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Union Pacific Corp. (NYSE:UNP) Q3 2018 Antithesis Alarm October 25, 2018 8:45 AM ET

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Executives

Lance M. Fritz – Union Pacific Corp.

Kenny Rocker – Union Pacific Corp.

Thomas A. Lischer – Union Pacific Corp.

Robert M. Knight, Jr. – Union Pacific Corp.

Analysts

Amit Mehrotra – Deutsche Bank Securities, Inc.

Ken Hoexter – Bank of America Merrill Lynch

Jason Seidl – Cowen Securities

Ivan Yi – Wolfe Research LLC

Justin Continued – Stephens, Inc.

Brian P. Ossenbeck – JPMorgan Securities LLC

Ravi Shanker – Morgan Stanley & Co. LLC

J. David Scott Vernon – Sanford C. Bernstein & Co. LLC

Bascome Majors – Susquehanna Banking Accumulation LLLP

Allison M. Landry – Credit Suisse Securities (NYSE:USA) LLC

Christian Wetherbee – Citigroup All-around Markets, Inc.

Thomas Wadewitz – UBS Securities LLC

Brandon R. Oglenski – Barclays Capital, Inc.

Walter Spracklin – RBC Dominion Securities, Inc.

Keith Schoonmaker – Morningstar, Inc. (Research)

Matthew Reustle – Goldman Sachs & Co. LLC

Operator

Greetings, and adequate to the Union Pacific Third Division Antithesis Call. At this time all participants are in listen-only mode. A abrupt question-and-answer affair will chase the afterward presentation. As a reminder, this appointment is actuality recorded and the slides for today’s presentation are accessible on Union Pacific’s website.

It is now my amusement to acquaint your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific.

Thank you, Mr. Fritz, you may now begin.

Lance M. Fritz – Union Pacific Corp.

Thank you, and adequate morning, everybody and adequate to Union Pacific’s third division antithesis appointment call. With me actuality today in Omaha are Kenny Rocker, Executive Vice President of Business and Sales; Tom Lischer, Executive Vice-President of Operations; and Rob Knight, our Chief Banking Officer.

This morning Union Pacific is advertisement net assets of $1.6 billion for the third division of 2018 or $2.15 a share. This represents an access of 33% of net assets and 43% in antithesis per allotment aback compared to 2017. This was an best annual almanac for Union Pacific alike afterwards the account from accumulated tax reform.

Total aggregate added 6% in the division compared to 2017. Premium and Automated carloadings both added 9%, while Agricultural Articles grew 2% and Action volumes were bottomward 2%. The annual operating arrangement came in at 61.7% which was burst with the third division of 2017. College ammunition prices had a 0.3 abrogating appulse on the operating ratio.

Strong top-line beforehand was account by an access in volume-related costs, college spending due to some abiding arrangement inefficiencies and added bulk hurdles. While we’ve appear solid banking results, we did not accomplish the account and abundance assets that we had accepted during the quarter. However, we accept that Unified Plan 2020 alternating with added G55 and Zero initiatives and contempo changes to our administration team, position us able-bodied to alpha alive aloft account and operational improvements action forward.

We launched Unified Plan 2020 on October 1 in our Mid-American aisle with the ambition of creating added automated operations on the eastern one-third of our network. While early, I am admiring with the antecedent results, as we accept apparent beforehand in several key accomplishment indicators on our network.

We’ve additionally fabricated a cardinal of added changes to drive near-term abundance accumulation that you will apprehend about today from the blow of the team. Our complete Union Pacific aggregation is absolutely affianced in the accomplishing of Unified Plan 2020 and our afterward of alive a highly-reliable, added able network. There is abundant added to appear as we abide to roll-out Unified Plan 2020 aloft our network, and I’m aflame about the opportunities it’s action to actualize for both our barter and our shareholders.

I’m assured we accept the adapted bodies and the adapted affairs in abode to beforehand our operations, to lath added reliable account for our barter and accomplish industry-leading banking performance. The aggregation will accord you added of the accommodation on the third division and Unified Plan 2020 starting with Ken.

Kenny Rocker – Union Pacific Corp.

Thank you, Lance and adequate morning. For the third quarter, our aggregate was up 6% apprenticed by backbone in our Premium, Automated and Agricultural business groups with the fractional account in Energy. We generated complete net bulk appraisement of 1.75% in the division with connected appraisement burden in our atramentous and all-embracing intermodal markets. The access in aggregate and a 4% beforehand in boilerplate acquirement per car collection a 10% access in bales revenue. So now, let’s booty a afterpiece attending at the accomplishment in anniversary business group.

Ag Articles acquirement was up 6% on a 2% access in aggregate and a 4% access in boilerplate acquirement per car. Atom carloads were up 2% apprenticed by able exports, predominantly aircraft to Mexico, accompanying with added calm appeal connected from lower blah prices. These assets were partially account by assiduous weakness in aureate due to bargain U.S. competitiveness in the apple bazaar exports.

Grain articles carloads were up 6%, apprenticed by abiding appeal for booze and added bio fuels. This renewable ammunition strength, accompanying with added meat production, additionally collection an access in shipments for beastly proteins. Fertilizer carloads were up 5% due primarily to connected backbone in consign potash.

Energy acquirement added 1% for the third division as a 2% abatement in aggregate was account by a 2% access in boilerplate acquirement per car. Atramentous and coke aggregate was bottomward 3% primarily apprenticed by arrangement accident and retirements, accompanying with lower accustomed gas prices which fell 3% adjoin the third division 2017. Beach carloads were bottomward 23% due to the appulse of bounded beach and bazaar abatement in the Permian Basin. Furthermore, favorable awkward oil bulk spreads collection an access in awkward oil shipments which was the primary disciplinarian for the 40% access in petroleum, LPG and renewable carloads for the quarter.

Industrial acquirement was up 13% on a 9% access in aggregate and a 3% access in boilerplate acquirement per car during the quarter. Architecture carloads added 10% primarily apprenticed by able bazaar appeal for bedrock and adhesive and favorable year-over-year comps due to Blow Harvey that impacted the Texas Gulf in the third division of 2017. Likewise, plastics carloads added 14% due to the aforementioned favorable third division comps connected from the blow and backbone in polyethylene shipments with added production. Automated chemicals aggregate added 14% due to the connected automated assembly growth.

Premium acquirement was up 18% with a 9% access in aggregate and a 9% access in boilerplate acquirement per car. Calm intermodal aggregate added 7% apprenticed by connected appeal for bound barter accommodation and backbone in bindle and LTL shipments. Auto genitalia aggregate beforehand was apprenticed by over-the-road about-face and assembly beforehand at key locations.

International intermodal aggregate was up 12% as new ocean carrier business abide in the third quarter, accompanying with able acceptation and consign shipments. Accomplished agent shipments were up 8% due to able barter and SUV sales, added assembly at UP third bulb and beforehand with new chump wins. Although the alpha was bottomward 1% for the quarter, the ablaze barter articulation was up 7%.

Looking ahead, for the blow of 2018, our Ag Articles beforehand continues to face ambiguity in the consign atom markets from adopted tariffs. However, we are seeing some complete breach in the bazaar due to crop issues in South America and added countries, which has fabricated U.S. atom added aggressive in the apple markets.

We advanced connected backbone in biodiesel ammunition and renewable agent ammunition shipments due to an access in bazaar appeal for renewable fuels. We additionally apprehend bound barter accommodation accumulated with the bulk of abuse to abide our assimilation beforehand aloft assorted segments of our aliment and cooler business.

For Energy, we apprehend favorable awkward oil bulk beforehand to drive complete after-effects for petroleum products, but boxy year-over-year frac beach comparisons accompanying with bounded beach accumulation and softer bazaar altitude will appulse beach volumes. We additionally apprehend atramentous to acquaintance connected headwind for the of the year, and as consistently for coal, acclimate altitude will be a key agency for demand.

For Industrial, we advanced upside in plastics as assembly ante increase. Metal shipments are accepted to abound due to able architecture in action markets accompanying with bound barter capacity. In addition, we advanced connected backbone in automated assembly which drives beforehand in several commodities.

For Premium, over-the-road conversions from connected bound barter accommodation will present new opportunities for calm intermodal and auto genitalia growth. Admitting challenges aural the all-embracing intermodal market, we advanced beforehand year-over-year for the of the year connected from new business wins. The U.S. ablaze agent sales anticipation for 2018 is 17 actor units, bottomward 1% from 2017. However, assembly accouterment and new acceptation business will actualize some befalling to account the weaker bazaar demand.

So, afore I about-face it over to Tom for his operations update, I’d like to allotment a few observations on the beforehand we are authoritative commercially as we put Unified Plan 2020 into action. We are alive complete carefully with barter to lower our car account levels and aish antithesis cars from the network. This includes both clandestine and arrangement equipment. In the near-term, we plan to accomplish adjustments to our advertorial accuse to incentivize greater car and asset appliance aloft both our carload and assemblage alternation networks. Added importantly, we are and we will abide to alarmingly appraise every carload on our arrangement to actuate if it fits into our operating action at the adapted margin.

In closing, I’m absolutely appreciative of how our bartering aggregation is communicating with our barter at every about-face and in some cases accepting difficult conversations with them. We are proactively agreeable our barter so that ultimately we can lath them with a safe, reliable and mutually able account product.

And with that, I’ll about-face it over to Tom.

Thomas A. Lischer – Union Pacific Corp.

Thank you, Kenny and adequate morning. I’ll get started with a quick amend on our assurance accomplishment for the aboriginal three quarters. Our reportable abrasion abject was 0.77, an beforehand of 1% compared to aftermost year. The reportable bulk of our abuse accessories incidents or derailments was 3.20, access of 8%. In accessible safety, our cast bridge adventure bulk was 2.66, an access of 6%.

I appetite to agenda that although we accept a amazing bulk of alteration and change accident with the accomplishing of Unified Plan 2020, assurance is still job one. Our ambition is that all of our advisers acknowledgment home cautiously anniversary and every day. That ambition has not, and will not change. So that’s a quick update. Now, let’s about-face to the changes we are authoritative as we apparatus UP 2020.

As I acclaimed in aftermost month’s appointment call, Unified Plan 2020 is fundamentally an accomplishing of absorption agenda railroading acceptance in a address that fits our arrangement and the needs of our customers. It is a change from operation that accouterment from focus on affective trains to affective cars. The plan changes are advised to access car acceleration connected in bargain adaptable and car dwell. In addition, to beforehand accessories aeon times, the plan is additionally advised to bigger antithesis our assets aloft the network. The aftereffect is a added simplified arrangement that improves believability for our barter while abbreviation operating costs and beforehand requirements.

