Welcome to
the Union Pacific 4th Quarter 2018 Conference Call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr.
Lance Fritz, Chairman, President and CEO for Union Pacific. Mr. Fritz, you may now begin.
Thank you, Rob, and good morning, everybody, and welcome to Union Pacific's 4th quarter earnings conference call. With me here today in Omaha are Jim Vena, our new Chief Operating Officer Kenny Rocker, Executive Vice President of Marketing and Sales Tom Lischer, Executive Vice President of Operations and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting record 2018 Q4 net income of $1,600,000,000 or $2.12 per share. This represents an increase of 29% in net income and 39% in earnings per share when compared to adjusted results for 2017. Total volume increased 3% in the quarter compared to last year.
Industrial and premium car loadings grew 6% and 9% respectively, while agricultural products declined 2% and energy volumes were down 9%. The quarterly operating ratio came in at 61.6%, which improved 1.1 percentage points compared to the Q4 of 2017. Strong top line growth and improved operating performance drove the year over year improvement during the quarter. We launched Unified Plan 2020 on October 1 last year to help drive improved safety, service and operations. And I'm pleased to report that we're ahead of our initial schedule and seeing meaningful gains in on time performance, productivity and financial results.
The network design changes we implemented over the past few months have already had a measurable impact. We've eliminated the excess network costs that we previously discussed. Cost savings are being realized by parking excess freight cars and locomotives, by cycling cars faster in our network and by reducing the size of our workforce. We're seeing steady improvement in the key performance indicators we use to gauge progress. As a result, we announced late last year that we're accelerating implementation of Unified Plan 2020, which we now expect to be complete by the middle of the year.
Shortly, you'll hear from the team on our 4th quarter results and the status of the Unified Plan 2020 initiative. But first, I'd like to introduce Jim Vena, an old friend who we just appointed Chief Operating Officer effective last week. Jim's leadership abilities and accomplishments over a 40 year career at Canadian National Railway are well known in the rail industry. Jim will have full authority over all aspects of Union Pacific's operations to implement precision scheduled railroading principles as he leads the next stages of our Unified Plan 2020. We're fortunate to have him as the newest member of our leadership team.
I'll now turn it over to Jim for a few remarks.
Thank you, Lance, and good morning. First, I'd like to say how pleased I am to return again to the railroad industry. Union Pacific is a great company with a storied history and an impressive track record of financial success. I am proud to be part of it. While I arrived only last week, it is apparent to me that Union Pacific is committed to changing its operating model in pursuit of running a safe, more reliable and highly efficient network.
I've also observed that there are a lot of talented people here working hard to move the company ahead. There's been good progress made in recent months improving a number of key service metrics, but we have a long way to go. I plan to spend time right away out on the railroad interacting with employees. In fact, I've already visited the field and I can tell you there's a lot of opportunity out there. I'm assessing the status of Unified Plan 2020 both in terms of progress made to date and initiatives that are currently underway.
I believe that Union Pacific can become the industry leader in safety, operating efficiency, customer service and financial performance. I know the railroad has a vision in place to get to a 55 operating ratio already and we will be working aggressively towards that goal. But first things first, Lance, let's break 60%. I'm excited about the opportunities and challenges that lie ahead. And with that, Kenny, I turn it over to you.
Thank you, Jim, and good morning. For the Q4, our volume was up 3%, driven by solid growth in our premium and industrial business groups with the partial offset in energy and ag. We generated positive net core pricing of 2.5 percent in the quarter. The increase in volume and a 2% improvement in average revenue per car drove a 6% increase in revenue. Let's take a closer look at the performance of each business team.
Ag Products revenue was up 5% on a 2% decrease in volume and a 7% increase in average revenue per car. Grain carloads were down 10%, driven by reduced soybean shipment to China. This was partially offset by growth in other feed grain shipments, predominantly to the Mid South and Mexico. Grain products carloads were up 2% as the same demand for biofuels drove increases in biodiesel, renewable diesel fuel and soybean oil markets. This was partially offset by tariff related challenges in mills and slowing ethanol growth year over year.
Fertilizer and sulfur carloads increased 18% due to a prolonged fall application, coupled with continued strength in export potash. Energy revenue decreased 8% for the quarter on a 9% decrease in volume, while the average revenue per car remained flat. Coal and coke volume was down 6%, primarily driven by a contract change and retirement. While natural gas prices were higher, it was not enough to offset the volume decline. Sand carloads were down 47%, largely due to the impact of regional sand within the Permian Basin.
Furthermore, favorable crude oil price spreads drove an increase in crude oil shipments, which were the primary driver for the 25% increase in petroleum, LPG and renewable carloads for the quarter. Industrial revenue was up 10% on a 6% increase in volume and a 3% increase in average revenue per car during the quarter. Construction carloads increased 10%, primarily driven by increased market demand for rock shipment. Metals and Ores volumes increased 19% due to strength in energy, construction and manufacturing markets. Plastics carloads increased 10%, driven by higher production coupled with new plant startups.
Premium revenue was up 15% with a 9% increase in volume and a 6% increase in average revenue per car. Domestic intermodal volume increased 3%, driven by back to back strong peak seasons, continued demand for tight truck capacity and strengthened parcel and LTL shipments. Auto Parts volume growth was driven by over the road conversions and production growth at key locations. International intermodal volume was up 21% as the new ocean carrier business continued in the 4th quarter, coupled with a strong pull ahead of shipments due to the 2019 tariff implementation. Finished vehicle shipments were flat.
4th quarter U. S. Auto sales were down approximately 1% from the Q4 2017. However, shift in consumer preference from sedans to light trucks and SUVs, coupled with stronger shipping levels out of Mexico and growth with winning new customers enable UP to overcome declines in the overall market. For 2019, our Ag Product Groups expect uncertainty to continue in the grain market due to foreign tariffs.
We anticipate continued strength in biodiesel and renewable diesel fuel shipments due to an increase in market demand for renewable fuels that will offset headwinds within the ethanol marketplace. We also expect the tight truck capacity combined with the value of rail to support long term penetration growth across multiple segments in our food and refrigerated business. For energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. Local sand supply and softer market conditions will continue to negatively impact sand volumes. We also expect coal to experience continued headwinds throughout 2019 and as always with coal, weather conditions will be a key factor for demand.
For industrial, we anticipate an increase in plastic shipments driven largely by additional plant expansions coming online in 2019. In addition, we anticipate continued strength in industrial production, which drives growth in several commodities. For premium, over the road conversions from continued tight truck capacity, as mentioned with AG, will present new opportunities for domestic and auto parts growth. The U. S.
Light vehicle sales forecast for 2019 is 16,800,000 units, down about 2% from 2018. We will continue to watch the OEMs as they implement their rationalization plans. Consumer preferences driving production shift and new business wins will create some opportunity to offset the weaker market demand. Furthermore, uncertainty in the international trade and the potential for slower growth in the U. S.
Economy could also present headwinds as 2019 progresses. Before I turn it over to Tom for his operations update, I'd like to share that we continue to work closely with the operating department as we implement service changes with the Unified Plan 2020. Moreover, our commercial team is diligently engaged with customers to educate them on ways to better manage their railcar inventory and help them grow their business. With that, I will turn it over to Tom.
Thank you, Kenny and good morning. I'd like to get started with a quick update on our safety performance for 2018. Our reportable injury rate was 0.82%, an increase of 4% as compared to last year. Reportable rate for our rail equipment incidents or derailments was 3.28%, an increase of 12%. In Public Safety, our grade crossing incident rate was 2.69, an increase of 5%.
