Union Pacific Corporation (UNP) Q1 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Union Pacific First Quarter Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's Web site. 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 Sakes; 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 woman and men of Union Pacific continue to connect American businesses and communities to each other and to the world, whether it's stocking a home pantry, supplying essential goods to healthcare providers, or moving critical building blocks for U.S. industries, they're getting the job done and they're not missing a beat. Their spirit shows up in so many ways. I see it in our health and medical team, looking out for the safety of our employees. I see it in our operating team, moving the goods that make a difference in peoples' 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 the Union Pacific to navigate the uncertainties that lie ahead. We'll start with Jim, and an operations update.

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

Thank you, Jim, and good morning. For the first quarter, our volume was down 7%, primarily due to declines in our Premium and Bulk business groups. The decrease in volume was partially offset by a 5% improvement in the average revenue per car, and drove freight revenue to be down 3% in the quarter. So, let's take a closer look at how the first quarter played out for each of our business groups. Starting with Bulk, revenue for the quarter was down 5% on a 7% decrease in volume, partially offset by a 2% improvement in average revenue per car. Coal and renewable carloads were down 19% as a result of softer market conditions from historically low natural gas prices and a mild winter. Looking ahead, we expect continued challenges in coal as natural gas futures remain low and customer stockpile stay at high level. Weather conditions will also continue to be a factor. Volume for grain and grain products was up 4% primarily driven by strong export ethanol volume. This was partially offset by reduced shipments of export wheat. Fertilizer and sulfur carloads were up 7% predominantly due to strong domestic fertilizer shipments. Finally, food and beverage was up 2% in unit as we saw strength in beer shipments become slightly offset by reduced refrigerated and dry food which were impacted by a challenging truck environment. Industrial revenue was up 3% with a 3% increase in volume and flat average revenue per car due to mix. Energy and specialized increased 10% primarily driven by strength in petroleum as favorable Canadian spread facilitated stronger crude oil shipment to the Gulf earlier in the quarter. However, with the reduction of oil prices in the past week, we expect crude oil shipment to be impacted in the near term. Forest products volume was flat. Reduced paper shipments were offset by increased lumber shipments due to strong housing start and a mild winter during the quarter. Industrial chemicals and plastic shipments grew by 4% due to the strength in domestic and export plastic shipments along with strong demand of detergents and chemicals. Metals and minerals volume decreased by 3%, reduced sand shipments from the impact of local sand and drilling decline were partially offset by continued strength in rock shipments in the South coupled with increased metal shipment. We expect to see continued challenges in sand with oil prices remaining at lower level. 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 shut down OEM in North America in the last few weeks of March, resulting in a 1% decline in volume year-over-year. Domestic intermodal volume declined 5%, driven by soft market demand and surplus truck capacity coupled with weakness related to the pandemic later in the quarter. International intermodal volume was down 24% during the quarter. Weakness early in the quarter was related to challenging comparisons with 2019 driven by accelerated shipments related to the tariff policy implementation. Further weakness was driven by pandemic-related supply chain disruption that began in China had slowly impacted much of Asia. Looking ahead, there remains quite a bit of uncertainty surrounding this global pandemic that we are facing. With the freefall in economic indicators over the past few weeks and uncertainty about when we will see the COVID pandemic curve starts to flatten out, an accurate assessment of 2020 is hard to pinpoint at this time. As you can see, our volume in the second quarter has started off slowing with the volume down 22% so far driven by auto production shutdowns and retail closure as U.S. demand is constrained by the pandemic-related social distancing and quarantine. Many of the auto manufacturing plants are scheduled to be shutdown until at least early May. Already our auto shipments have been down around 80% in the second quarter so far. Likewise, the recent projections in Mexico indicate that some manufacturing sectors like auto will be shut down for similar time periods as well. However, the CARES Act that was recently signed offers some upside to open the economy for business and improve unemployment for America plus it also encouraging to see that much of Asia is restarting production along with China's recent purchases of U.S. grains. More importantly, I like to make this point clear, we are not letting the uncertainty of the economy hold us back. We are staying focused on what we can control. The good news is that the lower cost structure combined with the improved service products that we've achieved with Unified Plan 2020 is a competitive advantage for us, customers are recognizing it, and awarding us new business. As Lance and Jim mentioned before, the railroad has never run better. I want to thank our employees as they are taking the necessary precautions to stay safe and healthy, so we can keep the operations running for our customers. We will continue to stay in close contact with our customers, and we are ready when the supply chains recover. As demand improves, we expect our strongest service products will place us in a great position to win incremental opportunity. 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 five 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 two 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 production -- fuel price reductions favorably impacted our quarterly operating ratio by 80 basis points and added $0.04 earnings per share. Setting inside those items, core margin improvement for the quarter was a remarkable 3.8 points, and added $0.18 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 results 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 increase 13% due to increased debt levels, while income tax expense also was higher up 11% due to higher pre-tax 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 five-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 provide a summary of our first quarter operating expenses. Through our Unified Plan 2020, and G55 + 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 6200 full-time equivalent versus last year. Sequentially, our workforce is down 2%. Breaking the year-over-year, reduction is 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 last year-over-year weather-related cost 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 operations. Our consumption rates for the quarter improved 5% versus last year to a first quarter best level. Decreased costs associated with maintaining smaller active locomotive fleet as well as lower weather-related costs were key drivers of the 10% reduction in purchase services and materials expense. In addition, as we use both our locomotive and car fleet 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 reserve 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 lower 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 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 that 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 of 2020 as a result of the strong productivity focus embedded in unified plan 2020. We've also taken more than 1500 basis points off of our operating ratio since the great financial crisis in 2008, 2009. That further strengthens our ability to manage through today's challenges and emerged 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 purchases were funded in part from our January debt issuance. Union Pacific 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 2.7 times, in line with our previously stated goal of maintaining strong investment grade credit ratings no lower than BBB plus 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 a 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 leveraged 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 three 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 car loadings are currently down 22%, and our current view is that volumes for the full quarter could be down around 25% or so. With volumes declines of that magnitude we are taking actions across the board to right-size our resources and manage expenses. Even with aggressive action however, it is unlikely we can improve our second quarter operating ratio on a year-over-year basis with that level of volumes 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 well 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.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Allison Landry with Credit Suisse.

