Union Pacific Corporation (UNP) Q1 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Union Pacific First Quarter 2021 Conference Call. At this time, all participants are in a 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 website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may begin.

Thank you and good morning, everybody and welcome to Union Pacific's first quarter earnings conference call. With me today in Omaha are Eric Gehringer, Executive Vice President of Operations; Kenny rocker, Executive Vice President, Marketing and Sales and Jennifer Hamann, our Chief Financial Officer. Before discussing first quarter results, I want to recognize our employees for their work during the major winter events we experienced in February and early March. Many of the communities we serve faced unprecedented weather conditions that damaged factories and made surface transportation nearly impossible. Our employees rose to the occasion to maintain or restore critical service in those areas while dealing with weather impacts art to their own homes and families. We owe a debt of gratitude to our team as they again proved the resiliency, their grid and their dedication to serve. Moving on first quarter results, this morning Union Pacific is reporting 2021 first quarter net income of $1.3 billion or $2 a share. This compares to $1.5 billion or $2.15 per share in the first quarter of 2020. Our quarterly operating ratio came in at 60.1%, reflecting the impact of weather and rising fuel prices in the quarter. As you will hear from the team, and see these items, our core results improved 150 basis points. We delivered strong productivity in very challenging conditions and based on our core performance, I remain optimistic about the remainder of the year. In fact we are affirming our 2021 guidance. While it was a tough quarter, that does not dampen our expectations. We're in a terrific position to take advantage of the improving economic outlook and grow our volume. Our service product, our cost structure and continuing productivity set us up for an outstanding year. To get us started reviewing the details, I will turn it over to Eric for an operations update.

Thanks, Lance, and good morning. The operating team rose to the challenge of this past quarter as it responded to numerous weather challenges across the network. The speed with which the team recovered the network is a testament to the transformation PSR has had on our operations. Moving to Slide 4, we began 2021 with strong key performance indicators across the rough board as the operations were solid and running smooth in January. However, the winter weather challenges we faced in February and March across our network had a heavy impact. The South in particular is not accustomed to the whether they faced. In fact, the weather across our southern region represented the second worst stretch of cold temperatures in over 70 years. Through the team's hard work our network recovered quickly, and we were able to mitigate, most of the impact to our service. In fact, we recovered twice as fast compared to our recovery from the flooding in 2019 and significantly faster than any disruptions we experienced before implementation of PSR. While the operating team is frustrated with the mixed results you see on Slide 4, we will return all of these measures to a state of constant improvement through execution of our transportation plan. Weather heavily impacted the results you see in freight car velocity, freight car terminal dwell and train speed. However, we continue to make good progress on our efficiency measures as both locomotive and workforce productivity improved in the quarter. These improvements were driven by our continual evaluation and adjustment of our transportation plan as well as through our continued efforts to grow train link. Intermodal trip plan compliance decreased in the quarter as weather and a surge in intermodal shipments of 12% year-over-year placed significant pressure on that service. Our manifest service remained solid during the quarter, driving improvement in trip plan compliance for manifest and autos. The team did an excellent job of maintaining this service product throughout the weather impact. Slide 5 highlights some of our recent network changes. We continue to push train length to drive productivity while striving to provide a better service product to our customers. Train length was almost 9,250 feet in the first quarter, which was up 10% or 850ft year over year. One enabler of this great progress is our siding extension program. During the quarter, we completed two sidings and began construction or the bidding process, and another 18 sidings. We continue to make progress in the redesign of our operations in the Houston area to drive efficiency. We are leveraging the recent investment of our Englewood facility and we consolidated the blocking of local cars at our Settegast yard, allowing us to curtail operations at four of our smaller yards around the area. This allows us to bypass those smaller yards and deliver cars directly to the customers, eliminating extra handlings, improving transit time and reducing crew start. We also curtailed switching operations at our North Council Bluffs yard by leveraging surrounding yards, which will reduce local train starts. As I look to the future, I'm excited about the full pipeline of initiatives we have to drive productivity throughout our network and enhance our service product. Turning to Slide 6; everything we do is done with the focus towards safely accomplishing our work. We understand the continuous improvement we need to make and safety, and we have the right plan to achieve our goal. We remain focused on executing on the PSR principles that transformed our operation and there still remain many opportunities for us to improve our operations and drive productivity we have work to do to return our service product to the level we expect. We need to return intermodal trip plan compliance to the mid to upper '80s, manifest trip plan compliance to the low to mid '70s and freight car velocity, the low '20s. We're on that path today as we fully recognize the importance of providing our customers with a highly reliable service product. With that, I will turn it over to Kenny to provide an update on the business environment.

