聯合太平洋集團 (UNP) 2002 Q1 法說會逐字稿

Before I'm done, I'm give you an outlook on real estate on for the second quarter and the rest of the year. Interest expense, down all year at $163 million. About half of that is lower debt levels. Our tax rate came in this quarter at 37.8, up from 37.2 a year ago. As overall net income is up 23%, and EPS at 86 cents up 19%. We'll take a look at the revenue results at the railroad. We'll provide more detail in terms of the business groups. We had two business groups up.

It's stilly a pretty tough economy. I'd look at areas like the chemical group. Their overall revenue is down 1%.

At third and 4th quarter we were running below 4 and 5%. We're hoping to be seeing a little bit of a bottom on that business line. On the next slide, we have average revenue per car. As I've said in the past, this is not a perfect of -- perfect measuring of pricing.

Mix can affect it both positively and negatively. One of the drivers was overall -- one of the drivers was the reduction in the real cost adjustment [INAUDIBLE], which is a price index we use.

It impacts about 25% of our business and it was really driven down by lower fuel prices.

The ARKAF index was down quarter and 1st quarter. The outlook is right now it will be down in the second quarter. If you step back and look at the individual business groups, excluding auto and energy, you'll see that we did end up with positive ARK. Industrial products group led the way.

They're up 5%. Now about half of that is price and the balance is mix, particularly when you look at our lumber shipments this quarter, we had all-time records.

Intermode, up an ARK. Agriculture and chemicals, on the agriculture side, we did see a low price pressure on whole grains.

We see good yield improvement.

Auto reflex GM and our legacy business overall. We still see for the year a price increase, assuming the economy turns around in the second half of a minimum of 1%, so we do see that we will be able to offset some of our strategic decisions with the price side with other price actions.

This is operating results at the railroad. Overall operating revenue was flat. Our other revenue was up. I did not mention that in the average revenue per car, but we are seeing a little bit of strength here. Our focus on expanding on the [INAUDIBLE] and the customer supply chain logically started with [INAUDIBLE] Chrysler is helping increase that revenue, but all that needs to be taken into consideration when you think about yield.

On the cost side, labor costs were flat. We were able to offset inflation that ran about 4%.

You'll notice our overall force counts were down about 3%. If you step back and look at the labor unit costs on a cost per revenue ton mile, we did drive the labor costs down about 3%.

We ran expenses around $8 million.

We now have around 425 additional units compared to a year ago. If you take out the locomotive leases, our overall equipment costs were flat on improved cycle times of about 2%.

The biggest change obviously has been in the fuel line. Overall fuel costs down 33%.

Fuel price came in at 61 cents compared to 92 cents a year ago. We have said we had about 45% of our fuel hedged at 70 cents for us.

That not only helped us in the first quarter, but we also saw a significant reduction in terms of our actual yield purchase costs, our regional spreads.

Normally we look at a premium to gulf coast fuel of about 7 cents in terms of our actual buy. That was only around one or two cents this quarter, so we did see some very nice reductions in our actual fuel buying.

In addition, we did build our fuel inventories here when fuel costs were at kind of the low point in December.

One other item on the fuel line are fuel consumption rates to improve 4% for the quarter, again reflecting an upgrade of our locomotive fleet.

Supplies down around 4%. That's a trend we've seen all last year.

All that is entirely a result of reduced locomotive maintenance spending. Other costs where we had the biggest increase up 16%, just over $40 million.

You'll recall last year, when we saw the economy turning down, and we said this in the release, we did everything we could here to stop spending in order to try to get an assessment where the economy was going.

Not all of that was sustainable. I'll talk about our outlook and the other cost line for the rest of the year.

Most of that reduction came about 2/3 of the -- I'm sorry taken from reduced maintenance contracts. Put it all together, we have total expenses down 3%, our national revenue drove our operating income up 14%. We note in the key statistics again, operating ratio is down about two points.

Fuel costs will give you our outlook for the second quarter.

Second quarter a year ago we were at 92 cents. Right now, including the hedge, we're averaging about 75 cents for fuel and very volatile.

If you look over the last two or three weeks, we have seen swings a full nickel either way.

But right now, no changes in the rest of the quarter. We'll be in the 75 cent range. Operating ratio provides the components. You look at total we're down 2.2 points.

The labor ratio was held flat. Note, the biggest drop came in fuel and utilities almost four points which was offset by an increase in our other costs as we discussed earlier.

Take a minute to look at our trend in other expenses.

What I have here is by quarter, other costs for last year and what we saw this year. You can see here, the last year we averaged just about $300 million for the year.

My expectation this year assuming the economy turns around will be in the 310 to 315 million range.

It covers a litany of items. Our state and local tax line was up almost 18%.

$6 million in the quarter. A big piece of that is the more money we make, the higher taxes we pay in terms of property. Take a minute here to look at overnight results.

