Q4 2020 Norfolk Southern Corp Earnings Call
Greetings and welcome to the Norfolk Southern Corporation fourth quarter 2020 earnings call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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It's now my pleasure to introduce Pete <unk> Senior director of Investor Relations. Thank you. Mr. Sharma line you may now begin.
Thank you and good morning, everyone. Please note that during today's call. We will make certain forward looking statements, which are subject to risks and uncertainties and may differ materially from actual results.
Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties, we view as most important.
Our presentation slides are available at Norfolk, Southern Dot com in the investors' section along with a reconciliation of non-GAAP measures used today to the comparable GAAP measures. Additionally, a transcript and downloads will be posted after the call.
It is now my pleasure to introduce Norfolk, Southern Chairman, President and CEO, Jim Squires.
Good morning, everyone and welcome to Norfolk, Southern's fourth quarter 2020 earnings call.
Joining me today are Cindy Sanborn, Chief operating Officer, Alan Shaw, Chief Marketing Officer, and Mark George Chief Financial Officer.
I'd like to begin today by recognizing the hard work and dedication of all of our employees persevered and adapted throughout 2020 to serve our customers and communities and enhance shareholder value.
As the past year unfolded change was one of the few Constance driven by the COVID-19 pandemic as well as a global shift in energy markets that significantly impacted our business.
Our people day in and day out ensured that our railroad was positioned to succeed by delivering for our customers changing needs, while seizing efficiency opportunities that produced record productivity levels and advanced our <unk> based operating plan.
Moving to our results on slide four for the quarter EPS was $2.64 and the operating ratio was an all time record at 61, 8%.
Prior to summarizing the full year results I'll highlight two previously disclosed noncash charges.
First recall in the first quarter, we launched a rationalization of our locomotive fleet by 703 units, which resulted in a noncash charge of $385 million.
This was possible due to the deep and lasting efficiency that we've driven into our train network through precision scheduled railroading.
Next.
In the third quarter, we disclosed a 99 million noncash impairment charge related to an equity method investment.
I will speak to full year results, excluding both of these charges.
For the full year revenues declined 13% as we experienced significant disruption in business levels on the dual impacts of the global pandemic and energy market changes.
In response, we press forward with the <unk> initiatives and quickly adapted to control costs and as a result, we more than offset the revenue decline with a 14% reduction in our adjusted operating expenses.
The adjusted operating ratio improved to 64, 4%, which marks the fifth consecutive year of improvement.
As we managed significant volume fluctuations throughout the pandemic, we idled for additional hump operations streamlined our resources and completed a redesign of our southern operations around Atlanta ahead of peak season.
Since our launch of top 21, we've completed a total of six hump rationalizations, and we've substantially reduced our asset requirements.
Our ongoing efforts to improve fuel efficiency and resource productivity produced our best results to date.
These actions contributed to another year of operating ratio improvement on an adjusted basis and are especially crucial to drive profitability and efficiency even further in 2021.
We see ample opportunity to affect more positive change and remain focused on closing the O our GAAP with the industry.
Moving into 'twenty and 'twenty, one we are committed to providing a superior value to shareholders and best in class service to customers through an efficient profitable operation building further upon record productivity and efficiency gains to foster a platform of growth.
Increasing resilience in our service offering and creating latent capacity to grow with our customers is in lockstep with our goals to grow profitably and efficiently.
This alignment is paramount as we continued to leverage our superior positioning to consumer and industrial markets that have been proven growth drivers for Norfolk Southern.
We will leave no stone unturned as we drive efficiency and create value for our shareholders I'll now turn the call over to Cindy.
Good morning, when I spoke to you last quarter I had been at Norfolk southern for less than two months.
But I had already found a strong foundation and opportunities for us to maximize the value of our franchise.
The most recent quarter has reinforced my belief in the magnitude of opportunity in front of us and that we are positioned to capture that opportunity.
During the fourth quarter, we saw volumes continue their climb from pandemic induced lows earlier in the year. So the mission of the operating team was handling more business, while reducing resources and improving productivity.
Our push for efficiency led to record train weight and record train lengths in the quarter. These.
These larger trains combined with our strategy of better matching train size and locomotive horsepower drove us to record fuel efficiency and enabled us to get the job done with a smaller workforce and a record low count on locomotives.
I also have to thank the people that make up our operations team and all kras.
We achieved these records due to their hard work and most importantly, we did so safely.
Turning to slide seven our network performance throughout most of 2020 was strong with many metrics at or above record performance levels, even with unprecedented volume volatility.
We accelerated network changes in the fourth quarter ahead of holiday peak season, and as volume reached the highest point of the year.
As you can see on the slide our network fluidity metrics came under pressure as the quarter progressed.
It is important to note that implementing these network changes as soon as possible while challenging is.
A key to future success, with our ongoing efficiency and growth initiatives, which I'll cover in more detail shortly.
I can confidently say that we are meeting these challenges head on and have already improved fluidity in the first quarter as the black line on the graph indicates.
We are focused on executing and improving the plan and when necessary and justified deploying temporary resources to quickly address congested areas.
For example, while we put put locomotives into storage this quarter well, we'll use those locomotives temporarily if needed before returning them to inactive status.
I have been very pleased with the way the team has risen to the challenge, especially during the holiday peak season, when they up their game to meet service expectations, even with additional premium intermodal traffic.
Moving to slide eight traffic coming back is both our challenge and an opportunity we can and will add resources to meet customer needs, but first we must explore every option to fully utilize our existing crews and locomotives.
We eliminated a lot of structural cost, including indirect and supporting cost during the pandemic. So we're being very careful to keep those costs from creeping back.
Before we add a new service the team goes through an extensive vetting process to explore the alternatives, including rebalancing traffic between existing trains and tactical extra trains.
The focus is on using additional volume to help us increase the value we ring out of each locomotive and each crew start.
Railcar velocity as our touched on throughout as we push to quickly move volumes through the network.
We have also made our organizational structure within operations more efficient during the quarter by reducing from nine to six geographic divisions and de layering our management structure to speed decision, making and ensure that communication is clear and quick.
As Alan will explain we are preparing for significant volume growth in 'twenty 'twenty one.
On slide nine our six techniques that will help us get maximum leverage from additional traffic.
Full Penn is a technique used to optimally match train size with the pulling power of locomotives well.
Well he volume fluctuations can make this challenging full pen drives fuel efficiency controls crew starts and improves asset turns.
Increasing the blending of different kinds of traffic on the same train supports full pan and minimize additional train starts.
We improved car velocity by blocking cars for the most distant possible destination, reducing yard costs by minimizing handling.
Well, we have reshaped the network through our four recent hump yard conversions, we are successfully minimizing hiring and training costs by helping furloughed employees in one craft transfer to another.
