聯合太平洋集團 (UNP) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Union Pacific First Quarter 2021 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website.

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

Thank you, and good morning, everybody, and welcome to Union Pacific's first quarter earnings conference call. With me today in Omaha are Eric Gehringer, Executive Vice President of Operations; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, our Chief Financial Officer.

Before discussing first quarter results, I want to recognize our employees for their work during the major winter events we experienced in February and early March. Many of the communities we serve faced unprecedented weather conditions that damaged factories and made surface transportation nearly impossible. Our employees rose to the occasion to maintain or restore critical service in those areas, while dealing with weather impacts to their own homes and families. We owe a debt of gratitude to our team as they, again, prove their resiliency, their grit and their dedication to serve.

Moving on to first quarter results. This morning, Union Pacific is reporting 2021 first quarter net income of $1.3 billion or $2 a share. This compares to $1.5 billion or $2.15 per share in the first quarter of 2020. Our quarterly operating ratio came in at 60.1%, reflecting the impact of weather and rising fuel prices in the quarter.

As you'll hear from the team, absent these items, our core results improved 150 basis points. We delivered strong productivity in very challenging conditions. And based on our core performance, I remain optimistic about the remainder of the year. In fact, we are affirming our 2021 guidance.

While it was a tough quarter, it does not dampen our expectations. We're in a terrific position to take advantage of the improving economic outlook and grow our volume. Our service product, our cost structure and continuing productivity set us up for an outstanding year.

To get us started reviewing the details, I'll turn it over to Eric for an operations update.

Thanks, Lance, and good morning. The operating team rose to the challenge this past quarter as it responded to numerous weather challenges across the network. The speed with which the team recovered the network is a testament to the transformation PSR has had on our operations.

Moving to Slide 4. We began 2021 with strong key performance indicators across the board as the operations were solid and running smooth in January. However, the winter weather challenges we faced in February and March across our network had a heavy impact. The South, in particular, is not accustomed to the weather they faced. In fact, the weather across our Southern region represented the second worst stretch of cold temperatures in over 70 years.

Through the team's hard work, our network recovered quickly, and we were able to mitigate most of the impact to our service. In fact, we recovered twice as fast compared to our recovery from the flooding in 2019 and significantly faster than any disruptions we experienced before implementation of PSR.

While the operating team is frustrated with the mixed results you see on Slide 4, we will return all of these measures to a state of constant improvement through execution of our transportation plan.

Weather heavily impacted the results you see in freight car velocity, freight car terminal dwell and train speed. However, we continue to make good progress on our efficiency measures, as both locomotive and workforce productivity improved in the quarter. These improvements were driven by our continual evaluation and adjustment of our transportation plan as well as through our continued efforts to grow train link.

Intermodal trip plan compliance decreased in the quarter as weather and a surge in intermodal shipments of 12% year-over-year placed significant pressure on that service. Our manifest service remained solid during the quarter, driving improvement in trip plan compliance for manifest and autos. The team did an excellent job of maintaining this service product throughout the weather impact.

Slide 5 highlights some of our recent network changes. We continue to push train length to drive productivity, while striving to provide a better service product to our customers. Train length was almost 9,250 feet in the first quarter, which was up 10% or 850 feet year-over-year.

One enabler of this great progress is our siding extension program. During the quarter, we completed 2 sidings and began construction or the bidding process on another 18 sidings. We continue to make progress in the redesign of our operations in the Houston area to drive efficiency. We are leveraging the recent investment of our Inglewood facility, and we consolidated the blocking of local cars at our Settegast Yard, allowing us to curtail operations at 4 of our smaller yards around the area.

This allows us to bypass those smaller yards and deliver cars directly to the customers, eliminating extra handlings, improving transit time and reducing crew starts. We also curtailed switching operations at our North Council Bluffs Yard by leveraging surrounding yards, which will reduce local train starts.

As I look to the future, I'm excited about the full pipeline of initiatives we have to drive productivity throughout our network and enhance our service product.

Turning to Slide 6. Everything we do is done with the focus towards safely accomplishing our work. We understand the continuous improvement we need to make in safety, and we have the right plan to achieve our goals. We remain focused on executing on the PSR principles that transformed our operations, and there still remain many opportunities for us to improve our operations and drive productivity.

We have work to do to return our service product to the level we expect. We need to return intermodal trip plan compliance to the mid- to upper 80s, manifest trip plan compliance to the low to mid-70s and freight car velocity in the low 220s. We're on that path to date as we fully recognize the importance of providing our customers with a highly reliable service product.

With that, I will turn it over to Kenny to provide an update on the business environment.

Thank you, Eric, and good morning. Our first quarter volume was down 1% from a year ago due to weather events and the leap year in 2020. Solid gains in our intermodal and export grain markets were offset by declines in our industrial and energy-related markets.

Freight revenue was down 5% for the quarter due to the decrease in volume, coupled with the lower fuel surcharge and negative business mix that offset -- that were offset by our core pricing gains.

So let's take a closer look at how each of our business groups performed in the first quarter. Starting with our bulk markets, revenue for the quarter was down 1%. Volume decreased by 2%, which was partially offset by a 1% increase in average revenue per car due to the positive mix in traffic and core pricing gains.

Coal and renewable carloads were down 16% as a result of continued high customer inventory levels, a contract loss and weather-related challenges, which were partially offset by higher natural gas prices.

Volume for grain and grain products was up 16% driven by increased demand for export grains. Fertilizer carloads were down 4% as reduced export potash shipments were partially offset by stronger demand for industrial sulfur.

And finally, food and refrigerated volume was down 6% driven primarily by decreased demand for food service due to the ongoing pandemic as well as weather-related challenges.

Moving on to Industrial. Industrial revenue declined 13% for the quarter driven by an 11% decrease in volume. Average revenue per car also declined 1% from a lower fuel surcharge and mix.

Energy and specialized shipments decreased 14% primarily driven by reduced crude oil shipments due to unfavorable price spreads and reduced demand.

Forest products volume grew by 7%. Lumber was driven by strong housing starts, along with an increase in repair and remodel. We also saw strength in brown paper driven by increased box demand and low inventories.

Industrial chemicals and plastics shipments were down 9% for the quarter due to the severe storm in mid-February that caused plant interruptions for producers throughout the Gulf Coast as well as feedstock shortages in certain sectors.