This is a pro forma basis. We'll look at an apples to apples comparison. Overall, this is good given the current tough environment. Operating revenue is down about 3%. One point of that is reduction in rates, and directly tributable to reduced fuel surcharge in that business.

If you take fuel surcharge out of the equation, they actually did increase their yield about a half a point. The balance of revenue decline is the result of an overall reduction in tonnage.

Other components, wage and benefit costs, costs up about 2%. Their inflation is around 4%.

They did have fewer employees this quarter than a year ago, so they were able to achieve productivity. Larger items, depreciation you'll note is up 7% compared to a year ago.

A big piece of that is a significant reduction in salvage values for equipment they're selling. Fuel costs down 28%, driven by fuel prices down by 29%.

In the other category, down around 16%, that's an overall reduction in spending at overnight. Put it together, operating income is flat, they did get a little improvement at the operating ratio at 96.6. Let's take a minute to look at the cash flow.

We had a very good quarter. Cash operations, we've up -- were up to 60% from a year ago. Half is driven by income. The balance is working capital. One of the comments here, we had our severance going on. Overall, cash operations very good. You look at free cash flow at an improvement of 44% year over year. Balance sheet, continue to make good progress. We show a couple of good measures, debt to capital, nice improvement, and on the more conservative look with leases. We're continuing a very good trend in terms of improving the balance sheet. On our credit ratios, when you look at interest coverage and cash flow to debt, again, continued improvement, and I expect to see those kind of trends continue all year.

I want to wrap it up here with our outlook for other income.

I wanted to give you some perspective here in second quarter, and outlook for the full year. The bars on the left side, you can see the first two quarters here, both what we saw last year and what we'd expect this year.

We're down about $9 million in 1st quarter. You can see for second quarter that we had a very strong quarter a year ago for second quarter real estate sales that told around $75 million.

Right now, the outlook is around 20, so we'd be about the same level here as 1st quarter.

For the full year, we do see some opportunity here.

A year ago we recorded $162 million in other income. Right now, my outlook could be around $200 million. The main driver here, and you may have heard about this, it was announced six or seven months ago, but we are in the process of come completing a sale of inoperating rides to the Utah Transit Authority.

It's about a 175 mile quarter.

The potential deal is north of $40 million. It's all cash. There is a chance we could close the deal in June, but right now my outlook is for 3rd quarter.

With that potentially closing this year. We would see some upside to

our overall other income levels of about $40 million. That completes the review of financials.

Good morning.

Given the uncertain economy, we're pleased with what we've accomplished in the 1st quarter. We were cautiously optimistic as we entered the year. We held our own in a difficult environment as a result of the strength of our diverse business mix, our emphasis on meeting customer service requirements, our new service offerings, and a focus on achieving operational efficiencies.

The results of our efforts is a fifth consecutive quarterly rise to customer satisfaction to another postmerger high.

It has improved 13 of the last 14 quarters.

We've been able to improve customer satisfaction.

Most of our auto customers [INAUDIBLE] 15 plus million vehicles to a GEM consensus of 16 to 16.5 million. Clearly the new-game contract has been a factor in our overall revenue increase.

This is a third consecutive year we received the Toyota Award.

Intermodal revenues were the highest for any quarter in our history. We also begin to see some signs of domestic market improvement.

But the real story lies in improvement. We've be successful on improving the intermodal units on two fronts.

First, we've and we've made significant improvement by focus on improved reliability and acreasing asset utilization to make sure that our operating is efficient.

Last October, we launched Blue Streak, one of our new services in conjunction with the Norfolk Southern.

Blue streak is a premium intermodal service from Los Angeles to Atlanta in five days that is aimed squarely at taking business off the highways.

Based on our success, we expanded Blue Streak to cover Charlotte, Jacksonville and Miami.

We've also initiated a second daily train to take advantage of demand for this premium service. With a modest economic recovery, Blue Streak and other new product offerings as well as our focus on improvement should result in solid revenue growth for intermodal for the rest of the year. Industrial products revenue was up slightly from last year, gaining momentum as the quarter progressed, an encouraging sign as this group is closely tied to strength in the economy.

Construction materials such as lumber, cement, and stone showed double digit gains for the quarter.

The strong housing market had much to do with the lumber upswing. Strong demand for road waiving materials in California and Texas drove that up.

The downside was a fall off in steel, [INAUDIBLE] and scrap caused by a combination of weak demand, strong imports, and a big drop in production due to mill closings.

Other area is newsprint.

As for new services, we continue to make inroads along the quarter. Our service is pulling business off the highway to the Pacific Northwest into California and Arizona and Vegas. As the economy recovers we hope to realize nearly a quarter of a billion dollars of revenue this year, up 16% since 1999 when the service was initiated. Agriculture products revenue was also flat with a year ago.

Weak demand continued to be weak in most domestic and export markets. Shipments from Mexico were strong. We expect both domestic and export corn and soy beans to continue to outpace last year.

