Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Good morning. I'm Ken Hoexter, BofA's air freight and surface transportation and shipping analyst. Again, welcome to the next part of our 29th Annual Global Transportation Conference, Global Transport Airline and Industrial. We welcome CFO, Jen Hamann, from Union Pacific up next. This is her second time in the past 4 years as a presenter at our conference. Many more in our role in IR decade -- more than a decade ago. Jen has been CFO since January of 2020 at UP since 1992. She's joined in the audience by Brad Stock of IR, his third consecutive year, so we thank Brad for joining us again. See came out for your questions, the tough ones afterwards. UP has been kind enough to participate in our conference for 19 of the past 21 years. We've been hosting the event. So we thank you for your commitment to our conference. So with that, I'm going to turn it over to Jen to jump right in. It looks like volumes are off about 3% versus our -- up 1% for the target. We've got the recent STB hearings. 1Q focused on hiring and service issues, margins, technology and so much more to hit through today. So Jen, as we're now halfway through the second quarter, let me turn it over to you for thoughts on how things are progressing. What your key messages for the day, hopefully, we'll get that through the show, and then we'll jump into some detailed Q&A. So with that, Jen Hamann.

All right. So thank you, Ken, and good morning to everybody. I'm just going to make a few quick remarks, and I think will touch on some of the things that you said. The slides that accompany my prepared comments this morning can be found on our Investor website, next to the webcast for the event. Before I start, I have to remind you all that I will be making forward-looking statements, and those statements are subject to risks and uncertainties. So please refer to the Union Pacific website and our SEC filings for additional information about our risk factors. So we'll start off on Slide 3 here. And this is just a quick recap of our first quarter results. The business development efforts that the team has gone through the last several years and the robust demand environment drove a 4% volume increase in the quarter as we outpaced our rail peers. Volume improvement, combined with solid core pricing gains and a positive business mix, to produce revenue growth of 17%. Rising fuel prices and service challenges, however, contributed to higher costs in the quarter and offset some of our positive top line momentum. The net result was first quarter earnings per share, up 29% to $2.57, and our operating ratio improved 70 basis points to 59.4%. While all in, I view this as a solid quarter. We fully recognize that there was upside that went untapped as a result of our service challenges. And as we'll discuss further, improving service to our customers is paramount and crucial to achieving our full year goals. Turning to the second quarter on Slide 4. As Ken was alluding to, this is showing you a look at our current volume picture. Volumes across all 3 business teams are being impacted by the actions we're taking to improve network performance. Overall, our volumes are down 2% versus last year. If you look at the business teams in a little more detail, bulk is flat versus last year, driven by continued strong coal demand, with coal volumes up 8%. Grain and grain products is down 8%, and that's recognizing 2 things. It has a very tough comparison to last year. And then when you look at both coal and grain, we know that those volumes are both heavily impacted by our efforts to improve network fluidity. Industrial is up 4% versus last year, driven by broad-based industrial market growth. Metals & Minerals continues to lead the way up 10%. Energy and specialized markets remains the only business line within the industrial space that's down year-over-year, driven by lower petroleum shipments. Premium continues to be down year-over-year, driven by intermodal volumes down 10% as our international volumes remain soft and are down 20%, setting growth in the domestic space, which is driven in part by our new Knight-Swift business. Automotive volumes are up 10% as we continue to be encouraged by the sequential improvement that we're seeing year-to-date in both parts and now finished vehicles. If you look on Slide 5, then, as we discussed both at our earnings release and at the STB hearings that followed, improving our network performance and our customer service has our full and undivided attention. We have action plans in place that are increasing crews and locomotives at key locations. We're adjusting transportation plans and working very proactively with our customers to reduce freight car inventories. As you can see from the chart on Slide 5, the key metrics that we are watching bottomed out in April and are starting to see steady, slow improvement. In particular, freight car velocity has improved and is currently running close to 190 miles per day on a 7-day basis. And with over 550 employees in the training pipeline, we're set to graduate over 300 new hires in the early months of summer. So while we're not declaring victory certainly, and there is plenty of hard work ahead of us, there is positive momentum building as we execute our recovery plan. If you look then on Slide 6, this is where we've laid out our updated full year guidance that we provided at our earnings call in April. As stated at that time, the achievement of these goals, including the operating ratio that starts with the [ 55 ], is dependent on improving our service product and seeing some stabilization in fuel prices. One piece of that, our operations, is where we have ultimate control and you just saw some of our progress. The other piece, fuel, is outside of our control, and it does continue to apply additional pressure. With regard to capital allocation, the guidance we provided at the beginning of the year has not changed. I do, however, want to highlight that last week, we raised our dividend, 10%, which is in line with our dividend payout target of 45% of earnings. Then just to quickly close up on Slide 7 is an update on some of our ESG work. Last week, we conducted our 2022 Annual Shareholders Meeting. And so I felt like an appropriate time to highlight the great work that the team has done to increase and improve the ESG disclosures we're providing to the investment community and to our employees and the community at large. From our initial climate action plan and human capital reports, to our newly enhanced Building America Report and our 2022 proxy, we are taking very deliberate steps to be more transparent. These increased disclosures have not only provided you more data, but are also providing greater clarity on our plans to achieve our long-term goals. And I think it's fair to say that we really do have a great ESG message, both as Union Pacific and as an industry. And while these efforts are extremely important, ultimately, it's still about action and progress. And so the actions that we're taking, like increasing the use of biofuels, purchasing battery, electric locomotives and investing in a diverse workforce and linking management comp to these efforts are ultimately what drives greater returns for our stakeholders. And these efforts really just represent a beginning, and I believe there are many great steps ahead for us on this ESG journey. So with that, Ken, we can get into your questions.

