Union Pacific Corporation

Eastern Time on April 18, 2019 in Omaha, Nebraska. This presentation and the accompanying materials include statements that contain estimates, projections, or expectations regarding the company's financial results and operations and future economic conditions. These statements are forward-looking statements defined by the federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Materials accompanying this presentation include more detailed information regarding forward-looking information and these risks and uncertainties. In addition, please refer to the company's website and SEC filings for additional information about our risk factors.

Greetings and welcome to the Union Pacific first quarter 2019 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on 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. Thank you, Mr. Fritz. You may begin.

Thank you, Rob, and good morning, everybody, and welcome to Union Pacific's first quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales, Jim Venna, Chief Operating Officer, and Rob Knight, Chief Financial Officer. This morning, Union Pacific is reporting record 2019 first quarter net income of $1.4 billion, or $1.93 per share. This represents an increase of 6% in net income and 15% in earnings per share compared to 2018. Total volume decreased 2% in the quarter compared to last year. Quarterly operating ratio came in at 63.6%, a one-point improvement compared to the first quarter of 2018. Severe winter weather and flooding across our network adversely impacted volumes and added incremental operating costs in the quarter. In spite of these headwinds, we still achieved year-over-year margin improvement as a result of our G55 and 0 and Unified Plan 2020 efforts. I am extremely proud of the men and women of Union Pacific and applaud their heroic efforts to safely restore our rail network. Our ability to quickly recover operations after severing the east-west artery of our network is unprecedented. I also want to thank our customers for working with us during these historic weather challenges. With these incidents behind us, our operating performance is rapidly improving, enabling us to provide a safe, reliable, and efficient service product for our customers. We've largely completed our initial transportation plan changes associated with Unified Plan 2020 and well ahead of schedule. But these changes are really just the foundation for the great opportunities we see going forward, like our terminal rationalization initiative that Jim will touch on later. With that, I'll turn it over to Kenny to provide more details on our results.

Thank you, Lance, and good morning. For the first quarter, our volume was down 2%, largely driven by weather-related hurdles. volume decline in our energy and ag business groups with a partial offset in industrial and the premium. However, we still generated positive net core pricing of 2.75% in the quarter. Freight revenue was down 2% driven by a decrease in volume as average revenue per car was essentially flat. Let's take a closer look at the performance of each business group. Starting with ag products, revenue for the quarter was down 3% on a 7% decrease in volume and a 5% improvement in average revenue per car. Grain car loads were down 7%, driven by reduced grain exports to China. This was partially offset by strength in feed grain shipments to our southern region. Volume for grain products was down 6%, predominantly due to weather-related challenges impacting soybean and ethanol shipments. Partially offsetting these declines was sustained demand for biofuels and other related products. And lastly, food and beverage volumes were down 10% driven by a mix of weather-related impacts, brewery production changes, and the foreign policy effects on dry foods and export protein. Moving on to energy, revenue was down 16% as volume declined 15% coupled with a 2% decrease in average revenue per car. Coal and coke volume was down 14%, driven by ongoing headwinds of retirements and contract changes, as well as fewer shipments from the Powder River Basin due to the historic Nebraska flooding in March. Sand Carlos were down 45%, largely due to the impact of local sand within the Permian Basin. However, on a positive note, Favorable crude oil price spreads drove an increase in crude oil shipments, which was the primary driver for the 18% increase in petroleum, LPG, and renewable car loads for the quarter. Industrial revenue was up 5% on a 4% increase in volume and a 1% improvement in average revenue per car during the quarter. Construction car loads grew 12%, primarily driven by increased market demand and favorable weather conditions in the south for rock shipments. Plastics volume was up 8% due to higher production. In addition, metals volume increased by 6% due to the continued strength in the energy, construction, and manufacturing markets. Turning to premiums, revenue for the quarter was up 3% with a 2% increase in volume while average revenue per car remained flat. Domestic intermodal volume declined 5% during the quarter, and severe weather negatively impacted service and intermodal terminal operations. Additionally, truck capacity and more competitive truck rates provided fewer opportunities for spot over-the-road conversions. Auto parts volume was negatively impacted by North American auto production. International intermodal volume was up 15% in the first quarter, driven by strong volume from the tariff pull ahead earlier in the quarter, coupled with new business wins. And finally, finished vehicle shipment declined 3% as the first quarter U.S. auto sales were down approximately 3% from 2018. While light truck and SUV sales were actually up, the offset was not enough to overcome the decrease in car sales. In addition, weather impacted fluidity, creating higher inventory and reduced shipment. Looking forward to the rest of 2019. For ag products, we anticipate continued strength in bio shipments due to the increase in market demand for renewable fuels, which will offset the headwinds in the ethanol marketplace. In addition, we expect stronger beer shipments, along with long-term penetration growth across multiple segments, of our food and refrigerated business. Furthermore, we expect uncertainty to persist in the grain market due to the foreign tariffs. For energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. Local sand supply will continue to negatively impact sand volume. We also expect coal to experience continued headwinds throughout 2019, and as always with coal, weather conditions will be a key factor for demand. For industrial, we anticipate an increase in plastic shipment, driven largely by plant expansions coming online later this year. In addition, we expect continued strength in industrial production, which drives growth in several commodities under this business segment. For premium, Domestic intermodal volume could be impacted by a softer truck market in 2019, which may limit the opportunities for over-the-road truck conversions. However, longer-term fundamentals still provide a bullish outlook for over-the-road conversions. The U.S. light vehicle sales forecast for 2019 is 16.8 million units, down about 2% from 2018. Consumer preference for SUVs over sedans will continue to create some opportunity. We will continue to watch the OEMs as they implement their rationalization plans to their production plans. And finally, for our international intermodal business, we expect volumes to normalize back to seasonal levels. As it relates to international trade, there still remains uncertainty, and we will continue to watch the U.S. economy, which could also present headwinds as 2019 progresses. So before I hand this off to Jim, I want to give a shout out to the operating and engineering team for their tireless effort to get our network back in service from the historic weather event that we've encountered over the past several weeks. Both our commercial and operating teams worked closely together to minimize our impact on our customers. And thanks to our customers for being patient and understanding while we worked to restore service back as quickly and as safely as possible. And with that, I'll now turn it over to Jim.

