Greetings and welcome to the Union Pacific Fourth Quarter Earnings Call. At this time, all participants will be 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 website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Mr. Fritz, you may begin.

Thank you, Rob. Good morning, everybody, and welcome to Union Pacific’s fourth quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Jim Vena, Chief Operating Officer; and Jennifer Hamann, our Chief Financial Officer. This morning Union Pacific is reporting 2019 fourth quarter net income of $1.4 billion or $2.02 per share. This compares to $1.6 billion or $2.12 per share in the fourth quarter of 2018. Our quarterly operating ratio came in at 59.7%, a 1.9 percentage point improvement compared to the fourth quarter of 2018. . : Before we go any further, I want to recognize all of our employees for their remarkable service and productivity achievements in 2019. The women and men of Union Pacific are transforming our railroads. Step change increases in car velocity and trip plan compliance while using one-third fewer cars and locomotives takes ingenuity, initiative and teamwork and the team, through the implementation of Unified Plan 2020 is changing our network in fundamental ways to be safer, more reliable, and more efficient. With that, I’ll turn it over to Kenny to provide more details on our results.

Thank you, Lance and good morning. For the fourth quarter, our volume was down 11% primarily due to declines in Premium and the Energy business group. The decrease in volume partially offset by a 1% improvement and average revenue per car drove freight revenue to be down 10% in the quarter. Let’s take a closer look at the performance for each of the business groups. Starting off with Ag products, revenue for the quarter was down 2% on a 2% decrease in volumes and flat in an average revenue per car. Grain carloads were down 1%, as fewer domestic shipments were partially offset by modest gains in exports. Volume for grain products was up 2% driven by an increase in ethanol from the Midwest to East Coast markets. Fertilizer and sulfur carloads were down 13% primarily due to weakness in export potash. Moving on to Energy, revenue was down 25% as volume declined 20%, coupled with a 6% decrease in average revenue per car related to negative mix with the loss of long-haul sand volume. Sand carloads were down 53%, due to the impact of local sand as well as a slowdown in market activity. Coal and coke volume was down 25%, due to a weaker market conditions resulting from lower natural gas prices and soft export demand. In addition, contract changes also impacted volume in the quarter. However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipments, which was the primary driver for the 19% increase in petroleum, LPG, and renewable carloads for the quarter and we expect to see this positive trend for crude oil to continue in 2020. Industrial revenue volume and average revenue per car were flat for the quarter. Both construction and plastic shipments have been strong in…

Thanks, Kenny. As you’ve already heard this morning, we continue to deliver strong results which I think speaks volumes for what is possible. Our operating metrics continue to improve and as a result, we are seeing a better service product for our customers. The team once again responded to the challenge of rightsizing our cost structure in the face of declining volumes while also driving significant productivity and I couldn’t be more proud. For example, crew starts were down 20% in the quarter and outpaced the 11% decline in carloads we experienced. This, along with our Unified Plan 2020 actions drove an operating ratio of 59.7%, which was outstanding. While we will continue to drive productivity, it cannot come at the cost of safety. As always, safety remains our number one priority at Union Pacific. Turning to slide 11, I’d now like to update you on our six key performance indicators. We continue to see significant year-over-year improvement in our metrics. This is a direct result of our relentless focus on improving network efficiency and service reliability as part of Unified Plan 2020. Continued improvement in asset utilization and fewer car classifications led to a 5% improvement in freight car velocity and a 13% improvement in freight car terminal dwell compared to the fourth quarter of 2018. Train speed for the fourth quarter increased 1% to 26.2 miles per hour, compared to 2018. Now turning to slide 12, continuing our trends from the third quarter, locomotive productivity improved to 14% versus last year as efforts to use the fleet more efficiently enabled us to park units. As of December 31st, we had around 3,100 locomotives stored, which excludes 300 units that were either sold or retired. Driven by a 17% decrease in our force levels, workforce productivity increased 4% year-over-year…

Thanks, Jim, and good morning. Today we are reporting fourth quarter earnings per share of $2.02 and 1.9 points of year-over-year improvement in our operating ratio to 59.7%. This is an all-time best fourth quarter operating ratio for Union Pacific and our third consecutive quarter starting with a 59%. As shown on Slide 17, we received a partial insurance recovery of $40 million associated with the flooding experienced in the first half of 2019. $25 million of the $40 million reduced fourth quarter operating expense adding $0.03 of EPS to the quarter as well as helping the operating ratio by half a point. Lower year-over-year fuel prices favorably impacted the quarterly operating ratio by 0.2 points, although our fuel surcharge lag actually had a $0.01 negative EPS impact compared to 2018. The good news is that in the face of significant volume headwinds, we drove core margin improvement of 1.2 points in the quarter. These results are a proof statement that true our company initiatives to improve productivity, the UP team is having great success running a more efficient reliable network. Looking now at our fourth quarter income statement, operating revenue totaled $5.2 billion, down 9% versus last year on an 11% volume decrease. Operating expense decreased 12% to $3.1 billion as we demonstrated our ability to be more than volume variable with our cost structure. These results net to operating income of $2.1 billion, a 5% decrease versus 2018. Below the line, other income increased 22% driven by reduced environmental and benefit plan costs partially offset by lower real estate sale gains. Quarterly income tax expense increased 3% on a higher effective tax rate. For full year 2020, we expect our annual effective tax rate to be around 24%. Although net income of $1.4 billion was down 10% versus…

Thank you, Jennifer. As discussed today, we leveraged strong productivity to deliver solid fourth quarter and full year financial results. Unified Plan 2020 continues to serve as a catalyst for improved productivity and a better service product. Looking ahead to 2020, we are committed to operating a safe railroad and providing highly consistent, reliable and efficient service for our customers while focusing on opportunities to grow the business and improve margins. Our strong operating performance in 2019 gives us confidence that as we attract business to our network, we’ll leverage it very efficiently generating strong free cash flow and improve financial results. This is going to position us to continue investing in our network and returning excess cash to our shareholders. So with that, let’s open up the line for your questions.

[Operator Instructions] Thank you. And our first question comes from the line of Scott Group with Wolfe Research.

Hey, thanks. Morning guys.

