Union Pacific Corp (NYSE: UNP) Q1 2020 Earnings Call Transcript

Union Pacific Corp (UNP) Q1 2020 earnings call dated Apr. 23, 2020

Corporate Participants:

Lance M. Fritz — Chairman, President and Chief Executive Officer

V. Jim Vena — Chief Operating Officer – Union Pacific Railroad

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Analysts:

Allison Landry — Credit Suisse — Analyst

Amit Mehrotra — Deutsche Bank — Analyst

Brian Ossenbeck — J.P. Morgan — Analyst

Christian Wetherbee — Citigroup — Analyst

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Scott Group — Wolfe Research — Analyst

Tom Wadewitz — UBS — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Justin Long — Stephens — Analyst

Brandon Oglenski — Barclays — Analyst

Jason Seidl — Cowen — Analyst

Walter Spracklin — RBC — Analyst

Bascome Majors — Susquehanna — Analyst

Jordan Alliger — Goldman Sachs — Analyst

David Vernon — Bernstein — Analyst

Jon Chappell — Evercore — Analyst

David Ross — Stifel — Analyst

Presentation:

Operator

Greetings, and welcome to the Union Pacific First Quarter Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation.

[Operator Instructions]

And the slides for today’s presentation are available on Union Pacific’s website.

It is now my pleasure to introduce your host, Mr. Lance Fritz. Chairman, President and CEO for Union Pacific. Mr. Fritz, you may begin.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you, and good morning, everybody, and welcome to Union Pacific’s first quarter earnings conference call. With me today in Omaha practicing safe social distancing are Jim Vena, Chief Operating Officer; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, our Chief Financial Officer.

Before we discuss our first quarter results, I want to acknowledge the dedication and hard work of our employees. During this COVID pandemic, the women and men of Union Pacific continue to connect American businesses and communities to each other and to the world whether it’s stocking a home pantry, supplying essential goods to healthcare providers, we’re moving critical building blocks for US industries. They’re getting the job done and they’re not missing a beat.

Their spirit shows up in so many ways, I see it in our health and medical team looking out for the safety of our employees. I see it in our operating team moving the goods that make a difference in people’s lives and I see it in our leaders helping us work together, staying on point and position for the future. Their dedication is inspirational and lays the foundation for better days ahead. Our rail network has never run better and we continue to provide a safer, more reliable and more efficient service product to our customers. I am so very proud of the entire Union Pacific team.

Moving on to our first quarter results, this morning Union Pacific’s reporting 2020 first quarter net income of $1.5 billion or $2.15 a share. This compares to $1.4 billion or $1.93 per share in the first quarter of 2019. Our quarterly operating ratio came in at 59%, a 4.6 percentage point improvement compared to the first quarter of 2019 and an all-time best quarterly OR. In addition to improving the efficiency of the railroad, we also made improvements in our safety results, which is always our top priority.

For the quarter, our employee safety results improved 11% versus 2019. We also made progress in fuel consumption rate during the quarter. This reduces our fuel expense, while also reducing our carbon footprint and the carbon footprint of our customers, which is a step in our commitment to address global warming. As I turn it over to the rest of the team, you’re going to hear how our first quarter results have further strengthened Union Pacific to navigate the uncertainties that lie ahead. We’ll start with Jim and an operations update.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks, Lance, and good morning everyone. As Lance mentioned, the railroad is healthy and operating smoothly as our customers have seen minimal rail service impact. We are taking every precaution to protect our employees. We are social distancing and using technology whenever possible to replace face to face interaction.

Over the past few weeks, I have taken the opportunity to visit several field locations practicing good social distancing. To talk with our employees, I could not be more proud of how they remain dedicated to safely and reliably operate in the railway without disruption, as they recognize the critical role they play in delivering goods needed throughout our country, their dedication is to be commended.

Overall, the team had a very strong quarter, really the results speak for themselves. You see the impact of all the changes we made at Union Pacific to become more efficient and provide a better service product to our customers. These changes drove an operating ratio of 59% which was outstanding and there are still many more opportunities ahead of us to further improve safety, asset utilization and network efficiency.

Now I’ll turn into slide 4, I’d like to update you on our key performance metrics. For the first time, we are seeing an improvement across all of our metrics. And as a result, we are seeing a better service product for our customers. This is a direct result of our focus on improving network efficiency and service reliability, as part of our operating model. Compared to the first quarter of 2019, freight car velocity improved 8%, driven by continued improvement in asset utilization and fewer car classifications.

Freight car terminal dwell improved 11% largely due to improved terminal processes, transportation plan changes to eliminate car touches and a decrease in freight car inventory levels. Building up our progress in 2019, we continue to implement changes in order to run a more efficient network that requires fewer locomotives, which has led to an 18% improvement in locomotive productivity this quarter versus last year. As demonstrated by crew starts being down 13% in the quarter which outpaced the 7% decline in carloads, we continue to take steps to deliver positive workforce productivity. Trip plan compliance is where our customers feel the benefit of our transformed operating model, the improvement in the intermodal speaks for itself. With manifest and autos, we are holding ourselves to our higher standard as we tightened schedules and we’ll see improvements as we move forward.

We are off to a great start this year and we expect to see continued improvement in our service product going forward. Starting next week, we will provide some additional operating statistics, in particular, freight car velocity, which you’ve heard me say a number of times is my favorite one that I look at every morning on our investor’s website on a weekly basis to provide more insight to how our operations are running.

Let’s turn to slide 5, it highlights some of our recent network changes, as a part of our continued implementation of position schedule railroading, we consolidated mechanical shops in the LA Basin and Houston areas. In the LA Basin, we’ve consolidated from three shops to one, while in Houston, we’ve gone from two shops to operating just one as well. Increasing train size remains one of our main areas of focus, and we are making excellent progress.

At our recently completed Santa Teresa Block Swap Facility, we are consolidating the intermodal traffic from our eastern ramps destined to port terminals in the Los Angeles, Long Beach area. This allows us to operate longer and more efficient trains across the Sunset Route and provide a better more consistent service product to our customers.

We also completed eight 15,000-foot sidings as a part of our 2020 capital plan to extend sidings in targeted locations. These sidings support our efficiency initiatives by increasing the number of long trains we can operate in each direction, thus reducing demand for crew starts. If I put in more product on fewer trains, we have increased train length across our system by 19% or over 1,300 feet since the fourth quarter of 2018 to approximately 8,400 feet in the first quarter of 2020.

The capital we are investing to improve productivity as well as to maintain the safe efficient network is critical to the long-term health of our railroad. Given the current business levels and uncertain economic environment, we are planning to trim back our 2020 spend by $150 million to $200 million.

To wrap up, we are committed to protecting our employees’ health and safety while providing uninterrupted critical service to support the nation’s supply chain. While we’re early in the second quarter, so far we have been able to hold steady and maintain train length gains as volumes have dropped. We continue to evaluate our transportation plan including yard and local schedules in order to meet customer demands while balancing our resources and assets to meet current volumes.

Since the latter half of March as volumes declined more steeply we stored additional locomotives and railcars. However, those locomotives remain in at-the-ready status and both assets are available to add back quickly as volumes return. We have also furloughed additional employees, however, we are increasing our auxiliary work and training status boards to be prepared should volumes come back quickly or in the event of an outbreak within a group of the employees. We have made great progress at this point. However, we will continue to transform our operations in order to further improve safety, asset utilization and network efficiency.

With that, I’ll turn it over to Kenny to provide an update on our business environment. Kenny?

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Thank you, Jim, and good morning. For the first quarter, our volume was down 7%, primarily due to declines in our Premium and Bulk business group. The decrease in volume was partially offset by a 5% improvement in average revenue per car and drove freight revenue to be down 3% in the quarter. So, let’s take a closer look at how the first quarter played out for each of our business groups.

Starting with Bulk, revenue for the quarter was down 5% on a 7% decrease in volume, partially offset by a 2% improvement in average revenue per car. Coal and renewable carloads were down 19% as a result of softer market conditions from historically low natural gas prices and a mild winter. Looking ahead, we expect continued challenges in coal as natural gas futures remain low and customer stockpile stay at high level. Weather conditions will also continue to be a factor.

Volume for grain and grain products was up 4%, primarily driven by strong export ethanol volume. This was partially offset by reduced shipments of export wheat. Fertilizer and sulfur carloads were up 7%, predominantly due to strong domestic fertilizer shipments.