This helps both the employee and Norfolk Southern.
Those crap transfers are one way, we are being more agile flexing, our resources up and down in sync with traffic volumes.
We adapted the plant quickly through the pandemic and we continue to exercise that muscle memory.
Finally, we are dynamically managing our operation to handle traffic fluctuations keeping cars moving even when volume spikes.
I am confident that we can meet customer expectations with our fast efficient network with that I will turn it over to Alan.
Thank you Cindy and good morning, everyone.
<unk> related to Covid, 19, and energy markets challenged volume in 2020.
With revenue improving sequentially through the second half of the year.
Throughout the recovery.
Continued our focus on project driven growth and margin improvement supported by our market approach and service product.
As you can see on slide 11, the dual shock of the pandemic and declining energy markets pressured volumes in 2020.
However, volume in both our intermodal and industrial markets, excluding energy returned to growth during the fourth quarter as the economy continued its recovery from the pandemic.
Turning to slide 12, full year, 'twenty 'twenty revenue decreased 13% and total volume declined 12%.
While our business capitalized on a V shape recovery and consumer driven markets year over year declines persisted in energy, which accounted for more than 70 per cent of the 'twenty 'twenty revenue decline.
Our continued commitment to margin improvement partially mitigated these impacts resulting in our P. Less fuel increases in all three business groups during each of the last four years.
The mix impact of increasing share of intermodal volume relative to decreasing energy volume resulted in the total ARPA you decline.
Merchandise revenue fell 11% with almost all markets experiencing pandemic related losses.
Notably energy related commodities face supply and demand shocks.
<unk> high inventory levels and record low commodity prices.
Most prominent in the second quarter dramatic declines in manufacturing and vehicle production place downward pressure on steel prices and production for much of the year.
Intermodal revenue recovered significantly in the second half of the year.
However, first half losses resulted in a 6% revenue reduction and a 2% decline in revenue excluding fuel for the full year.
E Commerce, and consumer driven business supported the intermodal recovery, particularly in our premium segment.
Secular declines in the coal industry accelerated during the pandemic as coal revenue and volume dropped 37% in 2020.
In the face of declining low demand with product substitutes gaining market share.
Utility volume fell sharply year over year due to sustained low natural gas prices reduced industrial power demand and high stockpiles.
Lower seaborne coal prices were a headwind entering 2020, which coupled with the onset of COVID-19, and import restrictions led to challenged volumes, especially in the second and third quarters.
While pandemic conditions negatively impacted revenue and volume in 2020, we maintained our focus on delivering a service product that enables our customers and Norfolk southern to grow as the dynamic transportation environment continues to strengthen.
This approach supports our strategy of providing a truck competitive consistent and reliable service product to our customers.
Allowing our customers to compete while creating operating leverage for Norfolk, southern and adding value for our shareholders.
Moving to slide 13, our fourth quarter revenue results improved sequentially and outperform normal seasonality as the economic recovery gained momentum.
Total revenue for the quarter was down 4% year over year as energy declines outweighed the year over year growth in both intermodal and merchandise.
Excluding its energy components.
ARPA declined reflecting lower fuel surcharge revenue and the negative mix effect of higher intermodal and lower coal volume.
Within merchandise, both volume and revenue were down 5% year over year, driven by declines in crude oil and natural gas liquids.
Crude oil shipments were heavily impacted by reduced global consumption due to COVID-19, leading to lower refinery run rates significant storage worldwide and unfavorable price spreads.
Shipments of natural gas liquids were also down significantly due to additional pipeline capacity coupled with lower consumption.
Partially offsetting these declines were gains in soybeans from increased opportunities for export.
Reflecting our longstanding focus on margin improvement merchandise quarterly revenue per unit less fuel increased year over year for the 23rd consecutive quarter.
Intermodal business levels grew meaningfully year over year as we leveraged our powerful franchise to secure new opportunities from the surge in E commerce activity Rec.
Record tightness in the trucking sector and recovering global demand.
Excluding fuel fourth quarter revenue increased 11% year over year.
Domestic shipments were up 7% year over year propelled by more than 30% increase in premium shipments.
Revenue per unit less fuel reached a record level on the fourth quarter, marking the 16th consecutive quarter of year over year growth.
Our coal franchise experienced continued declines amid low energy prices in the fourth quarter.
Thermal export volume increased which was more than offset by a 40% decline in utility tons.
Our utility franchise face continued pressure from low natural gas prices renewable generation and reduced manufacturing output.
In total coal volume fell 25 per cent from the same period in 2019.
Record level revenue per unit less fuel was driven by positive mix within our utility markets and volume shortfalls.
Moving to our outlook on slide 14, we are closely monitoring economic developments and the attendant impacts on our franchise.
Markets have not recovered equally.
The consumer driven market recovered first and has exceeded pre pandemic levels, while manufacturing markets have been slower to recover with existing social distancing protocols and labor force participation.
Although economic uncertainty persists current trends support optimism for our business in the coming year.
With an improving manufacturing sector and expected strength in consumer spending.
Yeah.
With respect to the merchandise markets. We expect this steady recovery in manufacturing activities to support our customers' efforts to rebuild inventories and meet increasing demand.
Total manufacturing activity is accelerating driving opportunities across our merchandise segments.
Supply chain disruptions on supplier shortages have further impact that inventory levels downward.
Creating additional need for increased activity in the coming months.
Prices for steel are up more than 80 per cent year over year, which will lift production and trade activity U S. Light vehicle production is expected to exceed 2019 levels by 3% in 'twenty, 'twenty, one, which will support automotive volume in adjacent markets like steel and plastics.
Housing remains a growth story, resulting in increases in construction activity.
Growth in our agriculture and forest products segment will be led by Agrifuels in foodservice related markets as consumer gasoline demand returns and the service sector recovers.
Although most energy related markets are expected to remain challenged.
Projected strength in consumer spending low inventory levels record tightness in the trucking industry and our best in class Channel partners will continue to spur growth and a robust intermodal franchise.
Good spending is forecasted to rise 7% in 'twenty 'twenty, one due to can debt continued pandemic induced spending patterns and high levels of personal savings.
Triggering increased demand for our intermodal product.
Our outlook for coal remains pressured by high stockpiles that will lower utility volumes.
Partially offsetting these declines will be export thermal and domestic met volumes projected to increase as the global recovery from COVID-19 continues into 'twenty and 'twenty one.
In summary, we expect 'twenty 'twenty, one revenue growth as overall economic conditions improve throughout the year.
We are constantly adapting to the evolving needs of our customers.
<unk> valued transportation solutions to the marketplace.
We recognize that sustainable low carbon transportation is essential to our customers and our growth strategy.
We remain committed to our efforts to improve fuel efficiency modernize our fleet with energy management solutions and partner with our customers to prevent pollution.