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

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 if the -- 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 out those pieces that are [technical difficulty] -- 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 too? And if there's any way to sort of parse out what percentage you think would be the structural takeout versus how much would likely come back with a recovery in demand? Thank you.

Okay. So, so far, I'll tell you the team has done a spectacular job. We are -- actually our train size has grown in April, not come down. So are full-bore, everyone is 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.

Okay, excellent. Thank you.

Thanks for the questions.

Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.

Thanks, operator. Hi, everybody. Thanks for taking the question. Jennifer, I didn't fully touch your comment around the OR for the second quarter. Did you say it was going to be down year-over-year or were you preparing 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 volumes 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 --

Right, okay, got it. Okay, that makes sense. Thanks for the clarification, 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 the labor and other costs of the business that might need to ramp back up. So if you could just talk to us how you manage that, I mean, 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 -- the hopefully V-shaped recovery on the other side. Just help us think about how you manage through this dynamic that's a little bit unique?

Well, listen, that was a multi-person answer question. I think Jennifer wants to jump in, 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 in 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 in 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 purposefully, 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 of less money, but they're available real quick to return to the railroad so we don't impact. Service is key for us, you know, 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 were more than 100% volume variable, but I think when you thinking about how we look at the second quarter, I mean obviously 25% down volumes, and you -- your earlier questioner 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.

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

Thank you.

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

Hey, good morning. Thanks for taking the question. Maybe one for Kenny, can you just go through the impacts of energy across the portfolio, specifically look, you mentioned crude before, but want 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, I'll walk you across pretty quickly here. The coal prices have just dropped here even over the last few months. There are some levels that we haven't seen in a while. I'm sure you see the same for curve forecast, and we'll see what happens there, but there is nothing that leads us to believe there is 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 off, and there's more production that will come on. That is a positive for us. We're hearing that the -- or we know that the operating rates, where a number of our plastics producers has 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.

