聯合太平洋集團 (UNP) 2020 Q1 法說會逐字稿

Greetings, and welcome to the Union Pacific first quarter earnings 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, 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 health care 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 so very proud of the entire Union Pacific team.

Moving on to our first quarter results.

This morning, Union Pacific's 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 OR.

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 4. 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 is where our customers feel the benefit of our transformed operating model.

The improvement in the intermodal speaks for itself.

With manifest and autos, we are holding ourselves to a 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 product going forward.

Starting next week, we will provide some additional operating statistics, in particular, freight car velocity, which, you've heard me say a number of times, is my favorite one that I look at every morning on our investors website on a weekly basis to provide more insight to how our operations are running.

Let's turn to Slide 5. It highlights some of our recent network changes.

As a part of our continued implementation of Precision Scheduled Railroading, we consolidated mechanical shops in the LA basin and Houston areas.

In the LA basin, we've consolidated from 3 shops to 1; while in Houston, we've gone from 2 shops to operating just 1 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 the intermodal traffic from our eastern ramps, destined to port terminals in the Los Angeles, Long Beach area.

This allows us to operate longer, more efficient trains across the Sunset Route and provide a better, more consistent service product to our customers.

We also completed 8 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 product on fewer trains, we have increased train length across our system by 19% or over 1,300 feet since the fourth quarter of 2018 to approximately 8,400 feet in the first quarter of 2020.

The capital we are investing to improve productivity as well as to maintain a 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 customer demands, while balancing our resources and assets to meet current volumes.

Since the latter half of March, as volumes declined 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 boards 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 to 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 average revenue per car and drove freight revenue to be down 3% in the quarter.

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 volumes.

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 units as we saw strength in beer shipments become slightly offset by reduced refrigerated and dry foods, which were impacted by a challenging truck environment.

Industrial revenue was up 3% with a 3% increase in volume and a flat average revenue per car due to mix.

Energy and specialized increased 10%, primarily driven by strength in petroleum as favorable Canadian spreads facilitated stronger crude oil shipments to the Gulf earlier in the quarter.

However, with the reduction of oil prices in the past week, we expect crude oil shipments 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 plastics shipments grew by 4% due to the strength in domestic and export plastics shipments, along with strong demand of detergents and chemicals.

Metals and minerals volume decreased by 3%, reduced sand shipments from the impact of local sand and drilling declines, 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 the most of the first quarter until the pandemic shutdown OEMs 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 have slowly impacted much of Asia.

Looking ahead, there remains quite a bit of uncertainty surrounding this global pandemic that we're facing.

With the free fall and economic indicators over the past few weeks and uncertainty about when we will see the COVID pandemic curve start 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 slowly, 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 autos, 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 Americans.

Plus, it's also encouraging to see that much of Asia is restarting production, along with China's recent purchases of U.S. grain.

More importantly, I'd like to make this point clear.

We're not letting the uncertainty of the economy hold us back.

We're seeing a focus on what we can control.

The good news is that the lower cost structure, combined with the improved service product 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 stronger service product 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.

Thanks, Kenny, and good morning.

As you heard from Lance earlier, Union Pacific is reporting first quarter earnings per share of $2.15 and an all-time best quarterly operating ratio of 59%, our fourth consecutive quarter starting with a 5. Comparing our first quarter results to 2019, there are a few puts and takes.

Last year, we incurred higher weather-related expenses, and you may also recall that we received a payroll tax refund that benefited both our operating ratio and earnings per share.

As shown on Slide 13, these 2 items had an offsetting impact in our 2020 results.

Fuel was an unexpected tailwind in the quarter and likely will be for much of 2020, as the year-over-year fuel price reductions favorably impacted our quarterly operating ratio by 80 basis points and added $0.04 to earnings per share.

Setting aside those items, core margin improvement for the quarter was a remarkable 3.8 points and added $0.18 to earnings per share, as we continue to demonstrate the power of our operating model as well as the ability to flex our cost structure in the face of volume challenges.

Thanks to the dedication and resolve of the entire Union Pacific team, we took another significant step forward to our goal of operating the most efficient, reliable and consistent railroad in North America.

Looking now at our first quarter income statement.

2020 operating revenue totaled $5.2 billion, down 3% versus last year on a 7% year-over-year volume decrease.

Demonstrating our ability to be more than volume variable, operating expense decreased 10% to $3.1 billion.

These results net to operating income of $2.1 billion, a 9% increase versus 2019.

Below the line, other income decreased compared to 2019 as the payroll tax refund I referenced on the prior slide included $27 million of interest income.

Interest expense increased 13% due to increased debt levels, while income tax expense also was higher, up 11% due to higher pretax income in the quarter.

Net income of $1.5 billion was up 6% versus last year, which, when combined with our share repurchase activity, led to an 11% increase in earnings per share to $2.15.

Looking at revenue for the first quarter.

Slide 15 provides a breakdown of our freight revenue, which totaled $4.9 billion, down 2.5% versus last year.

While not able to offset the impact of the 7% lower volumes, the combination of favorable business mix and our pricing actions had nearly a 5-point positive impact on our quarterly freight revenue.

Positive mix in the quarter was driven by lower intermodal shipments, partially offset by lower sand volume.

In addition, fuel surcharge revenue declined $47 million in the quarter to $351 million and impacted freight revenue by 25 basis points.

Drivers of the decline were lower volume and fuel prices.

Now let's move to Slide 16, which provides a summary of our first quarter operating expenses.

Through our Unified Plan 2020 and G55 and 0 initiatives, we drove improvement across all cost categories.

Compensation and benefits expense decreased 12% year-over-year, primarily as a result of our workforce and productivity initiatives.

Total first quarter workforce declined 15% or about 6,200 full-time equivalents versus last year.

Sequentially, our workforce was down 2%.

Breaking the year-over-year reductions down a little more, we saw a 19% decrease in our train and engine workforce, while management, engineering and mechanical workforces together decreased 13%.