Our leadership and sustainability is resonating with our customers and the markets. We serve validating these efforts.
We are confident in our ability to leverage our value on the marketplace to secure new opportunities to support our customers' growth and grow our margins.
I will now turn it over to Mark who will cover our financial results.
Thank you Alan and good morning, everyone.
On Slide 16, you'll note Q4, 2020 was free of any non core items meeting the or improvement of 240 basis points was clean.
We did in Q4 2019 report a non operating asset impairment of $21 million that adversely impacted EPS by six cents.
On a $19 million retroactive income tax credit that aided EPS by seven cents.
So with the absence of those two items core EPS improvement this quarter was 10 cents.
Moving to the fourth quarter highlights on slide 17 Revo.
Revenue was down 4% on volume that was down 1% as mix and fuel surcharge headwinds continued.
Against that 1% decline in volume, we drove down operating expenses by 8% in the quarter as benefits from workforce on asset productivity continued to grow.
As a result operating income actually grew in the quarter by $22 million or 2%.
And the operating ratio improved to 61 eight.
240 basis point improvement over Q4 of 2019.
This is a record low or for Norfolk, Southern and we are well positioned to continue driving this down in 'twenty 'twenty, one and beyond.
The margin improvement achieved in the fourth quarter capped off a year in which free cash flow improved by 14% to $2 1 billion another record for rns.
Moving to a review of operating expenses on Slide 18, total opex was down $139 million or 8%.
Fuel was down 87 million with lower pump prices contributing to $62 million of that reduction.
And consumption was down 21 million led by fewer G T EMS as well as a 3% improvement in fuel efficiency in the quarter.
Comp and benefits are down 7% led mainly by employment cost with the workforce down by 3300 or 15%.
$10 million in one time separation costs for certain craft employees, partially offset these savings.
Purchased services was down 41 million or 11% as we're making progress on our structural and semi structural costs within this category as well as due to the absence of detour costs associated with flooding in the prior year.
Depreciation increased modestly by less than 1% as we've been able to successfully reduce asset intensity, including within the locomotive fleet, which continues to have ample surge capacity to absorb growth.
Materials were down 7% due to lower spend associated with the smaller and more productive locomotive fleet.
Lastly gains on the sales of operating property was $11 million in the quarter, a decline of 32 million versus the prior year.
So another quarter of expense reductions foreign excess of the volume decline.
Leaving us well primed to deliver strong operating leverage as 2021 unfolds.
Now turning to slide 19 for the remainder of the fourth quarter P&L.
Below the operating income you will see that other income net of $43 million is 25 million better than the prior year due to the absence of the $21 million impairment of natural resource assets in Q4 2019.
We also had another quarter of healthy gains on our company owned life insurance investments.
Our effective tax rate in the quarter was just under 23% helped by the Covid gains that are exempt from income taxes.
Net income increased by 1% and EPS rose by 4% as we ramped up share repurchases to nearly 500 million in the quarter.
Now for a look at the full year on slide 20, and a preface I'll speak to the adjusted numbers on this slide excluding the impacts of the two noncash charges during the year the $385 million locomotive rationalization.
And the $99 million investment impairment.
Despite the unprecedented volatility in business volumes that resulted in a 13% decline in revenues. We maintained focus on our long term operational transformation, while adapting to the market changes that were induced by the global pandemic as well as the contracting energy markets.
In the midst of this we produced record workforce productivity.
Locomotive productivity and fuel efficiency, which allowed us to more than match the revenue decline with a 14% reduction in adjusted operating expenses, while ensuring we are ready to serve improving freight demand as the economy recovers.
The adjusted operating ratio posted improvement to $64 four per cent the fifth consecutive year of improvement.
But theres more under the covers when we look at the 30 basis point improvement for the year.
Moving now to slide 21.
You can see during the second quarter of 2020, the 29% hit to revenue on a year over year basis took a toll on the operating ratio, but every other quarter of the year improved in the 230 to 240 basis point range.
A year and especially during the depths of the pandemic induced volume trough. The team really pressed forward to adapt our operating plan to the changing business environment. In fact, two of the four hump idling during the year occurred within Q2.
And when the nationwide automotive network shutdown, we completely redesigned our auto plan to absorb it into existing trains.
In addition, we continued to press lower on resources and ensure that we were able to serve a surge in demand as economic activity increased which is exactly what happened.
We maintained a heightened sense of urgency to transform the business, while ensuring we are positioned for long term success and further margin improvement.
Moving on to cash flow on slide 22.
Although 2020 cash from operations came in under the 2019 levels.
Spend on property additions for the year was right in line with the reduced target. We said earlier in the year of $1 5 billion, which was a 26% reduction from 2019 levels.
We pivoted early in the year to this reduced capex target at the outset of the pandemic and executed the plan, while keeping priority on the health of the physical network.
Thanks to these tight controls on both capital and operating expenses free cash flow improved to a record $2 1 billion.
While shareholder distributions totaled $2 4 billion.
Average share count.
Declined by 3% with over one 4 billion of buybacks as we maintained tight focus on returning capital to shareholders, while maintaining strong liquidity.
To close we have excellent momentum on improving both our cost and asset structures, while we deliver on the growth in 2021.
We expect this formula to yield even greater margins and cash flow and we remain committed to delivering significant returns for our shareholders.
With that I'll hand back over to Jim.
Thank you Mark turning to slide 24, I will wrap up with our 2021 expectations.
As you heard from Alan we expect segments related to manufacturing and consumer activity to drive growth, while energy related commodities are likely to remain challenged.
We are modeling total revenues up approximately 9% with intermodal, leading the way merchandise growing solidly and coal declining.
The power of our intermodal and merchandise segments to propel us to growth. Despite the secular decline in coal highlights the continuity of our strategy over time.
As we move ahead, we will leverage many avenues to drive long term volume and revenue growth, including a fast and reliable service product the advancement of technology initiatives, such as access N S and rail pulse just to name a couple.
And our steadfast commitment to being a sustainable and socially responsible corporate citizen.
With this positive momentum, we expect to achieve greater than 300 basis points of or improvement in 2021 versus our adjusted 2020 result, and to end 2021 with a full year run rate of 60%.
As we have said before when we achieve our targets we won't stop there.
In addition, we expect capital expenditures to approximate $1 6 billion with a dividend payout ratio of 35% to 40% an increase versus our prior target payout ratio of one third.
As we demonstrated in 2020, we are committed to protecting liquidity, while using remaining cash flow and financial leverage to repurchase shares.
We are optimistic about growth in the year ahead, and we'll advanced productivity initiatives to bring freight onto the railroad more profitably than ever.
We know there is more improvement to be made across the organization and we'll continue executing on our commitments to drive efficiencies and create long term sustained value for our shareholders.