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

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

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

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

Great, it sounds like there's a calculation aspect to the kind of like your core pricing, so just wanted to make sure that was clear. Thank you.

Okay.

Your next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Hey, thanks, good morning. 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 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 given 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 is 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. Rail 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 purchase 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 still don't have that line of sight and what's going to happen. So we're not in a position, I'm not in a position even though we're talking to him 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 that you can hear very well educated, deeply experienced economists that still think about a V-recovery. You hear about W-recoveries, U-recoveries, a slow hockey stick ramp-up. I think our collective belief at this point is it's sharp and deep, it's going to last for a while, and recovery is going to be some kind of ramp but probably not terribly steep, and so, we're looking for those markers and nothing would please me more than to be wrong about this 25 percent-ish, and see some time in the second quarter that we're starting to see demand firm and our supply chains reflected, but there's a lot that needs to happen between here and there.

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

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

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

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

Got it, that's very helpful. Appreciate the time. Thank you.

Thanks, Chris.

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

Great. Good morning. Just a follow-up on that on your volume outlook there, Lance, I guess if you're running it down kind of 20, 22 now, and you're targeting down 25% for the quarter, are you expecting things to get worse from here or 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 two 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 is a lot of unknowns. I don't think we know enough yet to know what's left to deteriorate in the demand economy versus how that's going to be offset by recovery. So there's just a lot of moving parts and I think above 25%-ish is a good marker for us to plan our activity around. We've mentioned it to you as a result, and we'll hope for better. Kenny?

I want to just give you a view from my seat when our commercial teams go then 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 improving to make us more competitive with truck light 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 two-thirds along the way through our big season. We felt very good. I mean we felt 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've 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 felt really confident wants the market comes back.

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

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

No, I think you summed it up, Jim.

Okay, nice. Thanks again.

Thanks guys, and just the local fleet numbers.

I appreciate the thought.

I'm sorry, Ken, you broke up.

Oh, just the local fleet, Jim mentioned.

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

Hi, Jim. There's something we don't talk a lot about. There's two 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 to month, and then, Jim's got other locomotives that we store in a low -- 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 week, that'd be great.

Thanks for the time guys there. I appreciate it.

Thanks, Ken.

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

Hey, thanks. Good morning, guys. So I wanted to just follow-up on something I heard earlier, Jim and 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 are going to start, Jim…

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

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

Right.

So that's the part of our workforce, not the whole workforce. So to your question, Scott then about full-year or no you know we 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. You know, we feel very, very good about our potential and when you saw what we did was 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 for 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 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 is a full-year run rate, somewhere in the mid-50s range, whenever, not this year, obviously, but whenever things normalize. Is there anything about that 59 and 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 of years, when things…

Not making a commentary on your math on what it translates into for the full-year. That 59 in the first quarter was clean.

Right, thank you.

Thanks, Scott.

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

Yes. Good morning, and impressive performance against the tough backdrop, clearly. I wanted to ask you what Jim, if you could offer some thoughts on the kind of the PSR process it's like, sometimes you say well like, a softer volume environment 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, we had 14 carload terminals we now have whatever your number is. Maybe we -- it doesn't need to be nine; it could be five or six. 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 networks, it's something else?

Tom, by now, I don't like to get away 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 shut and idled five hump yards already, and there's probably possibility for more depending on how the traffic flows are, and we'll do that at the right time. Fort Worth cost us a little noise for a while, in the first quarter operationally and so you need to make sure you bet these things down well you don't impact the operation, but we see opportunities 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 put in place for intermodal. Later on this year we're going to have consolidation in Chicago, down to three intermodal facilities from six. 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 see -- touch the customer in a better way and the whole LA basin. So Tom, there's still lots out there. I see lots of opportunity but I'm being rolled. 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 I -- there's lots of opportunity left, I must have just answered it, someone's going to ask me what any I mean, 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.

