Union Pacific Corp (UNP) — Q1 2020 Earnings Call Transcript

Thank you, and good morning, everybody, and welcome to Union Pacific's first quarter earnings conference call. With me today, in Omaha, practicing safe social distancing, are Jim Vena, Chief Operating Officer; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, our Chief Financial Officer. Before we discuss our first quarter results, I want to acknowledge the dedication and hard work of our employees. During this COVID pandemic, the women and men of Union Pacific continue to connect American businesses and communities to each other and to the world, whether it's stocking a home pantry, supplying essential goods to healthcare providers, or moving critical building blocks for U.S. industries, they're getting the job done and they're not missing a beat. Their spirit shows up in so many ways. I see it in our health and medical team, looking out for the safety of our employees. I see it in our operating team, moving the goods that make a difference in people's lives, and I see it in our leaders, helping us work together, staying on point and positioned for the future. Their dedication is inspirational and lays the foundation for better days ahead. Our rail network has never run better, and we continue to provide a safer, more reliable, and more efficient service product to our customers. I am very proud of the entire Union Pacific team. Moving on to our first quarter results, this morning, Union Pacific is reporting 2020 first quarter net income of $1.5 billion or $2.15 a share. This compares to $1.4 billion or $1.93 per share in the first quarter of 2019. Our quarterly operating ratio came in at 59%, a 4.6 percentage point improvement compared to the first quarter of 2019, and an all-time best quarterly operating ratio. In addition to improving the efficiency of the railroad, we also made improvements in our safety results, which is always our top priority. For the quarter, our employee safety results improved 11% versus 2019. We also made progress in fuel consumption rate during the quarter. This reduces our fuel expense while also reducing our carbon footprint and the carbon footprint of our customers, which is a step in our commitment to address global warming. As I turn it over to the rest of the team you're going to hear how our first quarter results have further strengthened Union Pacific to navigate the uncertainties that lie ahead. We'll start with Jim, and an operations update.

Thanks, Lance, and good morning everyone. As Lance mentioned, the railroad is healthy and operating smoothly as our customers have seen minimal rail service impact. We are taking every precaution to protect our employees. We are social distancing and using technology whenever possible to replace face-to-face interaction. Over the past few weeks, I've taken the opportunity to visit several field locations practicing good social distancing, to talk with our employees. I could not be more proud of how they remain dedicated to safely and reliably operating the railway without disruption as they recognize the critical role they play in delivering goods needed throughout our country. Their dedication is to be commended. Overall, the team had a very strong quarter. Really, the results speak for themselves. You see the impact of all the changes we've made at Union Pacific to become more efficient and provide a better service product to our customers. These changes drove an operating ratio of 59%, which was outstanding, and there are still many more opportunities ahead of us to further improve safety, asset utilization, and network efficiency. Now turning to slide four, I'd like to update you on our key performance metrics. For the first time, we are seeing improvement across all of our metrics, and as a result, we are seeing a better service product for our customers. This is a direct result of our focus on improving network efficiency and service reliability as part of our operating model. Compared to the first quarter of 2019, freight car velocity improved 8% driven by continued improvement in asset utilization and fewer car classifications. Freight car terminal dwell improved 11% largely due to improved terminal processes, transportation plan changes to eliminate car touches, and a decrease in freight car inventory levels. Building off our progress in 2019, we continue to implement changes in order to run a more efficient network that requires fewer locomotives, which has led to an 18% improvement in locomotive productivity this quarter versus last year. As demonstrated by crew starts being down 13% in the quarter, which outpaced the 7% decline in carloads, we continue to take steps to deliver positive workforce productivity. Trip plan compliance, where our customers feel the benefit of our transformed operating model, the improvement in intermodal speaks for itself. With manifest and autos, we are holding ourselves to our higher standard as we tighten schedules, and we'll see improvements as we move forward. We are off to a great start this year, and we expect to see continued improvement in our service products going forward. Starting next week, we will provide some additional operating statistics, in particular, freight car velocity, which you have heard me say a number of times is my favorite one that I look at every morning on our Investors Web site on a weekly basis to provide more insight into how our operations are running. Let's turn to slide five. It highlights some of our recent network changes. As a part of our continued implementation of position-scheduled railroading, we consolidated mechanical shops in the L.A. Basin and Houston areas. In the L.A. Basin, we've consolidated from three shops to one; while in Houston we've gone from two shops to operating just one as well. Increasing train size remains one of our main areas of focus and we are making excellent progress. At our recently completed Santa Teresa block swap facility, we are consolidating intermodal traffic from our eastern ramps destined for port terminals in Los Angeles Long Beach area. This allows us to operate longer and more efficient trains across the Sunset Route, and provide a better, more consistent service product to our customers. We also completed eight 15,000 foot sidings as a part of our 2020 capital plan to extend sidings in targeted locations. These sidings support our efficiency initiatives by increasing the number of long trains we can operate in each direction, thus reducing demand for crew starts. By putting more products on fewer trains we have increased train length across our system by 19% or over 1,300 feet since the fourth quarter of 2019, to approximately 8,400 feet in the first quarter of 2020. The capital we are investing to improve productivity as well as to maintain the safe efficient network is critical to the long-term health of our railroad. Given the current business levels and uncertain economic environment, we are planning to trim back our 2020 spend by $150 million to $200 million. To wrap up, we are committed to protecting our employees' health and safety while providing uninterrupted critical service to support the nation's supply chain. While we're early in the second quarter, so far we have been able to hold steady and maintain train length gains as volumes have dropped. We continue to evaluate our transportation plan, including yard and local schedules, in order to meet customers' demands while balancing our resources and assets to meet current volumes. Since the latter half of March, as volumes decline more steeply, we stored additional locomotives and railcars. However, those locomotives remain in at-the-ready status and both assets are available to add back quickly as volumes return. We have also furloughed additional employees. However, we are increasing our auxiliary work and training status force to be prepared should volumes come back quickly or in the event of an outbreak within a group of the employees. We have made great progress at this point; however, we will continue to transform our operations in order to further improve safety, asset utilization and network efficiency. With that, I'll turn it over to Kenny to provide an update on our business environment. Kenny?

