聯合太平洋集團 (UNP) 2004 Q1 法說會逐字稿

Good morning.

And welcome to Union Pacific's first quarter 2004 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 star one.

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

Please go ahead, sir.

Thank you.

Good morning.

And thank you for joining us today on our first quarter earnings conference call.

Jim Young is here with us today in his new role as President and COO of the railroad, Jim will discuss the strong market demand for our service as well as our railroad operations and our recovery efforts.

Rob Knight is assuming Jim's former post of our CFO and will walk you through the financials.

Ike Evans is here this morning in his new capacity as Vice Chairman of the corporation.

Ike is a key player in our newly-established office of the chairman, working together with both Jim and I. So he will be available for questions at the end of the remarks as well.

As we mentioned in our March press release and conference call, the first quarter of 2004 challenged us both operationally and financially.

For the quarter, we are reporting earnings of 63 cents per diluted share.

That compares with 57 cents per diluted share that we reported from continuing operations a year ago.

We saw exceptionally strong demand for our service in the quarter.

Setting records for both quarterly carloads and revenue.

Unfortunately, several factors and including our service challenges and the impact of some truly adverse weather conditions eroded the strong revenue gains.

Today's reported numbers also include the impact of the Arkansas Supreme Court verdict that we discussed with you back in March.

As you probably recall, the court affirmed a $30 million jury verdict against the railroad that includes $25 million in punitive damages.

With the accumulated interest we are now facing a payment of nearly $36 million.

We strongly believe that this decision to affirm is unconstitutional and contrary to recent decisions of the United States Supreme Court.

Given that, we will seek review the by the U.S.

Supreme Court.

However, based on the Arkansas court's decision, we recorded the expense of $35.8 million, or about 8 cents per diluted share, in the first quarter.

Now, also in the quarter, we had a $38.6 million one-time reduction in our state tax liability.

This equated to about 9 cents per diluted share.

Rob will take you through the financial details, and Jim will he give you more technicolor on our operations and business events but let me just say that these results are clearly disappointing and frustrating for all of us.

We firmly believe that our company can and should generate much stronger performance and we're absolutely committed to doing just that.

We expect that most of you have been monitoring our weekly service metrics as they're reported to the AAR.

We also alerted you through our 8-K filing to the customer communications on our website regarding the service issues.

We will be updating that communication from time to time as well.

So we encourage to you keep watching these information sources to track progress as the situation evolves.

We would like to spend most of our time this morning discussing the efforts we have under way to restore our operating efficiency, and improve our company for the future.

I would like to take just a couple of moments at the outset to walk you through the key drivers behind the recent situation.

This may give you a better perspective on how the situation developed and what we need to do to fix it.

Back at the start of 2003, the nation was preparing for war, and the economic outlook was very uncertain.

Following two years of a flat economy, we saw another soft year ahead and made a conscious decision to keep our man power supply tight.

Now with 20/20 hindsight we didn't back bill as many retiring train crew personnel as we should have to meet demand as it ultimately turned out.

Traffic volumes were flat through the first three quarters of the year but in the fourth quarter we saw a demand increase across all of our business teams that reached well above both our customers and our own expectations.

This increased demand stressed our crew supply, and led us to ramp up our hiring efforts.

It is difficult, however, to respond quickly to demand surges because of the long lead time for hiring and training the conductors and engineers.

To help us in the interim we brought more than 200 workers into train service temporarily from alternative sources such as borrow-outs from other railroads.

When we spoke with you in January, we were making solid progress towards improving our service metrics, despite strong traffic demand.

In fact, our average train speeds were close to 24 miles an hour at that period.

Shortly after that, however, mother nature gave us an unusually severe winter to contend with over much of our network.

These conditions placed a huge stress on the system, and with our resources already strained, we saw a compounding effect.

A slower railroad obviously is less efficient and consumes even more of the basic resources that we needed.

Crews, locomotives, freight cars, terminal capacity and main line capacity.

When we updated our earnings outlook we told you that March would be a critical month in terms of both demand and our operating metrics.

We weren't sure how much of a traffic rebound we would see, and as it turned out, March was much stronger than forecasted.

Volumes were up nearly 9% year over year, with particular strength in the commodities moving to and from the west coast, where we have experienced some of our greatest crew shortages.

Hiring and training efforts have continued at a significant rate.

With this rapid surge in demand, consumed our resources and essentially negated the benefit of adding nearly 1,000 trainmen to our rosters during the first quarter.

To add insult to injury, on March 29, we were set back again with the 40-car coal train derailment near Topeka, Kansas, that destroyed a major bridge and shut down that critical route for almost four days.

These events created a compounding effect that strained our resources, reduced network velocity, decreased our operating efficiency and increased our failure cost.

Unfortunately in a complex network environment, it takes time to reverse these negative trends.

But I would like to assure you that we do understand the root causes.

We believe we have got the right initiatives in place and we're 100% focused on turning this situation around, so that we can take advantage of the opportunities we see in the marketplace in front of us.

Now, with that, I will turn it over to Rod to go through the financials and to Jim so he can talk about those initiatives in most detail---more detail.

Then I will come back to wrap it up with some comments on our outlook for the longer term.

Rob?

Thanks, Dick.

