聯合太平洋集團 (UNP) 2003 Q2 法說會逐字稿

Matters discussed on this call contain statements that are not statements of historical fact.

These statements are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities and Exchange Act of 1934.

Forward-looking statements include without limitation statements regarding expectations as to operational improvements, expectations as to cost savings, revenue growth and earnings, the time by which certain objectives will be achieved, estimates in cost relating to environmental remediation and restoration, supposed new products and services, expectations in claims, lawsuits, environmental costs, commitment, contingent liabilities, labor negotiations or agreements, or other matters that will not have a material adverse effect on our consolidated financial position, results of operations and liquidity and statements concerning projections, predictions, expectations, estimates or forecasts as to the corporations and its subsidiaries, business, financial, and operational results, and future economic performance, statements of management's goals and objectives, and other similar expressions concerning matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the time that, or by which, such performance will be achieved.

Forward-looking information is based on information available at the time and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

Important factors that could affect the corporation and its subsidiaries future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements include but are not limited to whether the corporation and subsidiaries are fully successful in implementing their financial and operational initiatives, industry competition, conditions, performance and consolidations, legislative and regulatory developments, including possible enactment of new tax rates and possible enactment of initiatives to regulate the rail business, natural events such as severe weather, fire, floods, and earthquakes, the effects and adverse general economic conditions both within the United States and globally, any adverse economic or operational repercussions from terrorist activities and any government response thereto, or a risk of war, changes in fuel prices, changes in labor costs, labor stoppages and the outcome of claims and litigation including those related to environmental contamination, personal injuries and occupational illnesses arising from hearing loss, repetitive motion, exposure to asbestos and diesel fumes.

Forward-looking statements speak only as of the date the statements were made.

The corporation assumes no obligations to update forward-looking information to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information.

If the corporation does update one or more forward-looking statements no inference should be drawn that the corporation will make additional updates with respect thereto, with respect to other forward-looking statements.

Good morning and welcome to the Union Pacific's second quarter earnings release teleconference.

At this time, all participants are in a listen-only mode and the floor will be open for questions and comments following the presentation.

If at any point you wish to register your question, please press 1, 4.

At this time, it's my pleasure to turn the floor over to your host, Mr. Dick Davidson.

Sir, you may begin.

Thank you, Melissa.

Good morning and thanks for joining our second quarter earnings conference call.

With me this morning is our usual cast of characters.

Ike Evans, President of the Railroad, and Jim Young, our CFO.

I will start off today with a few remarks about the second quarter and then Jim will go over the financials, then Ike will discuss our operations.

At the end, I'll give a third quarter outlook and open it up for questions.

Our second quarter earnings were $1.10 per share compared with $1.15 a year ago.

There are a number of pluses and minuses in that $1.10, but continued high fuel prices more than offset what would have otherwise been earnings growth.

Jim will provide the details in just a moment, so I'll make just a couple more comments.

In a weak business climate, second-quarter car loadings were just about flat, but through our pricing focus, surcharge revenue, and double-digit growth at Overnite, we managed to achieve total revenue growth of over 3%.

We also hit a new second quarter record for productivity on flat car loads moving 4 million gross ton miles per employee.

As I mentioned, fuel costs remain very high, adding nearly $54 million to our rail expense, or costing us roughly 12 cents a share.

We also had the one-time cost to redeem the first $500 million of our convertible preferred securities, which totaled $15 million or 3 cents a share.

And also a change in our depreciation schedule added 25 million or 6 cents in earnings to the quarter.

Our focus on running a quality profitable company is clearly paying dividends for us, and with help from a little stronger economy and moderating fuel prices, we're truly positioned for growth.

Looking at our overall second quarter performance, I see a number of strengths.

In a soft economy, our franchise produced record revenue.

In fact, it was our best ever quarterly revenue, topping the third quarter of 2002.

Coal rebounded with a record quarter and looks very promising into the second half of the year.

Industrial products continues very strong with broad growth across 12 of that group's 16 business lines.

Overnite extended its streak of quarterly gains and operating income to 5 with a 15 % increase over this past year.

Before I turn the program over to Jim, I would like to remind folks what we believe sets Union Pacific apart from its peer group.

If you follow our company, you've heard us discuss our great franchise diversity.

With six strong business teams, no one group accounted for more than 22% of our revenue in the second quarter.

This key takeaway here is that our franchise diversity is vital to sustained revenue growth.

In a tough economy, our less cyclical businesses, such as ag products and energy can lead us, and have lead us to greater profitability.

In a stronger business environment, intermodal, automotive, and chemicals can also grow and lead the way.

Looking at the bars on the right, you will see that automotive, intermodal, and industrial products each had a best-ever second quarter in 2002.

But when you look at this year, only one of the three, industrial products, was able to achieve substantial growth.

In fact, it was that group's best-ever quarterly revenue.

Now, rising from the bottom to the top this year was agricultural products and energy.

Ag products continues to execute on the price front and overcame a more than 2% decline in car loading, primarily due to weaker grain shipments, to register a 6% increase in revenues.

And I'm very pleased to report that energy also had 6% revenue growth in the quarter.

Its first up quarter after five consecutive quarterly declines.

Now, Ike will talk about our full performance a little later, but let me say this strong return to growth in our bulk franchise is, clearly, a very positive thing for us.

Not surprisingly, both automotive and chemicals were down 2%.

The performance of these groups is highly correlated to the economy, and with our significant market position in both, industry slowdowns clearly can have an impact.

Fortunately, we were able to offset some of the softness in finished vehicle revenue through our increased share of the auto parts market.

Revenue from finished vehicles was down over 4%, in part due to GM's Oklahoma City plant shutdown, as you might remember because of the tornado, while our parts revenue was up nearly 11%.

As seen in the auto parts business, our quality focus and service reliability further strengthens our revenue diversity, allowing us to grow counter to the business cycles through truckload conversions.

Certainly, the stronger economy leads to stronger growth, but our strong franchise positions us to grow even in a challenging environment.

Now, with that, I'll turn it over to Jim to give you the financial details.

Jim.

Thank you, Dick.

Good morning, everyone.

We'll start with the corporation's second quarter income.

Despite significantly higher fuel prices and a tough economy, overall operating income of $605 million was basically flat to a year ago.

Other income at $5 million was down about $30 million, about half of that decline is a result of lower real estate sales this year.

A year ago we had a large sale in Las Vegas that totaled $17 million.

Didn't repeat that this year.

The balance of the decline is attributed to $15 million of early redemption costs resulting from the retirement of $500 million of our tides on May 16.

Interest expense continue to trend, we have seen all year, declined 6%. 5 million of that is from lower debt, and then about 4 million from the retirement of tides.

