Union Pacific Corporation (UNP) Q1 2023 Earnings Call Transcript

Union Pacific Corporation (NYSE:UNP) Q1 2023 Earnings Call dated Apr. 20, 2023.

Corporate Participants:

Lance M. Fritz — Chairman, President & Chief Executive Officer

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Eric J. Gehringer — Executive Vice President, Operations

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

Analysts:

Scott Group — Wolfe Research — Analyst

Tom Wadewitz — UBS — Analyst

Ken Hoexter — Bank of America — Analyst

Chris Wetherbee — Citigroup — Analyst

Ben Nolan — Stifel — Analyst

Justin Long — Stephens — Analyst

Jordan Alliger — Goldman Sachs — Analyst

Jason Seidl — TD Cowen — Analyst

Brian Ossenbeck — JPMorgan — Analyst

Allison Poliniak — Wells Fargo — Analyst

Amit Mehrotra — Deutsche Bank — Analyst

Jon Chappell — Evercore ISI — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Brandon Oglenski — Barclays — Analyst

Walter Spracklin — RBC — Analyst

Bascome Majors — Susquehanna — Analyst

Ari Rosa — Credit Suisse — Analyst

David Vernon — Bernstein — Analyst

Jairam Nathan — Daiwa — Analyst

Presentation:

Operator

Greetings, and welcome to the Union Pacific First Quarter 2023 conference call. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today’s presentation are available on Union Pacific’s website.

It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you. Mr. Fritz, you may begin.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thank you, Rob, and good morning, everyone, and welcome to Union Pacific’s first quarter earnings conference call.

With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Eric Gehringer, Executive Vice President of Operations; and Jennifer Hamann, our Chief Financial Officer. The story of the past quarter for Union Pacific is one of resiliency, battling heavy snow, Arctic temperatures, flooding and tornadoes, the team maintained service levels and exited the quarter on a positive trajectory. First, varying through those harsh conditions, our employees delivered for our customers, which demonstrates again that our people are the foundation for the great things that lie ahead.

Turning to the first quarter results. This morning, Union Pacific is reporting 2023 first quarter net income of $1.6 billion or $2.67 per share. This compares to first quarter 2022 results of $1.6 billion or $2.57 per share. Our first quarter operating ratio of 62.1% deteriorated 270 basis points versus 2022, driven by excess cost, inflation and lower volumes. A series of weather events throughout the quarter had a real impact on our ability to capture demand, especially within our coal business as well as added costs to the network.

Through those events, our service product showed greater and greater resiliency, quickly rebounding each time as we were better positioned with crew resources to support our customers and with April month-to-date freight car velocity is about 200 miles per day, we are operating a network that is positioned for consistent and reliable service. While a more difficult start to the year than expected, it doesn’t reduce our expectations for 2023. As you’ll hear from the team, all of our goals are still in front of us.

Let me turn it over to Kenny for an update on the business environment.

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Thank you, Lance, and good morning.

Freight revenue for the first quarter increased 4% driven by higher fuel surcharges and solid pricing gains, partially offset by a 1% decline in volume. Bulk volumes were muted in the quarter as weather and service-related challenges impacted shipments. Additionally, weaker market conditions for premium also drove lower volume for the first quarter. However, our strong focus on business development and new business wins, partially offset by some of that decline.

Let’s take a closer look at each of these business groups, starting with bulk. Revenue for the quarter was up 4% compared to last year, driven by a 7% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains. Volume was down 3% year-over-year. Grain and grain products volume was down 1% driven by weaker export grain shipments, as world demand for US grain has softened coupled with drought impacts affecting supply in UP served regions.

Fertilizer carloads were flat in the quarter. Strong export potash was offset by decline in phosphate volume from weather conditions delaying shipments. Food and refrigerated volume was down 6% due to reduced beer import and weather conditions negatively impacting both fresh and canned shipments. And lastly, coal and renewable volume was down 4% compared to last year driven by weather interruptions and associated service challenges that impacted our locomotive and crew resources.

Moving on to Industrial. Industrial revenue was up 5% for the quarter, driven by a 5% improvement in average revenue per car due to higher fuel surcharges and core pricing gains. Volume for the quarter was flat. Industrial chemicals and plastic volume was down 2% year-over-year driven by lower industrial chemicals shipment due to challenged industrial production and reduced housing demand. Metals and minerals volumes continued to deliver year-over-year growth. Volume was up 3% compared to last year, primarily driven by growth in construction materials and increased frac sand shipments, along with new business development wins.

Forest products volume declined 19% year-over-year, driven by soft housing starts and lower corrugated box demand for non-durable goods shipment. However, energy and specialized shipments were up 6% versus last year, driven by strength in demand for LPG and petroleum products. These gains were partially offset by fewer soda ash shipments due to weather and service-related challenges.

Turning to premium. Revenue for the quarter was up 3% on a 1% decrease in volume compared to last year. Average revenue per car increased by 5%, reflecting higher fuel surcharge revenue and core pricing gains. Automotive volumes were positively driven by strengthening OEM production and dealer inventory replenishment for finished vehicles. Domestic intermodal business wins were offset by a weak freight and parcel market, driven by high inventories, increased truck capacity and inflationary pressures. On the international side, despite weakened import, more container ship inland versus the first quarter of last year, resulting in year-over-year growth.

So now moving on to Slide 7. Here is our outlook for the rest of 2023, as we see it today. Starting with our bulk commodities. We expect grain to be challenged near-term as export demand softens and supply tightens throughout this crop year. However, as we look ahead towards the next crop season and late fall, we’re encouraged by the initial forecast. For coal, low natural gas prices and a milder winter allow utilities to build more inventory. We are experiencing normal softening through the shoulder months. Looking further out in the year, demand will largely be dependent on natural gas prices and summer weather. Lastly, we expect biofuel shipments of renewable diesel and their associated feedstocks to grow due to solid market demand, new production coming online and business development wins.

Moving on to Industrial. The forecast for industrial production is to shrink in 2023 and the demand is getting weaker in forest products. However, we expect to see continued strength in construction and metal with new business lines. And finally for premium, we expect near-term challenges in the intermodal market from high inventory levels, inflationary pressures and weak consumer spending as people shift back to spend more towards services than goods. We will be closely watching for potential market uptick in the latter part of the year. In addition, we expect automotive growth to continue driven by strong OEM production and dealer inventory replenishment.

So to wrap up, we are facing economic uncertainty and a tough pricing environment in a few of our markets, but we expect to see shrink in some other commodity areas. Our diverse portfolio allows us to maintain our pricing guidance. To capture more demand, we are working closely with Eric and his team to be agile and have resources available in locations where we need them. I am confident that the team’s relentless focus on business development will drive volumes to exceed industrial production this year.

