Greetings and welcome to the Union Pacific First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. The operator provided instructions. As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may begin.

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

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

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

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

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

Thank you. The operator provided instructions. And our first question is from the line of Amit Mehrotra, Deutsche Bank. Please proceed with your question.

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

So thanks for the question. So yes, I mean starting off the year with a 60.1 and be able to get to in that range of 56.5 to 57 and as we said, we're hoping to get closer to the 200 basis points of improvement. That certainly says we have to improve over the balance of the year and make very strong improvement to hit those targets. And so in terms of what gives us confidence, it really is the ability to win in the marketplace. As we mentioned that we're expecting volumes to be around 6% or so up year-over-year as you might recall back in January our original guidance was 4-6%, so we're now seeing strengthening in the economy. Kenny and the team are winning new business and so, those are all very positive signs. And then again, the efficiency piece, certainly we were impacted in the quarter with weather and fuel, they took their toll on the first quarter operating ratio. But we still generated 150 basis points of core improvement. And so as we look to grow volumes and put some of those transitory issues behind us, we feel good about the rest of the year.

Thank you. Thanks.

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

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

Yes. Thanks, Scott. I'll start with the last part of the question and end with the first part, regarding whether the CP or the CN were to acquire the KCS, our concern really is the same. What we're focused on is that the STB says the next Class 1 merger must provide an enhancement to competition and clear improvement for all customers. For that to be true in any transaction our current service product has to remain intact. So our concern is making sure that we have good operational and commercial access to all the customers that we serve currently in Mexico and in other parts, whether this be on the CP railroad or the CN railroad. As regards that transaction, the first thing we're focused on is making sure that the STB sets up a level playing field for all Class 1 mergers and that the 2001 merger rules should apply to every Class 1 merger, so that the STB has a full opportunity to vet the game plan to enhance competition by the transaction. And then, if you think a little bit about what we're focused on, you're exactly right. We're focused on the three stools to drive enterprise value for Union Pacific: value-based pricing in the marketplace, making sure we're efficient and productive both in assets and operating expense, and focusing on growth. I think growth is going to play a bigger role; it has to. As regards whether or not that changes our stance on overall M&A activity, our big concern on any Class 1 merger is that in the STB's regulatory review, they are committed to enhancing competition and they are also committed to taking a look at the downstream impacts. When you boil that all together and note that the STB has full authority to put in whatever remedies and regulations are required to achieve that, we've always thought there is lots of opportunity for long-term value destruction if not handled correctly. We'll be very active and engaged in this process with the STB and potentially directly with the acquirers and we're going to first and foremost focus on making sure that we protect our interests and then help the STB enhance competition as they seek to do so.

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

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

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

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

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

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

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

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

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

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

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

Yes great, thank you. Ravi, so we do evaluate our guidance periodically. Of course, every quarter is an opportunity and we've delivered what we think is a good prudent middle-of-the-fairway set of expectations as we look forward. We're already kind of moving ourselves up in the range, which is meaningful; 200 basis points of improvement is a significant change year-over-year, particularly when you're at the performance level that we were at last year at 58.5. That would mark us being a very, very strong industrial performer. So there's no more news on second half guidance. I would also just remind you that there is very high optimism on what the second quarter is going to look like, just because the comps are so easy, but then when you get to the third and fourth quarter, we're starting to lap the real acceleration in domestic intermodal, particularly the parcel world, and we're also then starting to lap some of the real strength in grain. So it has yet to be seen exactly how that plays out. But even in that context, our guidance stands. And then in terms of what to expect for our Investor Day next week. You're going to hear us lay out just what we talked about here: how we serve our customers and how that continues to improve and what to expect from us there in real granular terms. You'll get a good sense of the work streams and what to expect. You're going to hear us lay out how we expect to grow; we will name customers, we'll talk about very specific opportunities and work streams that you can hold us accountable for. We'll talk about what winning looks like in that context and kind of reaffirm guidance this year. And then we're going to talk about a couple of markers we're going to lay down for the next three years. And then we're going to start with a nice overall context of how doing that together with all of our stakeholders really comes to reality. So we'll talk about our ESG story. We'll talk about what's going on with our employees, the communities that we serve. Because I think that's a critically important part of how we run this railroad. We have a social license to operate in all 7,300 communities that we serve and they need to hear us talk about how much we value them and our relationship with them and how we keep it healthy. So you're going to hear all of that in two hours and you're going to see the leadership team of Union Pacific tell that story collectively.