Finally, food and beverage was up 2% in units as we saw strength in beer shipments become slightly offset by reduced refrigerated and dry foods, which were impacted by a challenging truck environment. Industrial revenue was up 3% with a 3% increase in volume and a flat average revenue per car due to mix.

Energy and specialized increased 10%, primarily driven by strength in petroleum, as favorable Canadian spreads facilitate a stronger crude oil shipment to the Gulf earlier in the quarter. However, with the reduction of oil prices in the past week, we expect crude oil shipments to be impacted in the near term.

Forest products volume was flat. Reduced paper shipments were offset by increased lumber shipments due to strong housing starts and a mild winter during the quarter. Industrial chemicals and plastic shipments grew by 4% due to the strength in domestic and export plastics shipments along with strong demand of detergents and chemicals.

Metals and minerals volume decreased by 3%, reduced sand shipments from the impact of local sand and drilling declines were partially offset by continued strength in rock shipments in the south, coupled with increased metal shipments. We expect to see continued challenges in sand with oil prices remaining at lower levels.

Turning to Premium, revenue for the quarter was down 6% on a 12% decrease in volumes, while average revenue per car improved by 6%. Automotive shipments were strong for the most of the first quarter until the pandemic shutdown OEMs in North America in the last few weeks of March, resulting in a 1% decline in volume year-over-year. Domestic intermodal volume declined 5%, driven by soft market demand and surplus truck capacity coupled with weakness related to the pandemic later in the quarter.

International intermodal volume was down 24% during the quarter. Weakness early in the quarter was related to challenging comparisons with 2019, driven by accelerated shipments related to the tariff policy implementation. Further weakness was driven by pandemic related supply chain disruption that began in China and have slowly impacted much of Asia.

Looking ahead, there remains quite a bit of uncertainty surrounding this global pandemic that we’re facing. With the free fall in economic indicators over the past few weeks and uncertainty about when we will see the COVID pandemic curve start to flatten out, an accurate assessment of 2020 is hard to pinpoint at this time.

As you can see, our volume in the second quarter has started off slowly with the volume down 22% so far, driven by auto production shutdowns and retail closures as US demand is constrained by the pandemic related social distancing and quarantine. Many of the auto manufacturing plants are scheduled to be shut down until at least early May. Already our auto shipments have been down around 80% in the second quarter so far.

Likewise, the recent projections in Mexico indicate that some manufacturing sectors like autos will be shut down for similar time periods as well. However, the CARES Act that was recently signed offer some upside to open the economy for business and improve unemployment for America. Plus, it’s also encouraging to see that much of Asia is restarting production along with China’s recent purchases of US grain.

More importantly, I’d like to make this point clear, we’re not letting the uncertainty of the economy hold us back. We’re seeing focus on what we can control. The good news is that the lower cost structure combined with the improved service product that we’ve achieved with Unified Plan 2020 is a competitive advantage for us. Customers are recognizing it and awarding us new business.

As Lance and Jim mentioned before, the railroad has never run better. I want to thank our employees as they are taking the necessary precautions to stay safe and healthy, so we can keep the operations running for our customers. We will continue to stay in close contact with our customers and we are ready when the supply chains recover. As demand improves, we expect our stronger service products will place us in a great position to win incremental opportunity.

With that, I’ll turn it over to Jennifer who’s going to talk about our financial performance.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Thanks, Kenny, and good morning. As you heard from Lance earlier, Union Pacific is reporting first quarter earnings per share of $2.15 and an all-time best quarterly operating ratio of 59%. Our fourth consecutive quarter starting with a five. Comparing our first quarter results to 2019, there are a few puts and takes. Last year we incurred higher weather-related expenses and you may also recall that we received the payroll tax refund that benefited both our operating ratio and earnings per share. As shown on slide 13, these two items had an offsetting impact in our 2020 results.

Fuel was an unexpected tailwind in the quarter and likely will be for much of 2020 as the year-over-year fuel price reductions favorably impacted our quarterly operating ratio by 80 basis points and added $0.04 to earnings per share. Setting aside those items, core margin improvement for the quarter was a remarkable 3.8 points and added $0.18 to earnings per share as we continue to demonstrate the power of our operating model as well as the ability to flex our cost structure in the face of volume challenges. Thanks to the dedication and result of the entire Union Pacific team, we took another significant step forward to our goal of operating the most efficient, reliable and consistent railroad in North America.

Looking now at our first quarter income statement, 2020 operating revenue totaled $5.2 billion, down 3% versus last year on a 7% year-over-year volume decrease. Demonstrating our ability to be more than volume variable operating expense decreased 10% to $3.1 billion. These results net to operating income of $2.1 billion, a 9% increase versus 2019. Below the line, other income decreased compared to 2019 as the payroll tax refund I referenced on the prior slide included $27 million of interest income.

Interest expense increased 13% due to increased debt levels while income tax expense also was higher up 11% due to higher pretax income in the quarter. Net income of $1.5 billion was up 6% versus last year, which when combined with our share repurchase activity led to an 11% increase in earnings per share to $2.15.

Looking at revenue for the first quarter, slide 15 provides a breakdown of our freight revenue which totaled $4.9 billion, down 2.5% versus last year. While not able to offset the impact of the 7% lower volumes, the combination of favorable business mix and our pricing actions had nearly a 5 point positive impact on our quarterly freight revenue. Positive mix in the quarter was driven by lower intermodal shipments, partially offset by lower sand volume. In addition, fuel surcharge revenue declined $47 million in the quarter to $351 million and impacted freight revenue by 25 basis points. Drivers of the decline were lower volume and fuel prices.

Now let’s move to slide 16, which provides a summary of our first quarter operating expenses. Through our Unified Plan 2020 and G55+0 initiatives, we drove improvement across all cost categories. Compensation and benefits expense decreased 12% year-over-year, primarily as a result of our workforce and productivity initiatives.

Total first quarter workforce declined 15% or about 6,200 full-time equivalents versus last year, sequentially our workforce was down 2%. Breaking the year-over-year reductions down a little more, we saw a 19% decrease in our train and engine workforce while management, engineering and mechanical workforces together decreased 13%. This expense category also benefited from less year-over-year weather-related costs offset by the payroll tax refund I referenced earlier.

Fuel expense decreased 18% as a result of lower diesel fuel prices and fewer gallons consumed with a more efficient operation. Our consumption rate for the quarter improved 5% versus last year to a first quarter best level. Decreased costs associated with maintaining a smaller active locomotive fleet as well as lower weather-related costs were key drivers of the 10% reduction in purchase services and materials expense.

In addition, as we use both our locomotive and car fleets more efficiently, we’ve been able to lower lease expense, which largely contributed to the 12% decline in equipment and other rents. With regard to other expense, which was down 2% in the quarter, we recorded an adjustment to our bad debt reserve to recognize uncertainty related to certain customer receivables due to the potential impact of COVID-19. That expense increase was offset by running a safer railroad, which lowered destroyed equipment costs as well as freight loss and damage expense.

Finally, for full year 2020, we now expect year-over-year depreciation expense to be flat. Looking at our productivity and our costs structure, net productivity totaled approximately $220 million in the first quarter. As Jim detailed earlier, with our improved key performance indicators, the successful implementation and enhancement of our operating plan is increasing efficiency while at the same time providing a superior service product for our customers.

As we discussed in the past, we view productivity as a volume neutral measure. In other words, we’re reporting only that part of our cost savings attributable to the actions we are taking. But as we enter this recessionary periods sparked by COVID-19, I’d like to make a couple of comments about volume variability, in particular, as it relates to prior recessions. First, and most importantly, Union Pacific is running at efficiency levels we’ve never experienced before as a company. For example, we were more than volume variable on a fuel adjusted basis in the first quarter 2020 as a result of the strong productivity focus embedded in Unified Plan 2020.

We’ve also taken more than 1,500 basis points off of our operating ratio since the great financial crisis in 2008-2009. That further strengthens our ability to manage through today’s challenges and emerge stronger on the other side. Moving to cash generation, as we face these fluid and uncertain times, we recognize the need to maintain ample liquidity. With the strength of our balance sheet and our strong cash generation, I can confidently say that we are well positioned for the challenges we are facing.

