Q4 2020 Union Pacific Corp Earnings Call

Ladies and gentlemen, thank you for joining us today your teleconference will begin shortly thank.

Thank you for joining us today your teleconference will begin shortly.

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John.

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Thank you for joining us for this morning's Union Pacific Teleconference will you call we'd be starting shortly thank you for joining us for this morning's Union Pacific teleconference. You coal will be starting shortly thank you.

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Greetings and welcome to the Union Pacific fourth quarter 2020 conference call.

At this time, all participants will be in those suddenly mode.

A brief question and answer session will follow the formal presentation.

If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.

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

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

Thank you very much Robert and good morning, everybody and welcome to Union Pacific's fourth quarter earnings Conference call I apologize for the delay or service provider was experiencing technical difficulties. This morning, we will handle any unnecessary inappropriate public disclosures after the call.

With me today in Omaha are Eric Garringer Executive Vice President of operations, Kenny Rocker Executive Vice President of marketing and sales and Jennifer Hayman, Our Chief Financial Officer before discussing our fourth quarter and full year results I must first acknowledged the performance of our exceptional employees twenty-twenty presented challenges that.

No one anticipated and all of US hope to never experience again, the women and men of Union Pacific worked hard in the face of the pandemic to provide our customers with fluid and uninterrupted service their dedication produced service and efficiency improvements that are now part of the U P. DNA positioning our company to flourish in the day.

[noise] ahead. This past year has reinforced my conviction that our people are truly the best in the business.

Moving on to our fourth quarter results. This morning Union Pacific is reporting 2024th quarter net income of $1 $4 billion or $2 five per share.

These results include the impact of the previously announced $278 million pretax noncash impairment charge related to our Brazos yard investment excluding that charge adjusted net income is $1 $6 billion or $2.36 per share. This compares to 1.4.

$4 billion or $2.02 per share in the fourth quarter of 2019, our adjusted quarterly operating ratio came in at 55, 6%, an all time quarterly record and 410 basis points better than the fourth quarter of 2019. These outstanding results demonstrate our potential when we leverage all three.

Three profitability drivers simultaneously volume growth productivity and pricing, our fourth quarter and full year performance bolsters. The optimism we have for the long term potential of our company to provide a bit more detail, we're gonna start with Eric and an operations update.

Thanks, Lance and good morning, the operating team delivered impressive results from the quarter as we did an excellent job, adding volume to our network in an extremely efficient manner. While also managing the normal challenges associated with the holidays. The fourth quarter is another proof statement of how P. S. R has continued to transform our operations I'm proud of our into.

Tire operating team and their achievements during a very challenging year.

We could have not achieved what we did in 2020 without their support and commitment.

Moving to slide four.

To update you on our key performance indicators, where the team once again made improvements across nearly all of our measures.

Freight car velocity and freight car terminal dwell, both improved year over year, driven by focusing on asset utilization and reducing car touches.

Locomotive and work force productivity, both all time quarterly records improved as we continue to use those resources more efficiently through our P. S. Our journey.

These improvements were driven by an evergreen process to evaluate and adjust our transportation plan, while using fewer locomotives. In addition, the train and engine work force decreased 12% versus 2019, while volume increased 3%.

In the face of intermodal volume growth of 12 per se, we maintained a high level of service as evidenced by our intermodal trip plan compliance results to achieve higher levels. We are working with customers to improve the timely pickup of containers in order to improve box turns increased parking capacity and create chassis. So.

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We view, our intermodal ramps as production facilities that must improve their efficiency in order to drive a more reliable service product.

Finally, our manifest service remained strong during the quarter driving a three point improvement in trip plan compliance from manifest and autos. The team did an excellent job of maintaining the service product throughout the year. Despite the significant fluctuations in demand.

This past year presented quite the challenge to the operating team the drastic fall off in volume in April followed by the rapid recovery on July required agility as we shut down portions of our operations and then reopen them all while staying focused on keeping our employees safe and healthy.

The improvement we made across all of our key metrics. During 2020 provides a strong foundation for continued improvement in 'twenty and 'twenty one.

Slide five highlights some of our recent network changes.

We continue to push train linked to drive productivity, while providing a better service product to our customers.

Compared to the fourth quarter 2018, when we first began implementing precision scheduled railroading, we have increased train length across our system by 30% or 2100 feet to approximately 9150 feet in the fourth quarter of 2020. This is a tremendous progress, especially when you.

Consider that our seven day car loadings fell 9% over the same period.

One enabler of this great progress as our siding extension program.

We completed 36 sightings in 'twenty 'twenty, allowing longer trains to run in both directions and reducing train starts. This was a monumental accomplishment by our engineering department to finish these sidings and then by our network design team to leverage this increased capability.

The redesign of our operations in Houston remain on track recent investments at our Englewood yard focused on extending the bold tracks to add density to the yard and facilitate longer trains. This process project also leverages the investments we've made along the mainline.

Finally last month, we announced a new service from southern California to our pop up intermodal ramp in the twin cities of Minnesota with minimal capital investment we are turning in existing yard into a small intermodal terminal, allowing us to provide new service to an attractive market and a quick and efficient manner.

As I look to the future I'm excited about the full pipeline of projects, we have to drive service enhancements and productivity across our entire network turning to capital spending.

As demonstrated on slide six Union Pacific continues to deliver value to our shareholders through the efficient use of capital R. P. S. Our implementation has generated significant capacity, allowing us to maintain this disappointed in 'twenty and 'twenty one.

Pending final approval by our board of directors, we are targeting capital spending of $2.9 billion in 2021, basically flat with last year.

About 80% of our planned capital investment is replacement spending to harden our infrastructure replace older assets and improve the safety and resiliency of the network we remain.

Focused on modernizing our locomotive fleet through the upgrade of older core units generating a longer life out of an existing asset boosting its reliability and improving its fuel efficiency is a win for all stakeholders the per.

Plan also includes targeted freight car acquisitions to support replacement and growth opportunities.

We will continue to invest in capacity projects on our network to improve productivity and operational efficiency.

We plan to complete more than 20, citing extensions focused on the southern end Pacific Northwest parts of our network. These siding support our train length initiatives and targeted future growth areas for our business.

Finally, we remain focused on our enhancements to our energy management system to reduce fuel consumption leveraging integration with our P. T C platform.

Looking to 2021.

We remain focused on continuing to drive the organization using the P. S. Our principles that have led us to this new level of operational excellence.

Everything we do must be done with an eye towards doing our work safer, while maintaining a high standard on the prevention of our personal injuries. We recognize we have yet to reach our full potential or improvement in rail incidents in 'twenty 'twenty indicates that we have the right plan in place to make the entire network safer.

We will be judicious judicious with our resources and turn them quickly we are determined to be as efficient as possible at our terminals to improve the reliability of our service product and we will push productivity through train length and other initiatives, we must continue to deliver a highly consistent and reliable service product.

For our customers there are many opportunities for us to improve across all aspects of our operations, we must seize upon those in order to fulfill the long term goals of our railroad with that I will turn it over to Kenny to provide an update on the business environment.

Thank you Eric and good morning today I'm pleased to report our fourth quarter results as our volume was up 3%.

The fourth quarter ended strong with December posting the highest seven day Carl on a month in 'twenty 'twenty.

Solid gains in our premium business group during the quarter were partially offset by declines in our industrial markets.

Freight revenue was down 1% for the quarter as our increase in volume was offset by lower fuel and a negative business mix.

Let's take a closer look at how the fourth quarter perform for each of our business groups.

Starting with bulk revenue for the quarter was up 1%.

On flat volume and a 1% increase in average revenue per car.

Coal and renewable carloads were down 16%.