And good morning.

I would like to start today with a quick look at what was really the first quarter story line.

First, we had solid growth in our operating revenue, up 6%, to a record $2.9 billion.

Unfortunately, we had an almost 9% increase, $212 million, in our operating expense, largely due to our service inefficiencies, weather, and the Arkansas Supreme Court ruling that added about $30 million to our casualty cost line.

If you look further at the $212 million of increased operating costs, you will see that over 55%, or $120 million of this increase can be isolated as incremental first quarter failure costs.

We have already mentioned the Arkansas case, the full cost of the quarter was $30 million, excluding accrued interest, a combination of inefficient operations, and severe weather conditions that we experienced across much of our network, costs roughly $60 million with added labor, equipment and fuel costs.

Costs associated with service incidents, were also higher in the first quarter driven primarily by the loss of the key bridge near Topeka that Dick mentioned earlier and another major derailment on our east west main line in Iowa.

We also incurred an incremental $15 million to hire and train new crew personnel at the accelerated rate.

Turning to the first page of your financial package, we have our income statement.

It is important to note that during 2004, we will be comparing our results against 2003's income from continuing operations.

You will note 2003 results show income from discontinued operations related to the overnight, as well as cumulative effect of accounting change related to the recognition of FAS 143.

As we walk down the line items of the income statement I will be using additional slides in some cases to provide detailed information, and then returning to this slide to discuss each component separately.

Starting at the top, we have already discussed operating revenues so let's turn to the next slide.

You will see a break down of the 170 million or 6 1/2% year over year growth we achieved in commodity revenue.

Volume growth and the mix of business accounted for about 4.8 points of the growth.

With the exception of automotive, carloads were up in every business group with the highest growth rates in ag products, up 8%, industrial products, up 7%, and intermodal, up 5.

For intermodal, it was the best ever first quarter car loadings.

Ag products and industrial products growth with their higher arc also helped drive mix.

Price added another point of growth, consistent with our commitment to a 1% of price all in net of fuel surcharges.

Of the six commodity groups we had our best price growth in agricultural and industrial products, both seeing around 2% price.

Our fuel surcharge programs and the fuel component of RCAF added another .7 points to our year over year revenue growth.

I will talk more later about our surcharge program which we're continuing to add to new business.

Returning to the income statement, we will look at the components of operating expense, starting out with salaries and benefits which were up 5%.

We had a $47 million cost increase in the quarter on 1% increase in average number employees, this translates into roughly a 4% increase in average wages per employees, due to inflation, and the impact of our slower velocity.

For the quarter, we'd estimated items such as higher training costs, recrew rates and costs per crew added approximately $40 to $45 million to this line item.

These costs are particularly disappointing when you consider that we had some good news in our comparisons as a result of last year's one-time severance cost and this year's decrease in protection pay.

In the second quarter, we will likely see hiring and training costs at about first quarter levels, then falling off some in the second half of the year.

Longer term, the overall run rate for this expense will be higher than in previous years, due to our expectation for continued hiring, because of higher volume and attrition.

The next slide addresses some of the numbers that have been discussed relative to our hiring and training of crew personnel.

During 2004, we will graduate about 4,000 trainmen, but given the expected attrition rates, we will see a net addition of our crew base of roughly 1300 employees on a year -- full-year basis.

And you can see from the chart, we're estimating that our average yearly head count will increase a little over 2% for the year.

However, without the forecasted growth in GE and line employees our head count would have been down slightly year over year.

This reflects our efforts to increase back office productivity, as well as improve efficiencies in other nonoperating areas.

These numbers reflect today's best estimates but if demand is stronger, or if our return to operational efficiency is slower, head counts could be higher.

The next line item on the income statement is rent expense.

Rents increased $17 million in the quarter.

One driver was car hire charges due to strong volume growths in ag products, industrial products, and intermodal.

Additionally, we would attribute roughly $10 million to our service issues as car cycles increased and our system inventory climbed.

The impact of locomotive rentals was relatively minor in the quarter but our efforts to bring on added peak power and new locomotives will cause an increase in this line item over the next couple of quarters.

Conservatively, we would estimate second quarter year over year increase in the $13 million range for locomotives.

The next income statement line item is depreciation.

It was actually down $1 million from a year ago.

This decrease reflects -- relates to the impact of a depreciation rates study we recorded in the second quarter of 2003, this favorable rate change offset the increased depreciation expense from our 2003 capital program.

Full-year depreciation costs should increase by about 5%.

Looking at the fuel and utilities line, total costs increased $37 million.

Unlike the last few quarters, the drivers of the increased expense was volume, not so much price.

Consumption increased by about 29 million gallons, or $30 million.

About half, due to increased volumes, and half due to operating inefficiencies, driving a higher consumption rate per gross ton mile.

Our actual price per gallon was up two cents in the quarter to $1.02 per gallon.

This price increase added $4 million to expense.

Let's talk about fuel surcharges for a moment.

We recovered a total of $39 million in the quarter. $18 million more than a year ago.

That equates to about a 50% recovery rate against a more normalized fuel price.

And we're on track for a 60% recovery on a full-year basis.

So at the end of the day, we are recovering more, but we still prefer lower fuel prices.

