly some of that technology advances.

Okay. Maybe just a couple more quick follow-ups on this. So from a capital spending perspective, does any of this have any potential change to your guidance for less than 15% CapEx? I think you gave us through 2024 in your long-term guidance. And secondly, maybe you can give us kind of how your customer base, I guess, is reacting to these kind of efforts you're putting on in ESG?

Yes. So for the first question relative to capital spend, you're exactly right, our guidance from 2020 to 2024 is less than 15% of revenue. And that's unchanged with anything that we talked about yesterday with the unveiling of our Climate Action Plan. Certainly, there may be some investments that ramp up in the latter part of that 3 years. And then, of course, beyond that, we'll continue to look and see what technology is available in that [ $2 million part of capital ], but we still feel very comfortable that we'll be able to make progress towards achieving our goals and continue to be on a strong path forward with our automotive modernizations, with our energy management systems, and that's all encompassed within that 15% of revenue or less than 15% of revenue guidance that we have out there long term. In terms of the customers, there's varying levels, I would say, of interest by our customers, but all are becoming more and more aware of it. I think we have somewhere -- Brad, correct me if I'm wrong here. I think the number is like 1,200 or so customers who have signed up to receive the annual statement from us telling them how much they saved in terms of emissions by using Union Pacific over the course of the year. And that's a number that's growing. We're also seeing increased use on our website for our carbon calculator. So it's becoming more and more in the dialogue. We're seeing it in more of the RFPs that we're getting from our customers. I don't believe that at this point, it's something that's actually, I'll say, swinging the needle for our customers to say, "Oh, I'm going to switch to rail versus truck just because of the ESG aspects," but it's becoming a bigger part of the dialogue and the phrase I like to use is that it's the [ easy path ] for a customer to immediately save 3/4 in terms of greenhouse gas emissions on 1 shipment, all they have to do is [ leave ] it from truck to [ rail ]. We need to be able to make sure that they feel comfortable in doing that with our service product, and so that's a lot of where PSR comes in. That's where lowering our overall cost structure is a tremendous help to us as well as improving that service reliability. So we've got to bring all those pieces together, but the conversation is definitely there with our customer base, and I would say it's increasing and at a pretty good clip as well.

Okay. I want to switch over to discuss maybe your productivity target for this year and what kind of transpired that we ended up with $250 million versus $500 million at the start of the year. Obviously, the big piece of that seems to be volume. We -- you're going to end up 4% volume probably versus much higher than that, that you've kind of laid out in the beginning of the year. So I guess my question is, is the volume-driven cost saving leans towards a certain commodity type? Because you did end up having a really good year on the industrial side and you have positive mix obviously there, but some of the premium and the intermodal volumes have been really disappointing relative to initial expectation. So does one segment of the commodities drive productivity more than others? Just trying to think about as we go into 2022, how we think about the kind of productivity momentum for UP next year?

Yes. So there's a couple of questions kind of embedded in that, so I'll maybe start with the first part. So we did last week reduce our productivity guidance and our volume guidance. We said our volume guidance is going to be up 4% for the year as our outlook, and that's at the low end of the range that we originally put out in January, 4% to 6%. And then the productivity of around $250 million versus the $500 million. In terms of what's really impacted the productivity, while there is a little bit of mix in the productivity between the commodity groups that I'll talk to in a minute. It's really been more about some of the challenges that we have faced on our network through a variety of different things. Certainly, at the beginning of the year, you had a Winter Storm Uri and the deep freeze of the network, not only across the middle part of our network went through, but also in the Southern tier were Houston, Dallas. Just the extremely cold weather, the impact that, that had on the productivity of our network. Then you had the wildfires. You had the bridge outage that we had. It was out for about a month and the restoration from that. You had some other weather events and washouts and then just kind of getting the network [ pulled ] back up and then some of the crew utilization issues that we've had here more recently. Some related to COVID, some related to the vaccine mandate, really just all of those things together that I would say have been the primary contributor in terms of the productivity shortfall that we're experiencing. Yes, there's maybe a little bit of a mix difference, but the mix that I would say is you're probably seeing is getting a little bit better fuel assumption, improvement in fuel efficiency because of the growth in whole that we weren't expecting coming into the year, maybe a little bit less on train length because of some of the differences in the intermodal network, where you've seen those carloads being held back a little bit. So there's some puts and takes there, but I would say that's on the margin relative to some of the other things that impacted us in terms of our productivity for 2021.