As a result of continued high customer inventory levels lower export demand on a mild start to winter.

Volume for grain and grain products was up 20% driven by increased demand for export grain.

Fertilizer and sulfur carloads were down 2% due to less export potash shipments, which was partially offset by strong industrial software and domestic fertilizer shipments.

Finally, food and refrigerated volume was up 7% due primarily to strong beverage shipments in the quarter.

Moving on to industrial.

Industrial revenue declined 7% from a 6% decrease in volume.

Average revenue per car also declined 2% due to lower fuel surcharge and negative mix.

Energy and specialized shipments decreased 16%, primarily driven by reduced petroleum shipments due to low oil prices and reduced demand.

Forest products volume grew by 11% shrimp and lumber was driven by strong housing start.

Along with an increase in repair and remodel.

We also saw strength in brown paper, driven by increased box demand and low inventory.

Industrial chemicals, and plastics shipments were flat for the quarter.

Nor industrial chemicals volume was offset by growth in plastics from increased production and improve operating rates domestic.

Domestic plastic demand for food packaging and medical supplies remain strong.

Metals and minerals volume was down 11%, primarily driven by market softness in rock and reduced frac sand shipments.

Oh shaded with the decline in oil prices and surplus local fan.

Turning now to premium revenue for the quarter was up 5% on a 9% increase in volume average revenue per car declined by 4%, reflecting the mix impact from increased intermodal shipments.

Automotive volume was down 3% for the quarter finished vehicles shipments were flat highlighting continued recovery in demand and strong inventory restocking ship.

Shipments of auto parts were down 5%, mostly due to COVID-19 related disruption calls on supply chain shortages for parts.

Intermodal volume increased by 12 per cent year over year, driven by continued strength in domestic truckload and parcel shipment.

Spite, depending on retail sales increased throughout the quarter and we continue to see the E commerce footprint grow as a percentage of total sales.

Now looking ahead to 'twenty 'twenty one.

As we put together our plan for the year, we start with the key economic indicators that drive our business as illustrated on slide 12.

We're keeping a close eye on the economic forecast as you know there has been some volatility in recent months with the timing of the recovery largely pushed into the second half of 'twenty 'twenty one.

But the latest economic assumptions released in January show, a more bullish outlook in some markets.

While our goal is to outpace the market. They are still from pieces of our business that will continue to be adversely impacted by external factors.

The pizza, we're watching most closely as the industrial economy, which is still expected to be weak year over year in the first quarter.

Looking more closely at our three business teams.

For our bulk commodities, we expect a continued negative outlook for coal in 'twenty and 'twenty one.

Electricity demand and natural gas prices are forecasted to improve however high customer inventory levels entering the year.

And bond with an increased demand for other energy sources and a contract law per.

It's a challenging market.

As always weather conditions will be a key factor of day man.

All in we see lower year over year of coal volumes, reducing total company car loans by roughly 1%.

However, there is continued strength for export grain as China remains committed to incremental AG product purchases and the 'twenty 'twenty, one calendar year with clearly a tougher year over year comparison in the back half of the year.

We also are optimistic with our biofuel shipments and domestic production is expected to increase which will drive new volume at new U P destination facilities of renewable diesel feedstock and finished product.

Looking at our industrial commodities energy comps for the first quarter will continue to be challenge and beyond the first quarter there is uncertainty.

However, our diverse portfolio improved service product and ability to compete will drive growth. In addition, we are encouraged with the sequential improvements we're seeing for industrial production and the projections for growth in the second half.

This improvement along with growth in plastic shipments should be a positive fourth in 'twenty and 'twenty one.

And lastly for premium we expect strong uplift in both our automotive and intermodal businesses.

Automotive sales are forecasted to increase from 14 million units in 'twenty 'twenty to closer to $16 million in 'twenty and 'twenty one.

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Retail inventories remain relatively low and truck utilization is expected to remain high in 'twenty 'twenty one.

Retail and inventory restocking along with continued strength in retail sales and a tighter truck supply should drive domestic intermodal volumes higher in the year on.

Our premium business will benefit from the new twin cities intermodal terminal, which Eric mentioned earlier.

We're starting out small with current capacity of roughly 20000 loans and future plans to build out to over five times that.

We're excited to see that this new terminal has already started to receive loaded containers from Los Angeles and the first week of January.

Furthermore, we continue to pursue additional expansion opportunity to penetrate the market.

In summary, I'm proud of our commercial team they did a fabulous job in 2020 to stay close to customers on win new business.

As we began 'twenty 'twenty one I'm excited about the opportunities we have on the pipeline to grow with customers and penetrate new markets.

With that I'll turn it over to Jennifer to review our financial performance.

Thanks, Kenny and good morning, I'm going to start off this morning with our adjusted income statement on Slide 15, where we provide both the reported and adjusted look to remove the impact of the Brazos impairment charge throughout my remarks today I will speak to the adjusted results.

Operating revenue totaled $5 $1 billion down 1% versus 2019 on a 3% year over year volume growth adjusted operating expense decreased 8% to $2 $9 billion as we continued demonstrating our ability to grow without adding costs in at a one for one.

Taken together, we are reporting fourth quarter, adjusted operating income of $2 $3 billion, a 9% increase versus 2019.

Other income of 66 million is up $10 million versus 2019, as a result of increased real estate gains.

Interest expense was flat compared to 2019, as we mitigated the impact of increased debt levels by lowering our effective interest rate 20 basis points year over year.

Adjusted net income of $1 $6 billion increased 13% versus 2019, which when combined with share repurchases led to a 17% increase in earnings per share to $2.36.

Or 55, 6% adjusted operating ratio was 410 basis points better year over year and is an all time quarterly record for Union Pacific core improvement totaled 320 basis points as lower fuel prices contributed 90 basis points.

Looking more closely at fourth quarter revenue Slide 16 provides a breakdown of our freight revenue, which totaled $4 $8 billion down 1% versus 2019.

3% volume growth was offset by the impact of lower diesel fuel prices down 33 per cent year over year, which reduced revenue by three and a half point, although we continued to yield pricing dollars in excess of inflation in the fourth quarter and experienced an improving pricing environment. These gains were more than offset by a negative.

Business mix and reduce freight revenue a quarter point.

Strong intermodal volumes and lower petroleum carloads were a mixed headwind in the fourth quarter. However strength in grain shipments helped mitigate that impact both year over year and sequentially.

Now, let's move on to Slide 17, which provides a summary of our fourth quarter adjusted operating expenses, starting first with compensation and benefits expense, which decreased 3% year over year, as we offset wage inflation and the 37 million one time employee bonuses with lower force count.

Excluding the bonus impact quarterly cost per employee remained elevated increasing 9% as we tightly managed head count.

Fourth quarter work force levels declined 14% or about 4800 full time equivalents driven primarily by the great work, Jim Eric and team have done to grow train length. Our train and engine work force continues to be more than volume variable down, 12%, while management engineering and mechanical workforces they kept together.

Other decreased 15% quarter.

Quarterly fuel expense decreased 35 per cent, a result of lower diesel fuel prices and an improved fuel consumption rate offset by volume growth, our fourth quarter fuel consumption rate decreased 4% versus 2019 with roughly half of the improvement driven by core productivity half from interline run through fuel adjustments.

With some offset related to business next purchase services and material expense declined 7% in the quarter driven by more productive use of our locomotive fleet and a couple of favorable interline settlement as automotive shipments remain impacted by the pandemic subsidiary Drayage expense was also lower year over year equipment and other end.

Fell 4% in the quarter as a result of lower locomotive and freight car lease expense as we continue to use those assets more efficiently increased intermodal volumes offset a portion of those savings. However.