We’re about one ages into accomplishing of the Mid-America corridor. To akin set everyone, the Mid-America corridor, as the map on our beforehand indicates, encompasses ample north-south cartage flows on the eastern end of our railroad and about 50% of our circadian carloads blow this corridor.

Our beforehand appropriately far, in total, we advanced added than 150 architecture changes to our busline plan on this aisle alone. And we are able-bodied on our way to implementing those (00:13:13) plan changes. I am admiring and encouraged with the antecedent results. In fact, let me accord you few authentic examples that represent the types of changes we are making.

For one chump on our Little Bedrock account unit, we afflicted breadth we body blocks of cars and how we move those blocks to destination. As a result, we accept decidedly bargain the bales car abide and their cars are now accession at destinations up to three canicule sooner. Accession chump on the (00:13:42) account assemblage now pre-blocks cars at their own facility. As a aftereffect of all this change, the cars are now bypassing UP’s agent switching backyard altogether eliminating 24 to 36 hours of terminal abide and accouterment the chump an all-embracing faster alteration time to destination.

In added instances we accept adapted alternation agenda abundance to bigger antithesis our assets and bland chump demand. These adjustments beforehand asset appliance by establishing a added complete agenda aloft our network, abbreviation the cardinal of locomotives and aggregation starts adapted to administer the business. I appetite to point out that in all of these cases, we assignment carefully with the barter to end up with a win-win solution. We were able to beforehand operational adeptness for Union Pacific and account believability for the customer. And although we accept fabricated dozens of these types of changes in abbreviate aeon of time, we are aloof accepting started. There is added to come.

As we apparatus the UP 2020 operating model, we will activate to focus on new accomplishment indicators or KPIs. These KPIs will adjust with the operating goals we are aggravating to accomplish and our banking targets. We are in the action of evaluating some of the adapted indicators at altered levels of the organization, and for the operating functions. However, at a aerial level, the measures on this beforehand are adapted KPIs to barometer our beforehand as we apparatus UP 2020.

For anniversary measure, we are d a pre-unified plan baseline for September, the accepted bulk and our ambition for the end of 2019. I appetite to agenda that the 2019 goals are not the end state. These are acting (00:15:27) targets as we apparatus the Unified Plan aloft our arrangement aing year and as we abide to accumulation and analyze PSR attack aloft 2019.

To activate with, bales car acceleration is abstinent in circadian afar per car and is connected with focus affective from cars adjoin affective trains. Operating account is a subset of the account cardinal we broadcast with the AAR, but excludes cars in accumulator and cars placed at chump facilities. Measuring operating account is adapted as we (00:16:01) abatement as we auspiciously access car velocity.

Cars per carload brings calm car account and volume, acknowledging that account levels will alter with seasonality and as we abound the business. Adaptable abundance is a admeasurement in gross ton afar per application day. Declared accession way, it is the cardinal of gross ton afar that we move anniversary day for anniversary assemblage of application in the alive fleet. This is an all-embracing adaptable metric, including bazaar time.

Car bulb acquiescence is a admeasurement of how able-bodied we are confined our chump compared to our account schedule. And workforce productivity, measures circadian car afar per full-time agent and will accord us a adequate adumbration of how calmly our advisers are working. As I declared earlier, this by no agency is an all-embracing account as there are a cardinal of added abstracts we adviser on a circadian basis.

Following the advertisement of Unified Plan 2020 aftermost month, I accept had some – there has been some acceptance of what we’re accomplishing is a ablaze adaptation of PSR, or that UP is not absolutely committed to authoritative the changes all-important to accomplish PSR benefits. I can assure you that is not the case. We do accept a planned appearance access to accomplishing and we are alive to beforehand the changes aback and breadth we can. We are additionally absolutely committed to the basal credo of PSR including accretion car velocity, aspersing car dwell, allocation of aperture abridgement (00:17:35) and adaptable and aggregation requirements. This will be accomplished through simplifying the abuse arrangement and bigger acclimation resources.

While our access may be different, the axiological PSR operating attack are the same. As our accomplishing progresses, we apprehend to apprehend allowances added railroads accept accomplished including account reliability, action productivity, bigger asset appliance and bargain ammunition consumption. And we accept started to see some complete results. Aback the alpha of August, we accept removed over 625 locomotives from the alive fleets and we accept band of afterimage for accession 150 locomotives to booty out of the arrangement by year’s end.

On the antecedent slide, our car operating account has appear bottomward 6,000 cars aback September, and we currently accept action affairs to abate this account by about 10,000 added in the a term. On the TE&Y front, our September workforce was bottomward 2% adjoin August on burst volume. While I apprehend it’s alone one month, the numbers are affective in the complete direction. We are encouraged by the antecedent after-effects because the appulse of best of the 150 added account changes that I batten of beforehand are aloof alpha to be acquainted actuality in October.

I’d like to highlight some of the changes we’re authoritative in our operational alignment as a allotment of the Unified Plan 2020. Aloof this anniversary we appear the alliance of our operating regions from three to two. As a allotment of the bounded consolidation, we are additionally abbreviation our operating account units from 17 bottomward to 12. These changes will bigger adjust our administration anatomy and controlling processes with the new operating model, accouterment added acceleration and action as we apparatus the Unified Plan.

In addition, we are closing our adaptable adjustment bazaar in South Morrill, Nebraska in January 2019. As we activate to apparatus the arrangement architecture changes, car flows and cartage patterns will shift. As a result, we are alive through a terminal cause process.

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Further, in an accomplishment to accrue two-way advice with our barter and drive faster resolution of account issues, we are affective our chump affliction and abutment function, including car management, from business and sales to the operating department. This alteration will be acute in our action to abate operating car inventory. Additionally, we are in the action of accumulation and restructuring our Engineering functions to drive bigger accountability and added productivity.

Finally, we are authoritative some near-term reductions in our administration workforce aloft reductions accompanying to the consolidations and closures I described. These reductions will action in the fourth division of this year and we apprehend added workforce reductions as the Unified Plan is implemented into aing year.

Wrapping up, we are architecture new adeptness actuality at Union Pacific that will accredit acknowledged accomplishing of the Unified Plan 2020. We’re off to a abundant alpha and I am assured that we will complete the abounding year accomplishing of our plan backward aing year. In fact, we are about to activate the aing appearance of accomplishing on our Sunset Route which is beforehand than we anticipated.

As we accomplish beforehand aloft our arrangement in advancing months, the aftereffect will be a simplified arrangement that operates added safely, with greater believability and efficiency. I am aflame about the changes demography abode and I am encouraged about the aboriginal results. Change is never accessible and there will be challenges alternating the way, but I am assured that our accomplished and motivated aggregation is up to the task.

With that, I’ll about-face it over to Rob.

Robert M. Knight, Jr. – Union Pacific Corp.

Thanks, Tom, and adequate morning. We’ll alpha with a epitomize of our third division results. Operating acquirement was $5.9 billion in the quarter, up 10% adjoin aftermost year. Complete bulk price, added ammunition customs acquirement and a 6% access in aggregate were the primary drivers of acquirement beforehand for the quarter.

Operating bulk totaled $3.7 billion, up 10% from 2017. Operating assets totaled $2.3 billion, a 9% access from aftermost year. Beneath the line, added assets was $48 actor compared to $90 actor in 2017, and as a reminder, third division 2017 after-effects included a ample acreage auction in the favorable adjustment of a action matter.

Interest bulk of $241 actor was up 34% compared to the antecedent year. This reflects the appulse of college debt, complete debt balance, partially account by a lower able absorption rate. Assets tax bulk decreased 39% to $483 million. The abatement was primarily apprenticed by a lower tax bulk as a aftereffect of the accumulated tax reform, partially account by college pre-tax earnings. Our able tax bulk for the third division was 23.3%. For the fourth division of this year, we apprehend our able tax bulk to be in the mid 23% range. And action forward, we now apprehend that our normalized tax bulk in the approaching abode will boilerplate about 24%.

Net assets totaled $1.6 billion, up 33% adjoin aftermost year, while the outstanding allotment antithesis beneath 7% as a aftereffect of our connected allotment repurchase activity. These after-effects amalgamate to aftermath an best annual almanac antithesis per allotment of $2.15. Our operating arrangement of 61.7% was burst with the third division of aftermost year. And as a reminder, aftermost year’s workforce abridgement affairs and Blow Harvey had an abortive appulse of 1.1 credibility on our third division 2017 operating arrangement afterwards adjusting for the change in alimony accounting. The accumulated appulse of ammunition bulk and our ammunition customs lag had a 0.3 point abrogating appulse on the operating arrangement in the division compared to 2017.

Freight acquirement of $5.6 billion was up 10% adjoin aftermost year. Ammunition customs acquirement totaled $482 million, up $255 actor aback compared to 2017 and up $70 actor adjoin the added division of this year. The abrogating business mix appulse on bales acquirement for the third division was 2 abounding points. Decreased beach volumes and an access in lower boilerplate acquirement per car intermodal shipments collection the mix change in the quarter.

Core bulk was 1.75% in the third quarter. Appraisement continues to be a claiming in our atramentous and all-embracing intermodal markets, and excluding atramentous and all-embracing intermodal, bulk bulk was 2.75% in the quarter. For the abounding year, we still apprehend the complete dollars that we accomplish from our appraisement accomplishments to able-bodied exhausted our abuse aggrandizement costs.

Turning now to the operating expense. Beforehand 21 provides a arbitrary of our operating costs for the quarter. Comp and allowances bulk added 2% to $1.3 billion adjoin 2017. The access was apprenticed primarily by volume-related costs, arrangement inefficiencies and added TE&Y training expenses, partially account by lower administration costs as a aftereffect of our workforce abridgement affairs that we accomplished aftermost year. For the abounding year, we still apprehend action and all-embracing aggrandizement to be beneath 2%.

Total workforce levels were up about 1% in the third division adjoin aftermost year. Advisers not associated with basic projects were up about 2%. The access was apprenticed by our TE&Y workforce, which was up 8% due to college carload aggregate and added advisers in the training pipeline. Partially offsetting the access in our TE&Y workforce was a 6% abridgement in administration advisers and advisers d basic action work.

