Greetings. Welcome to Union Pacific Fourth Quarter 2020 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. Mr. Fritz, you may now begin.

Thank you very much, Rob, and good morning, everybody. And welcome to Union Pacific’s fourth quarter earnings conference call. I apologize for the delay. Our service provider was experiencing technical difficulties this morning. We will handle any necessary and appropriate public disclosures after the call. With me today in Omaha are Eric Gehringer, Executive Vice President of Operations; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, our Chief Financial Officer. Before discussing our fourth quarter and full year results, I must first acknowledge the performance of our exceptional employees. 2020 presented challenges that no one anticipated and all of us hope to never experience again. The women and men of Union Pacific worked hard in the face of the pandemic to provide our customers with fluid and uninterrupted service. Their dedication produced service and efficiency improvements that are now part of the UP DNA, positioning our company to flourish in the days ahead. This past year has reinforced my conviction that our people are truly the best in the business. Moving on to our fourth quarter results. This morning, Union Pacific is reporting 2020 fourth quarter net income of $1.4 billion or $2.05 per share. These results include the impact of the previously announced $278 million pretax non-cash impairment charge related to our Brazos yard investment. Excluding that charge, adjusted net income is $1.6 billion or $2.36 per share. This compares to $1.4 billion or $2.02 per share in the fourth quarter of 2019. Our adjusted quarterly operating ratio came in at 55.6%, an all time quarterly record and 410 basis points better than the fourth quarter of 2019. These outstanding results demonstrate our potential when we leverage all three profitability drivers simultaneously, volume growth, productivity and pricing. Our fourth quarter and full year performance bolsters the optimism we have for the long-term potential of our company. To provide a bit more detail, we’re going to start with Eric and an operations update.

Thanks, Lance, and good morning. The operating team delivered impressive results in the quarter, as we did an excellent job adding volume to our network in an extremely efficient manner, while also managing the normal challenges associated with the holidays. The fourth quarter is another proof statement of how PSR has continued to transform our operations. I’m proud of our entire operating team and their achievements during a very challenging year. We could have not achieved what we did in 2020 without their support and commitment. Moving to slide four, I’d like to update you on our key performance indicators where the team once again made improvements across nearly all of our measures. Freight car velocity and freight car terminal dwell both improved year-over-year, driven by focusing on asset utilization and reducing car touches. Locomotive and workforce productivity both all time quarterly records improved as we continue to use those resources more efficiently through our PSR journey. These improvements were driven by an evergreen process to evaluate and adjust our transportation plan, while using fewer locomotives. In addition, the train and engine workforce decreased 12% versus 2019, while volume increased 3%. In the face of intermodal volume growth of 12%, we maintain a high level of service as evidenced by our intermodal trip plan compliance results. To achieve higher levels, we are working with customers to improve the timely pickup of containers in order to improve box turns, increase parking capacity and create chassis supply. We view our intermodal ramps as production facilities that must improve their efficiency in order to drive a more reliable service product. Finally, our manifest service remains strong during the quarter, driving a 3 point improvement in trip planned compliance for manifest and autos. The team did an excellent job of maintaining this service product…

Thank you, Eric, and good morning. Today I’m pleased to report our fourth quarter results as our volume was up 3%. The fourth quarter ended strong with December posting the highest seven-day carloaded month in 2020. Solid gains in our premium business grew during the quarter were partially offset by declines in our industrial market. Freight revenue was down 1% for the quarter, as our increase in volume was offset by lower fuel and a negative mix -- business mix. So let’s take a closer look at how the fourth quarter performed for each of our business groups. Starting with bulk, revenue for the quarter was up 1% on flat volume and a 1% increase in average revenue per car. Coal and renewable carloads were down 16% as a result of continued high customer inventory levels, lower export demand and a mild start to winner. Volume for grain and grain products was up 20%, driven by increased demand for export grain. Fertilizer and sulfur carloads were down 2% due to less export potash shipment, which was partially offset by strong industrial sulfur and domestic fertilizer shipments. And finally, food and refrigerated volume was up 7% due primarily to strong beverage shipments in the quarter. Moving on to industrial. Industrial revenue declined 7% from a 6% decrease in volume. Average revenue per car also declined 2% due to lower fuel surcharge and negative mix. Energy and specialized shipments decreased 16%, primarily driven by reduced petroleum shipments due to low oil prices and reduced demand. Forest product volume grew by 11%. Strength in lumber was driven by strong housing start, 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 flat for the…

Thanks, Kenny, and good morning. I’m going to start off this morning with our adjusted income statement on slide 15, where we provide both the reported and adjusted look to remove the impact of the Brazos impairment charge. Throughout my remarks today I will speak to the adjusted results. Operating revenue totaled $5.1 billion, down 1% versus 2019 on a 3% year-over-year volume growth. Adjusted operating expense decreased 8% to $2.9 billion as we continue demonstrating our ability to grow without adding costs in at a one for one. Taken together, we are reporting fourth quarter adjusted operating income of $2.3 billion, a 9% increase versus 2019. Other income of $66 million is up $10 million versus 2019, as a result of increased real estate gains. Interest expense was flat compared to 2019, as we mitigated the impact of increased debt levels by lowering our effective interest rate 20 basis points year-over-year. Adjusted net income of $1.6 billion increased 13% versus 2019, which when combined with share repurchases led to a 17% increase in earnings per share to $2.36. Our 55.6 % adjusted operating ratio was 410 basis points better year-over-year and is an all time quarterly record for Union Pacific. Core improvement totaled 320 basis points as lower fuel prices contributed 90 basis points. Looking more closely at fourth quarter revenue, slide 16 provides a breakdown of our freight revenue, which totaled $4.8 billion, down 1% versus 2019, 3% volume growth was offset by the impact of lower diesel fuel prices, down 33% year-over-year, which reduced revenue by 3.5 points. Although, we continue to yield pricing dollars in excess of inflation in the fourth quarter and experienced an improving pricing environment, these gains were more than offset by a negative business mix and reduced freight revenue a 0.25 point.…