Our materials and supplies line item was up $20 million in the quarter, with an increased number of locomotive overhauls and freight car repairs being the key drivers.

These expenses were largely planned in anticipation of some increased locomotive demand in '04.

The first quarter expense amount should really be the high water mark for the year, with some year over year increases going forward.

Lastly, we had a $92 million increase in our purchase services and other line item.

In January, we had told you to expect about a 10% increase over this $363 million reported last year, due to increased locomotive spending and the timing of some facility costs.

Our actual experience came in slightly higher, at about 12% or $42 million.

The remainder of the cost increase in this category was attributable to the Arkansas court case, as well as some of the operating incidents and inefficiencies that we mentioned today.

For the remainder of the year, we would look for about 6-8% growth in this category over the next nine months, depending somewhat on how quickly our service recovers.

Looking at our operating income, it was down $55 million year over year, as our operating margin fell from 13.5% in the first quarter of '03 to 10.9% this year.

Although the majority of the increased costs did come from service inefficiencies, the Arkansas court case subtracted a full point from our operating margin.

That said, we aren't satisfied with these results and are working hard toward bottom line improvements.

Finishing up then on the full income statement, other income was up $15 million in the quarter primarily due to increased real estate sales on a full-year basis we would still expect this line item to be in the $50 to $100 million range.

Interest expense was down $16 million year over year.

Lower overall debt levels and the redemption of the tides reduced interest expense by nearly $24 million.

This progress was partially offset by $6 million in interest charges related to the Arkansas case.

Income tax expense was down $41 million from a year ago.

In part due to lower income.

The biggest component of change was the one-time apportionment change which decreased our state tax liability.

This resulted in an effective tax rate of 20.3%, versus 35.9% in the first quarter of '03.

For the remainder of the year, our effective tax will be roughly 35% due to some ongoing state income tax benefits.

All of these figures net down to a $17 million increase in our income from continuing operations, or the 63 cents per diluted share that we are reporting.

As Dick mentioned this compares to 57 cents earnings per share from continuing operations a year ago.

Taking a quick look at our capital spending plans, we had originally talked about spending in the $2 billion, plus or minus range, depending upon business volumes.

Today with very strong demand driving a need to increase some of our capacity and growth spending we are targeting the plus side of this or about $2.1 billion as the full year expenditure.

Jim will walk through some of our 2004 plans in a moment but let me assure you that we have not lost focus on returning our cost of capital.

All of our capital projects continue to go through a rigorous review process and their returns must exceed necessary hurdle rates to meet our approval.

Let me wrap up today with a summary of our cash flows.

Cash from operations was slightly better than a year ago.

Up $12 million due to slightly higher net income from continuing operations.

Cash used for capital, other, is higher by about $21 million.

Primarily as a result of the receipt in '03 of a $96 million dividend from the FXE.

Dividends were up 19 million due to the 30% increase we announced last November raising our quarterly dividend to 30 cents per share.

Free cash flow then netted out to be about $28 million lower year over year.

As a reminder, due to the seasonal nature of our business, compared to the relative consistent flow of expenses, the first and second quarters of the year don't generate much positive cash flow.

With that, I will turn it over to Jim for a discussion of the rail operations.

Thanks, Rob and good morning, everyone.

As Dick and Rob both discussed we are not satisfied with our current state of operations.

We do, however, see some bright spots.

Record volume moved across our network in the first quarter, as demand for our services was strong and in many cases greater than anticipated.

For example, we projected whole grain car loadings would increase about 6% in the first quarter, instead we moved nearly 10% more cars and had demand for an additional 5%.

Out of this strong demand, we see a very positive pricing environment, evidenced in part by best ever quarterly average revenue per car.

This pricing opportunity will play out over time as contracts expire, but the long-term perspective would say that we have great pricing potential.

These demand levels and pricing opportunities are a great story, but we didn't execute.

Our operating inefficiencies eliminated the leverage we would normally achieve on 6% revenue growth, we view this performance as unacceptable, and I will share with you our plans for improvement.

A couple of weeks ago, we issued an open letter to our customers outlining our service recovery plans.

Our customers are growing, and we are committed to growing with them if we can receive an adequate financial return.

However, we also need to manage expectations and do a better job of managing the flow of traffic under our network.

One mechanism available to meet our business is price.

A greater value is being placed on the service we provide and a higher price is warranted.

Dick gave you some perspective on the factors behind our operating inefficiencies, but at the end of the day, volume growth outstripped our current capacity, especially in the area of train crews, and we lacked the ability to respond quickly.

For the quarter, we saw our commodity revenue grow 7% to a record 2.8 billion.

In fact this was the best first quarter revenue for our three leaders; industrial products, ag products, and intermodal.

Looking at the individual groups, industrial products had double digit revenue growth in nine of its 16 business lines.

Most notably, steel and scrap were up over 25%, lumber revenue up 12%, and rock was up 10%.

Wheat exports were really the story in ag products group with nearly 150% volume growth in gulf exports.

Intermodal revenue grew 9% on 5% carload growth and a 4% increase in average revenue per unit.

Fuel surcharge revenue, import strength and a mix shift to domestic containers drove this positive performance.