This expense category also benefited from less year-over-year weather-related costs, offset by the payroll tax refund I referenced earlier.

Fuel expense decreased 18% as a result of lower diesel fuel prices and fewer gallons consumed with a more efficient operation.

Our consumption rate for the quarter improved 5% versus last year to a first quarter best level.

Decreased costs associated with maintaining a smaller active locomotive fleet as well as lower weather-related costs were key drivers of the 10% reduction in purchased services and materials expense.

In addition, as we use both our locomotive and car fleets more efficiently, we've been able to lower lease expense, which largely contributed to the 12% decline in equipment and other rents.

With regard to other expense, which was down 2% in the quarter, we recorded an adjustment to our bad debt reserves to recognize uncertainty related to certain customer receivables due to the potential impact of COVID-19.

That expense increase was offset by running a safer railroad, which lowered destroyed equipment costs as well as freight loss and damage expense.

Finally, for full year 2020, we now expect year-over-year depreciation expense to be flat.

Looking now at productivity and our cost structure.

Net productivity totaled approximately $220 million in the first quarter.

As Jim detailed earlier with our improved key performance indicators, the successful implementation and enhancement of our operating plan is increasing efficiency, while at the same time, providing a superior service product for our customers.

As we've discussed in the past, we view productivity as a volume-neutral measure.

In other words, we're reporting only that part of our cost savings attributable to the actions we are taking.

But as we enter this recessionary period, sparked by COVID-19, I'd like to make a couple of comments about volume variability, in particular, as it relates to prior recessions.

First, and most importantly, Union Pacific is running at efficiency levels we've never experienced before as a company.

For example, we were more than volume-variable on a fuel-adjusted basis in the first quarter 2020, as a result of the strong productivity focus embedded in Unified Plan 2020.

We've also taken more than 1,500 basis points off of our operating ratio since the great financial crisis in 2008, 2009, and that further strengthens our ability to manage through today's challenges and emerge stronger on the other side.

Moving to cash generation.

As we face these fluid and uncertain times, we recognize the need to maintain ample liquidity.

With the strength of our balance sheet and our strong cash generation, I can confidently say that we are well positioned for the challenges we are facing.

Cash from operations in the first quarter increased 10% versus 2019 to $2.2 billion.

Free cash flow after dividend and after capital investments totaled over $1.3 billion, resulting in a 91% cash conversion rate.

We also returned $3.6 billion to shareholders during the first quarter through the continued payment of an industry-leading dividend and the repurchase of 14 million shares of our common stock.

Share repurchases were funded, in part, from our January debt issuance.

Union Pacific's strong investment-grade credit rating and a very attractive interest rate market allowed us to issue $3 billion of new debt.

A portion of that issuance funded the $2 billion accelerated share repurchase program we entered into in February and the rest is for 2020 debt maturities.

We finished the quarter at an adjusted debt-to-EBITDA ratio of 2.7x, in line with our previously stated goal of maintaining strong investment-grade credit ratings, no lower than BBB+ and Baa1.

Although COVID-19 was not contemplated when we originally set our leverage targets back in 2018, the decision to manage our balance sheet in line with the strong investment-grade credit rating was clearly the right one.

We maintain an active dialogue with our rating agencies.

And at this time, they are comfortable with our current leverage position.

We finished the first quarter with $1.1 billion of cash on hand.

However, in an abundance of caution, we issued $750 million of 30-year notes in early April to further increase liquidity.

As of yesterday, our cash balance was around $2 billion, and we have additional levers available, if needed.

The current bond market is open to us, as evidenced by our April issuance.

We also have $2 billion of credit available under our undrawn credit revolver and up to an additional $400 million available under our receivable securitization facility, which is 50% drawn at this time.

As we sit here today, we do not believe it will be necessary to tap those additional sources, but we view them as a prudent backstop to have at the ready.

Turning now to our 2020 outlook.

We are formally withdrawing much of our previous guidance in light of the current economic uncertainties.

In particular, we are no longer providing guidance for the full year 2020 volume, headcount, operating ratio or share repurchases.

To date, we have repurchased roughly $17 billion of the targeted $20 billion 3-year program that is set to conclude at the end of this year.

We will continue to monitor business conditions and adjust this activity as we see prudent.

But with share repurchases currently paused, completion of the full $20 billion seems less likely today.

As you heard from Kenny a moment ago, our second quarter carloadings are currently down 22%, and our current view is that volumes for the full quarter could be down around 25% or so.

With volume declines of that magnitude, we are taking actions across the board to rightsize our resources and manage expenses.

Even with aggressive actions, however, it is unlikely we can improve our second quarter operating ratio on a year-over-year basis with that level of volume loss.

Unchanging for 2020 is our long-standing guidance around pricing.

We still expect the total dollars generated from our pricing actions to exceed rail inflation costs.

With regard to productivity, we are widening our range of expectations for full year 2020 to $400 million to $500 million.

We clearly got off to a very strong start in the first quarter, and our commitment to productivity is unwavering.

However, we also recognize that the loss of volume leverage is a challenge.

In terms of cash generation and cash allocation, we've modeled a number of different down volume scenarios.

In each, we plan to maintain the dividend, but with the capital modifications Jim mentioned, and a suspension of share repurchases.

The outcome of that exercise is a strong confidence in our ability to generate significant free cash flow after dividends in some pretty dire economic conditions.

This is a testament to the earnings power of our franchise, as demonstrated by our first quarter results.

Although frustrated by current conditions, the potential is clearly there.

Longer term, our guidance of capital expenditures of less than 15% of revenue, a dividend payout ratio of 40% to 45% of earnings, and ultimately, that 55% operating ratio remain intact.

As you have heard from the entire leadership team today, we are unwavering in our commitment to improving safety, efficiency and service as we all firmly believe in the strong long-term prospects of our company.

So with that, I'll turn it back 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.

(Operator Instructions)

And our first question comes from the line of Allison Landry with Crédit Suisse.

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?

Broadly, any thoughts you could share about how you're thinking about the coal network going forward.

