Q1 2020 Earnings Call

Greetings and welcome to Union Pacific first quarter earnings call.

At this time, all participants are in listen only mode.

A brief question answer session will follow the formal presentation.

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

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

Thank you and good morning, everybody and welcome to Union Pacific's first quarter earnings Conference call.

With me today in Omaha, practicing safe, social distancing or Jim's, Anna Chief operating Officer, Kenny Rocker Executive Vice President of marketing and sales and Jennifer Heyman, our Chief Financial Officer.

Before we discuss or first quarter results I want to acknowledge the dedication and hard work bar employees. During this call that pandemic the women and men of Union Pacific continue to connect American businesses and communities to each other and to the world whether its stocking a home pantry supplying a central goods, the health care providers or move.

In critical that building blocks for U.S. industries, they're getting the job done and they're not missing a beat their spirit shows up in so many ways I see it in our health and medical team looking out for the safety of our employees I see it in our operating team moving the goods that make a difference in people's lives and I see it in our leaders helping us work.

Together staying on point and position for the future their dedication as inspirational and lays the foundation for better days ahead.

Our rail network has never run better and we continue to provide a safer more reliable and more efficient service product to our customers I am so very proud of the entire Union Pacific team.

Moving onto our first quarter results. This morning Union Pacific's reporting 2021st quarter net income of $1.5 billion or $2.15. A share. This compares to 1.4 billion or $1.93 per share in the first quarter of 2019.

Our quarterly operating ratio came in at 59%, a 4.6 percentage point improvement compared to the first quarter of 2019, and an all time best quarterly or in addition to improving efficiency. The railroad. We also made improvements in our safety results, which is always our top priority.

For the quarter, our employee safety results improved 11% versus 2019, we also made progress in fuel consumption rate during the quarter.

Reduces our fuel expense, while also reducing our carbon footprint and the carbon footprint of our customers, which is a step in our commitment to address global warming.

As I turn it over the rest the team you're going to hear how our first quarter results have further strengthened union Pacific to navigate the uncertainties that lie ahead, we'll start with Jim and an operations update.

Thanks, Scott a lots and good morning, everyone. As was mentioned railroad is healthy.

Operating smoothly as our customers have seen minimal rail service impact we're taking every precaution to protect our employees, we are social distance, even using technology whenever possible to replace face to face interaction.

Over the past few weeks that taking the opportunity to visit several field locations practicing good social distances to talk with our employees I could not be more proud of how they remain dedicated this safely and reliably operating the railway without disruption.

They recognize a critical role they play in delivering goods needed throughout our country. Their dedication is to be commended overall the team had a very strong quarter really the results speak for themselves you see the impact of all the changes we've made a union Pacific to become more efficient and provide a better service product to our customers. These changes drove an operating.

The ratio of 59%, which was outstanding and there are still many more opportunities ahead of us to further improve safety asset utilization and network efficiency.

Now turning to slide four I'd like to update you on our key performance metrics for the first time, we're seeing improvement across all of our metrics and as a result, we're seeing a better service product for our customers. This is a direct result of our focus on improving network efficiency and service reliability as part of our operating model.

Compared to the first quarter 2019, right car velocity improved 8% driven by continued improvement in asset utilization and fewer car classifications freight car terminal dwell improved 11% largely due to improved terminal processes transportation plan changes to eliminate car touches and a decrease in freight car inventory.

Levels.

Building up our progress in 2019, we continue to implement changes in order to run a more efficient network that requires fewer locomotives, which has led to an 18% improvement in locomotive productivity this quarter versus last year.

As demonstrated by crew starts being down 13% in the quarter, which outpaced the 7% decline and Carlos we continue to take steps to deliver positive workforce productivity.

Her plant compliance is where our customers feel the benefit of our transformed operating model the improvement in intermodal speaks for itself would manifest in autos, we're holding ourselves to a higher standard as we tightened schedules and we'll see improvements as we move forward.

We're off to a great start this year and we expect to see continued improvement in our service product going forward. Starting next week, we will provide some additional operating statistics in particular freight car velocity, which you've heard me say a number of times as my favorite a one that I looked at every morning on our investors website on a weekly basis to provide more.

Our insight into how our operations are running.

Let's turn to slide five.

The highlights some of our recent network changes as a part of our continued implementation of position schedule railroading, we consolidated mechanical shops in the L.A. basin, and Houston areas and the L.A. Basin. We've consolidated from please reshapes the one while in Houston, we've gone from to shop, the operating just one as well increasing train size remain.

One of our main areas of focus and we're making excellent progress at our recently completed sat there to raise a block swap facility, we're consolidating intermodal traffic from our eastern wraps destined to port terminals and the Los Angeles Long Beach area. This allows us to operate longer more efficient trends across the sunset wrote and provide a better or more.

Consistent service bought outdoor customers.

We also completed 815000 foot side and as a part of our 2020 capital plan to extend sidings and targeted locations decided to support our efficiency initiatives by increasing the number of long things within operating needs correction, thus reducing demand for crew starts by putting more product on fewer trends, we have increased train length across our system.

By 19% or over 1300 feet since the fourth quarter 2018 to approximately 8400 feet in the first quarter 2020.

The capital, we are investing to improve productivity as well as to maintain the safe efficient network is critical to the long term health of our railroad given the current business levels and uncertain economic environment, We're planning to come back our 2020 spend by 150 to 200 million doors.

To wrap up we're committed to protecting our employees health and safety, while providing an uninterrupted critical service to support the nation supply chain.

Well, we're early in the second quarter, so far we've been able to hold steady and maintain train length gains as volumes have dropped we continue to evaluate our transportation plan, including yard and local schedules in order to meet customer demands, while balancing our resources and assets to meet current volumes.

The latter half the March as volumes declined more steeply we stored additional locomotives and railcars. However, those local motors remain in at the ready status and both assets are available to add back quickly as volumes return.

We have also portal that additional employees. However, we are increasing or exemplary work and training status sports and be prepared should volumes come back quickly or in the event of an outbreak within a group of employees. We have made great progress to this point. However, we will continue to transform our operations in order of further improved safety asset utilization.

And network efficiency with that I'll turn it over to Kennedy to provide an update on our business environment Kenny.

Thank you Jim and good morning for the first quarter, our volume was down 7%, primarily due to decline in our premium and bulk business group. The decrease in volume was partially offset by 5% improvement in average revenue per car and drove freight revenue to be down 3% in the quarter.

Let's take a closer look at how the first quarter played out for each of our business groups.

Starting with bulk revenue for the quarter was down 5% almost 7% decrease in volume, partially offset by 2% improvement in average revenue per car.

Hello, and renewable carloads were down.

19% as a result of softer market conditions from historically low natural gas prices and a mild winter.

Looking ahead, we expect continued challenges in coal and natural gas futures remain low and customer stockpile at high level.

Weather conditions will also continued to be a factor.

Volume for grain and grain products was up 4%, primarily driven by strong export ethanol volumes.

Was partially offset by reduced shipments of export wheat.

Fertilizer and software carloads were up 7% predominantly due to strong domestic fertilizer shipments.

Finally, food and beverage was up 2% and units as we thought strengthen beer shipments become slightly offset by reduced refrigerator and dry foods, which were impacted by challenging truck environment.

Industrial revenue was up 3% with a 3% increase in volume and a flat average revenue per car due to mix.

Energy and specialized increased 10%, primarily driven by strength in petroleum, it's favorable Canadian spreads facilitate a stronger crude oil shipment to the golf earlier in the quarter.

However, what the reduction of oil prices in the past week, we expect crude oil shipments to be impacted in the near term.

Forest product offering was flat.