Okay, thanks, Kenny, and good morning, everyone. Let's turn to slide 11. As you heard from Lance and Kenny, our operations were challenged during the first quarter by a series of significant weather events. Heavy snowfall and harsh winter conditions in the Midwest and Pacific Northwest were followed by widespread flooding that washed out our east-west mainline in Nebraska for 13 days. In addition, our ability to reroute the 50 trains per day that normally travel in this corridor was limited due to the widespread nature of the flooding. As a result, fluidity and asset utilization were impacted as we deployed additional people and equipment to operate the railroad. We took some bold actions this time around to help us restore operations. And while impactful to the business in the short term, these actions allowed us to quickly return to normal operations. Our terminals are current. and we are moving traffic as presented. A new operating mindset of Unified Plan 2020 is clearly working and I'm extremely proud of our employees who work safely and efficiently to restore operations. Turning to slide 12, I'd like to now take a minute to update you on the six key performance indicators I am focusing the team on going forward. Despite the weather, Nearly all of our metrics improved year over year. This is a testament to the work we are doing as part of Unified Plan 2020 to improve network efficiency and service reliability. Our continued focus on asset utilization and minimizing car classifications led to a 19% improvement in freight car terminal dwell and a 7% improvement in freight car velocity compared to the first quarter of 2018. Train speed for the first quarter decreased 6% to 23% 0.3 miles per hour as network disruptions impacted fluidity. Turning to slide 13, we improved locomotive productivity 6% versus last year as efforts to use the fleet more efficiently enabled us to park units. As of March 31st, we had approximately 1,900 locomotives stored. And even with a 4% decrease in the total workforce, our productivity was down 2% year over year as daily car miles declined 6% in the quarter. In addition to improving productivity, delivering a great service product is an equal goal of the team. Car tripline compliance improved two points versus 2018 as customers benefited from increased brake car velocity and lower dwell. And we expect our customers to continue seeing a more reliable service product going forward. I know many of you watch our weekly dwell and velocity numbers and have already noticed our improvement over the last few weeks. Turning to slide 14. The last time I spoke with you, I had only been on the job about 10 days. Since then, I've spent a lot of time in the field getting familiar with our network and evaluating Unified Plan 2020. As last mentioned, we completed our initial transportation plan changes, and they are delivering good results. But I will tell you, there's a lot of opportunity ahead of us to further improve asset utilization and network efficiency. Flight 14 highlights some of the recent network changes, including our initial terminal rationalization results. We stopped humping cars at Hinkle and Pine Bluff and curtailed yard operations in Salt Lake City, the Kansas City complex, and Butler Yard in Wisconsin, to name a few. And we continue to look for additional rationalization opportunities. For example, we have multiple intermodal facilities in the Chicago complex, which provides an opportunity to reduce operational complexity while improving our service. We also decided to pause construction of Braslo's yard. The remaining capital dollars planned for Braslo's in 2019 will be reallocated to sign an extension on the Sunset Corridor and a block swap yard in Santa Teresa, which will add to our network flexibility. These projects directly support our productivity initiatives, which are off to a great start, as illustrated by the graph on the right. By putting more product on fewer trains, we have increased train length 7% the last couple of months, and I expect to see continued improvement in this measure as the year progresses. Turning to slide 15 and to wrap up, it's been a very busy first 90 days for me at Union Pacific. I'm having a lot of fun, and I'm excited about what's ahead. Our network showed tremendous resiliency in the face of significant weather during the quarter, and we're already seeing it in our key operating metrics. As we move forward, improving safety, efficiency, and service reliability across our rail network, customers will benefit from an end-to-end service product that enables greater supply chain efficiency. With that, I'll turn it over to Rob.

Thanks, Jim, and good morning. Before I jump into the results, I thought I would level set everyone on some of the ins and outs that we experienced in the quarter. Unprecedented weather events negatively impacted volume growth while driving additional operating expenses. These weather challenges resulted in a 1.6 point negative impact to our operating ratio and 15 cents earnings per share compared to the first quarter of 2018, which I'll detail more in a minute. You also saw the 8K that we filed in March where we recognized a $42 million payroll tax refund along with $27 million of associated interest income. This refund had a .8 point favorable impact on the operating ratio and a 7-cent EPS tailwind in the quarter compared to last year. The combined impact of lower fuel price and our fuel surcharge lag had a favorable impact for the quarter of 0.9 points on our operating ratio and 6 cents of EPS compared to 2018. Taken together, the positives in the quarter from fuel and the tax refund were essentially offset by the negative weather impact. The good news is that despite the weather challenges, Our G55 and zero in our unified plan 2020 efforts drove core operating margin improvement of about one point or 27 cents of EPS compared to the first quarter of last year. To give you a little more detail on the weather impact in the quarter, the combination of the winter storms in February and flooding in March were the primary drivers of the 2% year-over-year volume decline in the quarter, or roughly $150 million. Although our car loadings are starting to rebound, we do not expect to make up much of this lost revenue, with the possible exception of some opportunities in coal and grain. We also incurred around $40 million of weather-related costs in the quarter, primarily in the compensation and benefits and purchased services and materials cost categories. Given that we still have a couple of minor outages today, a small amount of costs will likely carry over into the second quarter. And finally, capital expenditures associated with the flooding are estimated to be around $30 million. And now let's recap our first quarter results. Operating revenue was $5.4 billion in the quarter, down 2% versus last year. The primary driver was a 2% decrease in volume. Operating expense totaled $3.4 billion, down 3% from 2018. Operating income totaled $2 billion, a 1% increase from last year. Below the line, other income was $77 million, an increase of $119 million compared to last year. The increase was driven by interest income of $27 million associated with the previously mentioned payroll tax refund and a favorable year-over-year comparison. And as a reminder, first quarter of last year, 2018, those results included the bond redemption costs of $85 million, resulting in a favorable quarterly comparison. Interest expense of $247 million was up 33% compared to the previous year. This reflects the impact of higher total debt balance, partially offset by a lower effective interest rate. Income tax expense was flat at $399 million. Our effective tax rate for the first quarter was 22.3%. For the full year, we now expect our annual effective tax rate to be slightly north of 23%. This is primarily driven by the benefits related to stock option exercises and a recent tax legislation in Arkansas to decrease its corporate income tax rate. And as a result of the legislation, we will decrease our deferred tax expense by $21 million in the second quarter of 2019. Net income totaled $1.4 billion, up 6% versus last year, while the outstanding share balance decreased 8% as a result of our continued share repurchase activity. As I noted at start, these results combined to produce a first-quarter record earnings per share of $1.93 and a one-point year-over-year improvement in the operating ratio to 63.6%. Trade revenue of $5 billion was down 2% versus last year. Fuel surcharge revenue totaled $398 million, up $45 million when compared to 2018. Business mix had a meaningful impact of negative four points on the freight revenue for the first quarter. Decreased sand and agricultural product volumes, along with an increase in lower average revenue per car intermodal shipments, drove the negative change in mix. Core price was 2.75% in the first quarter, which represents a one quarter of a point sequential improvement compared to the fourth quarter of 2018. Slide 20 provides a summary of our operating expenses for the quarter. Compensation and benefits expense decreased 5% to $1.2 billion versus 2018. The decrease was primarily driven by the payroll tax refund that I mentioned earlier and headcount reductions, partially offset by wage inflation, employee severance costs, and weather-related expenses. Total workforce levels were down 4% in the first quarter versus last year. Productivity initiatives and lower volumes enabled a 2% decrease in our T, E, and Y workforce, while our management, engineering, mechanical workforces together declined 6%. Fuel expense totaled $531 million, down 10% compared to last year. Lower diesel fuel prices and gallons consumed were the primary drivers of the decrease in quarterly fuel expense. Compared to the first quarter of last year, our average fuel price decreased 3%, to $2.07 per gallon. Our fuel consumption rate increased about 1% during the quarter, primarily due to mix and the weather impact. Purchase services and materials expense was down 4% compared to the first quarter of 2018 at $576 million. The primary drivers of the decrease in the quarter were reduced mechanical repair costs and less contract services and materials, partially offset by weather and derailment-related expenses. Turning to slide 21, depreciation expense was $549 million, up 1% compared to 2018. For the full year 2019, we estimate that depreciation expense will increase about 2%. Moving to equipment and other rents, this expense totaled $258 million in the quarter, which is down 3% when compared to 2018. The decrease was primarily driven by lower equipment lease expense and less volume-related costs, partially offset by weather-related challenges. Other expenses came in at $305 million, an increase of 15% versus last year. Higher casualty costs, including destroyed equipment and freight loss and damage, were the primary drivers of this increase. For the full year of 2019, we expect other expense to be up in the 5% to 10% range compared to 2018. For an activity savings yielded from our G55 and Zero initiatives, and a unified plan 2020 totaled $120 million during the quarter, which was partially offset by additional costs associated with the weather and derailments. As a result, net productivity for the quarter was approximately $60 million. With these incidents behind us, we are still confident in our ability to deliver at least $500 million of productivity in 2019. Looking at our cash flow, cash from operations for the first quarter totaled $2 billion, up about 3% when compared to last year due primarily to higher net income. Free cash flow before dividends totaled $1.2 billion, resulting in free cash flow conversion rate equal to 84% of net income for the first quarter. Taking a look at adjusted debt levels, the all-in adjusted debt balance totaled $27.6 billion at the end of the first quarter, up $2.5 billion since year-end 2018. This includes the $3 billion debt offering that we completed in February, partially offset by repayment of debt maturities. We finished the first quarter with an adjusted debt to EBITDA ratio of 2.6 times, up from the 2.3 times that we reported at year-end 2018. And as we have previously mentioned, our target for debt to EBITDA is up to 2.7 times. Dividend payments for the first quarter totaled $626 million, up from $568 million in 2018. During the first quarter, we repurchased 18.1 million shares at a cost of $3.5 billion. This total includes the initial 11.8 million shares that we received as part of a $2.5 billion accelerated share repurchase program that we initiated in February of 2019. We expect to receive additional shares under the terms of the ASR with final settlement to be completed prior to the end of the third quarter of this year. Between dividend payments and share repurchases, we returned $4.1 billion to our shareholders in the first quarter. Looking ahead to the remainder of the year, our guidance for 2019 remains unchanged, which is a testament to our belief that the weather challenges of the first quarter are behind us. We expect volumes for the full year to increase in the low single-digit range. And as Kenny mentioned earlier, We should see strength in a number of business categories along with some uncertainty in others. Our pricing strategy remains unchanged as we continue to price our service product to the value that it represents in the marketplace while ensuring that it generates an appropriate return. We are confident the dollars we yield from our pricing initiatives will again well exceed our rail inflation costs in 2019. Although our planned capital spending is shifting somewhat as a result of the reallocation that Jim walked through, The weather-related capital that I discussed, we will expect capital expenditures to still be around that $3.2 billion range for 2019. Importantly, we remain confident in our ability to achieve a sub-61% operating ratio in 2019 on a full-year basis, and we still expect to be below 60% by 2020. And our commitment to reaching a 55% operating ratio beyond 2020 has never been stronger. With that, I'll turn it back over to Lance.