Thank you, Jim, and good morning. For the first quarter, our volume was down 7%, primarily due to declines in our Premium and Bulk business groups. The decrease in volume was partially offset by a 5% improvement in the average revenue per car, and drove freight revenue to be down 3% in the quarter. So, let's take a closer look at how the first quarter played out for each of our business groups. Starting with Bulk, revenue for the quarter was down 5% on a 7% decrease in volume, partially offset by a 2% improvement in average revenue per car. Coal and renewable carloads were down 19% as a result of softer market conditions from historically low natural gas prices and a mild winter. Looking ahead, we expect continued challenges in coal as natural gas futures remain low and customer stockpiles stay at high levels. Weather conditions will also continue to be a factor. Volume for grain and grain products was up 4% primarily driven by strong export ethanol volume. This was partially offset by reduced shipments of export wheat. Fertilizer and sulfur carloads were up 7% predominantly due to strong domestic fertilizer shipments. Finally, food and beverage was up 2% in unit as we saw strength in beer shipments become slightly offset by reduced refrigerated and dry food which were impacted by a challenging truck environment. Industrial revenue was up 3% with a 3% increase in volume and flat average revenue per car due to mix. Energy and specialized increased 10% primarily driven by strength in petroleum as favorable Canadian spread facilitated stronger crude oil shipment to the Gulf earlier in the quarter. However, with the reduction of oil prices in the past week, we expect crude oil shipment to be impacted in the near term. Forest products volume was flat. Reduced paper shipments were offset by increased lumber shipments due to strong housing starts and a mild winter during the quarter. Industrial chemicals and plastic shipments grew by 4% due to the strength in domestic and export plastic shipments along with strong demand for detergents and chemicals. Metals and minerals volume decreased by 3%, reduced sand shipments from the impact of local sand and drilling decline were partially offset by continued strength in rock shipments in the South coupled with increased metal shipments. We expect to see continued challenges in sand with oil prices remaining at lower levels. Turning to Premium, revenue for the quarter was down 6% on a 12% decrease in volume while average revenue per car improved by 6%. Automotive shipments were strong for most of the first quarter until the pandemic shut down OEM in North America in the last few weeks of March, resulting in a 1% decline in volume year-over-year. Domestic intermodal volume declined 5%, driven by soft market demand and surplus truck capacity coupled with weakness related to the pandemic later in the quarter. International intermodal volume was down 24% during the quarter. Weakness early in the quarter was related to challenging comparisons with 2019 driven by accelerated shipments related to the tariff policy implementation. Further weakness was driven by pandemic-related supply chain disruption that began in China and had slowly impacted much of Asia. Looking ahead, there remains quite a bit of uncertainty surrounding this global pandemic that we are facing. With the freefall in economic indicators over the past few weeks and uncertainty about when we will see the COVID pandemic curve starts to flatten out, an accurate assessment of 2020 is hard to pinpoint at this time. As you can see, our volume in the second quarter has started off slowing with the volume down 22% so far driven by auto production shutdowns and retail closures as U.S. demand is constrained by the pandemic-related social distancing and quarantine. Many of the auto manufacturing plants are scheduled to be shut down until at least early May. Already our auto shipments have been down around 80% in the second quarter so far. Likewise, the recent projections in Mexico indicate that some manufacturing sectors like auto will be shut down for similar time periods as well. However, the CARES Act that was recently signed offers some upside to open the economy for business and improve unemployment for America plus it also is encouraging to see that much of Asia is restarting production along with China's recent purchases of U.S. grains. More importantly, I like to make this point clear, we are not letting the uncertainty of the economy hold us back. We are staying focused on what we can control. The good news is that the lower cost structure combined with the improved service products that we've achieved with Unified Plan 2020 is a competitive advantage for us, customers are recognizing it, and awarding us new business. As Lance and Jim mentioned before, the railroad has never run better. I want to thank our employees as they are taking the necessary precautions to stay safe and healthy, so we can keep the operations running for our customers. We will continue to stay in close contact with our customers, and we are ready when the supply chains recover. As demand improves, we expect our strongest service products will place us in a great position to win incremental opportunities. With that, I'll turn it over to Jennifer, who's going to talk about our financial performance.

