Q4 2023 Union Pacific Corp Earnings Call
Participants
Eric J. Gehringer; EVP of Operations; Union Pacific Railroad Company Inc.
Jennifer L. Hamann; Executive VP & CFO; Union Pacific Corporation
Kenyatta G. Rocker; EVP of Marketing & Sales - Union Pacific Railroad Company; Union Pacific Corporation
Vincenzo James Vena; CEO & Director; Union Pacific Corporation
Allison Ann Marie Poliniak-Cusic; Director & Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Amit Singh Mehrotra; Director and Senior Research Analyst; Deutsche Bank AG, Research Division
Bascome Majors; Research Analyst; Susquehanna Financial Group, LLLP, Research Division
Benjamin Joel Nolan; MD; Stifel, Nicolaus & Company, Incorporated, Research Division
Brandon Robert Oglenski; VP & Senior Equity Analyst; Barclays Bank PLC, Research Division
Brian Patrick Ossenbeck; Senior Equity Analyst; JPMorgan Chase & Co, Research Division
Christian F. Wetherbee; MD & Lead Analyst; Citigroup Inc., Research Division
David Scott Vernon; Senior Analyst; Sanford C. Bernstein & Co., LLC., Research Division
Jairam Nathan; Research Analyst; Daiwa Securities Co. Ltd., Research Division
Jason H. Seidl; MD & Senior Research Analyst; TD Cowen, Research Division
Jeffrey Asher Kauffman; Partner; Vertical Research Partners, LLC
Jonathan B. Chappell; Senior MD; Evercore ISI Institutional Equities, Research Division
Jordan Robert Alliger; Research Analyst; Goldman Sachs Group, Inc., Research Division
Justin Trennon Long; MD & Research Analyst; Stephens Inc., Research Division
Kenneth Scott Hoexter; MD & Co-Head of Industrials and Basic Materials; BofA Securities, Research Division
Ravi Shanker; Executive Director; Morgan Stanley, Research Division
Scott H. Group; MD & Senior Analyst; Wolfe Research, LLC
Thomas Richard Wadewitz; MD and Senior Analyst; UBS Investment Bank, Research Division
Walter Noel Spracklin; MD & Analyst; RBC Capital Markets, Research Division
Presentation
Operator
Greetings, and welcome to the Union Pacific Fourth Quarter Earnings 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. Jim Vena, Chief Executive Officer for Union Pacific. Mr. Vena, you may now begin.
Vincenzo James Vena
Thanks, Rob. Good morning, and thank you for joining us today to discuss Union Pacific's fourth quarter and full year results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Hamann; our Executive Vice President of Marketing Sales, Kenny Rocker; and our Executive Vice President of Operations, Eric Gehringer.
The Union Pacific team is executing our multiyear strategy to lead the industry in safety, service and operational excellence. Our fourth quarter shows a lot of what's possible and demonstrate that we're on the right path to achieving those goals. We exited 2023 with strong momentum, which gives me great confidence that we have a winning strategy. There's work to do, but we're building the foundation for future success.
Now let's turn to Slide 3. This morning, Union Pacific reported 2023 fourth quarter net income of $1.7 billion or $2.71 per share. This compares to 2022 fourth quarter net income of $1.6 billion or $2.67 per share. Fourth quarter operating revenue was flat as increased volumes and core pricing gains were offset by lower fuel surcharge revenue and business mix. Expenses year-over-year were also flat as lower fuel expenses and productivity gains were offset by inflation, volume-related costs and higher casualty expenses.
Our fourth quarter operating ratio of 60.9%, improved 10 basis points versus last year. And more importantly, we demonstrated strong sequential OR improvement of 250 basis points from the third quarter. We are taking the right actions to increase the efficiency of our railroad while also improving service for our customers. Key to our strategy is excelling in what we control. We made great progress in those areas this quarter. That provides further proof that we're on the right path to future success.
So with that, let me hand it over to Jennifer to provide more details on the fourth quarter and full year financials.
Jennifer L. Hamann
Thanks, Jim, and good morning. Let's begin by walking through our fourth quarter income statement on Slide 5. Starting with the top line. Operating revenue of $6.2 billion was flat versus 2022 on a 3% volume increase. Breaking it down further, freight revenue totaled $5.8 billion, up 1%. The biggest driver of freight revenue in the quarter was fuel. Lower year-over-year fuel prices reduced fuel surcharge revenue and impacted freight revenue 375 basis points, as fuel surcharges declined $180 million versus 2022 to $795 million.
Volume growth in the quarter contributed positively, adding 350 basis points to freight revenue. And the combination of price and mix also was positive, increasing freight revenue, 75 basis points as solid core pricing gains were mostly offset by an unfavorable business mix. Intermodal shipments of 5% contributed heavily to the mix dynamic. Wrapping up the top line. Other revenue decreased 13%, driven by lower accessorial and subsidiary revenue.
Switching to expenses. We provided expense details for both fourth quarter and full year in our appendix slides. But let me hit some of the highlights. Against our 3% volume growth, operating expense of $3.8 million was flat. Digging deeper into a few of the expense lines. Compensation and benefits expense was flat compared to 2022. Fourth quarter workforce levels decreased 2%, while our active TE&Y workforce was flat against the 3% volume growth. This solid level of workforce productivity mostly offset wage inflation as cost per employee only increased 1% in the fourth quarter. Fuel expense in the quarter decreased 11% on a 15% decrease in fuel prices, from $3.70 per gallon to $3.16. Our fuel consumption rate deteriorated 3% as we moved a less fuel-efficient business mix with increased intermodal shipments and fewer coal moves.
Finally, other expense grew 20% as a result of higher casualty costs and the comparison to 2022, which included insurance recoveries. Coming out of COVID, we had a sizable case backlog that we largely worked through the last couple of years. Importantly, we do not see these elevated expenses as a reflection of a long-term trend, particularly with our intense focus on improving safety. Fourth quarter operating income was flat at $2.4 billion. Below the line, other income increased $16 million due to higher real estate gains. Fourth quarter net income of $1.7 billion and earnings per share of $2.71 both improved 1% versus 2022. Our operating ratio of 60.9% improved 10 basis points year-over-year and 250 basis points sequentially.
Moving to Slide 6 with a quick recap of full year 2023 results. Revenue of $24.1 billion declined 3%, driven by reduced fuel surcharges, business mix and lower volumes, partially offset by core pricing gains. Operating income totaled $9.1 billion and our full year operating ratio of 62.3% deteriorated 220 basis points. Earnings per share of $10.45 decreased 7% versus 2022. And then reflecting the impact of our overall financial results, return on invested capital declined 180 basis points to 15.5%.
Turning to shareholder returns and the balance sheet on Slide 7. Full year 2023 cash from operations totaled $8.4 billion, down roughly $1 billion from 2022. The combination of lower net income and nearly $450 million of labor agreement payments were the main drivers. Free cash flow and our cash flow conversion rate also reflected those impacts. We returned $3.9 billion to shareholders in 2023 through dividends and share repurchases. Our adjusted debt-to-EBITDA ratio finished the year at 3x as we continued to prioritize a strong balance sheet and be A-rated by our 3 credit agencies.