Fresh and frozen commodities should also benefit because of our express lane premium refrigerated service.

It was a major plus in the 1st quarter. Service was over 90% on time, volume was up 10%, and our customers continue to give us high marks. Working together with CSX we serve Boston, New York, among other cities, and for the full year, we expect this business to grow 15%.

Chemical revenues were off slightly. The down word trend has slowed subtly.

We've started to see some positive signs. In fact, plastic shipments picked up during the quarter due to a slight improvement in demand.

Petroleum were higher [INAUDIBLE] appears to indicate that a recovery is finally not that far off.

Coal volume stayed strong with helping the keep operations fluid. In March, we begin to see demands soften as stockpiles reached for normal levels.

Our operating performance was just industry in the basin. It helped us break records out of the basin, 43 million tons, and for average trains per day, [INAUDIBLE].

Coal volumes rose.

We remain optimistic about our potential for continuing to grow our coal business in expansion to Eastern markets. We'll continue to focus on improving our profitability.

This means increased use of distributing power and longer trains as well as reducing failure costs. I should also mention that for the first time in several years, there won't be a coal quarter maintenance shut down this summer.

Our cold quarter has been improved that we can run repair programs and keep trains moving at the same time.

There were also positive developments on the operating side. Among the most significant as a 4 point improvement in our service delivery index. It's an internal benchmark which measures performance that we've made to our customers.

Our customer satisfaction index and service delivery index moved in lockstep. The fact that both are at all-time highs is strong evidence that operations are into wid and that railroad [INAUDIBLE] fluid and efficiency climbs.

We're confident that our focus on productivity improvements will help us to continue to make operating ratios [INAUDIBLE].

In that regard, 1st quarter employee productivity was up 17% compared with last year's 1st quarter.

This puts us on a track to continue our nearly 20-year trend of annual productivity improvements. As we've said, we have many ongoing initiatives aimed at maintaining this momentum.

Safety we mains our top priority and we are suing everything possible to make sure we do everything we can in the 1st quarter.

We're making progress in this area, but we're not at all satisfied with a 2.3 reportable injuries for 200,000 -- 200,000 man-hours worked.

We can make improvements in that area. In talking about safety and productivity, our remote pilot in Des Moines has been a huge success.

We're planning four pilots this year and expect to roll out remote control during the next couple of years.

Both Dick and I have actually operated remote control units. I'm sorry to say that we weren't the best of our train class, however, the training experience did reinforce our belief that remote control is not just a productivity improvement.

It will also make our terminals a safer place to work. We anticipate the technology will allow us to save 30 million jobs. Those are the highlights of our railroad's 1st quarter.

We're making progress on all fronts. Now it's up to us to take full advantage of our unparalleled franchise, our business product diversity and the innovative new services that are earning this new business and improving yield. Operating on February cease, productivity gains will help us get to our ultimate goal to be one of America's best companies.

Thank you.

He talked about remote control technology.

That's an example of one of the efforts that we have in front of us to help us continue to improve productivity and shareholder returns, but there are many that we could talk about and you've heard us talk about a number of them.

He also mentioned that he and I weren't the best in the class. You'd be interested to know that Mary Jones was the best in the class.

So mary can take a bow. As we look at the second quarter, there are clearly questions marks.

Many economists and economic indicators are telling us the recession is over, but we are seeing some mixed signals in the business. Customers are starting to talk about increase it production, and for the month of April, core loadings are up in some of the more economically sensitive commodities tease, such as chemicals.

We need to be careful, though with earlier comparisons given the timing of the easter holiday this year.

Still we're hopeful this is a sign of improvement that can be sustained through the remainder of the quarter and get stronger going forward. On the expense side, fuel prices are another question. We benefited from low price in the 1st quarter, but the instability in the middle East continues to create uncertainty for the remainder of the year.

However, our hedge position should help us keep fuel prices below last year's second quarter levels.

In any event, we'll continue to focus our efforts on the areas that we can control, such as productivity enhancements and quality service. With a little help from fuel price, this combination should result in further improvement in our operating ratio for the second quarter and double digit growth in our operating income. As for next income, Jim mentioned earlier that a key question mark the for the second quarter will be the timing of real estate sales. We'll have double digit growth in operating income, but net income is still sort of iffy because we're not sure where our real estate sales are going to come out. However, bottom line, we expect to achieve year over year earnings growth again in the second quarter.

The exact amount of the growth will ultimately depend to answers to these various questions. For the full year, our outlook hasn't changed much from when we spoke to you in January.

Economic recovery is still a key driver in our business plan. We expect revenue growth between 1 and 3% with that growth improving throughout the remainder of the year. At the upper end of that range, fuel price averaging in the lower 70s and continued improved productivity we expect to achieve an operating ratio below 80% for the full year as well as double digit growth in earnings per share. This would help fund our capital spending of just under $9 million for the year, assuming the economy continues to strengthen. If we hit these targets, we'll have cash of $350 million.

