Okay, everyone, I think we're going to go ahead and get started here. If everyone please take their seats. Got a few housekeeping items we'll take care of first. I think most of you know me, Mike Staffenbiel, Assistant Vice President of IR here at Union Pacific. Thank you all for coming today. Thank you for joining us. Nate, webcast is up and going? Welcome to everybody on the webcast as well. Thank you for joining us. We have several UP team members here today, so if there's something you need during the day, just please let one of us know and we'll do whatever we can to assist you. I do have a few logistical items to take care of. First, let's do a very quick safety briefing. We will be in this main ballroom throughout the day.
The exits are to your right as you sit facing the stage. In the unlikely event that we have to evacuate this room, the exits are, again, to your right, down the stairs and out the hotel. We should be in good shape there. If inclement weather should develop, the hotel staff will direct us downstairs to a lobby. In the event of emergency, I will call 911. Let me know. We have several UP team members here today that are qualified in CPR. I'll have them just raise their hands at this time so you kind of know who they are. Many. If you haven't found them already, the restrooms are located back behind the stairs, towards this way. There's another set of restrooms downstairs by the check-in of the hotel if you need to access those as well.
As for the meeting itself, the meeting agenda is in the pitch book, behind tab two, that you all should have. We'll follow this agenda as closely as we can today or closely as possible today. There will be time for Q&A after each of the segments, particularly to focus on the topics which are just covered in that segment. We'll have a more open-ended Q&A with the senior team at the end of the program. When we get to Q&A, because we are webcasting, we would ask that you raise your hand, wait for a mic to come to you. We have several mic runners here today, also let us know your name and your firm that we can capture that information along with your questions on the webcast for those listening in. We will also be making some forward-looking statements today.
These statements are subject to risks and uncertainties. Please refer to our cautionary information regarding forward-looking statements in tab one of your pitch book. It's also posted on the webcast presentation right at the front for those listening in. Along those lines, as you probably have already noticed in the materials, we have not yet included the slides that accompany Rob Knight's financial presentation. We'll distribute those slides and post them on our website prior to Rob's update later this afternoon. That should be around 3:40, depending on how close we are running to schedule. With all that, we're going to start by showing you a short video. I will turn the stage over to Lance Fritz, our Chairman and CEO. Nate, can you start the video? Welcome to the 2018 Union Pacific Investor Day.
Thank you for joining us here in Omaha, and thank you for joining us on the phone. The title of the video clip that we just saw is called Forging Our Future, which is perfect. That's the theme for our conference today. What you're going to see this afternoon are a number of our company leaders, and they're going to share how we are Forging Our Future. Those stories are going to run the gamut of our business activity. You're going to learn a little bit about how we put our transportation plan together and execute it, how we efficiently plan for and execute capital spending, how we grow the business, and how we use technology to enhance the business. Throughout the day, you're going to hear a number of common themes. First, that we remain absolutely dedicated to a safe, high-service product for our customers.
Second, that we are going to improve our operating ratio through our G55 and Zero initiatives, including annual improvements in volume, price, and productivity. Third, you'll hear how we're going to leverage innovation and technology to better serve our customers, improve our service product, and continuously produce productivity. What you're not going to hear so much about today is the now.
You've seen ever since early March the service improvement that we've made and the fluidity improvements that we've made. You're going to hear a little bit about that, we are well on the way to serving our customers in the manner that they've come to expect from us, we're just not going to spend much time on it. Instead, today is going to be all about building your confidence in the future of Union Pacific to match the confidence of the management team. This conference is a great time, it's an opportune time to talk about both the challenges and the opportunities that we face. The world's changing pretty dramatically. We all see it, right? Consumers can buy almost anything online, whether it's with just a few clicks or even today, you don't have to touch a thing, you can just speak to something named Alexa.
With just a few more clicks, you can track that product. You can buy anything you want and have it delivered when you want, anywhere you want. Our customers are expecting the same level of service for their several thousand dollars per car purchases that they make with us. Reality is that customer expectations are changing rapidly and they're changing radically, our competition isn't standing still either. All of us in this room have some form of driver assist on our vehicles, I would imagine. Autonomous trucking and platooning are not some far-fetched dreams. Pilots for both are happening all around the world. You know that. You see it. You read about it every day. While that innovation is being embraced by us as consumers, the communities that we serve are raising their voice on things like blocked crossings and safety and environmental issues.
Those are the same communities where our employees work and live, where our kids go to school. Their voices are impacting regulation and legislation, both locally and federally. Ultimately, those are the communities that are going to determine whether or not we have a social license to operate in their backyard. We have to pay attention to their needs as well. In addition to the best employees in our industry, we have awesome leading-edge technology, and you're going to see some of that we're using to address these changing realities. We'll tell you stories about all kinds of pilots that are underway at Union Pacific. One-off pilots aren't the end game. What we're trying to create is a posture of constant evolution. Our vision and our mission help guide us on that path, and our values kind of dictate how we travel the path.
The vision is pretty straightforward. We build America. Our mission inside of that vision is that we're a team dedicated to serve. Service is what we're about. In executing that mission, we follow three core values. We hold them dear. We have a passion for performance, which means we want to win, and we want to win with every stakeholder. We hold ourselves to very high ethical standards. That means how we do things matters as much as what we do. We're constantly and relentlessly building our team. Our Six Value Tracks strategy is built on the foundation of that vision, mission, and values. The first of the Six Value Tracks is world-class safety, and what that means to us is records every year on the way to an incident-free or no incidents on the railroad.
In order to make that happen, we incorporate individual accountability, we use data-driven processes and a relentless deconstruct of every incident so we can determine root causes and put in place the appropriate risk mitigation. Second track is excellent customer experience, and that's bigger than the service product itself. That's about anticipating needs, quickly responding, keeping commitments, and providing and offering innovative solutions to our customers. The third track is innovation, and that includes both low-tech approach and high-tech approach, and you'll hear about both today. It's also about building centers of excellence around some of the game-changing technology and analytics that we're deploying. Innovation supports each of the five other tracks as we're building them. As a matter of fact, it's rare that I would see progress on one of these value tracks without an innovation component.
The next track is resource productivity, which is getting the most out of what we've got, like turning cars faster, making assets last longer, squeezing more out of our fuel so it takes us further, and designing processes that help us work better and smarter together. That's the track of our Grow to 55 and Zero initiatives, which also help us make progress on some of the other tracks. Our fifth value track is maximized franchise, and that encompasses everything we do and use to provide our customers with an excellent service. That includes the skill and know-how of our employees, the assets and technology that we deploy, and the service products themselves. Maximizing our franchise also includes a thoughtful approach to market penetration and the competitive landscape and developing new business opportunities.
Finally, our last track, which I think is maybe the most important of the Six, is engaged team. Our team leverages their diverse talents to relentlessly build all Six Value Tracks, and you're going to see some great examples of that this afternoon. The successful execution of this Value Track strategy benefits all of our stakeholders, but most important to you in this room, it generates long-term enterprise value for our shareholders. Our management team's going to speak today on several themes that demonstrate how we forge our future. First up's going to be our operating panel. Cameron Scott, our Executive Vice President of Operations, who's going to talk about service recovery, he's going to talk about safety. He's going to share with you the confidence he has in continuing to provide an excellent experience for our customers while generating meaningful productivity.
He's going to set the stage for more detailed discussions from his team about service improvement, achieving annual productivity gains, and the high-return capital projects that we have planned in the coming years. Next up is going to be Beth Whited. She's our Executive Vice President of Sales and Marketing. Beth's going to provide an overview of our franchise and why we think it's the best in the industry. She's also going to share the economic and market trends that provide our optimism about the future. Beth's going to be followed by members of her team that lead each of the four business groups. Those business group leaders are going to review the trends in their market segments and provide some of the detail on a handful of their commercial opportunities.
They're going to outline where they think we have the greatest growth opportunities and what it takes to capture them. Following Beth is Lynden Tennison. He's our Chief Information Officer, and he's going to lead a panel that goes into some detail on all the cool things that we're doing around innovation and technology. As part of that panel, you're going to hear from our Chief Engineer, Eric Gehringer. He's going to talk to us about the productivity plans he's got for our capital renewal programs. Closing out that panel is going to be Chantel Kruse, and she's going to tell us about how our logistics subsidiary, which is called Loup, is offering new and innovative service products and solutions to our customers.
At the end of the day, I'm sure what you're really waiting for is Rob Knight, who you all know, our Chief Financial Officer. He's going to wrap it all up and kind of outline how forging our future translates into great financial results and increasing shareholder value. Our hope, my personal hope, is that you leave here today with more confidence, with confidence in the future of Union Pacific, and a much better understanding of exactly how we're going to make it happen. I'm going to close my opening comments with a reminder of our most precious resource at Union Pacific, and that's our people. Our people are at the center of everything Union Pacific does. They're the cause and the reason for any success we've had and any of our achievements.
The Union Pacific leaders that you're going to see here today, they're just a tiny fraction of that team, and they are excellent representatives of Union Pacific's entire team. I really wish you would have an opportunity to meet and talk with the entire team, all 42,000. They're a group of very talented, dedicated, hardworking employees and team members who are literally forging the future of Union Pacific. On that note, I'm going to introduce Cameron Scott, our Executive Vice President of Operations and Chief Operating Officer. Cameron?
Thank you, Lance, and good afternoon. As always, I want to start with safety. You have heard me report each quarter our ongoing safety results and the improvement we have been able to achieve the past several years. To put it in a broader perspective, we finished 2017 as the safest railroad in North America for the third consecutive year, setting several company records along the way, and we have every intention of keeping that trend going into 2018 and beyond. It all starts with a promise, a Courage to Care promise we all make to each other, that we will do what is in our collective control to ensure each one of us returns home safe each and every day. As Lance referenced just a minute ago, innovation is vital to how we approach and engage our safety initiatives.
In addition to traditional programs such as Total Safety Culture, we're introducing new and innovative ways to think about safety. One program is called Voice in Safety, which takes safety to the next level of employee engagement, encouraging everyone to put safety top of mind. Another new program is called Mainline Analytics, which uses big data to identify the highest risk track miles and then initiate action to prevent derailments before they occur. These are just two examples. We are proud of the safety improvements we have made, and we will continue making safety job one in everything we do. Switching to network performance, I'm pleased to report we have made significant progress on our operating metrics from where we were just a couple of months ago. Our system velocity and terminal dwell are approaching levels closer to where we were at this time last year.
Our rolling day seven average operating car inventory has declined about 23,000 cars, or a robust 10% from the high-water mark back in March. To put the significance of this number in perspective, 23,000 cars represents nearly 300 miles of track capacity, whether it be on the main line or sidings or in terminals. Inventory is still a little higher than we want it to be. As we continue to reduce car inventory, it results in better network fluidity, equipment cycle time, utilization of our locomotive and TE&I resources, and most importantly, a better service product for our customers. We believe beginning last year, a combination of challenging events contributed to our service slowdown. Included in this was the impact from Hurricane Harvey last fall, followed by a steady pickup in business.
We saw a particular strength in energy-related commodities, which resulted in record manifest volume in our Southern Region. The rollout of Positive Train Control, or PTC, also had an impact as implementation began to extend into our Southern Region. We were slow to take the actions necessary to control car inventory, and our hiring pipeline for new train and engine employees was inadequate in certain hubs. We took a number of actions to help drive our operating improvement. To begin with, we accelerated the hiring of new employees to account for expected attrition and for growth, and we are utilizing hiring incentives where necessary to attract applicants. We strengthened our management processes. Shortly, Greg Workman will discuss how we are enhancing our inventory management system to ensure that cars move quickly through our system without buildups in yards or on trains.
He will explain how we have changed our transportation plan to create more capacity in our Southern Region switching yards, and he will highlight a number of new exciting capital projects that will support longer-term growth and productivity. On the PTC front, we filed an alternative implementation plan with the STB to allow more time and flexibility to problem-solve issues, and we're making very good progress troubleshooting PTC braking events. As we implemented PTC on more and more of our network, the number of times the system stopped trains for unintended reasons increased. Think of these as false positives, where the system triggered an automatic braking event to stop the train even though no operating violation occurred. These events happened for reasons such as telecommunication gaps or software issues that are not uncommon with the new technology. We've been aggressively tackling PTC stops and have made steady improvements.
You can see this in the stop rate, which is a red line in the graph, which measures the number of train stops per 1,000 miles of train operation. You can also see it on an absolute basis. Despite the number of increasing PTC trains we're running each month and expanding our PTC footprint, we're seeing a declining number of daily stop events. We will face further challenges as we finish PTC implementation over the next couple years because more and more of our network will be implemented as trains will be using it. We are confident that our core activities around organized problem-solving, training, and system upgrades will continue to drive the braking event rate down. Shifting to our investment plan, we have a robust planning process in place to ensure we are making the right capital investments at the right time and at the right locations.
It starts with our replacement capital program, which includes approximately $2 billion each year to replace worn assets, to harden our infrastructure, and to improve the safety and resiliency of our network. Next, we invest for growth where we can expect to generate attractive returns. We take both a short- and long-term view of economic conditions and the projected shipping needs of our customers. From that input, we project expected volume growth and business mix changes. We then identify where potential constraints or bottlenecks may occur and what network capabilities will be required to sustain service and achieve productivity goals. Growth investments include new track and terminals and improving the existing infrastructure to be more efficient. It also means additions to our commercial facility portfolio, which includes intermodal and auto ramp facilities and other assets that directly support customers.
As we look out over the next five years, we expect to continue targeting the Southern Region for our largest growth investments. Brazos Yard is a big part of that investment plan, and you will hear more about that shortly. In addition to Brazos, we are expanding switching capacity at our Angleton Yard near Houston and our Livonia yard in Louisiana. We are building new Storage In Transit or SIT yard capacity for our plastic customers. Looking beyond the South, we plan to expand our lift capacity at our LATC Intermodal Terminal in the L.A. Basin and our G4 facility near Chicago. As you can see from the map, there are many more growth projects planned in the coming years. With respect to other critical resources, we plan for the appropriate number of locomotives, freight cars, and workforce required to support our volume projections.
Starting with locomotives, our goal is to maintain the surge fleet in the range of 300 units. The surge fleet is in place to protect network from potential service interruptions like hurricanes and to handle unplanned surges in volumes. We currently have 175 high-horsepower locomotives in storage, and we expect this number to increase as network velocity continues to improve. We plan to acquire about 60 new locomotives this year, which completes a multi-year purchase commitment, and we do not anticipate being in the market for new locomotives over the near-term planning horizon. However, we will continue to use capital dollars to modernize and maintain our current locomotive fleet so it remains reliable and fuel efficient.
From a railcar perspective, we will likely be in the marketplace each year for specific rail freight cars that are in demand, as well as for containers and chassis to support our intermodal service products. We've continued to maintain a workforce of appropriate size to support market demand. This includes an appropriate training pipeline to account for expected attrition and growth. While we expect our workforce to grow with volume, our productivity initiatives will enable us to grow car loads faster than our employee count. We've made good progress achieving gains in operational productivity since beginning our G55 and Zero initiatives. Initial gains were achieved in areas like crew productivity, which includes train length, recrews, overtime, and the elimination of unpredicted starts. We've also lowered mechanical costs by reducing maintenance expenses and consolidating facilities. We've increased fuel efficiency and achieved a greater workforce productivity on our engineering maintenance functions.
Some of our largest gains have been achieved in our capital programs. Our service challenges this year have resulted in negative offsets to some of those gains from previous years, particularly in the locomotive, crew, and fuel categories. Productivities in other areas, like renewal capital projects, remain strong. As service continues to improve, we expect to get back on track achieving annual gains in productivity. We're currently developing and implementing new productivity initiatives that will provide the foundation for future savings. On the right, you can see we have a hierarchy for how we plan to achieve productivity improvements. On the most basic levels, we first target processes and organizational initiatives to reduce cost and improve service. Further up the hierarchy, we look for technology solutions. Finally, we put iron in the ground, as we say, or capital, only when necessary and when adequate returns can be achieved.
You will hear a number of speakers describe the examples of productivity initiatives on all four levels of this hierarchy. They will discuss past successes, future opportunities that are underway and being conceptualized. Tom Haley, Vice President of Network Planning and Operations, will explain how we are using technology to reduce variability events on the railroad. He will also discuss initiatives that are underway to increase resource productivity through process improvements, particularly with our train operations. Greg Workman, Vice President of Service Strategy, will provide more details on process improvements underway that leverage technology to help us better manage inventory, sustain service through unseen fluctuations in demand. Greg will also discuss our investment in Brazos Yard and other capital projects to support the Southern Region's operation and growth plan.
Cindy Sanborn, our Vice President of Operations in our Western Region, recently arrived here from CSX and will share some of her observations and ideas for process and organizational improvements. Later in the afternoon, our Chief Engineer, Eric Gehringer, is going to tell you how we are driving real productivity improvements in our engineering, renewal, and maintenance operations. You will also hear about technology from our Chief Information Officer, Lynden Tennison. After our presentations, I hope you will see that G55 is not only a mindset, but it is part of our culture and is measurable, with significant savings being generated each year. Looking forward, our operating outlook is promising, and our future is bright. We will continue to focus on safety, striving to make progress on our way to zero incidents. We will focus on sustaining our operating improvements and delivering an excellent service product for our customers.
We will also progress on the implementation of PTC on the remaining portion of our network. We will continue advancing a myriad of G55 and zero productivity initiatives to drive margin and returns. Finally, I want you to know that I am confident we have the right team in place, the right resources, and the right operating practices to sustain our service improvement and regain our productivity momentum. With that, I would like to hand off to the rest of our operating panel. Following the three speakers, we will pause for a brief question and answer. With that, I'll turn it over to Tom Haley.
Thank you, Cam. Good afternoon, everyone. I'm Tom Haley, VP, Network Planning and Operations. I've been at Union Pacific for almost 30 years and have worked in both operations and finance. Network planning designs our service products. We analyze and determine the company's needs for critical resources. These include our workforce, locomotives, freight cars, terminals, and line capacity. After safety, our main objective is to ensure we're running an efficient railroad that provides excellent service for our customers. Today, I'm going to review some initiatives underway to continue the progress we've made over the years in these areas. In the rail network, velocity, service, and productivity are all related. While it's intuitive that higher velocity should drive better service reliability, we have demonstrated this relationship, as you can see in the scatter plot of monthly results stretching from 2005 through last month.
While our average train velocity year to date is below where we want it to be, it is up 25% over this time period. We achieve improvement through network design changes, investment, and a relentless focus on improving customer service. We also improve both velocity and service by taking variability out of our network. Variability is our name for the issues that cause us to fail. Removing variability has the double benefit of directly improving velocity and also making our service more reliable. For these reasons, we focus intently on reducing variability in our network. Variability events are those which interrupt normal railroad operations. Usually, these are unexpected and often stop trains. When one train stops, it typically also stops or delays following trains. Cost is lost velocity.
When trains are late, cars are at risk of not making their scheduled connection to the next train, similar to missing a connection when your initial airline flight is delayed. Ultimately, our ability to deliver reliable service to customers is diminished. There are many causes of variability. Some of the largest include locomotive failures, car braking issues, signal issues, track issues, curfews for track maintenance, and flooding events. We track and manage a dozen different categories of variability events. A couple of points on the chart you see. First, you can see by the solid blue bars that we've made good progress in the variability categories I just named. Although 392 events per day in 2018 is still one event every four minutes occurring somewhere in our network.
The second point is that we now have a new variability category we're diligently working on, and that's train stops from positive train control, as you can see in the dashed outline above the 2018 bar. We've demonstrated we know how to do this, and we have ample opportunity for further improvement. Also, as you heard from Cameron, we're making good progress in reducing the PTC stop rate on the railroad in recent months. We have a technology tool that helps our team visualize where and when service interruptions take place. The system segments the entire railroad into five-mile increments and graphically represents the category and frequency of each variability event. That information allows us to pinpoint the source of the largest and most frequent problems. For example, we started tracking flooding events from rainstorms that damage our track.
So far this year, through a wet spring, we've experienced no major flooding interruptions. Our visualization technology led us to locations where we are most at risk of washouts. The solution has been to harden these sites against flooding by improving drainage. Another example of combining analytics with our problem-solving processes is the reduction of train failures in northern Texas. Our variability management tools helped us pinpoint a problem of heavy trains stalling on a particular grade, and then to trace the root cause back to locomotive testing in Nebraska, 900 miles before the failure. We've now cut these failures in half. There are many more opportunities like this all over our network. As we continue to eliminate causes of variability, we will create velocity, better service, and our costs will go down. Another way we're improving both productivity and service is an initiative we call Blend and Balance.