With that, I’ll turn it over to Eric to review our operational performance.

Eric J. Gehringer — Executive Vice President, Operations

Thank you, Kenny, and good morning.

Starting on Slide 9, we continue to make great strides on safety as evidenced by our 10% improvement in derailment performance for the first quarter. While encouraging progress on safety, our goal remains a future with 0 incidents and 0 injuries. We’ve made progress on derailments by implementing state-of-the-art technology like precision train builder and our geometry inspection fleet. This is on top of our network of more than 7,000 wayside detection devices and our 24×7 operating practices command center. Further supporting our efforts in March, the industry announced the set of key safety actions. These include the installation of additional wayside detectors and enhanced standards for how we proactively use and share critical data. In addition, the industry is expanding efforts in first responder training and deploying technology to provide real-time railcar condition monitoring. The railroad industry remains one of the safest transportation modes in the nation. And through our capital renewal program, Union Pacific invests almost $2 billion annually back into its network to further improve safety.

Now moving to Slide 10 for a look at our current operational performance. As Lance mentioned, mother nature made her presence felt across the Union Pacific network this season, bringing extreme weather in many forms. UP crews in California battled flash flooding, persistent mudslides and heavy snow. The Central Sierras for example recorded over 700 inches of snow this season. That’s 222% above historical averages. Employees across our central corridor and upper mid-west portions of our system also worked through prolonged blizzards, ice and Arctic temperatures. These events challenged our ability to maintain a fluid operating state on specific portions of the system. However, thanks to the dedication and proactive efforts of our employees, the network quickly recovered after each event.

And as the chart on slide 10 demonstrates, we’re exiting the quarter on a positive trajectory versus the congested state we were entering this time last year. Our April month-to-date metrics show a network in a healthier state with freight car velocity at 200 miles per day, intermodal TPC in the high 70s and manifest TPC on the rights as well. That result also reflects our hiring efforts, as we focus on backfilling attrition and targeting locations where crew challenges persist. We currently have around 1,000 employees in training, which is an increase of approximately 500 versus last year. In addition, we have utilized borrowed out employees to address hard to hire locations and get crews where needed.

Now let’s review our key performance metrics for the quarter starting on Slide 11. Sequentially, we held our ground through the obstacles of the quarter, both freight car velocity and manifest and auto trip plan compliance made slight improvements from last quarter’s results. Intermodal trip plan compliance remained effectively flat as we battled resource and balances, driven by weather interruptions. With our current traffic mix, freight car velocity consistently running around 200 to 205 miles per day will strengthen our entire service product, including bulk, manifest and intermodal performance.

Turning to Slide 12 to review our network efficiency metrics, locomotive productivity dropped 5% versus first quarter 2022. However, it remained flat sequentially from last quarter’s results as we continue to operate a larger locomotive fleet in an effort to support the recovery of the network. In the second quarter, the team is focused on moving more freight and rightsizing the fleet. To that point, we are in the process of storing over 100 units to at the ready status.

First quarter workforce productivity declined 6% to 991 daily miles per FTE, driven by an increased number of trainees and lower volumes. Our strong training pipeline supports our ability to capture available demand and future growth, while managing attrition and reducing borrowed out employees. As employees graduate from training, we expect productivity to improve. Train length is effectively flat compared to last quarter’s results. Lower intermodal traffic coupled with extreme cold temperatures across the northern tier of our network presented a headwind to our train length initiatives for the quarter. The team remains committed to strengthening the network, while recovering lost productivity.

Wrapping up on Slide 13. The success drivers for 2023 remain unchanged and the entire team is dedicated to building on the momentum gained as we exited the quarter. We remain committed to addressing employees quality-of-life feedback and are pleased with the recent agreements regarding paid sick leaves. We will continue to work diligently in finding win-win solutions that enable a strong service product and provide our employees with more consistent work schedules. In addition, as you heard from Kenny, we continue to aggressively look for opportunities to strengthen volumes. With the service product demonstrating resiliency, we have added back train sets and targeted freight cars to the network to capture available demand. I am confident that the foundation we’re laying will provide a safer, more consistent and reliable service product to meet the growth needs of our customers.

With that, I will turn it over to Jennifer to review our financial performance.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

Thanks, Eric, and good morning.

We’ll start on Slide 15 with a look at our first quarter income statement. Operating revenue totaled $6.1 billion, up 3% versus 2022, despite a 1% year-over-year volume decline. Other revenue decreased 5%, driven by $30 million of increased subsidiary revenue which was more than offset by a $50 million reduction in accessorials. Lower intermodal volume and greater supply chain fluidity drove the accessorial decline.

Operating expense increased 8% to $3.8 billion, resulting in first quarter operating income of $2.3 billion, down 3% versus last year. Below the line, other income increased $137 million year-over-year, largely driven by a $107 million one-time real estate transaction that contributed $0.14 to earnings per share. Interest expense increased 9%, reflecting higher debt levels.

Net income of $1.6 billion was flat versus 2022, but when combined with share repurchases resulted in a 4% increase in earnings per share to $2.67. Our first quarter operating ratio increased 2.7 points to 62.1%. Falling fuel prices during the quarter and the lag on our fuel surcharge programs positively impacted our operating ratio by 190 basis points. Core results offset the fuel benefit and were a 460 basis-point drag to operating ratio. Included in that is the impact of weather, which is difficult to quantify, but between both lost revenue in additional expense, we estimate to be in excess of $50 million.

Now looking more closely at first quarter revenue, Slide 16 provides a breakdown of our freight revenue, which totaled $5.7 billion, up 4% versus last year. Lower year-over-year volume reduced revenue 150 basis points. Total fuel surcharge revenue of $883 million added 475 basis points to freight revenue reflecting the lag in our programs. The combination of price and mix increased freight revenue 75 basis points as ongoing pricing actions were mostly offset by our business mix. Fewer lumber shipments and more short-haul rock shipments were the primary drivers of the negative mix.

Turning now to Slide 17 and a summary of our first quarter operating expenses, which totaled $3.8 billion. Compensation and benefits expense increased 7% versus 2022. First quarter workforce levels increased 4% with transportation employees up 5%, the result of our dedicated hiring efforts over the last 12 to 15 months. Cost per employee, only increased 3% in the quarter, as wage inflation was partially offset by a larger training pipeline. During the first quarter, we signed agreements with the majority of our labor unions to provide paid sick leave to our employees. These agreements became effective April 1 and represent just under half of our craft professionals.