Thank you, Rob. As discussed today, we delivered record first quarter financial results driven by improved operating performance while dealing with significant weather challenges. Unified Plan 2020 created a more resilient and robust network, allowing us to quickly return to normal operations. For the remainder of 2019, we looked to build on the momentum we had prior to the weather challenges and provide a consistent, reliable service product for our customers, while at the same time improving our operating efficiency. We remain focused on increasing shareholder returns by appropriately investing capital into the railroad and returning excess cash to shareholders through dividends and share repurchases. With that, let's open up the line for your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we'll 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 Brian Ostenbeck, JP Morgan.

Hey, good morning. Thanks for taking my questions. So, Jim, now that you've been here for more than 10 days, it looks like you've been pretty busy going back to 514 with the terminal rationalization network changes. And I was just hoping if you could give us a bit more context as to what could come next. You have Chicago circled here on the map. You've done what seems like a few hump yard closures. How many more do you think you can close? How early in the process do you think you are when you look at redesigning service and maybe making some more of these terminal changes?

Well, good morning, Brian. I appreciate the question. And I'll tell you, I did not have my feet up on the desk. Okay. So it's been a lot of very interesting. First of all, I wanted to make sure I understood how this network worked. It's very important to that you don't make some big mistakes when you're out there trying to change a network. The last place I was at, I worked for 40 years, and after 40 years, you get a real good feel of the way the place is. This is what I've found so far. I don't like to put out guess about what I'm going to do, but I'll tell you, I think we moved very quick. We got set back with the weather that we had at the end of February and the floods that were unprecedented. In fact, we've been railroading for a long time, and I'm impressed with what the team was able to do to turn this thing around and get us back to normal operation very quickly. So what I'm looking at is real simple. We're trying to take touch points out of the cars. We speed the cars up, and you can see what we did first quarter. We rationalized the locomotive so we don't have excess out there, and we parked a lot of locomotives and are able to handle the same traffic with substantially less. I think there's more opportunity there. We'll continue to do that. And the terminals, we have our eye on a number of terminals that make sense for us. We'll do it through this next quarter. And as we do, we'll do them cautiously. I want to make sure I don't disrupt the service too much to our customers. And slowly but surely, we'll work through this. When I'm saying slowly, it doesn't mean that I'm going to still be looking at the terminals. I've got a plan written down of which ones we're going to go after next, and we'll announce them as we do them. I hope I answered your question, Brian.

Yeah, thanks, Jim. Just as a follow-up, and I don't know if I'm reading too much into this, but on the KPIs, which I think are really quite helpful, we don't have the goals there anymore, at least from what we had before. So just wanted to see if these are still the ones you're thinking of moving forward, if the goals are under consideration. Anything else you can provide around that would be helpful. Thanks.

Ryan, listen, year-end goals are important when you're trying to do some budgeting, but for me, that's the way I look at it. So let's take a look at locomotive productivity up 6%. I was going to blow by the goal real early in the year, so do we want to stop? I don't think so. The way I look at it is there's a lot more left in the locomotive productivity. I'm going to see how fast we can get to the best number that we can, the least amount of locomotives to work. I think there's still some action there, and we would have blown by that end goal earlier before the middle of summer. So for me, it's how fast, what do we need to do, do it in a smart way, and we'll blow by all the goals we had set up for the end of the year.

Brian, this is Lance. We have not changed any of those goals that we had showed in the KPIs that we had up in the January analyst call. It's just at this point, it looks like there's upside, and we're just going to move through to the upside.