We periodically report progress we've made in improving train length, which is part of this initiative. In 2017, we made further progress by setting train length records in every train type category. We call our initiatives Blend and Balance because there's opportunity to both blend service networks and to better balance our resources, such as locomotives and crews. This reduces unproductive and costly repositioning work as well as idle time. As you can see in the bottom right, we've made the most progress in our manifest network, which handles our carload traffic. This is important because Union Pacific operates the largest carload network in the industry. We've also been able to combine the majority of our auto traffic into other services, such as manifest and intermodal. We see significant opportunity in our intermodal and other networks too.
For example, we're combining bulk and manifest trains, where doing so will result in fewer train starts and a greater balance of locomotives and crews. Our objective with Blend and Balance is to improve productivity while enhancing service for our customers wherever possible. Our approach is to apply people, process, and technology. Each year, we analyze our entire network, one major corridor at a time, through a collaborative process we call corridor waves. These waves begin with modeling an optimal solution. We bring together our service design, commercial, and operating teams, including those closest to the work, who often have the best ideas about how to improve toward the optimum. This process ensures that we take into consideration all viewpoints about how proposed changes will affect costs, network fluidity, and the service needs of our customers.
We are continuing to step up our network design tools as well as day-to-day decision support tools. These efforts will help us make further gains in blending and balancing operations to take out waste and to improve service. Next, I'll summarize some of our fuel conservation initiatives. Fuel continues to be one of our largest cost categories, especially with higher fuel prices. In 2017, we set an all-time record for fuel efficiency. This is a notable achievement since it came at a time when our business mix leaned much more towards premium traffic, which has a relatively high fuel consumption rate, and less towards coal traffic, which has a much more efficient fuel consumption rate. There are a number of ways we're making this happen. As our locomotive fleet is upgraded with new units or through overhauls, we improve fuel efficiency. We also proactively shut down locomotives between assignments.
Today, 88% of UP's locomotive fleet is equipped with automatic engine shutdown devices that turn off an idling locomotive after a certain amount of time has passed. Union Pacific is the industry leader in utilizing distributed power, which means placing locomotives on both the head and the rear of trains, in some cases, the middle of trains, as you see in this picture. This practice reduces friction, drag, saving fuel, as well as enabling longer train sizes through better train handling control. Today, more than half of our gross ton miles are generated by trains with distributed power. Looking forward, the largest gains will be driven by energy management systems or EMS.
These systems are driven by a series of software and hardware applications with the goal of applying the appropriate amount of horsepower, considering the length and weight of a train, the terrain and speed limit along the route, and the train's schedule. We're expanding use of this technology today in our train operations. As these systems mature, they will also be able to control individual locomotives in the train consist, including distributed power units. Software will automatically turn locomotives on and off as needed to maximize fuel efficiency. Imagine integrating energy management systems with advanced dispatching technology. Such a system could see what lies ahead and take action to adjust the speed of one or more trains to conserve fuel. Algorithms could be used to guide these decision-making processes to achieve the best overall outcome for service and cost.
Longer term, we believe positive train control is a platform that we can build upon to achieve significant productivity improvements in many aspects of our operations. The first step is to finish PTC implementation. At the end of 2018, we will have PTC installed on 100% of the required lines in accordance with federal requirements. We will also be approximately 75% implemented. As this work continues, Union Pacific is a leader integrating the energy management systems I described earlier with PTC. Testing of energy management with PTC is occurring live today, although many features require further development. PTC produces immense amounts of data, particularly equipment location information that can be harnessed to drive systems like shipment tracking and better arrival estimates to help us improve our customer service. It will also help us better track and manage our railroad assets.
Advanced computing interacting with PTC can lead to better train control. It will also help us further reduce some of the variability incidents I spoke of earlier. The calculations already embedded in PTC that determine the stopping distance for a train can be utilized to safely operate trains closer together. This can create more capacity and increase train velocity while reducing the need to make significant investments in new track infrastructure. They also allow us to eliminate certain wayside signaling devices. Over time, by applying computing and automation, we can achieve greater productivity in everything from track and equipment maintenance to train operations and better service for our customers. All of these initiatives will require further development in PTC capabilities, they offer great promise in improving productivity, asset utilization, and service performance. I will turn it over to Greg Workman, our Vice President of Service Strategy.
Good afternoon. My name is Greg Workman. I've been at Union Pacific for 34 years, most recently as the Chief Engineer. Before that, I spent eight years as Regional Vice President of Operations for our Southern Region, headquartered in the Houston suburb of Spring, Texas. I am now Vice President of Service Strategy, it is in that capacity that I plan to speak to you today about improving service, capacity, and productivity in the south. My goal is to help the company fully capitalize on current growth opportunities while maintaining service excellence. Cameron mentioned earlier we experienced some deterioration in our operating performance earlier this year, the Southern Region was particularly affected. A contributing factor is the record manifest volumes we have experienced in recent years. We have returned to more normalized levels of velocity and car inventory in recent weeks.
To lead off, I'm going to review some of the actions we've taken to reduce car inventory, increase velocity, and improve our ability to handle additional volume growth in the south. There is a close inverse correlation between inventory and train velocity. If velocity slows, we see cars quickly accumulate in yards and on trains. Rising inventory begins to consume even more capacity, further hindering velocity. Over the past couple of months, we were able to reverse this process through a series of actions designed to increase the velocity and flows of cars through the network. These actions include changing our transportation plan to route cars in a manner that avoids terminals that are above fluid capacity limits. We've worked with our interchange partners to alter routing and blocking arrangements to the mutual benefit of all parties. We also increased throughput by adding locomotive and crew resources in our yards.
To help sustain service on a longer-term basis, we are in the process of enhancing our active inventory management system. Car inventory is best managed at the serving yard level. Serving yards are generally small, flat switching yards that are nearest to customer facilities. They are the gathering and distribution point between the customer and our large regional yards. Previously, we had visibility to car inventory levels for individual customers, but we had no way to view and manage total capacity at a serving yard on a real-time basis. We are now enhancing system capabilities to enable local managers and our customer service organization to view and manage inventory more proactively. Users will soon have a complete picture of current inventory, cars en route, and capacity limits for each serving yard on our railroad.
We are adding dynamic capacity management tools that specify actions to be taken when a buildup of car threatens system fluidity. It will also help us work with customers to manage private car fleets more effectively, with a further objective of increasing car velocity and asset utilization. Some of the near-term actions we have taken in the south to improve velocity and decrease inventory have added cost and pulled more crew and locomotive resources into the system. I can assure you that these are not permanent solutions. Instead, they are short-term actions to force car inventory out of the network and increase our switching capacity. We are now developing solutions to handle greater volume with faster car velocity, all at a lower cost with fewer resources. A big part of that solution is our new Brazos switching yard, which is currently under construction in Central Texas.
It is the first new greenfield hump yard we have built on Union Pacific since Livonia Yard was constructed in Louisiana in the early 1990s. Its construction cost is estimated to be $550 million. The yard is strategically located at the junction of seven major rail lines in South Central Texas. These lines directly connect Brazos to major cities like Houston, Dallas, Fort Worth, and Austin. It also links our four Texas gateways to Mexico with the cities of Memphis, St. Louis, and Chicago. Brazos will be capable of switching 1,300 cars per day, and it is expandable up to 2,300 cars a day. Because of its strategic location, it will enable us to route cars more directly, thus increasing car velocity. Our operating costs will also be lowered as car miles and car handlings are reduced.
Brazos will enable us to shift our T plan to route cars in a manner that is most efficient, thus increasing car velocity by reducing route miles and car handlings. This creates additional capacity at existing terminals, allowing us to handle even more volume growth. Brazos also gives us flexibility as we work with our multiple rail partners in Mexico and in the East to develop the most efficient car blocking plans for interchange traffic. Not only will Brazos lower overall transportation costs, it was designed to be the most efficient switching yard on our railroad. The cost to switch a car at Brazos will be far below any other yard in our network. Along with other line of road and terminal investments we plan to make, Brazos will enable manifest volume growth of up to 150,000 annual car loads over time.
Best of all, we expect the yard to begin operations by the beginning of 2020, just over 18 months from now. We have made or are in the process of making other investments in our Southern Region that also support growth, improved car velocity, and service. This map portrays the major location of these investments. First, you can see that we are constructing two new storage and transit or SIT yards to support our plastics customers. These yards are both greenfield facilities. SIT yards are used for interim storage of plastic car loads between the time of production and the time of shipment to final destination. The Livonia facility was completed in 2016 and was expanded last year. The Angleton SIT yard is under construction adjacent to our Angleton switching yard near Houston. Phase 1 will be completed later this year.
These two new yards increase our total SIT capacity by nearly 40% and will increase the number of SIT yards we operate on our system to nine. We are constructing sidings, double track, and powering switches in and around Houston. These projects will increase train capacity and facilitate switching operations. In West Texas, we are adding run-through tracks, power switches, and switching tracks. These projects will support our energy commodities while facilitating run-through trains in this high-capacity corridor. As in Houston, we are adding sidings, connections, and yard capacity in the Dallas-Fort Worth area for future growth and to enable longer trains. We are building staging tracks at our Eagle Pass gateway and sidings north of Laredo to support Mexico growth, and we are making similar investments in the San Antonio area and our Livonia Yard and near Prime Pointe Industrial Park near Dallas, all to support expected volume growth.
We expect all of these projects to be completed over the next two to three years. As you can see, there's a lot going on in our Southern Region as we prepare for expected volume growth. The projects we are undertaking are all intended to support this growth while making our service product both fast and efficient. With that, I'll turn it over to Cindy.
Good afternoon, everyone. I'm Cindy Sanborn, Regional Vice President for our Western Region, headquartered in Roseville, California. I've been here at Union Pacific since February of this year after spending 30 years at CSX, where I most recently served as Executive Vice President and Chief Operating Officer. I can tell you that I am very excited to be here at Union Pacific, and I'm sure some of you might be interested in my initial impressions since arriving and how my observations compare to previous experiences. I plan to share some of those thoughts with you today. First off, when I came to Roseville, I was very pleased to discover a team of knowledgeable, capable, and engaged employees who are proud of the work they do every day.
I am also pleased to say that I've observed at Union Pacific the same high level of passion and commitment to performance that I've become accustomed to during my career. Very clear to me that safety is firmly ingrained in the culture of this company, and its employees are committed to looking out for one another. I can see why Union Pacific has been the safest U.S. railroad for the past three years in a row. This is also a company that is firmly focused on the customer. When I arrived, we were struggling somewhat to provide the high level of service, speed, and reliability that UP's customers deserve and are used to experiencing. I am pleased to report that service has since returned to more normalized levels, although we still have room for improvement in a couple of our service units' major yards.
We also have very strong process-oriented culture to drive continuous improvement. The company has developed a toolkit of resources known as the UP Way that engage and empower all employees to continuously improve safety, service, and efficiency in their daily work. UP also has great technology resources, which are a wonderful advantage in understanding and visualizing what's going on across the network. As I look across the West, I see an opportunity to improve both service and productivity. Earlier, Tom Haley talked about Blend and Balance initiatives. The objective is to maximize the efficiency of assets and crews by balancing the flow of trains, reducing train starts, and increasing train length. From my experience, this has the effect of increasing car velocity, thus overall service performance to our customers. I see great opportunities for expanding Blend and Balance out West.
At the most basic level, I see nothing fundamentally different about operating a railroad in the West than back East. Both networks are complex and have varying densities of traffic depending on the location. The mix of trains can also be challenging. For example, UP and CSX both have passenger and premium trains operating across the same lines as manifest and unit trains. In the Western Region, I've observed that geography can be a more of intense factor with respect to grade, and that does affect how we operate. The fundamental objective of moving freight cars and providing good service to customers is exactly the same. I think my experience at CSX enhances what has already been done or is being considered here. Railroads are not shy about benchmarking and learning best practices from each other in general. I am very pleased to see that UP is no different.
Hump yard conversion is such a hot topic that it sometimes overwhelms the philosophy behind it. As I said earlier, I believe that philosophy is about increasing car velocity. Hump yard conversion should be the result of transportation plan changes made to improve car velocity. Firstly, a hump yard can be a very efficient means of classifying cars if it is part of a well-designed transportation plan and if it is operated efficiently. For example, if it's necessary to classify a large number of cars very quickly and at one location, a hump yard is most efficient. Inversely, it can be difficult to process a large number of cars in a flat-switching yard during the same amount of time.
It's also important to note that following the integration of Union Pacific and Southern Pacific railroads in the late '90s, UP consolidated switching operations, enabling the closure of some yards and the conversion of other yards from hump yards to flat switching. Today, we are left with three large hump yards in the West associated with about 10,000 route miles. If it makes sense to convert any of these yards to flat switching in the future, we will do so. Lately, I've spent much of my time getting to know the people and visiting various parts of the Western Region. Once again, I am very impressed with what I've seen and have come to appreciate the various strengths of the Union Pacific network. While I've been here for only a short time, I already see what I believe to be numerous opportunities to improve service and operate more efficiently.
I can affirmatively say that many of these ideas are informed by past actions we took at CSX. Of course, I've also observed many great ideas and ways of doing business that are unique to Union Pacific. As I become more familiar with the network, I am sharing my initial thoughts and ideas with a receptive leadership group at UP. As a reminder, I've only been on site for about three months, while it may sound like I'm speaking in generalities, you can be sure that I have many specific philosophies as well as ideas to test and implement. For example, I believe that reducing labor costs and increasing labor productivity also create great leverage for reducing other costs, such as overhead expenses.
In my experience, there are three keys to improve labor productivity through technology: mobility, automation, and predictive analytics. You will hear Lynden discuss innovation in these areas and more later in the presentation. From my perspective, I think about them in the following ways. Mobility allows people to focus on productive activities and spend less time on ancillary tasks such as data entry and inspections. Technology is enabler of mobility. An example we will soon be rolling out is a mobile device that enables car inspectors to enter inspection information in real time while the inspection is underway, instead of recording the results at a later time at a remote computer terminal. Automation is self-explanatory, using technology to perform tasks that are monotonous or costly to perform manually.
You will hear later about how Union Pacific is using computerized technology to inspect rail cars and how drones are being used to inspect bridges and other assets. Finally, predictive analytics helps people to focus on the most important tasks. It also includes an aspect of equipment health monitoring. In this area, we have opportunities to monitor both fixed assets, such as a remotely controlled switch, or movable assets, such as a locomotive. An example is to use this technology to develop a signature or criteria that predicts failure based on past experience. In this way, we will be able to predict when a key component will fail and repair it before it becomes disruptive to operations. It also helps us allocate our labor forces more efficiently, allowing them to focus on performing actual repair work versus physically inspecting an asset strictly based on time intervals.
Beyond technology, another area that supports efficient use of labor falls into what I call structural category. By structural, I mean consolidation of facilities or restructuring the way we handle cars by our transportation plan that improves car velocity and reduces handling. I see some opportunities to consolidate car repair facilities. We've taken a small step in that direction with the consolidation of a couple facilities in Arizona. Blend and Balance is another example of structural change, which I spoke about earlier in my remarks, and you also heard from Tom. To close, I want to say again that after many enjoyable years at CSX, I am very pleased to now be at Union Pacific. I am also confident that my prior experiences will help further improve this great company. With that, I'll turn it over to Mike, and we'll begin Q&A.
All right, we'll get started here with Justin over here, and then we'll go to Mr. Wadewitz here second, and then we'll come over here third. We can kind of get started here. Go ahead, Justin.
Right. Thanks, Mike. Justin Long from Stephens. I wanted to start with a question on PTC. I think all the rails are talking about how they can leverage this technology, but I was curious if you have any preliminary estimate on the productivity opportunity from PTC. Also, as we think about improving your PTC capabilities, what kind of capital investment will be required in order to do this? I just want to get a sense for how much of this is leveraging the existing system versus incremental investment in bolt-on products and services.
Cameron, it should be.
All right. I think you have heard Rob mention before that we think ongoing capital with PTC will be in the $50 million range. We feel that that will be in a ballpark-type figure, maybe a little bit more to realize some of the productivity initiatives that you heard from Tom. Long term, PTC has, we think, some tremendous leverage in putting together a brand-new signal system and running trains closer together. You heard Tom mention that, which could free up a tremendous lot of capacity on the railroad and potential velocity as well.
Tom.
Yes, I wanted to offer two questions. One, if you look at over the last 10 years gross ton miles per employee, the metric seems like it's been more one where you see cyclical improvement related to volume, and it's kind of hard to see a clear trend of improvement in that metric. I wonder, if you look forward, would you expect that metric to improve meaningfully as a result of these programs? Is that a good metric? The second would just be on one-man crew. You didn't really mention that, but there seem to be a lot of things that you'd say, well, that could be coming in the future. Is that something you're optimistic on as you look forward a bit further? Thank you.
I think your last statement on one employee per train inside PTC operations will be a longer-term initiative that Union Pacific has. I think we feel extremely confident that the technology will work efficiently and safely to allow that to become a reality.
We feel very confident in that.
Hey, Tom, in talking about GTMs per employee, I think you all realize that there's a fair amount of mix impact to a measure like that. If you look in the last, call it five or six years, coal dropping by half is a significant headwind, all else being equal in terms of mix of business on the GTM side. Having said that, I think the thing that is most pertinent to pay attention to is headcount per car load. We anticipate being able to leverage whatever growth happens with slower growth on the headcount side.
Question here.
Ravi Shanker from Morgan Stanley. If I can just follow up to the previous response, and maybe take it a step further, how much of an incremental step is it from PTC to going to potentially a fully autonomous train at some point in the future? Is it a base that you can build on or is it potentially a completely new set of technologies? The second question is there a limit to train length from a safety perspective? You guys showed us some pretty impressive statistics, just how far can you push that?
How about I start with train length, and I might turn this over to Tom Haley as well. A good portion of our double track railroad, we're running 14,000, 15,000-foot trains on a daily basis, and we're doing it very safely. From a safety perspective, there is not an issue there. DPU technology, PTC technology enables us to push that train length potential. We feel good where our network allows us to keep pushing train length in that direction. Where we have single track railroad and are restricted by siding length, we will use a variety of analytics to run longer trains and fit other trains inside that corridor. We still think there's a lot of runway ahead of us here on train length. Tom, did you have anything you wanted to add?
No, I really don't.
Ken?
Great. I think Ravi had a second question if you want to-
Oh, I'm sorry. Yeah, that's right
Ravi?
PTC, yes. PTC on autonomous operations. This team is very excited about that opportunity. We actually visited Rio Tinto in Australia, and there is nothing like seeing and touching and smelling to believe that it is possible. We were on board their trains. The technology exists on our railroad today. It is not a brand-new technology that needs to be developed. The reliability of PTC has to be proven out first and become extremely reliable. There will be some additional capital that will be needed to make autonomous a reality. We do believe it is extremely doable in the longer term.
Great, thanks. Ken Hoexter from Bank of America Merrill Lynch. Maybe just a question for Cam and the group on, how do you view the fundamental difference of what we've seen with precision railroading at different rails and the ability to, what we saw with Canadian National, how quick they were able to clean up the backlog and get the service, even before the capital investments. The second question on that would be, given the capital investments you're making in the Houston region and all the other Southern Regions that we just talked about, are there things that you need to do faster in order to clean up the backlog even to handle the increased growth in the interim?
Want to start with Cindy, why don't you tackle that?
Your question, Ken, on precision railroading and what's fundamentally different. Having some experience with that from my Eastern background, I don't see anything fundamentally different. When I think about what is actually put in place, it's really a function of the remarks that I made around car velocity. When you think about the idea of how to reduce and streamline transit, reduce handlings, you take a lot of labor intensity out, and you also have a great faster turn in assets. Those two levers really can drive some great value, and I think in the same time, can also create a compelling service product for our customers. Don't see a lot of difference.
Okay, we'll go Chris, then Jason, then Amit, and then we'll pick up the report.
Yeah, thanks. Chris Wetherbee from Citi. Wanted to touch a little bit on CapEx for a minute, and Cam, you talked about locomotives. When you think about sort of the near term, if you could put a little bit of framework around when you think you might need locomotives in the construct of what you're sort of doing with all the plans that you have. I think maybe taking a step back, thinking a bit about this, a bit bigger picture, how do you think about the needs of capital of the network as you see some of the challenges ahead in sort of getting the service where it needs to be? We've seen CapEx numbers come down, and I'm sure Rob will talk about that a little bit later on, but how are your thoughts?
What's your team asking for, and how does that look for the next couple of years?
All right. On the locomotive side, which is a perfect question, when we say we're not in the market for new locomotives after these new deliveries this year, we do mean that. The capital step up will be small on the locomotive side, and it will be in modernizing and maybe a few extra overhauls on our current fleet. All of that fits very nicely into the guidance that all of you have heard from Rob throughout this year on the 15% of revenue or potentially less. Framework going forward looks very sound on the locomotive front.
