Welcome to the Union Pacific Unified Plan 2020 Investor Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr.
Rob Knight, Chief Financial Officer for Union Pacific. Thank you. Mr. Knight, you may begin.
Thank you. Good morning and welcome to today's conference call to discuss Union Pacific's Unified Plan 2020, which is a new operating plan that implements precision scheduled railroading principles. With me here today are Lance Fritz, CEO and a few of our new leadership team members. We have Tom Lischer, Executive Vice President of Operations Kenny Rocker, Executive Vice President, Marketing and Sales and Lindon Tennison, Executive Vice President and Chief Strategy Officer. We realize the timing of the call is not ideal today being Yom Kippur and I apologize and unfortunately we did not have many options for the call.
I will kick off the call today by saying a few words about the new operating plan and reiterate our financial guidance and then turn it over to Lance, who along with Tom, will provide more details on our plan. By now, I'm sure you've seen the press release and the Form 8 ks we issued Monday afternoon announcing our Unified Plan 2020. I'm sure you also recall the investor conference that we held back in Omaha back in May. During that meeting, we discussed a number of initiatives that we are undertaking to achieve productivity gains in the coming years as well as opportunities to further grow volume and price. As you will hear shortly, our initiatives have evolved.
We are now ready to move forward from piloting precision scheduled railroading principles to a full scale implementation. We are calling this new operating plan Unified Plan 2020. At this stage of the implementation, we have not yet quantified the magnitude or the timing of the savings that we expect to realize from the new operating plan. However, we do anticipate significant benefits to be realized as the implementation is phased in across the network. Therefore, we are not changing the financial guidance at this point that we provided at our May Investor Conference.
We continue to guide to a 60% operating ratio on a full year basis by 2020. We also remain fully committed to the longer term goal of reaching a 55% operating ratio after that. In addition to expected efficiency gains from our new unified plan, we will continue to see productivity improvements from our other G55 and 0 initiatives. And we expect positive annual volume growth and pricing above inflation to also be contributors to achieving our operating ratio goals. Turning to capital spending.
Our guidance remains unchanged that we will remain at or below 15% of revenue in the coming years. As we make further progress in the rollout of our Unified Plan 2020, we will provide periodic updates regarding expected benefits to our costs and capital spending expectations. Following our prepared remarks this morning, we will take some time for Q and A, but please keep your questions to the topic of our new operating plan as we plan to wrap up this call within the hour. We will of course discuss general business topics during our Q3 earnings release next month. So with that, I'll turn it over to Lance.
Thank you, Rob, and good morning, everyone. By a number of measures, it's evident that we have not made the kind of progress I expect in improving our service and productivity performance in our recent months. We're not meeting the expectations of our customers and we know we can be better. I believe a large part of the problem is attributed to the complexity in our network transportation plan that has emerged over time compounded by significant changes in business mix. Unified Plan 2020 is a way of addressing that network complexity.
In a nutshell, it's precision scheduled railroading principles implemented on the UP network taking into consideration the unique characteristics of our franchise and our base customers. Some of you may be wondering why we are announcing this change now and not back in May at our investor conference. Recall that in May, we discussed a pilot of PSR principles that we call blend and balance. The pilot included blending train types and balancing crews and locomotives in our Pacific Northwest to Chicago quarter. We learned a lot from that pilot and now believe that a more unconstrained implementation of those concepts and other PSR principles is warranted across our entire rail network.
As we said in May, we aren't shy about adopting best practices from other railroads. Considering the three factors I just mentioned, the complexity in our current network, the lessons learned from our blend and balance pilot, and what we've learned from PSR implementation at other railroads, we think the time is right for a broad implementation precision scheduled railroading principles on the Union Pacific. Shortly, you will hear more details. But first, I'd like to speak to some of the recent changes to our leadership team. Tom Lischer is our new Executive Vice President of Operations and he is with us here today.
Tom has 23 years of experience in Union Pacific's operating department and I have complete confidence in his ability to lead the implementation of our new Unified Plan 2020. Among Tom's many responsibilities, I've asked him to look closely at challenging and changing the way we lead and manage our operating workforce. I believe there are many tasks and activities that we ask of our workers that make their jobs more complex and less efficient. I've asked Tom to identify how we can not only streamline our operations, but also remove low value and unnecessary work. I believe this will increase workforce engagement and productivity by allowing employees to focus on activities that really matter and create value for our customers.
We also have Kenny Rucker here today, who is our new Executive Vice President of Marketing and Sales. Kenny replaced Beth Whited, who is now leading our Human Resources and Labor Relations organization. Kenny is a 24 year veteran of Union Pacific and most recently led our Industrial Products business team. Kenny is going to do a great job working with our customers through this transition. And finally, we have Lindon Tennison, who is named Executive Vice President and Chief Operating Officer and assigned responsibility to lead our network planning and operations organization.