Reduce paper shipments were offset by increased lumber shipments due to strong housing start and a mild winter during the quarter.

Industrial chemicals, and plastics shipments grew by 4% due to the strength and domestic and export plastic shipments along with strong demand of detergents and chemicals.

Metals and minerals volume decreased by 3% reduce asked shipments from the impact of local fan and drilling declines were partially offset by continued strength rock shipments in the south coupled with increased metal shipments.

We expect to see continued challenges in San with oil prices remain in that lower level.

Turning to premium.

Revenue for the quarter was down 6% on a 12% decrease in volume while average revenue per car improved by 6%.

Automotive shipments were strong for the most of the first quarter until the pandemic shutdown Oems in North America in the last few weeks of March resulting in a 1% decline in volume year over year.

Domestic intermodal volume declined 5% driven by soft market demand and surplus truck capacity, coupled with weakness related to the pandemic later in the quarter.

International Intermodal volume was down 24% during the quarter.

Weakness early in the quarter was related to challenging comparisons with 2019, driven by accelerator shipments related to the tariff policy implementation.

Further weakness was driven by pandemic related supply chain disruption that began in China and have slowly impacted much of Asia.

Looking ahead, there remains quite a bit of uncertainty surrounding the global pandemic that we're facing.

With the freefall and economic indicators over the past few weeks and uncertainty about when we will see the covance pandemic curves start to flatten now an accurate assessment of 2020, it's hard to pinpoint at this time.

As you can see our volume in the second quarter has started off slowly with the volume down 22%, so far driven by auto production shutdowns and retail closure as you have to man its constrained by the pandemic related social different thing and quarantine.

Many of the auto manufacturing plant are scheduled to be shut down until at least early may.

Already our auto shipments have been down around 80% in the second quarter. So far likewise, the recent projection and Mexico indicate that some manufacturing sector like autos.

We'll be shut down for similar time periods as well.

However, the care Act that was recently signed offer some upside to open the economy for bid and improve unemployment for American.

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Also encouraging to see that much of Asia as restarting production along with China's recent purchases of U.S. Green.

More importantly, I like to make this point clear, we're not letting the uncertainty up the economy hold us back we're staying focused on what we can control.

The good news is that the lower cost structure combined with improved service product that we've achieved with unify plant 2020 is a competitive advantage for us.

And with our recognizing it and award enough new bit.

As Lance and Jim mentioned before the railroad has never run better.

Want to thank our employees as they are taking the necessary precautions to stay safe and healthy. So we can keep the operations running for our customers.

We will continue to stake in close contact with our customers and we are ready when the supply chain recover.

The man improve we expect our stronger service product will place within a great position to win incremental opportunity.

Yeah, I'll turn it over to Jennifer who wants to talk about our financial performance.

Thanks, Kenny and good morning.

As you heard from Lance earlier Union Pacific is reporting first quarter earnings per share of $2 in 15 cents, an all time best quarterly operating ratio of 59% our fourth consecutive quarter, starting with a five.

Comparing our first quarter results to 2019, there are a few puts and takes last year, we incurred higher weather related expenses and you may also recall that we received the payroll tax refund that benefited both our operating ratio and earnings per share.

As shown on slide 13. These two items had an offsetting impact in our 2020 result.

Deal was an unexpected tailwind in the quarter and likely will be for much of 2020 as the year over year fuel production fuel price reduction favorably impacted our quarterly operating ratio by 80 basis points and added four cents earnings per share.

It inside those items core margin improvement for the quarter was a remarkable 3.8 point and added 18 cents earnings per share as we continue to demonstrate the power of our operating model as well as the ability to flex our cost structure in the face of volume challenges.

Most of the dedication and resolve the entire Union Pacific team. We took another significant step forward to our goal of operating the most efficient reliable and consistent railroad in North America.

Looking now at our first quarter income statement 2020, operating revenue totaled $5.2 billion down 3% versus last year on a 7% year over year volume decrease.

Demonstrating our ability to be more than volume variable operating expense decreased 10% to $3.1 billion. These results net operating income of $2.1 billion, a 9% increase versus 2019.

Below the line other income decreased compared to 2019 as the payroll tax refund I referenced on the prior slide included $27 million of interest income.

Interest expense increased 13% did increase that level well income tax expense also with higher up 11% due to higher pretax income in the quarter.

Net income of $1.5 billion was up 6% versus last year, which when combined with our share repurchase activity led to an 11% increase in earnings per share to $2.15.

Looking at revenue for the first quarter Slide 15 provides a breakdown of our freight revenue, which totaled $4.9 billion down 2.5% versus last year.

Well not able to offset the impact the 7% lower volumes the combination of favorable business mix and our pricing actions have nearly a five point positive impact on our quarterly freight revenue.

The mix in the quarter was driven by lower intermodal shipments, partially offset by lower sand volume.

In addition, fuel surcharge revenue declined $47 million in the quarter to $351 million and impacted freight revenue by 25 basis point.

Drivers of the decline were lower volume and fuel prices.

Now, let's move to slide 16, which provides a summary of our first quarter operating expenses.

Through our unified plan 2020, Mg 55 in zero initiatives, we drove improvement across all cost categories.

Transition and benefits expense decreased 12% year over year, primarily as a result of our workforce and productivity initiatives.

Total first quarter workforce declined 15% or about 6200 full time equivalents versus last year sequentially, our workforce was down 2%.

Breaking the year over year reductions down a little more we saw a 19% decrease in our training engine workforce, well management engineering and mechanical Workforces together decreased 13%.

This expense category also benefited from last year over year weather related costs offset by the payroll tax refund I referenced earlier.

Fuel expense decreased 18% as a result of lower diesel fuel prices and fewer gallons consumed with a more efficient operation our consumption rate for the quarter improved 5% versus last year to a first quarter best level.

Decreased costs associated with maintaining a smaller active locomotive fleet as well as lower weather related costs were key drivers of the 10% reduction in purchase services and materials expense.

In addition, as we use both our locomotive and car fleets more efficiently, we've been able to lower lease expense, which largely contributed to the 12% decline in equipment another rents.

With regard to other expense, which was down 2% in the quarter, we recorded an adjustment to our bad debt reserve to recognize uncertainty related to certain customer receivables due to the potential impact of cobot 19 that expense increase was offset by running a safer railroad, which lowered destroyed equipment costs as well as freight loss and damaging Stan.

Finally for full year 2020, we now expect year over year depreciation expense to be flat.

Looking out productivity in our cost structure net productivity totaled approximately $220 million in the first quarter.

As Jim detailed earlier with our improved key performance indicators.

Successful implementation and enhancement of our operating plan is increasing efficiency, while at the same time, providing superior service product for our customers.

As we discussed in the past, we view productivity as a volume neutral measure in other words were reporting only that part of our cost savings attributable attributable to the actions we are taking.

But as we enter this recessionary period sparked by covered 19 I'd like to make a couple of comments about volume variability in particular as it relates to prior recession.

First and most importantly union Pacific is running at efficiency levels, we've never experienced before the company.

For example, we were more than volume variable on a fuel adjusted basis in the first quarter 2020, as a result of the strong productivity focus embedded and unified planned 2020.

We've also taken more than 1500 basis points off of our operating ratio since the great financial crisis in 2008 2009.

Further strengthens our ability to manage through today's challenges and emerge stronger on the other side.

Moving to cash generation as we faced these fluid and uncertain times, we recognize the need to maintain ample liquidity with the strength of our balance sheet and our strong cash generation I can confidently say that we're well positioned for the challenges we're facing.

Cash from operations in the first quarter increased 10% versus 2000 $19 billion to $2.2 billion.

Free cash flow after dividend after capital investments totaled over $1.3 billion, resulting in a 91% cash conversion rate.