Thank you. Jason Seidl, Cowen. Looking at your investing in the future for the next 5 years, obviously you've spent a lot of time on the Southern Region, I guess this is just a broader question. How much more do you envision the Southern Region growing than the northern over that period? Is this more of a case of you just got to catch the south up a little bit?
Our new capacity investments in the south are right in line with Beth and her team on a yearly basis and on a long-term basis. As Beth's team projects more volume down south, with the petrochemical business and plastics plus Mexico, you will see our investment strategy stay on the Southern Region, just like you saw inside that red circle. Again, all of this fits very nicely from a % of revenue basis within Rob's guidance.
Thanks. Deutsche Bank. Just on the discussion about hump yards versus flat switching, maybe if you could help us think about the relative costs of switching between those two within your network, maybe on a carload basis. We think about Brazos, what does that do in terms of the cost per car to switch, in terms of a hump yard versus a flat switching process? Just related to that, kind of piggybacking on Chris's question, is there any way you could kind of communicate in terms of CapEx on a revenue ton mile basis, how much headroom do you have on RTMs before the capital plans that you have in place that you've already thought about and articulated have to be maybe revised higher, which could actually be a good thing given the volume growth.
Last quick one for me is, we've seen the gap between WTI and Brent, maybe this is a question for the commercial team, but would love to understand, to the extent you can, the ability to actually export crude on a large scale along the Gulf, given some of the port infrastructure issues around the LOOP LLC facility and whether they can actually have significant export capabilities out of the U.S. Thank you very much.
I'll turn it over to Tom Haley on the first question, which was hump yard efficiency and a little bit of cost basis, flat switching versus hump yard.
We've looked at it pretty closely. All of our big network yards are large flat switch yards and are alternatives, operationally and with our finance team. A well-utilized, well-designed hump yard can produce the lowest cost per car handle. I'm not prepared to give you a number, but it's compelling that that's the case. Brazos, as Greg said, will be our lowest cost yard and by a substantial amount. That's the hump yard story.
Your capacity or capital question. Particularly on capacity, it is driven, as we mentioned throughout the presentation, on return on investment. If the returns are there for the capacity dollars we're spending, we will do the project, and we will spend the money. I am sure there are multiple ways to look at that from an analytics perspective, but that is what drives us. There was a third question in there, too. Is it just two? Did we answer them?
We capture all those?
We got crude.
Oh, crude capabilities in the Gulf.
Do you want to table that, Beth, so we get to you? Okay.
We'll pick that one up when the marketing groups comes up.
Yeah.
Thank you. It's Sherilyn Radbourne with TD Securities. I guess what struck me in the slide deck was the bar chart of south manifest car switching volume. There's no numbers on that bar chart, but you can see a very significant surge since 2016. Maybe you can give us a little bit of context for the type of increase that you've seen. I assume that that has a pretty heavy energy component, but maybe you can also speak to just kind of the mix of traffic that's driving that.
Okay. Tom?
It's the manifest areas that have grown on us. Chemical traffic, plastics, call it petrochemical, sand traffic, other energy-driven commodities have been behind it.
Brian?
All right, thanks. Brian Ossenbeck with JP Morgan. I know, Cindy, you've only been there for a couple of months, but on the last conference call, we heard a little bit about a transportation plan being changed in the Pac Northwest. It seemed like it caused a bit of congestion. Some things worked, some didn't. Wanted to see if you had any other details you could provide for that. Then just on the PTC, can you give us an update on interoperability? I know we're switching over with Metrolink sometime in July, but it seems like there's some progress being made out in L.A. as well. Thank you.
Yeah, Brian, the PNW project, I'll let Tom talk some specifics about that. That predated me a little bit, but I think the real context behind how we think about Blend and Balance, in addition to Tom's comments, are really, again, about car velocity. There's going to be opportunities. I see opportunities to continue to push on that, even in the PNW area and other areas. I'm real excited about what I see. I get up every morning really excited about the opportunity that I see in front of us here. From a little bit of a historical perspective, if I can, let me let Tom kind of provide that.
Sure. The Blend and Balance is really a good process. It starts with a model, an optimization model that's driven around productivity. We build on collaboration with the teams I mentioned in my presentation. We do it within a good service product. It really plays to our strengths. We've been at this a while. We've gotten trained productivity. We've been developing the Blend and Balance process and the things I just mentioned. The PNW pilot was part of doing that. We learned a lot. We have a portion of the original design in activity out there and a lot of concepts and things that we're building on as we move forward.
On PTC, we have 25 plus entities that we will onboard under our PTC network, short lines, commuter operators, plus BNSF on our own railroad. Two or three of those entities are testing with us now. For some positive news on PTC, the failure rate that you saw on that red line in the red box is actually below where we currently are. I think we've learned a lot in implementing ourselves, and as we onboard those entities, we're hopeful. I can't quite say confident, but we're hopeful that that failure ratio is going to be below where we currently sit on our network.
Here?
Yep. Thanks. Matt Ross from Goldman. A quick question for Tom on intermodal train size. Can you talk a little bit about why you didn't see that same gain that you did in the manifest train size over the past five years? What you think a quantifiable target would be in terms of improvement, whether that's growth on a percentage basis or using that 174 as a base number on a go-forward basis, and if that improvement actually involves sacrificing some volumes in less dense areas, if that's a part of the plan in any way.
On that chart, I deliberately put manifest and intermodal next to each other. Although we set a record in intermodal last year, it's only up a couple of boxes from the previous record. Like I said in my comments, we see ample opportunity in intermodal as well as the others. Stand behind that. I don't have a specific number for you, some of the details that you're asking for there, but intermodal's definitely an area of opportunity. Headwind on size over the last, I don't know, three years maybe, or maybe a little more, is there's been a growth in our premium traffic, which tends to run in smaller trains, has trailers in it, that kind of thing. Despite that, we set a record last year, and I think there's a lot more we can do here.
Allison.
Thank you. Allison Landry from Credit Suisse. You've always talked about adopting best practices from the other rails where they exist. Within the context of precision railroading, are there elements of this that you're experimenting with or implementing on the network? Can you get to a 60 OR without it? From what I understand, it needs to be implemented in its entirety to really work. Just would love to get your thoughts on that. Thanks.
Everything that you just heard Tom mention on the manifest size, four or five years ago, when we were in Chicago, you asked, "Have you run your course on train size?" We said at that conference, "No." We were at 90-ish, we're now at 103. The Blend and Balance that Tom talked about, the algorithm we developed to look at our network and come up with solutions to increase train size and have better car velocity, as Cindy said, is still in its beginning phases. We are not done with that. His 103 size on the manifest network has plenty of headroom for growth. Do I think we can get to a lower operating ratio without precision schedule railroading? I would say absolutely yes. Are there items we can learn from CSX and Canadian National and CP? Absolutely. You bet.
The algorithm I just talked about on train size, we actually first saw when Cindy had my job at CSX inside their operation research group. We stole what we could stole, and we think we do it better than CSX now.
Question over here.
Ben Hartford with Baird. I think the network overall average velocity is still two to two and a half man hours slower than where we were peak over the past decade. These initiatives, while handling additional volume, is there a line of sight to meet or exceed those high water marks in terms of overall average network velocity?
Our best year on velocity was 2016, we are confident that we can get back to that level. Just realize that, I think you pointed this out, as you load the network, particularly in certain areas, it can be a little bit of a headwind on velocity. We don't have the same network today that we did back in 2016, meaning we've shifted our volume component down south. We're working hard with the appropriate investments to keep pace with that. I don't have any doubt in my mind that we can get back to 2016 velocity levels. I just don't have a timeline Brandon.
Hey, how are you doing? Brandon Oglenski from Barclays. Looks like we're capturing a lot more information in this business maybe than we did even in the recent past. I know you're talking a lot more about technology initiatives and algorithms. I guess two-part question here. First off, can you quantify to us how much this is costing you in CapEx incrementally that maybe we weren't spending before? Incrementally, are we spending that prior PTC development money now on these opportunities? Secondly, is this something that in the future or even today, you want to integrate more with your customers as well to get maybe a more holistic picture on operations and network planning?
Tom, I'll let you tackle that.
I'm not sure I heard all the pieces of that. Cameron talked about the investment rate in PTC, in that vision that I summarized, certainly leveraging data out of PTC for better asset information, equipment turns, and customer shipment information is certainly part of it.
I'd like to give you one example that blends work that our commercial team is doing and how it pertains to operating. Beth's team, working through Lynden Tennison, has created what we call Smart ETA, that uses predictive analytics to really give customers a better, truer picture of when they can count on us to arrive. That also has an absolute connectivity to what I'm going to call Smart Call, which is when we call crews to show up at terminals to get on board a train for us. We use kind of an old, antiquated system now. When we saw what Beth's team was doing, we saw an absolute connectivity to the operating department team. There's no question embedded in what you asked us that there'll be synergies back and forth between commercial and operating and our customers. Time for a couple more maybe, right here.
We'll come down here to Fadi.
Casey Deak with Wells Fargo. Just a question on the PTC variability. You talked a little bit about the reduction you want to see in variability across the network, but the one chart you have with the PTC variability coming down to 0.34 per thousand train miles, how close can you get that to zero? Is there a target there? Is that something where you're kind of at a baseline level? Then taking that into the whole network and looking at variability across the board, are there targets out there for you of what you would expect in a fully efficient model?
I'll let Tom answer the second variability question. Absolutely, the PTC ratio that you mentioned, 0.34, in no way, shape, or form are we accepting that as good. We've made great progress. If you remember the first number, 1.22 down to 0.34. That number really needs to get down to less than 0.2 and in a 0.1 type range, so that the PTC impact to the network is lessened and lessened over time. We're confident that we have the right technology fixes and some of the human elements where crews aren't quite familiar with PTC yet, that we've got that better in hand than we did several years ago as we started implementing PTC. Tom, why don't you tackle variability?
The variability, I mentioned a number of categories there, that's just a great set of initiatives. As we improve it creates velocity. It takes out things that are associated with velocity, reduces operating expense. Plus, those variability events, a lot of them are service failures. It takes those out. We do have a glide path going forward, what I can tell you about that is just that there's a lot of opportunity there and good leverage. It is significant work.
Within every department within operating, they have their own individual glide paths. They're all dedicated to hitting those targets beyond 2020. That all supports velocity. Fadi?
Yeah. Fadi Chamoun from BMO. I want to go back to the cost per GTM argument we talked about earlier. If I take the two railroads that are the closest to you in average length of haul, you have a much higher cost per GTM. If you can kind of explain why would that be the case, if it makes, if it's structural. The second point is, if I look over the last several years, the rate of change in that cost structure for UNP has not been as good as it has been for the other rails. You mentioned something about the distribution of volume. Is that one of the reasons why you have not been able to show that, is the volume kind of caused this cost per GTM to behave this way?
I'm just trying to understand here the opportunity for Union Pacific to kind of close that cost gap to some of the other railroads that are kind of closest to you from a cost structure standpoint.
Our cost structure, you can look at as a hindrance from one perspective, and you can look at it as a godsend in another. Here's my perspective, okay? Our manifest network is like none other in North America. We have 14 hump yards, about ready to build number 15. All of those cars have a beautiful profitability to them. Some of our other railroads that you're mentioning, if you're comparing us to other railroads, they have half the hump yards and half the serving yards that we do. The strength and beauty of the Union Pacific network lies squarely in that manifest network, and that does lead to a different cost structure. It also leads to a very nice profitability structure as well.
To your point, our work in the operating department team is to leverage the heck out of the productivity initiatives that we have so that we narrow that cost difference between us and some of the other networks you might be looking at.
Okay, with that, let's take a short break and we'll try to stay on schedule here, so maybe be back in around five to 10 minutes here, around 1:35 P.M. We'll try to get going again. All right.
Markets as they evolve and our automotive distribution centers, intermodal terminals, and manifest terminals are located strategically to provide excellent access points throughout our network. We believe our terminal franchise is unmatched in the industry. You heard Cam talk about manifest strength earlier. Our franchise also connects us to the world markets. We have unparalleled port coverage in the Gulf as well as the West Coast, and our broad interchange coverage, which includes the industry's best access to Mexico, allows our customers to connect to virtually any market across North America. The strength of our franchise allows us to penetrate and grow diverse markets, and we're doing that today, and we'll continue to do that into the future. One of our foundational strategies is continuing to strengthen and expand our franchise along that maximize the franchise value track.
We do that by landing new customers on our network, either through new commercial facilities such as an auto ramp or an intermodal ramp, or through industrial development projects. The heat map that you see on the slide there, highlights track projects by business team since the beginning of 2017 through year to date 2018. The larger the circle is, it indicates how much density we have in that particular business team in that location. As you can see, our track projects are supporting growth markets very heavily focused in Texas, where industrial and energy markets are thriving, but they are growing in other locations as well. They're focused in key geographic regions, but our network economic and industrial development team or NEID, is working hard to connect customers with rail throughout the whole network.
The team recently launched something that we're calling Rail Within Reach, which helps economic development organizations, landowners, developers, and other entities attract rail-served clients. Rail Within Reach also helps customers quickly and easily find rail-served sites or facilities by using a site selector tool that's available on our website. The NEID team is helping companies that want to be rail-served connect to our franchise, and they have the expertise to help them find the right rail solutions. While these companies benefit from having access to rail and especially in key geographic locations, the Rail Within Reach effort allows us to continue to serve customers shipping diverse commodities across a broad geography. In other words, connecting more companies to rail-served properties provides opportunities to make the most of our franchise and grow.
At any given time, we have hundreds of active projects going on across our network, and each year we turn over to operations about 300 expansion projects. Our strong focus on strengthening the franchise is essential to growing our business in the future. Our franchise is the foundation. It's just one of the factors, though, influencing our growth. From a domestic perspective, our stronger U.S. economy provides Union Pacific with very significant opportunities to capture more volume. Tax reform will provide meaningful stimulus for the U.S. economy. As customers invest money saved from tax cuts back into their own businesses, their growth will bolster our business. For instance, chemical producers are investing billions in facility expansions in the Gulf Coast, providing Union Pacific with significant opportunities to move additional volume in this area.
GDP and industrial production have both been strengthening throughout the year, and the outlook for next year is solid as well. The significant increase in those metrics this year looks to continue into 2019 and remain solid thereafter. As production of commodities like steel, plastics, industrial chemicals, and other manufactured products increases, we'll see corresponding increases in volume. Housing starts have risen over the last few years and are forecasted to continue trending upward. Steady growth in housing translates to increased shipping of products that build homes, like lumber and other construction materials, but there's also a variety of other materials that are needed once those homes are constructed, like base chemicals for paint, nylons for carpet and furniture, as well as appliances to stock the homes. Again, our volume will benefit from increased production and use of these products.
Light vehicle sales in the U.S. for this year are forecast at 16.9 million units, which is down about 2% from last year. Although forecasts do show a slight decrease over the next couple of years, the tax reform bill signed into law could give that industry a lift in sales as well. With more take-home pay, households can afford new vehicle purchases, and UP will be well-positioned with our franchise to take on growth as consumer spending increases. The global economy also plays a key role in our growth. Our franchise is located in the U.S., but our business expands beyond our borders to touch global trade. There are a number of bright spots on the global front. Our international volume is nearly 40% of our total car loads and spans all four of our business groups. I want to make sure I said that right.
Did I say our international volume? I meant to. If I said intermodal, I was wrong. Our international volume is nearly 40%. Our premium team, which handles the lion's share of our international volume, has seen significant growth in international business this year following an agreement with Ocean Network Express, ONE, the company resulting from the merger between Japan's three largest ocean carriers. While the NAFTA agreement is still under discussion, we believe Mexico is going to continue to be a bright spot for us. Manufacturing growth in Mexico has a positive effect on premium and industrial volumes as producers ship their products to the U.S. and beyond. Mexico Energy Reform, which opens the Mexico energy markets to U.S. producers of refined petroleum products like diesel, gasoline, and LPGs, increases our energy volumes as those producers expand their markets south of the border.
Global demand for food has a positive effect on international business for our agricultural team, which helps ship American-grown products like grain and ethanol to ports for export. Turning back to the U.S., truck is our largest transportation competitor, and we have a sizable opportunity to convert truck traffic to rail across all segments of our business. According to the Bureau of Transportation Statistics on tonnage hauled, truck held 84% market share, with rail at 11% and the remainder moving via water. The Electronic Logging Device, or ELD rule, works in our favor to convert volume from truck to rail. With drivers being held to their hours of service requirement, they are spending less time on the road than they did in previous years. When you add a driver shortage to that mix, the result for us is tighter truck capacity than ever before. Truck rates have risen accordingly.
High rates and low capacity allow us to capture the demand and bring more business to rail while assisting us secure the appropriate price, including increases in excess of inflation for the value that we provide. We have the opportunity to convert freight off the highways in almost every market using all types of equipment. Loup Logistics, a wholly-owned subsidiary of UP, is focused on user-friendly, door-to-door, multimodal services and solutions and helps us expand the reach of rail by offering a variety of logistics services to the market. When you add our network extension initiatives to Loup's capabilities, we have the product and expertise in place to offer rail transportation as an alternative to almost anything moving long-haul over the highway. Chantel Kruse, Vice President of Loup Logistics, is here, and she will talk in more detail about Loup later.
Converting shipments to rail is good for our business, but it also helps to alleviate the growing congestion on the nation's highways. As Lance mentioned before, beyond growing our business and improving our margins, we also have great opportunity to improve the experience that customers encounter when they work with Union Pacific. Delivering a positive experience in every interaction and at every touchpoint along the supply chain is critical to ensuring our customers continue to rely on us as a preferred transportation partner. We're listening to our customers more closely than ever, focusing on their needs, and we're finding solutions to improve their experience as a whole. As a transportation provider, a core piece of our product is, of course, the shipping experience itself. It starts with the basics of delivering the products customers trust us to ship. But it's more than just that delivery.
We need to do it consistently and give customers great visibility to monitor their supply chains. If there are any unforeseen delays, we need to be in the business of providing proactive and accurate ETA adjustments. In addition, we are seeing more and more interest in better connectivity between systems to enable a seamless connection that helps customers manage their supply chain. Our customers are looking for more than a transportation provider. They're looking for a supply chain partner that brings them insights to help them optimize their business. We are creating innovative solutions to provide a better shipping experience with enhanced visibility solutions and more accurate ETA information. For instance, mobile work order system allows crews to report freight car movements in real time, allowing customers to instantly locate their cars and make more informed decisions about when to order and release them.
A simplified shipment tracking interface will also provide customers better visibility by replacing pages of railroad-centric events with just the key transit elements that customers need to manage their businesses. Smart ETA, which Cam mentioned earlier, allows us to provide more accurate ETAs and predict shipment arrival times and provide proactive notifications to our customers. It's a great new technology that will provide greater visibility. We're also piloting direct APIs with customers in order to integrate our systems with theirs, enabling better forecasting and visibility. Together, these improvements make it easier to do business with Union Pacific and make for a better customer experience overall. If we just take a minute and take a little bit closer look at Smart ETA.
With the use of live GPS readings, which are being provided by the PTC control-equipped locomotives, positive train control-equipped locomotives, we're able to use velocity data and GPS coordinates to better predict a train arrival time. Using algorithms and machine learning models, we're then able to more accurately predict an ETA. This new Smart ETA enables us to give our customers a better idea of when trains will arrive so that they, in turn, can plan their business and their personnel better than they are able to do today. This chart shows an actual premium train from origin to destination and the average ± accuracy reading at various points along the journey. As you can see, at origin, Smart ETA accuracy was much better than our current ETA and is consistently better throughout the trip.
Currently, we're piloting this technology and plan a widespread rollout later in the summer. Between a flourishing franchise, a favorable U.S. economy, global market opportunities, truck-to-rail conversion, and a focus on providing the very best customer experience we can offer, we have a very solid foundation for growth. Going forward, our team is focused on seizing the diverse market opportunities that are available to us and pricing effectively for the value that we provide to the marketplace. With that, we'll kick off the business team presentations. Allow me to welcome Kenny Rocker.
Okay. Thanks, Beth. Good afternoon, everyone. My name is Kenny Rocker, and I've held various leadership positions within Union Pacific over the past 23 years. I am now the vice president of our industrial team, and today I'm here to share some exciting news about how we'll grow now and in the coming years. As background, the industrial team generates 26% of Union Pacific's freight revenue. It is largely the consolidation of our former industrial products and chemical business teams and is comprised of seven categories: construction, forest products, industrial chemicals, metals, plastics, soda ash, and specialized, which primarily includes waste, lime, salt, and government shipments. Forest product shipments, including lumber and paper, originate primarily in the Pacific Northwest or Western Canada. Soda ash shipments originate in the southwestern Wyoming and California.