Linden has been with the company for 26 years, including the last 13 as our Chief Information Officer. As one of the longest serving executives of the company, he has the unique insights needed to develop and lead company strategy, while ensuring we are appropriately leveraging new technologies. As Head of Network Planning, his team is responsible for identifying and overseeing the changes we will make to implement our Unified Plan 2020. I believe that combining the strategic planning and network planning organizations is the best way to enable the success of both organizations while bringing new and creative perspectives that we need to be successful in the transition. There have been several large implementations of precision railroading.
Each has taken a different form and ours is going to be no different. That's why we're calling our implementation Unified Plan 2020. The original use of the term unified plan dates back to the mid-2000s. Like today, the first unified plan was a clean sheet approach to redesigning our transportation plan by the people who execute the plan, our operating workforce. Today, we're using the same process to implement precision scheduled railroading principles.
Before I turn the mic over to Tom to provide more details, I want to be clear that our implementation of Unified Plan 2020 will be done safely, collaboratively and thoughtfully. We will protect and enhance the record setting safety performance that we've achieved in recent years. We will work closely with our customers and other railroads as we make changes to our transportation plan, and we will be thoughtful as we strive to enhance both service reliability for customers and operational efficiency. In summary, Unified Plan 2020 is our path forward to secure our place as the industry leader in safety, service and financial performance. I'll now turn it over to Tom Lischer to give more details about our implementation plan.
Tom?
Thank you, Lance, and good morning. First of all, I'm very excited to be leading operations for Union Pacific and to begin the job at a time of such great opportunity to make positive and impactful changes. As was mentioned earlier, Unified Plan 2020 is fundamentally an implementation of precision scheduled railroading principles in a manner that fits our network and the needs of our customers. Like other PSR implementations, it is a change in operations that shifts from moving trains to moving cars. Along with increased car velocity, it emphasizes reduced locomotive and car dwell and balancing resources.
Balance is achieved by taking advantage of the natural flows of trains across the network. Where possible, we will combine current service networks to create longer general purpose trains. The outcome is a simplified network that improves reliability for our customers while reducing operating costs and investment requirements. The plan is also designed to improve more predictable work for our employees. We've already begun the implementation plans around October 1.
We will begin our Mid America corridor, which is our north south routes along the eastern end of our railroad from Wisconsin through Chicago onto the Mexican gateways in Texas. We are starting now to communicate these changes with our customers. The rest of the network will be implemented in 3 or 4 later phases. While the exact timing is yet to be determined, we expect that the initial implementation will be fully completed across our entire network by the end of 2019. I intentionally use the phrase initial implementation because that's what it is, the first steps of implementing a more efficient network.
From there, we will implement follow on changes where we will build on the initial progress and achieve further gains in service reliability and operating efficiency. We believe that we have the in house talent and expertise to implement the Unified Plan successfully. A number of our employees in operations and network planning worked with other railroads to integrate interline services with those railroads as they implemented PSR. I'd like to also directly address a couple of questions that I'm sure many of you are curious about. First, at this time, do not have any plans to close any switch yards or convert any hump yards to flat switching.
We do expect to minimize car classifications and increase car velocity on the railroad, which reduce costs and create more capacity in our terminals for future growth. As we progress through the implementation, we may determine that certain yards are no longer required or that operations can be significantly reduced as compared to today. We will adjust our plans accordingly as the implementation progresses. Also, we continue to see a need to complete the construction of our new Brazos Hump Classification yard in Texas. In addition to providing the capacity that the yard will be instrumental in streamlining our switching operations in our Mid America corridor.
2nd, while we do expect to see reduced labor, locomotive car and fuel expense from the Unified Plan, we have not yet established specific goals in each of these areas. We will be providing further information regarding our goals and expectations over time. In close, 1st and foremost, we will be continuing to improve upon the record setting safety performance that we have achieved in recent years. Our implementation will be thoughtful and thorough. We will communicate closely with our customers as changes are made to the current transportation plan, and we will incorporate lessons learned from our early phases of the implementation into the subsequent phases.
In summary, our goal is to successfully implement our Unified Plan 2020 over the next 15 months in a manner that enhances safety, service reliability and operating efficiency. Now, I'll turn it back over to Lance.
Thank you, Tom. And I need to make a correction. I mistakenly called Linden our Chief Operating Officer when I introduced him as opposed to our Chief Strategy Officer, which is his official title in his role. So with that, let's open up the line for your questions. As a reminder, please keep your questions limited to the topic of the Unified Plan 2020.
Thank you. We'll now be conducting a question and answer Our first question will be coming from the line of Scott Group with Wolfe Research.