Safety remains our number one priority and the entire Union Pacific team is committed and aligned to improving these metrics in 2019. I'd like to share an update on our Unified Plan 2020 progress so far. Implementation of the Unified Plan 2020 began in October. On our Mid America corridor, we initiated and cut over approximately 100 and 60 changes to our transportation plan and the results thus far are very encouraging. In this corridor, car inventory is down over 16,000 cars, car dwell is down almost 4 hours driving a reduction in our total daily crew starts.
Other operating measures such as car trip plan compliance, train departure and arrival performance and car connection performance have also improved. Furthermore, we are well underway of implementing our Phase 2, our sunset route, which is LA to Chicago and LA to our Southeast corridors. This phase includes over 200 network T plan changes and over half of these are already cut over. Next week, we will begin on our 3rd and final phase addressing the PNW in our Northern California corridors. Our goal is to complete the initial implementation of all three phases by the middle of this year, which is 6 months faster than we originally planned.
Work continues on our efforts to rationalize switching yards and we will share the results of these initiatives later this year. As Unified Plan 2020 continues to evolve, we expect to see further gains in labor productivity, which will be reflected in trained crew and mechanical and engineering workforces. The culture of our workforce is changing as our employees are actively engaged in both generating new ideas and implementing those ideas to our transportation plan. I am pleased with the progress we have made so far, not only the results, but the process we are following. Last quarter, we introduced 6 key performance indicators that we believe are appropriate measures to gauge our Unified Plan 2020 progress over time.
These KPIs align our operating goals with our financial targets. Today, we have updated each KPI chart with the current results for the week ending January 22. The chart shows a pre unified plan values from September of last year and a gold bar representing the range of expectations for our performance levels at year end 2019. The year end goals coincide with the data that we showed you last October. As you can see, we have made steady improvement.
Freight car velocity has improved 9% since September. Operating inventories and cars per carload continued to improve due to faster car cycle time and a reduction in freight car dwell. Moving on to locomotives, locomotive productivity increased 7% as we consolidated train operations and parked as to excess power. We have stored over 1200 locomotives since August and we expect units and storage to continue to increase. The results of these improvements are more fluid and more reliable service product.
Car trip plan compliance increased 14 percentage points and daily manifest service issues decreased 35% since September. As a reminder, the 2019 year end goals are interim goals as we implement the Unified Plan 2020 across our network this year and beyond. Also keep in mind seasonality, weather events and periodic service interruptions will drive variability in our KPI results. The results for workforce productivity in December are down from September primarily due to seasonality of carloads, but we expect large gains over the course of this year. Overall, we are pleased with the performance of our KPIs and we expect continued improvement in our operations this year.
So turning to capital, in 2018, we invested $3,200,000,000 in our capital program. In 2019, we are also targeting about around $3,200,000,000 pending final approval of our Board of Directors. 70% of our planned 2019 capital allocation is replacement spending to harden our infrastructure, replace older assets and to improve our safety and resiliency of the network. We will purchase no new locomotives in 2019, although we will continue to modernize our existing fleet. Freight car acquisitions will support both replacement and growth opportunities.
We will continue to invest in capacity projects on our network where constraints and productivity opportunities exist. We also plan expansions at intermodal ramps and other commercial facilities to accommodate expected growth. Planned investment in positive train control is $115,000,000 and that's down $43,000,000 from 2018. To wrap up, Unified Plan 2020 is off to a great start and I'm very proud of the team's efforts. We have made excellent progress in a short amount of time, but we are just getting started.
2019 will be a year full of change and the results will be a safer, more reliable and more efficient network. So with that, I'll turn it over to Rob.
Thanks and good morning. Before I get started, as a reminder, our results for the Q4 of 2017 were impacted by 2 adjustments that we made associated with the Tax Cuts and Jobs Act, which was passed in late December of 'seventeen. These adjustments included a $5,900,000,000 reduction in income tax expense an approximately $200,000,000 reduction in equipment rents expense driven primarily by our equity ownership in TTX. Comparisons that I make today to 20 seventeen's financial results exclude the impact of these adjustments. With that introduction, here's a recap of our Q4 results.
Operating revenue was $5,800,000,000 in the quarter, up 6% versus last year. Positive core price, increased fuel surcharge revenue and a 3% increase in volume were the primary drivers of revenue growth for the quarter. Operating expense totaled $3,500,000,000 up 4% from 20 17. Operating income totaled $2,200,000,000 a 9% increase from last year. Below the line, other income was $46,000,000 compared to $33,000,000 in 2017.
The year over year increase was driven primarily by additional real estate gains. Interest expense of $240,000,000 was up 28% compared to the previous year. This reflects the impact of higher total debt balance, partially offset by a lower effective interest rate. Income tax expense decreased 32% to $462,000,000 The decrease was primarily driven by a lower tax rate as a result of corporate tax reform, partially offset by higher pretax earnings. Our effective tax rate for the 4th quarter was 22.9%.
For 2019, we expect our annual effective rate to be around 24%. Net income totaled $1,600,000,000 up 29% versus last year, while the outstanding share balance decreased 7% as a result of our continued share repurchase activity. These results combined to produce a 4th quarter record earnings per share of $2.12 Our operating ratio of 61.6 percent was an improvement of 1.1 points compared to the Q4 of last year. The combined impact of fuel price and our fuel surcharge lag had a 0.5 point favorable impact on the operating ratio in the quarter compared to 2017. Freight revenue of $5,400,000,000 was up 6% versus last year.
Fuel surcharge revenue totaled $488,000,000 up $195,000,000 compared to 2017 and up $6,000,000 versus the Q3 of 2018. Business mix had a negative impact of 3.5 points on freight revenue for the Q4. Decreased sand volumes and an increase of lower average revenue per car intermodal shipments drove the negative change in mix. And as Kenny already stated, core price was 2.5% in the 4th quarter, which represents a 3 quarters of a point sequential improvement compared to the 3rd quarter. We realized solid pricing gains across most business segments during the quarter.
For the full year, as we expected, total dollars generated from our pricing actions well exceeded our rail inflation costs. Now turning to operating expense. Slide 21 provides a summary of our operating expenses for the quarter. Compensation and benefits expense increased 4% to $1,300,000,000 versus 2017. The increase was driven primarily by employee severance costs related to our recent workforce reduction, volume costs and wage inflation, partially offset by lower management labor costs.
Total workforce levels were approximately flat in the Q4 versus last year. Employees not associated with capital projects were also unchanged year over year. Our TE and Y workforce was up 4% due to higher carload volume and more employees in the training pipeline. Offsetting this increase was a 1% reduction in management employees and a 2% reduction in our mechanical and engineering workforces. Fuel expense totaled $640,000,000 up 17% compared to last year.
Higher diesel fuel prices were the primary driver of the increase in fuel expense for the quarter. Compared to the Q4 of last year, our average fuel price increased 15% to $2.33 per gallon. Our fuel consumption rate increased about 1% during the quarter, primarily due to mix. Purchased services and materials expense was down 1% compared to the Q4 of 2017 at $582,000,000 Higher intermodal contract services were more than offset by lower mechanical repair costs and joint facility expenses. Turning to Slide 22, depreciation expense was $555,000,000 up 4% compared to 2017.
The increase was primarily driven by higher depreciable asset base. For the full year 2019, we estimate that depreciation expense will increase about 3%. Moving to equipment and other rents, this expense totaled $269,000,000 in the quarter, which is down 3% when compared to 2017. The decrease was primarily driven by lower freight car and locomotive lease expense, partially offset by increased volume related costs. Other expenses came in at $221,000,000 down 8% versus last year.
Increased casualty costs were more than offset by insurance proceeds related to Hurricane Harvey and other items during the quarter. For the full year 2019, we expect other expense to be up in the 5% to 10% range compared to 2018. Productivity savings yielded from our G55 and 0 initiatives totaled $65,000,000 during the quarter, which was partially offset by additional costs associated with operational inefficiencies. The impact of these operational challenges totaled just under $20,000,000 in the quarter, which is down from the $50,000,000 that we reported in the 3rd quarter. The additional costs were primarily in the compensation and benefits cost category.