Good morning.

Good morning.

So, I wanted to start on the 8% headcount reduction for the year. Just so I understand, is that an average for the full year? Or is that a beginning to end of year number, just because, if it’s an average, it doesn’t seem to really imply any additional headcount reductions from here. So I just want to – is that the right way to think about where we are from a headcount standpoint?

Hi, Scott. This is Jennifer. Yes, that 8% is a full year average and it does imply some further reductions from here. I think if you just roll forward where we are at into 2020, it would be around 6% or so. So, we are looking for further gains and obviously, volumes will depend on that and we are going to continue to try to improve our efficiency overall, but that’s our view today.

Okay. Okay. And then, on the volume outlook, so, slightly positive. Obviously, we are starting in a [depot] [ph] net gas is below 2, right. Maybe could you just share sort of what you are assuming for coal volumes this year? And what are maybe the biggest tailwinds that you see in terms of the things out there, Kenny? And then, just as we think about the OR guidance and the volume outlook, volume guidance together, what’s the sensitivity to operating ratio if you think the volumes ultimately stay negative?

Kenny, why don’t you take the volume question and I’ll circle back on the OR question?

So, first of all, each of our customers have a unique decision tree that they are using when they are trying to figure out whether or not they are going to dispatch coal or they are going to go to natural gas. I can tell you that our commercial and operating team have been really dogged in sitting down with our customers and looking at ways to improve efficiencies in the supply chain whether that’s train length, whether that’s cycle times, whether it’s things like forecasting by days, we are doing everything we can to make sure that that supply chain is competitive. When you step back and look broadly at the volume outlook, you look at the petrochem industry and the plastics that we will expect to continue to grow there some other things along with that that are not as large in volume like the feedstocks that will help us out. We also expect continued growth in terms of the petro side of things. So, the crude oil business and then also if the weather is favorable, the rock shipments in the south, there is still a lot of upside there and a lot of growth in the south. Now, those are just the markets and you also think about the second half of the year. There is still some positives that I am expecting will happen on the trade side and that will not just impact positively on the Ag side during the, call it the September time range, but also our international intermodal side. So those are things that from a market perspective we expect to happen. Having said all those things, our commercial team has a very aggressive mindset to say regardless of whatever the market happens we need to go out there and win because we have a better service product. So we are going out there. We are creating intermodal products. We’ve got a – this is all public information. We have a product for our international intermodal business that’s with Northern Iowa Railroad and Valor Victoria. On the Bulk side, we are going out and securing more business based on the new service product that we have for our grain products moving west. So, you heard about the markets and it’s also good to hear about the mindset of our commercial teams.

And, Scott, regarding your question on the volume to top side and the impact on OR, the way we’ve wired up the plan right now and what we’ve shared with everybody this morning, we do expect to see some volume growth. Now, take that exactly as intended which is, it can be very small, but we do expect it to be a plus sign, not a minus sign. And as you point out, the first part of the year is challenged. It’s still got headwinds against tough comps on international intermodal and of course a loose truck market and natural gas pricing against coal. But when you take it all into account, you take some of the impacts that we expect to see from the recent trade deals and tightening of the truck market we anticipate the second half looks better. All put together, that wires up for us to something like a 59 operating ratio and that’s what we are pursuing right now. Of course, there is a lot of moving parts and it’s early in the year. So, we’ll just continue to manage as we see the markets evolve.

All right. Thanks for the time guys.

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

Thanks. Good morning gentlemen. If I can just follow-up on the last question, just what level of truck market tightening are you really envisioning? Is it just a more of a return to a normal market? Or is it something like a 2018 like, almost ELD like scenario given the kind of [five] [ph] supply side catalysts we have in place?

Yes, we are seeing some tightening occur now and what I call it is, we do feel like we are at the floor. Again, it’s some of the things play out with trade we are expecting by mid-2020 to tighten more – for me to put a hand on whether or not it’s going to get back to normal level, that’s hard to say. But we do in talking to all of our customers and seeing some of the bankruptcies that have taken place in the market, we expect for it to certainly be a better truck environment for us to compete in. Finally, just as we think about the truck market, I just want to emphasize on our premium - our intermodal network, our service product has improved better. Customers are seeing less dwell for their commodities. We’ve talked about the reduced complexities in Chicago. And so, all of those things really create a lower cost structure that gives us a lot of confidence that we can compete in the marketplace.

Got it. And just a follow-up, now that you are kind of comfortably into the PSR process and you are like sub-60 or at this point [indiscernible] 2020. What’s your line of sight to G55 and kind of when you guys get there and kind of what level of incremental heavy lifting do you need to get there? I mean, is that mostly a top-line driven walk from this point on or do you think there is still big cost components that will get you another 400, 500 basis points more?

So, Ravi, this is Jennifer. You’ve heard us talk about the long-term target and I think you’ve also heard us say, and remember that when we first put that out there, we were not in the phases of adopting Unified Plan 2020. And so, now that we are in that we are even more confident in our ability to get there. But we have also talked about it in terms of kind of the three levers in terms of volume, price and productivity and certainly what helps us to this point has been the price and productivity. We’ve not had as much on the volume side. And so, with the great service product that the operating teams put together, we feel very confident about our ability to start bringing that volume on and we will leverage that very efficiently. But we still have obviously great productivity opportunities ahead as well. We said that we are looking to get about another $500 million here in 2020. That’s off of $590 million in 2019. So, those are big numbers and we feel very good about that. So, we’ll continue to press on all fronts as we move forward.

Great. Thank you.

The next question is coming from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Thanks, operator. Hi, Jennifer. Just I wanted to follow-up very quickly if I could on the headcount question, because I actually didn’t follow the math on that. If you just take the average levels in the fourth quarter and extrapolate that, it would translate – that itself would translate to 8% decline in average headcount. So, I could be calculating something wrong. But if you can just offer a little bit more clarification there just given how important that is to the overall productivity of the company?

So, thank you. Yes, I mean, the headcount reductions are very important for us overall. We’ll continue to push that. The math is, assuming some volume improvement and that we want to leverage that very effectively. So, we are going to continue to push that forward and again, we are saying 8% plus minus is what we are looking for in a full year basis.