While 2023 was a difficult year, I'm pleased with the progress we've made over the last several months to improve our service and productivity. We believe this performance marks an inflection point as efforts to improve the efficiency of our railroad through safety, service and operational excellence is starting to be reflected in our financials.
With that, I'm going to turn it over to Kenny to provide some comments on 2023 and kick off our commentary on 2024.
Kenyatta G. Rocker
Thank you, Jennifer, and good morning. You just heard from Jennifer that freight revenue was up 1% in the quarter as our volume gains of 3% were partially offset by lower fuel surcharges. So let's jump right into the business teams to recap the market drivers on the revenue side.
Starting with bulk. Revenue for the quarter was flat compared to 2022, driven by a 3% increase in volume, offset by a 2% decrease in average revenue per car. Core pricing gains were more than offset by lower fuel surcharges and the unfavorable impact of low natural gas prices on our index-based coal contracts.
Fertilizer shipments grew compared to 2022 as demand for field application was strong. due to lower nitrogen prices. Grain product shipments were up for the quarter as our team secured new feedstock opportunities for renewable diesel production in Louisana and California. Additionally, ethanol shipments increase with our improved service.
Lastly, coal continued to be challenged in the fourth quarter, due to mild weather and decreased coal competitiveness from low natural gas prices. Industrial revenue was up 4% in the quarter, driven by a 3% increase in volume. Core pricing gains in the quarter were mostly offset by lower fuel surcharges and a negative mix in volume. Business development in our petroleum and LPG commodity segment contributed to the growth. Demand improved for our plastics business, in both export and domestic markets. However, sand volumes were negatively impacted by softer natural gas prices that reduced drilling in the Eagle Ford Basin and increased utilization of in-basin sand in the DJ Basin.
Premium revenue for the quarter was down 3% on a 4% increase in volume and a 7% decrease in average revenue per car from lower fuel surcharges and truck market pressure. Automotive volumes were negatively impacted by the UAW strike, but those decreases were mostly offset by dealer inventory replenishment and business development wins that I mentioned on the last quarter's call. Intermodal volumes were positive in the quarter, driven by stronger West Coast imports, domestic business development wins and strengthen our Mexico volumes. Now let's start talking about 2024.
Here are some key economic indicators that we're watching this year on Slide 10. These are S&P's forecasts from their January report, and you'll notice that it shows a mixed picture for 2024. Industrial production looks to be flat. Housing starts are expected to remain challenged, but demand for auto continues to be strong.
Turning to Slide 11. Here is our 2024 outlook as we see it today for the key markets we serve. Starting with bulk. We anticipate continued challenges in coal as natural gas futures remain volatile and inventories are high. Domestic grain is relatively stable, but we are keeping a watchful eye on export demand. On a brighter note, we expect fertilizer to be strong as repair that Canpotex Portland facility are now complete and commodity prices remain competitive, moving into the spring season. And growth within biofuels continues to be driven by a strong demand outlook, combined with a heavy focus on capturing new business, including incremental volumes secured from Minnesota and Iowa origins.
Moving on to Industrial. The construction market will be challenged to exceed last year's record volumes as we're seeing softness in parts of the market. However, we foresee the petroleum and petrochem market remaining favorable due to our focus on business development.
And finally, for premium on the international intermodal side. We expect the market to improve year-over-year, but a contract we lost earlier in 2023 will negatively impact our 2024 volumes. On the domestic side, we are staying close with our customers who have indicated that they'll see a soft start to the year. Nonetheless, our strong service product sets us up to handle market demand. And for automotive, we will see strength in this market with improved OEM production and business development wins.
In summary. The economic environment continues to look muted in 2024, particularly in the first half. We're off to a floor start in January based on severe winter storms and market challenges we're seeing in coal and intermodal. But I am encouraged that we expect to see growth in some markets with our strong focus on business development. For the second half, we are well-prepared to handle the demand if the market and economy improves. We continue to make significant capital investments on both carload and intermodal front to capture more freight over the (inaudible).
Those investments, along with our unmatched service offerings and improved service products from Eric's team create a winning environment for our customers. I'm excited for the opportunities in front of us, and our commercial team is ready to help our customers win in the marketplace.
And with that, I'll turn it over to Eric to review our operational performance.
Eric J. Gehringer
Thank you, Kenny, and good morning. Moving to Slide 13. To start, I want to express my appreciation to the team for their relentless focus on improving our service product and driving network efficiency. It's thanks to their efforts that our network showed tremendous fluidity and reliability during the fourth quarter.
Freight car velocity improved 14% to 217 miles per day compared to fourth quarter 2022. Increased train velocity and a reduction in terminal dwell drove that performance.
Service was strong during the quarter as we saw a significant 12-point improvement in both intermodal and manifest and auto trip plan compliance. In addition to trip plan compliance, we have hundreds of customer-specific performance metrics that also showed great improvement throughout the quarter. Most importantly, we are delivering the service we sold to our customers, which is critical to our long-term growth strategy.
While winter is here and has certainly brought its challenges, the railroad overall is very healthy, and I'm confident the team will continue its positive momentum. Safety continues to be the foundation of everything we do. During the quarter, we delivered improved derailment performance through our investments in technology and process. We remain focused on the critical actions that drive real change. So everyone goes home safely each day.
Now let's review our key efficiency metrics for the quarter on Slide 14. During the fourth quarter, we saw year-over-year improvement across all of our efficiency metrics. Locomotive productivity improved 14% versus fourth quarter 2022 and 9% sequentially as we continue to identify and execute on opportunities to utilize the fleet more efficiently. Throughout the second half of 2023, we stored nearly 500 units from our operable fleet.
Workforce productivity improved 4% compared to fourth quarter 2022. With the strong crew base, we are focused on effectively managing workforce levels to the demand of the business. However, challenges do remain from scheduled work agreements that, in the near term, require additional employees. Train length improved 2% compared to fourth quarter 2022 as we continue to remove car touch points from the system. In total, throughout 2023, we were successful in extending train length as improvements in the second half more than offset the declines in intermodal shipments.
We remain persistent in our focus on train length to drive productivity while providing a better service product to our customers. As we move into 2024, we will continue to transform our railroad through a variety of technology initiatives and targeted capital investments designed to further improve safety, improve our service product enhanced resource utilization and ultimately lower our cost structure.
So to wrap up, let's review our capital outlook for 2024 on Slide 15. We are targeting capital spending of $3.4 billion in 2024. Similar to 2023, we will support safe and productive operations by investing in our infrastructure and renewing our older assets. This includes modernizing locomotives and acquiring freight cars to support replacement and growth opportunities.