Thank you for your attention we will now open the line for Q&A operator.
Thank you well now be conducting a question and answer session.
Your line to ask a question. Please press star one from your telephone keypad and a confirmation tone will indicate your line is on the question queue.
You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
The number of analysts joining us on the call today, well be limiting everyone to 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 Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
Maybe just one for for Cindy in on just the service levels. You mentioned that you had some challenges when youre doing the redesign in the fourth quarter, but you expect them to improve as maybe you can give us some some level of confidence as to how you're applying some of the resources tactically.
Cross the network, what sort of issues you've had to face and just how you feel about hiring in the pipeline as you start to get ready for this type of growth in 2021.
Hey, Brian Thanks for the question. So as we went into the fourth quarter with some of our operational changes are southeast plan I also referenced in my prepared remarks, some organizational changes that we made and in fact, we did reduce our locomotive fleet by about 100 locomotives during the quarter. So as we digested a lot of those challenge.
Is we were starting to run a little slower and we did in fact inject a little bit of support from a resource perspective in temporarily.
Also add debt.
We were recovering from some of the challenges that I described.
We did have some COVID-19 impacts with us with some of our employees out as part of the Covid protocols and also ill ill ill as individuals' so.
That was how we were kind of how I would diagnose the fourth quarter as we come out of the fourth quarter are running through the holidays to get back on our feet, we've gotten a lot better where you're not at 'twenty 'twenty levels, but we are much much better we are continuing to tweak and take resources out of it.
Ms of consolidating trains so we still have.
Opportunities to digest changes within the network.
As necessary, we will inject a resort some resources in to make sure that we recovered quickly from challenges that we may have.
From from thinking about the the volume that we're seeing.
I think some of it is in unit train and that will require resource use a little bit different than our scheduled network, but I will tell you that in our scheduled network, we still have a lot of opportunity to.
To to consolidate trains make them longer.
And make them heavier even on top of the grains that we made in the fourth quarter.
And I can tell you that you know.
Even on our intermodal our fleet for example, our intermodal train operation.
Got about 10% of our of our trains are operating over 10000 feet. So we still have some opportunity to grow in that space and that should help us manage our head count in in this year to fly.
Flat to down from where we exited 2000 and December of 2020, So I'm pretty confident we'll we'll continue to make some.
Some gains there and also our locomotive fleet.
Great. Thank Cindy for all the details there maybe one for Mark looking at the gains I think he says about $11 million in the quarter looking at the cash flow I think it implies or something a little bit higher than that just looking at the gain on disposal. So maybe if you can clear line up for me and then just give us a sense as to what youre expecting for gains in 2021, when you look at debt.
300 basis points of or improvement.
Yes, the property gains Brian were in the quarter. The fourth quarter were 11, we ended up the year.
It really $26 million of gains a little shy of where we had intended for thought and.
And the guidance for 2021 is to be in that $30 million to $40 million range.
But you know these property gains are lumpy and they.
They can move around and we'll provide some transparency.
And if we have a bigger ones in a given quarter, we'll we'll call them out and let you know.
Alright, Thank you Mark.
Thank you.
The next question comes from the line of Scott Group with Wolfe Research. Please proceed with your questions.
Hey, Thanks morning, guys. So Alan you want to start with you on that.
The 9% revenue growth can you give us directionally, how much is volume versus <unk> and then in the in the fourth quarter. Kolar Pugh was was really strong was there any liquidated damages or is that just a mix I'm just trying to understand if that's sustainable or not.
Scott as we look into 'twenty, one we are projecting very strong growth in both our intermodal and automotive markets as well as our merchandise ex energy.
We expect energy revenues to remain about flat.
They accounted for about 75 per cent of our revenue decline in the in 2020. So we're not going to have that headwind, which is going on and cover the growth in the other markets that we're targeting 9% revenue growth upper single digit volume growth. So modest modest pardon me RPE.
Greg just because of the mix impact of <unk>.
On the intermodal leading the way with respect to call you you got it right now we did have about $12 million of incremental year over year and in volume shortfall, which aided the debt.
<unk>, we also had positive mix within our utility franchise in which our utility north volume, which as you know is shorter haul was down about 50% and our utility South volume was down about 30% and then we've also got some good pricing to in some of our markets as well.
All of that rolls up into the.
Overall <unk> improvement that you saw within coal.
Okay helpful and then Mark.
Mark for you on the on the cost side. So it sounds like full year head count is going to be down a couple percent, but maybe help us think about some of the other pieces on the cost side I know on comp per employee purchase services.
Depreciation any other big Big items, you can help us with thank you Scott Scott are you referring to 2021.
Yes, where 2020.
'twenty one just in terms of the guidance you could give us on comp per employee purchase services any of the other pieces right. So so for comp per employee you know you can expect the traditional year over year inflationary.
Rate increases of a few percent but.
On the also have some incentive headwinds as well.
Really we didnt payout on incentive compensation at target. This year, we fully expect to be at or above target next year. So you'll have pressures there.
In addition, you're going to have some pressures on.
Certain variable costs like purchase services.
As in rents as those go with volume.
And we are though however, pushing on efficiency and productivity to help mitigate some of those things.
Depreciation.
Is there any way to just say what on what the headwind would be from incentive comp just going from a partial payout to a full payout.
I'm not going to put a finer point on that just yet Scott.
But you can probably.
You know you can probably compute that.
This year incentive comp was down.
And we expect that debt.
It's going to bounce back and hopefully bounce back significantly, but we will provide a little bit more guidance on that as we get into the year and we start to see how the trends are going.
Okay. Thank you guys.
Thank you.
Our next question is from the line of basketball majors with Susquehanna. Please proceed with your question.
Yeah. Thanks for taking my question I wanted to go back to some of the merchandise markets, where the outlook is pretty constructive outside of energy, we got steel prices through the roof, you mentioned auto but.
Could you talk with what you're hearing from your customers I mean are there discreet.
Where you have plants reopening utilization rising like how much visibility do you happen to this turning into a real sequential volume acceleration versus just seeing some of the indicators and in a very different backdrop from what we saw on the first six months of last year. Thank you.
Yeah vascular guidance I think we've got pretty good visibility into this.
At least for the next couple of quarters you saw our.
Merchandise ex energy rotate into growth year over year during the fourth quarter. So.
And we're continuing with that level of momentum as you've noted steel prices are at like 12 year highs right and so our customers are talking about adding back capacity.
The corn market or I should say.
Corn wheat and soybean market.
Those commodity prices are about six year highs in the housing market is about as strong as it's been.
14 years, and so you couple that with the fact that wholesale inventory levels are close to two year lows and there's a lot of demand for our product out there.
You know even in even in the paper market, those who make corrugated cardboard thereof, they're sold out because of the proliferation of E commerce and so across the board, we're seeing strength in our merchandise network.