Okay. And just as a follow-up, again, I guess, this question is for Jennifer. And that’s really – how do we interpret, just conceptually at least $500 million of net productivity? And the way I’ve just always thought about it is that, it’s kind of like the uplift in profits that you expect in a neutral revenue environment and I just want to ask, is that a fair way to think about it? And also, just the guidance that you are giving for 59 OR assume some drag from mix, because if you get the $500 million plus, and you overlay some revenue growth on it, I would have just assumed the OR improvement would have been better than a 59 OR. So if you can just help us think about conceptually the $500 million relative and kind of layering on the revenue growth on top of that?

Sure. So, when we think about productivity and talk to you about, that does exclude volume. So, when we talk about being able to turn around and move to the positive side of the ledger, from a volume standpoint, that’s where you start talking about incremental margins which we think could look very favorable for us. We think we’ve got a great plan put together for 2020 and feel very good about the guidance that we are giving, 59 OR. Making another very solid step forward in 2020 and we are looking to do that with not much volume and off of a 6% down year this year. So, I think it’s a good move for us and next solid step down and we’ll continue to press the envelope. But we want to do it safely, reliably, continue providing the really good service product and keep moving forward. But we are not trying to meter our progress either. We are going to try to go as fast as we can.

Jim, I know you love this question. What inning are you in the PSR process?

Well, baseball finished. So, let’s talk football, it’s right in the middle of the real exciting part.

What yard line are you on?

Well, I started on the 20 yard line, or 25 yard line and I don’t think I’ve hit the middle of the field yet.

Okay. That’s enough for me. Thank you very much.

Thank you. You are welcome.

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

Hey, good morning. Thanks for taking my question. So, Jim, maybe more specific one on efficiency for you. How do you think about fuel as you look at the network here? You get longer trains, a younger locomotive fleet, better horsepower management, but you haven’t really seen the improvements from the field as some of the other peers have done, I think Canada or even CSX. So, what level of confidence you think you have in that improving and how big of a event mover do you count on that in the next couple of years?

I think, fuel is an area where we can get better. We are investing this year with more locomotives that will make it even easier for us. That’s be able to get some fuel conservation. So we did a lot of work in 2019 and we see the same sort of trend line going. Every railroad is different in their topography, but we feel that there is still money left on the table that we can save and be more fuel efficient. Bigger trains, more cars on less trains is probably the biggest way for us to get the more fuel conservation. And I’d be guessing on the final number. We are shooting for an improvement from last year and we’ll continue to have that.

But the pace of improvement – excuse me - start accelerate here, so I think you are doing about 1% or 2% last couple of quarters, but train lengths are up as you mentioned about 16% year-over-year. So is this a lagging indicator or something that needs to have a few more things fall into place before you can get the material benefit on that?

I wouldn’t change the trend line that what we’ve done in 2019 as an improvement in the trend line in that low 1%, 1.5% sort of gain that we should be able to be more efficient on fuel. So, at this point, that’s what I see for numbers.

All right. Thanks, Jim. Thank you.

Thank you.

And again one on exports. Kenny, can you just clarify what you mean on the trade deal in terms of what type of benefit you expect on the Ag side? And then how you think about the export corn, which is down about half when you look at the current marketing year here in the U.S.? Thanks.

Yes, so, there is – the larger piece of the pie is really on the soybean side and that’s really more of a – probably more, I call it more about a fourth quarter type look for us. Brazil comes in during the first part of the year. But then there are some other parts of the grain that we could see a slow uptick and as you mentioned, corn would be one of them, milo could be one of them, wheat would be one of them. I think it’s too soon to tell the timing of it. We’ve been talking to our customers and a lot of traders are talking and I’d expect more clarity as we move throughout the year over the next few months. But what you need to hear is that, get into space one trade deal we see it as a positive.

Yes, Brian, this is Lance. So, the Phase 1 trade deal essentially takes China as a headwind and sets it up to be a potential tailwind. Very high level, they are committing to over doubling their purchases of U.S. goods with a concentration in Ag in some other areas. That if it comes true, or if even a large portion or even a half of it comes true, it’s a really nice tailwind for us going into the next couple of three years. So that there is – it just basically turns a headwind into a tailwind.

All right. Thanks, Lance and Kenny. I appreciate.

Yes.

The next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Thanks, good morning. Could you just maybe speak to the rate of OR improvement throughout the year? And should we expect it to accelerate meaningfully once volumes do inflect positive since you are not currently getting all the full benefits of PSR? I guess, in other words, should second half margins be a lot better than the first half?

So, Allison, as you know, our margins tend to be follow some of the seasonality. We tend to have some of our weakest – or I guess, highest ORs in first quarter, improve through the year. Third quarter tends to be our best margins then they go down a bit. Some of that has to do with weather. Some of that has to do with the volumes that we are moving. So, we don’t see anything at this point that would fundamentally change that pattern. We are not going to guide to quarterly numbers. But that’s how you could think of it.

Okay. All right. That’s helpful. And then, just another question on the productivity. I guess, first, does that include the lapping of weather and inefficiency costs that you saw in the first part of 2019? And then, Jennifer, I think you said that it does not include incremental on volume. Is that right, because I think if I do the math and back out productivity, it seems to imply low teens incremental on sort of what I’d call organic growth and normally you do much higher than that? So, if you could help us and walk through that. Thank you

So, to the last part of the question about productivity, I think we said that that excludes volumes and so if you put volume on top of that, that helps us drive much better incremental as we move through the year. So, I think that, what was the first part of your question again there?

Does the $500 million include lapping of the weather and inefficiency costs from the first half of 2019?

Yes, yes.

Okay.

It starts from scratch.

Yes, it starts from scratch. Right, right.

Okay. Thank you.

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

Hey, good morning. And Jim, nice job on the continued improvements or team, I guess. But, maybe just thinking, I am still a little confused by some of the answers upfront, if volumes are up and you are getting pricing – core pricing gains, it seems like you are targeting up flat employee absolute number, given the 8% decline, which would make – I guess, if you are looking for volumes to increase, maybe that’s the flow through. And then, given the productivity savings, the math would seem to suggest the larger operating ratio improvement. Is there may be a larger mix negative impact that we are looking at than – and maybe kind of you can dig into the coal impact. I don’t know, maybe it’s more export – loss of export tonnage or contract losses or anything on the domestic side?