Assuming we are able to reach agreements across the board, we would expect cost per employee to be up mid-single digits for the year, consistent with what we discussed in January. Fuel expense grew 7% on a 9% increase in fuel prices as we moved less freight. Our fuel consumption rate deteriorated 1% as the impact of our fuel conservation efforts was more than offset by reduced network fluidity. Purchased services and materials expense increased 16%, driven by maintenance of a 3% larger active locomotive fleet and inflation. Equipment and other rents was up 9% as a result of increased car hire expense related to elevated cycle times. And the other expense line grew 6% related primarily to higher environmental remediation costs.

Turning to Slide 18 and our cash flows. Cash from operations in the first quarter decreased to $1.8 billion from $2.2 billion in 2022. The primary driver was Presidential Emergency Board back pay settlements paid in January, which totaled $383 million. That payment also impacted our quarterly cash flow conversion rate and free cash flow, with both roughly in line with last year’s performance when you exclude that payment. In the quarter, we returned $1.4 billion to shareholders through dividends and share repurchases, and we finished the first quarter with an adjusted debt-to-EBITDA ratio of 2.9 times as we continue to be A-rated by our three credit agencies.

Wrapping up on Slide 19, we are maintaining our 2023 full year guidance to achieve volumes above industrial production, price gains in excess of inflation and operating ratio improvement. Our plans for capital allocation also are unchanged. As with every year, there are puts and takes to how the year plays out. While 2023 started a bit slower-than-expected, I need to remind everyone it is only April 20, we have 8.5 months in front of us and many opportunities with volume, service and productivity.

Before I turn it back to Lance, I’d like to express my thanks to the UP team. We are skilled and running the outdoor factory that is our railroad, but mother nature seem very focused on testing those skills this year, given the extremes we faced. And yet, the team forged ahead, keeping the network fluid and our customers served. Fantastic work by everyone.

With that, I will turn it back to Lance.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thank you, Jennifer.

As Eric discussed, we continue to make great strides on safety. Derailments have been in the spotlight recently. The entire industry understands the critical role we play in support of the communities we serve. In fact, since 2000, Union Pacific’s mainline derailments are down almost 30%, helping make this past decade the safest for the rail industry. Working collaboratively and proactively, the industry can further improve on that safety record. Looking forward, as you heard from Kenny, consumer-facing markets are in rough shape right now. Importantly though, they remain opportunities to capture additional demand in a number of markets. The entire team is executing a plan to capture those additional carloads, supported by an improved service product.

Finally, with birthday approaching, I’d like to highlight the actions Union Pacific is taking to protect our planet. At the end of 2022, we released our second Annual Climate Action Plan, highlighting updates to achieve our greenhouse gas emission reduction targets. This includes our goal of net 0 emissions by 2050. Over the past year, we’ve turbocharged our locomotive modernization program, we’ve committed to both battery and hybrid electric locomotive, and we’ve increased our biodiesel blend to over 5%, and we’re being recognized for that work. This past year, Union Pacific was selected as a member of the Dow Jones Sustainability Index for the first time, and we were the highest ranked railroad in the transportation category on Fortune’s Most Admired Companies. Union Pacific is committed to being a sustainability leader, driving long-term value for all of our stakeholders.

Before turning to Q&A, as it relates to the CEO search process, the Board is fully engaged and executing its duty to identify the next leader. And I can say from personal experience, what a wonderful job it is to be at the helm of a company like Union Pacific. I’ll continue to lead the team until the new CEO is identified, and I’m energized by what we can accomplish in the coming months as well as the great potential this company has for years into the future.

With that, let’s open up the line for your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Scott Group — Wolfe Research — Analyst

Hey, thanks. Good morning. Lance, any timing on CEO search? And any thoughts on what you and the Board are looking for? And then, Jennifer, margins down 270 basis points. Obviously, we need some nice improvement the rest of the year to get to full year improvement. Can you help us bridge us to that full year improvement? And any thoughts on second quarter, it’s an easier comp, do you think margins inflect positive in Q2, just any thoughts? Thank you, guys.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yes, thank you, Scott. So I’ll just circle back to the press release that the Board sent when they announced earlier in the year that we were in the process of identifying a new CEO. They were clear on what they were looking for then, right track record and experience in safety and customer service, business development, clear vision on culture and a good operating experience. So they are crystal clear on what they’re searching for. And the only update I have for you is we’re using an excellent third-party external consultant, and they’re being very thorough in their search, which is underway.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

So then, Scott, to your OR question, I mean, you’re exactly right. We need to make sequential improvement through the year and then that needs to become year-over-year improvement at some point for us to be able to meet that guidance. The factors that are going to help drive that, certainly, fuel is something that is looking different to us this year than it did last year. Particularly, right now, you saw the 1.9 points that benefited our OR in the first quarter. That will — comparison will get a little tougher in the back half, so it may look different than 2002 did, but certainly fuel, I think is something. But then it’s the main levers that you know that we have available to us, it’s volume, price and productivity. And of course, volume, it depends a little bit what that is, but we also have pure cost control. So if volumes are something that are not our friend, and we’re not able to get that leverage, we also have the ability to control costs through being very careful and diligent in our management.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Jennifer, one last thing. What gives us a ton of confidence as we look into the end of the year is how the networks operating right now. It’s in a place where we can get the volume, and we can squeeze out the excess cost.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

Absolutely.

Operator

Thank you. And our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Tom Wadewitz — UBS — Analyst

Yes, good morning. Wanted to ask you about the head count level. I think the training pipeline for TE&Y looks like it’s larger, but I think that the level of people that you’ve had that are traded on the system, it seems like it’s been static for a while. And so I’m just wondering what do you think about in terms of where you need to get for TE&Y that are trained in on the system? And I guess in terms of attrition, gas attrition been an ongoing problem? Has that stabilized? Just thinking about that head count dynamic and then. I guess, how that fits into how you would expect network performance to go from where we are? Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah. So, Tom, we entered the year saying total head count hires that addition to the TE&Y would look kind of like what it did in 2022, predicated on our plan for volume. Volumes looking a little cloudy right now to us, certainly in the first quarter, in the back half and so of course that hiring plan is being looked at an adjusted. Net-net, in the second quarter, you’re going to see us add to the active TE&Y head count coming out of the training pipeline. The question really is, what’s the training pipeline look like for the rest of the year. Having over a 1,000 in the pipeline is a very strong pipeline for us.

In terms of attrition. We tend to have about a 10% turnover in our TE&Y workforce. That really hasn’t changed over the course of the last five years. We don’t necessarily see it changing right now. So one of the adjustment factors is, if we find ourselves getting out over our skis a little too far, attrition can help us adjust pretty quickly.