Listen, the coal network was built to handle way more trains than we're handling.

So it starts off on a separate piece of the railroad.

So there's no if, ands or buts that we're going to -- we're looking at that.

We've got plans to be able to take advantage and use some of that, both in maintenance and some of the capital that we've put on the ground in there.

On some of the other network, a little more difficult because it just mixes up with the rest of the trains we run.

But absolutely, Allison, we've got a plan of when some segment of the railroad sees a downturn in traffic that we fix it.

The big challenge for Kenny is this, I want him to fill it up.

So I think he's got a great service product, and we get out there and fill up those pieces that are running with less traffic right now.

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 or 2?

And if there's any way to sort of parse out what percentage you think would be structural takeouts versus how much would likely come back with the recovery in demand?

Okay.

So, so far, I'll tell you, the team has done a spectacular job.

We have -- actually, our train size has grown in April, not come down.

So we are full bore, everyone's on looking at how we make this place with what the traffic that's offered to us and make it the most efficient.

So it's actually gone up in size -- train size in April.

You'll see that when -- as 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, I'm no -- there's a certain point when it's impossible to do.

So we're not there yet.

Our next question comes from the line of Amit Mehrotra with Deutsche Bank.

Jennifer, I didn't fully catch your comment around the OR for the second quarter.

Did you say it was going to be down year-over-year?

Were you comparing it sequentially?

I wasn't exactly -- I don't think I understood exactly what you were saying there.

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.

Okay.

Got it.

Okay.

That makes sense.

And then, Jim, I just want to come back to Allison's question really quickly.

Obviously, the 25% decline in volume, it's a bit unique, I guess, in the quarter because the decline in revenue is so significant, but also kind of short-lived, which introduces a whole host of other dynamics in terms of how you manage labor and other costs in the business that might need to ramp back up.

So if you could just talk to us how you manage that?

I mean it's basically, PSR is important but -- and thank God, you guys did it in the context of what's happening currently, but is the second quarter just going to like reflect more of a normal kind of 50%, 60% decremental margin quarter?

Because a lot of those costs that you would normally have to structurally kind of move away has to remain because you have to prepare for the, hopefully, V-shape recovery on the other side.

Just help us think about how you manage through this dynamic that's a little bit unique?

Well, listen, it was a multi-person answer question.

I think Jennifer wants to jump in.

Yes.

But let me just start with what I see.

You can see that we're high double-digit drop in the number of employees already versus where the business dropped.

And so it gives us a chance to be able to be there.

And that's why the comment the way I answered Allison's question, I'm very comfortable that at this place, I don't know what's going to happen to the business, I'm open for a big V coming back, but who knows.

So we are prepared and preparing to make sure that we do not set ourselves up that if the business comes back quicker than some people think, that we're prepared for it.

So that's why the way we parked our locomotives, we've got lots of locomotives, I don't even want to talk about how many we've got parked right now, it's so many.

I worry more about the productivity number that's out there.

That's what's real key is how many -- so we've got locomotives ready to go.

The business comes back, if it comes back slow or fast, we're ready for it.

And people, we have been smart about how we manage all the labor that we have.

So we are purposely at this point because of the substantial drop over a short period of time that we have put people in places so that we can recall them.

They cost us a little bit less money, but they're available real quick to return to the railroad, so we don't impact.

Service is key for us.

You can't be running an efficient railroad, and I've always said that and I know some people mix this whole thing up, PSR and service.

So you can't have a good operating railroad that will operate safely if you don't have customers that want to come on it.

And that's what we're building.

I think we're there.

Kenny should be able to go out and sell it.

But at the end of the day, that's what we're all about.

Jennifer?

Yes.

I mean -- so we're obviously not going to give guidance on decremental margins.

Again, you look at our first quarter performance, very strong.

We're more than 100% volume variable.

But I think when you think about how we look at the second quarter, I mean, obviously, 25% down volumes, and as your earlier question was asking around the operating ratio, it's tough to keep up in terms of your cost cutting when you have volumes come out that fast.

We are going to be very aggressive and do everything we can but we are not going to give specific guidance relative to headcount for second quarter or relative to the margins.

But just know, we're going to pull every lever available to us.

Our next question is from the line of Brian Ossenbeck with JPMorgan.

Maybe one for Kenny.

Can you just go through the impacts of energy across the portfolio, specifically, like, you mentioned crude before, but I wanted to hear a little bit more about, perhaps, natural gas what that does to the plastics producers in the Gulf Coast?

And is it -- I hear your comments on coal, but is it too early to think about some potential upside in coal, if we were to see an improvement as production gets shut down?

Yes.

So I'll walk you across pretty quickly here.

The coal prices have just dropped here even over the last few months to some levels that we haven't seen in a while.

I'm sure you see the same forward curve forecast, and we'll see what happens there.

But there is nothing that leads us to believe there's going to be large upside with coal.

But we'll keep working with Jim's team to get the productivity that we can get out of it.

The other part of the energy side, of course, is the oil prices and you've seen what has happened there on the petroleum side with crude oil.

We'll see what happens with those prices.

Those prices also have an impact on our sand business in terms of drilling and then to a lesser degree, the drilling pipe segments, also.

As you look at our plastics business, there is going to be an impact on our plastics business.

I will tell you that there is more production that has come on, and there's more production that will come on, that is a positive for us.

We're hearing at the -- or we know that the operating rates where a number of our plastics producers have taken a step down, but that's still a very positive segment for us.

I will say this, and I want to end it all with this.

At the end of the day, our service product has been as good as it has been as we continue to see other pieces of carload business come up for us to bid on and compete for.

I really like the position that the service product has put us in.

All right.

So a follow-up for, maybe Jennifer and Jim.

If -- I believe last time we talked, you're targeting a $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 if you can just give us a little bit of context to that, if clearly, the volume environment is different, but if this is a volume-neutral sort of metric, maybe you can help bridge the gap there between the 2 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.

What 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 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 of a chance to reduce.