Tax rate for the quarter came in at 37.4, that's up almost a full point compared to a year ago, and fully diluted earnings per share of $1.10, as Dick mentioned, includes 3 cents per share for the tides and redemption costs.

But it also continues to include the remaining tides dilution of 14.5 million shares.

Take a minute here to look at, update you on our tides, as you know.

We did call the first traunch, 500 million on May 16.

I have got the details here.

It's reduced diluted shares by 7.3 million shares, reduced interest costs by $31 million, then also we had one-time redemption costs of 3 cents.

On July 7th, as a result of a 45-year low interest rates, we decided to go ahead and call a second traunch and basically refinance this call.

Our new debt that we put on the books to retire the tides came in about 4.4%.

It was a combination of 7- and 30-year debt.

You see the impact it will have on our third quarter earnings.

Annual interest savings will be about $9 million, that's net of refinancing, and then our one-time redemption cost, again, at 3 cents per share, we'll see in third quarter.

If you step back and look at the overall impact for 2004 now that we would have retired a billion dollars, you'll see we'll save about $40 million of interest, and you'll see an impact positively of about 19 cents per share.

Take a look here at revenue at the railroad, Ike will cover more details here in a minute.

Overall revenue increased about 2.5% on flat car loads.

It's a best ever quarter for commodity revenue in the history of the company.

The key here is average revenue per car lead increased 3% with all six of our business groups showing an increase year-over-year.

About 2/3 of the increase in ARC is attributed to fuel recovery, both from direct fuel surcharge and through RCAF recovery.

And then 1/3 of the increase is attributed to increased rates.

Overall mix for the quarter was about a wash.

For the quarter, direct fuel surcharge revenue totaled $31 million, up $17 million from first quarter.

RCAF added about $11 million in terms of higher prices, of which about half of that is recovery of fuel costs.

If you put it together, it says in the second quarter our fuel surcharge revenue and the RCF portion of fuel accounted for about $38 million.

You will see here in a minute, our overall fuel prices are up about $54 million.

So, for the quarter, we recovered about 70%.

If you look at first half, though, our recovery of fuel, we were able to recover around 30%.

Take a look here at operating results at the railroad.

As you will recall, in first quarter of this year the industry adopted FAS 143, accounting for asset retirement obligations.

No adjustment was made to prior year earnings, so the reported expense variances are somewhat of an apples-to-oranges comparison.

What I've included on the slide is an additional variance column as if FAS 143 were adopted in 2002.

In effect, this gives you a more comparable look year-over-year.

For example, if you look at salary and benefit costs, we show a reported increase of 4%, but if you adjust for FAS 143, that increase is only 1%.

I'll talk a little more about labor here in a minute.

Rent expenses declined 3%.

Lower volume in chemicals and autos, plus increased offline car hire receipts in the industrial products area, drove the decline.

Depreciation down 3% after FAS 143.

As Dick mentioned, lowered depreciation rates, reflecting longer rail life, more than offset higher capital spending.

Around $12 million of the decline in the second quarter is attributed to catch-up in terms of going back to January '01 with the new depreciation rates.

Our third-quarter outlook for depreciation all ends when you put in FAS 143.

New depreciation should be around $265 million.

Fuel costs, up 21%.

We averaged about 88 cents a gallon at the railroad compared to 72 cents a year ago.

Material supplies down $7 million after the FAS 143.

That decline is really a shift down to purchase services, which I will talk here in about a minute.

Put it together, revenue up 3%, costs up 3, overall operating flat.

A couple of the key statistics, on the chart you will know our overall employee force levels were down 2%.

We should see that trend continue all year.

Operating ratio at 79.8 was up 0.7 of a point.

If you take out the impact of fuel, both higher fuel costs and offset it with the surcharge revenue, fuel would still account for a full one-point deterioration on our operating ratio.

Take a minute to look at our labor costs, try to help you get an apples-to-apples comparison here.

As I mentioned, FAS 143 added $29 million to our costs this year.

Protection pay, which, again, we talked about last quarter, added about $16 million.

You'll recall, we will see about a $60 million increase in protection costs reported through the P&L this year.

It's not a cash hit, we actually had this reserved here in prior years.

So that puts an adjusted basis for 2002, about $958 million.

Overall productivity continued strong, increased about 4%, and you can see our inflation ran about 2%.

All in all, we had a good quarter in terms of labor cost efficiency.

Take a minute to look at fuel.

On the fuel line, what I'm showing here are diesel fuel costs that we incurred, both last year and so far this year, which you will note from the slide, is the spread has changed quite a bit after a high of about $1.12 in March this year compared to 61 cents the prior year.

You can see our spreads come in.

The future's market still indicates a relatively high price going forward.

Right now, we're paying about 90 cents a gallon for fuel.

Our outlook is around 85 to 90 cents for the rest of the year.

Purchase services and other, again, what we're doing here is giving you the main drivers here.

I mentioned FAS 143.

Another big driver this quarter was joint facility costs were up around $12 million.

That's entirely timing.

In the first quarter, hey were actually down about $8 million.

We don't expect this to be an issue the rest of the year.

Our contract costs primarily reflect the shift of the expense associated with the material costs where we're doing more outsourcing in terms of locomotive contract maintenance.

And then also I mentioned last quarter higher state and local taxes and insurance costs.

When you step back and look here for the third, fourth quarter, we should see this line item come in around 360 to $370 million.

Take a minute here and look at Overnite, a good strong, another strong quarter for them.

Overall revenue up 10%.

If you take out fuel surcharge revenue, Overnite's revenue would be up 9% on 5% volume, so they're seeing both good volume growth and yield improvement.

On the cost side for Overnite, a couple of key items.

You know, fuel cost were up 25%, although Overnite does a great job in terms of recovering the full cost of fuel.

Their other costs were up 27%.

Really two unusual items.

A year ago, we had a $4 million good news item on a legal settlement.

This year, we've got around a $4 million unusual claim here for an accident.

So, you've got about an $8 million spread there in costs that really are one-time.

Put it all together, you've got operating income up 15%.

Note their operating ratio did improve 0.2 of a point, and their service continues to be very good at 97%.

Cash from operations down slightly about $17 million.

That includes for the first half an $80 million cash put into our pension.

We put $50 million into the railroad and $30 million in Overnite.

Overall capital, others is primarily timing and, as you know, we did increase our dividend this year of 15%.

When you step back again and look at overall outlook for cash, we're comfortable with $400 to $600 million free cash flow range for the year.

Finally in the balance sheet, we continue to make progress.

I've got three different looks here from the most conservative where you put leases, full impact of leases in, and you count the tides that are 100% debt to just the straight debt to cap ratio.

Key here, good improvement.

I've also noted on here, we have now reached levels on the balance sheet where we were before the mergers back in 1994, so we really have made good progress here.