The soda ash-producing region in Green River, Wyoming, is the world's largest natural soda ash reserve and production region. Plastics and industrial chemicals production is concentrated in the Gulf Coast. Union Pacific facilitates an important link in the plastics supply chain by providing storage and transit, known as SIC. Union Pacific has more SIC capacity than any other railroad, thus providing greater optionality in the marketplace. Construction commodities, including aggregates and cement, have high railcar shipment density in Texas. Metal commodities, including pipe and steel, have a strong presence in the Gulf as well as the Upper Midwest. The majority of our industrial traffic moves via manifest service utilizing network and regional manifest terminals. Transload terminals throughout the network enable us to access non-rail-served customers and support additional logistics services. All right. Shifting to market drivers influencing industrial shipments. First, I'd like to speak to manufacturing.
The industrial team's commodity mix has a diverse set of attributes, including several inputs to industrial and light manufacturing. Plants receive steel, minerals, and other raw materials as inputs for their production. A vast number of chemical compounds shipped on Union Pacific support the manufacturing of more complex chemicals. As Beth previously mentioned, industrial production indicates market strength. This provides a positive outlook for U.S. manufacturing and will stimulate the industrial shipment growth. On the petrochemical side, increased drilling has provided ample low-cost feedstocks, resulting in significant industry investment, largely for plastics and industrial chemicals. Union Pacific will benefit from plastic resin shipment growth associated with Gulf area producers adding production. Strong oil and gas drilling also generates demand for raw steel, finished pipe, stone, and other commodities at drilling sites. Additionally, Union Pacific has secured new business to transport commodities associated with the construction of the chemical plant expansions.
Chemical industry investments will also enable continued growth opportunities through increased jobs as well as population and housing demand. Commercial, residential, and government infrastructure investments also drive shipments of steel, aggregate, cement, and wood products. Union Pacific serves many growing population centers, and Texas continues to be a key market for Union Pacific's growth linked to infrastructure demand. The forecasted demand in construction spending and cement consumption indicate a very favorable outlook. We expect upside opportunity in our lumber and panel markets, driven by strength in new home construction and single-family housing. Housing demand is supported by ongoing job creation and wage increases. Millennials are a key demographic group for builders. In fact, they represented the largest homeownership gains among all age groups in 2017. The consumer group is anticipated to continue to drive home purchases.
Consumer buying behavior trends, including growing e-commerce, have resulted in transportation demand for brown paper materials used for packages. With all of these positive market drivers to leverage, the industrial team maintains a heightened focus on business development. This includes growth in new and existing customers, truck conversions, project opportunities, and new site locations. In 2017, the industrial team secured over 900 unique business development opportunities. Within the past 12 months, over 185 new service locations have been added to the industrial network portfolio. Union Pacific's network reaches several of the fastest-growing state populations, including Texas, California, and Colorado. With our rock and cement network, five new destination yards have been established year-to-date in Texas, with additional yards anticipated later this year in Texas and Colorado. We anticipate strong lumber and panel shipments driven by market demand and tight flatbed truck supply.
Union Pacific has increased its moves of southern yellow pine, which is prevalent in the Southeast, and we anticipate additional opportunities going forward. As of April 2018, the American Chemistry Council reported over $194 billion in announced, completed, started, and potential U.S. chemical capital investment projects. This increased investment will drive transportation needs for various industrial commodities and will be a significant part of the team's growth in the future. UP anticipates elevated carloads of plastic resin shipments aligned with the growing domestic market demand, as well as an increased plastic resin production intended for export. Also associated with chemical investments are drilling pipe shipment opportunities. Transload service solutions will be utilized to continue capturing these opportunities. Transload services for pipe often include storage prior to it being moved to a job site. Staging and storage of the product ensures it gets to the final destination on time.
Speaking of transloads, Union Pacific utilizes a vast transload network to win new business with truck-competitive commodities. Door-to-door services enable UP to expand its market reach to customers that are not directly rail-served, as well as customers who have transload, warehouse, and multimodal distribution needs. We continue to have success penetrating truck shipments for drilling pipe, lumber, and other commodities. Additional carload growth is anticipated in conjunction with our transload network. Dallas-to-Dock is an example of a new service offering that will incorporate a transload of plastic resin. Asia is a growing global destination market for U.S. resin exports. To answer our customers' needs for multiple export options, Union Pacific has partnered with KTN to provide the new service solution, Dallas-to-Dock. With the Dallas-to-Dock service, plastic pellets are loaded into hopper cars at origin and then transported to KTN's new facility adjacent to our Dallas intermodal terminal.
KTN will package the resin and transload the product into intermodal containers. With less than a two-mile distance to Union Pacific's intermodal ramp, there will be no congestion, no driver shortages, and no delays. The containers travel to ocean ports via our premium intermodal service from Dallas. At the port, the containers are loaded onto vessels destined for global markets. We are on track to open the Dallas-to-Dock facility with KTN in the third quarter of this year. We are very pleased with the level of contractually committed volume already secured. Customers are excited about the value proposition of Dallas-to-Dock as it capitalizes on surplus marine container capacity, access to the largest ships calling U.S. ports, and the short transit time to destination markets. The product offering has the ability to expand to other commodities beyond plastics.
Positive market drivers and industry trends have positioned the industrial team for growth. Thank you. I will now turn it over to Brad Thrasher, Vice President of Agricultural Products.
All right. Thank you, Kenny. My name is Brad Thrasher. I hit the 30-year mark, my 30-year anniversary this March. Over those 30 years, I've had a wide variety of roles touching almost all of our different commodity areas, leadership over roles of two of our subsidiaries are now part of Loup, as well as positions leading pricing and business development. Today, I'm here to talk to you about our agricultural products business. Our ag products business represents a $4.3 billion portfolio for Union Pacific, and is comprised of four major segments. Whole grains such as corn, wheat, and beans comprise our largest at 39%, followed by grain products. Those are the commodities derived from the value-added processing of grains.
This segment includes fuel-related commodities such as ethanol, biodiesel, and other related feedstocks, protein meals and feed ingredients for animal rations, and commodities like corn syrup and starches for human consumption. Supporting the growth and development of these major crops is our fertilizer segment, which distributes nitrogen, phosphate, and potash to all their major growing regions across the U.S. and into export markets. Our food and beverage business is 18% of our volume is comprised of beverages for human consumption like beer and wine, bulk food ingredients such as rice, sugar, or tomato paste, as well as a temperature-controlled portfolio of fresh and frozen foods that move in our state-of-the-art reefer fleet. Looking at the map, you can see that our grain origination franchise has great coverage across the heart of our very productive Midwest.
The largest demand segment for our whole grains is a strong and stable domestic portfolio that represents about two-thirds of our grain movements. This includes the well-established dairy and poultry feed markets on the West Coast, growing dairy operations in the Intermountain areas, as well as the large cattle and poultry markets in the South. We also have excellent access to all of the Mexico gateways to help serve the growing feed needs in Mexico. This stability allows us to run a highly optimized network of shuttle trains from origin to destination with a very competitive cost profile. In addition, we also move grain out into the world markets through the major export terminals in the Pacific Northwest, interior river terminals, as well as through an extensive network of export terminals in the Gulf of Mexico.
The export market is a truly global commodity market, extremely dynamic, and can be highly variable with shifts in trade policies, global competition, and even weather events across the globe rapidly influencing the global supply chains. On the grain product side, ethanol is our single largest segment, with production facilities heavily concentrated in our Midwestern corn region. We distribute that ethanol across the United States and into the metropolitan areas, as well into the growing export markets through the Texas Gulf. Our other grain products and commodities move throughout the U.S. in both manifest and unit train movements. On the food and beverage side, you've heard a lot about our premier manifest franchise.
Well, that manifest network allows us to efficiently distribute imported and domestic beverages across the U.S. and from Mexico, originate frozen meats from the Heartland, and it provides us great coverage of the country's top fruit and vegetable production areas. This franchise provides significant opportunities for additional fresh and frozen food growth that we're actively targeting with innovative new service products. As I alluded to in my opening slide, our key demand drivers for ag products really revolves around feed, fuel, and food. On the food side, increasing worldwide demand for more and different proteins and more affluent diets is having an immense effect. Population growth and increasing standards of living are resulting in increasing demands for protein and better foods.
This protein can come in the form of domestic production fed with imported grains, feed meals derived from those grains, or actual imports of finished pork, poultry, or beef. This chart shows how most people in the world get by on less protein than here in the U.S. As these countries move up into the right and consume more protein per capita, opportunities created for us to serve that demand with raw feed materials or the finished products themselves. On the supply side, continued growth in trend line yields and advances in precision agriculture will allow the U.S. to continue to produce more over time to meet these growing needs.
While there's a lot of international competition among the big three grain export hubs, the U.S., South America, and the former Soviet Union states, the efficiency of American agriculture will ensure that we continue to play a strong role in this growth. Meat production here in the U.S. continues to grow, with almost 150 billion pounds produced in 2017 for both domestic and export sales. The same world that wants more protein also wants a healthier environment, and there's a growing global need for octane and oxygenates. Renewable ethanol remains a cost-effective and environmentally safer alternative to other additives. On the food side, continued population growth and changing consumer preferences are driving increased demands for fresher foods, wine, and import beer, all categories that we either have a very strong presence in or that provide new growth opportunities by converting from truck.
Let me tell you about a few of those specific opportunities that we're targeting to take advantage of these global trends. I've talked about the growing global need for octane and oxygenates. We've worked with our customers to develop and expand a number of new ethanol export terminals and are well-positioned with that capacity to participate in the global growth markets. Domestically, there's increased dialogue around transitioning to E15 on a year-round basis, which, if implemented, could see domestic use increase significantly over time. Lastly, Mexico Energy Reform will provide additional opportunities as they further open up their fuel markets to ethanol use. While export grain can be very dynamic and highly competitive among the three big export hubs, global grain movements will continue to grow over the long term, and we will remain agile in going after opportunities at profitable levels.
With poultry and dairy production expanding in the areas we serve, we continue to work with customers to expand our domestic demand footprint with new greenfield feed mills, ensuring that those customers have access to a wide variety of feed ingredients and that we can support their business for years to come. These same feed customers are also some of the world's largest producers of poultry and red meat, exporting roughly 16%-18% of their production to other countries. Increasing truck challenges and rising fuel costs are opening up attractive new opportunities to help move it into the global marketplace via the West Coast.
UP's franchise, along with our premier refrigerated boxcar fleet, uniquely situates us to capture this growth, and it also happens to be a huge efficiency opportunity for us, repositioning our reefers that are moving empty from the East into the heart of our produce growing areas. The temperature-controlled transportation market is very fragmented and is especially susceptible to restrictions imposed by the new ELD regulations. The top 24 refrigerated carriers account for less than 5% of the total market, and most of the fleet is comprised of private carriers, smaller regional carriers, or individual owner-operators who can struggle to meet and adapt to the new regulatory demands. Temperature-controlled truck rates recently spiked to all-time highs in January and are presenting us with a unique opportunity to engage with existing and new customers with a rail-centric, temperature-controlled supply chain alternative.
To do this, we have a number of innovative service solutions being worked on across a variety of modes, commodities, and geographic areas. With our great franchise and premium reefer fleet, we've always had great penetration of the traditional rail-susceptible commodities. Frozen french fries, hardy vegetables like potatoes and onions, canned goods, tomato paste, wine, and frozen dairy products have all been our stock and trade for years. With the changes in the trucking environment, we feel that significant opportunity remains in the fresh produce markets. We estimate that we currently participate in less than 5% of the addressable fresh produce market originating in the West Coast. In addition, there are other significant produce flows into and across the U.S., where innovative rail-based service solutions can provide opportunities for conversion from trucks.
To address these opportunities, we are developing creative service solutions for new commodities and new geographies across all our teams. The foundation of these creative service solutions are our Cold Connect cross-docks in Delano, California, Wallula, Washington, and Rotterdam, New York, that form the backbone for a new high-speed, five-day-a-week service offering in the industry, our Food Train Network. This network is not only fast enough to open up opportunities to handle the more perishable products that don't traditionally move rail, but it also provides a faster and more reliable ride to our traditional customers that is attracting growth from them. Chantel will go into more details on the unique capabilities of our Cold Connect facilities that are operated by Loup. Jason will share some of the new opportunities we see in the intermodal space, and Bernardo will talk about our opportunities to handle produce from Mexico.
With that, I will hand it over to Linda Brandl, Vice President of our Energy business.
Thank you, Brad. Good afternoon, everyone. I'm Linda Brandl, and in two weeks, I'll celebrate my 30-year anniversary with Union Pacific. In my tenure, I've had the opportunity to lead our coal business, our automotive business, Union Pacific's National Customer Service Center, and Union Pacific Distribution Services, which is now part of Loup. You can cover a lot of ground in 30 years. My management assignments have been varied and interesting along the way, including time in premium operations. My current position, leading the merged energy commodities, is one of the most invigorating of my career. I'm excited to talk to you about it today. Energy was a $4.5 billion business, or 23% of Union Pacific's 2017 revenue. Coal and petroleum coke accounted for 73% of Energy shipments, primarily originating in the Powder River Basin thermal coal mines in Wyoming.
We also originate thermal coal out of Colorado and Utah. From other various origins, most of the coal we ship is consumed by the U.S. electric power market sector and industrial coal users. While the majority stays domestic, we do participate in export coal and coke. Shipments historically fluctuate below 10% of our overall coal and coke volumes. Switching to sand, which last year represented 15% of our Energy segment, Union Pacific serves northern white sand mines in Wisconsin, Minnesota, and Illinois, and Midwest mines in Missouri and Nebraska, as well as multiple regional mines, including those in Texas and Arkansas. The sand we ship is primarily used in oil and natural gas drilling. Our key destination markets line up with the major shale plays. The remaining 12% of our Energy segment includes petroleum, liquid petroleum gas, and renewables.
Petroleum and LPG typically originates in Texas or western Canada. As you would expect, the Southern Region of our network is particularly important for these commodities. Renewables, which includes our windmill components and biomass shipments, is a much smaller volume. Wind shipments are project-based, supporting wind farm development. Our small but growing biomass shipments are moving export to Europe out of the Gulf. While we continue to see headwinds in our coal business, coal remains an important part of the Energy portfolio. Market conditions, policy, and age have driven structural decline in our coal business as units retire. With natural gas trading in the switching zone for Powder River Basin coal, we are adapting to the cyclical variability that comes with weather events and commodity prices. Pricing environment in coal is challenging in terms of both product and transportation competition.
Historically, Union Pacific's volume in the western coal market has moved in general with coal's overall percent participation in U.S. electricity generation. While retirements and contract changes continue to be a risk, the Energy Information Administration's May 2018 short-term energy outlook projects a moderating decline for coal in the next few years, with coal remaining around 28%-29% of fuel share. We're also encouraged by recent policy discussions related to coal's contributions to the reliability and resilience of the U.S. electric grid. Next, let's look at sand. Frac sand and drilling market fundamentals are strong, supported by rising crude prices and growth in proppant intensity for each well.
Inside this growing pie, where final delivery truck miles to the well site are meaningful, Union Pacific's broad network is very well-positioned to price to our value and deliver sand to several shale basins, including the Permian, the Eagle Ford, the Scoop and Stack in Oklahoma, and the DJ Basin, along with others. Our sand shipments have been a source of growth, in particular, over the last five quarters, as shale plays served by our rail network enjoyed a strong drilling environment with continually increasing amounts of sand in each well. The recent phenomenon of local sand has become a topic of great interest and significance to industry players, including Union Pacific. Several new mines opened in the Permian Basin, which will displace northern white sand to an extent, but timing is not yet clearly defined.
Far, there have been delays in local mine capacity additions related to things like workforce availability, sand quality, and distribution infrastructure, but mines are coming online, and a certain amount of local sand will certainly be desired for this market, with transitions continuing through 2018 and into 2019. Longer term, the balance of northern white sand versus local in-basin sand could be impacted by well productivity, and we'll see that play out over the next few years. While the use of in-basin sand is unfolding primarily in the Texas region, UP is well-positioned to serve multiple shale destination markets, including Oklahoma, Colorado, and the eastern markets we reach via interline shipments. As an example, Oklahoma is a bright spot for us as drilling is increasing, and we believe UP has the best franchise to serve that market.
Our sand shipments to Oklahoma in the first quarter of 2018 increased by over 150% year-over-year. Next, I'd like to talk about where we are seeing opportunities in our energy business. Merging our energy commodities together into one business unit created an environment where we anticipate and embrace volatility. Our opportunities are exciting, can be fast developing, and often emerge within a window that has a shelf life. Spreads in market indexes like API or Newcastle for coal, the timing of pipeline capacity and associated impact on crude spreads, and geopolitical events that impact energy pricing are all examples of market dynamics that allow commodities like coal, crude oil, and sand to travel. Our opportunities can change rapidly, but I wanted to highlight a few that represent the types of changing market dynamics currently resulting in business for Union Pacific.
On the coal side, global supply and demand dynamics have supported a healthy increase in our export volume in the last 18 months. For context, Union Pacific shipped more export tons in 2017 than any year in the previous 20 years, with 2018 starting out on a similar pace. Recall that coal exports are not a huge portion of our coal base, but the increase in total U.S. tons desired by the global marketplace is a welcome development. Union Pacific served coal is finding outlets through export terminals in the Gulf and on the North American West Coast, including Mexico. Current oil prices and proppant demand provide evolving opportunities for sand deliveries. As source competition changes in one market, we adapt to others. As increasing U.S. and Canadian crude production outpaces the pipeline takeaway capacity, we have opportunities to again participate in crude by rail.
Currently, we are seeing strong interest in crude-by-rail shipments from the Permian and from Western Canada. Union Pacific's franchise also positions us well to participate in finished fuel and LPG markets opened by Mexico Energy Reform. We have a small but growing opportunity to ship biomass to Europe to feed their energy needs. While this one is on a much smaller scale, biomass represents an example of how we are focused on winning in innovative new markets. Prudent investment in volatile markets can be a challenge, and I would like to share an example of how we took an underutilized facility and turned it into a multi-commodity resource geared towards flexibility. This year, with the growing demand for sand in the Oklahoma market, we commissioned a project to enable an existing Loup facility in El Reno, Oklahoma, to handle unit train sand business.
Union Pacific's network, and El Reno in particular, is strategically placed between the Scoop and Stack plays, allowing value from minimized truck delivery miles and flexibility as drilling occurs in either play. We recognize that speed to market was critical, so working with Loup, we repurposed an underutilized asset that had previously been used for wind components and turned it into one that could be used for sand or pipe or other commodities as the needs change in the Oklahoma market. This facility, along with others recently expanded or developed along Union Pacific central Oklahoma tracks, are important enablers for this growing energy market. In closing, we see our energy business unit as a dynamic and rapidly changing sector of our business, with both challenges and opportunities.
Rapid go-to-market strategies and effective value capture custom to each market and opportunity, coupled with smart investments and agile operations, are the keys to success. Next, I'll turn it over to Jason Hess, Vice President, Premium.
Thank you, Linda. Good afternoon. My name is Jason Hess. I've been with Union Pacific for nearly 24 years. I feel very fortunate to have served in a number of capacities during my tenure. Prior to my current role leading the Premium, I led our intermodal and agricultural team, as well as our national customer service center, which is currently known as the customer care and support group. Since joining Union Pacific in 1994, I've held a number of key other positions, including roles in our chemicals and industrial products business segments. I am truly excited to speak to you today about our Premium business, the value of our Premium network, and the opportunities we see for growth. Premium is a consolidation of our automotive and intermodal business teams.
Specifically, the singular team brings together domestic intermodal, which includes Mexico and auto parts, international intermodal, and finished vehicles. The synergy within containerized automotive parts and domestic intermodal were obvious to us. Our 53-foot container programs for both business segments. Furthermore, having all domestic product lines under one team provides greater visibility to our container assets, which allows us to strategically consider future product development and asset investment strategies. The Premium team also manages markets and sells our service solutions for the finished vehicle business segment, as well as the automotive parts moving by boxcar and flat car. Finally, one Premium commercial team complements our Premium operations team, who today manages both the intermodal and automotive facilities. Looking at our business mix, 11% of our Premium volume in 2017 was finished vehicles.
We're the largest automotive carrier west of the Mississippi River, handling over 60% of Western U.S. rail automotive carload shipments. We operate or have access to over 40 vehicle distribution centers. UP owns 24 of those, we lease 2, and the others are private facilities. We also directly serve five vehicle assembly plants. We connect to all major West Coast ports, including six Mexico gateways, including the Port of Houston, to accommodate both import and export shipments. Union Pacific's intermodal franchise includes two segments, domestic, which includes the automotive parts, and international. Representing 51% of our Premium portfolio in 2017, the domestic intermodal business includes container and trailer traffic picked up and delivered within North America for intermodal marketing companies and truckload carriers. Parcel or small package and less-than-truckload, LTL, carriers with time-sensitive business requirements are also an important part of our domestic business.
