Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

All right. Good morning. I want to welcome everyone back to Nashville. We're really excited to have the Stephens conference here in Nashville again this year. We've got a great lineup over the next few days, and there's no way better to kick it off than to have Union Pacific as our first fireside chat this morning. So to introduce the representatives from Union Pacific, we've got Lance Fritz, CEO; Kenny Rocker, EVP of Marketing and Sales, sitting next to me. I'm going to let them make a few opening remarks, and then we'll get into Q&A. And as a reminder, this will be a fireside chat format. I usually start with 2 or 3 questions and then open it up to the audience. So you can go ahead and start thinking about your questions now. But Lance, Kenny, thanks again for being here, and I'll turn it over to you.

Thank you very much, Justin, and thank you all for joining us. For those on the phone, you can find the slides that we'll talk through this morning on the UP investor website right next to the webcast for this. For those in the room, we have hard copies, if you'd like one. I think everybody got one. We are going to make some forward-looking statements this morning. So we'd ask you to take a look at our filings with the SEC as well as on our website for additional information about our risk profile. If you'd go to Slide 3 with me, that's a slide that shows you our status of recovery. We've been making solid recovery for -- ever since the bottom for us, which was the middle of April. If you see the freight car velocity part of that slide, it's the yellow line. We had approached and broken into the 200 mile a day. That's an important number for us as we continue to recover and get back to normal. Recently here, we've dropped back down. That's really all about product in the grain world that's no longer able to go on the Mississippi River. It's coming over onto the railroad, and it's trying to go down into Texas to hit the Gulf Coast. That's been a bit of a struggle for us in that those are right through some of our still fragile crew areas. In order to support our customers, we flowed that product down, and we've really stressed those different crew bases. As a result, we're a little congested down there. That is temporary. This is not systemic, and we'll grow right back out of it and get back on trend line. We did tell you that the recovery is going to be in fits and starts. The good news is, on the right-hand side, we continue to bring the most constrained resource for us, crews, into the network. We've hired and graduated about 930 now. We've got about 600 in the pipeline. We'll be graduating about 150 a month as we exit the year to be a little bit more than that in the last month of the year. And most of our crew bases, about 2/3 of the railroad, maybe 3/4 are in pretty good shape, but we're still tight in a few areas where it's still been very difficult to hire, places like the Great Lakes, Iowa, Nebraska, few places up in the PNW and a couple of spots down between Kansas City and Texas and Louisiana. But we've continued to make progress there. We're doing all kinds of things, probably the 2 most effective -- the single-most effective has been employee referrals. Starting in January, out of 33,000 employees, we've had 13,000 referrals for people who our employees think are good candidates for us. That's turned into 1,000 job offers. So a fair portion of our overall hiring, which is bigger than just the TE&Y, has come through the referral program. And then, of course, there's other resources that are required to run the railroad. They're all generally in good shape. The 5 critical resources. We've got plenty of locomotives. We've got plenty of freight cars in terms of physical assets. Line of road capacity is in good shape. We continue to make targeted capital investment and will. And our terminal capacity is in good shape. You can see that in terms of our public numbers. Our car dwell has really not fluctuated much above 24 hours. We'd like it to start with a 23, but 24 is still not a bad performance for us. So the thing we're still focused on in fixing is our crew base. Kenny, you want to cover the markets?