Excellent, looking forward to that. Thank you.

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

Good morning. Thanks. Just wanted to go back to the topic of service and growth, and specifically the trip plan compliance. I know that both the manifest and intermodal took a step back from weather, but Eric, I think you mentioned earlier sort of getting the manifest trip plan compliance back to the low to mid '70s. So I mean, that's really where you need to be longer term to start to chip away at the opportunity to convert some of the merchandise volume from the highway, or do you need to be somewhere in the '80s or '90s range to really be competitive with truck, and then if you could just sort of help us through when you think you could get there, if that could start to accrue in 2021 and more about the '22 and beyond story?

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

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

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

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

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

Okay, I understand. Thank you, guys.

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

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

Sure. If we look at Slide 4 as our baseline, you see on the left-hand side we can just start with freight car velocity showing 20.9 for the last seven days versus 21.8 for the quarter. Freight car terminal dwell was 23.5 for the quarter and in the last seven days it's 22.6. So very strong indications that we are out of that weather event, we're recovering the system, have recovered much of the system and can get back on the pace that we were before. So strong confidence that we can do that. On the labor productivity side, we think about that two ways. Is there more opportunities to continue to grow that number? Absolutely there is. When we think about how do you make sure you're doing that, you're really focused on, are you getting the retention rate that you expect out of the people that are currently furloughed—we're sitting at 75% to 85% on that. So we're still very effective and have been able to retain when we need to be able to bring our people back for growth and at the same time, our total furloughed count on the train, engine and yard side is 1,400. So there is a strong pool there to draw upon, so no concerns at this time.

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

Thank you, Eric. I appreciate it.

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

Great. Good morning. Just a follow-up on a couple of things. In the first quarter you said last year your 4-6% carload target for the year. Moving to the top end of that, but if you can mention up 200 basis points since you set that target. Do you still see yourself as being conservative by staying in that target, or are there any losses we need to consider in share and then thoughts on headcount—your employee changes maybe—you're down 12%. What are your thoughts on employees by year-end? Thanks.

Let me take the conservative or not conservative question if I could. The short answer is no, I mean 4-6% was our best thinking before; 6% is our best thinking now. We'll keep tuned up on it. We've talked about the potential headwinds late in the year. But yes, it's our best thinking.

And I would just add to that on the headcount question, Ken, in terms of how we see that playing out, we called out about just shy of 30,000 employees. Today, we think that we should be able to, even at the high end of that range, keep steady state relative to those. You may see some ups and downs a little bit; we may actually have to do a little bit of hiring in some small locations if we don't have adequate crew bases there. You heard Eric refer to the 1,400 furloughs, but we plan on being very efficient with the crew base. And so we think even up to that high end of the range, we should be able to keep that pretty flat with some little seasonal fluctuation.

Appreciate it. Thanks.

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

Hey, good morning everyone and thanks for taking my question. So I want to follow up on Ken's question there, Lance or Eric or maybe you can, Jennifer with where trip plan compliance is where you want to get it. It just feels like a repetitive scene when rail volumes come back historically, we see not just Union Pacific but industry service metrics really lag. So I guess what can be different this time that you think you can do outside of adding resource base because I think historically, the answer was always add more locomotives and more employees and that is not always feasible. What's different now?

That's a great question Brandon. What's different for us is a demonstrated track record now in our world of PSR where when volumes return, we don't crater. Case in point: last year volumes dropped as dramatically as we've ever seen in our recorded history from late February into April and subsequently recovered as fast as we've ever seen. In the recovery period from Q2 to Q3 to Q4 we continued to improve our metrics on service. That's a proof statement right now. When you go from 120,000 seven days to 160,000 seven days, we've got a network that can handle that pretty readily and the job is to efficiently layer in the train starts that would be necessary—crews, locomotives—and we've demonstrated we know how to do that and should be able to do that. Eric, take the color.

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

Thank you.

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

Thank you. Kenny, you noted the tight truck capacity and the favorable outlook for taking share off the highway; beyond the weather, the West Coast congestion issues still seem to be in the headlines and the rails seem to be getting thrown at the bus a little bit as part of the problem, not the solution. Can you speak to the progression of clearing some of the backlog, especially as it relates to the West Coast ports? And then also, what's your capacity to actually take advantage then of this favorable competitive dynamic that you have from a cost perspective?