Metals and minerals volume was down 16% primarily driven by weather and market softness in rocks, coupled with reduced frac sand shipments associated with the decline in drilling and surplus in local sand.

Turning now to premium. Revenue for the quarter was up 2% on a 6% increase in volume. Average revenue per car declined by 4%, reflecting mix effects from greater container volume and fewer automotive carload shipments.

Automotive volume was down 13% for the quarter as manufacturers struggled with semiconductor-related part shortages and extreme winter weather disruptions to the supply chain. Finished vehicle and auto parts shipments were impacted similarly, with finished vehicles down 13% and auto parts down 14%.

Intermodal volume increased by 12% in the quarter. Domestic intermodal was up 16% year-over-year due to continued strength in retail sales and recent business wins. Parcel, in particular, benefited from ongoing strength in e-commerce. International intermodal volume grew 8%, despite port congestion related to strong growth in containerized imports.

Now looking ahead to the rest of 2021. For our bulk commodities, we expect continued negative outlook for coal. Electricity demand and natural gas prices are forecasted to improve. However, high customer inventory levels, combined with increased demand for other energy sources and a contract loss, present a challenging market. However, there is continued strength for export grain, as China remains committed to incremental ag product purchases, and the 2021 calendar year was clearly a tougher year-over-year comparison in the back half of the year.

We also are optimistic with our biofuel shipments, as domestic production is expected to increase, which will drive new volume at new UP destination facilities for both renewable diesel feedstock and finished products. As we look ahead to our industrial commodities, the year-over-year comps for our energy markets are favorable. However, there is still uncertainty with the speed of the recovery in those markets.

We are encouraged by the stronger forecast for industrial production. Full year 2021 is now forecasted at 6.5%, a 2 percentage point improvement since we spoke in January. Plastics volumes will also remain strong for us in 2021 as production rates increase.

And lastly, for premium, we expect uplift for both our automotive and intermodal businesses. Automotive sales are forecasted to increase from 14 million units in 2020 to 16 million in 2021. We are optimistic that automotive production will normalize, as supply chain issues for parts are expected to improve later in the second quarter.

With regard to intermodal, limited truck capacity will encourage conversion from over-the-road truck to rail. Retail inventories remain historically low. Restocking of inventory, along with continued strength in sales, should drive intermodal volumes higher this year.

Before I hand this over to Jennifer, I'd like to express my appreciation to our operating and engineering teams for their hard work and dedication to keep our network running in the unprecedented weather events in February and March. Both our commercial and operating teams work closely together to quickly recover operations for our customers and win new business.

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

Thanks, Kenny, and good morning.

I'm going to start with a look at the first quarter operating ratio and earnings per share on Slide 13. As you heard from Lance, Union Pacific is reporting first quarter earnings per share of $2 and a quarterly operating ratio of 60.1%. Comparing our first quarter results to 2020, the extreme winter weather previously discussed negatively impacted our operating ratio by 160 basis points, or $0.16 to earnings.

In addition, rising fuel prices throughout the quarter and the associated 2-month lag on our fuel surcharge recovery programs impacted our quarterly ratio by 100 basis points, or $0.11 per share. Despite these challenges, our core operations and profitability continued to improve, delivering 150 basis points of benefit to our operating ratio and adding $0.12 to earnings per share.

Looking now at our first quarter income statement on Slide 14. Operating revenue totaled $5 billion, down 4% versus 2020 on a 1% year-over-year volume decrease. Operating expense decreased 3% to $3 billion, demonstrating our consistent ability to adjust costs more than volume. Taken together, we are reporting first quarter operating income of $2 billion, a 7% decrease versus last year.

Interest expense increased 4% compared to 2020, resulting from an increase in fees related to our debt exchange, with some offset from lower weighted average debt levels. Income tax decreased 7% due to lower pretax income. Net income of $1.3 billion decreased 9% versus 2020, which, when combined with share repurchases, resulted in earnings per share of $2, down 7%.

Looking more closely at first quarter revenue, Slide 15 provides a breakdown of our freight revenue, which totaled $4.6 billion, down 5% compared to 2020. Factoring in weather and last year being a leap year, the volume impact on freight revenue was a 75 basis point decrease.

Fuel surcharge negatively impacted freight revenue by 200 basis points compared to last year. The decrease was driven by the lag in fuel surcharge recovery as well as slightly lower fuel prices.

Our pricing actions continued to yield pricing dollars in excess of inflation. However, those gains were more than offset by a negative business mix and reduced freight revenue 225 basis points. Although our grain shipments increased in the quarter, this impact was more than offset by very strong intermodal volumes, coupled with declines in petroleum and industrial product shipments.

Now let's move on to Slide 16, which provides a summary of our first quarter operating expenses. Starting with compensation and benefits expense, down 3% year-over-year. First quarter workforce levels declined 12% or about 4,100 full-time equivalents, generating very strong productivity against only a 1% decrease in volume.

Specifically, our train and engine workforce continues to be more than volume variable, down 11%, while management, engineering and mechanical workforces together decreased 13%. Offsetting some of this productivity was an elevated cost per employee, up 10%, as we tightly manage headcount, base wage inflation and higher year-over-year incentive compensation as well as higher weather-related crew costs.

Quarterly fuel expense decreased 5%, a result of lower volume and prices. Our fuel consumption rate was essentially flat, as productivity initiatives were offset by the additional fuel needed as a result of the extremely cold temperatures.

Purchase services and materials expense improved 6% driven by our loop subsidiary utilizing less drainage as a result of lower auto volumes as well as maintenance cost related to a smaller active equipment fleet. These savings were partially offset by additional weather-related expenses.

Equipment and other rents fell 7% driven by higher equity income from our ownership in TTX. The other expense line increased $22 million this quarter driven by higher casualty expenses that were primarily related to adverse developments on certain claims. This increase should not be viewed as an indicator of UP's current safety record.

As we think about expenses going forward, recall that last year, in the second and third quarters, we took temporary actions in response to the pandemic, reducing management salaries and closing shops. These actions produced a 2% headwind in total for second quarter expenses, predominantly impacting compensation and benefits and purchased services and material expenses.

And for a full year comparison, excluding Brazos, we now expect both purchased services and materials as well as other expense to be up mid-single digits versus 2020.