Which gives us a lot of confidence as we move into 'twenty one.
And as that grows should we expect the traditional relationship where you're able to add cars to existing trains or have some of the ethane link gains that you've made maybe limited that normal kind of cyclical calculus that we're used to.
No you're exactly right, we Cindy highlighted that a little bit.
We've got capacity for growth since most of our growth is going to be oriented towards consumer and manufacturer and that's generally carload small block shipments and that's gonna fit neatly into existing intermodal and merchandise trains.
A data point within our intermodal franchise, we've really been working on our productivity and train weight has improved year over year about 900 basis point Moore.
And train length, and so right. There you can visualize kind of vertical stacking of crazy, creating more revenue density.
Improving productivity of crews and fuel and locomotives.
Thank you.
Yeah.
Thank you. Our next question is from the line of Amit Malhotra with Deutsche Bank. Please proceed with your questions.
Thanks, operator, good morning, everybody congrats on the results.
Alan I guess the first one is for you.
If we look back at 2020.
And compare the volume performance to your closest competitor.
There was significant volume under performance.
And this is not a critical question, it's more of a I'm just trying to understand what's behind that specifically as it relates to merchandise.
Yeah.
Sorry, yes.
Yes.
I'm sorry could you just finished the last part of your question Yeah. Yeah, I'm just I'm just trying to understand <unk> has a lower cost structure for now at least.
I'm just trying to understand is the volume under performance relative to <unk> over the course of 2020, specifically on merchandise is that a pure market share shift or are there is there something beneath the numbers that maybe explains it better and if you can also talk about how you expect that relative performance to trend over 2021.
Yeah, I mean, we talked about this a lot last year.
We are fierce competitors and we're going to go out there and work on compete for every pound of business. That's that's available to us both with.
Our eastern rail competitor and within that $800 billion trucking logistics market. We've got a lot of confidence in our franchise, we've got a lot of confidence on our customers and.
You can take a look at revenue per revenue ton mile comps and you can see our focus really is on on.
Helping our customers grow and on margin improvement specific to merchandise.
Let's say that the year over year gap between us and our eastern rail competitor was about 550 basis points in the fourth quarter.
400 of that was just an energy.
400 basis points. So that's it's over 80% of it right now.
I've talked about as we lead into the fourth quarter that we were about we were about.
The run up against the most difficult comp of the year with respect to to crude oil and.
That certainly played out and so you know those energy headwinds that we saw last year, which defined about close to three quarters of our overall revenue decline are not something that we expect to see this year, we're not calling for growth there and if that does happen, we're well positioned to handle it and to profit from it.
And we are seeing some signs there that commodity prices are strengthening and thermal coal.
Is is in pretty high demand.
In the worldwide market.
But we're not we're not expecting that level of headwind. This year, which is why we really believe we're going to rotate into pretty strong growth led by our intermodal and our merchandise ex energy franchise.
Great. Okay, that's really helpful and encouraging.
Second follow up.
I guess for Cindy or market when I look at the guidance. It implies kind of mid mid to high 70% incremental margins, which is a really nice a nice number I guess could you just break it down in terms of dollar cadence you are basically projecting on $900 million increase in revenue and a $200 million.
<unk> expenses.
Which is which as you know a very good performance and I think it would be helpful to I guess, Cindy or Mark just talk about your confidence level in terms of being able to achieve that how much relies on price and how much relies on just blocking and tackling and be able to control the cost structure on just your overall confidence in being able to achieve.
Net.
Sure I'll start Cindy can provide some color, but yeah look the cost inflation as I had mentioned, we're going to be fighting some traditional inflation in terms of wages.
But we are looking to really hold head count.
Flat or perhaps even drift down from where we ended this year.
That's largely going to be dependent upon where this incremental volume comes as to how.
Our aggressive we can get on constricting some of those head count related costs.
But we feel pretty pretty good and pretty confident with our with our plan to manage it that way and mitigate some of the wage inflation we.
We do have fuel inflation in our in our cost as well as well as you know you have normal step up in depreciation, but other areas, where we're baking in some efficiency and productivity gains in multiple levels on the P&L and I think we feel like Cindy had talked about we have the capacity we can make our trains longer.
Yes, when we have unit train type of traffic, we're gonna have to add some some crews and costs, but aside from that Cindy would you add anything no I think that sums it up very very well and I think you know.
While we're very encouraged by the growth and we want to serve our customers and and and and.
Have a great service product out here if it doesn't come we're going to we're going to take appropriate action. So we have a lot of opportunity even with absorb existing growth and continue to consolidate trains.
And consolidate cars.
So just <unk>.
On our car velocity initiatives.
But we will pivot if we need to pivot. So our team is we got a lot of momentum here. If you look at the results come on out fourth quarter on first a lot of momentum and I will will drive it home.
Great. Okay. Thanks, very much everybody. Good luck I appreciate it.
Thanks, Amit.
The next question is from the line of Walter <unk> with RBC capital markets. Please proceed with your questions.
Thanks for taking my question good morning, everyone.
So I just thought I'd.
Just starting on the some of the.
A more administrative.
Other income line that you flagged.
Can you get it.
Jumping around quite a bit quarter to quarter.
And impact in the last couple of quarters as well can you give us some guidance as to what to expect.
On a general base level.
On a quarterly basis on that other income line going forward.
Thank you Walter for the question. So look the the main driver of volatility in that line is are the returns on our company owned life insurance investments, which are invested in a combination of both equities and fixed income.
So it does move around quite a bit depending.
Depending on market performance and that's why you see the volatility you see we've guided historically that other income would be in that $80 million to $100 million range.
But frankly, it will move around quarter to quarter, and if markets deteriorate, it's gonna be a potential headwind for us, but we've we've enjoyed a pretty good pretty good healthy gains here. These past couple of years, yes, absolutely and you were guiding historically for 23% 24% tax.
<unk> had a good run with lower taxes. This year, what would be your expectation on the tax rate for 'twenty one.
Yeah, So you're right, we guided to $23 24, we're not going to change that guidance right now.
We know that there is tax law being debated and whether the.
Federal statutory rate moves up to 28%, which is what the current administration is aiming for we don't know the timing we don't know if there'll be some compromise at a lower rate.
But our better performance than the guide.
No.
It's really driven by in large part the company owned life insurances. Those gains are non tax so that definitely provides us tailwind, which is why we've been better past couple of years than the guided rate, we're not going to bake that in and anticipate.
More tailwind from that here in 'twenty 'twenty, one so we're going to stick with our guide of 23 to 24.
Thanks Walter.
Our next question comes from the line of Sharon on right on point with TD Securities. Please proceed with your questions.
Thanks, very much and good morning, I'll just stick to one here.