This is Ivan Yee on for Scott Group. Going back initially to your the management team there, do you think you'd have a higher probability of success if you brought on some seasoned executives from say CN, CP or even CSX that have more PSR experience?
That's a great question, Ivan, and the short answer is no, but we're always looking for talent that can help the team. So if you look at our experience base right now, we interchange and have interline relationships with each of the other 3 large railroads that have been following a precision scheduled railroad philosophy, if you will. And so we've learned a great deal from those interline relationships exactly what PSR is, how it works, how it impacts us and how it impacts them. We also have experience inside the company that has worked for and in PSR Railroads, and we're looking for talent that can add to the juice here. But I think we have the right talent to be able to implement those 7 core tenants and do it effectively on the Union Pacific franchise.
Thank you. And as a follow-up, in every instance of PSR in the past, we've seen a consistent drop in headcount, call it, 20% to 30%. Should we expect something similar at UP under the Unified Plan?
Yes. For sure, we are expecting to see efficiencies come out of implementation of these principles. Exactly what that translates into, we're not ready yet to say. But again, I expect the more efficient movement of freight cars, the more efficient use of locomotives, the more efficient and productive use of our crews to ultimately generate productivity in a substantial amount.
Great. Thanks for the time.
Next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, thanks. Good morning. I wanted to ask a question about timing. Lance, how are you thinking about sort of when you'd expect to see some of the benefits from what you're doing? I know you're starting with one of the pieces of the network first and then rolling it out over a 15 month period.
But should we begin to see benefits in the Q4 or is it something in the first half of next year? Can you give us some help with that?
Chris, that's a great question. And let's start with where the footprint is beginning. Phase 1, this mid American quarter, represents about half of our manifest volume and a very large percentage, less than half, but a large percentage of our overall traffic. So it's not a small toe in the water. It's a pretty substantial move right out of the chute.
We think it's a good one because it's a great test of bulk networks, of premium networks and of our existing manifest network being blended and balanced under these seven core principles. So, in terms of timing, we expect to get started in that Phase 1 sometime around October 1. I expect it will there will be some fits and starts as we implement, and it's just going to be difficult to say exactly when efficiencies and productivity starts showing up in a way that you would see them, although I anticipate that's not going to be a year's long story, that's going to be a quarter's long story and maybe a month's long story.
Okay. That's helpful. And you kind of alluded to it in your answer to my earlier question, but the service dynamic, we had in instances of PSR rollout previously seen some disruptions to service. It could be due to the speed or the severity of the changes that are being made. What are your expectations around service performance, particularly in the early stages of implementing this?
And should we expect to potentially see some volume declines initially as you go through this process?
Yes. So I'll start and then I'm going to turn that over to Kenny for a little bit more Technicolor. But my expectations are, the initial design of the Unified Plan 2020 has occurred at the level where it has to be executed. So the first thing that we're very focused and diligent about is making sure that the plan is an executable plan. Now having said that, it's going to require change from our frontline supervisors, from our local management teams, from our crew base and from our customer base.
And anytime you're asking large groups of people to change like that, there's risk. And so I don't doubt that, eyes wide open, we're going to have some risk that we have to manage through as we make this implementation happen. And with that, I'll turn it over to Kenny for maybe a little more technical.
Yes, sure. First of all, I just want to talk about our approach and how we expect to approach the marketplace. We've been working broadly with the marketplace proactively and we've been highly engaged with them. I can tell you at a broad sense, we'll be sitting down with all of our customers talking about their processes, their efficiencies, their ability to for us to work efficiently with them. And to Lance's point, there may be some customers where we may have to decide that it does not fit in the network.
But our intent and our goal is that our commercial team will work to retain our business and we're going about this to grow volume. We're not going in this that we lose volume or that we can't win.
Okay. Thanks for the time. I appreciate it.
Next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Thanks. Good morning. Thanks for taking my question. So first one, I just want to follow-up on the OR comment at the top of the call. Specifically, is the 60% target what you think the company will be achieved in 2020 as a result of this new operating plan?
Or will there be some new target that is communicated as you start to roll out the PSR process? If you can just clarify that. And then there's just wondering also if there's any improved visibility on achieving the 55% target. It's been more aspirational in the past, but I'm trying to get a sense if you can offer some more concrete thoughts on when that could possibly achieve as a result of this new operating plan? Thank you.
Amit, this is Rob. Our guidance has not changed from what we previously had said and that is to achieve a full year 60 OR by 2020. Now I would say that everything we're talking about this morning is consistent with that and will help us drive towards that and then ultimately to a 55. We have not yet put as a date on when we expect to achieve the 55 OR, but I would say that it is in our sites, if you will, in terms of our aggressive efforts here using the principles of the unified plan that we're talking about and all the other G55 and 0 initiatives that we have previously been discussing, which includes good service, which allows us to get pricing, it allows us to go after aggressive costing opportunities in our company. This or the Unified Plan 2020 is consistent with that.