Lastly, we expect our annual effective tax rate to be slightly higher than previously thought, around 24%.

Looking now at productivity on Slide 17. In spite of the $35 million weather headwind, we continue our solid productivity trend in the first quarter, generating $105 million. Productivity results were led again by train length improvements contributing to strong workforce and locomotive productivity, as Eric detailed earlier.

Turning to Slide 18 and our cash flow. Cash from operations in the first quarter decreased to $2 billion from $2.2 billion in 2020, a 9% decline. Despite that, free cash flow after capital investments increased 5% to over $1.4 billion, highlighting our ongoing capital discipline as well as a slightly slower start to our capital programs.

This generated a cash flow conversion rate of 106%. Free cash flow after dividends also increased in the quarter, up $115 million, or 17%.

Supported by our strong cash generation and cash balances, we returned $2 billion to shareholders during the first quarter, as we maintained our industry-leading dividend payout and repurchased shares totaling $1.4 billion.

We finished the first quarter with a comparable adjusted debt to EBITDA ratio of 2.8x, on par with year-end 2020.

Wrapping up on Slide 19. Despite the slow start to the year, we remain confident in our ability to show improvement across all 3 performance drivers: volume, price and productivity. We do face some volume headwinds, declining coal demand, the lingering impact of industrial chemical plant closures from the February storm and the semiconductor shortage that is continuing to impact autos into the second quarter.

Setting that aside, though, there are even more reasons to be encouraged about 2021: the pace of vaccination rollouts, strong consumer and trade demand and an improving industrial production forecast, and we are increasingly optimistic about our ability to drive business to the railroad.

Since early March, we have seen an improving demand trajectory, with March averaging roughly 157,000 7-day carloadings, and we crossed the 160,000-plus threshold in April. So with the strength we're seeing in our volumes, we now expect full year carload growth to be around 6%.

Our guidance around full year pricing, productivity and operating ratio improvement in the range of 150 to 200 basis points all remain intact. However, with our updated volume outlook, we will likely be closer to the 200 than the 150. We clearly have work ahead of us to achieve these goals, but a brighter economic picture and good traction on our PSR initiatives give us a path to success.

Turning to cash and capital. Our capital spending plan remains at $2.9 billion for the year, well within our long-term guidance of below 15% of revenue as we generate capacity through our PSR focus. We will maintain our industry-leading dividend payout ratio and are committed to strong share repurchases. Specifically, we plan to return approximately $6 billion to our shareholders in 2021 through share repurchases.

Before I turn it back to Lance, I'd like to add my thanks to our exceptional workforce. Mother nature tested our capabilities this quarter. And once again, our workforce showed they are ready for the challenges and committed to serving our customers.

So with that, I'll turn it back to Lance.

Thank you, Jennifer. As you've heard me say many times, our first priority will always be safety. I'm confident in our ability to meet our high expectations in that area. With today being Earth Day, it feels appropriate to highlight the actions we're taking to protect our planet.

In February, we announced our science-based target to reduce greenhouse gas emissions by 26% against the 2018 base by 2030. Additionally, in our 2021 proxy statement, we rolled out our ESG strategy, which we call Building A Sustainable Future 2030. We'll expand on this strategy in our 2020 Building America Report, which is going to be published in early May in conjunction with our Investor Day. We're reinforcing our commitment to delivering value to all of our stakeholders.

As you heard today, we're very optimistic about the future. Our service product made more resilient through PSR, and lower cost structures, enabling us to win new business and expand opportunities that will ultimately grow the top line.

Looking to the rest of the year and improving economic outlook, our continued commitment to value-based pricing that exceeds inflation and the opportunity for strong productivity gives us confidence to affirm our 2021 guidance.

Union Pacific is poised to take advantage of a strengthening economy by leveraging our best-in-industry franchise to produce long-term growth and excellent returns.

So with that, let's open up the line for your questions.

(Operator Instructions) And our first question is from the line of Amit Mehrotra with Deutsche Bank.

I guess, you went from -- no follow-up for me this time, okay, so I'll just stick to one. Jennifer, I just wanted to focus on the 200 basis points of margin improvement this year. I think that implies 56.5 OR for this year, which would be impressive.

It sort of implies you guys hitting kind of a mid-50s or better this year at some quarter, maybe in the back half of the year. Wondering if you could just talk a little bit more about that. Mix is obviously getting a little bit better, but if you can talk about what you think needs to be achieved to get to the high end of that 150 to 200 target.

Yes. Thanks, Amit, for the question. So yes, I mean, starting off the year with a 60.1% and to be able to get to in that range of 56.5% to 57% and, as we said, we're hoping to get closer to the 200 basis points of improvement, that certainly says we have to improve over the balance of the year and make very strong improvements to hit those targets.

And so in terms of what gives us confidence, it really is the ability to win in the marketplace, as we mentioned, that we're expecting volumes to be around 6% or so up year-over-year. As you might recall, back in January, our original guidance was 4% to 6%. So we're now seeing strengthening in the economy. Kenny and the team were winning new business, and so those are all very positive signs.

And then again, the efficiency piece. Certainly, we were impacted in the quarter with weather and fuel. They took their toll on the first quarter OR, but we still generated 150 basis points of core improvement. And so as we look to grow volumes and put some of those transitory issues behind us, we feel good about the rest of the year.

Our next question comes from the line of Scott Group with Wolfe Research.

Lance, just given everything going on, I wanted to ask an M&A question. So you guys have been very focused on operating ratio and -- over time. And I sense perhaps more of a focus on volume and overall earnings growth going forward. I wonder, does that change your view around M&A and if it's perhaps time to start thinking more about that?

And then on the specific transactions on the table right now, do you have a view or a preference of CN KSUs or CP KSUs is, one, a bigger threat to you? Is perhaps one that's more likely to cause you to think about extending your own network reach?

Yes. Thanks, Scott. I'll start with the last part of the question and end with the first part.

Regarding whether the CP or the CN were to acquire the KCS, our concern really is the same. What we're focused on is what the STB says the next Class 1 merger must provide, and that is an enhancement to competition and clear improvement for all customers.

For that to be true in any transaction, our current service product has to remain intact, so our concern is making sure that we have good operational and commercial access to all the customers that we serve currently in Mexico and in other parts, whether that's near or on the CP railroad or the CN railroad.