Okay. Thanks, guys. Appreciate it. Next question is from the line of Scott Group of Wolf Research. Please proceed with your question.

Hey, thanks. Morning, guys. So, Jim, I was wondering if you can help. When we look at the service issues, is there a way you can isolate some of the weather impacts versus maybe some of the natural growing pains that we typically see with PSR? Do you think you're also having some of those? And then maybe more specifically on head count, Can you give us any sort of directional color on how you think about headcount next quarter for the year? I think you had a 10% labor productivity target. Is that also one of the KPIs you think you could, to use your term, blow by?

Maybe that wasn't the best way to describe it, right, Scott? So let me be more tempered. So on the labor productivity, we see labor continuing to drop. And it will drop through the year as we become more efficient in handling our product. So I'm not concerned about it. We don't see adding. We see dropping. And we'll continue to drop on labor productivity. The weather, what was interesting about the weather was just the magnitude of the place. If you think about it, we talked about the 50 trains a day that we that we run on our east west corridor, but it also went down towards Kansas City, we lost subdivisions. And we still have one of our lines and impact on a couple others where we're cut off rebuilding a bridge and we're still working around. So there's still some impact today. But nice part is, is we recovered quickly. DSR, or when you change things, if I wanted to, I guess I could have come on and parked 500 locomotives first day, and that would have impacted. It takes a while to grow into that. But we're doing it a little smarter. We're down the number that we need to be, but I didn't do it first day. We're doing it strategically. You shut down a hump yard, like when Pine Bluff was shut down as a hump operation. It does take a while. And if I would have done three or four of them at the same time, we would have impacted more of the network. So we're being smart about it. So that's what we're trying to do, Scott.

Okay, that's helpful. And then just maybe secondly for Kenny, the last couple quarters, you guys have been talking about the competitive pricing dynamic with BN. More of the same? Is anything changing there? In the big picture, are you seeing any changes in behavior from BN?

I don't want to get into commenting specifically about another carrier, but I'll tell you the competitive marketplace is still very strong. There's still a lot of pressure there, a lot of pressure on the trucking side. I feel like our commercial team did an excellent job of pricing to the market. I also feel like as Jim and the operating folks get us back to the reliable service that we saw before the flood and the snow, that that's an opportunity for for us the price for the value.

Okay. Thank you, guys.

The next question is from the line of Ari Rosen with Bank of America. Please proceed with your question.

Hey, it's Ken Hexter. Lance, Jim, and team, great job showing the resilience of the network. Just, Jim, on the 1900 locomotives you parked, Is there a need for those to keep around for growth, or do you go take impairment charge on those? Can you give some thoughts on the future of your locomotive?

I think both answers. We're going to keep some. It makes sense. They're good locomotives. And if we have some excess, we're going to return some. We're going to get rid of some. But we're working through that.

But Rob, maybe you have a... This is Rob. Yeah, I mean, we're going to work through that, as Jim says. And we'll look at and uncover any opportunity we think we have for locomotives as appropriate. But there's no imminent impairment charge plan here.

Okay. And then if I can just get a follow-up on your normal sequential operating ratio improvement. Can you give thoughts on the cadence as we move through the rest of the year, Rob, just given kind of some of the charges in the quarter and maybe what, you know, if we look at normal sequential, what you've done in the second quarter versus first? but then thinking about the weather just to try to understand your path to get to the your, your full year targets and, you know, relationship to Jim's kind of commentary about maybe blowing by certain targets up to that point. But if you can still make up that target, or if there's still kind of the ability to beat those prior targets, that'd be helpful. Thanks, Rob.

Yeah, I mean, as you know, the first quarter is generally a little bit higher operating ratio. And that's that's traditionally true. There was a lot of ins and outs as we walk through in the first quarter. Fuel, as an example, was a tailwind, and we don't know exactly how that's going to play out for the balance of the year. But to answer your question, without giving specific quarterly operating ratio guidance, for us to get to our confident guidance of a sub-61, that obviously implies that we're expecting to make great progress, which we all feel real good about, great progress from here on out for the balance of the year. All right.

Appreciate the insight, and great job on the snapback. Tough luck. Thank you.

Thanks, Ken.

Next question is from the line of Allison Landry with Credit Suisse. Please proceed with your questions.

Thanks. Good morning. I wanted to ask another one on the yards. So, you know, obviously you talked about the, in addition to the two closures, you know, can you talk about whether you have or you're expecting to convert any of the humps to flat switch closures? and then any sort of sense that you could give us in helping us to try to quantify the potential OR improvement, or maybe if you could tell us how much of the overall initiative is baked into the $500 million.

Rob, do you want to start?

I'll take the second part of that question first, and that is, again, without giving specific numbers, I would just tell you that it is a part. I mean, these initiatives that Jim's talking about and others are are all going to be critical contributors to us achieving that $500 million plus of productivity this year. So without giving specific numbers, it is a part of that. And, of course, as you've heard me say before, we're not going to stop at just the 500. If we get an opportunity to go the plus, we're going to take advantage of that as these initiatives continue to play out this year.

And, Allison, this is Lance. Jim can add more technicolor, but As we've stopped humping in a place like Pine Bluff or Hinkle, we did not tear out the hump, and they do continue to switch cars. They flat switch cars right now that are meant to be there. You know, we speak in terms of cars that are naturally meant to be in those yards. That's either because that's where they fit in the network for where they're trying to go or where they came from, or they're literally local cars. So, Jim, you got anything else on that?

Yeah, listen, Allison, for me, I don't look at it as I need to shut a hump yard down. What I look at is how do I speed up the rail cars? And as a team, how do we get more utilization of the rail cars, better utilization of the locomotives, better utilization of the people? So you can see what we did the first quarter even with the impact. Our train size jumped up 7%. That's key. That tells us that we're moving more rail cars on the same number of trains, and you can do the math, what that does on people starts. You see an increase in locomotive productivity up 6% first quarter, and we will continue to look for opportunity, and I know there's opportunity there. And if we do that, we have less locomotives, and it impacts the whole system on how we do it from mechanical to engineering. We've removed the number of trains that we have started. The terminals is a subset of what we're trying to do. Maybe I'm getting too long on this, but it's real important. I don't wake up in the morning and say, I'm going to shut down another hump yard. If we can save on the touch points, if it speeds up the rail cars, and if it makes sense that it's a cheaper model to shut down the hump yards, that's why Hinko went as a hump yard. That's why Pine Buffalo is gone as a hump yard. That's why Brazos, we looked at and said, we don't need it right now with the mix of traffic that we have and the efficiency we can do with the terminals that we have. That's the way I look at it. So hopefully Allison and I explained it to say, I'm not looking for the next one. Now, let me finish this. Is there a next one? Yes, there is. But we'll announce it when we pull the trigger.

Okay. That was really helpful. Thanks for that, caller. And then yesterday, KCS was talking about the severe congestion issues that have plagued the Houston area. And I know historically it's been probably an even bigger pain point for you guys. But I wanted to get your perspective on how PSR can help to improve fluidity there and whether you think there could be an opportunity to scale back the elevated CAPEX you've had to put in the region in the last several years. Thanks.