Tom Wadewitz — UBS — Analyst

So it sounds like I guess trained level goes up, but overall headcount kind of static as the training pipeline comes down is maybe the best way to look at it.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

I think it really does depend on the volumes to a degree, Scott. And so certainly as Lance said, second quarter, I think you certainly see our total head counts going up, it’s going to be probably different than last year first half. We’ve got the training pipeline loaded in the first half, and I think the question is going to be what does the second half look like.

Tom Wadewitz — UBS — Analyst

Yeah, okay. Thank you.

Operator

The next question is from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Ken Hoexter — Bank of America — Analyst

Hey, great. Good morning. So just, it looked like the operating service levels were flat. You mentioned that a couple of times. I guess, Eric, did. But, velocity was really came down the past few weeks. I guess, during the quarter and then more recently showed a pretty solid rebound. I guess maybe the last week or two. Is there anything changing with the operating plan was this, I don’t know if Eric or Lance, you want to throw in some thoughts or was this just kind of the end of some of the weather stretches that you were talking about? Can you just talk about how operations are doing now and what’s changing?

Eric J. Gehringer — Executive Vice President, Operations

Thanks. Yes, I can. Thanks for the question. Now you’re somebody is exactly accurate, it was towards the tail end of winter is really where we were about three weeks ago. Having come out of that and with all the work that we’ve done on the hiring side is amongst other actions, you’re seeing the output of having two to three weeks without whether being that headwind. With weather largely, if not entirely, behind us with winter, you should expect us, as our customers expect to maintain where we are. We’ve reinforced that 200, 205 miles per day is what drives our TPC metrics to the level our customers expect.

Ken Hoexter — Bank of America — Analyst

Great. Thanks, Eric.

Operator

The next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Chris Wetherbee — Citigroup — Analyst

Hey, thanks. Good morning, guys. Maybe one quick follow-up on the head count point. I guess I’m just curious. Given what you guys have been able to do with some degree of service recovery, what do you think about pausing sort of the hiring as you sort of reassess volumes depending on sort of how that plays out in the second half of the year? Curious about that. And then maybe on that point for Kenny, just in terms of like what you’re seeing in the month of April, it seems like we’ve seen March and April will be a little bit softer across the board of transports, not necessarily, Union Pacific specifically, a little bit softness there? Kind of curious what you’re hearing from the customers, has there been a bit of a spring low here or maybe that picks up in the near-term? Just kind of some thoughts there would be helpful.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Hey, good morning, Chris. This is Lance. I’ll start and then turn it over to Kenny on your second question. So let’s unpack the head count question a little bit. We are in a much better shape this time this year versus same time last year. The hiring pipeline is full, but more importantly, we’ve been filling our classes everywhere we’ve been looking for people across the railroad for about the last three or four months. That is very different than our experience last year where we found it very difficult in about six crew hubs all in the northern region to be able to find candidly the workforce to be able to hire. So we’ve been much more aggressive in the back half of last year, amping up things like hiring bonuses, finding creative unique ways to create a workforce, a pool to hire from and that’s paying dividends, right now.

So you’re exactly right in terms of as we look into the year, right now, we’re starting to evaluate our original plan for hiring versus what volumes are doing and what the back half of the year balance is going to look like. Our longer-term guidance remains in place and that is, we fully expect to be volume variable and have ultimately our headcount grow at less than our volume numbers are growing. But clearly coming out of last year, we had to fix the ship and get our crew boards healthy at a little excess, not excess, at a little factor of safety to the crew board so that we can take events and recover quickly, so that our service product was consistent. And we’re in that place right now, we’re essentially there. We’re solving some of the problem with borrow outs, so hiring is going to have to replace them because they are expensive and it’s a burden on our employees to be borrowed out, but we are in much better shape looking into the rest of the year.

Kenny?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah. Hey Chris, so let’s just start off. You look at our coal, we’re expecting it to have a seasonal low this time the shoulder month. But I mentioned. If you look at it last year and natural gas prices were much higher. So this is more of a normal low for us. Domestic intermodal, we’ll keep an eye on it, it’s a very loose market right now, there is quite a bit of truck capacity that’s out there. So we’ll be watching that. And then also last year, if you look at it our grain business would deal pretty stronger time of year. Now we’re seeing more global grain go into places where we export it last year. Now having said all of that, looking forward to the rest of the year, hey, we’re still bullish about some of these markets that I mentioned, whether it’s finished vehicles, the metal, rock that’s in our construction area as one in and biofuels.

Chris Wetherbee — Citigroup — Analyst

Okay, that’s helpful color. I appreciate the time, guys.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yes.

Operator

The next question is from the line of Ben Nolan with Stifel. Please proceed with your question.

Ben Nolan — Stifel — Analyst

Yeah, thank you. I appreciate it. Maybe, Kenny, if I could just follow-up with that, we’ve been hearing a whole lot of noise about near-shoring, reshoring, specifically around Mexico. Was curious if you can maybe put a little color around if that’s something you’re seeing, if there is any notable business wins or anything specific to the moving of manufacturing back to North America that you’re hearing from your customers?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

We are seeing a little bit of that. We’ve seen our production related to the auto’s OEMs, there was one pretty large, highly public announcement that came out. And with that, you got to remember, there is a lot of other inputs that move by rail, whether it’s soda ash for the glass and metals that comes in for the car. That’s great for us also in our bulk commodities on the ag side we’re expecting some new production and receivers down there, so yes, it is looking pretty encouraging and this is the first time that we are seeing tangible things that we can point toward, so that’s a positive for us. I won’t go on and on. We enjoy a fabulous network there. I’ll leave it at that.

Ben Nolan — Stifel — Analyst

Okay, and just to clarify, how should we think about the timing of an impact on that? I mean, is this something that could happen near-term or is this a big picture, longer-term kind of a dynamic?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

This is big picture longer term. I mean, you’ve got to get time for these locations. They actually build out the physical infrastructure there in the plan.

Ben Nolan — Stifel — Analyst

Okay.

Lance M. Fritz — Chairman, President & Chief Executive Officer

And not but, Ben, it’s wonderful to have new production facilities spot in the North American market, but we will get our fair share. We have a wonderful franchise to and from Mexico. And anytime industry shows up in the North American continent, it’s good for us, it’s good for railroads.

Ben Nolan — Stifel — Analyst

All right. I appreciate it. Thank you.

Operator

The next question is from the line of Justin Long with Stephens. Please proceed with your question.