Another great revenue story is in our energy group where despite two large contract losses, we saw 4% revenue growth.

For the quarter, it was our best-ever tonnage out of both the Powder River Basin and Colorado/Utah.

Chemicals also grew 4%.

Driven primarily by a 25% increase in LP gas, 6% growth in liquid dry chemicals and 5% growth in soda ash due to strong export and domestic consumption.

Overall the chemicals group recorded its highest quarterly revenue in over three years.

Finally we had a 2% decline in our total auto revenue on flat revenue from finished vehicles and an 8% decline in parts.

The story here is really tied to higher auto inventories and slower North American vehicle production which was down 4% in the first quarter.

If you take a step back and look at the areas with the greatest growth the strength of UP's manifest franchise is highlighted.

We're moving record amounts of steel, scrap, rock, lumber and the demand we are seeing is even greater.

We believe this trend is significant and is a clear positive for Union Pacific.

Looking ahead into the rest of 2004, we have the potential for the first quarter's demand to be sustained.

The current outlook is for continued strong economy, and that's driving increasing levels of demand across the board, but particularly, in our industrial products segment.

We also see solid growth in our ag products group as we have begun moving larger quantities of corn from Nebraska to the Pacific Northwest for export, something we haven't done in four years.

Both ethanol and express lane business demand should grow as well.

Our chemicals business should remain strong, at least in the near term.

As Wyoming soda ash producers are in a sold-out position this year.

Demand for liquid and dry chemicals looks good and will likely track the strength of the economy.

We are optimistic about the potential for intermodal, although growth is limited by our current operating difficulties.

With roughly two-thirds of all intermodal volume touching the L.A.

Basin, capacity issues in that area require us to manage volumes carefully.

The two areas with the potential for slower growth are autos and energy.

Although 2004 auto sales projections are for at least 3% growth, inventories remain high, and manufacturers are looking at production cuts.

Finally, coal inventories are at or below normal levels and the overall demand for western coal remains favorable.

In fact, we have completely offset the $200 million of contract losses we started the year with, due to strong year over year growth.

Moving on to operations, this is the first quarter perspective contrasting growth and velocity.

If you compare the bars on the left to those on the right as first quarter volumes increased and we experienced adverse weather conditions, we could not maintain our velocity.

Although we added nearly 1,000 trainmen by the end of the quarter, this was still not enough to improve velocity given the strong March car loadings and continuing network congestion.

Our approach to resolving our service problems is three-fold.

One, add more crews.

Two, add more locomotives.

And lastly, reduce business volumes in certain areas.

Let me walk you through this plan.

As we mentioned, we added just under 1,000 train crew personnel into service during the first quarter and will add nearly 1400 more in the second quarter.

In April, alone, we've added 400.

Importantly, by September, we will have added roughly 3700 new employees into train service, of course we will have some attrition, and retirements throughout the year, but as Rob showed you, we will still be up about 1300 trainmen at year end.

As we add more trainmen to the rosters, we have the follow-on challenge of increasing our engineer pool in certain areas.

We are working aggressively to increase the training of experienced conductors to become engineers.

But this effort is naturally lagging, as we must first staff the conductor ranks.

We will graduate over 400 new engineers by the end of the third quarter with another 300 scheduled for promotion in the fourth quarter.

In the interim, we are working closely with our unions to temporarily borrow out engineers from areas of surplus to shortage areas.

We are also focusing on utilizing our crew base more efficiently.

That includes such things as reducing our recrew rate.

We lost over three points in this measure in the first quarter or the equivalent of 300 employees.

In addition to crews, the other resource that can provide the quickest spark to velocity is locomotive power.

Our plan for 2004 is to acquire 270 new locomotives plus an additional 350 units under short-term leases.

By the end of the second quarter, we will have all of the short-term power in place, plus 100 new units with the remaining 170 coming on in the last half of the year.

We have the potential to pull more power, both short-term and long-term ahead, if the volumes remain strong.

But we also have the ability to return the short-term power as the velocity comes back.

Some other measures we're taking to improve operations include establishing local customer service contacts, in some of our more congested areas such as Phoenix and West Colton.

We built temporary -- two temporary transload facilities one in Tucson and one in Montclair California to help keep rail cars out of Phoenix and the West Colton yards while we work out the backlog.

Finally we have taken some limited steps to slow volume growth primarily on our Sunset corridor.

We are closely monitoring carloads especially in the L.A. basin and Sunset corridor areas and will take further action to reduce business levels if the situation requires it.

As an additional heads up, I should mention that several days ago, Drage Company drivers began an informational picket at UP's intermodal terminal in Lathrop, California.

Their dispute is not with UP.

However, the resulting truck driver shortage has hindered our ability to unload traffic at Lathrop.

Because of these pickets, we issued an embargo yesterday for traffic inbound to Lathrop.

We are monitoring this situation closely and have developed action plans as required to meet customer needs.

Although our entire system has felt the effects of our slow down, we said that our primary quarter of difficulty has been the Sunset corridor.

Our double track work on that route will improve our long-term ability to handle greater volumes in the west.

The distance of this corridor from West Colton to El Paso is 760 miles.

We have a second main track over roughly 30% and over the next three years, we plan to increase that to about 60%.

