Q4 2019 Earnings Call

Greetings and welcome to the Union Pacific fourth quarter earnings call.

It's time, all participants will be listen only mode a.

A brief question answer session will follow the fall presentation.

If anyone should to cooperate assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded in the slides for today's presentation are available on Union Pacific's website.

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

Thank you Rob good morning, everybody and welcome to Union Pacific's fourth quarter earnings Conference call with me today in Omaha, or Kenny Rocker Executive Vice President of marketing and sales, Jim that <unk>, Chief operating officer, and Jennifer Sherman, Our Chief Financial Officer.

This morning Union Pacific is reporting 2019 fourth quarter net income of $1.4 billion or $2.02 per share. This compares to 1.6 billion or $2.12 per share in the fourth quarter 2018.

Our quarterly operating ratio came in at $59, 7%, a 1.9 percentage point improvement compared to the fourth quarter of 2018. This represents a fourth quarter record and the third straight quarter with an operating ratio that starts with a 59, that's a remarkable achievement given the volume challenges we experienced in.

2019.

Before we go any further I want to recognize all of our employees for the remarkable service and productivity achievements in 2019, the women and men of Union Pacific are transforming our railroad step change increases and carbon lots of the and tripling compliance while using one third fewer cars and locomotives.

Takes ingenuity initiative and teamwork and the team through the implementation of unified plant 2020 is changing our network in fundamental ways to be safer more reliable and more efficient with that I'll turn it over to getting to provide more details on our results.

Thank you I think good morning for the fourth quarter, our volume was down.

<unk>, primarily due to declines in premium and the energy business group. The decrease in volume, partially offset by 1% improvement an average revenue per car drove bright revenue to be down 10% and the quarter.

Take a closer look out the performance for each of the business groups.

Starting off with <unk> product revenue for the quarter was down 2% on a 2% decrease in volume and flatten an average revenue per car.

Grain carloads were down one point that.

You are domestic shipments were partially offset by modest gains in export.

Volume for Green product was up 2% driven by an increase in ethanol from the mid west to East coast market.

Fertilizer, it's all four carloads were down 13%, primarily due to weakness in export potash.

Moving on to energy revenue was down 25%.

Volume declined 20%, coupled with a 6% decrease an average revenue per car related to negative mix, what the law of long haul sand volumes.

San Carloads were down 53% due to the impact of local thin as well as the float around and market activity.

Coal and Coke volume was down 25% due to a weaker market conditions, resulting from lower natural gas prices and salt export demand. In addition contract changes also impacted volume in the quarter.

However, on a positive no favorable crude oil price rise drove an increase in crude oil shipment, which was the primary driver for the 19% increase in petroleum LPG and renewable Carlo for the quarter.

And we expect to see that positive trend for crude oil to continue and 2020.

Industrial revenue volume an average revenue per car were flat for the quarter.

Well construction of plastic shipments have been strong and all of 2019 and continue to be favorable in the fourth quarter as well.

Construction carloads increased 5%, primarily driven by strong market demand in the south rock shipment.

Classic volume increased 2% due to plant expansion, but tempered due to soft domestic demand.

Fourth product volume decreased 8% driven by softness in the lumber and paper market.

Turning to premium revenue for the quarter was down 14 work that on a 15% decrease in volume while average revenue per car improved by 1%.

Domestic intermodal volume declined 8%, primarily driven by an abundant trucks apply coupled with softer demand during peak season.

International Intermodal volume was down 23, part that during the quarter, reflecting weak market conditions related the trade uncertainty and a challenging year over year fourth quarter comp driven by celebrated shipment in 2018 seeking to avoid tariff.

And finally finished vehicle shipments were down 13% for the quarter, reflecting weak year over year auto sales, coupled with the G.M. labor strike.

Fourth quarter U.S. auto sales were down approximately 1% from 2018.

Strong light truck and ask you vsel did not fully offset declining car demand.

Going forward, we will began to report on our three business group bulk industrial premium.

We're 2020 in our bulk segment, we expect coal to experience continued challenges with volume and the new year and weather conditions law would be a factor for coal demand.

However on a positive note, we anticipate continued strength in advance.

I hope you shipment and associated Beanstock due to an increase in demand.

We also expect stronger beer shipments along with long term penetration growth across multiple segments of our food and refrigerated business.

In addition.

With the recent sign another phase one trade deal with China, We expect to see those AG export rhythm in the latter half of the year.

For industrial.

Local fan supply will continue to further impact bar.

However, we anticipate an increase in plastic shipments driven largely by plant expansion.

An online this year as well as continued shred it can and the construction market in the south.

Additionally, we expect favorable crude oil price right to drive positive results for petroleum product.

And lastly for premium the U.S. light vehicle sale for cap or 2020, and 16.7 million unit down between 2% to 3% from 29 thing.

Consumer preference were asked to be the over sedans will continue to partially offset the decline in car demand.

Domestic intermodal volume at sequentially strengthening however, we'll continue to be impacted by truck competition in the first path of 2020.

Where we sit today, we expect a more balanced supply demand and the truck market by mid 2020, which support intermodal competitiveness during the second half of the year.

We expect international intermodal to return to normal seasonal flow, but faces tough year over year comparison in the first quarter due to the accelerated shipment.

Into aboard tariff increases in early 2019.

As we began 2020 I feel really good about where we're headed our service product has improved significantly and the table with SAP or up the grow and web business, what our customer.

I'm excited to see the benefits of an improved supply chain continue for our customers.

And with that I'll now turn it over to Jim for an update on our operating performance.

Thanks County, as you've already heard this morning, we continue to deliver strong results, which I think speaks volumes for what is possible or operating metrics continue to improve and as a result, we are seeing a better service product for our customers. The team. Once again responded to the challenge of Rightsizing, our cost structure and the pace of declining volumes well.

Also driving significant productivity and I couldn't be more proud for example crew starts were down 20% in the quarter and outpaced the 11% decline and carloads we experience.

This along with our unified planned 2020 actions drove an operating ratio of 59.7, which was outstanding.

While we.

While we will continue to drive productivity it cannot comment the cost the safety has always safety remains our number one priority and Union Pacific.

Turning to slide 11, I'd now like to update you on or six key performance indicators.

We continue to see significant year over year improvement in our metrics. This is a direct result of our relentless focus on improving network efficiency and service reliability as part of unified planned 2020 .

Continued improvement in asset utilization and fewer car classifications led to a 5% improvement in freight car velocity in a 13% improvement in freight car terminal dwell compared to the fourth quarter of 2018.

Speed for the fourth quarter increased 1% to 26.2 miles per hour compared to 2018.

Now turning to slide 12, continuing our trend from the third quarter locomotive productivity improved 14% versus last year's efforts to use the fleet more efficiently enabled us to park units as of December 31st we had around 3100 locomotive store, which excludes 300 units that were either sold or retired.

Driven by a 17% decrease in our.

Force levels workforce productivity increased 4% year over year, despite the volume decrease.

Our trip plant compliance improved nine points year over year, driven by increased freight car velocity and lower dwell demonstrating our team's commitment to delivering a consistent and reliable service product for our customers.

We're pleased with our progress in 2019, and we expect to see continued improvement in our service product going forward.

Slide 13 highlights some of the recent network changes we have made as part of the unified planned 2020, we recently stopped pumping cars that Davidson yard and Fort worth we also reduced switching that our synagis yard in the Houston area.

And shifted the work the nearby Inglewood yard on the third quarter earnings call, we talked about a change in Kansas City. The star pumping cars at NEP yard building on that change, we recently curtailed operations and armor Dale yard and moved the work to a single location and our 18th Street yard for the entire in Kansas City Copeland and.