Cash from operations in the first quarter increased 10% versus 2019 to $2.2 billion. Free cash flow after dividend and after capital investments totaled over $1.3 billion, resulting in a 91% cash conversion rate. We also returned $3.6 billion to shareholders during the first quarter through the continued payment of an industry-leading dividend and the repurchase of 14 million shares of our common stock.

Share repurchases were funded in part from our January debt issuance. Union Pacific’s strong investment grade credit rating and a very attractive interest rate market allowed us to issue $3 billion of new debt, a portion of that issuance funded the $2 billion accelerated share repurchase program we entered into in February and the rest is for 2020 debt maturities.

We finished the quarter at an adjusted debt-to-EBITDA ratio of 2.7 times, in line with our previously stated goal of maintaining strong investment grade credit ratings no lower than BBB+ and Baa1. Although COVID-19 was not contemplated when we originally set our leverage targets back in 2018, the decision to manage our balance sheet in line with a strong investment-grade credit rating was clearly the right one. We maintain an active dialog with our rating agencies, and at this time, they are comfortable with our current leverage position.

We finished the first quarter with $1.1 billion of cash on hand. However, in an abundance of caution, we issued $750 million of 30-year notes in early April to further increase liquidity. As of yesterday, our cash balance was around $2 billion and we have additional levers available if needed. The current bond market is open to us as evidenced by our April issuance. We also have $2 billion of credit available under our undrawn credit revolver and up to an additional $400 million available under our receivable securitization facility, which is 50% drawn at this time. As we sit here today, we do not believe it will be necessary to tap those additional sources but we view them as a prudent backstop to have at the ready.

Turning now to our 2020 outlook, we are formally withdrawing much of our previous guidance in light of the current economic uncertainties. In particular, we are no longer providing guidance for the full year 2020 volume, headcount, operating ratio or share repurchases. To date, we have repurchased roughly $17 billion of the targeted $20 billion three-year program that is set to conclude at the end of this year. We will continue to monitor business conditions and adjust this activity as we see prudent, but with share repurchases currently paused, completion of the full $20 billion seems less likely today.

As you heard from Kenny a moment ago, our second quarter carloadings are currently down 22% and our current view is that volumes for the full quarter could be down around 25% or so. With volume declines of that magnitude, we are taking actions across the board to rightsize our resources and manage expenses. Even with aggressive actions, however, it is unlikely we can improve our second quarter operating ratio on a year-over-year basis with that level of volume loss.

Unchanging for 2020 is our long-standing guidance around pricing, we still expect the total dollars generated from our pricing actions to exceed rail inflation costs. With regard to productivity, we are widening our range of expectations for full year 2020 to $400 million to $500 million. We clearly got off to a very strong start in the first quarter and our commitment to productivity is unwavering. However, we also recognized that the loss of volume leverage is a challenge. In terms of cash generation and cash allocation, we’ve modeled a number of different down volume scenarios. In each, we plan to maintain the dividend but with the capital modifications Jim mentioned and a suspension of share repurchases.

The outcome of that exercise is a strong confidence in our ability to generate significant free cash flow after dividends in some pretty dire economic conditions. This is a testament to the earnings power of our franchise as demonstrated by our first quarter results. Although frustrated by current conditions, the potential is clearly there. Longer term, our guidance of capital expenditures of less than 15% of revenue, a dividend payout ratio of 40% to 45% of earnings and ultimately that 55% operating ratio remain intact. As you have heard from the entire leadership team today, we are unwavering in our commitment to improving safety, efficiency and service as we all firmly believe in the strong long-term prospects of our company.

So, with that, I’ll turn it back to Lance.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you, Jennifer. Our first priority has been and will always be safety. We made good progress on safety in the first quarter and I expect continued improvement. From a service and efficiency perspective, I am so thankful that we went through the tough process of implementing the Unified Plan 2020 over the last 18 months. That work has put us in a position of great strength to deal with the future. When the time arrives were COVID-19 is largely behind us, Union Pacific will be well positioned for long-term growth and excellent returns.

With that, let’s open up the line for your questions.

Questions and Answers:

Operator

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Allison Landry with Credit Suisse.

Allison Landry — Credit Suisse — Analyst

Thanks. Good morning. Jim, as you think about the persistent reduction in coal tonnage and the GTM intensity of that network, do you see opportunities for or are you considering making any structural changes that might reduce maintenance capital requirements, probably any thoughts you could share about how you are thinking about the coal network going forward?

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Listen, the coal network was built to handle way more trains than we’re handling. So, it starts off on a separate piece of the railroad. So, there is no if, ands, or, buts that we’re going to — we’re looking at that, we’ve got plans to be able to take advantage and use some of that both in maintenance and some of the capital that we put on the ground in there.

On some of the other network little more difficult because it just mixes up with the rest of the trains we run. But absolutely, Allison, we’ve got a plan of when some segment of the railroad sees a downturn in traffic that we fix it. The big challenge for Kenny is this, I want him fill it up. So, I think he has got a great service product and we get out there and fill up those pieces that are running with less traffic right now.

Allison Landry — Credit Suisse — Analyst

Okay. And then could you give us a sense for how much train starts are down in April? And then in terms of just headcount declines, do you think you can continue to outpace volume declines in the next quarter or two. And if there’s any way to sort of parse out what percentage you think would be structural take out versus how much would likely come back with the recovery in demand? Thank you.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Okay. So, so far, I will tell you, the team has done a spectacular job. We have — actually our train size has grown in April, not come down. So, we are full bore every one’s on looking at how we make this place with what the traffic that’s offered to us who make it the most efficient. So, it’s actually gone up in size, train size in April. You will see that when — as we report next or you’ll see it from how we talk at different conferences.

As far as people, I think, we’ve done a great job of staying ahead of the game. There would come a point where it’s difficult to stay ahead of the drop in business. But so far, even up to this point right now with the traffic that we see in April. We’ve been able to stay ahead and be productive and that we are dropping more than the adjustment in business. But I’ll tell you, I know there’s a certain point when it’s impossible to do. So we’re not there yet.

Allison Landry — Credit Suisse — Analyst

Okay. Excellent. Thank you.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thanks for the questions.

Operator

Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.

Amit Mehrotra — Deutsche Bank — Analyst

Thanks, operator. Hi, everybody. Thanks for taking the question. Jennifer, I didn’t fully catch your comment around the OR for the second quarter. Did you say it was going to be down year-over-year, were you comparing it sequentially, I wasn’t exactly — I don’t think I understood exactly what you were saying there?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Thanks, Amit. No, my comment wasn’t on a year-over-year basis in saying that with volume declines that we’re expecting of this magnitude, so down 25% or so. It’s unlikely that we would be able to improve our operating ratio in the quarter, it was a quarter only comment on a year-over-year basis.

Amit Mehrotra — Deutsche Bank — Analyst

Right. Okay. Got it. Okay. That makes sense. Thanks for the clarification. And then, Jim, I just want to come back to Allison’s question really quickly, obviously, the 25% decline in volume, it’s a bit unique, I guess, in the quarter because the decline in revenue is so significant but also kind of short-lived, which introduces a whole host of other dynamics in terms of how you manage labor and other costs in the business that might need to ramp back up. So, if you can just talk to us, how you manage that, I mean, it’s basically PSR is important, but — and thank God, you guys did it in the context of what’s happening currently. But is the second quarter is just going to like reflect more of a normal kind of 50%, 60% decremental margin quarter because a lot of those costs that you would normally have to structurally kind of move away has to remain because you have to prepare for the hopefully V-shaped recovery on the other side. Just help us think about how you manage through this dynamic that’s a little bit unique?

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Well, listen that was a multi-person answer question, I think, Jennifer wants to jump in. But let me just start with what I see. You can see that we’re high double-digit drop in the number of employees already versus where the business dropped. And so it gives us a chance to be able to be there and that’s why the comment the way I answered to Allison’s question, I’m very comfortable that at this place I don’t know what’s going to happen to the business. I’m open for a big V coming back, but who knows.

So we are prepared and preparing to make sure that we do not set ourselves up that if the business comes back in quicker than some people think that we’re prepared for it. So that’s why the way we parked on locomotives. We’ve got lots of locomotives. I don’t even what to talk about how many we’ve got parked right now, it’s so many. I worry more about the productivity number that’s out there, that’s what’s real key is how many.

