Union Pacific Corp Q4 FY2020 Earnings Call

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 not have 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 set all-time quarterly records and 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 maintained 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 plan compliance for manifest and autos. The team did an excellent job of maintaining this service product throughout the year, despite the significant fluctuations in demand. This past year presented quite the challenge to the operating team. The drastic fall off in volume in April, followed by the rapid recovery in July required agility, as we shut down portions of our operations and then reopened them, all while staying focused on keeping our employees safe and healthy. The improvement we made across all of our key metrics during 2020 provides a strong foundation for continued improvement in 2021. Slide five highlights some of our recent network changes. We continue to push train length to drive productivity, while providing a better service product to our customers. Compared to the fourth quarter 2018, when we first began implementing precision scheduled railroading, we have increased train length across our system by 30% or 2,100 feet to approximately 9,150 feet in the fourth quarter of 2020. This is tremendous progress, especially when you consider that our seven-day car loadings fell 9% over the same period. One enabler of this great progress is our siding extension program. We completed 36 sidings in 2020, allowing longer trains to run in both directions and reducing train starts. This was a monumental accomplishment by our engineering department to finish these sidings and then by our network design team to leverage this increased capability. The redesign of our operations in Houston remained on track. Recent investments at our Englewood yard focused on extending the bowl tracks to add density to the yard and facilitate longer trains. This project also leverages the investments we’ve made along the main line. Finally, last month, we announced a new service from Southern California to a pop-up intermodal ramp in the Twin Cities of Minnesota. With minimal capital investment, we are turning an existing yard into a small intermodal terminal, allowing us to provide new service to an attractive market in a quick and efficient manner. As I look to the future, I’m excited about the full pipeline of projects. We have to drive service enhancements and productivity across our entire network. Turning to capital spending, as demonstrated on slide six, Union Pacific continues to deliver value to our shareholders through the efficient use of capital. Our PSR implementation has generated significant capacity, allowing us to maintain this discipline in 2021. Pending final approval by our Board of Directors, we are targeting capital spending of $2.9 billion in 2021, basically flat with last year. About 80% of our planned capital investment is replacement spending to harden our infrastructure, replace older assets and improve the safety and resiliency of the network. We remain focused on modernizing our locomotive fleet through the upgrade of older core units, generating a longer life out of an existing asset, boosting its reliability and improving its fuel efficiency is a win for all stakeholders. The plan also includes targeted freight car acquisitions to support replacement and growth opportunities. We will continue to invest in capacity projects on our network to improve productivity and operational efficiency. We plan to complete more than 20 siding extensions focused in the Southern and Pacific Northwest parts of our network. These sidings support our train length initiatives and target future growth areas for our business. Finally, we remain focused on our enhancements to our energy management system to reduce fuel consumption, leveraging integration with our PTC platform. Looking to 2021, we remain focused on continuing to drive the organization using the PSR principles that have led us to this new level of operational excellence. Everything we do must be done with an eye towards doing our work safer. While maintaining a high standard on the prevention of our personal injuries, we recognize we have yet to reach our full potential. Our improvement in rail incidents in 2020 indicates that we have the right plan in place to make the entire network safer. We will be judicious with our resources and turn them quickly. We are determined to be as efficient as possible at our terminals to improve the reliability of our service product and we will push productivity through train length and other initiatives. We must continue to deliver a highly consistent and reliable service product for our customers. There are many opportunities for us to improve across all aspects of our operations; we must seize upon those in order to fulfill the long-term goals of our railroad. With that, I will turn it over to Kenny to provide an update on the business environment.