And just the way we measure cost takeout, it's true cost, we're not -- there isn't anything -- volume doesn't help us.

But I'll tell you this, is 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 markets changed for us even more, I'm very comfortable with where Jennifer has got us guiding for this year.

I'm very comfortable.

I won't use the word [goal] because otherwise, Jennifer will get excited about it.

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 up 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%, it gives you all the opportunity not to add resources in, and you can count that all as productivity.

Right.

Yes.

It sounded like there's a calculation aspect to it, kind of like your core pricing.

So I just wanted to make sure that was clear.

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

I wanted to talk a little bit about volume, if we could.

The 25% decline in the second quarter is not too far off of where we're running kind of currently here, which would suggest that maybe we're kind of getting closer to the bottom.

I want to get a sense, maybe, Kenny, for you, discussions with your customers or maybe each individual business line.

Can you walk us through sort of what are the puts and takes to kind of get you comfort with that 25% number?

We appreciate you giving it, but kind of curious what's the sort of drivers behind that.

Yes.

So first of all, I believe you all see some of the information that we see publicly in terms of where the automotive OEMs are and they appear to be coming back sometime next month, call that the first half of May.

Clearly, there's going to be some ramp-up issues with that, maybe they wouldn't start at 100%.

We'll keep an eye on where that is.

As we look across our industrial customers, there are some customers that we're still seeing produce at a pretty strong clip.

Our rock network is still working pretty well.

On the grain side, we're pretty optimistic there.

We'll see what happens over the next few months.

We do know that China has come in and purchased some grain.

During the back half of the year, we would expect that we should see some benefit from the Phase 1 deal.

And then as you look at how -- as we're talking to our customers on the consumer side, I'll call those international intermodal and our domestic customers, I'll tell you, they're still -- they still don't have good line of sight into what's going to happen.

So we're not in a position -- I'm not in a position, even though, we're talking to them every day, to tell you what will happen there.

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, right, 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%-ish and see sometime in the second quarter that we're starting to see demand firm and our supply chains reflect it.

But it's a -- there's a lot that needs to happen between here and there.

Okay.

That's very helpful.

I appreciate that.

And then 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, I thought 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 a very much challenging sort of quarter to get that productivity, and that -- maybe that sort of remainder of the $400 million to $500 million is more back-end weighted to maybe 3Q or 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.

No.

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 -- I've said this 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, Chris.

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.

Our next question comes from the line of Ken Hoexter with Bank of America.

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% for the quarter, are you expecting things to get worse from here?

Are you not anticipating things reopening?

I mean I guess, just thinking about this only in the third, fourth week of April, you still have 2 months left and with things maybe apparently starting to reopen, are you expecting things to deteriorate from here?

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's 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 a 25%-ish is a good marker for us to plan our activity around.

We've mentioned it to you as a result, and we'll hope for better.

Kenny?

Yes.

I want to just give you a view from my seat.

When our commercial team goes in and we talk to our customers, we're talking about -- after we go through our safety side, the second thing we talk about is the service product.

And Jim is exactly right.

We've got a very strong service product to sell.

We talked about the car velocity improvement that make us more competitive with truck-like services.

As we entered into the year, what I would tell you is that on a carload basis, we felt really good about some of the wins in some key markets, and we felt really good about opening up new markets that we hadn't touched.

On our domestic intermodal side, we're about 2/3 along the way through our bid season.

We feel very good.

I mean we feel very good about what we won in that area.

So we need the market to help us there.

Even in our international intermodal business, towards the back half of the year, there have been some jump ball opportunities that we feel really good about that we won that you should see.

So coming into the year, we felt really good about our opportunity to compete.

The service product is something that we're going to use to make the pie larger to compete against truck.

But we feel really confident once the market comes back.

I guess if I could just switch over to Jim or Jen for my follow-up.

You talked about trimming CapEx.

You got -- 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?

Well, listen, Ken, it's a good question in that, usually, the way I like to look at it is, if you have a downturn in 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 early part of next year.

And because we give guidance on a year-to-year basis, that's what's happening.

So we are not.

Absolutely, there are some areas where we're going to spend money faster, and we can see that.

So if we have some opportunity, even after we make the adjustment in the capital to be able to use some of that cash because we're more efficient, we'll spend it this year at this point.

But stay tuned, and we'll adjust it as we see what happens to the business.

Jennifer, anything else?

No, I think you summed it up, Jim.

And just the local fleet numbers?

I'm sorry, Ken, you broke up.

You want the locomotive fleet...

Oh, just the locomotive fleet.

Jim mentioned it.

Listen, we've got so many locomotives parked that I'm just about embarrassed to say how many we have parked, okay?

So and there's some noise in it right now because of the business drop, but this is the number I look at, Ken.

And I gave it to you that 18% improvement in 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 our best locomotives, and you can see the fuel efficiency that we said 5%, but you could take some of the noise out, but a true 4% betterment.

So listen, locomotives, we have a lot of them parked, and we continue to park them every day right now with where we are with the business levels.

And Jim, there's something we don't talk a lot about.

There's 2 ways to look at our stored locomotives.

There's locomotives that are stored and intended to be stored for a while.

That is we don't anticipate their need in the next week, 2, month.

And then Jim's got other locomotives that we store in a status called at-the-ready.

And at-the-ready are literally ready to be pulled out and put back into service on a moment's notice.

And so that mix is changing every day but the at-the-readies allow us to react to business upturn, which we hope we see, and we hope it's a strong V. That would be great.

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

So 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?

You want to start, Jim?

Or you want me to?

Sure.

Listen, I'll start real quick.

Just to clear up the whole discussion about people.

We 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 Jim's comment, that 19% is our train and engine crew.

So that's a part of our workforce, not the whole workforce.

So to your question, Scott, then about full year OR.

We've pulled that guidance off the table, and it really is going to be dependent on what happens in the marketplace.

The commentary that you've heard us have here today.

Again, we would love to see volumes come back and, in that environment, we feel very, very good about our potential.