Fuel bulk totaled $659 million, up 46% aback compared to aftermost year. College agent ammunition prices and a 5% access in gross ton afar were the primary drivers of the access in ammunition bulk for the quarter. Compared to the third division of aftermost year, our boilerplate ammunition bulk added 34% to $2.38 per gallon. Our ammunition burning bulk additionally added during the division by about 4%. While there was some adverse appulse from mix, the complete disciplinarian of the added sea bulk was the service-related challenges that we experienced.

Purchase casework and complete bulk added 3% to $632 million. The access was primarily apprenticed by volume-related costs, college prices acquirement busline casework and added adaptable and bales car adjustment costs.

Turning to beforehand 22, abrasion bulk was $547 actor up 4% compared to 2017. The access is primarily apprenticed by a college depreciable asset base. For the abounding year 2018, we appraisal that abrasion bulk will access about 4%.

Moving to accessories and added rents, this bulk totaled $272 actor in the quarter, which is bottomward 1% aback compared to 2017. The abatement was primarily apprenticed by lower bales car and adaptable charter expense, account by added volume-related and arrangement bottleneck costs. College disinterestedness assets in 2018 additionally contributed to this favorable year-over-year variance.

Other costs came in at $287 million, up 25% adjoin aftermost year. The primary drivers were an access in ecology costs as able-bodied as college accompaniment and bounded taxes. For the abounding year 2018, we apprehend added bulk to up about 10% compared to 2017.

Productivity accumulation yielded from our G55 and Zero initiatives were abundantly account by added costs as a aftereffect of connected operational challenges. The appulse of these operational challenges, complete aloof beneath $50 actor in the quarter, which is bottomward from the $65 actor that we appear in the added quarter. The added costs were primarily in the advantage and allowances bulk category, although acquirement services, ammunition and accessories rents were additionally impacted.

Looking forward, we apprehend our G55 and Zero initiatives, including Unified Plan 2020, will not alone annihilate these abortion costs, but will put us aback on clue to accomplish cogent abundance accumulation in 2019 and beyond.

Looking at our banknote flow, banknote from operations through the aboriginal three abode totaled $6.4 billion, up about 18% aback compared to aftermost year due primarily to college net income.

Taking a attending at adapted debt levels, the all-in adapted debt antithesis totaled $24.8 billion at the end of the third quarter, up about $5.3 billion aback anniversary 2017. This includes the $6 billion debt alms that we assured in aboriginal June, partially account by claim of debt maturities. We accomplished the third division with an adapted debt to EBITDA arrangement of about 2.3 times. And as we mentioned at our Investor Day, our new ambition for debt to EBITDA is up to 2.7 times which we will accomplish over time.

Dividend payments for the aboriginal three abode totaled $1.7 billion, up from $1.5 billion in 2017. This includes the aftereffect of three 10% allotment increases over the accomplished year, including the fourth division of 2017 and the aboriginal and third abode of this year. We repurchased a complete of 44.7 actor shares during the aboriginal three abode of 2018, including 2.2 actor shares in the third quarter. This includes the antecedent 19.9 actor shares we accustomed as allotment of a $3.6 billion accelerated allotment repurchase affairs that we accomplished in June. We apprehend to accept added shares beneath the agreement of the ASR as the affairs alcove accomplishment afore the end of this year. Amid allotment payments and allotment repurchases, we alternate $8.7 billion to our shareholders in the aboriginal three abode of this year.

Looking to the of the year, we apprehend solid aggregate beforehand to abide in the fourth quarter. For the abounding year, we apprehend aggregate to be up in the low to mid-single chiffre ambit adjoin 2017. We will crop appraisement dollars able-bodied in antithesis of our aggrandizement costs. With account to basic investments, we apprehend abounding year 2018 spending to be about $3.2 billion or about $100 actor beneath than our advanced appear $3.3 billion plan. Advanced we guided to beforehand in our abounding year operating arrangement compared to 2017. While we accept this ambition is still achievable, we are starting to see some risks.

Implementation of Unified Plan 2020 in the Mid-American aisle is on track, however, we abide to see animated levels of spending alike as our account metrics boring improve. While aggregate beforehand is still strong, we are not seeing the accustomed melancholia ramp-up in our consign atom business due to tariffs and adopted competition. We accept accordingly challenged the complete alignment to beforehand abundance assets by ramping up our G55 and Zero initiatives and these accomplishments are now starting to accretion traction.

And as Tom aloof stated, we accept removed over 625 locomotives and over 6,000 cars from our arrangement aback August 1. We are simplifying our operating administration anatomy by eliminating one of three regions and bristles of our 17 account units. We accept appear the cease of our South Morrill adaptable bazaar and we are alive through a terminal cause process. We are demography accomplish to abate our administration workforce with about 475 positions actuality alone by the end of this year. In addition, accession 200 arrangement positions will be eliminated. This is the aboriginal of what will adequate be added reductions as we abide to drive abundance aural our administration workforce.

While we are assured the accomplishments that we are demography will aftermath near-term results, the timing of these initiatives may not abutment an bigger operating arrangement accomplishment in 2018.

And as we attending advanced to aing year, we apprehend to get aback on clue authoritative cogent beforehand abbreviation our operating arrangement and alive adjoin a 60 OR by 2020. While we apprehend complete aggregate beforehand and bulk appraisement increases to be aloft contributors to our operating arrangement improvement, abundance assets will comedy a key role.

Unified Plan 2020 will be implemented aloft our arrangement with the aboriginal appearance accepted to be completed by the end of this year and the afterward phases by the end of 2019. As we accomplish beforehand in the advancing months, we will see lower costs. Although we haven’t accomplished our banking targets for 2019 and abounding aspects of Unified Plan 2020 are still actuality formed out, it is not absurd to apprehend that we should crop at atomic $500 actor of abundance in 2019. We will see this abundance in the anatomy of lower advantage costs as able-bodied as accumulation resulted from operating abate adaptable and bales car fleets, including accessories rents and acquirement services, abstracts and food and fuel. While we accept not yet accomplished our basic spending needs for 2019 at this time, we do apprehend beforehand dollars to be beneath than 15% of revenue. We will abide to lath alternate updates to our banking goals and advice as we accomplish added beforehand implementing our G55 and Zero initiatives, including our Unified Plan 2020.

So with that, I’ll about-face it aback over to Lance.

Lance M. Fritz – Union Pacific Corp.

Thank you, Rob. As we discussed today, we delivered almanac third division antithesis per allotment apprenticed by able volumes and solid top-line acquirement growth. While we admit that opportunities still abide to beforehand our arrangement performance, we are encouraged by the beforehand that has been fabricated so far.

Furthermore, I’m admiring with the backbone of the abridgement and the complete appulse on best of our business segments. Adorable ahead, I’m assured that the contempo beforehand we’ve fabricated on our Unified Plan 2020 will beforehand in the near-term. As we move advanced with the implementation, alternating with added G55 and Zero initiatives, we will accomplish our abundance drive and beforehand the bulk hypothesis for all four of our stakeholders.

With that, let’s accessible up the band for your questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be administering the question-and-answer session. Due to the cardinal of analysts aing us on the alarm today, we will be attached anybody to one primary catechism and one aftereffect catechism to lath as abounding participants as possible.

Our aboriginal catechism is advancing from the band of Amit Mehrotra with Deutsche Bank. Amuse beforehand with your question.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Hey, thanks, operator. Acknowledgment for demography my question, everybody. Aloof a aftereffect on the $500 actor of abundance aing year, so that it translates to maybe a little bit added than 200 abject credibility of margin. Accustomed our acquirement forecast, at least, I’m not abiding – it’s consistently been adamantine to affectionate of construe abundance numbers for the balustrade into maybe a net accumulation cardinal and added specifically, how do you contemplate the risks about the frac beach angle as silica is ramping up in basin Permian mines? I advanced they’ve taken up 12 actor bags and maybe accession 10 actor bags to 15 actor bags to go. So aloof accustomed the addition margins of those carloads, what’s the appulse to abundance accumulation aing year if those volumes basically go away? Thanks.

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, Amit, as I said – this is Rob – as I said in my comments, we’ve not accomplished for 2019. And all the issues and challenges and questions that you’ve asked are acutely in the action of us alive through and we are not able to accord advice on all those items.

All (00:36:04) calling out actuality is that we are action assured in the aboriginal innings of our absorption that we’re accepting with our G55 and Zero initiatives and best specifically, our Unified Plan 2020. And as we attending at that, we apperceive there’s action to be – we advanced there’s action to be a complete aggregate environment, but absolutely what that aggregate looks like and what the mix looks like and how beach or added t about-face out charcoal to be apparent at this point. But admitting all that, all those affective parts, we advanced we’ll be able to drive at atomic $500 actor of abundance from the initiatives that we accept able-bodied underway adapted now.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Okay. Maybe aloof one aftereffect on the CapEx, because you did lath maybe a 2019 framework for that at atomic beneath 15%, if I attending aback several years, the aggregation has spent on boilerplate about bifold abrasion levels and I advanced that’s about the case with the abuse breadth as a whole. It is not the case with about any added automated breadth that’s alike capital-intensive and alike has long-life assets. So I was acquisitive you could advice me accept that.

Cost inflation, I don’t advanced explains it fully. There may be some befalling – I admiration (00:37:14) should be abundant added able with the bulk of CapEx projects (00:37:17) the breadth as a whole, not aloof you guys, but the breadth as a whole, there’s aloof a lot of money that’s actuality larboard on the table with account to adeptness of CapEx projects.

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. Amit, I advanced you’re right. I mean, I advanced the balustrade – and I advanced the simple acknowledgment or the abbreviate acknowledgment to why is the basic spending in the abuse industry is so abundant greater than depreciation, absolutely the acknowledgment lies largely, I advanced in the abiding asset investments that are independent aural that investment. So there’s a lot of affective genitalia there, but that absolutely is the simple answer.

But I will acquaint you, as we attending at Union Pacific’s basic spending, we haven’t accomplished for 2019, but you’re right. I did alarm out that we’re abbreviating our advice to be beneath than 15%, and I’m complete appreciative as we’ve formed over the aftermost several years to be as acclimatized as we can in alive the improvements we’ve apparent in our operating arrangement over the aftermost decade or so and added to come. We’ve been appropriately focused on actuality acclimatized and anxious and lined up about actuality acclimatized about our basic spending, and we were appreciative to affectionate of airing that bottomward as we accept over the years, and we’re aloof walking it bottomward as a percent of acquirement alike added as we attending to 2019.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Do you advanced there’s an befalling to get into (00:38:23) 13%, 14% breadth CSX is today, or is that aloof a little bit too low accustomed the beforehand opportunities you’re seeing?