At the end of the year, the sum would enable to us to approach the lower end of our cost of capital goal.

Union Pacific is a company with roots that go back to the beginning of work. In some respects, our franchise is brand-new. The quality of our recent performance shows our potential.

The potential to grow our business, to win customer confidence and provide a strong return for our shareholders. Despite some obstacles, we have met our commitments and with the strength of our new rail network, I think we're just beginning to hit our stride.

As the economy improves, we have a industry opportunity to leverage our franchise for the benefit of all our shareholders.

Thanks for joining us. We'll be happy to take questions.

Thank you.

The floor is now open for questions. You may register your questions by pressing 1 4 on your touch-tone phone at this time. If your question has been answered, remove yourself from queue by pressing the pound key.

Use the handset for optimum sound quality. Thank you.

First question, Tom Wadowitx. State your affiliation.

Good morning.

Bear Stearns. Just a couple questions for you. If you look at the system right now, especially on the merchandise side, how much excess capacity do you see in the system?

Because it does -- it sounds like there's a potential to really leverage that could be improvement in the economically sensitive categories.

In terms of railcars or locomotives or how much you can increase the length of trains, how much capacity do

you think?

This is Dick.

That's a great question if you ask 10 different people in our country, you might get four or five different answers, but we do have a lot of additional capacity. Let me come at that from a couple of ways.

When we started out the year we had 125 million freight cars in storage. Today business has gotten stronger, we still have 12,000 cars in storage.

We're not using our locomotive fleet as hard as we're capable of using it and our track capacity, while it's not uniform throughout the railroad in different routes, there's different levels of capability, but our debottlenecking dollars in the last four or five years has given us plenty of capacity to grow our business. Also, we've never had tested the limits of the benefits we've gotten from our merger, where we have directional running such as Southern Missouri to the Houston area.

As you know we have directional running there.

We have it from New Orleans to houston. It will be the same story, we'll develop pinch points as we go along and that's how we direct our capital spending is we eliminate pinch points, but we've got considerable capacity.

Okay.

Then on the head count side, you had a nice reduction year over year in head count. I'm wondering, does that

accelerate due to the improve of the railroad retirement act or something that's likely to be steady throughout the year?

You may remember last year, in the year 2000 in fact, when business started to tail off in the 4th quarter, we took a charge to batten down the happens to get ready for whatever might come, and that related to Jim's remarks about the 1st quarter of 2001.

We reduced our head count 4% in 2001.

This year we're not looking for that large of a number, probably something in the 2% range, but it's volume dependent.

If our business were down strongly, it will take -- which we hope it will -- it will take a few more people to run the trains and you won't see quite the kind of a head count reduction that you would if business stayed flat, which obviously is a good problem to have.

But the thing you ought to bear in mind here, a really important thing, it's not head count, it's your unit cost, and you will continue to see great improvement in unit cost and growth in productivity.

I do think all of us think that we will see a net reduction in employees.

But it will depend on where we end up in the volume growth.

Last question.

You look at the customer surveys which appear to show very favorable trends. That's great. In terms of comparison to what

some of the other railroads report, on site, compared to last year?

Let me say something to frame the question up front.

No railroads measure customer satisfaction or on-time performance the same way. You really got to look under the covers to understand what the numbers reflect.

I don't know how the other railroads measure their success. I do know how we measure our own.

With that caveat, Ike, do you want to elaborate on that?

Tom, I would answer it this way.

We would not be continuing to get additional business if we weren't meeting our customer requirements, and being easy to do business, we're working hard at that and to understand what those requirements are and then fulfill them at the same time.

So I would look at it in terms as to whether we continue to

grow that top line as to whether we're meeting our customer service requirements.

Congratulations on a nice quarter. Thanks for the time.

Thanks, Tom.

Our next question, Scott Flower.

Solomon Smith.

Good morning all.

Just a couple of questions. I guess one tactical. Could you give us some flavor of what you see the second quarter and then perhaps the full year outlook for coal.

Obviously your coal volumes held up relatively well in -- in 1st quarter as your utilities continued to restock.

However obviously at this point it does look as if things are slowing down in terms of current demand. Can you give us some flavor on

volumes, what you might expect for second quarter, and secondly, how quickly we might expect a rebound out of it, if you will, coal stock or destocking that may be occurring in the near term for second half?

Ike, do you want to answer that one?

We obviously have seen a slowing, Scott, as the quarter went on.

As you've noted our current loadings were up 1%, and I think you can probably -- we think that demand will be relatively flat where it is today, and we don't see major reductions from where it is.

Obviously the wild card here is weather and let's all hope that there's an early and hot summer. That will take care of that problem.

So basically flat issue volumes year over year even despite some of the stockpile rebuild?

That's what I just wanted to say here.