Jon, when you look at the port congestion that's going on there, there's a lot going on. There's a lot of supply chain conversation with ocean carriers and the port; there are labor issues at terminals, warehousing capacity constraints, and trucking capacity constraints. What we're focused on here is what we can control. We're staying very coordinated with the customers on what they plan to do and what their forecasts are. We in turn take that and work proactively with operations to plan the resources. We've also taken actions to incentivize customers to get equipment moving regardless of ownership through changes to charges and we're sitting down with our customers to talk about efficiency in turn times and what they can do to get the network moving. We feel encouraged by the incremental wins that we're seeing on the domestic side and are optimistic about the marketplace as we move through the year.

Jon, Union Pacific is a critical component of that entire supply chain. When we look at being able to ensure that we have the resources on hand, we're always looking at total footage of trains that we're able to depart from the LA Basin specifically out of the ports and intermodal terminals. From July to October last year, we had capacity at 60,000 feet; as volumes increased we intentionally increased that to 68,000 in the middle of November and then again on April 1 of this year, we took that to 80,000. That's on top of driving a 25% increase in our train starts out of the LA Basin to support that growth. So you see Union Pacific as the component in that process that's doing everything it can to bring on that volume and efficiently get it out of the LA Basin and into inland terminals, which helps overall fluidity with the entire supply chain.

Okay. Thank you, Kenny. Thanks, Eric.

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

Yes, good morning. I wanted to go back a little bit to some of the consolidation questions. I think your comments this morning and in the past have been cautious about rail consolidation. Are you essentially against consolidation? Would you say we just don't think it should happen, or is that kind of overstating it? And then in terms of gateway, you do a large amount of business at the Laredo gateway—how do you protect yourself if CP or CN get control of KCS? There is some bridge traffic from Laredo to Chicago that would potentially be at risk—how do you think about protecting yourselves at that gateway?

Tom, good morning and thanks for the questions. We've been very clear on consolidation: we think the STB's review should ensure any Class 1 merger enhances competition and has better outcomes for all customers, and they should contemplate downstream impacts. Our big concern is that poorly designed consolidation can destroy long-term value for the industry. We'll have to navigate the current process to see how it comes out and of course we'll be an active participant. Regarding the Laredo gateway: the KCSM uses Laredo heavily. We'd have to do two things: ensure that operationally we're treated fairly and equitably at the gateway and make sure commercially that we're treated fairly and equitably to all the points we currently serve in the United States in conjunction with KCSM. Our franchise is very strong and represents roughly two-thirds of rail cross-border traffic to and from Mexico; it would be a problem if that excellence is replaced by an inferior outcome because we're disadvantaged. So we'll be crystal clear about that in front of the STB and in the process.

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

Yes, 100%. There are remedies and potential concessions that would flow through the STB process.

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

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

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

Thanks, Cherilyn. We announced the mutual commitment program and have taken action to protect those customers that are in the program. We are doing that with a lot of quicker responsiveness as we see market changes and supply chain tightening. We are in constant communication with our customers and talk with them about their supply chains as it relates to dwell time and what they're doing with their BCOs and individual customers, so we're going beyond just having that surcharge out there and working with customers to help them efficiently utilize assets.

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

We have seen strong engagement and would expect continued interest given the market environment.

Thank you. That's all from me.

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

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

Walter, to clarify, we said business mix is expected to be negative for the year, but not that overall yields would necessarily be negative. When you think about yields there are numerous components—mix and price and fuel surcharge. We do expect the second quarter to look better relative to last year's comps, and as fuel prices and surcharge dynamics normalize, that should look better over the balance of the year as well.

On congestion and what we can do: it's about having the right resources against it, staying ahead of it, and having transparency and visibility with our supply chain partners. That's about coordination with ports, ocean carriers, truckers, warehouses and customers. We're focused on that end-to-end visibility so the whole supply chain can be fluid and competitive. Eric, you want to add on the operational resources?