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 carload 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 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 winter. 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 starts, along with an increase in repair and remodel. We also saw strength in brown paper, driven by increased box demand and low inventory. Industrial chemicals and plastic shipments were flat for the quarter. Lower industrial chemicals volume was offset by growth in plastics from increased production and improved operating rates. Domestic plastic demand for food packaging and medical supplies remain strong. Metals and minerals volume was down 7%, primarily driven by market softness in rock and reduced frac sand shipments associated with the decline in oil prices and surplus local sands. Turning now to premium. Revenue for the quarter was up 5% on a 9% increase in volume, average revenue per car declined by 4%, reflecting the mix impact from increased intermodal shipments. Automotive volume was down 3% for the quarter. Finished vehicle shipments were flat, highlighting continued recovery in demand and strong inventory restocking. Shipments of auto parts were down 5%, mostly due to COVID-related disruptions, causing supply chain shortages of parts. Intermodal volume increased by 12% year-over-year, driven by continued strength in domestic truckload and parcel shipments. Despite the pandemic, retail sales increased throughout the quarter and we continue to see the ecommerce footprint grow as a percentage of total sales. Now looking ahead to 2021, as we put together our plan for the year, we start with the key economic indicators that drive our business, as illustrated on slide 12. We’re keeping a close eye on the economic forecast. As you know, there has been some volatility in recent months with the timing of the recovery, largely pushed into the second half of 2021. But the latest economic assumptions released in January, show a more bullish outlook in some markets. While our goal is to outpace the market, there are still some pieces of our business that will continue to be adversely impacted by external factors. The piece we’re watching most closely is the industrial economy, which is still expected to be weak year-over-year in the first quarter. Looking more closely at our three business teams, for our bulk commodities, we expect a continued negative outlook for coal in 2021. Electricity demand and natural gas prices are forecasted to improve. However, high customer inventory levels entering the year combined with an increased demand for other energy sources and a contract loss presents a challenging market. As always, weather conditions will be a key factor of demand. All in, we see lower year-over-year coal volumes, reducing total company carloading by roughly 1%. However, there is continued strength for export grain, as China remains committed to incremental ag product purchases in the 2021 calendar year, with clearly a tougher year-over-year comparison in the back half of the year. We also are optimistic with our biofuel shipments, as domestic production is expected to increase which will drive new volume at new UP destination facilities of renewable diesel feedstocks and finished products. Looking at our industrial commodities, energy comps for the first quarter will continue to be challenged and beyond the first quarter, there is uncertainty. However, our diverse portfolio, improved service product and ability to compete will drive growth. In addition, we’re encouraged with the sequential improvements we’re seeing for industrial production and a projection for growth in the second half. This improvement along with growth in plastic shipments should be a positive for us in 2021. And lastly, for premium, we expect strong uplift in both our automotive and intermodal businesses. Automotive sales are forecasted to increase from 14 million units in 2020 to closer to 16 million in 2021. A continuing benefit from vehicle inventory restocking efforts, plus recent wins to convert finished vehicles and auto parts shipments from over-the-road truck will further bolster UP’s automotive business. Retail inventories remain relatively low and truck utilization is expected to remain high in 2021. Retail inventory restocking along with continued strengthened retail sales and a tighter truck supply should drive domestic intermodal volumes higher in the year. Our premium business will benefit from the new Twin Cities intermodal terminal, which Eric mentioned earlier. We’re starting out small with current capacity of roughly 20,000 loads and future plans to build out to over five times that. We’re excited to see that this new terminal has already started to receive loaded containers from Los Angeles in the first week of January. Furthermore, we continue to pursue additional expansion opportunity to penetrate the market. In summary, I’m proud of our commercial team. They did a fabulous job in 2020 to stay close to customers and win new business. As we began 2021, I’m excited about the opportunities we have in the pipeline to grow with customers and penetrate new markets. With that, I’ll turn it over to Jennifer to review our financial performance.