To put that capacity growth in perspective, roughly 25% of all UP traffic originates and terminates in our L.A. service unit.

And this quarter, we saw a 7% increase in the amount of traffic flowing along the Sunset corridor.

Long-term projections for the LA ports show that volume could more than double in 10 years.

In addition to the Sunset corridor, we are increasing capacity across Iowa, through signaling upgrades, improving north/south traffic flows on our Chicago/Mexico route, adding intermodal terminals in Tucson and Dallas, and improving the flow of coal traffic around Denver.

So what do we expect in the future?

Volume demand is strong and growth trends remain positive.

The nation's economy is growing and a strong railway system is a vital part of the overall infrastructure needs.

Ship capacity, truck capacity, and rail capacity are all in tight supply.

And against this backdrop, the pricing environment is favorable.

Our challenge is to take advantage of this opportunity, and improve the financial returns on our business.

In the short-term, the key to service improvement is to get resources in place to efficiently handle the growth and a return to running our operations to plan.

I'm confident that we will overcome our current operational issues, and convert this strong growth in our bottom line results.

With that, I will turn it back over to Dick.

Okay.

Thank you, Jim.

With all of these efforts under way, we know that everyone is trying to determine how long the recovery process will take.

Although we would like to answer that question precisely, there are just too many variables to do that.

What we can tell you is that demand for our service remains very strong.

The key will be how much of that strong demand we're willing or able to handle within our network constraints.

We also believe that fuel prices will remain high in the near term, although really it is anybody's guess about what might happen.

A year ago, we paid about 88 cents a gallon in the second quarter.

And our current spot price is about $1.05 per gallon.

We will keep focusing on our fuel surcharge program but as Rob said earlier we're not completely offsetting the impact of higher diesel prices.

The true wild card is projecting second quarter -- in projecting our second quarter performance will be the pace of our service recovery.

We are pursuing a number of efforts to boost velocity across the system, but there are still a great deal of progress that has to be made.

Particularly in terms of both training our engineers on the West Coast.

As the recovery occurs, it will, in all likelihood, be with couple of steps forward and one step back, as we work through a very dynamic situation.

With such uncertainty, it's difficult to develop specific financial targets.

The service metrics in April are at lower levels than they were throughout most of the first quarter.

We're hopeful that we will start to see progress, but we're dealing with a number of variables that make that timing very unclear.

Where the quarter ultimately comes out will be a function of our recovery progress.

Until then, the best guidance we can offer is to watch our volumes, watch our velocity, and watch the price of fuel.

Those three factors will ultimately tell the story of what happens in the second quarter.

For the remainder of 2004, the story is much the same.

At this point, we clearly won't achieve the double digit growth in earnings per share that we had originally targeted for the year.

Again, the business demand is there, and the pricing environment is very strong.

But network velocity in the pace of our recovery will truly be the key to improving the financial performance of the company.

As for capital spending, Rob mentioned that the 2004 plan is now about $2.1 billion.

We had originally talked in terms of $2 billion, plus or minus, depending on volume.

Current business levels and resource needs dictate that we spend a little more.

With the extra capital spending, and the increased costs associated with the service challenges, we will not achieve our original free cash flow target for the year of $500 million after dividends.

At this point, it is too early to set a new target.

Again, it is going to depend on how quickly our operations improve so we will keep you updated as things unfold.

Looking further ahead, we're focused on finding ways to learn from these recent experiences to make Union Pacific a better company.

With all of our discussion about hiring and training, it is clear that a new focus area for us is the changing demographics of our work force, about 20% of our employee base will be eligible for retirement in the next five years, and about twice that number over the next 10.

As we work through the recent hiring efforts, we have been re-examining our recruiting techniques and our training programs, as well as our ability to retain talented people.

Going forward, we will continue our unrelenting focus on productivity.

But in addition to backfilling for greater attrition, we also will need to hire for growth.

Improvements to our employee processes are part of a larger effort to strengthen our entire quality program.

In fact, this is one of the biggest challenges that I have put on Ike's plate in his new role.

He will be looking at some of the railroad's major processes and trying to find new ways to drive failure costs out of the system, and improve asset utilization.

Our ongoing yield strategy remains focused on achieving higher value for our service, and taking a larger percentage of our revenue to the bottom line through productivity.

I've already touched on our continued production productivity efforts but in addition we must price for the value of that service that we are providing our customers.

Our recent service issues and the unprecedented growth in demand truly highlight the value of our capacity and of the Union Pacific franchise.

We must optimize price to balance the best use of our capacity at the highest possible margin which ultimately drives the improvement in returns.

We need to generate returns that exceed our cost of capital, thus enabling us to grow and reinvest in the business.

As an example, the main driver behind the establishment of circular 111 was the need to protect the long-term investability of our coal business.

This concept crosses all business groups.

And pricing can help us get there.

In closing, let me assure you that we have never been more committed to our customers, our employees, and our shareholders than we are today.

As we have noted several times this morning, the timing of our recovery is uncertain.

However, we believe we've got the right initiatives under way to improve our operations, and restore service quality.

Looking past today's difficulties, we've got great confidence in our people, and in the overall strength of the UP franchise.

This remains the premiere rail company in North America and we look forward to the opportunities it will bring to grow profitably and drive value for our stakeholders.