Thank you, Kenny, and good morning. As Lance mentioned earlier, Union Pacific has reported first quarter earnings per share of $2.15, along with a record low quarterly operating ratio of 59%. This marks our fourth consecutive quarter starting with a five when comparing our first quarter results to 2019, and there are some factors to consider. Last year, we faced increased weather-related expenses, and we also had a payroll tax refund that positively affected our operating ratio and earnings per share. As illustrated on slide 13, these two factors had opposite effects on our 2020 outcomes. Fuel unexpectedly benefited us this quarter and is likely to do so for much of 2020 due to the reduction in fuel prices, which positively impacted our operating ratio by 80 basis points and contributed $0.04 to our earnings per share. Excluding these items, core margin improvement for the quarter was an impressive 3.8 points, adding $0.18 to our earnings per share, showcasing the strength of our operating model and our ability to adjust our cost structure in response to volume challenges. Thanks to the hard work and results of the entire Union Pacific team, we continue to make significant strides toward operating the most efficient, reliable, and consistent railroad in North America. Now let's examine our first quarter income statement. Operating revenue for 2020 reached $5.2 billion, a decrease of 3% compared to last year due to a 7% decline in volume, highlighting our capacity to perform beyond mere volume variables. Operating expenses fell 10% to $3.1 billion, leading to an operating income of $2.1 billion, up 9% against 2019. On the bottom line, other income was lower than in 2019, as the payroll tax refund mentioned earlier included $27 million in interest income. Interest expenses rose by 13% due to higher debt levels, while income tax expense increased by 11% due to greater pre-tax income for the quarter. Net income stood at $1.5 billion, up 6% year-over-year, which, combined with our share repurchase activities, resulted in an 11% rise in earnings per share to $2.15. Reviewing our first quarter revenue, slide 15 shows our freight revenue totaled $4.9 billion, down 2.5% from last year. Although we couldn’t fully counteract the effects of lower volumes, a favorable business mix along with pricing efforts positively impacted our freight revenue by nearly five points. The positive mix this quarter was driven by fewer intermodal shipments, somewhat balanced by reduced sand volumes. Additionally, fuel surcharge revenue dropped by $47 million to $351 million, influencing freight revenue by 25 basis points due to lower volume and fuel prices. Next, slide 16 summarizes our first quarter operating expenses. Through our Unified Plan 2020 and G55 + 0 initiatives, we achieved improvements across all cost categories. Compensation and benefits costs declined by 12% year-over-year, primarily due to our labor and productivity initiatives. Our workforce decreased by 15%, or about 6,200 full-time positions, compared to last year, and was down 2% sequentially. Specifically, our train and engine workforce decreased by 19%, while management, engineering, and mechanical workforces collectively dropped by 13%. This expense category also benefitted from reduced weather-related costs offset by the prior year’s payroll tax refund. Fuel expenses fell by 18% due to lower diesel prices and reduced consumption thanks to more efficient operations. Our consumption rates improved by 5% from last year, achieving a first quarter best level. The 10% decrease in purchased services and materials expenses was driven by lower costs linked to maintaining a smaller active locomotive fleet and reduced weather-related expenses. Similarly, we improved our efficiency in using both our locomotive and car fleets, leading to a 12% decline in equipment and other rental expenses. For other expenses, which decreased by 2%, we adjusted our bad debt reserve to account for uncertainties regarding certain customer receivables related to COVID-19. However, this increase was countered by our commitment to operating a safer railroad, resulting in lower equipment destruction costs and less freight loss and damage expenses. We now project that for the full year 2020, depreciation expenses will remain flat year-over-year. In terms of productivity and our cost structure, our net productivity reached approximately $220 million during the first quarter. As Jim highlighted earlier, with our enhanced key performance indicators, the effective implementation and improvement of our operating plan is driving efficiency while delivering superior services for our customers. We view productivity as a volume-neutral metric. In other words, we are reporting only the portion of our cost savings resulting from our efforts, but as we navigate this recession triggered by COVID-19, I'd like to comment on volume variability as it relates to previous downturns. Importantly, Union Pacific is operating at efficiency