Okay. So effectively, a lot of that $250 million reduction seems to be tied to kind of these out of your control events rather than really mix and volume.

I would say so. There's, like I said, if we move some of the buckets within productivity between some of them with the volume shifts, but I wouldn't say it actually was an inhibitor in any way to our productivity.

Okay. Okay. So effectively, if I think about 2022, let's say, volume is an IP plus, which I think what you've kind of been aiming for to grow volume by industrial production plus, we should be able to get the volume productivity driven, but some of the productivity of this year kind of moves into next year as well, to some degree. I mean every year, there are storms and issues like that, but this seems to have been kind of a bit of an exceptional year between the supply chain and the storms and all that.

Right. And you're right. [ It depends ] on the supply chain in one -- some of those issues did in terms of network [ fluidity ], but that certainly had an impact. It impacted our productivity as well, particularly if I go back to the June, July time frame when we really surged resources to the West Coast and then wound up with our terminal being congested on the eastern part of our network because there wasn't the train capacity or the international chassis to come move those boxes off in a timely manner. So you're right, there's always some different issues. I think the key point in this is maybe where you were going, Fadi, is we still have plans, the work streams, the programs up against a whole variety of activities across our operating team to drive greater productivity. And that pipeline very much still exists. Certainly, train length is a big component of that. That helps drive a number of things that helps improve our service product, helps drive crew efficiency but then also with better car utilization, better utilization of our local and through terminal crews as well as scale consumption. So all of those work streams are still there, and we'll definitely be putting a lot of emphasis on that as we move into 2022.

Okay. How much visibility do you feel you have now on kind of the cost inflationary issues going into 2022? Do you have a good handle on what the cost inflation will look like next year?

Yes. So we're still putting some of the -- what I'll call the final touches on our 2022 plan. Our long-term guidance relative to inflation that we laid out back in May for the, again 2022 to 2024 time frame is 2% to 4%. That's probably going to run a little bit higher than that here in 2022 as you've seen some greater inflationary pressures. We'll talk about that in our January earnings release. But it's probably safe to assume that we'll probably be a little stronger than that 2% to 4% in the early part of that guidance range.

Okay. And can you give us kind of a bit of a flavor to where that inflation is being experienced the most?

Materials is certainly one area. Some of that goes into our CapEx. And so that's where the -- at our Analyst Day, we talked quite a bit about the productivity that we're working on, on the engineering side of our railroad, which doesn't necessarily flow through the OE side, which has a very big impact on our capital spend and being able to stretch those capital dollars as far as we can. So we're certainly seeing it on some of those fronts from a materials perspective. You're also seeing it in terms of some of the contract labor. Labor continues to be pretty tight here. And so you're seeing that in some of those contract labor forces where you've got hourly employees that are part of the -- whether it's some of the construction activities, whether it's ramp operations, any of those areas where we use contract labor, you're seeing that as an inflation source as well.

Okay. I mean in terms of your cost per employee, you seem to have leaned this year towards kind of a model where you're using maybe a little bit more over time. And is there an opportunity to get kind of more optimized level in that cost per employee? Like I'm just wondering how does that number kind of look going into the next few quarters. It doesn't sound like it's necessarily wage inflation, but it's more a function of some of these kind of adjacencies and potentially maybe over time use?

Yes. I mean you simply do see some wage inflation on the labor side. But I think if you go back to third quarter of 2020, that's a new [ SAAR ] cost per employee to take a pretty sizable step-up as we were just starting to utilize our [ base ] in a little bit different manner. That stayed elevated as you were looking at the year-over-year comp until you get to third quarter of this year, and then it was more normalized. I can't remember the exact number, was it 3.5%?

Yes, 4%.

4% wage inflation, comp for employee inflation in the third quarter of 2021. So we think that's kind of a more normalized run rate that we're going to be looking at here going forward.