Yes. Sure. If you look at the slide, this -- at the top, it says fourth quarter volume to date, you can see that our volumes are up 4% year-over-year so far. And bulk for us -- our bulk unit, again, just to remind you, is the ag business also with our coal business, it's up 1%. We've seen some pretty good strong movement on our coal shipments. We talked about a couple of wins we had earlier in the year. And then our grain and grain products is down a little bit. I'll call it grain products up and grain a little bit down. And then our forest -- I mean, our fertilizer business in food and refrigerated, both together are down around 7%. Our industrial business is really strong. We've got a lot of good growth coming out of our metals and minerals business. That's up 16%. We've talked about some business development wins in that area on the metals side. So we're excited to see that growth there. On our energy and specialized business, it's up 5%. And then we're keeping an eye on our petrochem business. Our plastics and industrial chemicals business is down 2%. As you can imagine, we're starting to see a little bit of softness now in our forest products. And again, let's call that both lumber and the paper business, it's down around 15% so far year-over-year. So keeping an eye on that. On our premium business, so our intermodal business and our autos business, it's up 7%. And we're seeing the impact of restocking from finished vehicles. That's up significantly. Some of that is also driven by business development wins, but it's up around 26%. So strong wins there. Auto parts is a little bit flat. So a little bit of difference there. And then our intermodal volumes, up 5%. We've got some easy comps in our international intermodal, and I see us up very significantly. And then on our domestic intermodal, we're seeing some impacts from the parcel business. In the last earnings review, we talked about it being down around 16%. It's a little bit higher than that as we sit here today. So those are the markets. And then I talk to you about some BD wins. If you go to the next slide, I just want to talk about the growth that we're seeing. And I need to really make this clear, we've got Swift on us now coming January 1. We've got Schneider. But our end game is to really make the pie larger. It's not just the movements of those tables. We love having them on the team. But the real vision is to grow that business and compete against over-the-road truck. We're going to be improving the terminal capacity there over the next couple of years, over 1 million in lifts that we're expecting to see. Very excited about Twin Cities. We've been talking about that for a while, 100,000 lifts now. We feel good about the fact that we've got both international, intermodal going in there and domestic intermodal today. By the end of the year on our Inland Empire, 75,000 lifts like we stated. We feel good about filling out that capacity, and we will fill out that capacity. Tomorrow, I'll be going to Chicago for our grand opening for our Global 4. And so there, we'll have our ag transload facility there that's opening up. Also, we're going to have some wide-span cranes that we'll also be opening up. So really on the offense in terms of growth when we think about both the capacity for lifts and volume that's coming in there and then the ability to handle that business. We've inserted quite a bit of technology into our intermodal network that we feel good about and that we're excited about. Precision Gate Technology, we call it PGT. We've seen roughly 65% improvement on the trucks coming into our ramps. And so again, they don't have to stop. That technology reads all the information, boom, tells that truck where to go and pick up that commodity -- I mean, pick up the container. So that's great. And we've seen a larger pickup of our UPGo app that helps really propel and energize that. I talked a little bit about the wide-span cranes that are coming on our network. And again, we're looking at our intermodal business holistically. We've also inserted more equipment in there. And so you see the reference to the chassis that we're investing in, which is great for growth. And then we've also, on our own containers, our UMP EMAX -- EMP UMAX product, we've also inserted GPS onto those containers. And you can see the 40,000 reference there. So humbly speaking, when we look across the board, there's wins, there's investment for capacity, there's investment in technology for the customer. So we're excited and we're set up to grow. With that, I think you've got some...