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 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 by 0.25 points. Strong intermodal volumes and lower petroleum carloads were a mixed headwind in the fourth quarter. However, strength in grain shipments helped mitigate that impact both year-over-year and sequentially. Now let’s move on to slide 17, which provides a summary of our fourth quarter adjusted operating expenses. Starting first with compensation and benefits expense, which decreased 3% year-over-year as we offset wage inflation and the $37 million one-time employee bonus with lower workforce counts. Excluding the bonus impact, quarterly cost per employee remained elevated, increasing 9% as we tightly managed headcount. Fourth quarter workforce levels declined 14% or about 4,800 full time equivalents, driven primarily by the great work Jim, Eric and team have done to grow train length; our train and engine workforce continues to be more than volume variable down 12%, while management, engineering and mechanical workforces decreased 15%. Quarterly fuel expense decreased 35%, a result of lower diesel fuel prices and an improved fuel consumption rate offset by volume growth. Our fourth quarter fuel consumption rate decreased 4% versus 2019, with roughly half of the improvement driven by core productivity, half from middle line run through fuel adjustments, with some offset related to business mix. Purchase services and material expense declined 7% in the quarter, driven by more productive use of our locomotive fleet and a couple of favorable interline settlements. As automotive shipments remain impacted by the pandemic, subsidiary drayage expense was also lower year-over-year. Equipment and other rents fell 4% in the quarter, as a result of lower locomotive and freight car lease expense, as we continue to use those assets more efficiently. Increased intermodal volumes offset a portion of those savings however. The other expense line is where you see the impact of the $278 million non-cash impairment charge; when adjusted this expense category was up 2% year-over-year. As you’ll recall, last year, in the fourth quarter, we reported a $25 million insurance recovery in this cost line. So, solid expense control including state and local taxes, which ended the quarter better than expected. Freight loss and damage expense also was lower versus 2019, as we run a safer railroad. Turning for a moment to our 2021 expense expectations, look for the following. Depreciation expense to be relatively flat versus 2020, purchase services and materials expense to increase high-single digits with the recovery in the auto volumes and other expenses should be up low-single digits, primarily driven by higher state and local taxes in 2021, and for income taxes, we expect our annual effective tax rate to be between 23% and 24%. Looking now at productivity, we continued our strong productivity trend in the fourth quarter, generating $170 million of productivity. We finished 2020 at $708 million and a total of nearly $1.4 billion over the past two years, a fantastic achievement by the entire Union Pacific team. These productivity gains were led by the operating departments continued progress on train length initiatives and more efficient use of all of our resources. Importantly, as Eric demonstrated on the KPI slide, we achieved this higher level of productivity while also improving the reliability of our service product. To finalize the cost variability analysis we provided throughout 2020, slide 18 illustrates how we were more-than-volume variable on a fuel-adjusted basis, whether viewed year-over-year or sequentially. Stepping back to look at full year 2020 on slide 19, we’re reporting earnings per share of $7.88, which when adjusted for the impairment charge is $8.19, declining only 2% versus 2019, despite facing volume and revenue declines of 7% and 10%, respectively. Driven by the strong productivity gains I just discussed, adjusted operating income only declined 5% to $8.1 billion. Our full year adjusted operating ratio of 58.5% represents an improvement of 210 basis points versus 2019. Collectively, these results demonstrate the organization’s agility and overall transformation as we work to overcome 2020 challenges. Turning now to cash and returns, Union Pacific maintained a strong cash position throughout 2020, as we purposefully maintained greater liquidity through the pandemic, while at the same time, continuing to generate significant cash flow. Aided by the timing of some tax payments, full year 2020 cash from operations decreased only 1% versus 2019 to $8.5 billion, despite a 6% decrease in adjusted net income. Free cash flow after capital investments totaled $5.6 billion, resulting in a 101% adjusted cash conversion rate. Our dividend payout ratio for 2020 adjusted for the impairment charge was 47% or slightly above our 40% to 45% target range, as we maintained our dividend through the economic downturn and distributed $2.6 billion to shareholders. And although we paused our repurchase activity during 2020 in an effort to preserve liquidity, we still repurchased a total of 22 million common shares or 4% during 2020, at an all-in cost of $3.7 billion. This includes repurchases of $749 million made in the fourth quarter. In combination dividends and share repurchases totaled $6.3 billion returned to our shareholders. Turning to the strength of our balance sheet, Union Pacific remains committed to maintaining a strong investment grade credit rating, ending 2020 with a Baa1 rating from Moody’s and an A- from S&P. Excluding the impairment charge, we finished the year at a comparable adjusted debt-to-EBITDA ratio of 2.8 times. Our all-in adjusted debt balance at December 31, 2020, of $29 billion increased $1.5 billion from year-end 2019, as we took actions in the fourth quarter to pay down $1.3 billion of debt, given our strong liquidity position. Finally, our adjusted return on invested capital came in at 14.3%, down from 2019, due to the impact of the pandemic on our earnings and while a declining ROIC is never desirable, staying within a historically high range reflects our long-term capital discipline, as well as the added benefit of PSR capacity creation. Turning to 2021, we are confident in our ability to execute on the opportunities ahead. Importantly, our outlook for the year includes the potential for improvement across all three performance drivers, volume, price and productivity. With volume we’re looking for full year growth in the 4% to 6% range, largely driven by year-over-year increases in the second quarter. Our visibility to the year is murky however and it really depends on a number of factors, the vaccine rollout, the sustainability of consumer demand and trade, particularly as it relates to grain volumes and a second half industrial recovery. But as you heard from Kenny, we are bullish about our opportunity to win in the marketplace and drive business to our railroad. From a business mix perspective, we see mix staying negative in 2021, with the most pronounced challenges in the first and fourth quarters. The first quarter will be pressured as we move from an environment where crude and industrial car loadings grew in 2020 to today where those volumes are lower year-over-year amidst growing intermodal business. However, we could see those first quarter headwinds moderate some if grain shipments stay strong. That grain strength and tough year-over-year comparisons will likely become a headwind though in the back half of 2021, particularly in the fourth quarter. With an improved demand environment, as well as a reliable service product, we will remain disciplined in our pricing approach and expect to yield pricing dollars in excess of inflation dollars in 2021; embedded in that guidance is our expectation that all-in inflation for the year is expected to be around 2.25%. On the productivity front, you heard Eric outline our plans for continued progress, which should generate roughly $500 million of added productivity this year. The combination of growing volumes, pricing above inflation and ongoing productivity should produce a full year operating ratio that is one of the best if not the best in the rail industry in 2021. And assuming the year plays out as I have just described, we’d expect to be in the range of 150 basis points to 200 basis points of operating ratio improvement in 2021, so another solid year of gains. In terms of first quarter guidance, we’re expecting volumes to grow in the low single-digit range, with a potentially tougher operating ratio comparison, dependent on the mix headwinds I just mentioned. Turning to cash and capital, you heard our plan to invest around $2.9 billion of capital for the year, well within our long-term guidance of less than 15% of revenue, as we generate capacity through our PSR journey. The combination of topline growth, increasing profitability and ongoing capital discipline should result in a cash conversion rate that again is in that 100% range and positions us to drive strong cash returns to our shareholders in the form of an industry-leading dividend payout and strong share repurchases. Bottom line, we expect our performance in 2021 to be a great step toward achieving a 55% operating ratio, which is ultimately about enabling growth through efficiency and generating more cash. Before I turn it back to Lance, I’d like to add my thank you to our exceptional workforce. 2020 was a very difficult year and our employees really rose up against the adversity and showed us what is possible. So, with that, I’ll turn it back to Lance.