As regards to that transaction, the first thing we're focused on is making sure that the STB sets up a level playing field for all Class 1 mergers and in that does not apply the waiver that they created potentially for the KCS back in 2000, 2001. We think those new 2001 merger rules should apply to every Class 1 merger, so that the STB has a full opportunity to vet the game plan to enhance competition by the transaction.

And then if you think a little bit about what we're focused on, you're exactly right. We're focused on the 3 stools that drive enterprise value for Union Pacific -- the 3 legs of the stool, excuse me. We're focused on making sure we get value-based pricing in the marketplace. We're focused on making sure that we're efficient and productive, both in assets and an operating expense. And we're focused on growth, and I think growth is going to play a bigger role. It has to.

And then as regards whether or not that changes our stance on overall M&A activity, our big concern on any Class 1 merger is that in the STB's regulatory review, they are committed to enhancing competition, and they're also committed to taking a look at the downstream impacts and whether it creates incentives or an instability in the industry for further consolidation. In that context, we see a lot of opportunity for long-term value impact that's not in our best interest.

So we're going to be very, very active and engaged in this process with the STB and potentially directly with the acquirers. And we're going to, first and foremost, focus on making sure that we protect our interest and then help the STB enhance competition as they see fit.

Okay. So it sounds like you've got some concerns around both transactions, and you're not thinking about M&A as a -- in your near future.

That's correct, Scott. At this point, we are not contemplating M&A. We've done plenty of work to understand what the costs or -- and benefits could be. And we'll just continue to be engaged and monitor the process.

The next question is from the line of Chris Wetherbee with Citi.

Lance, wanted to pick up on some of your comments about some of the long-term growth potential. I guess, in the context of the competitive environment and the improvements that UP has been making under its PSR progress over the course of the last couple of years, can you at least maybe give us a little bit of a sort of preview of maybe how you think about some of the growth opportunities for the franchise as you go out maybe just beyond this year?

But obviously, including this year, it seems like macro is going to be a help to you, but has service gotten to the point where maybe the competitive landscape in the Western hat in United States is getting a bit more favorable for you? Or does that sort of factor into your outlook when you think about sort of multiyear growth potential of the company?

Great question, Chris, and thank you for asking it. So when we think about growth, there's a number of ways that we're able to attack it. One is opening markets to us that hadn't been opened before, either through a more consistent, reliable service product, which is true, or a lower cost structure, which is also true. So we see clearly more opportunity happening.

Another way to do it is to expand our reach, and that can be done any number of ways. It can be done by a new intermodal terminal in Minneapolis. It can be done by a new transload. It can be done by taking property that already exists around the Dallas Intermodal terminal and turning it into opportunity to site new industry on it. All of that is underway.

And Kenny, maybe I'll ask you to make some observations and give us a few examples of the kind of growth opportunities you're achieving right now.

Yes. So thanks. So first of all, Chris, it really does start with the service product. Eric and his team have done a really fabulous job of improving the service performance, and it shows up in things like car velocity. So for example, as you look at our intermodal network, as that velocity becomes more reliable and more consistent, we're able to compete right up there with truck on that domestic network. The same is true with parcel.

And then as you look at the carload business, the lower cost structure has really opened up markets for us. We're able to compete and have been able to win in lower value commodities. In areas like bulk, we're able to access customers that may not have wanted to take large positions on either fertilizer or some commodities like grain. That's been encouraging to us.

On the auto side, we've been really excited about new lines that we've won that we -- that weren't there in the past.

And then finally, Lance, as you talk about products help us out, we talked about the product offering in Pocatello where we're going to be able to provide a match-back opportunity for containers to get back to the West.

Yes. And Kenny, it's something else, Chris, that we haven't mentioned yet, 2 big drivers of near-term wins. One is our technology base, our technology platform. You all know we rewrote our ERP over the course of the last number of years, and it's microservices architected.

What that means is APIs are really easy for us to do. We've already got something approaching 4 dozen active APIs with our customer base. Those are helping us win business with electric vehicle manufacturers, for instance, that really care about the data streams. So our technology platform is winning.

And then our ESG story is winning. There's a number of customers that are looking to us to help them reduce their carbon footprint. And as you know, that's becoming a much, much more important part of the conversation with a number of our customers.

So there's a lot of moving parts there, Chris. And from our perspective, there's a lot of opportunity.

The next question is from the line of Ravi Shanker of Morgan Stanley.

Lance, if I can give you a one, two-part question. First is on the guide. I mean, obviously, you guys had a bit of a tough circumstance here with the weather that's completely understandable in 1Q.

But given the much stronger second half macro outlook than 3 months ago, did you consider kind of raising the guidance at all? And also, not to steal your thunder from next week, but can you give us a sense of what we can expect at the Analyst Day in terms of broad topics that you may address?

Yes. Great. Thank you. Ravi, so we do evaluate our guidance periodically. Of course, every quarter is an opportunity. And we've delivered what we think is a good, prudent, middle-of-the-fairway set of expectations as we look forward. We're already kind of moving ourselves up in the range, which is meaningful.

200 basis points of improvement is not chump change year-over-year, particularly when you're at the performance level that we were at last year at 58.5. That would mark us as being a very, very strong industrial performer. So there's no more news on the second half guidance.

I would also just remind you that there is some kind of very high optimism on what the second quarter is going to look like just because the comps are so easy. But then when you get in the third and fourth quarter, we're starting to lap now the real acceleration in domestic intermodal, particularly the parcel world. And we're also then starting to lap some of the real strength in grain. So it has yet to be seen exactly how that plays out. But even in that context, our guidance stands.

And then in terms of what to expect for our Investor Day next week, so what you're going to hear is you're going to hear us lay out just what we talked about there. We're going to lay out how we serve our customers and how that continues to improve and what to expect from us there in real granular firm, so you can get a good sense of the work streams and what to expect.

You're going to hear us lay out how we expect to grow. We'll name customers. We'll talk about very specific opportunity and work streams that you can hold us to account for. We'll talk about what winning looks like in that context and kind of reaffirm, of course, guidance this year. And then we're going to talk about a couple of markers we're going to lay down for the next 3 years. And then we're going to start with a nice overall context of how doing that together with all of our stakeholders really comes to reality.