We are also investing in technology, terminal and mainline capacity projects to improve productivity. Specific to our technology investments, we recently cut over NetControl, replacing our 50-year-old transportation management system. This cutover positions us to use real-time analytics to open new capabilities for Union Pacific and our customers. Great work, led by our technology team. On the growth front, we will continue to invest in projects that expand our intermodal footprint and support business development in targeted high-growth areas such as Inland Empire, Kansas City and Phoenix, to name a few.
So with that, I'll turn it back to Jennifer to lay out our initial financial thoughts for 2024.
Jennifer L. Hamann
Thanks, Eric. Turning to Slide 17. Let me start by pointing out that we added a new appendix slide that contains several of the 2024 modeling assumptions that should be helpful to everyone in framing our current expectations. As you heard from Kenny, it's a difficult market to forecast, as economic indicators show a muted and uncertain economy, throwing a couple of other variables such as what the Fed might or might not do with interest rates and a presidential election, and we've got an interesting year ahead.
On top of the macro pressures, lower coal demand and some lost international intermodal business are expected to negatively impact our volume. And as you've seen in the weekly carload data, January is off to a slow start as cold temperatures across our system impacted operations and volume, with first quarter volume down 9% year-to-date. I am confident, however, that our strong and improving service product will allow us to capture available demand.
We clearly demonstrated that in the fourth quarter as we took advantage of the unexpected but short-term surge in intermodal. More certainly in the economy is our expectation to generate pricing dollars, in excess of inflation dollars even with ongoing headwinds from certain intermodal contracts. With those pressures, we do not expect price to be accretive to margins in this year.
Key for UP in 2024 is our ability to control the controllables by driving a strong safety culture, making ongoing service gains and improving network efficiency. We're confident that regardless of the demand environment, we will take the necessary actions to run a more efficient network.
Finally, with capital allocation. There is no change to our long-term strategy. We are investing $3.4 billion back into the railroad as Eric detailed. Next, we prioritize our industry-leading dividend payout and then excess cash will be returned to shareholders through share repurchases. However, given first quarter debt maturities of $1.3 billion, we will not be repurchasing shares in the first quarter. It's always difficult in late January to make predictions for the year ahead, and this year is no different. There are currently ongoing challenges from a macro and inflationary perspective. What is very encouraging though, as we start out 2024 is our momentum, which you've heard us mention several times today. We demonstrated with our fourth quarter performance, what's possible and we look forward to further improvement in the year ahead.
With that, let me turn it back to Jim.
Vincenzo James Vena
Thank you, Jennifer. Let's turn to Slide 19. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. Kenny outlined our view on the upcoming year. Our volume outlook today reflects headwinds from lost business, coal demand and relatively soft economic forecast. Much of that is out of our control. We are mitigating these impacts through business development and value creation by providing great service to our customers.
Eric described the progress we've made to return our service levels to industry best. While there's work to do, the team made consistent improvement through the quarter to exit in a very fluid state. Obviously, winter is here, but that's part of railroading. I judge our success by how we minimize the impact on our customers and how quickly we recover the network. So far, we've grown -- we've shown great resiliency.
Finally, as Jennifer laid out, our productivity and pricing gains will be key to overcoming ongoing inflationary pressures in 2024 as well as the soft economy. While many unknowns remain, I'm confident we'll succeed in the areas we control. We've got plenty of opportunities this year to improve safety, service and operational excellence. As you heard me say in October, I came back to Union Pacific to win. My vision and the opportunity I see for this company has not changed. We have the right team and strategy in place to grow this road long term, and I'm very confident we'll see a better Union Pacific in the future.
We're now ready to take your questions. Rob?
Question and Answer Session
Operator
(Operator Instructions) And our first question today is from the line of Chris Wetherbee with Citigroup.
Christian F. Wetherbee
Maybe if I could ask just sort of the outlook for 2024. As you sit here, it sounds like the muted macro environment is keeping you cautious. But I guess when you think about the opportunities that you have, can volume be up this year? I know some of the macro indicators that you highlighted are muted, but they are still positive. So curious about volume growth. And I guess, in that context with pricing maybe not necessarily being accretive to margin, is there enough in that volume and some of the cost efficiencies that you guys are working on to get margin expansion?
Jennifer L. Hamann
So Chris, maybe let me start and then Kenny can give you some more color. I mean, we're just not going to give you a number in terms of what we think can happen with volumes because of what you yourself said, there's just a lot of uncertainty. And we just don't think it's prudent sitting here at the end of January to give you some sort of a forecast, based on hopes for a second half recovery. Do we hope that, that will happen and are we going to work diligently to move every piece of business that's there? Absolutely.
And I think you really saw what the network can do with our fourth quarter performance. But we just need to see a little more certainty. And hopefully, that plays out through the year, and we can provide that. But sitting here today, we just don't see that. But Kenny, maybe talk about your margin.
Kenyatta G. Rocker
I talked about it in my opening comments, it's a mixed bag of opportunities that are in front of us. we feel really good about the biofuels market. That market is growing. Demand is growing. We're capturing business in those markets. On the industrial side, we've had some record year on the construction side. Still be a strong year, but as we are coming out of the gate with weather, that's going to be a little bit challenged for us.
We feel really good about our petrochem business and wins that we've had from a business development perspective. On the petroleum and ALPG side, those are all positive for us. On our premium business, again, those are really economic driven. And so we'll be looking to see what happens with demand overall. I talked about the international intermodal side and the loss there. We feel really encouraged by our ability to win on the auto side, and you heard us talk about both wagon wind and last quarter. And so is there a lot of demand there and the forecast for growth there. We really feel good about that market.
Christian F. Wetherbee
Anything on the margins?
Jennifer L. Hamann
I'm sorry?
Vincenzo James Vena
Margins.
Jennifer L. Hamann
Oh, on Margins. Again, I'm not -- this might become a broken record, .I hope not. But I mean we are not going to give the guidance. I mean we're going to do everything we can as much as we can. And again, you saw what we did in the fourth quarter. But every kind of other guidance I would give is going to be predicated on what I think is going to happen with volumes, and we just don't have that clarity. And I don't think it's prudent to do that sitting here today.
Vincenzo James Vena
Chris, let me just maybe just try to put this all into a box of the way we're thinking. It's very difficult for us to look forward and say this is exactly the way the year is going to go. More Important to me and the team is, what have we done operationally, and what are we doing to provide Kenny and the entire team, the capability to go out there and maximize what's available for us and what we can bring on to this railroad.
And for me, that's the single most important thing. I think, what we've shown is the capability to flex up. We have the assets to be able to flex up. We have the capacity to be able to flex up. And if we continue to drive the efficiency of the railroad, which I expect we will, then what we do is we win in the marketplace. And whatever is out there, we're going to compete against everybody else, trucks and other railroads, and we think we have a winning model. So that's the challenge we have. And it would be truly, it would be a mistake for us to come out and say, "I can't tell what's going to happen," like Jennifer pointed out with the inputs and the effects from interest rates and everything else that's happening in the economy. But I'm very comfortable that we are going to maximize what's available for Union Pacific and when.
Operator
Our next question is from the line of Walter Spracklin with RBC Capital Markets.