In the second quarter, we do expect to be up year over year. Ike mentioned that the maintenance shut down won't happen in June in the Powder River Basin like the past four or five years, we'll have normal loadings, so we expect the second quarter to be up year over year.

I think for the entire year, what we are looking for is kind of flat compared to 2001, at the end of the day.

So that's what we said going

into the year and I think that we still expect that.

Just a couple other quick ones. I know that Jim mentioned that despite 1st quarter results on ARK, and I'm fully it's not perfect as a surrogate for pricing, but use it at the moment, that you still expect to get to your 1% bogey.

I'm trying to understand given the effects of the GM contract

and Legacy coal contracts will be a drag through the four quarters, what's going to change relative to improvements in the other categories or even within those first two categories that make you confident that you'll get to that 1% level for the full year relative to what happened in 1st quarter?

Ike, do you or Jim want to handle that one?

I'll take it.

You look at the areas. We obviously factored in the Gm contract and we looked at that 1% kind of yield going through the year here.

RCF I think will turn around. It's getting the impact of a very sharp drop-off in fuel. Probably more importantly is the approach we're taking in marketing the business, where you really are looking at understanding the competitive landscape of the yield opportunities we're going to expand, Blue Streak Two is an example is going to start back up.

Those have been opportunities where we've been able to yield up. So step back and lock at industrial products. I think again we see strength obviously, demand goes up, you have greater opportunity to increase products.

We see intermodal continuing to give us opportunities. Chemicals will be tough. It's a tough market. If you see a little bit of demand pickup there, we'll have a little bit of opportunity. Ag products, the wild card will be whole grains.

I would only add to that that I think history is a good predictor of future.

We've already done it three years in a row, where we've netted 1% in price and there's no reason why we won't net fore% in 2002, so that will -- 4% in 2002.

We still netted a 1% price. That's our commitment, that we'll deliver that year over year, year on out outgoing and we've done it.

Are you seeing any ramifications or if you will, preshipping in your international intermodal business relative to two things, one, the May 1 general rate increase that a lot of the steam ships are taking on the Eastbound Pacific.

Secondly, the long shore men have a contract up at the end of June.

Is that more steamship marketing banter, or are you actually seeing that there may be some earlier movements on

the oceanside, hence what you see on the international intermodal box side as you look at second quarter, could we see a softer June and July relative to how you see those two factors based on shipper behavior, trying to get in front of those?

I don't think so, Scott.

At this point in time, there could be a little bit of all of that, it's hard to totally sort it out. We think it's

[INAUDIBLE] of inventories. We would expect the demand to be the same about the same moving on out.

Thank you very much.

Next question is from James Valentine.

Morgan Stanley Dean Witter. Looks like you have the best quality of earnings here for the season. Congratulations. I have a quick question in terms of your guidance towards double earnings growth.

Do you want consensus, namely all of [INAUDIBLE] on the southside to be including the $140 million figure in our number?

Do you have a reps on the second quarter or second -- a preference on the second

quarter?

The likelihood is probably in the second half, although it's not inconceivable that big -- the big transaction could occur in the second quarter.

We think it's more likely the 3rd quarter.

And Jim, the way I think you want to look at the EPS for the year, again, you have to look at the full year, that we had with 160 million in other income in 2000 once and if we close the deal plus I get my base real estate sales out there, the economy holds, you would be up about $40 million pretax.

I think that's the right way to look at this thing in terms of the incremental year over year gain in the other income line.

Second question.

This is more kind of big picture. You had the best quality of [INAUDIBLE] so far so I think you're probably best to be able to answer this.

Fuel dropped $110 million, let's say you haven't had the benefits of good weather in terms of operating costs being lower. The operating ratio would have deteriorated between 100 and 200 basis points and volumes of revenue were about flat.

I'm trying to understand, because this is happening across the whole industry,

does this mean that if volumes don't grow, that it's going to be really tough to see the industry see any kind of improvement other than because of lower fuel prices?

Let me say this. Volume isn't the only thing that drives revenue growth. Price is, as well. That's one thing. However, none of us believe we have a business here that we're not going to grow volume.

We all believe that quality of service is going to drive volume growth, and we're providing that.

We're a quality focus company, and believe in continuous improvement. We're seeing it and our customers are voting with their business.

It's a difficult environment. We have to have revenue growth over a period of time. The fact that we've performed to the degree that we have in the last couple of years with basically flat revenue I think is an achievement to what we've been able to accomplish.

But Jim, you've got to give us credit for fuel one way or the other.

It didn't give us credit when it was up and you know, now you take it out when it's down. You can't have it both ways.

I'm trying to understand, going forward, I'm trying to understand if revenue doesn't come back, surge back 4 or 5 or 6%, is it realistic to think we're going to get market improvement?

We're not looking for a 5 or 6% surge necessarily, we're looking for slow continuous growth somewhere between 1 and 3% for the year, so we're not building the company based on a sharp spike, we're looking more for hopefully a slow modest improvement.