So, we’ve got locomotives ready to go. The business comes back, if it comes back, slow or fast, we’re ready for it. And people, we have been smart about how we manage all the labor that we have. So, we are purposely, at this point, because of the substantial drop over a short period of time that we have put people in places, so that we can re-call them. They cost us a little bit less money. But they are available real quick the return of the railroad. So, we don’t impact.

Service is key for us. You can’t be running an efficient railroad and I’ve always said that. And I know some people mix this whole thing up PSR in service. So, you can’t have a good operating railroad that will operate safely if you don’t have customers that want to come on it and that’s what we’re building. I think we’re there, Kenny should be able to go out and sell it, but at the end of the day, that’s what we’re all about. Jennifer?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Yeah, I mean, so we’re obviously not going to give guidance on decremental margins. Again, you look at our first quarter performance is very strong, we were more than 100% volume variable. But I think when you think about how we look at the second quarter, I mean, obviously 25% down volumes and as you — your earlier question was asking around the operating ratio. It’s tough to keep up in terms of your cost-cutting when you have volumes come out that fast.

We are going to be very aggressive and do everything we can, but we are not going to give specific guidance relative to head count for second quarter or relative to the margins. But just know we’re going to pull every lever available to us.

Amit Mehrotra — Deutsche Bank — Analyst

Okay. Okay. I’ll keep it to two, guys. Thank you very much. Appreciate it.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thank you, Amit.

Operator

Our next question is from the line of Brian Ossenbeck with J.P. Morgan. Please proceed with your question.

Brian Ossenbeck — J.P. Morgan — Analyst

Hey, good morning. Thanks for taking the question. Maybe one for Kenny, can you just go through the impacts of energy across the portfolio, specifically look you mentioned crude before, but want to hear a little bit more about perhaps natural gas, what that does to the plastics producers in the Gulf Coast? And is it – I heard your comments on coal, but is it too early to think about some potential upside in coal if you were to see an improvement as production gets shut down?

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah. So, I’ll walk you across pretty quickly here. The coal prices have just dropped here even over the last few months to some levels that we haven’t seen in a while. I’m sure you see the same forecast and we’ll see what happens there. But there is nothing that leads us to believe there is going to be large upside with coal, but we’ll keep working with Jim’s team to get the productivity that we can get out of it.

The other part of the energy side, of course, is the oil prices and you’ve seen what has happened there on the petroleum side with crude oil. We’ll see what happens with those prices. Those prices also have an impact on our sand business in terms of drilling and then to a lesser degree the drilling pipe segments also.

As you look at our plastics business, there is going to be an impact on our plastics business. I will tell you that there is more production that has come on and there is more production it will come on. That is a positive for us. We’re hearing in that the — or we know that the operating rates where a number of our plastics producers have taken a step down, but that’s still a very positive segment for us.

I will say that, and I want to end at all with this, at the end of the day, our service product has been as good as it has been. And we continue to see other pieces of carload business come up for us to bid on and compete for. I really like the position that the service products has put us in.

Brian Ossenbeck — J.P. Morgan — Analyst

Thanks, Kenny. So, follow-up for maybe Jennifer and Jim. If — I believe last time we talked to you’re targeting a $500 million plus productivity gain, which is more volume neutral, and it looks like now you’re taking it down a little bit at least from how we see it here. So, maybe if you can just give us a little bit of context to that if clearly the volume environment is different, but if this is a volume neutral sort of metric maybe you can help bridge the gap there between the two numbers?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Sure. So, you’re right. We do take out the volume variability part of the costs. So, if we’re going to have fewer train starts because of lower costs, we don’t count that in the number, but if we have reduced train starts like through Jim’s long train productivity initiatives, those are things that we put into our productivity number. What I — what my comment was meant to say is that when you have less volume, it’s harder to leverage that. And so when we were putting together our plan for 2020 recall we originally said we were looking for a little bit of positive volume growth when we gave the guidance of $500 million or so productivity.

We’ve obviously taken that volume growth off the table in terms of what we’re seeing today. And so that’s why we feel like we need to widen that range a little bit in the $400 million to $500 million range. So, that’s how you should think about that. But, Jim, you might want to add a little more.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

So, Jennifer, and Brian listen, the $220 million first quarter starts us off real well to be able to deliver what we said. I think, it’s prudent that we look at it, because if you drop volume you have less of a chance to reduce and just the way we measure cost take-out it’s true costs, we’re not — there isn’t anything — volume doesn’t help us. But I’ll tell you this is there is a list of things that I still want to get done.

And with that, the way we operate our locals, the way we’re handling our intermodal terminals that make it more efficient. The train size is still there. We can be more fluid with how we handle the railcars as you’ve seen us shut down a couple of diesel shops. So, all those things are still out there and unless really the markets change for us even more, I’m very comfortable with where Jennifer has got us guiding for this year. I’m very comfortable. I won’t use the word go by it otherwise Jennifer will get excited about it, but I’m very comfortable with where we are.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Brian, this is Lance, I just want to add, it’s really simple to think about. If in this quarter as we anticipate volumes are off something like 25%, you got to take something like 25% of your activity out of the railroad to match before we start talking about incremental productivity. So, the basis for which you’re going to create productivity gets very, very difficult when you take an order of magnitude change like that. On the opposite side, if you’re growing 3%, 4%, 5% gives you all the opportunity not to add resources in and you can count that all as productivity.

Brian Ossenbeck — J.P. Morgan — Analyst

Right. Yeah, it sounds like there is a calculation aspect to it kind of like your core pricing. So, just wanted to make sure I was clear. Thank you.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Okay.

Operator

The next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Christian Wetherbee — Citigroup — Analyst

Hey, thanks, good morning. Wanted to talk a little bit about volume if we could, the 25% decline in the second quarter is not too far off of where we’re running kind of currently here which would suggest that maybe we’re kind of getting closer to the bottom. Want to get a sense maybe Kenny for you, discussions with your customers or maybe each individual business line, can you walk us through sort of what are the puts and takes to kind of get your comfort with that 25% number? We appreciate you given it, but kind of curious what’s the sort of drivers behind that.

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah. So, first of all, I believe you all see some of the information that we see publicly in terms of where the automotive OEMs are. And they appear to be coming back sometime next month call that the first half of May. Clearly, there is going to be some ramp-up issues with that maybe they wouldn’t start at 100%. We’ll keep an eye on where that is.

As we look across our industrial customers, there are some customers that we’re still seeing produce at a pretty strong clip. Our rock network is still working pretty well. On the grain side, we’re pretty optimistic there. We’ll see what happens over the next few months. We do know that China has come in and purchase some grain. During the back half of the year, we would expect that we should see some benefit from the Phase One deal.

And then as you look at how — as we’re talking to our customers on the consumer side, I’ll call those international intermodal and our domestic customers, I’ll tell you they’re still — they still don’t have that line of sight and what’s going to happen. So, we’re not in a position, I’m not in a position, even though we’re talking to them every day to tell you what will happen there.

Lance M. Fritz — Chairman, President and Chief Executive Officer

So, Chris, this is Lance. Let me step that back up and come up to a higher level of depth and length of our downturn. So, we’re learning every week a little bit more about the dynamics of how deep it might be and how long it might be. That’s still very unclear. And the goalposts are pretty broad right that you can hear very well-educated deeply experienced economists that still think about a V recovery, you hear about W recoveries, U recoveries, a slow hockey stick ramp up.

I think, our collective belief at this point is, it’s sharp and deep, it’s going to last for a while and recovery is going to be some kind of ramp, but probably not terribly steep. And so we’re looking for those markers and nothing would please me more than to be wrong about this 25%-ish and see sometime in the second quarter that we’re starting to see demand from and our supply chains reflect it. But it’s — there’s a lot that needs to happen between here and there.

Christian Wetherbee — Citigroup — Analyst

Okay. That’s very helpful. I appreciate that. And then maybe coming back to the productivity comment and maybe this is for you, Lance or Jim or Jennifer. I guess, when you think about that sort of dynamic of volumes coming out. I thought that was very helpful to give us some of that perspective about sort of the base kind of going away in terms of generating productivity. So, is it reasonable to think that sort of 2Q is going to be there. The very most challenging sort of quarter to get that productivity and that maybe that sort of remainder of the $400 million to $500 million is more back-end weighted to the 3Q or 4Q when the volume dynamic is hopefully a little bit more stable.