When we look out for the rest of the year, we still expect another 100 to 200 basis points improvement on our balance sheet for the year.

I do realize I did miss the discussion on other income, flipping through the slides here.

Let's see if we can call this back up here before I turn it over to Ike.

There we go.

Now, I've got it right here.

Other income, important here.

We did talk about this second quarter shortfall here compared to the prior year.

And look at third quarter here.

If you look to a year ago, we had a very large land sale.

You remember the UTA, in fact, our other income for the quarter was $161 million.

What we see for third quarter this year is real estate sales in the 10 to $20 million range, but that will be offset by the early retirement costs associated with the second traunch of our tides.

Right now, plus or minus $5 million in the line item.

We, right now, see fourth quarter other income being in the 10 to $15 million range.

So that completes the financial review, I'll turn it over to Ike.

Thank you, Jim, and good morning.

After a difficult operating environment the first quarter of the year, the second quarter was equally challenging.

If you plot our business performance over the first six months of the year, it really tells two stories.

One of volume and one of price.

Car loading started out strong then weakened as energy prices climbed and America waited to see what would happen in Iraq.

Then we experienced a spring slowdown resulting from high chemical feed stock prices, slower auto production, and fewer whole grain shipments.

These factors combined with steamship price increases to press volumes early in the quarter.

Then in June, and continuing in July, we have seen some volume improvement, especially in the areas of agricultural products, industrial products, and energy.

On the pricing front, we have strengthened as the year has progressed.

Our fuel surcharge and significant RCF increases have contributed to this growth, but our pricing discipline has been equally important.

As we previously have committed, we're seeing about a point of price exclusive of RCF and surcharge benefits.

New premium products with high reliability are earning us higher-valued business.

But the second half outlook still has a few question marks for us all.

One area of concern is chemical production.

Since last fall, we have seen a sharp run-up in energy prices and essential chemical feed stock.

The chemical industry responded by raising their prices to offset higher costs.

These increases led consumers to work down inventories and we saw a sharp decline in our storage and transit inventory during March and April.

In terms of new production, the industry is still seeing weak demand in the face of high feed stock prices in an uncertain economy.

Recently, Alan Greenspan testified before the house and senate energy committees about the gap between national gas supply and demand.

Greenspan acknowledged that tight supplies and high soaring prices were hurting industry that used gas as a feed stock for plastics, fuel additives, and fertilizers.

What may come from these hearings is unclear, but any recovery in the industry is likely a few quarters away.

If you believe that every cloud has a silver lining, one plus in the gas story is the increased focus on coal for electric generation.

Across the nation and, importantly, in Washington, D.C., demand is building for clean burning, low sulfur coal found in the southern Powder River basis.

Our performance in other basins in the second quarter set several new records.

On June 11, we moved 44 trains out of the southern Powder River basin, setting a new Union Pacific record, breaking our old record by two trains.

We averaged nearly 33 basin trains per day, topping the previous second quarter mark of 31 trains, and we continued our great streak of productivity gains by obtaining record efficiency with tons per train, tons per car, and cars per train.

But best of all, a combination of our Powder River Basin lines, with our coal shipments out of Colorado and Utah, produced record energy revenue for the quarter.

Looking ahead, the second half of the year looks promising as demand continues to be strong and stockpiles are declining in the heat of the summer.

As I mentioned, coal's long-term future is just as exciting.

In the coming years, three new coal-fired plants will begin operations in our network in Iowa, Wisconsin, and Texas.

These expansion efforts by our existing customers are great examples of Union Pacific's market growth opportunities today, tomorrow, and well into the future.

Another bright spot has been our construction and aggregates market.

As Dick mentioned, industrial products had another great quarter, with record-setting highs for both total revenue and average revenue per car.

In fact, 12 to 16 business lines that make up the group recorded record revenue growth in the quarter.

Even more encouraging is that many of the goods moved by this group are important bellweathers of economic activity, things like appliances, paper, newsprint, and lumber.

So, despite some economic weakness, we have been able to grow this business.

How?

By truckload conversions.

The first half of the year, our industrial products group converted over 35,000 trucks off the highway and on to Union Pacific.

Looking closer at industrial products, nearly 60% of its revenue was earned by these four business segments.

In aggregate, revenue growth for the four was nearly 8% in the quarter, and each group set second quarter records.

This strong growth is a result of providing reliable service and a truck-competitive market.

For example, removing lumber along the I-5 corridor and unit rock trains in both Texas and California.

Our rock network is an exciting story for this business and we're changing the game here.

Leveraging the economies and efficiencies of unit trains, we're competing and winning in a short haul market.

In fact, our rock revenues have grown to the point where they're beginning to rival our soto ash business, and more importantly, the margins are good as well.

Another game changer is the significant opportunity in intermodal.

An example of how we are working to access this market is our blue streak service.

Introduced in September of '01, it was our first new intermodal service offering.

This alliance product with the Norfolk Southern offers three-tiered guaranteed service from Los Angeles to Atlanta and other points on the east coast.

UPS is the anchor customer for this service, and our newly improved service standards are helping to strengthen that partnership and further grow the business.

We're helping UPS and other important customers extend their market reach using faster, more economical intermodal service versus single driver trucks.

In fact, when UPS wanted to explore a new service option, they turned to rail and the economies of rail versus truck.

In conjunction with the CSX we're providing service from Los Angeles to New York in just over 60 hours.

This premium intermodal product is a one-of-a-kind service that is taking our intermodal offerings to the next level.

These new products are a step-change improvement enabled by our infrastructure investments and the fluidity of our network.

While we still have challenges as we continue to upgrade our network, we have been able to overcome them by the sheer dedication and enthusiasm of our people.

I personally witnessed this enthusiasm when one of the test trains stopped for a crew change.

Everyone in the yard moved to the track to watch the exchange.

I commented that I was amazed at a 30-second crew change, it was just a 30-second crew change, and the local manager who was actually timing the handoff was quick to correct me that it was only 15 seconds.

That's the kind of pride in Union Pacific and the pride of our employees and a job well done.

We will continue to improve our infrastructure while selectively increasing our new premium products.

In fact, it was our past network investments that enabled the record revenue growth we saw in the second quarter.

And further investments are critical to ensuring our customers receive reliable service for the best cost.

We prioritize our capital to maximize the benefit from each dollar spent.

Looking back, our post merger capital was allocated primarily to improving the fluidity of our critical quarters and updating our locomotive fleet.

These investments helped us to increase train speeds, lower dwell times, and improve customer satisfaction coming out of the merger.

Today, we've progressed to the next phase of improvement as we undertake our largest tie program ever.

Using our quality system process to execute the project and minimize system interruptions, we have already installed 6% more wood and twice as many concrete ties than a year ago.

Importantly, we estimate that 20 to 30% of our annual quality costs or roughly 200 to $300 million are related to infrastructure failures.