I got it. Got a couple of last slides. If you go to Slide 6 with me, let's talk a little bit about our Climate Action Plan. We are within a handful of days of publishing the 2022 Climate Action Plan. I want to highlight some of the things that we've done over the course of the last year from our last plan. First thing is we've conducted a pretty extensive climate scenario analysis. What that does for us, and you'll see it in the new Climate Action Plan, it helps us over the course of the next handful of decades kind of understand what environment are we going to be in, i.e. how big is the lift? Are we going to have some tailwinds or more headwinds in terms of achieving our goals? We committed through the business ambition for 1.5 degrees Celsius -- to achieving 1.5 degrees Celsius. There's about 3,000 businesses in that initiative. And one of the commitments that we've made is to go back to the Science Based Targets initiative and relook at our 2030 objective in the context of 1.5 degrees Celsius. So that work is underway. I imagine it's going to change our target, probably not make it any easier. Another part of that commitment is to have a solid target to be neutral net-zero value chain greenhouse gas emissions by 2050. We've turbocharged our locomotive modernization. We did 120 this year. We've got over $1 billion committed investment for the next 3 years to do 600 incremental locomotives. And we also purchased some battery electric locomotives earlier this year, committed to, they're not delivered yet, so that we can test battery electric in yards and see if that's viable technology. We partnered up with The Nature Conservancy. It's our fourth pillar in our Community Ties Giving Program. And we've launched with The Nature Conservancy 3 nature-based solutions. They're in Nebraska, California and Texas, and they include things like grassland and wetland restoration, groundwater recharging. If you read The Wall Street Journal yesterday, there was an article in there about California doing some groundwater recharging. We're a part of that team. And then also protecting threatened habitat species. We are the first U.S. Class I railroad to become a TCFD supporter. And in 2023, we've committed to publish our political giving report so that we can be completely transparent about how our political giving supports or doesn't support the Paris Agreement and then be very transparent about what we're going to do about any inconsistencies in that giving. So there's a lot going on in there. If you go to the Slide 7, that's going to be the last slide content we've got. Why are we bullish? Why did you hear Kenny talk so confidently? It's because as we look into 2023, we think we're well positioned to outperform not just industrial production, but the railroad industry in general. Why is that? We've got the best franchise. You can see we serve all the growing population centers west of the Mississippi. We also serve wonderful generation markets like the Gulf Coast petrochem franchise, the bread basket of the United States, and we're doing a hell of a good job on business development through Kenny's team. So bottom line is we look forward into next year. We think continuing our commitment to PSR, continuing to price ahead of inflation and continuing to drive the engine of business development, leveraging our franchise, leveraging what we're good at, being consistent, reliable, that's the recipe. It's the recipe for success, Justin.

All right. Well, thanks, Lance. Thanks, Kenny, for those opening remarks. And maybe to get things kicked off, you gave an update on volumes and how the network is running. But if you just look at the quarter-to-date trends, are you still comfortable with the guidance that you provided for both volumes and the OR this year?

Yes. We're not going to change any guidance, of course, right now. Clearly, we are remaining comfortable on what we said at the earnings release after the third quarter. There's a lot of moving parts in there, right? It looks like there's some headwinds, although there continues to be tailwinds that we can take further advantage of. There's more coal volume than we've been shipping. We've shipped more of it, but there's more to be shipped. The grain season has kicked off. It's very long. I mentioned earlier that shifting from the river to our railroad has caused us a little bit of congestion concerns, but they will be short-lived. There's still great year-over-year opportunity when it comes to the finished vehicle side. Even as things like housing slows down, there's still strong rock in construction material demand. So net-net, I think we still believe in what we said for the fourth quarter, although there are a few more headwinds than we thought there would be.

Okay. Got it. And the other hot topic right now is obviously the ongoing negotiations with the labor unions. We now have 3 unions that have not ratified the contract. So I just wanted to get your latest thoughts on the probability that we see a work stoppage, what your updated thoughts are there. And if we do see a work stoppage, how you would anticipate that to play out and how you prepare for that like we did in September.

Yes. So lay of the land, we've got 7 unions that have ratified. We have 3 that have failed ratification, and we have 2 that are in ratification votes. The 7 unions that have ratified, they're something like 25%, maybe approaching 30%, of our employee population as an industry. The 3 that have not ratified, they're something like 25% again to maybe near 30% of the population. The ones that are ratifying right now, they're at about 45% of our employee population, the transportation craft. So it's very important to let that transportation craft vote go. They -- we will know that outcome by November 21, I think, is their final date. I'm disappointed that we have unions that have not ratified. It is a very good deal for our membership, for our employees. Cumulative general wage increases of 24%, maintaining a platinum health care plan. There's a requirement to negotiate on property for some work rule changes. But candidly, there are work rule changes that we will couple with quality-of-life job changes like scheduling unscheduled work. And again, I think that's going to be far better for our employee base. So net-net, the argument that you see in the newspaper is boiled down to, "I can't get a sick day if I'm sick." Well, the way our -- all of our agreements have been negotiated over decades is our employees enjoy the best long-term disability benefit in the industries. After day 4 of being sick, for half a year, you get 60% of your wages covered. And some of our crafts have negotiated for 70% for a full year. It's a benefit that virtually no other industry provides. In return, our unions for a long time have said, "It's okay for us to go each day that we're ill without pay because we wanted wages and we wanted this other benefit." But the course of the last handful of years, that's turned on its head. Our employees no longer like that trade. So we're going to have to negotiate with them regardless of this round on adjusting that trade and thinking about how we're going to pay them for sick days in the context of it's really already reflected in the wage base. In terms of go forward, we're working actively with the administration in Congress. The backstop is Congress passing law, legislation that imposes a deal. I hope we don't get there, but I'm more anxious about that. And it looks like that's becoming more and more probable. I still don't think it's probable that we get a strike. I think Congress acts before a strike. A strike is in nobody's interest right now, but that's still possible. So the most important thing now is let's see what the transportation crafts do. Hopefully, they ratify. If they do, that's good momentum. If they don't, it's extra pressure to make sure that Congress acts before status quo runs out in about the beginning of the second week in December.

