Union Pacific Corp (UNP) — Q1 2019 Earnings Call Transcript

Abrupt Start…AM 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 the future economic conditions. These statements are forward-looking statements bind with the federal securities laws. Forward-looking statements are subject to risks and uncertainties that can 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.

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 Vena, 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 1 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 Zero 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 a 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 declined 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 carloads 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 the same demand for biofuels and other related products. And lastly, food and beverage volumes were down 10% driven by a mix of weather-related impact, role reproduction changes, and foreign policy effects on dry foods and export proteins. 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 carloads 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 carloads 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 carloads 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 premium. 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, as 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 shipments declined 3%, as 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 shipments. 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 to see 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 tariff and 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 shipments, 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 conversion. However, long-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 plants. 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 teams for their tireless effort to get our network back in service from the historic weather events 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 main line 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. The new operating mindset of Unified Plan 2020 is clearly working and I'm extremely proud of our employees who worked 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 23.3 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 trip plan compliance improved two points versus 2018 as customers benefited from increased freight 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 how we 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 Lance 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. Slide 14 highlights some of the recent network changes including our initial terminal rationalization results. We stopped pumping 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 Brazos Yard. The remaining capital dollars planned for Brazos in 2019 will be reallocated to siding 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 $0.15 earnings per share compared to the first quarter of 2018, which I'll detail more in a minute. You also saw the 8-K 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 0.8 point favorable impact on the operating ratio and a $0.07 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 $0.06 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 and our Unified Plan 2020 efforts drove core operating margin improvement of about one point or $0.27 of EPS compared to the first quarter 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 a 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 the purchased services and materials cost categories. Given that we still have a couple of minor outages today, a small amount of cost 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 a bond redemption cost 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 the 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%. Freight 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 products 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 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 TE&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 weather impact. Purchased 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 was 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 2019, we expect other expense to be up in the 5% to 10% range compared to 2018. Productivity savings yielded from our G55 and Zero initiatives and the 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 a 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 look 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.

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 slide 14 with the terminal rationalization and network changes. And I was just hoping if you can 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 then maybe making some 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 there'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. So this is what I've found so far. And I don't like to put a 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 in the end of February and the floods that were unprecedented. In fact, I'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. But – so what I'm looking at is real simple. It's – 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 locomotives, 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. In 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. We're not – when I'm saying slowly, it doesn't mean that, I'm going to still be looking at the terminals. So 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. 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, I 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.

Brian, listen, year-end goals are important when you're trying to do some budgeting. But for me, this is the way I look at it. So let's take a look at – look more to 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 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.

Yeah. Let – Brian, this is Lance. So, 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.

Hey, thanks. Good morning guys.

Good morning.

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 headcount, 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, Scott. Let me clarify. Regarding labor productivity, we see labor continuing to decrease and it will keep declining throughout the year as we improve our efficiency in handling our product. I'm not worried that we aren't adding; rather, we are experiencing a drop in labor productivity. The weather was interesting due to its magnitude. We mentioned running 50 trains a day on our east-west corridor, but it also affected Kansas City where we lost sub-divisions. We're still dealing with one line and a couple of others that are impacted as we rebuild a bridge. There's still some effect today, but the good news is that we recovered quickly. When changing things, I could have parked 500 locomotives on the first day, which would have had an immediate impact, but that approach takes time to manage effectively. We're doing it more strategically. We're at the necessary reduction level now, but I didn't take drastic steps all at once. Shutting down a hump yard, like Pine Bluff, takes time to adjust. If I had shut down multiple yards simultaneously, it would have had a greater negative impact on the network. We're being smart about our approach, and that's what we're aiming for, 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 the same. Is anything changing there? And big picture are you seeing any changes in behavior from BN?

Yes, I don't want to get in 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's 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 us to price to the value.

Hey. It's Ken Hoexter. Lance, Jim and Kenny great job showing the resilience of the network. Just Jim on the 1,900 locomotives you parked, is there a need for those to keep around for growth? Or do you go take an impairment charge on those? Can you give some thoughts on the future of your locomotive fleet?

I think both answers. We're going to keep some that make 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…

Yes. Yes, this is Rob. Yes. I mean we're going to work through that as Jim says and we'll look at it and uncover any opportunity we think we have for our locomotives as appropriate, but there's no imminent impairment charge plan here.

Could you provide an update on your expected operating ratio improvement as we progress through the year? Specifically, could you discuss the changes observed this quarter and the comparisons to the second quarter versus the first? Additionally, considering the weather factors, how do you foresee reaching your full-year targets in light of Jim's comments about possibly exceeding certain benchmarks? It would be helpful to understand if there's still a chance to surpass those earlier targets. Thank you.

Yes. Ken, I mean as you know the first quarter is generally a little bit higher operating ratio and that's traditionally true. There was a lot of ins and outs as we walked through in the first quarter. Fuel as an example was a tailwind in that we don't know exactly how that's going to play out through 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 really good about great progress from here on out for the balance of the year.