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 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 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 at the 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 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.

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 opportunity 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 dropped 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 narrowing it down a bit, 4% to 6% sounds pretty good. You mentioned domestic intermodal growing; could you talk a little bit about international intermodal expectations, especially as we go through the year, because there seems to be a clear ramp up through the ports in the fourth quarter and actually in the first quarter here?

Kenny, do you want to take that?

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 highlight 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 as the supply chain itself settles down that we should, we believe we’ll see more of those international boxes moved to an 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 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.

(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 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.

I want to re-emphasize that the guidance we gave is built on assumptions we outlined. And if those assumptions are better, we will. We want to grow faster than 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’re talking about 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.

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

Hey. Thanks. Good morning. Maybe 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 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 2018 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 pricing in terms of that environment. We’d much rather be in this environment than the loose environments you’ve heard us talk about in ’19 and the first part of ’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 in 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 plan compliance, but there’s also an opportunity for you to take some of the business that has 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?

There’s a lot to unpack here. Let me take the surcharges first. 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 being 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 are not turning; that’s where that can shift and then the supply chain is going off. We’re working with customers 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, Union Pacific has 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.

Good morning. I wanted to ask about where you see the network going and, from a terminal perspective and as it relates to congestion, are you finished with terminal consolidation in Chicago? Are you still planning terminal consolidation in Los Angeles and for intermodal? And what metrics should we expect to improve the most in 2021? You had a big improvement in train lengths in 2020; will that trend continue at the same pace, or are there other key PSR metrics that might improve more given your operating focus in 2021? Thank you.

Sure, Tom. Thanks for the question. So let’s start with an update on Chicago. Our consolidation of intermodal ramps in Chicago is complete. We are working right now 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 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 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 big logistics parks next to major intermodal terminals. I think the BNSF 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?

Allison, 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, historically active 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?

I appreciate that question. If you look at our network today, we have 11 rail ports that are out there. You look at the major terminals like whether it’s Los Angeles, Houston, 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.

(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 in periods where they were 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.

Bascome, I would say that we have not changed our enthusiasm around that. And if anything, I think we’re continuing to find ways to not only build train length, but combine the different types of traffic that are moving on our trains. That gives us further opportunity to do that. So those are things that we 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.