I mean you saw what we did with down 7% volumes in the first quarter, making very strong improvements in our operating ratio.

And that's the, kind of, call that the proof statement, test case, whatever words you want to put around that in terms of what we're capable of.

So we're just not going to give any guidance right now because we don't have great visibility to what volumes are going to be other than where we think second quarter is going to end out.

But let's stay tuned on that.

And if that changes and starts to turn around a little bit, you bet.

I mean we think we've got great long-term opportunities.

Absolutely.

We're looking forward to when our markets start returning to normal because the -- to Jennifer's point, the first quarter is an absolute proof statement of what we're capable of doing.

So I guess that's actually my follow-up, if I can.

Like so a 59% in the first quarter, to me, as a full year run rate, is somewhere in the mid-50s range, whenever -- not this year, obviously, but whenever things normalize.

Is there anything about that 59% in 1Q that you feel is sort of not sustainable that we shouldn't think about sort of what the earnings power is in a couple years when...

Not making a commentary on your math on what it translates into for the full year.

That 59% in the first quarter was clean.

Our next question is from the line of Tom Wadewitz with UBS.

And impressive performance against a tough backdrop, clearly.

I wanted to ask you, Jim, if you could offer some thoughts on the kind of the PSR process.

It's like -- sometimes you say, well, a softer volume environment makes it a little bit easier to make some big structural changes.

I think it'd be fair to say this is more than a soft volume environment.

So how do you think about the PSR changes, the pace of change and whether you can take another look at structural position, so you say, hey, we had 14 carload terminals, we now have whatever your number is, maybe we -- it doesn't need to be 9, it could be 5 or 6?

How do you think about that?

Just in terms of -- I'm thinking of the intermodal and carload terminal network and whether you have now a chance to say, "Oh, we can ratchet that down even further," or maybe it's outside the terminal network or something else.

Tom, you know me by now, I don't like to get way ahead and guess on what we're going to do next.

And a lot of it is driven by car flow.

So I think we have -- we've shut and idled 5 hump yards already, and there's probably a possibility for more depending on how the traffic flows are.

And we'll do that at the right time.

Fort Worth caused us a little noise for a while in the first quarter operationally.

And so you need to make sure you bed these things down where you don't impact the operation.

But we see opportunity still and it doesn't matter where the volume is.

It -- whether the volume is down or up, I see productivity that we can and efficiency that we can get out of the place.

And it's across the board.

It's how we manage the number of people that we have that need to manage, the processes we've put in place for intermodal.

Later on this year, we're going to have consolidation in Chicago down to 3 intermodal facilities from 6. So I think that's great for us.

We are looking at what we're doing down in the LA basin to see how we can give a better service product and be able to be -- touch the customer in a better way in the whole LA basin.

So Tom, there's still lots out there.

I see lots of opportunity, but I'm being real -- hopefully, I'm being smart, and I'll let Lance and Jennifer and Kenny give me the feedback.

But we're trying to do this -- or I'm trying to do it in a systematic manner where we don't impact the customer to the point where we lose business because of what we're doing, and we're able to do it.

And I think -- and I've been here just over a year.

I think it's been successful, great leadership from everybody at the table here with me.

This is a team effort.

So I'm real happy, and there's lots of opportunity left.

I might as well just answer it.

Someone's going to ask me what inning I'm in.

It's not football season anymore.

It's not baseball season, and I hope it was baseball season, but it's still like I got half of the game to go yet.

Okay?

Tom, part of your question also kind of is contemplating, again, depth and length of this downturn.

And that's what makes our decisions the most difficult right now.

So right now, what we've got is decisions that we've made about resources like our ops boards, so that some part of our furloughed crews are more accessible to us quickly.

We've talked about at-the-ready locomotives.

We've taken an action here on our nonagreement workforce.

And instead of taking a large-scale of permanent force reduction, we thought for this period of time, it's more prudent to ask our nonagreement workforce to take required unpaid leave of absence, a week, a month, for 4 months.

All of those actions are with an eye towards recovery is going to occur.

We need to be ready for it.

We need to be ready for whatever shape it takes.

And still do what's prudent in the current environment.

We think we got that balance.

Right.

Okay.

That makes a lot of sense.

For my second question, just wanted to, I guess, ask a question about the kind of price versus volume calculus.

I guess as the truck market is -- there's obviously a lot of excess capacity out there.

So probably in the near term, trucks compete a bit harder and maybe they can even compete on longer length of haul that might affect you, whereas, we normally think eastern rails are more affected by truck.

Kind of how do you manage the pricing approach?

It's great to be really disciplined on price, but that could cause some further share loss to truck in certain segments on a near-term basis.

So I don't know, Kenny or Lance, if you want to offer thoughts on the kind of V versus truck and price versus volume approach?

Sure.

Let me start, and Kenny will give it some fine points.

Parts of our pricing philosophy, the core pricing philosophy is unchanged, and that's about having to generate a return on whatever piece of business we secure and making sure that our price reflects our value.

What's cool about having fundamentally shifted our cost structure is that it opens up more markets to us.

Clearly, trucks are very competitive in a loose market like what we've got right now.

There's going to be elements of truck competitive business that make no sense for us to pursue because somebody in the trucking world is willing to take it just to generate enough cash to survive.

But our cost structure opens up a broader segment of that market to compete and win and generate an attractive return, and we're doing that.

Yes.

The only thing I'll mention is that, again, just to go back to the car velocity number, and that's an average number.

There's some marked areas where that car velocity number is much greater.

And it has given us the ability to go out there and get the pricing that we believe we should be receiving for the service product that we're providing to our customers.

There is tremendous value that we're talking about when we talk to our customers and we're renewing business and going after new business and asking them to open up their truck lanes for us.

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

Sorry, but just a follow-up on the productivity targets, again.

A little bit confused because based on the commentary about the changing range, it does sound like the productivity target is at least somewhat related to volume growth.