Full year productivity totaled $265,000,000 which was partially offset by $175,000,000 of additional costs related to network inefficiencies. Net productivity savings for the year was $90,000,000 Railroad operations improved steadily throughout the quarter. And as Lance mentioned earlier, we are pleased to report that we are no longer experiencing the failure costs associated with the inefficient network operations. Slide 24 provides a summary of our 2018 earnings with a full year income statement. Operating revenue increased about $1,900,000,000 or 7 percent to $22,800,000,000 Operating income totaled $8,500,000,000 an increase of 8% compared to 2017.
Net income was approximately $6,000,000,000 while earnings per share increased 37 percent to a record $7.91 per share. Looking at our cash flow. Cash from operations for the full year totaled $8,700,000,000 up about 20% when compared to last year due primarily to higher net income. As expected, capital spending in 2018 totaled $3,200,000,000 or about 14% of revenue. Return on invested capital was 15.1 percent in 2018, up from 13.7% in 2017, driven primarily by higher earnings.
Taking a look at adjusted debt levels, the all in adjusted debt balance totaled $25,100,000,000 at year end 2018, up $5,600,000,000 since year end 2017. This includes the $6,000,000,000 debt offering that we completed in early June, partially offset by repayment of debt maturities. We finished the 4th quarter with an adjusted debt to EBITDA ratio of 2.3 times, up from 1.9 times in 2017. As we have previously mentioned, our target for debt to EBITDA is up to 2.7 times, which we will achieve over time. Dividend payments for the year totaled $2,300,000,000 up from $2,000,000,000 in 2017.
This includes the effect of 2 10% dividend increases in 2018. During the Q4, we repurchased 8,000,000 shares at a cost of $1,200,000,000 Additionally, we received 4,500,000 shares in the 4th quarter associated with our $3,600,000,000 accelerated share repurchase program that we initiated in June. In total for the year, we repurchased 57,200,000 shares at a cost of $8,200,000,000 These repurchases reduced our full year average share balance by 6% compared to 2017. Between dividend payments and share repurchases, we returned $10,500,000,000 to our shareholders in 2018. Free cash flow before dividends totaled nearly $5,300,000,000 resulting in a free cash flow conversion rate equal to 88% of net income for 2018.
Looking at 2019, we expect volumes for the full year to increase in the low single digit range. And as Kenny mentioned earlier, we should see strength in several business categories along with uncertainty in others. We will price our service product to the value it represents in the marketplace, while ensuring that it generates an appropriate return for our shareholders. We are confident the dollars we yield from our pricing initiatives should again well exceed our rail inflation costs in 2019. For full year 2019, we expect overall inflation to be about 2% with labor inflation in the 2.5% range.
On the productivity side, we plan to yield at least $500,000,000 of savings this year. We will see productivity in the form of lower compensation expense enabled by a more efficient workforce. Labor savings and lower purchase services and materials expense will result from operating smaller locomotive and freight car fleets. Faster asset turns should reduce equipment rents and improve fuel consumption. Regarding our operating ratio, we are pleased with the recent progress that we have made eliminating operational inefficiencies and accelerating the Unified Plan 2020.
These accomplishments, along with the expectation of low single digit volume growth in 2019, gives us increased confidence that we will reduce our operating ratio more quickly in the near term. Therefore, assuming the economy cooperates, we are setting new operating ratio guidance for 2019 of a sub-sixty 1 percent and we expect to be below 60% by the year 2020. The plans and guidance that we established last year for capital spending, capital structure and use of free cash flow remain essentially unchanged. We will continue to appropriately reinvest in the business to maintain and improve the condition of our infrastructure. We will invest capital to support growth and productivity initiatives that meet our cost of capital threshold and we expect return on invested capital to grow.
As Tom mentioned earlier, we plan to spend around $3,200,000,000 in 2019 on capital expenditures, which is flat with 2018. Longer term, we expect capital investments to continue to be less than 15% of revenue. After capital expenditures, we will continue returning cash to shareholders in the form of dividends, maintaining our target payout range of 40% to 45% of earnings. We expect to take another step forward to increase our debt to EBITDA ratio towards our ultimate goal of up to 2.7 times, while maintaining a minimum credit ratings of BBB plus and Baa1. The amount by which we increase our debt to EBITDA ratio in 2019 will depend on the strength and stability of both the economic and financial markets.
We will continue with our previously announced 3 year plan to repurchase approximately $20,000,000,000 of shares by 2020. This plan is now over 40% complete with the $8,200,000,000 of share repurchases that we completed in 2018. So to wrap up, positive full year volume, core pricing dollars in excess of inflation dollars and significant productivity benefits will all contribute to another year of strong cash generation and an improved full year operating ratio in 2019. And longer term, we remain firmly committed to reaching our goal of 55% operating ratio beyond 20 20. So with that, I'll
turn it back to Lance. Thank you, Rob. As discussed today, we delivered record 4th quarter financial results driven by strong volumes, solid top line revenue growth and improved operating performance. Looking ahead to 2019, we're going to build on the momentum achieved during the past quarter as we continue implementation of Unified Plan 2020 under the guidance of a leader with extensive precision scheduled railroad experience. We'll continue to pursue other G55 and Xero initiatives as well as we make further gains in safety, service and efficiency.
We're optimistic that the economy, the strength of our diverse rail network and improved service performance will drive positive volume growth this year and provide further price improvement opportunity. We remain focused on increasing shareholder returns by making appropriate capital investments and returning excess cash to shareholders through growing dividends and share repurchases. I am confident that we have the right organization in place with an appropriate mix of UP veterans and new thought leaders to achieve our goals for the year. With that, let's open up the line for your questions.
Thank you. We will now be conducting a question and answer Thank you. And our first question comes from Jason Seidl with Cowen and Company.
Thank you and good morning, gentlemen. I wanted to touch on a few exceed your inflation rate and then you said your inflation rate was going to be about 2%. Do you consider the 4th quarter number well exceeding the rate of inflation that you guys posted?
Jason, yes. And in fact, as you know, and I think I'll repeat for everybody else's benefit how we calculate price, It is an all in yield number. It's not a same store sales type of calculation. It's the dollars that we generated across our entire book of business. And so when we say, well, if fleet exceeds inflation dollars, we're comparing that dollar, if you will, that we generate across the entire book of business from pricing actions against the dollars that we incurred as a result of inflation.
So, yes, we did well exceed inflation dollars in the Q4 and we expect to continue to do that again in 2019.
Okay. Fantastic. And the next one shockingly is going to be on PSR. Can we talk
a little bit about the
pace of improvement and maybe compare UP's network to some of the other networks that have seen PSR implemented? And is there anything at UP that would cause it to go slower or cause it to go faster?
I'll start out and then I'd like to turn it over to Jim for his perspective and then Tom as well. So the bottom line is, we're focused on implementing the principles through Unified Plan 2020 on our railroad and we see lots of opportunity to dwell to decrease inventory, to improve cars per carload, to improve labor productivity across the board. We have benchmarked our other railroads that implemented precision scheduled railroading. And with puts and takes, we understand what they're achieving and some of them are setting up some pretty strong benchmarks for us to pursue. But our focus is getting the efficiencies and the improvement here.
Jim?
Lance, all I can really add is the question, is there any real difference in the speed? No, there is no real difference and we're going to do it as quickly as possible to be able to look at every piece of the company to see how we get it to be as efficient as any other railroad in North America.
Thank you very much gentlemen. Jim, welcome aboard.
Thank you.