Lance M. Fritz — Chairman, President and Chief Executive Officer

No, I don’t think we’re saying that specifically, I think, what we’re saying is with such an abrupt downturn and the depth of it, productivity is going to be harder to come by. So, for instance, it’s very unlikely and it would be unreasonable to think about the second quarter in the $200 million order of magnitude like we saw in the first quarter. But I don’t think a reasonable expectation is no productivity. I wouldn’t expect that from us.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Listen, we are spending capital and we have the savings that I mentioned earlier on in place. We expect the train size to go up and have less train starts for the business that we have. So, that’s productivity. We expect to be more productive with our local assignments and local operations. We expect to be more productive on our intermodal facilities and how we handle the traffic that we have.

So, as much as volume does make some of it harder, I’d love to have — I’ve said this the whole time love to have a quarter with 2% or 3% volume growth. Hang on. I’d love to see where that number is. But it is not there, because I’m not real worried about not having productivity this quarter.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

And just a quick reminder, I mean, our comparisons on a year-over-year basis relative to productivity get harder through the course of the year. We closed out the year with close to $200 million, $215 million of productivity. So, take all of those comments kind of in your mosaic of how you think about it, Chris.

Christian Wetherbee — Citigroup — Analyst

Got it. That’s very helpful. Appreciate the time. Thank you.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks, Chris.

Operator

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

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Great. Good morning. Just a follow-up on that, on your volume outlook there, Lance. I guess, if you’re running it down kind of 2022 now and you’re targeting down 25% for the quarter, are you expecting things to get worse from here? Are you not anticipating things reopening, I mean, I guess, just thinking about this only in the third, fourth week of April. You still have two months left and with things maybe apparently starting to reopen, are you expecting things to deteriorate from here.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Well, part of what we’re making that commentary on is reflective of how we’re planning for the second quarter. So, we tend to be pretty conservative. There is a lot of unknowns, I don’t think we know enough yet to know what’s left to deteriorate in the demand economy versus how that’s going to be offset by recovery. So, this is a lot of moving parts. And I think a 20%-ish is a good marker for us to plan our activity around. We’ve mentioned to you as a result and we will hope for better. Kenny?

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah. I want to just give you a view from my seat when our commercial team go then and we talk to our customers, we’re talking about — after we go through our safety side, the second thing we talk about is the service product. And Jim is exactly right, we’ve got a very strong service product to fill. You talked about the car velocity improvement that make us more competitive with truck like services. As we entered into the year, what I would tell you is that on a carload basis, we felt really good about some of the wins in some key markets and we felt really good about opening up new markets that we hadn’t touch.

On our domestic intermodal side, we’re about two-thirds along the way through our bid season. We feel very good, I mean, we feel very good about what we’ve won in that area. So, we need the market to help us there. Even in our international intermodal business towards the back half of the year, there have been some jump ball opportunities that we feel really good about that we won that you should see.

So, coming into the year, we felt really good about our opportunity to compete. The service product is something that we’re going to use to make the pie larger to compete against truck, but we feel really confident once the market comes back.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Thanks, Kenny. Thanks, Lance. I guess, if I could just switch over to Jim or Jennifer my follow-up, you talked about trimming capex, that’s contrasting a little bit what we’ve heard from some of the others who look to take advantage of the downturn maybe to get some cheaper build out capabilities. Can you maybe talk about that? And, Jim, can you clarify the status on the locomotive fleet and the park capacity? Thanks

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Well, listen Ken, it’s a good question. And that usually, the way I like to look at it is, if you have a downturn of business and you know it’s going to come back, why adjust your capital program at all. We went through it and it’s more like a timing that rolls into next year. This is not anything that — everything that we had in the capital plan was built for could make this railroad better more productive, safer and sustainable over the long term. So, we’re not changing that, but we thought it was prudent with where the revenues are at this point in the business level, to just slide some of it into an early part of next year. And because we give guidance on a year-to-year basis, that’s what’s happening.

So, we are not — absolutely, there is some areas where we’re going to spend money faster and we can see that. So, if we have some opportunity even after we make the adjustment in the capital to be able to use some of that cash, because we’re more efficient, we’ll spend that this year at this point. But stay tuned and we’ll adjust it as we see what happens to the business. Jennifer, anything else?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

No, I think you summed it up, Jim.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Okay, thanks. Thanks, Ken.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Thanks, guys. And just the local fleet numbers [Indecipherable].

Lance M. Fritz — Chairman, President and Chief Executive Officer

I’m sorry, Ken, you broke up.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

What you want [Speech Overlap]

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Just the loco fleet Jim mentioned.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Listen, we’ve got so many locomotives park that I’m just about embraced to say how many we have parked. Okay. So, and there is some noise in it right now because of the business drop, but this is a number I look at Ken and I gave it to you. That 18% improvement in locomotive productivity is the key number. We have lots of locomotives parked. We’re good if the business comes back. We’re good if the business grows. We are being smart. We’re putting all the technology.

We’ve got the best locomotives and you can see the fuel efficiency that we said 5% [Phonetic]. But you could take some of the noise out but a true 4% betterment. So, listen locomotives, we have a lot of them parked and we continue to park them every day, right now, with where we are with the business levels.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Hey, Jim, there’s something we don’t talk a lot about, there is two ways to look at our stored locomotives. There is locomotives that are stored and intended to be stored for a while. That is we don’t anticipate their need in the next week to month. And then Jim has got other locomotives that we store in a status called at the ready. And at the ready are literally ready to be pulled out and put back into service on a moment’s notice. And so that mix is changing every day, but the at the readies allow us to react to business upturn, which we hope we see, and we hope it’s a strong V. That would be great.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Thanks for the time guys there. I appreciate it.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thanks, Ken.

Operator

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

Scott Group — Wolfe Research — Analyst

Hey. Thanks. Good morning, guys. So, wanted to just follow up on something I heard earlier. Jim, in the answer to the first question, were you suggesting that April headcount is down more than volumes are down sort of more than 20%? And then, Jennifer, I totally get second quarter OR commentary, you’ve got some cushion with the strength of the first quarter. Any thoughts at all about the ability to improve for full-year basis?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

You want o start, Jim? Or you want me to go ahead?

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Sure. Listen, I’ll start real quick. Just to clear up the whole discussion about people, we started at 19% drop that we’ve announced over the first quarter year-over-year and we think that we will continue to drop that down as the business comes down and with some productivity. I’m not sure where we’re going to end up exactly, but stay tuned, I think, we’ve got a great story moving ahead.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Yeah. And just to clarify, Jim’s comment, that 19% is our train and engine crew.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Right.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

So, that’s a part of our workforce, not the whole workforce. So, to your question, Scott, then about full year OR. No, we pulled that guidance off the table and it really is going to be dependent on what happens in the marketplace. The commentary that you’ve heard us have here today, again, we would love to see volumes come back and in that environment, we feel very, very good about our potential. I mean, you saw what we did with down 7% volumes in the first quarter, making very strong improvements in our operating ratio.

And that’s the kind of call that the proof statement and test case, whatever words you want to put around that in terms of what we’re capable of. So, we’re just not going to give any guidance right now because we don’t have great visibility to what volumes are going to be other than where we think second quarter is going to end out, but let’s stay tuned on that. And if that changes and starts to turn around a little bit, you bet, I mean, we think we’ve got great long-term opportunities.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Absolutely. We’re looking forward to when our markets start returning to normal, because to Jennifer’s point the first quarter is an absolute proof statement of what we’re capable of doing.

Scott Group — Wolfe Research — Analyst

So, I guess, that’s actually my follow-up if I can, like, so a 59% in the first quarter to me is a full-year run rate somewhere in the mid-50s range whenever — not this year obviously, but whenever things normalize. Is there anything about that 59% in 1Q that you feel is sort of not sustainable that we shouldn’t think about sort of what the earnings power is in a couple of years when things normalize?

Lance M. Fritz — Chairman, President and Chief Executive Officer

Not making a commentary on your math on what it translates into for the full year. That 59% in the first quarter was clean.

Scott Group — Wolfe Research — Analyst

Right. Thank you, guys.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks, Scott.

Operator

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

Tom Wadewitz — UBS — Analyst

Yeah. Good morning and impressive performance against the tough backdrop, clearly. Wanted to ask you what, Jim, if you could offer some thoughts on the kind of the PSR process, it’s like sometimes you say, well, a softer volume environment makes a little bit easier to make some big structural changes. I think, it’d be fair to say this is more than a soft volume environment.