Walter Noel Spracklin
On the intermodal side. I know there was a business loss there. And -- but looking at some of the statistics in L.A. Long Beach, there seems to be a really good uptick in volumes into those regions or that region. Red Sea impact, perhaps East Coast is down. Ken, are you seeing that there is new business coming that way? And could that be a nice offset to any business loss or -- could it create an opportunity for a business -- more business wins as more volume shifts to LA Long Beach? And perhaps the fluidity of LA Long Beach, is that keeping pace with the new volume that's coming its way.
Kenyatta G. Rocker
Yes. So thank you, Walter. We've spent a lot of time looking at the global supply chains in the canal and so forth. I'll tell you right now in the near term, we haven't seen any significant shift. We've been talking to our -- the vessel carrier owners. We know they put in tariffs, our customers have put in tariffs to go over the Panama canal, for example. And so we've been working with them to move as much as we can with the network that we have; with the match back opportunities that we have; with the reload opportunities that we have; with the new products that we have on the -- with the Houston lines that Eric has given us; to give our customers every reason to go to the West Coast. So what we have seen is we are seeing more going IPI, we have a very efficient service network to accomplish that. We're happy about the customers that we have that have been able to grow in that market. And then finally, we have a great network where the service, we're able to capture that and get all of that business that's out there.
Eric J. Gehringer
And as we think about that because to your point, you can't predict the future with entire clarity. It's another reminder, Walter, of the fact that when we talk about having a buffer, and you look at what we did in the fourth quarter, we generated the ability to make sure we have that buffer. That buffer in locomotives, that buffer in railcars positioned in L.A. So in the event the volume is there, we've supported Kenny's team to be able to actually capture it.
Walter Noel Spracklin
And the fluidity in the terminals right now. Is that -- how would you assess that?
Eric J. Gehringer
Very fluid. As you saw in the fourth quarter, 14% improvement in car velocity doesn't come unless you've got very fluid operations. Now to Jim's point, are there opportunities? Of course, there are. In fact, I'll talk about those as we go through this. But overall, right now, yes, very fluid.
Operator
Our next question is from the line of Scott Group with Wolfe Research.
Scott H. Group
So it seems like you're framing this as there's things we can control and things we can't control. It strikes me that over time, the industry has been able to have some control over price. And you're talking about inflation up 5%. And right now, yield ex fuels is only up 1%, right? So it just seems we need more price. Can we get more price? I don't know. How do we think about that?
And then could you just clarify like this international intermodal contract. When did we lose that? Because it sounded like it happened sometime in '23, but we just -- we're seeing really good intermodal growth. So I'm a little confused with why we're flagging this as such a big issue right now.
Kenyatta G. Rocker
Scott, I got both of those. Thank you. So first of all, you're exactly right. Prices are controllable. And let me make this clear. It's not like we are jumped up here and wait until January 1 to look at price. We've been going down this path here for a few months. You've heard Jennifer and I say that we have a set amount, call it, almost half that we can touch from a pricing standpoint. Our commercial team has really been very effective sitting down with customers; talking to them about the improved service product; talking to them about our increased inflationary pressures that we saw from the labor side; and how Eric is leveraging that to improve the service products that we give them.
They're seeing the same input. They're seeing the same increases. I've been meeting with customers. And so they know that. So yes, we control a portion of that and so we've been very focused on articulating that story. I think you had a question on the international side. And yes, you're correct. We lost some of that earlier in the year, last year. The bulk of that will still be working through in 2024.
Jennifer L. Hamann
But just to your question, Scott, I think what Kenny is talking about with that loss, that kind of goes to our discipline when it comes to price and making sure that the business that's on our railroad is running at acceptable margins. Sometimes that doesn't happen and we might lose a piece of business.
Kenyatta G. Rocker
Yes. I mean with the service product, when the investments that you heard Eric talk about this morning, the margins have to be acceptable to be on the network.
Vincenzo James Vena
Well, I hate to always recap these, and I won't. But let me recap this, Scott, for you. So inflation when I was the first call that I had in October, I was pretty clear that we are going to deal with the inflationary pressure that is presented for us that we have to tackle, and we're doing it 2 ways. We are dealing with it on a price -- from the price side, and we're also dealing with it on the efficiency side. And I think we have a clear view. This is not a short-term 3 months, you can fix it on the price side. And even on the efficiency side, we've seen improvements in efficiency, and you can see that from the number. And I think there's more available for us on the efficiency side from how we operate our trains, the fluidity and the terminals, how we use our people, and we did a really good job. The team did a fantastic job in the fourth quarter, and I expect it to get better as we go through the year.
So those 2 things we're tackling head on. We're not being shy about it. We're being straight. I've met with a lot of customers in groups and in small and I've been clear about what the pressures are and what we're going to do about it moving forward. But at the end, we want our customers to win in the marketplace. We want them to win. So we're being smart about how we price and what level. And it's different for different marketplaces, and that's how we're handling it. But I'm excited. I think we overcome this year, by the end of the year, we'll see ourselves in a different position.
Operator
Our next question is from the line of Tom Wadewitz with UBS.
Thomas Richard Wadewitz
Jim, you've seen -- you realized a very fast and positive response in terms of the rail network operations since you've been at UP. Where do you think you're at, in terms of kind of further improvements? So I don't know if you want to look at like locomotives, what the active fleet is and where it can go to. Maybe if you could comment a little bit on headcount. I think that the headcount was down pretty meaningfully sequentially. So I guess I'm just trying to get a sense of kind of are we at the stable level now after that really quick improvement? Or our head count and active locomotive fleet going to have further steps down as we go into '24?
Vincenzo James Vena
Listen, thanks for the question. So the way I see it is this. I think there's more on the railroad to become more efficient. And the concentration is a little different than the last time I was here and a little different than what we just were able to do in the fourth quarter. I think there's opportunity in speed and car velocity that will help us be able to move the railcars faster, use a few less locomotives and be able to keep the network more fluid. But the real big piece for us and what we're going to concentrate on, and we think there's a capability to be much better is how fast we operate our terminals, and the fluidity through the terminals to be able to have the products. Now it's just not in the transportation piece. We are looking at ways on the engineering side, how we do maintenance, how we do capital work on the mechanical side, how we -- what it costs us to perform overhauls. Every piece of the network is still there. So I think there's still more left on that piece to be able to do.
Thomas Richard Wadewitz
Can you offer a thought on how that translates to head count? Do we think head count goes down further? Or is it kind of stable at current level?
Vincenzo James Vena
Well, the challenge we have with head count is we signed some collective agreements and you live with what was given to you. And some of those collective agreements put pressure on headcount. They put pressure on from both the time off, the sick benefit time off that we provided. We had some weekends when the football game were on that, that we had an extra 15%, 20% people all got sick at the same time. So we need to be able to figure out how to deal with that, and we'll do that as we move ahead. It must have been a real bad weekend, right at the same time as one of the Playoff games was on. But at the end of the day, those are stumbling those are blocks that we have to go over this year.
