Hello. I'm Brad Stock, Assistant Vice President of Investor Relations, and welcome to Union Pacific's 2021 Investor Day. We're so pleased you have chosen to join us today for this virtual event as we lay out our vision for Union Pacific for the next 3 years and beyond. Now with a virtual event, one of the challenges is that we're a little limited on the amount of time we have to delve into detailed subjects. So In an effort to supplement what you'll see today, we have provided additional material to fill some of those gaps.
On the platform you are watching this event from today, There will be slides that accompany the presentations in order to provide additional information. All of the slides, videos and recorded Q and A sessions will be available after the event in the Resources section. You will also find today's agenda and speaker bios. All of the slides from today's presentations are also available on the UP Investor website. Yesterday, we published our 2020,000,000,000 America report, which is our sustainability report.
It now includes all of the information you previously found in our fact book. Our ESG story continues to evolve as does this report. We hope you find it to be thorough and helpful. A link to that report can be found on the platform as well. On today's agenda, you'll note that we have 3 separate Q and A sessions where sell side analysts will have the opportunity to ask live video questions of our leadership team.
In addition, through the platform, you have the opportunity to submit questions that we will leave into the conversation as well. With the Q and A sessions, please note that all of the speakers have been fully vaccinated. Finally, before we start today's activities, I must remind you of our Safe Harbor statement. Today's Investor Day presentations contain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward looking statements orally or in other writing during, among other things, today's management presentations and question and answer sessions.
These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such forward looking statements as a result of a number of factors or a combination of factors affecting the operation of the business and other risks identified in today's presentations. And Union Pacific's annual report on the Form 10 ks for the year ended December 31, 2020, and in other reports filed by Union Pacific with the Securities and Exchange Commission. Forward looking statements reflect the information only as of the date they are made. Union Pacific does not undertake Any obligation to update any forward looking statements to reflect future events, developments or other information.
So with those housekeeping items covered, let's begin. I'm very pleased to hand the presentation over to our Chairman, President and CEO, Mr. Lance Fritz.
Hello and welcome to Union Pacific's Investor Day. Well, I'd much rather be doing this in person than virtually, my leadership team and I are excited to spend the next few hours sharing our Plans to unleash the great potential of UP franchise. You're going to hear 2 major themes in our remarks today. First, a firm commitment Precision Scheduled Railroading or PSR and second, passion and a plan to grow our business volumes. Importantly, we'll translate how achieving those two objectives are going to enable us to continue our long track record They are delivering industry leading cash returns to our shareholders.
Some of what we'll discuss today is a continuation of the great work already underway. And you'll also hear about some changes that we believe are critical to achieving a full potential of Union Pacific. Before I lay that foundation out for you, let's Step back and reflect on our journey and the great progress we've made over the last few years. At our last Investor Day in May of 2018, we laid out The following objectives that we expected to achieve by 2020, positive volume growth, pricing gains above inflation, a 60% operating ratio, capital investments of less than 15% of revenue, $20,000,000,000 of share repurchases, a dividend payout ratio of between 40% 45%, debt to EBITDA ratio of 200.7 times And maintaining strong investment grade credit ratings. Of course, we had no idea when we laid out those targets that we'd face a global pandemic that would severely impact The fact that we were still able to achieve 6 of our 8 objectives is remarkable and the 2 where we fell short, Volume growth and share repurchases were directly and heavily impacted by the pandemic.
Our most remarkable achievement was a 58 point 5, adjusted operating ratio in 2020. That's 4 20 basis points better than 2018 with volumes down 13%. That achievement was a direct result of implementing PSR. PSR also enabled the roughly $18,000,000,000 of share repurchases And a 56% increase in the annual dividend during the period. Something that can get lost in all of those numbers is the how And that's Union Pacific's employees.
The women and men of UP made those numbers happen. They use their knowledge, their Skills, their determination and grit to fundamentally transform the railroad and generate exceptional performance. Before I get into our strategic plan, I think it's important to frame how we view the competitive landscape over the next 3 years. Everybody is experiencing the rapid transformation and consumerization of our economy. Supply Chain and logistics are no different.
It shows up in technology platforms and ecosystems used by our customers. It shows up higher expectations that customers have in their user experience and it shows up in our ability to react more quickly to changes in demand. It also Discussion of the competitive landscape begins with our network, which is the strongest in the industry and a key differentiating factor for UP. As we will discuss over the course of today's presentation, one of the key objectives of our PSR initiatives is The most obvious example is all of the attention around Kansas City Southern and their potential merger partners. As you know, We believe any proposed merger should go through the STB review process to test the merger expectations Around competition and improving service for customers, of course, we welcome competition and We also want to be on an equal playing field.
We will fully participate in the STB process to seek equitable treatment That supports a competitive environment for our industry and for our customers. Regardless of moves by our competitors, we believe that our Strong franchise positions us to win, whether it's our access to the grain fields in the Midwest, the gateways to the East, the Gulf Coast Petrochemical Complex, The major population centers of the West or the 6 major border crossings in and out of Mexico were positioned to win. Another area where we are seeing the competitive landscape shift is the emergence of autonomous trucks. This is a trend we've been following closely. This past December, we made an investment in 2 Simple as a way to both Stay connected to the developments and to leverage this technology in our own operations.
We're currently evaluating autonomous drayage as a way to expand the reach of our Ultimately, our answer to autonomous trucks is autonomous trains. Using the positive train control platform we've already invested in, We believe the ability to reduce crew size is in our future. This provides for a safer and more sustainable method of transportation. Certainly from a public safety standpoint, running an autonomous train on a fixed track seems much safer than running 18 wheelers without drivers On our highways, and although rails today have a significant environmental advantage over trucks, the transition to electric trucks could change that dynamic. Again, Union Pacific is not standing still.
We're working with both U. S. Locomotive OEMs on innovative solutions, which you'll hear about later today. We are committed to making our low emission profile even lower. Now with this as backdrop, let's look at where we are today.
Union Pacific will celebrate its 159th birthday in a couple of weeks. We're no stranger to sustainability and the need to think and plan for the long term. As we look ahead, we see new challenges, new opportunities And the ability to leverage our enhanced agility, the strategic plan that we'll discuss with you today is framed with 4 driving principles serve, grow, Win and doing that together. And while these may be new words, the essence of our strategy is unchanged. Everything we do starts with serve and the transportation products we provide our customers.
Precision scheduled railroading, which we first started implementing in 2018 is the foundation for delivering customer centered operational excellence. PSR isn't just a new operating plan or philosophy for us. It's now embedded in our culture and we actually talk about it as Pretty simple railroading. We're applying that mindset to everything we do. We've done the extremely hard work of reducing layers in the organization, which reduced our administrative and management staff roughly 30% over the last 3 years.
This has come with some real pain, But it was necessary to drive decision making to where it belongs in our organization, closer to our customers. And the results speak for themselves. Since 2018, we've increased our freight car velocity 6%, our dwell times are down 21%, locomotive productivity is up 30% And workforce productivity is better by 19% despite down volumes. As we look for volume growth in 2021 and beyond, We have work streams lined up against each of these metrics to drive further improvement, which leads to the next tenet of our strategy, grow. We have the best franchise in North America.
We're providing one of the best service products in the industry and we've got one of the lowest cost structures in the industry. And we have available capacity as we're using fewer assets to move our customers freight. Similar to the cultural shift we've experienced with PSR, Learning to grow and aggressively pursue growth requires a change in mindset. We've already taken a number of actions, particularly in our marketing and sales team To position us differently in the marketplace, but the culture shift isn't limited to our sales team. We have to push the entire organization to have a growth mindset.
A great example is a program that we call Scouts, where we are empowering local operating employees to lever their knowledge To find business development opportunities. We also see opportunities to grow by providing more services for our customers. Today's logistics And supply chains are complicated and they're very tough to manage. We can help by adding services for our customers using breakthrough technology, which is part of the reason we hired Rahul Jalali as our new CIO. Rahul comes to us from Walmart and knows all about being committed To the customer, Rahul, Kenny and the marketing and sales team are spending time with our customers to learn in great detail their experience with UP.
That work is helping us break down the user experience barriers that keep our customers from doing more business with Union Pacific. In addition, we expect to grow by expanding our reach. We already do this today through our Loop subsidiary. It serves as an intermodal marketing company or IMC, especially in the service sensitive auto parts sectors, As well as a transload provider for carload customers. As we've reduced car touches through PSR, we curtailed a number of smaller yards And beyond providing efficiency and service gains, emptying those yards creates opportunities for new transload locations for storage and transit Tracks and yards for customer lease tracks.
We're always looking for opportunities to better serve customers and win competitive business. If there's an Opportunity to accelerate growth either organically or inorganically by helping solve a customer's problem or by filling a supply chain gap, We're going to pursue it. Successful execution of our plans to both serve and grow lead to winning. Our ultimate goal is to be the best. We are a logistics leader today and we plan to continue to be one going forward.
In the past, that leadership As manifested itself in our safety performance, our operating ratio and our cash flows. Going forward, we'll continue to focus on driving all of those metrics, While turbocharging our results by increasing our share of new and existing customers transportation spend. Jennifer is going to wrap things up today with our financial targets, which are a clear win for our shareholders. But let me give you a quick spoiler alert. We will achieve a 55% operating ratio in 2022.
Let me repeat that. We're going to achieve a 55 operating ratio in 2022. Our definition of winning extends to each of UP's 4 stakeholder groups, which is the final piece of the strategy together. For our communities, it's about being a responsible corporate citizen that cares about the environment, Working to protect the waterways, air and other natural resources. It's also about being a leader in diversity and inclusion And setting and achieving goals to make our workforce reflect the communities that we serve.
For our customers, it's about being the best for them day in and day out, Helping them easily find transportation solutions that make them more competitive. It's also about delivering their freight safely and damage free. For our employees, it starts and ends with safety. We want every employee to go home safely every day. When it comes to employee injuries, the goal is 0 And nothing matters more.
We also want to be an employee that supports its workforce and provides a work environment where each employee Can be his or her full and authentic self and we believe employees are more productive when their financial success is aligned with the company's success. Right now, shareholders are voting on an employee stock purchase plan, which would be available to all employees and include a matching And for shareholders, it's about bringing together all the elements I've spoken about today To create sustainable long term value, it's an exciting time to be at Union Pacific and we are confident that the great track record we've established over the last Several years will be even better going forward. The team at Union Pacific is motivated to succeed. We're developing a culture Around serve, grow, win together and I'm looking forward to putting our talent, our plans and our goals on display for you today. So with that, let's kick things off with how UP is working together to build a sustainable future.
Our world is changing. Modernization is happening faster than ever. Risks are more intense and changes to protect the environment are a must. Building a sustainable future 2,030. Over the next 10 years, we sustainable solutions, seamless customer experiences built on innovative solutions, championing environmental stewardship, reduced GHG emissions Together, we will build a stronger, more sustainable future.