Next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Hey, thanks. Good morning. Appreciate taking the questions. So Lance and Kenny, obviously, the regulators have been a bit active here with some inquiries before the government shutdown. So maybe you can just give your perspective.
It seems like they've appreciated the communication that you've had with them and with other stakeholders, but it didn't stop them from launching the inquiry into some of the accessorials and demurrage fees. So maybe just give us an update on that and whether or not you think when they come back if adding 2 new Board members will change how this might play out?
Ryan, this is Lance. So you're absolutely right. The STB has expressed interest in understanding our implementation of precision scheduled railroading in the form of Unified Plan 2020 and also our approach to customers and helping them change behavior. We've been crystal clear with the STV in terms of what our efforts are, what our approach is and what the end game is. And I'll leave it to Kenny to dive a little deeper.
He's done a tremendous job being in front of the STB, explaining what we're doing and then being in front of our customers explaining what we're doing and why. And I'll touch just one last base and that is there are incremental members of the STB being named and now sworn in. And the STB has a very big docket in front of it of proposed rule changes. So we're working very diligently to help the STB members understand from our perspective the potential impacts of some of what's been proposed, what better alternatives exist and helping them work through that docket in a good swift logical fashion. So, Kenny?
Yes. So, Brian, thanks for the question. I say this humbly, but we've done a really good job of being proactive and communicating and being engaged with the STB. I can tell you that engagement has been very consistent. Lance sent a letter that will be public on the accessorials.
He sent that Monday. We'll be sending out something later this week here in the near term, really just updating the STB on where we are on the assetorials and how Unified Plan 2020 is going.
All right. Thanks. I appreciate that. And just as a follow-up maybe on the headcount and the productivity side. This is for Tom.
The KPIs are great. I appreciate the updates, but it looks like there's some seasonality given that the daily car models for FTE hasn't moved up. We gave average for December. The other ones were kind of the last 7 day moving average. Can you just give us some context as to where these were in the Q4?
And how you would expect, especially the productivity, how big of a factor is that in the $500,000,000 of targets target savings rather you're expecting this year? That would be helpful.
So on the T and Y side, our training pipeline is kind of what threw that off a little bit from the actual people side. On a sequential basis, the number is actually coming down from for the 4th quarter, ending pretty well in December. That is going to continue moving forward. We're in early innings as far as the labor productivity goes. So I would just look forward to seeing what that happens going forward.
With the other side of it, our engineering and our
mechanical areas, we've made the
adjustments in those labor productivities as we've made, say, for example, the locomotives come out, we've made the adjustments there. But we are in early innings on that side and we do see that improving going forward.
Brian, this is Rob. If I can just add on to your point on the $500,000,000 or at least number of productivity we expect to generate in 2019. Recall the goal that we put on that particular KPI of a 10% -ish improvement is what we're focused on. And yes, to get $500,000,000 plus productivity, you can assume without precise numbers, you can assume that labor productivity across the board is going to be a significant part of that.
Okay. Thanks for all the details. Appreciate it. Yes.
Next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, thanks. Good morning and welcome back Jim. Glad to have you back. Wanted to touch base just to follow-up on that comment Rob maybe on the efficiencies for 500. If you can get a little bit more granular and sort of give us a sense of maybe how you think about the net benefit of that as we move into 2019.
So it sounds like you're lapping some service issues that 175 of service from 2018. I'm not sure how we think about that in 2019. And then how we think about the 500,000,000 in the context of inflation and the pricing that you're able to get. So I guess maybe in other words, how much of that $500,000,000 do you think really is net that drops to the bottom line as you run through the PSR initiatives?
Yes, Chris, I get your question. And I'll probably frustrate you, because I won't give as much detail around that that you're asking, but I do get it. And yes, we are lapping some of those inefficiency costs and that's why we have the at least $500,000,000 figure out there. So, yes, there is some so called low hanging fruit of some we won't re incur some of the inefficiency costs that we had primarily earlier in the year. So that's a good guide.
But we are where we are. I mean, so we are going to improve $500,000,000 at least off of where we ended the year on a full year basis and it's going to come across the board. It's largely driven by the efficiencies that we have been talking through the Unified Plan 2020, but it's every stone is going to be turned over in the organization, not just within operations. So all of that contributes. And yes, we have the headwind of the call it 2% inflation in there, but $5,000,000 to the bottom line of productivity is what we're striving to get at least.
Okay. Okay. That's helpful. I appreciate that. And then maybe just turning to the volume side.
So there's been some announcements, I think, from a service perspective around the intermodal business, and we're talking about sort of rolling out from the PSR work to the sunset quarter. Just want to get a sense of within the 2019 volume guidance, how you think about intermodal? Is there some maybe contraction or calling of some less profitable business that's included in that number? And maybe is that or is that sort of a variable that could impact the outcome as we move through 2019?
Denny? Yes. So I'll take that. Thanks for that question. First of all, we have a very positive outlook on our intermodal franchise, both as we parse out the intermodal and the domestic side.
We're still in the early innings on what all we want to do with the network. Jim, Tom and myself will be working as a team as we look for more productivity and make sure we have the most reliable consistent service product out there.
Yes, I want to circle back Chris on overall volumes. So if you look around the globe, you can certainly find spots that cause you concern, right? Europe slowing down. You can even read some reports that maybe it's ebbing into negative growth territory. Clearly, we've got trade potential impacts with China, both real now and future potential.
So those are clear overhangs that we're keeping an eye on. Having said that, we have touched base with our customers and continue to do so. And as we look at the economic indicators in the United States, we still see support for what we consider low single digit volume growth. And we're poised to be agile if that doesn't happen, but it feels like the U. S.
Continues to plug along and so we're prepared for that.
Okay. Thanks very much for the color. Appreciate it.
The next question is from the line of Justin Long with Stephens. Please proceed with your questions.
Thanks and good morning. So I would guess the productivity guidance you've provided for this year is more back half weighted as you'll have PSR fully rolled out on the network. So is it possible to help us understand the productivity gains you're assuming in the first half of the year versus the second half of the year? I just wanted to get a better sense of the second half run rate post PSR.
Rob? Yes, Justin, I mean, we aren't detailing it quarterly the way you're asking, but I can just tell you that we're not sitting around waiting for the back half of the year to come. We're going after it, as you heard both Jim and Tom and Kenny talk about earlier. We are going after it now and we feel like we finished 2018 with pretty good momentum. So, without giving details of precisely how much is going to show up in each quarter, I can tell you that, I don't view it that way.
I look at it as an opportunity in front of us. We're going to go after as much opportunity on the productivity front as we can.
Yes. You've seen the numbers, whether it's year over year or what we talked about middle of the year to now. Locomotives year over year that number is down 1200, a number like that. From peak to now, it's down about a couple of 1,000. I mean, we are entering the year on pretty good front forward posture.
Okay. That's helpful. And just to clarify on the guidance for a sub-sixty one OR this year, does that assume $500,000,000 of productivity or does it assume something higher than that?
Yes, Justin, this is Rob. It assumes the economy cooperates, it assumes that we generate and see positive volume, although we won't use volume as lack of volume as an excuse, but our assumption is positive volume on the low single digit side. It assumes pricing dollars generated above inflation dollars and it assumes at least $500,000,000 of productivity. So all of that has to be we're counting on all that. We're going after every one of those aspects.
Okay. And I guess lastly for Jim, congrats on the new role. And I wanted to circle back to some of the longer term OR commentary. I'm guessing given your limited time at the company, your input on the targets thus far has been pretty limited. So is it reasonable to expect that after a quarter or 2 of getting out on the network, seeing the railroad, we could potentially revisit this 2020 target and maybe put some numbers around the timing of getting to that 55 longer term?