There's certainly been a lot of talk across the industry at that congestion in L. A long beach and in Chicago as a result of the import surge that we've seen is that having a collateral impact on Norfolk, southern and and if so how are you working with shippers and your rail partners to alleviate that congestion.
Thanks, Cheryl and good morning.
The congestion on the West Coast ports has.
There's limited.
Transcon volume that we enjoy and it's also caused.
So all of our channel partners to allocate more assets out, there, which which limits upside in the east.
And then with respect to Chicago.
All of the congestion that we're seeing in Chicago is largely outside of our intermodal gates and Thats with.
With the drayage community and with warehouses as they go through endemic protocols and frankly I have difficulty getting people to work because of.
Because of Covid concerns and so what that does share on as it slows down the turn of the assets the chassis and the boxes, which.
Which can which can limit upside volume as well. So we're communicating really closely with our channel partners. We've got we're aligned with the best in the business and they're really good at what they do and so we're working on solutions collaboratively.
In order to.
To mitigate these impacts on as a result, you saw that our intermodal revenue X fuel was up 11% year over year in the fourth quarter.
Thank you.
Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Hi, Thanks. Good morning, So just clarify on that 16 run rate by the end of the year and is this how we should think about Q4 or would you expect that to be more of a second half run rate.
And then if you could comment on your expectations are there.
Q1, or some of the other rails have been a bit cautious on both year over year improvement in and are also pointing to you sequential deterioration that's a bit worse than normal.
Is that a fair way to think about Q1 and then just.
If you could clarify on the on the run rate for the 60.
Allison This is mark thanks for the question, we're not going to get into the quarterly guidance for Q1.
You know volume will play a role obviously volume has started strong here.
But as you know Q1 typically is the highest or quarter that we do have there are some seasonal cost reasons for that.
Whether or not.
You know I would expect from a year over year perspective, we will show improvement each quarter, but sequentially I'm not going to get into that yet until we understand where volume is fallout.
With regard to the timing of the year.
Yeah.
It will also depend on the cadence of the volume throughout the year I would expect to be on a glide path towards that 60.
And it's too early to say.
Again, what quarter, we're going to touch it.
Okay got that.
And then maybe Mark I guess another one for you maybe if you could just give us your thoughts on leverage.
And what you're targeting for 2021.
Sure Allison so.
We're basically staying fully committed to our triple B plus b double a one credit rating with Moody's.
So we're going to manage leverage and of course of the year Accordingly to make sure that we.
Work towards staying in bounds.
Stay committed again to our current rating so I'm not going to put an exact number of what that means in terms of.
Incremental debt or or necessarily deleveraging, but just know that were.
We're committed to be with within the bounds.
Okay, great. Thank you guys.
Thank you.
The next question comes from the line of David Ross with Stifel. Please proceed with your questions.
Yes, good morning, everyone.
Having a conversation with somebody in the industry. The other day, who said that.
Intermodal and PSS are.
And as minor incompatible.
Intermodal is about accommodating imbalances in searches and <unk> goal is really to eliminate them.
Do you think about intermodal and our goals and is there a friction there.
Strongly disagree with that characterization of <unk> as applied to an intermodal franchise, we believe that.
And we have applied P S. Our principles to our intermodal network and we'll continue to do so while maintaining intermodal as a growth engine Cindy yes.
I would say that yeah, sorry, it's really.
About simplifying things and having very good asset terms that can be done in any class of business you want to think about.
And I think you know in absorbing volume growth into existing scheduled trains on mixing trained so that we can get some cases, while you will see some intermodal in the train you also see manifest in other commodity so all of those are levers that naturally all with with CSR and are completely.
Compatible with with any kind of business that we that we might be able to bring on to rail David our intermodal franchise. As you know is unrivaled in the east it's a position of strength for us and for our shareholders and for our channel partners.
<unk> is about reducing complexity and run on trains on time, which is exactly what you want and then intermodal network and we already have a point to point.
Intermodal network.
With a lot with very little intermediate switching.
We are very focused on our productivity initiatives within intermodal to drive additional business into the existing try and structure.
I noted earlier, the fact that our our train weight.
Increase was about 900 basis points above our train length increase and so what that does is what we're doing is we're just adding that additional business into the existing trains.
And improving our ability to double stack.
Yeah, and just as a quick follow up on net.
Related to double stacking are there any corridors left in the network, where that's a problem and you can't take advantage of the double stack capabilities.
We are double stack capable and well over 95% are on.
Our line segments.
Excellent. Thank you.
The next question is from the line of Chris Wetherbee with Citi. Please proceed with your questions.
Hey, Thanks, Good morning, Alan maybe sticking on the intermodal outlook for a moment here I guess you guys have done a pretty good job improving the yields on that business ex fuel over the last several years. The last two years I guess in particular when you look at 'twenty, one how do you sort of balance the approach obviously truckload is going to have a very good year from a pricing standpoint, there obviously is.
Read across to intermodal as a result of that are you going to be leaning in a little bit more on the volume side or is it still going to be a balance where you're looking to get more price out of the franchise.
Chris we're going to continue our balanced approach, we've got long term deals with our channel partners and we've frankly take a long term approach to the markets. We do not want to interject the volatility associated with the spot market.
Two our intermodal rate base, we do have a small percentage of business, that's transactional and we're adjusting our rate plan there, but for the large part we're taking measured rate increases and you saw our.
Rate increases benefit from that in 2019 in the first half of 2020, when we were in a freight recession over time, what that means is that our rates are moving at a pace that's higher than changes in the spot market on a little bit higher than what's going on in the contract market. So as a result, you should not.
Not see expect to see any kind of significant rate increase in 2021.
Because frankly overall contract rates were slightly down in the truck market and.
In 2020.
It will support further rate improvements in 2022.
Okay. Okay got it that's helpful. I appreciate it and then just a quick follow up on on Capex, obviously guiding down too.
<unk> 15 per cent of revenue I think thinking back to the.
Sort of launch at <unk> on the Investor Day, I think the guidance was maybe a little bit higher than that over the longer run. So it may be trying to think about how what's changed since then and maybe if this is more of a sustainable kind of run rate. When you think about it as a percentage of revenue or maybe that's not the right way to think about it but just any sort of thoughts on capex, because obviously, it's come down and that's going to be a boost of free cash.
Yes. Thanks.
Yeah, We've we've took our cash capex down at a significant readjusted baseline level of one 5 billion. This past year and we've talked throughout the year about the fact that we want to grow it modestly from here and really liked to see revenue our revenue growth outpaced the growth in capex.
Oh, you know what that means growing into a smaller percentage then so be it and certainly that's where the math equates to this year is that we will grow into a smaller percentage.
We want to do Capex on budget Capex based on logic and need not just based on revenue.