Also returned $3.6 billion to shareholders during the first quarter through the continued payment of an industry, leading dividend and the repurchase of 14 million shares of our common stock.

Share repurchases were funded in part from our January debt issuance.

In Pacific strong investment grade credit rating and a very attractive interest rate market allowed us to issue $3 billion of new debt.

A portion of that issuance funded the 2 billion dollar accelerated share repurchase program, we entered into in February and the rest is for 2020 debt maturities.

We finished the quarter at an adjusted debt to EBITDA ratio of 2.7 times inline with our previously stated goal of maintaining strong investment grade credit ratings, no lower than triple B, plus and be double a one.

Although coven 19 was not contemplated when we originally set our leverage targets back in 2018, the decision to manage our balance sheet in line with a strong investment grade credit rating was clearly the right. One we maintain an active dialogue with our rating agencies and at this time, they're comfortable with our current leverage position.

We finished the first quarter with $1.1 billion of cash on hand.

However, in an abundance of caution we issued $750 million of 30 year notes in early April to further increase liquidity as of yesterday, our cash balances around $2 billion and we have additional levers available if needed. The current bond market is open to us as evidenced by our April issuance. We also have 2 billion.

In dollars of credit available under our Undrawn credit revolver and up to an additional $400 million available under our receivable securitization facility, which is 50% drawn at this time.

As we sit here today, we do not believe it will be necessary to tap those additional sources, but we view them as a prudent backstop to have at the ready.

Turning now to our 2020 outlook.

We are formally withdraw and much of our previous guidance in light of the current economic uncertainties.

In particular, we are no longer providing guidance for the full year 2020 volume headcount operating ratio or share repurchases.

Today, we have repurchased roughly $17 billion of the targeted 20 billion dollar three year program that is set to conclude at the end of this year.

We will continue to monitor business conditions and adjust this activity as we see prudent.

But with share repurchases currently pause completion of the full $20 billion seems less likely today.

As you heard from Kenny a moment ago, our second quarter car loadings are currently down 22% and our current view is that volumes for the full quarter could be down around 25% or so.

With volume declines of that magnitude, we're taking actions across the board to rightsize, our resources and manage expenses.

Even with aggressive actions. However, it is unlikely we can improve our second quarter operating ratio on a year over year basis with that level of volume loss.

Changing for 2020 is our longstanding guidance around pricing, we still expect the total dollars generated from our pricing actions to exceed rail inflation costs.

With regard to productivity, we are widening our range of expectations for full year 2020 to $400 million to $500 million, we clearly got off to a very strong start in the first quarter and our commitment to productivity is unwavering. However, we also recognize the lot that the loss of volume leverage is a challenge.

In terms of cash generation and cash allocation, we've modeled a number of different down volume scenarios in each we plan to maintain the dividend, but with the capital modifications, Jim mentioned Anna suspension of share repurchases.

The outcome of that exercise is a strong confidence in our ability to generate significant free cash flow after dividends in some pretty dire economic condition.

This is a testament to the earnings power of our franchise as demonstrated by our first quarter results.

Although frustrated by current conditions the potential is clearly there longer term our guidance of capital expenditures of less than 15% of revenue a dividend payout ratio of 40% to 45% of earnings and ultimately that 55% operating ratio remain intact as.

As you have heard from the entire leadership team today, we are unwavering there our commitment to improving safety efficiency in service as we all firmly believe in the strong long term prospects of our company so with that I'll turn it back plant.

Thank you Jennifer.

Our first priority has been and will always be safety. We made good progress on safety in the first quarter and I expect continued improvement from a service and efficiency perspective, I am so thankful that we went through the tough process of implementing the unified plan 2020 over the last 18 months that work has put us in a position of.

Great strength to deal with the future when the time arrives where cobot 19 is largely behind US Union Pacific will be well positioned for long term growth and excellent returns with that let's open up the line for your questions.

Thank you.

We'll now be conducting a question and answer session if you'd like to ask your question. Please press star one on your telephone keypad and the confirmation tell them indicate your line is in the question Q.

Start to few late you move your question from the Q.

From a distance unique speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Due to the number of analysts joining us on the call today, well be limiting everyone. Do 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 Allison Landry with credit Suisse.

Thanks, Ken Good morning, Jim.

As you think about the persistent reduction in coal tonnage and GTM intensity about network do you see opportunities for or are you, considering making any structural changes that might reduce maintenance capital requirements.

You know probably any thoughts you can share about how you're thinking about the call that looked like board.

Listen the coal network or was built to handle we more trends were handling so it starts off on a separate piece of the railroad so.

With ands or buts that we're going to we're looking at that we've got plans.

Be able to take advantage in use some of that the both in maintenance and some of the capital that would put on the ground in there on some of the other network little more difficult because it just mixes up with the rest of the trends we run but absolutely Allison we've got a plan though.

In some segments of the railroad sees a downturn in traffic that we fix it mid challenge for Kenny as this I wanted to fill it up so I think he's got a grid service product and we get outdoor and fill up those pieces that are Ah.

Running with less or less traffic right now.

Okay and then.

Could you could you give us a sense for home how much train starts are down in April and then in terms of just Bob headcount declined Keith. Thank you can continue to outpace volume declines and the next quarter to and if there's any way to sort of parse out what percentage do you think would be structural take out versus.

How much but look like they come back with a recovering tomorrow. Thank you.

Okay. So so far I'll tell you. The team has done a spectacular job. We actually are train size is a growing and April not come down. So we are full bore everyone's on looking at how we make this place with what the traffic that's offered to us and make the most efficient so it's actually gone up in size train size.

In April you'll see that when though as we report next door, you'll see us the from how we talk with different the conferences as far as people.

I think we've done a great job of staying ahead of the game there would come a point, where it's a difficult to stay ahead of the drop in business, but so far even up to this point right now with the traffic that we see an April we've been able to stay ahead and be productive in though we are a take dropping more than the adjustment in business, but I'll tell you.

No.

Certain point when it's impossible to do so we're not there yet.

Okay excellent. Thank you I.

Excellent questions.

Our next question comes from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.

Thanks, operator.

Hi, everybody. Thanks for taking the question Jennifer I do believe that's your comment around the award for the second quarter.

Did you say it was going to be down year over year Weve comparing sequentially I wasn't exactly I think I understood exactly what you're saying.

Thanks Summit no my comment was on a year over year basis, and saying that with volume declines that we're expecting of this magnitude so down 25% or so it's unlikely that we would be able to improve our operating ratio in the quarter. It was a quarter only comment on a year over year right. Okay got it okay that makes sense. Thanks for the clarification and then Jim.

I just want to come back the Allison's question really quickly obviously, the 25% declining volume you know, it's a bit unique I guess in the quarter because.

The decline in revenues, so significant but also kind of short lived which which introduces a whole host of other dynamics in terms of how you manage.

Labor and other costs in the business it might need to ramp back up. So you can just talk to us how you manage I mean, basically PSR is important but and thing God you guys did it in the context of what's happening currently, but but but is the second quarter. We're just going to reflect more of a normal kind of 50, 60%.

Incremental margin quarter, because a lot of those cost that you would normally have to structurally kind of move away has to remain because you have to prepare for the.

Hopefully V shaped recovery on the other side just help us think about how you manage through this dynamic that's a little bit unique well well. So there was a multi person to answer question I think that Jennifer wants to jump in but let me just start with.

What I see you can see the were high double digit the drop in the number of employees already versus where the business dropped and so it gives us a chance to be able to.

Be there and that's why the comment the way I answered Allison's question I'm very comfortable that at this place I don't know, what's going to happen to the business I'm open for a big movie coming back, but who knows so we are prepared and preparing to make sure that we do not set ourselves up but at the business comes back in.