Okay. Switching over to the other side of this kind of pricing growth. We've seen kind of the cadence gets a little bit better since 2019 and kind of quarterly has been getting a little bit firmer. And I think you have roughly 55% of the business that you touch every year, I think, it's right on that number. Like how do you feel about the pricing opportunity going into next year? Can you see an acceleration, just given kind of you probably are lagging a little bit the trucking industry in that pricing story?

Yes. So to your first part of your question, if you look at our portfolio of business, you've got 45% of our business that's under multiyear contracts. And some portion of that, of course, comes up for renewal every year. Then you get 25% that is in spot, kind of think of that as tariff pricing. And then the remaining 30% is 1 year or less contracts in duration. So your 55% in terms of us being able to touch it annually is in the ballpark plus whatever is rolling off on a multiyear period. In terms of the pricing environment, the demand environment continues to stay very strong. So that's supportive of pricing and also we want to price to the level of our service product. I think we're well over -- we've had some episodic issues this year, we think long term, we're providing a more reliable consistent product to our customers and there's a value in that. And so we still feel very positive on that. Again, as you know, our long-term guidance relative to pricing is that we're going to yield pricing dollars in excess of our inflation dollars. That's sort of our commitment every year and feel very confident in our ability to achieve that.

Okay. And if I kind of tie it up a little bit to trip plan compliance and some of the [ risk metrics ], which have kind of been impacted this year by a whole list of things from storms to supply chain issues and all these kind of things. Does this need to get to some higher level sustainably to help impact pricing? Or like how is the pricing power kind of correlated with those service metrics, which have been very volatile in the last few quarters?

They have been volatile. I mean it all goes to the value that you're delivering for your customers. So to the extent that you can be more reliable so they can plan their schedules, their production, their work crews more reliably on the service level that you're providing, so that the dray drivers are being able to schedule in a more timely manner, all of these things come together to say, ease of doing business, ease of understanding and knowing when your shipments are going to arrive, that all plays the dynamic in there. I think if you go back to the early part of this year, 2021, coming into the year, the network was operating very well. I think our intermodal ship plan compliance number was in the mid-80s-ish, maybe even got up to [ low ] 90 in some cases, and the trip plan compliance for our manifest in [ our ] network was kind of mid-70s-ish, I would say, for us to do that in a month-over-month, year-over-year in a very consistent fashion, that's the ballpark that we need to be in. So it's not like we're trying to get to a whole another plane of service provision that we haven't been. It's just kind of getting back to those levels and then being able to execute on that sustainably and consistently. The other thing that I think is important to realize is those are averages. And so if we're running trip plan compliance for intermodal in, call it, mid- to high 80s kind of number, that tells you that some of the folks within that probably mid- to high 90s, and those are going to be your very service-sensitive customers, your premium customers. And then you probably have another segment that's below that. So each customer's experience is unique. And so I think that's important to take into consideration when you're thinking about kind of those aggregate numbers that we provide.

And have these metrics been improving recently? I know you kind of overcome some of the problems, I guess, that you've had, especially on the intermodal network in the last few months. Things seem to be running a little bit better now. What's been kind of the trend in the service metrics in the last couple of months? Are you starting to see that inflection point on a sustained basis? And is your plan compliance and -- yes.

Yes, the network is running better. We started making some improvements, I'd say, coming out of the Labor Day holiday, took a little bit of a step back in October, the first part of November. Really, we did some great work over the Thanksgiving holiday and have levered some pretty strong gains there. That we're a couple of weeks past Thanksgiving now, and those seems to not only be holding but building upon themselves. So I feel very good about that. With that has come some of those trip plan compliance numbers. Our intermodal network, in particular, I would say, is very fluid, and we're ready to take on more business there and certainly are setting ourselves up well. I think as you're well aware of, Fadi, we've got the Knight-Swift business that's coming on in the beginning of 2022. So I'm very excited about that. The manifest trip plan compliance has been lagging a little bit, but it is starting to uptick to as we've been able to drive some of the older cars out of our terminals over the holiday weekend and being able to push those up against the customers a little bit more readily. So I'd say right now, all things are heading in a good direction.