I'll start, Allison. So... Houston's a very complex terminal complex. It's got a number of different class ones operating and a ton of industry with a lot of local service attached. So to your point, I mean, historically, it's one of the more difficult areas of the railroad to operate reliably and efficiently. Having said that, implementing Unified Plan 2020 down there has shown it makes a difference. We're providing more frequent local service. We're touching cars less frequently, and as a result, we're becoming more reliable in our service product. We're a big footprint in the area, but we're not the only one, and we have to rely on smooth coordination with the other railroads in the area, which we work on every day and are getting a little bit better at every day. Jim?

Allison, what I can say is this. You know, we're current and we're very fluid in Houston. There's a lot of traffic. There's multiple railroads that operate on each other's tracks, and we've got to work close to make sure that we get all the traffic. I want us all to be successful. And it's nice that the other railroads are also looking at how they improve the efficiency of their operation. And I think we've got to work together to make sure that we've got a clean operation through Houston. But if you take a look at what we've been able to do, We've been able to increase the productivity and the number of cars put through in our Houston complex that we have to switch from all the customers, and we'll continue to look for opportunity to make it much more fluid so we turn the cars quicker. A good number to look at is our terminal dwell, which we were able to drop substantially in the first quarter from last year. You dropped terminal dwell by 20%, which started before I got here, so I give a lot of credit to Tom Wisher and the whole operating group and the whole company for But at the end of it, we drop that by 20%. We're more fluid. So I think we have a solution. We're all fairly current right now, and we'll work with the rest of the parties as we move ahead to make it as fluid as any other place on the railroad.

Okay. Thank you, guys.

Thank you.

The next question is from the line of Amit Maltra with Deutsche Bank. Pleasure to see you with your question.

Thanks, Operator. Hi, everybody. Thanks for taking my question. Jim, just to follow up, to the previous lines of questioning. Are there, I guess, any large quick payback types of projects that are happening today? Because there's just not that many quarters left between now and the end of 2020, and the implied incrementals are quite heroic to get to the target in 2020, and it's obviously, it gets incrementally harder every quarter we progress. So I'm just wondering if we're gonna see this break out in operating results. I know the weather was an impact in the quarter. Or is this more like a 2020 event, given the types of changes you're addressing, or some of the changes that are being implemented maybe have quicker paybacks that we can see in the next one to two quarters? Thanks.

Listen, if we look at it, we've said that we're going to be sub-61. We've got everything in place to be able to beat sub-61, and we're going to deliver it. And there's a lot of projects that we have in operations and through the whole company. This is not just an operations-delivered product. This is an entire company delivering for leadership from the whole company. So I think the simple answer is we're going to deliver under 61, and I can't use that word about blow by it anymore, okay? But I'm very comfortable that we've got the right – product in place operationally and the rest of the company to deliver that. If I could just comment on that.

This is Rob. You know, it is – you obviously can tell from our results and our tone that we feel really, really good about the early innings of the implementation of the PSR and the Unified Plan 2020 and G55 and Zero initiatives, et cetera, in the face of the very big challenges that we face in the first quarter. with down volume. So if you look at the balance of the year, and our guidance is that for the full year, volume will be on the positive side of the ledger. So we think we're in a great position to leverage not only the great work that Jim's just walked through, but the added positive volume that we are projecting for the balance of the year. The combination of that is what gets us to that sub-61.

Right. Okay, that makes sense. Thank you. And then just one follow-up, maybe on the other side of that question. You know, 60 OR, 61 or under OR is well below, you know, what obviously CSX is reporting. At what point does Union Pacific's profitability targets, you know, I guess better reflect, you know, the structural advantages of the business, especially from a length of call perspective?

Yeah, neat. So first things first, we're focused on executing our current goals, which is sub-61 this year, sub-60 next year. Of course, we're not going to stop and pause there. And we've for quite some time said we think we're capable of a 55, and we think sometime after 2020 we are more confident than ever that we're capable of a 55. So without using anyone else's yardstick, just looking at what we're capable of doing, we are very, very confident we're going to hit our near-term goals, and then later we'll talk about other goals.

Any sense on when that 55, the time frame? I know you've been resistant on talking about it, but is it early next decade, mid-next decade? Any better kind of refinement around what the time frame of that is?

Yeah, let's get below 60 first, then we'll talk about it.

Okay, I have to ask. Thanks, guys. Appreciate it.

The next question comes from the line of Brandon Oglenski with Barclays. Please receive your questions.

Hey, good morning, everyone. Thanks for taking my question. Kenny, I guess I wanted to come back to this issue of inventory pull forward, because you guys mentioned it in your prepared remarks. Have you pulled your customer base and just thought about the idea that maybe we pull forward a lot in 2018 and early 2019, and we could see a prolonged lull in intermodal demand throughout the summer?

Yeah, we've been talking to our customers, and we do know that there is still some inventory out in the warehouses, out on the West Coast. And I think the best thing is to let us get through April and into May, and we'll get a little bit more clarity on that. But we are seeing some of that being worked off right now.

Okay, I appreciate that. And then, Jim, I want to come back to your prepared remarks as well, because I think you mentioned that you stopped capital work at the Brazos Yards. which if I'm not mistaken, I think was a key tenant of the prior operating plan. So can you talk about where you see maybe more opportunities on the capital side of the budget? And I think, you know, Lance, in the past, you've talked about capacity on the network being around 190 or 195,000 units per week. Is that still the same? Or should we be thinking, you know, we're unlocking a lot of potential capacity in the network here?

I'll start on capacity. And I think you've got it right at the tail end in part. And that is, we are unlocking terminal capacity predominantly through Unified Plan 2020 and the implementation of PSR. Having said that, we've always talked about capital is put where we find constraints that keep us from executing the plan. And so there are some targeted capital areas remaining, and there probably always will be, where mix shift or volume shift or how we're running the railroad tells us we could get real benefit with a rifle shot of capital. I'll also mention at Brazos, so for a little while now, we've been talking about the implementation of UP 2020 could very well either change the way we use Brazos or change its timing. And by unlocking capacity and touching cars fewer times around Brazos, we found that we have an opportunity to pause that capital, that we don't need to increment yet in the network. So, Jim, you want to talk about where capital might be spent?

Sure. You know, one example is we have a network, and we're blessed that we have a lot of capacity in areas where we can run trains to where other people have been running them and where we've been running them. So to be able to tie in, we're going to spend some money, some of the money that we've reallocated from Brazos to – puts long sidings in between LA and El Paso so we can continue to run trains at the length of the capability that we have. We started with a few trains that helped us on our length, but we think that we harden that capability. It will be later on this year, third quarter, to be able to really bump up and save train starts and run trains at the size that we have the capability of operating. So we're smart to not only, you know, I don't want to be short-term focused. I think we're building this railroad for the long term. and invest in the right places that helps us to be able to keep this railroad running efficiently two, three, four, five years down the road. Rob, anything on the capital? I think you've covered it.