Justin Long — Stephens — Analyst

Thanks, and good morning. I wanted to circle back to the full year guidance. Obviously, the start of the year has been more challenging than you anticipated. So in order to hit your outlook, do we need to see a meaningful positive inflection in the freight market? And if so, when does that need to occur? And then, Kenny, maybe just a clarification on intermodal. I think you said international volumes were up, but I was wondering if you could share the percent change you saw on both international and domestic intermodal? Thanks.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

So I’ll take the first part of that question. Again, our guidance relative to volumes is exceeding industrial production. We came into the year, industrial production was forecast to be down about 0.5%, it’s actually gotten a tad bit worse, it’s now down about 0.7%, so that not a huge bar I guess to exceed. And yes, we started a little weaker, down 1.5 points here in the first quarter, but you just heard, Kenny, talk about kind of the different markets that are available to us and the fact that as our service product is improving, we’re putting more assets into play to move more carloads and that’s giving us greater flexibility to move those assets around to hit the markets that are available to us. And so we feel quite confident that we will be able to reach that goal as it relates to volumes and the rest of our full year guidance, obviously which we reiterated.

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

I don’t think I’m going to break out domestic and international here, but what we saw, I mentioned, this is just because you do have a more fluid intermodal network. On the international side, we don’t have a lot of the stack boxes on either end. More of those ocean carriers are moving inland, and we’re seeing that. We put products up against that that’s helping that with our grain facility down there on the Dallas side with the KTM, there they’ve hit their largest volume record in the first quarter. They just announced they’re going to expand. So we feel good about that, that we can move more of that inland.

Justin Long — Stephens — Analyst

Okay, thanks.

Operator

Our next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

Jordan Alliger — Goldman Sachs — Analyst

Yeah, hi, morning. Just sort of curious. I think other than volume talked about other productivity or cost. Other than fuel expense maybe going down, what are some of the other cost levers that you could use to help drive OR to improve over the course of the year, obviously volume dependent would be things like purchase transport? Just trying to get a sense. Thanks.

Lance M. Fritz — Chairman, President & Chief Executive Officer

So it’s a great question, Jordan. So as you think about that and the progress we’re seeing right now, it’s impacting nearly every one of our cost lines in a positive way. The big ones that we talk about is certainly starting with fleet size. In our prepared comments, I mentioned the fact that we’re taking a 100 locomotives and putting them in storage, but they’re in a storage state in which they can still be there quickly to gain volume. Next after that it’s all about crew utilization right, which stretches everything from re crew rates to debt had held the ways to how do we think about over time and making sure that we’re being judicious with the use of overtime. From there, we certainly do, even though you mentioned that we do focus on our fuel consumption, and I’m really encouraged actually by the first quarter, because if you look at January, we came out very strong, February was kind of okay and March was certainly weak, which means with weather behind us, there is no reason that we shouldn’t snap right back to that great progress that we saw in January. So it’s those others, but I’ve listed the biggest ones.

Jordan Alliger — Goldman Sachs — Analyst

Thank you.

Operator

Our next question is from the line of Jason Seidl with TD Cowen. Please proceed with your question.

Jason Seidl — TD Cowen — Analyst

Hey, thanks, operator. Good morning, everybody, appreciate you taking time. Two quick things. Kenny, I think you said there were some pricing pressures in a few of your industries. I mean, I understand intermodal. Would love to hear what else is being pressured out there? And also in terms of the West Coast port labor situation, how much freight do you think got diverted? And if we get a resolution here, hopefully in the near-term, do you think it would come back quickly or would take some time?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah. So before I talk about domestic intermodal, which, I think, is your question, I just want to reiterate that we’ve got a broad, diverse set of customers and markets that we get the price and we’ve said that publicly, call it, approximately roughly half of that business we get to touch every year outside of just one particular market. Now there is a lag impact to that, but sales leaders, the commercial teams have done a really fabulous job going out articulating, hey we’re spending quite a bit of capex. We’re putting quite a few resources out there. They understand what’s taking place in the industry with our business on the labor side and the labor negotiations and candidly, they are experiencing the same inflationary pressures. So you’ve got that piece.

Now talking about domestic intermodal, yeah, domestic intermodal has been a pretty loose market, quite a bit of truck capacity that’s there. We’re seeing it in our bit and RFPs. We’ve got mechanisms that our employees for. Our suite of intermodal customers to go out there and compete and win business based on their own strength and capabilities, which give us confident and the other part of that is the fact that as the market tightens up, we can quickly capture that upside.

Lance M. Fritz — Chairman, President & Chief Executive Officer

And Kenny, Jason’s last question about the West Coast ports and ILW.

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah. We’ve been in close contact with the West Coast ports and they believe that there should be an agreement here near-term. I’ll tell you, it’s hard to quantify what’s been diverted away because of some of these labor challenges. I’ll tell you, when we look at the order book going out to, I’ll call it the West Coast ports, it looks like the negative delta that we saw year-over-year is becoming less and less.

Jason Seidl — TD Cowen — Analyst

And that’s good. And you think that there was an agreement again knockout works, everyone wants that, that you would receive it back quickly or will come back over time?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

I think that’s just — I can’t be that precise, Jason. We could be positive about it. But to be precise, probably just wouldn’t be a good idea.

Jason Seidl — TD Cowen — Analyst

All right. Sounds good. I appreciate the time as always, guys.

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thanks, Jason.

Operator

Our next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Brian Ossenbeck — JPMorgan — Analyst

Hey, good morning. Thanks for taking the question. Can you just to follow-up on the pricing reset. Is that kind of going as is expected? Do you still have a little bit more of a lag impact because volumes, maybe a little bit weaker than you thought? So I guess, that can accelerate here? And same sort of question with price mix, is that probably the worst you’d expect in the near-term here as you look at the different end markets as they’re developing?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah. Certainly, the way we calculate price volume increasing and improving helps us to, I’ll say that also because it is April and not December we have time to get more of that volume into play as we move throughout the year. I would not say that there are some markets that are harder to capture price there other than those areas where we have mechanisms in place along with domestic intermodal. We’ve been very disciplined in our approach to take price and then some cases we’ve also taken some risk there to make sure that we’re pricing towards the market.

Brian Ossenbeck — JPMorgan — Analyst

And Kenny, the same what you said about domestic intermodal, to a lesser degree is true in coal, where you’ve got natural gas can be a driver of some pricing?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Absolutely, we’ll be watching natural gas pretty closely.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

And to the next part of your question, Brian, coming into the year, our view is that mix would likely be negative throughout the year, primarily around the fact that we were expecting to see more growth on the intermodal side. Obviously, that’s changed a bit. And so looking to the second quarter, at least we’re probably expecting a bit of a positive mix. Beyond that, I think it’s too soon to say, but I do think that’s something that is different as we sit here today than when we came and talk to you in January.