Okay. And Jennifer, when you talk about volume growth being in line with industrial production or better, is that incumbent, say, both the cyclical demand and the inorganic growth? Because I know there's a big kind of effort on business development as you see now, you're trying to gain share from highway. You're trying -- and you've had some success, I guess, with a few contracts, including Knight-Swift. But does that kind of number include what you feel is potentially inorganic growth opportunities that you have in the pipeline?

Yes. I mean that's really what gives us the plus to the industrial production is if we were just kind of growing with our markets and not all of our markets are perfectly correlated with industrial production, but [ ITI ] does drive a big portion of our business. As we look back over time and look at our correlates, that's kind of where we've been the most correlated. So for us to say when we look at growing over the next 3 years, I think we said kind of 3%-plus-ish and again, probably skewed a little bit higher in the earlier part of the guidance here because you've still got some growth in industrial production coming out of the pandemic. That's what gives us the confidence in that plus portion is the fact that we are going out and winning new business, converting more business over to our railroad. And I think I need to remind everyone that included in that also, we said that we've got about 0.5 point headwind pull, which continues to be in secular decline. Now pull, as we talked earlier, turned out to be a good news story for us here in 2021, much different than we were expecting coming into the year as natural gas prices have gone up. And that probably is going to look to stay fairly strong going into at least the first part of 2022 when we look at that forward gas projection. But the longer-term, [ coal is going away ], and that's going to be a headwind that we believe we'll be able to overcome to get that 3% kind of growth CAGR over the 2022 to 2024 period.

And when you think about this inorganic growth opportunity, is it weighted more towards -- I mean, we're talking about kind of conversion from trucking, but is it necessarily more weighted towards the intermodal side of things? Is that where you see the biggest potential?

Yes. I mean -- and we talked about that in our Analyst Day that when you look at where our volumes are going to grow and we believe they're going to grow over the next 3 years, it is going to be more skewed towards that premium sector, in particular, domestic intermodal and that you'll see that become a slightly -- probably pick up 1 percentage or 2 of our total carload portfolio over that time frame. And that isn't necessarily taking something that's moving by truck today. We also see things converting from other modes of transportation into our containers. So it's an all-in kind of opportunity for us, but that is going to be where we're seeing, we believe, the major of our growth coming.

Okay. And I mean, I think that the kind of understanding that intermodal is a little bit more competitive business and ultimately, the margin profile may not be as robust as it is in the manifest business and kind of the carload business. But I'm also thinking, in your case, the incrementals may be pretty strong still given that you're coming out of PSR and you have this opportunity to densify the train and kind of densify the network. Is that the right way to think about it as we go into the next at least maybe 2 to 3 years that the intermodal growth could be as good incrementally in terms of margin as some of the other business?

So in terms of incrementals, again, we did give some guidance on this back in May, and we said that we look for our incrementals to be in the mid- to high 60s over the next 3 years. And that's with, again, the belief that the driver -- the key driver in our growth over that time period is going to be intermodal. So that says that we're going to have to bring that business on and handle it in a very efficient manner. And we spent some time back in May talking about the opportunities we have on the intermodal side of our network to run that operation more efficiently, not only giving the better service product to our customers, but turning the assets -- turning the ramps into a more fluid operation, running our normal ramps in production lines so that we can give a better service product and to be able to achieve those kinds of incrementals. So that's all part of the kind of that mosaic that we provided back in May of what we intend to achieve over the next 3 years.

Okay. A couple of questions I want to relay. Maybe one on the labor side. Are you -- I mean you have a high attrition rate, obviously. Even if you're not increasing the head count, you still have to go to market and hire a bunch of people. Is the market getting better? I know a lot of your peers have had difficulties with hiring and keeping that pipeline of training kind of full. How are you finding the labor availability as we go into next year?