And what we showed in the fourth quarter is with all that, all the pluses and all the headwinds we had on headcount, we were able to keep the headcount and reduce it overall in the company. And there is no reason for us not to continue to do that. We will look for every opportunity. And sorry, I can't give you a specific number because this is a moving target as we move ahead. We're implementing new agreements through this year. So it will be noisy. It won't be a straight tangent down. The slope won't be perfect. It will be a little up and down, but I'm very comfortable that we have the programs, the processes in place to be able to correct that and have the way, which is less people handling the same amount of business.
Operator
Our next question is from the line of Jon Chappell with Evercore ISI.
Jonathan B. Chappell
I was going to ask this anyway. I guess it's a perfect follow-up and maybe it's just reading between the lines. So when Eric mentioned some of the challenges remaining from the work agreements that required additional employees. I mean it was noticeable to me that you stressed near term. So is this just -- is there a time where the anniversaries where you could be a lot more flexible based on the volume environment? Or was the stress on near term kind of related to what you were just mentioning, Jim, you're putting programs in place, you're trying to address it and that you hope at some point, you can kind of reverse that trend? .
Vincenzo James Vena
Yes. In 2024, we have dates of implementation for the agreements that we have not implemented completely. And those are pressures on the number of people that we would need to operate. So that will be through 2024, and that's why I've always talked about this is a -- I see this as a 2-year adjustment to the railroad to be able to get that. But we do have programs in place as we implement, we run into things that we operate as efficiently as I think we can, we'll mitigate that. You mitigate it by running less trains, having more cars on the same trains. We grow. We put more cars in the same trains instead of starting more. We use the people and the facilities that we have more efficiently. So -- but it's a 2024 headwind for us that we are going to overcome just like we did in the fourth quarter.
Jennifer L. Hamann
Well, just a reminder, John, we only have the work best agreement in place with the PLE team. We're still negotiating with SMART-TD.
Operator
Our next question is from the line of Amit Mahotra with Deutsche Bank.
Amit Singh Mehrotra
Congrats on the good results. Jennifer, I want to come back to the 5% inflation. So you've got a $15 billion cost structure that basically translates to like $750 million of higher costs in '24. I assume that's a gross number because you've done -- you guys have done a phenomenal job actually lowering the cost structure as we move from 3Q to 4Q. So is there any help you can give us in terms of how you think about that gross 5% translates to kind of like a net cost number in the context of the revenue outlook?
Jennifer L. Hamann
Yes. No. I mean, you've got that exactly right, Amit. The 5% is the gross number. So that's our challenge, right? And opportunity is to offset that with productivity. And so that's where you heard Jim talk, you heard Eric mention, we have those opportunities in virtually every cost category. But depreciation aside, that's kind of fixed for the year. But we absolutely have opportunities to offset that in terms of how we run the railroad. And I think just think about wage inflation and think about fourth quarter. So we had wage inflation first half of this year.
Our wages are going to be up 4% for our union personnel. It's going to go to 4.5% in the second half, but our cost per employee was only up 1% in the fourth quarter. So that's productivity that's enabling us to offset some of that. And so that's the task of this management team, and that's those controllables that we talked about, and that's where we're very much focused.
Amit Singh Mehrotra
But is there any help? Like, I mean, can you offset half of it? Can you offset 40% of it? Like -- because that's obviously critical to understanding the EBIT and margin outlook, which I know is highly uncertain, but at least give us some sense of how much you can offset that gross number by in your opinion?
Jennifer L. Hamann
I mean you also know that volumes play a role in that in terms of how we're able to leverage and build longer trains and more work to put up against some of those inflationary costs. So that's our challenge, but I'm really not going to be able to give you any more than that.
Operator
Next question is from the line of Allison Poliniak with Wells Fargo.
Allison Ann Marie Poliniak-Cusic
So obviously, service is improving here. Just in terms of customer engagement, any color on sort of the pipeline of opportunities? Is it going to accelerate? Are there unique opportunities? And I guess along with that, are you seeing any improvement in some of the conversion of some opportunities out there? Just any thoughts.
Vincenzo James Vena
Allison, let me start, and then Kenny, please jump in. So if we look at this railroad that we are blessed with that we operate, and I think you've seen some of the steps we've taken is you have to provide a level of service we sold to our customers, and that's our goal. And we work real hard every day to do that. We operate the railroad very efficiently. We're the opportunity, we have a mix of traffic that's available to us that originates on our railroad. So when I go around the entire railroad, I'm very comfortable that we offset and we have the capability to offset.
And we are tackling whether it's that industrial complex all the way from New Orleans to Brownsville, Texas, whether it's the grain, whether it's the soda ash, whether it's the intermodal, the West Coast and our speed. We are able to provide speed for customers that require speed and not all of them do. We can go from L.A. to Texas, a close to 2,000 mile journey and we do that in 48 hours. So that's truck-like and our service that we put on from Mexico going into Eastern Canada, partnering with CN and ourselves into the East plus into Chicago is unparalleled. We can do it as fast as anybody. So there's lots of opportunity out there for us. And what we have to do is with good service, the customers will see what's possible, and they will want to partner with Union Pacific and grow their business with us versus anybody else. Kenny? .
Kenyatta G. Rocker
Yes. So first of all, we have a robust business development pipeline. It's a healthy one. If it's encouraging one. We're excited about the pipeline in front of us. So a lot of opportunities there. The main thing I want to start with is our service product is in a strong position. And so as we talk about the service that we sold to customers, you look at some of the markets just to get a little bit more detail here. Look at coming out of Mexico, that's a service product that Eric has given us daily. That's undisputed and unmatched coming out of Mexico. It's the fastest product. It's also a product that is on time.
You look at the West Coast and someone asked me a question earlier, we're blessed with a network where we can pitch and we can catch. We can pitch coming out of the West Coast as we onboard an on-dock. We've got a strong IPI. We can catch in the Inland Empire. We built that up. We put investments there, and we've shared with you that we've got plans to really grow in that area. And with the network and the service product we have, we're expecting to grow.
If you look at the carload side, you've heard us talk about some of the wins in the auto side. I talked about the petrochem side. That's a great network down in the Gulf service product is improving. Our commercial leaders, commercial teams are sitting out there and talking to customers about taking a little bit more truck off the road. So we're bullish on getting out there and growing as the service product is there, and we're investing in the network.
Operator
Our next question is from the line of Brandon Oglenski with Barclays.
Brandon Robert Oglenski
Eric, I wanted to come back to you because I think in response to an earlier question, you spoke about, there's still more to come on things like velocity and train length. And then I think Jim ever alluded to some local service plan changes. So do you want to elaborate a little bit more on where you see productivity gains this year?
Eric J. Gehringer
Absolutely. So you mentioned car velocity, so let's start there. As you're thinking about 2024 and what's in front of us, you saw what we did in the fourth quarter, a 14% improvement, 217 miles per day. That becomes a floor. A floor that is we work every single day, as was mentioned before, we're working to improve that.