Thank you, Jennifer. When we began our PSR journey in the fourth quarter of 2018, our objective was to drive efficiency across every facet of the operations while providing customers with a safer and more reliable service product. As you heard today, we’ve made tremendous strides toward that goal and we are building a solid foundation of operational excellence. We made good progress across a number of areas in safety last year. We achieved substantial improvement on the rail incident side, while we held the line on personal injuries in a very challenging year. Our safety performance is moving in the right direction and I expect continued improvement. In 2020 we took a step forward to reverse the impact of global warming. Our commitment to set science-based targets and an improved fuel consumption rate demonstrate our pledge to operate sustainably. While there’s more work to be done, these are important milestones to reduce our carbon footprint and help our customers do the same. Best of all, our enhanced service product combined with a lower cost structure is helping UP win in the marketplace and grow. And as you heard from Kenny, our team is energized about the prospect of an improving economy that only expands opportunity to win new business. To wrap up, watch for more information soon on an upcoming Investor Day in early May. While we would love to meet in person, it will most likely be a virtual event. Regardless, we’re excited to lay out our vision to lead Union Pacific into a future of long-term growth and excellent returns. With that, let’s open up the line for your questions.

Thank you. [Operator Instructions] Thank you. And our first question today comes from Justin Long with Stephens.

Thanks. Good morning and congrats on the quarter. Maybe to start with one for Jennifer on the guidance, so you talked about the expectation for 150 basis points to 200 basis points of improvement this year. But just given there were some unusual items in 2020, can you talk about the base 2020 OR that you’re using for that guidance? And then on the first quarter OR guidance, I just wanted to clarify, are you expecting a deterioration on a sequential basis or year-over-year? I just wanted to make sure I understood that.

Okay. I’ll start with that last one, Justin, in terms of the Q1. As you know, there’s seasonality in our operating ratio and Q1 is generally our worst operating ratio of the year. And so my comments were on a year-over-year basis, not sequentially. Because that’s -- that would be a very tough call to roll Q4 into Q1 when you think about the fact that you’ve got the inflation that comes in year one, first of the year in terms of inflation, health and welfare, payroll tax is starting up again. So that was a year-over-year comment. In terms of full year guidance, when we look at the 58.5%, we did have about 130 basis points that was attributable to fuel on a year-over-year basis and as we’re looking forward, we’re really not expecting any kind of a headwind or tailwind from fuel as part of that 150 basis points to 200 basis points of guidance into next year. You’re right there were some unusual things that happened during the course of 2020. We did take some employee salary actions through the course of the year. We did that for about three months. We shut down some shop closures. So obviously those will be costs that will come back into the year that aren’t going to be present on a year-over-year basis. But that’s how we look at it and so when we’re giving the 150 basis points to 100 -- excuse me, 150 basis points to 200 basis points, that’s to the 58.5%, and obviously, you can make some adjustments to that to kind of set up what you see as a comparable.

Okay. Great. Very helpful. And then, I wanted to ask about service and the key performance metrics. I know you have that slide in the presentation that outlines the progression there. But talking to shippers, the big question is, has a service improvement come as a function of a lower volume environment? I know in the fourth quarter that that changed. But how are you thinking about those key performance metrics in 2021 as volumes improve, and let’s say, they’re in line with your guidance? Do you feel like you can still improve on these performance metrics across the board, and if so, maybe you could talk about where you see the most opportunity?

Eric, do you want to take that.

Yeah. I appreciate the question. So as we’ve mentioned before, we did have challenges when you look at the entire ecosystem that is the supply chain. As we’ve reported this morning on a 12% increase in volume in intermodal, we also saw an improvement in our trip plan compliance for intermodal up to 83%. I do expect that to continue. There is opportunities moving forward. I can even tell you three weeks into the year, I’ve seen a significant improvement off that 83% fourth quarter base. Now when you think about the opportunities and where we can go with that to continue to improve, we’ve been focused on that in 2020 and it remains a very critical item for us in 2021. As we think about how do we operate our intermodal terminals, but also how do we partner with our customers. So we’ve spoken before about the Gate Reservation System, that’s a continued opportunity for us. Every opportunity that we can see as a railroad that inbound traffic allows us to more efficiently plan for it, and obviously, turn that efficiency into improved performance for the customer. At the same time, you’re seeing us work through the intermodal ramps themselves and when we think about generating capacity, how do we ensure that we do that in a very reliable manner, because increased capacity will drive fluidity and that fluidity drives to better performance over the road. So very focused on in 2021 and it’ll be a key result that we need to drive even off this relatively high base of 83% in the fourth quarter.

Hey. Eric and Justin, just a proof statement, when you look backwards into 2020, we improved year-over-year our service product in the second quarter as volumes drop and we improved our service product year-over-year in the third quarter and fourth quarter when volumes came back. So we’ve got a proof statement that we’re able to in either environment continue to make improvements.

I’ll add there, we’ve been working really closely with our customers and they have recognized that as the product comes through our line, that that service product has improved. So Eric talked about the whole supply chain. Yeah, we’ve seen some puts and takes in terms of chassis supply and that sort of thing. But once that is on our network, Eric and his team are really performing.

Okay. Great. I appreciate the time.

Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.

Thank you, Operator. Good morning, everybody. I wanted to talk a little bit about the outlook on the volume side and narrowed down a bit 4% to 6% sounds pretty good on the outlook. You mentioned domestic intermodal growing, could you talk a little bit about the international intermodal expectations, especially as we go throughout the year, because there was -- there seems to be a clear ramp up through the ports in fourth quarter and actually in the 1Q here?