We'll be just thrilled with that.

Good.

Let me also point out to you, Jim, that revenue ton miles increased 3% in the first quarter and our operating expense increased at something just over half of that level with fuel taken out of it, so we're going to continue to run a more and more efficient railroad.

That [INAUDIBLE] just a line when I said we're a 140-year-old company with only 140 years of history.

We've got a brand-new railroad with this franchise and we're still -- I mean, we are just excited as can be about the potential here to run the company better, to continue to do things more efficiently, to provide higher levels of customer satisfaction ring, and just run a -- and just run a good company.

We're looking forward to the future.

Good. I've got lots of earnings growth myself. The last question, can someone address coal yields and competition in -- longer term competition kind of philosophically how you feel about the capacity you have and pricing of some of your bigger coal contracts on a long-term basis.

The bulk of the major higher profitable coal contracts are pretty much behind us in that sense.

We will continue to price based on route efficiencies and strength that we have to market, and we're going to be competitive and make good business decisions about this coal business. Despite the pressure, this is a great business, and it has good margins and it's -- we've made the right decisions to date about where we are with our coal business.

Let me offer a comment to you.

You asked about capacity, how we stand on capacity for coal. You know, we're in great shape. When -- one statement about that is we're not shutting down for maintenance, we've finally built enough capacity in the coal route that we can go in and do heavy maintenance with a full traffic load going over the railroad.

Having said that, we still have about 30 miles of single track going up to the Powder River Basin that form we're in great enough shape that there's no hurry to complete it.

We'll do a chunk this year, a chunk next year and maybe complete it in 2003 or 2004. We quadruple tracked part of the transcontinental line and double tracked all the remaining pieces down to Kansas City and the old Chicago Northwestern portion has been double tracked, so we're feeling pretty good about our capabilities to deliver high quality service, continuing reducing cost at the same time.

So we're optimistic here.

Great. All we need is a better economy. Thanks so much.

Thank you.

Thanks. Next question is from Gary Yablon.

First Boston.

Good morning. Wanted to ask a question. Maybe it's an Ike or a Dick question on fuel consumption. I was astounded with the productivity on consumption.

I'm just looking at carloadings basically flat year over year and fuel consumption down on my numbers about 80 million gallons or so.

What's going on in that marketplace? Because that's moving the needle a lot more than I've

seen in the past unless I'm looking at the numbers incorrectly.

Well, I could answer that quickly and then Ike could probably give you a more accurate answer.

But it's a lot of things. We had a good winter for one thing, but probably more importantly, we renewed our locomotive fleet. We are quickly if we don't already have it developing the best locomotive fleet in America. Commodity mix has a lot to do with it.

As you know, the 1st quarter was a record for coal loadings and of course that's an efficient consumer of diesel fuel, but -- and we have a very aggressive training program for our employees as well using simulators, we teach them as well as we can how to operate our trains in an efficient manner.

The GPU operations per our locomotives, where they're not all in the head of the train, we have them in the middle and rear, distributed throughout the train, we have figured that that saves us 10 or 15% on fuel consumption.

So there's a whole plethora of things that are working towards that. We continue to think that we'll get better and better. Did I Miss anything?

No. I think you said it well.

The relationship between gallons consumed and volumes has reached a new level? Is that what you're saying?

This quarter is the best performance we've ever had of gallons consumed.

If I could stay on the pricing and yield front, Ike, and ask you, revenue up 1 to 3% for the year, how does that break out between units versus yield, or should I think well, we're going to do 1% in yield, 1% in pricing, so that's how it splits, that's basically what you're telling us?

You got the math.

Okay.

One for Jim, if I could. Jim, could you come back to your formal remark about lower

end approach our lower end of cost capital control. What is your cost of capital?

I've shown you our chart.

We use 8 to 10%. Today it's on the lower end. We look at the slope of the line, continuing to move it up every year, but long-term, I'm

on the higher side.

I want to make sure your -- make sure I'm understanding what you said correctly.

By the end of this year, we will approach a return on capital -- a return on capital will approach on the lower end

of that 8 to 10% range?

Yes, it will approach the 8%, but it will still be below.

Okay.

Put this in historical context for me, Jim. How narrow is that spread vis-a-vis where it's been in years past.

Is this the narrowest it's been [INAUDIBLE] you can remember? Help me out with that.

You've got a new -- as long as you've -- even looking back and no oil company, if you look back, we did achieve our cost of capital in many years and even exceeded.

We're a new company now, but we all firmly believe that we can meet it, but exceed it over time.

Our goal is to every year have a an improvement on our return on capital going forward here.

Okay. Is senior management's compensation to some extent riding on that statement?

You bet. There's no question that the comp committee and the board of directors looks hard at those numbers every year.

Thank you.

Our next question, John Barnes.

Deutsche Banc. Good morning.

Good morning.