Thank you. The next question is from the line of Tom Wadowitz with UBS. Please proceed with your questions.

Good morning. I wanted to ask one about the train schedule. I think that UP in September announced they were moving to PSR approach and developed the three corridors and plans for rolling those out. Jim, you didn't start until I think mid-January or so. With the framework that a big part of PSR or a big component is reviewing and changing the schedules, it seems like a lot of that was done before you got there. Is it possible that you have another round of you know, reviewing the schedules, you know, resetting, or how should we look at it given a lot of the plans seem to be in place before you even got there?

I think the team, Tom, you know, great question. The team did a great job of speeding up the rail cars, getting rid of some touches. I think the next step is we get to refine that. When I look at the network, we have trains that are operating that we have opportunities to be able to speed them up be able to start less trains. So that's the next piece that we're doing. So great foundation built on by the entire team before I got here on January 14th. And we're building on that. But lots of opportunity from what I see in how we operate our trains and yards.

Hey, Tom, let's also be clear that Unified Plan 2020, when implemented, was perceived, and that's one of the reasons we brought Jim on, it's perceived to be an evergreen process. So we You know, getting Jim's perspective, his fresh eyes on that first round of implementation, we're going to find more. And we'll continue to find more year after year after year. So it's meant to be an evergreen process that continually gets fine-tuned.

Tom, the only thing I'll add is that Jim and I, our commercial teams are working together. So our end vision is a more reliable product. And, again, we think that will help us grow in the marketplace.

But just to be clear on that, so do you think there is another significant review of the schedule, you know, or is it more kind of tweaking things? It's still significant. It's still significant. Okay. I appreciate that. A quick one for you, Kenny, just on the coal and grain side. I mean, I guess when you have the, you know, corridors that are shut, you prioritize trains typically. I would think of coal and grain being lower priority than, you know, merchandise and intermodal. So, I mean, is there pent-up demand for coal and grain where you have probably some, you know, the network starts running, you can, you know, handle some more volume in those areas? Is that a reasonable thing to consider in the near term that you might have some pent-up coal and grain to handle?

Well, first of all, I debate you on the fact we really appreciate the coal demand. and the ag business, so I need to clarify that. It's a small upside to that, and we're working with the receivers and the shippers on both sides of both the coal and the ag side.

Okay, fair enough. Thank you for the time.

The next question is from the line of Justin Long with Stevens. Please proceed with your question.

Thanks, and good morning. So to start, I just wanted to clarify on the productivity target. Is the $500 million plus guidance a gross productivity number? And if so, could you share your outlook for net productivity this year? It sounds like the $60 million of operational challenges we saw in the first quarter isn't going to zero in the second quarter, but it should be down significantly. So just wanted to get some more color around that.

Yeah, Justin, this is Rob. That's a great question. Our $500 million plus productivity guidance goal is a net. So we achieved $60 million in the first quarter, to your point. And, yes, there will be some lingering carryover weather-related costs in the second quarter, but significantly less than what we experienced in the first quarter. But that does imply for us to get $500 plus for the full year, When you consider we have only 60 of it, which was great work considering the conditions, that shows our competence and our ability to continue to make progress as the year progresses.

Okay, great. That's helpful. Going back to the terminal rationalization and network changes, are you expecting this to generate any gains on sale as you look out the next couple of years? And if so, are any gains getting baked into that 2019 or 2020 OR guidance?

Hey, Justin, no gains other than normal annual gains, which we talk about all the time. We always have our real estate team looking for opportunity to monetize assets we no longer need. That's a normal flow of business. There's nothing unusual that has been baked into our guidance for 19 and 20, and we'll just keep evaluating our property as it makes sense.

If I could just make one other comment, just a clarification. At Union Pacific, we do not count real estate sales in our operating ratio calculation.

Okay. That's good to clarify. I appreciate the time.

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

Hey, thanks. Good morning. Kenny, maybe a question on the volume outlook. Just sort of understanding what we've seen so far in the first quarter, obviously some weather disruptions and some softer numbers. And then the maintained outlook for the full year, obviously there's been some full flow of activity and then towards maybe a bit on the high side. It sounds like we're working through that now. Is there something else that you're seeing that gets you a little bit more confident that you can hit that? There's obviously an implied sort of acceleration as you move into 2Q, 3Q, and 4Q. It seems like maybe there's still some lingering impacts on the network. I just wanted to get a sense of sort of how you're looking at it and what you're hearing from the customers about sort of the demand environment to get you comfortable with sort of a little bit of that acceleration as we go through the rest of the year.

Yeah, I just want to reiterate the low single-digit volume forecast for the year. And, yeah, we are talking to our customers. You know, the economy looks stable right now, and there is a sort of a mixed bag with it. I'll tell you that, you know, there are commodities like our metals business. I talked a little bit about our petroleum. We talked for a while about plastics. Industrial production is still on the positive side, even though it was revised downward a little bit. And the uncertainty is around international trade. On one end, you've got the ag business that we export out that we've talked about. And then the other piece that we're looking at is will there be an impact on the trade coming from Asia, and how will that demand look? But overall, we feel like it's a pretty stable economy for us to grow in.

Okay, that's helpful. I appreciate it. And then we touched on this earlier in the call, just sort of on the head count and how we think about maybe that playing out over the course of this year. Obviously, there's a big sequential step down in the first quarter, and presumably volumes come back in a better way as the rest of the year progresses. You know, any sort of incremental color you can help us with in terms of how we should be thinking about that. as 2019 progresses. Can you make further progress sequentially from where we are? Should we see some natural sort of variation of volume going forward?

Chris, this is Rob. I mean, you know we're not going to give a specific headcount number, but when you look at our confidence coming out of the first quarter where our headcount was down a total of four with some challenges, obviously, that impacted that number and our commitment of a $500 million plus productivity number, which is going to be a big chunk of that is going to come from the labor line. it does imply that we are confident in our ability to continue to drive headcount down, and hopefully with positive volume. That is our plan. So the combination of that is powerful, and that's what gets to the sub-61. Okay. Okay.

Thanks very much. I appreciate it.

Yep.

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

Thanks, Murray, everyone. Just a follow-up on the plan capex shifts. You guys have always been adamant that you guys continue to pursue growth while implementing PSR. I think there's been some skepticism about whether that's possible or not. But kind of just given some of the capex shifts, the browsers and such, is there like a slight shift in that plan?

No. So, Ravi, two things. One is We continue to view capital the same way we always have viewed capital, which is it's got to generate an attractive return. We'll put it where we need it. We plan capital from the bottom up, but we still think we're going to be at or below, I think below is our guidance, 15% of revenue. Where that capital is going is shifting around as unified plan shifts traffic and and puts emphasis on some areas of the network where maybe it hadn't been before. The second part of your question, which was can you grow when you're implementing a PSR railroad, and we think absolutely you can. We think the end game is a consistent, reliable service. Our customers want that. As we demonstrate we deliver that, we believe there's upside to the volume that is available to us. So we think growth is achievable.