Now we'd be happy to take your questions.

Thank you.

The floor is now open for questions.

You may register your question by pressing star one on your touch-tone telephone at this time.

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

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

Once again, that is star one on your touch-tone telephone at this time.

Our first question is coming from Scott Flower with Smith Barney.

Please pose your.

Yes, good morning, all.

Good morning, Scott.

Yeah, just a -- I guess a couple of questions.

I know that you went through in great length about where we got to where we are and what we're doing to improve.

I guess a couple of things relative to the service issues.

One of the things I noted that you didn't talk as much about, and I know that you talked about the steps of where we got to where we are, which all makes sense, is how much of what happened relative to the L.A. basin pointed out the continued fragility in parts of the old Southern Pacific, Colton was an SP facility, the Sunset route is an SP route.

And I'm just wondering what your thoughts are as we look at the SP, if you're relooking at what the capacity needs are and the capital needs are over time?

I think that is a very interesting question.

Since we merged with the SP, we have invested $18 billion of capital in the entire new Union Pacific system including the SP.

Several billion dollars of that obviously is in the old SP.

We have remedied a lot of the situations we saw in deferred maintenance and inadequate capacity, particularly along the Gulf Coast.

Colton, in my estimation, has been more impacted by the crew shortages, but certainly the increased business has impacted it as well, but we do have the ability somewhat to balance the workload among other terminals, which we are doing, actually, by doing more work at Urmow and other locations.

But clearly the Sunset route which was one of the real jewels of the Southern Pacific because it linked up the west coast and our southeastern and southern operations, needs additional capacity.

Now, it is a strong railroad and it is a great railroad.

In fact the first trip I ever made across it I was just -- couldn't have been more pleased with the quality of the property.

But it is a franchise for us.

And I believe -- I really believe that we can see continued strong growth there as we add capacity.

But it has got to have additional capacity added to it.

And that's it in a nutshell.

When we bought the company, we didn't have that much volume, and since it is such a good franchise route, it is growing like all get-out and we just need to keep growing our ability to handle cars there.

Okay.

And just two other questions.

One of the issues, and I know you all lived it and know it in more detail than I do, but one of the problems that happened in '97, '98 and I'm not suggesting that this is similar, in terms of the depth, was that the problems spread at different parts of the network, and I'm just wondering as you embargo traffic or try to do things to alleviate pressure on L.A., what are your thoughts on monitoring and being careful about different parts of the network and I guess I know there may be some other reasons for this but I noticed some dwell times in the Houston area that don't particularly look great and maybe those are unrelated issues related to Mexico, et cetera.

I'm just wondering how should we think about the risks or problems of -- in a network business, doing things that ultimately come back and hurt you in other parts of the network, and make the problems spread somewhat?

Scott, you're a good student of the railroad network.

You understand it very well.

But you know it is like an airline.

When you have a thunderstorm over Chicago, it impacts what happens with airplanes around the world.

And a railroad is sort of the same way.

And you know the Houston situation came about because of a number of different issues, but certainly a part of it was the consumption of resources because of the slow-down of the railroad as well as some of the issues that happened in Mexico, like the bridge being washed out, one thing and another.

But you know, our focus here, I mean we know how to fix this thing.

Is hire people, bring on more locomotives, at least temporarily, until we get our train speeds back up and that's just what we're doing.

And then I guess last question, I will let someone else have at it, I'm just wondering, has the -- and I think you sort of at a broad level addressed one of the things I wanted to talk about which is you talked about the problems of volume in a complex network and I'm just wondering, has the current situation, as well as other thoughts over the last 24 months, just in general, as the economy is coming back, made you all try to reevaluate how you run the business, and what I mean by that is, just the business just too complex, it just seems like -- there may be a real question in my mind of how well any railroad can handle, you know, volume picking up at an accelerated pace, and I'm just wondering I think you broached it on value pricing,, et cetera I'm just wondering have you thought at all about how you can simplify the operation of the railroad and that may be a very superficial way of looking at it but it just seems like it may be too complex operationally to grow volumes that quickly and whether you have to look at how do you extract value for your shareholders in other ways.

That is a great question, Scott and that is one of the things I put on Ike's plate is to be thinking about is how we improve our planning processes, and forecasting the future and that sort of thing.

But Jim talked about that a lot, too.

Let me ask Jim to put his two cents in here.

Well, Scott it has been a while since we've had this kind of demand, as you know, but you know, I don't look -- you said volume is a problem, I see volume as an opportunity, and really what we've got our marketing teams looking at is one, how do you meet our business, and you step back from the network, look at the flows, look at the customer demand, and really try to control the volume of these corridors, because it is all inter-related.

We are going to do that in some ways through price.

When you look at it.

And other ways, on the products that we offer.

Volume also, Scott, adds operating opportunities as well, and one example I just mentioned is that the forest products business has been so strong coming off the West Coast that coming out of a certain location there, we used to send it to one of our big hump yards out on the West Coast to be classified to move east.

The volume has now grown where we can -- assemble a solid train of point of origin and run it all the way to north plat, Nebraska, where we are going to the eastern carriers, so while volume presents challenges, clearly, it also -- it does present some opportunities to do things.