So these investments are necessary.

Not only to meet the service demands of our many customers but to maximize our franchise value, as well.

Looking forward, we believe that annual capital spending of $2 billion is sufficient to enable enhancements and service reliability.

Our disciplined approach and prioritization allows us to balance the interests of our shareholders and our customers, providing increasing level levels of free cash flow, while making yearly improvements to our networks.

Even with this level of infrastructure improvement, internal measures of how we operate our rail network continue to improve.

Train plan compliance and car connection are ahead of last year's second quarter levels, while recrew rates match 2002.

However, you have seen a decline from the first quarter in both the weekly AER reportings and our internal metrics as we entered the maintenance peak season.

As I mentioned, we're busier than ever this year, and this will likely continue through the third quarter.

But despite the short-term impact of our maintenance work, our percentage of customers kept, as shown by the to-and-from industry measure, reached best ever levels in the quarter.

The longer-term benefit is a win for our customers and ultimately our shareholders.

We firmly believe that quality service costs less, so we focus every day on running a quality company and turning the basics of doing things right the first time into improved service reliability.

Over the last three years, our cost of quality measures improved more than a point a year.

At the end of the day, internal statistics are not the ultimate measure.

It's how our customers view us that matters.

We've seen a six-point jump in our customer satisfaction index the past three years.

That's not a coincidence.

That's quality service, satisfying customer requirements.

Our quality focus also makes us more productive.

If you eliminate time spent fixing mistakes or troubleshooting, there is more time to study processes, test innovative ideas, move freight, and work with customers.

In the second quarter, we saw a 4% increase in productivity on a 2% increase in gross 10 miles, and on a 2% decrease in average employees.

It's not just our human resources that we're using more wisely.

We reduced unit cost in the quarter as we used our assets more efficiently.

We are positioned to handle more business and further leverage productivity as the economy picks up.

And I save the best for last because safety is every employee's priority at Union Pacific.

Our field communication and training efforts are making great strides in this area.

But until I can report to you that our reportable injuries are 0, we still have more work to do.

We honestly believe we cannot run a successful railroad unless we run a safe one.

So halfway through the year, we're building momentum.

The strength of our franchise, the diversity of our traffic mix, and the dedication of our team is paying big dividends for our customers, our shareholders, and our employees, as well.

Each and every day, our potential for revenue growth, coupled with our focus on quality and productivity is proving to be a unique combination that's producing quality results.

Dick.

Okay.

Thanks, Ike.

I wish could get you excited somehow about the company.

Let me say that I feel the same by Ike does.

This is a great company with great potential.

The opportunities in front of us are tremendous, and we're really looking forward to the future.

However, one near-term cloud on the horizon is energy price.

Diesel fuel and natural gas prices have remained stubbornly high, affecting our customers' businesses and our cost structure, as well.

As well as, I think, creating a drag on the entire economy.

Estimates of key growth indicators such as GDP and industrial production, have been revised downward throughout the year.

Originally, GDP was forecast to be over 3% this year, but that estimate has now been reduced to only a 2% annual growth rate.

In the same way, industrial production's outlook has fallen from nearly 3% growth to flat.

The good news, though, is to reach even those lowered expectations, we need to have a strong second half of the year.

Another positive note is that light vehicle sales estimates have stayed basically flat during the year, around 16.4 million units, and the forecast for housing starts has actually improved.

In January, housing starts were expected to be down from 2002 by roughly 150,000 homes.

But today, as interest rates stay at historically low levels, housing starts are expected to exceed last year's pace.

The third quarter could be another challenging one for us.

But we're hopeful the economy will meet the expectations that I just mentioned, and that high fuel prices will return to more normalized levels.

Last year, we reported $1.63 per share in the third quarter.

You will remember, that included 44 cents of one-time gains, so our core earnings were $1.19 per share.

This year, the economy, and fuel in particular, continue to be wild cards, which makes our third quarter difficult to predict.

Our current outlook would be for revenue growth of around 3%, and fuel prices between 85 and 90 cents a gallon.

At those levels, we would expect earnings to be about $1.10 per share, plus or minus a nickel or so.

However, if the economy starts to gain momentum, we could see some upside to that range.

I should also remind that you these projections include the effects of our convertible preferred redemptions, the three cents and one-time cost to redeem the second $500 million traunch, as well as the total benefit of decreased interest expense and reduced shared dilution.

In the face of these earnings headwinds, we remain steadfast in our pursuit of productivity enhancements and cost control.

We will continue to reduce our failure costs and improve our asset utilization, and carefully manage our capital dollars.

And our full year, free cash flow targets remain unchanged at 400 to $600 million after dividends.

Our commitment to generate such strong free cash in a challenging year is a testament to our belief in this great company.

And we're using this cash to continue the great progress we have already made to improve our balance sheet.

As you know, we substantially increased our debt levels during the Southern Pacific merger, but today, our debt is actually below pre-merger level, and we have one of the strongest balance sheets in the entire rail industry.

Clearly, we can't control what happens with the economy, so our focus has to remain fixed on the dual goals of revenue growth and cost control.

We'll leverage our franchise diversity, looking to groups such as energy and ag to provide the revenue growth necessary to weather this challenging economy.

We'll continue to improve our service reliability and use these higher service levels to drive continued growth in areas like industrial products and auto parts, and we'll pursue productivity improvements that will enable us to convert a larger piece of that revenue into operating income.

These objectives are aimed directly at the longer-term goal of an operating margin in the mid 20s and earning our cost of capital.

Guiding these efforts is Union Pacific's commitment to be a company where our customers want to do business, employees are proud to work, and shareholder value is created.

So, with that, we would be glad to take questions from our guests on the other end of the line, here.

Thank you, the floor is now open for questions.

You may register your question by pressing 1, 4 on your touch-tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask all participants to please utilize the handset for optimal sound quality.

Thank you.

Our first question is coming from Mr. John Barnes.

Please state your affiliation.

Hi guys.

John Barnes, Deutsche Bank.

Just to be clear on the tide redemption real quick.

Reducing the share count by 14.6 million, you already saw some lower share count in the second quarter.

Should we be lowering that by another 7 million shares, so it would be looking 264, 265, is that the right share count to be using?

Morning, John.

I think you're right.

Let Jim nail that down for you.

Again, you have a little timing here in the way it averages out in the beginning-ending quarter here, but next quarter you will get the full impact of the first 7.3 million, plus we're doing the math here a little bit, there is some waiting, about another 7.2, 7.3 left.

So you should be able to take out, really, 14-14.6 million shares.

For the third quarter.

For the third quarter.

Okay.

All right.

Jim, in terms of your cap ex plans for the year, bonus depreciation off the new tax bill, is there any plan there to maybe accelerate things in '03 or '04?