In addition, we continue to adjust our local operations to align with customer demand, while remaining focused on delivering the quality service product going forward. He will continue to look for ways to reduce car touches leading to additional terminal rationalization opportunities on our network.

Increasing train size remains one of our main areas of focus that utilize our existing network capacity and we're making excellent progress by putting more product on fewer trades, we have increased train length across our system by 16% or over 1100 feet since the fourth quarter at 2018 to approximately 8200 feet in the fourth quarter of 2000.

And then 19 looking forward I expect to see continued improvement in train length through a combination of transportation plan changes and targeted capital investments that it will talk about more on the next slide.

In 2019, we invested approximately $3.2 billion in real world infrastructure pending final approval approval by our board of directors for 2020, we're targeting based capital spending the $2.95 billion with an additional $150 million for strategic siding extensions.

About 80% of our plant 2020 capital investment is replacing spend into his replacement spending to harden our infrastructure replace older assets into improve the safety and resiliency of the network. We will purchase no new locomotives in 2020, although we will continue to modernize our existing fleet.

Good at freight car acquisitions will support both replacements and growth opportunities. We will continue to invest in capacity projects on our network to improve productivity and operational efficiency, including investments to support the consolidation of intermodal operations in Chicago.

We also planned strategic siding extensions to increase train like capacity capability and targeted locations Besides will support our efficient.

Initiatives by increasing the number of long trains we can operate in each direction.

Thus reducing demand for crew starts positive train control spending will focus on interoperability testing and enhancement to our energy management system to reduce fuel consumption.

To wrap up.

We have made a number of changes to our operation in the last year and the results have been tremendous. However, there are still a lot of opportunities ahead of us to further improve safety asset utilization and network efficiency as we move forward look for us to continue pushing the envelope as we transform our operations.

Run in a safe.

Reliable and efficient railroad for all of our stakeholders is job one and our team is committed to making that happen and with that I'll turn it over to Jennifer.

Thanks, and good morning.

They were reporting fourth quarter earnings per share of $2.02 and 1.9 0.5 year over year improvement in our operating ratio to 59.7%.

As an all time that fourth quarter operating ratio for Union Pacific and our third consecutive quarter, starting with a 59.

As shown on slide 17, we received a partial insurance recovery of $40 million associated with the flooding experienced in the first half of 2019 25 of the $40 million reduced fourth quarter operating expense.

Three cents as the quarter as well as helping the operating ratio by half a point.

Lower year over year fuel prices favorably impacted the quarterly operating ratio by zero point to point, although our fuel surcharge flag actually had a one cents negative EPS impact compared to 2018.

The good news is that in the face a significant volume headwinds we drove core margin improvement of 1.2 points in the quarter. These results are approved statement that through our company initiatives to improve productivity you PTC is having great success running a more efficient reliable network looking out our fourth quarter income statement operator.

In revenue totaled $5.2 billion down 9% versus last year on an 11% volume decrease.

Operating expenses decreased 12% to $3.1 billion as we demonstrated our ability to be more than volume variable with our cost structure.

These results net operating income of $2.1 billion, a 5% decrease versus 20 team.

Below the line other income increased 22% driven by reduced environmental and benefit plan costs, partially offset by lower real estate sale gain.

Quarterly income tax expense increased 3% on a higher effective tax rate.

Full year 2020, we expect our annual effective tax rate to be around 24%.

Although net income of $1.4 billion was down 10% versus last year, our fourth quarter earnings per share only decreased 5% to $2.02 per share as our continued share repurchase activity offset roughly half of the income impact.

Slide 19 provides a breakdown of our fourth quarter freight revenue, which totaled $4.9 billion at 10% decrease versus 2018, driven primarily by 11% volume decline. Additionally, fuel surcharge revenue had a 1% negative impact to revenue down $125 million to 300.

And $63 million.

Although not able to offset the impact of volumes and feel the combination of our ongoing pricing actions and business Nick had a two and a half point positive impact on our quarterly freight revenue.

Consistent with our guidance throughout 2019 total dollars generated from our pricing actions for the year well exceeded our rail inflation cost.

Ken You mentioned, we will begin reporting under our new business team structure at our first quarter call.

In mid February we will provide a mapping of our carload volumes to the new business group and make available pro forma volume and revenue for prior years at the same time. We also will start providing weekly revenue ton miles across key market segment beyond the three new business team.

Slide 20, and 21 for a summary of our fourth quarter operating expenses.

Starting with compensation and benefits expense this category decreased 18% to $1 billion.

Driven by a 17% workforce reduction or about 7100 fts versus 2018.

Productivity initiatives, coupled with lower volumes resulted in a 20% decrease in our train and engine workforce, well management engineering and mechanical work forces together decreased 16%.

<unk> expense fell 20% to $512 million as a result of lower diesel fuel prices and fewer gallons consumed through more efficient operation.

And through a combination of reduced purchase transportation or mechanical repair costs and less contract services and materials are purchased services and materials expense declined 9% to $531 million.

Turning to slide 21, depreciation expense of $559 million increased 1% compared to 20 team.

Equipment, another round of $230 million decreased 14%, driven primarily by lower equipment lease expense and less volume related costs.

Other expense increased 5% to $231 million as a result of increased casualty costs and higher state and local taxes, partially offset by the insurance recovery I previously mentioned.

For full year 2020, we expect year over year depreciation expense increased about 2% and other expense to be wrap.

Up roughly 5% looking out productivity net productivity savings driven by our GE 55, and their initiative and unified plan 2020 totaled approximately $215 million in the fourth quarter. These results bring our full year 2019, net productivity to $590 million.

Which significantly exceeded our guidance of at least 500 million dollar and marks an all time high annual productivity savings for Union Pacific. This really is a remarkable accomplishment for the team considering the backdrop, we achieved this again unprecedented flooding and a weakening and environment.

Stepping back to look at full year 2019, we reported earnings per share of $8 in 38 cents a share a 6% increase versus 2018, despite facing volume and revenue declines at six and 5% respectively.

Importantly, as a result, or the strong productivity gains I just discussed we held operating income flat year over year at $8.6 billion. As you know over the course of 2019, we had a number of different items that impacted our operating ratio and earnings but when you said all that aside the important measure for us is improvement in our core performance.

Which is nearly two points better versus last year as we met our guidance of a sub 61% operating ratio for 2019.

And we can't talk about a full year operating ratio, 60.6% without acknowledging the hard work and dedication of our workforce. These results could not have been achieved without them so hats off to the team.

I'd now to cash in returns 2019 was another year of both strong cash generation and cash returns to our shareholders as free cash flow after capital investments totaled nearly 5.2 billion, resulting in a cash flow conversion rate equal to 87% of our net income.

The on continuing our strong program as capital investment, we rewarded shareholders with to 10% dividend increases in the first and third quarters, bringing our dividend payout ratios to just over 44% as we distributed $2.6 billion.

We also repurchased 35 million shares of our common stock at an all in costs and $5.8 billion, reducing our full year average share balanced by 6% versus 2018.

In combination the dividends and share repurchases added up to a total of $8.4 billion of cash return to our shareholders.

In addition to the cash generating power of our business. We funded part of this cash return to the strength of <unk> balance sheet.

We ended 2019 with an all in adjusted debt balance of $27.4 billion up $2.3 billion from year end 2018, our solid investment grade credit rating and a very attractive rate market allowed us to issue $4 billion of new debt during 2019, partially offset by the repayment of debt maturity.

Yes.

With that we finished the year at an adjusted debt to EBITDA ratio of 2.5 times as we are continuing to increase our leverage position to the previously guided target of 2.7 times, while maintaining minimum credit ratings of triple B, plus and be double a one.

Finally, our return on invested capital came in at 15% basically flat with 2018, as we stay disciplined with our capital spend in a challenging volume environment.