Hey Ken, this is Lance. And I’ll start by just making sure we lay a crystal clear expectation of ourselves in 2020. And that is, we expect as part of the $500 million in productivity to have both carryover productivity, which is some of the headcount question that you are asking about, as well as incremental productivity. If our volume is flat this year, we are going to have incremental employee productivity. If our volume grows, we will not add back resources at the same pace that we will grow. Now we are expecting growth to be pretty minor, I think is probably the right word and it’s largely second half. So, we are building kind of a cautious plan that gives us flexibility depending on what actually occurs as the year progresses. So I just want to be crystal clear about that. There is – we are sharing with you what we are comfortable sharing at this point. But the expectation is, continued productivity, some carryover, more realize through action and we’ve got plenty of actions up against that.

Right, and just building off that, I mean, our headcount of 8% plus, minus really is somewhat dependent on what happens with volumes, but again, we feel confident in our ability to drive the productivity and I think you’ve seen us do that this year as the volumes have fallen off. We have been very aggressive in terms of the actions that we’ve taken. And so, again, to Lance’s point, we feel good about the plan. But there is, we are sitting here on January 23rd. There is a lot of the year left in front of us and we’ll take the actions that we need to take. But we are bullish about the opportunities, particularly as we look to see some volume return to us in the back half of 2020.

Hey, I think I’ll add. I think you were asking about export coal. And we said this publicly before, it’s a smaller percentage of our coal book is less than 10%, but yes, it has been impacting our export. Coal has been impacted. We will wait to see what happens with both the weather and natural gas. Natural gas plays a much larger role in how our customers are going to start on what they want to do with coal.

Kenny, if I could just get my follow-up with you then, if the international intermodal was down 23% significantly more than the West Coast markets noted, is that share a shift loss of contracts? Is there anything you want to highlight, I guess, as we look to balance that out?

We actually had tougher comps. I mean, if you think, if you go back to the 2018 fourth quarter, we had a really strong quarter. And so, now what you are seeing is just the comp and we should lap that here in the first quarter of this year. I mean, yes, the first quarter of this year.

Great. Thanks guys.

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

Yes, good morning. Wanted to – I guess a question for Jim. When I think about the – you had a tremendous pace of cost takeout or network improvement, how would you think about the duration of the big cost saves in network improvement? Is this a three year program that you’ll still have a lot left to do in 2021? Or is it’s something where you really capture – you get from the 25 yard line to the – into the end zone in 2020. So just wanted if you could offer some thoughts on that and then also perhaps what the really big buckets are that are left for network productivity?

Hey, Tom. Thanks for the question. So, if we think about – I’ve been doing this for way too long. So, you’d never ever stop looking to productivity gains. You always look for what you can do to make the place better. So, the team delivered a great 2019. I would like to give everybody at Union Pacific a lot of credit with what we’re able to deliver. But that’s behind us. So, moving forward, we have projects that are short-term. So we have projects across the entire company that will help us to be able to deliver more productivity. Specifically, we have also some projects that will a while. We announced over a $100 million being spent on sidings. We don’t expect to get them in the early part of the year. That will be later and into next year. So the productivity gains are of this year. We see we have to deliver on that $500 million that we’ve guided to and that means across the board and we see some more coming in the following years. Never ever in my career have I've gone out somewhere and not found a way to make it a little bit better and improve. So I don’t see that ending this year, but there is a big bucket this year and then it will get a little tougher as the time goes on.

Are there particular areas that stand out if it’s train lengths with some of the further siding investments is the big lever or a lot less than – I guess, terminal productivity and some of the changes with the hump yards? Or what would stand out as being the greatest remaining opportunity?

Train length is real important. Absolutely, train length is one that we have to deliver on. We think that we can make the terminals even more efficient. So we turn the cars quicker that helps the whole fleet. We’ve got plans to put the intermodal terminals together in Chicago from six down to three. That helps us in the efficiency. So, the way we handle our locomotives, I think we are not going to get rid of another 2,000 locomotives. We’d only run an output just over 3,000 locomotives now, but we think there is gains there. There is gains on how we repair cars. There is repair on – there is money on gains on how we move our people around the network. The balancing of the network. There is a long list I could go through and spend an hour taking you through it. But I am very excited with what we have on the table for this year.

Okay, great. So, just one last short follow-up. I think a number of the questions on the call are focused on the elements of your guidance. At the end of the day, it does feel like the guidance is somewhat conservative in terms of what you can do on the cost side and putting together some of the pieces, do you think it’s fair for us to take away from the framework that there is an element of conservatism in the guide?

Well, I’ll start and say, Tom, that it’s very early, specifically our confidence in the guidance we gave at the first part of the years and we build our plan appropriately. And then what you’ve seen from us over years is we react as the year is progressing, as things change and universally, we know how to get productivity and we are demonstrating we know how to generate an excellent service product. One of the things we’ve got to demonstrate this year is growing with that service product. Part of Kenny and the commercial team, they are going to have to learn what the network is capable of and how to sell those products and get customers signed upfront.

And I would just say, to add on to what Lance said, there is a 59 OR for us would be a new record level for us. It’s an area that we’ve not gotten to and so, we are going to continue to push the envelope and go as far as we can. But we felt good about the performance that we had this year. But you know, we got there a lot differently than the way we thought we could when you think about the fact that we came into the year thinking we were going to have a couple points of volume growth that ended up down 6%. We certainly didn’t anticipate the weather events that we encountered. So, to Lance’s point, we are going to be very diligent about working hard to pull all the levers that we can and be aggressive to make improvements.

Okay. Thanks for the time.

Yes.

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

Yes, hi. Good morning. Just two questions. Just back on the Ag real quickly, can you talk a little bit about how much the export Ag business is to your total Ag franchise? And then, maybe just to give some sense, what was the adverse impact from exports in 2019?