Kenny, do you want to take that.

Yeah. Let me just take a step back and highlight a few comments that I made earlier this morning in terms of the challenges on the energy side and highlights the fact that, hey, maybe we’d be at that 5% to 7% range, if you pulled out the coal that we acknowledged. Having said all that, on the international intermodal side, we said this publicly, we stated that we’ve had a pretty significant win in the second half of the year, we’re expecting that to continue to ramp on. We also have been encouraged by as the supply chain itself settles down that we should we believe we’ll see more of those international boxes moved to a on dock type scenario versus being transported. So, on the international side, if the trade opens up, as consumer spending gets better, we would expect that that volume would increase. And as I stated earlier, the service product in that area has really improved and even as we sit today, it’s a very strong service product.

Okay. That’s good color. Kenny, appreciate that. My follow up is going to be for Jennifer. Jennifer, you mentioned you guys got a little bit more conservative on the cash side with COVID. Clearly, ramping up, though, your share repurchase activity in 4Q, given the outlook for CapEx is relatively flat and it looks like you guys are looking to grow some of your profits here in 2021. How should we think about the share repurchase program? Are you guys going to try to play a little bit of catch up in 2021?

So, thanks, Jason, for that question. In terms of catch up, we still have probably a little bit higher cash balance that we’re carrying today at the $1.8 billion. So that gives us, I think, a good strong start into the year. And then we’ll see how the rest of the year plays out. Certainly, as we talk at our Analyst Day in May, we’re going to outline probably some more specific plans around not only our long-term outlook of the business performance, but then how we’re going to deploy that that cash to shareholders. So we’ll probably talk more in May.

Okay. Appreciate the time as always. Everyone be safe out there.

Yeah. Thanks, Jason.

Thank you, Jason. Same to you.

Thank you. [Operator Instructions] The next question is from the line of Scott Group with Wolfe Research.

Hey. Thanks. Good morning, guys. So, Jennifer, I didn’t hear any color around labor cost outlook for the year. Maybe if you can share some thoughts there. And I guess, I’m trying to figure out full year OR is typically pretty similar with what you do in the fourth quarter and the guidance implies something worse than that. So maybe it’s on the labor side. And then if I can just bigger picture on the operating ratio, I know it’s not a full year, you just sort of did that mid-50s OR with down revenue? Does that feel like the as good as it can get or do you feel like there’s room for further improvement on that longer as you go out the next few years? Thank you.

Well, let me take that last part first. I mean, you’ve heard us say, Scott, that while we have the 55% target out there that we’re still moving towards. We’ve not said that that’s an absolute endpoint. We still see opportunities ahead of us to continue to improve the efficiency. You’ve heard, Eric, talk through some of that and we’re very bullish. We’re -- we think there’s lots of opportunities ahead. So, again, those will be things that we talked more about in May. In terms of the statement about fourth quarter being a predication in terms of what our full year is going to be, I absolutely appreciate that optimism and confidence, and we feel very confident ourselves. But as you know, there’s a lot of puts and takes and there’s variations. We did have a bit of a help from fuel in 2020 that we’re not expecting in 2021. But it really is rooted in those three guidance levels that we gave you in terms of our volume, our pricing and productivity, if we can outperform on any of those categories versus our outlook today that would be upside certainly.

Yeah. I want to re-emphasize that, Jennifer, that the guidance we gave is built on assumptions we outlined. And if those -- if we can make those assumptions better, we will. We want to grow faster the market. We’re going to get as much productivity as we can. We’re going to be relentless about efficiency.

Yeah. And you also asked about the labor side, we’re not giving specific labor cost inflation. If you -- if you’re talking about kind of where we’ve seen that elevated cost per employee, we do expect that to continue. We’re going to continue to manage the workforce very tightly and we think that’s the right decision overall to make.

Thank you, guys.

Yeah. Thanks, Scott.

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

Hey. Thanks. Good morning. May be my question to be on the pricing side, so it sounds like there’s an opportunity there on price and maybe particularly on the intermodal side. There’s a setup I think in the truckload market that looks kind of similar to what we saw in 2018 in terms of inflationary pricing. So just wanted to get a sense of maybe what you think the opportunity is and maybe using ‘18 as a corollary, do you think we can get that type of acceleration in the core pricing side as we move forward and sort of where within the book of business, do you see the best opportunity?

So, first off, I just want to say that all starts with our service product, which allows us to really go out and compete and price to the marketplace, and so we’re excited about the service product and where it is. Having said that, we’re in January. We’re in the early part of bid season. We’ve gone through 15% to 20% of the bids out there. And what I would tell you is that, based on the tight supply, based on the tight market, there is a somewhat favorable opportunity for us in product in terms of that environment. We’d much rather be in this environment than the loop environments you’ve heard us talk about in ‘19 and first part of the ‘20. So we’ll see how it plays. We’ll have a little bit more clarity as we get through our bid season. But right now, it appears to be a favorable environment.

Okay. Thank you very much.

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

Thank you. Good morning. Kenny, I want to follow up with you. Obviously, some well publicized congestion issues, you guys had to surcharge to the fourth quarter, probably, couldn’t take out as much business as you wanted to. We’ve read you’ve lifted the surcharge. Should we read that to mean that you have the confidence that not only can you keep up this pretty strong intermodal trip planned compliance, but there’s also an opportunity for you to take some of the business that is been piling up in the West Coast that maybe weren’t able to take in the fourth quarter and really grow the entire intermodal franchise at a greater pace than maybe otherwise without those issues?