Let me close out today with our view of the year ahead.

As we looked at 2020, we expect to see volumes inflect the positive side of the ledger on a full year basis growing up or center. So overall this view takes into account expected declines in coal and sand volumes as well as the top year over year intermodal comparisons that Ken you mentioned.

Against this volume expectation, we will continue to pursue a pricing strategy, where the dollar gained exceed our 2020 rail inflation costs.

This expectation is fully supported by the great service product, we're providing our customers and is integral to achieving our 2020 and long term return objectives.

With regard to inflation, we expect overall inflation in 2020 to be around 2% with labor inflation closer to 2.5%. We also expect our workforce to be down around 8% or so on a full year basis.

Coming off of a record productivity performance in 2019, we expect to yield at least another $500 million that productivity savings in 2020, as Jim and team continue to identify and pursue efficiency savings.

Together, we believe these activities should result in another strong step down in our operating ratio.

And while we don't anticipate a fuel tailwind like we experienced in 2019, we're confident in our ability to achieve a sub 60 operating ratio. In fact, we believe we should close out 2020 with a full year number that looks more like a 59.

As it relates to our capital allocation, our high level guidance for capital spending capital structure and use of free cash flow remains unchanged. The first call on cash is our capital investment, which we still expect to be less than 15% of revenue over the long term and $3.1 billion for 2020.

After capital expenditures, we will continue returning cash to shareholders in the form of dividends, maintaining our targeted payout ratio of 40% to 45% of earnings.

And we should complete our previously announced three year plan to repurchase approximately 20 million.

Shares by the end of 2020.

Our plan is now 70% complete leaving about $6 billion to repurchase this year.

In summary, we expect positive full year volume solid core pricing and significant productivity gains will all contribute to another year of strong generate cash generation and margin improvement. We're taking another step forward with our operating ratio in 2020 on the path to our longer term target of 55% operating ratio.

With that I'll turn it back like.

Thank you Jennifer as discussed today, we leverage strong productivity deliver solid fourth quarter and full year financial results.

FID planned 2020 continues to serve as a catalyst for improved productivity in a better service product.

Looking ahead to 2020, we are committed to operating a safe railroad and providing highly consistent reliable and efficient service for our customers, while focusing on opportunities to grow the business and improve margins are strong operating performance in 2019 gives us confidence that as we attract business to our.

Network will leverage it very efficiently generating strong free cash flow and improved financial results, there's going to position us to continue investing in our network and returning excess cash to our shareholders. So with that let's open up the line for your questions.

Thank you.

Well, having conducting a question answer session. If you want to ask a question. Please press star one on your telephone keypad and the confirmation told indicate your line and the question Q.

You mean press star too late to move your question from the Q.

Participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.

Doosan number of analysts joining us on the call today, we have their own S. One primary question and one follow up question to accommodate as many participants as possible.

Thank you and our first question comes from the line of Scott Group with Wolfe Research.

Hey, Thanks morning, guys.

So I wanted to start on the the 8% head count reduction for the year. Just one Anderson is that is an average for the full year or is that it beginning to end of your number just because it's an average it doesn't seem to really imply any additional headcount reductions from here. So I just wonder is that the right way to think about where we are from Uh huh.

From standpoint.

Hi, Scott This is Jennifer Ah, yes that 8% is a full year average and it does imply some further reductions from here I think if you just rolled forward, where we're at into 2020 it'd be around 6% or so so we are looking for further gains and obviously volumes will depend on that we're going to continue to to try to improve our efficiency.

Overall, but that's our view today.

Okay.

Okay, and then on the volume outlook.

So slightly positive.

Obviously, we're starting in a de pole not guess is below two right. Maybe can you just share sort of.

What you're assuming for coal volumes this year and what or maybe the biggest tailwinds that you've seen in terms of the things out there Kenny and then just as as we think about the or guidance and the volume outlook volume guidance together, what's the sensitivity to operating ratio. If you think the volumes.

Ultimately stay negative anyway, you can take the volume question I'll I'll circle back on the or question. So.

First of all.

Each of our customers have a unique decision tree, but there you then when they're trying to figure out whether or not they're going to dispatch coal or they're going to go to natural gas I can tell you that our commercial an operating team have been really dog and sitting down when our customers and looking at ways.

Improve efficiencies in the for partnering whether that's train length, well that cycle times, well, the things like forecasts and by day.

We're doing everything we can make sure that supply chain.

When you step back and look broadly at the volume outlook.

You look at the Petrochem and industry and and the plastic that we will expect to continue to grow their from other things along with that that are not as large and volume like the feedstocks that will help us. All we also expect continued growth in terms of though the Petro a thought of things though.

Okay, All business and then also.

The whether it's favorable rock shipments in the south are there still a lot of upside there in a lot of growth in the south.

Now those are just the market and you also think about the second half of the year, there's still some positive that I'm expecting will happen on the tree side and that will not impact positively on the act by doing the call. It the September time range, but also our international.

In intermodal thoughtful Gogo thing that from a market perspective, we expect to happen.

Having said all those things are commercial team has a very aggressive mindset and say regardless of whatever the market happens we need to go out there and when because we have a better service products, but we're going out there we're creating intermodal products. We've got a this is all public information. We are we have a product or international.

Intermodal business, though with northern Iowa Railroad and Bauer, Victoria Err on the bulk five were going out and secure more business based on the new service product that we have for our green products moving way.

So you heard about the markets and this also good you hear about the month of our commercial team.

And Scott regarding your question on the volume to top side and the impact on all our.

The way, we've wired up the plan right now and what we've we've shared with everybody. This morning.

We do expect to see some volume growth now you know take that exactly as intended which is.

It can be it can be very small, but we do expect it to be a plus nine not a minus nine and as you point out the first part of the year is a challenge that's still got headwinds against.

Tough comps on international intermodal.

And of course, a loose truck market and a natural gas pricing against coal, but when you take it all into account you take some of the impacts that we expect to see from the recent trade deals and tightening of the truck market. We anticipate the second half looks better all put together that wires up for us to something like a 59 up.

Rating ratio and and that's what we're pursuing right now of course, there's a lot of moving parts and it's early in the years. So.

We'll just we'll just continue to manage as we see the markets evolve.

Thanks for the time Gus.

The next question is from the line of Ravi Shankar with Morgan Stanley . Please proceed with your question.

Thanks morning, gentlemen.

If I can just one last question just what level off truck market tightening or you really envisioning and it just Moreover returned to normal market or is it something like a two Andy 18 like almost in the like scenario given the kind of five supply side catalysts, we haven't plus.

Yes.

So we're we're seeing that some tightening occur now and what I call is we do feel like whereas before.

Again at some of the thing a play out with Trey we are expecting by mid 2020 odd to talk more for me to put a hand on whether or not it's going to get back to normal levels that hard to say, but we do and talking all of our customers and seeing some of the bankruptcy that are taking place in the market we expect for it to.

Certainly a better truck.

Environment for us to compete in finally, just as we think about the the truck market I just want to Appathon.

On our you know premium our intermodal network you know our service product has improved better.

Customers are RCM left well for their commodities, we've talked about the reduce complexity that Chicago and so all those things really create a more cost structure that gets off a lot of confidence that we can compete in the marketplace.

Got it and just a follow up another year or kind of comfortably into the PSR process and you're like a sub 60 or at this point 2000 2020.

What's your line of sight, the GE 55, and kind of when you guys get there and kind of what level of incremental heavy lifting do you need to get there I mean is that mostly topline driven walk from this point on or do you think there are still big cost components that would get you another four or 500 basis points for.