The international segment made up 37% of our volume in 2017, and it consists of import and export container traffic, mainly passing through the U.S. West Coast ports. Overall, intermodal utilizes just over half the route miles on Union Pacific's network, routing freight between 33 UP owned and operated intermodal terminals, as well as customer-operated on-dock rail facilities. Between domestic and international, Union Pacific serves more markets than any other railroad and nearly twice as many major markets than our nearest competitor. In addition to our extensive network reach, we also offer the largest rail-owned container fleet for domestic shippers using our EMP and U-MAX service solutions. EMP is a domestic interline container service offered by Union Pacific and Norfolk Southern, and U-MAX is a domestic interline container service offered in conjunction with the CSX. EMP and U-MAX each have a fleet of more than 40,000 containers.
As we consider the key drivers to our performance, the positive market drivers include the strong U.S. economy and consumer sentiment continues to propel our intermodal business, along with auto parts volumes driven by over-the-road conversion and growth in light truck demand. Additionally, we are seeing growth in our parcel and LTL segments, driven by the strength and design of our intermodal network and continued growth in e-commerce. Also, tightening truck capacity due to ELDs and driver shortages, combined with the strength in the economy and consumer sentiment, create a potential for volume and margin growth. Finally, consumers continue to preference trucks and SUVs, which could put pressure on some of our small car plants, but could also increase the use of bi-level or tri-level auto racks. This can translate into more rail volume. Market drivers with an uncertain impact, regulatory changes with NAFTA and Trans-Pacific trade.
Additionally, most economists predict flat to declining automotive sales, but because of our strong partnership with numerous OEMs, we will continue to have opportunities to grow despite a potential flat market. Examples include global manufacturers and foreign entries into the U.S. Last, ocean carrier profitability remains strained despite consolidation in the marketplace. This will continue to put pressure on transportation logistics partners and pressure on the ocean carriers themselves to look for the most efficient service alternatives. We are very excited about our future and the growth we expect to see as a result of the international intermodal, ocean carrier contract wins in 2018. ONE is just one such example. You may recall, ONE is a joint venture between the top three Japanese ocean carriers. ONE business began onboarding in the second quarter of this year.
The compelling value of our franchise that I had outlined earlier, our reliable service product, and the customer's experience with us are just a few of the reasons Union Pacific is winning in this market segment. Despite lower sales in the finished vehicle market, Union Pacific has growth opportunities with international brands and electric vehicles, which should help us offset the weaker automotive market in 2018. As previously mentioned, we maintain approximately 60% market share for finished vehicles through our strong OEM relationships, our automotive network, our asset contributions, and the majority of our business is in multi-year contractual agreements. As you will hear from Bernardo Ayala next, Mexico produce has been a large untapped intermodal opportunity, and we have a focused effort to provide new solutions for this market segment.
Our temperature-controlled business also continues to increase. Looking ahead, we will be adding intermodal service to our Cold Connect operations in Wallula, Washington. This innovative service offering will be a key driver for growth in this new intermodal market segment. Later, Chantel Kruse will talk more about Cold Connect initiative. Finally, as we see record levels of brick-and-mortar store closing, we are realizing an increase in traffic in the e-commerce space. I want to take a minute to dive a little deeper on e-commerce and how it impacts our premium business. As consumers, we are all spending more of our dollars online and having items shipped to our house. At Union Pacific, we see the e-commerce trend manifest itself in growth at our parcel and LTL customer base. Retail sales are clearly showing a shift from brick-and-mortar to online.
The chart shows that the growth in e-commerce sales compared to the growth in all other retail sales in the U.S. as reported by the U.S. Census Bureau. The blue bars illustrate the rapid annual growth rate in e-commerce sales over the last several years and the first quarter of 2018. Sales in all other retail has remained relatively flat, as represented by the green bars. The yellow line represents e-commerce as a percent of total retail sales, which is approaching 10%. During the same time period, Union Pacific grew our parcel and LTL business segments near a 14% compound annual growth rate. Working collaboratively with our customer base, we continue to improve and expand our intermodal service offerings to capitalize on e-commerce growth opportunities. This is great news because this business tends to mix up our Premium portfolio.
Our intermodal franchise is well-positioned to serve both existing retail supply chains and provide us with good foundation to continue to evolve with growth with e-commerce. Premium's innovative service offerings include extending beyond our intermodal ramps, creating value, increasing supply chain efficiencies, and addressing customer pain points, and providing overall ease of doing business platform to our portfolio. This includes bundling services that are typically outside our physical footprint, but within our area of influence. Our innovative managed services platform bundles in-house solutions, providing value to multiple stakeholders, including our ocean carriers, domestic intermediaries, and our BCOs. For example, we are leveraging Loup's extensive dray network in order to bring to the market increased dray efficiency, reduced complexity, and more capacity.
Union Pacific provides an extensive franchise, multiple intermediaries, export knowledge like plastic resins, paper products, and hay exports through this diverse franchise and our business team collaboration and working together. Essentially, Union Pacific brings together under our control assets, systems, and a dray network, along with our unmatched retail franchise, differentiating ourselves from the competition and delivering true value to a complex supply chain. I want to thank you, and now I want to turn it over to Bernardo Ayala to talk more about our Mexico business.
Thank you, Jason. Good afternoon. My name is Bernardo Ayala, and I've been with Union Pacific for almost 13 years and a total of 19 in the industry. In my current role, I'm responsible for the strategic and tactical management of Union Pacific's Mexico markets. During my career, I've also held positions in the company's transportation and Premium operations departments. Moreover, I had the opportunity to work in Ferromex, Mexico's largest railroad concessionary, where I held positions in the law department and led the government affairs office. In 2017, our Mexico business accounted for approximately 11% of the company's total revenues. The majority of that revenue came from traffic that includes finished vehicles, auto parts, and other freight moving in 53-foot containers. Union Pacific's Mexico franchise allows the railroad to interchange traffic across the country's six most important international rail gateways with Mexico.
Those gateways include, from west to east, Calexico, Nogales, El Paso, and Eagle Pass, through which we connect with Ferromex, and Laredo and Brownsville, in which we interchange with Kansas City Southern de México. That connectivity allows Union Pacific to tap into Mexico's most developed and industrialized markets, as well as fast-growing regions that create fertile ground for new business development opportunities. To maximize the reach of our franchise, we have sales offices strategically located throughout the country, as well as intermodal ramp managers in those locations where we administer our own chassis and container fleets for our Mexico premium service offerings. In discussing Mexico's main macro drivers, we find that early into the present administration, major structural reforms were passed. Amongst them, education, telecommunications, tax, finance, labor, and energy.
Today, Mexico is starting to see benefits from those reforms, like the ones in labor, where 3 million jobs have been created, and in energy, where investments worth $175 billion have been committed or executed, according to the Mexican government. Mexican exports for the 1st quarter of 2018 grew over 11% versus the same period last year. Manufacturing, which accounts for 86% of Mexico's total exports, together with agricultural products, led the country's export market growth. Mexico has become the second-largest exporter of goods to the U.S., and it is the U.S.'s second-largest export market. The presidential election is scheduled for July 1st of this year. Mr. Andrés Manuel López Obrador from the National Regeneration Movement Party, or MORENA, has been leading the polls. Second in the race is Mr. Ricardo Anaya, who is running under a coalition of political parties, PAN and PRD.
In third place is Mr. José Antonio Meade, who is the candidate of incumbent party, PRI. Although the three parties have different political platforms, all three candidates are in support of improving security, abating corruption, and providing economic stability. NAFTA's renegotiation outcome is unknown, although several chapters have been closed, there are others like regional content, investor state dispute settlement system, and [inaudible] pending. NAFTA has clearly been an instrument to help integrate three of the largest economies in the world. That integration, which has been built around trade and existence of World Trade Organization tariffs, should help mitigate a possible impact of a bilateral NAFTA or its subversion overall. An unpredictable outcome around the presidential election and NAFTA's renegotiations have pressured the peso, further compounding on the 50% accumulated depreciation that started in 2014, driving annual inflation at levels higher than 6%.
Mexico has challenges to overcome with security, corruption, and rule of law. However, the Mexican government has taken actions to address those issues, such as instituting an accusatory system, as well as passing anti-corruption legislation and a law of internal security that regulates the use of the armed forces in the fight against crime, just to list a few. We remain confident that the Mexican government will continue with the work on the efforts needed to improve in those areas. Not only most of our volume and revenue is associated with Mexico's strong automotive and manufacturing sectors, but it is also in those two markets, as well as energy, where we anticipate to see most of our growth. Mexico is on track to become the fifth largest vehicle manufacturer in the world, and currently, over 70% of its production is consumed in the U.S.
Additionally, its robust and fairly mature manufacturing capacity provides ample opportunity to grow our cross-border intermodal service offerings with both carriers, which almost every market in Mexico. A constitutional reform that was passed in 2014 has created a new competitive environment in which the private sector is able to openly participate in the importation, storage, supply, and distribution of refined products. Mexico's local production of refined products has been declining, and conversely, imports have been increasing, most of which are sourced from the United States and which are already moving on Union Pacific in the form of LPG, gasoline, and diesel. We're working and expanding on different business development initiatives like fresh produce, export coal, and refined products. Mexico is the largest exporter of produce to the United States, with 350,000 truckloads moving across the border every year.
Meanwhile, saturated capacity and environmental restrictions in western ports of the United States, combined with strong coal prices and increased Asian demand for coal, are allowing Union Pacific to export Uinta Basin coal to the port of Guaymas, located in the shores of the Gulf of California. Union Pacific was the first carrier to ship export gasoline and diesel to Mexico on account of the implementation of that country's Energy Reform. Moreover, we have been handling LPG blends, which, like gasoline and diesel, are in increased demand. Consequently, we are combining the strength of our origins with our unparalleled access to Mexico to tap into different regions with different shippers. With that, I want to thank you for your time, and I will turn it to Mike Staffenbiel here for a second question and answer session.
Before we take the first question, I think we had a question earlier around crude that I think we'll have Beth kind of follow up on that we said we'd kind of come back to. We'll start with that one.
Okay. The way that our destination terminal network is set up for crude oil, there are facilities that do one of or two or three of three things. They either serve a refinery directly, they're attached to pipeline capacity that can run to a different refinery, or possibly to the LOOP LLC. They also, most of them, have significant storage capabilities. We don't get a lot of visibility to the ultimate destination of the crude oil. That's really being handled by the terminal operator. I don't have a lot of perspective to give you in terms of whether or not those ultimate destinations will be in locations where there could be congestion from capacity to load shifts. Chris.
Hey. Thanks, Chris Wetherbee from Citi. I guess I wanted to talk broadly about the pricing environment and sort of what we're seeing from the truckload market. Clearly, a very tight market there probably provides you a good backdrop. I guess maybe two questions. First, sort of how much of your business do you consider really competitive with truck, where there's an opportunity to gain some pricing under the truck umbrella? Second to that, when you think about this market, is it similar to what you saw in 2014 or 2015 when you had energy and truckload pricing working together and you saw sort of a rise in core price from 2%-4%? I'm trying to get a sense of maybe what the magnitude of the potential pricing cycle is for you guys with the backdrop of a strong pricing market in TL.
Okay, in terms of truck competitiveness, all of our business teams have some truck competitive business. It's, of course, most pronounced on the intermodal side. Even within our industrial and ag market, certainly, there's a lot of truck competition in the refrigerated markets, as well as in things like lumber and steel. Okay, we have some that are very truck sensitive, some not so much. I don't have a percentage for you, but definitely, we touch truck markets. In terms of price and how the truckload tightening impacts us, we are definitely seeing truck tightening in many markets. We're seeing the ability to achieve higher pricing in those markets that are very truck competitive and truck sensitive. Of course, we have our core business that could be in a long-term contract or not as truck competitive, et cetera.
We have markets that I've talked to you about in the past, including international intermodal and coal, where we see very significant competitive pressure on the pricing side. We won't be changing our guidance in any way here today. It's still that in 2018, we definitely expect to see pricing dollars well in excess of our inflationary costs, and out into the future, we would expect to exceed our inflationary costs with our pricing.
Ken?
Wonderful, thanks. Ariel Rosa from Merrill Lynch. Two quick ones, one for Kenny. You mentioned that SIT yards are a good thing. I don't know, that seems to be like a death of a car if the assets go and sit down. Is that a big profit center? Do you charge if assets are sitting still and in storage? Secondly, Beth, I guess Linda mentioned more variability in volumes. Do you then think about if you have more variability in the flows, I need to charge a lot more for that to cover the increased variability and flexibility of the revenue stream?
You want to answer that SIT one?
First of all, just to take a step back, we have a lot of optionality for our customers in the marketplace. We can go straight to the port. We have great access with interline partners where we can touch the East Coast. We talked about the packagers, we talked about our Dallas-to-Dock offering. Yes, our SIT network does provide our customers optionality and also value proposition, and we feel like the margins and the price we charge reflect the SIT value proposition.
Just to build on that a tiny bit. I don't know if this will come out. Awkward, sorry. The freight car assets that are sitting, as you will, don't belong to us. The customers own those cars, so the utilization hit is really their hit. We do charge storage if you're in the facility and using our assets. Okay? Then the second piece was variability. You asked about whether that changes our mind about pricing. Certainly, we are having good conversations with customers about volatility and the cost that that drives in our network. Obviously, there's a couple of different ways you could approach that. One is, work with customers to ship more ratably, if that's possible for them, or ask them to participate in the cost of providing a service sometimes, but not others. We have those conversations with customers all the time.
Ravi.
Ravi Shanker from Morgan Stanley. A question for Jason on e-commerce. It was pretty impressive to see that you're running at a 14% CAGR on e-commerce, which kind of keeps up with the market. We have seen the e-commerce delivery window shrink from several days a few years ago to two days, on its way to maybe one day. Is that something the intermodal network can keep up with, that pace of delivery? The second question to Brad on the ag market, can you specifically talk about truck versus rail share in the ag market? Are you seeing any switch one way or the other? Thanks.
Yeah. I can address the e-commerce first. When you think about the e-commerce, it is very hard to talk about which one of our segments it moves in, because it could really be the international segment. It could be in the LTL parcel. We tend to correlate that closely with parcel and LTL because of exactly what you said, the speed of shipments and getting there. We do have the capacity on our railroad to continue to grow that business. We talked a little earlier about some expansions in L.A., LATC, expansions at G4. That is a primary lane and an e-commerce lane, so I do believe we have the ability to grow that. Again, it will be spread across a lot of our different business segments because e-commerce means it is coming in from other countries. It is international, it is the international segment.
It is moving sometimes domestically between distribution facilities to get closer to that end customer. Then, of course, it moves in the parcel business. We still have room to grow, and we have got some capacity projects to help us with that.
Hi, Brandon Oglenski from Barclays.
Oh, there was a second piece.
second piece.
Yeah. Second piece. I think you had a question about the relative truck share of the agricultural products market. Really, the biggest area that that applies is in the fresh and frozen markets. If you look at our traditional markets, we feel like we're nicely penetrated in those. The big opportunity I talked about is in the fresh produce area where we have 5% of the total marketplace.
We'll go Brandon, then Bascome, and then we'll come back over here.
Okay, thanks, Mike. Brandon Oglenski from Barclays. I think back to the last 3 or 4 analyst meetings that you guys have hosted, we've always had pretty favorable outlooks when we look at all the verticals. I think in the past, you've called for modest volume growth or even above the economy volume growth in the past. The reality is, we've seen results at Union Pacific actually trail the industry on volume expansion. I know you guys have had a lot of headwinds in the coal business, even your intermodal book of business, I think is down in the last 3 or 4 years, or even 8 years. I guess a 3-part question. Number one, is this just telling us that it's very difficult to grow at the price point that you guys have and the margins and profitability?
Secondly, is there any capital limitations that have been placed in the business? Is it constrained in any way? Lastly, if those are not the case, what incentives can you put into this organization to actually start to see a lot of expansion? We have seen some other Class 1 railroads in North America see a lot of growth in this same time period.
Okay. You asked if it was difficult to grow at these price points. I don't know that I would say that it's necessarily difficult to grow at these price points. Our focus is on making sure that the business that we bring on to the railroad is reinvestable and that we like the margins, that allows us to continue to generate returns for our shareholders from an ROIC perspective, and that we are working on improving the operating ratio. I do not feel like we've been constrained by capital in any way. We obviously have things that we're working on in the Southern Region in particular, where we are seeing significant growth, I don't feel like anything about our growth has been constrained. We have a very significant business development effort at UP.
Our teams are, as you saw from everybody's presentation, looking at new markets, identifying truck that can be converted to rail. We are seeing, I think, nice growth this year. We've guided you to low single-digit growth, we're happy with the results we're seeing at this point this year. We've had some nice wins in the intermodal space. Kenny's team has been converting some truck traffic, as has Brad's. Obviously, the frac sand business has been strong. In terms of growth, we're seeing it, we are generating really good returns from it.
Hey, Brandon, let's also be crystal clear, right? You can see in the AAR reported data that there are certain commodities, market segments, where we have historically or are in the process right now of losing share. Our franchise gives us good exposure to virtually every market segment we compete in. Typically, if we're losing share, it's because we're making a decision that whatever it takes to secure the business in that particular segment on the margin is either not attractive to us from a price perspective or a margin perspective, or both.
Bascome.
Yeah, Bascome Majors, Susquehanna. I appreciate all the color and granularity on the business. Beth, could you tie it together for us? When we look at the next one to two years, is there a commodity or theme or anything specific that you're really, really excited about that's going to move the overall needle for UP as a whole?
Yeah. We actually had a really strong theme in here around produce, we see that being a growth engine for us. It's not hundreds of thousands of loads, but it's going to be a nice market, and we're going to be able to provide services and commodities that we've never been able to touch before. Our plan, Brad laid out a little bit of it to you, but we really want to grow our Food Train Network and bring on new branches of it that serve new markets. Today, we're very focused on the Northeast. We think the Southeast has potential for us as well. Bernardo talked about the Mexico opportunity. That's a big deal. Okay, there's one. Obviously, truck penetration is a big deal for us, and we do see customers over time that will convert to intermodal because that's easier.
A truck still shows up and you know what to do with it. We also see customers who will convert from intermodal into boxcar because there's even greater savings. You get more cube, et cetera. We're very focused on growing that market. Every single one of the teams has strategic initiatives aimed at new markets. Kenny talked a little bit about converting steel that has traditionally been truck. There's example after example across all the business teams. We have rigorous market research projects going on with each team aimed at identifying markets that we're under-penetrated in or we believe we have a service solution.
One of the things I think you'll hear us talk about more and more, we've talked about it a little bit today, is really converting customers over that are rooted in a rail service solution and giving them extra logistics offerings that they may need in order to be able to use rail and leveraging our Loup subsidiary.
Jason. Thanks, Jason Seidl, Cowen. I guess first I'll start with Kenny, and then I have a question for Jason. Kenny, you talked a little bit about the big chemical opportunity. I think most of us in this room are well aware of how many $ billions have been spent by that market. Can you put some numbers around it? You said you had some contracts tied up, so maybe on a % of potential car loads or maybe on a revenue number. Then remind us the length of haul that we're going to see in the future on this business, how it compares to the current length of haul for your chemical business.
Consistent with what Beth has mentioned in the past, we see that in the tens of thousands in terms of volume, in terms of car load. Just want to reiterate, our Dallas-to-Dock product is just one of many product offerings that we have in the marketplace. I talked a little bit earlier about our access to the different ports and going into our SIT and we serve a large number of packagers.
Again, it's one of many of the product offerings that we have.
The length of haul that you see in terms of comparable to your existing chemical network?
That's a good way of thinking about it. It's pretty consistent with what you're seeing today.
Okay. For Jason, two-part question. One's a clarification. I think Ravi talked a little bit about the e-commerce business growing at 14% CAGR, but as I'm looking at it here, it looks like that's your CAGR for the total parcel in LTL. Am I correct in assuming that's total and not just e-commerce growth?
Yeah, actually, we were just correlating the LTL and parcel as a reference to e-commerce, that is not. That is the parcel and LTL growth for Union Pacific.
Are you able to actually dive down and figure out what that e-commerce growth was, or is that a little bit too difficult?
First of all, we don't dive down into the businesses in that much detail. Like I mentioned earlier, it's about impossible to actually tag e-commerce onto one specific segment because it really does cross across a lot of our different segments.
Yeah, that's what I figured. Okay, on the international business side, can you talk about the pie in terms of the U.S. West Coast versus maybe Canada versus the East Coast longer term? We're seeing record numbers coming out of some of the East Coast guys and big expansion plans into Canada. How do you see that total pie, West Coast U.S. versus Canada versus the East Coast?