levels we've never previously attained. For instance, we became more than volume variable on a fuel-adjusted basis in the first quarter of 2020 thanks to the effective productivity focus embedded in Unified Plan 2020. Since the Great Financial Crisis of 2008-2009, we have successfully reduced our operating ratio by more than 1,500 basis points. This strengthens our capacity to maneuver through current challenges and emerge even stronger. Regarding cash generation, in these uncertain times, we understand the importance of maintaining sufficient liquidity. I can confidently assert that our strong balance sheet and cash generation position us well to confront the challenges ahead. Cash from operations increased by 10% compared to 2019, amounting to $2.2 billion. Our free cash flow, after dividends and capital investments, totaled over $1.3 billion, leading to a 91% cash conversion rate. During the first quarter, we returned $3.6 billion to shareholders through significant dividends and repurchasing 14 million shares of our common stock, partly funded by our debt issuance in January. Union Pacific's robust investment-grade credit rating and favorable interest rates enabled us to issue $3 billion of new debt. A portion of this issuance was directed towards the $2 billion accelerated share repurchase program we initiated in February, while the remainder will cover our 2020 debt maturities. We concluded the quarter with an adjusted debt-to-EBITDA ratio of 2.7 times, aligning with our stated objective of maintaining strong investment-grade credit ratings no lower than BBB plus and BAA1. Although we did not foresee COVID-19 when we set our leverage targets in 2018, managing our balance sheet in accordance with a strong investment-grade credit rating has proven to be the right strategy. We maintain consistent communication with our rating agencies, and they currently support our leveraged position. At the end of the first quarter, we had $1.1 billion in cash. However, to further enhance liquidity, we issued $750 million in 30-year notes in early April. As of yesterday, our cash balance was approximately $2 billion, with additional avenues available if necessary. The current bond market remains accessible, as evidenced by our April issuance. We have $2 billion of credit available under our undrawn credit revolver and an additional $400 million accessible via our receivable securitization facility, which is currently 50% drawn. While we do not anticipate needing these extra resources, we view them as a prudent backup should the need arise. Moving forward to our 2020 outlook, we are formally withdrawing much of our prior guidance due to the ongoing economic uncertainties. Specifically, we will no longer provide projections for full-year 2020 volume, headcount, operating ratio, or share repurchases. To date, we have repurchased approximately $17 billion of our targeted $20 billion over three years, which is set to conclude at the end of this year. We will continually assess business conditions and adjust accordingly, but with share repurchases currently paused, accomplishing the full $20 billion target seems unlikely. As Kenny mentioned earlier, our second quarter car loadings are presently down by 22%, and we anticipate volumes for the entire quarter to decline by around 25%. In light of such significant volume reductions, we are implementing measures to adjust our resources and control expenses. Even with these aggressive actions, it is improbable that we can enhance our second quarter operating ratio compared to the previous year given the anticipated volume loss. Our pricing guidance remains consistent for 2020. We still expect that total revenues from our pricing actions will surpass rail inflation costs. Regarding productivity, we are expanding our expectations for full-year 2020 to a range of $400 million to $500 million. We had a strong start in the first quarter and remain committed to productivity, but we acknowledge that the loss of volume leverage presents challenges. Regarding cash generation and allocation, we have modeled various scenarios involving decreased volumes. In each scenario, we plan to maintain dividends but will make capital modifications, as Jim mentioned, and suspend share repurchases. The outcome of this exercise reaffirms our confidence in generating substantial free cash flow after dividends even amid challenging economic conditions. This underscores the earnings potential of our business, as evident in our first quarter results. Though we are frustrated by the current situation, the prospects for the future are clear. Looking ahead, our guidance remains for capital expenditures to be less than 15% of revenue, a dividend payout ratio of 40% to 45% of earnings, and maintaining our 55% operating ratio. As reiterated by our leadership team today, we are committed to enhancing safety, efficiency, and service while firmly believing in the long-term potential of our company. I'll now turn it back over to Lance.