And Bascome if part of your question touched on whether there is a limit to train length at some point in the future, Eric mentioned we’re going to continue to find train length opportunity through 2021. Part of that is reflected in our capital plan for another 20 siding extensions. 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. Jen, I think there’s a little confusion — could you clarify your comment on the first quarter? Is it going to be worse year over year, or is it just going to be tough? I’d appreciate some clarification because I’m unclear on your thoughts. And a follow-up on the siding length: you’re only building half the number of new sidings this year versus last year, 20 versus 36. Should we expect a deceleration in that progress, or any comments about the slowdown? 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’t improve it. Just saying that you need to take into account those 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 grain certainly did in terms of helping that business mix profile in the fourth quarter. So that was my commentary, Ken.

Ken, I would say, I appreciate the question. When you think about the siding number 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 rely solely on capital investments. 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 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 a unified plan. And nothing would please us more than to have enough volume growth to justify investing more capital. You look at our ROIC, 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, at this date we will need to turn on more growth capital. It’s going to depend on where the carloads are in the network, how much they are, but again, when we do face that question, that’s a very good day for us.

And I think it’s important to note that in the roughly $2.9 billion 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 depreciation expense being relatively flat, as you know, we do studies every year in terms of looking at 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 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 sights to, while continuing to improve our margins and yields, add to that more strength in 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.

That’s a great question. 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 for us.

And Kenny, you’ve changed your work structure to streamline it. You’ve distributed business development goals more broadly 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 volatile in 2020?

Again, the big things we’re looking at is consumer spending and trade there, and the timing and adoption of the vaccination. We expect to have a direct impact on international intermodal volumes. As demand recovers we believe we will see sustained improvement. 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?

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 in early November last year. He’s bringing fresh energy and perspective to the team. Allison, we think about the role of technology in all of the above: growth, customer experience, platforms and ecosystems for our customers to participate in and resolving their needs from their perspective. There’s been real energy 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 a minimally viable product in the hands of our operations team and then developing it into a very strong productivity tool today. But Kenny and Eric, you guys are the ones experiencing it.

We certainly want to take advantage of it from a commercial standpoint to make it easier for customers to do business with us and to support growth. 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 APIs before and it’s opened up markets for us and literally we’ve been able to go out there and win business with having APIs in our toolkit. I’ve been encouraged by Lance’s comments with Rahul coming on board; he really has a vision for helping us remove pain points that the customer might have through IT. And then lastly, from a visibility standpoint, we certainly utilize technology to see what’s coming to ports. A good example is the containers that are heading into the West Coast ports. We have a better handle and more clarity now of what’s at the port, what’s coming to the ports and we utilize that to leverage a good strong service product.

Allison, Lance and Kenny have both highlighted tools and technology that allow us to see our railroad better. 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. For example, the upgrade with our implementation of our CATX system at the Harriman Dispatch Center drives not only more fluidity, but it drives improved customer service. When I look at what our engineering and mechanical departments are doing to reinvent the way they do their work, whether it’s to occupy less time or to do the work in a more efficient manner, there are countless 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 inventories stand?

Those are a couple good questions, Cherilyn. Right now we’re kind of in the early innings, and what I would tell you is that for this quarter it looks like grain in the near-term will hold up. 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. I think the last part of your question is around inventory. We feel good about the fact that there’s still quite a bit of grain out there. We saw 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.

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

That’s right on Lance. Some of our customers have talked about Brazil and whether or not there’s a drought down there that might impact demand. But I can tell you, we’re focused on executing and getting as much grain business exported 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 a bit of mix of infrastructure, service, technology and then focus from the sales team. But where do you see the biggest opportunities, are there specific commodities? 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, how do you reconcile the two compared to what you’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? Putting some context around that would be appreciated.

Okay. Brian, let me try to unpack that holistically. 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 that we’re looking for commodities that are under-penetrated by rail and have the dynamics where they should see greater rail penetration. We’re also focused on customers that used to ship on us and don’t anymore to understand 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 the target markets are deliberately broad. In terms of what it takes, it takes an excellent service product which for most customers is reliability and consistency. There’s also a safety and an ESG component. Many of our customers look to us to help them meet commitments to their stakeholders in terms of their carbon footprint. It also takes us having a deep knowledge of the marketplace through Kenny’s commercial team. That team understands markets deeply, enough to understand what it takes to win. And then we’ve got to have service products designed that meet the needs of our customers. You’re partly right that as we grow, a lot of that looks like it will flow into the intermodal product and intermodal can mix us down. Having said that, our intermodal product is also becoming more profitable over time and we’re not going to stop that initiative. We’re also confident in our ability to leverage growth through productivity. So you put that all together and bottom line 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. Our confidence coming out of 2020 has never been higher in our ability 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?