It's a phrase we hear more and more ESG, but what does it At Union Pacific, our approach to environmental, social and governance is woven into our DNA. Our railroad has had a Front seat to some of the biggest cultural events of the last 160 years and our ability to quickly adapt and keep America moving has made us successful. That resiliency will continue to serve us well as we reinforce our commitment by introducing a more comprehensive approach to ESG issues. Our approach addresses the evolving needs of our stakeholder groups over the next decade. We couldn't be more excited to share with you what's coming.
The key to our success is always going to be our people. So we're really committed to fostering a diverse and inclusive environment. If you have a workforce that comes from different backgrounds and different perspectives, you're going to get more Challenge to decision making, you're going to get more different thinking about how you approach problem solving and you're going to get more creativity. Recognizing we still have work to do, in 2020, we set goals to reach new much higher representation levels in our organization by 2,030 for both women and minorities, a target of 11% female representation, Which is a doubling and 40% for minorities. We're implementing a lot of new tools to make sure that we have an inclusive environment, Particularly in the areas of professional development, we've created a wonderful program with the University Nebraska at Omaha for employees to be able to earn a degree, either undergraduate or graduate, with no out of pocket expenses.
Additionally, We've created training to help our team understand how do I welcome diversity in the environment, how do I make people included. We're We're implementing a new program called Embracing Our Differences, which really helps us take it to the next level and create the kind of psychological safety for our employees That makes them be able to bring their very best self to work. For me, this is one of the most important things that we can do. We want to make Sure that Union Pacific is that welcoming environment where everybody can be their best.
Union Pacific is proud of the role it plays Supporting the transition to a more sustainable future, one that provides innovative economic solutions. By Sporting Goods via rail, our customers are reducing their own carbon footprints by up to 75%. We developed the online carbon emissions Customers eliminated an estimated 21,900,000 metric tons of greenhouse gas emissions. We're proud to move environmentally responsive products Such as renewable fuels and the parts to build wind turbines, over the past 10 years, we've moved more than 80,000 carloads of wind components. As we work to further reduce emissions, we're proud to provide our supply chain partners solutions that reduce their own carbon footprints.
Earlier this year, the Science Based Targets initiative approved our targets to reduce absolute scope 1 and 2 greenhouse gas emissions from our efficiencies gained with precision scheduled railroading and we're leveraging our energy management system to identify fuel saving opportunities. EMS works like cruise control. It's either being installed or we're doing software updates on high horsepower locomotives with the goal of equipping the entire fleet By year's end, at Union Pacific, we recycle as many wood ties as possible and we're working to keep even more out of landfills. One project we're investigating is burning use ties, while sequestering the carbon to create energy that feeds directly into the power grid. It's an Opportunity to power communities our railroad operates in.
Union Pacific has the longest running supplier diversity program in the rail industry. Since its launch in 1982, we've made significant progress, but we can do more and we are. Last year about $423,000,000 in goods and services were purchased from more than 2 75 diverse suppliers in 35 states And that's an increase of 29% from 2019. We're also driving our suppliers to play an active role. Currently, 89% of our strategic suppliers reported purchasing goods and services from diverse suppliers, their own support for our communities.
For 2021, we set yet another aggressive goal to increase our year over year diverse spend by 25%. To help us accomplish this goal, we've added 2 additional employees who focus on identification and outreach. And we've joined additional regional diversity councils to broaden our reach. Finally, we are thrilled to announce a new partnership With Hightowers Petroleum, a Black owned business in Ohio that will handle our fuel card program. Under that program, we spending approximately $50,000,000 annually, representing a tenfold increase in Union Pacific spend with Black owned businesses.
I am super excited about the progress we've made and I'm even more excited about our opportunities ahead.
When I think about communities, it's about how we aid and support them. We connect small towns and thriving cities to the globe, providing them with SaaS and opportunities to both grow and prosper. The key component of being a community partner is being present. Our equipment and property must be clean. All our employees must be professional and we must show up to help communities solve problems and answer their questions.
One of the key tools to help us engage is Union Pacific's Community Ties Giving program dedicated to building and fostering those communities. 4 years ago, we redefined and focused our philanthropic giving on the premise of successful community must be safe, have a strong workforce pipeline And have vibrant community spaces. Last year alone, we provided $26,800,000 serving nearly 3,000 organizations With a significant portion providing direct assistance to those impacted by the pandemic. When you add up the data from the past 4 years, we have impacted 40,000,000 people with over 18,000,000 of those coming from underserved communities. We know our philanthropy giving has the potential to change a life.
The decisions we make as a company can still change the arc of the community. Such a combination is humbling, yet incredibly powerful And some of the most important work we do here at Union Pacific.
The work we're doing to forge a brighter, cleaner Future is built around our ESG goals and initiatives and layered into our corporate strategy. Together, We will deliver value to each and every stakeholder.
Hello, everyone. I'm excited to be here with you today to dive into our 1st pillar of our strategy, serve. Union Pacific's operating department is on a journey. It's a bold journey inspired by our desire for productive, Sustainable growth fueled by our deep conviction to serve as we build America through operational excellence. Operational excellence focuses on empowering those Closest to the work to leverage the unconstrained potential of our collective team.
The foundation of operational excellence is safety. We will continue to leverage Our ever evolving safety programs that empower our team members to own all facets of risk identification and mitigation. One of the many examples is our work This year to leverage advanced modeling and our system wide network of weather sensors to reduce the risks of derailments caused by weather events. Another John Turner will discuss is Union Pacific's proprietary precision train builder software. These and many other examples are delivering on our Safety commitment not only to our team, but also to the communities we operate within.
Now let's turn to PSR. As you heard from Lance, PSR has been guiding force over the last two and a half years and has enabled us to make significant improvements to our service product and efficiency. While we are Proud of our progress so far. There is no end in sight in term of what PSR can do. With every accomplishment, we see new Let's start with train length.
Growing train length will remain critical to delivering continued productivity. We are laser focused Leveraging process enhancements and capital investments to drive gains and train length and John will discuss more details in a few moments. Next This is locomotive productivity. We have delivered significant locomotive productivity over the past 2 years by storing excess units. The work to Operating lean locomotive fleet will never end, but those efforts are expanding to further focus on variability.
We will deliver a 20% plus reduction locomotive variability to drive an even more productivity. This aggressive goal will accomplish through our modernization programs, implementation Technologies like rail cleaner and maintenance component overhauls that target repeat failure modes. To reduce the amount of touches required to move a car, we will Continue to deliver on our commitment to simplify the network. For example, just last month, we implemented new transportation plans That curtailed 4 yards in Houston and 1 in Council Bluffs. Other curtailment opportunities remain and each Curtailed facility provides a new opportunity for our sales team to profitably grow the business.
Finally, capital investment. Our journey is not That includes but is not limited to active initiatives to automate material unloading, consolidation of material warehouses And leveraging machine learning for items ranging from automated track inspection to automated work equipment. Shane Keller will review a wide range Initiatives within those departments, as you heard Lance lay out, operational excellence includes a customer centric approach to growth. The customer We will deliver over the next 3 years. 1st and foremost, we are continuing to leverage our low cost structure to Your new growth opportunities, Kenny and his team will share numerous examples later today.
Next, we are implementing new technologies That not only improve the customer experience, but also allow customers to optimize their business as well. 3rd, and a question we To efficiently handle growth, our sales team plans to deliver. Finally, we will be agile in our ability to enter new markets with Speed. Our new Twin Cities intermodal terminal is a perfect example. By being flexible with our transportation plan and willing to take more calculated risks, We can meet market demands quickly.
And as you'll hear later today, there are more opportunities on the horizon. Technology is prominent across all of these So our CIO, Rahul Jalali will provide insight into how technology is supporting our efforts to serve our Now I'd like to turn it over to my leadership team who will lay out additional service and productivity initiatives that include our drive
Today, I want to talk about service and productivity and how that Ultimately turns into growth. Almost 23 years ago, I excitedly started my career as a brakeman. In my career, I've held every Operating position except locomotive engineer. And I can tell you so much has changed since I switched cars and road trains for a living. I vividly We're carrying all the paperwork, rule books, timetables, HAZMAT guide and work orders.
A work order is how a trained person reports Into and out of our customers' facilities. I lugged around so much paperwork, I can still feel the weight of it in my memory. In addition to the weight,
technology did not allow us to report
card movements until the end of our shift. Thanks to mobile work ordering reporting devices, we've been able to address these issues by eliminating paperwork and reporting near real Switch is improving service, productivity and ultimately safety. Another position I held was as an agreement supervisor called One way we are expediting the learning curve for Yard Masters is through an initiative to develop a terminal planning tool using in house Technology that utilizes algorithms to maximize car connections and throughput to improve service for our customers. This system allows is a decision tool that helps the team build complex train profiles, reducing the time it takes to complete work events and makes building longer trains Easier and more efficient. Our productivity related to building longer trains has been a significant driver of our success and will continue to be in activity and our customers' needs.
To achieve our train length goals, we will leverage 3 key strategies. First, we'll leverage our Previous investments. Our central corridor between Chicago and Green River, Wyoming has multiple mainline tracks. The team developed The combo tool to identify opportunities to leverage these investments by combining manifest, bulk and intermodal where it makes sense. 2nd, Our strategic transportation plan adjustments is where we schedule train meets to take advantage of long sidings or multiple mainline The train meet is a location where passing tracks are located for opposing trains to pass each other.
3rd, We'll continue to make strategic investments to extend sidings on specific corridors. We've already added over 40 sidings with another 60 Siding extensions planned for the future. We are poised for growth with our primary corridors operating at 60% to 70% of fluid capacity. In order to get the most of our franchise, we must match over the road capability with terminal capability. Rising PSR principles, we have reduced Cardwell by around 20% since implementation.
This has created headroom of busy facilities and allowed repurpose other facilities for future growth. From a terminal perspective, we are in fantastic shape to grow with our terminals operating around 70% of fluid capacity. In my career, I've seen huge market changes in coal, ethanol, frac sand, crude oil And even our intermodal franchise. These changes make being nimble paramount to our ability to enter new markets. One way we are being responsive is by Repurposing facilities to meet current market demand, enhancing our ability to grow and enter new markets.
I have 3 great examples to share. First, in Chicago, We are repurposing a portion of the proviso hump yard to expand our Global 2 intermodal ramp. This allows us to consolidate operations in Chicago, simplifying our network, increasing density for our intermodal franchise, which creates productivity and sets The stage for growth. In Houston, with projected carload growth in the Gulf Coast, we modified the infrastructure to support growth for our Englewood hump yard, creating additional processing capability, again creating growth opportunities. As we looked around the network, we saw an Opportunity in our ramp portfolio, specifically in Minneapolis.
As a result, we are being nimble and creative by entering the market with a pop up facility. This This is our first step before making a more permanent investment. We're employing a similar process in other markets, which we are extremely Excited about. We continue to look for the best ways to utilize our franchise as our customers' transportation needs All over time, we wake up every day with a relentless drive to improve service and productivity, ultimately leveraging both to grow our franchise.