So no date at this point on the achievement of the 55, but rest assured, we're going to get to the 60 as soon as we can and continue to progress towards that 55.
Okay. Just one follow-up for me. If you look at PSR at CSX more recently and other places, CapEx reductions have been a big part of that. Also asset and land sales have been a big piece of that. Any you've targeted kind of 15% of sales as the right CapEx number for you guys now.
Is there an opportunity to cut that down as you focus on asset utilization in turns and how you're thinking about asset and land sales, which have obviously been a a historical part of the implementation process? That's it for me. Thank you.
Yes, Amit, this is Rob. And our guidance, as I said earlier on, the capital spending is unchanged and that is at 15 percent of revenue or less, which actually I'm very proud of over the years, we've done a great job of being very disciplined in our capital spending to get it down from what was historically higher levels than that 15% marker down to that 15% or less number. So we'll continue to keep that philosophy in terms of being as disciplined on our capital spending as we can as we roll out the Unified Plan 2020, but no change in terms of our guidance on the capital spending. And as it relates to asset sales, I would say no change. We've always been fairly aggressive at making the right decisions around our real estate and our asset sales, but there's no sort of imminent transactions that I would assign to the Unified Plan 2020.
The other point I would make is I think you and everyone else knows that our asset sales do not show up in our operating ratio calculation. So when we say a 60% ultimately a 55%, that does not include any asset sales in that guidance.
And Amit, this
is Lance. Just one addition to that. We always talk about our franchise and how it's a unique and very valuable franchise. As we look at that footprint of our railroad, as it stands right now, there's just no obvious place where we've got wholesale change in the amount of assets or the amount of railroad we have that would be better in somebody else's hands than in ours right now.
I just wanted to ask a
follow-up just really quickly. It may be a silly question, but what is exactly transformational about this plan? Because the OR target has stayed the same, the CapEx target has stayed the same. There's just not a lot of detail on this call in terms of what's transformational. So maybe I'm missing it, but if you can just help us in terms of how what you're doing is actually going to translate to the returns in the business in 2020 that's different from what you laid out 4 months ago at the Analyst Day?
Yes, sure. So I'll start and then I'll ask Tom to give a little more technical on that answer. So what's transformational about this is how we're going to design the transportation plan itself, how we're going to execute the service product for our customers. We're going from a focus on trains to a focus on car and car movement. We expect a fair amount a large amount of productivity to fall out of that as a result.
We should see much better utilization of locomotives, much better utilization of crews, much better utilization of cars, and there's all kinds of costs that are related to those utilizations that will be realized. But Tom, maybe you can give a little more technical color on what's transformational for the network.
Yes. So this transformation from moving from trains to cars will spin the cars quicker, which the outcome of that is a much better service product and a quicker car velocity. We've the tenants of our blend and balance pilot, we've shifted that. That was a train look, a train look in the sense of train size. We've shifted that to how do we move the cars quicker.
We have examples out there where we're gaining efficiencies in more train service by just designing it differently in our network, where we've taken a daily service, we move the cars quicker, which reduces the number of locomotives we need, the number of crews we need, and we actually get larger trains out of that just by redesigning how we do it. So we're starting with the car first and working it backwards toward the market.
The next question comes from the line of Brandon Oglenski with Barclays.
Lance, I guess, we just went to your analyst meeting back in May in Omaha, and I think these things aren't put together haphazardly. But this seems like a very big change in strategy, and yet the financial targets aren't changing. So along with a lot of executive changes at company, so can you just tell us what drove all this change in the last 3 or 4 months? And was this board directed or were you guys just looking across the universe and saying, our plans for May aren't actually stacking up to what
we thought they would achieve?
Yes, that's a great question, Brandon. So, I'll take you through the thought process and it wasn't a last month or a 2 months ago thought process. We've talked for probably a year now or more about testing these principles in Pacific Northwest last October, so roughly a year ago. And in launching that, we were intending to learn what would it look like if we tried to use some of the precision scheduled railroading principles, but also held to some of the constraints that we put on ourselves like multiple service product types and some operating practices that we were still holding dear to in the field. What we learned in that process and maybe we didn't communicate this clearly enough in May is that there's definitely something being learned there.
There was definitely value in blending and balancing the network, but we constrained ourselves too much in the implementation. And then the other thing that we've learned over time is if we look at our performance as a railroad, I would consider us not reliable and consistent enough for our customer base in terms of our service product. There are periods where we have a fantastic service product and then periods where that fades. And that's, I think, because we have an old transportation plan design that was overly complex and as a result, a bit fragile. And so that's not an moment from last month or the month before, that's a realization over a period of time.