Thanks, Jen. Appreciate the presentation. So looking at the volumes trending down 2%, you've set a full year target of -- to exceed industrial production. Do you want to just clarify what your IP target is and what [indiscernible] needs to ramp as we move into the second half to hit that? And then what your [ uncanny ] view on the state of economic activity right now? Obviously, we're hearing a lot from the spot market in trucking where pricing is rolling over. But the truckers, public truckers talk about any seeing any demand. We just had Shawn from CSX talking about we're still seeing strong demand, the anticipation for the second half. So maybe throw in what's built into -- what you're seeing now, and then your economic outlook?

Yes. So starting with the first part of the question about industrial production. There's a lot of different numbers out there. But generally speaking, you're seeing most industrial production forecast for 2022 to be 5% or so. So our guidance is above that, and we still feel very comfortable with that. When we initially laid that out in January, we talked about the fact that we expected it to be more back-half loaded. And I would say we still see that maybe a little bit heavier than we originally anticipated, in part due to some of our service and congestion issues, which are pushing a little bit of that off. But you continue to see some supply chain issues when you think about what's happening in terms of international intermodal, when you think about the chip shortages, which are getting better that are still out there. And now you have some things that are not -- we're not kind of originally part of our thinking when we came into the year, where you have very high natural gas prices that are going to sustain coal demand into the second half of the year. And we really didn't see that coming into the year. And also, you -- while grain volumes and grain demand has stayed strong with the Ukrainian war and issues going on over there, you're seeing even greater demand for grain and grain products here in the U.S. So those are a few of the things that give us, I think, a pretty strong belief in what we see happening in the second half of the year. And that's not really even touching on the industrial products part of our business, which has been strong really since, call it, the mid part of 2021 and is continuing strong this year. And we're really not seeing or hearing from our customers any letup in that. Metals is very strong. We've had some new production come online, and that's certainly helping. And what also is encouraging is when you think about the infrastructure builds and the money that is there to come into core infrastructure, which we think we have an opportunity to haul a lot of that, I don't think much of that money has really been spent or deployed yet. And so that, we believe, is going to give us sustainability, at least into the second half and maybe into 2023 as well.

So let's come back and we'll revisit some of the commodities in a couple of minutes, but let me hit on one of the things -- you referred some targets here, including your operating ratio. You said 55x, which includes rising fuel, a softer first half volume target. You said incremental margins in the mid-60s. Is it just the service side or the employee side on the service? Are there -- you kind of mentioned a couple of things in terms of miles, car miles per day. What is the core here? Is it just beyond the employees that fix the problem? Or are there other things that you need to do on operations to get there?