Robert M. Knight, Jr. – Union Pacific Corp.

Well, breach tuned. I mean, we’ll see. Again, I would say that it depends on a lot of factors, but I would acquaint you that we’re as acclimatized as we can be about our basic spending. So we’ll see.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Okay. I acknowledge the answers. Acknowledgment so much.

Operator

The aing catechism is from the band of Ken Hoexter with Merrill Lynch. Amuse beforehand with your question.

Ken Hoexter – Bank of America Merrill Lynch

Great. Adequate morning. Two questions. Tom, you mentioned the change from the analysis appearance to now if you go aback to aback you were aloof starting this, and you saw some changes necessary. How do you acquaint if it’s working? Adorable at the stats, some of the (00:39:06), cars per carload or Trip Plan Acquiescence assume to accept gone, I acceptance adjoin what you would accept anticipation accustomed the aboriginal changes. And how bound can you accomplish adjustments as you go through the plan?

Thomas A. Lischer – Union Pacific Corp.

So, our railroad is action through a lot of changes adapted now. On the metric side, that’s not the primary acumen for the failure, of course, you adeptness accept apparent before. We see beforehand as we about-face the assets quicker that could actualize capacity, which is action to beforehand our believability and ultimately go out to the adeptness side. It’s difficult to say or anatomize out what allotment of our beforehand is due to the Unified Plan adjoin added initiatives that we have.

Lance M. Fritz – Union Pacific Corp.

Yeah. But to your question, Ken – this is Lance – clearly, it’s complete aboriginal innings, right? We’ve aloof started implementing Appearance 1 on October 1. What we’re complete optimistic about are seeing movement in some of the KPIs that we would accede the aboriginal aboriginal indicators like car terminal dwell. We’re seeing that move in the adapted direction. We’re action to see and are seeing adaptable abundance as we’re demography locomotives out affective in the adapted direction. That car Trip Plan Compliance, that has a lot of affective genitalia to it, and it’s adamantine to move it early, right, because it’s a aggregate of what are you accomplishing to and from industry, which is aboriginal and aftermost mile, what are you accomplishing in the terminals, what are you accomplishing over the road. And so, the actuality that it’s treading baptize adapted now, I don’t advanced that’s abnormal or unexpected. But, over time, we do apprehend that to move in the adapted direction.

And then, the added allotment of your catechism is how bound can we accomplish changes. This is axis into a way of action for us. So, while the phased accomplishing of the aboriginal abundance of Unified Plan 2020 or PSR on our railroad is affectionate of well-conceived, central of that, there are already opportunities to try article that’s allotment of that plan. And if it doesn’t assignment out aloof as thought, reconstructing it and accomplishing it again. That’s allotment of what Tom affected on aback he said we’ve affectionate of reorganized some of our administration anatomy on the operating side, so we can accomplish those kinds of changes added rapidly.

Ken Hoexter – Bank of America Merrill Lynch

Appreciate that. Aloof a follow-up, Lance. Your thoughts now on volumes afterwards actuality up 4% to 6% in the aftermost two quarters, it seems to me, we’re action a little slower to get started this quarter. Is that aloof boxy comps? Or are you seeing annihilation that would beforehand a slowing abridgement from your perspective?

Lance M. Fritz – Union Pacific Corp.

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I’m action to alpha with that, Ken, and I’m action to about-face it over to Kenny to accord us a little added technicolor. But, I think, overall, there’s not abounding indicators that we see in our served markets affectionate of broadly that acquaint us of a all-around slowdown. Now, there’s affluence of risk, right? Chinese tariffs affectation a accident and they can agitate barter flow. We see all-embracing economies, decidedly Europe adorable like they’re slowing bottomward a little bit. So, I don’t advanced it’s all aflush on the horizon, but we aloof don’t see any specific markers that acquaint us that beforehand isn’t action to happen. And, Kenny, can you ample in a little bit?

Kenny Rocker – Union Pacific Corp.

Hey, Ken. This is Kenny. Aboriginal of all, we do accept tougher comps in our beach volumes, and so we are seeing beneath beach affective in that Permian Basin. The added affair that Lance alluded to is on our atom side. We are seeing what I’ll alarm a adjournment of what could be affective out or exporting out here. And so, we’ll watch the soybeans and the grains and accrue an eye on that.

Now, accepting said all these things, I’m bullish and the bartering aggregation is bullish that we accept some areas that we’re assured to abound into the quarter. Our petrochem business will grow. We’re assured the wins on our all-embracing intermodal breadth to grow. So, we’re still action that it will be in the positive.

Ken Hoexter – Bank of America Merrill Lynch

Great. Adequate luck with the plan. Acknowledge the time and thoughts.

Lance M. Fritz – Union Pacific Corp.

Thank you.

Operator

Next catechism is from the band of Jason Seidl with Cowen & Company. Amuse beforehand with your question.

Jason Seidl – Cowen Securities

Thank you, operator. Adequate morning, gentlemen. I basic to allocution about the plan and how that could appulse both volumes and appraisement action forward. How do you advanced that as you alpha convalescent account to the customers? Is this a aggregate grab (00:43:40)? Is this action to be your adeptness in some areas to access appraisement in some of your articles because that your bulk appraisement alike excluding some of this added actuality (00:43:52) your competitors?

Lance M. Fritz – Union Pacific Corp.

Yeah. So, I’ll alpha with that, Jason, and then, I’ll canyon it on to Kenny and Tom for their thoughts. So, the way we advanced about this plan and the appulse on volumes and appraisement is aboriginal our access to appraisement is not changing, and that is the business has to be re-investable, it has to be adorable to us from a allowance perspective. Now, there’s a new analyze put on that as we apparatus this plan, and that is it has to fit aural the arrangement that we’ve designed.

If you go back, one of the – not one of the, the distinct bigger alert for us to about-face how we’re designing our busline plan, is that the way we had been accomplishing it resulted in abounding altered bazaar casework that became complete circuitous to assassinate and as a result, weren’t agriculture what the chump basic broadly which was consistent, reliable service. That’s why we’re authoritative the about-face to Unified Plan 2020. It will accomplish connected reliable account as we focus on car movement. And focus added of our absorption on affective in the apparent arrangement adjoin bazaar assemblage alternation networks. And so, the net aftereffect is there is accession analyze we put on bulk or on business, and that is will it fit into the arrangement as we’ve advised it.

In agreement of the aggregate side, as we aftermath a added connected reliable network, that should accomplish added befalling for us from customers. I advanced that’s action to be the case. I don’t apperceive absolutely aback that shows up, and amid actuality and there, there are apparently risks to the aggregate which are barter that either are anxious about the way we’re designing their busline plan and appetite to try added alternatives; or customers’ businesses that don’t fit able-bodied with the complete plan and they appetite to try added alternatives. So, with that, Tom or Kenny, you got any added observations?

Kenny Rocker – Union Pacific Corp.

Just complete quickly, Lance. You hit on everything. I’ll aloof say I’ve been absolutely afflicted with the bartering team, because they accept been out aboriginal and proactively talking with barter about the busline plan that we’re implementing, and I can additionally acquaint you that as we attending at the business, we are putting that analyze on to accomplish abiding that it does fit with our network. In some cases, there accept been a brace of examples breadth we accept adopted not to abutment the business because it does not fit into the network. So, if you’re allurement the question, are we able to airing abroad from this and if it doesn’t fit in the network, afresh that acknowledgment is, yes. But like I started off saying, we’re absolutely focused on aggravating to abound our volumes by educating our customers.

Jason Seidl – Cowen Securities

That was a adequate blush (00:46:42). And array of as a aftereffect to that, on your – you mentioned you accept – you’re accomplishing some terminal cause plans, you’re closing out adaptable adjustment shops. So it’s starting to attending added like, I advanced (00:46:59) what investors apprehend from absorption railroading. I was aloof curious, accept you guys brought anybody from the alfresco in on a consulting abject for this program? Or is this all actuality done internally?

Lance M. Fritz – Union Pacific Corp.

So I’ll booty a ache at that and afresh Tom adeptness be able to accord a little added detail. So, aback you advanced about the adeptness that we accept centralized on PSR, we do accept employees, some at aerial levels like a Cindy Sanborn who is now action to be alive the complete arctic arena of the network, alternating with others, decidedly in the operating aggregation and additionally in the arrangement planning and access aggregation who accept acquaintance and in some cases abysmal acquaintance in PSR.

Having said that and compassionate that we accept complete aplomb in the complete aggregation and they’re accomplishing a hell of a job, both designing from arena up, because it’s not actuality done in Omaha, it’s actuality done by the bodies that accept to assassinate the artefact on the ground. We are consistently adorable for agency to access our knowledge. One way is we accept spent a abundant accord of time with railroads that accept implemented PSR to accept from their angle what worked, what they admired they would accept done differently, what they ambition they would accept accelerated during their antecedent phases. So we accept abstruse from that and it’s reflected in our own planning. And we are consistently out in the exchange adorable for aptitude that can add to the aggregation that we accept got.

Jason Seidl – Cowen Securities

Okay. Acknowledge you for the time as always.

Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

The aing catechism is advancing from the band of Scott Accumulation with Wolfe Research. Amuse beforehand with your question.

Ivan Yi – Wolfe Research LLC

Yes, adequate morning. This is Ivan Yi on for Scott Group. Aboriginal question, aloof basic to aboriginal analyze your 10% action abundance ambition for 2019. Does this almost beggarly a 10% beforehand amid arch adding about to volumes? And what aggregate beforehand are you d for 2019? And if volumes are weaker than expected, can you still get to 10% action productivity? Acknowledge you.

Lance M. Fritz – Union Pacific Corp.

Rob, can you handle that for us?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. You’re apropos – on the 10% — I would not booty that as an all-embracing arch count. That’s an adeptness admeasurement on that beforehand that Tom showed earlier. That’s not adage that we’re action to accept 10% beneath arch count. What will behest what the complete arch adding cardinal is, is abundance is a big allotment of it, obviously, but so will volume. So that did not contemplate volume, which at this point we advanced will be aggregate growth. So, there’s a lot of affective genitalia on that. I advanced the bulletin there was that’s one of the key KPIs from an operating standpoint as we roll-out Unified Plan 2020 that action adeptness about alive an able operation is article we apprehend to beforehand upon.

Lance M. Fritz – Union Pacific Corp.

And we put those percentages plus/minus out as adjustment of consequence what we’re assured to achieve.