Revenue based affordability for example, but that said we've put this budget together and.
Alex I'm, sorry, if Alan comes in and says you know we've got these certain projects we need to help drive growth we will examine it if Cindy comes and says we got some work to do on siding expansions or.
To augment the network a little bit more from a maintenance away perspective will examine it.
So we're not going to be dogmatic.
I would like to two.
Barry the 16% to 18% range from.
From here.
Okay. That's helpful color I appreciate the time thanks.
Our next question comes from the line of Brendan Glinski with Barclays. Please proceed with your questions.
Hey, good morning, everyone and thanks for taking my question I'm, Cindy I guess I wanted to come back to the beginning of the call here did you.
Swiftly say that head count could actually be down in 2021, and I guess I just wanted to balance that against the comments that you've had.
With bringing back some unit train service need for crews. So can you just maybe hash that out a little bit more.
So what guidance would be flat to down from where we ended 2020, so but.
And to your point some of the some of the on some of the reason we would need to keep it flat would be the unit trains.
So what that implies is that we're still consolidating and you're still figuring figuring ways to make our scheduled network much more efficient.
And absorb the growth and provide a very solid service product for our customers. So that's our mission going forward. We're actively in it now and have been and I'm very pleased with momentum that we have there and and going forward I think we will see good good results from it.
Okay, and I don't mean to be pesky here and I know, it's been on call, but on the first quarter, you did say something about bringing back temporary resources is that going to have.
Any impact on those metrics in the near term that we need to be aware of.
Yeah, when I spoke about that it was really about recovering from some of the challenges that we faced in the fourth quarter, including some COVID-19 impacted crew districts, where we had to move some temporary resources in from a from a head count perspective, those are back out now and then secondly, we had reduced locomotives in the quarter.
And some of the challenges that we had at the very end.
Injected those for a very temporary period of time and have since pulled those out so.
What what I was talking about earlier in my commentary was really around the fourth quarter.
Got it alright, thank you.
The next question comes from the line of John Chappell with Evercore. Please proceed with your questions.
Thank you a couple for Alan first on call. So you said on the in your outlook Slide you expect coal to decline this year, which from a secular standpoint, I don't think anyone would argue with that premise.
The comps are so easy from the middle of this year. The precipitous declines you saw especially in second quarter, you've seen sequential volume increases as you've gone through the year and come out of the pandemic. The ARPA you increases exiting 2020 and even your through a couple of weeks of 2021, the carload comparisons don't look that bad so.
Just I understand that calls on decline forever, but is there a reason why you couldn't just see a reprieve in 2021, given those factors I just addressed.
Hey, John.
I hope you're right I think the thing that gives me the largest pauses the status of stockpiles that utility plants. They are at.
Across our system the publicly available numbers show, they're pretty close to about 130 days.
So that is really going to limit.
Volumes for us that's about 40% higher than they were this time last year.
So that's a headwind right.
If.
You know they need manufacturing engineers commercial businesses reopened to start creating that load for the utilities as well on natural gas seems to be stuck in the mid twos per million Btu. So that's that's an issue too. So those are all headwinds.
Look as we talked about is this if it returns that's great. We're ready and we've got a really good coal franchise and I do think there is some upside on thermal export coal but.
But we're not planning on it and we're not we're not baking it into our and do our outlook. That's that's upside.
Okay understood and then shifting to auto you guys have had a really strong start to the year and really real strong last several months. We're hearing some issues. The chip shortage is potential near term production issues. Obviously, you have a bit of a unique franchise there or are you hearing any concerns from your customers about potential near term shutdowns because of some of these.
Equipment shortages.
Yes, we've got we've got a great auto team and they've done a very good job of building.
Building that franchise for US, yes, there are supply disruptions.
And basically on many of the markets if not all of the markets that we serve semiconductors that you referenced is something that we've heard of as well. Although generally are the automakers are are allocating the scarce resources to the.
The Suvs and trucks.
And vans, which is predominantly what we handle on our bi level product.
But the auto auto volume will be upside for us this year.
Okay, great. Thanks, a lot island.
The next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Hey, good morning, guys.
So.
One thing that always stands out in terms of talking to the intermodal market and the railroads.
We're talking about advancing service levels in intermodal on a lot of the channel partners are frustrated with the handoffs at the terminals and things like that if you think about your outlook for volume growth do you get concerned at all that the channel and the terminal network is going to be able to handle that debt sort of mid to high single digit volume growth in the <unk>.
Mobile segment I mean, how do you how are you set up to kind of handle that because it seems like over the last peak season. We had we certainly saw some congestion across the intermodal network.
Yeah, David Good question, we've talked about that briefly before where the drayage community and slowed down on the processing and other warehousing has impacted street dwell and turns of equipment chassis and containers and that is limited and the upside.
However, even with that we still delivered 11% year over year revenue growth on the fourth quarter ex fuel surcharge and you can see that our volumes within our intermodal franchise to start the year are up double digit.
So we've got we've got a great franchise, we've got great Channel partners again, they are very good at what they do and in managing complex supply chain. So we're going to work with them on this we're delivering that level of growth.
With our intermodal franchise now.
But.
I mean, I guess is there anything you can do to advance.
On the efficiency of that handoff operation do you need to think about that difference.
Is that the way youre interacting with channels differently just to kind of on.
<unk> some additional growth potential or was it going to be just more kind of working with them status quo do you I mean, I guess I'm just trying to figure out like how do you unlock the potential that could be on that intermodal business. Yes. It is on on that it really is about improved I'm, sorry, it's about improving the transparency and the visibility of what we're seeing.
And the assets that we share.
And then it's it's about channel partners working with their <unk> on the warehousing on getting in.
In the chassis is back into the gate.
Alright. Thanks.
Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your questions.
Yeah.
Thanks, operator, good morning, everyone.
Cindy you talked a lot about taking some structural costs out of the network in 2020. So as you look at 2021 and beyond are there any structural cogs costs left in your opinion and if there are when do you think you guys can address them.
Yeah, Jason So we talked about some of our terminal consolidations on hump conversions that have occurred over the last couple of years, you've seen us work very very strongly prior to my arriving.
On that area, we have four actual humps left operating as hump yards.
And so we will continue to look at yards and see how we can speed up cars on the real mission around.
Terminal capability and terminal footprint is around.
It's around keeping cars moving are not pushing cars in the terminals moving cars pass terminal. So I think theres still some room, there quite a bit of room.
You've seen us pivot now a little bit more into looking at our train length and locomotive utilization with full and and that's going on that's that's really our primary focus now, but we will always circle back and find opportunities.
To get the most out of our network and speed up cars and terminals are one of the message that we used to do that so there's always opportunity and as we think about growth and we see the growth that were having in 2021, its probably will look a little different than maybe what we would've thought in 2020, so we have to be very.