Not necessarily, you know, we're getting -- we're looking at our cash flow and our plan, although at the end of the day here, we will take a hard look here at what maybe some of the incremental costs will be on locomotives, coming in compliance with the new emission standards.

I don't see any major change up for bonus depreciation.

Probably if there was a jump ball or something, you know, that could tip us over.

No major change.

We're really doing the necessary things right now.

Okay.

In terms of the protection payments in '03, do those protection payments roll off in '04, so we should get a positive comparison there?

What we said, John, total protection coming through the P&L is about 100 million per year pretax.

That will rolloff about a third, a third, a third, you know, so next year I would look maybe 25, $30 million reduction in protection costs in, '04.

Okay.

Lastly, I'm kind of curious on the price.

The one point is pretty encouraging on the price side, but you have had, you know, an increase in competitive lanes in the west, especially with some build-in, modest build-in, in the chemical fields and that kind of thing.

Can you give us a feel for what pricing is looking like on the more competitive lanes and not so much with your captive customers?

Well, I -- you know what, you characterize that a little differently than we look at things.

I think when we think about competition, we think about trucks more than anything.

And as Ike mentioned in his remarks, we're making great progress at growing our truck competitive business.

As far as what's going on with the Western railroad, we look at it a deal at a time and see if it makes sense for us, you know.

That's -- I mean that's just it.

And -- and, of course, as you know, we're doing pretty well in a tough economy, and our pricing is up.

So we're happy with the way things are going.

Do you see it differently Ike or Jim?

No.

Market-set prices.

And, John, we have said we believe long-term, 1% all in price, even with the rail competition piece, it's very reasonable for us.

Okay, guys, I appreciate your time.

Congratulations on the quarter.

Yeah, thank you, John.

Thank you, your next question is coming from Scott D. Flower.

Please state your affiliation.

Yeah, Scott D. Flower, Smith Barney.

Just a couple of questions.

One was tactically, I know that you're optimistic relative to coal, but obviously, there has been some short-term disruptions and/or production issues in the PRB, and I was wondering if you could elaborate on your view and what some of the short-term productions would do.

I know you gave us outlook, but I wonder if you could give us more color as you see the production issue short-term in the basin.

Let me talk a swing at that and Ike can fill in the blanks.

You know, the second quarter, as we said, was a terrific quarter for us.

In spite of some episodic mine production problems.

And we don't think that they're a trend, just that they're episodic, due to weather and maintenance and that sort of thing.

We think the same thing is going to continue in the third and fourth quarter.

We look for strong coal loading in the second half of the year.

You know, the mines, economic benefit, obviously, to produces as much coal as they can because the market is strong right now.

The utilities are asking for all the coal they can get.

So, Ike.

I think you said it well, Dick.

There have been some issues, but we work with each of the mines to maximize their output and demand is strong.

Utilities, stockpiles are down.

Utilities, their burn rates are up, and we should see up revenue in the third quarter.

And then, just while we're on coal, could you give a little detail exactly when these three new coal plants were coming on line and if you might -- if you have the detail in terms of which utilities those represented in terms of the capacity?

Ike, have you got that?

Yeah, I do, Scott.

It's mid-America.

In Iowa, Council Bluffs.

And it's out there.

It's in the '07 time frame.

It's Wisconsin Electric and they're Oak Creek facility, and it's in that same -- as a matter of fact, all three are in the '07, '08 time frame.

And then there is one, the City Public Service of San Antonio in Texas.

They're all -- they're looking about, you know, 15 million tons.

These are in existing facilities.

These are the first new coal-fired plant units to come onstream in a long time.

That's why we're so excited about it, even though it's out there a little ways.

Got it.

A couple other quick questions, and maybe Jim can speak to this.

Could you give us a little more elaboration on the depreciation schedule changes?

I know you noted it was related to rail life, but help me understand what assumption changes were made and what was this -- obviously, you do periodic life studies, et cetera, but could you put a little more color as to the changes and depreciation schedules and exactly what that related to?

Sure, Scott.

You know, we look at our depreciation rates every year, making sure we're in sync with the acid consumption.

With the STB, you're required every six years to submit a new study for rail and road bed, and then every three years for rolling stock.

What we -- the change this quarter is primarily in rail, and what we have seen there is an extension of the life.

And I can attribute that to several things.

One, new technology hit hard in rail.

Now with the price point over the last several years has been the same as kind of the standard carbon rail.

You get a substantial life increase with head hardened rail.

Rail grinding, in terms of the programs we've had in place for years.

It's really starting to pay off in terms of showing extended life.

And third, overall maintenance of road bed, which also helps extend that life.

We saw this trend on rail life actually start a couple of years ago, but it was not significant enough to make the change, and I expect it to continue as we continue to -- in fact our program this year on new rail replacement is around 70 to 80% that will go on the ground will be the new head hardened rail.

What is the gross ton mile assumption.

What did it go from or to?

I'm assuming that's the way you measure the life of rail, the number of gross ton miles over the life.

What was the change from and to in terms of the assumptions?

There's two measures.

On curved rail, you went from 540 million gross ton miles to 670, and on your tangent track, you went from 1.17 billion to 1.22 billion.

And then a last quick question.

I know that you all talked about increasing the maintenance blitz in terms of some of the programs, and I'm just wondering, obviously, you see a payback in that.

Is that a function of having some of the flexibility with the free cash to deploy more, more quickly, or is that because you saw some areas in the old SP that you wanted to come back and go over again?

I wanted more color on the maintenance blitz and the thought process behind that in terms of the uptick.

Let me take a cut at that.

Going back in history, when we bought the Chicago Northwestern, and the Southern Pacific, we inherited a lot of maintenance opportunities.

Both on the locomotive side and the physical plant side.

We reprioritized our capital dollars, really, to look at the whole new integrated network.

Not just the UP, but we had to take into account our acquisition, as well.

So we put ties in the very worst, and rail, in the very worst parts in CNW and Southern Pacific, plus we really focused on the locomotive fleet.

As you know, we've totally renewed the locomotive fleet since 1996.

That's a great news story, and we propped up the worst pieces of the two acquired companies.

In doing that, actually, we sort of lowered the state of maintenance on the Union Pacific because we were trying to smooth things out.

We got the locomotive thing behind us, that's well in hand, and now we're -- while we're still spending the same capital dollars, or actually less than we spent immediately following the merger, we're reprioritizing our focus on ties and rails so we can start bringing the whole railroad system now up to a higher maintenance level where we'll have a safer railroad, less slow orders, and one equipped to really produce a quality, high-speed, on-time operation.

So that's just sort of the genesis that of where we're at, and the really good news story is we've tightening our capital spending while renewing our rolling stocks and in the process of really renewing our track structure.

You focused on that in one of your studies here a year or so ago.