Okay. Any questions from the audience? Ted?

Lance, the issue of capacity is certainly politically charged. And it almost seems to me it's [ Patrick Stewart's ] definition of pornography, I can't describe it, but I know it when I see it. And then you're sort of seeing the Amtrak cases, you're seeing it with the KCS with that magic carpet rides [ reduced ] it. How do you -- the numbers you have sort of show looking back what you've done, but when there's question in the public sector about what capacity is out there, and this is really a macro question. How do you -- how does the industry go out and explain the art of the possible there? It seems -- and it's -- obviously, it's incredibly complex. But I think more and more, it needs to be understood.

Yes. That's a great question. And it depends on who in the public you're talking to is what lands, right? Sometimes you can talk to really numerate people, and all you got to do is talk about, our railroad requires about $3.5 billion in capital a year for both keeping the doors open, maintenance capital as well as targeted productivity or safety or efficiency or growth initiatives. Those are gigantic numbers, sub-15% of revenue, but there's maybe 1 or 2 other industries in the world that invest routinely that kind of capital. So for numerate people or people that are tuned into that, they'll listen to that and go, "Oh, yes, okay, I get it. Capital is very precious for you. It's a gigantic asset base, $77 billion of asset base. And that's -- you don't move that needle easily, and you got to be careful how you're deploying the capital." In the case of what you pointed the CP-KCS, they cheated. They showed a 75-minute segment of moving through about 1/8 of their route in Houston visually. And it looked easy. Hey, let's fast forward the track image recorder on a locomotive. You get through no problem, right? No -- there's no capacity issue here. We open that aperture up to their full route, and their full route takes about 11 hours, right? And it shows that in order to get through Houston in about 75 minutes, there's a lot of dwelling and queue management on either side of the city. So it just depends on who you're talking to. I also find we constantly have to have conversations with passenger agencies, whether it's a city's commuter agency or Amtrak because they lust after the private property of a railroad. And we have to help them understand, hey, you know what we care about, we've been around for 160 years. We've got right of way that if we give it up, is never coming back. And it's our lifeblood. And we make money and we reward our shareholders and we grow community by moving freight. So while today, you might want to use some of that capacity for passenger services, our highest best use is freight. And there might be a way for us to use it and scratch your itch, but those are very, very hard conversations. They take a long time to figure out because we're not going to give up private right of way to scratch somebody's itch over the next 10 years. I didn't answer your question because it's an impossible question to answer, but I told you kind of what we talk about when we're talking about capital.

That makes sense. But just sort of maybe one other piece, the proverbial debate in all asset-based networks is building the church for Easter Sunday, whether you're building to surge or today's surge is tomorrow's base. Obviously -- and I'm obviously focused on intermodal. And it's a very long horizon there for planning, acquisitions, zoning and what have you. How do you really decide how -- what point of the parabolic curve you're aiming for to -- because obviously, you've got -- capital is scarce. It's expensive. How do you decide where on the growth curve you want to be?