The other expense line is where you see the impact from the $278 million noncash impairment charge. When adjusted this expense category was up 2% year over year as you'll recall last year in the fourth quarter, we reported a $25 million insurance recovery in this cost line.

Solid expense control, including state and local taxes, which ended the quarter better than expected freight loss and damage expense also was lower year versus 2019, as we run a safer railroad.

Turning for a moment to our 'twenty 'twenty one expense expectations look for the following depreciation expense to be relatively flat versus 2020 purchase services and materials expense to increase high single digits with the recovery in the auto volumes and other expenses should be up low single digits, primarily driven by higher state and local tax.

It is in 'twenty and 'twenty one.

And for income taxes, we expect our annual effective tax rate to be between 23 and 24% looking.

Looking now on productivity, we continued our strong productivity trend in the fourth quarter generating $170 million of productivity. We finished 2020 at $708 million and a total of nearly $1.4 billion over the past two years, a fantastic achievement by the entire Union Pacific team.

These productivity gains were led by the operating departments continued progress on train length initiatives and more efficient use of all of our resources importantly, as Eric demonstrated on the K P. I slide we achieved this higher level of productivity, while also improving the reliability of our service product.

To finalize the cost variability analysis, we provided throughout 2020 slide 18 illustrates how we were more than volume variable on a fuel adjusted basis, whether viewed year over year or sequentially.

Stepping back to look at full year 2020 on slide 19, we're reporting earnings per share of $7 88, which when adjusted for the impairment charge is $8.19 declining only 2% versus 2019, despite facing volume and revenue declines of seven and 10 per cent respectively drew.

Given by the strong productivity gains I just discussed adjusted operating income only declined 5% to $8 $1 billion. Our full year adjusted operating ratio of 58, 5% represents an improvement of 210 basis points versus 2019 collectively these results demonstrate the organizations.

Alrighty and overall transformation as we work to overcome 2000 twenty's challenges.

Turning now to cash and returns Union Pacific maintained a strong cash position throughout 2020, as we purposefully maintained greater liquidity through the pandemic, while at the same time continuing to generate significant cash flow.

Aided by the timing on some tax payments full year 2020 cash from operations decreased only 1% versus 2019 to $8 $5 billion. Despite a 6% decrease in adjusted net income.

Free cash flow after capital investments totaled $5 $6 billion, resulting in a 101% adjusted cash conversion rate our dividend payout ratio for 2020 adjusted for the impairment charge was 47 per cent or slightly above our 40 to 45 per cent target range as we maintained our dividend through.

The economic downturn and distributed $2 $6 billion to shareholders and although we paused our repurchase activity during 2020 in an effort to preserve liquidity, we still repurchased a total of 22 million common shares or 4% during 2020 at an all in cost of $3 $7 billion.

This includes repurchases of 749 million made in the fourth quarter in combination dividends and share repurchases totaled $6 $3 billion returned to our shareholders.

Turning to the strength of our balance sheet Union Pacific remains committed to maintaining a strong investment grade credit rating and in 2020 with a b double a one rating from Moody's and an a minus from S&P. Excluding the impairment charge. We finished the year at a comparable adjusted debt to EBITDA ratio of 2.8 times are all in <unk>.

The debt balance at December 31, 2020 of $29 billion increased $1 $5 billion from year end 2019, as we took actions in the fourth quarter to pay down $1.3 billion of debt given our strong liquidity position.

Finally, our adjusted return on invested capital came in at 14, 3% down from 2019 due to the impact of the pandemic on our earnings and while the declining ROI see is never desirable staying within our historically high range reflects our long term capital discipline as well as the added benefit of P. S. Our capacity creation.

Jim.

Turning to 'twenty 'twenty, one we are confident in our ability to execute on the opportunities ahead and importantly, our outlook for the year includes the potential for improvement across all three performance drivers volume price and productivity with volume, we're looking for full year growth in the 4% to 6% range largely driven.

By year over year increases in the second quarter, our visibility into the year is murky. However, it really depends on a number of factors the vaccine rollout the sustainability of consumer demand and trade, particularly as it relates to grain volumes and a second half industrial recovery, but as you heard from Kenny we are bullish.

About our opportunity to win in the marketplace and drive business to our railroad.

From a business mix perspective, we see mixed day negative in 'twenty and 'twenty, one with the most pronounced challenges in the first and fourth quarters. The first quarter will be pressured as we moved from an environment, where crude and industrial carloadings grew in 2022, a day, where those volumes are lower year over year amidst growing intermodal business.

However, we could see those first quarter headwinds moderate some if grain shipments stays strong that grain strength and tough year over year comparisons will likely become a headwind, though in the back half of 'twenty 'twenty, one, particularly in the fourth quarter.

With an improved demand environment as well as a reliable service product, we will remain disciplined in our pricing approach and expect to yield pricing dollars in excess of inflation dollars in 'twenty and 'twenty one embedded in that guidance is our expectation that all in inflation for the year is expected to be around 2.25% on.

On the productivity front, you heard Eric outlined our plans for continued progress, which should generate roughly $500 million of added productivity. This year the.

The combination of growing volumes pricing above inflation and ongoing productivity should produce a full year operating ratio that is one of the Beth if not the best in the rail industry in 'twenty 'twenty, one and assuming the year plays out as I have just described we'd expect to be in the range of 150 to 200 basis points of operating ratio.

Improvement in 'twenty 'twenty, one so another solid year of gains in terms of first quarter guidance, we're expecting volumes to grow in the low single digit range with a potentially tougher operating ratio comparison dependant on the mix headwinds I just mentioned turning to cash and capital you heard our plan to invest around $2.9 billion of cash.

For the year well within our long term guidance of less than 15 per cent of revenue as we generate capacity through our P. S. Our journey.

The combination of topline growth, increasing profitability and ongoing capital discipline should result in a cash conversion rate that again is in that 100 per cent range and positions us to drive strong cash returns to our shareholders in the form of an industry, leading dividend payout and strong share repurchases bottomline.

We expect our performance in 'twenty and 'twenty, one to be a great step toward achieving a 55 per cent operating ratio, which is ultimately about enabling growth through efficiency and generating more cash before I turn it back to Lance I'd like to add my thank you to our exceptional work force 'twenty 'twenty was a very difficult year and our employees really rose up again.

The adversity and showed us what is possible so with that I'll turn it back to Lance.

Thank you Jennifer.

When we began our P S. Our journey in the fourth quarter of 2018, our objective was to drive efficiency across every facet of the operations, while providing customers with a safer and more reliable service product as you heard today, we've made tremendous strides toward that goal and we are building a solid foundation of.

Operational excellence, we made good progress across a number of areas on safety last year, we achieved substantial improvement on the rail incidence side, while we held the line on personal injuries and a very challenging year. Our safety performance is moving in the right direction on it I expect continued improvement.

In 2020, we took a step forward to reverse the impact of global warming our commitment to set science based targets and an improved fuel consumption rates demonstrate our pledge to operate sustainably while there's more work to be done. These are important milestones as reduce our carbon footprint and help our customers do the same.

First of all our enhanced service product combined with a lower cost structure is helping us win in the marketplace and grow and as you heard from Kenny our team is energized about the prospect of an improving economy that only expands opportunity to win new business to wrap up watch for more information soon on an upcoming investor day in <unk>.

Early may well, we would love to meet in person it will most likely be a virtual event, regardless, we're excited to lay out our vision to lead Union Pacific into a future of long term growth and excellent returns with that let's open up the line for your questions.

Thank you well now be conducting a question and answer session.

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In the interest of time, and so that we can accommodate as many analysts as possible. We would ask everyone to please limit themselves to one question.