Yeah. There’s -- believe or not, there is a lot to unpack here. Let me take the surcharges first. So, first of all, those surcharges were in place for our customers that are in our MCP program. So I want to clarify that. We have a program where customers receive containers and we want to make sure those customers under that program receive those containers. During peak season, we ran into a scenario where we wanted to make sure those customers received them because of the high demand. Demand is tight right now, but it’s not as tight as it was in the peak season. So we’ve removed those surcharges and we want to go out there and grow. Let me pivot to another part of your comments around the congestion and just really break down what we’re seeing in the marketplaces. A lot of the containers are coming off the water. Some of them are going on dock to buy rail, when I talked about that service product in great. Other parts of that business is going into warehouses out there and what you’re seeing is some of those containers are out there, they are not turning some of the chassis they’re not turning that’s where that can shift and then the supply chain is going off. We’re working with customer very closely. Eric is working with customers very closely. We’ve made some changes to our accessorial charges to really incentivize and make sure that all customers in our supply chain get the service product. But again, as I stated, once we saw Union Pacific we’ve done a just a fabulous job of executing that service product.

All right. Thank you, Kenny. Very helpful.

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

Yeah. Good morning. I wanted to ask you a bit about where you think the network goes and what are -- from a terminal perspective and maybe it relates a little bit to the congestion? So are you planning -- are you complete with your terminal consolidation in Chicago? Are you still planning to do terminal consolidation in LA and intermodal? And then what should we think about in terms of metrics that would improve the most in 2021? You had great improvement in train lengths in 2020 and I don’t know if that’s -- it’s kind of a nice line up to the right. Does that continue with the same slope or are there other key PSR metrics that we should look at that may be improved more, given your focus on the operating side in 2021? Thank you.

Sure, Tom. Thanks for the question. So let’s start with an update on Chicago. So our consolidation of intermodal ramps in Chicago is complete. We are working right now -- and the construction is complete. We’re working right now here in the month of January to consolidate the G1 operation into G2. At the same time, we’ve finished our consolidation of our two intermodal ramps in Houston and that’s 100% complete. Now to your point, the efforts that we put forward looking at our terminals to drive increased efficiency, they never end. Just this month, in fact, with the investments we made in Englewood, we’re rationalizing the hump that we have at Settegast. Now, we often talk on these calls about humps. But I think it’s important to point out that when we think about terminal efficiency and continued gains, it’s all of our terminals. So even if it doesn’t have a hump, we still look for it, because in a PSR strategy and being a PSR railroad, you’re still driven after safety to touch the cars less. So, even our non-hump terminals represent opportunities to touch the cars less by rationalizing out switching operations. We may use them for other operations like black swapping, but not for switching. So here in the fourth quarter, we stopped switching in Mason City, Iowa. We rationalized switching in El Paso, Texas. Now, again, to be very clear, those efforts will continue in 2021 and beyond. Now, regarding the metrics, you’re going to watch the ones that we report, but of course, internally, we have many more metrics that we help us not only are lagging indicators, but leading indicators. I would leave you with on the car dwell and car velocity. Those are going to be your two biggest indicators of the benefits that we get by making improvements in our terminals, regardless of whether it’s a hump or just a conventional classification here.

Can you comment briefly on the LA question, whether you’re going to do consolidation in terminals there or not?

Across the entire system, we’re always looking for opportunities. We have a team out in the field. And here in Omaha that is very focused on constantly asking ourselves as we make changes, are there then additional opportunities based on those changes? So that’s as far as I’ll guide you through today.

Okay. Thank you.

The next question is from the line of Allison Landry with Credit Suisse.

Thanks. Good morning. Maybe just following up on Tom’s question about the intermodal network, you’ve talked about some changes. But specifically, I think, a couple of the other rails have announced the development of a big logistics parks next to major intermodal terminals. I think the BN has a couple on their network. Is there any opportunity on the UP network for something like that, where you can sort of create these sticky long-term relationships with customers and really drive long-term share gain?

Yeah. Allison, this is Lance. I’ll start and then I’m going to turn it over to Kenny for some detail. The short answer is yes and they do exist. We’ve got a very large industrial park immediately adjacent to the Dallas Intermodal Terminal, where we’ve talked to historically and it’s alive and running about the Dallas to dock plastics product. So, yeah, there are opportunities like that and we do search for ways to use our real estate to the benefit of the railroad and that’s happening all the time. Kenny?

Yeah. I appreciate that question. I tell you what, if you look at our network today, I’m glad you asked it, because we haven’t talked about it quite a bit. But we have 11 rail ports that are out there. You look at the major terminal like, whether it’s Los Angeles, whether that’s Houston, whether it’s Dallas, even if you look at the Chicago area. We already have rail ports in those major areas that we align, trying to take trucks off the road and complement it with the intermodal network or carload network for that matter. So we’re doing that today. I don’t want anyone to leave with the impression that that’s not occurring today. There are more opportunities for us to go out there and be aggressive and you’re seeing some of that with the Twin Cities intermodal terminal.

Thank you. [Operator Instructions] The next question comes from the line of Bascome Majors with Susquehanna.

Yes. Good morning. In the last two years, you’ve increased your train length by roughly 30% and I believe you said the volumes down and there were period where we’re about 9% on a daily basis. So that’s considerable progress. I was just curious, when we think about the model of growing merchandise traffic and adding new revenue cars to existing train starts and the typically high incremental margins that come with that. Has that calculus been changed a little bit as far as how much capacity is left to go, as hopefully the industrial economy recovers or is there still a lot of runway to continue that historic relationship that you typically see when industrial traffic recovers? Thanks.