Ivan Yi – Wolfe Research LLC

Great. Acknowledge you. And my aftereffect additionally on labor, how abounding contractors do you currently accept on the network, and how abundant (00:50:02) apprehend to abate them by as allotment of the Unified Plan? Thanks.

Lance M. Fritz – Union Pacific Corp.

That’s a abundant question. We don’t apperceive – well, we don’t accept the numbers accessible adapted now as to the complete cardinal of contractors on the network. I’ll aloof admonish you that not every architect looks the same. So, we said we are in the fourth division demography out 200 contractors. Those are complete abundant focused in the IT apple breadth they assignment full-time on projects that we accord them, and they’re supervised by somebody abroad in a altered allotment of the world.

We accept abounding added contractors that do altered things on our property, because they can do it either added finer than we can or because the asset beforehand to do the assignment doesn’t accomplish faculty for us to accomplish because it wouldn’t be deployed all the time. So, in that case, you advanced about article as simple as snow abatement and grass cutting, and afresh you go all the way up to contractors that are alive some of our intermodal ramps. So, there’s a lot of affective genitalia there. You’ve targeted properly, Ivan, that that is an befalling cost, and to the admeasurement that we can acquisition low value-added assignment or agency to do that added efficiently, that’s accession brazier of costs that we’re targeting.

Ivan Yi – Wolfe Research LLC

Thank you.

Operator

The aing catechism is from the band of Justin Continued with Stephens. Amuse beforehand with your question.

Justin Continued – Stephens, Inc.

Thanks, and adequate morning.

Lance M. Fritz – Union Pacific Corp.

Good morning.

Justin Continued – Stephens, Inc.

Wanted to alpha with one on pricing. On bulk pricing, could you aloof allocution about what collection that deceleration sequentially? I apperceive you’ve discussed pressures in atramentous and all-embracing intermodal for a while, but alike if you band that out, we saw a deceleration of about 25 abject points. And then, adorable advanced on appraisement in 2019, maybe I’m account too abundant into this, but you said appraisement assets in 2019, but you didn’t specify aloft inflation. So, could you aloof allocution about your apprehension for appraisement about to aggrandizement in 2019 as well?

Robert M. Knight, Jr. – Union Pacific Corp.

Justin, this is Rob. Let me alpha with that, and Kenny will apparently accord a little bit added of a faculty of what he’s seeing in the market. Cardinal one, you apperceive how – I’ll echo for you and anybody else, how we account our price, which I’m complete appreciative of and we’ve done for the 15 years aback I’ve been CFO, and that is conservatively affected on an all-in crop basis. So it’s not a same-store sales affectionate of number. It’s an all-in yield. And that’s a complete bourgeois way of adorable at it, but I advanced it’s a best authentic way of adorable at what did you absolutely booty to the basal band from your appraisement actions.

And I would say that as you attending at the aberration amid our 1.75 all-in appear this division adjoin the two that we appear in the added quarter, it’s affectionate of agreeable hairs. There wasn’t absolutely a big change because of the rounding mechanics is allotment of it, but additionally the way we account price, aggregate is a factor. As a simple example, if we booty a 10% access on a allotment of business and the aggregate is down, we yielded beneath dollars. So we don’t adding that as a 10% increase. We adding that as whatever the dollars that we absolutely yielded. And so mix, which played adjoin us this quarter, mix acutely was a agency in the bourgeois way that we account price.

Looking to 2019, as you know, Justin, we’re never action to accord complete advice on complete appraisement numbers. But to your point, I can acquaint you that we do apprehend it to be aloft aggrandizement dollars. I mean, so the dollars that we crop from our appraisement accomplishments in 2019, we are aloof as assured as we arch into 2019 as we were in 2018 that those dollars will crop aloft our accepted aggrandizement dollars. Kenny, you appetite to…?

Kenny Rocker – Union Pacific Corp.

Yeah, you summed it up good, Rob. I will say, Rob laid out our methodology, and we’ve confused beneath beach acquirement sequentially third division adjoin the added division which had an impact. But accepting said all of that, if you attending at some of the added markets, I’m absolutely admiring and afflicted with our adeptness to bulk to the market. You attending at some of our markets like our calm intermodal market, you attending at our carload business, that’s adapted in antagonism with truck, complete admiring with our adeptness actuality to airing up the appraisement to bulk to the market.

Justin Continued – Stephens, Inc.

Okay. So, absolutely said accession way, alfresco of mix, you would say the appraisement ambiance is abiding or bigger than it was aftermost quarter? Is that fair?

Kenny Rocker – Union Pacific Corp.

That’s a adequate way to attending at it.

Justin Continued – Stephens, Inc.

Okay. Great. And as my follow-up, maybe to ask the abundance catechism a little bit differently, how aggregate abased is that $500 actor ambition for aing year? There seems to be added affair in the bazaar about the macro ambiance and the aeon for both industrials and transports. If we accomplish the acceptance the bales ambiance weakens in 2019, do you still advanced this abundance ambition is achievable?

Robert M. Knight, Jr. – Union Pacific Corp.

Hey, Justin, this is Rob. I mean, as you know, we’re never action to use and haven’t acclimated the abridgement of aggregate as an alibi for not accomplishing productivity. Accepting said that, acutely complete aggregate is our acquaintance because it gives us added optionality operationally to clasp out productivity. But as we attending to 2019, again, we are cerebration that in our – well, we haven’t accomplished it yet, our aboriginal attending is that aggregate will be on the complete ancillary of the balance and that absolutely is anchored in our added than $500 actor productivity. So depending on what absolutely plays out, I will assure you if aggregate were down, which is not our outlook, but if aggregate were down, we would aloof as aggressively go afterwards that 500 added number, but absolutely what it turns out to be remains, we’ll see.

Justin Continued – Stephens, Inc.

Okay. Acknowledgment for the time today.

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Lance M. Fritz – Union Pacific Corp.

Okay.

Operator

Next catechism is from the band of Brian Ossenbeck with JPMorgan. Amuse beforehand with your question.

Brian P. Ossenbeck – JPMorgan Securities LLC

Hey, adequate morning. Acknowledgment for demography my question. So, aloof basic to go aback to, I advanced beforehand 14 on the metrics and the angle and the goals are helpful. But aloof to get some faculty of the benchmarking, the arrangement accomplishment has been arduous for some time as you mentioned. So breadth are these key metrics about to aback the arrangement was a little bit added fluid? And can you accord us a faculty of how these were benchmarked adjoin your aeon operating PSR to the admeasurement you’re able to get that array of detail, acquainted this is not an end game, the 2019 numbers you had, but aloof – can you put some angle on how that looks adjoin UP arrangement maybe a year or two ago and afresh additionally your aeon would be helpful.

Lance M. Fritz – Union Pacific Corp.

Yeah, so this is Lance. I’ll alpha and afresh I’ll about-face it over to Tom. So parsing that catechism out, the aboriginal affair to agenda is some of these KPIs are KPIs that we accept not tracked historically, and it would be a complete job to affectionate of actualize them from a actual perspective. So, we’re not adequate to beforehand that time. That sounds like time not able-bodied spent. Some of them we can clue aback historically like adaptable abundance or car dwell. And if you attending at aloof all-embracing – and those are appear numbers, absolutely car abide is. You can see that some of our best car abide was way aback apparently about the 2013 affectionate of cardinal or timeframe. But car abide for us, depending on how we architecture the network, ranges maybe at best 26 hours added to in the 30 hour added ambit aback we’re congested.

As we looked in the added quarter, one of the affidavit that our disability costs were bargain in the added division was that through the added quarter, we angry a corner. And we didn’t accept September for any acumen added than it’s about the aboriginal ages afore we started in ardent implementing Unified Plan 2020. So, there’s absolutely no abracadabra about application that as a baseline. We chose to use that as a baseline because some of these measures like the aggregation abundance cardinal based on car miles, the car afar per day, those things were aloof starting them out, so we ample we’d aloof alpha them out in September. Tom, what would you like to add to that?

Thomas A. Lischer – Union Pacific Corp.

Really, as Lance said, the focus on car abide aspersing that car dwell, accepting the assets quicker helps to drive our account artefact aback up.

Brian P. Ossenbeck – JPMorgan Securities LLC

Okay. And then, aloof to aftereffect on that complete quick, the benchmarking adjoin peers?

Lance M. Fritz – Union Pacific Corp.

Oh, yeah. I’m sorry. Brian, Brian I’m sorry. Yeah, we did and accept absolutely benchmarked ourselves adjoin every added PSR railroad, and we do that periodically adjoin every added railroad. And what I’d say is the ambition ranges that you see on that metric beforehand are both engineered, they’re acquired from the arrangement as we advanced it will be advised on us, right, because the architecture is not complete. But we took a complete ample aboriginal footfall in the Mid-American corridor, and so we accept a faculty for what to apprehend in the actual phases. That’s account cardinal one. Account cardinal two we accept burden activated that adjoin what we see in complete accomplishment and in beforehand from starting point on the added railroads.

Now, I would admonish you there’s apparently one affectionate of audacious aberration in one way, and that is we’re starting the action with an OR in the 62 to 63 ballpark breadth some of the added actual implementations accept started at a college OR level. So there’s that. But, we additionally can see breadth everybody abroad started in agreement of their adaptable productivity, their car dwell, their ample in the blank. And the added affair I would say is, we apprehend cogent as we point out in that slide, cogent improvement. We’re already starting to see aboriginal allotment that abound that aplomb in it. But every railroad is a little different. Right? We accept – we go over the continental divide. We accept some appealing cogent acceleration and fall. That apparently agency that’s action to attending a little altered than somebody who doesn’t.

Brian P. Ossenbeck – JPMorgan Securities LLC

Okay. Acknowledgment for that, Lance. And as a aftereffect (01:00:32) a shorter, quicker one. You apperceive aftermost time we saw mix in price, this activating breadth mix is a bigger annoyance than bulk price, as you account it was 4Q of 2015 and the aboriginal division of 2016 (01:00:46) alpha the aftermost time frac beach bazaar collapsed. So, Kenny, can you airing us through any of the offsets that you adeptness accept in those markets? You mentioned petroleum, LPG beforehand as able-bodied as the awkward out of the Permian. Are those able to absolutely account what you adeptness be adverse in agreement of mix about-face in basin beach (01:01:04)?

Kenny Rocker – Union Pacific Corp.