And as we really dig down and understand from our own experience and others what PSR looks like and will do, we're convinced that focusing on car movement and some of the other tenants, the 7 of them, that are the basis for PSR, that it actually is the next step in our evolution of running a safe, reliable and efficient network. So that's the sum total of what's driven us here. The reason why you're not hearing any new or additional targets is we're just not ready yet to put those out. We think this helps us get to a 60% and ultimately a 55%, perhaps quicker, but right now, we think 60% by 2020 is still an appropriate target until we change it.
Okay. I appreciate that. But when we've seen this type of plan implemented at other railroads, what typically happens is a pretty drastic reduction in labor costs and relative labor expense. And I know that was asked earlier, but what commitments are you willing to give to your shareholders today on where you think the largest cost reductions are likely to be achieved given this new plan?
Yes, that's a great question. So we would expect there to be cost reductions in locomotives given locomotive utilization. We would expect our crew utilization to improve, so those costs should improve as well. And we will see freight car utilization improve and those costs should improve as well. I also would anticipate that we'll be more efficient and productive in our management and overhead structures.
So you'll probably see benefits there as well.
Okay. Thank you. Next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Hey, good morning. Maybe Lance, just building on that question around kind of organization here. You've talked a lot about how the approach to design and the approach to operations management is going to change. Can you maybe add some color around things that are on the table around staffing in the organization, the operational support functions, where decision making is going to be at the corporate level versus in the field, the number of districts, that kind of thing, to help us understand kind of how deep this change is going to be?
Sure. Those could all be on the table, right, and are all part of the discussion, whether it's how many regions we have, number of service units, etcetera. The focus that's going to drive those is the consistency and reliability of the service product, the simplification of it, making sure that we have a service product that can be executed for our customer base and that generates efficiencies. So as has been true in history, it's true now. We're just going to be doggedly determined and laser focused on efficiencies and productivity.
We think this is a mechanism that helps that, but there are other mechanisms in our G55 and Xero that is going to continue to be driven as well.
But I guess as you think about the go to market functions with the way sales and marketing is organized, consolidating some of the service products, is that going to be a broader change for the marketing function as well? Like how should we think about that collaboration between sales and operations going forward and how that could be different than it's been in the past?
Yes, David, that's a great question. And there could be impacts on all kinds of things like what our work looks like in customer care and support or what our work looks like in supporting a premium ops function or fill in the blank? I mean, Kenny, there's all kinds of things that we do between sales and marketing and operations that their workload and their work type might change.
Yes, certainly. We have a small number of what I'll call boutique or very specific type service products out there and with our new change in how we're approaching the market from an operation perspective, Clearly, there is an opportunity for us to consolidate or minimize some of the added costs out there. And we'll be aggressively looking at those opportunities as we continue.
All right. And then maybe just one last follow-up, Rob. Quickly, can you give a sense for when you might be able to give us some more updates on the financial targets?
Well, I would anticipate that we'll periodically give updates as we roll out the unified plan. So I'm not committing to changing our targets, but I would just make a comment to your question and to other questions we've had here. We're not doing this for the fun of it. We're doing it with an eye on it being the most reliable right product for this network that will drive additional financial opportunities as we roll it out. So we're not changing our targets at this point in time, but we certainly have every expectation that there will be benefits as we roll this out.
All right. Thanks guys. Next question comes from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.
Thanks. Good morning everyone. When you considered your approach to implementing these PSR principles, did you consider kind of ripping off the band aid like some of the others have done while doing this versus the more kind of slow and balanced approach that you've taken? Are you confident that you can see the benefits roll through effectively with this approach?
Yes, Ravi, we have discussed all kinds of different ways to implement this change in our T plan. And to your point, just trying to implement it across the entire railroad all at once, we thought that the risks of long term value creation and near term value creation were greater in that than the benefits that we saw to us and to our customers and our shareholders. And I also want to make sure that nobody thinks that we're somehow phasing this concept in over a very long period of time. This first piece that we're going to be putting in place is larger by itself than 2 out of the 3 PSR railroads right now. And then we'll, in 3 incremental phases, take on the rest of the network.
And it's not going to be at a slow deliberate pace. It'll be at a rapid pace, as rapid a pace as the team can absorb and the customers can absorb.
Great. And just a follow-up, can you just update us on what kind of conversations you've had with your customers right now? Are they excited or are they nervous? And also, do you expect a competitive reaction to this from your restaurant competitor? Thanks.
Yes. So we thanks a lot, Robbie. We've been speaking with our customers all along and I can tell you that in the marketplace we have received some positive comments overall. The main thing I want to just interject is that we have been intensely and highly engaged with them. We've been proactive with them and it's been at a very detailed carload level and those conversations will continue.
Yes. And Ravi, your other question about competitive reaction, we focus on running our railroad to the benefit of our stakeholders, and I'll leave it at that.