Thanks for welcoming me Justin. But you knew I was not going to answer that question after I am here for 10 days. It's pretty hard to say how much of the railroad I've seen. I've been out in the field. I'll tell you this much, there's opportunity out there.
There's opportunity in how fast we turn the assets from locomotive cars. There's impacts to engineering. But what I'm really happy to see is the whole team before I showed up was working towards a improved service, improved assets, improved speed, all the things that count. So we're going to do as a team everything we can to do it as fast as possible without truly affecting service to the point where we're affecting the customers that pay the bill every day.
Okay, great. I'll leave it at that.
Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning.
Before I really get going, Rob, can you just quickly quantify the insurance and severance items in the quarter?
Yes. The insurance recovery that I called out, it was in the neighborhood of $15,000,000 call it a penny EPS and the severance was roughly $25,000,000
Okay, helpful.
So, Jim, welcome. And I'm not sure exactly how you're going to answer this based on how you just answered that last question. But UP has told us that they think structurally they should have the best margin of any railroad. Given sort of your background and history, do you agree with that?
Thanks, Rob. So you guys have already got out that we're going to be the best. Listen, Scott, seriously, there is nothing holding back from what I've seen from before and where I've been on-site from the franchise and what we can do. There's some things that we can do real fast short term and there's others that we're going to have to target some capital in places to be able to run the trains and the cars as quick as possible and we will do that. But I don't see any reason for us to push against the best in the industry.
Do I realize that and I know some of those people in the other railroads, there's no way Keith is going to make it easy, there's no way JJ is going to make it easy and there's no way Foote's going to make it easy. So we're going to work hard to see what the heck we can do to be in the same ballpark and play the same game.
And when we've seen precision railroading at past railroads, it has been associated with closing hump yards and yard rationalization. Do you think we'll start to see that from UP?
Everything's on the table. So I visited a hump yard last week and there is no if ands or buts we have opportunity. So everything, flat yards, hump yards, there is nothing that's not on the table. And I'd be remiss to say, listen, we're going to shut down X amount of yards with 10 days on the job. We're going to spend a lot of time to make sure we get the plant set up to handle the business as efficiently as possible with
The
Next question is from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Great job on a solid performance and accelerating the plan, Lance. But Kenny, maybe you can delve into kind of what kind of changes have you already launched with customers in changing how the business is run? Any examples you can give us on things that have changed as you rollout PSR?
Sure. Thanks for that question, Ken. So first of all, what we've done is we've been very proactive with our customers and we've been very granular with them on the changes that we want to make. So specifically, we tell them exactly what will happen. We talk to them about when and then we talk to them about what they can expect.
And so we've done that at every turn. We've also sat down with our customers and talked to them about how to have the most efficient supply chain in terms of what we're trying to accomplish from a rail perspective. As Tom mentioned earlier, we've had quite a bit of decrease in our rail inventory. Significant part of that is on the private cars fleet and a lot of that is because our commercial team has been proactive and working with the customer to let them know how to run efficient rail service with us.
Yes. And Kenny, those conversations haven't been easy, right. So customers aren't just immediately embracing the conversations you're in England with them, but your team is doing a tremendous job helping them understand how they can change their operating processes so that they receive better service net net overall.
Yes. That's right.
Great. Appreciate that. And then if I can get one in for Jim as well, and Jim, welcome. From your perspective so far and kind of how Lance has described it, he stressed a lot about what fits our railroad in precision railroading principles. And given your background at your prior firm, what is different, maybe you can explain to us from your perspective in the way Union Pacific has previously talked about PSR principles versus the precision railroading we saw?
And then your thoughts on how that relates maybe to headcount reduction or timing of that?
Ken, nice to hear your voice again. So thanks for welcoming me back. So I don't think there's anything different, substantially different. The network can be a little bit different. Customer pairs can be a little bit different.
But the end result for PSR is pretty simple. You want to have great service and I will admit it right upfront, there is always and Kenny knows there's going to be some noise on the way there. And when you're more efficient in how you turn the locomotives, you need less of them. You need less people to service them. And I could go through a long list to tell you.
I don't see anything major difference, but I'll let Lance talk about if there's really that much structurally different and I think that's what it is. Structurally, we're a little bit different than the railroad I used to work at. But at the end of it, the principles are you run a real efficient railroad to the point where down the road we will be able to attract new business because we are more efficient that we were not able to attract at this point, make ourselves more competitive in every place where we are competing, not only against railroad, but against trucks. So it's a real positive. And the quicker we can get to that efficiency, it just helps us drive the bottom line in this company to a new point.
So that's
what we're doing. Amen, Jim. Ken, I think you shouldn't read too much into and I've said this over and over, when I talk precision scheduled railroad principles, it's precision scheduled railroading, it's all the things that build it done the UP way, which just means at right speed, engaged with customers and you're seeing how we implement it in full. So it's not like a piece here or piece there and I think we've been crystal clear about that as well.
Appreciate that and the time. Thanks guys.
Yes. The
next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Good morning. Thanks. I wanted to Jim ask you, in previous iterations of PSR, the shedding of marginal traffic across the entire book, not just intermodal, and the resulting disruption of traffic flows seem to allow Hunter to halt the system and redesign it very quickly, like we thought at CSX and CP. And it doesn't seem like we've really seen that so far at UMP and I'm not hearing that from you guys today. Maybe that's due to the fact that the STB is keeping a pretty close eye on the customer impact.
But in your experience, is shedding business a necessary part of this process in order to fully realize the benefits of PSR implementation? And if you don't think so, I'd be curious to hear any thoughts on why maybe Hunter did it that way?
Well, Allison, thanks for the question. First of all, too early for me to say what impacts and what the efficiency will do to the business that's out there right now. I'd be truly guessing and I don't like to guess. But if you have everything on the table, you need to deal with the flows of traffic, how well it fits into the plan to be efficient. And in other places that have done PSR or scheduled railroad before, there has been some impact.
But it's a logical decision to go through. You try to do it as little as possible, but at the end of the day, you're going to be smart enough to move ahead and operate the railroad in a very efficient manner. So, Allison, sorry, I can't give you any more than that. I'd be guessing and that's not what
I'm doing. And Allison, this is Kenny. I just want to say, we're working together as a team, Tom, Jim and I, to really educate the customer on how to fit in our network. I can tell you, we're not going in this thing looking to say, hey, we may lose this business because we're shipping. We're going in to win and grow our franchise.
Okay. That's helpful. And Jim can appreciate you're not wanted to guess. And then I wanted to see if you may be able to elaborate on comments you made that perhaps you'll target some capital to be able to run the trains as quick as possible. Can you give us some sense of what that could relate to or maybe an example that would be helpful?
Thanks.
Real quick example from what I've seen already is we want to build the length of the trains up and the technology is in place to operate trains at a larger size than we are today and we might have to target some places where we can meet larger trains and that's what we're going to do and we want to do that fairly quickly. We want to be able to turn on that and I know Rob's on board, Lance is on board, the whole team's on board. Just makes the place more efficient. So that's an example.
This is Rob. I would just add, of course, all of that will be embedded in the guidance that we gave of less than 50% of revenue as we look. So we'll work we might move a capital dollar from this project to that project. That kind of decision well may be made, but within the overall structure that we've guided.
The next question is from the line of Tom Wadewitz with UBS. Please proceed with your questions.
Yes. Good morning and congratulations on the strong momentum at the railroad and also on so you've had a lot of questions on PSR and kind of how you're approaching it. You've got your own KPIs. I just wanted to get some thoughts on how you think the review of the train schedule, how we might consider that? I think that's been a key component of scheduled railroading at CP, CSX when it was rolled out, running fewer trains, taking train miles out and so forth.