The way we see it is, if you go back to even 2015 when you had the West Coast strike, you saw some business migrate to the East Coast. That took place then. Of course, the Panama Canal expansion kind of helped with that. Recently, you've seen a few % go to Canada each year. I do think, though, while the pie may have shifted, we do believe the pie is going to continue to grow, we're still going to see growth on the West Coast. A lot of those shifts have taken place. Some may still, based on capacity at those other terminals on the East Coast or in Canada, what they'll be able to handle. We do see the overall pie being able to grow and us participating in more West Coast imports.
Thank you. It's Oh, yeah?
Yeah. We'll go with Tony, then Justin, then Tom-
Tony Hatch
Probably cut it off there.
Quick one for Jason. Following up on that, the LTL parcel business. Do you break out, or do you have direct business with Amazon as your western competitor does, and how is that business growing, and where do you see that? For Bernardo, a similar kind of question on the breakdown. You gave us an overall refined products piece in Mexico. We know it's a great opportunity, assuming politics doesn't change all that. How is your business doing in that? We get that information from another carrier that goes down there. I just wanted to see how we can compare to your refined business growth within Mexico or taking to the border or with your partner.
Specifically with Amazon, today they're mostly a BCO for us, a shipper. We do have a direct relationship with Amazon, not necessarily in terms of shipping. We have sales accountability for them. We spend a lot of time talking to them. I don't want to comment too much because we have lots of ongoing discussions with Amazon. We do see them as part of our growth in our intermediary strategy. You're seeing them as a BCO show up more in the intermediary business that we're doing, and we have long-term discussions about what the long-term strategy is for Amazon and how Union Pacific fits into that.
Justin. Justin.
We can answer his Mexico Energy Reform question. That is a small piece of business for the Union Pacific. Some of it we do, actually a lot of it we do in conjunction with KCSM today. They have most of the refined products terminals on them. We also do a significant amount of LPGs with both them and the Ferromex serving Western Mexico. I wouldn't call that a substantial book of business for us in our overall portfolio.
I wanted to ask about domestic intermodal. Historically, you've talked about the addressable market for truckload conversions. I'm just wondering if there's any update to what that number looks like today. As you think about that opportunity, what's your expectation for domestic intermodal growth long term? We always hear GDP plus, but I'm curious if that means mid-single digits, high single digits, how you're thinking about that.
I don't think our projection's the upside for conversions is still a significant amount of business that can be converted. I don't think anything's really changed there. It's maybe happening faster today than it had in the past just because of things like we talked about ELDs tightening capacity. Maybe on the front end, we're seeing some of that actually come to us and come to fruition. In terms of domestic intermodal overall, I think it really has a lot of things in play. E-commerce growth, what does that mean? How does it play across the different businesses, specifically the intermodal business? I do think it's a GDP plus type number, depending on conversions and what happens in the market with truck capacity in the future. It's pretty unpredictable what's going to happen long term.
I do think in the near term, though, there's lots of opportunities to see a GDP type plus growth.
Okay, last question, Tom, and then we need to move on.
Yeah. Beth, I think we looked at crude by rail in the past. It was meaningful in, say, 2012 through 2014, and then it pretty much fell down to being not meaningful. Do you think the opportunity is something we should consider in the future, or is it kind of noise? The second question, broader, on your carload book, do you think the carload volumes for UP grow above or below the pace of industrial production growth in the U.S.? Just kind of broadly thinking about the growth profile. Thanks.
We would view the open crude markets that exist today out of Western Canada and the Permian as being short term. We wouldn't see that as something that lasts over the long term, that pipelines will ultimately take that volume, we believe. I guess, unless you guys want to disagree with me, I don't know if anybody else has a different opinion, but I would suggest that our carload volumes are moving with an industrial production sort of number. Obviously, there's some markets that have different impacts from that, but if you're looking for something broad, I would say industrial production is the right number to think about. Obviously, we'll be trying to convert more, but it does tend to move with industrial production.
Okay. With that, we'll do a quick transition here and bring our technology panel up, our last panel of the day. Next up, we're going to keep things going here. First up will be Lynden Tennison, our Senior Vice President and Chief Information Officer. Lynden?
Good afternoon, everyone. My name is Lynden Tennison. I'm the Chief Information Officer here at Union Pacific. I've been in this role for nearly 14 years, and I've spent over 25 years at Union Pacific, and held a number of jobs within the company. Prior to this assignment, I led one of our small technology subsidiary companies as President and CEO, and I worked for nearly three years for one of our former chief operating officers as the tech person within the operating department. Before joining Union Pacific, I was at American Airlines, where I led the artificial intelligence and operations research organization within Sabre, which was their technology division. I began my professional career at AT&T, where I worked in emerging technology areas, including a number of years spent in the Unix operating system space.
Our team is made up of over 1,200 employees and 300 contractors, if you exclude the team that's doing our Positive Train Control system, which is a very large initiative on its own. Of the 1,500 people, over 800 are doing systems design and development. We recruit at the top universities in the U.S. and have a dedicated career path for our IT professionals, very similar to what you would find at a pure technology company. We even have a small group of 25 professionals that have obtained the distinction as a Union Pacific Distinguished Technologist, a difficult-to-obtain title that's governed by a peer review panel. Candidly, our IT team is as good as most pure play software and hardware engineering organizations around the world. One of the areas that this team has been focused on is our NetControl platform.
NetControl, as a system, was initiated to replace our over 40-year-old core transportation management system, what we call TCS. Our environment is Java-based and leverages open source principles and technologies. The NetControl platform is unique and unmatched in the transportation industry. It allows us to utilize cutting-edge technologies to build complex transportation solutions in a cost-effective, secure, flexible, and agile way. We've also modernized our legacy EDI value-added network, or VAN platform, which today we call Gateway Connect. This platform provides us with a secure, efficient, and highly scalable tool to connect with customers, trading partners, and other transportation providers at amazing speeds and with unique capabilities. I believe these two key platforms will offer us the ability to continue to differentiate ourselves from a safety, a productivity, and a customer value for many years.
We can quickly develop and deploy advanced automation, deep analytics, including AI solutions like machine learning, integrate quickly and effectively with our customers' operational and logistics systems. We also provide Internet of Things, or IoT capabilities, allowing us to leverage more sensor integration to streamline our maintenance and inspection processes. I'll highlight one of the areas we're leveraging the NetControl platform to drive IoT processes when I discuss SensorX later in my speech. Before I move on, however, I think it's important that I not leave you with the perception that we're building our internal tech capabilities without a clear focus on business results. On the slide you see now, you see two indicators of our relentless focus on driving both company and internal IT percentages of revenue as compared to other industries.
Although this isn't a perfect measure, it's a reasonable indicator of the relative efficiency of our technology spend. You can see that despite our industry-leading technical capabilities, we're highly efficient in our delivery model. In fact, our cost as a percentage of revenue for IT is one of the lowest ratios we've seen in any industry. You also see on the slide a picture of a locomotive radio, which represents another example of how we leverage our technical capabilities to lower costs. We used our in-house design expertise to redesign our locomotive radios. We were convinced that we could take a significant cost out of these devices. By using our electrical engineering capabilities, we were able to reduce the cost of these radios by over 50%, saving us over $10 million. Having this deep design expertise will continue to drive benefits over the years to come.
One current initiative underway is a project we call SensorX. This work is leading edge, and we've filed patents on portions of our work here. On the screen, you'll see a device that one of our electrical engineers designed. This small, inexpensive device is comprised of three different electronic sensors: an accelerometer, a strain gauge, and a digital temperature sensor. This device can be installed in the webbing of the rail to improve our inspection processes in a myriad of ways. For example, we can inexpensively replicate much of the functionality in our current wheel impact load detectors by using the accelerometer and the strain gauge sensors to identify wheel defects, such as flat spots on wheels through the kinetic energy transferred to the track.
This can avoid track damage and reduce the risk of wheel-caused derailments by giving us a significant boost in the frequency and the timeliness of such inspections. We can also use the temperature gauge to continuously measure track temperature, allowing us to more precisely forecast and prevent incidents such as broken rails caused by sudden temperature drops or sun kinks, which are caused by rapid temperature increases. We can use the strain gauge to identify situations such as out-of-balance loads. All of these capabilities are enabled by our NetControl IoT platform, which provides sophisticated processing capabilities for diverse sensor types. These use cases, plus many more, will allow us to continue to improve our safety, inspection productivity, and drive increased capital effectiveness.
I could go on and on about additional opportunities. Now I'm going to turn the stage over to Eric Gehringer, who will talk about our engineering inside UP. Eric?
Good afternoon. My name is Eric Gehringer. I'm Union Pacific's Chief Engineer, which means I'm responsible for everything related to our track, terminal, bridge, and signal infrastructure. I've been with the Union Pacific for 12 years. During that time, I've held various positions on the maintenance side, methods and research, as well as equipment and track renewal operations. Today, I will discuss engineering department's role in improving productivity. For us, this is more than reducing expenses to improve the operating ratio. Most of the spending that we are responsible for is part of our capital budget, or more specifically, our replacement capital. Over the past several years, the engineering department has been engaged in a large number of productivity initiatives.
Each initiative leverages Union Pacific's innovation, resource productivity, and engaged team value tracks, along with many of our UP Way tools that we use to drive continuous improvement projects at the company. First, a little background. Engineering renewal work involves the replacement of assets that have reached the end of their useful life. This includes ties, rail, bridges, and ballast. Over the past two years, the engineering department has been engaged in a number of G55 and Zero projects to improve productivity. The impact of these projects is greater than simply lowering our maintenance expenses and the cost of capital replacement programs. When we do our work, it is necessary to establish a curfew, which is a time window during which trains cannot operate where our employees are present. There is a natural productivity trade-off to be considered when planning curfews.
Our work gangs are more productive when they are able to occupy the track longer curfews slow the flow of trains and adversely impact customer service. I'm pleased to say that our initiatives have been successful. Productivity for our wood tie replacement projects has increased by 9%, from 294 to 319 ties per hour. Year to date in 2018, the same metric has increased another 4% to 333 ties per hour. While we are pleased with the results so far, we have even more productivity initiatives planned for the next couple of years, which will further reduce cost and reduce the time required for our gangs to perform their work. Next, I will walk you through several of these initiatives in more detail.
You will see that each initiative features new innovations to automate costly processes and to reduce the amount of train delay caused by tie renewal work. Today, our engineering department operates 14 tie gangs. Each gang consists of 80 to 100 employees and utilizes approximately 29 mechanized track machines. On average, each gang installs 2,000 to 2,400 ties every shift. Combined, the 14 gangs replace approximately 4 million ties annually. The first step in the renewal process is the distribution of new ties along the right of way. This requires a combination of vehicles, large equipment, and employees all engaged on track to unload 4 million ties along more than 3,300 track miles each year. The objective of the first initiative is to automate the unloading process. Soon we will utilize custom-built rail cars capable of autonomously unloading wood ties with less human intervention.
With this innovation, new wood ties will be loaded into magazines on each rail car. Each rail car will be capable of transporting 400 ties. Each train will consist of 80 rail cars for a total capacity of 32,000 ties per train. Using a computer system in conjunction with various mechanical devices, the magazines are capable of automatically distributing new ties along the right of way at an appropriate rate for the specific project. This initiative will reduce track curfew time by approximately 16,000 hours per year and deliver a significant reduction in tie unloading costs. With the new ties distributed, we move forward with the second initiative involving replacement of old ties with new ties. The engineering department is currently working with suppliers to develop new equipment that will result in another step-change improvement in wood tie replacement productivity.
The new equipment will rely on a combination of proven and new technology to significantly reduce the number of machines required to replace wood ties. In total, we expect our cost to replace wood ties will ultimately decrease by more than 10% versus our 2015 baseline. The third initiative relates to the collection, transportation, and disposal of old wood ties. The current process is costly and requires extensive track time. Today, used wood ties are handled multiple times as they are assembled into progressively larger piles along the right of way. Once a pile reaches 500 to 2,000 ties, a contractor loads those ties into rail cars. The loaded rail cars are then transported to a facility for final disposal. The entire process requires us to handle each tie seven to eight times.
A new process, currently under development, will gather all ties immediately after removal by dedicated scrap tie trains. The new process will dramatically reduce the number of times each tie is handled and will be capable of performing in days what currently takes weeks for each wood tie renewal project. The cost to dispose of wood ties will reduce considerably. The process is also expected to reduce track curfew time by 12,000 hours annually. Engineering expects to begin realizing reduced cost and curfew times on two of these projects in 2019 and a third in 2020. Next, I will highlight a productivity initiative related to track maintenance operations. The initiative is entitled REPS, which stands for Regional Engineering Productivity System. The goals of REPS include, One, increasing the time workers spend performing value-added tasks. Two, standardizing the entry and communication of defects and other items to be repaired.
Three, provide work gang leaders tools to improve planning and logistics. Four, promote standard work. One of the foundational aspects of REPS is a system that awards productivity points for each project that is completed. More complex projects are assigned higher points. Work teams are incented to plan their day in a manner that is most efficient. For example, work gangs will try to complete all projects that are in the vicinity of each other in order to minimize travel time. Since early 2017, we've achieved a 3% improvement in the time between the discovery of a defect and the time it is repaired. In 2018 and beyond, REPS will remain the foundational tool engineering employs to continue to improve productivity through effective management of resources.
In addition, the engineering department is developing strategies that will further leverage REPS in many areas, including infrastructure health and optimizing the use of personnel, equipment, and other resources. In closing, the engineering department remains committed to steadily improving productivity and reducing the time required to perform our work as we maintain and improve the railroad's critical infrastructure. Next, I will turn it over to Chantel.
Thank you, Eric. Hello. My name is Chantel Kruse, and I'm the Vice President of Loup, our commercial subsidiary. I have been a part of the UP team for 22 years in a variety of different roles within the marketing and sales department. Today, I will provide you with an overview of Loup, and I will introduce a few of our growth initiatives. We are aggressively introducing and expanding creative solutions to help grow our business and to deliver an excellent customer experience throughout our customers' supply chains. Before Loup was officially created in November 2017, Union Pacific had four subsidiary organizations with histories rich in bringing new business and products to the railroad. Union Pacific Distribution Services, or UPDS, provided four paramount service offerings, including transloading, which combined the economies of rail with flexibilities of over-the-road. Logistics solutions worked to iron out supply chain wrinkles.
Intermodal auto parts shipping protected customer schedules while also providing the best service and value. In 2017, we purchased cold storage assets, and we have been responsible for delivering the Cold Connect product offering. Streamline brought door-to-door intermodal shipping to the marketplace, providing ease of access to gate and equipment supplies, as well as a vast network of drayage and rail providers throughout the U.S., Mexico, and Canada. ShipCarsNow combined rail, truck, and drive-away services for the automotive marketplace. Insight Network Logistics provided supply chain management expertise to optimize network costs and efficiencies across customer inventories. To give you the full picture of this benefit, here you will see what we mean at Loup when we say that we're a full-service solution to our customers. Today, we offer a full suite of logistics solutions.
We don't take our role lightly, and we see our greatest mission to live out the statement that solutions live here. Since our formation, we've worked quickly to integrate our books of business into one. Completing this process smoothly allows us to capitalize on network extension opportunities and our collective buying power in the marketplace. Almost any commodity can transit by rail, thanks to the combined breadth of the Loup product lines. I'd like to draw your attention to our business mix. We are recognized across our solutions to have a portfolio that's both mature yet vibrant. In even our most established books of business, we still see opportunity to drive growth, continuous improvement, and innovation. As one organization, we provide a full North American supply chain solution for almost any commodity and have skilled experts to oversee the process from start to finish.
In my next few slides, I'll discuss just a few of our ongoing initiatives for 2018. I've selected one initiative from each of our product lines to give you a glimpse of how we're forging a path forward in each area of our business. Let's start first with our newly developed domestic reload program. This program supports our ocean carriers' desire to reduce empty repositioning costs. Through Loup's network, we marry available ISO capacity to the capacity needs in the domestic intermodal market. We are helping our steamship customers by getting their fleets back to the port, and we're also helping our domestic customers by offering incremental container capacity in constrained markets. We have started this program with additional capacity in Chicago, and we have plans to extend to other constrained markets like Memphis, Kansas City, and St. Louis throughout this year.
Next, I'll speak to you about what we're confident to be a growth opportunity that exists in the space of intermodal auto parts. New for this year, we plan to expand our current business development efforts in this area to target growth beyond our current portfolio of manufacturers. We believe this can lead to the development of a new market, working with top-tier suppliers of auto parts who require similar time-sensitive or just-in-time service that we've proven ourselves to be experts in. By developing relationships with additional auto manufacturers, we believe a significant opportunity exists in the competitive space of auto part shipments, and we look forward to the growth opportunities that exist for Loup in this area. A third initiative I'd like to introduce today is our Select Connect program for our network extension vendors. Our transloaders play a critical role in driving a better Loup customer experience.
Through our in-depth discussions with our key suppliers, Loup has identified several opportunities to improve speed to market, provide more accurate initial bids to our customers, as well as an opportunity to enhance the Loup brand with our network extension vendors. Select Connect is a brand-new classification that Loup is rolling out in 2018. This distinction will allow Loup to recognize and align with key network extension vendors in a way we never have before. With hundreds of potential transload locations across the Loup network, the program will provide current and prospective customers a stamp of Loup approval to help them be more comfortable that Loup has vetted a vendor, and we stand behind their service quality. This initiative brings a maturity to Loup's supplier network as we look to partner with the very best providers in building our service solutions.
For our suppliers, that brings stability and mutual commitment, for our customers, that brings consistency and dependability. Finally, Cold Connect. Cold Connect is an industry-changing initiative that is allowing us to penetrate a market otherwise untouched by rail. We have developed a railcar product that is an LTL-like service offering. We have a unique ability to be involved throughout the produce supply chain, as we utilize the best attributes of refrigerated rail, warehousing, and truck, creating a competitive, value-added supply chain solution to the food industry. As Jason mentioned, we are working in conjunction with the UP Premium team on the development of a ramp at our Wallula location. This will expand our product offering to distribution areas not currently covered by Cold Connect, as well as enhance shipments by adding the ability to ship a wider variety of products to our current customer base.
Technology is available for us to utilize to improve shipment visibility for our produce customers and create new market opportunities. Our real-time visibility to inventory at our warehouses provide visibility to the SKU-level detail our customers need. We offer reporting throughout the rail journey that provides visibility for the entire shipment, with special attention to accurate and proactive temperature control updates. In addition, we are piloting the use of ethylene filters to help us extend the shelf life of non-traditional rail products like apples. We believe that this will help open up additional market opportunities for our rail products. Loup brings meaningful supply chain solutions to current and prospective customers. Loup's customers benefit from our blended and expanded portfolio, a larger market presence with deepened buying power, and our wide breadth of experience.
Our continued focus to cultivate unique solutions and meet our customers at or before their point of need, drives innovation at a rapid pace in our organization. We are looking ahead to create the solutions of the future while also finding ways to complement and grow the Union Pacific franchise. Thank you, and now I will turn it over to Mike.
Thanks, Chantel. We'll take a few questions here for this particular panel. We're going to take a short five-minute break, and we'll come right back with Rob, and then the final Q&A. I know a lot of you have flights and are trying to get out of here this evening, we will have shuttles arranged downstairs as well. Let's take just a few questions, and then we can start. Robbie?
Ravi Shanker , Morgan Stanley. Chantel, a question for you. Can you help us with some numbers on Loup, how big it is, and maybe how do you measure the success of Loup? Is it in terms of cross-selling opportunities, in terms of boosting the OR at UP, what's the target there? Also a question for Eric. What's been the union's response to the engineering productivity initiatives if things like track maintenance and supervision are being replaced by automation? Thanks.
Okay, I can start. Loup's revenue results roll up to subsidiary revenue and our other revenue line. Recently, we started breaking out subsidiary revenue in our 10-Q, but that also includes our other subsidiaries as well in those numbers. At this point, we don't have plans to isolate Loup's revenue exclusively. I think to answer your next question about Loup and how we measure success, one of our primary objectives is to find ways to help the railroad grow in all these diverse markets that we are part of. We are bringing profitable, reinvestable business to the railroad.
My question about engineering, all three projects that I spoke about on the capital side are in their development phase. As we work through those, we're obviously conscious of CBA implications. Equally important in those is really the idea that when I focused on reducing track curfew time, that's equally important in those projects. It's not just the labor component.
This is a question.
You have me? Tony?
Sorry, yeah, sorry. A question for Lynden, I apologize if you did highlight it. That 1% plus or so that you made the comparison to, how does that compare to a Class I average or to, say, whoever you would consider to be the leader in spending? That's operating expense, right? How would you compare that in capital? I'm excluding historic PTC, your capital budget and your future budget, how will that grow?
Let me make sure I understand the question. How do I compare to the rest of the industry? Is that one of the questions?