Got it. And also, I believe you guys filed with the STB for a trackage rights agreement with Norfolk Southern. Can you give us a little more color there? Is that just a temporary thing to get past the weather issues, or is it more of a longer-term solution?

Ravi, I'm not sure exactly what you're referencing there. I will say that we have coordinated with other railroads through these weather events and are still doing some of that with peer railroads. That's just part of the normal course of business when we face significant traffic disruption. Okay, I can follow up offline. Thanks so much.

The next question is from the line of David Vernon with Alliance Bernstein. Please receive your questions.

Hey, good morning, guys. So Jim and Rob, maybe a question for you guys on the redeployment of some of the existing CapEx to sort of capacity-producing initiatives. As you're pushing some of the CapEx from Brazos into extending sidings in the sunset, Jim, are there areas that you see additional work needing to be done to sort of unleash further productivity? Can you give us a sense for how much runway there might be here, not to just change the scheduling and the operations, but also to change the physical plant a little bit? I guess the real question here is how constrained are you by the setup of the existing network right now, and when do those constraints lift?

David, good question. So I think we've got a great network. I think we can operate in a real – very fluid manner. As we implement PSR, we actually get more capacity. We're going to spend capital only in places where it allows us to be more efficient than we are today and deliver a better product to our customers. At the end of the day, when we're done with this PSR, done meaning that we've got most of it implemented because it's a continuous view, we want to be able to give our customers the best service so that they can compete in the marketplace against everybody else. And we win and they win. And that's what we want to build. So this is not, I don't feel constrained anywhere. But down the sunset, there was an opportunity for us to be able to improve our service to our customers, be able to be more efficient ourselves. We can get into Chicago quicker if we can, all the better. We're real strong into Texas. We want to continue that. And we want to build on that so our customer wins, they win, more business, we win. So that's what it's all about.

And maybe as you come out of that process, as you think about, you know, in your prior experience as far as kind of the way capital is deployed, the management of that MOW function, you know, when you come out of this thing, where do you think the long-run CapEx has been coming? I know you guys have been saying sort of sub-15s. But with a lighter mix of traffic kind of running over the network, can you help us understand kind of how below 15 that long-term capex number could be?

Rob, would you handle that for us, please? Yeah, David, I'll just reiterate what you've heard us say. And, by the way, we're very proud of the effort that has been underway for several years to get us to where we are today in terms of a sub-15% of our revenue, in terms of a confidence level of our ability to spend capital where the returns are there and still be at that 15% or lower number. That's pretty good progress. So I would just say that we totally understand the value and the impact of capital dollars, both on the positive side in terms of investing where growth and opportunity and returns are there, but also on the cash side of being as disciplined as we can in not spending capital where we don't need to spend and freeing up capital dollars where we can't. We're all about that. But at this point in time, our guidance remains 15% or less. of revenue on our capital spending. And a lot more to play out, as you've heard from Jim all morning today, as he looks at different opportunities going forward.

So no sort of commentary on whether the PSR or post-PSR world would be even better than that sub-15 number or... At this point, no. Okay. Thank you.

The next question is from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.

Yeah, thanks very much. Good morning, everyone. Kenny, I'd like to come back on international animal. You obviously had a very nice increase year-over-year, and you called out some business wins. Can you give us a sense of the timing of those wins and how much left on a comps basis that that's going to drive? And if there's any, when you look at your pipeline of what might be coming up, do you feel good about any upcoming potential new business wins that will allow you to keep growth going forward?

Yeah, so we lap those here within the next couple months here. And yeah, I do feel very bullish about the pipeline that's out there, our business development pipeline. And as I stated, the beauty of what we're seeing with this more reliable service product, we saw that before the floods, is that it opens up rail-centric markets for us. And as we get more confidence, we're expecting that to open up truck-centric type opportunity. But we've got a good cadence of opportunities that we can compete on. And we just want to make sure that we can win those at the appropriate levels for us.

And when you look at the pricing environment, you're ticking up nicely every quarter, it seems. And I just wanted to understand if that's due to some of the prior weakness or higher trucking prices. and therefore may slow, or is it more of a better rail pricing environment than what you've seen previously? I just want to get a handle on how much more pricing trends we can anticipate, or do we start to see it dip down as pricing in the trucking market starts to come back down a bit?

Yeah, so you're right. We saw a stronger pricing environment during the second half, of last year. I'll tell you, this year we are seeing some softness in the spot market, but we still think that the overall contractual truck market is a stable market. I'll call that stable. So the expectation really is that the commercial team, they're just going to price to the market that's out there, and we're expecting that a more reliable service product will also help us in that.

Okay, that makes a lot of sense. And just a housekeeping, if I may, the tax rate that you called out there, just north of 23%, indicated that Q2 might be a little lumpy. Do you have a guidance for the Q2 tax rate relative to the full year tax rate that you guided?

No, other than, Walter, I did call out the $21 million Arkansas item that will show up in the second quarter. So that will, you know, show up in the second quarter. And the full year is lower rate than what we previously were projecting based on that and the impact of equity exercise of options on our tax rate.

And should we use 24 longer term, which is what you kind of got it to before these kind of lumpy items? Is that a good number for –

Beyond 2019, that's probably a reasonable assumption.

Perfect. Thank you very much.

The next question is from the line of Tyler Brown with Raymond James. Please proceed with your questions.

Hey, good morning. Just one question here. So the IMCs have had a strong, call it 12 months on the pricing front. Your competitor is obviously in discussion with their IMCs. You've got a $5,500 goal, and I would be presumptuous, but I would say intermodal is going to play a significant role in achieving that. So my question is, why don't you guys push harder on domestic intermodal price to really catch up with what the IMC saw? Or is it that you're under some multi-year contracts with your IMCs, and we could see that maybe when those contracts reset? Or am I missing something altogether?

Yeah. You know, what I say is that you've seen our price come up sequentially. I have the gift that I can see how we're pricing this business and we are pleased that we're pricing to the market. I won't go into any details on how we're differentiating the pricing inside of our domestic versus our international and the modal business. I can tell you that as the market shows out, we price to that market. I'll continue to say that as we get our service product more reliable, and also in our intermodal network that we'll expect that we'll be able to price accordingly. All right, thank you.

The next question is from the line of Fadi Shamoon with BMO. Please, see with your questions.

Good morning, and thank you for squeezing me in here. Just one lingering question for Jim. Jim, when I look at the kind of classification assets relative to the size of the manifest network of Union Pacific and compare it to some of the other railroad, the Canadian railroad and some of the other railroad that implemented PSR, you still have significantly larger classification and network relative to the other railroad with PSR. Is there a specific reason why, maybe because of mix or other issues, you would have that larger classification network, or is it fair for us to interpret that as a potentially long-term, strong opportunity for rationalization?