Thank you and our first question today comes from Justin long with Stephens.

Thanks, Good morning, and congrats on the quarter.

Maybe to start with one for Jennifer on the guidance. So you talked about the expectation for 150 to 200 basis points of improvement this year, but just given there were some unusual items in 2020 can you talk about that the base 2020 or that you're using for that.

Guidance and then on the first quarter or guidance I. Just wanted to clarify are you expecting a deterioration on a sequential basis or year over year I just wanted to make sure I understood that.

Okay I'll start with that last one just in terms of the Q1 as you know there's seasonality in our our operating ratio in Q1 is generally our worst operating ratio of the year and so my comments were on a year over year basis not non sequentially.

Because that's that would be a very tough tough haul too you know roll Q4 into Q1. When you think about the fact that you've got the inflation that comes in year. One you know first of the year in terms of inflation health and welfare payroll taxes, starting up again, and so that was a year over year comment in terms of full year guidance.

You know when we look at the 58 and a half we did have about 130 basis points that was attributable to fuel on a year over year basis and as we're looking forward, we're really not expecting any kind of a headwind or tailwind from fuel as part of that 150 to 200 basis points of guidance into next year, you're right. There were some unusual things.

That happened during the course of 'twenty 'twenty, we did take some employee salary actions through the course of the year, we did that for about three months, we shut down some shop closures. So obviously those will be costs that will come back into the year that aren't going to be present on on year over year basis, but but that's how we look at it in and so when we're giving the 150 to 100 and.

Excuse me 150 to 200 basis points, that's to the 58, five and obviously you can make some adjustments to that to kind of set up what you see anything comparable.

Okay, Great very helpful. And then I wanted to ask about service and the key performance metrics. I know you have that fight in the presentation that outlines the progression there, but yeah talking to shippers and the big question is how.

Has the service improvement comment as a function of a lower volume environment I know on the fourth quarter that that changed but how are you thinking about those key performance metrics in 'twenty and 'twenty, one as volumes improve and I'd say, they're in line with your guidance do you feel like you can still improve on these performance.

Metrics across the board and if so maybe you could talk about where you see the most opportunity.

I appreciate the question so as we can.

I mentioned before we did have a challenge is when you look at the entire ecosystem that is the supply chain as we've reported this morning on a 12% increase in volume on intermodal. We also saw an improvement on our trip plan compliance for intermodal up to 83 per cent I do expect that to continue there is opportunities moving forward I can.

Even tell you three weeks into the year I've seen a significant improvement off that 83 per cent fourth quarter base now when you think about the opportunities on where we can go with that to continue to improve we've been focused on that are in 'twenty 'twenty and it remains a very critical item for us from 2021, as we think about how do we operate our intermodal terminals.

But also how do we partner with our customers. So we've spoken before about the gay reservation system. That's a continued opportunity for us every opportunity that we can see as a railroad that inbound traffic allows us to more efficiently plan for it and obviously it turned that efficiency into improved performance for the customer at the same time you're seeing.

This worked through the intermodal ramps themselves on when we think about generating capacity how do we ensure that we do that in a very reliable manner because increased capacity will drive fluidity in that fluidity drives to better performance over the road. So are very focused on in 2021 and it'll be a key result that we need to do.

I've even off this a relatively high base of 83 per cent in the fourth quarter.

And Eric and Justin just a proof statement when you look backwards into 2020.

We improved year over year, our service product in the second quarter as volumes dropped and we improved our service product year over year in the third and fourth quarter. When volumes came back. So we've got a proof statement that we're able to in.

Either environment continue to make improvements all I'll say is we've been working really closely with our customers and they have recognized that as the product come through our aligned that that service product has improved.

So Eric talk about the whole supply chain, yeah, we've seen some puts and takes in terms of chassis supply and in that sort of thing, but once the once it is on our network Eric and his team have really performed.

Okay, Great I appreciate the time.

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

Thank you operator, good morning, everybody wanted to talk a little bit about the outlook on the volume side and narrowed down a bit you know, 46% sounds pretty good on the outlook you mentioned domestic intermodal growing could you talk a little bit about the international intermodal our expectations, especially as.

We go throughout the year, because there was there seems to be a clear ramp up through the ports in.

On the fourth quarter and actually in the <unk> here.

Anyone think that yeah, let me let.

Let me just take a step back and highlight.

A few comments that I made earlier on.

This morning in terms of the challenges on the energy side and highlight the fact that he.

Hey, maybe we'd be at that five to seven per cent range. If you pulled out the coal that.

We acknowledge having said all of that on the international intermodal side are we said this publicly we've stated that we've had a pretty significant win in the second half of the year, we're expecting that to continue to ramp on.

We also have been encouraged by as the supply chain itself settles down that we should Oh, we believe we'll see more of those international boxes moved to on Doc type scenario versus being translated so on the international side of the trade opens up its consumer spending.

It gets better we would expect that that volume would increase and as I've stated earlier the service product in that area has really.

Improved and even as we sit today, there's a very strong service product.

Okay. That's good color can I appreciate that and my follow up is going to be for Jennifer Jennifer you mentioned, you guys got a little bit more conservative on the cash side with Covid.

Nearly ramping up though your share repurchase activity in <unk>, you know given the outlook for Capex is relatively flat and it looks like you guys are looking to to grow some of your profits here in 2021, how should we think about the share repurchase program are you guys going to try to play a little bit of catch up in 2021.

So thanks, Jason for that question you know in terms of catch up you know, we still have probably a little bit higher cash balance that were carrying today at the $1 8 billion. So that gives US you know I think a good strong start into the year and then we will see how the rest of the year plays out certainly as we are talking.

At our analyst day in May we're gonna outlined probably some more specific plans around not only our long term outlook on the business performance, but then how were going to deploy that cash to shareholders. So we'll probably talk more in may.

Okay I appreciate the time as always everyone be safe out there Jim.

Since then to you.

Thank you in order to allow all participants to ask a question. Please limit yourself to one question.

The next question is from the line of Scott Group with Wolfe Research.

Hey, Thanks, good morning, guys.

So Jennifer I didn't hear any color around labor cost outlook for the year, maybe if you can.

Share some thoughts there and I guess I'm trying to figure out the full year of war is typically pretty similar with what you do in the fourth quarter and the guidance implies something worse than that so maybe it's on the labor side and then if I can just bigger picture on the operating ratio.

I know it's on a full year, you just sort of did that mid fifties or with down revenue does that feel like the as good as it can get or do you feel like there's room.

Room for further improvement on that longer as you go out the next few years.

Well, maybe I can take that last part first I mean, you've heard us say Scott that while we have the 55 target out there that we're still moving towards we've not said that that's an absolute endpoint you know we still see opportunities ahead of us to continue to improve the efficiency you heard Eric talk through some of that and we're very bullish you know, where we think there's lots of opportunities.

Ahead, so again those will be things that we talk more about in may in terms of the the statement about fourth quarter being a predication in terms of what our full year is going to be you know I, absolutely appreciate that optimism and confidence and we feel very confident ourselves, but as you know theres a lot of puts and takes and then there's variation.

Did have a bit of a help from fuel in in 2020 that were not expecting in 'twenty and 'twenty, one, but it really is rooted in those three guidance levels that we gave you in terms of our volume or pricing and productivity. If we can outperform on any of those categories versus our outlook today that would be upside certainly yeah.

I want to reemphasize that Jennifer that.

Well the guidance. We gave is built on the assumptions, we outlined and if those if we can make those assumptions better we will we want to grow faster than the market, we're going to get as much productivity as we can we're gonna be relentless about efficiency, Yeah and you also asked about the labor side, we're not giving specific labor.