Quicker.

And some people think that we're prepared for it. So that's one of the way we Parker locomotives. We've got lots locomotives I don't even want to talk about how many we've got park right now so many.

Worry more about the productivity number that's out there that's what's realty is how many so we'd love locomotives ready to go that business comes back comes back slower fast we're ready for.

And people.

We have been smart about how we manage.

All the labor that we have so we are purposely at this point because of the substantial drop over a short period of time that we have put people in places. So that we can we call on the cost us a little bit less money.

But there are available real quick the return of the railroad. So we don't impact services keyboards, you can't you can't be run an efficient railroad and I've always said that I know some people Miss this whole thing up PSR and service so.

Can't have a good operating railroad that will operate safely. If you don't have customers that want to come on it and that's what we're building I think were where there can you should be able to go out and sell it but at the end of the day. That's what we're all about Jennifer Yeah. I mean, so we're obviously not going to give guidance on decremental margins again, you look at our first quarter performance very strong.

We were more than 100% volume variable.

But I think when you're thinking about how we look at the second quarter, I mean, obviously, 25% down volumes and as you. Your earlier question or was asking around the operating ratio, it's tough to keep up in terms of your cost cutting when you have volumes come out that fast we are going to be very aggressive and do everything we can but we're not going to give specific guidance relative to head count.

For second quarter or relative to the margins, but just know we're going to pull every lever available to us.

Okay.

Okay I'll keep it to two guys. Thank you very much appreciate it.

Thank you and me.

Your next question is from the line of Brian Ossenbeck with JP Morgan. Please proceed with your question.

Hey, good morning, Thanks for taking my question.

One for for Kenny can you just go through the impacts of energy across the portfolio. Specifically look you mentioned crude before but when you hear a little bit more about perhaps natural gas with that those to the plastics producers in the Gulf coast and as it and hear comments on coal, but is it too early to think about some potential upside and coal if we were to see.

Improvement is production guess shutdown.

Yeah, So I'll I'll walk you across a pretty quickly here.

You know a coal prices of just dropped here even over the last few months.

Some levels that we haven't seen in awhile.

I'm sure you see the thing for curve forecasts, and we'll see what happens there but.

There is nothing for that but lease up the believe there's going to be large upside with coal.

But we'll keep working with him team to get the productivity that we can get out of it. The other part of the energy thought of course, Oh, all prices and you've seen what has happened there on the petroleum crude oil.

We'll see what happens with those prices those prices also have an impact.

On the RCM business in terms of drilling and then to a lesser degree.

The drilling pipe segments also.

As you look at our plastics business.

There there is going to be an impact on our plastics business I will tell you that there are more production that have come on and there's more production. It will come off that is a positive for.

We're hearing that the or where we know that operating rates or number of our plastics producers have taken a step down but that's still a very positive segment for us.

I will say that I want to end at all with this at the end of the day our service product has been as good as it has been and we continue to see.

Other pieces of Carlo business come up.

For off the bid on and compete for I really liked the position that the service product has put a thing.

All right. Thanks, getting so a follow up for maybe Jennifer and Jim.

Yes, I believe last time, we talk to you or you're targeting a 500 million plus productivity gain.

Which is more volume neutral and looks like now you're.

Taking it down a little bit at least.

From how we see it here. So maybe you can just give us a little bit as context to that if clearly the volume environments different but if this is a volume neutral sort of metric.

Maybe you can help bridge bridge the gap there between the two numbers.

Sure. So so you're right we do take out the volume variability part of the cost. So we're gonna have fewer train starts because of lower costs, we don't count that in the number the if if we have reduced train starts like surgeons long train productivity initiatives. You know those are things that we put into our productivity number what <unk>.

Well my comment was meant to say is that when you have less volume, it's harder to leverage that and so when we were putting together our plan for 2020 recall. We originally said we were looking for a little bit a positive volume growth. When we gave the guidance of 500 million or so productivity. We've obviously taken that volume growth off the table in terms of what we're seeing today.

And so that's why we feel like we need to widen that range a little bit in the 400 to 500 million range Hum that that's how you should think about that but Jim you might want to add a little more fully Jennifer and Ryan listen the.

220 million first quarter starts a soft real well to be able to deliver what we said I think it's prudent that we look at it.

He dropped volume you have less of a chance the reduce and just the way we measure cost takeout. It's true cost we're not there isn't anything volume doesn't help us but I'll tell you. This is there's a list of things are they still want to get done and with that the way we operate our locals the way we're handling our our interim.

A little terminals that make a more efficient the train size is still there we can be more fluid with how we handle the railcars you've seen though so shut down a couple of a couple of diesel shops. So all those things are still out there and.

You know unless we really the market's changed for us even more I'm very comfortable with where a jennifers got us guiding for this year.

Very comfortable I won't use the word globalized the otherwise Jennifer will get excited.

What I'm very comfortable with where we are Brian. This is lance I just want to add its really simple to think about it.

If in this quarter as we anticipate volumes are up something like 25%.

You got to take something like 25% of your activity out of the railroad to match before we start talking about incremental productivity. So the basis for what you're going to create productivity gets.

Very very difficult when you take a an order of magnitude change like that on the upside if you're growing three four or 5%.

Gives you all the opportunity not to add resources and and you can count that all is productivity.

Right it sounds like there's.

Calculation aspect to it kinda like your core pricing. So I just wanted to make sure that was that was clear. Thank you.

Got it.

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

Hey, Thanks, Good morning wants to talk a little bit about volume if we could.

25% decline in the second quarter is not too far off of where we're running kind of currently here, which would suggest that maybe we're getting closer to the bottom Wanna get a sense, maybe Kenny for you.

Discussions with your customers or or maybe each individual business line can you walk us through sort of what are the puts and takes the kind of gives you comfort that 25 number. We appreciate you given it's a kind of curious whats the sort of drivers behind that.

So first of all I believe you all fee or some of the information that we see publicly in terms of where the automotive Oems are in.

There appear to be coming back sometime next month or call that the first half a may.

Clearly there is gonna be some ramp up issues with that maybe they wouldn't start at 100%, we'll keep an eye on where that is.

As we look across our industrial customers are there some customer that we're still seeing.

Produced at a pretty strong.

Our rock network, it's still a working pretty well on the Green <unk>, we're pretty optimistic there we'll see what happens over the next few months, we do know that China has come in and purchased some green during the back half of the year.

We would expect that we should see some benefit from the phase one deal.

And then as you look at how as we're talking to our customers on the.

On the consumer thought I'll call those international intermodal and our domestic customers I'll tell you there still they still don't have got line of sight and the what's going to happen. So we're not in a position I'm not in a position even though we're talking to them everyday to tell you what will happen there. They so Chris This is Lance let me.

Step back up and come up to a higher level of depth and length of our downturn. So we're learning every week a little bit more about.

The dynamics of how deep it might be and how long it might be it's still very unclear and the goalposts are pretty broad right that you can hear very well educated are deeply experienced economists that still think about of the recovery.

Here about W. recoveries, you recoveries, a slow hockey stick ramp up.

I think our our collective belief at this point is it's sharpened deep it's going to last for awhile and recovery is going to be some kind of ramp, but probably not terribly Steve.

And so we're looking for those markers and nothing would please me more than to be wrong about this 25, percentish and see sometime in the second quarter that we're starting to see demand from and our supply chains reflect that.

But it's a theres a lot that needs to happen between here and there.

Okay. That's a that's very helpful. Appreciate that.

Maybe kind of back to the productivity comment and maybe this is.

The answer or.