Sweating the assets is about getting the most out of our equipment and increasing productivity. This is done through minimizing downtime and increasing Liability through predictive maintenance and upgrades. I'll highlight some of our initiatives that are generating increased workforce productivity, better equipment And lowering our cost structure. Our locomotive initiatives have reduced the size of our locomotive fleet. To see workforce productivity, we need to normalize to an Employee per active locomotive look, said differently, the number of employees needed to maintain each locomotive.
We've increased productivity by 28% over the last 5 years. On the freight car side, reduced car dwell and increased car velocity have resulted in fewer Cars and inventory, like the locomotive side when you normalize the number of employees per active car, you can see an almost 45 Increase in workforce productivity. PSR is about working smarter, not necessarily working harder. We have Variety of technology that supports these smarter work processes. Let me highlight a suite of sensing technology that helps us identify and fix our rolling stock before they fail Hot box detector measure the temperature of the wheel bearing.
We collect this data on individual cars Fix and prevent online failures. Hot wheel detectors measure the temperature of wheels as they roll through on trains. This gives us a real time view of the health of the car's Braking system. Wheel impact detectors measure the impact load the wheel is putting on the rail. All three of these examples collect rolling and trending data On the health of the running gear, in the past 6 years, bearing derailments are down by 50%.
Similarly, wheel cause derailments are down 70% over the last 10 years. During the pandemic slowdown, we closed several shops in both the engineering and mechanical side. As the demand for these facilities came We were very intentional and deliberate about the facility we wanted when we brought them back online. We took this opportunity to Activity and cost competitive, not only with other roads, but independent contract facilities as well. Our Jenks locomotive rebuild facility in North Little Rock is a Example of this, it is safer, more productive and cost efficient.
Our Jenks 2.0 facility has 50% Fewer employees. It's 22% more productive and has lowered its cost by 40%. Today, is 4 50 days injury free. Our DeSoto, car and Denver maintenance way facilities have experienced similar results towards becoming world class. Similar to Our side, we use an array of sensing technology that allows us to collect information on the health of our track and rail.
Our current geometry cars are rolling lab of sensors and computer equipment. They require a locomotive, a train crew and 2 operators to operate the geometry car. We're currently This is in service this year. An auto box can operate 20 fourseven at a fraction of the cost of our current systems. The geometry equipment I Let me highlight a couple of examples.
We currently have patent pending equipment we refer to as autonomous tie on loading.
We've been developing this car
over the last Helping this car over the last 2 years and are in our final design. The car that you see on the video is being tested in production today. By the end of the Summer, we'll have 5 cars in service. This design can distribute ties 3 to 4 times faster and requires 80% less labor than the conventional method. We have partnered With some local firms to develop a tie plate distribution machine.
This machine alleviates some of the safety risks of our current operation and shows For significant labor savings, we plan on field testing next month here in Omaha. On the locomotive side, we continue to develop Enhance our energy management systems for both a fuel savings and train handling perspective. We're exploring Alternate fuels where it makes sense. We're finalizing our strategy to test and deploy battery electric locomotives in our yard and local Operations in California. In summary, we will continue to challenge the team to be smarter, use technology, automate where we can And increased efficiencies.
We will get there by fully incorporating PSR thinking into every facet of our engineering and mechanical teams.
Moving throughout the message you heard from both John and Shane was the importance that technology plays in our pursuit for operational Our operating and technology groups have always closely partnered to look for innovative approaches to meet and exceed our ever changing
Technology has always played a crucial role at Union Our job is to make sure that our teams and customers can engage in the fast, easy, most efficient way. I've been with UP for about 6 months, and I've Spent a lot of time learning the business by walking our yards, talking to customers, and the mission is clear: reduce friction by better Enabling our internal teams to serve our customers in the most effective way possible. We're going to make some major strides on this in this coming year. Let me tell you about When I joined UP, one of the 's I had right off the bat was to see how much of an advanced platform company we are. The most Advanced companies on this planet are platform companies.
In past, you've heard about our development of an industry leading logistics management platform, which I like I think as air traffic control and transportation management system rolled into 1, and internally, we call it net control. It is a Centrally connected brain of our complex business and is also an adoptive function to meet tomorrow's challenges. And I'm connects many of our systems products such as train, locomotive, dispatching, crew and many more allowing us to leverage our connected Applications such as artificial intelligence, machine learning, Internet of Things, IoT lovingly called, and produce friendly, flexible This platform includes 94,000,000 lines of code. That makes it bigger than some of the leading social media companies And the code base that they have. It's also created in a very modern microservices architecture designed to be highly scalable and flexible.
As As a result, faster solutions for our customers, lower operational costs and enabling us to be ready for the future, such as a Serverless world and really a cloud native deployments going forward. We're also seeing some early returns from this platform that We've already implemented the impact it's having. We're delivering AI based tools which augment human decisions such as terminal optimization, which
provides intelligent classification cuts
in the yards for inbound As an hour every day. 2nd example, Movement Planner. It's a module of our dispatch system and we are putting intelligence into it for Signals for a dispatcher for the meet and passes of the trains on the network, allowing our dispatchers to focus on more important tasks, but helps us modernize our operations to be running a better, safer and more connected railroad today. But what I'm really excited about is what It will allow us to do in the future. This gives us the ability to quickly adapt and deliver for the fast changing needs of Our operations and ultimately, our customers.
The operating department has an abundance of projects And initiatives that will propel our railroad to new heights as we strive for operational excellence. We will leverage technology to improve safety, provide a better service product to our customers and reduce our carbon footprint. We have the right team of leaders in place And a motivated team that is ready to deliver on those commitments. We're excited to grow with our customers, offering them new and exciting rail products as we convert more Our network is ready for growth and to be leveraged to deliver strong financial results. So with that, we're ready to answer your questions.
Hello. I'm here to talk to you today about profitably growing the business. Everyone at Union Pacific is excited for the opportunities we have to grow Union Pacific now and into the future. We have a strong customer base that serves a diverse yet balanced business mix with a strong franchise stretching across 23 states serving over 7,000 communities. We play an essential role in global trade with roughly 40% of our business moving internationally.
Union Pacific has the premier franchise with Mexico, the only railroad with access to all 6 gateways to Mexico. The strength in our diverse business mix gives us stability through the economic ups and downs in our various markets. When we look towards the next 3 years. Here are the economic indicators that correlate closely with our business. You see that industrial production is forecasted to average 2.8 We also recognize that we will face continued challenges in our energy related markets.
But Despite those hurdles, we have a solid strategy that you're going to hear about today that enables us to outperform the markets with our reliable service And our continued focus on enhancing the customer experience. Earlier, Lance talked about Union Pacific's strategy, serve, Four ways: grow with PSR transform our sales culture advance the customer experience Expand our network reach to serve new markets. These four areas will give us long term and sustainable growth into the future. Growing with PSR, Growth starts first with having a solid service product that meets the needs of our customers. Since the start of our PSR effort, we're moving cars Faster and utilizing both our assets and our customers' assets more efficiently as Lance mentioned earlier.
Our focus on faster transit times and improved reliability is opening doors for us to convert more truck business to rail, which is the most environmentally responsible mode of ground transportation. With the growing trend towards ESG, we Also support moving a variety of sustainable commodities from renewable energy like wind turbines and bio Fuels to renewable products like recycled paper and plastics. Let's hear from the commercial leaders as they give you some very specific
Our reliable manifest network puts us in prime position to Capitalizing the emerging market supporting ESG. ESG has become increasingly important for UP, our customers and our stakeholders. One market in particular with a strong growth potential is renewable diesel. Renewable diesel is a direct replacement for regular diesel and it can reduce CO2 emissions by 80% compared to petroleum diesel. That's helping UP and our customers reduce our carbon footprint.
A push towards ESG is continuing to increase demand this environmentally beneficial product. In fact, annual announced Production which UP would have access to has a potential to grow from 455,000,000 gallons today to over 4 Where demand is expected to double to over 2,000,000,000 gallons. To capture this outstanding opportunity, we are working With existing producers as well as new market entrants to build out an end to end supply chain product does the best in the industry. Another great opportunity for UP as a result of the increased renewable diesel production is the opportunity to handle the inbound feedstocks into these Plants through our extensive network of soybean oil production, ethanol plants and other feedstock sources. This provides our customers many Options and a consistent supply of feedstocks no other railroad can provide.
These products naturally fit into our existing manifest network as they are Consolidated and supplied from smaller facilities throughout our network and this allows our customers to avoid millions in capital costs of bulk storage And track infrastructure by facilitating those shipments that are continuously produced and consumed. Phillips 66 is a good example A valued partner in the space. They're expected to begin production of renewable diesel at the Rodeo, California refinery this year Supporting their sustainability programs, Union Pacific and Phillips 66 have collaborated to develop a supply chain that will deliver consistent and ratable source of feedstocks for this new lower carbon intensity fuel. Our team has an aggressive strategy to continue to grow renewable diesel production on our network, so So we can participate in both the inbound feedstock and outbound product. Through this and the business we've already secured, We're anticipating this market to be a growth driver for UP for the next several years.
Our efficiencies gained from PSR have also translated to a lower cost structure, which has to more effectively compete for truck. We have not been traditionally able to compete. Improved car velocity has also supported this penetration. We have examples all over our business that demonstrate this. For instance, in the fertilizer space, we have partnered with smaller co ops and we are now handling incremental car to 20 additional destinations.
Our improved manifest service also provides optionality to customers alongside our unit train model. Customers are able to ship and receive their products in a consistent and ratable manner, ultimately integrating with their supply chain and improving speed to market. We recently won brand new business with a grain products customer by selling these advantages. UP's reliable manifest solution Actually reduced overall cycle time when taking into account dweller origin and destination. This improves equipment Thus requiring the customer to have a smaller fleet to maintain and reduces expenses that come with it like leases, maintenance and storage.
In addition, choosing a manifest option eliminated the customer's needs to invest in new track and storage infrastructure. Our consistent and reliable service matches the consistent production and consumption of the product. And last, we are able to show the customer that UP's network and service provides supply chain flexibility. This customer is able to optimize their production and supply their customer from multiple plants versus having to ship all the product from a single origin. Overall, PSR has been a game changer, not only for productivity, but also by revealing previously untapped levers to accelerate growth.
As Kenny Jared, our team is intensely focused on growing our carload business and as consumers and manufacturers respond to cultural and environmental shifts to use recycled We're seeing more interest in developing supply chains to move those products by rail. Our service offerings fit well here. Not only are we directly supporting ESG initiatives by participating in the recycled goods supply chain, there's the added benefit of moving the freight in an environmentally preferable way. These recycled products are typically very low value. So for us to be able to move them profitably, we have to have a low cost structure, which is the Benefit we have seen from PSR.
Collet is a good example of where we've seen this work. Collet is recycled glass That is collected and then reused in the manufacturing process. It gets added to new material and is melted in the furnace to produce new bottles, jars and other glass products. We've worked with several of our Cola customers to relook at lanes where we were not successful in the past and our new lower cost structure is allowing us To win the business, we've even partnered with Loop using Translates to win shipments of collet from Oregon into California. Historically, collet has been a smaller But it's growing.