You compared it to other industries in that, I'd love to know how it compares to, well, frankly, to BNSF.
I have the data to compare all of that. We are very competitive from an efficiency versus our peer group. I won't go into the specifics, but just suffice it to say we're very competitive there. From the standpoint of our capital spend, I don't know, Rob, how you want me to. I mean
We.
I don't really break that out.
We're not going to project capital spend out into the future. It's fair to say that when we look at our IT capital spend, our tech capital spend, that there's more appetite for it as we look out in the future. The majority of our spend right now is on running the infrastructure that we've got and productivity changes to that infrastructure. There's a smaller piece that's about transformational spend, which is some of what you heard about today. I anticipate that smaller piece grows and the other two pieces don't. Net, there'll be more appetite in IT, but it's not enormous.
Yeah, pretty small.
Casey?
Casey Deak with Wells Fargo. Chantel, just wanted to ask on the intermodal wholesale aspect of the business, it would seem that selling into that kind of disintermediates the intermodal marketing companies. Is it a certain type of customer that you would be targeting? What is the profile of somebody who's going to fall into that category of a Loup customer, especially for that intermodal product?
I'm a believer that it's an option for all intermediaries. Customers that ship on the ramp side, we also see on the wholesale side at Loup. It also opens the door to others that maybe couldn't handle that kind of door-to-door themselves or would prefer us to use our expansive network to help them be competitive in the marketplace. I think we're seeing a little bit of everything across the board because we do have great coverage in terms of our dray network and then, of course, the North American reach in terms of gate and equipment.
Let's just take one more and then take a quick break. Allison, I think I know you.
Thanks. Allison Landry, Credit Suisse. With Loup, does your go-to-market strategy for cross-border intermodal with Mexico, has that changed at all? The reason I'm asking is, has there been any changes as a result of BNSF's strategy or venture with Kansas City Southern from a competitive standpoint?
No. Our strategy is the same. We are serious about solutions, and like I mentioned earlier, we are very focused on growing and finding new solutions, expanding existing solutions for that business.
Let's take a quick five-minute break. If there are a couple other questions, we can pick it up in the final Q&A. Let's just take a quick five-minute break, and then we'll be back with Rob's presentation.
All right.
You ready for us? It was good.
We'll retake it.
It worked.
Took a long time. Well, I didn't mean to catch it.
I didn't either. Well, we weren't here. I wasn't here for the first part.
I wasn't.
He did go through pretty quick. So be it. That's okay.
Actually amazing.
Amazing.
Like, it actually was all right. This is a very good question. The interesting thing about this, maybe it's true of other colleges and colleges, these animals stick around for a long time.
You ready, Mike?
Give it one minute for everyone to get seated in the morning.
30-second warning. One-minute warning.
Thank you. Yeah. Now they're not paying attention.
All right.
Thank you, Mike. Good afternoon. I think as I am speaking, my slides are being passed around to the group. I'm going to wrap up with what it all means financially, and then we will have a full Q&A here with the senior team. Before I tell you what we are going to do, let me first remind you, all of you who know me know I can't talk without reminding everyone what we've accomplished over the last decade or so, which we're very proud of. Over this time period, we were successful in delivering significant improvements in our core financial results. Back in 2004, we had an 87.5% operating ratio. We finished 2017 with a 62.8% operating ratio, nearly a 25-point reduction. We had earnings per share of $0.71 per share. In 2017, we reported $5.79 per share and 18% compound annual growth rate.
Thank you, Mike. Good afternoon. I think as I am speaking, my slides are being passed around to the group. I'm going to wrap up with what it all means financially, and then we will have a full Q&A here with the senior team. Before I tell you what we are going to do, let me first remind you, all of you who know me know I can't talk without reminding everyone what we've accomplished over the last decade or so, which we're very proud of. Over this time period, we were successful in delivering significant improvements in our core financial results. Back in 2004, we had an 87.5% operating ratio. We finished 2017 with a 62.8% operating ratio, nearly a 25-point reduction. We had earnings per share of 71 cents per share. In 2017, we reported $5.79 per share and 18% compound annual growth rate.
Our return on invested capital increased from 5.3% to 13.7%, over eight percentage points of improvement. We accomplished all this without the benefit of volume growth. In fact, volume decreased 9% over this time period, largely because of the falloff in coal. Cash from operations grew to over $7 billion in 2017, up from around $2 billion. Declared dividends per share increased from $0.30 per share to $2.48 at the end of last year, which was also an 18% compound annual growth rate. We repurchased more than 350 million shares, totaling about $23 billion. Our market cap increased from $18 billion to approximately $110 billion. Now let's take a look at what we've accomplished since our last Investor Day, which was in late 2014.
While volume went against us over the past few years, as we've discussed, we were still able to achieve solid price and solid productivity improvements, and we achieved or surpassed most of our financial objectives. The one goal that we are likely to fall short of that we set back in 2014 is the operating ratio. I'll update you on our thoughts going forward here in just a minute. Overall, this was a very solid performance, enabling us to return significant cash to shareholders. At our last Investor Day, we told you that we would grow our cash flow and that we would return more of that cash to our shareholders. We've done that. We've walked our talk. Over the last three years, we increased our annual dividend per share 30% and paid out $5.8 billion in dividends.
Over the same time period, we repurchased 107 million shares at a cost of $10.6 billion. Combining dividends and share repurchases, we returned $16.4 billion of cash to our shareholders over the last three years, representing 120% of net income over that same period. Turning now to our operating ratio targets. We are now guiding to a 60% operating ratio on a full-year basis by 2020. Our operating ratio improvement over the years has been driven by a company-wide effort to continuously seek out new opportunities to increase our margins through our safety, service, productivity, and pricing initiatives. Many of you will remember that we started our efforts with Project 75 in 0 at a time when our operating ratio was in the 80s. In four years, we dropped it to almost 70. We next initiated Project OR, which got us to a 63.5 operating ratio.
Our latest initiative is G55 and Zero, which is designed to achieve a 55% operating ratio by growing our business, achieving annual productivity improvements, achieving price above inflation, and progressing on our safety initiatives. While the timeframe for reaching 55% will be beyond the year 2020, we are firmly committed to reaching that goal. Hopefully, what you've heard from us today from our operating team, our marketing and sales organization, and the technology panel demonstrates that we have opportunities for further near-term OR improvements, they are very real and achievable. The ultimate timing of reaching a 55 will also be dependent on other factors, many of which are beyond our control. The global economy, trade policies, energy markets, et cetera, are all examples. The drivers to achieve margin improvement are the same drivers that we've always talked about, that's volume, pricing, and productivity.
Since our last Union Pacific Investor Day 2018, we generated over $1.3 billion of pricing benefits and $1 billion of productivity, both, as we've discussed, without the benefit of volume growth. For the next three years, including 2018, our guidance remains essentially unchanged. We expect positive annual volume growth driven by market growth and new opportunities that we discussed today. We expect to generate pricing above inflation, and we will continue achieving significant productivity improvements through our Grow to 55 and Zero initiatives. All of this will combine to generate higher earnings and cash flow for our shareholders in the coming years. As always, we will continue to maintain a disciplined approach to our capital spending, prioritizing projects where returns justify the investments. Our Grow to 55 and Zero initiatives will not just improve our margins, but will also generate productivity improvements in our capital programs, as we've discussed earlier.
Eric Gehringer, our Chief Engineer, showed you a few examples like the tie replacements, that are great examples of that productivity. This productivity and many others will help keep our capital investment needs at or below 15% of our revenue in the coming years. Turning to our balance sheet. We believe that we have the capacity to increase the level of debt in our capital structure. Several factors have led us to this conclusion. First, as I showed you earlier, we have demonstrated the ability to consistently increase margins and cash flow over many years. Second, we expect higher annual cash flow as a result of the new, lower corporate tax rate, of which we are a significant beneficiary.
We are confident in our ability to achieve further annual improvements in revenue, operating margin, and free cash flow as we grow to a 55% operating ratio in the coming years. We previously targeted an adjusted debt-to-EBITDA ratio of just under 2 times. We are now increasing that target to a ratio of up to 2.7 times. We have been saying that our objective is to maintain a strong investment-grade balance sheet, and we are now specifically defining this to mean a credit rating of no lower than a Baa1 by Moody's and a BBB+ by S&P. Although we will not increase our debt level to 2.7 all at one time, we do plan on taking a significant step in the near future, which we will get about halfway there in 2018.
As we continue to make progress in achieving our financial targets, we will further increase debt, getting up to the 2.7 over the following year or two. What does all this mean with additional cash? What are we going to do with it? First, as I stated earlier, we will continue to invest in the business while maintaining our capital spending at 15% of revenue or less. Second, we will increase our dividend to remain in the target payout range of 40%-45% of earnings, and the remaining cash, including cash from new debt, we will allocate to share repurchases. Over the next three years, inclusive of 2018, we expect to repurchase approximately $20 billion of our shares. This represents just under 20% of UP's current stock market value. To wrap up, we see great opportunity in the coming years to significantly grow shareholder value.
Everything that we've talked about here today gives us tremendous confidence in our ability to do that. Hopefully, we have provided you with a good sampling of that this afternoon with the key initiatives that we have underway and some of the insights that we have on how we will translate our plans and actions into meaningful results. With that, we'll open it up for the broader final Q&A.
Okay. We'll get to everybody here. Let's start with Ken.
Great. Thank you for the presentation today, Lance and team. I guess if I could just start out with. With talking about going back to the opportunity to improve the margins, and maybe Lance or Cam, bring you in on the precision railroad question, which is just what we've seen at CN and CP and CSX and how they talk about or what Hunter used to talk about the network overhaul that was needed to make that level of improvement to get that. Rob, over the years at conferences, you've always said, "Well, what we do, others should look to what we do. We've got the OR." Now we're starting to see the networks maybe surpass in terms of the margin or speed with which they were able to get to that level.
Maybe you can just take a step back and talk to us about why, Lance, what you're doing, or Cam, how you're positioning the network is different than what the precision rail model is and why you still believe keeping the things the way you do with hump yards and the like, that it can still achieve that level of improvement.
Okay. I'll start taking a stab and then Rob or Cam or anyone else can jump in. When we look at how to run our business, we've said this over and over again, we'll look anywhere else where we can find somebody that's utilizing assets better, getting better fuel efficiency, driving better resource productivity or velocity, et cetera. All other railroads are an opportunity for us to learn from. As we look at the pace of change for us, we are in pretty tall cotton right now, our pace of change, I would anticipate, is going to be a little different than it was early in the stages of, let's say, Project 75 and 0 and Project OR and 0. That doesn't mean that we've lost either appetite or sense of urgency or the ability to continue to improve.
I won't guess or try to estimate how other businesses look at their book and their portfolio and how they try to satisfy their stakeholders. I look at how we're trying to do it here, and I think how we're addressing each of those issues, whether it's productivity, price, the ability to grow volume, we address all of that with an eye towards each of the stakeholders and making sure that we're ultimately driving long-term enterprise value. I think we are. We've demonstrated that we are, and we're going to continue to do that.
Tom?
Yeah. Also on operating ratios, I think getting to 60 in 2020 seems pretty reasonable, and it's a pretty favorable cyclical environment. If we look at the 55, and we take a step back, you had a lot of price over 10 years that drove 2,000 basis points margin improvement. To go forward, seems like there's probably less price. How should we think about that 60 to 55? Are you going to get more from productivity? Is there more need to grow volume than in the past? Because again, the framework in the past was, hey, you did great on price, and that was the most powerful driver on the margin side.
Yeah, Tom, let me take a shot at that. You're probably right that the dollars that we actually achieve looking forward might be a little more productivity versus price than it was if you look historical, because we had the benefit of going, when we took that 25-point improvement that I referenced in our operating ratio, we did have the benefit of some lucky pricing in those years, and that's behind us. Our commitment on pricing and our guidance still is pricing above inflation. I remind you that our guidance also and our assumption to get to a 55 is positive volume. We achieved what we've achieved looking backwards without the benefit of positive volume. We're going to need positive volume to help us get there as soon as we can.
Yeah, All those levers, volume, price, and productivity, are going to be the drivers. Exactly how they deliver each year remains to be seen. I will assure you that our entire organization is focused on the G55 target. In fact, everywhere in the company has that kind of tattooed on their head and all the initiatives we have underway, which we're trying to include everyone in our company being involved, they're focused on finding ways to get to that 55. That's going to take help with the economy. It's going to take some other things to drive there. That's kind of how we're thinking about it, and it's going to take, again, the combination of volume, pricing, and productivity.
Okay. Thank you.
Chris?
Thanks, Chris Wetherbee from Citi. Wanted to ask, I guess, two questions. First, on the OR, thinking about this 60 in 2020, you were ±60 in 2019 previously. I guess when you think about pulling that target and then putting the 60 in 2020, where are some of the puts and takes that give you sort of the confidence that one more year kind of gets you to that level? The second question is more broadly about sort of volume for the business. Do you think that coal has sort of bottomed out to the point that as we look out over towards that 55 target, that volume will be a bigger part of the story than it has been as we've seen the significant improvement really driven by pricing?
I'll take a shot at that also. Chris, again, if you look at coal and you listen to what Linda and Beth talked about earlier, while coal we don't expect to take the free fall that we've lived through the past several years, we do think there's some softness still in front of us. We don't think it's going to kick up. We think we've lived through, if you will, the significant falloff like we saw when electricity generation from coal went from 50% down to the 29-ish or whatever it's at right now, 29, 30-ish. To get to 60, we are counting on a positive economy and a positive volume to help us drive that. To your question of what changed that we went from the 60 ± to the 60, we feel real good, and Cam and his team went through it.
We feel real good about the progress we've made. We admitted we incurred some costs and kind of fell off the wagon, if you will, in terms of the line we were on to drive the $300 million-$350 million of productivity this year. We backed off that given some of the challenges that we experienced in the first quarter. While I've said publicly we're going to still have some of those Of service costs in the second quarter, because there's a lead lag effect. We are very pleased, and it is the key to see the metrics moving in the right direction. What gives us confidence that we can get to a 60 by 2020?
It's confidence in the economy cooperating, our ability to develop business volume growth, our ability to get pricing above inflation, and our confidence that we will get back on that very aggressive, steady pace of path of generating very solid productivity.
Ravi?
Ravi Shanker from Morgan Stanley. Rob, first, a clarification. You typically do not include real estate gains or large amount of ancillary revenues in your OR. To get to the 60 OR target by 2020, can you confirm there's no real estate or ancillary in that?
Yeah. Thank you for asking that, by the way. Not all railroads report it exactly the same, and I'm not being defensive, but we're proud that our achievements on what we've accomplished so far in our operating ratio targets does not include real estate. When we give a 60 and ultimately a 55, we are not counting any real estate gains in that.
Got it. Another question for you is, you said that the getting to the leverage target depends on macro conditions. Can you kind of bracket what you're looking at or what's the gating factor there? If GDP growth slows, would you consider not levering up as much, or do you need to get to a negative volume situation? At what point would you say, "You know what? Maybe we don't lever up as much as we said we would"?
I'm not sure I tracked.
Yeah. I think the question, Rob, was about what might be the gating macro conditions that retard us from being able to make the kind of progress on OR that we think we're going to make. I think when we're talking about that, in your minds, I think you always hear a conversation about how we're due for a recession. If we get some kind of major incident-driven recession that starts up in 2019, that could very well be something that makes it really, really difficult, in the timeframe we've outlined, to be able to accomplish what we've talked about here.
Thanks. Deutsche Bank. Rob, on the last earnings call, you talked about not pulling margin targets out of the air, which obviously makes sense, and I'm sure you guys have a kind of bottom-up plan in terms of how you get to 60%, certainly in 2020, and then hopefully 55%. With that being said, what's really kind of a little bit curious is your 55% target kind of mirrors in some ways what the expected long-term incremental margins for the business are over time. Maybe a little bit lower, but it kind of implies that over time, I guess your absolute margins will kind of reach parity with your incremental margins.
If you could just kind of help us around putting a little bit more meat around assuming volume and pricing roughly stay kind of within your expectation, how much of that bridge, either to 2020 obviously would be more relevant, is actually within your control from a productivity or net cost savings perspective? Then I just have a follow-up on CapEx. Thanks.
Yeah. I would say that the part that's not in our control is the overall economy, and as I called out, that's probably the largest gating item as to why we can't fixate a date on when we feel confident we'll get to a 55. It'll obviously be beyond 2020, and we're going to get there as quickly and as efficiently as we can. The biggest gating item that's out of our control would be the overall economy, because when you're at this level of operating ratio, you do need positive volume growth to sort of take advantage of the incremental margins that we're talking about. All of you know that we're not in this game to have the best operating ratio. We think that is a good measure of efficiency. We're in this to drive returns and cash returns for our shareholders.
We know there's a correlation there, so we're not shying away from business at this stage that doesn't have a 55 operating ratio on each individual move. Be rest assured of that. To your point on the incremental margins, it is going to take, again, 50%-60% kind of incremental margins on that assumed positive volume growth for us to get to the 60 and ultimately to the 55.
Just a point on what Rob just said. I know you all read our proxy. In there, you saw that we're compensated on three things. We're driven on three things. Operating income growth, that's absolute dollars, the efficiency of generating that's operating ratio, and doing it with capital efficiency, and that's return on invested capital. There's also an element of safety service, kind of a balanced scorecard. That's how we're compensated, and that's what drives kind of our ultimate goal setting.
Just one follow-up on the CapEx, if I could. You talk about 15 or lower for the foreseeable future. I just want to try to understand your confidence around that because we have had a couple of rails that have seen a lot of volume growth, and that's driven a lot of inefficiencies, and you've seen actually CapEx tick up pretty significantly. Just help us understand a little bit around the control that you have over CapEx in maybe a growing kind of pro-cyclical environment.
Yeah. I would say that we feel confident in the network that we've built. We are continuing to make investments like the Brazos that we previously had announced, but we talked about that today as necessary investments. I know one question that you all have is, if the economy surprised and volumes were the opportunity was way larger than our planning assumptions are based around, might there be opportunities for us to spend additional capital, take advantage of that, so long as the returns were there, that we're confident? Yeah, that's possible. As we look at our best look at the longer-term business environment and the volumes that we are confident that we can attract at the right level of margins, we think the 15% or less of capital spending gets us there.
Justin, we'll come to the back.
I had a couple of questions. First is on mix. I know it's hard to predict, but I'm curious just directionally what you're assuming in the guidance to get to a 60 OR. Is it positive, negative, stable? Secondly, on productivity, if you look over the last three years, you mentioned about $1 billion of cumulative productivity gains. Over the next three years, it sounds like you expect that number to be higher, is there any color on how much higher, or what's getting baked into the forecast there?
Lance, I'll take the second part. I didn't catch the first one, to be honest. I would say on the productivity, yeah, we're very proud of the $1 billion of productivity we achieved over the last three years. I'm not guiding that the next three years are going to be more or less than that. I can just tell you that it's going to be equally aggressive, and I think the G55 and Zero initiatives will be the driver. Again, we're all committed to and lined up to put our shoulder to the wheel on achieving that. Whether it turns out by the time we close the doors three years from now to be more or less than $1 billion, we'll see how that all plays out. Again, it is the levers of volume, productivity, and pricing above inflation that will get us to that 60.
Justin, we'll let Beth answer your mix question. Just going back to productivity, the last three years, two of them totaled -15% volume, you had a, what, a +2% or whatever it is.
Yeah.
We got $1 billion of productivity out of that environment.
Yeah. Beth.
Yeah. When it comes to mix, what I would say is we have initiatives going kind of across the board, when you think about the business that appears to be growing and the opportunities that we have, a lot of that comes in a domestic sort of intermodal, in truck conversion, as well as in our carload business where we're going after lumber and steel. You may see things like frac sand moderating as we move forward and in-basin sand comes online, you'll see things like intermodal and lumber and other consumer products probably rising. Does that help?
We don't know.
I don't know. I was trying to give you levers to look at. When you balance all that out, where does it come out? I'll let you make an assumption, when I think about the business that we're working on and we see growing, it'll be truck competitive business. Some of that's going to be intermodal, and some of that's going to be on the carload.
Beth, if I can just reiterate what you all have heard me say many times, as we don't try to guide on mix because, again, it's a Union Pacific franchise advantage that we play in so many different markets that we have more variety and more diversity in our product mix that I've given up years ago trying to project exactly what mix will. Because you also have mix within mix. One thing we know is we have a great franchise that will take advantage of any business opportunities that we have. It might mix you up and it might mix you down on ARC, but we're very focused on, in every one of our business lines, driving productivity improvement and driving margin improvement.
Even though the ARC might show up as an up or down number, the overall margins, we're focused on driving each one of them to improve.
We'll go Bascome and then Jason.