Thank you, Jennifer. Our first priority has been and will always be safety. We made good progress on safety in the first quarter, and I expect continued improvement. From a service and efficiency perspective, I am so thankful that we went through the tough process of implementing the Unified Plan 2020 over the last 18 months. That work has put us in a position of great strength to deal with the future. When the time arrives, where COVID-19 is largely behind us, Union Pacific will be well positioned for long-term growth and excellent returns. With that, let's open up the line for your questions.

Thanks. Good morning. Jim, as you think about the persistent reduction in coal tonnage and the GTM intensity of that network, do you see opportunity for, or are you considering making any structural changes that might reduce maintenance capital requirements, probably any thoughts you could share about how you're thinking about the coal network going forward?

The coal network was designed to accommodate significantly more trains than we currently operate. It begins on a distinct section of the railroad, so we are definitely evaluating that. We have plans to leverage some of that capacity for maintenance and capital investments we've made there. On other parts of the network, it's a bit more complicated since it integrates with the other trains we operate, but we certainly have a strategy in place to address any downturns in traffic on specific segments of the railroad. The main challenge for Kenny is to maximize capacity. I believe he has an excellent service offering, and we are focused on utilizing those segments effectively.

Okay, and then could you give us a sense for how much train starts are down in April? And then in terms of just headcount declines, do you think you can continue to outpace volume declines in the next quarter too? And if there's any way to sort of parse out what percentage you think would be the structural takeout versus how much would likely come back with a recovery in demand? Thank you.

Okay. So, so far, I'll tell you the team has done a spectacular job. Actually our train size has grown in April, not come down. So we're full bore, everyone is on looking at how we make this place as efficient as possible with the traffic that's offered to us. So it's actually gone up in size, train size in April. You'll see that when we report next or you'll see it from how we talk at different conferences. As far as people, I think we've done a great job of staying ahead of the game. There would come a point where it's difficult to stay ahead of the drop in business, but so far, even up to this point right now with the traffic that we see in April, we've been able to stay ahead and be productive in that we are dropping more than the adjustment in business, but I'll tell you there's a certain point when it's impossible to do, so we're not there yet.

Okay, excellent. Thank you.

Thanks for the questions.

Thanks, operator. Hello, everyone. I appreciate the opportunity to ask a question. Jennifer, I didn't fully understand your comment regarding the operating ratio for the second quarter. Were you saying it would be down compared to last year, or were you making a sequential comparison? I wasn't quite clear on what you meant.

Thanks, Amit. No, my comment was on a year-over-year basis, and saying that with volume declines that we're expecting of this magnitude, so down 25% or so, it's unlikely that we would be able to improve our operating ratio in the quarter. It was a quarter-only comment on a year-over-year basis.