Yes. So it's safe to say we do not build with long-term capital dollars, the church for Easter Sunday. That -- when we think about investing in the 5 critical resources, line of road and terminal last a long time. If you put it in the wrong place -- it's a boat anchor for a long time. And so we're very careful and prudent and use a lot of modeling to figure out where do we need to put iron in the ground literally. And we won't build that out far in advance of need, right? Where we can build out capability a little bit closer to the edge case is in things like crews. We've -- that's been demonstrated to us here. When we run the network tight and you either get a surge or you get some network events that really beat you down, it's very hard to recover when you're running tight. The economics look great when it's smooth sailing. When it's not smooth sailing, the economics get destroyed pretty quickly. So our perspective is we're going to -- we're postured to be more thoughtful about making sure we're adequate in the crew world, in the staffing world. And there's still, I think, all the reason to not get over our skis, ahead of ourselves on the hard capital world, the dollars in the ground.

And the only thing I'll add to that, Ted, is you've seen over the last, call it, 18 months or so, maybe 2 years, we've been very thoughtful about looking at underserved markets. And so Twin Cities is an example of that. And that's scalable. So you talked about growth. I mentioned that 100,000 lift capacity. If and when the team grows beyond that, we'd like to invest more in that. Same thing with Inland Empire. I talked about the numbers there. If and when we grow that, that's scalable, too. And there are other markets that we're looking at all across our network to say, "Hey, where can we grow? Where can we attack over-the-road trucks and really penetrate those markets?" So that is -- you need to hear that, that is happening all the time.

Yes. And Kenny -- the other part that's important about what Kenny just said is different for us in the course of the last handful of years, and that is we started both of those at very small scale and pop up: popped up Twin Cities at 20,000; popped up Colton at 40,000 or 45,000. Those are -- it's like testing a market before we put $100 million in.

Lance, you made a comment earlier, you're still comfortable with the guidance, but there are some additional headwinds. If I think back to the prepared comments you had, there's some near-term congestion issues. You called out lumber as an area of weakness. You called out domestic intermodal, specifically parcel business, that's been weak. But maybe either one of you, Lance or Kenny, just comment about where you're seeing those additional headwinds as we move into the fourth quarter. And maybe any update on peak season or lack thereof?

Yes. Candidly, I'm not sure if I remember a peak season, Lance.

You haven't seen one in -- since you've been in the job?

In the last 2 years. So I'm not going to -- and I mean that kind of honestly here. But some of the other areas, we're just going to keep an eye on is just areas like our petrochem business. We are -- and I talked about that in my remarks, we are seeing a little slowdown on a year-over-year basis, a couple of points. And so we want to make sure that there is no tie in the housing starts with that. Again, domestic intermodal would be an area that we're going to look at, to just keep an eye on that. Our parcel shipments, and this is to your peak season comments, it's down a little bit more than it was even during our last earnings. And so we'll keep an eye on that. And then on our bulk side, there's just an opportunity for us to capture more demand there with our coal and grain.

And rock.

And rock. And I feel really great about what we're doing with rock, and that's an area of growth, and we're seeing that. And just -- I know you asked about the headwinds, but again, there's just a lot of pent-up demand on the automotive side. And you couple that with some wins that we've had, Justin, I feel good about really trying to exploit the areas where there is growth, and rock and autos will be one of those areas where we pivoted and have put resources up against it. And we're seeing that growth pop.

And I guess transitioning to that point on the business wins. And I guess it was Slide 7 where you talked about the positioning of the business into 2023. What's the economic environment that you're planning for next year? Is your base case a mild recession? And if that's true, is that an environment where you can still grow volumes and improve margins?

Yes. Why don't I start, and then I'm going to ask you to fill it in, Kenny. So we're not going to call a recession. But clearly, if you read anything about next year, the reports are getting more pessimistic, not optimistic. So the -- what's making next year hard from a planning purpose is there's some macro and micro trends that really favor Union Pacific. Natural gas is going to be high. So we're -- coal, we anticipate is going to be strong demand through most of next year. That bucks a long-term secular trend. But for next year, it looks pretty darn good. We think with the infrastructure bill, rock is going to continue to be very strong and good next year. Because of all the automotive headwinds this year, we think automotive has an opportunity to be good. And consumers are still sitting on a pile of cash, right? They're collectively sitting on, depending on what you read, north of $2 trillion to $3.5 trillion or $4 trillion ahead of the cash they had in 2019. They say they're very anxious, and interest rates are clearly destroying demand in the housing start world, but consumers are still pretty flush and still spending. So there's just a lot going on next year that's hard to call. My -- our estimation: we think we're going to beat the industry at growth because onboarding business development wins continuing to develop business, and some of these very narrow kind of micro impacts on our book of business that are pretty sound.