So, how you think about the PSR changes, the pace of change and whether you can take another look at structural position. So, you say, hey, we had 14 carload terminals. We now have whatever your number is, maybe we — it does need to be nine, it could be five or six. How do you think about that just in terms of — I’m thinking of the intermodal and carload terminal network and whether you have now a chance to say, oh, we can ratchet that down even further or maybe it’s outside of the terminal network, it’s something else?

Lance M. Fritz — Chairman, President and Chief Executive Officer

Tom, you know me by now, I don’t like to get way ahead and guess on what we’re going to do next. And a lot of it is driven by car flow. So, I think, we have shut and idled five hump yards already and there’s probably possibility for more depending on how the traffic flows are, and we’ll do that at the right time. Fort Worth caused us a little noise for a while in the first quarter operationally. And so you need to make sure you bet these things down where you don’t impact the operation.

But we see opportunity still in — and it doesn’t matter where the volume is. It — whether the volume is down or up I see productivity that we can and efficiency that we can get out of the place and it’s across the board. It’s how we manage, number of people that we have that need to manage, the processes we put in place for intermodal. Later on this year, we’re going to have consolidation in Chicago down to three intermodal facilities from six. So, I think that’s great for us.

We are looking at what we’re doing down in the LA Basin to see how we can give a better service product and be able to be touch the customer in a better way, in the whole LA Basin. So, Tom, there’s still lots out there, I see lots of opportunity, but I’m being real — hopefully, I’m being smart and I’ll let Lance and Jennifer and Kenny give me the feedback, but we’re trying to do this or I’m trying to do in a systematic manner where we don’t impact the customer to the point where we lose business because of what we’re doing and we’re able to do it.

And I think you — and I’ve been here just over year I think it’s been successful, great leadership from everybody at the table here with me, this is a team effort. So, I’m real happy and I — there’s lots of opportunity left. I’m also just answer, if someone’s going to ask me what inning I’m in, it’s not football season anymore. It’s not baseball season and I hope it was baseball season, but… [Indecipherable]

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

It’s still like that. I got half of the game to go yet. Okay.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Hey, Tom, part of your question also kind of is contemplating again, depth and length of this downturn. And that’s what makes our decisions the most difficult right now. So, right now, what we’ve got is decisions that we’ve made about resources like our exports [Phonetic], so that some part of our furloughed crews are more accessible to us quickly. We’ve talked about at-the-ready locomotive. We’ve taken an action here on our non-agreement workforce. And instead of taking a large scale of permanent force reduction we thought for this period of time it’s more prudent to ask our non-agreement workforce to take required unpaid leave of absence. So, weak a month for four months.

All of those actions are with an eye towards recovery is going to occur. We need to be ready for it. We need to be ready for whatever shape it takes and still do what’s prudent in the current environment. We think we’ve got that balance.

Tom Wadewitz — UBS — Analyst

Right. Okay. That makes a lot of sense. For my second question, just wanted to, I guess, ask a question about the kind of price versus volume calculus. I guess, is the truck market is, there’s obviously a lot of excess capacity out there. So, probably in the near term trucks compete a bit harder and maybe they can even compete on longer length of haul that might affect you whereas we normally think eastern rails are more affected by truck.

Kind of how do you manage the pricing approach. It’s great to be really disciplined on price, but that could cause some further share loss to truck in certain segments on a near-term basis. I don’t know, Kenny or Lance if you want to offer thoughts on the kind of view versus truck and price versus volume approach.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Sure. I’m — let me start and Kenny will give it some fine points. Parts of our pricing philosophy, the core pricing philosophy is unchanged. And that’s about having to generate a return on whatever piece of business we secure and making sure that our price reflects our value. What’s cool about having fundamentally shifted our cost structure is that it opens up more markets to us. Clearly, trucks are very competitive in a loose market like what we’ve got right now. There is going to be elements of truck-competitive business that makes no sense for us to pursue, because somebody in the trucking world is willing to take it just to generate enough cash to survive. But our cost structure opens up a broader segment of that market to compete and win and generate an attractive return, and we’re doing that.

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah, the only thing I’ll mention is that, again, just to go back to the car velocity number and that’s an average number, there is some mark areas where that car velocity number is much greater. And it has given us the ability to go out there and get the pricing that we believe we should be receiving for the service product that we’re providing our customers. There is tremendous value that we’re talking about when we talk to our customers and we’re renewing business and going after new business and asking them to open up their truck lanes for us.

Tom Wadewitz — UBS — Analyst

Right. Okay. Thank you for the time.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you, Tom.

Operator

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

Ravi Shanker — Morgan Stanley — Analyst

Thanks. Good morning, everyone. Sorry, but just a follow up on the productivity targets, again, I’m a little bit confused because based on the commentary about the changing range, it does sound like the productivity target is at least somewhat related to the volume growth. So, is it fair to say that you are now at the stage of PSR where kind of a lot of the costs side like the fat [Phonetic] in the company has been taken out and it’s mostly going to be an efficiency/volume driven or improvement story from here?

Lance M. Fritz — Chairman, President and Chief Executive Officer

Hey, I’ll start, Ravi. This is Lance. So, the short answer is, it’s always easier for us to get productivity in a growing environment than in a shrinking environment. We’ve proven we can get it in a shrinking environment. When you shrink it 25%, it gets really, really difficult. Don’t go to zero, but it just gets pretty difficult. In terms of PSR and fat, clearly at 59% operating ratio. There is less easy opportunity than there was at 69% operating ratio. But there is still opportunity and Jim’s outlined many of them.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Lance, I think you hit that perfect unless there is a follow-up on it.

Ravi Shanker — Morgan Stanley — Analyst

Yeah. And maybe Lance, I’ve a follow-up for you kind of just thinking big picture, do you think a situation like this can be unprecedented shutdowns you’re seeing right now. Again, going back the adage of never waste a good crisis, I mean, do you see some of your customers making permanent changes in their domestic or global supply chains. I’m assuming some of that is at risk for you, some of that as an opportunity kind of where do you see are some of the kind of permanent changes coming to supply chain in the future?

Lance M. Fritz — Chairman, President and Chief Executive Officer

That’s a great question, Ravi. And for sure there are going to be some opportunities that grow out of this crisis. One is, we do hear our customers talking about evaluating their supply chains with an eye towards reliability being valued a little bit higher. That means near shoring or onshoring some of those supply chains and that would be a good thing for us generally speaking. We haven’t necessarily seen that happen. I think, it’s way too early. I don’t think you’re going to see wholesale investment happen until suppliers, the industry starts becoming more confident in the demand side, but clearly I think we’re going to see that, and that will benefit, Mexico, it will benefit our to and from Mexico business and it will probably benefit our inside the United States business as well.

Ravi Shanker — Morgan Stanley — Analyst

Great, thank you.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Yeah.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks, Ravi.

Operator

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

Justin Long — Stephens — Analyst

Thanks and good morning. So, I wanted to follow up on some of the intermodal commentary, obviously, we’ve seen a substantial decline in fuel prices and it doesn’t sound like the energy market is coming back anytime soon. Does that change the way you think about long-term growth in your domestic intermodal business or with the service improvements that you’ve seen and continue to see, do you think this is still a GDP plus business when the economy bounces back, even if the energy market doesn’t bounce back?

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah, there is no change in how we look at the business, what’s changes that our service product is much, much stronger now and much more reliable and gives us an opportunity to compete and win out there. And as I mentioned being two-thirds into the bid season on the domestic side, we feel really good about the wins that are out there. I can’t predict what’s going to happen with GDP when it — where those numbers are going to go, but I can predict that the service product is going to allow us to compete and win. And I feel just as confident and feel just as committed to what our commercial team is doing on the international intermodal side too.

Justin Long — Stephens — Analyst

Okay. And maybe as a follow-up on mix obviously was positive here in the first quarter. But going forward, how are you thinking about general merchandise versus intermodal on a relative basis as we kind of think about the magnitude of the volume decline that we could see in the near term? And also just the timing of the recovery between those two segments, just wanted to get your high level thoughts on how those businesses perform on a relative basis as we think about the implications for mix?