Jim or Jennifer I guess, what do you think about that sort of dynamic of volumes coming out of what that was very helpful to give us some of that perspective about sort of the base kind of going away in terms of generating productivity.

The thing that's for Twoq, either very much challenging sort of quarter to get that productivity that maybe that sort of remainder of the 400 to 500 is more backend weighted to the be Threeq. You were for Q1, the volume dynamic is hopefully a little bit more stable.

No I don't think we're saying that specifically I think what we're saying is with such an abrupt downturn and the depth of that productivity is gonna be harder to combine so for instance is very unlikely and it would be unreasonable to think about the second quarter in the 200 million dollar order of magnitude like we saw in the first call.

Order, but I don't think.

A reasonable Alf X.

Expectation is no productivity that I wouldn't expect that from us.

Listen we are spending capital and we have the sidings that I mentioned earlier on in place. We expect to train size to go up and have less train starts for the business. The we have so that's part productivity, we expect to be more.

Productive with or a local assignments and local operations, we expect to be more productive on our intermodal facilities on how we handle the tribe that the we have so as much as volume does make some of it harder I'd love to have set this up the whole time loved to have a quarter with two or 3% volume growth hang on I'd love to see where that number is.

But.

But it is not there Chris I'm not real worries about not having productivity this quarter.

A quick reminder, I mean, you know our comparisons on a year over year basis relative to productivity get harder through the course of the air you know we closed out the year with close to 200 $215 million or productivity. So.

Take take all of those comments kind of in near mosaic and how you think about it Chris.

Got it that's very helpful. I appreciate the time thank you.

Yes.

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

Great Good morning.

Just a follow up on that on your volume outlook. There Lance I guess, if you're running it down kind of 20 to 22, now and you're talking down 25% for the quarter are you expecting things to get worse from here are you not anticipating things reopening I mean, I guess just thinking about this only in the third fourth week of April you still up too much left and.

And with things, maybe apparently starting to reopen are you expecting things to deteriorate from here.

Well part of what we're making that commentary on is reflective of how we're planning.

For the second quarter. So you know we tend to be pretty conservative theres a lot of unknowns.

I don't think we know enough yet to know what's left to deteriorate in the demand economy versus how that's going to be offset by recovery.

So there is this a lot of moving parts and I think.

A 25 Percentish is a good marker for us to plan our activity around we've mentioned it to you as a result.

And we'll hope for better Kenny.

I wanted to just.

Give you a view from my seat when our commercial team goals and we talk to our customers. We're talking about after we go through our safety far the second thing we talk about is the service product and Jim is exactly right. We've got a very strong service product fulfill and talked about the car velocity improving that make us more competitive with truck light.

Services as we entered into the year, what I would tell you. It's I don't know Carlo bases, we felt really good about some of the wins in some key market and we felt really good about opening up new market that we had touch on our domestic intermodal thought were about two thirds along the way.

Through our bid season, we feel very good I mean, we feel very good about what we won a in that area. So we need the market that help help us there even in our international intermodal business.

Towards the back half a year there've been some jump ball opportunities, but we feel really good about that we won a that you should see so coming into the year. We felt really good about our opportunity to compete the service product with something that we're going to use a make the par larger compete against truck, but we feel really confident wants to them.

Market comes back.

Thanks, Ken Thanks, I guess, if I could just switch over to Jim or Gen. For my my follow up you talked about trimming capex.

Yeah, that's contrasting a little bit what we've heard from some of the others, who look to take advantage of the downturn maybe to get some some cheaper buildout capabilities can can you maybe talk about that Jim can you clarify the status on the locomotive fleet and the park capacity. Thanks.

Well listen the Ken it's a good question in the.

Usually the way I like to look at it is if you have the downturn of business and you know what's going to come back why adjust your capital program at all we went through it and it's more like they timing the rules into next year. This is not.

This is not anything that the everything that we had in the capital plan was built for to make this railroad better more productive safer and sustainable over the long term. So we're not change in that but we thought it was prudent with where the revenues are at this point in the business level to just slide some little bit in the early part of next year.

And because we know we give the guidance on a year to year basis, that's what's happening so we're not.

Absolutely there is some areas, where we're going to spend money faster and we can see that so if we have some opportunity even after we make the adjustment in the capital to be able to use some of that cash because were more efficient we'll spend that this year at this point, but stay tuned and I will just as we see what's happened to the business Jennifer anything else now I think he said.

Ended up Jim Okay.

Thanks, Ken.

Thanks, guys and just the local fleet numbers.

Sorry can you broke up.

Just.

Hopefully, Jim Jim and Oh listen we've got so many locomotives part, though just about embarrassed to say how many we have part okay. So and if so there's some noise in that right now because of the business drop but this is a number I look at Cannes and I gave a tia that 18% improvement and locomotive productivity is the key none.

We have lots of locomotives part we're good at the business comes back would have good if the business grows we are being smart we're putting all the technology. We've got the best locomotives and you can see the fuel efficiency that we said five but you can take some of the noise up with a true 4%.

Betterment.

So.

Listen locomotives, we have a lot of them parked and we'll continue to park and every day right now with a where we are with the business levels. There's something we don't talk a lot about theres two ways to look at our stored locomotives.

Theres locomotives that are stored and intended to be stored for a while that is we don't anticipate their need in the next week two month.

And then Jim's got other locomotives that we store and <unk> and I.

Status called at the ready and at the ready are literally ready to be pulled out and put back into service on a moment's notice and so that mix is changing every day, but the at the reddys allow us to react to business upturn, which we hope we see and we hope it's a strongly that'd be great.

Thanks for the time dusk appreciate thanks, Ken.

Our next question is from Atlanta, Scott Group. This Wolfe Research. Please proceed with your question.

Hey, Thanks morning, guys. So why don't you just follow up on something I heard earlier, Jim and the answer to the first question where are you, suggesting that April headcount is down more than volume, so down sort of more than 20% and then Jennifer I totally get second quarter or commentary.

You've got some cushion with the strength of the first quarter any thoughts at all about the ability to improve for full year basis.

Jimmy.

Listen I'll start real quick.

Just to clear up the whole discussion about people. We have we started at 19% drop that we've announced over the first quarter year over year, and we think that we will continue to drop that down as the business comes down and with some productivity I'm not sure where we're going to end up exactly but.

You know stay tuned I I think we've got a great story moving ahead, and just to clarify Jim's comment that 19% as our train and engine Korea right. So that that's a part of our workforce not not the whole workforce. So to your question. Scott then about full year. All our no you know we pulled that that guidance off the table and it really is going to be there.

And then on what happens in the marketplace. The commentary that you've heard us have here today again, we would love to see volumes come back and in that environment. You know, we feel very very good about our potential I mean, you saw what we did with down 7% volumes in the first quarter, making very strong improvements in our operating ratio and that's the kind.

I'd have a you know called that the proof statement test case, whatever for or do you want to put around that in terms of what we're capable of so we're just not going to give any guidance right now because we don't have great visibility a two to what bomb volumes are going to be other than where we think second quarter is going to end out, but let's stay tuned.

On that and if that changes and and start to turn around a little bit you bet and when we think we've got great long term opportunities absolutely we were looking forward to win.

Our markets start returning to normal because the two agenda first point the first quarter is an absolute proof statement of what we're capable of doing.

So I guess, that's actually my follow up if I can like so a 59 and in the first quarter to me as a full year run rate somewhere in the mid Fiftys range whenever not this year, obviously, but whenever it's things normalize is there anything about that 59 in one Q that you feel is sort of not sustainable that.

We should think about sort of what the earnings power is in a couple of years.

Not making those commentary on your math on what it translates into for the full year at 59 in the first quarter was clean.

Great. Thank you guys.

Thanks.