The Ravi this is Jennifer you know you've heard us talk about the long term target and I think you've also heard to say and remember that when we first put that out there we were not in the phases of adopting inside planned 2020, and so now that we're in that were even more confident in our ability to get there, but we've also talked about it in terms of kind of the three.

Others in terms of volume price and productivity and certainly what helped US to this point has been the price and productivity, we've not had as much on the volume side and so with the great service product a that the operating teams together, we feel very confident about our ability to start bringing that that volume on and we will leverage that very efficiently.

But we still have obviously, great productivity opportunities ahead as well you know we said that we're looking to get about another 500 million here in 2020, that's awesome Fiveninety a in 2019. So those are big numbers and we feel very good about that so well continue to press on all fronts as we move forward.

Great. Thank you.

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

Thanks, Operator, Hi, Jennifer just I wanted to follow up very quickly if I could on the head count question, because I actually didnt follow the map on that.

If you just take the average levels in the fourth quarter and extrapolate that it would translate that that itself would translate to 8% decline in average headcount. So I could be calculating something wrong, but if you can just offer a little bit more clarification. There just given how important that is to the overall productivity of the company.

So thank you yeah, I mean, the the head count reductions are very important for US overall, we'll continue to push that you know the math is the you know assuming some volume improvement and that we want to leverage that very effectively.

So we're going to continue to push that forward and you know again, we're saying, 8% plus minus is what we're looking for in a full year basis.

Okay.

Just as a follow up again, I guess those questions for Jennifer.

And that's really how do we interpret you know just just conceptually the at least 500 million net productivity and the way I just always thought about it is that it's kind of like the uplift in profits that you expect in a in a neutral revenue environment and just want to ask is that a fair way to think about it and also does the guidance that you are.

Giving for 59 the war assume some drag from mix because if you get the 500 million plus and you overlay some revenue growth on it I would have just assume the or improvement you know would've been better than a 59 a war. So you can just help us think about conceptually the 500 relative and and.

Layering on the revenue growth on top of that.

Sure. So we think about productivity and talk to you about it that does exclude volume so.

When we talk about being able to turnaround and moved to the positive side of the ledger from a volume standpoint, that's where you start talking about incremental margin, which we think could look very favorable for US you know we think we've got a great plan put together for 2020 until very good about the guidance that were given you know 59, all our making another very solid.

Forward in 2020, and we're looking to do that with not much much volume and off of a 6% down even this year. So.

I think it's a good good move for US next solid step down and we'll continue to suppress the envelope, but we want to do it safely reliably continue providing a really good service product and keep moving forward, but we're not trying to meet or our progress either we're going to try to go as fast as we can.

Jim I know you Love. This question what inning are you in the PSR process [laughter] well baseball finish so let's talk a football soon as of right in the middle of the real excited by what yard line are you on [laughter] well I started on the 20 yard line 25 yard line and I don't think of hit the middle of.

The field yet.

Okay. That's enough for me. Thank you very much. Thank you welcome.

[laughter].

Next question is from the line of Brian Ossenbeck with JP Morgan. Please proceed with your questions.

Hey, good morning, Thanks for taking my question.

And maybe more specific one on.

Efficiency for you how do you think about fuel as you look at the network here yet longer trains a younger locomotive fleet Center horsepower management, but you haven't really seen improvements in fuel that some of the other.

Peers have done.

Another event CSX so.

What level of confidence you think you haven't that improving.

How big of a needle mover.

On that in the next couple of years.

I think a fuel is a is an area where we can get better we're investing a this year with more locomotives it'll make that the even easier for us to be able to get some fuel conservation. So we did a lot of work in 2019, and we see the same sort of trend line going every railroads different in their topography, but.

Though we feel that Theres still money left on the table that we can save on and be more fuel efficient.

Bigger trains more cars on more unless trains as the probably the biggest way for us to get the more fuel conservation and I'd be guessing on the final number we're shooting for an improvement from last year and we'll continue to have that.

But the pace improvement.

Excuse me start to.

Accelerate keryx I think you've been at one or 2%.

Couple of quarters between links are up as you mentioned that 16% year over year. So is this the Viking indicator or something.

Needs to have seen where things fall into place before you can get some material benefit of it.

I wouldn't change the trend line of what we what we've done in 2019 as an improvement in the trend line in that you know low one 1.5% sort of a gain that we should be able to.

The more efficient them fuel so at this point, that's where I see put numbers.

Hi, Thanks.

I guess you went on.

<unk> exports any can you just clarify remain on on the trade view.

In terms of that type of benefit you expect them X. I mean, how you think about the export corn, which is down about half when you look at the current marketing here here in the U.S. Thanks.

Yeah. So.

There's a but the larger piece of the pie.

Is really on affordability site, and that's really more of a problem or call. It more of a fourth quarter type look for for Oh, Brazil comes and during the first part of the here, but then there are some other parts of the grain that we could see a low uptick and as you move.

Mentioned corn would be one of them Milo could be one of them, we would be one of them I think it's too soon the tail.

Timing of it we've been talking to our customer than are lot of traders are talking and not expect more clarity as we move throughout the year over the next few months, but what you need the here is that.

Getting the phase one trade deal, we see enough of a positive.

Yeah. Brian . This is this is lance so.

The phase one trade deal essentially takes China is a headwind and sets it up to the potential Tailwinds you know very high level. They are committing to oh, we're doubling their purchases of U.S. goods with a concentration in AG and some other areas that if it comes true or.

Even a large portion or even a half of it comes true. It's a it's a really nice tailwind for us going into the next couple of three years. So there's.

It just basically turns into a a headwind into a tailwind.

Hi, Thanks I appreciate it.

The next question comes from Atlanta, Allison Landry with Credit Suisse. Please proceed with your questions.

Thanks, Good morning, but could you just maybe speak to the rate of all our improvement throughout the year and should we expect it to accelerate meaningfully wants volumes do inflect positive since you're not currently getting all the the full benefits of PSR I guess in other words shut second half margins be a lot better than first half.

So since as you know our margins tend to be follow some of the seasonality. We tend to have some of our weakest Oh, I guess highest oh ours in first quarter improved through the year third quarter tends to be our best margins and then then they go down a bit some of that has to do with weather some.

But that has to do with the volumes that were moving so we don't see anything at this point that will fundamentally change that pattern, we're not going to guide to Gordon quarterly numbers, but that's how you can think of it.

Okay.

Alright, that's helpful. And then just another question on that on the productivity I guess first does that include the lapping us whether an inefficiency costs that you saw in the first part a 2019 and then Jennifer I think you said that it does not include Incrementals on volume is that right because I I think.

I do the math and back out productivity it seems to imply low teens incrementals on sort of what I call organic growth and normally do much higher than that so if you got to help us and dr. that thank you.

So you know to the last part of the question about productivity.

I think we said that that excludes volumes and so if you. If you put volume on top of that that helps US you know drive much better incrementals as we move move through the year. So I think that what was the first part of your question again there.

Does that 500 include lapping.

The weather and inefficiency costs from the first half of 29 team.

Yes, yes.

That is it started yet started from scratch right right. Okay.

Thank you.

Our next question is from the line of can extra with Bank of America. Please proceed with your question.

Hey, good morning, and Jim Nice job on the continued improvement our team I guess, but maybe just thinking I'm still a little confused by some of the answer is up front if volumes are up and you're getting pricing core pricing gains. It seems like you're targeting a flat employee absolute number given the 8% decline, which would make I guess if your line.

And for volumes to increase maybe that's the flow through.

Then given the productivity savings that the math would seem to suggest a larger operating ratio improvement is there may be a larger mix negative impact and that we're looking at than than that and maybe can you can dig into the call impact I don't know, maybe it's more export loss of export tonnage or or contract losses or anything on the domestic side.