I remember because I told you were right on the mark about our need to put in a few more ties and that sort of thing.

That's exactly what we're doing.

And Ike had mentioned in his commends, and maybe it was using just round figures, 2 billion of cap ex.

Is that sort of an on, forward-looking view of steady stay cap ex?

I thought there was a range underneath that up to 2 billion.

Are we saying for '03, we should be looking for 2 billion or somewhat less than that?

We've always given you guidance when the analysts fill in their computer models, is that 2 billion is probably a pretty good steady state capital spending number.

While we said that the last three years, we haven't spent that and won't this year.

Could you just, and I'll let someone else have it after this, what should be the, right now, the sense of cap ex for this year?

I thought the range was sort of 1.8 or so to 2 billion, and with the economy not behaving well, my sense would be that you probably should be toward the lower end of the middle of that range.

We'll probably be right in the middle of, Scott, at about 1.9.

But our real focus is on free cash.

We've committed to produce the free cash, and we will, but we think we can do that and probably spend in the 1.9b range.

Great.

Thank you.

Thank you, your next question is coming from James J. Valentine.

Please state your affiliation.

Morgan Stanley.

Jim, if I could ask a more detailed question about the guidance.

I'm sure we'll get questions afterwards.

I want to understand.

You're saying $1.10 is the third-quarter guidance, but if we take out the tides, that's a 3 cents sell on a clean basis, you're going to have to assume that's a one-time, it's really $1.13.

Is that right?

That's right.

And is there, and just once again, sorry to be so, I guess, specific, but is that -- is there any reason why that's not an apples-to-apples comparison to what's out on consensus now, are there any other unusual items that you threw in the $1.13 that might not have been in expectations?

No.

Okay.

Along those lines, normally you guys see a pretty good sequential pickup from second to third quarter in operating income.

You did $1.10 here in the second quarter, although there was a little bit of a benefit from the depreciation schedule, but not much, and you're talking $1.10 here for the third quarter, and I'm trying to, I guess, reconcile that, given that normally you see some sequential improvement.

Jim, you want to take that.

Well, you know, Jim, obviously we're being cautious here.

I have given you the fuel price numbers here and it's been staying stubbornly high now.

I will tell you, though, in the last couple of days, we've seen a falloff here, you know, from 90 plus to around 85, 86 cents.

It's tough to extend that out here.

It's been so volatile.

You know our leverage.

Dick mentioned that.

If we get a little bit of chick in the economy here, and it's sustainable, you know, we can lever our numbers up nicely.

You see our car load numbers.

You know, we're running actually up about 2% right now on car loadings.

And I mean it's early for the quarter here, but if we can hold some of those trends there, we have got some upsight.

Good.

Good.

The second question was regarding the dividend policy, the question we're getting from everyone now, given, you know, we haven't seen -- I know you have been using your cash for paying down debt.

That has been a good effort there.

But now it looks like you're getting into pretty comfortable leverage ratios.

What is the thought here on doing something with the dividend?

Well, um, Scott, or Jim, I think we have got a number of things we can do with our cash.

One thing is we can increase our dividend, we can continue to reduce debt, buy back tides, invest in the physical property a bit more, and we look at all of those opportunities as we go forward, and we will look at our dividend policy again, later in the year.

So, you know, that's a possibility that we're continuing to reduce debt, buying tides back.

Any number of things.

It's nice to have that problem.

Right.

Right.

One more question and that is I'm trying to understand if there are, or think through a scenario, where we could see more disciplined pricing out West for, in terms of rail-to-rail competition for, specifically, for the large contracts.

The things such as coal, autos, intermodal, and I guess, given what we have seen up to now, namely that customers come in and say winner takes all, and because the stakes are so high, the railroads have to get very competitive.

Is there any reason to think that formula we have seen out West here for at least, probably, 10 years at least, is going to change any time in the not too distant future?

I think Ike said it best when he said competition sets the price, and Jim, you said the last 10 years but, honestly, I think that was the whole point of deregulation back in 1980, and, you know, it's been good for us thus far, and I think, regardless of what happens on pricing on these big contracts, we're still focused on net price increase year after year.

Right.

Okay.

Great.

Thanks, guys.

Appreciate it.

Thank you, your next question is coming from Thomas R. Wadewitz.

Please state your affiliation.

Yeah, hi, Thomas R. Wadewitz from Bear Stearns.

A couple -- two different questions for you.

Maybe if you can give me a sense, specifically, on the ag yield.

I think you talked about that a little bit.

Can you give us further detail on whether you think that's going to continue where you see this sharp year-over-year improvement in ag yields?

Ike, do you want to take that one?

I think the answer is yes.

We do expect it.

The answer is yes, and with the expected harvest, we think we have had some opportunities.

So, Tom, the short answer to that is yes.

But while you're talking about ag, just let me say this, the wheat harvest, all the way up from Texas through Kansas into Nebraska is extraordinary.

It's wonderful.

And the outlook with the corn harvest this year, right now, the government experts are predicting an all-time record in corn production.

So, you know, today the ag opportunities look really, really good.

We continue to make great progress with double-digit growth on our fresh and perishable wine and with our express lane service coming out of base California to the East Coast.

So, that's been in double-digit growth, as well.

So.

Ag looks pretty encouraging right now.

When you look at some of the really strong expectations for the harvest in corn and also in wheat, can you just give us some kind of a framework?

What potentially could be the volume growth in the ag line item, you know, if the strong harvest is realized?

Are we looking at 5% volume growth in ag or 10%?

And I know grain is, you know, not the whole ag line item, there are others in there.

Can you give us a framework for how we can translate that strong harvest into some volume forecast.

Let me say this.

It's impossible to forecast with any high degree of fidelity, but looking in the rear view mirror, the first three weeks of the third quarter our volume is up 5% in the ag products line.

So, we hope that translates into the future.

Do you see it differently, Ike or Jim?

No.

No.

So the first 21 days of July our volumes are up 5%.

Okay, but when you start transporting that stronger harvest, could it be as much as 10% next year or -- ?

We've already started, Tom.

Okay.

We're already -- I mean we're hauling a lot of wheat right now, and we're seeing the growth.

It's -- plus express lane continues strong, and we have a lot of good stuff going on in the ag products business.

Okay, great.

All right.

Sounds like that 5% area is pretty reasonable.

One other question for you.

Looking at the intermodal business that you won recently, the premium business, can you give us a sense what it was specifically that changed that enabled to you compete for that business, and to what extent there is more business there that you can look to gain from UPS and the premium intermodal?

Ike you want to --

UPS approached us about providing this service for them and we were able to do it, and we couldn't be more excited about it.

The thing that is just as exciting is it's an opportunity because UPS becomes the anchor on that train to go out and pick up additional business off the highway with premium and truckload business.