So is it fair to say that you're now at the stage of PSR where kind of a lot of the cost side, like the fat in the company has been taken out, and it's mostly going to be an efficiency/volume-driven OR improvement story from here?

I'll start, Ravi.

This is Lance.

So the short answer is, it's always easier for us to get productivity in a growing environment than in a shrinking environment.

We've proven we can get it in a shrinking environment.

When you shrink at 25%, it gets really, really difficult.

It doesn't go to 0%, but it just gets pretty difficult.

In terms of PSR and fat, clearly, at 59% operating ratio, there's less easy opportunity than there was at 69% operating ratio.

But there's still opportunity.

And Jim's outlined many of them.

Lance, I think you hit that perfect, unless there's a follow-up on it.

Yes.

And maybe, Lance, I have a follow-up for you, kind of, just thinking big picture.

Do you think a situation like this and the unprecedented shutdowns you're seeing right now, again, going back to the adage of never waste a good crisis, I mean do you see some of your customers making permanent changes in their domestic or global supply chains?

I'm assuming some of that is a risk for you, some of that is an opportunity.

Kind of where do you see are some of the kind of permanent changes coming to supply chain in the future?

That's a great question, Ravi.

And for sure, there are going to be some opportunities that grow out of this crisis.

One is we do hear our customers talking about evaluating their supply chains with an eye towards reliability being valued a little bit higher.

That means near-shoring or on-shoring some of those supply chains.

And that would be a good thing for us, generally speaking.

We haven't necessarily seen that happen.

I think it's way too early.

I don't think you're going to see wholesale investment happen until suppliers, the industry starts becoming more confident in the demand side.

But clearly, I think we're going to see that.

And that will benefit Mexico, it will benefit our to-and-from Mexico business, and it will probably benefit our inside the United States business as well.

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

So I wanted to follow-up on some of the intermodal commentary.

Obviously, we've seen a substantial decline in fuel prices, and it doesn't sound like the energy market is coming back anytime soon.

Does that change the way you think about long-term growth in your domestic Intermodal business?

Or with the service improvements that you've seen and continue to see, do you think this is still a GDP-plus business when the economy bounces back even if the energy market doesn't bounce back?

Yes, there's no change in how we look at the business.

What's changed is that our service product is much, much stronger now and much more reliable and gives us an opportunity to compete and win out there.

And as I mentioned, being 2/3 into the bid season on the domestic side, we feel really good about the wins that are out there.

I can't predict what's going to happen with GDP when it -- where those numbers are going to go.

But I can't predict that the service product is going to allow us to compete and win.

And I feel just as confident and feel just as committed to what our commercial team is doing on the international intermodal side, too.

Okay.

And maybe as a follow-up on mix.

Obviously, it was positive here in the first quarter.

But going forward, how are you thinking about general merchandise versus intermodal on a relative basis as we kind of think about the magnitude of the volume decline that we could see in the near term?

And also just the timing of the recovery between those 2 segments.

Just wanted to get your high-level thoughts on how those businesses perform on a relative basis as we think about the implications for mix?

Well, if you're thinking about relative basis and for that, you're talking about margin by commodity or product line, we like them all.

And we've talked about how we've done a lot of work to fundamentally improve the intermodal margins to a point where we'd love to see that grow like anything else.

But this mix that you saw here has a lot to do with the fact that we're getting $1,200 a box for every move of intermodal versus $2,500 or $3,000 for a carload box.

Jennifer?

Yes.

I mean in the first quarter, obviously, the -- if you just look at it on an average revenue per car basis, of our 3 business teams, the group that has the highest average revenue per car is our industrial team.

And that's the group that had a little bit of growth for us here in the first quarter.

So those are the lines.

We've started giving you guys the revenue ton-mile information on a broader segment of business.

And so I would just continue to watch that.

We don't know what business is going to come back first.

And so that's really going to be the driver in terms of how the economy restarts and where that comes through.

If it comes through in the manufacturing sector, that might be a positive for us.

If it comes through more on the consumer goods and we're seeing more intermodal move, you'd see it there.

I'm less worried about mix and more concerned about what's absolute volume is going to do, and that's where we want to see the market come back to us.

Our next question comes from the line of Brandon Oglenski with Barclays.

Jennifer, you did say that you have solid free cash flow expectations after dividends under various scenarios.

So I'm going to sneak it in there and ask if you're willing to share some of those scenarios with us even hypothetically.

But more importantly, I guess that's insinuating, maybe in a lesser demand environment, we can still protect the dividend.

I guess would you be looking at leverage as that first source of liquidity?

Or would it be capital spending?

I guess where are the priorities in a weaker environment?

So I appreciate the question about sharing the scenarios, but obviously, you know that I'm not going to do that.

In terms of our cash priorities, I mean, you've heard us consistently talk about we're going to invest in the business for the long term.

That's what we're in this world to do is run a railroad and serve our customers and grow the business.

And so Jim laid out very well for you how we're prioritizing that.

And so first dollar goes to the capital investment.

And we have our dividend, which we're very much committed to.

We view that as an important part of our return to shareholders.

And then the excess free cash we have been using for share repurchases.

And that priority in terms of our spend is unchanged at this point.

Yes.

The first claim goes to keeping the railroad running and running well.

Yes.

The next question comes from the line of Jason Seidl with Cowen.

Most are asked and answered at this point.

But I wanted to circle back to a remark that 2/3 of your domestic intermodal business has been sort of repriced, so you've gotten through that.

Just wanted to see if you guys can give a little bit more color on that commentary and how you think that pricing market is going to shape out going forward?

And what are your plans as you approach that, particularly since you are improving your service product?

So what you're offering now is a lot different than what you're offering, let's say, 3, 4 years ago.

Yes.

Well, thanks for that question.

You've got a number of things going on.

We've got a much stronger service product, which is going to help us as we're competing against all the move, call it, barge, rail or truck.

But we also have a lower cost structure, which helps us get into some of these newer markets.

What I would tell you is that because our service product has been so strong, I think that's been the change X factor for us to go out and win this new business.