When you think about the resource base, you're talking about locomotives, cars and crews. We have reported over 3,000 locomotives in storage, but more importantly we have locomotives pre-placed in geographical areas like the LA Basin so we can be agile. From a car perspective, driving intermodal velocity allows you to turn cars faster and provide more at-the-ready equipment. From a crew perspective we follow the same monthly process to evaluate demand; as Jennifer mentioned, there may be sporadic hiring in some locations, such as the LA Basin, but no immediate concerns on crews. Finally, it's the agility for decision making—when I talked about increasing capacity out of the LA Basin by 25% that was a decision we started on Monday and by Wednesday we were already moving resources there to answer the call. So I feel very comfortable on the operating side.

I'll add that we stay very coordinated with the customers on their forecasts, and then we translate that to operations. We've made changes to charges to incentivize movement and we're sitting down with customers to talk about efficiency and turn times. We feel good about the visibility and coordination and the decisiveness to keep the network fluid.

Okay, I appreciate it. Then just to clarify, I was referring to the business mix being negative in the first quarter by 2.5% and I think Jennifer indicated that would probably be pressured for the full year—just wanted to confirm that. Thanks.

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

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

Jordan, the second quarter should look better. Last year's second quarter was heavily impacted by the pandemic, especially in autos. We still have some production headwinds this year from supply chain issues, but we expect revenue per carload to look better and potentially turn positive in the second quarter depending on mix. We feel good about the direction, particularly in the back half. On biofuels, we've been encouraged with where we are today and even more encouraged by year-end and long term. Renewable diesel demand is growing; we're working with customers to land facilities on our network and we've seen committed capital. We believe it's a real and growing opportunity for us.

Yes, we're seeing customers invest and commit to renewable fuels and related facilities. That bodes well for incremental volume and longer-term growth in that segment.

Thank you.

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

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

Great question, Justin. The short answer is we believe we can grow faster than our served markets. GDP might not be the best single comparator because a lot of services are embedded in GDP; industrial production might be a better comparator. One caveat is that a handful of commodities—coal, petroleum, and perhaps frac sand—may lag or decline. Take those off the table and our expectation is we can grow at a better rate than our served markets.

And just to add, we expect to grow profitably. We recognize the mix dynamic in our business today, but we are focused on improving profitability through efficiency, pricing and service, and that's baked into how we're looking at the future.

Okay, appreciate the time.

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

Good morning. One of the things that stands out in these two competing bids for KCS is the opportunity to convert highway traffic either from the Laredo gateway or the Texas area perhaps down into Mexico up into the Midwest. As you look at that intermodal opportunity and truck conversion opportunity, would you agree that that is a huge potential market? If so, what are you guys doing to actually capitalize on that short of a merger, and what can you do to catalyze some of that growth because it seems like there's a lot of truck-competitive traffic in that corridor?

Thank you, David. Yes, there is a lot of truck traffic that can be converted to rail and we're constantly working with both the FXE and the KCSM to try to get that done. We have been successful in growing our domestic intermodal product even though some flows come to and from Mexico. We expect to continue to do that. There is pick-and-shovel work here: it often involves convincing partners to invest in transload or to accept changed logistics. We also can use truck in Mexico as an origination or destination and transload at the border when direct rail routing isn't feasible. So yes, the market is big; conversion is possible but requires work with partners and customers. We've not seen a complete game plan filed with the STB yet; once we see it we'll evaluate how real it is and whether it impacts us adversely, in which case remedies would be appropriate.

And then as a quick follow-up, if you look at routing on your railroad from the border up into the Midwest, customers have a lot of say on routing. So just because there is another way to move it up a different route that is longer, how much do customers influence routing and the diversion risk?

Customers certainly have commercial influence on routing decisions. A potential acquisition could result in the combined carrier proposing alternative routings that might be commercially attractive to some customers but inferior overall. That's one of the downstream impacts the STB needs to evaluate so we're focused on ensuring customers continue to have competitive options.

Thanks, Lance.

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

Thanks, operator. Lance and team, thank you for taking this. Kenny, maybe one for you on the automotive side: obviously that's a question mark. Once manufacturing gets back up and running, what should that backlog look like for you guys and what should we expect on the volume side in the second half of the year and maybe into the first half of 2022?

Jason, if the demand is there we expect that demand to be strong for the rest of the year going into peak season. So the overall demand will be there. You've heard us talk about some of the wins in international intermodal and we've also had Eric talk about what we're doing to service customers. We're encouraged with the demand structure and our ability to compete, and as supply chain constraints ease—warehousing and dwell time—velocity should open up and allow us to move more volume.

Okay, great. Appreciate it.

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

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

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