Yes, I tell you that, if you look at our grain business, it’s a significant piece. I’d tell you it’s been where from a third to call it 40%. What was the second part of your question?

Really just, how much was that business let’s say, down given the tariff issues in 2019?

I’d call it easily over half. I call it easily over half.

Yes, and those impacts, Jordan, that’s on basically, China getting out of purchasing U.S. soybeans and going down to Brazil. DDGs which have been on again, off again were off for a fair period of time and it impacted even a little bit of corn, a little bit of wheat. So, the impact on export grain and grain products was pretty broad.

By half.

And the only thing I would add, Jordan, is that, really we would see it also open up the imports on the international intermodal side. I mean, that has a pretty sizable improvement of volume growth there too. So just keep that in mind too.

So, by half, you sort of mean half of the total decline in agriculture or I am just – didn’t know what half meant?

There is a lot of upside here for us going forward on the Ag side and we are going to do everything we do to take advantage of it.

Okay. And then just one other question. Just on the – thinking about the volumes in 2020, how much of the – call it 1% volume outlook give or take is tied to intermodal recovery, whether it be domestic or international? Just trying to get a sense for how big a part of the volume story is related to your views on intermodal?

Yes, Jordan, this is Lance. I don’t think we put a fine point on exactly what volume is going to look like next year. But let’s walk you through what needs to happen to have volume growth occur. In intermodal, we need international intermodal to get back to normal where U.S. consumers feel healthy and they are consuming and it’s coming in off West Coast ports. That’s important to us. Domestic intermodal, we need both consumers to feel good. We need truck market to tighten up a bit. So the competitive mode isn’t quite as price aggressive and loose as they are right now. We need the trade deals to have a real impact on agricultural exports and imports. We need manufacturers in the industrial economy in the U.S. to gain a little bit more confidence and get their feet back under them in terms of capital investment and risk taking and then we continue – a continuation of what’s going on in the petrochem industry from the standpoint of good feedstocks to make U.S. the cost – low-cost competitor for plastics manufacturing and finding markets for that plastic. So there is a lot of moving parts there. It’s not one thing and of course, those moving parts will change over the course of the year.

Great. Thank you very much.

Yes.

Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.

Okay. Thanks. Good morning. There has been a lot of questions about sort of the guidance and I guess, maybe I just wanted to think about if this way when you think about 2020, and maybe your expectations, if you were to see sort of upside to that, where do you think the most likely sort of places that will come from? Or is it more volume stuff that maybe is a little bit less in your control or maybe is it a little bit more productivity or things that Jim was doing with the network just a little bit more in your control. Just want to get a sense, we do see upside that the guidance is sort of where you think it’s more likely to be coming from?

Yes, Chris, great question and thank you. So, the way I think about it is, if I could just invent the year that I would love to have in 2020, it would have a stronger upside. It would be a great mix. If I could magically make it happen, I’d like to see frac sand come back stronger. I’d like to see natural gas to go to $3.50 or $4 and take some of the pressure off coal. And I’d really like to – Kenny hears this every day. But I’d really like to see and experience the commercial team just relentlessly selling the new service product and getting a lot of traction quickly on convincing our customers that it’s got staying power and what it means to their supply chains and being built deeply into their supply chains. That would tee up a pretty sweet year. From the productivity side of the world, I have all the confidence in the world that our operating team, Jim, Tom, they are going after it as hard and strong as they can and it would be a blessing to have more top-line to work with.

Okay. Okay. That’s helpful. I appreciate the color. And then if I could just ask a question, I guess on price and mix and appreciate that the core pricing numbers are not going to be reported anymore. But when you think about some of the moving parts, I guess, sequentially from 3Q to 4Q just to help us a little bit in terms of what the pricing environment would actually look like today? I appreciate your comments about what you think about the truckload market, Kenny’s comments about how that might change as the year goes on. But, from 3Q to 4Q, can you give us a little bit of color directionally how things were kind of moving from a price mix perspective?

Yes, I would tell you, it’s – you’ve got formidable competitors on the truck side. And as I mentioned before, we do see that – it looks – it feels like it’s bottoming out. We are expecting that to improve. You got to remember, we are coming from a third quarter to fourth quarter where we had improved service products, better dwell, stronger trip plan compliance and so we really inserted that into part of our value proposition. So, regardless of the competitive forces out there, we want to make sure that we are pricing the product to the value that we are providing.

Okay. And anything on mix as – mix from one quarter to the next?

Jennifer?

I think it was slightly positive year-over-year when you think about, in particular although we had - coal was certainly down, but the intermodal piece was down significantly as well. So, a little bit positive.

Okay. Thank you very much. Appreciated.

You are welcome, Chris.

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

Yes, thanks very much. So, going back to volume, I know, Kenny, there has been a quite a few swing factors – significant swing factors in your individual items. I mean, coal was down, but intermodal minus 23% and when you give your guidance, we see a bunch of question marks in areas where there has been quite a bit of volatility. Obviously, you haven’t put question marks in your model when you came out your plus 1% volume. So I am just trying to get a little bit of sense just directionally on what you are assuming in – say, your coal Ag and intermodal, given how big those are an impact in the overall volume? On the Eastern Rails for example, I mean, they are guiding minus 15% revenue here in coal. Obviously, you will be a little less than that. But is a high single-digit decline in your coal business a reasonable bogie for 2020? Intermodal, like you said, I mean, it was down 23% and it’s going to have a tough comp in the first quarter, but again, are you projecting mid to high-single-digit recovery. Just to some way to quantify so we can gauge when we go back to investors and say, look, Union Pacific has plus 1% volume growth and it’s predicated on a few things like this which gives us confidence or lack of confidence right at this point. But the question mark next to those line items that gives us a little bit of uncertainty as to what your plus 1% is implying?

Walter, this is Jennifer. I am going to just going to reiterate our volume guidance and then let Kenny talk about the markets a little bit. So we said that we expect on a full year basis to get to the positive side of the ledger. We didn’t say plus 1%. We said it just get to the positive side, but we are going to have – that does mean we are going to have to offset the declines in coal, frac sand and then a tough start to the year with the year-over-year comparisons relative to intermodal. So, we haven’t sized any of those things in terms of what the level of declines are and we are not going to. But that’s all kind of in that mosaic that we’ve put together is to give you that guidance that we are looking to inflect positive on a full year basis. So, Kenny?