In 2020, we grew our Collet shipments by over 40% as we continue to find more opportunities to grow. We're using the Collet Sales model to widen our approach to other recycled commodities like paper, plastic and even carpet. As ESG becomes more prominent, we are Our ability to attract new customers to Union Pacific and grow our core business is demonstrating success. We're seeing it from Thousands of new Forest product shipments previously moving truck to our sales team developing creative solutions to grow, utilizing Our LOOP subsidiary or latent capacity,
our team is energized and I'm looking forward to what's to come. Personal vehicles are evolving from internal combustion engines to But within this is a second evolution where electric vehicle manufacturers, which I'll refer to as EV, are the first 1st of their kind to market direct to consumers. Direct to consumers mean that EV manufacturers have different requirements. For example, they require speed to market And Union Pacific through PSR has been successful in delivering EVs to the market faster, more efficiently and The proof is in Union Pacific's premier finished vehicle network and the success that we're already realizing in the EV space, Both with existing name brands and new emerging ones, keep in mind that for every carload of EVs we handle, we take an average of 1.2 In 2020, we took nearly 9,600 trucks off the highway. And in 2021, we will exceed 31,000.
That's a 3 22 percent increase in just a year and the number of trucks we are taking off of our nation's congested highways for the EV market So if you step back and you look at the potential we have to convert other automotive and intermodal freight to rail, we can make a big difference On the sustainability initiatives for our customers. Simply put, Union Pacific is the rail transportation leader in the EV market. And as a result of our PSR And our intense focus on meeting EV direct to consumer requirements, we are poised to realize significant growth in this segment. A new level of B2B supply chain execution has arrived with the rapid change in consumer online purchasing. This change requires us To rethink how we deliver freight for redistribution, there is of course speed to market, but there is also frequency to market.
Consumers are buying every day of the week with the expectation that shipping happens every day of the week as well. Take myself, for example. When I placed an online order on a Sunday morning, I expect by that afternoon to receive a notification that says your shipment is on its way. PSR has been a critical part of our evolution into serving the B2B e commerce market. As Jason has referenced earlier, through PSR, we continuously review our network In order to provide a safe, reliable and efficient service product, but what we don't talk about as much is how PSR allows us to increase the frequency of our service Across the week and as a result, we've been able to evolve and meet the needs of this growing market.
We've won in a big way With multiple small package shippers and retailers and that's why e commerce is an important part of our growth strategy. We are strategically positioned for long term growth in the e commerce sector and look forward to continuing to grow with the industry leaders.
Now I want to move to the next area of growth, transforming our sales culture as it takes the sales team to get business development wins over the finish line. When I say transform our sales culture, what I mean is that we're focusing on these three things: people, technology And processes. First, let's start out with people. There has been a lot that has happened with our sales team over the past 2 years. We made changes to remove layers in the organization and increase our response time to our customers.
We've consolidated our sales model to be more And easier for us to support our customers. 2nd, when we talk about technology, here's what we've done. We have better tools to make it easier for our sales team to do their job so they can spend more time hunting. We've new technology to be faster in price quotes by almost 30%. We've integrated more data within our sales management tools to get A full three sixty degree picture of our customers.
And lastly, when it comes to processes, we've changed our selling approach with more players throughout The supply chain, we are prospecting more in new markets that have opened up for us and going after more targeted campaigns to win new business by reconnecting with customers Who may have moved away from our railroad. One more example is our Locals with Capacity campaign, which is a collaboration with operating to identify Five pockets in the manifest network where we can grow our volume by putting more density on local trains. These types of wins are base hits, But we're finding ways to optimize the network and grow with our customers. This is the right type of business that we want to go after. More importantly, our improved service product to win with larger customers too, like Hyundai Merchant Marine and the Hub Group.
They are recognizing the value that we're bringing to their companies as a reliable transportation provider. And Finally, with the strong drive towards growth, we established a new incentive program to motivate and reward our sales team That supports the Hunter mentality. You've heard Lance say that we're transforming the culture for the entire organization. It's not just the sales team. The Whole organization is changing and focused on growing the business.
Enhancing the customer experience enables us to grow faster. The world is changing, and we are investing in technology to make sure we're providing a competitive, cost effective service product to help our customers We're optimizing our customers' journey as they do business with us and this is how we're delivering a strong customer experience that That sets us apart in our industry. We recognize the need for technology to help grow our business for both our intermodal and carload markets. Lance highlighted my previous experience in retail and leading technology with
a customer mindset. As I joined UP, literally on day 1, Kenny challenged me to have Echo's focus on solving real customer needs. This is what I like to call customer obsession, which for technology is really enabling our Sales teams to deliver experiences and service offerings, which become a differentiator for our business. We're taking several steps to do this. And as Kenny spoke about the culture earlier, we're also changing the way within technology to work with our internal and external customers differently.
We have a new Customer experience initiative underway, which brings the customers' needs to a heightened level of visibility by directly feeding customer insights Into our cross functional agile development teams who quickly deliver solutions to the pain points within 30 to 90 days and not years. Just in the few months, we have had co interviewed with Kenny's team around 40 plus customers, which has resulted in 25 I want to highlight is the success we're seeing with our application programming interfaces or APIs as they're lovingly called, powered by our net control platform that I I spoke to you earlier about. Union Pacific's really been a leader in this space to develop the customer APIs, to integrate directly with Customer supply chains allowing customers to gain real time visibility using their own systems without having to interact with ours, which is saving them time Close to 40 plus integration services for our customers based on their needs in the areas such as enhanced supply We provided to a large EV company from Northern California, really allowing them to gain visibility on their product flow, such as advanced shipment notifications, bay updates, which shows location on origin and destination ramps, shipment ETA notifications.
And for these leading Sure. It was an absolute must have for their service providers, so they could participate in delivery execution, giving them the ability to plan their business operations. And because of our continued investment in the foundational technology platforms, we can meet these types Customer integration requirements for customers in matter of weeks are enabling us to quickly expand our book of business, taking care of our So they can take care of their customers. All around works out better. So in closing, I would say our technology expertise and mindset of customer The automated, integrated ecosystem player, our relentless focus is to reduce friction throughout the customer journey.
The strain that we're seeing in today's supply chains demonstrates the need for new uses of technology to connect shippers, carriers and 3PL companies. We're launching a number of new initiatives we're calling Intermodal Excellence. These initiatives will leverage technology, improve business processes to efficiencies needed to deliver greater capacity, service quality and growth. A strength of our intermodal franchise It's the broader relationships we have with shippers, intermodal marketing companies, motor carriers and ocean carriers. We are making this diverse channel of Customers more efficient by integrating our transportation management systems with customer systems and with other supply chain partners.
For Obtaining early notification of upcoming shipments enables us to ensure we have the terminal and train capacity available. We can give the most time sensitive loads priority while less urgent freight is deferred to days with lower demand. This method of operation is Consistent with PSR principles of running regular balanced train schedules while also ensuring service commitments are made. Increasing the capacity of our intermodal terminals is critical to enable growth and improve profitability and asset utilization. One way of doing this is to Speed up the flow of trucks and containers through our ramps.
We are currently modernizing the gate systems at Turn inspection portal automatically confirms the identity of the load and documents the physical condition of the equipment the driver will be able to enter the gate without Gate transactions will go from minutes to seconds. Further enhancements such as a real time yard inventory system and a Train load planning optimizer will quickly guide the dray carriers to the optimal location in the yard to either pick up Or drop off a load. We are also creating better tools for our intermodal operations managers. We are Giving them better real time insights into current and potential problem areas. For example, we are creating a system that helps monitor And manage the flow of assets across our network, including locomotives, well cars, chassis and containers.
It will compare resource availability with projected demand and train schedules to predict where and when constraints may occur and with enough Foresight to correct problems before they affect service. We are using technology, better business processes and deeper integration with our customers To enhance the competitiveness of Union Pacific's Intermodal product to ensure it remains a long term growth engine for the company.
The last focus area for our growth strategy is expanding our network reach to integrate deeper within our customer supply chains and grow our geographical footprint. Brent, UP has a great franchise. We want to unleash this franchise strength along with our improved service product to reach more customers.
In all our markets, the bulk team is intently focused on expanding our network reach to meaningfully grow carloads. We constantly pursue increasing our physical footprint Through locating new facilities or reactivating or expanding existing access, we also strategically target industries and customers to extend broader and integrate deeper within the supply chain. An example of these pursuits in action is our expanding participation in the beverage market. We have experienced great success with this business, primarily through aligning with a large winner in the space, Constellation. With this strategic partner, we have achieved and expect to continue year over year growth.
Two examples of how we are doing this. Number 1, a focus on product Development and our ability to insert them into the rail supply chain. As an example, seltzers have become increasingly popular beverage choice. The industry is expected to grow 35% in 2021 alone with case demand more than doubling in the next 5 years. Recognizing this, we recently worked with Constellation to convert seltzer moving in truck into the rail network.
The second thing we did is network alignment and investments with the breweries and destination facility to continue handling projected rail growth. Our Our team is now actively employing this market leadership and expertise to bring new beverage market participants into a rail centric distribution model that has proved Successful. In addition to beer, wine and seltzers, this also includes capturing energy drinks, teas, juices, This is milk alternatives and other evolving consumer trends. We continue to leverage data and our relationships to convert prospects to rail, Whether they're new production players or on the other side of the supply chain. As a result, additional destination capacity continues to be added on UP To support the growing beverage network, all of these actions and partnerships set us up for a bright future to win in this market.
We're seeing a huge opportunity in the world of transporting auto parts and finished vehicles, and Loop is playing a key role in that growth. As you know, Loop is a wholly owned subsidiary of Union Pacific Railroad, and we are entrenched in the automotive industry. We serve the auto parts market through our door to door Intermodal service product and we provide auto manufacturers or OEMs shipment tracking visibility for Our finished vehicles at the VIN level via our shipment vision suite. We're digging deeper into the auto parts supply chain, converting business from truck to intermodal And transitioning shipments away from congested highways into a more efficient and environmentally responsible rail solution. So how do we do it?
Our team leverages the strength of the UP franchise, which provides access to the largest intermodal network in North America, reliable service product With the most truck competitive lanes and an excellent customer experience due in part to our full service door to door premium solutions Through our automotive expertise and the trusted relationships we have with OEMs and their suppliers, we build optimized supply chains. With a proven track record of value creation, Loop continues to find opportunities to grow in the marketplace, inclusive of even the most time sensitive materials needed for the production of new vehicle models. To give you an example, late last year, Loop was awarded a significant share of inbound transportation of auto Current example, Ford recently awarded us the opportunity to move inbound auto parts for the launch of the new 2022 Bronco At the Michigan Assembly Plant, we are honored to support this key new product and we'll continue to provide our consistent and reliable service. In addition to established OEMs, we are Actively working with part suppliers and emerging manufacturers. Every piece of business we convert to intermodal lowers the overall cost of a vehicle And reduces the impact on our environment.