Well, I mean, we're doing things on a number of fronts. The piece that will ultimately give us sustainability in terms of our service product right now will be the employees. But we've also put a few locomotives into the network in key locations. We've readjusted our transportation plan. We've done work to make sure that we can restore fluidity in parts of the network that are most challenged, and some of that has involved moving employees. I think you're familiar with the term borrow out. So we're maybe long on a crew pool in another part of our network, but short in another part. We can post that job and you have to work with the unions to be able to do that. But assuming they come to that agreement, we can post the job and on a voluntary basis, a crewman can select to go to another part of our network and work and not lose their seniority at their home district. And so we've got about 80 borrow outs. Most of those are up in the PNW right now, but we'll be looking to move some of those probably more into the central corridor as we move through the year and as we get staffing up in other areas. So that's kind of the linchpin, but we have to pull all levers. And that's really where we're working with our customers as well to try to help them keep some of their inventories back a bit. As they saw our network slow down in, call it, the late February, early March time frame, they had a natural response to insert more cars. When you think about the cars on our network, call it, 2/3 are private cars. So there are cars that are controlled by our customers. And so they have that ability. And when they saw the network slow down, they inserted cars, which was a natural response. But because of that slowdown, it tended to exacerbate the situation. And so that's why we focused on inventory reduction to try to improve the fluidity. And as you saw, I do believe it's taking hold. It's not going to be a steady straight line up, but we're making improvement.

All right. Well, it's amazing because when we think about, oh, let's just hire more employees, you hire employees and you don't think about how local and switching around of routes and specifically in where their service areas. So it becomes more -- a lot more local than we think. So as CFO, let's get to a specific number, right? So historically, you've done about a 220 basis point improvement from first quarter to second quarter in operating ratio. That would indicate going from 59% to 57%. I'm not asking for a specific number to validate. But any thoughts in terms of seasonality or fuel or anything else that pushes you up or down in terms of normal seasonality that we should be considering at this point or service or [indiscernible]?

Yes. I mean service obviously, is a part of it. The rising fuel prices is another part of it. Last year, our second quarter was our best quarter ever from a profitability, operating ratio standpoint. And so it's a very tough comparison. And we said at our April earnings release, we wouldn't be able to match that. And that still is the situation today. But there's a lot of headwinds out there for us today in terms of that improvement. First and foremost is getting the service product right. We can control that. We're putting the resources up against that but the fuel will give us a headwind as well.

Has fuel accelerated and it's deteriorating from first quarter?

It has come up a bit, yes. I mean, we're actually -- we were looking at prices yesterday, and we're paying about $4 a gallon right now. And we look back historically, and if that holds, say, for the month of May, which it probably will, that will be the highest price we've ever paid for a gallon of diesel. We look back -- of course, you know we have records that go back forever. I believe it was July of 2008. We paid not quite $4. So fuel prices are high.

If you haven't seen the release on the dividend, it's got a great line that we've paid a dividend for like 145 consecutive years. So they definitely have data that goes back. So talking about -- you know what, let me just ask you on fuel before I move on. Fuel, back in the '90s, it seemed like the truckers switched to a weekly fuel surcharge. The air freight companies kind of followed after the Iraq war into kind of moving, they eventually move to weekly surcharges. The rail still seem to be kind of on a mostly quarterly. Is there a reason historically why the rail industry, too, hasn't adjusted to a more quarterly base surcharge? Sorry, weekly basis?

Weekly basis. So 2 things, with the exception of our intermodal, we'll talk about that in a second, most of our surcharges update monthly, but there's about a 2-month lag because say you close out the month of April, you now know what the average on high diesel fuel was for the month of April. So we post that effective May 1 or that effective May 1. Here's the April average for May, and it's going to become effective in June. So that's the way the majority of our programs work. On the intermodal side, we do have, on the domestic side, some that are just weekly.

Okay. So let's talk about the employees, right? So you've moved from 48,000 employees back in 2015 pre-PSR. You've got about 30,000 currently, which is about almost down 40%. Carloads are down 10% at that time. So obviously, we all know that PSR means being more efficient with your assets. But you're fighting kind of the public accounting from the STB of what -- have you over caught employees to meet the environment. So as you transition from the PSR environment to a growth phase, and I'm talking about we've got this excess capacity and growth. What does that employee base look like? And what do you need to get to in terms of whether it's the TE&Y employees or what have you? When you look at these issues, how do you adjust?