Thanks for bringing that up. We’ve been encouraged by the fact that the Mexico business has a significant percentage tied to the automotive network and we’re seeing that come back, which is encouraging to us. We’re also seeing areas like Mexico energy reform and pipeline projects as potential growth for us. As I look at some of the wins that we’ve had, to Lance’s comments around truck-to-rail conversion, Mexico is an area where we have to go after and grow 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 outside of the automotive network, and so we’ve been working with customers and supply chain partners to see what we can do to unlock some of those markets. So we’re pretty encouraged about Mexico 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. 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 have converted to PSR, they’ve noted a very significant service improvement that led to the ability to grow share strongly, especially against non-PSR railroads, as you are. My question therefore is, what is the capacity of your organization to grow? Are there any capacity issues that you’ve identified that you need to address to accommodate that growth and are you considering non-traditional paths toward growth, such as acquiring another market? What are your thoughts around those other routes?

Walter, let me take a stab at that and maybe Jennifer wants to add. When we think about growth and using our service product to grow, 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, and I don’t see even in a strong growth scenario a surprise that would cause us alarm. I think our processes, our mechanisms for seeing growth as it’s occurring, knowing where it’s happening and being deliberate about what we’re going after, position us well. I really think the network is on very good footing. In terms of non-traditional growth, we think of three ways to grow. The first is put carloads to fit the network that are profitable; clearly, that’s favored because it has great incremental margins. Another way is to perform more functions for our customers, providing logistics and supply chain solutions that make customers stickier. The third is increasing geographic footprint. We’ve been clear that large class one mergers often face regulatory risk that can destroy value and the economics often don’t pencil out. But increasing geographic reach can also be done through using our real estate, incremental transit loads or logistics partnerships. We’re thinking about all three, and all three have actions associated with them. We’ll get into more detail at Investor Day.

Walter, just to put a bow on it, what you’re touching on is the leverage and opportunity ahead of us to grow in a less capital-intensive manner over the next period of time. Think about the locomotive assets we can deploy, the freight cars, the track capacity, the ability to redeploy terminals — those are all great levers for us to use as we start deploying assets if we see growth. I think that’s the real value and the leverage that we have ahead of us.

Makes a lot of sense. Appreciate the time.

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 the second part 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?

Jordan, I think you’re thinking of it right. If we think about revenue per unit, you heard us say we’re looking at low single-digit growth on volume for Q1. 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 diesel fuel surcharges are much lower year-over-year. That will weigh on revenue per unit. Then obviously the mix: industrial carloadings are typically higher average revenue per car and those volumes remain down, creating a headwind. We’re bullish on grain and feel good about that. So, as we move into the second and third quarters, if industrial recovers and fuel comparisons abate, mix could improve and be a tailwind.

Just a follow up quickly on intermodal arc, which I guess has been running a bit negative. Does that have a chance to move to a better pricing direction in the upcoming quarters?

There’s mix within intermodal between international and domestic and there are differences there and then as part of that premium group, automotive is also in there which impacts averages. We’ll evaluate pricing dynamics as bid season progresses and as demand and truck market tighten.

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 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 customers?

That’s a great question, David. We are not satisfied with our KPIs; we’re pleased with the progress and think they are market-competitive and position us to compete for and win business. But we also think there’s upside in terms of improvement. That said, 100% compliance is neither realistic nor optimal. In the railroad environment, a high-80s to low-90s intermodal trip plan compliance and an 80% ballpark for manifest and autos would be a sweet spot: it balances resources and supports a consistent, reliable service product that customers need. There is upside and it continues to set us up to compete effectively. We’re already set to compete effectively against our primary rail competitors and to go after truck conversions.

Is there any sort of tension between trip plan compliance and train length, operationally? I would think there might be a tension there; are you maximizing efficiency and leaving some growth on the table or is that not the right way to think about it?

I wouldn’t say that’s the right way to think about it. We’ve moved most of our critical operating KPIs in 2020 in the right direction — efficiency, productivity and service. We’ve demonstrated we can move them both in the same direction. It’s not easy; if we don’t think about our network in a coordinated way we can create false trade-offs between productivity and service. But we believe those are false trade-offs if you do the hard work across the network. We will continue to do that.

All right.

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 at this time. Thank you for your participation.