We are able to get a longer haul or compete more closely with the truck piece.

So we're going to continue to price as a service product, we expect to be over inflation.

There's nothing that shows me we wouldn't be able to do that, even though, right now, there's a lot of truck capacity out there.

Okay.

So you'd say that of the 2/3 that you priced, that's been over inflation, and you expect the remaining 1/3 to be priced over inflation as well, even in this difficult market?

That's true.

That's correct.

That's the excellent way to think about it.

The next question comes from the line of Walter Spracklin with RBC.

So I want to focus my questions on the rebound, not so much when it's going to happen, but how you're going to handle the different potential shapes of that rebound that you alluded to.

And I guess the first question perhaps for Jim.

I mean there's a lot of complexity out there with regards to nonessential goods kind of being filling warehouses and essential goods having run.

I think when things start to clear out, is there any concern that a sharp recovery is going to be aggravated by the complexity of cleaning out the system, so to speak?

How are you preparing for if we do see a faster rebound?

How you handle that without being barred down?

Yes.

Walter, listen, it's a great question because it's -- this is an extraordinary event.

It's affecting the economy in a completely different way than I think anything we've ever seen.

So we don't know whether it's going to be a quick up or it's going to be a slow up, but this is what we've done.

We are -- we have prepared ourselves with the key ingredients.

You need to operate the railroad and rebound.

So it's locomotives, people.

We are out there every day, and I give everybody in Union Pacific and all the people that are out there working that are still out there working every day, not just at Union Pacific, accolades because our employees have come to work.

And we have had no major issue with being able to move any of our trains.

But what we're doing to get ready is the railroads in a safe manner.

We're out there putting capital in.

We have locomotives ready to go.

Like, we've got enough locomotives that it could go back to where we were before, they are in a state where within hours, we can turn them back on and put them out in the fleet if we need to.

We have people, instead of furloughing them completely, we're carrying a few extra and not just a few, but we've decided that it was a smart thing to do, to be able to put the people back on to be able to operate the train.

So we've done everything we can to handle, whether it's a V, whether it's a U or it's -- and I'm hoping for a sharp turn.

I hope the economy, personally, turns.

And everybody can get back to work and live the life that we had before.

But if not, we're set up to be ready for it, Walter.

And the second question here is related to a prior question, and Lance answered the question by the opportunity being near-shoring.

Two other opportunities I wanted you to comment on.

First of all, does this give you, I guess, on Jim's side, the ability to bring people back at lower resource levels and easier to do than cutting them down to that level, if this didn't happen?

And secondly, how would you -- how would rail fit into the e-commerce trend in a world where e-commerce is ramping up far faster than previously anticipated?

How does rail provide a solution if this new world sees a lot more e-commerce purchases?

Let me start, Jim?

Yes.

And then I'll turn it over to you.

So on the e-commerce question, clearly, we're seeing e-commerce continue to penetrate in retail.

We think that changes the opportunity.

We don't think it decreases the opportunity.

The change is supply chains.

We still have a need to get from bulk to distribution site.

Clearly, we're not part of a hours or 1-day delivery, but we don't have to be.

What we have to be is part of the supply chain that gets product to the forward distribution site that can fulfill like that.

And we are, and we continue to do that.

So we -- what it really says is we need to have our eyes wide open on the winners in that world and align well with them.

And then I'll let Jim answer the question on resources and bringing them back.

Walter, when you -- when we have -- whatever starting point we're at and we're at, at this point, absolutely, because we see productivity gains.

So we will not recall the same number of people back to work as we adjust it down.

So no ifs, ands or buts, whether it was -- whether we were full workforce and we have productivity gains that would have brought it down or now as it comes back, we just won't need quite as many people as we have before.

Train size is one.

We've got -- if we can keep the train size up, we're going to need less people.

So that's a good way to think about it, Walter.

Our next question is from the line of Bascome Majors with Susquehanna.

Jennifer, I understand the desire not to guide headcount in a very volume-uncertain environment.

But I was hoping you could kind of give us a dollar framework for the executive pay temporary reductions and the sort of rotating leave of absences you've got with the management workforce.

Thanks, Bascome.

I'm going to decline that opportunity.

It's part of everything that we're doing to manage our cost structure and pulling all the levers across the board.

And you've heard us talk about that before, and you saw it in the first quarter, where we were able to make improvement in every one of our cost categories.

And so this is part of certainly the comp and benefits line, but we've got work going on across the board.

And that's really the way that we look at it is in that context.

Our next question comes from the line of Jordan Alliger with Goldman Sachs.

Just a quick question.

Obviously, you had a pretty good degree of variable costs in the first quarter.

When you think about it, the expenses, total expenses, as you look out over a full year basis, how would you describe or ascribe variable costs versus fixed costs or semi-variable on sort of the whole cost base?

Yes, let me get started, and I know Jennifer has been thinking about this a lot.

We did look backwards into the last recession, the Great Recession, and looked at our variable versus fixed at that time, what we communicated to the world and what we actually executed.

And we did a better job through the recession than we thought based on what we thought was variable and fixed at that time.

I can tell you, going into this downturn, we're even more agile and flexible than we were in the last downturn.

Yes.

I mean when we went back and did some of that work that Lance referenced, I think, by the time we got through the recession, kind of, call it, end of 2009, we would have said we were maybe 80% volume variable or so adjusted for fuel.

We said we were more than 100% already here in first quarter of 2020.

So again, we have already been taking, and that's the blessing of what we embarked with PSR and Unified Plan 2020 is, we have already made significant changes in our cost structure.

And when you think about yard closures, increasing train length, all of those things, and the locomotive productivity we're seeing, that's given us great -- much greater volume variability.

Obviously, in the short term, those areas that are the most volume variable for us are going to be on the comp and benefits line.

Fuel is almost 100% volume variable for us.

Equipment rents is also pretty volume variable.

And then everything else is something that, over time, we'll continue to work through.