Now if you peel that back and you say, okay, within that, where do you see the biggest opportunities? You mentioned train length, so we can start there. Train length is an opportunity, always has been and candidly always will be because the railroad is dynamic. Train length comes in 2 forms. The first one, Kenny just gave a great example of Inland Empire, where we're bringing more volume onto the railroad. I already have an existing train, and we can just tack it onto the back of that. The other way that it comes with in our actual transportation plan changes that we make. An example of that is the one that Kenny brought up with Mexico.
When you think about that being 2 trains before and now we're consolidating that traffic into one, it allows us to drive productivity that way. After that, the fluidity drives our locomotive fleet. There's other factors, but at the very core of it, it is about fluidity. We took out 500 units out of the system in the second half of last year, a little bit because of volume but the vast, vast majority of it because of fluidity.
Continuing that work allows us to continue to rightsize the fleet. And we don't talk a lot about purchased services on these calls. The purchase service is a big opportunity for us, whether you're thinking about how many vehicles do we have on this railroad to operate it, whether we think about how much fuel that we're using. We also have opportunities on the casualty side.
As Jennifer has mentioned many times before, it's an opportunity all the way from the safety side. That's why we're so focused on safety as well as even as we think about our service product, right? We have teams that are dedicated to making sure that the freight that we haul is successfully helped more into destination without being damaged and how do we drive down any claims that we have. So it is a target-rich environment, and we are doing everything every day to capitalize on that.
Operator
Our next question is from the line of Bascome Majors with Susquehanna.
Bascome Majors
Following up on the locomotive piece earlier, you talked about storing 500 units and having a 9% sequential increase in productivity. Jim, as you look forward a bit further, can you talk about how you think about UP's fleet renewal strategy for locomotives over the next, call it, 3 to 5 years? And how, at this point, is some of the regulations that California is proposing impacting the way that you think strategically about that significant investment for the railroad?
Eric J. Gehringer
Bascome, I think it's a great question. If you look at the bottom line, we have enough locomotives that we would not have to look in the planning period of 3 years out that we would have to purchase any locomotives. But we always look at the greenhouse gas emissions of our locomotives, what we need to do to be able to invest to make them more efficient, both on a fuel spend and greenhouse gas emissions. So I think we will target certain capital expenditures. It's not in the plan this year, and we'll look at it again to see where we are. We're testing new innovative ways to have propulsion. So we'll continue to do that and invest in locomotives that can be hybrid, that are able to work out there for us. So -- and in certain situations, we can implement it. But I don't see the requirement is that we do not have to spend money, but bottom line is we know that we will invest in our fleet. And we don't want to have the oldest fleet in the network. So we'll continue to invest and renewing the fleet as we move ahead, but it will not happen in 2024.
Operator
Next question is from the line of Ken Hoexter with Bank of America.
Kenneth Scott Hoexter
Congrats on solid and rapid results here. Just want to check, I guess you're not changing that you don't need volume gains to get margin improvement. Is that right? Am I hearing that right? And then your thoughts on outpacing normal sequential shifts into the first quarter. Should we still expect that like you did in the fourth quarter, given the weather or accelerating gains?
And then just a side one, Kenny, I just want to understand, are you -- can you talk about the scale of the intermodal loss in '24? Did we see it in the fourth quarter? Or is that all coming? And can you talk scale? I guess that was a surprise, I think, to everybody so far.
Vincenzo James Vena
Okay. So 3 questions, Ken. That was very good. I like it. So why don't we start?
Jennifer L. Hamann
Where are we going to start?
Vincenzo James Vena
Why don't we start with the contract is real simple. The contract was lost early in 2023 and said the business has actually lost starting January 1. Correct, Ken?
Kenyatta G. Rocker
That's true. We'll still see, the bulk of it still showing up in 2024.
Vincenzo James Vena
So that's the challenge. It's a 2024 issue. And it was early in 2023 that we lost that business.
Jennifer L. Hamann
Yes. And so Ken, in terms of your margin questions, again, not going to give you any specifics there. We have 3 levers, as you know, that we use to attack and generate profitability and volume, price and productivity. You've heard us talk about the fact,in my prepared comments, the price were all positive in excess of inflation dollars is not going to be accretive to margins here in 2024. We are unsure about the volume picture. There's a lot of puts and takes, as you heard, and we know we've got some headwinds from a contract loss in coal. And so the lever that we are most confident about and have ultimate control over is the productivity side.
And so you're right, we have shown in periods of declining volumes in the past that we can through productivity and price generate margin improvement. But we're not giving the guidance on what -- any kind of magnitude of volume changes. So I don't want to try to get into that game of linking x amount of volume with x amount of productivity and margin. The thing that you will see from us in our results, regardless of what happens with the volume, is that we're performing better. We're running better. We're running more efficiently and driving productivity. And whether that results in positive or negative in the financial picture, is going to be a function of some of that volume and how that plays out through the quarter and through the year.
First quarter, in particular, is going to be a bit of a challenge for us. Volume, yes, in the weather. You heard us talk about that. But a couple of other things just to remind everyone of in terms of a year-over-year comparison. Last year, we had about $100 million, a little over $100 million real estate transaction that was in our earnings. And we also had a very strong fuel benefit in the first quarter of last year. It helped our margins by, I think, almost 2 points and about $0.25. So I just want to remind everybody of those kind of year-over-year comparison pressures.
Operator
Our next question comes from the line of Justin Long with Stephens.
Justin Trennon Long
And maybe taking a shot at asking that question a little bit differently. Jim, you've now been at the company for roughly a couple of quarters. Do you have any updated thoughts on the size of the total productivity opportunity going forward? And roughly how much of that is dependent on volume growth. If we want to make our own assumption that volumes are flattish this year, hypothetically, is that a scenario where you can still see meaningful margin expansion year-over-year?
Vincenzo James Vena
Listen, I think it was a well-framed question. I like it because it gets to the crux of who we are at Union Pacific and what the vision is and what our goals and objectives are. I'm very clear on it. I think we are going to have quarters just like the first quarter, but maybe we don't see as much of a sequential improvement as we would like because of the pressures that we had in January so far with weather, and I'm not sure what's going to happen. I've been around for way too long to forecast what's going to happen when winter is on and when we come through spring and everything that can happen then.
But fundamentally, I see us as having a best operating ratio in the industry. And that's what we're driving towards, and we'll get there. And I see it in the future, and the future is not so far that it's cloudy. I see it clearly in what we have to do. So for me, that's really important. And I don't care whether we -- whether the business -- and the business in the marketplace gives us business or not. But I'll tell you, I'm pretty clear, okay? We have a great railroad. We operate very efficiently. We should win with the customers, and I expect Kenny and his team to deliver. This is not -- people want to talk about we lost the business. We need to go replace that and we need to bring it on and we need to do that in the short term, not the long term, without going after making an adjustment on price to go get the business. We have that capability, and we can deliver value to the customer. That's how I think.