They can this is lance and I'll start by just making sure we lay a crystal clear expectation of ourselves in 2020 and that is we expect as part of the 500 million and productivity or to have both carry over productivity, which is some of the head.

Count question that you're asking about as well as well as incremental productivity. If our volume is flat this year.

We're going to have incremental employee productivity, if our volume grows.

We will not add back resources at the same pace that we will that we will grow now we're expecting a growth to be pretty.

Minor I think is probably the right word and it's a largely second half. So oh, we're building kind of a a cautious plan.

That that gives us flexibility depending on what actually occurs as the year progresses. So I just want to be crystal clear about that Theres. A you know we're sharing with you what we're comfortable sharing at this point.

But the expectation is continued productivity some carryover more realized through action and we've got plenty of actions up against that.

Right and just still enough that I mean, you know our headcount of.

8% plus minus really is somewhat dependent on what happens as volumes, but then again, we feel confident our ability to drive the productivity and I think you've seen us do that this year as as the volumes has fallen off we have been very aggressive in terms of the actions that we've taken and so again it till at this point, we feel good about the plan.

But there you know we're sitting here on January 23rd there's a lot of the year left in front of us and we'll take the actions that we need to take and but we're bullish about the opportunities, particularly as we look to see some volume returned to us in the back half of 2020.

The only thing I'll add I think you were asking about export coal and we've said this publicly before if a smaller percentage of our coal coal book is less than 10%, but yeah. It has been impacted our export.

Oh has been impacted we'll wait to see what happens with both the weather and natural gas natural gas flavor, a much larger role and how our customers are going to the thought on what they want to do a with coal.

[noise] can if I could just get my follow up a few then in the international intermodal was down 23% significantly more than the West coast market markets noted is that share shift lots of contracts is there anything you want to highlight I guess as we look to to balance that out.

Yeah, we actually had tougher comps I mean, if you think if you go back to 2018, a fourth quarter.

We had a really strong quarter.

And so now what you're you're seeing is just the comp.

And we sit lap that here in the first quarter over this year I mean first for this year.

Great. Thanks.

The next question comes from line of Tom one of its with the U.S. Please proceed with your question.

Yeah. Good morning, one or two isn't just a question for Jim.

When I think about the you've had a tremendous case of cost takeout or network improvement how would you think about the duration of the big cost saves the network improvement is this a three year program that you'll still have a lot left to do in 2021.

Or is this something where you really capture you get from the 25 yard line to the a into the end zone in.

In 2020, so just wondered if you could offer some thoughts on that and then also perhaps what they're really big buckets are that are left or network productivity.

Hey, Tom Thanks for the question.

So if we think about that I've been doing this for wait too long, so you'll never ever job.

[noise] always.

Look for what you can do that make the place better so we made.

The team delivered a great 2019, but give everybody a union Pacific a lot of credit, though with what we were able to deliver but that's behind us. So moving forward. We have projects that are short term. So we have projects across the entire company that will help us to be able to deliver more productivity specifically.

We have also some projects that will take a while we announced the in over $100 million being spent on site.

Hi, These we don't expect to get them in the early part of the year they'll be later and into next year. So that productivity gains are this year, we see.

With that deliver on the 500 million that we've got a too and that means across the board and though we see some more coming in the following years I've never ever in my career.

But going out somewhere and not found a way to make it a little bit better and improve so I don't see the ending this year, but theres a big bucket. This year and then it will get a little tougher as time goes on.

[noise] are there particular areas that stand out if it's a train length with some of the further siding investments, it's a big lever or a lot left on a pro to I guess, a terminal productivity and some of the changes with the hump yards or what would stand out as being that the greatest start remaining opportunities.

Trading like there's real important absolutely train length is a is so when do we have to deliver on we think that we can make the terminals even more efficient. So we turn the cars quicker helps the whole fleet. We've got plans to put the intermodal terminals together in Chicago from six down to three that helps listen the in the efficiency.

The way, we handle or locomotives I think we're not going to get rid of another.

2000 locomotives, we only running out with just over 3000 locomotives now, but we think theres gains there there's gains on how we a repair cars, there's a repair or there's money on gains on how we move or people around the network the balance into the network. There's a long list I could go through and spend an hour taking you through it but I'm very excited with what we.

On the table for this year.

Okay, Great. So just one last short follow up I think a number of the questions on the call a focused on the elements of your guidance at the end of the day. It does feel like the guidance is somewhat conservative in terms of what you can do on the cost side and putting together some of the pieces do you think it's fair for us to take away from a you know the framework.

That there's an element of conservatism in a in the guide.

Well I'll start and say Tom that it's very early typically are.

Our confident in the guidance, we give it the first part of the years and we we build our plan appropriately and then what you've seen from US over years is we react as the year is progressing as things change and universally we know how to get productivity and we and weve, demonstrating we know how to generate.

An excellent service product.

One of the things we've got to demonstrate this year is growing with that service product you know part of Kenny and the commercial team, they're going to have to learn what the what the what the a network is capable of a and how to sell those products and get customers signed up for.

And I was just a tad onto Atlanta said there is you know a 59 LR for us would be a new record level for US you know, it's an area that we have not gotten too and so we're going to continue to push the envelope.

And so as far as we can but you know we felt good about the performance that we had this year, but you know we got there are lot differently than the way. We thought we did when you think about the fact that we came into the you're thinking they were going to have a couple of points the volume growth and ended up down 6%. We certainly didn't anticipate the weather events that we encountered so Atlanta.

This plant, we're gonna be very diligent about working hard to pull all the levers that we can and and be aggressive to to make improvement.

<unk>.

Okay. Thanks for the time it.

The next question, it's coming from the line of Jordan Alger with Goldman Sachs, Let's see if your question.

Hi, good morning.

Just two questions just back on the AG real quickly can you talk a little bit about how much are the export act businesses to your total Act franchise and then maybe just to give some sense what was the adverse impact from exports in 2019.

I tell you that a if you look at our grain business is.

It's a significant activity anywhere from a third to call. It a 40% what was the second part of your question.

Really just you know how much was that business, let's say down given the tariff issues.

In 2019.

I'd I'd call it easily or over over half our call these easily overhang.

Yeah, those impacts a Jordan that's on you know basically China getting out of purchasing U.S., soybeans and going down to Brazil.

Ddgs, which have been on again off again were off for a fair period of time and it impact that even you know a little bit of corn, a little bit a week. So the impact on export grain and grain products was was pretty broad.

By half one other thing up and they only thing I'll ask door and is that you know really we will see it also open up the imports on the international intermodal side, I mean that has a pretty.

By football improvement of volume growth there too so just.

Keep in mind too.

So by half, though you sort I mean half of the total decline in agriculture or I'm, just didn't know what happened that.

Yes, Sir.

There's a lot upside here for us going forward on the on the AG side, and we're gonna do everything we do to take advantage of it.

Okay and then just just one other question just on the I'm thinking about the volumes in 2020, how much of the call at 1% volume outlook give or take is tied to intermodal recovery or whether it be domestic or international just trying to get a sense for how big a part of the volumes.

Story is related to your views on intermodal.

Yeah. Jordan. This is Lance I don't think we put a finer point on exactly what volumes going to look like next year.

But let's walk you through what needs to happen to have volume growth occur.

[noise] intermodal, we need international intermodal to get back to normal where you as consumers feel healthy and they're consuming and it's coming in off West coast ports, that's important to us domestic intermodal we need a both consumers to feel good we need a truck market to two tighten up a bit.

So the competitive mode.

Isn't quite as price aggressive and loose as they are right now we need a the trade deal to have a real impact on agricultural exports and imports.

We need manufacturers in the industrial economy in the U.S. to gain a little bit more confidence a and get their feedback under them in terms of capital investment and risk taking a and then we continue a continuation of what's going on in the Petrochem industry from the standpoint of.