Can you offer some thoughts on has that already been done? Is reduction in train starts kind of a key component? I know you've talked more about car miles per day. But just if you could offer some thoughts on that or if that's still to come in the future?
Hey, Tom, this is Lance. So I'll start in outlining for everybody on the call our process of adjusting our transportation plan, which Tom mentioned in his comments and then give it over to Jim and Tom to add detail. So recall, Tom was talking about the mid American quarter, 160 T Plan changes in the Phase 2, 200 and we're just launching on Phase 3. So that is those changes are exactly what you are talking about, Tom. That's about balancing the network, it's about blending, it's about taking what used to maybe be a unit train, but it wasn't efficient as a unit train and turning it into manifest and blending those networks and then also looking for opportunities to knock off train starts, which ultimately ends up being a productivity tool for crew utilization.
So all that Phase 1 is underway. The process has been for us to bring in from the field, the individuals have to execute the work. We hold them accountable for designing a T plan that is highly reliable and efficient. And then they work with our network planning team to make it real. So that's how Phase 1 happened, Phase 2 happened, it's how Phase 3 is going to happen this coming week.
And a little more technicolor, Jim or Tom?
Go ahead, Tom. So we are to
your point, we are looking at train size and the train schedules to maximize footage across the territories that we can operate. Jim alluded to some capital opportunities that we're studying right now to get a quick turn on. But this is going to be an evergreen process as we continue. We're going to continue to look for the efficiencies not only at the local or the node type area, but the line side to drive those efficiencies across the network.
Listen, the only thing
I could add and maybe it will save some of the questions later on. Bottom line is, we are going to use less cars to move the same amount
of business, because we are going
to make them run faster. You do that by running them through terminals quicker than we are today, substantially quicker than we are You're going to run less locomotives because they're going to get over the road quicker and we'll be able to turn them in the terminal and we're going to be more efficient in how we handle them through the shops and even the equipment department, the mechanical people, how they handle the locomotives, how long they're out of service. We're going to go after the engineering people to see how efficient they are with capital to make sure that we're not blowing capital. We don't need to add the capital. We'll use the capital we have to be able to fix the railroad and make sure we've got the most optimal railroad.
I could keep on going for a long time. The keep on going for a long time. The bottom line what we want is good service with moving trains with more cars on them in an efficient manner. The locomotives are better. So we're going to touch.
We've already touched and we're going to touch the railroad across the whole company. It's not just one segment. It's exciting. Like there is nothing better to see when this thing comes through. Some of them will be real quick changes that we can make and we've made changes already.
We just dropped Tom and I went through and we dropped a couple of 100 more locomotives in the 1st 10 days. So is there more to come? Yes, there is, but let's be smart about it. So I'm excited. It's fun.
And it's not like me going to Tibet or China or something, because it's a different but this is pretty good in Omaha, I'm enjoying it.
Okay. So that all makes sense and I don't mean to overly focus on one metric, but can you offer a thought on how train starts may have changed? I mean, are they down what percent they might be down or what or is that the train start reduction something that would come later on?
Tom, you want to give a little commentary kind of qualitatively on what's happening with train starts?
They're moving down, aligned with our expectations. We see some opportunity here going forward in the next couple of months. Yes.
And you see it across the board, Tom. So we are finding opportunity to take manifest train starts down, because we are finding opportunity where we have 4 starts between terminals and we really only need 2. And then we are also finding opportunity where we used to run a bulk train once every 2 weeks and we're just sucking those cars into the manifest network. So we're knocking out that bulk train start and growing train size in the manifest network. We are seeing all of that and there is lots and lots of opportunity to continue.
Right. Okay. Thanks for the time. I appreciate it.
Yes.
The next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Thanks. Congrats team. Best of luck, Jim. Jim, I know you've been at the company for, I guess, 10 days now, including the weekends. But you've been obviously at the rail industry for several decades.
And I'm sure you had a good sense before you came in, in terms of what Union Pacific does well and maybe what can be improved upon. And I think you've touched on a few things from an efficiency perspective, but you can just help us understand the DNA of UNP as you look from outside in, what they've done well, what you think at least can be improved upon, I think that would be helpful and just understanding the opportunity.
Well, listen, you pass judgment when you look from outside. It's a great company, great franchise. So it's got all the great people. It really has and we're going to put some extra focus on operating efficiency. And I think they UP was already started doing that before I showed up, so which is nice and they got a great team from sitting around the table here with me.
We have got strong people from the finance side, the marketing side. So I think it's a great opportunity, great company and we don't want to be where we are. We want to be close to the best of the best down the road. So that's what we're driving for.
Okay.
Thanks for that answer. Let me just ask maybe a more specific one for Rob on the comment, the earlier comment Rob made with respect to the OR target this year being predicated on volume growth, productivity growth, just a lot of things that's rolling up into that OR target. But we are in a little bit of a transition period with respect to volume growth just given the uncertainty out there in your own guidance for this year. So Rob, how should we think about how much of the OR improvement is in fact predicated on the volume and revenue growth assumptions in the plan? Or is there just so much cost opportunity because you have that at least $500,000,000 productivity target out there?
No, I get your question and I'm not going to give you a precise number to that. As you know, having followed us a long time, we don't use, as I said earlier, the lack of volume as an excuse to not achieve our productivity, but volume is our friend. So I can't split the hairs the way quite the way you're asking it, but our outlook right now is the economy is cooperating and our outlook is that volume will be on the positive side of the ledger in the low single digits. And we're not going to get at least that and we're going to be
as aggressive as you've heard us talk all morning here and looking for opportunities that we are pretty
confident we know are out there and additional ones that no doubt will come as, pretty confident we know are out there and additional ones that no doubt will come as Jim and the team get further engaged. So we're going to go after and by the way, we're not just going to stop at we're going to get as far below the 61 as we can. So when we say sub-sixty 1, we're going to do as good a job as we can pulling all the levers.
Okay. I'm going to ask one more just because I understand the answer, but I guess it wasn't overly precise because you just can't you're not you guys can't provide that I guess and I understand that. But maybe on the CapEx because you have provided a precise number on CapEx. Now it's a little over 13% of sales. Can you just talk about the filter?
Has the filter changed in terms of what's being greenlit in terms of new projects? And what's caused that reduction? And all the incremental cash flow, I guess, could that go now back to share repurchase? Would that be the number one use of the incremental cash flow? And that's it for me.
Thanks so much.
Yes, Amit. This is Robin. One of the things you've heard me say for several years now, we are very proud about the process that we have as an organization around our disciplined capital spending. So we have a joint effort that heavily involves, of course, operations, marketing and finance to really grind and make sure we're making the right decisions with an eye on long term returns when we make capital investments. So we're not starving the railroad.
We want to make capital investments. As a CFO, I'm the happiest guy in the room to make a capital investment because I know we only do that when the returns justify it.
So when you look at it,
our disciplined process around our capital, I would say that the process has not changed. What may well change, as Jim alluded to earlier, is specific projects here or there, where he sees and the team sees the opportunity to generate strong returns going forward. And where he sees and the team sees the opportunity to generate strong returns going forward. Those dollars may be redirected to different projects, but the process at a macro level is unchanged.
Got it. Thanks guys. Congrats again and good luck in 2019. Appreciate it.
Thanks, Sameer.
The next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks. Good morning, guys. So you guys have made some pretty good with the PSR implementation already and it sounds like you're going to be done with it in 6 months. Is there a risk that Jim's full impact may not be able to come through because you're pretty much going to be done with the plan before he gets ramped up at the railroad? Or if Jim does come in and find a bunch of things to do, I mean, maybe that could extend the pace of implementation?
Ravi, let's be really crystal clear. Phase 1 of implementing this whole thing, when we're doing that in 3 phases, that will be done by midsummer. This is an evergreen, right? So it's not like 1 and done and then we live with that tea plan and it's set in stone. This is a relentless pursuit of efficiency and enhanced reliability on our service product to customers.