Yeah. So, acknowledgment for that question. Aboriginal of all, I’ll aloof say that there are added shales out there that accept a adequate action of opportunity, and so we are advancing those opportunities and accepting wins there. At the aforementioned time, you are acquainted of the awkward oil opportunities that are out there, both out of the Permian and out of Canada. We don’t go into a lot of detail. We don’t allocution about customers. But I can acquaint you that we accept wins in both of those markets, and we feel adequate about the aggregate that’s advancing out there. It won’t absolutely account the sand, but we feel adequate about the volume, and we’ll see breadth that upside takes us.

Brian P. Ossenbeck – JPMorgan Securities LLC

All right. Thanks, Kenny. Acknowledge the time.

Operator

Next catechism is from the band of Ravi Shanker with Morgan Stanley. Amuse beforehand with your question.

Ravi Shanker – Morgan Stanley & Co. LLC

Thanks. Adequate morning, everyone. If I can aftereffect afresh on bulk and acknowledgment for description on bulk adjoin mix, but aloof adorable at the connected affectionate of pressures in the all-embracing intermodal business, I’m apprehensive if there is a achievability at all that you guys maybe cull aback on that a little bit, affectionate of, if that is actuality a annoyance to all-embracing allotment and afresh pricing. That’s the aboriginal question.

Second is, Rob, you articulate acutely assured about accepting bulk adjoin complete dollar bulk adjoin mix in 2019. We accept apparent some of the abuse aggrandizement benchmarks absolutely fasten action into the fourth division of this year. Apprehensive affectionate of aback you advanced will that complete bulk mix spread, is that because you apprehend that aggrandizement cardinal to appear aback bottomward again? Or do you advanced you can get the appraisement to added than account aggrandizement if it’s like 4% or 5% aing year?

Lance M. Fritz – Union Pacific Corp.

Rob, you appetite to booty that bulk adjoin inflation? And then, Kenny will…

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. Ravi, let me aloof state, aboriginal of all, at the outset, that – aback this ties into your catechism and the antecedent question, that we never accord advice on mix. And I accept consistently beheld it as a huge advantage of the UP authorization that we comedy in so abounding altered markets that there’s a lot of mix affective parts, and there is mix aural commodities, and so there’s a lot of affective mix things which is why we don’t alike attack to try to action that or adviser to it. We (01:03:25) abridgement deals us. But I will assure you that commercially and aloft the complete organization, we are focused on alive bulk breadth we can on every move, whether it’s a complete mix or a abrogating mix aback you add it all up, it adeptness be a abbreviate booty move, for example, but we’re aloof as focused on alive bulk and allowance beforehand on that abbreviate booty move as we are a continued booty move. So I wouldn’t booty mix as implying bulk is my point there.

Number two, to your catechism on the beforehand adjoin inflation, (01:03:59) footfall aback and accord you the advice that we accept accustomed and that is that our dollars that we crop from our appraisement accomplishments will be greater than the dollars that we expend on inflation. So you’re right. I would apprehend at this point that aggrandizement will be college in 2019 than we accept apparent in 2018. But the dollars that we crop from our appraisement accomplishments should still exhausted – may not – I’m not adage by what gap, but it should still exhausted the dollars that we expend on the aggrandizement cost, admitting aggrandizement adequate be a little higher.

Kenny Rocker – Union Pacific Corp.

And, Ravi, I’ll be appealing blunt here. Anniversary article bazaar is different. Anniversary deal, anniversary chump is different. I can acquaint you aback you see us win in the marketplace, it’s at adequate margins.

Ravi Shanker – Morgan Stanley & Co. LLC

Great. And aloof a quick follow-up. I advanced on the slides you had listed atramentous as a headwind action forward. I’m a little afraid to see that, because I advanced (01:04:56) expects admiring Nat Gas (01:04:56) appraisement at atomic for the blow of the year, if not into 2019. Can you aloof allocution about – can you aloof admonish us affectionate of what is the affectionate of baseline breakeven point you would apprehend to see on Nat Gas (01:05:11) and affectionate of breadth do you advanced that goes in 2019?

Kenny Rocker – Union Pacific Corp.

Yeah. So, aboriginal of all, there are a cardinal of things action on in comedy there. Accustomed gas prices were bottomward 3% affectionate of year-over-year by the quarter. There are some retirements in there. There’s a book of business on the atramentous ancillary that’s consistently advancing up for renewal. And as I mentioned in my beforehand statement, we absent some business. So we’re not action to get every win there and we focus on the ones that we win accept to be at adequate margins.

Ravi Shanker – Morgan Stanley & Co. LLC

Great. Acknowledge you.

Operator

The aing catechism is from the band of David Vernon with Alliance Bernstein. Amuse beforehand with your question.

J. David Scott Vernon – Sanford C. Bernstein & Co. LLC

Hey. Adequate morning, guys. Rob, I admiration if you could allocution about the $500 actor and advice us accept how we should use that for clay and maybe how it compares to above-mentioned levels of productivity. I’m aloof aggravating to advanced about how abundant of that $500 actor we should be assured to bead down. I’m not adorable for specific advice on what the antithesis cardinal is action to be aing year, but as you advanced about the way you admeasurement abundance in the past, how abundant and how able has that cardinal been in agreement of bottomward bottomward to the basal line? And how does the consequence of $500 actor compared to maybe the aftermost brace years run rate?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. That’s a abundant question. In this year, we accept been alive through the abortion bulk or the disability costs that I talked about, so this year is not a adequate benchmark, but I advanced it helps acquaint and access and set us up for a able year in 2019 because we accept every apprehension that we’re action to aish those disability costs that we’ve apparent throughout 2018 and afresh do way added than that with the Unified Plan 2020. So it’s a big number. I can’t acquaint you how to archetypal added than we’re d aplomb in our adeptness to drive abundance and as we’ve declared here, we’re assured that our acceptance at this point, the aboriginal planning phase, is that aggregate will be on the complete ancillary of the balance and we’re aloof as assured as anytime on our adeptness to drive bulk aloft inflation. So, from a clay standpoint, you’ll accept to affectionate of booty those ambit and do what you advanced the abridgement is action to attending like. But I would say that the $500 million, and afresh I said at atomic $500 million, is a big number. I mean, you can attending at – historically, maybe if you went aback over a continued aeon of time, you’d see UP in the $250-ish actor affectionate of range. So we advanced $500 actor in any one year added is a big abundance achievement.

J. David Scott Vernon – Sanford C. Bernstein & Co. LLC

All right. Acknowledgment for that color. And maybe, Lance, aloof as a quick follow-up, in adorable at the balustrade over the years, it’s consistently seemed to be accepted acumen that the authorization at UP is great, the cartage mix, the breadth of haul, the business foundation which the arrangement is congenital is really, absolutely good. As you guys are action bottomward this aisle of absorption appointed railroading, is there any acumen to accept that maybe you can’t do bigger than added implementations accept been based on the affection of the business franchise?

Lance M. Fritz – Union Pacific Corp.

Yeah, I advanced the best sum for that, David, is we advanced we should be the best d railroad absolutely for the acumen of our authorization and aggregation and abounding added assets and we should accept the best banking performance. That’s what we’re targeting. That’s what we’re cutting for.

J. David Scott Vernon – Sanford C. Bernstein & Co. LLC

And as you advanced about array of active adjoin that eyes with the board’s affectionate of direction, is that breadth you’re blame the alignment and you’re accommodating to accomplish the changes that you charge to accomplish to get there? Like, I’m aloof aggravating to get a faculty for that akin of commitment, if you could aloof animadversion on that.

Lance M. Fritz – Union Pacific Corp.

I accept we’ve apparent a adapted akin of charge in this aboriginal month, if you will, of activity. Accumulation regions, accumulation engineering functions, affective article like chump affliction and abutment from business and sales into the operating team, award 475 jobs that we advanced can be done added efficiently, streamlining the organization. There are abounding aboriginal accomplish that are absolutely aloof aboriginal steps. And, yes, that akin of charge all-important to ultimately accomplish a 55 operating arrangement at some point in the future, that is in place.

J. David Scott Vernon – Sanford C. Bernstein & Co. LLC

All right. Thanks, guys.

Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

Next catechism is advancing from the band of Bascome Majors of Susquehanna. Amuse beforehand with your question.

Bascome Majors – Susquehanna Banking Accumulation LLLP

Yeah, acknowledgment for (01:09:37) in here. Not to exhausted a asleep horse on the operating targets, but I anticipation it was absorbing with the KPIs that you laid out and almost a 10% abundance beforehand arrangement on those amid now and the end of 2019. If we appetite to clue this with the abstracts that’s about accessible to us, and affectionate of admeasurement your beforehand in added real-time, what would you beforehand we attending at? I mean, acutely if you’re successful, the OR should beforehand as you go bottomward this path. But what could we attending at account or account that you would point us to?

Lance M. Fritz – Union Pacific Corp.

Yeah. So, you see a brace of those KPIs that are currently published, terminal abide is one that will be a adequate one to watch. That’s a adequate all-embracing indicator. We broadcast a bales car number. I advanced it’s a big added across-the-board number, but that should appearance some movement as well. And the added affair to agenda is, those KPIs are now actuality congenital into how we adviser our business and we will accept an befalling to analysis them with you on a annual abject as well.

Bascome Majors – Susquehanna Banking Accumulation LLLP

Thank you. And that’s absolutely a absolutely adequate segue into my follow-up. Lance, afterwards some changes aftermost year to your allurement plans, adapted now, it looks like the chief administration is apprenticed by a aggregate of operating assets and operating arrangement with some ROIC targets alive the longer-term incentives. Based on your discussions with the lath about your new operating action over the aftermost few months, is this the adapted allurement amalgamation to drive outcomes you’re adorable to accomplish with the new operating plan here? And I guess, if the acknowledgment is, no, we adeptness abuse that, how adeptness things adeptness attending abnormally from allurement standpoint aing year?

Lance M. Fritz – Union Pacific Corp.

Yeah. That’s a abundant question, Bascome. So we do accept at this time that our accepted allurement bales are adapted and alive adapted behavior and it’s for this reason. In the big picture, if we advanced about what’s important in this – in our industry and our company, aboriginal and foremost is authoritative abiding we get our beforehand and invested basic right, that from that perspective, I beggarly absorb it at the adapted time, at the adapted amount, in the adapted place, and accomplish the allotment all-important to allure capital. And so, the abiding plan actuality congenital about ROIC makes all the faculty in the world, right? We’re a complete capital-intensive aggregation and we got to accrue an eye on that.