Oh, good feedstocks to make us a the cost low cost competitor for plastics manufacturing and finding markets for that plastic. So there's a lot of moving parts. There. It's not one thing and of course, those moving parts will change over over the course there.

Great. Thank you very much yep.

Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your questions.

Hey, Thanks, good morning.

But a lot of questions about sort of the guidance on I guess, maybe just wanted to think about it. This way when you think about 2020 and and your expectations.

If you just see sort of upside to that where do you think that most likely sort of places that would come from or is it more volume stuff that maybe it's a little bit less in your control or maybe is it a little bit more productivity or things that Jim is doing well that works went a little bit more and your control like in a sense, we do see upside to the guidance sort of where you think it's more likely to be kind of.

Yeah, Chris Great question and thank you. So the way I think about it is Ah if I could just invent the year that I would love to haven't 2020, it would have a stronger upside it would be a a great mix if I could magically make it happen I'd like to see Frac sand come back stronger.

I'd like to see natural gas to go to 350 or four bucks and take some of the pressure off coal.

Not really like to you know Kenny Here's this every day, but I'd really like to see an experience other commercial team just relentlessly selling the new service product and they're getting a lot of traction quickly.

On the on unconvincing, our customers that it's got staying power and what it means to their supply chains and being built deeply into their supply chains that would that would tee up a pretty sweet here I'm from the productivity side of the world I have all the confidence in the world that ER or operating team Jim Tom.

They're going after it as hard and strong as they can and and it would be a blessing to have more top line to work with.

Okay. Okay. That's helpful. Appreciate the color.

And then if I can just asking question I guess on on price and mix and appreciate that the core pricing numbers are not going to be reported anymore, but when you think about yeah. Some of the moving parts I guess sequentially from Threeq to Fourq, you just to help us a little bit in terms of what the pricing environment, but actually look like today and I. Appreciate your comments about what you think about the triple.

Market Ken's comments about how that might change as the year goes on but from Threeq to Fourq. You can you give us a little bit of color Directionally, how things were kind of moving from a price mix perspective.

Okay.

You've got formidable competitors on on the truck side.

I mentioned before we do see that.

Feels like it's bottoming out.

We're expecting that to improve.

You got to remember were coming from a third quarter to four quarter, where we had improved service product.

You know better dwell a stronger for point compliant and so we really don't forget that into a part of our value proposition. So.

Regardless of the competitive forces out there we want to make sure that we are pricing the product to the value that we're providing.

Okay and anything on mix is like mix from from one quarter to the next.

Jennifer I think it was slightly positive year over year. When you think about in particular, we had a coal would certainly down but the intermodal piece was down significantly as well so a little bit positive.

Okay. Thank you very much Christian.

Welcome Chris.

The next question is from Atlanta, Walter Spracklin RBC capital markets. Please proceed with your question.

Yeah, Thanks, very much so glioma to volume.

I think there's been a quite a few swing factors and significant swing factors in your individual line items I mean coal was.

It was down but intermodal minus 23% and when you give your guidance here we see.

A bunch of question marks in areas, where you know the it hurt there has been quite a bit of volatility. Obviously you haven't put question marks in your model. When you when you chemo your plus 1% volume so I'm just.

Trying to get a little bit of sense, just directionally on what you're assuming in say your coal AG in intermodal.

Given how big those are impacting your overall volume.

On the eastern rails for example, I mean, they're guiding minus 15%.

Revenue here in coal or you know, obviously, you'll be a little less than that but are you know is.

Is a high single digit decline in your coal business a reasonable.

Bogey for Four Q2 020.

Intermodal like you said I mean, it was down 23% is going to have a tough comp in the first quarter, but again is it are you projecting mid to high single digit recovery. It just to some way to quantify so we can gauge when we go back to investors and say look Union Pacific has plus 1% volume growth and it's predicated on a few things like.

This which gives us confidence or lack of golf is just right at this point with the question marks next to those line items. It gives us a little bit of uncertainty as to what you're what your plus 1% is employed.

This is Jennifer I'm going to is going to reiterate our volume guidance and then like can you talk about the markets a little bit. So we said that we expect on a full year basis to get to the positive side of the ledger, We Didnt say plus 1%. We said you know just get to the positive side. The we are going to have you know.

That is that doesn't mean, we're gonna have to offset the declines in coal Frac sand and then you know a tough start to the here with the year over year comparisons relative to intermodal. So we haven't size any of those things in terms of what the level of declines are and we're not going to but that's all that kind of in that mosaic that we put together the to give me.

Guidance that we are looking to inflect positive on a full year basis, Kenny Yeah, we certainly feel the challenges with a low natural gas.

Today, again, where we're three weeks into.

So the mom three weeks until the year.

I think it's premature to really look out ahead on what's going to happen there.

Setting aside the AG and their intermodal business.

<unk> in terms of a timing perspective.

Reputation is that the Trump capacity should tighten up.

By mid 2020, and the expectation is that from a tray perspective things should get better fourth in the second half of the year.

Okay understood and coming back on on the or are they understand the 55 long term target, but you know investors are pushing back a lot no one on long term targets as something too.

Put a lot of stock in but you know clearly Jim you've done a tremendous amount of work here. This is the data look look very very positive and amid a volume environment that.

As a challenging is an understatement and so if we were to see a normalization is it fair to say that within the next two years, we could see.

Yeah again, a normalization in 2020 could we see within a two year timeframe, you're hitting those critical long term loan term lower targets yeah Walter.

The the question of when 55 happens has a fair amount of moving parts, which is why at this point we haven't.

Put a stake in the ground and say we think it's this date certain we continue to work to to try to understand that ourselves and and build a model and scenarios that we believe in that that get the path there, but you know stepping back and just thinking broadly about it things that help would be.

The.

Favorable mix more volume growth I have a lot of confidence all the confidence the world in our ability to generate productivity and a great service product regardless of what the the environment looks like.

And then are making sure we have a pricing environment right. We constantly talk about those three levers to pull.

And there's a lot of moving parts on those three levers thing volume price and productivity certainly productivity is gonna get tougher and tougher as we get closer and closer to that 55, and we're making a hell of a step we made a hell of a step in 2019, and we're signing up for another good strong step up.

2020, and I think over time, it'll it'll become a little more more more clear to US do you think you're halfway through the year you get to get some more visibility to put a stake in in that timeframe.

Halfway through the year, when you get a little bit more.

Data points to work with.

Walter were closer to that time than we were this time last year and you and the rest of our investors and analysts will be will be the first to know when we're ready to put a stake in the ground I. Appreciate it okay. Thank you very much.

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

Thank you operator morning, everybody, but Jim just wanted to check in on sort of how you're viewing operational performance versus the volumes that are coming through on the network, especially as we look into the back half of the year. When some of your businesses might inflect, specifically domestic intermodal given your views truck market sort of your.

Year over year comps.

Should we look at the network being slightly more challenged in two age 20.

Though I don't see any challenge of that's the best thing that could happen is a we've given kenny and the whole marketing team a service product that allows them to sell.

Be able to go alter and whatever the market can give who we should be able to win that we want to win with our customers. So as they come on and we see a volume increase that's the best thing that could happen.

The fact, the an increase in business allows us to use the same trains with more railcars on it allows us to move things. There's some of course always a if it's up a unit train business that comes on you have to put new trains on but we do everything we can run them on manifest in intermodal trains. So I'd be very excited the is the market gave us.

Strong growth the would put it on the same cranes in the incremental savings and in our cost structure for the amount of revenue we bring in so that'd be a the purpose scenario for us.

Mark on lock on wood for that then.

My follow up question my follow up questions going before were up for Kenny Kenny How do you view the shift we've seen in some global supply chains with the trade War you know we've seen.