Lance M. Fritz — Chairman, President and Chief Executive Officer

Well, if you’re thinking about relative basis, and for that you’re talking about margin by commodity or product line we like them all and we’ve talked about how we’ve done a lot of work to fundamentally improve the intermodal margins to a point where we’d love to see that grow like anything else. But this mix that you saw here has a lot to do with the fact that we’re getting $1,200 a box for every move of intermodal versus $25 [Phonetic] or $3,000 bucks for a carload box. Yeah, Jennifer?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Yeah. I mean, in the first quarter, obviously, if you just look at it on an average revenue per car basis of our three business teams, the group that has the highest average revenue per car is our industrial team. And that’s the group that had a little bit of growth for us here in the first quarter. So, those are the lines we’ve started giving you guys the revenue ton-mile information on a broader segment of business. And so I would just continue to watch that.

We don’t know what business is going to come back first. And so that’s really going to be the driver in terms of how the economy restarts and where that comes through, if it comes through in the manufacturing sector that might be a positive for us, if it comes through more on the consumer goods or we’re seeing more intermodal move, you’d see it there. I’m less worried about mix and more concerned about what’s absolute volume is going to do and that’s where we want to see the market come back to us.

Justin Long — Stephens — Analyst

Okay. I’ll leave it there. Thanks for the time.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thanks, Jason.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thank you.

Operator

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

Brandon Oglenski — Barclays — Analyst

Hey, good morning everyone and thanks for taking my question. Jennifer, you did say that you have solid free cash flow expectations after dividends under various scenarios, so I’m going to sneak it in there and ask if you’re going to share some of those scenarios with us even hypothetically. But more importantly, I guess that’s continuing maybe in a lesser demand environment we can still protect the dividend. I guess, would you be looking at leverage as that first source of liquidity or would it be capital spending, I guess, where are the priorities in a weaker environment?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

So, I appreciate the question about sharing the scenarios, but obviously you know that I’m not going to do that. In terms of our cash priorities, I mean, you’ve heard us consistently talk about we’re going to invest in the business for the long term, that’s what we’re in this world that do is run a railroad and serve our customers and grow the business. And so Jim laid out very well for you how we’re prioritizing that and so first dollar goes to the capital investment. And we have our dividend, which we’re very much committed to. We view that as an important part of our return to shareholders. And then the excess free cash we have been using for share repurchases and that priority in terms of our spend is unchanged at this point.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Yeah. The first claim goes to keeping the railroad running and running well.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Yeah.

Brandon Oglenski — Barclays — Analyst

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.

Jason Seidl — Cowen — Analyst

Thank you, operator. Most are asked and answered at this point, but wanted to circle back to a remark that two-thirds of your domestic intermodal business has been sort of re-priced. So, you’ve gotten through that. Just wanted to see if you guys can give a little bit more color on that commentary, and how you think that pricing market is going to shape out going forward? And what are your plans as you approach that particularly since you are improving your service products? So, what you’re offering now is a lot different than you are — what you’re offering, let’s say, three, four years ago?

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah. Well, thanks for that question, you’ve got a number of thing that’s going on. We’ve got a much stronger service product which is going to help us as we’re competing against all the move, call it barge, rail or truck. But we also have a lower cost structure, which has helped us get into some of these newer markets. What I would tell you is that because our service product has been so strong, I think, that’s been the change, X factor for us to go out and win this new business.

We are able to get a longer haul or compete more closely with the truck piece. So, we’re going to continue to price as a service product. We expect to be over inflation. There is nothing that shows me we wouldn’t be able to do that even though right now there is a lot of truck capacity out there.

Jason Seidl — Cowen — Analyst

Okay. So, you’d say that, of the two-thirds you priced, that’s been over inflation and you expect the remaining third to be priced over inflation as well even in this difficult market.

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

Yeah. That’s true. That’s correct. That’s an excellent way to think about it.

Jason Seidl — Cowen — Analyst

Fantastic. Appreciate the time as always, and everyone please be safe out there.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you, Jason.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks very much.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

You too.

Operator

The next question comes from the line of Walter Spracklin with RBC. Please proceed with your questions.

Walter Spracklin — RBC — Analyst

Thanks very much. Good morning, everyone. So, I want to focus my questions on the rebound, not so much when it’s going to happen, but how you’re going to handle the different potential shapes of that rebound that you alluded to. And I guess the first question perhaps for Jim, I mean, there’s a lot of complexity out there with regards to non-essential goods kind of being filling warehouses and essential goods having run. I think, when things start to clear out, is there any concern that a sharp recovery is going to be aggravated by the complexity of cleaning out the system so to speak. How are you preparing for if we do see a faster rebound, how you handle that without being brought down.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Walter, listen, it’s a great question because it’s — this is an extraordinary event, it’s affecting the economy in a completely different way than I think anything we’ve ever seen. So, we don’t know whether it’s going to be a quick up or it’s going to be a slow up. But this is what we’ve done, we have prepared ourselves with the key ingredients you need to operate the railroad and rebound. So, it’s locomotives, people, we are out there every day and I give everybody at Union Pacific and all the people that are out there working that are still out there working every day, not just at Union Pacific, accolades because our employees have come to work and we have had no major issue with being able to move any of our trains.

But what we’re doing to get ready is the railroads in a safe manner, we’re out there putting capital in, we have locomotives ready to go like we’ve got enough locomotives that it could go back to where we were before. They are in a state where within hours we can turn them back on and put them out in the fleet if we need to. We have people instead of furloughing them completely, we’re carrying a few extra and not just a few, but we’ve decided that it was a smart thing to do that be able to put the people back on to be able to operate the train.

So, we’ve done everything we can to handle whether it’s a V, whether it’s a U or it’s — and I’m hoping for a sharp turn. I hope the economy personally turns and everybody can get back to work and live the life that we had before. But if not, we’re set up to be ready for it, Walter.

Walter Spracklin — RBC — Analyst

And second question here is related to a prior question and Lance answered the question by the opportunity being near shoring. Two other opportunities I wanted to you to — wanted you to comment on. First of all, does this give you, I guess, on Jim’s side, the ability to bring people back at lower resource levels and easier to do than cutting them down to that level if this didn’t happen.

And secondly, how would you — how was — how would rail fit into the e-commerce trend in a world where e-commerce is ramping up for faster than previously anticipated. How does rail provide a solution if that — if this new world sees a lot more e-commerce purchases? Thanks.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Let me start, Jim.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Yeah.

Lance M. Fritz — Chairman, President and Chief Executive Officer

And then I’ll turn it over to you. So, on the e-commerce question, clearly, we’re seeing e-commerce continue to penetrate in retail. We think that changes the opportunity. We don’t think it decreases the opportunity. The change is supply chains, we still have a need to get from Bulk to distribution site. Clearly, we’re not part of a hours or one day delivery. But we don’t have to be, what we have to be is part of the supply chain that gets product to the forward distribution site that can fulfill like that. And we are and we continue to do that. So, what it really says is, we need to have our eyes wide open on the winners in that world and align well with them. And then I’ll let Jim answer the question on resources and bringing them back.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Walter, when you — when we have — whatever starting point we’re at and we’re at at this point. Absolutely, because we see productivity gains. So, we will not recall the same number of people back to work as we adjusted down. So, no, if, ands or buts. Whether it was — whether we were full workforce and we had productivity gains that would have brought it down or now as it comes back, we just won’t need quite as many people as we have before. Train size is one, we’ve got — if we can keep the train size up, we’re going to need less people. So, that’s a good way to think about it, Walter.

Walter Spracklin — RBC — Analyst

Appreciate the time.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Bascome Majors — Susquehanna — Analyst

Yeah, thanks for — thank you for taking my question. Jennifer, I understand the desire not to guide headcount in a very volume uncertain environment, but I was hoping you could kind of give us a dollar framework for the executive pay, temporary reductions and the sort of rotating leave of absences you’ve got with the management workforce. Thanks.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Thanks, Bascome. I’m going to decline that opportunity. It’s part of everything that we’re doing to manage our cost structure and pulling all the levers across the board, and you’ve heard us talk about that before. And you saw it in the first quarter where we were able to make improvement in every one of our cost categories. And so this is part of certainly the comp and benefits line, but we’ve got work going on across the board. And that’s really the way that we look at it is in that context.

Bascome Majors — Susquehanna — Analyst

Thank you.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you for that, Bascome.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Thanks, Bascome.