So we'll talk about our ESG story. We'll talk about what's going on with our employees, the communities that we serve because I think that's a critically important part of how we run this railroad. We have a social license to operate in all 7,300 communities that we serve, and they need to hear us talk about how much we value them and our relationship with them and how we keep it healthy.

So you're going to hear all of that, and you're going to see it in 2 hours, and you're going to see the leadership team of Union Pacific tell that story collectively.

Our next question is from the line of Allison Landry with Crédit Suisse.

Just wanted to go back to the topic of service and growth and specifically, the trip plan compliance. Obviously, both the manifest and the intermodal took a step back from weather. But Eric, I think you've mentioned earlier sort of needing to get the manifest trip plan compliance back to the low to mid-70s.

So I mean, is that really where you need to be longer term to start to chip away at the opportunity to convert some of this merchandise volume from the highway? Or do you need to be somewhere in the 80s or 90s range to really be competitive with truck? And then if you could just sort of help us through when you think you could get there, if that could start to accrue in 2021 or if it's more of a '22 and beyond story.

I appreciate the question, Allison. So my guidance today was really focused on the short term. As we think about going into the second quarter that we're in right now and what the team is focused on was responding to and recovering trip line compliance, both on the intermodal and the manifest and the auto side.

To your point, into the discussion we've had so far this morning, growth is going to take a lot of different forms. I remain completely open to the idea that as we continue to progress forward, both in 2021 and beyond, we're going to see opportunities to be able to grow that service product very intentionally broadly. But then also some growth opportunities will demand certain operations that we will continue to work with Kenny on, as he finds those opportunities and we partner together to bring them on the railroad.

So we have a complete dedication to growing TPC broadly. But then also, we remain very close with Kenny to ensure that we're providing the service and certain opportunities to continue to grow that business.

Eric, let me jump in. And part of your question, Allison, was kind of what should the thresholds be. And our experience, at least right now, and I would say, into the near term tells us trip plan compliance on the manifest side at about 75-ish, plus or minus. Better -- more is better, but there is a threshold at which more costs more than it's valued.

And then on the intermodal side, we do think high 80s, 90s is kind of where that needs the park to be, to be reliable and truck competitive.

Okay. So just to clarify on the manifest, the mid-70, like 75, that's where you want to be. Or what way do you reach those threshold where you just mentioned that costs are kind of in the low- 80s? Or should we think about the mid- 70s mark?

Look, Allison, it's not a hard and fast rule. If you look backwards when volume goes away like it did in the second quarter, you can run a railroad really, really smoothly and efficiently and get those numbers jacked up pretty good.

I would just say, somewhere in the mid-70s is great for manifest. If it starts creeping up into the mid-80s and mid-90s, it's probably more service than is valued and not the same in intermodal. Intermodal, there's an appetite for 90s, and they'll pay for it.

Yes. Let me jump in real quick. I just want to say what is critical here is the reliability part of the agreement could predictably can get to that 75, and we can take that to the customer. We can still talk to them about going after truck lanes because they know predictably that it's going to be at 75 or 77 or 73, or whatever that number is.

Next question is coming from the line of Brian Ossenbeck with JPMorgan.

One for Eric, if you can just give us an update on the metrics through April here on the key -- KPIs, I think that would be helpful to hear how things are moving on some of the more detailed ones that you track. And then just from a bigger picture perspective, workforce productivity is still pretty strong, despite the challenges off an all-time record last quarter. How do you view that in the context of some of the growth that you're mentioning? Can that still improve independent of the growth and what the mix might look like?

And then if I can squeeze one in for Lance. Can you just give us an update on -- we're talking about labor on the training crew size negotiations. I realize it's still early, but we are seeing more about putting potentially a conductor on the ground in the -- I guess, the next few years, if and when that gets negotiated. So if you can just bring us up to speed on what that means and how that's progressing, that would be helpful as well.

Eric, you can get started.

Sounds good. So if we look at Slide 4 as our baseline, so you see on the left-hand side, we can just start with freight car velocity showing 209; last 7 days, 218. Freight car terminal dwell showing 23.5 for the quarter; last 7 days, 22.6. So very strong indications that we are out of that weather event. We're recovering the system, have recovered much of the system and can get back on the pace that we were before. So strong confidence that we can do that.

He had also asked about labor productivity.

Yes. So on the labor productivity side, we think about that 2 ways. Is there more opportunities to continue to grow that number? Absolutely, there is. When we think about how do you make sure you're doing that, you're really focused on, are you getting the retention rate that you expect out of the people that are currently furloughed. We're sitting at 75% to 85% on that, so we're still very effectively being able to retain when we need to be able to bring out people for growth. And at the same time, our total furloughed count on the TE&Y side is 1,400, so there's a strong pool there to draw upon. So no concerns at this time.

And then I'll build off that labor productivity commentary to answer your labor negotiation question, Brian, which is we are right in the middle of national round. It's been underway for over a year. The railroads are pursuing crew size changes in the capital locomotive.

If successful, that would put one of the individuals on the ground servicing more than one train. We think that's got a lot of positives to it. First and foremost is a lifestyle improvement for half of the capital locomotive in that circumstance.

One of the most difficult parts of being train and engine men on the railroad is that their work schedules are unpredictable. They match the flow of trains, which are 24/7, 365. If we can put somebody on the ground, we can create that work into shift work and scheduled shift work, which is a real benefit.

There are other benefits. Of course, it's a real productivity move, but that's far from certain that we'll be able to get that in this round. We're pursuing it. Of course, it's got to be negotiated.

The next question is from the line of Ken Hoexter with Bank of America.

Just a follow-up on a couple of questions. In the first quarter, you said -- last year -- or first quarter, 4% to 6% carload target for the year. You're moving to the top end of that. But if -- Kenny, you mentioned IP up 200 basis points since you set that target.

Do you still see yourself as being conservative by staying in that target? Or are there any losses we need to consider in share? And then thoughts to meet that, just to follow on the last question, your employee changes. Maybe, Jen, you can throw, I mean, down 12%, what your thoughts are on employees by year-end.

Let me take the conservative or not conservative question, if I could. The short answer is no. I mean, 4% to 6% was our best thinking before. 6% is our best thinking now. We'll keep tuned up on it. We've talked about the potential headwinds late in the year. But yes, it's our best thinking.

Yes. And I would just add to that, kind of similar to some of the OR commentary. We're also starting in a little bit worse spot than we anticipated when we laid out our guidance for you, right? We had a tougher first quarter than how things actually played out with what happened with weather.