<unk> and looking at and looking at opportunities and we will continue to do that so I don't have a specific number for you Jason but I understand it is really never done with looking at structural cost and we'll pull that out.
Every opportunity we can find it.
Well. Thanks Thats helpful. A follow up here, Alan you talked a little bit about intermodal RPE like I want to make sure I understand what you said you said that really.
Don't look for too much this year in terms of gains, but it's going to be more of 2022 is that how we should think about it.
Yes.
<unk> talked about the arc of the improvements Jason and the fact that we.
It didn't.
Reflect debt reduction in spot prices over the 18 month period in 2019 in the first half of 2020 overall contract rates were in the truck market on average.
I think flat or down slightly and in 2020 and so we're just we're taking a long term approach to this because I don't want to interject that level of volatility.
So our rate structure or our customers our channel partners rate structure, either right and they need something that they can plan on it.
At a time so.
The truck market continues to improve and rate contract rates actually improved this year go up which we think they will then that would be reflected in.
And improvements in the 2022 rate structure.
So Alan how should we think about the cadence of your intermodal contracts.
Actual pricing renewals.
Like when does it when do the bulk of them renew.
Well on.
Told you I've mentioned, Jason that we've got long term deals with us with our contract with our channel partners.
Okay perfect I appreciate because that helps schnell.
Okay take care Jason Thank.
Thank you.
The next question is from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.
Thanks, I just wanted to follow up on that last point, because I think that's a little bit of a surprise because most people do expect the rails to be at least you know sort of afford dirt of beneficiaries of truck pricing tightness.
Is this a new philosophy or was this the same approach that you guys had back in 2018 as well I'm just trying to figure out if it's just a case of.
Oh, I know, what you're saying the same thing, but in terms of different magnitudes I mean can you give us a ballpark of what we can expect 2021.
And 2020 do intermodal pricing to increase for you guys.
Yeah, Ravi let me be clear, we are going to benefit from tight truck market and youre going to see that both and.
And volume.
And.
In intermodal and merchandise you know you've got we're looking at really healthy growth on our merchandise ex energy and in our intermodal volumes this year.
I've talked about is our long term approach to markets and this is something that we've employed.
For years.
Within our intermodal franchise, and it's we don't want that level of volatility associated with the spot market into our rate structure. We do have a small portion of our intermodal business is transactional and and we are reassessing our rate plan to the positive there however for free.
Most of it it's it's.
The rate increases unwind over time and as a result, what you see is over time less volatility and yet our our price in intermodal exceeds the spot market and slightly exceeded the contract market recalled I mean contract rates.
Were flat or slightly down on the truck market in 2020.
We took rate increases on we've got 16 consecutive quarters of RP less fuel improvements in.
In our intermodal franchise on 23 consecutive quarters and our merchandise franchise. So.
We take a measured approach to this.
Got it and maybe as a follow up for Cindy can you just give us an update on how you're thinking about deploying technology and automation across the network.
In the next year or three again, you've seen some of your peers.
Hard to commercialize things like automated train inspection portal.
Where are you guys with respect to rolling technologies on the network.
Yeah. Ravi we are doing we are doing the exact same things rolling it we do have plans around our inspection portals automated train and spent on automated train inspection track inspection excuse me as well as mobility tools to help our employees be more effective and efficient and more time on tool if you will.
As well as.
Think of analytics to help us manage through our failures before they become failures and not have to wait for a failure in terms of let's say a switch failure or something on line of road able to predict that so we've got a number of great Hum.
Projects that are in flight and we're working very closely with our technology team here to get quick adoption and and make our railroad safer and more efficient with the use of technology.
Very good thank you.
Thank you.
Our next question is from the line of Justin Long Stephens. Please proceed with your question.
Thanks, and good morning, I wanted to ask about truckload conversions in the network cab any commentary around that the trend you're seeing there in the fourth quarter and early part of this year and as we think about the 2021 guidance.
What's baked in from a conversion standpoint are you just making end market assumptions and truckload conversions would be upside to that or can you just help us think through that.
Hey, good morning, Justin So I think one way to think about our revenue growth.
In 2021, as its 9% right and so I've talked about how energy, which is pretty close to about 20% of our revenue basis can be flat. So you can envision that and the rest of our market, which is generally the more truck competitive.
We are seeing above 9% revenue growth.
And.
Yes, that's above macro.
So with that.
Plus it in that is the fact that we are going to continue to target that $800 billion.
Trucking logistics market and leverage the strength of our franchise, which includes our intermodal network and the fact that we've got a diverse merchandise network and.
We sit on top of a majority of the consumption and in manufacturing in the United States.
Okay and then for my second question just a quick follow up on call RP you. Alan I think you walked through some of debt mixed dynamics in the fourth quarter, but as we think about 2021 is your expectation that call RP you is relatively <unk>.
Sequentially with where we ended the year last year can you help us think through that as well.
Yes, I would anticipate it's going to decline.
We had a record.
Mark do you within our coal franchise in the fourth quarter, we're not calling for that.
I noted that our utility South franchise, Justin you know has a longer length of haul on generally has higher rates than utility north.
Outperformed utility north and so as a result, typically we talk in terms of a 50 50 mix between those two franchises and in the fourth quarter. It was about 60% utility south and 40% utility north.
I anticipate that will go back.
50, 50, moving forward and as we've talked about just on the upside really is in that.
Export thermal market, which which has a shorter length of haul than the export met market and so that has a.
A mix impact as well.
Okay. That's helpful. I appreciate the time.
Thank you.
A final question today is coming from non line of Jordan Alger with Goldman Sachs. Please proceed with your questions.
Yes, hi.
I'm not sure if youre actually referenced this directly but on the revenue per carload I know you talked about some individual commodities call just now in intermodal.
Total company standpoint.
Is the anticipation that as we start the year, it's still going to be a negative headwind and then as we move into the second and the merchandise volumes in industrial picks up and that's when it flips to sort of a from a headwind to a tailwind as we think about you know having a slight positive for the full year.
And you're asking I'm, sorry, I joined <unk>.
Yes.
Yeah as we start the year, you know Oh, yeah, Great question and I'm glad you asked that yes, we.
I need to make it clear that we yes, we are expecting a year over year decline in <unk> in the in the first quarter and you know a lot of that is makes a lot of that is fuel surcharge headwinds and then as you go through the year ultimately will get to a point, where we've got a modest increase in ARPA you.
<unk>.
That is driven by.
We've talked about a 9%.
Revenue increase and a high upper single digit volume increase.
Great. Thanks, so much that was my question.
Thank you. This concludes the question and answer session I'll now turn the call back over to Mr. Jim Squires for closing comments.
Thank you for your questions today, we look forward to talking with you again next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.
Yeah.