Well, I wouldn't -- first of all, I wouldn't say that we're transitioning from PSR to growth. The PSR is going to support our ability to grow. And it's not as though during our adoption of PSR, we wanted to shrink the volumes, or even over that 10-year period, we wanted to shrink our volumes. But you had coal moving away, you had different secular things. But PSR has given us the platform, we believe, when you think about just a sustainably lower cost structure that can make us so much more competitive. And once we get these service issues behind us, which we absolutely will, that gives us a better service product long term, we believe, to provide to our customers. And so those are the 2 things that are really going to enable the growth. In terms of the amount of employees that we'll need for that growth, it won't be at a one-for-one. It will be less employees than we needed historically. Some of that is technology, though. It's not all PSR. Some of it is technology that's helping us work smarter. That's both back-office, that's in our mechanical forces, that's in our engineering forces. Some of it is the train and engine crews when you think about the longer trains as we're able to use citing the extensions that we've invested in, the money that we've put into technology. We're able to extend the length of our trains, and that helps us be more efficient in terms of that crew base as well.

Wonderful. So sticking with the employee theme, Jim Foote talked about -- kind of at NARS, talked about shifting how you work with the employee, whether it was a different negotiating model, which the round is still open, right? You're still negotiating with the unions. Any thoughts on concluding the national negotiations? Is that coming due? I mean, I know these things take years, but it seems like we've been at it for a year. So maybe just to your thought on that. And what's the outcome from it? What should we expect? Should we expect one-person crew? Should we expect any other progression from that to be able to get to handling the growth that the rails want to see?

Yes. So in terms of where we're at right now, we're in the mediation phase with our unions. They have asked to be released from mediation, and the mediator has declined that because we've made a couple of offers. I don't know that we have seen anything come back from the other side. So the mediator is trying to fulfill their role and mediate. But at some point, my guess is, if we cannot reach an agreement, and it's hard to see that right now when you've only got one side kind of negotiating a bit, then it's probably likely that you will come out of mediation and go to either binding arbitration or a Presidential Emergency Board. It feels like that's the direction that we're going. We would certainly like to get an agreement with our employees sooner versus later. I came in on the end of your discussion with Sean. We understand clearly that the inflation that people are seeing is having a serious impact on our employees. And the paycheck they're getting today isn't covering as much as it was a couple of years ago. And so it's disappointing that they turned down the offer of us giving some comp ahead of that. But be that as it may, we need to get it resolved, and we want to get it resolved as quickly as we can. In terms of what ultimately comes out of it, I think this period of labor tightness and the fact that as we're going out into the market and it's becoming harder and harder to attract employees to our jobs, I think it tells all of us that we need to think about our work differently. And as you said, one of the things that's in this bargaining round is the ability and the flexibility to go to a single-person crew. It doesn't mean that we expect to operate all of our trains with one person that have our locomotive. Based on what that train is going to be doing, there may be trains on our network, like there will be trains on our network that always have 2 people in the cab of the locomotive. But there are other trains that we think that we could take the conductor out. And that's a piece of work that we actually think could be much more attractive to new hires is that, that could be a scheduled job that's on the ground, that is a shift work that you have a specific location that you report to work every day, and that you're home every night. And so we think really that some of the changes that we would like to be able to bargain for and to be able to come to agreement with our unions on can be very helpful, both for their employees and the lifestyle, and that it would be beneficial for everybody, but we're having a hard time getting over that kind of loggerheads, if you will.

Yes. Yes. It's amazing how long we've seen [indiscernible]. Shifting to -- back to service. You recently -- or I guess, Kenny might have recently sent a letter to employees embargoing some freight. It appears some of that reversed, if I understand it, right? And you're moving some of that freight. Maybe talk about that and talk about what's going on in terms of, I guess, you quickly mentioned the workforce productivity, locomotive productivity, which had fallen. Maybe how quickly do we see an acceleration of that now that maybe -- talk a bit more about the higher range and you've mentioned the 500? How -- what's the time frame you in the fully up and running and back to your historical levels?