And we are never done. So my expectation of Jim is that you are going to be after it with the team with Tom and Lyndon and Kenny forever. It's an evergreen process, Robbie.
Sorry, Jim, don't put your feet up just yet.
I was just wondering whether you thought, listen, I'm over here just relaxing. So I really appreciate it, Ravi. Thank you very much.
Just as a follow-up, Rob, maybe Phase 1, you're going to be done by mid-twenty 19 and maybe this is related to the first question. But can you just talk about some of the items that will kind of bridge the OR gap between the 61 at the end of 2019 and 60 for 2020? Again, are those related to PSR or are those unrelated to PSR items?
Obviously, it's all of the above. I mean, PSR principles in the UP 2020 clearly will be a major piece of it. But remember, we've got our GBP-fifty 5 and 0 initiatives, which the difference between that and the Unified Plan 2020 really in my mind is the G55 and 0 initiatives is implied to mean everyone in the organization whereas the Unified Plan 2020 is fairly heavily operational. But everyone in the company is focused on driving productivity in everything we do. And I would say as we look to the sub-sixty 1 to the sub-sixty to your question, it's going to be driving all of the things we've been talking about today, the productivity, the efficiencies that will be evergreen and continue.
It will be our relentless pressure and focus on getting as much price in the market as we possibly can. And at this stage of the game, we see positive volume being a contributor as well. So it's going to be all those levers.
Great. Thanks so much.
The next question is from the line of Matt Russell with Goldman Sachs. Please proceed with your question.
Good morning. Thanks for taking the question. Somewhat of a follow-up to an earlier question in terms of pricing initiatives. At this point, do you think you're actually driving any shift in mix from customers that are receptive to the pricing terms versus those that aren't?
Ben? Yes, thanks for that question. No, we haven't seen that right now. I can tell you that we're priced into the market. We're priced into to our value proposition.
And as our service product becomes more reliable, we're optimistic about our opportunity to continue to do that.
And I want to add a little bit to that, Matt. So saying that we are deliberately trying to move mix with prices, that's probably not precisely accurate. Saying sometimes that happens because when Kenny's team is pushing and trying to get as much as they can for the value that we're delivering, sometimes they break business. And when that happens, it can affect mix. And I don't doubt that has happened historically and I don't doubt it's going to continue to happen.
Absolutely. Understood. Okay. And then Rob, regarding the $12,000,000,000 remaining on the buyback, right now you're running about $3,000,000,000 in free cash flow after dividends per year. That leaves a $6,000,000,000 gap there.
At your current EBITDA level, you could do another $4,000,000,000 in debt raise and not breach the leverage targets. So how do you think about bridging that $2,000,000,000 gap over the next 2 years? Is it free cash flow growth? Is it EBITDA growth? And you referenced it in your remarks, how comfortable are you that you can achieve that if you do see deterioration in the macro environment?
I mean, we expect to make progress and we will it will all be predicated on how our earnings growth projects and how we actually deliver in actuality. And right now, as you can tell from our tone, we're feeling pretty good about that. So I would anticipate that we'll continue to move up the scale, if you will, on the guidance that we've given and continue to make progress on the on completing the buyback, working up towards that 2.7 times that we talked about. We made good progress in 2018. We expect to continue to make good progress in 2019 2020.
And
ultimately you think there is enough whether it's CapEx takeout or cost takeout opportunities where you could still achieve that full $20,000,000,000 even if you had an environment where volumes were declining or slowing down in
particular areas?
Yes. But of course, we always take a look at what's happening in our business and if you had a recession or something like that, which we're not projecting, I mean, we obviously take that into consideration.
Understood. Understood. Thank you.
Next question is from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.
Yes, thanks very much. Good morning, everyone, and welcome back, Jim. Yes, my question is around PSR and the implementation that we've seen or attempts of implementation that we've seen in the past. And we've seen examples where it was attempted and failed and the examples where it was attempted and achieved. And it seems that in those areas where it was attempted and achieved, it was done in a fairly aggressive fashion with a very short timeframe that typically resulted in a fair degree of disruption and that's disruption at the customer the labor level, the regulator level.
Mike, where we've seen it fail is where we've tried to water it down a bit and tried not to be as disruptive and it hasn't worked. What I'm trying to figure out now which way what is the risk that we see perhaps adjustment to PSR that puts it puts the PSR implementation at risk?
So I'm going to start by saying I'm not sure I'm going to buy into the premise of the question. I'll say Jim can talk perfectly about the experience at CN, kind of the mother ship of the concept and that happened over a fairly long period of time and continues to happen. So Jim, why don't you share those perspectives with us?
Walter, nice hearing from you. To start off with, there's things that you can do real quick and is there going to be some noise? I give it. Kenny is going to have some noise, but we've got to be smart about how we do it. So the noise does not affect us both from regulatory or customer.
So we have that. But you move fairly quick and you see some advantages. The first few points are easier to drive and quicker. It took us at the old company a long time to get the last piece. That's cultural change with people.
It's how people think. It's how people do. So all those things take a little bit longer and there is some things that we find as you go through the process, you're going to have to spend capital to be able to extend sightings and tweak things to put it in. And so all that's in the mix and this whole question about whether we are going to succeed, I will be honest, I could have just stayed doing what I was doing. I didn't come back to sit around and enjoy myself and enjoy Omaha and everything that the network has to offer.
I'm here to deliver. The team is here to deliver. We're going to have a lot of fun doing it. It was going to be an exciting time and
we're going to deliver it, Walter. I'm not worried about it. Absolutely. And I want to come back to maybe one of the fundamental differences, maybe not of how we're going about it. And that is Kenny has talked over and over about being in front of the customer, making sure they know what we are up to.
That doesn't mean that the conversation goes smoothly and comfortably, but it means that they know and the end game is we want them to understand what we're doing, what it takes to fit well in this newly designed network, what those behaviors look like, so that the service to them is highly efficient, highly reliable and consistent, which is the end game. That's what they want. And so maybe that's a stylistic change. It doesn't slow us up, but it does change, I think, how the customer perceives what's going on.
Yes, that makes sense. Okay. Just moving over to pricing, perhaps Kenny you can address, you pointed and highlighted fairly significant change sequentially in your pricing, a lot higher than I would expect from a quarter to quarter basis. Was there any kind of lumpy contracts re signed? Was there the benefit of spot business that from the tail end of the trucking?
Can you perhaps give us a little bit color on why that lifted so much? And could we see a continuation of a very significant sequential lift if whatever factors were at play in the Q4 continue into 2019?
Yes. So, first of all, we still have the competitive forces that we've talked about in the past. They are still there. There wasn't anything unique or that we want to call out. Like I have stated, we're just going to continue to price to the market.
We're going to price to the value proposition that we have in a more reliable service product is going to give us more opportunity.
So nothing that specifically that caused the increase in the Q4 like was it renewal like even without being specific to different customers, was it just higher renewals or any color at all?
Yes. This is Rob. I would say, as we said in our opening comments, we pretty much got saw positive pricing except for the areas that Kenny just mentioned where we continue to face some competitive pressures. We pretty much got good price across the board. There was no single driver or marquee storyline there.
It was just steady hard work and good service and it came in at the 2.5.
Percent.
Okay. Okay. Thanks very much for the color.
The next question comes from the line of Mike Bonsal with Stifel. Please proceed with your question.
Great. Thank you. Just wanted to ask you, I mean, a lot of the other rails that have gone through PSR have first seen customer deteriorate before it has later gotten better. Do you
expect that to apply to Union Pacific?