Great. Thanks. The next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Good morning. Thanks for taking my question. I was wondering if you could maybe talk a little bit more about the pilot you did. And really what I'm looking for is some specifics in terms of metrics of fluidity, so train starts, velocity, on time origination, on time arrivals. Could you give us a sense of the before and after on those metrics?
And then maybe if you could talk about train starts for the overall network, where you're at now and when you think maybe we could start to see that number come down?
Yes. Okay, Allison. So I'll start at a higher level and then turn it over to Tom for a little bit lower level. So when we did the blend and balance pilot up in the Pacific Northwest, what we were really trying to do 1st and foremost was balance the network while maintaining large train size and while maintaining virtually all of the individual boutique customer commitments we had. So we really constrained ourselves from lessons learned perspective, overly constrained ourselves kind of retarding success.
What happened in that pilot is we did get very large train sizes and then we also got very difficult work for our teams to execute in the field. So a second lesson learned was we didn't have the people that were executing the work design the work the plan itself and that's something else we've changed in this implementation. So I'll ask Tom to give us a little more technical in terms of how that test worked and what's going to be different.
So if you look at how this has been implemented in other areas, it has been kind of a top down. We've started from a car level, a local execution level as we roll this out. We think that's very important with our commercial team aligned with us that we build the program like that. That is a lesson we learned up there. And then make it a simple executable plan.
Lance alluded to that as well. So when you think about low value work, we have worked through our team and we continue to work through our team to eliminate low value work. So we have time to work through our processes to implement this thing. Lots of lessons learned, plenty of debriefing that we've walked through on that piece, and we're optimizing now around the car versus the train side. The train is an outcome and an enabler, and another outcome is going to be our we see with locomotives and cars or crews.
And so, Allison, what we expect to see is we're going to you will see us talk about different metrics as this rolls out. Car velocity probably becomes more important to us than train velocity. Terminal dwell, car terminal dwell will be very important, remain important. Locomotive utilization will remain very important to us. And we'll be educating our stakeholders on those measures as we're rolling them out.
Okay. And just a follow-up question. Are there any parts of the system or any franchises that are not compatible with precision railroading? I guess, I'm trying to understand if you're fully embracing the model as we've seen it implemented at some of the other rails or if there's if this is more adopting some of the key principles, but maybe not a full implementation?
Allison, I anticipate this is a full implementation. Every railroad that has PSR also has portions of their network that are dedicated to customers that can support it and where it makes sense. So for instance, we have a very valuable, very important premium intermodal network that supports some very important customers and that will remain in place. But having said that, there's other parts of our domestic intermodal network that will be blended into this overall general purpose train. So the short answer is, it's going to be a full implementation that makes sense on our franchise.
Okay. If I could just sneak one more in. So the example that you just gave us with the premium, very important intermodal customer, Why I mean it seems like precision railroading would be beneficial in terms of serving a customer that is very service sensitive. So just curious why you don't think it would be implemented in that example?
It will be implemented in the network. And what I'm saying is that particular train schedule is probably going to be worked into the overall T plan as opposed to deconstructed. There's some very specific train schedules that exist today and they're a fraction of our overall transportation plan and they will remain. And then we'll work product into them.
Great. Thank you so much.
Yes. The next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.
Yes, good morning. I think you're asked a little bit about this. I didn't catch the response. But on the Board involvement, I know you Lance, you said you've been, I guess, working on this since last October. But what was the Board's role in this in terms of saying you really ought to prioritize this or and how do you think their role might be looking forward in terms of if you show success on this or if you get bogged down and don't show success?
Yes, great question, Tom. So our Board is very active and very engaged. And as you would imagine, like every Board of a publicly traded company, they're responsible for oversight of the corporation, inclusive of its strategy. So as we've built out a strategy, which includes this Unified Plan 2020, they've been educated on it, they've pushed and probed, and they've supported it. And now their expectation is we'll execute it and execute it well and follow the kind of time frames and set out expectations for them in an execution plan that is successful.
We anticipate the exact same thing, and they're holding us accountable to that.
Okay, great. And then I guess a more granular question on the new Wisconsin to Texas corridor, the Mid American corridor, how do you think about that October 1 date? What is it specifically that you're implementing? Is it a new train plan? And so you really that's the primary thing that you'll have cars run on different trains, you'll run presumably fewer trains.
And how would we think about what that new train plan has? Is there a significant reduction in train originations or what the kind of what would the feel of that new train plan would look like? So maybe just some thoughts on October 1 and what happens then?
Tom, you want to take that? So over the last couple of weeks and the next couple of weeks, we're going to be implementing this plan. There's over 250 individual changes that we have worked through from that execution level and ownership level in our field organizations that the team is working through and how they're going to implement that going forward. So there is some significant plan changes of how we're going to be doing that from a number of trains and such like that productivity measures. I don't have that for us today, but we'll be implementing those here going forward.