Yes. So our plans for the year are about 1,400 new hires. I think we've got about 250 or so that are already in service today. As I mentioned, we've got another 300 or so that are going to be graduating over the next couple of months. And so that gives us a good running start. So by midway through the year, we'll be probably not quite halfway into the hiring. And then some of the hiring is back-end needed to, that launch into 2023 when we have the Schneider business coming on. So those are kind of all things that are taken into consideration there. In terms of the letter to the customers. As I mentioned, as we saw our network slow down, and we saw customers put more cars to move their freight. And so as we started digging into that analysis, one of the things that we determined was that we had too many cars on the network to support the actual carload volumes that the customers were tendering to us. And so we started working with the customers to talk to them about that and asking for their help in purposely holding some of their cars back. Those were obviously very tough discussions. You've seen some of the -- if you watch the STB hearings, you heard what some of our customers had to say. You saw some letters that they may put out there. It's made for, unfortunately, a very tense situation but I will also say that our customers have really stepped up to the plate and have been helpful despite some of the conversations. And not that they're happy to be helpful. I absolutely understand that it has been a difficult situation for them. but we have not had to purposefully meter anyone since we put that letter out. Everything that you see when you look at the inventory coming down from a private car standpoint, it has been the actions that our customers have taken to either shift trade to different modes, hold cars back. We've had some customers that have accelerated downtime so that they could take a downtime during this period. We see them sending cars to be maintained, increasing the maintenance cycle or pulling ahead of the maintenance cycle, so to speak. So we've not actually had to pull that lever with any customer to this point. But it's a dialogue that we're still having. We're watching it very closely, and we're hoping that we don't have to do that.

So shifting to the West Coast, right? We obviously see a lot of news about the backlog out there through the year. Vessels have fallen now in the backlog from 91% to 33%, partly because it's starting with the Chinese New Year, Lunar New Year, then moving on to the shutdowns in China. Given the improvement of -- it seems like some of that's also an improvement in supply chains and the lockdowns. Now the concern is the service levels when the freight hits, which I guess you're hiring. And so now if we think about that, you've got 1.5 months, let's say, before we start to really see it as going to gets ramped up, then you see the sailing time, which could be right about the time the West Coast port negotiations come to a close. So what's your thoughts on the fluidity of -- out west on the dock, getting it in and how is that improving? And then what's the thought as we get this wall of freight that could be approaching?

Yes. So I think the important thing there is to try to be prepared for it, try to get as much visibility as that we can. We have assets that are staged towards the West Coast when you think about the platforms that the containers need to ride on. Right now, if that wall was here, we probably wouldn't be moving it, unfortunately, as fluid as we would like to, but we hope by the time that we start to see some of that coming more to us, that we will be able to do that. And we're making preparations for that. As you heard me say, our international volumes are still down 20% year-over-year here in the second quarter right now. And so we've not yet seen that shift. There's maybe a little bit of pent-up demand there based on our service, but most of that is just freight that's not wanting to move on us currently.

So it's not economic activity, it's where service levels and capabilities are, which allows you to get that vision for that second half?

And the economic activity. I mean, the demand is there as well.

That's what I'm getting at. It's not economic activity that's showing softness, that's why.

That's right.

I just want to say that you're not seeing anything that suggests that softness there?

No, we're not. I mean, obviously, we're seeing all the same headlines everybody else is about the recessionary fears, about what inflation is doing. We certainly are having those conversations with our customers, but the tenor of those conversations really has been that they continue to see growth opportunities. And there's different segments of our business, right? The bulk side is really not as linked to the economy. We've talked about natural gas. We've talked about the demand for grain. You look on the industrial side, that's the piece that is more economically linked, but there are very strong drivers there when you look at industrial production, still, call it, 5% or so. The consumer has the most impact on the premium segment. but you still have restocking that needs to happen. And whether that's on the shelves at a retail big box store or if it's in the car lots. There's still a restocking element that has to happen that even if consumer demand slows down a little bit, which I wouldn't be surprised if we see that. I think there's still a really good opportunity to move that freight.

I'm still surprised by the dichotomy that we're hearing in terms of economic. What's going on in the spot market rates, which I get a smaller part of it versus the commentary from the backdrop from the truckers and the rail. So let's switch subjects. We've got a couple of minutes left. On CPK issue in terms of -- you've made -- maybe just to simplify what do you need to defend or what do you need to ensure you still have access to through the merger? What would maybe simplify us, what, from a UP perspective?