Thank you, Eric, and good morning. Our first quarter volume was down 1% from a year ago due to weather events and the leap year in 2020. Solid gains in our intermodal on export grain markets were offset by declines in our industrial and energy related market. Freight revenue was down 5% for the quarter due to the decrease in volume, coupled with the lower fuel surcharge and negative business mix that offset...that were offset by our core pricing. Let's take a closer look at how each of our business groups performed in the first quarter. Starting with our bulk markets, revenue for the quarter was down 1%, volume decreased by 2%, which was partially offset by a 1% increase in average revenue per car, due to the positive mix in traffic and core pricing gains. Coal and renewable carloads were down 16% as a result of continued high customer inventory levels, our contract law and weather-related challenges, which were partially offset by higher natural gas prices. Volume for grain and grain products was up 16%, driven by increased demand for export grain. Fertilizer carloads were down 4% as reduced export potash shipments were partially offset by stronger demand for industrial sulfur. And finally, food and refrigerated volume was down 6%, driven primarily by decreased demand for food service due to the ongoing pandemic as well as weather related challenges. Moving on to industrial, industrial revenue declined 13% for the quarter, driven by an 11% decrease in volume. Average revenue per car also declined 1% from a lower fuel surcharge and mix. Energy and specialized shipment decreased 14% primarily driven by reduced crude oil shipments due to unfavorable price drag and reduced demand. Forest products volume grew by 7%, lumber was driven by strong housing starts, along with an increase in repair and remodel. We also saw strength in brown paper, driven by increased box demand and low inventory. Industrial chemicals and plastic shipments were down 9% for the quarter, due to the severe storm in May and February that cost plant interruptions for producers throughout the Gulf Coast as well as feedstock shortages in certain sectors. Metals and minerals volume was down 16% primarily driven by weather and market softness in rock coupled with reduced frac sand shipments associated with the decline in drilling and surplus in local sand. Turning now to premium, revenue for the quarter was up 2% on a 6% increase in volume. Average revenue per car declined by 4% reflecting mix effect from greater container volumes and fewer automotive carload shipment. Automotive volume was down 13% for the quarter as manufacturers struggled with semiconductor-related part shortages and extreme winter weather disruptions to the supply chain. Finished vehicle and auto parts shipments were impacted similarly with finished vehicles, down 13% and auto part, down 14%. Intermodal volume increased by 12% in the quarter. Domestic intermodal was up 16% year-over-year due to continued strength in retail sales in recent business land parcel in particular benefited from ongoing strength and e-commerce. International intermodal volume grew 8% despite poor congestion related to strong growth in containerized import. Now looking ahead to the rest of 2021, for our bulk commodities, we expect a continued negative outlook for coal, electricity demand and natural gas prices are forecasted to improve have high customer inventory levels, combined with increased demand for other energy sources and a contract law presents a challenging market. However, there is continued strength for export grain as China remains committed to incremental ag product purchases in 2021 calendar year, with clearly a tougher year-over-year comparison in the back half of the year. We also are optimistic with our biofuel shipments as domestic production is expected to increase, which will drive new volume at new UP destination facility for bulk renewable diesel feedstocks and finished products. As we look ahead to our industrial commodities, the year-over-year comps for our energy market are favorable however, there is still uncertainty with the speed of the recovery in those markets. We are encouraged by the stronger forecast for industrial production. Full year 2021 is now forecasted at 6.5%, a 2% point improvement since we spoke in January. Plastic volumes will also remain strong for us in 2021 as production rates increase. And lastly, for premium, we expect strong uplift in both our automotive and intermodal businesses. Automotive sales are forecasted to increase from 14 million units in 2020 to closer to $16 million in 2021. We are optimistic that automotive production will normalize and supply chain issue for parts are expected to improve later in the second quarter. With regard to intermodal, Limited truck capacity we're encouraged conversion from over the road truck to rail. Retail inventories remain historically low, restocking of inventory along with continued strength in sales should drive intermodal volumes, higher this year. Before I hand this over to Jennifer, I'd like to express my appreciation to our operating and engineering teams for their hard work and dedication to keep our network running in the unprecedented weather event in February and March. Both our commercial and operating teams work closely together to quickly recover operations for our customers and win new bit. With that, I'll turn it over to Jennifer to review our financial performance.