When you say 250 individual changes, are those train design changes or what are you referring to?
So it would be train design changes as well as car design changes. So how do we move the cars faster with less touches, overhead some of our network facilities and ultimately, get a better product. An example of that is we have a customer that we took their cars and we kept them out of 1 of the terminals that will reduce 36 hours on our cycle time. We implemented that here recently, and we already got positive feedback from that customer that cycle time has come down, and they're looking to grow the business with us potentially. So there's 250 individual changes like that.
Yes. Okay. And is it reasonable to think train starts go down initially or is that the wrong way to think about it?
Tom, it's feasible. I think what's the focus is more predictable train starts, more predictable local service, more frequent movement of cars. And so what we should see first is dwell should be moving, we should see a better utilization of our crews. Now there might be some hiccups because we're asking for people to fundamentally change their behavior, right? We historically have been trying to keep trains moving on line of road.
So we've eliminated a lot of what are called work events on our network. A work event is where you stop a train on line of road to drop off or pick up cars. Under this new plan, there are more work events on line of road. So train velocity might be negatively which is what customers care about. So it really is a fundamental kind of deconstruct and reconstruct of our tea plant as you asked in the beginning.
Next question comes from the line of Justin Long with Stephens.
Wanted to circle back to Phase 1 of this rollout that's being completed in Mid America. Could you talk about when you expect that phase to be completed? And just going back to the timing of starting this, what was the rationale of starting October 1 instead of waiting until after peak season that I think almost everyone in the industry is expecting to be pretty robust?
That's a great question, Justin. And I'll start with the last question and end with your first. The why not wait a while is because we've become frustrated and eager to make a move in the consistently consistency and reliability of our service product. So we feel a sense of urgency to get moving. And what was so interesting is when we brought the team together to first design what Unified Plan 2020 could look like.
They started chomping at the bit of wanting to implement the changes as soon as they could. And so the game plan really has been largely timed out based on the people who are going to do the work wanting to get at it right now and not wait. We think we can do that successfully even in the context of peak season. We've got a good solid plan around it. So we're not concerned that, that gets disrupted.
And help me again on your first question, I don't remember it.
When you expect Phase 1 of the rollout to be complete in Mid America?
Right. So I anticipate that we're fully implemented 1st part of the Q4. We're working the bugs out. And I would think sometime in the first quarter next year, early, mid, depends on how many bugs we get, how much broken glass there is, we go to the next phase. And after that, all those phases should be complete in 2019.
Okay. That's helpful. And second question I had, how do you expect this plan to influence margins across your different segments? I know you don't break this out, but as we just think about the rate of change going forward, is there more of a margin opportunity in a particular business like intermodal? Or do you see the rate of margin improvement being pretty consistent across the board?
Justin, this is Rob. And as you pointed out, we don't break out the margin by group, but I would just say there's no story behind that. We're focused on improving our margins at the enterprise level and at every individual line item. So I wouldn't try to slice that any finer than that.
Okay, great. I'll leave it at that. Thanks for the time.
Next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Hey, good morning.
Thanks for taking my questions. So I just wanted to start with going back to the hump and switch yards with no plans to convert or close any of those at this point. A lot of the stuff is initial stages right now, but at least with other PSR initiatives, we've seen them begin with a wide range of conversions, ultimately some switch back. But with Mid America being about 50% of manifest volume, I thought we might have seen some of those initially. So when would you expect to take or possibly evaluate making those steps from a yard perspective?
Yes, Brian. So we'll be evaluating our assets, network yards, regional yards, hump yards, all along the process. And if we find that we have changed the fundamental utilization of a yard to an extent where we need to consolidate it out of the network, we'll do it. Still need to be utilized.
Now some of them are going to
utilize a little differently. I think still need to be utilized. Now some of them are going to utilize a little differently. I mentioned work events. We typically would not do work events in our hump yards Under this new plan, we've got a number of work events designed into each of the hump yards.
So that's a different kind of work, and we might find that it uses the assets differently. We need to redeploy our assets a little or change them. But right now, we don't see that, but we've got our eyes wide open to it.
Okay. And one of the other things you mentioned, Lance, was the amount of broken glass. Clearly, that's been a hallmark of past PSR plans. This one's obviously a bit different. What's I guess what's the feedback from regulators who are still kind of getting ahead around the last one and how that was rolled out?
Did you get any input from them? How focused do you think they are on this initiative? And I guess ultimately, how much broken glass do you think there will be to clean up here?
Yes, Brian, thank you. The regulators are very aware of most recent implementations of PSR. They're, I'm sure, going to follow us very carefully and closely to see what our customer base is saying about the implementation. And our appetite is all about making customers understand and have a transparent view of what we're asking them to do and the changes that are going to happen to them and that we're definite risk. I anticipate some of that risk will occur even as we try to mitigate it and we'll just have to see what that is and we'll manage it appropriately as it's occurring.