So far it hasn't been. That's not our objective. Right now, we are making pretty radical changes and I'm sure you can find some number of customers at UP who could tell you that they're not real happy because we've fundamentally changed the service product. Broadly speaking, the network is providing a better service product to most of our customers and that's our intent.
Well, of course, to build on that a little bit, we have seen actually a 35% reduction in our service issues on our manifest program. So where we've put in the our Unify plan 2020 and we've rolled that out, we have seen that really good improvement in the overall reliability. Obviously, there is more opportunity to get better here.
Great. Sounds good. And also just wanted to ask you, you said you don't need any locomotives in 2019. I think you've said that before. Is that primarily because purchased a lot of locomotives in the last few years?
Or is it because you're running the network more efficiently and you can park
some more now because of the efficiency?
It's because we have a lot of locomotives in storage right now and we just don't need to add to the fleet. I will remind you, we did say that we are going to continue to modernize some of our heavily used units in the fleet and that's for an eye towards improving reliability. Reliability of the fleet is really critical as we continue to grind efficiency on the resource.
Got it. Thanks very much.
The next question is from the line of David Vernon with AllianceBernstein. Please proceed with your questions.
Hey, good morning guys. I had another sort of philosophical question around the whole PSR thing. I think where we've seen this work really well in the past is a very tight integration between sales and operations. In fact, most times you've had sort of like a president of the business kind of controlling both functions. And it's really a shift from designing operations services with operations to delight customers to really selling the schedule that's most efficient to run.
I just wanted to get a sense for how you guys are addressing that kind of tension between sales and operations either organizationally or through incentives or through business process changes to make sure that as you are implementing this stuff, you are getting that tight integration that you need between the selling functions and the operating functions to really get the most out of this initiative. So if you could talk to that, that would be great.
Yes. I'll let the guys doing it speak to that, okay. So let's think about it. There is going
to be some impacts. I keep on saying it and I'll say it again and from all the questions that we've had, people have said there's going to be impacts and there's going to be impacts. As soon as you change things, you start charging people demurrage for using your car and you make sure you collect the bill so that they give you the car back and they take it on arrival so it doesn't sit in your yard. That's a big change and we're going to make those changes. We're going to make it quick.
The Chief Operating Officer and the Chief Marketing Officer, sorry about the change in title, I apologize, but okay, they can work hand in hand if we have the same goal, which we have the same goal. If there's some tension at the end of the day, if we all understand where the goal is at the end and I'll tell you JJ and I had a great relationship, okay. And there's no reason for Kenny and I not to have the same relationship where we know what the goal is and we know where there's going to be some impacts and we know there's some tough decisions to make. And I am absolutely sure that Lance will keep the feet to the fire to make sure that we come to a solution that makes sense. And so that's my 2 piece of that.
That's exactly right, Jim.
With the initial implementation, Kenny and I have been a lockstep. Having those conversations with the customers. As we make changes, we're very tight on what we're doing as we go forward.
So no organizational changes or sort of incentive changes around kind of how you are actually taking the product to market?
Yes. You've seen our organizational change when we added Jim into the team. And what we did was we took a great team and we made it all that much better, which is why you're hearing confidence from us in terms of what we're going to accomplish in 2019 and beyond. And I'll tell you that we have good robust dissent debate, right, about what should we do in this situation. And the end game is putting a filter on what's it take to be the safest, best service product, which is most reliable and consistent and most efficient railroad in North America.
And those are the decisions that we're going to make. So, yes, we fight about it. And usually, it's a fight about which is going to get us faster, which is going to get us more, which is the better path, not should we even take this path.
Path. Maybe Kenny, just as switching gears real quick as a follow-up. In your discussions with Are you hearing anything from the steamship lines about how they're going to be adapting their service schedules to North America with the introduction of IMO 2020 later in the year?
Yes. So I just left Asia a couple of months ago. Right now, we haven't had any extensive conversations about that, but we're going to stay close to our customers and be engaged with them.
All right. Thanks.
Yes. Thank you.
The next question is from the line of Ben Hartford with Robert W. Baird. Please proceed with your questions.
Yes. Thanks. Maybe Kenny, just to follow-up on the inbound ocean freight situation. Could you provide a little bit of context as to what the present environment is? We're hearing a lot about, obviously, pull forward.
You mentioned that in your remarks, the inbound ocean freight data into the West Coast has been strong here. Warehouse capacity is tight. So any sort of perspective, particularly post Chinese New Year as we get into March and the spring ramp, what type of activity do we see? Do we see transloading activity in domestic intermodal pickup and a low and on the international intermodal side? And how much of a volume risk do you see post Chinese New Year given the pull forward that we are seeing at the present time?
Thanks.
Yes. So thanks for that. We definitely saw it in the 4th quarter, as I alluded to in my earlier comments. As we're talking to our largest customers now and as you probably have read in the press release, there's still some strong volume out there and we do see that based on the pull ahead. There's also some of that with the Springfield on the retail side and we're going to just continue to stay close to our customers to see how the volume shakes out.
Our next question is from the line of Brandon Nieglinski with Barclays.
I know it's been a long call, so we'll just keep to one. But Lance, I guess, if we look back the recent history of Union Pacific, your other West Coast rail peers have really outgrown and specifically CN. So I guess and I feel like Union Pacific has always had more of a balanced plan on margins, pricing and volume. With the transition to more of a scheduled railroad, does this create a lot of opportunities to maybe have targeted expansion with your customers? Or should we be thinking volume is more in the cards looking ahead?
Yes. Thank you for the question, Brandon. So the way we think about it is our Unified Plan 2020 is all about consistent reliable service, better service, which our customers are starting to see and we're going to grow on that and the most efficient service, generating the best returns, because we do think we should be in the lead or with the leaders of the pack in that sense. I anticipate that customer service product coupled with the work that Linden's team and IT have been doing with sales and marketing on the experience and targeted technology investment towards an enhanced customer experience, that makes us more attractive than competition in the marketplace, whether it's truck or another railroad. So I do think over time, we should have growth opportunity that presents itself to us that we don't have right now.
But that's yet to be seen. That's the strategy and we're intent on pulling that off on implementing that.
Well, thank you. Welcome back, Jim.
Thank you very much.
Thank you. Our final question is from the line of Bascome Majors with Susquehanna.
Hey, thanks for taking my question here. Jim, welcome back first of all. You're coming in as unquestionable change agent in a very large organization. Clearly, you have a tremendous amount of experience that suggests that this will be a successful foray much like your last ones, but inevitably some of those decisions are going to be unpopular and there's a lot of people at UP to object to them. How do you get or how did you get the conviction that you had the leeway you need from the rest of the management team and the Board to make the tough decisions that you're going to have to make over the next couple of years?
And if you could just talk a little bit about that process and how you got comfort level with taking this role, I think that would be helpful. Thanks.
Bascome, thanks for the question and nice to hear your voice again. So when you make a decision to change and come back to work, Lance and I spent a considerable amount of time and same thing with Rob and with Tom to go over and make sure that the vision was aligned with what we need to do to be able to deliver and be able to take this company to where it should be. So at the end of it, I would not have come on board if I wasn't comfortable that everybody and it wasn't the push to get them to have the same goals and objectives and understanding what we had to do to get there. So that was the easiest part. So you communicate, talk before and we both agreed that listen it's what the goals and objectives are.
I would if I was worried about the decision making with the Board and with Lance or anybody else in the company, I would have stayed at home. I would have done something else. I'm not worried about that. And so that was the process that we took Bascome.
Thank you. Welcome back.
Appreciate it. Looking forward to the next few years.
Thank you. At this time, I would turn the floor back to Mr. Lance Fritz for closing comments.
Well, thank you, Rob, and thank you all for your questions. We're looking forward to talking with you again in April and going over what our progress is at that point.