Our next question is from the line of Tom Why don't Miss with CBS. Please proceed with your questions.

Hi, good morning, and impressive the impressive performance against the tough backdrop, but clearly.

Wanted to ask you Jim if you could offer some thoughts on that kind of.

PSR process, it's like sometimes you say well I.

Softer volume environment makes it easier to make some big structural changes.

It could be fair to say this is more than a soft volume environment. So.

How do you think about.

Start changes the pace of change and whether you can take another look at structural position. So.

We had 14 carload terminals, we now have whatever your number is maybe we you know it doesn't need to be not it could be five or six.

Think about that just in terms of I'm thinking of the intermodal and carload terminal network and whether you have now a chance to say Oh, we can ratchet that down even further or maybe it's outside the terminal networks and something else.

Yeah, Tom you know me by now I don't like that get way ahead, and guess on what we're going to do next and a lot of it is driven by a car flow.

So I think we have Ah, we shut we've shut and idled the five Ah hump yards already and the there's probably possibility for more dependent on how the tropic those are and we'll do that at the right time.

It worth a caused us a little noise for a while in the first quarter operationally and and so you know you need to make sure you bet. These things down where you don't the impact the operation, but we see opportunity still.

And and it doesn't matter where the volume is.

It is the whether the volumes down or up.

He productivity the weekend and efficiency. The we can get out of the place and it's across the board. It's Oh, we manage the number of people that we have that need to manage the processes, we put in place for a intermodal.

Later on this year, we're going to have a consolidation in Chicago down to us we intermodal facilities from six so I think that's great for US we are looking at the what we're doing down in the L.A. basin to see how we can give a better service product and be able to the a touch the customer in a better way in the whole L.A. basin.

So Tom there's still lots out there.

See lots of opportunity, but I'm being rule.

All of them being smart and I'll, let the Lance and Jennifer and.

And can be a give me the feedback, but we're trying to do this or I'm trying to do in a systematic manner, where we don't impact the customer to the point, where we lose business because of what we're doing and were able to do it and I think you and I've been here just over a year I think that's been successful great leadership <unk> everybody at the table here with me. This is a team effort. So.

Real happy and I've, there's lots of opportunity left I wasn't just answer if someone's going to ask me what inning I mean, it's not football season anymore, It's not baseball season, and I hope It was baseball season, but the thing it's still like that I got half of the game to go yet okay.

The part of your question also kind of is contemplating.

Again depth and length of this downturn and that's what makes our decisions are the most difficult right now so right now what we've got is a decisions that we made about resources like our arts boards. So that some part of our furloughed cruise or more accessible to.

Just quickly we've talked about at the ready locomotives, we've taken an action here on our non agreement a workforce and instead of.

Taking a large scale of.

Permanent force reduction we thought for this period of time, it's more prudent to ask or non agreement workforce to take required unpaid leave of absence, a week or month for four months all of those actions are with an eye towards.

Recovery is going to occur we need to be ready for it we need to be ready for whatever shape. It takes a and still do what's prudent in the current environment. We think we got that balance.

Right, Okay that makes a lot of sensor for my second question.

Just wanted to I guess ask your question about the kind of price versus volume.

Volume.

Calculate.

I guess the truck market is.

A lot of excess capacity out there. So you know probably in the near term trucks competed bit harder and you know maybe they can even compete on longer length of haul that might affect you, whereas we normally think eastern rails are more affected by truck kind of how do you manage the pricing approach.

Great to be really disciplined on price but.

Actually caused some further share loss to truck in certain segments.

On a near term basis I don't know can your Lance if you want to offer thoughts on that kind of view versus truck in.

Price versus volume approach sure I'm, let me start and Kenny will will give it some fine points.

Parts of our pricing philosophy, the the core pricing philosophy is unchanged and that's about having to generate a return on whatever piece of business we secure.

And making sure that our price reflects our value.

What's cool about having fundamentally shifted our cost structure is that it opens up more markets to us.

Clearly trucks are very competitive in a loose market like we've got right now.

Theres going to be elements of truck competitive business that make no sense for us to pursue because somebody in the trucking worlds willing to take it just to generate enough cash to survive.

But our cost structure opens up a broader segment of that market to compete and win and generate an attractive return and we're doing that.

The only thing I'll mention is that again just to go back to the car velocity number.

And that's an average number there some you know more areas, where a carve a lot for car velocity in numbers much greater and it has given us the ability to go out there and get the pricing that we believe we should be receiving for the service product that we're providing our customers there's tremendous value that we're talking about.

When we talk to our customers and we're renewing business and going after new business and asking them to open up a their truck lines for.

Right Okay.

Thank you for the time like it.

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

Thanks morning, everyone.

Sorry, but just a follow up on the a and b productivity targets again.

A little confused because.

In a b is the other commentary about the changing range. It does sound like the productivity target does that give you some water related to the wall even growth.

So is it fair to say that you are now at this stage of PSR American if I'm a lot of the <unk> the cost side like the facts in the company has been taken out a ended its its mostly going to be up up and efficiency slash volume driven or improvement story from here.

So I'll start the Ravi this is lance so the short answer is.

It's always easier for us to get productivity in a growing environment than a shrinking environment. We've proven we can get it in a shrinking environment. When you shrink at 25% because really really difficult doesn't go to zero, but it just gets pretty difficult.

In terms of a P.S.R. and fat.

Clearly at 59 operating ratio, there's a less easy opportunity than there was at 69 operating ratio, but there's still opportunity and gyms outlined many of them.

Well, that's I think you hit the perfect unless there's a follow up on that.

Yes.

The allowance for the for you kind of just thinking big picture.

Do you think.

Oh situation like there's going to the unprecedented a shutdowns you're seeing right now.

Going back the added you've never we used a good crisis I mean do you see some mature customers, making permanent changes in their domestic our global supply chain is I'm, assuming some of that is at risk or you some of that as an opportunity where do you see our some of the kind of permanent changes.

Coming due to supply chain feature that's a great question Ravi and for sure there are going to be some opportunities that grow out of this crisis.

One is we do here our customers talking about.

Evaluating their supply chains with an eye towards reliability are being valued a little bit higher that means near shoring or onshoring. Some of those supply chains and that would be a good thing for us generally speaking we haven't necessarily seen that happened I think it's way too early I don't think you're going to say.

See wholesale investment happen until.

Suppliers the industry starts becoming more confident in the demand side, but clearly I think we're going to see that and that'll benefit Mexico, it'll benefit our to and from Mexico business and it'll probably benefit our inside the United States business as well.

Great. Thank you yeah.

Our next question is from the line of Justin long with Stephens, Let's just use your question.

Thanks, and good morning.

I wanted to follow up on some of the intermodal commentary, obviously, we've seen a substantial decline in fuel prices and it doesn't sound like the energy market is coming back anytime soon.

That change the way you think about long term growth in your domestic intermodal business or with the service improvements that you've seen and continue to see do you think this is still a GDP plus business when the economy bounces back even if the energy market doesn't bounce that.

Yeah, there's no change in how we look at the business. What's changed is that our service product is much much stronger now and much more reliable and gives off an opportunity to compete and win out there and you know as I mentioned.

In two thirds until the bid season on the domestic five we feel really good about the wins that are out there.

I can't predict what's going to happen with GDP. When it you know what were those numbers are going to go but I can't predict.

That the service product is going to allow us to compete and win I feel justice confident and infield justice.

Committed to what our commercial team is doing on the international intermodal far too.

Okay, and maybe as a follow up on mix. Obviously it was positive here in the first quarter, but you know going forward. How are you thinking about general merchandise versus intermodal on a relative basis as we kind of think about the magnitude of the volume decline.