You talked a little bit about adding the new locomotives.

Dick, you mentioned you're well under way to having one of the best locomotive fleets. Can you give us an indication so I can project my expense line a little more accurately, can you give us an idea on what your plans are on further locomotive additions are this year and when we should expect them?

The number is just over 400 new locomotives.

I'm glad you asked that question. We bought quite a few more locomotives last year, we retired even more.

So the net went down. We retired something over 500 last year. And the same thing will happen again this year. But as I recollect, we've got just under 300 of the SP-70s yet coming from General Motors and about 100 GE's coming.

We're in a most now we're going forward, we won't be in quite such a rush to get the fleet modernized because we have the hard work behind us, mostly old [INAUDIBLE] we were so worried about are gone.

We'll be able to go at a more moderate pace. We're bringing in I think just under 400 this year.

You expect another 500 to be retired this year?

It all kind of depends on what happens with volumes, but sure, if volume stayed flat we'd retire 500, but if volume gross well we could well retire less than that.

Another thing we've been doing, John, that's not so visible probably to the analyst community is getting rid of all of our short-term locomotives.

We have taken out a huge

number of short-term lease locomotives over the past three or four years and let them go back. It's been a great story for us.

The $1.9 billion you're forecasting, for this year, can you give us a breakdown?

I didn't say quite 1.9, something under.

I hedged my bets. Overnight is about $50 million of the total. The increase that you're hearing will mostly be in the track maintenance side, engineering.

We've got a lot bigger program this year and a strong rail program, as well.

Less money on capacity. We're doing a little debottlenecking here. Our track maintenance is

stronger.

In terms of track, do you have any formalized plans for track rationalization and are there any particular yards or terminals that have been identified for potential closure at some point?

John, I tell you, that's an interesting question.

We did our track rationalization about 15 years ago, when I first became part of the U.P., we took a look at our short lines and branch loins and took out about 7,000 miles of railroad.

John took responsibility for that effort in the late 80s and he just did a wonderful job of nationalizing, but as an example, when we opened [INAUDIBLE] yard, we closed Eugene and is closed Stockton, and closed a number of surrounding yards, we're always looking for that kind of opportunity, but our railroad has been pretty well streamlined now for a second aid, and there were some new opportunities presented with the merger that we've taken advantage of, and there's not an awful lot of opportunity left, but we'll continue to peck away and outsource some short lines and streamline a few more yards as time goes along, but it's not a huge windfall.

We've already got that behind us.

Ike, can you give us an idea what the split is on the intermode business is between containers and trailers, and, also, have you heard at all from the [INAUDIBLE] as to whether they're going to use the number of trailers or the number of miles that they can put on the railroads as one of their bargain chips with the teamsters when the agreement comes up for negotiation?

I can't comment on what the [INAUDIBLE] are doing as far as their national agreements.

I don't know that. We are continuing to increase the spread between our containers and trailers as we move away from some of the trailer side to higher value containers.

The actual split on it is very high.

It's probably 2/3 containers or so.

Two-thirds container, one-third trailers.

Thanks for your time.

Thank you, John.

Thank you. Next question is from Jill Evans.

J. P. Morgan.

Good morning. I'll run that some questions. It's getting late. Number one, coal yields, 3-1/2% decline year over year is that what you expect going

out for the first of the year?

Probably.

That's hard to predict. A lot of us has to do with link to haul. There's quite a mix issue in coal, but we'll probably see a

couple points drop.

That was my question. There was some mix this year on the 1st quarter.

That's right.

You can't -- -- can't just put a stake in the ground and say you're going to see it where it is right now.

Ike, don't you think two percentage points wouldn't be unrealistic?

Right.

We should get help with the RCF going forward also.

The coal contracts coming up for renewal this year, there's been some press about a new contract coming out.

How many contracts are coming up this year and next year.

Can you give us an idea?

I think the way you got to think about that, Jill, there are coal contracts that come up every year, either at our railroad or somebody else's railroad or coal that hasn't even been handled before in the East, so there are opportunities and challenges year in, year out.

But Ike said something very important and you may not have picked up on it, that there are very few contracts left out there today that have these wonderful legacy qualities that we miss so much.

Most of those that work through and the vast majority of our business today is it pretty -- it's pretty much at market rate.

So those huge impacts that we have childhood through in the last two, three, four years, we should not continue to see those.

Okay.

That's helpful. Maybe for Ike, I was wondering if you could comment, one of your Western competitors commented in general that he does not see a significant amount of growth potential for the rail industry and commented unlike some of his competitors that saw more growth opportunity, can you give us some example of where you are concretely taking market share from the highway.

Or Ike, another way, maybe over the next six quarters or near-1/2, can you give us any rank for us where you look out and really do some the opportunity for growth here for you on the Western rails.

I'd like to kind of give just a little overview and let Ike add the fabric to it.