Well, it's really more from a customer perspective. We want our customers to have the same choices post merger that they have today. And so to do that, you need to make sure that there's equitable pricing, north and south of the border, and that we still are treated fairly at the gateways. Those are 1 and 2 in terms of what needs to happen. Because the customers today, as you know, they come to the border and they have the choice. They could stay on KCS and be interchanged to the CP to go to final destination. The preponderance of those customers are not choosing to do that, and that's because we do have the better route structure, North, South, and we have more destination options versus the merged company. They certainly will have single-line service then, but I think they've even said that even with single line service, that's not going to totally take out the route advantages that we have, and certainly isn't going to impact the destination advantages that we have. The only other thing that we have a concern with and you've seen probably in our filings is that certainly, part of the design of the merger is that they expect to grow their volumes. Some of that moves on trackage rights on us, particularly through the Houston area. And so we want to make sure that there's good visibility to the volume growth and that we're able to invest the capital with them bearing a portion of that capital cost in advance of that traffic.

So before I get to regulatory, we talked a lot about volumes. We didn't really hit too much on pricing. We talked about fuel and sustainability. What's the underlying -- in an inflationary environment, maybe given the history of UP, what is the impact on pricing and the ability to keep pace in an inflationary environment, given your contract structure?

I think you're familiar with our structure, call it, 50% of our business is in multiyear deals, and some portion of that is going to roll every year. And then you've got about 20% or so that is under tariffs. So think of that as spot pricing that we have the ability to adjust with anywhere from 15 to 30 days notice. And then the rest of the book is in 1 year or less, contracts and duration. So in any given year, we have at least 50% of the book that we're able to actively touch in terms of renewals. And it has been a strong demand environment, particularly in the domestic intermodal space, and you're seeing good demand for the service that we have. And so that gives us an uplift. We obviously need to provide a much better service product to support that, and that's obviously our focus right now. But we feel good about that underlying demand and the price dynamics that go with it.

Is there -- you said the 1,400 -- I just want to make sure I got this 1,400 employees, about 500 are done now. You'd expect to have most of those by the end of the year, the full time?

Yes. They'll -- there'll probably still be a few in the training pipeline at the end of the year.

Okay. So that was a bleed into the regulatory question, right? So which is kind of all the rails were the U.S. rails were called in to talk to the STB about service levels. We've got a more active STB in terms of talking to the rails about these issues on a more regular basis, maybe because some of the service issues are more at the core of what's going on in the supply chain concerns. What are your thoughts, the takeaway, now that we're 2 weeks after the hearings, the impact on reciprocal comp mandates, which may be coming. Does this mean a limitation in pricing at some point from your ability to get that proper pricing?

Well, I think it really goes back to the service offering and what we're doing to meet our customers' needs and what we're able to do to support their plans to grow. We've long believed and you've heard me say this before, probably again. Our best thing that we can do in terms of the regulatory picture is to provide our customers with a good service product. When we see things like the STB hearing, which is certainly not a situation we ever would want to invite, but we did because of our service product. And when your customers are having to reach out and then they feel like that's their avenue, and the STB is the voice of the public, so to speak, in terms of representing that interest. So it all makes logical sense in terms of what's brought us to this point, where we have concerns, and we are certainly having this dialogue with the STB, we're having this dialogue with our customers is that further regulation does not equate to improve service. We have historically shown that we can provide good service. You don't have to go back that many years, and the railroads have been providing pretty good service. Unfortunately, we're all struggling right now. And so that certainly doesn't create a great backdrop for the defensive regulation. But the regulatory environment a few years ago when we were providing good service is the same as the regulatory environment today. It's just we're struggling a bit because of some of the hiring issues. And quite frankly, it's the change in the labor force that's impacted everyone, all facets of the supply chain, not just the railroads coming out of the pandemic, which was something nobody really foresaw and we're all still learning how to work and plan in this new environment, and it requires being much more nimble, much more flexible in how we react to things and try to be more proactive instead of reactive. But regulation, I don't believe, or increased regulation isn't going to solve that. You mentioned reciprocal switch it would actually consume more resources, both on our part and the part of the other railroad that would be taking advantage of the reciprocal switch, to move the goods for that customer. The same way when I -- there's been talk about, well maybe running shorter trains instead of longer trains, shorter trains consumes more resources. And so what we're trying to do, what the industry is trying to do is to be more efficient with the resources that we have so that we can provide a good customer service. It's an equation that has worked. We've shown that it can work, and we just need to get through this bit of a time period where we're not showing it and demonstrate it. But like I said, I feel very optimistic about the changes and the improvements that we're seeing. Certainly, we're having to -- and I think it starts at the end of this week, actually, there's increased reporting requirements. We have no issue with that transparency requirement. We'll be reporting the additional metrics that the STB has asked. We're doing, I think, biweekly phone calls. So we will absolutely participate and cooperate and do everything that we need to do and are very confident that we will see this get resolved.