Cost inflation, if you're if you're talking about kind of where we've seen that elevated cost per employee. We do expect that to continue on we're going to continue to manage the work force very tightly and we think that's the right decision overall from me.

Thank you guys.

Thanks Scott.

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

Yeah, Hey, Thanks, and good morning, you've made me my question would be on the on the pricing side. So it sounds like there's an opportunity there on price and maybe particularly on the intermodal side. There's a set up I think on the truckload market that looks kind of similar to what we saw on 2018 in terms of inflationary pricing. So just wanted to get a sense of maybe what you think the opportunity is and maybe using 18.

On a corollary do you think we can get that type of acceleration in the core pricing side as we move forward and you know sort of where within the book of business do you see the best opportunity.

So first off I, just want to say it all starts with our service product, which allows us to really go out and compete in price of the marketplace and so we're excited about the service product being where it is.

Having said that we're in January we're in the early part of the season, we've gone through 15 or 20 per cent.

On the base out there and what I would tell you that based on the type of five based on the tight market.

There is a somewhat.

Somewhat favorable opportunity for us Brian in terms of that environment, we'd much rather be in this environment.

The environment as you've heard us talk about and 19 in the first part of 'twenty.

So we'll see how it plays will have a little bit more clarity as we get through our bid season.

Right now it appears to be a favorable environment.

Okay. Thank you very much.

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

Thank you good morning, Jim.

Kenny I want to follow up with you, obviously, some well publicized congestion issues you guys had the surcharge in the fourth quarter I'm, probably couldn't take on as much business. As you wanted to we've read you've lifted the surcharge is it should we read that to mean that you have the confidence that not only can you keep up this pretty strong intermodal trip plan compliance, but theres also.

So an opportunity for you to take some of the business that has been piling up on the West coast that maybe you werent able to take them in the fourth quarter and really grow the entire intermodal franchise are at a greater pace than maybe otherwise without those issues.

Yeah, there Eric.

Believe it or not.

A lot to unpack here.

Well, let me take the surcharges birth.

So first of all of those surcharges were in place.

For our customers that are in our M. C. P program. So I want to clarify that we have a program where customers receive containers and we want to make sure those customers on to that program would be those containers dorm.

So on peak season, we ran into a scenario, where we wanted to make sure those customers receive them because of the high demand demand is high right now, but it's not as tight as it was on the peak season, but we've removed those surcharges.

And we want to go out there and grow.

Let me pivot to another part of your comments around the congestion and just really a breakdown.

Breakdown on what we're seeing in the marketplaces, you know a lot of our containers are coming off the water.

Some of them or go on on talk to us by rail and I talk about that service product being a great. Other parts of that business is going into our warehouses out there and what you're seeing is some of those containers are out there are not turning some of the chassis are not turning that's where that congestion in the supply chain is going on we're working with customers.

Culturally Eric is working with customers very closely we've made some changes to our athletes Oreo charges, they're really incentivized and make sure that all customers on our supply chain.

Get the service product, but again as I've stated Watson saw on Union Pacific We've got on just.

A fabulous job of executing that service product.

Mhm.

Alright, Thank you Kenny very helpful.

Our next question is which line of Tom <unk> with UBS. Please proceed with your question.

Yeah. Good morning, I wanted to ask you a bit about where you think the the network goes and what are.

Yeah from a terminal perspective, and you know maybe it relates a little bit to the congestion.

So are you you know are you point out are you complete with your terminal.

Consolidation in Chicago are you still planning to do.

On terminal consolidation in L. A in intermodal.

And then what what should we think about in terms of metrics that would improve the most.

In 'twenty and 'twenty, one you had great improvement in train lengths.

In 2020, and I don't know if that's you know it's kind of a nice line up to the right does that continue at the same slope or are there other key P. S. Our metrics that we should look at that that maybe improve more given your focus on the operating side in 2021. Thank you.

Sure John Thanks for the question so let's start with an update on Chicago, So our consolidation of intermodal ramps in Chicago was complete we are working right now on the construction is complete we're working right now here in the month of January to consolidate the G. One operation into G too at the same time.

We've finished our consolidation of our two intermodal ramps in Houston, and that's 100% complete now to your point.

The efforts that we put forth looking at our terminals to drive increased efficiency, they never and I'm. Just this month in fact.

With the investments we've made in Inglewood, we're rationalizing the hump that we have set against now we often talk on these calls about comps, but I think it's important to point out that when we think about terminal efficiency and continued gains. It's all of our terminals. So even if it doesn't have a hump, we still look for it because in a P. S. Our strategy.

Being a piece of railroad, you're still driven after safety to touch the cars less so even on non hump terminals represent opportunities to touch the cars less by rationalizing our switching operations. We may use them for other operations like block swapping, but not for switching so here in the fourth quarter, we stopped switching and based on the city.

The Iowa, we rationalize switching in El Paso, Texas now.

And to be very clear those efforts will continue in 2021 and be on now regarding the metrics.

You're going to watch the ones that we reported but of course internally we have many more metrics that help us not only as lagging indicators, leading indicators I would leave you with.

On car dwell and car velocity and those are going to be your two biggest indicators of the benefits that we get by making improvements on our terminals, regardless of whether it's a home or just the conventional classification yard.

Kent can you comment briefly on the L. A question, whether you're going to do consolidation and terminals there or not.

Across the entire system, we're always looking for opportunities do you have a team out in the field.

Here in Omaha that is very focused on constantly asking ourselves as we make changes are there then additional opportunities based on those changes so that's as far as our guide you through the day.

Okay. Thank you.

The next question is from the line of Allison Landry with credit Suisse.

Thanks, Good morning, maybe just following up on on Toms question about the intermodal network.

You know you talked about some changes, but you know specifically I think a couple of the other rails have announced the development of a big logistics parks next two major intermodal terminals I think the BN has a couple on their network is there any opportunity on the U T network for something like that where you can sort of create these sticky.

Long term.

Relationships with customers and really drive long term share gains.

Yeah. Allison this is lance I'll start and then I'm going to turn it over to Kenny first for some detail that the short answer is yes, and they do exist Oh, we've got a very large industrial park immediately adjacent to the Dallas Intermodal terminal, where we've talked historically in and it's alive and running about the Dallas.

The dog plastics, a product so yeah, there are opportunities like that and we do a search for ways to use are on.

Our real estate and to the benefit of the railroad and that's happening all the time Kenny.

I appreciate that question I'll tell you what if you look at our network today and I'm on.

I'm glad you asked that because we haven't talked about it quite a bit but we have 11 rail ports that are out there you look at the major terminals like whether it's Los Angeles, where there's Houston, whether its Dallas, even if you look at the Chicago area, we already have rail ports in those major areas that we align.

We are trying to take trucks off the road and complement it with the intermodal network or carload network for that matter. So we're doing that today I don't want anyone to leave with the impression that that's not occurring a day, they're more opportunity for us to go out there and be aggressive and you were seeing some of that with the twin city of intermodal terminal.

Thank you.

As a reminder, in order to allow all participants to ask a question. Please limit yourself to one question.

Question comes from the line of basketball majors with Susquehanna.

Yes, good morning.

And the last two years, you've increased your strength.

Roughly 30% and I believe you said the volume's down on the over that period, where we're about nine on a daily basis.

Cause considerable progress I was just curious when we think about the model of a growing merchandise traffic and.

Adding new revenue cars to existing train starts and the typically high incremental margins that come with that.

That calculus been changed a little bit as far as how much capacity is left to go is hopefully the industrial economy shoppers or is there still a lot of runway to continue that historic relationship that you typically see when when industrial traffic recovers specs.