Got it, that makes sense. Thanks for the clarification. Jim, I want to quickly revisit Allison's question. The 25% decline in volume is quite unique this quarter, given the significant revenue decline, and it seems to be temporary. This creates various challenges in managing labor and other business costs that may need to be adjusted again. Can you discuss how you handle this situation? While maintaining a focus on PSR is crucial and it's great that you all managed this in the current context, will the second quarter reflect a more standard 50% to 60% decremental margin, given that many costs typically reduced will need to stay in place to prepare for what we hope will be a V-shaped recovery? Please help us understand how you navigate this unique situation.

That was a complex question. I believe Jennifer wants to add to this, but let me begin with my perspective. We’ve already seen a significant reduction in our workforce compared to the drop in our business, which gives us an opportunity. This is why I feel confident in my response to Allison’s question. I remain uncertain about the future of the business and am open to the possibility of a swift recovery, but we can’t predict it. We are getting ready to ensure we're not caught off guard. If the business rebounds sooner than expected, we’ll be prepared. That’s why we’ve strategically positioned our resources. We have many resources that are currently inactive, and I hesitate to disclose the exact number because it’s substantial. My main concern is the productivity levels and how many resources we have available. We are equipped for a quick response, whether the recovery is slow or rapid. We’ve been thoughtful in managing our workforce. Given the drastic drop in a short time, we have assigned people strategically, allowing for their quick return to the operation. This approach is cost-effective and ensures we retain the ability to maintain service. Providing excellent service is essential; an efficient operation requires customers, which is what we are focusing on. I believe we are making progress in this area. Kenny should be able to promote our services well, and ultimately, that’s our main objective. Jennifer?

We are not providing guidance on decremental margins at this time. However, our first quarter performance was strong, with our volume variable exceeding 100%. As we approach the second quarter, we are facing a significant drop in volumes, around 25%. It's challenging to maintain effective cost management with such rapid changes in volume. We will be very proactive in our efforts, but we cannot offer specific guidance regarding headcount for the second quarter or the margins. Please rest assured that we will utilize every means at our disposal.

Okay. Okay, I'll keep it at two, guys. Thank you very much. Appreciate it.

Thank you.

Good morning. I appreciate the opportunity to ask a question. Kenny, could you explain how energy is affecting the portfolio? You mentioned crude oil earlier, but I would like to know more about natural gas and its impact on plastics producers in the Gulf Coast. Additionally, regarding your comments on coal, is it premature to consider any potential positive developments in coal if we see production cuts?

Yes, I'll go through this quickly. Coal prices have dropped significantly in the last few months to levels we haven't seen in some time. I'm sure you're aware of the curve forecasts, but nothing suggests that there will be a substantial increase in coal prices. We'll continue collaborating with Jim's team to enhance productivity. On the energy front, oil prices have also seen notable changes, particularly in crude oil. We'll monitor those prices as they also affect our sand business related to drilling and, to a lesser extent, the drilling pipe segments. Regarding our plastics business, we're experiencing both reductions and increases in production, which is a positive sign. Although many of our plastics producers have reduced operating rates, this segment remains strong for us. Ultimately, our service product has performed well, and we're seeing new carload business opportunities arise for us to pursue. I am pleased with the position our service product has put us in.

Thanks, Kenny. So, a follow-up for maybe Jennifer and Jim, I believe last time we talked, you are targeting $500 million plus productivity gain, which is more volume neutral and looks like now you're taking it down a little bit at least from how we see it here. So, maybe you can just give us a little bit of context to that if included the volume environment is different, but this is a volume neutral sort of metric, maybe you can help bridge the gap there between the two numbers?

Sure. So, you're right, we do take out the volume variability part of the cost. So, if we're going to have fewer train starts because of lower costs, we don't count that in the number, but if we have reduced train starts, like through Jim's long train productivity initiatives, those are things that we put into our productivity number. My comment was meant to say is that when you have less volume, it's harder to leverage that, and so, when we were putting together our plan for 2020, recall, we originally said we were looking for a little bit of positive volume growth when we gave the guidance of $500 million or so in productivity. We've obviously taken that volume growth off the table in terms of what we're seeing today, and so, that's why we feel like we need to widen that range a little bit in the $400 million to $500 million range. So that's how you should think about that, but Jim, you might want to add a little more?