Thanks. Kenny and good morning, I'm going to start with a look at the first quarter operating ratio and earnings per share on Slide 13. As you heard from Lance, Union Pacific is reporting first quarter earnings per share of $2 and a quarterly operating ratio of 60.1%. Comparing our first quarter results 2020 the extreme winter weather previously discussed negatively impacted our operating ratio by 160 basis points or $0.16 to earnings. In addition, rising fuel prices throughout the quarter and the associated 2-month lag on our fuel surcharge recovery programs impacted our quarterly ratio by 100 basis points or $0.11 per share. Despite these challenges, our core operations and profitability continued to improve, delivering 150 basis points of benefit to our operating ratio and adding $0.12 earnings per share. Looking now at our first quarter income statement on Slide 14, operating revenue totaled $5 billion, down 4% versus 2020 on a 1% year-over-year volume decrease. Operating expense decreased 3% to $3 billion demonstrating our consistent ability to adjust costs more than volume. Taken together, we are reporting first quarter operating income of $2 billion, a 7% decrease versus last year. Interest expense increased 4% compared to 2020 resulting from an increase in fees related to our debt exchange with some offset from lower weighted average debt level, income tax decreased 7% due to lower pre-tax income, net income of $1.3 billion decreased 9% versus 2020 which when combined with share repurchases resulted in earnings per share of $2, down 7%. Looking more closely at first quarter revenue; Slide 15 provides a breakdown of our freight revenue which totaled $4.6 billion, down 5% compared to 2020. Factoring in weather and last year being a leap year, the volume impact on freight revenue was a 75 basis point decrease. Fuel surcharge negatively impacted freight revenue by 200 basis points compared to last year. The decrease was driven by the lag and fuel surcharge recovery as well as slightly lower fuel prices. Our pricing actions continue to yield pricing dollars in excess of inflation. However, those gains were more than offset by a negative business mix and reduced freight revenue 225 basis points. Although our grain shipments increased in the quarter, this impact was more than offset by very strong intermodal volumes coupled with declines in petroleum and industrial product shipments. Now let's move on to Slide 16 which provides a summary of our first quarter operating expenses. Starting with compensation and benefits expense down 3% year-over-year. First quarter workforce levels declined 12% or about 4100 full-time equivalent generating very strong productivity against only a 1% decrease in volume. Specifically, our train and engine workforce continues to be more than volume variable down 11%, while management, engineering and mechanical workforces together decreased 13%. Offsetting some of this productivity was an elevated cost per employee, up 10% as we tightly managed headcount-based wage inflation and higher year-over-year incentive compensation as well as higher weather-related crew costs. Quarterly fuel expense decreased 5%, a result of lower volume and prices. Our fuel consumption rate was essentially flat as productivity initiatives were offset by the additional fuel needed as a result of the extremely cold temperatures. Purchased services and materials expense improved 6% driven by our loop subsidiary utilizing less drayage as a result of lower auto volumes as well as maintenance costs related to a smaller active equipment fleet. These savings were partially offset by additional weather-related expenses. Equipment and other rents fell 7% driven by higher equity income from our ownership in TTS. The other expense line increased 22 million this quarter driven by higher casualty expenses that were primarily related to adverse developments on certain claims. This increase should not be viewed as an indicator of current safety record. As we think about expenses going forward recall that last year in the second and 3rd quarters. We took temporary actions in response to the pandemic reducing management salaries and closing shop. These actions produce a 2% headwind in total for second quarter expenses predominantly impacting compensation and benefits and purchased services and material expenses, and for a full-year comparison excluding, we now expect both purchased services and materials as well as other expense to be up mid-single digits versus 2020. Lastly, we expect our annual effective tax rate to be slightly higher than previously thought, around 24% looking now at productivity on Slide 17, in spite of the $35 million weather headwind, we continue our solid productivity trend in the first quarter generating $105 million. Productivity results were led again by train length improvement contributing to strong workforce and locomotive productivity as Eric detailed earlier. Turning to Slide 18 and our cash flow, cash from operations in the first quarter decreased to $2 billion from $2.2 billion in 2020, a 9% decline despite that free cash flow after capital investments increased 5% to over $1.4 billion, highlighting our ongoing capital discipline as well as a slightly slower start to our capital programs. This generated a cash flow conversion rate of 106%. Free cash flow after dividends also increased in the quarter, up $115 million or 17%. Supported by our strong cash generation and cash balances we returned $2 billion to shareholders during the first quarter as we maintained our industry-leading dividend payout and repurchase shares totaling 1.4 billion. We finished the first quarter with a comparable adjusted debt-to-EBITDA ratio of 2.8 times on par with year-end 2020. Wrapping up on Slide 19; despite the slow start to the year, we remain confident in our ability to show improvement across all three performance drivers' volume, price and productivity, we do face some volume headwinds declining coal demand the lingering impact of industrial, chemical plant closures from the February storm and the semiconductor shortage that is continuing to impact autos into the second quarter. Setting that aside though, there are even more reasons to be encouraged about '21. The pace of vaccination rollouts, strong consumer and trade demand, and an improving industrial production forecast. And we are increasingly optimistic about our ability to drive business to the railroad. Since early March, we have seen an improving demand trajectory with March averaging roughly a 157,000 seven-day car loadings and we crossed the 160,000 plus threshold in April. So with the strength we're seeing in our volumes, we now expect full year carload growth to be around 6%. Our guidance around full-year pricing, productivity and operating ratio improvement in the range of 150 to 200 basis points, all remain intact. However, with our updated volume outlook, we will likely be closer to the 200 than the 150. We clearly have work ahead of us to achieve these goals. But a broader economic picture and good traction on our PSR initiatives, give us a path to success. Turning to cash and capital, our capital spending plan remains at $2.9 billion for the year, well within our long-term guidance of below 15% of revenue as we generate capacity through our PSR focus. We will maintain our industry-leading dividend payout ratio and are committed to strong share repurchases. Specifically, we plan to return approximately $6 billion to our shareholders in 2021 through share repurchases. Before I turn it back to Lance, I'd like to add my thanks to our exceptional workforce. Mother Nature tested our capabilities this quarter and once again our workforce showed they are ready for the challenges and are committed to serving our customers. So with that, I'll turn it back to Lance.

Thank you, Jennifer. As you've heard me say many times, our first priority will always be see, I'm confident in our ability to meet our high expectations in that area. With today being Earth Day it feels appropriate to highlight the actions we're taking to protect our planet. In February, we announced our science-based target to reduce greenhouse gas emissions by 26% against the 2018 base by 2030. Additionally in our 2021 proxy statement we rolled out our ESG strategy, which we call building a sustainable future 2030, we will expand on this strategy in our 2020 building America report, which is going to be published in early May in conjunction with our Investor Day. We're reinforcing our commitment to delivering value to all of our stakeholders. As you heard today, we're very optimistic about the future. Our service product made more resilient through PSR and lower cost structure is enabling us to win new business and expand opportunities that will ultimately grow the top line. Looking to the rest of the year and improving economic outlook, our continued commitment to value-based pricing that exceeds inflation and the opportunity for strong productivity gives us confidence to affirm our 2021 guidance. Union Pacific is poised to take advantage of a strengthening economy by leveraging our best in industry franchise to produce long-term growth and excellent returns. So with that, let's open up the line for your questions.

Thank you. [Operator Instructions] And our first question is from the line of Amit Mehrotra, Deutsche Bank. Please proceed with your question.

Thanks. I guess you went from no follow-up for me this time. Okay, so I'll just stick to one. Good morning, everyone. Jennifer, I just wanted to focus on the 200 basis points of margin improvement this year. I think that implies 56.5 OR for this year, which would be...which would be impressive, it sort of implies you guys hitting kind of a mid '50s or better this year at some quarter maybe in the back half of the year. I'm wondering if you could just talk a little bit more about that mix is obviously getting a little bit better, but if you can talk about what you think needs to be achieved to get to the high end of that 150 million 200 target.

So thanks for the question. So yes, I mean starting off the year with a 60.1 and be able to get to in that range of 56.5 to 57 and as we said, we're hoping to get closer to the 200 basis points of improvement. That certainly says we have to improve over the balance of the year and make very strong improvement to hit those targets. And so in terms of what gives us confidence, it really is the ability to win in the marketplace. As we mentioned that we're expecting volumes to be around 6% or so up year-over-year as you might recall back in January our original guidance was 46%, so we're now seeing strengthening in the economy. Kenny and the team winning new business and so, those are all very positive signs. And then again, the efficiency piece, certainly we were impacted in the quarter with weather and fuel, they took their toll on the first quarter OR. But we still generated 150 basis points of core improvement. And so as we look to grow volumes and put some of those transitory issues behind us. We feel good about the rest of the year.