And that we could see in the near term and also just the timing of the recovery between those two segments just wanted to get your high level thoughts on how those businesses perform on a relative basis, we think about the implications for mix.

If you're thinking about relative basis and for that you're talking about margin by commodity or product line, we like them all and we've we've talked about how we've done a lot of work to fundamentally improved the intermodal margins to a point, where we'd love to see that grow like anything else.

But this mix that you saw here has a lot to do with a the fact that we're getting 1200 Bucks a box for every move of intermodal versus 25 or 3000 Bucks for a carload bucks.

I mean, the you know in the first quarter. Obviously, you know the you just look at it on an average revenue per car basis. The of our three business teams. The group that has the highest average revenue per cars or industrial team and that's the group that had had a little bit of growth for us here in the first quarter. So you know those are the lines. You know we started giving you guys the revenue ton mile.

All information on a broader segment of business and so I would just continue to watch that.

So.

We don't know what business is going to come back first and so that's really going to be the driver in terms of how the economy restart and where that comes through if it comes through in the manufacturing sector that might be a positive for us if it comes through more of the consumer goods and we're seeing more intermodal live.

You'd see it there you know I'm less worried about mix and more concerned about whats absolutely was gonna do and that's where we want to see the market come back to it.

Okay I'll leave it there thanks to the dock thanks, Jason.

Our next question comes from the line a friend and I don't see with Barclays. Please proceed with your questions.

Hey, good morning, everyone and thanks for taking my question.

Jennifer you did say that you have solid free cash flow expectations after dividends under various scenarios, so I'm going to sneak it in there to ask if you're willing to share some of those scenarios are with us even hypothetically, but more importantly, I guess the insinuating you know maybe in a lesser demand environment. We can still protect the dividend I guess, you know would you'd be looking at.

Leverage as that first source of liquidity or would it be capital spending I guess, where are the priorities in a weaker environment.

So you know I appreciate the question about 700, obviously, you know that I'm not going to do that you know in terms of our cash priorities. I mean, you you've heard US consistently talk about you know we're going to invest in the business for the long term that's.

That's what we're in this world. The two is runner railroad and serve our customers and grow the business and so Jim laid out very well for you you know how we're prioritizing that in so first dollar goes to the capital investment and we have our dividend, which we're very much you know committed to we view that as an important part of our returned to shareholders and then the.

This free cash we have been using for share repurchases and that that priority in terms of our spend is unchanged at this point.

Yeah. The first first claim goes to keeping the railroad running and running well.

Okay. Thank you.

Thank you next question comes from the line of Jason Seidl Cowen. Please proceed with your question.

Oh, Thank you operator, or most or asked and answered at this point, but wanted to circle back to remarks, and two thirds of your domestic intermodal business has been sort of reprice gotten through that just wanted to see if you guys can give a little bit more color on that commentary in how you think that pricing market is going to shape out going.

Forward.

And what are your plans as you approach to particularly since you are improving your service products. So what you're offering now is a lot different than you were what you're offering lets say three four years.

Well you know thanks for that question, you've got to a number of things going on we've got a much stronger.

Service product, which is going to help us.

As we're competing against all of them over call. It you know barge rail or truck.

But we also have a more cost structure, which help us get into some of these newer markets.

What I would tell you is that because our service product has been so strong I think that's been the or a change X factor for us to go on and win new business, we are able to get a longer haul or compete more closely with the truck piece, though.

We're going to continue to took price of the service product.

Expect to be over inflation.

There's nothing that shows me, we wouldn't be able to do that even though right now there's a lot of truck capacity out there.

Okay. So so you'd said that of the two theres you priced that's been over inflation and you expect the remaining third to be priced over inflation as well even in this difficult market.

That's true that's correct.

Excellent way to think about it.

Fantastic.

Appreciate the time as always and everyone. Please be saved Walter Thanks, Jason.

The next question comes from Atlanta for Walter Spracklin with RBC. Please proceed with your question yeah. Thanks, very much a good morning, everyone. So I want to focus my questions on the on the rebound not so much when it's going to happen, but but how you're going to handle the different potential shapes of that rebound that you alluded to it.

And I guess the first question press for Jim I mean, there's a lot of complexity out there you with regards to non essential goods kind of being filling warehouses and essential goods having run.

I think when things start to clear out is there any concern that you know a sharp recovery is going to be aggravated by the complexity of a of cleaning out the system. So to speak is are you know how are you how are you preparing for.

If we do see a faster rebound how you handle that with opening bogged down.

Yeah, Walter listen it's a it's a great question because it's a.

This is an extra ordinary event to effect in the economy in a completely different way than I think anything we've ever seen so we don't know whether it's going to be a quick up or it's going to be a slow up but that's what we've done. We are we have prepared ourselves with the key ingredients you need to operate the railroad and rebound so.

So its locomotives people we are out there every day and I'd give everybody a union Pacific than all the people that are out there working that are still out there working every day and not just a union Pacific accolades, because our employees have come to work and we have had no no major issue with being able to move any of our trains.

So what we're doing to get ready is the railroads in a safe manner. We're out there putting capital in we have locomotives ready to go like we've done enough locomotives that it could go back to where we were before they are.

In a state where within hours, a week and turn them back on and put them. All the fleet. If we need to we have people instead of following them completely we're carrying a few extra.

And not just a few but we decided that it was a smart thing to do that be able to be able to put the people back on to be able to operate the train. So we've done everything we can to handle whether it's a v., whether it's a a U or a its and I'm, hoping for a sharp turn I hope the economy personally turns and everybody can get back.

The work and the and lived the life that we had before but if not the.

We're set up to be ready for Walter.

And the second question here is it's related to a prior question in Atlanta answered. The question by you know the opportunity being near shoring.

To to other opportunities I want you to ask what are you to comment on first of all does this give you a I guess on Jim side, the ability to bring people back.

At lower resource levels and easier to do that cutting them down to that level.

You know if this didn't happen and secondly, you know how would you how is how would rail fit into.

E Commerce trend in a world, where you know ecommerce is ramping up first for faster than.

Then than previously anticipated how does rail provider solution.

If that if this new world.

Sees a lot more E commerce purchases.

Let me start and then I'll turn it over to you. So on the ecommerce question clearly, we're seeing ecommerce continue to penetrate in retail.

We think that changes the opportunity we don't think it decreases the opportunity that changes supply chains, we still have a need to get from bulk distribution side clearly were not part of a hours or one day delivery, but we don't have to be what we have to be as part of the supply chain.

And that gets product to the forward.

Distribution site that can fulfill like that and we are we continue to do that so we would it what it really says we need to have our eyes wide open on the winners in that world and align well with them.

And then I'll, let Jim answer the question on the on resources and bringing them back.

Well there when you when we have whatever starting point, where out and where at this point, absolutely because we see productivity gains.

So we will not recall the same number of people back to work as as a we adjusted down so no advantage of buds, whether it was a whether we were full workforce and we apart activity gains or what are brought it down or now as it comes back we just won't need quite as many people who is we had before train size is one we've got you know if we can keep the train size up we're going to need less.

People. So that's a good way to think about at Walter.

Appreciate the type.

Thank you.

Our next questions from the line of Bascome majors with Susquehanna. Please proceed with your questions.

Yeah. Thanks for taking my question, Jennifer you understand the desire not to guide headcount in a very volume uncertain environment, but I was hoping you could kind of give us a dollar framework for the executive pay temporary reductions and but you're sort of rotating leave of absence as you've got with demand.

Sure workforce specs.

Thanks Bascome.

I'm going to decline that opportunity, it's part of everything that we're doing and manage our cost structure and you know pulling all the levers that across the board and you've heard us talk about that before and you saw it in the first quarter, where we were able to make improvement and every one of our cost categories and so this is part of certainly the comp and benefits line, but we've got work.