So -- but to your headcount question, Ken, in terms of how we see that playing out, we're at, call it, just shy of 30,000 employees today. We think that we should be able to, even at the high end of that range, kind of keep steady state relative to those.

You may see some ups and downs a little bit. We may actually have to do a little bit of hiring in some small locations if we don't have an adequate crew base there. You heard Eric refer to the 1,400 furloughs. But we plan on being very efficient with the crew base. And so we think, even up to that high end of the range that we gave, the 6%, we should be able to keep that pretty flat with some little seasonal fluctuation.

Next question is coming from the line of Brandon Oglenski with Barclays.

I guess, I want to follow up on Ken's question there. Lance or Eric or maybe even Jennifer, with where trip plan compliance is and where you want to get it, it just feels like a repetitive scene when rail volumes come back.

Historically, we see not just Union Pacific, but industry service metrics really lag. So I guess, what can be different this time that you think you can do it with such a lower resource base? Because I think historically, the answer was always throw more locomotives assets, employees at it.

Yes. That's a great question. A very fair question, Brandon. What's different for us is a demonstrated track record now in our world of PSR, where when volumes return, we don't crater. A case in point, perfect rate case in point is last year. Last year, volumes dropped as dramatically as we've ever seen in our recorded history from, call it, late February, early March into April and then subsequently recovered as fast as we've ever seen.

And if I recall in the recovery period from Q2 to Q3 to Q4, we continue to improve our metrics on service. That's a proof statement right now. When you go from 120,000 7-day to 160,000 7-day at the end of the year, now clearly, you're loading resources into a pretty empty network at that point, but you're still having to do the work of loading resources into the network.

I think the same is true right now. I'm going to make up a number. If we go from today's volume to 180,000 7-day, we've got an -- a network, a physical franchise that can handle that pretty readily. And the job would be to efficiently layer in the train starts that would be necessary, the crew, the locomotives. And we've demonstrated, we know how to do that and should be able to do that.

Eric, a little segment color?

Yes. And one of the greatest tools to do that is all of our continued efforts on train length. As we reported this morning, we're up 10%, 850 feet. But when you're thinking about the service product and being able to deliver that, one of the best tools you have is a very fluid network.

As we think about 2.5 years ago, we would have had 800-ish trains running around in any given day. Now we're at 600, 605 a day. That's 25% less potential variability events, which is the primary driver for any degradation in trip plan compliance.

So continuing to leverage train length on top of how we operate in our terminals, both key opportunities to consistently drive that number up to that mid- 80 number.

The next question is from the line of Jon Chappell with Evercore ISI.

Kenny, you noted the tight truck capacity and the favorable outlook for taking share off the highway. Beyond the weather, the West Coast congestion issues still seem to be in the headlines, and the rails seem to be getting thrown under the bus a little bit as part of the problem, not the solution.

Can you just speak to the progression of clearing some of the backlog, especially as it relates to the West Coast ports? And then also, what's your capacity to actually take advantage then of this favorable competitive dynamic that you have from a cost perspective?

Yes. We've seen those same headlines you're reading. I'm going to start. And then Eric, I'll ask you to finish, and then pitch it back to me to talk about the upside on opportunities.

But look, when you look at the port congestion that's going on, there's a lot of players in that supply chain. I've had really close conversations with a lot of the ocean carriers and even the port here recently. So let me just break down a few things.

One, we know about the increased demand that has got pretty sudden. But one of the things that you look at, another variable that you look at is the warehousing capacity. So in a lot of cases, the warehouses out there are just full. They're unable to physically take the container, so we are seeing those containers still left out there on the port.

There are some challenges on the trade side, certainly some labor issues at the terminals. And then you look at the trucking capacity to even go long haul, there's tightness there. And so what we're focused on here is what we can control.

And Eric, if you want to just talk about what we're doing from an operational standpoint.

Sure. And Jon, I appreciate the question because Union Pacific is a critical component of that entire supply chain Kenny was mentioning.

So when we look at being able to ensure that we have the resources up against that, we're always looking at what's the total footage of trains that we're able to depart from the L.A. Basin, specifically out of ICTF.

And so if we go back in time from July to October last year, we had 60,000 feet of capacity. Now as we saw that volume continue to increase, we were intentional and ahead of time, increased that to 68,000 in the middle of November. And then actually, again, in April 1 of this year, we took that to 80,000. Now that's on top of and driving a 25% increase in our train starts out of the L.A. Basin also to support that growth.

So you see -- I hope you see Union Pacific as the component in that process that's doing everything they can to bring on that volume and efficiently get it out of the L.A. Basin and into the inland terminals, which helps the overall fluidity of the entire supply chain.

So just to close out here, Jon. We feel good about the incremental wins that we're seeing on the domestic side. It is a tight market because we're going through bid season. We feel encouraged by some of the past wins on the international intermodal side. So as we move throughout the year, we're feeling very optimistic about the marketplace.

Next question comes from the line of Tom Wadewitz with UBS.

I wanted to go back a little bit to the -- some of the consolidation questions. Lance, I think your comments this morning and in the past have been kind of cautious about rail consolidation. Are you essentially against consolidation? Would you say we just don't think it should happen? Or is that kind of overstating it?

And then in terms of gateways, I mean, obviously, you do a large amount of business at the Laredo gateway. How do you protect yourself if CP or CN gets KSU, and there's some essentially bridge traffic that you have from Laredo to Chicago that would potentially be at risk? So how do you think about what you need to do to protect yourself at that gateway?

And Tom, and thanks for the questions. We've been very clear on consolidation. You mentioned it. We think that the process, the STB has committed to undertake in terms of reviewing any Class 1 merger to ensure it both enhances competition, has better outcomes for all customers and that they contemplate the downstream impacts.

When you boil that all together and note that the STB has full authority to put in whatever remedies and regulations are required to achieve that, we've always thought there's lots of opportunity in that to destroy long-term value for the industry.

That's our big concern. We are constantly evaluating long-term enterprise value creation. Part of that is whether or not mergers make sense for us, and that's always been a primary sticking point. We'll have to navigate this current process to see how it comes out. And of course, we'll be an active participant in it.