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We’ve adapted that so that the administration aggregation gets punished or adored incrementally based on about accomplishment on operating income. So that’s a about operating income. So that’s an important abiding allurement plan. I advanced it looks right. The concise is congenital on two big measures. One is operating ratio, which is how calmly we’re demography the top band and advice it into the basal line. That’s alarmingly important for us. And operating margin, which is – or operating assets afresh which is are you growing, and are you growing as expected. So, for adapted now, we advanced those accomplish sense. But the added affair to agenda is our Advantage Committee of the lath is consistently evaluating what are the adapted incentives and how do we adjust administration with what makes best faculty for advantageous shareholders. I advanced we’ve got that right, adapted now, but that does change over time, and it could change in the future.

Bascome Majors – Susquehanna Banking Accumulation LLLP

Thank you.

Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

Next catechism comes from the band of Allison Landry with Credit Suisse. Amuse beforehand with your question.

Allison M. Landry – Credit Suisse Securities (USA) LLC

Thanks. Adequate morning. I advanced you mentioned earlier, or gave an archetype of bypassing allocation yard. So aloof admiration if that agency we should maybe apprehend a amend of the bulge yards and maybe if I could ask it this way, how abounding cars per day does one of the bulge yards charge to action in adjustment to absolve the economics? And how abounding of your top 10 allocation yards accommodated this threshold?

Thomas A. Lischer – Union Pacific Corp.

Well, I acknowledge the question, Allison. As I referenced, we are action through a terminal cause process. That is a allotment of our action as the cartage levels or cartage accouterment through our new programs and our new plan. As far as bulge yards or switching yards, we’re adorable at what cars accurately charge to be there and assessing if those cars – if we can shut bottomward that adeptness and become added able with surrounding areas. As far as the bulge backyard goes, they alter a little bit, but a thousand cars-ish at a bulge backyard is what we’re adorable at from a cause process, but it’s action to be predicated on how the cartage flows end up in our organization.

Lance M. Fritz – Union Pacific Corp.

Yeah. Allison, I wouldn’t use that as a adamantine and fast rule, right. You apperceive that I advanced bulge yards are complete altered about the network. Some of our bulge yards are advised to run at 2,000 added cars a day and some are advised to run at 1,200 cars a day. The end d absolutely is if the cars charge to be switched and charge to be switched there, is that the everyman bulk advantage and if it is, we’ll accrue application it. And if we get to a point breadth appliance drives an addition decision, we’ll do that.

Allison M. Landry – Credit Suisse Securities (USA) LLC

Okay. That’s helpful. So maybe the cardinal per day isn’t the alone focus, and mix and altering and that array of affair adeptness comedy a role.

Lance M. Fritz – Union Pacific Corp.

Yeah.

Allison M. Landry – Credit Suisse Securities (USA) LLC

Okay.

Lance M. Fritz – Union Pacific Corp.

Basically breadth you accept to about-face the cars, that will behest and because one of the things we’re accomplishing is, we’re abbreviation the times we blow a car, which is abundant overall, but we still accept to blow it about to get it in block (01:15:33).

Allison M. Landry – Credit Suisse Securities (USA) LLC

Okay. Aloof based on what you’re seeing or array of the aerial akin appearance of all the yards, does it assume like there is a adequately cogent befalling to accede shutting bottomward some of these yards?

Thomas A. Lischer – Union Pacific Corp.

We are alive through that action adapted now. We don’t accept specifics at this point. We’re alive through that. There’s not a specific backyard we accept targeted at this point, but we are adorable carefully at those opportunities of breadth the car should be and if there is befalling to bang a yard. There will be added to appear on that later.

Allison M. Landry – Credit Suisse Securities (USA) LLC

Okay. Fair enough. Acknowledge you.

Lance M. Fritz – Union Pacific Corp.

Thank you.

Operator

The aing catechism is from the band of Chris Wetherbee with Citi. Amuse beforehand with your question.

Christian Wetherbee – Citigroup All-around Markets, Inc.

Yeah, hey. Thanks. Adequate morning, guys.

Lance M. Fritz – Union Pacific Corp.

Good morning.

Christian Wetherbee – Citigroup All-around Markets, Inc.

Wanted Rob to appear aback to the abundance catechism for a minute and I don’t appetite to abbreviate the $500 actor plus, because it is a big number. Aback I attending over the aftermost three years or so it’s array of been in the range, at atomic the bump at the alpha of the year has been in the ambit of anywhere from like $300 actor to $400 actor plus. So, I acceptance I basic to get a faculty of if this implies some back-end array of weighting (01:16:47), I guess, at the affairs which would assume to accomplish faculty aloof accustomed the actuality that you’re starting now and it will apparently abide to access through 2019? Or if there are maybe abeyant upside opportunities on the abundance ancillary from accomplishing of the plan?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, Chris, I would say that we’re not bound abundant yet to calendarize that $500 million. But you’re right, I mean, we will be ramping as we go in agreement of the accomplishing of Unified Plan 2020. So that adequate will accept some appulse on the calendarization of the $500. And again, I would accent that, anamnesis I said at atomic $500. So we’re hopefully not action to leave any money on the table here. We’re action to aggressively go afterwards all the opportunities and we’re action adequate about this. And, oh, by the way, we accept to get that affectionate of cardinal added in adjustment to drive to our ultimately our 55 OR which we’re committed to and alive to accepting to a 60 by no afterwards than 2020. So it’s action to booty this affectionate of initiative. And so, I guess, I would abridge my acknowledgment by saying, we’re action to go afterwards that. It’s action to be at atomic $500. Adequate we’ll accept some lumpiness, if you will, from quarter-to-quarter or aback it absolutely plays in afresh we’re action to be alive through that as we appearance in the of the arrangement on the UP 2020.

Christian Wetherbee – Citigroup All-around Markets, Inc.

Okay. That’s helpful. I acknowledge that color. And then, aloof one quick one. I acknowledge that it takes some time to affectionate of run through what you advanced the abeyant opportunities are and you guys are implementing at. Aback should we apprehend array of a bigger amend in agreement of what you can get OR-wise both near-term as able-bodied as maybe best term? So, I guess, the abbreviate catechism is aback do we get the array of abounding set of banking targets based on the program?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, Chris, it’s Rob again. I would say that, I beggarly breach tuned. I’m not able that we’re action to change our guidance, but I would aloof say that as you know, accepting followed us for abounding years, we’re not action to apathetic bottomward to get to a ambition by the complete end of the ambition date. And I use that advertence in the 60. We’re action to get to the 60 as cautiously and calmly and as bound as we can. But at this point in time, our advice still is by 2020. That doesn’t beggarly in 2020, but by 2020 is our official advice on that. And so, we’ll amend you as adapted if charge be, but at this point in time, that’s how we’re marching.

Christian Wetherbee – Citigroup All-around Markets, Inc.

Okay. Acknowledge it. Acknowledgment for the time.

Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

Our aing catechism is from the band of Tom Wadewitz with UBS. Amuse beforehand with your question.

Thomas Wadewitz – UBS Securities LLC

Yeah, adequate morning. So I acknowledge the advice you aggregate in the slides, that’s helpful, and the annotation on the Unified Plan 2020. I feel like I’m still a little cryptic in agreement of some of the things your action and so forth. Accept you affectionate of appear up with the new schedule, and that’s allotment of the 150 changes you’ve referred to that there is a new agenda on the Mid-American aisle and you’re implementing that? Or is that article that you’re still affectionate of accomplishing work, appear up with the new alternation agenda at some point in the future?

Thomas A. Lischer – Union Pacific Corp.

So, for 150 altered busline plan changes that we’re implementing, about 125-ish of those are completed adapted now. And we’re continuing to move forward. We accept implemented the ones that were the quickest and the accomplished impact. We accept aloof got over aftermost anniversary our beach plan which confused body of these assemblage trains that would body body over a brace of canicule to a circadian service. That’s not afterwards the lumps. We accept had some issues of accepting that going, but overall, it seems to be authoritative the advanced run. This anniversary we started our intermodal plan of alive best intermodal trains up and bottomward the aisle here. So that’s aloof accepting started.

Lance M. Fritz – Union Pacific Corp.

Yeah. So, Tom, I advanced to anon acknowledgment your question. It is a new busline plan. And what it agency is, Tom’s aggregation started at arena akin with the cars to and from industry, and congenital from that breadth is the best able abode to about-face those and do work, what’s the best able way to beforehand them added into the arrangement to breadth they appetite to go or to interchange, and afresh reconstructed a busline plan that does that. So, aback Tom is talking about the beach plan (01:21:19) advanced there’s a cardinal of origins up in Wisconsin and Minnesota, and they accrue cars and they ample those cars with beach over time. And in a assemblage train, it takes three, four, sometimes bristles canicule to accrue the cars, actualize a assemblage alternation and address them down.

In today’s plan, instead we cull cars circadian from those origins. We accrue it into a apparent arrangement and address them down. What that does is it saves canicule on car trips. And you aggrandize that into all the t and all the barter that we do aloft the arrangement and that’s how you get time accumulation on car movement and abide accumulation in yard.

Thomas Wadewitz – UBS Securities LLC

So, is that aloof directionally, is that alive a abridgement in alternation starts and access in alternation length, or not necessarily?

Lance M. Fritz – Union Pacific Corp.

You know, so the aboriginal affair to focus on are, it will drive a abridgement in the time it takes a car to go from agent to destination on average. It will abate the time a car is sitting in a terminal on average. It will abate the bulk of adaptable adeptness adapted on average. I advanced we’ll see some alternation alpha impact. It should. And alternation length, it could additionally abide to advice us abound alternation length. Those affective genitalia are a little beneath bright in agreement of ultimately will absorb beneath crews, because the artefact is added able and reliable. How abundant of that is because of trains, (01:22:53) alternation starts, that’s adamantine to aggravate out adapted now.

Thomas A. Lischer – Union Pacific Corp.

So, a lot of this is about how we’re acclimation that arrangement one end to the other, A to B, B aback to A. That drives adeptness in our – over the alley aggregation starts. So you should see that. That’s how we’re advancing about our awkward alpha team-wise.

Thomas Wadewitz – UBS Securities LLC

Okay. And then, aloof one abrupt follow-up, the blazon of access generates beforehand in action productivity, so you see arch adding go bottomward afresh you acquaintance accession railroad (01:23:26). Are you abbreviation your hiring and is that the training action advancing bottomward accustomed that it seems adequate you would see some action abundance and maybe arch adding abridgement action forward?

Lance M. Fritz – Union Pacific Corp.

We are, yeah. What you said is true. The action for new hires is starting to appear down. It was accomplishing that at the tail-end of the third division and we advanced that to continue.

Thomas Wadewitz – UBS Securities LLC

Okay. Great. Acknowledgment for the time.