It's a good question. Every railroad is different, and I'm intimately knowledgeable of one other, to the point where understand how the setup is. So you have to be careful in that a hump yard, there is nothing wrong with a hump yard. It's the most efficient way to handle 1,800, 2,000 cars a day. There is nothing better. It's low cost. It works well. So if the business is such that you need it, it would be remiss to start fooling around by moving cars to other places. My focus is you take the touch points out. You go longer haul trains. You have trains that can handle more cars. And if we need a hump yard, then we put it in place. I think there's opportunity, but never judge one railroad over the other because of the traffic mix and the kind of flow of traffic that we have. So I know how many CN has, and I know how many of the other railroads have, and I can tell you that we will get to the point where we have just enough hump yards to handle the cars most efficiently. And in some places, it's more important for us to shut down multiple yards that we have in a city where we go down from three to two or to one, just like we're looking at the intermodal that we mentioned in Chicago. We've got a number of work sites in there, and we think we can give our customers a better product by dropping and consolidating and be able to operate better. in a smoother manner in Chicago and give a better product to our customers and be more efficient. So that's what it's all about, Fatih. Hopefully I explained it.

No, that's great. And maybe one close follow-up. So you've talked in the past about trying to remove the level of maybe a customization that has been built over time and inherited this manifest network. Is this process still ongoing or have you change the service and the design of the service to the point where that's becoming more active, I guess.

Hey, Fadi, this is Lance. Yeah, that process is still underway. So if you go back, the way we would describe the network prior to Unified Plan 2020 was really an accumulation of unique trained service designs. automotive network, and a coal network, and a grain network, and an ethanol network, and a rock network, and et cetera, et cetera. As the first phase of Unified Plan 2020 happened, we consolidated a number of those unique services into manifest service so that a train was handling more than one type of commodity. There's still work to be done there. There's still plenty of opportunity to be done there. And at the same time, Fadi, there are still going to be parts of our network that are specialized, unique trains. For instance, the coal network makes all the sense in the world, in most cases, to remain in a unit shuttle train network, as do grain shuttles, as do some of our rock network. But we have just taken that too far, I think, in our previous design, and we've unwound a good part of it and there's still more to be done.

Thank you.

Yep.

Next question is from the line of Sherilyn Radborn with TD Securities. Please proceed with your question.

Thanks very much and good morning. It has been a long call so I thought I'd just ask one on the 7% increase in train length. Just wondering if you can give a bit of color on where that was achieved in the network either by line of business or by geography and talk about how much higher you're able to take that based on the current siding infrastructure.

Well, we did it across the company, actually. We did it in our east-west, northern flow from the west coast all the way to Chicago. We did it on the sunset. We were able to do it on the mid-America, north-south from Texas up to Chicago and up into Minnesota. And we also were able to do some of it, and we're just starting there on our bulk capability. We think there's capability to be able to operate those trains in a much more efficient manner, so we'll continue to do it, Sherilyn. So it will spread out through the whole company.

Yeah, and Sherilyn, in terms of what's feasible, you're exactly right. Different routes on the network have different train length capability, but that's not a hard and fast rule, right? We've talked historically about... It's about where can you meet and pass traffic, and that doesn't mean every train on that corridor has to be built to the length of the sidings. You can always dictate that some of the traffic exceeds siding length, and that means the pass for the opposing train has to take the siding. So there's a lot of moving parts there. We've got plenty of upside from where we are right now.

Great. And maybe just as a quick follow-up, would that 7,400-foot train length achieved there in March, would that be a record for the company?

I don't know. We'd have to look at that. I wish it was because I love records.

But, Sherilyn, we'd be guessing. But if there is a record better than that, Sherilyn, I want to go buy it. All right.

Thank you. That's all from me.

The next question is from the line of Jason Seidel with Cowen and Company. Please receive their question.

Hey, guys. This is Adam on for Jason. I guess I'll try and keep it quick here with just a single question for you guys. And this may be more for Jim, but I just wanted to ask about the challenges of implementing PSR at UP versus CN and taking, you know, a much longer outlook, much longer in terms of time. Is there anything that would inhibit similar outcomes over time at UP versus CN?

Jim, would you also, when you answer that question, reflect on timing of implementing?

I think sometimes people forget that it took a while at CN to really get it moving. and get it to the place where it became the most efficient railroad in North America. It wasn't a quick fix and go, and I think it was, you know, it took some time and lessons learned. There's some things you can do quicker, but you also don't want to impact your service to customers and lose a lot of business because of it. So I'm doing it and we're doing it as quick as we can. We think we have a great plan and we'll move ahead. What I found here at Union Pacific, was it's a brand-new company. You know, I didn't know a lot of people when I showed up, but I'll tell you, the quality of the group right through the whole company, and I've visited a lot of places. I flew into, you know, every one of the locations, major locations that we have in this company, and I found people at the front line that want to be – their goal is the same as my goal. They want to have the best operating efficiency in the industry. So when you start with that as a base – It's a wonderful place to be, and it goes from the top to the bottom of the company and back up. So it's truly an exciting place to be.

Thanks, Jim. Appreciate the time.

You're welcome.

Our next question is from the line of Ben Hartford with Baird. Please proceed with your questions.

Thanks for taking the time. I just want to circle back on international intermodal. You included the question mark here in the slides, and obviously you talked about the inventory overhang to start the year. As you think about international for the balance of the year and adding some of the uncertainty, is it due to the fact that inventories are a bit elevated, or is it a bit more structural? If we look at the port data in March, East Coast was stronger than West. Is there something structural going on as it relates to diversion away from the West, or is the uncertainty just due to the fact that inventory levels here at the beginning of the year are elevated?

Yeah, I think it's easy to forget that both pull has started back in 2018, and they carried all the way into 2019. So we're talking about a pretty long period of time here. So, yes, it is about the inventory levels. We do need to see how they work off. As I mentioned, we have a lot more clarity as we get through April and May. Now, on the second half of the year, we'll have tougher comps, but we're expecting that a stable economy will still provide a positive number there.

Okay. And then maybe this is a follow-up on the domestic intermodal side for you and Jim as well. As you think about domestic intermodal, intermodal. I think you talked about pricing to the market, but also hoping that a more reliable service product would help that sales, that value proposition. As you think about the next three to five years as PSR takes hold, the market's going to do what it's going to do. Spot pricing is weak. But as you think about the conversion opportunity over the road over the next several years, that was removed on this outlook slide as well. How do you see the domestic intermodal conversion opportunity stripping out, sterilizing some of the cyclical noise right now as you get service where it needs to be? Is this still a product that can grow at a multiple of underlying, let's say, U.S. IP or GDP growth?

Yeah, so I stated in my comments, and I'll reiterate it, I'm bullish. We're bullish on the fact that there is upside on the domestic intermodal intermodal business, and, yes, a more reliable service product will help us out there. And I've got to emphasize this as we're talking about it. Also in our manifest business, there's still room for us to grow in our rail-centric business and for us to capture manifest business that's moving trucks. So it's not just a domestic intermodal piece. We're bullish across the board here.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Lance Fritz for closing comments.

Thank you very much, Rob, and thank you all for your questions. We're looking forward to talking with you again in July.

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