Brian Ossenbeck — JPMorgan — Analyst

Thank you. Just a quick follow-up for Lance on the regulatory and legislative side, a lot of noise coming out of DC, some of the safety things you mentioned earlier and some of the stats on UP specifically, but what are you most focused on when it comes to the different topics that are being discussed down there? We tend to focus on train length, service in FRA safety advisory recently, but I just wanted to hear what was important and what you thought we should focus on when it comes to the various topics being discussed after the safety issues that we’ve seen in the industry over the last few months? Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah. Brian, that’s a great question. So in engaging the legislators and DC, we help them understand what would actually move the ball in terms of safety, where regulatory effort would make a difference and where it wouldn’t. To your point, train length wouldn’t statistically on UP since 2019 train length is up something like 20% in our mainline inciting derailments are down 26%, so there’s 0 corollary between train length and derailments. But there are other things that they can help with. We’re taking action right now on wayside detection, that’s a place where the FRA can step in. Things that we emphasize that really don’t have a corollary impact, another one is crew size and whether conductors are redeployed to the ground that has no impact on safety around the world empirically. So we just broadly try to help them understand that and stay deeply engaged, Brian, this is a deep engagement all the time, right now.

Brian Ossenbeck — JPMorgan — Analyst

Thank you very much for the color. I appreciate it.

Operator

The next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Allison Poliniak — Wells Fargo — Analyst

Hi, good morning. I just wanted to ask on the new business. I guess first, is there any way I know there’s a lot of moving parts with volumes to maybe get quantify or help us understand the contribution of the new business wins in volumes? And then second, as part of that, just in terms of the new business pipeline, any notable trends and sort of the conversion that you’re seeing in terms of bringing on new business on to the rail? Thanks.

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah, Hey Alison, it’s pretty broad, because obviously in all three of our business teams, I mean if you look at it biofuels, renewable diesel for us is an emerging market, been very encouraged by our ability to land new customers, new production sites to move out of the mid-west going into the west. And those are attractive margins to us. On the industrial side, the same thing is true as we look at our metals business, in some of the minerals business tied to that. Same as with rock. Those are areas that are positive and they have structural increases related to population growth down in Texas, Louisiana and the Gulf. And so those are great, and then you all are aware, you’re aware, Allison, of some of the new recent wins in our intermodal sector. And again, we feel really blessed that we’ve got a suite of highly capable customers that can go out and grow business over the road, and it complements very nicely, our UNP, our UMAX and E&P product that we have in the marketplace.

Allison Poliniak — Wells Fargo — Analyst

Thanks. And just any color on the conversion trends in the new business opportunities out there?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

We see the pipeline is still there. Well, the thing that we’re keeping an eye on is, are they actually moving the forecasted amount that they initially told us. So no concerns with the pipeline, just a little bit of concern with making sure the volume that they committed to is still there.

Allison Poliniak — Wells Fargo — Analyst

Understood. Thank you.

Operator

The next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Amit Mehrotra — Deutsche Bank — Analyst

Thanks, operator. Hi, everyone. Jennifer, our earnings is going to be up as you move from 1Q to 2Q because there’s a big fuel benefit in the EPS line in 1Q and we calculate like $0.25 or something like that. And a lot of that’s going away because the lag on fuel and so you’re starting kind of from a whole to build back on as you move from 1Q to 2Q. I know there’s weather, but I’m just trying to understand the cadence of earnings growth from 1Q can actually grow in 2Q because of that operating income impact from fuel. And then just related to that, because volume seems to be the fulcrum for all of this, the average weekly volume in the quarter was 152,000 seven day carloadings, and I think last week you did under that and the weather is a lot better. And so I guess the question really is, is that like when are we going to see if weather was a big problem in the quarter you exited lower than you average for the quarter, when are we actually going to see some of the volume show up in the weekly carloads? Thank you.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

So let’s start off on the fuel piece, and we agree with your math on the $0.25 for the first quarter, that’s exactly right. You have to think about fuel in two pieces, I mean you have to think about the fuel surcharge piece and then the expense piece. And while in the first quarter, the fuel surcharge piece was a positive as we look at what our current prices are fulfill right now, call it $3 a gallon when we paid $4 a gallon a year ago, that’s going to flip on us and so that is going to have a different dynamic, but our fuel expense is going to be less as well. And so you really have to think about it in those two parts and separate that out, I would say, in the analysis.

The other thing I want to remind everybody about 2Q of last year was we did have an $0.18 benefit from a landfill, Illinois Tollway, and that was in our results and then we also had $35 million extra in some casualty expenses so that goes away, so you’ve got some puts and takes there. I just want to make sure everybody is thinking of as you’re putting that together. Our goal is going to be to continue to drive as much volume as we can across the network, do it as efficiently as we can and improve the service product and the output of that will be the output of that. I’m not going to give you specific earnings guidance on that.

And then to your other question about volumes. I think you need to factor in the Easter holiday that does have an impact on our volumes. And so while, yes, weather was clearing, we did have a holiday impact there and I think, again, we’re putting the assets into place, and we’re going to be moving the volumes that are available to us.

Amit Mehrotra — Deutsche Bank — Analyst

Got it.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah, I’m confident about what you’re talking about in reported numbers this week and beyond.

Amit Mehrotra — Deutsche Bank — Analyst

Okay, that’s great. And just related to that, Kenny, I don’t know if you have a view on intermodal yields. I know fuel, there’s a lot of noise in intermodal yields in fuel. But are we holding the line on intermodal yield ex fuel and is that the expectation kind of over the next few quarters?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

Yeah, and I’ve said this, Amit. We feel really good about the mechanisms we have in place for our customers to go out there and compete and win and retain business based on their capabilities and their strength. And I also feel good about again as the market move that we’ll be able to move more real-time with it and so that’s a positive for us.

Amit Mehrotra — Deutsche Bank — Analyst

Okay, thank you very much. I appreciate it.

Operator

Our next question is from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Jon Chappell — Evercore ISI — Analyst

Thank you, and good morning. Eric, I want to go back to the productivity, which I see may go back to every quarter, but just as it relates to getting to these full year targets, one of your peers is kind of laid out what a fluid network could mean from a cost perspective. So is there any way for you to quantify what you think the productivity improvements can contribute in the final three quarters of ’23? And also any way for us to kind of understand the timing? You’re still digging out of the weather mostly there is still taking people out of training, is this like 90% a second half productivity improvement type story or can you start to get some significant improvement in 2Q?