Yes, we certainly feel the challenges with the low natural gas. But they – again we’re three weeks into the month, three weeks into the year. I think it’s premature to really look out ahead on what’s going to happen there. Setting aside the Ag and the intermodal business, again, in terms of a timing perspective, the expectation is that the truck capacity should tighten up by mid-2020 and the expectation is that, from a trade perspective, things should get better for us in the second half of the year.

Okay. Understood. And coming back on the OR and I understand the 55 long-term target, but investors are pushing back a lot now on long-term targets as something to not put a lot of stock in, but clearly, Jim, you’ve done a tremendous amount of work here. The data look very, very positive and amid a volume environment that to say challenging, is an understatement. And so, if we were to see a normalization, is it fair to say that within the next two years, we could see, again a normalization in 2020, could we see within a two year timeframe you are hitting those “long-term over targets”

Yes, Walter. The question of when 55 happens has a fair amount of moving parts, which is why at this point we haven’t put a stake in the ground and say we think it’s at this date certain. We continue to work to try to understand that ourselves and build a model and scenarios that we believe in that get the path there. But stepping back and just thinking broadly about it, things that help would be favorable mix, more volume growth. I have a lot of confidence, all the confidence in the world in our ability to generate productivity and a great service product regardless of what the environment looks like. And then, making sure we have a pricing environment right. We constantly talk about those three levers to pull and there is a lot of moving parts on those three levers being volume, price, and productivity. Certainly, productivity is going to get tougher and tougher as we get closer and closer to that 55. We are making a hell of a step. We made a hell of a step in 2019 and we are signing up for another good strong step in 2020 and I think over time, it will become a little more clear to us.

And do you think, Lance, if you are half way through the year, you get to more visibility to put a stake in that timeframe half way through the year when you get a little bit more datapoints to work with?

Walter, we are closer to that time than we were this time last year and you and the rest of our investors and analysts will be the first to know when we are ready to put a stake in the ground.

I appreciate it. Okay. Thank you very much.

Our next question is from the line of Jason Seidl with Cowen & Company. Please proceed with your question.

Thank you, operator. Morning everybody. Jim, just wanted to check in on sort of how you are viewing operational performance versus the volumes that are coming through on the network especially as we look into the back half of the year when some of your businesses might inflect, specifically domestic intermodal given your views in the truck market, sort of your year-over-year comps. Should we look at the network being slightly more challenged in 2H 2020?

Though I don’t see any challenge, that’s the best thing that could happen is, we’ve given Kenny and the whole marketing team a service product that allows them to sell, to be able to go out there and whatever the market can give, so we should be able to win and we want to win with our customers. So, as they come on, and we see a volume increase, that’s the best thing that could happen. In fact, an increase in business allows us to use the same trains with more railcars on it. It allows us to move things. There is some of course always if it’s a unitrain business that comes on, you have to put new trains on, but we do everything we can to run them on manifest in intermodal trains. So, I’d be very excited if the market gave us strong growth, we’d put it on the same trains and you’d see a incremental savings in our cost structure for the amount of revenue we bring in. So, that’d be the perfect scenario for us.

I’ll knock on wood for that then. My follow-up question is going to be for Kenny. Kenny, how do you view the shift we’ve seen in some global supply chains with the trade war? We’ve seen a lot come back to North America in general, Mexico and always seen some go to Southeast Asia. How should we think about that impacting volumes from here on out?

Well, ideally, that would be short lived some of the products that originate in the Southeast Asia. As you know, a lot of that is going to the East Coast. So with a stronger trade agreement, we’d expect more to come back to the West Coast. I can tell you that we’ve had really good engagement across the supply chain starting with the international intermodal folks to make the West Coast ports in the U.S. more competitive and we will continue to do that.

Okay. I appreciate the color and the time as always everyone.

Thank you.

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

Hey guys. Thanks for taking the time. I do have a long-term question on cost and then I wanted to have a follow-up as well. If you think about the business being down about some 20% in revenue ton miles last five years or so. When you guys think about nominal cost inflation in this 2% to 2.5% range, is it right to think that the effective cost on the unit level for the business is a little bit higher as the base of business shrinks with the decline of coal? Or is that not the right way to think about the fixed cost leverage in the business?

So, David, you are talking about on a revenue ton mile basis, how should we think about our cost structure. I mean, one of our challenges that we put to the team every year is that, we want to offset inflation. But when you have some of your higher RTM, I think this is where you are getting to your heavier tonnage volumes falling away from you. That does make it harder for the team to be able to keep up with that. But I think that’s the great power of the UP franchise is the productivity that we’ve been able to drive and the work that’s underway, quite frankly to get better at that, and to be even much more diligent with that and actually weight can be a help to us as we try to build those longer trains, that’s going to improve our fuel efficiency.

Well, I guess, it was kind of more from an effective cost inflation perspective, right did the remaining traffic on the network have a little bit more burden to pay for every year or is that not the right way to think about it?

Well, clearly, we are a significant fixed cost business and what we’ve demonstrated in long-term variable cost, there are different pieces that have different lives in terms of being able to adjust up or down. So, in an environment that you just mapped out, which is the one we’ve lived the last five years, if volume is going down and it’s going down in dramatic fashion, it is hard to keep up. I think, one of the reasons that we are placing our employee base and the teams so much on this call is that, they’ve done a hell of a job in a pretty difficult volume environment seeking out productivity even in the fourth quarter being a great example. You got volumes down double-digit percent and yet, we generated what, a couple hundred million dollars in productivity in the quarter.

Okay. And then, maybe just as a follow-up, Jennifer, if you look at your core or your mix price on the revenue side and they are being up 2.5. It looks like there is a pretty big mix tailwind, because your declines were in your lower RPU traffic. Is that implying like a smaller conservation from core price in the fourth quarter? Or is that not the right way to read that slide?

No, I think we got a similar question earlier and you know, mix was slightly positive in the quarter. But not a significant driver of that number.

All right. Thanks, guys.