Hey, 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 exports, 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 non-agreement 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 non-agreement workforce to take required unpaid leave of absence, so a week a month for four 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, calculate, I guess is 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 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. I don't know Kenny or Lance, if you want to offer thoughts on the kind of view 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 is 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 is going to be elements of truck competitive business that makes 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 is some mark 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 or the service product that we're providing 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 lines for us.

Right. Okay, thank you for the time.

Thank you,Tom.

Our next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your questions.

Thanks. Good morning, everyone. I'm sorry, but just to follow-up on the productivity targets again a little bit confused because in a based on the commentary about the changing range, it does sound like the productivity target is somewhat related to volume growth. So is it fair to say that you are now at the stage of PSR a lot of the cost side like the fat and the company has been taken out, and it's mostly going to be an efficiency/volume driven or improvement story from here?

Okay. 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 zero, but it just gets pretty difficult. In terms of PSR and fat clearly at 59 operating ratio, there is a less easy opportunity than there was at 69 operating ratio, but there is still opportunity in Jim's outlined many of them.

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

Yes. That's maybe, Lance, I have a follow-up for you, kind of just thinking big picture. Do you think a situation like this going to be 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, and does that mean some of that is at risk for you, some of that as an opportunity kind of what do you see are some of the kinds 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'll benefit, Mexico it'll benefit our, to and from Mexico business, and it will probably benefit our inside the United States businesses as well.

Great, thank you.

Yep. Thanks, Ravi.

And next question is from the line of Justin Long with Stephens. Please proceed with your question.

Thanks and good morning. 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 given if the energy market doesn't bounce back?

Yes. There is no change in how we look at the business plus changes that are service product is much, much stronger now and much more reliable and gives an opportunity to compete and win out there, and as I mentioned we are in two-thirds 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 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 merchandize 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 two segments? Just wanted to get your high level thoughts on how those businesses perform on a relative basis if we think about the implications of mix?

Well, if you are thinking about relative basis and for that you are talking about margin by commodity or product line, we like them all, and we have talked about how we've done a lot of work to fundamentally improve the intermodal margins to a point where we would love to see that grow like anything else, but this mix that you saw here has a lot to do with the fact we are getting 1200 bucks a box for every move of intermodal versus 25 or 3000 bucks for a carload box. Jennifer?

Yes. I mean in the first quarter obviously just look at it on an average revenue per car basis of our three business teams, the group that has the highest average revenue per car is our industrial team, and that's the group that has a little bit of growth for us here in the first quarter. So, those are the lines we have sort of given you guys the revenue ton per 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 in the consumer goods and we are seeing more intermodal move, you see it there. I am less worried about mix and more concerned about what absolute volume is going to do, and that's where we want to see the market come back to us.

Okay, I will leave it there. Thanks for the time.

Thanks, Justin.

Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your questions.

Hey, good morning everyone, and thanks for taking my question. Jennifer, you did say that you have solid free cash flow expectation after dividend under various scenarios. So, I am going to sneak in there and ask if you are going to share some of those scenarios with us even hypothetically, but more importantly, I guess that continuing - you know, maybe lesser demand environment you can still protect your dividend. I guess would you be looking at leverage as that first source of liquidity, or would 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 am not going to do that. In terms of our cash priorities, I mean you have heard us consistently talk about we are going to invest in the business for the long-term that's what we are 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 are prioritizing that, and so, the first dollar goes to the capital investment, and we have our dividend which we 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.

Okay, thank you.

Thank you. The next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.

Well, thank you, Operator. Most are asked and answered at this point, but wanted to circle back to remark that two-thirds of your domestic intermodal business has been sort of re-priced, so you have 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 markets 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 you were, what you were offering, let's say three, four years ago?

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 modes 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 will 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 fleet. 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 said that other two-thirds that you priced, that's been over inflation and you expect the remaining third to be priced over inflation as well, even in this difficult market?

That's true. That's correct. That's an excellent way to think about it.

Fantastic, appreciate the time as always and everyone please be safe out there.

Thank you, Jason.