Thank you. Thanks.

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

Hey Thanks, good morning guys. Lance just given everything going on, I wanted to ask an M&A question. So, you guys have been very focused on operating ratio and over time, I sense perhaps more of a focus on volume and overall earnings growth going forward. I wondered, does that change your view around M&A and if it's perhaps time to start thinking more about that, and then on the specific transactions on the table right now, do you have a view or a preference of CN, in case your Cpk is one a bigger threat to you, is perhaps one that's more likely to cause you to think about extending your own network reach.

Yes. Thanks, Scott. I'll start with the last part of the question-and-end with the first part, regarding whether the CPU or the CN we're to acquire the KCS, our concern It really is the same. What we're focused on is with the STB says the next Class 1 merger must provide, and that is an enhancement to the competition and clear improvement for all customers, through that to be true in any transaction our current service product has to remain intact. So our concern is making sure that we have good operational and commercial access to all the customers that we serve currently in Mexico and in other parts, whether this near or on the CP railroad or the CN railroad as regards to that transaction, the first thing we're focused on is making sure that the STB sets up a level playing field for all Class 1 mergers and in that does not apply the waiver that they created potentially for the KCS back in 2000-2001. We think those new 2001 merger rules should apply to every Class 1 merger, so that the STB has a full opportunity to vet the game plan to enhance competition by the transaction. And then, if you think a little bit about what we're focused on, you're exactly right. We're focused on the three stools to drive enterprise value for Union Pacific, the three legs of the stool, excuse me, we're focused on making sure we get value-based pricing in the marketplace, we're focused on making sure that we're efficient and productive both in assets and an operating expense and we're focused on growth and I think growth is going to play a bigger role, it has to. And then as regards, whether or not that changes our stance on overall M&A activity, our big concern on any Class 1 merger is that in the STB's regulatory review, they are committed to enhancing competition and they are also committed to taking a look at the downstream impacts of weather creates incentives to remain in stability in the industry for further consolidation. In that context, we see a lot of opportunities for long-term value impact that's not in our best interest. We're going to be very, very active and engaged in this process with the STB and of potentially directly with the acquirers and we're going to first and foremost focused on making sure that we protect our interest and then help the STB enhance competition as they seek us.

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

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

Okay, thank you for the thoughts Lance. I appreciate it.

Next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.

Yes, hey, thanks, good morning! Lance, wanted to pick up on some of your comments about some of the long-term growth potential. I guess in the context of the competitive environment and the improvements that UP has been making under its PSR progress over the course of the last couple of years, maybe give us a little bit of a sort of preview maybe how you think about some of the growth opportunities for the franchise, if you go out maybe just beyond this year, but obviously including this year, it seems like your macro is going to be a help to you but has service gotten to the point where maybe the competitive landscape in the Western United States is a bit more favorable for you or does that sort of factor into your outlook when you think about some of the multi-year growth potential of the company.

Good question Chris and thank you for asking it. So when we think about growth, there is a number of ways that we're able to attack it, one is opening markets to us that hadn't been open before either through a more consistent reliable service product, which is true or a lower cost structure, which is also true. So we see clearly more opportunity happening. Another way to do it is to expand our reach and that can be done any number of ways, it can be done by a new intermodal terminal in Minneapolis, it can be done by a new transload, it can be done by taking property that already exists around the Dallas intermodal terminal and turning it into opportunity to cite new industry on it. All of that is underway and Kenny maybe I'll ask you to make some observations and give us a few examples of the kinds of growth opportunities you're achieving right now.

Yes. So, I think so. First of all, Chris, you know, it really does start with the service product. Eric and his team have done a really fabulous job of improving the service performance and it shows up in things like car velocity. So for example, as you look at our intermodal network is that velocity becomes more reliable and more consistent, but we're able to compete right up there with truck on that domestic network. The same is true with parcel. And then as you look at the carload business, the lower cost structure has really opened up market for us, we're able to compete and have been able to win in lower value commodities in areas like bulk, we're able to access customers that may not have want to take large positions on either fertilizers, or some commodities like grain that's been encouraging to us, on the auto side we've been really excited about new lines that we've won that we, that weren't there in the past, and then finally, Lance, as you talk about product sales that we talked about the product offering in Pocatello, where we're going to be able to provide a match back opportunities for containers getting back to the way.

Yes, and Kenny, there's something else that Chris, that we haven't mentioned yet, two big drivers of near-term wins. One is our technology base our technology platform. You all know we rewrote our ERP over the course of the last number of years and it's a micro services architecture. What that means is APIs are really easy for us to do. We've already got something approaching, 4 dozen active APIs with our customer base. Those are helping us win business with electric vehicle manufacturers for instance that really care about the data streams technology platform is winning and then our ESG story is winning. There is a number of customers that are looking to us to help them reduce their carbon footprint and as you know that's becoming a much, much more important part of the conversation with a number of our customers. So there's a lot of moving parts there Chris and from our perspective, there is a lot of opportunity.

Yes. Okay, great. That this great color. Appreciate the time. Thank you.

Thank you.

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

Thanks everyone. Lance, I can give you one to one question, first is on the guide. I mean obviously you guys had a bit of a tough circumstance here with the weather that's completely understandable in 1Q, but given the much stronger second half macro outlook than 3 months ago, did you consider going to raising the guidance at all and also not to steal your thunder from next week, but can you give us a sense of what we can expect at the Analyst Day in terms of broad topics that you may address?