Yes. Only a couple of things to add to that is -- so the macroeconomic indicators are changing a little bit. So for example, you look at industrial production, it's not positive for next year. So I don't want to portray that. But it's changed. It was 1.5 points negative. Now it looks like it's going to be 0.5-point negative, which is a positive for us. So the environment is moving around with this, and real question is time and how long will this last. I was with a group of lumber customers here recently, and they said, "Well, it's not that the housing market is completely dead because there's quite a bit of formations that have been built, and they need product. But they don't necessarily want to take these large positions with rail." And so that makes me think when will it kind of soften and firm up, and when can we see the housing markets pick up again. So it's still moving around quite a bit.

It's a very hard year to call. It's as hard a year as we've seen in some time.

Okay. Any other questions from the audience?

I'll preface this by saying it may not be a fair question.

Well, then don't ask it.

How do you -- and this is [indiscernible]. How do you reconcile 1.5 centigrade with the increased coal?

Yes. You can't, literally. The increased shipping of coal right now is a very, very narrow -- it's a very narrow phenomena driven entirely by high natural gas. In the long, long run, it might pause 1 or 2 or 3 units from closing down on their schedule. I don't think it does a lot more than that. I think what it really shows is if the United States doesn't get its act more fully together in the transition and reasonable and truthful, factual transition planning, we're in for a tough ride for consumers because I think coal continues to go away. And now you're faced with the next best alternative from a cost perspective, and it's natural gas or whatever else it is on the dispatch curve, and it's more expensive. That's happening and just going to happen more. I don't think coal sticks around for a long, long time.

How do you think about helping some of those grain customers taking grain from the river to the rail? It's -- as you mentioned, it's driving some congestion. But is this an opportunity to help out your customers drive pretty healthy pricing on these types of moves while supporting your overall focus on your own returns and margins? What are some of the moving parts besides it's driving a little congestion, which is -- [ sounds like a bad thing? ]

Well, it sounds like a bad thing because it pisses me off, right? I mean I want to continue to recover the network in its entirety for all customers. But you pointed out just right, it is a good thing. We are in a position to be able to help our customers because of our franchise, right? They came to us because we have a wonderful shot from the Great Lakes, from the growing regions down to the Gulf. We have to be careful because with our constrained crew base, there's limited capacity. And if we wholesale shift to grain, somebody else is -- who we've committed to, is having a bad time. So there's a lot of moving parts there. Kenny?

Yes. We -- you hit it on the head. We've got to be clear-eyed about it. We can't oversell the capacity. And candidly, it's a short-term solution for us, we can provide the customers. But it also provides us a little bit of margin improvement moving that product to help out the overall network. But the main thing is just making sure we get the capacity right.

On the new business wins for next year, obviously, with Schneider, this is a change in their rail partner. But for the other wins, are those coming from truckload? Or are those coming from your rail competitor? And is there a way to kind of put a number around total new business moving into next year from a carload perspective as we think about the company-specific opportunity for growth?