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

Thanks and good morning. So, on CapEx, you gave the guidance for this year, but I wanted to get your updated thoughts on CapEx longer term. If we are in this period where we start transitioning to a volume growth environment over the next several years, is there now enough capacity in the system to where you can hold CapEx relatively steady on an absolute basis, as we look at kind of 2021? And maybe just over the next several years?

Yes, so, I’ll start off and then Jim might want to chime in as well, but the great power that we are seeing through our Unified Plan 2020 implementation is through the idling of hump yards, closing terminals and other facilities. We are creating latent capacity in our network that we would hope to be able to deploy again as the volumes come back. So, to your point, we do see, kind of a structural downshift that we are able to enjoy for some period relative to our capital expenditures and when you think about the number of locomotives that we have idled, the freight cars we have parked, that’s capacity that we are anxious to deploy again and to be able to use in the marketplace. So I think you are thinking about it right. So, Jim, you might want to have some additional comments?

Well, Jennifer, I think you hit the high spots. What we are doing is this, is we are able to run the capacity. If you look at the capacity in the railroad, we are going to spend some money targeted to make sure that we can operate the trains more efficiently in places where we think we can lengthen the size of the train. But on the most of the networks, this network is built, so that we can handle more traffic. I do not see big investments in locomotives, of course. We’ve got lots of them parked. I don’t see big investment in railcars. We are turning them faster, but is there going to be some targeted investments that we need for growth and for customer and just cars that are getting old? Absolutely, keep the place current, sustainable over the long-term. So, I don’t see anything on the railroad where we need to worry about spending capital to make it more efficient or worried about some business coming on. That’s the best thing that could happen and we will continue to spend capital with the projects that we’ve announced. So, going down and building change in the intermodal franchise in Houston, in Chicago, and stay tuned, we’ll announce some more. We are going to spend capital on those to make ourselves more efficient and have a better service product. So, it’s a great place to be. We got lots of capacity. Let’s bring the business on.

Thanks. That’s helpful. And as a follow-up, I may have missed your answer to this on the coal outlook for 2020. I know you expect it to be down, but is there just kind of a rough sense you can give us on the order of magnitude? And I think last year, around the beginning of the year, you lost a coal contract. Is there any way to frame up how much of a headwind that was in 2019? And exactly when you start to lap that?

Kenny?

Yes, again. As I mentioned – I believe this is a little bit too early to go in and say what’s going to happen out there, three weeks in, yes, we did lap the contract or we will lap that contract here this year on the coal side.

Yes, and so being clear, that contract loss was lapped at the end of last year.

Correct.

So this, we are now fresh ground.

Right.

And is there any way to size that up in terms of car loads and what that headwind look like in 2019?

No, we are not going to size that up, but what we’ve expect out of coal this year is it’s starting up pretty challenging, if natural gas stays at the $2, $2.25 level, it’s going to be a tough year.

Okay, makes sense. I’ll leave it at that. Thanks for the time.

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

Hey, good morning everyone. I apologize, I missed the first part of this call. But I guess, I wanted to follow-up on that last line of questioning, Jim, specifically you know with your prior employer, we saw a lot of growth in the past decade on the network whereas Union Pacific and I know there was some specific headwinds in the coal book and what have you? But I guess, really it’s questions for Lance or Jim. What is specifically changing on the marketing or the sales front that you think you could reengage your customer base to actually drive some tonnage and revenue growth through the network?

Yes, I’ll start and let’s break growth into two pieces. One is, what are the markets like? What’s the ground and the environment in which you are competing and for us as we look into this year, we think, broadly speaking, the markets start getting a little better, right. Significant tailwinds like in trade, like a soft truck market, like the pull ahead to try to avoid tariffs in international intermodal, those things start abating and lapping and so that should create a better environment for us to compete in. Second part of that question is, controlling our own destiny. And from that perspective, our commercial team historically has had an excellent relationship with their customer base. It’s indicative of how we have implemented Unified Plan 2020, right? At the very beginning, we said our goal isn’t to break a lot of glass and alienate our customer base, so that we have to come back around and go on a charm offensive. Our intent was, we are going to take our customers along for the ride and keep them well informed and help them see how the changes that we are asking them to go through, as well as we are taking ourselves through to create a much better and much more reliable service product. That has occurred. That’s in the process of occurring and now our commercial team is taking that and turning it into new business like the business Kenny mentioned up in Northeast Iowa, where we’ve got a intermodal service product at the West Coast that two years ago would have never happened and now it’s generating very attractive volumes. The same is true in the agricultural market, the same is going to be true across our bulk.

The only thing I’ll add, I could rather offer few things and I want to just walk you through it. Again, the service product has improved. That’s on tighter standards, so we’ve got a tougher grade now for the customers that containers are being used more efficiently, because the container dwell has gone down. We’ve also inserted technology into our network with our intermodal terminal reservation system, so they get clearer visibility of when they are going to get the container. When they can expect it? We’ve reduced complexity out there in the networks. Jim talked about Chicago and alluded to Houston out there. We’ve talked about Santa Teresa in the past and the fact that, on an intermodal network, we expect to do a lot of block swaps there. So, really critically being transformative here on the product.

Thank you.

Okay, Brandon.

The next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Hi guys. Good morning. Could we just go to the capital – CapEx conversation you guys were having before? Just in terms of, you think about it, it sounds like there is some more of a targeted CapEx approach with the projects that you are implementing. Your line of sight for the next few years with the projects, is this a sustainable level of base capital? I mean, should we expect a downward trend to that number over time? Just any thoughts there?

Just let me step into that Allison. So, we’ve always been targeted on our capital and by that, I mean, the very first thing we layer in is, what’s it take to keep the doors open that’s replacement capital and for us this year, on the track side it’s $1.85-ish billion and there is a little bit more when you look over into the equipment side. And then, from that point, we’ve got to take your mandates like PTC and then we look for opportunity to invest where either there is targeted capital for growth or targeted capital for a service product enhancement which ultimately is growth or productivity. And so, everything that’s in the capital plan is built like that. It gets our first call on our cash and we are very comfortable that the level we are spending right now is an appropriate level. Sub-15% of our revenue and I don’t really see that changing as we look forward.