Yes great, thank you. Ravi, so we do evaluate our guidance periodically. Of course, every quarter is an opportunity and we've delivered what we think is a good prudent middle of the fairway, a set of expectations as we look forward, we're already kind of moving ourselves up in the range, which is meaningful, 200 basis points of improvement is not jump change year-over-year, particularly when you're at the performance level that we were at last year at 58.5 that would mark us being a very, very strong industrial performer. So there is no more news on the second half guidance. I would also just remind you that there is some kind of very high optimism on what the second quarter is going to look like, just because the comps are so easy, but then when you get the 3rd and 4th quarter, we're starting to lap now the real acceleration in domestic intermodal, particularly the parcel world and we're also then starting to lap some of the real strength in grain. So it has yet to be seen exactly how that plays out. But even in that context, our guidance stands. And then in terms of what to expect for our Investor Day next week. So what you're going to hear is you're going to hear us lay out just what we talked about there, we're going to...we're going to lay out how we serve our customers and how that continues to improve and what to expect from us there in real granular firms. So you can, you can get a good sense of the work streams and what to expect, you're going to, you're going to hear us lay out how we expect to grow, will name customers, we'll talk about very specific opportunity and work streams that you can hold us to account for. We'll talk about what winning looks like in that context and kind of reaffirm of course guidance this year. And then we're going to talk about a couple of markers we're going to lay down for the next 3 years. And then we're going to start with a nice overall context of how doing that together with all of our stakeholders really comes to reality. So we'll talk about our ESG story. We'll talk about what's going on with our employees, the communities that we serve. Because I think that's a critically important part of how we run this railroad. We have a social license to operate and all 7300 communities that we serve and they need to hear us talk about how much we value them and our relationship with them and how we keep it healthy. So you're going to hear all of that you're going to see it in 2 hours and you're going to see the leadership team of Union Pacific tell that story collectively.

Excellent, looking forward to that. Thank you.

Thank you. Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Good morning. Thanks. Just wanted to go back to the topic of service and growth, and specifically the trip plan compliance, not to say that both the manifest and Intermodal took a step back from weather, but Eric, I think you mentioned earlier, you know, sort of meeting to get the manifest trip plan compliance back to the low to mid '70s. So I mean, that's really where you need to be longer term to start to chip away at the opportunity to convert some of the merchandize volume from the highway or do you need to be somewhere in the '80s or '90s range to really be competitive with truck and then if you could just sort of help us through, when you think you could get there if that could start to accrue in 2021 and more about '22 and beyond story?

I appreciate your question, Allison. So my guidance today is really focused on the short-term as we think about going into the second quarter that we're in right now and what the team focused on responding to and recovering trip plan compliance both on the intermodal and the manifest and the auto side. To your point into the discussion we've had so far this morning, growth is going to take a lot of different forms. I remain completely open to the idea that as we continue to progress forward both in 2021 and beyond. We're going to see opportunities to be able to grow that service product very intentionally broadly, but then also some growth opportunities, will demand certain operations that we will continue to work with Kenny on as he finds those opportunities and we partner together to bring them on the railroad. So we have a complete dedication to growing TPC broadly, but then also remain very close with Kenny to ensure that we're providing the service in certain opportunities to continue to grow that business.

Eric, let me jump in and part of your question Allison was kind of what should the thresholds be and our experience at least right now. And I would say into the near-term tells us trip plan compliance on the manifest side about 75-ish plus or minus better more is better, but there is a threshold at which more costs more than it's valued. And then on the intermodal side, we do think high '80s '90s is kind of where that needs to be parked to be reliable and truck-competitive.

Okay, just to clarify the manifest the mid-70 like [indiscernible] at what point do you reach the threshold? We just mentioned that the cost is at low '80s or should we think about the mid-70s mark?

Look Allison, it's not a hard and fast rule. If you look backwards when volume goes away like it did in the second quarter you can run a railroad really smoothly and efficiently and get those numbers jacked up pretty good. I would just say somewhere in the mid '70s is great for manifest if it starts creeping up into the mid '80s in mid-90s, it's probably more service than is valued and not the same in intermodal, intermodal there's an appetite for '90s and they'll pay for it.

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

Okay, I understand. Thank you, guys.

Next question is coming from the line of Brian Ossenbeck with JP Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking the question. One for Eric. If you could just give us an update on the metrics through April here on the key performance, KPIs. I think that'll be helpful to hear how things are moving on some of the more detailed ones that you track. And then just from a bigger picture perspective workforce productivity is still pretty strong despite the challenges offer all-time record last quarter and how do you view that in the context of some of the growth that you're mentioning can that still improve independent of the growth and what the mix might look like? And then if I can squeeze one in for Lance, can you just give us an update on, we're talking about labor on the train crew size negotiations. I realize it's still early, but we're seeing more about putting potentially a conductor on the ground in the I guess the next few years. If and when that gets negotiated. So if you can just bring us up to speed on...on what that means and how that's progressing. That would be helpful as well. Thank you.

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

I also asked about the labor prudent.

Yes, so on the labor productivity side, we think about that, 2 ways. Is there more opportunities to continue to grow that number? Absolutely there is. When we think about how do you make sure you're doing that, you're really focused on, are you getting the retention rate that you expect out of the people that are currently furloughed, we're sitting at 75% to 85% on that. So we're still very effective had been able to retain when we need to be able to bring our people for growth and at the same time, our total furloughed count on the TE&Y side of 1400. So there is a strong pool there to draw upon, so no concerns at this time.

And then I'll build off that labor productivity commentary to answer your labor negotiation question Brian, which is we are right in the middle of national round. It's been underway for over a year. The railroads are pursuing crew size changes in the capital locomotive, if successful, that would put one of the individuals on the ground servicing, more than one train. We think that's got a lot of positives to it, first and foremost is a, is a lifestyle improvement for half of the capital locomotive in that circumstance, one of the most difficult parts of being train and engine men on the railroad is that their work schedules are unpredictable, they match the flow of trains, which are 24/7, 365. If we can put somebody on the ground, we can create that work into shift work and scheduled shift work which is a real benefit. There are other benefits of course it's a real productivity move, but that's far from certain that we'll be able to get that in this round we're pursuing it of course it's got to be negotiated.

Thank you, Eric. And I appreciate it.