And I did not come back here. I could have sat at home in Scottsdale or being somewhere doing some exciting hiking or mountaineering, but I decided to come back because I think we could win. And we have the railroad and the network to do that. So the pressure is on this team. The pressure is on Eric to make sure his entire team to deliver recover fast like we did with this last winter impact that we had. I expect Kenny to deliver. And I expect Jennifer and the entire team to look for every opportunity, how we monetize what we have as a railroad and win. So I love the question. Perfect. So hopefully, I answered that for you.
Operator
The next question is from the line of Ben Nolan with Stifel.
Benjamin Joel Nolan
And by the way, Jennifer, I do like the -- that last slide is helpful. The -- my question relates to Mexico. Obviously, that's an initiative that you guys really tried to accelerate last year. And then around the end of the year, there were the border closures. Just thinking through how you expect that business to trend moving forward? And if you're seeing a lot of these reshoring things or some of these interruptions causing any second guessing of that at all?
Vincenzo James Vena
Kenny, can you talk about the business and how we see it? And then if you don't mind, I'm going to answer the piece on the border, okay?
Kenyatta G. Rocker
Sure. Yes. I mean being near shoring is real. We've seen the billions that have gone in, in all of 2023. These are -- a number of them are highly industrial and rail centric, which we find encouraging. I talked about the service product that we have, and we're not waiting around for the nearshore in the (inaudible). We've seen some wins with us having the fact it's a product coming out of Mexico, especially in time sensitive products like auto parts. Again, it's daily service. We're reaching into the Midwest. We're reaching into different parts of Canada. And so we're encouraged by that. We're bullish about that. We are talking to customers about that. We're putting as much as we can on the network. And you also saw us create a service product into the Southeast, which we gained some traction on. So again, coming out of Mexico, it's a great franchise for us. We've got borders that we can get in and out of Mexico. So great product and great franchise.
Vincenzo James Vena
You bet. And on the border,I'm disappointed that the border will shut down, and I do not think that's the way to move forward. I think there is a problem. There's a humanitarian issue. I personally went down with some members of the team to go visit. And it's very difficult when you see people crossing the river and a mother with a child coming and then falling into some razor wire. That is not something that anybody should see. But at the end of the day, for us, I think it's more important that the border crossings are fluid, and we are doing everything, investing in systems to make sure we protect the railway crossings that we do not have people crossing on the trains.
And we've done a really good job of that. People are not crossing coming across from Mexico into the U.S. or vice versa on the trains, and that's what we will continue to do. And we will work close with customs and we have. Customs understands they have a problem, and we've worked very closely with them, and we will continue to have meetings and discussions so that we'll do everything we can to make sure that the rail operation is not impacted as we move forward.
Operator
The next question is from the line of Ravi Shanker with Morgan Stanley.
Ravi Shanker
You said that you're looking to push on rail length, which is -- train length is understandable. Jim, I want to see kind of how much room you have to kind of get more leverage there. A, kind of given your efforts already kind of how much more like physical space is there. Also, I think given some of the kind of regulatory scrutiny around train lengths kind of -- is this something that you guys can do by yourself? Or do you need to get the kind of STB or Congress is going to sign off on it?
Eric J. Gehringer
Yes. Thank you for that question. So core to your question is how do we think about train length and how do we execute that? So let's put volume to the side just for a second. Do our trains have capacity for more train length? Absolutely, yes, 100%. The work that we have in front of us that we've been executing now for years, and we'll continue to is to make sure that all of our systems behind the scenes continue to first identify those opportunities. And as we've always been to be exceptionally prudent about actually working through our physics engines and to understand exactly how to build our trains. That's science. And like all science, it evolves. And every quarter, every year, we see new opportunities to be able to keep capitalize on that. So I'm not going to guide you to a specific number. But I'm going to tell you, we see some opportunity there. You'll see us capitalize it in '24, and I'm excited and appreciative what the team is doing to make that happen.
Operator
Our next question is from the line of Brian Ossenbeck with JPMorgan.
Brian Patrick Ossenbeck
Just a quick follow-up first on the work rest rules. Is there anything in your guidance, were you assuming that SMART-TD actually does come on board? Or so far, are you just assuming that it's the BLE?
And then maybe for Kenny. Obviously, mix is probably harder to forecast than volume, but the 2 are related. So maybe you can just give us a sense in terms of some of these market pricing adjustments for coal and intermodal that have been more of a headwind than not the last couple of quarters. Is that something that we should anticipate also being a potential headwind into next year? Just curious how much visibility you have on that, knowing that it's probably truck and natural gas-dependent. But I guess is that directionally worse in '24 than perhaps it was in '23.
Vincenzo James Vena
Jennifer if you want to handle what's in?
Jennifer L. Hamann
In terms of the work rest piece, we do have an assumption that we'll come to an agreement probably sometime later in the year. So that's part of our overall thinking.
Kenyatta G. Rocker
You look -- you asked the question about intermodal domestic, Intermodal. First of all, if you look at where the rates have been, I'll differentiate the spot rates of the last 4 months sequentially shown, I'll call it, very slow gradual increase, which is encouraging. The same issue on the contractual side, very slow gradual improvement sequentially, the last 4 months. So I can't get into saying whether I think over the next 3 months, that's going to continue. We've got a lot of mixed feedback from customers, but encouraged by what we've seen in the past. I've said this before that we have mechanisms in our contracts for our suite of customers to keep them competitive, real time and times like this. And as the market improves, I would just mention some of those indices, it will help us some of those mechanisms that we have to secure a little bit more price and better margin.
Jennifer L. Hamann
Yes. And Brian, I think you also asked a broader mix question in terms of next year. And obviously, with a lot of unknowns about volume, it's hard to answer that. But you know the big drivers there really are in the intermodal front. And largely so goes Intermodal, so goes the broader mix for UP. We, obviously, have mix with index. As I know you're also aware. And so when you think about just the premium category, with automotive being very bullish on that as we think about some of the contract wins and what's happening in that market. That may help your overall premium mix, particularly as you've got some down, and then we'll see how the rest of the categories play out, but that's the big swing factor for us in 2024.
Operator
The next question is from the line of Jordan Alliger with Goldman Sachs.
Jordan Robert Alliger
A couple just real quick follow-ups or clarifications. One, I don't know if I caught the order of magnitude impact of the international intermodal loss, whether it be revenue or volume. And then secondly, what does it mean, price not being accretive to margin? Does that mean overall yields would it best be flat?
Jennifer L. Hamann
Yes. For the second part of your question, Jordan, it really just means mathematically, when you look at how the price impacts and is added to the revenue, it does not help your overall operating ratio calculation. Even though it's going to be higher than the inflation.
Vincenzo James Vena
Exactly. So when you do the math, you know that math, right?
Kenyatta G. Rocker
So again, we're not going to frame up the magnitude. I can tell you, we are focused on growing the international intermodal network. We've been blessed with a new intermodal terminal there in Phoenix. It's going to open up February 1. I talked about some of the other products that we have coming out of Houston. We've talked about Mexico. So again, we're bullish and we want to make sure that we're moving that product at the appropriate margin, acceptable margin.