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Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

The aing catechism is from the band of Brandon Oglenski with Barclays. Amuse beforehand with your questions.

Brandon R. Oglenski – Barclays Capital, Inc.

Hey. Acknowledgment for accepting me in here. I apperceive it’s been a continued call, so I’m alone action to ask one. But, Lance or Rob, I guess, as you guys attending out and you’ve committed to befitting CapEx low, 15% of revenue. If we put that in context, if you attending at some of your West Coast railroad competitors, some of them accept spent that akin absolutely a bit higher, but eventually apparent a lot of aggregate and top band amplification as well. And it’s appealing notable that you guys are still beneath your 2014 aiguille in revenues. So, I guess, how simple to the plan is developing top band and aggregate in the network, and do you advanced it can be done at these lower basic levels?

Lance M. Fritz – Union Pacific Corp.

Yeah, abundant question, Brandon. So address in apperception that acceptable in our apple is breeding growing and accomplished bulk of operating assets and banknote from operations, so that we can accolade our shareholders, allure capital, and put the basic aback to aerial acknowledgment projects. I advanced the abbreviate acknowledgment is, yes. The way we advanced about capital, we body it up from the bottom, so we don’t alpha with a ambition number, but that looks to us like beneath than 15% of revenue, and I advanced as we get added efficient, what I apprehend would appear is, we’re action to accept basic that is concrete complete structure, basement accessible to use.

Now, our basic spending adeptness ambition a little differently. Above-mentioned to implementing this Unified Plan 2020, we adeptness accept spent in this one area, and already it’s implemented we adeptness accept assignment accident in a altered breadth that we would like to either debottleneck or abutment with incremental capacity. But I don’t advanced that changes all-embracing the net-net ample number. And to accomplish what we try to – what we charge to achieve, like a 55 operating ratio, adorable ROIC, beforehand will help, and I advanced we will see beforehand because of added reliable connected account product. But I don’t advanced basic is action to arrest us from actuality able to do that.

Brandon R. Oglenski – Barclays Capital, Inc.

And I advanced if I heard you correctly, the priority, though, aboriginal and foremost is antithesis and allotment aural the organization?

Lance M. Fritz – Union Pacific Corp.

Our antecedence is consistently breeding growing operating assets and growing banknote from operations.

Brandon R. Oglenski – Barclays Capital, Inc.

All right. Thanks, Lance.

Lance M. Fritz – Union Pacific Corp.

Yes.

Operator

The aing catechism comes from the band of Walter Spracklin with RBC Basic Markets. Amuse beforehand with your question.

Walter Spracklin – RBC Dominion Securities, Inc.

Thanks complete much. Adequate morning, everyone. So, Rob, I guess, I’d like to appear aback to the OR about-face in agreement of your aplomb akin about an beforehand and suggesting that article has afflicted actuality that will acutely accord you beneath confidence. What has happened over the aftermost few months that’s led you to affectionate of banderole this OR advice for this year to be at risk?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, that’s a adequate question. And as I acicular out in my comments, we’re still focused on eliminating or abbreviation the accident as best we can. But you’re right. We did banderole the abounding year operating arrangement year-over-year beforehand in 2018 adjoin 2017 as a slight risk. And I would say, why is that? Well, what we’re seeing is the disability bulk that we’re action aggressively after, we accept every apprehension that they will be abaft us. Absolutely as we arch into 2019, are still lingering. Some of the acquirement about-face has not been our friend, conspicuously as Kenny commented, the atom markets accept not been our friend. But I’m not action to use that as an alibi as we don’t, because aggregate has still been adequately strong. But that in actuality is one of the challenges. And on a abate scale, some of the costs associated with the adapted accommodation to abate some of the arch count, the timing of that we are acutely action to accept a little bit of a conceivably a baby headwind in the fourth division on that. But you add all that up, those are the things that accept changed.

Walter Spracklin – RBC Dominion Securities, Inc.

Okay. Action advanced to aing year, you gave us the $500 million, but you did not accord us an OR. And action aback to a antecedent point, aloof captivation allowance connected and afresh abbreviation by $500 actor abundance afterwards the acquirement change should accord you about 200 abject points. So, are you finer allegorical to a 61% OR for aing year? And if not, breadth would the algebraic be amiss there in agreement of that calculation?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, I mean, we’re not giving because we’re aloof not to that point yet. We’re not giving advice on a abounding year operating arrangement in 2019. But again, we’ll see how it all plays out. We’re assured in the $500-plus productivity. At this point in time we do see complete volume. We’re assured in our adeptness to accomplish price. If you add it all up, I would apprehend that we will accomplish nice beforehand in the all-embracing margins. What that cardinal ends up being, breach tuned. But clearly, we are focused on a allusive move in the adapted administration on the operating ratio.

Walter Spracklin – RBC Dominion Securities, Inc.

I guess, breadth I’m allurement is $500 actor not equating to about 200 abject credibility all abroad according accustomed your accepted assumptions?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah, I mean, your algebraic is not wrong. I mean, that aloof affectionate of in a is a fair statement.

Walter Spracklin – RBC Dominion Securities, Inc.

Okay. And afresh you came back, Rob, afresh to array of reiterate the 2020 guidance. But Lance and anybody actuality and Tom, anybody has talked about the absolute befalling that the Unified Plan is presenting. And I’m disturbing with why you’re not alteration your advice for 60%. Is it that the 60% was no best accessible and now it’s accessible now that you’ve got a new plan? Or you haven’t affected absolutely the appulse or got a abounding faculty of what the appulse could be? I’m aloof absolutely disturbing with why you would accrue the 2020 ambition accustomed the absolute change that your alignment has put advanced with the Unified Plan.

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. No, I absolutely get it, Walter, and I would say that the acknowledgment to your catechism is affectionate of several things. One is, we are in the aboriginal innings of the accomplishing as we’ve talked all morning actuality of Unified Plan 2020 accepting absorption and action absolutely adequate about it. So we’re action complete adequate about that. We haven’t afflicted that guidance, but I would aloof alarm out that, I wouldn’t apprehend too abundant into that. I wouldn’t apprehend that, oh, jeez, they’re not assured because we are confident. But I would aloof highlight that at this point, that is a by 2020. It’s not a end of aftermost day of the year of 2020 affectionate of thing. So we’re action to get there as cautiously and as calmly and bound as we possibly can and breach tuned, I guess, in agreement of what affectionate of clip we’re able to make. As we get added innings beneath our belt with the accomplishing of Unified Plan 2020, I advanced you’ll alpha to see and we’ll allocution added granule, I would expect, about breadth are we on that aisle of improvement.

Walter Spracklin – RBC Dominion Securities, Inc.

Okay. Acknowledge you complete much.

Operator

Our aing catechism is from the band of Keith Schoonmaker with Morningstar. Amuse beforehand with your question.

Keith Schoonmaker – Morningstar, Inc. (Research)

Yeah, thanks. Compared to added balustrade that accept implemented absorption railroading, you acicular out that UP (01:31:12) absolutely adorable operating ratios apparently 10 allotment credibility to 15 allotment credibility bigger than breadth some (01:31:20) accession aberration is the calibration whereby (01:31:27) your arrangement is a assorted of the admeasurement of the others in abounding ambit track, miles, power, revenue, (01:31:32). Could you amuse busy on what complications this brings abnormally to those of us that are not railroad operators?

Lance M. Fritz – Union Pacific Corp.

Sure. I’ll start, and afresh Tom can add added technicolor. You’re right. Our calibration is absolutely a bit altered than the added railroads that accept implemented PSR. And I mentioned beforehand in the alarm as we’ve affianced with our aeon in those added railroads, we don’t absolutely see annihilation there scale-based that tells us there’s incremental accident to us. One of the things we’ve done is instead of implementing a cast new busline plan aloft the complete arrangement all at already is, we bankrupt it into phases. That’s a acceptance that calibration affectionate of does bulk in agreement of consequence of risk, and if our d plan aboriginal on was action to breach some chump relationships or if we got some aspect of the architecture amiss or some such thing, we didn’t appetite to do that arrangement wide. We basic to apprentice that in a abate block and that informs affectionate of why we went bottomward that path. But, Tom, is there any added observations you appetite to accomplish there?

Thomas A. Lischer – Union Pacific Corp.

Yeah. So we’ve angry our operating archetypal upside bottomward and we appetite to accomplish abiding we’re solid on that as we move advanced and designing the plan and alive with our barter to be proactive to beforehand that account reliability.

Keith Schoonmaker – Morningstar, Inc. (Research)

Thank you. I’ll leave it at that.

Lance M. Fritz – Union Pacific Corp.

Thank you.

Operator

The aing catechism is from the band of Matt Reustle with Goldman Sachs. Amuse beforehand with your question.

Matthew Reustle – Goldman Sachs & Co. LLC

Hey, thanks, guys. Aloof one quick one for me. Rob, you mentioned you accept added debt to raise. Ante are affective absolutely a bit decidedly aback the Analyst Day. Aloof accustomed the admeasurement of debt that you’ll be adopting here, these swings do accept an appulse on the basal line. Is that article that you’re because if agreement of the timeline for adopting that aing big block of debt?

Robert M. Knight, Jr. – Union Pacific Corp.

Yeah. I mean, those are all factors that go into our planning. We don’t accept annihilation to advertise here, but, yes, I beggarly (01:33:41) all of the things you highlight are action to the mix of us free what’s the adapted business accommodation to accomplish and when.

Matthew Reustle – Goldman Sachs & Co. LLC

Okay. So, is that something, I mean, has your apprehension confused up maybe in agreement of maybe accelerating aback we can see that aing leg?

Robert M. Knight, Jr. – Union Pacific Corp.

No, I wouldn’t say. We haven’t put a date on that, but I wouldn’t say it’s materially afflicted our thinking. We accept annihilation to amend here.

Matthew Reustle – Goldman Sachs & Co. LLC

Okay. Great. Thanks. (01:34:04).

Lance M. Fritz – Union Pacific Corp.

All right. Acknowledge you, Matt.

Operator

Thank you. This concludes the question-and-answer session. I will now about-face the alarm aback over to Lance Fritz for closing comments.

Lance M. Fritz – Union Pacific Corp.

Thank you, Rob, and acknowledge you all for your questions and aing us on this alarm today. And we are adorable advanced to talking with you afresh in January.

Operator

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Ladies and gentlemen, acknowledge you for your participation. This does achieve today’s conference. You may abstract your curve at this time and accept a admirable day.

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