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

Great. Good morning. Just a follow-up on a couple of questions. In the first quarter you said last year or first part our 46% carload target for the year. Moving to the top end of that, but if can you mention IP up 200 basis points since you set that target. Do you still see yourself as being conservative by staying in that target, or are there any losses we need to consider in share and then thoughts to meet that? Just to follow on the last question, your employee changes maybe Jan you can throw. I mean, down 12%. What your thoughts are on employees by year-end? Thanks.

Let me take the conservative or not conservative question if I could, the short answer is no, I mean 46% was our best thinking before 6%, our best thinking now we'll keep tuned up on it. We've talked about the potential headwinds late in the year. But yes, it's our best thinking.

And I would just add to that and Allison wants a large commentary. We're also starting in a little bit worse off than we anticipated when we laid out our guidance for you. We had a tougher first quarter than how things actually played out with what happened with weather. So, but to your headcount question, Ken in terms of how we see that playing out where it call it just shy of 30,000 employees. Today, we think that we should be able to even at the high end of that range, kind of keep steady state relative to those, you may see some ups and downs a little bit. We may actually have to do a little bit of hiring in some small locations if we don't have adequate crew base there. You heard Eric refer to the 1400 furloughs, but we plan on being very efficient with the crew base. And so we think even up to that high-end of the range that we gave, the 6%. We should be able to keep that pretty flat with some little seasonal fluctuation.

Appreciate it. Thanks.

Thanks.

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

Hey, good morning everyone and thanks for taking my question. So I guess, I want to follow-up on Ken's question there, Lance or Eric or maybe you can, Jennifer with where trip plan compliance is where you want to get it, it just feels like a repetitive scene when rail volumes come back historically, we see, not just Union Pacific but industry service metrics really lag. So I guess what can be different this time that you think you can do of such of our resource base because I think historically, you know the answer was always throw more light going to more locomotives assets employees that is no.

Yes, that's a great question, a very fair question Brandon. What's different for us is a demonstrated track record now, in our world of PSR where when volumes return, we don't crater a case in point. Perfect. Great. Case in point is last year, last year volumes dropped as dramatically as we've ever seen in our recorded history from, call it late February, early March into April and then subsequently recovered as fast as we've ever seen. And if I recall in the recovery period from Q2 to Q3 to Q4. We continued to improve our metrics on service, that's a proof statement right now when you go from 120,000 seven days to a 160,000 seven day at the end of the year. Now clearly, you're loading resources into a pretty empty network at that point, but you're still having to do the work of loading resources into the network. I think the same is true right now. I'm going to make up a number. If we go from today's volume to a 180,000 seven day, we've got on a network, a physical franchise that can handle that pretty readily and the job would be to efficiently layer in the train starts, that would be necessary to crews, the locomotive and we've demonstrated, we know how to do that and should be able to do that. Eric, take the color.

And one of the greatest tool to do that is all of our continued efforts on train length as, as we reported this morning, we're up 10%, 850 feet. But when you're thinking about the service product and being able to deliver that, one of the best tool you have is a very fluid network as we think about 2.5 years ago, we would have had 800-ish trains running around of any given day. Now, we're at 600 and 605 a day, that's 25% less potential variability events, which is the primary driver for any degradation and trip plan compliance, so continuing to leverage train link on top of how we operate in our terminals both key opportunities to consistently drive that number up to that mid 80 number.

Thank you.

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

Thank you. Good morning. Kenny, you noted the tight truck capacity in the favorable outlook for taking share off the highway, beyond the weather, the West Coast congestion issues still seem to be in the headlines and the rails seem to be getting thrown at the bus, a little bit as part of the problem, not the solution, can you speak to the progression of clearing some of the backlog, especially as it relates to the West Coast ports? And then also, what's your capacity to actually take advantage then of this favorable competitive dynamic that you have from a cost perspective? The headlines you are reading, I have got a thought in, Eric as you pitched in back me to talk about on opportunities, but, look, when you look at the port congestion that's going on there, there's a lot going on there. There's a lot of supply chain, the court conversations with a lot of ocean carrier and a port here recently, so let me just break down here a few things. One, we know about the increased demand that's been pretty flattened, but one other thing that you look at, another variable that you look at is the warehousing capacity. So in a lot of cases, the warehouses out there aren't just full, they are unable to physically take the container, so we have seen those containers still left out there on the floor. There are some challenges on the trade side, certainly some labor issues at the terminal, and then, if you look at the trucking capacity to even go long-haul, there are tightness there. So, what we're focused on here is what we can control. And Eric, if you wanted to talk about what we're doing from an operational standpoint.

Sure. And Jon, I appreciate the question because the Union Pacific is a critical component of that entire supply chain Kenny was mentioning. So when we look at being able to ensure that we have the resources up against that we're always looking at how, what's the total footage of trains that we're able to depart from the LA Basin specifically out of ICTF and so if we go back in time from July to October last year, we had 60,000 feet of capacity. Now as we sell that volume continue to increase. We were intentional and ahead of time increase that to 68,000 in the middle of November and then actually again in April 1 of this year, we took that to 80,000 now that's on top of and driving a 25% increase in our train starts out of the LA Basin also to support that growth. So you see, I hope you see Union Pacific as the component in that process, that's doing everything they can to bring on that volume and efficiently, get it out of the LA Basin and into the Inland Empire, inland terminals, which helps the overall fluidity with the entire supply chain.

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

Okay. Thank you, Kenny. Thanks, Eric.

There your next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. I wanted to go back a little bit to the some of the consolidation question Lance said. I think your comments this morning and, in the past, have been kind of cautious about rail consolidation, are you essentially against consolidation. Would you say. We just don't think it should happen, or is that kind of overstating it and then in terms of gateway. I mean, obviously, you do a large amount of business at the Laredo gateway, how do you protect yourself. Yes. CP CN get care few and there is some essentially bridge traffic that you have from Laredo to Chicago that would potentially be at risk? So how do you think about what you need to do to protect yourself at that gateway?