Operator

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

Jordan Alliger — Goldman Sachs — Analyst

Yeah. Hi. Just a quick question, obviously, you had a pretty good degree of variable costs in the first quarter. When you think about it, the expenses, total expenses, as you look out over a full year basis, how would you describe or ascribe variable cost versus fixed costs or semi-variable on sort of the whole cost bids. Thanks.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Yeah, let me get started. And I know Jennifer has been thinking about this a lot. We did look backwards into the last recession, the great recession and looked at our variable versus fixed, at that time. What we communicated to the world, and what we actually executed. And we did a better job through the recession than we thought based on what we thought was variable and fixed, at that time. I can tell you going into this downturn, we’re even more agile and flexible than we were in the last downturn.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Yeah. I mean, when we went back and did some of that work that Lance referenced, I think by the time we got through the recession kind of call it end of 2009, we would have said we were maybe 80% volume variable or so adjusted for fuel. We said we were more than 100% already here in first quarter of 2020. So, again, we have already been taken and that’s the blessing of what we embarked with PSR and Unified Plan 2020 as we have already made significant changes in our cost structure.

And when you think about yard closures, increasing train length, all of those things in the locomotive productivity we’re seeing that’s given us great — much greater volume variability. Obviously, in the short term those areas that are the most volume variable for us are going to be on the comp and benefits line. Fuel is almost 100% volume variable for us. Equipment rents is also pretty volume variable. And then everything else is something that over time we will continue to work through, but that’s where again, I think we’re just in a very good position or in a different position than we were in the last recession because of all the work that we had already undertaken and have in the pipeline because of our Unified Plan 2020 efforts.

Lance M. Fritz — Chairman, President and Chief Executive Officer

And Jordan, Jennifer, I think the critical difference is speed of decision making and the speed of implementation that’s fundamentally different today and a benefit.

Jordan Alliger — Goldman Sachs — Analyst

Right. Thank you for those thoughts.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Yeah.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Thanks, Jordan.

Operator

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

David Vernon — Bernstein — Analyst

Hey, good morning, guys. Thanks for taking the time. Jennifer, I want to ask you on the — or Ken, maybe, I want to ask you the step up in the mix price benefit from fourth quarter to first quarter. How much of that extra tailwind is from the mix side versus the price side. And if you think about within the commodity groups, is there any one particular driver of commodities that led to a better mix from a price realization standpoint?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Well, thanks for the question, David. But we are not giving specific pricing guidance any longer, I think, we made that statement a couple of quarters ago. So, I’m not going to break that out for you. But I think consistent with my commentary, less intermodal was certainly a part of that mix when you think that that is our lowest ARC business that we have on the railroad. And that was offset somewhat by the fact that we also had sand lower, but net-net, it was still a positive, again, if you really look at that industrial line, that’s where we had some good growth in the quarter. And that’s where we have some strong ARC.

David Vernon — Bernstein — Analyst

Okay. And then, I guess, as you think about the separate line on fuel, the fuel surcharge headwind sort of moderated a little bit into lower oil prices, is that also have like a mix component in it or like what are we looking at there in terms of the sequential step down in that fuel headwind into a lower fuel price environment?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Well, I think, as I said fuel is actually a tailwind for us in the quarter. And that’s kind of an all-in view in terms of the price, the surcharge, all taken together in terms of how we view that. There is a little bit of a lag year-over-year as we move into the second quarter as fuel prices have come down so steeply. But we don’t see that as being a significant driver relative to the — how we look at things on a mix basis.

David Vernon — Bernstein — Analyst

But is there a reason why the surcharge headwind to revenue would moderate into lower fuel, I’m just trying to understand how that number…

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Oh! The headwind to revenue?

David Vernon — Bernstein — Analyst

Yeah.

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

So, I mean, it is a factor in the overall ARCs as you see less fuel surcharge that’s going to be reflected in the ARCs we have. But as I mentioned, it does lag a little bit in terms of how fuel price comes down and how our surcharge comes down.

David Vernon — Bernstein — Analyst

All right. Thank you.

Operator

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

Jon Chappell — Evercore — Analyst

Thank you. Good morning, everyone. Just one from me. Jennifer, the buyback pause completely prudent, trimming the capex also makes a ton of sense. I assume you talked with the credit agencies around the time of your debt instruments earlier this month. So, just any change of tone from that perspective around leverage targets. And do you feel you kind of bumping up against the top end of 2.7 times? And how that impacts your decision to take on some of the additional liquidity which you said you don’t need right now, but just in case 2Q bleeds into 3Q at these levels?

Jennifer L. Hamann — Executive Vice President and Chief Financial Officer

Sure. So, we’ve used the 2.7 times as just kind of a short-hand math for you all in terms of expressing where we view that within kind of the context of our credit ratings. We — to your point, we did have dialog with the credit agency around the time of our $750 million issuance. We share with them kind of our best thinking, some of our scenarios. And as I mentioned in my comments, they’re comfortable with where we’re at. Certainly, if we had a need to go back into the markets, we would have that dialog again, but we feel very good where we’re at.

We believe we’ve got good access to credit. If we need that and we’ve got — obviously got some other things in terms of our revolver and the receivables facility if we need to. But those are, I would call more of a belts and suspenders approach, but feel good about it. I have no concerns there. And I believe the rating agencies feel good with us as well.

Jon Chappell — Evercore — Analyst

Alright. Thanks, Jennifer.

Operator

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

David Ross — Stifel — Analyst

Thank you. Good morning, everyone. Jim, wanted to talk about the first slide you put up regarding service level goals specifically around manifest in auto trip plan compliance, is there anything you guys have articulated as to where you want that to go from 64% today?

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

History tells me that different customers the manifest business is a little bit different. This tries to reflect what we’ve committed to the customer and we’re measuring ourselves harder than what we actually committed to the customer as far as what their trip plan is on their individual railcar. So, you never get this number to 100 just the same as the intermodal number never gets to 100. It’s impossible to get there, but I think I’d like to see it another double-digit improvement. And I think if we do another double-digit improvement, the way we measure it, we remove most of the noise or a lot of the noise on how the interaction is of us living up to what we’ve committed to the customer. So, that’s the way I look it, David.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Jim, a little bit of whatever the number was 64%, 65% in the first quarter was self-inflicted, you mentioned on the call that we had a little noise around our change in Fort Worth at Davidson Yard where you stopped humping at Davidson. And that impacted that to a degree for probably six weeks. So, I would expect to your point, we’re growing that number to start with seven.

Kenyatta G. Rocker — Executive Vice President – Marketing and Sales, Union Pacific Railroad

What’s not reflected in that number is that the transit times have gotten better. That’s one thing. And I can tell you our customers are acknowledging that the service on the carload side has gotten better.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Yeah. Right.

David Ross — Stifel — Analyst

And are there any commodities that are harder to handle that would reduce the productivity of the manifest network. So, if you have more of X then Y, it slows it down.

Lance M. Fritz — Chairman, President and Chief Executive Officer

Absolutely. If you have cars that you don’t touch as often makes it easier for you to be able to handle. So, if we were a bulk railroad and some people are bulk railroads more than we are at this point. Then you load them up at one place and haul them to the other, I’m going to say as my mother could do that. So, it’s a lot easier to get a number out of it, but — so, yes. But other traffic we have to handle in multiple and more steps, you have a better chance to have a failure somewhere in the process.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

And we love that business.

Lance M. Fritz — Chairman, President and Chief Executive Officer

I love it all.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

We love that.

Lance M. Fritz — Chairman, President and Chief Executive Officer

We’ve got a railroad that can fill up. So, I love it all, but…

David Ross — Stifel — Analyst

Well, I’m sure your mom is glad you’re following in the family footstep.

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

Well, we have to finish this call with a little humor.

Lance M. Fritz — Chairman, President and Chief Executive Officer

[Indecipherable]

Jim V. Vena — Chief Operating Officer – Union Pacific Railroad

And David and to everybody, I should have mentioned it even more and I know Lance well, but listen I’m real proud of everybody and also everybody else there that is work and to keep this country going from people at the front line everywhere. So, thank you very much.

David Ross — Stifel — Analyst

Thank you.

Operator

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

Lance M. Fritz — Chairman, President and Chief Executive Officer

Thank you very much, Rob, and thank you all for your questions. Thank you for participating with us this morning and for doing what you need to do to keep yourselves and your families, your loved ones safe and healthy. We look forward to talking with you again in July to discuss our second quarter 2020 results. Until then, I wish you all good health. Take care.

Operator

[Operator Closing Remarks]