Thanks, good morning. I wanted to ask another question about the yards. You mentioned the two closures; could you discuss whether you have plans to convert any of the humps to flat switch? Additionally, could you provide some insight on how we might quantify the potential for improvement or clarify how much of the overall initiative is included in the $500 million?

Okay. Rob, you want to start?

Let me address the second part of your question first. While I can't provide specific numbers, I can tell you that these initiatives Jim mentioned and others will be essential to us reaching over $500 million in productivity this year. So, although I won't give you exact figures, it's definitely part of that effort. Additionally, as I've mentioned before, we won't limit ourselves to just the five; if we have the chance to extend beyond that, we'll seize those opportunities as these initiatives develop throughout the year.

And Allison, this is Lance. So 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. 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 in that?

Yes, Allison. I don't view it as a need to shut down a hump yard. My focus is on how to accelerate the railcars and improve their utilization, along with better use of locomotives and our workforce. In the first quarter, despite the impacts, our train size increased by 7%, which indicates we're transporting more railcars on the same number of trains. This also positively affects manpower efficiency. We've seen a 6% rise in locomotive productivity in the first quarter, and we're eager to identify further opportunities. We have fewer locomotives, which influences our overall system operation, including mechanical engineering, and we've already reduced the number of trains. The terminals are just a part of our broader strategy. I want to emphasize that I don't wake up every day looking to shut down another hump yard. If reducing touch points can speed up railcars and provide a cost-effective model for closing hump yards, we evaluate that. That's why Hinkle and Pine Bluff were transformed from hump yards, and we determined that Brazos isn't necessary right now given our traffic mix and terminal efficiency. That's my perspective. I hope I've clarified that I'm not actively seeking the next closure, but I acknowledge that there could be one in the future, and we'll announce it when it's time.

Okay. That was really helpful. Thanks for that color. 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.

Yes, I'll start, Allison. Houston is a very complex terminal with several different Class 1 railroads operating along with a lot of industry and local service. Historically, it's been one of the tougher areas for the railroad to operate reliably and efficiently. However, implementing Unified Plan 2020 there has demonstrated a positive impact. We're providing more frequent local service and reducing the frequency of car handling, which has enhanced our reliability. While we have a significant presence in the area, we're not the only player, so we need to maintain smooth coordination with the other railroads, and we are improving that collaboration each day. Jim?

Allison what I can say is, is we are 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 as 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 and we have to switch from all the customers and we'll continue to look for opportunities to make it a much more fluid so we turn the cars quicker. Good number to look at is our terminal dwell which we were able to drop substantially in the first quarter from last year. You drop terminal dwell by 20% which started before I got here. So I give a lot of credit to Tom Lischer and the whole operating group and the whole company. But at the end of it, we drop that by 20% we're more fluid. So, I think we have a solution. We've 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 in the railroad.

Thank you, operator. Hello everyone. I appreciate the chance to ask my question. Jim, following up on the previous discussions, are there any significant quick payback projects currently underway? With only a few quarters left until the end of 2020 and the target numbers being quite ambitious, it feels like it's becoming increasingly difficult as we move forward. I'm curious if we will see a notable improvement in our operating results. I understand that weather impacted us this quarter, or is this more aligned with a 2020 focus due to the changes you're implementing? Additionally, are there any changes in place that might yield quicker returns within the next one to two quarters? Thank you.

If we look at it, we've stated that we're going to be below 61%. Everything is in place for us to exceed that target, and we are committed to delivering on it. We have numerous projects in operations throughout the company. This is not just an operational achievement; it involves leadership from the entire company. So, in simple terms, we will achieve below 61%. I can't say that we are ready to buy into it any further, but I feel very confident that we have the right product and operational support from the rest of the company to make it happen.

Rob commented that they feel very optimistic about the early phases of implementing the PSR Unified Plan 2020 and G55 + 0 initiatives, especially considering the significant challenges faced in the first quarter with decreased volume. He noted that for the remainder of the year, they expect to see positive volume, putting them in a strong position to benefit from the excellent work previously discussed and the anticipated increase in volume. This combination is expected to help them achieve a result below 61%.

Right. Okay, that makes sense. Thank you. And then just one follow-up maybe on the other side of that question. 60% or 61% is well below what CSX is reporting. At what point do Union Pacific's profitability targets better reflect the structural advantages of the business, especially from the length of haul perspective?

Yes. Amit, 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.

Can you provide any insights on when the 55% target might be achieved? I understand you have been hesitant to discuss it, but is it likely to be early in the next decade, mid-next decade, or can you give a more precise estimate of the timeframe?

Yes, Amit, let's get below 60% first and we'll talk about it.

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 that 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 early 2019 and we could see a prolonged dwell in intermodal demand throughout the summer?

Yes, we've been talking to our customers and we do know that there's 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.

Well, 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 I have to take this slowly. It requires a lot of data and careful handling.

Yes, this is Rob. We are re-evaluating and scrutinizing all areas of our operations to ensure that we are optimizing every aspect of our business model. We anticipate some results from those detailed analyses, contributing to our goals for the fiscal year.

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