And Tom, good morning and thanks for the questions. We've been very clear on consolidation. You mentioned that we think that the process the STB is committed to undertake in terms of reviewing any Class 1 merger to ensure it both enhances competition has better outcomes for all customers and that they contemplate the downstream impacts when you boil that all together and note that the STB has full authority to put in whatever remedies and regulations are required to achieve that we've always thought there is lots of opportunity in that to destroy long-term value for the industry. That's our big concern. If we are constantly evaluating long term enterprise value creation, part of that is weather not mergers make sense for us and that's always been a primary sticking point. We'll have to navigate this current process to see how it comes out. And of course will be an active participant in it. Related to the second part of your question, which is how do we protect or how do we ensure that the competitive option that the UP represent, it doesn't get disadvantaged by either the CPU or the CN, if they were to own KCS and you've got it exactly right. The Laredo gateway is the primary gateway for the KCS KCSM and we'd have to do 2 things. We have to make sure that operationally, we're treated fairly and equitably at the gateway and then we'd have to make sure commercially that we're treated fairly and equitably to all the points that we currently have an opportunity to serve with our franchise in the United States in conjunction with the KCSM, our franchise is damn good, the best in the industry. And that's why we represent about 2/3 of all rail cross border traffic to and from Mexico would be a crying shame and it would be against what the STB has committed they would do in evaluating the merger if that excellence is replaced by something that's inferior and it's because we're disadvantaged. So we'll be crystal clear about that in front of the STB and in the process.

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

Yes, 100%. There are, and they would be it positions concessions remedies that would flow through FTD.

Great. Thank you, Lance. Thanks for the perspective.

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

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

Yes. Thanks, Cherilyn. I mean clearly, we announced that and have taken the action to protect those customers that are in the program, and we are doing that with a lot quicker responsiveness as we see the market changes as we see the supply chain tightened. We will take those actions and European enough to, that we're in constant communication with our customers and help and talk into them about their supply chain as it relates to the Street time as it relates to dwell and what they're doing with their BCOs and individual customer, so were going beyond just having that surcharge out there and talking with our customers about what they can do to make sure that they can efficiently utilize of assets.

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

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

Thank you. That's all from me.

Gentleman, the next question is coming from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.

Yes, thanks very much. Good morning, everyone. So just following on that question with regards to congestion and if we do see a very significant increase in economic activity, potentially above and beyond what's currently expected, how much of your ability to protect services within is outside of your control? In other words, what can you do here to speak to your supply chain partners to make sure that, that everything remains fluid and how much of a risk is that? And just as a follow-on question there on yields. I think you mentioned that yields were going to be negative for the year and I'm just curious with everything going on with that demand and the potential pricing opportunities. Are you still expecting yields to be negative for this year?

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

Now we said the business mix is expected to be negative.

Right.

But not so overall yield. So when you think about yields. Obviously, there's numerous components there is the mix impact. There's, which we do expect is going to be pressured probably going to look a little bit better here in the second quarter and 3rd quarter of pressure in the 4th quarter with some of the grain come. But in terms of pricing. So, very good about pricing and then fuel surcharges. This is the last quarter where we've got a pretty negative comparison year-over-year relative to fuel prices and surcharges. And so that should look better over the balance of the year as well.

Yes, I'm sorry. Walter said yields, I went to how we define, yes without predominantly price at the price, so Walter, talking to a little bit about congestion and if economic activity surprises us and is even stronger and continues to strengthen, what are we going to do about avoiding congestion? And the short answer is making sure that we've got the right resources against it staying ahead of it through the viewpoint of Kenny and his team in terms of translating economic activity in the carloads for us which we do routinely and periodically to try to stay front. And I also need to make sure we talk, Kenny and Erin both talked about us having the full supply chain visibility and working towards that specifically with the West Coast ports, but that's an active engagement whether it's in the LA Basin or up in the PNW on our part to make sure that we and the entire supply chain have transparency and visibility into to make sure that we and the entire supply chain has the transparency and visibility into what's happening, what the metrics are and KPIs need to be for us to stay fluid and support an excellent service product. And from my perspective, that's not just about satisfying current demand, that's about making sure that the West Coast ports are competitive in a very, very competitive world where stuff can hit Prince Rupert or the Gulf Coast or the East Coast, Eric.

Yes, I'll take on the resources on hand over to the visibility. So when you think about what are the resource base rate, you're talking about 3 things, you're talking about locomotives. So obviously we have reported that we have 3000 plus locomotives in storage, but we also more importantly to respond to that growth as we have been at the ready locomotives that are actually pre-placed out in geographical areas like the LA Basin. So we can be very agile in responding to that, from a car perspective, we know how many constraints on that. Now as Kenny mentioned earlier, you're trying to drive intermodal velocity, higher and higher, which just allows you to turn the cars faster and provide you even more at the ready for cars as well and then crew base wise still use the same process we use every single month to evaluate crude demand, see as Jennifer mentioned, there may be sporadic hiring some of that may be in the LA Basin, but no immediate concerns on crews. And then, finally, it's the agility for decision making when I talked about increasing the train count on the LA Basin by 25% that was a decision we started on Monday, and by Wednesday. We're already moving the resources there to answer that call. So I feel very comfortable on the operating side.

Yes, I'd just add to that. We stay very coordinated with the customer on what they plan to do on what their forecasts are. And then we in turn taken that it didn't now with Eric and so he talked about the adjustments that we've made. We've got visibility just talking to our customers, from that perspective, obviously here this year, we made some changes to our charges to incentivize our customers to get the equipment moving regardless whether it's our equipment or their equipment. We are sitting down with our customers to talk about efficiency in turn times and well, I think they can do to get the network moving so boy. We feel really good about the visibility there. And in the coordination there and decisiveness there to keep the network fluid.