Okay. Thanks for your time. Yes. Next question is from the line of Jason Seidl with Cowen. Please proceed with your questions.
Thank you, operator. Hey Lance, hey Rob, 18. When you look at the ultimate impacts of precision railroading, a lot of times it's improved the service level a tremendous amount. Do you envision being able to grow some of your business lines even more as service improves specifically the intermodal section?
Yes. So we do anticipate at the end of the day, this is the way for us to have a more consistent, reliable service product and that will open up more markets to us and growth opportunities. So at the end of the day, yes, I do believe that this is a growth engine as well as an efficiency generating engine. So I think you hit it right on the head.
I also want to go back to a comment that you made a little bit about bringing potentially somebody in from the outside and that you guys are always looking for talent. When you pitch this to the Board, how concerned was the Board that we didn't have anybody here at UP that has presided over a precision railroading operation. And then could you possibly lean on some of the other railroads for some of their expertise as what happened in the past being that all railroads don't want another railroad to clog up?
Yes, you're exactly right on that last point, Jason. We all want our interline partners to be fluid and effective in executing their plan. So when we look at the team, we are all convinced, Board and management, that this team is capable of affecting this plan. We understand thoroughly what the tenants are. And while this is our first implementation full scale of these precision scheduled railroading tenants, they are not a mystery.
And we also have very good working knowledge of how PSR works given our relationships with our interline partners at the CP, at the CN and at the CSX. Now having said that, again, we're always looking for talent that can be added to the team that will help. We've got Cindy, she's going to be a help. We've got others on the team that have experienced this deeper in the organization, they'll be a help. And to the extent we see an opportunity to add to the team, we will.
All right.
Well, thank you for the time as always.
Yes. The next question is from the line of Hiram Nathan with Daiwa Asset Management. Please go ahead with your question.
Yes. Hi. Thanks for taking
my question. It's Jairam Nathan. The just on the benefits as from this plan here, as more railroads kind of implemented, how much of the benefits do you think will kind of stick and how much will that kind of go out, go away in this pricing?
Well, Jaram, let me take a stab at that. If I understand your question, we anticipate the benefits that we accrue to the company of precision scheduled railroading being implemented to be reflected in our operating income and in our margins. And I don't think that has anything to do with our pricing philosophy, which is we price to the value that we represent to the customer base and we're going to continue to do
that. Okay. And just on incentive compensation plan, do you anticipate you need to make any changes there while implementing the following implementation?
You know, Jerome, another good question. And we've looked at our incentive comp plans and we think they're incenting the management team the proper way. If you go into the proxy, you'll see our long term plan is built around return on invested capital and it's augmented by an operating income growth modifier. So we've got, in the long run, focus on how efficiently we're utilizing assets along with making sure we're growing at or above our competition writ large, the S and P Industrials. And then in the short term, our executive incentive plan is built around operating ratio and operating income, and we think those are the right things to measure in the short term in terms of are we being efficient in executing the business.
So we think we got the incentives right and they'll work in this context as well.
And finally, based on an earlier answer to your earlier question, so we shouldn't anticipate any charges, asset impairment or any other charges in the near
term? That's correct.
Thank you. Next question is coming from the line of Ben Hartford with Baird. Please proceed with your question.
Hey, good morning. I want to come back to a quick point made earlier about the timing of the implementation here during peak. You had expressed dissatisfaction with service and obviously you guys have made some declarations about market constraints and implemented some surcharges. Just wondering if the dissatisfaction around service is a specific allusion to some of the challenges earlier in the quarter, particularly given the reasonably soft freight environment at least on a relative basis to trying to determine whether we should decouple that dissatisfaction from some of those market declarations is in reaction to some of those challenges earlier this quarter? Yes, I think, is in reaction to some of those challenges earlier this quarter?
No, Ben, I wouldn't read too much into the kind of granular timing. When I talk about being dissatisfied with where we are, we expect to be the best railroad in North America, the best freight railroad in North America. And our service product right now is okay and that's not the best. So that's unacceptable to us. And it has nothing to do with something that happened last month or the previous month or we anticipate is going to happen next month.
Okay, that's helpful. Thank you. Yes. Thank you. I would
like to turn
the floor back over to Mr. Lance Fritz for closing comments.
Yes. Thank you very much, and we appreciate all of your time for joining us on this call. I am confident that the Unified Plan 2020, in conjunction with Union Pacific's diverse franchise and our industry best employees, is going to allow UP to remain the industry leader in safety, service and financial performance. We look forward to talking with you again in October during our Q3 earnings conference call. And with that, thank you all and have a great