So a lot come back to North American General Mexico, and then we've seen some go to southeast Asia, how should we think about that impacting volumes from here on out.

Well, you know ideally that would be shortly of some of the.

Product to originate in southeast Asia.

As you know a lot of that is going to the.

E coat.

So what a stronger trade agreement, we'd expect more to come back to the West coast.

I can tell you that we've.

Really good engagement across the supply chain, starting with the international intermodal FFO to make a west coast Port.

In the you a more competitive and we'll continue to do that.

I appreciate the color in the time is always everyone.

Thank you.

Next question comes from Atlanta, David Vernon with Bernstein. Please proceed with your question Hey, guys. Thanks for taking their time I do have a a longer term question on cost and then I wanted to have a follow up as well if you think about the business being down about some 20% in revenue ton miles last five years or so.

When you guys think about nominal cost inflation. This two to two and half percent range is it right to think that the effective cost them a unit level for the business is a little bit higher as the base of business shrinks with the decline of coal or is that not that way it right way to think about the fixed cost leverage in the business.

So David you're talking about on a revenue ton mile basis, how should we think about our cost structure. I mean, you know one of our challenges that we put to the team every year is that we want to offset inflation, but when you have some of your hierarchy and I think this is where you're getting to your heavier tonnage.

Volumes falling away from you that does make it harder for for the team to be able to keep up with that but I think that's the great how're of the P. franchise is the productivity that we've been able to drive.

You know in the work that's underway quite frankly to to get better at that and to be even even much more diligent with that you know and actually wait can be a help to us as we try to build those longer trains, it's going to improve our fuel efficiency I.

Well I guess the thing I was kept more more from an effective cost inflation perspective, right does the remaining traffic on the network have a little bit more burden to pay for every year or is that not the right way to think about it.

Well you know clearly we are a significant fixed cost business and what we've demonstrated.

In the long term variable cost there are different pieces that have different lives in terms of being able to adjust up or down. So in an environment that you just mapped out which is the one we've lived the last five years.

Your volumes going down and it's going down in a dramatic fashion.

It is it is hard to keep up that's I think one of the reasons that though we're raising our employee base and the team. So much on this call is that they've done a hell of a job in a pretty difficult volume environment eking out productivity, even in you know the fourth quarter being a great example.

You got volume's down double digit percent.

And yet we generated a what a couple of hundred million dollars and productivity in the quarter.

Okay.

And then and then maybe just as a as a follow up Jennifer if you look at your core your core or your mix price on the revenue side and there have been up two and a half it looks like there's a pretty big mix tailwind because your declines were in your lower ARPU traffic.

Does that imply like a small <unk> contribution from core price in the fourth quarter is that not the right way to read that flood.

No I think we Gotta similar question earlier, and you know mix was slightly positive in the quarter, but not not a significant driver of that that number.

Alright, thanks, guys.

<unk>.

The next question's coming from Atlanta, Justin long with Stephens. Please proceed with your questions.

Thanks, and good morning.

So on Capex you gave the guidance for this year, but I wanted to get your updated thoughts on capex longer term if were in this period, where we start transitioning to a volume growth environment over the next several years is there now enough capacity in the system to where you can hold capex.

Relatively steady on an absolute basis, if we look at kind of 2021 and maybe just over the next several years.

Yeah. So I'll start out and then just might want to chime in as well, but you know the great power that we're seeing through our unified plan 2020 implementation is through the idling of hump yards closing terminals. Another facilities, we are creating latent capacity in our network that we would hope to be able to.

To deploy again as the volumes come back so to your point you know we do see you know kind of a structural downshift a that we're able to enjoy for some period of relative to our our capital expenditures and when you think about the number of locomotives that we have idled the freight cars. They have part you know that's capacity the.

We're anxious to deploy again and to be able to use in the marketplace I think you're thinking about it right. Jim you might want to have my initial comments well Jennifer I think you hit the high spots you know what we're doing as this is we're able to run a run the capacity. If you look at the parent capacity in the railroad, we're going to spend some money targeted to make sure that we can operate the trains more afib.

Currently in places, where we think we can lengthen the the size of the train.

But on the most of the network. This network as bill so that we can handle more traffic I do not see.

See big investments in locomotives of course, you know with a lots of them part I don't see big investment in railcars were turned them faster, but these are gonna be some targeted investments that we need for growth and for customer and just cars, they're getting old absolutely keep the place current sustainable over the long term. So I don't see anything on the railroad where we need.

The worry about spending capital to make it more efficient or worried about some business coming on that's the best thing that could happen and we'll continue to spend capital with the the project. So we've announced the going down in the building a change in the intermodal franchise in Houston in Chicago, and Ah stay tuned we'll move on.

So more we are going to spend capital on those to make ourselves more efficient and have a better service product. So it's a great places to be we've done lots capacity, let's bring the business on.

Thanks, that's helpful and as a follow up I may have missed your answer to this on Nicole outlook for 2020, I know you expected to be down but is there just kind of a rough sense you can give us on the order of magnitude and I think last year around the beginning of the year you you lost a call contract is there anyway.

Hey to frame up how much of a headwind that wise in 2019 and exactly when you start to lap that.

Kenny.

Yeah, again, I mentioned, if I believe that a little bit too early to go in and say, what's going to happen out. There. Three weeks then yes, we did lap the a contract or we will lap that contract here this year.

On the coal thought.

Yes, so being clear that contract loss was left at the end of last year correct. So this we are now fresh ground.

And is there any way that decides that out.

In terms of carloads, and what that headwind look like in 2019.

No we're not going to size that up a book, what we fully expect out of coal this year as it so starting up pretty challenging if natural gas stays at the $2 $2.25 level is going to be a tough year.

Okay makes sense I'll leave it at that thanks for the time.

Your next question comes from the line a friend doesn't glinski with Barclays. Please proceed with your question.

Hey, good morning, everyone and apologies I missed the first part of this call, but I guess wanted to follow up on that last line of questioning.

Jim specifically you know with your prior employer, we saw a lot of growth in the past decade on the network, whereas Union Pacific and I know there were some specific headwinds in the call book and what have you, but I guess, but really its questions freelance or Jim what is specifically changing on the marketing or the sales front that you think you could reengage here.

Customer base.

To actually drive some tonnage and revenue growth through the network, yes, So I'll start and let's break growth into two pieces. One is what's what are the markets like what.

What's the ground and the environment in which you're competing.

And for US as we look into this year, we think broadly speaking the markets start or getting a little better right significant tailwinds like in trade like a soft truck market like the pull ahead to try to avoid tariffs and international modal those things.

Start abating, and lapping and so that should create a better environment for us to compete and second part of that question is a controlling our own destiny and from that perspective, our our commercial team. Historically has had an excellent relationship with their customer base, it's indicative of.

How weve implemented unified plan 2020 right.

At the very beginning we said our goal isn't to break a lot of glass and ER and alienate our customer base. So that we have to come back around.

And and go on a charm offensive or our intent was we're going to take our customers along for the ride and keep them well informed and help them see how the changes that were asking them to go through as well as we're taking ourselves through create a much better and much more reliable service product that's that has.

Occurred that's in the process of occurring and now our commercial teams, taking that and turning it into new business like the business Kenny mentioned up in northeast, Iowa, where we've got a intermodal service product off the west coast that two years ago would've never happened and now it's generating or.

Very attractive volumes. The same is true in the agricultural markets. The same is gonna be true across our book.

The only thing I'll add I could write off a few things I wanted just walk you through it.

In the service product has improved.

That's on tighter standards. So we are.

Got a tougher great now.

For the customer that containers are being used more efficiently.