Yeah. Bascome, this is Jennifer. I would say that we have not changed our enthusiasm around that. And if anything, I think is we’re continuing to find ways to not only build train length, but combine the different types of traffic that are moving on our train. That gives us further opportunity to do that. So those are things that were definitely have been doing and we will continue to do and I think it drives very favorable results as you saw in the fourth quarter.

Yeah. And Bascome if you were kind of part of your question, I thought I heard, is there a limit to train length at some point in the future? I think, Eric had mentioned, we’re going to continue to find train length and plan for finding train length opportunity through 2021. Part of that reflected in our capital plan for another 20 siding extensions or new sidings. And so we don’t see an end to that yet either.

Thank you.

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

Hey. Good morning. Great job on the operating ratio, but, Jen, I think there’s a little bit of confusion if you could just clarify your comment on the first quarter? Is it going to be worse year-over-year? Is it just tough? Just maybe some clarification, because I think there’s some confusion on your comments and thoughts? And then just a follow up on that last one, the siding length, you’re only building half the number of new sidings this year versus last year, so 20 versus 36? Should we expect deceleration on that progress or is there anything -- any comment about the deceleration there? Thanks.

Let me start with the OR question and then I’ll turn it over to Eric to talk to you about sidings. So my commentary is that, we are going to have a little bit tougher comparison here in the first quarter, and again, I’m talking year-over-year, just because of the mix headwinds that we’re facing. Not saying that we can improve it. Just saying that you need to take into that that mix headwinds as you’re looking at the calculus with the down industrial volumes, particularly less crude oil, but hopefully, we’re continuing to see strong grain and that will help and you saw what green certainly did in terms of helping that business mix profile in the fourth quarter. So that was my commentary, Ken.

Ken, I would say…

Okay.

Ken, I appreciate the question, when you think about the siding and doing 20 versus 36, I would not read into that as an intentional deceleration. What I would read into it is we’re being very judicious with working through the process that we have used over the last two years to truly understand where are the largest opportunities and then making the investment when we need it. We still want to continue to challenge ourselves, though, that growing train length does not necessarily all about capital investments. Jennifer briefly mentioned and I will elaborate, some of its just process. We have, for example, trackers today that are really more data analytics, that help us to see hours in advance of a combination opportunity where we can take two trains and put them together. We can see that five hours, six hours in advance, sometimes even longer. And what that allows us to do is for the local team to prepare for that, and then also, for example, our Harriman Dispatch Center to ensure that we have resources up against that. So we’re seeing the railroad with better clarity than we have ever before and you are going to continue to see us grow train length, but it’s not always going to be driven by capital investment alone.

Great. Thanks, Eric. Thanks, Jen.

Thank you. Our next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hey. Good morning, everyone, and thanks for taking my question. I guess, following on that line of thought there, you guys are keeping CapEx flat again, obviously, some spare capacity in the network, like, you’re talking about there. But I guess, how sustainable do you see this equation, keeping CapEx around these levels continuing to grow volume? Isn’t there’s some point at which physical capacity would be required? And I guess just as a quick follow on to that too, how are you guys keeping D&A flat this year, if you don’t mind?

So let me start on the capital and then we’ll turn it over to either Jennifer or Eric on the second part. So when we think about capital and long-term looking into the future, we’ve created quite a bit of excess capacity or open capacity through PSR and unified plan. And nothing would please us more than to have enough volume growth to justify investing more capital. You look at our ROIC, we -- every dollar that we put in the ground generating 15% plus, we love that. But we just don’t need it, given the amount of capacity that we have at hand, the way we’re running the railroad today. So, Brandon, it’s very difficult to look out into the future and say, boy, at this date, certain we will need to turn on more growth capital. It’s going to depend on where the car loads are in the network, how much they are, but again, when we do face that question, that’s a very good day for us.

Yeah. And I think it’s important to note that in the 29 [ph] that we -- roughly that we spent in 2020 and we’re going to spend again there in 2021. We’re making investments for growth in there. That’s not all maintenance CapEx and you think about some of the investments that we’re doing in the terminals and intermodal facilities in Chicago, in Houston, that’s going to support growth. So I think you need to keep that in mind too. Going back to your question on D&A being flat? I guess I’m not sure if you’re asking that. Were you asking that in terms of how do we do that in 2020? How are we doing that in 2021? Could you maybe clarify that a little bit?

Oh! Sorry. I think you said D&A would be flat this year, right?

D&A, I’m sorry.

Yeah.

Can’t help. Sorry, I thought you said, G&A. Depreciation expense, so as you know, we do studies every year in terms of looking at some rail life and I think we’ve got a little bit of favorable news there on rail and that’s helping us out a little bit on the depreciation side.

Thank you.

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

Thanks, Operator. Hi, everybody. Lance and Kenny, I guess, I just wanted to ask about growth. Because I think from here, growth and -- I guess, growth alone is what will allow the company to kind of realize the full benefits of all the changes with respect to the operations and the network. And I guess I’m not just talking about a rising tide, easy comps, cyclical recovery, but rather kind of above market growth and market share wins. And I think it would be fair to say that, the last decade was not characterized by growth, but rather maybe pricing and return. So you have a better network, a leaner network, I just love to get a sense of how are you going to pivot the business and the culture of the company towards growth? And maybe even just give us some tangible examples, because I think you have the market share wins, but if you could just provide a little bit more clarity on those?

That’s an excellent question. You’re exactly right, that we are in the process of turning our sites to -- while continuing to improve our margins and yields to add to that more strengthen the growth leg of the stool. And Kenny, you’ve got a couple of things culturally that you’ve done inside the commercial organization. It’s not all just about the commercial organization in terms of supporting growth. But I think they’re indicative of where we’re going.