Thanks, you too.

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

Thanks very much. Good morning, everyone. 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 non-essential 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 bogged down?

Walter, listen, this is a great question. 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 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 at Union Pacific and all the people that are out there working that are still out there working every day, not just the Union Pacific accolades because our employees have come to work, and we have had no major issues 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 following them completely, we're carrying a few extra and not just a few but we decided that it was a smart thing to do that 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 ask, wanting you to comment on? First of all, does this give you, I guess on Jim 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? Thanks.

Let me start Jim 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. It changes supply chains, we still have a need to get from both to distribution site. Clearly, we're not part of hours or one-day delivery, but we don't have to be. What we have to be as part of the supply chain that gets product to the forward distribution sites that can fulfill like that, and we are and we continue to do that. So 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 we have whatever starting point we're at and we're at this point, absolutely because we see productivity gains, so we will not recall the same number of people back to work as we adjusted down. So, no if ands or buts, whether it was, whether we were for workforce when 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 had 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.

I appreciate the time.

Thank you.

Our next question is from the line of Bascome Majors with Susquehanna. Please proceed with your questions.

Yes, thanks for taking my question, Jennifer, you understand the desire not to guide headcount in a very volume uncertain environment, but I was hoping you could kind of give us $1 framework for the executive pay temporary reductions and the sort of rotating leave of absences you've got with the Management workforce. Thanks.

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.

Thank you.

Thanks, Bascome.

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

Yes, hi. Just a quick question, obviously, had a pretty good degree of variable costs in the first quarter, when you think about it the expenses, total expenses now 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? Thanks.

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 in 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, 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 taken 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, pretty volume variable, and then everything else is something that over time, we'll continue to work through, but that's where I again, I think we're just in a very good position or 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 that's fundamentally different today and a benefit.

Great, thank you for those thoughts.

Yes, sure.

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

Hey, good morning guys. Thanks for taking the time. Jennifer, I wanted to ask on the -- or Ken maybe, I wanted 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 the price utilization standpoint?

Well, thanks for the question, David. But we're 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 when 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, just wanted to -- I'm just trying to understand how that number.

Oh, the headwind to revenue?

Yes.

No. I mean it is a factor in the overall arcs. 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.

All right, thank you.

Our next question is from the line of Jon Chappell with Evercore. Please proceed with your questions.

Thank you. Good morning everyone. 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 leveraged targets and do you feel you're kind of bumping up against the top end of 2.7 times, 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 rating. 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 belts-than-suspenders approach, but we feel good about it. I have no concerns there, and I believe the rating agency feel good with us as well.

All right, thanks, Jen.

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

Thank you. Good morning everyone. 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 with different customers the manifest business is a little bit different. This tried to reflect what we have committed to the customer, and we are measuring ourselves harder than what we actually committed to the customer as far as what their trip plan is on the individual railcar. So, you never get this number to a 100 just the same as the intermodal never gets to a 100. It's impossible to get there, but I think I would 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 have committed to the customer. So, that's the way I look at it, David.

Hey, Jim, a little bit of whatever the number was 64-65 in the first quarter was self-inflected. 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 six weeks. So, I would expect to your point, we are growing that number to start with a seven.

What's was not reflected in that number is that the transit times have gotten better. That's one thing, and I can tell you that our customers are acknowledging that the service on the carload side has gotten better.

Yes.

And are there any commodities that are harder to handle that would reduce the productivity with 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, we are bulk railroad. Some people are bulk railroads more than we are at this point then you will load them up at one place and you haul them to the other. I am going to say is my mother could do that. So, it's a lot easier to get a number of it, 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 got a railroad that can fill up, so I love it all.

I am sure your mom is glad you are following in family footstep.

Well, we have to finish this call with a little humor, [multiple speakers] and David, and to everybody, I should have mentioned even more, and I know Lance will, but listen, I am really proud of everybody and also everybody out there that is working to keep this country going from people at the frontline everywhere. So, thank you very much.

Thank you.

Thank you. 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 participating with us this morning and for doing what you need 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.