Great.

Thank you very much, all.

Thank you.

Our next question is coming from Tom Wadewitz with Bear Stearns.

Please pose your question.

Good morning, everyone.

Good morning.

I've got two different questions.

One, is just looking at second quarter and maybe looking a touch at timing.

It sounds like some of the coast side impacts are going to be a little more significant in the second quarter.

You said you leased the additional locomotives at the end of the first quarter.

Is your sense that things will look a bit worse in second quarter in terms of your year over year margin in terms of cost-side impact?

And also, is that probably the bottom and you think that there is a real good chance we’ll get back on track with more normal performance September?

Just what's your take directionally on those things?

If I gave that clear of an indication of what I thought, I'm sorry, I didn't mean to, because it is just too hard to predict, Tom.

Okay.

Let me pose it one other way.

If you look at the odds of recovering before the seasonal peak or the odds that this might get past September and go into where volumes pick up again in the fall, what's your sense on that?

You think you will get this fixed before the fall?

Or is there any way to get our arms around that?

I'm not going to give you any odds.

I will just reiterate that I think we are doing the right things and aggressively hiring people and bringing on more locomotives here.

Okay.

Fair enough.

Let me ask you one question then on the business side.

Jim, you actually alluded to you might, as volume growth comes in you might change focus a little bit on customers.

Does this change your -- kind of longer-term approach at really getting truck business, and I guess the high service level business, the premium intermodal, the auto parts, do you step back a little bit from that, and look at your capacity and your network, and maybe focus a bit more on the industrial or carload type of business that you -- you know that is really a strength of the franchise?

You know, Tom, I think this is still consistent with our yield strategy that we've had in place here.

Again, we're short resources right now.

But over time, and again, we're going to look at you know, the returns in the business, and we're going to match it up both short term, long term, we're going to look at the capacity in the corridors, an that's the way we will approach it from a customer perspective here.

We see -- you know, if you look at all of our business lines, there is really great opportunity in all of them.

And the challenge for us is how do we sort through that, and improve our returns.

Okay.

Great.

Let me toss in one last one.

On the coal, the new coal pricing approach, I think that is something which you know, seems to give us a lot of hope that the coal pricing environment can get better and it seems to be a pretty strong positive, a step that you're taking.

Do you have a sense of when we will get a little further information in terms of whether that is working or not, you know, when some of the contracts would roll off, and when we would be able to get kind of an update on how well the customers are accepting that?

Well, I mean it is there and we will have business coming on under the new circular, you know, in the next year or so.

So we will just -- you know, we will know a lot more about it here in a little bit.

Okay.

All right.

Thanks for the time.

Thank you.

Our next question is coming from [Jason Cidel] with Avon Dale Partners.

Please pose your question.

Good morning, gentlemen.

Good morning.

Dick, would it be fair to say that part of the decline in average train speeds and some other service metrics in March and April was due to just kind of the real large spike in car loading growth in March?

That clearly did have something to do with it.

In fact it was kind of a compounding effect in southern California.

We had an extraordinary growth there in our industrial products business and strong intermodal business, so -- and that was the point where we were most short of trainmen as well.

Train crews.

So yeah, it was -- it clearly was an added challenge for us.

Okay.

Next question, if you could give us just some numbers overall of how much freight that you either have turned down so far on a revenue basis or how much, you know, your expenses went up by, you know, pushing some of the freight off to the highway?

I don't know -- well Rob has sort of addressed that in his presentation, I think.

The problem is I missed it.

Rob, do you want to -- As we talked, we estimated there was the 120 which included of course the Arkansas court case, but 90 million on the cost side, all in of failures that we attribute to the service issues, and the weather, et cetera.

On the revenue, how much revenue we didn't generate its -- Jim, if you can help with that number, it is probably in the --

Well, it is tough – this is Jim, it is tough to predict a number.

I would tell you when you look at our six business groups, we clearly left demand -- really other than finished vehicles, which as I mentioned production was down, I think across the board, we left demand at the table.

And how much of that we could have handled, we feel we left a substantial amount of revenue on the table.

Okay.

Fair enough.

Last question, Dick and I will somebody else have at it, is there a chance that nine months from now you guys are back to normal, normal meaning, you know, maybe '03 operating levels?

Or is your goal to even go beyond those?

We're not making any predictions at this point.

But I will make a commitment to you.

That we will try our best here, as we go forward, to keep you updated and let you be aware just as quickly as we start gaining confidence that -- follow the weekly updates and the AAR, and follow Jack Koraleski's letter to our customers, and you will know just as much as we know.

Fair enough.

Thanks, guys.

Thank you.

Our next question is coming from Jordan Alliger with Lazard.

Please pose your question.

Hi, two things.

One, can you perhaps talk about the feedback you've been getting from some of the customers that you have had to limit the business with?

And then secondly, do you have some specific targets to add on crew, can you perhaps discuss your confidence in actually getting these people, you know, what proportions lined up, especially given the better economy, my guess is, you know, there is other employment opportunities potentially.

Thanks.

I think we probably all have visited customers recently and one thing that comes through loud and clear, is whether or not they're all happy about the service limitations because they're all seeing very strong growth in what is being experienced here, is tight capacity, just not on Union Pacific but every other transportation mode in the country, and this is one of the few really strong environments we've seen in recent years, and everybody is wanting to take advantage of it.