Okay, I appreciate. Then just to clarify, I was referring to there where it was negative 2.5% in the first quarter, I think Jennifer you you'd indicated that it would. The business mix would keep that kind of negative for the full year and that was what I was asking about but it sounds like you add to. That's great, thank you.

Our next question is coming from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.

Yes. Just following up on the revenue per carload yield and I'll be instead, to be sufficient to get move that into the positive territory as soon as the second quarter or is it more second half. And then just, then I think you've mentioned biofuel now for at least a couple of quarters. I'm just curious of that opportunity now and perhaps scope and size of that opportunity down the road. Thanks.

Jordan. This is Jennifer, certainly the second quarter should look better last year's second quarter was obviously with the pandemic greatly impacted especially with the auto production, which was virtually stopped. Now we do still have some production headwinds. This year, that's a little bit of a headwind, but we're expecting it to look better rather it will turn positive in the second quarter. I think that is really going to be dependent on the mix, but we feel good about the direction that things are going, particularly in the back half.

Yes, so biofuels, we've been very encouraged with where we are today with that and we are even more encouraged with where we see by the end of the year and long term, we do see that renewable diesel have a had lags. We've been working with customers to land by on our network and we feel really good about that. We've talked to a growing number of customers that are interested and have committed capital dollars to investment, but we know it's real. So that's why you're seeing that optimism there from us on the biofuels, at that point.

Thank you.

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

Thanks and good morning. Lance, following up on the topic of growth in some of the tailwinds that you mentioned. Do you think volume growth above GDP is something that's achievable longer term for the business and if the answer to that is yes, is this something that can happen without negatively impacting mix because I'm guessing a lot of the truckload conversion opportunity is coming in intermodal; it's a lower ARPU.

Yes, it's a great question, Justin. So the short answer is, we believe we can grow faster than our served markets, GDP might not be the best measure right because there is a boatload of services embedded in GDP but maybe instead, you'd have to look at the elements of industrial production. So the one caveat I'd give you is that's going to be true. We expect that to be true. We'll be able to drive that with the exception of handful of commodities, coal being one of them, perhaps petroleum being another one and maybe frac sand being another, but you take those off the table and our expectation, if we grow at a better rate than our served markets

And just say to the next question. We're going to grow profitably. I mean we expect to be able to, we recognize that that's a dynamic that we have in our business today, but we don't see that has been the hindrance has been able to improve our profitability through ongoing efficiency through price into the service that we provided in the marketplace. So that's all kind of baked into how we're looking at the future, and obviously we'll talk more about that on. Therefore

Great. Appreciate the time.

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

Good morning to Lance. One of the things that stands out in these two competing bids for case you is this opportunity to convert Highway Traffic either from the Laredo gateway or the Texas area perhaps down even as far down in the Mexico up into the Midwest, now as you look at that intermodal opportunity in that truck conversion opportunity. Would you agree that that is a huge potential market? and if so, what are you guys doing to actually capitalize on that short of a merger? and what can you do to kind of catalyze some of that growth, because it seems like there's a lot of truck-competitive traffic in that corridor and that's carriers are saying is not being converted today because there is a merger, like how do you think about getting out of that opportunity?

Thank you, David. So let's start with the potential there is a lot of truck traffic that can be converted to rail and we're constantly working with both the FXE in the KCSM to try to get that done. We have been successful in actually growing our overall intermodal product that we call it the domestic intermodal product. Even though it's to and from Mexico and we expect to continue to do that. Now let's pick and shovel work, right, because we've got to get the FXE or the KCSM interested in a move that might be relative shortfall for them in comparison to what they might be able to do just staying within Mexico, if that's the case, there is always an opportunity to use truck in Mexico as the origination or destination and transload at the border. It's a little more complex, but we do that today and we can continue to do some of that. So yes, the market's big it's pick and shovel work to convert and there has been plenty of advertising about the potential to convert and what it means in synergies, we have not seen the game plan that would be required to be filed with the SCB and once we see that game plan, all of us then can start evaluating how real is it and is it going to be done at our expense, in which case, there's got to be a remedy that maintains our competitive posture.

And then maybe just as a quick follow-up to that, if you look at the routing on your railroad of the reserve, why not Laredo up into the Midwest. That's always been the. I think the lease routing out there. I was just wondering for the rail traffic that's coming over that corridor. I'd imagine customers have a lot of say on the routing. So just because there is another way to kind of move it up a different route, it's out of route. I mean what role, the customers play and sort of determining the routing and some of that carload traffic that would help us assess kind of the diversion risk there?

A potential acquisition is the combined carriers might have the opportunity to go to an inferior routing through a commercial construct and it's, and it's not best for the customer, it's not best for the market.

Thanks, officer [ph]. Thank you.

Thank you. Our final question is coming from the line of Jason Seidl with Cowen. Please proceed with your question.

Thanks, operator. And then, Lance and team, thank you for taking this Kenny maybe one for you on the automotive side, I mean obviously that's a question mark. You guys have up there going forward. Clearly, that's going to depend on the ability to get the ships and manufacturing back up, but once that is back up and running. What should that backlog look like for you guys. And what should we expect on the volume side, in the second half of the year and maybe into the first half of 2022.

You're talking about international intermodal not automotive.

Automotive, yes.

If the demand is there. We expect that demand Jason, to be strong for the rest of the year. So going into peak season. So the overall demand will be there. You've heard us talk about some of the wins in the international intermodal side and we've also her Eric talk about what we're doing to service the customers out there. So we are encouraged with the demand structure that there with our ability to compete and as the supply chain moves out a little bit. And when I say that I mean the well that warehouse and the Street time that should also open up the velocity for us to move more volume.

So you're - then the premium service. Then in the back half of the year and then in the 2022, but it's just a question mark. I just ask quickly, it's going to come back.

I am. That's a good way to not feel confident about the demand on the international intermodal side.

Okay. I appreciate the time, as always.

Thank you, Jason.

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

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

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