But that's where, again, I think we're just in a very good position and in a different position than we were in the last recession because of all the work that we had already undertaken and have in the pipeline because of our Unified Plan 2020 efforts.

And Jordan, Jennifer, I think the critical difference is speed of decision-making and speed of implementation.

That's fundamentally different today and a benefit.

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

Jennifer, I wanted to ask you on the -- or Kenny, maybe, I want to ask you the step-up in the mix price benefit from fourth quarter to first quarter.

How much of that extra tailwind is from the mix side versus the price side?

And if you think about within the commodity groups, is there any one particular driver of commodities that led to a better mix from a price realization standpoint?

Well, thanks for the question, David.

But we are not giving specific pricing guidance any longer.

I think we made that statement a couple of quarters ago.

So I'm not going to break that out for you.

But I think consistent with my commentary, the less intermodal was certainly a part of that mix, and you think that, that is our lowest ARC business that we have on the railroad.

And that was offset somewhat by the fact that we also had sand lower.

But net-net, it was still a positive.

Again, if you really look at that industrial line, that's where we had some good growth in the quarter, and that's where we have some strong ARC.

Okay.

And then I guess, as you think about the separate line on fuel, the fuel surcharge headwind sort of moderated a little bit into lower oil price.

Does that also have like a mix component in it?

Or like what are we looking at there in terms of the sequential step down in that fuel headwind into a lower fuel price environment?

Well, I think as I said, fuel was actually a tailwind for us in the quarter, and that's kind of an all-in view in terms of the price, the surcharge, all taken together in terms of how we view that.

There is a little bit of a lag year-over-year as we move into the second quarter as fuel prices have come down so steeply.

But we don't see that as being a significant driver relative to the -- how we look at things on a mix basis.

But is there a reason why the surcharge headwind to revenue would moderate into lower fuel on the front end?

I'm just trying to understand how that number...

Oh, as a headwind to revenue?

Yes.

No.

I mean it is a factor in the overall ARC, as you see, less fuel surcharge that's going to be reflected in the ARCs we have.

But as I mentioned, it does lag a little bit in terms of how fuel price comes down and how our surcharge comes down.

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

Just one for me.

Jennifer, the buyback cause, completely prudent, trimming the CapEx also makes a ton of sense.

I assume you talked with the credit agencies around the time of your debt issuance earlier this month.

So just any change of tone from that perspective around leverage targets.

And do you feel you're kind of bumping up against the top end of 2.7x?

And how that impacts your decisions to take on some of the additional liquidity, which you said you don't need right now, but just in case 2Q bleeds into 3Q at these levels?

Sure.

So we've used the 2.7 as just kind of a shorthand math for you all in terms of expressing where we view that within kind of the context of our credit ratings.

We -- to your point, we did have dialogue with the credit agency around the time of our $750 million issuance.

We share with them kind of our best thinking, some of our scenarios.

And as I mentioned in my comments, they're comfortable with where we're at.

Certainly, if we had a need to go back into the markets, we would have that dialogue again.

But we feel very good where we're at.

We believe we've got good access to credit.

If we need that, and we've obviously got some other things in terms of our revolver and the receivables facility, if we need to.

But those are, I would call more of a belt and suspenders approach, but feel good about it.

I have no concerns there.

And I believe the rating agencies feel good with us as well.

Our next question is from the line of David Ross with Stifel.

Jim, wanted to talk about that first slide you put up regarding service level goals, specifically around manifest and auto trip plan compliance.

Is there anything you guys have articulated as to where you want that to go from 64% today?

History tells me that different customers -- the manifest business is a little bit different.

This tries to reflect what we've committed to the customer.

And we're measuring ourselves harder than what we actually committed to the customer as far as what their trip plan is on their individual railcar.

So you never get this number to 100%, just the same as the intermodal number never gets to 100%.

It's impossible to get there.

But I think I'd like to see it another double-digit improvement.

And I think if we do another double-digit improvement the way we measure it, we remove most of the noise or a lot of the noise on how the interaction is of us living up to what we've committed to the customer.

So that's the way I look at it, David.

Jim, a little bit of the -- whatever the number was, 64%, 65% in the first quarter was self-inflicted.

You mentioned on the call that we had a little noise around our change in Fort Worth at Davidson Yard where you stopped humping at Davidson.

And that impacted that to a degree for probably 6 weeks.

So I would expect, to your point, we're growing that number to start with a 7.

And what's not reflected in that number is that the transit times have gotten better.

That's one thing.

And I can tell you, our customers are acknowledging that the service on that carload side has gotten better.

Yes.

Right.

And are there any commodities that are harder to handle that would reduce the productivity of the manifest network?

So if you have more of X than Y, it slows it down.

Absolutely.

If you have cars that you don't touch as often, makes it easier for you to be able to handle.

So if we were a bulk railroad, and some people are bulk railroads more than we are at this point, then you load them up in one place and you haul them to the other.

I'm going to say as my mother could do that.

So it's a lot easier to get a number out of it.

But so yes.

But other traffic, we have to handle in multiple and more steps, you have a better chance to have a failure somewhere in the process.

And we love that business.

I love it all.

We love that.

We've got a railroad that can fill up.

So I love it all.

Well, I'm sure your mom's glad you're following in the family footsteps.

Well, we have to finish this call with a little humor.

A hell of a little rumor.

And David, to everybody, I should have mentioned it even more, and I know Lance will, but listen, I'm real proud of everybody and also everybody out there that is working to keep this country going from people at the front line everywhere.

So thank you very much.

This concludes the question-and-answer session.

I will now turn the call back over to Lance Fritz for closing comments.

Thank you very much, Rob, and thank you all for your questions.

Thank you for participating with us this morning and for doing what you need to do to keep yourselves and your families, your loved ones safe and healthy.

We look forward to talking with you again in July to discuss our second quarter 2020 results.

Until then, I wish you all good health.

Take care.

Ladies and gentlemen, thank you for your participation.

This does conclude today's teleconference.

You may now disconnect your lines, and have a wonderful day.