On on across the board and that's really the way that we look at it isn't isn't that contact.

Thank you.

Thank you Dave basket.

Our next question comes from the line of Jordan out there with Goldman Sachs. Please proceed with your question.

Okay.

Yeah, Hi, I just a quick question, obviously at a pretty good degree of variable costs in the first quarter. When you think about it expenses total expenses as you look out over the whole year both.

Well, how you describer ascribed vulnerable cost versus fixed costs or some of the goal on sort of the whole cost thats. Thanks, Yeah, Let me get started and I know jennifers been thinking about this a lot.

We we did look backwards into the last recession, the great recession and looked at our variable versus fixed at that time, what we communicated to the world and what we actually executed and and we did have a better job through the recession them we thought.

Based on what we thought was variable and fixed at that time I can tell you it going into this downturn, we're even more agile and flexible than we were in the last downturn.

Yeah, I mean, when we went back and some of that that work that Lance referenced you know I think by the time, we got through the recession kind of call. It end of 2009, we would have said we were maybe 80% volume variable or so adjusting for fuel. We said we are more than 100% already here in first quarter of.

2020, so again, we have already been taking in and that's the blessing of what we embarked with with PSR and unified planned 2020 is we've already made significant changes in our and our cost structure and and when you think about you know yard closures, increasing train length all of those things and the locomotive productivity we're seeing.

No that's given us a great much greater volume variability, obviously, you know in the short term those areas that are the most volume, though for us are going to be on the comp and benefits line fuel is almost a 100% volume variable for us equipment rents is also pretty pretty volume variable and then everything else is it's something that overtime.

Well, we'll continue to work through but.

That's right again I think we're just in a very good position there in a different position than we were in the last recession because of all the work that we had already undertaken and having the pipeline.

Because of our unified planned 2020 efforts and Jordan, Jennifer I think the critical difference is speed of decision, making and speed of implementation.

Ah that's fundamentally fundamentally different today and in a benefit.

Great. Thank you for those thoughts.

Yep.

The next question is from Atlanta, David Vernon with Bernstein. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the time, Jennifer I would ask you in there or can you maybe I wanted ask in the step up in the mix price benefit from problems fourth quarter to first quarter.

How much of that that that that extra tailwind as is from the mix side versus the price side.

And if you think about within the commodity groups is there any one particular driver of of commodities that led to a a better mix from a price realization standpoint.

Well thanks for the question, David but you know, we're not giving specific pricing guidance any longer I think we made that statement a couple of quarters ago, So I'm not going to break that out for you.

But you know it inconsistent with my commentary you Nonetheless intermodal.

It was certainly a part of that mix. When you think that that is our lower lowest arc business that we have on the railroad and that was offset somewhat by the fact that we also had sand sand lower but net net it was still a positive again, if you really look at that industrial line, that's where we had some some good growth in the quarter and that's where we have some strong arc.

Okay, and then I guess.

As you think about the separate line on fuel the fuel surcharge headwind sort of moderated a little bit into lower oil prices that also have like a mix component and that or like what are we looking out there in terms of the sequential step down in that and that fuel headwind into a lower fuel price environment.

Well I think as I said, you know fuel is actually a tailwind for us in the quarter and that's kind of an all in view in terms of the price the surcharge all taken together in terms of of how we view that there is a little bit of a lag year over year as we move into the second quarter as fuel prices have come down to steeply.

But we don't see that as being a significant driver relative to the you know how we look at things on a mix basis.

But there is the reason why the surcharge headwind to revenue would moderate into lower fuel on incentives I'm just trying to understand how that that oh. It was a headwind to revenue, yes, I mean it it is a factor in any overall ARX as you see a less fuel surcharge, that's going to be reflected in the ARX, we have but as I mentioned it does lag alone.

Little bit in terms of how fuel price comes down and how our surcharge comes down.

Alright, thank you.

Our next questions from the line of Jon Chappell with Evercore. She was your questions.

Thank you good morning, everyone.

Just one for me.

For the buyback caused complete recruiting training. The Capex also makes a ton of Sir I assume you talked with the credit agencies around the time your debt instruments are at or smart. So just any change of term from my perspective around leverage targets.

Do you feel you kind of bumping up against the top end to 2.7 times.

And how that impacts your decisions to take on some.

Just a liquidity, which you said you don't need right now, but just in case.

Thank you at these levels.

Sure. So so you know we've used the two seven is just kind of a short hand math for you all in terms of expressing a you know where where we view that within kind of the context of our credit ratings. We used to your point, we did have dialogue with the credit agency around the time of our.

750 million issuance.

We share with them kind of our best thinking some of our scenarios and as I mentioned in my comments, they're comfortable with where we're at certainly if we had a need to go back into the markets. We would have that dialogue again, we feel very good where we're at we believe we've got good access to credit you know if we need that and we've got obviously got some other things in terms of our revolver.

And the receivables facility or if we need to but those are I would call more of a belt and suspenders approach, but feel good about it I have no concerns there and I believe the rating agencies still good with us as well.

All right. Thanks, John.

Our next questions from the line of David Ross with Stifel. Please proceed with your question.

Thank you good morning, everyone.

I wanted to talk about that first slide you put up.

Regarding service level goals, specifically around manifest in auto trip plan compliance is there anything you guys have articulated as to where you want that to go from 64 today.

[noise] history tells me that.

Different customers the manifest business is a little bit different.

You know this tries to reflect what we've committed to the customer and we're measuring ourselves harder than what we actually committed to the customer as far as what the their trip plan is on their individual railcar. So you never get this number two 100, just the same as the intermodal number never gets to 100 its.

Impossible to get there, but I think I'd like to see it you know another double digit improvement and I think if we do another double digit improvement the way we measure it.

We remove most of the noise or a lot of the noise on how the interaction is of a us living up to what we've committed to the customer. So that's the way I look at it though David <unk>, Jim a little bit of the sick whatever the number was 64 65 and the for in the first quarter was self inflicted you mentioned on the on.

Call that we had a little noise around our change in.

For worth of Davidson yard, where you stop pumping a davidson and that impacted that to a degree for probably six weeks.

So I you know I would I would expect to your point, we're growing that number to start with a seven.

Well not reflected in that number is that the transit times have gotten better.

One thing and I can tell you our customers are acknowledging that the service on the Carlos has gotten better yeah.

And are there any commodities that are harder to handle that would reduce the productivity of the manifest network. So.

You know if you have more of X and Y it slows down.

Yes.

Absolutely if you have cars that you don't touch as often.

Makes it easier for you ought to be able to handle so if we were a a bulk railroad.

You know some people are bulk railroads more than we are at this point then you know load them up at one place on the all them to the other you know.

This is my mother could do that so it's a lot easier to get a number of it but but so yes, but other traffic we have to handle a multiple and more steps you have a better chance that have a failure somewhere in the process and we love that business I love. It all right, but we got a railroad that can fill up so I love it all.

[music].

Well I think you for your mom glad you're following in the family [laughter] well finish this call with a little humor element railroader and David then if everybody I should've mentioned that even more and I know last well, but listen the I'm real proud of everybody and also everybody else. There that is working to keep this country going from people that.

In line everywhere. So thank you very much.

Thank you.

Thank you. This concludes the question answer session I will now turn the call back over to Lance Fritz for closing comments.

Thank you very much Robyn. Thank you all for your questions. Thank you for participating with US This morning and for doing what you need to do to keep yourselves and your family's your loved ones safe and healthy we look forward to talking with you again in July to discuss our second quarter 2020 results until then I wish you all good health.

Take care.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and then the wonderful day.