Yes. So I don't -- you mentioned having a higher-than-average attrition rate. I don't know that we would necessarily say our attrition has changed much over the last several years. We continue to have what I would call kind of normalized attrition. But we are out hiring in many locations today. I would say, overall, it does appear to be a more competitive market. We're having to cast the net maybe a little bit wider than we had to in the past, but we are still able to attract employees, potential employees, to the network. We've got -- I want to say the number is somewhere between 500 and 600 employees that are in training classes today that are coming out over the next several months. And that's a combination of new hires and the people that we can call back from furloughs. So as you might recall, when we came into the year, we still have a fairly large number of folks on furlough. We haven't yet completed those furlough [indiscernible], but we still have a good chunk of those folks that are still coming through the refresher training classes as well as the new hires. So we're staying on ahead of it. We see the challenges. You can't hardly pick up the paper and not see something that's either talking about higher inflation or labor tightness, and so we're well aware about it. And so we're trying to be pretty proactive in our efforts to go out and hire and make sure that we're giving ourselves enough time to fill the classes that we need so that we're positioning ourselves to have the crews available. And we know we need to use the crews that we have today more efficiently. And that's been a big part of our efforts here over the last couple of months is to improve the efficiency with which were utilizing that idle asset.

Okay. Okay. I meant attrition for the rail industry rather to other industries, not -- you have kind of attrition has been kind of stable, I guess, you're right. So -- and this vaccine mandate, is it causing any issues in terms of having visibility into what kind of crews and workforce you have in the next few months?

Yes. So we have been working with our workforce for the last -- it's probably been a couple of months now or pretty close to a couple of months anyway since we started proactively going down and then asking people to tell us their vaccination status. We have a system that employees can go into, upload their vaccination card or if they're requesting an accommodation, whether it's related to medical that they have that ability. So that's given us a pretty good insight into the employees that are vaccinated or where they're at in the stage of the process. We have seen, in fact, the uptake on that continues to kind of increase as we're in [indiscernible] of the year in terms of -- and we've told people, we want you to let us know -- really not here -- just a testing telling us that you're not vaccinated or a testing telling us you're vaccinated so that we can have kind of that full picture. I think we're at about, call it, 60% to 65% of our employees today, maybe a little bit higher than that, that have gone completely through that process and are telling us sort of that they're either vaccinated or have an accommodation. And then there's another pretty decent chunk that are still kind of going through the process. So that's given us good visibility. Right now, it's our understanding, there's no clips, if you will, in terms of the vaccine mandate. And so we're just watching that. In fact, I think it's today, actually, maybe right now, Beth Whited, who was originally going to join us on this call to help talk about the ESG efforts, she's our Chief Human Resources Officer, but she's also in charge of sustainability. She's actually testifying today about the potential impact of the vaccine mandate. We just want to make sure that the government understands the impact that could be there if they continue to move forward and get finalized in terms of saying the deployment has to stop for some employees as of a certain date. We don't have that kind of a mandate as it sits today. There's various deadlines, but there's nothing that is a hard line in the sand or a cliff that's out there. So we're really kind of working on both fronts, if you will, making sure the government understands what the potential impact is and then making sure our employees understand what we're asking them to do, why we're asking them to do it, providing them as much education and opportunity as we can to get vaccinated.

Okay. We have 1 more minute. Just quickly, I wanted to ask you, in terms of the CP-Kansas City Southern deal continuing to progress towards completion here, how are you thinking about defending your position on that cross-border traffic between Mexico and the U.S.? Obviously, this is an important franchise for you. What are the strategic kind of possibility that you have, including potentially commercial alliances with other rails that you can kind of move forward with going forward to kind of improve your position? And if there's anything that you can share with us, any insight on how you're approaching that.

Yes, let me size it first. I think it's important to understand, when you're talking about our business that moves towards south of the border, it's about 11% of our total traffic today. And about half of that is what actually -- is it a change with the KCS? So you're talking about, call it, 5%, 5.5% of our business that's theoretically impacted by potential CP-KCS merger. Today, that business with its interchanging of the border has the option to stay on the KCS, interchange with the CP and go to the final destination. It's choosing not to do so because when we have the route structure back. A couple of weeks ago, at a different conference, Keith Creel commented on the fact that UP has a superior route structure in that corridor north-south. So we're not afraid of the competition. Our issue, and you've heard Lance say this before, Fadi, is we want to make sure that we're treated equitably at the border. That's our key concern, and that's where you're seeing us participate in the regulatory process. But as long as we're treated equitably there, we're fine competing and we have no issues competing and welcome that.

Okay. I think we're going to leave it here. Jennifer, thank you so much for the time this morning.

Thank you, Fadi.

And with that, we'll wrap it up. Thank you so much.

All right. Thank you all.

Thanks, everybody.