Operator
The next question is from the line of Jason Seidl with TD Cowen.
Jason H. Seidl
Tacking on to Jordan's question there. If we were to look at pricing and exclude sort of intermodal and sort of the natural gas impacts and some of the linked coal contracts, would pricing be accretive to margin in the remainder of the business? And also, as I look in that near-shoring commentary, how should we think about sort of post '24 in near-shoring? Where is that going to show up for you guys? And is there any extra CapEx that might be needed?
Jennifer L. Hamann
Yes, Jason, thanks for the question. We're just not going to get into that final level of detail. But certainly, those are substantial headwinds for us that have been impacting our yields through much of 2023. And the intermodal piece, for sure, is going to linger into 2024.
Kenyatta G. Rocker
Yes. So post 2024, as you look at it, I mentioned a lot of industrial base markets that are going there. I think in terms of auto, I think in terms of metals and minerals, I think in terms of petrochemical market.
Operator
Our next question is from the line of Jeff Kauffman with Vertical Research Partners.
Jeffrey Asher Kauffman
Just a follow-up on the near-shoring for Kenny. A lot of the companies we talk to say really all that's been done at this point is concrete has been poured in the ground, and some of these facilities have been announced. And really, you're not going to see a lot of this potential until kind of '25, '26, '27. Looking at your industrial development plan and kind of what's out there. Do you think -- and I'm going to ask you to guess here. Could this be 100 basis points in magnitude to volume on a basis over 3 to 5 years? Could it be larger than that? How should we think about scoping this longer-term industrial development opportunity for UNP?
Kenyatta G. Rocker
We're certainly not going to guide on your basis point question. Here's what I will say, though, and I've repeated this, and I want to make sure I hit this pretty hard. We've got a service product coming out of Mexico that is unmatched. It's a daily product. It's the fastest product to getting in and out of the heart of Mexico. We also have 6 gateway which gives us optionality, which gives our customers optionality, which gives us an opportunity to hit different parts of Mexico. So yes, we feel very bullish about Mexico and the growth, and we've been working from an industrial development perspective with all the stakeholders, with all the customers to help bring that on.
Vincenzo James Vena
The only thing I would add is this. With the ownership position we have in the FXE, I think that ties us even to be able to optimize what's available to us as near-shoring happens. And as we work collaboratively and make it the view as one railroad operationally will help us on the efficiency of being able to move the traffic. And I think we're able to offer the customers the best product. And we think it gives us a chance to win a bigger majority of any business that's added to those lanes.
Operator
Next question is from the line of Jairam Nathan with Daiwa.
Jairam Nathan
So just on the casualty and I guess, on the other expenses on the last slide, you have flat to down, it looks like casualty will be would be favorable here. So can you talk about some things that could kind of offset that?
Jennifer L. Hamann
Yes, Jairan. On the call, I mentioned the fact that we've had some higher casualty expenses certainly over the last couple of years, and we've been playing some catch up. And so that's really a large part of what's driven increase in those lines are in that line in the other line. And so we don't expect that to continue because it's not indicative of our safety performance. And in fact, you've heard us talk about being very focused on improving that overall performance. It really is some cleanup and some maybe outsized verdicts, too, just with some of what's going on in the courts. And we think we have some of those big things behind us. So looking forward to better footing in 2024.
Jairam Nathan
Okay. And finally, just on the CapEx question. Jim, we talked about FXE. In terms of capital additions would FXE be on the same piece in terms of investing in the business?
Vincenzo James Vena
Yes, they have the same capability. They do a real good job. I'm on the Board and so is Jennifer, and they have a great plan for 2024 and they invest in their railroad, the same as we do, bottom up, build the plant up to see what you need. So I'm very comfortable that they will invest and have the capability to invest what they need to move forward.
Operator
Our final question is from the line of David Vernon with Bernstein.
David Scott Vernon
So a couple of questions for you here. First, the CapEx moderation. Kenny, are you a little bit worried about how that's going to impact you for growth. And then second, given your exposure to the situation down in Mexico. Jim, I'd love to hear your thoughts on what you think the introduction of passenger rail might do down in Mexico, in terms of freight flows coming cross border. Any perspective or insight you can share in terms of the response that FXE, I think, had to give to the Mexican government in the last couple of weeks?
Vincenzo James Vena
So Kenny, let me ask the question. When we plan our capital, do we ever limit the capital so you have a problem for growth?
Kenyatta G. Rocker
Not at all.
Vincenzo James Vena
Perfect. That's the way we look at it. It's that simple. Never. So let me clear up this whole, David, because it's a great question. And you know the answer. So you're asking me, and you've heard it before, and I'm very clear on this. We build our capital plan from the bottom up to look at what we need to reinvest in the railroad and every year is a little bit different. Ties, rail, equipment. We look at growth and what we've identified on where we need to invest. We're opening February 1st, a new intermodal terminal in Phoenix. So we've invested in that. We're a quick turnaround. We don't fool around anymore. That would have been like a 6-month, 1-year discussion.
We turned around and in November, said there's a market there. And February 1, we're opening up a place. So we're able to invest quick, and that's the way I look at it. When we built it up, we came up with $3.4 billion. That is not a hard number. If there's an opportunity for us to invest, to grow this company or so we need to on the replacement and the -- what we do every day to operate the railroad, we'll invest. And we never ever skimp on safety, maintenance of the railroad, the capital cost we need and the growth. So we are there. I have no issue.
And on the passenger service. Listen, I give both the FXE and CP-KC. They're saying the right things, and I agree with them. We -- there's an interaction when you have passenger service that affects you, but there's nothing that you -- that I'm worried about that they can't figure out how to mitigate that and still operate a freight and passenger railroad efficiently. So I'm very comfortable that, that will not have a significant effect or really any effect as they move ahead. I'm sure that they will just move ahead and they'll be operating some passenger service on the railroad. So hopefully, we answered your questions, David.
As soon as we're done with the questions. I wouldn't mind just recapping and if there's a few people on, that's great. And if everybody else has got off, then I'm talking to my team here, and they love to hear the story. So the bottom line is, this is -- we have a great railroad. We have a franchise that allows us with the business mix to go up and down with -- because not one area ever. And you wish 1 year that every segment that we had, industrial premium, okay, and the bulk would all grow at one time, that's not the way the world is. I've never seen it in my career.
We need to be able to have the resiliency and the capability to react on what's happening. We don't know what's going to happen this year, but I'm telling you, fundamentally, we are on the right track to deliver. The team is engaged. We're excited and we're looking forward to winning this year. We have goals to grow revenue with our service, and we also have goals to be the most efficient operationally railroad in the industry. I'm looking forward to 2024. I'm excited. The team is excited, and I'm looking forward to talking to all of you in months and see how the first quarter went and see how we're growing and what we've done at this point. So thank you very much.
Operator
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.