Yeah. That’s a great question. And I’ll tell you, we have a number of commodities that will grow and we still have to compete. We still have to go out there and compete against trucks and other modes to go out there and win that business. We have good line of sight of those. We feel good about it. I like your word choice of culturally. I’ll tell you our teams were very excited about where we are. We’ve changed our compensation program, so that we can motivate the sales team to go out there and win. We want to make sure that they are spending their energy and focus on carload growth. And I can tell you that the leadership team here at the table with me, we’re all supportive and they’re all committed to that carload growth. I’d be remiss if I didn’t say we had really good clarity on what those goals are transparency, on what it’s like to win and really clear metrics that support growth. But behind it, we have things like ensuring that there’s good, not necessarily margins, but that we’re winning with the right kind of margins and we’ve achieved the right kind of price. So it’s all baked in there to just motivate the team and we expect that to be a great cultural change…

Yeah.

…for us.

And Kenny, you’ve changed your work structure to streamline it. You’ve distributed business development goals to more broad than just each salesperson. Everybody on your team has business development responsibility. Amit, there’s just example after example of fundamental changes that have been put in place in 2020 that we think are going to drive growth in 2021 and beyond.

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

Thanks. Good morning, everyone. Thank you for the end market commentary for 2021. But I think one of the end markets missing there was international intermodal. Apologies if I missed this. But can you address kind of what do you see in terms of trends there given that that was one of the markets that really was -- was really volatile in 2020?

Yeah. Again, the big things we’re looking at is consumer spending and trade there, the timing of the vaccination, adoption of the vaccination. We expect to have a direct impact on those international intermodal volumes. As the demand we believe we will be sustained. We feel good about the service product. We feel good about our interaction with our customers and the processes that they’ve adopted to allow us to efficiently grow there. So all of that going into 2021 we believe will be a positive for us.

Good. Thank you.

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

Hi. Good morning. I would love to circle back to that growth question. Just in terms of, I would love to hear your perspective on technology as an enabler of that growth? Are you looking at it more as sort of a productivity enhancer or is there more opportunity on sort of reliability and service in terms of gaining that share back, any thoughts?

Yeah. Let me start with that and then I think everybody on the team might have a perspective. The first thing I want to note is our most recent addition to the senior leadership team with Rahul Jalali, who joined us as our CIO. I think it was in early November last year. He’s bringing fresh energy and perspective to the team. And Allison, we think about the role of technology, all of the above, in terms of what you asked about it, it definitely plays a role in growth, in terms of customer experience, in terms of us developing platforms and ecosystems for our customers to participate in and resolving their needs from their perspective. There’s been a real juice applied to that in recent months. And we’re going to continue to use technology to enhance efficiency and productivity. UP vision is a great example of that getting something a minimum -- of minimally viable product in the hands of our operations team and then developing it on the fly into a very, very strong productivity tool today. But Kenny and Eric, you guys are the ones experiencing it.

Yeah. I would tell you, we certainly want to take advantage of it from a commercial standpoint to go out there and make it easier for customers to do business with us with again pointing towards growth. So, yes, we have a number of visibility tools that our customers are using, so they can see what’s coming to them at their plant either on the UP or offline. We’ve certainly talked about the usage of API’s before and it’s opened up markets for us and I mean, literally, we’ve been able to go out there and win business with having API’s in our tool kit. Again, we’ve done a great job of expanding that customer engagement with the API capabilities. I’ve been encouraged to Lance’s comments with Rahul coming on Board. And he really have a vision for helping us remove pain points that the customer might have through IT. And then lastly, just to set up, Eric here, from a visibility standpoint, we certainly utilize technology to see what’s common to us. So a good example of that is, the containers that are heading into the West Coast port. We have a better handle and more clarity now of what at the port, what’s coming to the point port and we utilize that to leverage to come up with a good strong solid service product.

So, Allison, Lance and Kenny have both highlighted tools and technology that allows us to see our railroads that. What I’m very excited about on top of all that is we have made tremendous strides in technology on how we execute on our railroad. So if you think about, for example, the upgrade with our implementation of our CATX [ph] system at the Harriman Dispatch Center. This drives not only more fluidity, but it drives improved customer service. When I look at what our engineering department and mechanical departments are doing to reinvent the way they do their work, whether it’s to occupy less time or whether it’s to do the work in a more efficient manner, there are almost a countless number of initiatives that relate to technology that are driving that and you’ll see that continue in 2021 and beyond.

Great. Thank you.

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

Thanks very much and good morning. Most of my questions have been asked, but I was hoping that you could expand a little bit on the outlook for your grain franchise, including where export flows stand now relative to normal and where do you think on farm inventory stand?

Now, those are a couple good questions, Cherilyn. I appreciate that. You know right now we’re kind of in the early innings and so what I tell you is that for this quarter, Jennifer mentioned that, and it’s still pretty early innings and but it looks like grain in the near-term will hold up. And so we’ll have to see. We’re working with our customers very closely to get forecasts on that. I’ll tell you, though, in the back half of the year, the comps get a lot tougher. However, that will still be a very strong 2021. So you want to keep that in perspective. I think the back -- last part of your question is just around inventory. We feel good about the fact that there’s still quite a bit of grain out there. We’ve saw the grain inventory decrease about 10% year-over-year. We’re expecting a pretty strong crop. With that, we feel good about that demand being sustained. So, Eric, and his team will deliver that and our commercial team will then engage to maximize as many shuttles as we can get.

And Cherilyn, I would add, current demand is being large -- from export perspective being largely driven by China and China’s entry back into the U.S. bean market, partly reflecting the Phase 1 U.S.-China trade deal, partly reflecting a basically recovered hog herd in domestic China. So what China does through the year is really going to kind of predicate what happens in the second half of the year in terms of export grain.