That's one of the things I was proud of when I came from Emerson Electric was a breath of fresh air in how we approach market opportunities.

You [INAUDIBLE] he took a more particular look at it than we ever had before in my further years experience in the country. Market segment by market segment we went through it.

What they have turned up is just astounding and heart warming. So Ike that doesn't go into

your pay now, don't forget. Would you like to elaborate on that?

Jill, that's why I keep in each of the meetings talk about some of our new services just for the reason that you ask.

Clearly they spread across all of our commodity lines just about. We got some great opportunities with our industrial products side, we have great opportunities to differentiate our product on the intermodal.

I mean, we really see a huge market out that that we are underpenetrated and that market is growing. So -- and the issue then is designing products based on a market analysis and then in that design, having the reliability into it and then delivering on it and that's what we're doing.

Any concrete examples where contracts have come from the highway to the rail?

Every one of those services, Jill, that I just talked about or just mentioned are all directed to highway traffic.

One of the clearest ones is the Express Lane and the Blue Streak. That is all product that would be traveling on the highway and the I-5. Those three are the specific examples are all business that was previously based on the Express Lane.

We've got customers that haven't shipped on rail in five and 10 years that have come back because the reliability of that service.

And again here's a seamless transcontinental service in conjunction with CSX. They were just blown out of the water.

In Mexico, did that go up in the quarter year over year and are the opportunities still big for the cross boarder traffic?

It was basically flat and it was flat -- down just a little bit, 1% or so, and that was primarily driven by lower auto vehicle and parts.

And we expect that to bounce back. With see Mexico as one of our franchise strengths. Mexico is a huge market opportunity and we've gone ahead and done analysis in that regard as far as what particular parts and markets and putting services together to go after it. We've also had a hit from -- with Ford, it's part of the auto piece, and that they are now producing the [INAUDIBLE] they're a smaller pickup truck in Louisville, Kentucky, versus Mexico.

Next question is from Christopher Leshock.

With Morgan Stanley.

I just wanted to clear up one thing and follow up with a quick question. The issue I'm scratching my head on here, the prior caller indicated that he thought fuel consumption fell by 80 million gallons year over year.

If I do the math that's like a 25% reduction in the fuel consumption rate.

Is that correct?

I didn't do the math.

It was a 4% reduction.

We're down on the fuel consumption rates.

The other one might have been for the year. I don't know where he got his number.

So if I look at the supplemental information, the 321 million gallons versus 322, there was a reduction of what, 1 million gallons?

Yeah, for 3% greater -- revenue ton miles.

Fuel efficiency improved 4%, bottom line.

Consumption rate.

In regard to winter weather, obviously it hurt the coal businesses a little bit, but it helped on the cost side.

Could you give us a feel for what categories saw some

savings due to the mild weather, and can you give us any type of a range on the cost savings?

Christopher, I don't think any of us have that here, but, you know, the thing that benefited would be things like train speed and hours of service tie-ups and locomotive maintenance and track maintenance, just any number of areas, but at the end of the day I think I'd have rather burned more coal.

Thank you.

Any more questions?

Thank you. If you have a question, or a comment, you may press 1 followed by 4 on your touch-tone phone at this time.

We have time for about one more.

Thank you.

Next question is from Rick Patterson.

UBS Warburg.

I'm not quite sure I got your question. You were asking about the merger between FXC and [INAUDIBLE].

Exactly.

In what context was your question praised?

You're at about 26% stake of the fair mix.

It would be diluted somewhat. Can you quantify the impact of

that?

Well, assuming that it's going to happen at this point is probably risky, because we don't know what's going to happen and we're not speculating on it. And we're still evaluating the situation from our point of view, but right now, the way it is envisioned, is that the merger would take place at the holding company level between the holding company that a group in Mexico has called ITM, so there would be no change in the structure of FXC. Whether it would later merge into that or not is a question we don't know.

We haven't gotten that far yet.

Okay. We thank you all very much.

Were there any more questions?

Thank you, sir.

We're

showing showing one last question coming from Scott Flower.

Maybe Ike could handle this. Could you give us a flavor for how much revenue did you achieve from new products in Q1 and what's your expectation in range of what the new products add to revenue in 2002? It will be a -- could you give us some flavor since new products are such a focus?

We think that the new products will give us just as they did last year, in the same range of 75 to 100 million dollars.

Okay.

The other thing I need to add, is each one of these products come in at a higher field than the products they displayed.

More than the average yield of our business today.

The other question would be as you look at growth on the volume side, how would you break that between just market growth, market share growth versus other forms of transport, market share growth versus rail alternatives? If you were to say whatever your baseline volume assumption is and you looked at those three buckets just for volume growth excluding yield and the pricing opportunities you have, how would you break that?

We have a business process in the way we look at our markets, and rather than go through it in detail, if you want to call and Jack or I, we can take you through it at some other time.

Okay. Great. Thank you.

Thanks you very much for listening today.