We are proud to play a part in helping our customers streamline their supply chains, while Also achieving their ESG goals, Union Pacific has by far the best service product to support the auto parts market and to move shipments between Mexico and the U. S. Efficiently and safely. As we look forward, we are excited to build on this growth momentum, Continuing to help our customers win in the marketplace now and well into the future.
Expanding our reach also means developing new locations on UP to serve our customers. Over the past 3 years, we have constructed close to 200 track projects with customers to support Over 325,000 annual carloads of sustainable economic growth. We have an experienced network Our industrial development team works closely with local municipalities on economic development to utilize FocusSight's programs. Today, this program features over 25 shovel ready sites on our rail network. These are large Scale development areas over 125 acres per site that have already been pre approved for rail They are strategically located with prime access to roads and highways and these sites are accessible To utilities, which make it easier and quicker for companies to get a new facility up and running.
One premier site that I'd like to highlight is Prime Point Industrial Park, a 3,000 acre site located just south of Dallas to support manufacturing, distribution, Refrigeration, cold storage and bulk transloading. It's strategically located close to major interstates and sits adjacent to our Dallas Intermodal Terminal. For the past few years, we've been able to attract new customers to the site like KTN and the Biagi Brothers. Currently, we have over 15 sites ready for development with either direct rail service or short dray to our intermodal facility. We're excited To feature Prime Point as a great speed to market solution for our customers, including Mexico.
Chemical production in the United States, In the Gulf Coast continues to expand. Since 2010, completed, under construction or planned investments total over $200,000,000,000 Since the first plastic expansion in 2017, we have grown our market share by serving nearly 90% of the expansions that have come online. And that doesn't happen by accident. It takes innovation, creativity and a passion to win. We are the industry leader in the rail transportation of plastics With our superior Gulf Coast franchise, best access to the nearby Mexico markets, export optionality and our best in class Storage and transit infrastructure.
We have built the premier rail transportation product for plastics. Let me share an example of how we approach Product development to support our plastics customers. Early on, we recognized that there was a supply chain constraint For producers to get their products to the global markets and we designed the Dallas2Dock product. Since launched in late 2018, Dallas to DOC has taken off. In 2020, during the global COVID pandemic, we saw volumes increase 25% And due to the success of the product, KTN, our Dallas to DOC partner, recently completed an expansion of warehouse space and additional packaging lines doubling its capacity.
Dallas to DOC at Dallas Sadock at Prime Point is providing industry leaders with supply chain optionality for their export products. Looking We are committed to developing solutions that will help us continue to win business and grow our market share in plastics.
Dallas Tadaka is a great example of one of the service offerings we've developed for our plastics market, But we have additional creative transportation solutions that we're bringing to other markets to help extend our reach. Take our Sport grain facility in Chicago, for example. We announced this new service offering last week. This is one creative solution where we Utilize an existing facility to co locate with shippers and receivers to meet demand.
Expanding our network reach includes our co location strategy. One area of focus is in Chicago at our Global 4 intermodal facility with our G4 Transload initiative. Global Forest Grain Export Strategy, which is anticipated to begin early in Q4 of this year, is our initiative to increase the competitiveness of our International Intermodal Market segment. In short, we're creating a more efficient containerized supply chain. Historically, much of the grain exports moved bulk And then containerization started to happen, but there is still an opportunity to have a more fully defined containerized strategy.
Our belief is that finding and developing opportunities for exports will increase our overall international competitiveness, providing better economics Success with our Global 4 Transload initiative is creating the most competitive export program in the Chicago marketplace. With co location, we create efficiencies within the supply chain. Effectively, we eliminate 1 dray from the bulk containerized loading Taking place directly at our terminal, this dray savings is material to the exporter and makes Union Pacific more competitive for the intact import move.
Over the past 10 years, we've invested almost $1,800,000,000 to support commercial facilities, of which over 60% has In the intermodal space, we believe intermodal is a growth engine for UP. Kiera and I are very excited to share with you a couple key projects we have To expand our intermodal network, both of these investments will strategically position UP closer to the fastest growing retail markets for intermodal And has the potential for significant opportunities for truck conversions in the future. The first project It's our Twin Cities intermodal terminal to give the marketplace a new alternative to a faster, direct and reliable intermodal service For regional shippers and receivers in the Midwest, this pop up facility began operations on January 4 this year. We Started out with domestic service between California and the Twin Cities. And as the facility expands, We will add international traffic into it.
Now turning to the West Coast. I'm very excited to share with you a game changer for us. Today, we're announcing our new intermodal expansion into Southern California with our Inland Empire Intermodal Terminal.
Our new Inland Empire Intermodal Terminal creates a tremendous opportunity to position Union Pacific directly in the heart of this massive import distribution region. The plan is to expand our intermodal presence into our West Colton yard, which will allow us to reduce freight costs, create new solutions for our customers and compete Today, there are roughly 2,000,000 imports trucked from the ports of LA and Long Beach to the Inland Empire. Conservatively, we estimate the Inland Empire market size to be around 1,500,000 remodeled units annually. This area is the fastest growing region of industrial warehousing space in Southern California and continues to be a leader across the United States. In fact, there's more than 625,000,000 square feet of existing warehousing space just in the inland empire.
That's equivalent To 15,000,000 short and long haul truckloads of freight. We're about a month away from introducing our pop up ramp, which will be capable of 45 1,000 lifts within our West Colton yard. This will bring to life our first intermodal presence in this region. Beyond the pop up, We will continue to increase our footprint with the goal of addressing the needs of the community, including taking local truck freight off the highway. Union Pacific's expansion into this region is an exciting new development and it demonstrates our commitment to intermodal and the advantage of Union Pacific's franchise To serve new markets.
In closing, the team and I talked about some really great examples surrounding how We're growing the business. I want to make it clear to all of you that we will outperform the market by Growing with PSR, transforming our sales culture, creating a better customer experience, expanding our network reach, With investments we are committing to make in the intermodal space to serve new markets. I'm excited for
I am UP. Union is not And always a me. This is what is meant by I am UP. I am up Heating calls to follow the notion of forward notion, go tired, I'm inspired, the loop and the local nation. I am the union of interconnection when tension meets invention, an ocean of signs and signals where ideas
I admire Engineer Empress Stephenson. She just gave me lots of guidance and I've been To call on her for anything else that I might need advice on, but just being a woman out here too, it's admirable.
To me, John Jensen is he comes to work every day with a positive attitude and does whatever he needs to do to get the job done.
Union Pacific to me is Mike Cook, the Director of our North He brings a passion to everything he does and cares about this railroad and everyone.
I am the last light standing, Joy, food is on the table. I am the window at the station here to help make things more stable. I I am the rallying cry to unify as we strive to make ends meet the traction and the tread where steel grit defies defeat.
Matt is the conductor on the YSP-fifty 1. He ensures that our new intermodal service in East Minneapolis is well taken care of and he works really well with the contractor to Sure, we are delivering a great service.
Kevin Merton, because he's a team player, he's always available, And he definitely helps me out when I have questions.
Steve Spencer with me. Positive attitude and always
And I am freight and animation, the diesel and the steam. I carry fuel that feeds our nation and dares each of us It's a dream.
Jim Hild is UP to me because he displays a great work ethic every day. He's always willing To jump in and help and always supportive to his staff.
I admire Brad Gross. I admire him because he never complains
I want all of our employees to know how much I appreciate the fact that we've got the best team in the industry. We've got the best team in the world. There is truly nothing we can't do when we put our minds to And we proved that day after day after day.
I am history innovating, 160 years long. I am made and in the I am 30,000 strong, racing and activating. They is I and I is we. I am
Good afternoon, everyone. I'm Jennifer Heyman, the CFO of Union Pacific. It's my privilege today to take the exciting serve and grow activities that Eric and Kenny and team just discussed and translate that into how UP shareholders win in terms of our financial targets over the next 3 years or between 202220 Lance kicked us off today with a scorecard from our 2018 Investor Day and I want to reiterate his point. Union Pacific produced remarkable financial results Over the last 3 years, despite the global pandemic, in particular, cash returns to shareholders totaled more than 25 Last 3 years is a big number and it's industry leading. UP's total cash returns to shareholders as a percent of Average market cap was nearly 22% between 2018 2020, a full 2 percentage points higher than the next And 4.5 points above the rail average.
These results clearly demonstrate UP's leadership position in the industry and our Commitment to shareholder returns. A key driver enabling our performance was the decision to adopt PSR and the dramatic efficiency gains we When we embarked on our PSR journey in late 2018, we ended that year at a 62.7% operating ratio, which put us Squarely in the middle of the rail pack, 4th of 7 railroads. In 2019, our first full year of embracing PSR and changing how we do business, we reported an operating 8.5% operating ratio moved from 3rd to 2nd and again narrowed the gap. Importantly, no railroad has stood still over this period. The industry is For this year, we've set a target of 150 to 200 basis points of operating ratio improvement.
And we've now Now said, we think we're going to be closer to that 200 basis points of improvement. Lance earlier drew a line in the sand on that 55% operating ratio goal, next Next year, 2022. Beyond that, Union Pacific will be an efficiency leader in the rail industry. Given Our route structures, our business mix, our pricing discipline and our efficient operations, we should have one of the lowest, if not the lowest operating ratio in the rail industry. That's And we're setting that target with every expectation that the industry as a whole will continue to improve, much like it has Several years.
One driver that will help us achieve that goal is our operational efficiency or serve. You heard Eric, Rick, John, Shane and Raul all talk about their productivity pipeline and plans to improve safety, leverage technology, grow train length and increase capital We expect these activities will produce a cost structure that continues to improve. Now we've historically framed our efficiency gains In terms of productivity, giving an annual productivity target and reporting our progress quarterly. Inside of UP, the number is meaningful and actionable, but it Can't be calculated externally. So, we will finish this year reporting against our $500,000,000 productivity target.
As we transition to growing volumes, however, a better yardstick We'll be incremental margins, which we expect to be in the mid to high 60% range over the period. Turning now to Gro. In April, we revised Our 2021 growth expectations to be around 6%, which factors in a full 2 percentage point drag related to lower Coal and energy shipments. Going forward, we expect to outperform industrial production and achieve volume growth of 3% compounded annually or a CAGR. Although Energy markets may fluctuate, coal will remain a headwind.
So included in that 3% growth CAGR is a coal volume drag of roughly 0.5 point. As Kenny and team discussed, Our opportunities for growth are broad based, but the primary growth driver will be intermodal. The ongoing shift to Your intermodal portfolio will drive mix pressure, but through our disciplined pricing and intermodal efficiency opportunities, we are confident that we will leverage that volume and produced strong results. We also remain committed to achieving core pricing gains in excess of our inflation dollars over the next 3 years as we provide our customers with Excellent service product that's more environmentally friendly than trucks. Connected to our growth expectations are Over the last 4 years, we've averaged capital spending at a sustainable level of less than 15% of revenue.