Yeah. Bascome Majors, Susquehanna. Rob, with your new leverage target of 2.7x EBITDA, can you just remind us how you get there, if that 2.7 is consistent with capitalized leases, other adjustments to how you've done it in the past?
It's consistent with how we've looked at it before when we were calling out less than two. It's an apples to apples measure. How do we get there? I would say that the entire organization, everybody up here and the other 41,900 employees, are focused on driving the business so that we drive solid growth in our cash flow. That, combined with the additional debt we're going to be taking on and the tax advantage, obviously, that we have right now, gives us the confidence in our ability to do this.
If I can tack on one high level one here. Hindsight is always 2020, if you go back to how you felt about the business in 2014 versus how you feel about it today, is the top line volume opportunity better, worse, about the same? Can you guys directionally just kind of point us in how you're thinking about the business and how good you feel about the next couple of years?
Yeah, we feel good about the business right now. I'll let Beth answer a little bit more deeply on the top line. What feels good about the business right now are very big macro impactors, right? The United States, in certain ways, is better postured than we were in 2014 to be both a global competitor and a global participant. Our tax structure is right from a corporate perspective, and the regulatory environment is much more focused on using technology and being less prescriptive and more describing what the end game is and letting industry get there. The one thing that makes us a little less optimistic is our global position on trade. That's the one thing I think we as a country could screw up, and if we do, it would be a negative impactor in the short term and the medium term.
I think in the long term, our country and our trading block has never been better positioned in context of overall trade in the world. Beth.
Yeah. I would say, the current market feels good, right? You've got, as Lance points out, really strong economic indicators both in the United States and globally. You have truck tightness that is not just cyclical. It also has a relationship to driver shortages as well as new regulations, and that makes rail competitive. I feel pretty bullish, and I think my team does, too, in terms of our ability to grow volume.
Jason Seidl, Cowen. First, let me start off by congratulating Mike and the rest of the team here. As someone here who puts on many conferences a year, I know all the hard work that goes into this, thank you very much. Rob, I wanted to drill down a little bit on your cost inflation projections from 2018-2020, because historically, rail cost inflation has been at or slightly below 2%. In general, it feels like everybody's inflation's going up even more when you listen to a lot of other companies, especially on the industrial side, talk about everything. Tell us a little bit about what is in your projections on that in rail cost inflation number.
Yeah, as you've heard us call out, all the rails should experience roughly the same actual inflation, because largely, we're in the same markets. When it comes to the labor inflation, these are national labor negotiations that take place. We're all experiencing essentially the same inflation on the labor line, whether it's health and welfare or wages. This year, we think both the labor line and overall inflation are going to be less than 2%, and I think that is where there's a gap between what other industries are facing, and we are facing an opportunity that looks like less than 2%.
As we get beyond 2018, we think it's going to look. We don't have perfect visibility on that, we would suggest that it goes back to maybe closer to more historical levels, which I would suggest is going to be higher than what we will finish out this year on the inflation.
Thank you.
We'll go Sherilyn, then Allison.
Thank you. Sherilyn Radbourne from TD Securities. Wanted to ask kind of a bigger picture question, and that is, it looks like the industry at large is probably going to converge on a 60% OR by 2020 and maybe high 50s beyond that. What are your thoughts on needing to kind of pivot to other measures of financial performance as opposed to the operating ratio to then differentiate?
Yeah, Sherilyn, let's go back to what we just talked about a little while ago. That is we do not run the business solely trying to improve OR. We look at three things. The paramount thing we care about is operating income growth so that we generate more cash. Cash is what allows us to do what Rob just announced in terms of our capitalization structure. Inside of that, we want to be as efficient as we possibly can be, that's OR, and as capital efficient as we can be, that's ROIC. You guys know this. Sometimes, you can get into the trap of shorthanding your business too much. I don't want to shorthand our business too much. What we just said is literally what we're trying to accomplish.
The end game is growing operating income so that we generate more cash, so that we grow enterprise value. Allison.
Thanks. Allison Landry from Credit Suisse. If I could go back to one of Rob's comments earlier about higher volume growth requiring a bit more CapEx over the next few years, how do we think about the returns on that incremental CapEx? Specifically if that growth comes from intermodal?
Yeah, no, that's a great question. Let me just clarify, I did not say the absolute dollars may well rise, but as a percentage of revenue, we're actually calling out, as you know. Previously, we were industry leader at 15% of revenue, and now we're saying we think that's going to be a bias towards maybe 15% or less, particularly as we finish the current locomotive purchase this year and PTC comes down a little bit from the levels that it's at now. We think that 15% or less covers our projected needs. What I was referring to earlier is, what might kick that on the outside of that range would be something that's not in our plan, would be some volume growth opportunity that carries with it returns that compel us to say, "You know what?
We need to spend more than that 15% given this opportunity." Again, we're not projecting that, I'm not guiding to that, it would take something like that for us to be willing to do that. We are willing to do that. It's another thing, you've heard me say this publicly a lot. As a CFO, I would love nothing more than to see opportunities to invest where the returns were so compelling that it made all the sense in the world for us to do that. We're just confident that combined with our discipline with G55 around the capital spending and our current projections around the business growth, as far as we could see, it's going to be in that range.
We'll go with Matt, we'll go with Brian over here.
Matt Ross from Goldman. Two questions. First on the leverage target, should we assume that you've confirmed this with the agencies? If so, how much cushion does that leave you being at 2.7 times? Does that put you right at the threshold of Baa1 BBB+? The second item is kind of a follow-up on CapEx. What makes percentage of revenue the right approach there versus just an absolute number? Does it imply some inflationary dynamics within the maintenance costs? If you could just walk us through that.
Yeah. First and foremost, on the first part of your question, it's the rating agencies are looking at, as you all are, us driving the fundamentals of the business and meeting the fundamentals. We think if we do what we were capable of doing, then combined with that growing up to 2.7, we think we've still got a little bit of cushion in those ratings that I talked about. I gave those ratings as a floor. That's a line in the sand that we're not willing to go below, but we think we still have an opportunity to stay above those absolute floor levels. On the CapEx, you all have heard me say this many, many times. We do not build our capital plan based on a % of revenue.
We just share that as a way of talking shorthanding, if you will, because behind the scenes, we've got a capital plan, we've got absolute dollars, we've got productivity assumptions built into every dollar we expect to spend over the planning horizon on our capital, and we're confident that that will get us to where we need to be. We roll that up in terms of how do we want to guide the street, and that's how we get to that 15% of revenue or less marker. It's not how we built the plan.
Brian?
Thanks. Brian Ossenbeck from J.P. Morgan. Beth, you've mentioned a lot of the positive factors for volumes right now. We have a strong economy, tight truck market. What about the, typically you've seen a big headwind to rail volumes in general from a strong U.S. dollar. I wonder if you can talk about the exposure of book of business right now to the dollar, and if you think that's going to change over the next couple of years. Lance, just a quick follow-up to you on the regulatory side. You mentioned it was getting a little bit more positive on as it relates to technology. I'm assuming that's in the automation in the industry. We just had comments out from the FRA.
There's a couple of thousand of them right now, I'm assuming it's going to take a long time, just curious to hear your thoughts on how that progresses and how quickly that might.
I'll start with that one on the strength of the U.S. dollar. That definitely has been a little bit of a headwind for us in the grain markets, makes some of the grain that's produced in other parts of the world more competitive, even though we have a large supply in the U.S. You'll see it sourced from other places because of the U.S. dollar. It's been a headwind. It may continue to be a bit of a headwind. We see it in some of the steel markets and other places. I still feel pretty good about our ability to grow volume because of the things that we already discussed. We definitely do see the U.S. dollar being a headwind in a couple of key markets.
In terms of the regulatory environment, let's deconstruct that a little bit and the three big impactors, we have many, but probably the three big impactors for us are the STB, the Surface Transportation Board, that's our commercial regulator, the FRA, the Federal Railroad Administration, that's our safety regulator, and the EPA. Take the EPA first. They appear to be posturing a little bit more reasonably when it comes to their regulatory regimes. If you go to the FRA, the FRA is growing in competence in terms of understanding how the railroads approach safety and our own personal motivations to be the safest we possibly can be, and their regulatory posture is reflecting that. If you look at the STB, that's still kind of a wild card for us. It has two board members of five right now.
One only can last until the end of this year, unless she specifically re-ups, and we've not heard word on that. We have two Republicans that have been nominated and a Democrat that is in the process of being put forward for it. We might not have full staff there till late summer or sometime in the fall, or maybe even late fall. The STB is the wild card for us that at this point has a full docket in front of it. They have to work through that docket. Congress has compelled them to do that, and we are working very hard to make sure that they look at that docket with the appropriate perspective.
Get all those? Okay, we'll go to Fadi-
Okay.
Back here, then to Brandon.
Okay, thanks, Mike. This is Fadi Chamoun from BMO. Two question. First, we've heard throughout the presentations today the growth opportunities in the customer service sensitive area of the book of business, whether it's intermodal or e-commerce, I was wondering, what does this mean for your capital spending, for your surge capacity? Does this mean you need to look at that differently? How this played out in your capital spending outlook that you've just given us. The second question is there an opportunity here to spend more and save more? There's a lot of projects that you talked about today in terms of productivity opportunity, how did you balance that against the buyback that you've talked about?
Those are great questions, Fadi. Let's take the first one. For sure, service expectations are ramping up, it's really across the spectrum of our service products, largely speaking. From our perspective that, I just shorthanded a little bit, really it's the overall experience expectation that's ramping up. It doesn't have that big of an impact on capital spending directly. It has a really big impact on how we organize ourselves and see ourselves through the customer's eyes. That has a lot of impact on changing internal processes. Historically, our processes might've been built around how do you take a lot of transactions and make it efficient for us? As we're looking now and into the future, it's about how do you make those transactions easier for the customer?
There's not necessarily a big CapEx spend there, although it is a lot of dislocation in terms of maybe internally in the organization. In terms of how do we think about spending more to save more, Rob hit it right on the head. Every dollar of operating income and cash that we generate, the first thing we do is we feed the railroad. Part of that's replacement capital. We're pretty efficient at that and understand that. You heard from Eric Gehringer some great ideas on how we're going to improve that. We would love nothing more than to find pathways where some incremental capital made us really attractive in terms of a productivity initiative or an outcome with a really attractive return. Where we see that, we spend the money.
We actively look for those opportunities, it's not like, boy, if we trip over one, we'll do it. We're constantly looking for ways to, as you heard today leverage technology, leverage innovation. I'll tell you one example of that is something we call Innovation Station. This is a little thing, but we launched a mechanism for all 42,000 employees to give us their ideas on how to improve the business along very specific questions that we ask. Last year, we had 10% of our population give us either an idea or be involved in that process. I expect that's going to stay high and grow this year. We're searching for ideas. Whether we fund them or not is all about whether they generate an attractive return.
Question over here. Yeah.
Hi, Mark Spatall from [inaudible] in Wisconsin. I just wanted you to spend a minute just comparing the company's aggregate energy exposure now versus 2014, just given some of the investments you're making in the Southern Region and kind of the rising strategic importance up there. Yet crude by rail, coal kind of obviously come back and be less important to the business overall. I'm thinking kind of specifically beyond the energy exposure you break out in the financials by revenue, sort of second-order effects. I think Kenny mentioned his presentation about the drilling industry driving steel demand or some of the side effects. I was wondering if you could just talk about that for a minute.
Are you looking for a percentage, or what's your question?
Looking for whether or not you feel the company's more or less exposed to global energy markets through sort of second-order effects, just given how much more important the Southern Region seems to be now versus 2014.
Yeah. I would say that it's probably pretty similar, but the mix has changed. We would've had more coal in 2014, and now we maybe have more frac sand and some of the other ancillary products. I don't have the numbers right in my head, but that's my gut feel on it. What I would say to you, the Southern Region is not really just about energy. The Southern Region supports our traffic back and forth to Mexico. The Southern Region is busy with population growth, so there's building activity there. There's construction of highway activity there. There's a lot that's just happening. It's a busy place, both from the energy side of things, but also the petrochemicals, the plastics, the industrial chemicals, as well as all the things that support a growing population. Of course, our growing business back and forth to Mexico.
It's not just energy that's driving the Southern Region to be very vibrant for us.
Brandon?
All right, thanks. Brandon Oglenski from Barclays. First off, in context, you guys have done a wonderful job the last decade improving results here. These questions can be a bit obnoxious. If I look back at where you guys maybe failed on reaching your operating ratio targets in the past, it was really the ability to drive volume growth in the network. I guess, just to my earlier question in the last panel, when we think about it, if the formula looks very much the same as it was in the past analyst meetings, where is the confidence that beyond a really strong macro environment, that UNP can get back to pretty significant volume growth? I think Lance even said that you're still facing market share challenges in the businesses like coal and international intermodal, and if anything, CapEx is even lower.
What confidence can you give your investors that there is a firm strategy to get back to top-line expansion, maybe recapture some of that lost share?
I'll start up, and then I'll ask Rob and anyone else to put a bow on it. Our strategy you heard in clear detail today, and that is, as we go forward, clearly, volume, price, and productivity are going to be playing key roles in improving our operating ratio. You heard why we think volume is a better environment for us moving forward than it's been historically. I would tell you, two years that combined were -13%, 14%, 15% volume. That just literally doesn't happen in the railroad environment very frequently. The third thing I would say is many of the initiatives and innovations that you heard today are putting us in a place where we are becoming more and more attractive, both in our markets that are new and to our existing customers and making them stickier.
That's pricing opportunity, and that's growth opportunity combined. That's why you should listen today and come away thinking, "Yeah, okay, that story holds together. I saw enough substance, and it gives me confidence that it makes sense.
We have a question back here, then we'll come to Allison, and then back over here to Ben and Ken.
Yeah. Ariel Rosa from Merrill Lynch. You touched earlier on the prospect for reducing two-man crews to potentially one-man crews. Given that you're operating somewhere in the neighborhood of 8,000 locomotives, just wanted to talk about how actionable you think that might be and what the savings opportunity might be there because it seems like it would be a pretty sizable headcount reduction opportunity. Separately, if you could also touch on your return expectations and capacity expansion that comes from the Brazos investment.
Cam, you want to take this?
What was the second question again?
It was the capacity expansion opportunity around Brazos, the investment from Brazos.
Okay. You may have to actually tell me what it is you want me to cover on the Brazos side. For PTC and one employee on the mainline trains, there's no question, as you all look at our operating ratio and productivity initiatives past 2020, that plays into our plans going forward, as does potential autonomous, which is out there into the future as well.
The technology is sound. We know we can get there. It's just a matter of working through our labor organizations and the FRA. That looks very good going forward. Now, what about Brazos?
Just to clarify, though, am I thinking about it right that the headcount reduction opportunity from going to one-man crews would measure in the thousands? And it sounds like you're saying it's maybe actionable by 2020. Is that-
Yeah, probably beyond 2020.
Got it.
I won't give you exact numbers, but for sure, the ballpark of what you're talking about is doable.
Okay.
Let's be crystal clear, just so nobody takes away the wrong thing from this dialogue. We do not need single-person crews to get to 60 operating ratio. We do not have an existing timed-out plan to get to single-person crews or autonomous. What you heard from Cameron is the technology is definitely capable of taking us there, we've got competition that might drive us there, and there's a whole lot of moving parts that we're going to have to address on the path there, and it will have an impact post-2020. We just don't know when.
Got it. Thank you. Then the other question was just around Brazos, in terms of return on invested capital expectations there.
The business that Beth has projected for the Southern Region and Texas and Brazos in particular, has very attractive returns. If we didn't have that return on capital for the largest single investment this company's made in a particular area, we would not be doing it. We feel very confident about the ROI on that project.
Awesome. We'll go to Ben.
Thanks. Allison Landry from Credit Suisse. In terms of the competitive pressure on price and coal and international intermodal that you've seen in the last couple of years, as you look out for the next three years, do you expect those pressures to ease?
We haven't seen any sign of easing at this point, it'd be difficult to predict the future.
Okay. My other question, could you give us a sense, on a corridor, major lane basis, what your capacity utilization is?
I would answer that, Allison. We've said this a lot. Cam referenced it in his earlier comments. Without a precise percentage, right now, we have more capacity in the western part of our network and more capacity in the northern part of our network. The southern part of our network is tighter. That storyline has been true now for several years, which is exactly why, for the last three years or so, we've been redirecting a greater percentage of our capital spending in the southern part of our network to deal with that for several years. I would say that's still the way I would characterize it today. Ben?
Yeah, thanks. This is for Rob. Rob, as you think about it, you made the comment in your prepared remarks about the significant step toward halfway between now and 2.7. Any details you can provide in terms of how you anticipate and when you anticipate executing that significant step? Is that more mid-year? Is that going to be at the end of the year? Are you looking for anything in particular before you take that significant step? Then second, maintaining a strong investment grade rating as you think about G55 and longer term, is that going to be a floor that, philosophically, you guys are going to be true to here going forward? There is a floor to how low you'll go as it relates to the credit rating?
Yeah. Great questions. I would say the answer to your first question of when are we going to take that first step, which I said in my comments, we expect to get halfway to that 2.7 from where we are today, this year. I would say the answer to that is soon. In terms of when are we going to move forward, the answer to that is soon. We're still evaluating exactly what mechanism is best, but I would say in short order you'll see some activity on that. The second part of the rating, as we look to 60% and ultimately to 55% OR, I would say that's a line in the sand right now we and our board have drawn in terms of the floor on our ratings.
That is a line right now that I would say is going to be there not only now, but I would say that's going to be out there as far as I can see.
Great. Hey, it's Ken Hoexter from Merrill, just following up. If I can actually, Lance, just follow up on your answer to Ariel before. I think you said the one-man crew was not in your 60% OR. You didn't say anything about the 55%. Would that be something that gets to develop in your 55% target?
No. You shouldn't hear, because I didn't mention it specifically, that it's somehow embedded specifically into the 55% game plan. We're going to get to a 55% OR, a 5x OR as rapidly as we can. In the much broader scheme of things, I've got to believe that single-person or autonomous trains would drive further productivity enhancement. We should also know that there are still a lot of moving parts in that, not least of which is most trains have to do some kind of work anyway. There's going to be people doing some amount of work, whether they're in the cab of the locomotive or somewhere else. That math doesn't just make one person leave the cab or two people leave the cabin, and there's no offsets, right? There's a lot to be thought through there.
The last, I guess, for years, the rails have negotiated together on the employment contracts. Is there anything that you see that Rail start thinking differently about how you want to negotiate with your employee base? I guess that would be my first question. While I've got you, if I can have you step back and think maybe a little bit broader. You get asked a lot about autonomous. You were talking about the rail autonomous. If you think about trucking autonomous, I think Beth mentioned that a little bit, or platooning. Is there anything that when you think about structurally how you make investments that cause rail or trucking, or does trucking in that environment, do you start thinking about different commodity shifts back to truck and away from rail in that kind of environment?
Yeah. For those of you that aren't aware in the room, our labor negotiations happen on a five-year cycle, typically. We're at the tail end of finishing up our most recent five-year cycle. The next one starts up essentially at the end of 2019 or January of 2020. We have not, as an industry, determined what we are going to be doing for that next cycle. At the same time, all of us make a judgment call as we approach that next cycle of negotiations to determine, is it better for us to collectivize, or is it better for us to do on property? I anticipate we'll probably continue to do collective negotiation. It's very good from the standpoint of protecting us from the least common denominator kind of agreement creation, those decisions haven't been made.
In terms of autonomous truck and the change in competitive dynamic, if you just look at it reasonably, labor is a bigger component of truck cost than labor is of rail cost, rail has a significant cost advantage today. I'm sure there are markets where if autonomous trucks occur, those markets become much more competitive with rail, than they were historically. At the same time, we're going to do everything in our power to continue to lower our cost basis so that we can compete for the same market volumes. A lot of moving parts there, and we'll just have to see how that plays out.
Ravi?
Lance, if I can just follow up on your last response. When you said, "We're going to do everything in our power to make sure we are competitive," does that also include potentially pushing into trucking yourself and maybe building your own truck fleet, either for drayage or to give shippers the option of moving goods via intermodal or on trucks?
Yeah, Ravi, if you look at how we've perceived the truck marketplace up to this point, it's not been attractive enough for us to take our precious capital and put it into those resources. At some point in the future, maybe that math changes. Right now, we tend to approach the truck market from the perspective of finding partners who are already deeply invested and very competent in that marketplace and combining with them to provide some kind of seamless or innovative service for our customer.
I don't see any other hands up. Any other questions? Okay. Well, with that, Lance, do you have a few parting comments you'd like to make?
Yeah, absolutely. I'll come up for my brief one sentence. Well, with that, thank you very much for participating in Union Pacific's 2018 Investor Day. We very much appreciate you coming into Omaha or joining us on the phone, and we hope you have a safe trip back home. Thank you very much.