So, Jennifer, and Brian, listen, $220 million first quarter starts us off real well to be able to deliver what we said, I think it's prudent that we look at it because if you drop volume, you have less chance to reduce, and just the way we measure cost takeout, it's true cost, there isn't anything, volume doesn't help us, but I'll tell you this, there's a list of things that I still want to get done, and with that, the way we operate our locals, the way we're handling our intermodal terminals to make them more efficient, the train size is still there, we can be more fluid with how we handle the railcars. You've seen us shut down a couple of diesel shops. So, all those things are still out there, and unless really the market changed for us even more, I'm very comfortable with where Jennifer's got us guidance for this year. I'm very comfortable. I won't use the word go by, otherwise Jennifer will get excited, but I'm very comfortable with where we are.

Brian, this is Lance. I just want to add. It's really simple to think about, if in this quarter, as we anticipate volumes are off something like 25%, you got to take something like 25% of your activity out of the railroad to match before we start talking about incremental productivity. So, the basis for which you're going to create productivity gets very, very difficult when you take an order of magnitude change like that. On the opposite side, if you're growing 3%, 4%, 5% gives you all the opportunity not to add resources in and you can count that all as productivity.

Listen, we are spending capital and we have the sidings that I mentioned earlier on in place. We expect the train size to go up and have less train starts for the business that we have. So, that's productivity. We expect to be more productive with our local assignments and local operations. We expect to be more productive on our intermodal facilities and how we handle the traffic that we have. So as much as volume does make some of it harder, I'd love to have the whole time. I'd love to have a quarter with 2% or 3% volume growth hang on. I'd love to see where that number is, but it is not there because I'm not real worried about not having productivity this quarter.

And just a quick reminder, I mean, our comparisons on a year-over-year basis relative to productivity get harder through the course of the year. We closed out the year with close to $200 million, $215 million of productivity. So, take all of those comments kind of into your mosaic of how you think about it, Chris.

Got it, that's very helpful. I appreciate that, and maybe coming back to the productivity comment and maybe this is for you Lance or Jim or Jennifer. I guess when you think about that sort of dynamic of volumes coming out of that that was very helpful to give us some of that perspective about sort of the base kind of going away in terms of generating productivity. So, is it reasonable to think that sort of 2Q is going to be there very much challenging sort of quarter to get that productivity and that maybe that sort of remainder of the 400 to 500 is more back-end weighted to be for 3Q and 4Q when the volume dynamic is hopefully a little bit more stable?

No, I don't think we're saying that specifically. I think what we're saying is, with such an abrupt downturn and the depth of it, productivity is going to be harder to come by. So for instance, it's very unlikely, and it would be unreasonable to think about the second quarter in the $200 million order of magnitude like we saw in the first quarter, but I don't think a reasonable expectation is no productivity. I wouldn't expect that from us.

Listen, we are spending capital and we have the sidings that I mentioned earlier on in place. We expect the train size to go up and have less train starts for the business that we have. So that's productivity. We expect to be more productive with our local assignments and local operations. We expect to be more productive on our intermodal facilities and how we handle the traffic that we have.

No, I think you summed it up, Jim.

Okay, nice. Thanks again.

Great. Good morning. Just a follow-up on that on your volume outlook there, Lance, I guess if you're running it down kind of 20, 22 now, and you're targeting down 25%, are you expecting things to get worse from here or are you not anticipating things reopening?

Well, part of what we're making that commentary on is reflective of how we're planning for the second quarter. So, we tend to be pretty conservative. There is a lot of unknowns. I don't think we know enough yet to know what's left to deteriorate in the demand economy versus how that's going to be offset by recovery. So there's just a lot of moving parts, and I think above 25%-ish is a good marker for us to plan our activity around.

I want to share my perspective from my position when our commercial teams engage with customers. After discussing safety, the next topic we address is our service product, and Jim is absolutely correct. We have a very strong service offering. We talked about improvements in car velocity that enhance our competitiveness with truck services. As we started the year, I want to emphasize that on a carload basis, we were optimistic about our victories in several key markets and felt positive about entering new markets that we hadn’t previously explored.