Related to the second part of your question, which is how do we protect or how do we ensure that the competitive option that the UP represent doesn't get disadvantaged by either the CP or the CN if they were to own KCS. And you've got it exactly right. The Laredo gateway is the primary gateway for the KCSM, and we'd have to do 2 things.

We have to make sure that operationally, we're treated fairly and equitably at the gateway. And then we have to make sure commercially that we're treated fairly and equitably to all the points that we currently have an opportunity to serve with our franchise in the United States in conjunction with KCSM.

Our franchise is damn good. It's the best in the industry, and that's why we represent about 2/3 of all rail cross-border traffic to and from Mexico. It could be a cry in shame, and it would be against what the STB has committed they would do in evaluating the merger if that excellence is replaced by something that's inferior, and it's because we're disadvantaged. So we'll be crystal clear about that in front of the STB and in the process.

Okay. But you think there are ways to protect the franchise at Laredo.

Yes. 100% there are, and they would be in positions, concessions, remedies that would flow through the STB.

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

I just wanted to ask a slightly different question regarding the capacity challenges on the West Coast. I was just hoping you could comment on what you've done to protect service for customers in the mutual commitment program and whether you expect to see more interest in that program going forward just given the capacity challenges across all modes.

Yes. Thanks, Cherilyn. I mean, clearly, we announced that and have taken that action to protect those customers that are in the program, and we're doing that with a lot quicker responsiveness. As we see the market changes, as we see the supply chain tighten, we will take those actions, and you're seeing us do that.

We're in constant communication with our customers and helping and talking to them about their supply chain as it relates to street time, as it relates to dwell and what they're doing with their BCOs and individual customers. So we're going beyond just having that surcharge out there and talking with our customers about what they can do to make sure that they can efficiently utilize those assets.

And do you expect to see more interest in that program going forward?

We have not seen any of that waiver, and we would expect the interest to be there and be strong.

Next question is coming from the line of Walter Spracklin with RBC Capital Markets.

So just following on that question with regards to congestion, and if we do see a very significant increase in economic activity potentially above and beyond what's currently expected, how much of your ability to protect services within -- is outside of your control? In other words, what can you do here to speak to your supply chain partners to make sure that everything remains fluid? And how much of a risk is that?

And just as a follow-on question there on yields. I think you mentioned that yields were going to be negative for the year. And I'm just curious, with everything going on with that demand and the potential pricing opportunities, are you still expecting yields to be negative for this year?

Let me start on both, and then I'll turn it over to, first, probably Kenny and Eric to comment on specifics about congestion and how do we avoid it. I don't think we've said anything about negative yields in the year, Jennifer.

No. We said the business mix is expected to be negative.

Right.

But not the overall yield. So when you think about yields, obviously, there's numerous components. There's the mix impact. There's -- which we do expect is going to be pressured, probably going to look a little bit better here in the second quarter and third quarter, probably some pressure in the fourth quarter with some of the grain comps.

But in terms of pricing, I feel very good about pricing and then fuel surcharges. This is the last quarter where we've got a pretty negative comparison year-over-year relative to fuel prices and surcharges, and so that should look better over the balance of the year as well.

Yes. I'm sorry. When Walter said yields, I went to how we define yields, which is predominantly price.

Yes, yes, yes.

So Walter, talking a little bit about congestion and if economic activity surprises us and is even stronger and continues to strengthen, what are we going to do about avoiding congestion? And the short answer is making sure that we've got the right resources against it, staying ahead of it through the viewpoint of Kenny and his team in terms of translating economic activity into carloads for us, which we do routinely and periodically to try to stay out in front.

And I also need to make sure we talk -- Kenny and Eric both talked about us having a full supply chain visibility and working towards that specifically with the West Coast ports. That's an active engagement, whether it's in the L.A. Basin or up in the PNW, on our part, to make sure that we and the entire supply chain have transparency and visibility into what's happening, what the metrics are and KPIs need to be for us to stay fluid and support an excellent service product.

And from my perspective, that's not just about satisfying current demand. That's about making sure that the West Coast ports are competitive in a very, very competitive world where stuff can hit Prince Rupert or the Gulf Coast or the East Coast.

Eric?

Yes, I'll take on the resources and then the visibility. So when you think about, Walter, the resource space, you're talking about 3 things. You're talking about locomotives. So obviously, we have reported that we have 3,000-plus locomotives in storage, but we also, more importantly, to respond to that growth, as we have our at-the-ready locomotives that are actually pre-placed out in geographical areas, like the L.A. Basin, so we can be very agile in responding to that.

From a car perspective, we don't have any constraints on that. Now as Kenny mentioned earlier, you're trying to drive intermodal velocity higher and higher, which just allows you to turn the cars faster and provide you even more at the readies for cars as well.

And then crew base wise, we still use the same process we use every single month to evaluate crew demands. See, as Jennifer mentioned, there may be sporadic hiring. Some of that may be in the L.A. Basin, but no immediate concerns on crews.

And then finally, it's the agility for decision making. When I talked about increasing the train counts off the L.A. Basin by 25%, that was a decision we started on Monday. And by Wednesday, we're already moving the resources there to answer that call. So I feel very comfortable on the operating side.

Yes. Just to add to that, we stay very coordinated with the customers on what they plan to do and what their forecasts are. And then we're in turn taking that and sitting down with Eric. And so he talked about the adjustments that we've made. We've got visibility just talking to our customers from that perspective.

Obviously, here this year, we've made some changes to our assessorial charges to incentivize our customer to get the equipment moving. Regardless, whether it's our equipment or their equipment, we are sitting down with our customers to talk about efficiency and turn times and dwell and things they can do to get the network moving. So boy, we feel really good about the visibility there and the coordination there and the decisiveness there to keep the network fluid.

Okay. I appreciate that. And just to clarify, I was referring to ARC there, where it was negative 2.5% in the first quarter. I think, Jennifer, you had indicated that it would -- the business mix would keep that kind of negative for the full year, and that was what I was asking about. But it sounds like you answered that, so that's great.

The next question is coming from the line of Jordan Alliger with Goldman Sachs.

Yes. Just a follow-up on the revenue per carload yield. Are the tailwinds going to be sufficient to move that into the positive territory as soon as the second quarter? Or is it more second half?

And then just -- I think you've mentioned biofuel now for at least a couple of quarters. I'm just curious of that opportunity now and perhaps the scope and size of that opportunity down the road.