That’s right on Lance. I mean, you got that dynamic. Some of our customers have talked about -- talk to us about Brazil and whether or not there’s a drought down there that might impact the demand. But I can tell you, we’re focused on executing and getting as much grain business as we can export out of the country if we can.

Great. Thank you for the time.

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

Hey. Thank you. Good morning. So one more question on growth, Lance, you talked in the press release about taking share of the freight transportation market. I want to ask if you could provide some more context around that, sounds like we need to do to get there is a bit of a mix of infrastructure, service technology and then focus from the sales team. But where do you see the biggest opportunities, are they, like, coal or commodity type? And do you think this is something you can actually quantify when we get to the Analyst Day in May? And then I guess on a related point, typically we think about some of the conversion opportunities coming with that as a neutral and negative mix. Appreciate can you just comments about the system and the margin accretive, but how do you reconcile the two kind of what we’ve seen in the past versus what you are targeting is that more of a density play or is it better service and better pricing? So putting some context around that would be appreciated.

Okay. Brian, so let me try to unpack that and I’ll try to do that holistically. So the question being around growing our share of the freight market and what does that mean? And you’ve asked some questions around the implications of mix and what it takes to win and what gives us confidence. So when we talk about growing our share of the freight market, we are deliberately broad, because we’re focused, first and foremost, on converting trucks from highway. Inside of that we’re looking for commodities that are under penetrated to train and have the dynamic where they should be -- we should see greater share overall of train penetrating freight. And also customers, they used to ship on us and don’t anymore trying to unpack why and what we can do about that and new markets that are opening up to us, both because of our service product and our cost structure. So, we’re deliberately broad because there the target markets are deliberately broad. In terms of what it takes, it takes an excellent service product and for most customers perspective that’s reliability and consistency. There’s also a safety and an ESG component there. Many of our customers look to us to help them meet some of their commitments to their shareholders and stakeholders in terms of their carbon footprint. So there’s that. It also takes us having a deep knowledge of the marketplace through Kenny’s commercial team. That’s, that’s the secret sauce of the commercial team is understanding many markets deeply, deeply enough to understand what it takes to win. And then we’ve got to have service products designed that do that that means the needs of our customers. And you’ve got it partly right, I think, maybe even largely right and that is, as we grow, looking forward, a lot of that looks like it’s going to go into the intermodal product and our intermodal product, everything else equal tends to mix us down. Now having said that, our intermodal product is also becoming more profitable over time and we’re not going to stop on that initiative. And we’re also very, very confident in our ability to leverage growth through productivity. So you put that all together and bottomline what it says is, we’re going to continue to use all three legs of the stool to make future margin generation better than today. And our confidence coming out of 2020 has really never been higher being able to do that.

Got it. Thank you, Lance. Appreciate it.

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

Yes. Good morning, everyone. I just wanted to touch on Mexico for a little bit. Commentary on the growth you’re expecting in 2021 in the Mexico business versus the U.S. business, should it be better or should it be worse, but the same?

Yeah. So thanks for bringing that up. First of all, we’ve been encouraged by the fact that, that Mexico business, we’ve got a significant percentage of that tied to the automotive network and we’re seeing that comeback, which is encouraging to us. We’re also seeing some areas like the Mexico Energy Reform, the combat area or pipeline for growth for us. As I look at some of the wins that we’ve had, to Lance’s comments around that truck business, really Mexico as an area where we have to go after and grow the pieces of business that were over the road that we haven’t won before. So we are encouraged about Mexico. At the same time, if you look at it as a whole, Mexico is still under penetrated, once you walk out thought of that automotive network and so we’ve been working with customers and supply chain partners to see what we can do to untap some of those markets. So we’re pretty encouraged about Mexico and what it has both for 2021 and long-term.

Got you.

Thank you, David.

Our next question is from the line of Walter Spracklin with RBC. Please proceed with your question.

Yeah. Thanks very much, Operator. So I want to take a little bit more cautious question around the growth or cautious angle to the growth question. When other PSR railroads or other railroads have converted to PSR, they’ve noted, obviously, a very significant service improvement that’s led to the ability to grow share very, very strongly, especially if they’re up against the non-PSR railroad, as you are. My question, therefore is, does that -- what is the capacity of your organization to grow? Are there any capacity issues that you’ve identified that you need to address in order to accommodate that growth and are you -- when we seen other railroads tempted to go down rather unconventional paths toward growth, acquiring another market? So what are your thoughts around kind of not the pure rail related growth opportunities, but going down some of those other routes, your view on that be appreciated as well?

Yeah. Walter, let me take a stab at that and maybe Jennifer wants to add to my comments. Thank you very much for the question. So when we think about growth and using our service product to grow? I -- absent some surprising very regionalized response, I think we’ve got good capacity around the network. We’ve got the ability to react to growth as it’s occurring, if we need to add to whatever our capacity is. And I candidly, I just look forward, and I don’t see even in some strong growth, I don’t see a surprise to us that would cause us alarm. I think our processes, our mechanisms for seeing growth as it’s occurring, know where it’s happening, being deliberate about what we’re going after. I really think the network is on very good footing. So that’s the -- what is needed in a capacity perspective. In terms of the part of your question about what elements are you thinking about growth when it comes to non-traditional? Unpacking we think of three ways to grow. The first is put carloads to fit the network that are profitable on the network. Clearly, that’s a step one and the most favored way to grow because it’s got great incremental margins and it uses capacity that’s available. Another way for us to grow is to do more for our customers, perform more function for them in their supply chains logistics. And that’s always an opportunity and we’re working on that, because it also helps make customers stickier with us. We’re providing greater value to them and in the process solving their problems, whatever their addressable problems are for us. Then the third way that we think about growth is increasing the geographical footprint. We’ve been pretty clear that when we think about that from a class one merger perspective that there’s a lot of opportunity for regulation to destroy value in that process. And so far, the economics just don’t look like they pencil out. But that’s not the only way to increase our geographic footprint. We can do it through, one of the earlier questions, how do we use our real estate to increase our reach maybe through incremental transit loads or incremental logistics parts. So, yeah, Walter, we’re thinking about all three, all three have action against them and I think we’ll probably get into a bit more detail on that when it comes to the Investor Day.