Yeah. That's Jim this is Jennifer I would say that we have not changed our enthusiasm around that and if anything I think as we're continuing to find ways to not only build train length, but combined the different types of traffic that are moving on a train that gives us further opportunity to do that so those are things that we were definitely have been doing in <unk>.

We will continue to do and I think it drives very favorable results as you saw on the fourth floor.

In the bathroom. If you were kind of part of your question I thought I heard is there a limit the train length at some point in the future.

I think Eric had mentioned, we're going to continue to find train length and plan for finding train length opportunity through 2021 part of that is reflected in our capital plan for another 20 siding extensions or new sidings and so we don't see them into that yet either.

Thank you.

Our next question is from the line of Ken <unk> with Bank of America. Please proceed with your question.

Hey, good morning.

Great job on the operating ratio, but John I think there's a little bit of confusion if you could just clarify.

Your your comment on the first quarter is it going to be worse year over year is it is it just tough, but just maybe some clarification because I think there's some some confusion on on your comments and thoughts and then just a follow up on that last one deciding lengths you're only building half the number of new signings this year versus last year, So 20 versus 30.

Should we expect deceleration on that progress or is there anything any comment about the deceleration there. Thanks.

Let me start with the question and then I'll turn it over to Eric to talk to you about the siding. So my commentary is that you know what.

We're gonna have a little bit tougher comparison here in the first quarter and again I'm talking year over year, just because of the mixed headwinds that we're facing not saying that we can't improve it I'm, just saying that you need to take into that that makes headwind as you're looking at the calculus with a down industrial volumes, particularly less crude oil.

But hopefully you know, we're continuing to see strong grain and that will help in any solid green certainly did in terms of helping that business mix profile in the fourth quarter. So that was my commentary again and.

And to build out so again I. Appreciate the question. When you think about the sidings on doing 20 versus 36, I would not read into that as an intentional on deceleration what I would read into it as we are being very judicious judicious.

With working through the process that we have used over the last two years to truly understand where are the largest opportunities and then making the investment when we need it we still want to continue to challenge ourselves, though that growing train length is not necessarily all about capital investment.

On a per briefly mentioned and I'll elaborate on some of it's just process. We have for example, trackers today that are really more Dan it data analytics that help us to see hours in advance of a combination opportunity where we can take two trains and put them together, we can see that five six hours in advance, sometimes even longer and what that is.

Allows us to do is for the local team to prepare for that and then also for for example, or Harriman Dispatch center to ensure that we have resources up against that so we're seeing the railroad with better clarity than we have ever before and you're going to continue to see us grow trailing but it's not always going to be driven by capital investment alone.

Great. Thanks, Eric Thanks, Jim.

Thank you. Our next question is from the line of Brendan Galinsky with Barclays. Please proceed with your question.

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

Following on that line of thought there you know you guys are keeping capex flat again, obviously, some spare capacity in the network like you're talking about there, but I guess, how sustainable do you see this equation you know keeping capex around these levels continuing to grow volume isn't there some point at which the physical capacity would be required and I guess, just as a quick follow on to that too.

How are you guys keeping DNA are flat this year, if you don't mind.

So let me start on the capital and then we'll turn it over to either Jennifer Eric on the on the second part.

So when we think about our capital and long term looking into the future, we've created quite a bit of excess capacity or or open capacity through <unk> on the unified plan.

And nothing would please us more than to have enough volume growth to justify it.

Investing more capital you look at our ROIC.

Every dollar that we put in the ground generating 15 plus percent, we love that.

But we just don't need it given the amount of capacity that we have at hand, the way we're running the railroad today so.

And it's very difficult to look out into the future and say boy at this date certain we will need to turn on more growth capital, it's going to depend on where the carloads are in the network how much. They are look but again when we do face that question. That's a very good day for us and I think it's important to note that in the two.

Nine that were you.

Roughly that we spent in 2020 and we're gonna spend again here in 'twenty and 'twenty, one, we're making investments for growth in there and that's not all on maintenance Capex. When you think about some of the investments that we're doing in the terminals and the intermodal facilities in Chicago and Houston, that's going to support growth. So I think you need to keep that in mind.

You are going back to your question on G&A being flat I guess I'm not sure if youre asking that what you're asking that in terms of how do we do that in 2020, how are we doing that in 2021 could you maybe clarify that a little bit.

Oh I'm, sorry, I think you said DNA would be flat this year right DNA I'm, sorry, [laughter] pet health. So I thought you said G&A our depreciation.

Asian expense, so I'm as you know we do studies every year in terms of looking at some real lives and I think we've got a little bit of a favorable news there on on rail and that is helping us out a little bit on on the depreciation side.

Yes.

Thank you.

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

Thanks, Operator, hi, everybody.

Lance and Kenny I guess I just wanted to ask about gross.

Because I think from here growth in I guess growth alone.

Is what will allow the company to realize the full benefits from all the changes with respect to the operations and the networks and I guess I'm not just talking about you know a rising tide easy comps cyclical recovery, but rather kind of above market growth and market share wins and I think it would be fair to say that.

No.

Last decade was not not characterized by growth, but rather maybe pricing and returns so.

You have a better network a leaner network I'd, just love to get a sense of how how are you going to pivot the.

The business on the culture.

The company towards growth and maybe even just give us some tangible examples because I think you have the market share wins, but if you could just provide a little bit more clarity on those.

That's an excellent question you're exactly right.

We are in the process of turning our sites to while continuing to improve our margins and yields to add to that a more strength on the growth leg of the stool and Kenny you've got a couple of things culturally that you've done inside the commercial organizations.

Not all just about the commercial organization in terms of supporting growth, but I think they're indicative of where we're going.

Yeah. That's a great question on that I'll I'll tell you we have a number of commodity that will will grow and we still have to compete we still have to go out there and compete against.

Trucks another mode to go out there and win that business. We have good line of sight of though we feel good about it.

I like your word choice of culturally I'll tell you on payments, we're very excited about.

Where we are we've changed our compensation program. So that we can motivate the sales team to go out there and when we want to make sure that they are spending their energy and focus on carload growth and I can tell you that the leadership team here at the table with me, we're all supportive and they're all committed to that carload growth I'd be remiss if I did.

I'd say, we had a really good clarity on what those goals are transparency on what it's like to win and really clear metric.

Support rope up behind it we have things like ensuring that there are good.

Not necessarily margins, but they were went in with the right kind of margin and we achieved the right kind of price. So it's all baked in there to just motivate the team and we expect that to be a great cultural change yeah, four and Kenny you've changed your org structure to streamline it.

You've distributed business development goals to more broad than just each sales person everybody on your team has business development responsibility on me.

There's just example, after example of fundamental changes that have been put in place in 2020 that we think are going to drive growth in 2021 and beyond.

Thank you.

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

Thanks morning, everyone. Thank you for the and market commentary for 'twenty 'twenty, one, but I think one of the end market's missing there was international intermodal our apologies if I missed this but can you address kind of what do you see in terms of trends there given that that was one of the end markets that it really was it was Betty watertight on 'twenty 'twenty.

Yeah, you know again, the big things, we're looking at is consumer spending and trade there.

The timing on the vaccination adoption of a vaccination.

We expect to have a direct impact on those international intermodal volume.

As the demand we believe will be sustained we feel good about the service product we feel good about our interaction with our customers on the processes that they have adopted to allow us to efficiently grow there. So all of that go on into 2021, we believe will be a positive force.

Great. Thank you.

Our next question is from the line of Allison <unk> with Wells Fargo. Please proceed with your question Hi.

Hi, good morning, we'd like to circle back to that growth question, just in terms of but love to hear your perspective on technology isn't able to an enabler of that great and are you looking at it and where it's sort of a productivity enhancer or is there more opportunity on sort of reliability and service in terms of eating that share back any thoughts.