So Chris, this is Lance, let me step that back up and come up to a higher level of depth and length of our downturn. So we're learning every week a little bit more about the dynamics of how deep it might be and how long it might be. It's still very unclear and the goalposts are pretty broad that you can hear very well-educated, deeply experienced economists that still think about a V-recovery. You hear about W-recoveries, U-recoveries, a slow hockey stick ramp-up. I think our collective belief at this point is it's sharp and deep, it's going to last for a while, and recovery is going to be some kind of ramp but probably not terribly steep, and so we're looking for those markers, and nothing would please me more than to be wrong about this 25 percent-ish, and see some time in the second quarter that we're starting to see demand firm and our supply chains reflected, but there's a lot that needs to happen between here and there.

Okay, that's very helpful. I appreciate that, and maybe coming back to the productivity comment and maybe this is for you Lance or Jim or Jennifer. I guess when you think about that sort of dynamic of volumes coming out of that that was very helpful to give us some of that perspective about sort of the base kind of going away in terms of generating productivity. So, is it reasonable to think that sort of 2Q is going to be there very much challenging sort of quarter to get that productivity and that maybe that sort of remainder of the 400 to 500 is more back-end weighted to be for 3Q and 4Q when the volume dynamic is hopefully a little bit more stable?

No, I don't think we're saying that specifically. I think what we're saying is, with such an abrupt downturn and the depth of it, productivity is going to be harder to come by.

Listen, we are spending capital and we have the sidings that I mentioned earlier on in place. We expect the train size to go up and have less train starts for the business that we have. So that's productivity. We expect to be more productive with our local assignments and local operations.

And just a quick reminder, I mean, our comparisons on a year-over-year basis relative to productivity get harder through the course of the year.

Thanks, Kenny. Thanks, Lance. I guess if I could just switch over to Jim or Jen from my follow-up, you talked about trimming CapEx that's contrasting a little bit what we've heard from some of the others who look to take advantage of the downturn, maybe to get some cheaper build-out capabilities. Can you maybe talk about that, and Jim can you clarify the status on the locomotive fleet and the park capacity? Thanks.

Well, listen to Ken. It's a good question in that, usually the way I like to look at it is if you have a downturn of business and you know it's going to come back why adjust your capital program at all. We went through it and it's more like a timing that rolls into next year. This is not anything that everything that we had in the capital plan was built for to make this railroad better, more productive, safer and sustainable over the long-term. So we're not changing that, but we thought it was prudent with where the revenues are at this point in the business level to just slide some of it into an early part of next year, and because we give a guidance on a year-to-year basis, that's what's happening.

No, I think you summed it up, Jim.

Oh, I just wanted to follow up on what you said about the locomotive fleet numbers.

Oh. Listen, we've got so many locomotives parked that I'm just about embarrassed to say how many we have parked. Okay. So, there's some noise in it right now because of the business drop, but this is a number I look at, Ken, and I gave it to you at 18% improvement and locomotive productivity is the key number. We have lots of locomotives parked. We're good if the business comes back, we're good if the business grows. We are being smart; we're putting all the technology, we've got the best locomotives and you can see the fuel efficiency that we said five, but you could take some of the noise out but a true 4% betterment.

Hi, Jim. There’s something we don’t discuss often. There are two perspectives on our stored locomotives. Some locomotives are stored with no immediate plans for use, while others are kept in a status called "at the ready," meaning they are prepared to be returned to service at any moment. This mix changes daily, but the at-the-readies enable us to respond to potential business increases, which we hope will happen, and a strong week would be fantastic.

Thanks for the time guys there. I appreciate it.

Hey, thanks. Good morning, guys. So I wanted to just follow-up on something I heard earlier, Jim in the answer to the first question. Were you suggesting that April headcount is down more than volume, so down sort of more than 20%? And then, Jennifer I totally get second quarter or commentary. You've got some cushion with the strength of the first quarter, any thoughts at all about the ability to improve for a full-year basis?

Sure, sure. Listen, I'll start real quick, just to clear up the whole discussion about people. We have started at a 19% drop that we've announced over the first quarter year-over-year, and we think that we will continue to drop that down as the business comes down and with some productivity. I'm not sure where we're going to end up exactly, but stay tuned. I think we've got a great story moving ahead.

Yes, and just to clarify on Jim's comment that 19% is our train and engine crew.

Thank you very much to everybody, and also everybody out there that is working to keep this country going from people at the frontline everywhere. So, thank you very much.