That will continue this year and we don't see that changing over The investments in the Twin Cities Intermodal Terminal and in the Inland Empire Intermodal Terminal are factored into this guidance as well as other Capital intensity is PSR. Our increased freight car velocity and locomotive productivity creates capacity within both our freight car And locomotive fleets. Similarly, the curtailed manifest yards and intermodal terminals represent capacity in our network for growth. In addition, today's 3 years positions Union Pacific to deliver higher returns on invested capital or ROIC. To grow ROIC, the pace of our earnings growth needs to be To the invested capital base, we will remain disciplined, both in the capital investments that I just described as well as in the use of our balance sheet.
Given our Split rating between Moody's and S and P, we are not drawing a bright line in terms of a single metric like debt to EBITDA as we have in the As it really means 2 different things to the different agencies, we have consistent dialogue with the rating agencies, they understand our long term commitment to maintain a And practice since we announced our leverage change back in 2018 and we'll continue to manage accordingly. Looking back at ROIC performance 2014 was the company's previous high watermark for returns at 16.2%. As we look ahead, we certainly expect to make Strong gains back towards that 16% range this year and then average around 17% or so between 2022 Last but certainly not least, I want to talk about cash. Cash is truly king and Union Pacific has demonstrated ability to generate cash and be resilient in that cash generation. Over the last 3 years, which includes the pandemic, we generated nearly $26,000,000,000 in Over that same period, we returned almost 100 percent or $25,200,000,000 to our shareholders in the form of dividends and share repurchases.
That Past performance establishes a track record of strong cash returns to shareholders, and our goal is to do even more in the coming years. As we announced a couple of weeks ago at 1st quarter earnings release, we are targeting share repurchases in the $6,000,000,000 range for this year. The majority of those repurchases are funded by cash from operations as well as reducing our Our year end cash balance to a more normalized level from $1,800,000,000 at the end of 2020 to closer to $1,000,000,000 by the end of this year. We also expect to get Through the pandemic and our disciplined capital deployment, we crossed the threshold of 100% cash conversion for the first time ever last year when our Back to average roughly 100% cash conversion rate over the period. In terms of how we deploy the cash, the first call will be to reinvest in the business.
And as I Just discussed, we will invest for growth, but at a historically lower level of capital intensity. Next, we prioritize our dividend. Union Pacific Shareholders have received a dividend since 18.99, 122 years consecutively. In 2018, we raised our dividend payout ratio target to 40 45%, the highest in the rail industry and competitive within the industrial space. Now from a practical standpoint, we've really been operating closer to the high end of that So today, we're officially dropping the low end and setting a dividend payout target at roughly 45% of earnings.
The remaining Which includes cash from new debt will go to share repurchases. In addition to the $6,000,000,000 in shares we plan to repurchase this year, we would look to buy Back another $18,000,000,000 to $19,000,000,000 between 2022 I am proud of all that the men and women of UP have accomplished since our last Investor Day and the financial targets we've established today Translates into another win for our owners. As you've heard from the entire team today, we have a strong plan to grow the top line, Have margin improvement and at the same time maximize capital utilization to again produce industry leading returns to our owners. We will serve,
Thank you. That opens the last Q and A session over to you, Lance.
Thank you very much, Vanessa, and welcome to our final Q and A panel. I've got Kenny Rocker and Jennifer Hayman with me as well as Rahul Jalali and Eric Gerringer, and we're ready, Vanessa, to go to the first video question.
Excellent. Our first question comes from Jordan Alija from Goldman Sachs. Jordan, your line is now open. Please go ahead.
Yes. Hi, everyone. Thanks for taking the time. Question for you on intermodal and volume targets, you mentioned the 3% CAGR, presumably that includes intermodal. So I'm just wondering, How do you look at intermodal growth over this timeframe from a growth percentage standpoint?
And then thinking about your sales force for a bit, As you try to get the truck conversions, particularly domestically, what would you say is the biggest stumbling block that gets run into? It certainly can't be priced. Thank you.
Yes, Georgian, we're not going to deconstruct that 3% any further, at least not today.
No, other than to say, when you look at our Our premium business is about half of our portfolio today. And as we look forward, that portfolio in total as a percentage of this total buy will Kind of grow a couple percent a year. So you can think about that from a mix perspective, you will see that grow a couple percent a year over the time period, Jordan. And I'll maybe have Kenny talk to me about that last part of your question.
Sure. I think the last part of the question were, are there any barriers To helping us get that domestic product. And I'll tell you the service product that we have has been allowing us to grow that business. We feel really good about some key network lanes that we have getting into Dallas, further into the Southeast, getting up to the Midwest. We've been encouraged by the amount of volume that we have been able to win here on our domestic business here recently.
Cool. Thanks for the question, Jordan. Appreciate it. Vanessa, let's get another question from video.
Thank you. Our next question comes from Jon Chappell from Evercore ISI. John, your line is open.
Thank you. Good afternoon, everybody. It's Evercore ISI. Lance, we go through Jennifer's presentation. It checks basically every box that you want to hear, the massive improvement in the OR, the productivity gains, The cash conversion at 100%, the buybacks to dividend growth and then you layer that on top of Kenny's with the network and the top line growth opportunity.
Anybody who's new to the story would think that Union Pacific has been the best performing rail stock for the last several years and unfortunately that hasn't been the case. So Maybe to turn it to you, why do you think that the stock has lagged a little bit given all the positive momentum you've had both operationally and financially? And what do you think are the 2 or 3 most important takeaways that we should take holistically from this presentation to make us think that Union Pacific will go back to that equity Premium valuation that you've had prior to the last couple of years.
Yes, John, I'm really proud of what the team has accomplished And whether you look at the last handful of years or the last 10 years, we're top quartile in TSR in the last 10 years. The last handful of years, we talked about 420 basis points of margin improvement. We're now industry leading the last two quarters and we anticipate to stay there. When we look into the future, John, what makes me very confident is lowest cost structure in the industry and we're not going to sit on our laurels. We're going to keep driving that.
That's new. We've got a transportation plan and network that's greatly simplified and is reliable and consistent with better service. That's new for us. Dan, we've got a better ability to price at market, to understand our markets And to be aggressive at product development for our markets maybe than we've been historically where we were perhaps a little bit more cautious. You put all that on top of the industry's best franchise and that's why the presentation in your words Ticked every box, everything we presented today, we fully anticipate to achieve like we anticipated achieving the 2018 numbers And the only thing that got in the way was a pandemic.
So that's a great question.
Thank you, guys. Thank you, guys.
Yes. Thank you. Vanessa, let's get another one from Vidyo.
Thank you. Our next question comes from Allison Landry from Credit Suisse. Allison, would you please unmute your video and audio?
Thanks. I mean, Jennifer, you've obviously talked about a lot of free cash flow conversion, raising the dividend target. But Kenny, one of the things that you talked about was network reach and extending that. Are there any opportunities for UMP to Look at maybe short line or regional short line systems or do you guys have any land holdings that are excess that Perhaps you could redevelop to capitalize on either shipping supply chains or secular growth trends?
100% to both. So we do periodically and routinely review short lines as potential extensions. When we also talk about reach, Allison, you should be thinking about us using our current land holdings as ways to enhance Our ability to reach customers and Kenny, you've got a ton of opportunity there.
Yes. Thanks, Allison. We talk about Prime Point. One of the things that we haven't talked a lot about, but You heard it in the video, it's our focus sites. We have 10 of those sites that have over 1,000 acres.
All of them have at least 125 acres. We've got some key wins in Iowa, located a customer for renewable diesel Up there a couple of key wins down in New Mexico and then also up in the Midwest and Wisconsin. So We're really taking advantage of our network and being very aggressive about doing that.
Yes. If I recall, some of those key sites, just off the top of the list, 6,000 plus acres in the Denver, Aurora, Colorado area, 2,500 acres in the Las Vegas, Nevada area. There's another like couple of 1,000 I mean, you've got them in really sweet sites around the territory.
That's going in metropolitan areas. So, that's very encouraging.
Yes. That's a great question, Allison. That's a turbocharger as far as we're concerned. Let's take an online question at this time. There's been minimal discussion of price.
Can you discuss price mix looking forward? Or are we talking about Cost plus and revenue growth is primarily volume dependent, Kenny.
Yes, I mean, we're always a market based pricing company, But we also with the service product are able to get price in the marketplace. Clearly, it's favorable now, but even in
the future with
this A more reliable service product. The team will be very focused on making sure that the price reflects the service that we have out there. Jennifer, you
Yes, I mean, we are not a cost plus pricer. We want to make sure and we will make sure as we have historically that each piece of business on our railroad earns its return And we feel very confident about that. Our overlying message in terms of pricing dollars above inflation dollars And certainly we see great opportunities and in tight capacity markets like we're seeing today and the great service product, we're very optimistic And we're very insistent on appropriate pricing for our business.
Amen. Let's take one more online. How is UP positioning itself To maximize the benefits of a more inflationary environment while minimizing the costs, what operating or capital line Do you expect to see the most inflationary pressures over the next 1 to 3 years? Jennifer, you want to handle that?
Yes. So When we think about inflation and we think about our inflation guidance over the next 3 years, we are looking for inflation to be a little bit higher. So 2.25 percent, When you look back historically, it was maybe more like 1.5%, 1.6%. Where we see the biggest opportunity for us Going forward is really leveraging that low cost structure to be a bigger helper and supporter of our customers so that we can further be Not just a service leader, value leader, but also help them as they're looking at inflationary pressures within their own cost structure. When we look at what it means for us, certainly on the capital side, we think about rail ties, those are areas where we may see inflation, but you heard Shane Talk about tremendous opportunities that he has to drive productivity in the engineering space.
If you look at it on the OE side, certainly our largest Cost component on the OE side is within comp and benefits. Health and welfare is inflation pressure that we continually see And we don't necessarily expect that to change going forward either. So those would be kind of the ways I would bracket that thinking in terms of our own internal cost pressures.
Hey Vanessa, let's go back to you for another video question.
Thank you. Our next question comes from Ken Hoexter from Bank of America Securities. Ken, your line is open. Please go ahead.
Great. Good afternoon. If you're talking, I guess, maybe 3% IP plus volume growth plus pricing above inflation about 2% to 3%, you're talking about 5% to 6% revenue growth or are you thinking more than that? And then I guess if that's what leads you then double digit EPS, within that you talked a lot about the success of PSR. Are there any other major things To be done any other major gains like the Inland Empire and any can maybe talk about the scale of the benefits or potential benefits from the 1 man groups?
Yes. Jennifer, you want to handle revenue guidance?
Yes. So we don't have to your point, Ken, we don't have specific revenue guidance out there. It's the 3% volume growth. And I think the thing that's important to note with that, that is above industrial production, but that also includes a 0.5. Headwind from Coal, so much like we're seeing coal and energy headwinds impact our volumes today, that's in that 6% guidance for 2021.