Eric J. Gehringer — Executive Vice President, Operations

Jon, thank you for the question. Obviously, we won’t guide you to the specifics on the timing of the productivity. What I would reinforce is that based on the performance that we see on the railroad right now it’s bringing me and others greater and greater confidence that we’ll see that productivity continue to grow throughout the rest of the year. To say as you look into the second quarter, the headwind of winter behind us, in the forecast of being able to grow the volume, that’s what’s going to drive that. Beyond that, I’m not going to guide to it, we’re just off focused on making sure that we drive that productivity safely.

Jon Chappell — Evercore ISI — Analyst

Any just broad range of numbers? I mean, if we go back to the Investor Day, any starting point there, anyway to kind of parse that out even in a broad range?

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

No. Jon, I think that be unwise for us to do that. We are not going to try to pace our productivity improvement. And so we want to do that. As you know, as fast as we can as safely as we can, while providing a really good service product, so that we can ultimately drive greater volumes across the network, that’s the real leverage and it fuels the productivity quite frankly.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah. Jon, this is Lance. So just putting a bow on that. Our expectation is in Q2 with a fluid network, we really squeeze out a bunch of the excess cost created by kind of weather and variability from those events. And then we start stretching our legs beyond Q2 to continue to recover some of the productivity and ultimately, all of the productivity that we forwent in 2022 and then start growing from there. We’ve got a fair amount of inflation that’s in front of us that we got to offset this year and going into next year, so we’re going to be fighting that battle through the whole year as well.

Jon Chappell — Evercore ISI — Analyst

Got it. Thanks, Lance, Jennifer and Eric.

Operator

Thank you. [Operator Instructions] And the next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker — Morgan Stanley — Analyst

Thanks. Morning, everyone. As a two very quick follow-ups here, one is I know mix was a headwind in the first quarter, but can you confirm that dollar price was above dollar inflation in the first quarter and if not kind of how does that trajectory changed rest of the year? And second, if you’re going to have a pretty significant inflection in volumes currently you’re running down 2.5% year-to-date, and if you get to better than down 0.7% for the full year guide, what macro assumption does that involve for the second half of the year? Are you counting on an improvement in macro conditions and over restock till you get you there? Thank you.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

The first part of your question. And yes, our pricing gains in the first quarter did exceed our inflation. Kenny?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

This is the second in terms of macro assumptions, we do not have planned in a recession, right. So a recession would be a problem for us. Absent that what we need is markets to continue to just behave reasonably, i.e. we need consumers to continue to be healthy, spend some, they don’t have to go crazy, they just needed not pulling their horns. And we need the industrial economy to continue to do what it’s doing, and we need inventory and this whole destocking to calm down after the first quarter first half. All of those I think are pretty reasonable expectations. The wildcard would be a recession.

Ravi Shanker — Morgan Stanley — Analyst

Thank you.

Operator

Our next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Brandon Oglenski — Barclays — Analyst

Hey, good morning. My one question for Lance or Eric, your trip plan compliance on manifest remains in like the low 60% level. And I know there’s definitional issues, but there are carriers out there delivering much higher than that. So I wonder, we’ve talked a lot about service product on this call today. What’s the right target for trip plan compliance and what are the steps to get there?

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah, so we are focusing on the manifest and autos. When that starts with the seven, so right, 70%, 75%, that’s in a place where our customers are giving us feedback that says that we are meeting their expectations. Now as far as steps to get there, you’re going to always have manifest and auto lag the intermodal TPC and it’s simply because the cycle time of those cars is longer. It’s a conversation we were just having in the last two weeks to make sure that we are doing those actions. So when you look at the velocity picking up, that’s a tailwind to it. When you look at our uses counts, which means that we are making connections in the terminals to the right, trains, that’s up. Just those two things alone drive TPC in the right direction, and we’re driving that as fast as we possibly can, because we want to send a message to our customers that we understand first quarter was difficult, but we’re in a better place now and it’s for their benefit and ours.

Brandon Oglenski — Barclays — Analyst

Thank you.

Operator

The next question is from the line of Walter Spracklin with RBC. Please proceed with your question.

Walter Spracklin — RBC — Analyst

Yeah, thanks very much. Just wanted to come back to service levels and the regulatory spotlight, clearly, the whole industry, Union Pacific included is under a bit of a spotlight from the regulator for their service issues and when I look back historically, whenever railroad needed to promptly address a service issue, operating metrics almost always deteriorate rather than improve. So I don’t know if this is best for Jennifer, but I want to come back to that question about, are you expecting an OR improvement as early as Q2 based on what you’re seeing now? I know you said you saw some pretty good exit trends in Q1 weather is behind you, Easter was more of a numbers event or a year-over-year numbers event as opposed to anything fundamental. So would you see yourself is on track to achieve Q2 improvement despite your efforts to address service and that Q2 improvement should continue through the rest of the year?

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

Yeah, Walter, I’m going to resist the temptation to give you 2Q guidance and stick with the full year guidance, but you all can do the math. I mean we have to make improvement quickly and it’s got to be sequential and at some point, obviously that has to be year-over-year and that is our focus, and that is our intent. And we’re very confident that we will do that.

Walter Spracklin — RBC — Analyst

Okay, and barring that, then perhaps your full year is at risk, if you can see that quickly or the quick turnaround that you’re mentioning, Jennifer, is that fair?

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

The longer you go into the year with that improvement, it gets more difficult, yes. I will agree with that.

Walter Spracklin — RBC — Analyst

Okay, all right. Okay, thank you very much for the time. I appreciate it.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

Thank you, Walter.

Operator

Our next question is from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Bascome Majors — Susquehanna — Analyst

Thanks for taking my questions. Can you talk a little bit about how your relationships and engagement with the STB has evolved over the last few months? And any expectations of how they will extend the service period — sorry the service oversight period when it expires in a few weeks here and then maybe walk in that for next 12 to 18 months. Where do you think their eyes will be most focused and how do you engage with them as the CPC deal stops sucking up oxygen in that room? Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thank you for the question, Bascome. So we are deeply engaged at the STB. There is an executive level interaction with an STB either staff or member virtually every day, certainly, several a week. What is helping in those conversations right now is demonstrably the service product is better and customer’s temperatures are down. The other thing, if you recall, late last year, there was a hearing at the STB that focused on Union Pacific and our use of embargoes. And we, to the STB and to our customers more importantly, made the commitment that we’re going to both look at how we use embargoes and have an eye towards essentially getting back to a place where they are rare. Year-to-date this year, 65% reduction in the use, in the last two months, 75% reduction as the railroad is getting better, and I have all the confidence in the world that kind of progress is going to continue.