Yes. So let me start off just talking about the vision. The mindset is not to go out there and swap share or to trade share with other competitors. Our vision, overall, really is to go after the truck business or the new markets, emerging markets. So let me give you an example of that. Emerging markets like renewable diesel, those are areas that -- those are new markets we've just gone in and been very aggressive on the origin side of the business, landing as many origin sites, and we feel really good about being able to do that. We also have to, where we can, come up with these destination solutions. And so we've done that where we can pitch and catch. That's an ideal scenario for us. And then there are other markets, again, emerging markets that may seem mature, but there's still a lot of investment and growth in there. So like our petrochem markets, for example. 5 years ago, we talked about the $200 billion that was invested in those markets. And we've been right along with our customers winning those new pieces of business, winning those expansions. And so although it looks like it's kind of rail-centric, those are -- that's also an emerging market for us also. Then you look at markets like our premium business. Finished vehicles business, there are still new entrants in those markets that are moving truck. And we're taking full advantage of our own network, selling that network to grow that business. And so we're seeing growth there. And again, you've heard us say, and you heard me talk about it a little bit earlier this morning, we're thrilled to have Hub and Swift and also Schneider on board. We also like our EMP UMAX, and the real end game is to grow that overall pie, not to just trade the share. That's why we're doubling down on the investments with the technology that we have, whether it's PGT or the GPS on the units and everything. So I can't size that for you, but I want to make sure that everyone in the room knows that we are equally enthusiastic about our carload growth as we are in the intermodal business.

Amen. And we shouldn't ignore the value that we're driving for dray drivers, truckers on our ramps on the intermodal product. That Precision Gate Technology, the UPGo app fully integrated into trucking companies' own applications and ELDs, that's a game changer, right? I mean 60%, 65% less time on the ramp, fully roll through, paperless access. Truckers -- we poll truckers that use our ramps all the time, and they're telling us now, "This is awesome. This is a great experience. I want more of it." When we're a preferred place to do business, we get the most efficient truck, our service product enhances, and it's a self-fulfilling prophecy. That's all in the war on taking trucks off the highway.

Okay. Got it. Any other questions from the audience? One in the back.

[indiscernible]

100%.

And who do we contact [ for that? ]

You can contact me. But the people -- there's a person that reports up through Rahul Jalali named [ Ashok. ] But just -- you can contact me directly, and I'll point you to the right person.

Come to us and we'll get you the right spot. We have at least a couple of large trucking companies that are integrated via API into our network.

And just to simplify that, they can still use their own network. We connect then through their network. So you heard me talk about the UPGo app. We still can connect in -- through those apps to whatever the OEM or trucking company is.

It's a great question.

Can we maybe talk about truckload conversions and what you're seeing? And where does service need to be to drive an acceleration in truckload conversions? And how long of a lag do you anticipate? Do the service need to be better for months, quarters? How do you think about that lag?

Kenny, why don't I start? And the short answer is service long term needs to be better than it is right now. The conversion cycle is really dependent on what's going on in the truck world and in the overall demand world. We saw, even when we weren't performing well through this year when trucks were tight in the first half of the year, there was a lot of demand for our service. People still wanted to use it. In an environment like we're in right now where trucks are loosening, our service product clearly has to be better and be more competitive.

Yes. I'd love to see it in those mid-70s on-time percentage number. We've seen it improve sequentially and slowly, but sequentially here over the last several weeks on our intermodal network. There's still just a ton of truck business out there that's ripe once there is a more consistent product out there, and we've got all the tools and the capacity to go after it, which is very encouraging.

Yes. What our customers tell us is it's not so much about the speed of our service product. It's about the consistency of our service product. And when they say that, they also care about spread. We publish a precise number. A lot of our customers also think it in terms of a day late is different than 3 days late if you're on a long-haul rail.

And with Schneider coming online in January, would you expect an immediate step-up -- sequential step-up in volumes? And how does that impact the service recovery? Do you feel like you can still improve service metrics sequentially as you onboard that business? Because it's obviously a significant amount of volume.

Yes. We actually do. We -- just to kind of step back, we are spending, I would say, a very intensive amount of time, both internally, making sure we're prepared and also with the other customers on our intermodal network to make sure we are prepared. We're doing that on a weekly basis. And so to get in the weeds here for a minute, whether it's the contractors at the ramps, whether it's literally how many train starts we're going to need, yes, we'll make sure that we're prepared for that network. And you've heard us talk about all the investments here in some of the terminals on our network. Yes, we would expect a step-up in the volume sequentially when they come on in January, and we're prepared for it.