Let me start with that and then I think everybody on the team might have a perspective. The first thing I want to note is our most recent addition to the senior leadership team with raw, whom Jalali, who joined us as our C. I O.

I think it was in early November last year.

He's bringing fresh energy and perspective to the team.

Allison, we think about the role of technology all of the above in terms of what you asked about it it definitely plays a role in growth in terms of customer experience in terms of us developing platforms and ecosystem for our customers to participate in and resolving their needs from.

Their perspective, there is there's been a real juice applied to so that in recent months.

And we're going to continue to use technology to enhance efficiency and productivity U P. Vision is a great example of that getting something a minimum minimally viable product in the hands of our operations team and then developing it on the fly into a very very strong productivity tool today look book.

Kenny and Eric you guys are the ones experiencing it.

I'll tell you, we we certainly want to take advantage of it from a commercial standpoint to go out there and make it easier for customers to do business with us with the end game.

Pointing towards growth. So, yes, we have a number of visibility tool that our customers are using so they can see what's coming to them at their plant either on the U P or offline. We've certainly talked about the usage of API before it's opened up a market for it and I mean literally we've been able to go out there on Wednesday.

Having API and our tool kit.

Again, we've done a great job of expanding that customer.

Engagement with the API capabilities I've been encouraged from.

His comment Rahul coming on board and he really have on have a vision for helping us remove pain point that the customer might have through it and then lastly, just a setup Eric here from a visibility standpoint, we certainly utilize technology to see work come into.

So a good example of that is the containers that are heading into the west coast Port.

We have a battle him handle on more clarity now what.

At the core it wouldn't come until the point port and we utilize that to leverage to come up with a good strong solid third pronto.

Allison Lance and Kenny on both highlighted.

Tools and technology that allows us to see a railroad.

But what I'm very excited about on top of all that is we have made tremendous strides in technology on how we execute on our railroad. So if you think about for example, the upgrade with our implementation of our Cat X system with him on Dispatch center. This drives not only more fluidity to drive improved customer service when I look at.

What our engineering department on mechanical departments are doing to reinvent the way they do their work, whether it's to occupy less time or whether it's to do the work on a more efficient manner. There are.

Almost book countless number of initiatives that relate to technology that are driving that and you'll see that continue in 2021 and beyond.

Great. Thank you.

Our next question is from the line of Cherilyn Radbourne from TD Securities. Please proceed with your question.

Thanks, very much and good morning, most of my questions have been asked but I was hoping that you could expand a little bit on the outlook for your green franchise, including where export flow stand now relative to normal and where do you think on farm inventories stand.

Okay.

A couple of good question Cherilyn, So I appreciate that.

You know right now, where we're kind of in the early innings and so what I'd tell you is that for this quarter Jennifer mentioned that.

And it's still pretty early on in but it looks like green in the near term we'll.

We'll hold up and so we'll have to see we're working with our customers very closely to give forecasts on that I'll tell you, though in the back half of the year the comps get a lot tougher however that will still be a very strong 2021. So you want to keep that in perspective, I think the last part of your.

Question is just around AR inventory are we.

We feel good about the fact that they were doing quite a bit of grain out there. We saw the grain inventory decrease about 10 per cent year over year, we're expecting a pretty strong crop.

With that you know we feel good about that demand being at the thing so Eric and his team will deliver that and our commercial team a fan engage.

To maximize them as many shuttle if we can get and share Atlanta I would add our current demand as being largely from export perspective, as being largely driven by China and China's entry back into the U S beer market, partly reflecting the phase one U S. China trade deal partly.

Collecting AR.

Basically recovered hog herd.

In domestic China, So what China does through the year is really going to kind of predicate what happens in the second half of the year in terms of export grain.

Right on with I mean.

You got that dynamic on some of our customers have talked about talked to us about Brazil on whether or not there was a drought down there that might impact the demand, but I can tell you we're focused on.

Executing and getting as much you know grain business that we can export out of the country.

Great. Thank you for the time.

Our next question comes from the line of Brian on <unk> with Jpmorgan. Please proceed with your question.

Hey, Thank you good morning, So one more question on.

Lance you talked in the press release about taking share of the freight transportation market wanted to ask if you could provide some more context around that and it sounds like we need to do to get there is a bit of a mix of infrastructure service technology.

And it took us from the sales team, but where do you see the biggest opportunities are they buy it makes it whole where commodity type and do you think this is something that you can actually quantify on when we get to the analyst day.

And me and then I guess on a related point.

Yeah, typically we think about some of the conversion opportunity is coming with a bit of a neutral or a negative mix. I. Appreciate you can't comment about this is still going to be margin accretive.

Accretive, but how do you how do you reconcile book.

And what we've seen in the past.

As you know what you're targeting is it more of a more of a density per year.

Better service better pricing so.

Putting some context around that would be appreciated.

Okay, Brian So let me try to unpack that and I'll try to do that holistically. So so.

The question being around a growing our share of the freight market and what does that mean and you've asked some questions around the implications of mix and and what it takes to win and what gives us confidence. So when we talk about growing our share of the freight market we are deliberate.

The broad because we're focused first and foremost on converting trucks from highway are inside of that we're looking for commodities that.

Our underpenetrated to train and have the dynamic where they should be we should see greater share overall of trained penetrating freight and also our customers that used to ship on us and don't anymore trying to unpack why and what we can do about that.

And the new markets that are on.

Our opening up to us both because of our service product and our cost structure. So you know we're deliberately broad because there the target markets are deliberately we're on.

In terms of what it takes it takes an excellent service product and from most customers perspective, that's about reliability and consistency. There is also a safety and an ESG component there many of our customers look to us to help them.

Meet some of their commitments to their shareholders and stakeholders in terms of their carbon footprint. So there's that.

It also takes us having a deep knowledge of the marketplace through Kenny commercial team. That's that's the secret sauce of the commercial team is understanding many markets deeply deeply enough to understand what it takes to win and then we've got to have a service products designed to do that that meets the needs of our customers.

You've got it partly right I think they've even largely right and that is as we grow looking forward a lot of that looks like it's going to go into the intermodal.

Product.

Our intermodal product everything else equal tends to mix us down now having said that our intermodal product is also becoming more.

Profitable overtime and were not going to stop.

On that initiative.

We're also very very confident in our ability to leverage growth through productivity.

Put that altogether and bottom line what it says is.

We're going to continue to use all three legs of the stool to make future margin cash generation better than today and our confidence coming out of 2020 has really never been higher and being able to do that.

Okay.

Got it. Thank you guys appreciate it.

The next question is from the line of David Ross with Stifel. Please proceed with your question.

Yes, good morning, everyone.

To touch on Mexico for a little bit commentary on the growth you're expecting in 2021, and the Mexico business versus the U S business shouldn't be better should it be worse about the same.

Yeah. So.

Thanks for bringing that up so first of all we've been encouraged by the fact that you know that.

Mexico business, we've got a significant percentage of that tied to the automotive network and we're seeing that come back which is encouraging to us.

We're also seeing from areas like the Mexico Energy reform.

Oh come on area or pipeline for growth force.

As I look at some of the wins that we've had and to lance's comments around that truck business really Mexico is an area, where we have been able to go after and grow that piece of the business that we're over the road that we haven't won before but we are encouraged about Mexico at the same time, if you look at it as a whole on Mexico.

It's still Underpenetrated once you walk outside of the automotive network and so we've been working with customers and supply chain partners to see what we can do to on tap some of those markets though.

We're pretty encouraged about Mexico on what a hassle for 'twenty 'twenty, one and long term.

Got you.