Think about On a gross basis, we'd be looking at closer to 3.5% volume growth absent that coal hit win. So I think I'll
hit that. I think I want to
point out is on the crude question that you were asking.
Yes, that's great. I think part of that question was also, so you're going to generate some revenue, And you're generating low teens or double digit EPS and there's probably some cost, Eric, Opportunity in there and product opportunity. So why don't we talk a little bit about that?
Sure. So on the cost opportunity side, I mean, we're going to continue to focus on our train length. We're Going to grow that trailing to 10,000 feet or above and we're going to stay very consistent on our locomotive productivity and been able to grow that as well. And those are the 2 biggest ones that we've We've been able to capitalize on, but then as Jennifer pointed out again, I mean Shane has a tremendous number of different productivity initiatives that are related to engineering and mechanical. I also see us still finding Additional opportunities on the automation side as we think even more broadly in conjunction with Rahul.
Yes. Rahul, there's a ton of opportunity in automation, isn't there?
All that's done. We are just getting starting to scratch the surface from a platform perspective and you heard me talk about all the platforms that we're launching And the amount of data that's generating and the ability to kind of help both our internal and external customers In integrating a total customer journey as well as optimizing what we can do for Eric's team here.
You bet. So all of that user experience Levered with our customers makes it easier to grow with them, which helps the top line and also makes it so that we don't have as much churn, which helps the bottom line. That's fantastic. Thanks for that question, Ken. Vanessa, let's go to the next video question, please.
Thank you. Our next question comes from Scott Group from Wolfe Research. Scott, please go ahead.
Okay. Thank you. So, Jennifer, I understand you're not giving revenue guidance, but when you think about the net of price and mix, Do you think revenue outpaces the volume guidance you're giving us? And then can you just clarify, you talked about the rating agencies different wanting different things. I guess if you've got sort of the rating agencies on board with your thinking, is you have willingness to use more Leverage on the balance sheet and your targets if they were on board.
So I'll talk to the first question there. You're basically asking is revenue with price going to give us positive yields. And yes, we would expect that as we look over the horizon. Even with some mix pressure, we do expect that to be on the positive side. In terms of your ratings question, so I think it's important to point out When we put out the specific target of the 2.7% back in 2018, we were going through a change in our capital structure.
Sure. We were adding pretty significant leverage and so it was important to put a marker out there in terms of where we were going to take that to. As we sit here today, we've largely gone through that process. We believe that we not fully, but pretty nearly optimized our capital structure. We're going to continue to use our balance sheet and the capacity that we generate there as we continue to grow earnings and use that to reward shareholders.
But when you think about a bright line measured on a quarterly basis, we think that through our dialogue with the rating agencies, the We've proven to be very disciplined in terms of our capital deployment and that we don't plan to significantly change our leverage, that That bright line on a quarterly basis just really doesn't make sense for us, but we're going to continue to reward our shareholders with our balance sheet while maintaining a strong investment grade credit rating.
Thanks for the question, Scott.
Thank you.
Yes. Let's go to an online question. Does the guidance Of low double digit EPS growth include share repurchases, Jennifer?
That's an easy one. Yes, it does. It's both the growth that we're going to generate From the business as well as share repurchases, those are both included in that guidance.
Perfect. Vanessa, do we have another online question?
Yes. We have several. Our next question comes from Tom Vadis from UBS Securities. Tom, your line is open. If you would unmute your video, please go ahead.
Yes, great. Thanks for the change for another question. So I've got 2. First, I want to get a sense of where you're at on some of the intermodal initiatives. A couple of things you mentioned like the grain matchbacks program at Global 4 and also kind of leveraging the real estate footprint.
So it seems like those are nice levers for your international intermodal growth. And I'm just wondering how early in that process are you? Have you been doing Matchbacks for a long time or is that kind of first inning of something you could do for a long time to support international growth? And then the second question, Lance, for you really, I guess if I think back to prior CEOs, I think back to Jim Young, I think Jim was very much about every car has to pay its way and earn a return and it was a long period of price and really capturing a lot of price. How do you think about what you want to be the kind of framework for your time as CEO?
Is it going to be really transition to volume growth and volume becomes more important than price or do you think it's just it's about balance? Thank you.
Thank you, Tom. Kenny, you want to start out on Matchbacks and is that new to us?
No, not at all. Thanks for the question, Tom. It's not new to us. We've always had a number of products in the marketplace. We're excited that we've been able to turbocharge those products.
And so when you think about the products that we have in Pocatello, Idaho, that's coming online this summer. We talked about the G4 Great matchback, that's coming online by the end of this year. And even that Inland Empire product, we're excited because we're going to start that up and Eric And the team are giving us the product here this summer. So feeling really bullish by how quickly We've been able to bring those on and especially when we talk about the Twin Cities intermodal product too.
Yes, fantastic. And Tom, so let me put my answer in the context of let's go out a few years and I'm retired or at a retirement party And I'm celebrating with the leadership team. And what we're celebrating is we're clearly the best dam railroad in the world And more importantly, we're clearly a logistics leader. Our safety record is second to none. We've demonstrated best margins in the industry.
We've demonstrably improved our return on invested capital, and we've also become more meaningful to the share of spend of our customers When it comes to the logistics and supply chain and we did that by adding new products and services that were really meaningful to them, help them solve problems in their markets. If we can say those five things, I'm having a hell of a retirement party.
So volume is on the list, but it's not
Volume is an enabler, right? Volume and the way we think about volume, Tom, is the market is going to present to us So what's available? And the more we can do, the more will become available to us. The better our cost structure, the more is available to us. The better our service product, The more is available to us and the more we remove barriers to doing business with us and make ourselves ridiculously easy to plug into, the more is available to us.
I look at that and think all of that comes at a price. There's a market clearing price. It's not one thing. It usually is a band. We want to be at the top end of that band and we want it all to pay for itself.
With a lower cost structure, we make it a little easier.
Yes, we don't think of those In terms of volume and prices being mutually exclusive, same way with growing versus our operating ratios. We still very much are in a place where we believe that we can do both of those things together.
Amen. Thanks for the question, Tom.
Thanks for the time.
Yes. Let's get another video question, Vanessa.
Thank you. Our next question comes from Amit Mehrotra from Deutsche Bank Securities. Amit, if you could On mute your video, here we go. Please go ahead.
Thanks. Jennifer, I'm sure you're going to miss the incremental margin questions, but thank you for putting it out there. First question, I guess, I just had 2 parter. First question is, what does the volume CAGR of 3% assume, if anything, on The outcome of what's happening at KSU, is there some headwind assumed, is it neutral, is there nothing assumed? And And then I just want to clarify the OR comment for next year.
I think Lance said 55 OR, but in the slides it's 55.x. Are you saying that it's going to be 55 at some point next year, but the annual is going to be a little bit above 55? If you can just clarify that. Thank you.
Yes. So in terms of the operating ratio, Amit, it is we're not putting a 55 dot What fill in the blank. We're going to be comfortably operating in that 55% range in 2022. What the exact Basis point is after that. We're not putting that because obviously we've got to finish out 2021.
You heard us up our guidance In the Q1 in terms of being closer to the 200 basis points of improvement this year, so we need to get through this year to really put a finer point on 2022, But it is going to be firmly in that 55 range and that's going to be our launch point obviously to continue to improve from there. In terms of your question about the merger, we believe very strongly that we've got a great competitive landscape, a great competitive For us in terms of looking at our franchise and regardless of what happens with the KCS, we feel very confident in being able to reach Our operating ratio targets.
Yes, that's exactly right, Amit. We're going to continue to compete and make sure our customers have Good fluid and competitive access to Mexico to and from like they do today. Vanessa, let's take another question online if we could Or excuse me, no question.
Sorry, Lance, were you looking for a video question?
Please.
Our next question comes from Brian Ossenbeck from JPMorgan. Brian, please unmute your video and audio to be able to ask
All right.
Thank you. So, two questions here. 1 on fuel consumption. So Eric, you mentioned a bunch of productivity initiatives on the operating side. I didn't hear fuel was one of them, but as you know, UP has been lagging in peers For a while now, even though you've got some new equipment, better efficiency, and it sounds like maybe a new service they're putting in for fuel economy towards the end of the year.
So Do you think you can close that gap? Do you assume you can close that gap? And I guess, bigger picture, why is the GAAP date as big as it has so far? And then just to maybe clarify on the incremental margin range for Jennifer, mid to high 60s, I would think maybe you can do a little bit better towards the high end of the range because it sounds like you've got 60% to 70% capacity on the network where you have 30% to 40% additional. So it sounds like a lot of opportunity to run some additional trains.
So the thoughts on that in fuel economy, if you could. Thanks.
So
on the fuel conservation, Brian, You pointed out and I'll kind of do it in reverse. So when you look across the industry, we're always very careful as we think about comparing to other railroads because no two railroads are exactly We face certain challenges in the West Partition of Bar System with grading curvature that others don't have to. Now, That doesn't mean that we don't expect to improve year over year in fuel consumption. The work that Shane mentioned with the modernization of 300 locomotives by the end of 2022 that will contribute to that. Our work in leveraging EMS and how we can turn off locomotives or at least idle locomotives More effectively than we can today, that will help on fuel consumption.
Our overall broad strategies around still reducing the fleet, we've often said we don't have 3 More locomotives to put into storage, that doesn't mean that we're satisfied with where our fleet is. We want to grow that, but we want to do it with still a lean base. So there's still opportunities. Even when you think about converting locomotives from DC to AC and being able to run that, you're getting more attractive effort, which allows you to actually reduce your fleet as So I guess I could kind of go on and on, but it's a very long strong portfolio of initiatives that you should continue to see us make progress on. Relative to peers, I'll let you make those comparisons.
I just would point out that we're a little bit different, but we still need to be successful at Groundstar and Mark.
But we are competitive. Absolutely. We're the best in the West And we're going to continue to improve and we've got some tailwinds and some headwinds and we're going to use the tailwinds to our advantage and overcome the headwinds.
Yes. And in terms of your incremental margin, You know, incremental margin mid to high 60s average over the period, we think that would be very, very strong performance and it certainly gives The ability for us to take on growing volumes in a very cost effective way. When you heard John talk about some of the excess Capacity or our room to grow, I really think of that more in terms of capital dollars and that really goes to our capital efficiency that we see going forward and why we're very Confident that we can continue to grow while staying below that 15%. That means I don't need to put incremental investment into a terminal Or into line of road to try to grow. That's where that capacity comment really came to that John was speaking to.
All right. Thanks for those questions, Brian.
Thank you. Thank you. Thank you.
We're going to go online next. The question is, are you indifferent from an ROIC or operating ratio perspective, Whether growth comes from intermodal or carload business. Let me get started and then I'll turn it over to either Jennifer or Kenny. We love Every single one of the products on the railroad, we're like a proud parent with their children. Having said that, Carload is wonderful because it's a unique aspect of the Union Pacific franchise.
We've got a better carload network than our primary rail competitor in the West, And it allows us to convert even more traffic from highway. It's harder because it involves local switching and some other things, But it's unique to our franchise and it leverages it and we love that. We love intermodal too though.