So, we -- and it's taken our service levels across the board to whole new levels.

We couldn't be more excited about this.

And premium pricing for premium service.

A wonderful story

Have you gotten a sense from them, though, there is more to go there?

They could potentially look to expand that further, or was this kind of a one-off-type of thing?

UPS is obviously competing with Fed Ex single driver, and if they can -- we can found a way to provide that reliability of service, rail economics are going to prevail, and they continue to look at that.

It's not just UPS either.

I mean we have looked at what the intermodal opportunity is in the premium markets, well, all markets, for that matter.

Ike has led a study using MacKenzie and it's fair to say the opportunities are unlimited.

We have seen significant growth opportunities as we continue to improve our service, and it's good business, too.

Okay.

Great.

Thanks.

Thanks for the time.

Thank you, your next question is coming from Ken Hoexter.

Please announce your association.

Hi, Ken Hoexter from Merrill Lynch.

Good morning and great job on some solid results for the quarter.

On the ag follow-up question there on the revenue, on the average revenue per car load, can you give us a mix on what was due to fuel surcharges and what was real price increases on the ARC portion?

And similarly for the coal, which was also strong, can you break down those too?

Thanks.

That's clearly a question for Ike or Jim.

I don't have the answer.

I think on ag, the biggest fuel surcharge, the biggest gain is on the intermodal line.

We've been able to do the best job there in the second quarter.

Coal, well, I don't know.

We would be guessing here in terms of the numbers.

Would the ag increase then be due to longer lengths of haul?

Actually, to more added value services, and most of the increases have been with express lane when we have gone out to be able to bring new business on the railroad.

Length of haul has played a role, though, we've hauled a little bit more grain to the PNW and things like that, that increased our yield there, too.

Okay, great.

A follow-up.

Is there any, I guess, desire to implement a hedge program now that we continue will the volatility going on the fuel side?

We've always had the desire, we just haven't had the means of execution yet.

The market has run away from us and we haven't found an entry point.

Our policy is to hedge 50% or greater of our consumption.

We just haven't found the entry points yet.

To lock in high prices, that would compound our profit.

Okay.

And then, just a follow-up on the forecast again, just -- because the third quarter.

I want to understand.

It seems like a sharp decline from where consensus was looking at and where I think most analysts were -- had, obviously, have their estimates.

But is that solely on the -- you have already said you expect revenues up 3%.

I'm just confused as to what on the expense side is taking this out?

Obviously, fuel, I understand you're seeing a leveling of fuel prices at these levels, but what else are we missing here on the cost side?

Fuel.

Fuel protection costs, the same kind of stuff.

Insurance costs.

Kevin, I think the big driver when you look at, on the cost side, will be fuel.

Again, the margins are narrowing a little bit when you look year-over-year, but if it stays up in this 90-cent range, um, you know, each penny is worth about $3 million in higher costs for the quarter.

Okay.

Thank you.

Thank you, your next question is coming from Gary H. Yablon.

Please announce your affiliation.

Hi,First Boston.

How are you?

Hi, Gary.

Maybe for Ike, I guess.

Ike, could you talk a little bit about purchase service and other costs, overall have been rising at a pretty good clip relative to volumes, revenues, whatever metric you might look at.

Could you tell us a little about why that's the case and what you see going forward?

Just, you know, beyond third quarter?

I could, Gary, but I'm going to let Jim give you more specifics.

Okay.

Hey, Gary.

The 385 mark will be the high mark for the year, you know.

I indicated there are a couple of unusual items in there, joint facilities, $12 million, it's all timing.

You know, my outlook, there is about $360 to $370 what, we pegged it here back in, you know, before we started the year.

There is also a shift for materials, as you recall, there is about a 10 to $15 million shift of cost that we previously reported materials that now comes under contracting through our locomotive contract costs.

At the end of the day, costs have been higher.

When you look at insurance items out there, you look at, again, the locomotive maintenance, higher state and local taxes have driven it up.

So, again, the run rates should be in that 360, 370 range here for the second half of the year.

So we're talking about a billion 4-ish on an annual basis.

That's right.

It used to be about a billion 2.

Well, you have to take in some of the shifts between contracts.

You have volume costs that come through there, limo lodging, you know, a lot of our limo contracts and hauling crews have gone up, insurance has been a driver, so that comes through.

Right.

Okay.

Jim just staying with you, if I could.

I thought I remembered that there were some severance costs for people take out that was going to linger into 2Q that didn't come out in 1Q.

Is that correct?

That's correct.

We really didn't have -- in fact we had very little severance this quarter.

One of the reasons is our retirement attrition rates have been much higher than we expected.

We may see another penny or so the rest of the year, but I don't see any major kind of item.

When was the last time you guys did a voluntary buyout?

Um, a couple of years ago.

A couple of years ago.

A couple of years ago.

I guess two questions to that then, is there a pent up demand for one, and if there were, could you do something like that?

Could -- is there that much more people that you can take out and still make the system more productive without losing service?

Well, let me tell you this, Gary.

We're going to be down 2% on head count this year, year-over-year, and we'll always be, as long as we're breathing, we'll be looking at ways to make the company more efficient.

And we will continue to provide the capability of addressing larger volumes of business with less people.

Now, as far as absolute head count, this is something I say every quarter.

At some point in our future here, absolute head count will cease to go down and probably increase.

But the thing you all should focus on is reduced unit cost.

We will perform more work at less expense, and Ike showed that on one of the graphs that he went through, that year after year, the unit costs are coming down.

While the head count, the absolute head count number well, will at some point in the future, cease to come down, unit costs won't change.

They'll continue to come down.

The downward progression won't change.

We'll still produce more work for less cost.

Okay.

And just finally, again back to you, Jim.

On the depreciation, could you just give us a little help, next year it's moving around a bit?

Could you give us some, whether it's rate of change or however you get comfortable talking to it?

Well, you know, part of it is related to volume, Gary.

You know, if you assume economic recovery next year, good volume growth.

You could see depreciation costs up in the 5 plus percentage range.

Okay.

Fair enough.

Thank you.

Thank you, your next question is coming from Jennifer Ritzer.

Please state your affiliation.

Hi, Lehman Brothers.

How are you?

Could you give us an update on your PO hedging.

Are you still 7% hedged for the rest of the year?

And secondly, I think tornadoes plagued you in the first half of the quarter.

Is there any way you can quantify how that might have effected your revenue or earnings, how you would have posted those two line items had tornadoes not been around in the first half of the quarter?

You want to talk about the fuel, and Ike and I can talk about --

We have not added -- we're currently 7% hedged at 73 cents for this year.

We haven't added to that.

I don't see us adding to that the rest of the year, unless you had a huge falloff here.

Next year, we're unhedged but we're looking again.