Wonderful. Let me see if there are any questions from the audience? If not, I can keep going. If you do, just feel free to raise your hand, I'll come back to you. So let's talk about leverage ratios, right? So now you're still generating cash even I get the service issues, you're going to get beyond them. But you're at about 2.8x, right, on to EBITDA.

Around, yes.

So you target $7 billion in buybacks this year, $18 billion, $19 billion over the 3-year period. The CapEx still about 14% of revenues, right? So post-PSR implementation, we're at that low level, do you seem to need? Is there anything you mentioned you pull locomotives, you had plenty of locomotives parts, plenty of cars, parts, getting any employees. Is there anything on the CapEx side that needs to shift? You mentioned you're already in there in sidings and things.

So this year, we're going to spend $3.3 billion. It's up 10% from last year. I think it's important to note that if you look back and you commented on the fact that even though our carloads have gone down over the last many years, every year that we have put out our capital plan and the amounts have varied from year-to-year, in part because of PTC. That was a big lift from a capital spend. But we have always been spending for growth and for technology and to support our productivity efforts. You've not ever seen, at least, in my 30 years at the railroad, a capital budget that was just kind of maintenance. And so you think of maintenance to call that $1 billion, $2 billion, $3 billion, that says we're putting some significant investment in there. We're investing in freight cars. We're investing in the modernization of our locomotive fleet, which is a great activity for us. The locomotives that we get post modernization are much more reliable. They're 5% more fuel-efficient. They've got a 50% improved emissions profile. So that's great from a carbon standpoint. And then investing in commercial facilities. So again, some of the intermodal growth that we have. But we're also investing in the siding projects and in some commercial facilities to support our carload products as well. So I feel like we've got a good capital plan and feel good about what our trajectory is there to support the growth that we see coming.

Wonderful. Anything you'd highlight on that technology side? I mean, obviously, we see the car inspection, track inspection, I mean, some great advances, which can, again, save on the job of going out and looking at railcars for hours that we can do at a lot quicker pace. Is there anything more innovative? Or anything else on the docket that you find interesting?

There's a host of technology. I mean, that's the -- probably one of the unsung stories about the rail industry is all the technology that really is behind it. We're doing a lot to try to improve the visibility of our service and our cars to our customers, trying to do more with ETAs, so being more proactive in giving them a view to when their car is going to be available. Communication and planning are huge in our business. And probably historically, we have not done this good a job there as we should. And so technology, and really being able to leverage that, should give us and our customers a better window to the service and help our planning as well as their planning in terms of being able to handle that in a much more responsive manner.

So just to wrap up. I appreciate your time here. So kind of affirming IP volumes, strong second half, we'll see a rebound. Pricing remains robust. We're not seeing kind of those economic impacts to QOR. We'll normal sequential, but maybe an impact from higher fuel prices a little bit here. Obviously, focused on better service, 1,400 employees by year-end, half of them by mid-year. So we should see that service and really ramp up. You're already seeing the inflection you mentioned in April. The union negotiations remain ongoing, but hopefully, we get some sort of resolution. Anything else you want us to take away?

No, I think the key message is, as you said and I said in my remarks, first and foremost, it's the restoration of our service product and improving our customer service. But beyond that, the opportunities to grow as the Union Pacific as an industry, I really think are tremendous. And I think we have the platform, we have the capacity and we have the mindset to grow. And now we just need to be able to prove that. And you started to see some signs of that. And unfortunately, it took a little step back. I'm very confident that the growth is there.

Yes, we've seen any step backs before and then you just show the growth over time.

Yes, it's there.

Thank you very much for your time. Truly appreciate you joining us. Thank you.

All right. Thanks, Ken.