We've got a game plan that's detailed by week in conversion, prepositioned intermodal wells, completely understood T Plan. Some of that T Plan is already converting. And the reason why we're confident that service product can get better as we bring that business on is Schneider will allow us to increase train starts in the intermodal network. The density will be there. And that gives things that are having a hard time getting a ride today and missing out have more predictable ride. So we actually think the metrics in the intermodal world have a tailwind as we introduce Schneider because of the impact on the T Plan for the intermodal world.

Okay. That's helpful. Just checking to see if there are any questions. We've got a few minutes left. I want to...

[indiscernible] It feels like on-time percentage [indiscernible] as a target. It still feels pretty...

Underwhelming.

Yes. What's the challenges to just get things to arrive on time here? Like I know [indiscernible] but it's just -- feels like a pretty good number [indiscernible].

Well, so let's go back to the conversation about building a church for Easter Sunday. What typically happens, we'll have a length of haul that's, call it, 1,000 miles on average. And there's a lot in the outdoor factory that can go wrong there with very limited alternative routing in the grand scheme of things. If you're a truck, there's almost unlimited alternative routing. If you're us, a little different. And so when you hit 75%, what you don't see is how big are those tails or how much are we missing by. And when we're running the network really well, 75%, 80%, 85% with average lateness being just a handful of hours and getting the van on ground so that a customer can hit their reservation window, perfectly adequate. Because typically, what a customer will do is say, "If your schedule is to get the container on ground today at noon, I'm going to commit to you, I'm picking up that container tomorrow at noon. I'm going to plan in 24 hours. I'm very comfortable with that." So when we're running at even 75% or 80%, we can hit those kinds of numbers with high predictability. What makes it hard to get to 95% or 100% is the capital investment, the redundancy that it would take to do that repeatedly, at least in today's world, today's technology. And we're just not -- we're not smart enough yet to use alternative investment like better modeling technology or whatever it is, AI, machine learning, that can help you get around the physical impediments that the network represents, right? So that's kind of it in a nutshell.

Yes. Let me just say something, and we've done this with rigor when we've talked to customers and had interviews with them. And I just want to hit hard what Lance said a little bit earlier. And in those interviews, whether it's commercial team, operating team, neutral parties, they really have said, "Hey, it's all about the consistency." And a good example of how we think about it is the customer doesn't feel the averages. They feel the outliers. And so Lance talked about it. If it's 3 days outlier, if it's -- but if you've got a really solid type average, they can build a supply chain around that, and that's consistent for them.

Can't be 50%, right?

Yes.

Maybe last question just to wrap up on head count given the focus on that number right now. If we're in a recession next year, and let's just say it's deep recession, rail volumes are down low mid-single digits, would you expect your head count to be down by a similar amount? Or just given the service challenges that we've been faced with here during the pandemic, would head count be flat? How do you think about managing resources in that type of environment, hypothetically?

Yes. So over the medium, long term, we still anticipate head count to move with volume but not one for one. We fully anticipate that. Having said that, short term, we're still focused on making sure that we get all of our crew boards up to full staffing and what we would consider on the lower end of miles and starts. What that means is by agreement, we can take a board and staff it at high miles or starts. That means that board is really turning hard, and people are making a lot of money. A lot of our employees like that, but it also drives them hard. There's a lot of work there. Where you can staff it at low miles and starts, employees are earning a little less money. They're -- but they're working a little less, and there's a little bit more predictability in their lives. So we're going to drive our boards down towards lower miles from higher miles. We're going to try to get our [ OTS ] boards back so that instead of furloughing out onto the street, we furlough into a relationship that's closer to UP. And in all of that, presuming there's growth next year, I still think we're going to be not one for one in terms of what happens. If there's a big deep recession, it gets a lot harder. We're going to try to do everything we can not to furlough employees, but that is still a tool. And if it's deep enough and hard enough, it's a tool we'll still need to use.

Okay. Great. Well, in the interest of time, we're going to wrap things up there. But Lance, Kenny, thanks again for being here with us today.

Thank you, Justin.

Appreciate it.

Yes. Appreciate it. Thanks, guys.