If markets repeat what they have done on history here, we're looking at both '04 and '05, and at some point here, it's to get, you know, up to 50% of our fuel hedged.

Okay.

Great.

As far as tornadoes go, you know, we have tornadoes every year, starting in the second quarter.

We're out here in the tornado belt, and I think Ike and I are the same on this.

We hate to hang our hat on weather.

As far as the increased costs or reduced revenue.

This clearly cost us a few million dollars this year.

We had a serious derailment where the train was blown off the tracks down in Kansas, which interrupted our service, but, you know, it's -- it's not something that we -- we see it every year.

Probably the bigger impact was what General Motors suffered in Oklahoma City when the tornado struck their assembly plant.

They were shut down for several months, and that took 3 or $4 million of revenue out of our revenue growth.

So, you know, if you added it all up, it's 5 or $6 million or $7 million.

We really haven't tried to quantify it.

But we have some weather costs every quarter.

Okay, great.

Thanks.

Thank you, your next question is coming from Fritz Voncourt.

Please announce your affiliation.

Excuse me, Mr. Voncourt, your line is live.

Our next question is coming from Jeff Kaufmann.

Please announce your affiliation.

Fulcrum Global Partners.

Thanks.

Dick, congratulations on a solid quarter.

Ike, kind of an off-the-wall question for you but I think a lot of the tough ones have been asked already.

There is a small company that one of our analysts here follows that claims to have developed the process that eliminates, dissolves, actually, the slag buildup in boilers from Powder River Basin coal, and they have been testing it with Pacific Corps, Pacific Corps signed on, Peabody's starting to endorse this.

It's not so much a call on this company, but it seems like their process works and they're talking about the opportunity for utilities to burn more PRB coal because they've eliminated the slag issue as a result.

Can you, from your perspective, tell us with your customer base, how significant is the slag build up with PRB relative to some other coals out there?

And if this process worked and could make PRB coal more attractive, eliminate the slag issue, how significant could this be to your market?

Is it more coming into new utilities who may not use PRB coal because of this, or a mix issue where people just may burn a little bit more?

Can you think out loud about that?

Ike, clearly --

I was going to refer it to Young.

I mean.

Yeah.

Clearly, I mean if that's the case, that's wonderful, and, you know, but I honestly don't know.

But we'll do some homework on it and --

I'm just wondering how big an issue for a lot of your coal customers, the slag buildup related to higher sodium content and PRB coal is?

It hasn't hit our radar screen yet at this point in time, Jeff.

Yeah.

You're on to something.

We'll follow it.

Fair enough.

Very good.

Thanks, guys.

Thank you, your next question is coming from Vic Haven.

Please announce your affiliation.

Yes, thank you, this is Vic Kapon from Deutsche Asset Management.

Dick, you mentioned about $400 to $600 million free cash flow this year, and if I read correctly, the first six months is only $31 million?

What did you say?

The first six month is only $31 million?

That's right.

Oh, oh, the first half -- well, Vic, as you have watched us year after year, you know we consume cash in the early parts of the year and the second half is when we really produce the free cash.

It will build in the third, fourth quarter.

Okay.

But --

The same story every year.

Never fails.

The range is pretty wide for the $600 million.

Do you think that -- is there a way to narrow down that range?

No.

We -- .

That's why we said 4 to 6.

We want to leave a little room there.

And that room is because of the economy or because of the fuel costs?

Oh, all of the above.

I see.

Okay.

Good job.

Thank you.

Thank you, Vic.

I appreciate everybody's positive comments here.

Thank you, your next question is coming from Bob Dunn.

Please announce your affiliation.

With SAM Investments.

Thank you.

The free cash flow question, do you see a potential to redeem the final traunch of the tides, or is that based on interest rates or cash flow or selling something, what is your outlook there?

The, as we said, the -- it's a nice opportunity we have with the kind of free cash we're producing, and that's one of the issues that we will look at, what we think will be of most benefit to our shareholders in the future between dividends, stock buyback, reducing the tides or spending opportunities.

Whatever it might be, we're going to focus on our investors and what will be the best return for them .

Thank you.

Thank you, your next question is coming from Greg Burns.

Please announce your affiliation.

Greg Burns, J.P. Morgan.

Thanks.

A question on the premium products.

It seems like you're getting some of your customers, essentially, to pay more for better service.

Sounds logical, but it's sort of the opposite trend we have seen in a lot of transportation, where people have been moving to deferred products, certainly intermodal model has been from a value proposition.

How much opportunity is there, and do you think if the economy tightens up, you would see more interest in these premium products?

Great question, Craig.

Ike?

We have studied this thing upwards, downwards and sideways with MacKenzie helping us, and Ike has really been into it.

You want to get go into that?

The answer is, we think the market is almost unlimited.

If you slice and dice it, it's in the billions, and the opportunity by providing reliable service and it's not about speed, it's about reliability, we think that there is just significant growth opportunity in the years ahead.

So, -- and we're working hard at it and we're going to make it happen.

And do you think demand will increase, it seems like customers are price sensitive.

Is that an obstacle or not really if the service is there?

It's an opportunity, because rail economics are going to rule at the end of the day, so as long as the reliability is there, we can -- almost endless what we can do.

Okay, and then I guess just a -- switching to Overnite, a quick question on the labor costs, the teamsters seem to have gotten a fairly hefty labor increase, I'm curious what Overnite's strategy is that -- would Overnite strategy be to match it?

Would it match the timing, the rate, or speak to maybe increased costs at a slightly lower rate?

Overnite, what -- you know, our goal has been to, you know, stay competitive so we can hire good employees.

If you look at all in labor costs of Overnite compared to teamster companies.

If I remember right, our all in labor costs, is about 30% less.

But, having said that, our hourly or mileage rates are competitive.

It's just all the other cost factors that go into teamster-controlled companies versus the nonunion, which Overnite is.

We still have about a 30% advantage, and I would expect that we would maintain that or improve on it.

Okay.

Thanks a lot.

Thank you, our final question is coming from William Lang.

Please announce your affiliation.

This is William Lang from Acanthus Capital.

I have a question with regard to your strategy about the convertible preferred stock.

I want to see if you're planning on buying more of them or -- ?

William, if I understood your question right, you're wondering if we're going to buy back the final third of our tides.

Correct.

Correct.

Well, that's what I said.

We're going to -- we'll look at a number of things, we'll look at increased dividends, further reducing debt, buy back of the common, buy back of the tide, investment opportunities -- and at the end of the day, we're going to arrive at what we think will benefit our shareholders most, and that's what we're going to do.

That's one of the opportunities, certainly.

Okay.

Thank you very much.

Okay, well, thank you all very much for your interest in our company, and we'll look forward to visiting with you again in three months.

Thank you for your participation.

This does conclude today's teleconference.

You may disconnect your lines at this time.