Painter dwell has gone now we've also in circuit technology into our network when our intermodal terminal reservation system, when they get clear visibility when they're going to get.

I'm, saying or when they can expected, we reduce complexity out there and in that work, Jim talked about Chicago and and alluded to a.

Houston out there, we've talked about Santa Teresa and the path and the fact that on an intermodal.

Network, we expect to do a lot of a block swap there so really critically.

And transformative here on the on the product.

Thank you.

Okay Brennan.

The next question is from Atlanta, Allison Poliniak with Wells Fargo.

Your question.

Hi, good morning.

Let's go to the capital at Capex. Our conversation you guys are having before just in terms. If you think about it it sounds like there's some more of a targeted capex approach with the projects that you're implementing.

Ryan has made over the next few years that project. You know is this a sustainable level apiece capital I mean should we expect a downward trend that number over time, just any but let me step into that Allison. So.

We've always been targeted in our capital and by that I mean.

The very first thing we layer in is what's it takes to keep the doors open that's a replacement capital and for US. This year on the track side, It's a billion eight five ish and a there's a little bit more when it when you look over into the equipment side and then from that point, we've got to take care.

Mandates like PTC, a and then we look for opportunity to invest where either there is targeted capital for growth are targeted capital for a service product enhancement, which ultimately as growth or productivity and so and so everything that's in the capital plan is built like that it gets our first call on our cash and.

We are very comfortable that the level. We're spending right now is an appropriate level, a sub 15% of our revenue and I don't really see that changing as we look forward.

Great and then just going back to the operating you highlighted a number of operating leverage that you can still well here I'm not that any of them are easy, but which when you start to see becoming more challenging and and 2020 just based on the improvements you've made that are.

Well I'm you know, what it's always difficult to make big change, but the I don't see any of them. We've got a line of sight, what we need to do I think Oh, we were going to deliver on those.

All those items that I listed off earlier on in the call and I don't see anything impacting us where we are not going to be able to deliver it. So we see line of sight. We know what we have to do we get the right people the that can make sure we deliberate and I'm looking forward to just and we're doing it in a nice smart measured way so that we don't impact.

Our service so I don't see anything really olden a sub.

Great. Thank you.

Welcome.

Our next question is from the line the irony sinuous Tyler. Please proceed with your question.

Hi, Thanks for taking my questions jet UBS. So I just I just noticed that there was a lot of talk about safety NYT opinion Commons and.

If I look at other expenses do it up about 5% Denise talked about and increase casualty caution nics expecting or the pipe as an increase this year.

Yes, I have you wish you kind of expecting a similar casualty number or should we see some benefits from the focus on safety.

Hi, This is Jennifer no. We are absolutely focused on safety as you said and we are not expecting a similar level of casually cost. We absolutely believe will be much better in 2020, what that 5% up guidance included higher state and local taxes, primarily which as we as we become more profitable those.

Taxes go up.

So you add on on safety, because I think it's really important though we talk about it for a minute I. Appreciate the question. So keep foundation for a railroad and the industry in what we what we do everyday a safety, we're not happy with the with the where we are overall our goal is to be the most the best most efficient railroad in North America.

And that includes in safety. So we've got lots of positive is that we see on one side of it but on the other side of how we handle and a measure safety, we need to get better and we're working hard we've seen a trend line and get that get the better at the end of the year and I would expect us to continue that this year our goal is to be.

We are the best Railroad in North America, and that includes the best and safety. So that's what we're working towards.

And just as a follow up.

With the U_s_m_c approaching do you see any.

Has that.

Do you see any changes in near term and how does that impact went to two intuitive.

Yes, so with the passenger U_s_m_c a it does take a little bit of a headwind and turn it into a tailwind it was mostly about uncertainty and risk, taking and where investment was occurring so why would anticipate that'll have a kind of a long term.

Slow a positive impact on our overall volumes.

Okay. Thank you that's all.

Your next question is from the line or Sherlund ran foreigner TD Securities. Please proceed with your question.

Thanks, very much good morning, I'm, just a couple of quick ones for me.

On the locomotives that you've got in storage and historically Union Pacific has maintained surge fleets. So just curious what are your thoughts on what size you might eat in terms of the surge fleet and what do you plan to start returning or selling the balance of those locomotives.

Well, a two things Jennifer can jump in anytime I think if we could find the buyer for some of the locomotives that we though the excess we were able to dispose of some we would do that and as far as a surge fleet cherilyn. It all comes down to we've got to a number of locomotives and normal status. So we can just go turned to switch field them up.

And start running them so.

We needed the put them back in service would be pretty easy task and we're talking in the hundreds of Ah that number. So that's the search it's sitting are ready to go.

And just to highlight Cherilyn. So we did in the quarter.

Reduce our total locomotive fleet by about 300, we sold a couple of hundred we did find a buyer and we scrapped another hundred or so so you know we are continuing to evaluate those things and allpoint and looking at what's the best financial decision first to make a as a company, but we look forward to bringing those locomotives.

It or in storage and putting them back into service because we do think.

That's the most cost efficient way to handle feature about volume growth is too.

Leverage that existing fleet.

Okay and.

The improvement in train size that you referenced should we assume that that most of that still resides along the sunset core door and that the siding extensions that are penciled into that Capex budget are directed to that region.

I think a we're going to seize the extension of the sunset with the Capex that we're putting it on the studies that will help but Oh, we also see.

To be able to deliver bigger trends with the volume decrease the team did a great job. So we see a volume will help us if we have a slight uptick in volume, but on top of that I see benefit across the whole network. We're just starting.

Down here down on the train length in every one of the quarter, So theres, a little bit and all of them a major piece will be the through the capital investment does show.

Great. That's all for me thank you very much.

Our next question comes from Atlanta, Bascome majors with Susquehanna. Please proceed with your questions.

Yeah. Thanks for taking my question here on the growth question, you guys talked about it improve service product and.

Probably adoption of your answers to the culinary today.

That seems to be resonating with your message and it certainly is showing up.

The trickling in compliance going from call. It low sixtys commits revenues the span of a couple of quarters here.

Or your customers starting to feel that and when does the network get to sort of a stable steady we would stay where you really unleash the sales team and are confident that you can deliver industry plush growth on a go forward basis. Thanks.

Yeah, just the bathroom. Thank you just to give a history lesson here last year. During the first half we had what I call both weather and a lot of changes to them that work and we were talking proactively what our customers about what would happen.

Bob <unk> third quarter or call it and all the second half a year our service product that the operating team gave us I mean, it really picked up.

And customers really got confidence there we have a number of Ah internal.

Measurement surveys that we do that we look at really everyday and we are seeing that our customers are communicating through.

Through that and talking with them that they see it ourselves being they're sitting down with them laying out the benefit fell in the ER quantifying the value proposition. If there was really setting up a good 2024.

Thank you and lastly, unified 2020 plan I think you launch that in late 2018.

Jim has been initiate a year.

And just took over in the CFO role and you're going to exhaust your buyback. This year should we expect good detail deep dive investor day sometime in the second half just anything you do to to help us on the timeline on when you may be ready to give us a bigger update thank you.

That's a great question Bascome, a we are talking about when's. The next good opportunity for us for us to in a concentrated way tell the story of what to expect and does so stay tune you know we will when the when that stories fully baked and needs to be shared a we will share.

And it wouldn't surprise me if its later this year.

Thank you.

Thank you.

Includes a question answer session I'll now turn the call back over to Mr. Fritz for closing comments.

Alright, Thank you Rob and thank you all for your questions and for being with US on our call. This morning, we look forward to talk with you again in April as we discuss our first quarter 2020 results. Thanks.

Thank you ladies and gentlemen, thank you for your participation. This concludes todays conference you may now disconnect. Your lines at this time have a wonderful day.