So what I expect at this point, the STB is a bit of a wildcard. I won’t predict what they do in May as regards the service reporting period, but I know the overall industry. And certainly, Union Pacific is in a place where our service product is not prompting more scrutiny and significant temperature coming into the STB from customers. And that’s their purview, that’s what they’re built for, is to react to customer feedback and that’s what they’ve done in 2022. So the fact that if we can get customers to a place where they are satisfied with the service product and in good dialog with us on it, that takes a lot of the pressure off the STB.

Bascome Majors — Susquehanna — Analyst

Thank you for that. And maybe the longer-term part of that question, over the next 12 to 18 months, where do you think they will focus most and how do you make sure that your shareholders’ and customers’ interests are protected there? Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Yeah. Bascome, so what we keep an eye on is the fulsome docket that they’ve got in front of them, things like final offer rate review versus this alternative dispute resolution mechanism forced open access, the use of revenue adequacy as a rate-setting mechanism. Those are things that we’re working hard with the STB for them to understand what the ramifications of some of those decision points are, what is and is not justifiable by data, in fact, and then of course, we engage fulsomely with them to help make sure the regulation coming out of the STB makes sense and accomplishes what they’re trying to accomplish, which is very good service product and growth in the rail industry.

Bascome Majors — Susquehanna — Analyst

Thank you.

Operator

The next question is from the line of Ari Rosa with Credit Suisse. Please proceed with your question.

Ari Rosa — Credit Suisse — Analyst

Great, thank you. Good morning. So really quickly, I was wondering what was the real estate transaction, maybe you could give a bit of color on that. I don’t think we saw it. And then Lance, as you approach, perhaps, the final months, perhaps quarters of your time as CEO at UP, I was hoping you could just kind of take a bigger picture step back and reflect on what are the accomplishments you’re most proud of and how you think about where you’d like to see the future of the railroad go from here? And in particular, I was hoping you could touch on your thoughts on the ability of UP to grow volume and take share over the next 5 or 10 years? Thanks.

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

And in terms of the real estate transaction, Ari, was the fiber optics deal.

Lance M. Fritz — Chairman, President & Chief Executive Officer

And Ari, thank you very much for the question and the opportunity to reflect just a moment. If I look back over the last eight years, now working on year nine, the thing I’m — things I’m most proud of is what we as a team have accomplished in terms of moving our transportation plan to a PSR model, doing that over the course of the last four years and doing it in a way where our customers weren’t damaged by the transition, they were benefited from it. I think we’ve done stupendous work on sustainability as I mentioned in my opening comments. We’ve done terrific work on diversity, equity and inclusion, we’re recognized for that right now in the industry and in our communities. We’ve done really good work on setting ourselves up to be able to grow. We’ve got a wonderful stable of partners, IMCs that are world-class in hub in Schneider and Knight-Swift and XPO and its current form. So I’m really, really pleased with that.

As I look into the future, we are pleased to be able to grow. We have to be consistent and reliable in our service product, that means we have to get our five critical resources right all the time. We got one of them wrong last year in part our issue and part the fact that the world blew up to a degree, but we have to be stable and consistent for our customers. They tell us they want that, and they will grow with us as we deliver that. So I know the growth potential is there. Their supply chains want to use rail more and the concept is really simple and straightforward. It’s in our strategy, serve with consistent, reliable service, grow with service product and products that meet our customers’ needs, do that in a way where we are the provider of choice, the partner of choice that allows us to win in the marketplace and do it together with all four of our stakeholders, being benefited from it. We think the strategy is sound, and we’re ready and executing on it.

Ari Rosa — Credit Suisse — Analyst

Great. Thank you, and congratulations.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thanks, Ari.

Operator

The next question is from the line of David Vernon with Bernstein. Please proceed with your question.

David Vernon — Bernstein — Analyst

Hey, good morning. Jennifer, a couple of questions for you. Within the guidance that you’re giving for a full year OR improvement, is that all just the mechanics of fuel or is there some improvement in the underlying business? And then as you think about CAR from 2022 to 2023 on a full year basis, can you give us some sort of absolute numbers around inflation and what added cost is being put in there for PTO and additional enhancements to the compensation package?

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

So in terms of our inflation guide, we said 4% was our inflation guide for 2023, and we said on the employee side to come from fluid the up mid-single digits and those things still hold and that takes into account what we have negotiated for and plan to negotiate for in terms of paid sick leave. In terms of how we’re going to get there and how we’re going to improve, it really is the basis for the service product, the pricing, fuel will be a component. I mean it obviously is a component in there, but we have other levers and that’s where we’re very much focused. Fuel is going to be what it’s going to be. We’re going to go after those items that we have the greater control over that’s winning new business, pricing it appropriately and moving it efficiently.

David Vernon — Bernstein — Analyst

And then maybe, Eric, just as a quick follow-up. As you think about the FTE count for the full year, where are you sort of targeting the business to be at year end 2023?

Jennifer L. Hamann — Executive Vice President & Chief Financial Officer

I think Lance already answered that question. Our hiring levels for this year are roughly — we came into the year, assuming that they were going to be roughly similar to last year. Attrition is roughly similar in terms of what happens in the back half, we’re really watching that from a volume standpoint.

David Vernon — Bernstein — Analyst

Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thank you, David.

Operator

Thank you. Our final question today is from the line of Jairam Nathan with Daiwa. Please proceed with your question.

Jairam Nathan — Daiwa — Analyst

Hi, thanks for squeezing me in. I just had a question on the EV penetration and as do you need to — does UP need to make investments given the fire risk of batteries within EVs?

Kenyatta G. Rocker — Executive Vice President, Marketing and Sales

I will say that we have not seen that risk right now. We have very close relationship with the EV leaders. We’ve enjoyed growth there. Our ramps are prepared to handle those EVs and then we’re looking at the forecast and the size and what we need to do if anything from an investment perspective to make sure that we can efficiently move those off and on the ramps and do it safely.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Jairam, I think fundamentally, the answer is, we have not seen a shift in risk based on our shipments of EVs.

Jairam Nathan — Daiwa — Analyst

Okay, great. Thank you.

Lance M. Fritz — Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions at this time. And I’d like to turn the floor back over to Mr. Lance Fritz for closing comments.

Lance M. Fritz — Chairman, President & Chief Executive Officer

And thank you, Rob, and thank you all for joining us today and for your questions. We’re looking forward to talking with our owners again in May at our Annual Meeting. Until then, take care.

Operator

[Operator Closing Remarks]