Great. And then, just going back to the operating, you highlighted number of operating levers that you can still pull here. Not that any of them are easy, but which ones do you start to see becoming more challenging in 2020 just based on the improvements you’ve made thus far?

Well, you know what, it’s always difficult to make big change, but I don’t see any of them, we’ve got a line of sight what we need to do. I think we are going to deliver on those – all those items that I listed of earlier on in the call and I don’t see anything impacting us where we are not going to be able to deliver. It’s we see line of sight, we know what we have to do. We got the right people that can make sure we deliver it. And I am looking forward to just – and we are doing it in a nice smart measured way so that we don’t impact our service. So, I don’t see anything really holding us up.

Great. Thank you.

You are welcome.

Our next question is from the line of Jairam Nathan with Daiwa. Please proceed with your question.

Hi, thanks for taking my questions. It’s Jairam. So, I just noticed that there was a lot of talk about safety in your comments and if I look at other expenses, they were up about 5% and you talked about increased casualty cost and you are expecting another 5% increase this year. Are you kind of expecting a similar casualty number or should we see some benefits from the focus on safety?

This is Jennifer. No, we are absolutely focused on safety as you said and we are not expecting a similar level of casualty costs. We absolutely believe we will be much better in 2020. What that 5% up guidance includes is higher state and local taxes primarily, which is we – as we become more profitable, those taxes go up.

Just I want to add on safety, because I think it’s really important that we talked about it for a minute and I appreciate the question. So, key foundation for a railroad and the industry and what we do every day is safety. We are not happy with the – where we are overall. Our goal is this to be the most – the best most efficient railroad in North America and that includes in safety. So, we’ve got lots of positives that we see on one side of it, but on the other side, about how we handle and measure safety, we need to get better and we are working hard. We’ve seen the trend line gets better at the end of the year and I will expect us to continue that this year. Our goal is us to be the best railroad in North America and that includes the best in safety. So, that’s what we are working towards.

Again, just as a follow-up, with the USMCA passing, do you see any – has that – do you see any changes near-term and how does that impact 2020 volume?

Yes, so with the pass of SMCA it does take a little bit of a headwind and turn it into a tailwind. It was mostly about uncertainty and risk taking and where investment was occurring. So, I would anticipate that will have a kind of a long-term slow positive impact on our overall volumes.

Okay. Thank you. That’s all I have.

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

Thanks very much. Good morning. Just a couple of quick ones for me. On the locomotives that you've got in storage, historically, Union Pacific has maintained a surge fleet. So, just curious for your thoughts on what size you might need in terms of a surge fleet and whether you would plan to start returning or selling the balance of those locomotives?

Well, two things and Jennifer could jump in any time. I think, if we could find a buyer for some of the locomotives that we’ve got excess, we were able to dispose of some, we would do that. And as far as a surge fleet, Cherilyn, it all comes down to – we’ve got a number of locomotives in normal status that we could just go turn the switch, fuel them up and start running them. So, if we needed to put them back in service, it would be pretty easy task and we are talking in the hundreds of that number. So, that’s the surge. It’s sitting there ready to go.

Yes, and just to highlight Cherilyn, so we did in the quarter, reduced our total locomotive fleet by about 300. We sold a couple hundred. We did find a buyer and we scrapped another 100 or so. So, we are continuing to evaluate those things at all points and looking at what’s the best financial decision for us to make as a company. But we would look forward to bringing those locomotives that are in storage and putting them back into service because we do think that’s the most cost-efficient way to handle future volume growth as to leverage that existing fleet.

Okay. And then, on the improvement in train size that you referenced, should we assume that that most of that still resides along the Sunset corridor and that the siding extensions that are penciled into the CapEx budget are directed to that region?

I think, we are going to seize the extension of the Sunset with the CapEx that we are putting in on the sidings that will help, but we also see – to be able to deliver bigger trains with the volume decrease, the team did a great job. So, if we see a volume will help us, if we have a slight uptick in volumes, but on top of that, I see benefit across the whole network. We are just starting down on the train length in every one of the corridors. So there is a little bit in all of them. A major piece will be the – through the capital investment, Cherilyn.

Great. That’s all for me.

Thank you very much.

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

Thanks for taking my question here. On the growth question, you guys have talked about an improved service product in probably a dozen of your answers to the Q&A today. That seems to be resonating with your message and it certainly is showing up in the trip playing compliance going from, call it, low 60s to mid-70s, the span of a couple of quarters here. Are your customers starting to feel that, and when does the network get to sort of a stable steady fluid state where you really unleash the sales team and are confident that you can deliver industry plus growth on a go-forward basis? Thanks.

Yes, just – Bascome, thank you – just to give a history lesson here, last year, during the first half, we had, what I’d call both weather and a lot of changes to the network and we were talking proactively with our customers about what would happen by mid third quarter, call it, the second half of the year, our service products at the operating team gave us, I mean, it really picked up and customers really got confidence there. We have a number of internal measurements and surveys that we do, that we look at really every day and we are seeing that our customers are communicating through and then talking with them that they see it. Our sales teams, they are sitting down with them, laying out the benefits, selling the service, quantifying the value proposition is there. So it’s really setting up a good 2020 for us.

Thank you. And lastly, Unified 2020 Plan, I think you launched that in late 2018. Jim has been in the seat a year. Jim just took over in the CFO role and you are going to exhaust your buyback this year. Should we expect a detailed deep dive Investor Day sometime in the second half? Just anything you can do to help us on the timeline and will you be ready to give us a bigger update? Thank you.

Yes, that’s a great question, Bascome. We are talking about when is the next good opportunity for us to – in a concentrated way, tell the story of what to expect. And so, stay tuned. We will – when that story is fully baked and needs to be shared, we will share it and it wouldn’t surprise me if it’s later this year.

Thank you.

Thank you. This concludes the question-and-answer session. I will now turn the call back over to Mr. Fritz for closing comments.

All right. Thank you, Rob, and thank you all for your questions and for being with us on our call this morning. We look forward to talking with you again in April as we discuss our first quarter 2020 results. Thanks.

Thank you. Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect your lines at this time and have a wonderful day.