Thank you David.

Our next question is from the line of Walter <unk> with RBC capital. Please proceed with your question, yes. Thanks, very much operator, so I want to take a little bit more cautious question around the growth or cautious angle to the growth question.

When when other peer share of railroads or what other railroads have converted to <unk>. They've noted obviously, a very significant service improvement that's led to the ability to grow share very strongly, especially if they are up against the non PSS. Our railroad as you are my question. Therefore is is does that.

What is the capacity of your organization to grow are there any capacity issues that you've identified that you need to address in order to accommodate that growth and are you I mean, we've.

We've seen other railroads tempted to go down rather unconventional path toward growth.

Yeah.

Acquiring another market. So what are your thoughts around.

Not the pure rail related growth opportunities, but going going down some of those other routes. Your view on that would be it would be appreciated as well.

Walter Let me take a stab at that and maybe Jennifer wants to add to my comments.

You very much for the question so.

When we think about growth and using our service product to grow.

You know absent some surprising very regionalized.

Response, I think we've got good capacity around the network, we've got the ability to react to growth as it's occurring if we need to add to whatever our capacity is and I candidly I just look forward and I don't see.

Even even in some strong growth are I don't see a.

<unk> to us that would that would cause us alarm I think our processes are mechanisms for seeing growth as it's occurring nowhere, it's happening being deliberate about what we're going after I really think the network is on very good footing.

So that's the that's the what is needed and a capacity perspective in terms of.

Part of your question about.

What.

Elements are you thinking about growth when it comes to non traditional.

Unpacking, we think of three ways to grow the first is put carloads that fit the network that are profitable on the network clearly that's that's a step one and the most favored way to grow because it's got great incremental margins and it uses capacity that's available another way for us to grow is to do more.

For our customers.

Perform more function for them and their supply chain logistics, and that's always an opportunity and we're working on that because it also helps make customers stickier with us, we're providing greater value to them and and in the process solving their problems.

Whatever they are addressable problems are for us and then the third way that we think about growth is increasing the geographical footprint.

We've been pretty clear that when we think about that from a.

Our class one merger perspective that there's a lot of opportunity for regulation to destroy value in that process and so far the economics, just don't look like they pencil out, but that's not the only way to increase our geographic footprint. We can do it through one of the earlier questions. How do we use our real estate to increase our <unk>.

Rich maybe through an incremental trans loads for incremental logistics parks. So yeah.

Walter we're thinking about all three all three have action against them and I think we'll probably get into a bit more detail on that when it comes to the Investor day Yeah.

Typically kind of put a bow on it I mean, I think that's what you're touching on is what we see as the great leverage and great opportunity. That's ahead of US is to grow in a less capital intensive manner over the next period of time. When you think about the locomotive assets that we can deploy that freight cars the track capacity day.

Ability to redeployed terminals, if we need to I mean, those are all great news stories for us to the extent that we start deploying those assets and we see a future where we will be deploying those assets I think that the real value on the leverage that we have ahead of us.

Thanks, a lot of sense I appreciate the time.

Thank you. Our next question is from the line of Jordan Alger with Goldman Sachs. Please share with your question.

Yeah, Hi, good morning.

Question, just on the revenue per carload or yield them I heard what you're saying about the first and fourth quarter, just sort of wondering from a context standpoint.

I get the headwind.

Can you sort of put that in context with the minus 4% you did in the fourth quarter Covid.

Did it look better versus that are we talking in the same order of magnitude that's sort of the second part of it is in terms of the second and third quarter when industrial set to most likely inflect positive cash there'll be a period, where mix becomes a tailwind in 'twenty 'twenty one.

So Jordan I think you're thinking of it right. So if we think about revenue per unit or arc, just flat revenue in the first quarter. You know you heard us say that we're looking at low single digit growth on a volume standpoint, but we are going to continue to have a pretty strong fuel headwind in the first quarter as we did through much of 2020.

You know right now we are paying call it about 60 or so a gallon from <unk>.

I think we paid close to about 90 in the first quarter of last year. So it's just that fuel surcharge revenue.

Gonna be a driver there in terms of the revenue per unit you you all see that and then obviously the mix with the industrial carloadings are continuing to be down that's our highest average revenue per car unit type of business and so that creates a headwind we're bullish on the grain and feel good about that so you know, we'll look to move as much of that isn't possible.

Can but there is going on but I think as you also touched on it.

Now to the second and third quarters, you know we have opportunities you know Kenny talked about an improving price environment youre going to have that headwind abate relative to the year over year fuel change them and then if we can get some growth on that on industrial side that could be great news as well.

Just just just follow up quickly on that on the on the arc for intermodal, which I guess its been running a bit negative is there mix stuff going on there too does that have a chance with better pricing to move in a positive direction in the upcoming quarters. Thanks.

Yeah, I mean again as you know there's mix within mix. So within intermodal you have both international and domestic and there are differences there and then as part of that premium group overall automotive is in there and automotive obviously is a big part of that when you see those volume is down year over year in intermodal growing mhm yeah.

Thank you.

Thank you.

Anil question. This morning is coming from the line of David Vernon with Bernstein. Please proceed with your question.

Hi, good morning, and on this topic of kind of Catalyzing growth Lance when I look at the performance metrics page on the trip plan compliance.

Typically like 83 for intermodal 74 from manifest I think one of the easiest lever you could have to take more share would be to improve those.

Those metrics I guess I'm looking for some perspective on on how satisfied you are with the trip plan compliance today, how does that compare to your primary competitor on the West and then what can you do.

To drive those metrics up because I would think that would be one of the easier path towards maximizing our share with existing customers.

It's a great question, David So we.

We are not satisfied with our Kpis were pleased with the progress we've made and we think they are.

Good in the marketplace and position us to be able to compete for and win business, but that we also think there's some upside in terms of improvement.

Having said that 100% is not an outcome. That's that's reasonable that that's actually likely or even optimal in the railroad environment. The way, we measure trip plan compliance, whether it's for the intermodal product or manifest and autos, what we have said and do think.

So we can get that intermodal trip plan compliance into the high Eighty's and low ninety's and have it sit there and if we can get the manifest in autos into the 80 ballpark and low eighty's and have it sit there that's a sweet spot balancing out our resources and fulfilling a consist.

<unk> reliable service product that supports the needs of our customers. So there is a bit of an upside there.

David I wouldn't hang my hat on that's going to generate two and three and Forex growth. What that does is it continues to set us up to compete effectively and we're already really set to compete effectively against our primary rail competition and we've got a lot of work underway with some delay.

Every on being able to compete effectively with truck.

And then is there any is there any sort of attention between that sort of playing clients net number and and train length. I guess no like operationally I would think that there might be a little bit of tension there, but I mean is this a situation where we are right now where we're maximizing efficiency and maybe leaving some growth on the table is that the way to think about it or was that not to.

But no I wouldn't I don't think that's the right way to think about it David although youre right that.

We have moved virtually all I think all of our critical operating Kpis in 2020.

Favorably in comparison to 2019, both the efficiency and productivity measures and the service measures. So we've demonstrated we can move them. Both on the same direction, it's not easy right, that's not a layup because.

If we don't think about our network right, we can get into a place where we're making those false tradeoffs between productivity and efficiency and the service product I label on false tradeoffs because they think they are we think about our network right. We can do the hard work of both.

Alright.

Yes.

Thank you.

At this time, we've reached the end of our question and answer session and I will hit on the floor back to Mr. Lance Fritz for any closing comments.

Thank you Robert Thank you all for your questions. We look forward to talking with you again in April when we discuss our first quarter 'twenty 'twenty. One results until then I wish all of you good health and safety and please take care. Thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.