So Jordan, this is Jennifer. Certainly, second quarter should look better. Last year's second quarter was obviously, with the pandemic greatly impacted, especially with the auto production, which was virtually stopped. Now we do still have some auto production headwinds this year. That's a little bit of a headwind, but we're expecting it to look better.

Whether it will turn positive in the second quarter, I think that is really going to be dependent on the mix, but we feel good about the direction that things are going, particularly in the back half.

Yes. So biofuels, we've been very encouraged with where we are to date with that, and we're even more encouraged with where we see that, by the end of the year and long term, we do see that renewable diesel have a -- had lagged.

We've been working with customers to land sites on our network, and we feel really good about that. We've talked to a growing number of customers that are interested and have committed capital dollars to investments, so we know it's real. So that's why you're seeing that optimism there from us on the biofuel standpoint.

Our next question is coming from the line of Justin Long with Stephens.

Lance, following up on the topic of growth and some of the tailwinds that you mentioned, do you think volume growth above GDP is something that's achievable longer term for the business?

And if the answer to that is yes, is this something that can happen without negatively impacting mix because I'm guessing a lot of the truckload conversion opportunity is coming in Intermodal that's lower RPU?

Yes. It's a great question, Justin. So the short answer is we believe we can grow faster than our served markets. GDP might not be the best measure, right, because there's a boatload of services embedded in GDP. But maybe instead, you'd have to look at the elements of industrial production.

The one caveat I'd give you is that's going to be true -- we expect that to be true and be able to drive that with the exception of a handful of commodities, coal being one of them, perhaps petroleum being another one and maybe frac sand being another. But you take those off the table, and our expectation is we grow at a better rate than our served markets.

And I would just say to the mix question, we're going to grow profitably.

Yes.

I mean, we expect to be able to -- we recognize that, that's a dynamic that we have in our business today, but we don't see that as being the hindrance to us being able to improve our profitability through ongoing efficiency, through pricing to the services that we're providing in the marketplace. So that's all kind of baked into how we're looking at the future. And obviously, we'll talk more about that on May 4.

The next question is coming from the line of David Vernon of Bernstein.

So Lance, one of the thing that stands out in these 2 competing bids for KSU is this opportunity to convert highway traffic, either from the Laredo gateway or to Texas area, perhaps down into -- even as far down into Mexico up into the Midwest.

Now as you look at that intermodal opportunity and that truck conversion opportunity, would you agree that, that is a huge potential market? And if so, what are you guys doing to actually capitalize on that short of a merger? And what can you do to kind of catalyze some of that growth?

Because it seems like there's a lot of truck competitive traffic in that corridor, and that these 2 carriers were saying is not being converted today because there isn't an merger. Like how do you think about getting after that opportunity?

Thank you, David. So let's start with the potential. There is a lot of truck traffic that can be converted to rail, and we're constantly working with both the FXE and the KCSM to try to get that done. We have been successful in actually growing our overall intermodal product that we call it the domestic intermodal product, even though it's to and from Mexico. And we expect to continue to do that.

Now it's pick-and-shovel work, right, because we've got to get the FXE or the KCSM interested in a move that might be relative short haul for them in comparison to what they might be able to do just staying within Mexico. If that's the case, there's always an opportunity to use truck in Mexico as the origination or destination and transload at the border. It's a little more complex, but we do that today, and we can continue to do some of that.

So yes, the market is big. It's pick-and-shovel work to convert, and there's been plenty of advertising about the potential to convert and what it means in synergies. We have not seen the game plan that would be required to be filed with the STB. And once we see that game plan, all of us then can start evaluating how real is it. And is it going to be done at our expense? In which case, there's got to be a remedy that maintains our competitive posture.

All right. And then maybe just as a quick follow-up to that. If you look at the routing on your railroad of the reserve Pacific line out of Laredo up into the Midwest, that's always been the -- I think, the least or queue that's routing out there.

I was just wondering, for the rail traffic that's coming over that corridor, I'd imagine customers have a lot of say on the routing. So just because there's another way to kind of move it up a different route that's out of route, I mean, what role do customers play in sort of determining the routing on some of that carload traffic that would help us assess kind of the diversion risk there?

Customers at the front end really don't play that greater role. With -- what we do with a customer when we're bidding for business is we determine the best route for the service product. That's what we sell to the customer.

Sometimes it's blind to the customer, and we route it as long as we're maintaining the service commitment to the customer. Sometimes, the customer has a full understanding and appreciation for the routing. And if we want to change it, it becomes a little bit more complex.

But net-net, at the front end of any transaction, we as a railroad determine the best routing, and that's always with an eye towards the best service product that meets the need of the customer. That's what gets problematic inside a potential acquisition is. The combined carriers might have the opportunity to go to an inferior routing through a commercial construct, and it's not best for the customer, it's not best for the market.

Our final question is coming from the line of Jason Seidl with Cowen.

Kenny, maybe one for you on the automotive side. I mean, obviously, that's a question mark that you guys have up there going forward. Clearly, that's going to depend on the ability to get the ships and manufacturing back up.

But once that is back up and running, what should that backlog look like for you guys? And what should we expect on the volume side in the second half of the year and maybe into the first half of '22?

Yes. You're talking about international intermodal, not automotive.

Automotive, yes.

The demand is there. We expect that demand, Jason, to be strong for the rest of the year. So going into peak season, so the overall demand will be there. You've heard us talk about some of the wins in the international intermodal side, and you've also heard Eric talk about what we're doing to service the customers out there.

So we are encouraged with the demand structure that's there with our ability to compete and as the supply chain moves out a little bit. And when I say that, I mean the dwell, the warehouse and the street time. That should also open up the velocity for us to move more volume.

So you're confident in the premium service then in the back half of the year and then into '22, but it's just a question mark and just how quickly it's going to come back.

I am. That's a good way to say it, Jason. I feel confident about the demand on the international Intermodal side.

There are no additional questions at this time. I will now turn the floor to Mr. Lance Fritz for closing comments.

Thank you, Rob, and thank you all for your questions. Just a reminder, we have an upcoming virtual Investor Day on May 4 at 2:00 p.m. Eastern time. We're all looking forward to discussing our strategy and vision for Union Pacific, and we hope you're going to be able to attend with us. I wish you all good health, and take care.

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