Yes. And I would say just going back So the long term guidance, the targets that we put out there for ROIC growing to 17%, incremental margins mid to high 60s over the period. That bakes in the fact that we do see the intermodal, the premium portion of our network growing faster. I think that's just a fundamental fact. When you look at where Kenny and team are targeting, it's truck markets.
And while some of that may convert to carload business, a good portion of it is going to convert into intermodal business.
Now think if we could snap our fingers, I'd like to double frac sand, double grain and have a whole boatload of domestic intermodal growth too. Maybe that will happen. Let's go to Vanessa, a video question.
Thank you. Our next question comes from Justin Long from Stephens. Justin, please unmute yourself. Your line is open.
Thanks. And my question actually builds on the prior question. I wanted to ask about incremental margins just because historically, I think We've been under the impression if you rank order things, merchandise would be well ahead of intermodal. But after implementing PSR, could you talk about That gap today when you look at incremental margins of merchandise versus intermodal, are we to the point now where they're both in that Range of mid to high 60s or is there still a pretty meaningful gap?
So There is still a gap today and that's really where you heard us talk about, in fact, John Panzer talked about intermodal excellence. We Recognize that because that is going to be a growth engine for us, we need to be diligent about improving the cost structure within that space. It's not on par today, but we want to grow in that area. We're not going to limit growth because it's not on par because we think we can Drive very strong cash returns from that business and that's very much what we're focused on doing. So again to Lance's point, we We don't necessarily have the luxury today to wave a magic wand that's going to drive where the business is going to be.
We want to be in a position to Have the service product, have the capacity and have the efficiency to handle what comes to us so that we can grow and do so very profitably.
Yes. Train length is our friend across the board though, Justin, right? I mean, whether we're dropping a couple of containers into an existing Intermodal train or adding a car onto an existing manifest train. Train length growth is our friend. Vanessa, let's get one more from video, and then I'll go to online.
Our next Question comes from Chris Wetherbee from Citigroup Global Markets. Chris, your line is open. Please go ahead.
Great, thanks. I guess I wanted to ask a question about the operating ratio potential of the business. I guess going back a long time covering you guys, You've generally set sort of absolute targets around operating ratio and obviously the incremental margin targets are quite good, but aren't an absolute target. So I guess maybe conceptually, how are you thinking about where you stand today versus where you've been Several of these Investor Days in the past where you felt the need to sort of set those meaningful targets. And then when you think about the incremental margin opportunity, How do you sensitize that around volume?
So you have a volume forecast and we'll see what the economy gives us particularly maybe as we get farther out into the forecast But can you still achieve those types of incremental margins and maybe a softer volume environment?
Yes. Let me start and then I want to turn it over to Jennifer. It's a great question, Chris. And what you're seeing is a very deliberate and specific Evolution, movement away from just trying to focus solely on operating ratio and kind of feeding that beast By setting a specific target out into the future that we're going to chase down because candidly, I think when we look at the future of our railroad, We're not giving up in any way or saying, boy, we think we're going to get slippage in operating ratio, but we just don't think Kind of slavish focus to that one number is very productive.
Yes. And I think kind of similar to when we talked about leverage targets, when we put out The 55 operating ratio target, we were not leading in the industry as we are today. We were in fact lagging and so we thought it was important to put that target out there To help our shareholders and people understand, we think this is the potential of our franchise. We still think there's more potential obviously because I said We're going to have one of the best, if not the best operating ratio going forward from this point. So it's not like we're saying we're going to take our foot off that gas.
We've moved into the position where we think we need to be and we're going to maintain that. This isn't going to be a one and done. We want to sustainably be here and hold that position. And we People to continue to improve. We know the rail industry is very focused on improving the efficiency and so that's how we're viewing ourselves.
In terms of incrementals, if we have less than the 3% kind of volume CAGR, we will be very diligent in making sure The volume we do bring on and the growth that we are able to generate has very strong incrementals. And I think we again So very positive about our ability to grow. Kenny and team have a great plan put together and you're going to like the results that we deliver from that.
We appreciate the question, Chris. We're going to go online now. It's a question for Rahul. Coming from a customer of the rail industry, Do you see any obvious technology improvement opportunity that the rail industry can tackle to improve service?
Yes. Coming from retail, it was all about taking a Customers perspective into removing the pain points that we have in our customer daily journeys. And one of the 's I had here was the Quality of the technologists that we have, top notch. But taking a perspective of what are those folks working Because rail industry traditionally has been an inward outlook and we've kind of changed in the perspective a little bit with Kenny's team of Doing the outward in look and looking at the entire customer journey map and removing the pain points in that map via Better customer touch points, removing the pain points, codifying, datafying the interactions And really making it easy to do business with and that's for our external customers and that principle then applies to my friend here, Eric, for our internal customers in automating and basically putting technology in precision scheduled railroading And really coined the word technology scheduled railroading, really codifying that and data find those processes and making it better for our customers.
Yes, fantastic. Thank you, Rahul. We're going to Vanessa go to you for 2 more video questions. So let's get our first.
Thank you, Lance. Our next question comes from Fadi Chamoun from B and O Capital Markets. Fadi,
Okay. Thank you. So talking about growth, I mean, clearly, it's a focus you, but also focus for the entire industry. And it feels like it's also driving some M and A in the industry currently. Obviously, M and A is potentially a source of friction reduction from the rail network.
It could potentially unlock Step function change in the cost structure, improve the service, but I understand there's some reluctance for The East West M and A story currently, what other things that you can do, Given that the growth issue is a kind of common enemy for the entire industry right now, what can the industry do in terms of tackling The opportunity to grow by developing maybe products that appeal to the customer that are more line, A direct lines service between Eastern Mass that can unlock that addressable market.
Fadi, great question. And let me touch just a moment on what you mentioned in terms of The merger potential for Class 1 Railroads and then get into how can railroads Create product that looks like it's from a single source. So you know that Our concern with Class 1 mergers going forward is all about the STB's ability to regulate the industry. They are the sole determinant of approval of a merger. And in doing that, they have their regulations say they have to look at 3 things.
It has to enhance competition. It has to have better outcomes from a service perspective for all customers, And they have to consider the downstream impacts. In that, they have full and open authority for whatever the regulations are required In order to make that happen. In that last piece, the reregulation of the railroad, that's the piece that we would be concerned about. In the current proposed transactions, whether it's the CP or the CN, we're going to be an active participant at the STB to make sure That as they're going through that process, we understand it, they hear our voice and what it means for our customers to continue to have good unfettered competitive access To and from Mexico and that might inform kind of future decision making.
So setting that aside, What a merger does, maybe 1st and foremost, there's a lot of synergy opportunities, which basically means being able to get rid of cost. But it allows the 2 merging railroads to create single line service. And the reason single line service looks attractive It's one touch point for the customer. It simplifies the customer's journey and the variability at the interchange goes away. Those are things that we can solve with our Class I partners.
We do it actively today, Eric, all the time and Kenny all the time.
That's right. Correct.
So it's
a great question, Fadi. But bottom line is we're just going to have to continue to look for Opportunities to be much simpler to do business with customers, make sure our interchange customers are identifying Partners are identifying the best interchange points for the service product and then making that interchange fluid and rapid. There's no magic to it really. It's pick and shovel work, and we do know how to do that. Vanessa, let's go to one more video question, please.
Thank you. Our last question comes from David Vernon from Sanford Bernstein and Co. David, would you please unmute your video and audio?
Absolutely. So Lance, having opened Pandora's box on merger questions, I figure I'll just put this one out For you to consider, one of the values that's being proposed in either the CP or same combination with KCS is the ability to Compete more effectively with truck traffic, which is a very large market between Texas and Chicago, where you have single line service. What's missing in your product today that is creating that opportunity that the other railroads see and what can we Like to see you guys do to get after that opportunity to maybe accelerate growth even faster?
We see a ton of truck opportunity as well. It is in existence today. A lot of that opportunity happens at the Maquilladora's just inside of Mexico. Some happens deeper in Mexico in terms of manufacturing and some happens in Texas Gulf Coast where we already serve and provide Good outlets to and from those manufacturers and producers. So I would say I don't see any magic In CP KCS, CN KCS, other than the thing I'm most concerned about, which is KCS market power in Mexico being projected into the United States and Canada, I.
Customers on Union Pacific need to continue to have the kind of access they have to and from Mexico, so that they can both get access to Industry and also benefit from Mexican Industry and Economy in their own supply chains. So that's what we're focused on in the process at the STB. I appreciate that question, David. Yes, please.
I I was just going to say, so absent the Texas reach question, what about that Texas to Detroit corridor? I I understand you do a lot of intermodal today that actually originates and trucks over the border and comes into a yard. If that is such a large opportunity, like What's stopping you from going after that today?
Nothing. We're going after it and we're generally penetrating today.
And let me jump in. Thanks for that question. We are winning. We're winning today. We've been able to win quite a bit of auto parts business here.
We talked about it publicly. A few wins that were all truck, very sizable, up and down that north south lane, but then also coming out of Mexico Hey, it was. So we're winning today, and we want to increase on those wins.
Hey, we got good partners into and out of Detroit in the form of other Class 1 railroads that serve that area. We're going to keep working at David because there's more opportunity as you point out. We appreciate that.
We're going to have our
last question which is thank you which is online and the question is, in labor negotiations, is there any focus on greater flexibility to be able to shift crews between districts In order to react to short term or unexpected changes in demand patterns. So the short answer is Yes. And we also have some of that flexibility today. In today's world, we have the ability, Eric, to borrow out crews From one area to another. Now that's at the cruise discretion.
We invite them and most times we get plenty that say yes and take advantage of it. But in the context of national negotiations, I'm not sure that's a specific thing we're asking for in this round.
No, not in this round. But to your point, we have success with the current process and it may be something we may still enter into and further negotiations if it becomes particularly important to us.
Right. But we do have a host of other things that are part of work rule modifications that we think could really benefit the railroad that are part of this round. And some can happen at national and some can happen on property. And so as we need something to change in our labor contracts, We have the ability to get them modified in negotiation with our labor unions. Thanks for that question online.
Okay. So that's going to conclude our day today. We very much appreciate all of you taking the time to spend roughly 3 hours with us to go over what our game plan is for the next handful of years, our confidence in that game plan, how it's constructed and wired together and the team that's going to be responsible for making it happen. You're going to be able to see a replay of this event. It will be posted in the next 24 hours.
And as you heard today, we're very excited about what the future holds for Union Pacific, right? Our future is exceptionally bright. I think the numbers that Jennifer shared at the tail end of the prepared comments in the video section speak for themselves. We heard Somebody basically in their questions say, hey, you ticked every box. We totally agree with them.
Our Future is built on service, which is customer centered operational excellence, growth Both in carloads, in service and products and reach, winning, being the best in the industry and being a logistics leader And doing that together so that all four stakeholders are moving in the right direction with us. With that, we thank you all for spending time with us. Take care.