Yeah. And Walter, just to quickly kind of put a bow on it. I mean, I think, that’s what you’re touching on is what we see as the great leverage and great opportunity that’s ahead of us is to grow in a less capital intensive manner over the next period of time. When you think about the locomotive assets that we can deploy, the freight cars, the track capacity, the ability to redeploy terminals if we need to, I mean, those are all great new storage for us to the extent that we start deploying those assets and we see a future where we will be deploying those assets. I think that’s the real value and the leverage that we have ahead of us.

Makes a lot of sense. Appreciate the time.

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

Yeah. Hi. Good morning. A question just on the revenue per carload yield, I heard what you’re saying about the first quarter and fourth quarter. Just sort of wondering from a context standpoint, I get the headwind. Can you sort of put that in context of the minus 4% you did in the fourth quarter? Could it look better versus that? Are we talking the same order of magnitude? And that sort of the second part of it is, in terms of the second quarter and third quarter when industrials set to most likely inflect positive, could there be a period where mix becomes a tailwind in 2021?

Yeah. Jordan, I think, you’re thinking of it right. So if we think about revenue per unit or arc, just flat revenue in the first quarter, you heard us say that we’re looking at low single-digit growth on a volume standpoint. But we are going to continue to have a pretty strong fuel headwind in the first quarter as we did through much of 2020. Right now we’re paying call it a $60 or so a gallon for fuel. I think we paid close to a $90 in the first quarter of last year. So just that fuel surcharge revenue is going to be a driver there in terms of the revenue per unit, you all see that and then obviously the mix. With the industrial car loadings continuing to be down, that’s our highest average revenue per car unit type of business and so that creates a headwind. We’re bullish on the grain and feel good about that. So, we’ll look to move as much of that as we possibly can. But there is going to be [Technical Difficulty]. I think as you also talk the second half to the second and third quarters, we have opportunities. Kenny talks about an improving price environment. You’re going to have that headwind abate relative to the year-over-year fuel change and then if we can get some growth on an industrial side, that could be great news as well.

Just follow up quickly on that on the arc for intermodal, which I guess has been running a bit negative. Is there mixed stuff going on there too is, does that have a chance to better pricing to move in a positive direction in the upcoming quarters? Thanks.

Yeah. I mean, again, as you know, there’s mix within mix. So within intermodal, you have both international and domestic, and there are differences there and then as part of that premium group, overall, automotive is in there. And automotive obviously is a big part of that, when you see those volumes down year-over-year and intermodal growing.

Yeah.

Thank you.

Thank you. Our final question this morning is coming from the line of David Vernon with Bernstein. Please proceed with your question.

Hey. Good morning. And on this topic of kind of catalyzing growth, Lance, when I look at the performance metrics page and the trip plan compliance is specifically like 83% for intermodal, 74% for manifest. I think one of the easiest levers you could have to take more share would be to improve those metrics. I guess I’m looking for some perspective on how satisfied you are with the trip plan compliance today. How does that compare to your primary competitor in the West? And then what can you do to drive those metrics up, because I would think that would be one of the easier paths towards maximizing your share with existing -- with customers?

That’s a great question, David. So we are not satisfied with our KPIs. We’re pleased with the progress we’ve made and we think they are good in the marketplace and position us to be able to compete for and win business. But we also think there’s some upside in terms of improvement. Having said that, 100% is not an outcome. That’s reasonable that that’s actually likely or even optimal. In the railroad environment, the way we measure trip plan compliance, whether it’s for the intermodal product or manifest and autos. What we have said and do think, is that we can get that intermodal trip plan compliance into the high 80%s and low 90%s and have it sit there, and if we can get the manifest and autos into the 80% ballpark and low 80%s and have it sit there, that’s a sweet spot, balancing out resources and fulfilling a consistent reliable service product that supports the needs of our customers. So there is a bit of an upside there, David. I wouldn’t hang my hat on that’s going to generate 2x and 3x and 4x growth. What that does is it continues to set us up to compete effectively. And we’re already really set to compete effectively against our primary rail competition and we’ve got a lot of work underway with some delivery on being able to compete effectively with truck.

And is there any sort of tension between trip plan client’s number and train lines, I guess, like operationally, I would think that there might be a little bit of tension there. But I mean, this is a situation where we are right now or where we’re maximizing efficiency and maybe leaving some growth on the table. Is that the way to think about it or is that not the way we to think about it?

No. I wouldn’t -- I don’t think that’s the right way to think about it, David. Although you’re right that, we have moved virtually all, I think all of our critical operating KPIs in 2020 favorably in comparison to 2019, both the efficiency and productivity measures and the service measures. So we’ve demonstrated we can move them both in the same direction. It’s not easy, right? That’s not a layup. Because if we don’t think about our network right, we can get into a place where we’re making those false trade-offs between productivity and efficiency and the service product. I label them false trade-off because I think they are, if we think about our network, right, we can do the hard work on both.

All right.

Thank you. At this time, we’ve reached the end of our question-and-answer session. Now I’ll hand the floor back to Mr. Lance Fritz, for any closing comments.

Thank you, Rob, and thank you all for your questions. We look forward to talking with you again in April, when we discuss our first quarter 2021 results. Until then, I wish all of you good health and safety, and please take care. Thank you.

This concludes today’s conference. You may disconnect your lines this time. Thank you for your participation.