And so that -- from that point of view, they're not at all happy with us.

On the other hand, it is obvious they want very badly to do business with us, and they need our service, and you know, they're just -- they're hoping here with us that to get things fixed as quickly as possible.

Jim, do you see it differently?

No, I think that is right, Dick.

And Ike, I know you visit with a lot of customers.

No, that's right.

No, I agree.

On the crew availability piece, we are finding people, and the quality of the people we are hiring is very good.

Yeah, that's the point.

I would like to elaborate on, Jim and I made a swing out on the West Coast, a couple of weeks ago, and visited a number of the various superintendents and operating facilities, and uniformly, the superintendents mentioned the high quality of the employees we're getting.

It is not easy.

We have to interview about 10 people to get one acceptable candidate, but we're getting enough candidates to fill the pipeline here.

In fact, the limiting factor on turning out graduates from our training program is having enough people on the ground to provide hands-on training for them.

That's what's kind of sets the rate that we can produce them.

But overall, it is a very, very good group of employees that we've been able to hire.

Thank you.

Thank you.

Our next question is coming from [Ken Hexter] with Merrill Lynch.

Please pose your question.

Hey, good morning.

Just wanted to follow-up on Jordan's question there on the volumes and customer acceptance, is there a chance that you kind of go to more customers and say we just -- we can't take the volumes because we just don't have the engineers, or would they prefer the delay in service and at least get it moved?

I mean I guess what I'm trying to balance off, the need to take volumes even at these great delays, or do customers want to choose other methods, modes of transportations?

I don't think there is a universal truth there.

I think some customers, you know, are actively looking for perhaps other means to move their business but we also know there is a lot of pent-up demand still out there.

For example, in the grain side, we have been -- we haven't been moving quite all the grain that needs to be moved.

A little bit more coal.

We've had a little bit greater demand than we've been able to meet there.

We know the coal is still there to be moved.

Some other products that they have been able to find truck capacity perhaps is moved by truck, but I think in many, many cases the business is there for us.

What do you think, Jim.

Our goal is to handle the volume.

We're spending a lot of time in front of customers, walking through their service, their demand, what action plans we're taking, but at the end of the day, we've got to match our capacity with demand.

And in some cases, you know, we won't handle the business.

Again, what we're trying to do is long term here.

If there is the volume numbers kind of continue here, when you look out in the future, which is what we're planning on right now, our intent is to handle as much as of that business as we can as long as the returns are there.

I guess what would also be helpful on the Sunset corridor, is there a break down, you know; is this something that is, you know, 80% intermodal, or is there a less of an impact from just the trucking versus intermodal on that line?

I think the percentage of premium business going across that railroad, intermodal plus automotive is a little bit north of 80% probably.

Okay.

And then finally, just on the coal side, you mentioned quickly you more than made up on the volume side from the lost contracts, I just wanted to clarify that real quick.

Is this something that is just existing customers are boosting volumes to offset that or have there been some smaller customers or any other possibility that there has been any additional business coming on line or is that just growth in pure volumes?

I think most of it is demand although there is one additional customer, OPPD started using us at the first of the year but most of it I think is demand from existing customers, isn't it, Jim?

Yeah, that's right.

There is a couple of smaller contracts that we brought on.

Although again, as we said earlier, when you look to the next three quarters here, I don't think you will see that kind of growth here, because again, the contracts, and as you recall a year ago, we did have some problems with weather in the first quarter.

But you know, the demand is strong.

And I think it is a great problem for us to have.

Okay.

And then Jim, just last question, it is just on the fuel recovery, I guess if I could just stay on that point for a second, you got -- I just want to clarify what percentage you now have that is under the fuel surcharge program and then what percent of your costs were recovered.

I just want to clarify the two differences.

Yeah, about -- in fact exactly 77% of our revenue currently is touched by a fuel surcharge mechanism of one type or another.

That -- we've seen nice growth in that number and it is currently 77% and what I said in terms of the recovery rate, against the norm -- more normalize fuel price we recovered about 50%.

Great, thanks for the clarification.

Thank you.

Our next question is coming from Dan Hemme with Prudential Equity Group.

Please pose your question.

Hi, good morning.

Jim, maybe this is a longer-term question, can you talk a little bit more about what risks you see, or opportunities you see on the service-related problems you're having now, having with price?

You talked a little bit about some of the actions.

Can you tell us, are you getting customer push-back on the quality of service now?

From a service standpoint wishing they had lower rates.

Sure.

That is pretty natural, when you're not delivering the goods, a lot of times the discussion starts with what are you going to do on pricing.

Our response to that, though, is one of demand exceeds capacity right now, and in fact when you look to the future, we continue to see that situation.

To me, that's a very good pricing environment.

We've got to improve our returns.

You know, we've talked about putting more capital into the Sunset corridor.

And at the end of the day, you know, most of our customers want us to be here long-term.

They want that investment there.

They want the commitment from Union Pacific in terms was our ability to deliver, so we are not -- you know we're pushing on improving our returns here.

Is there a point at which you get nervous if you have continued service problems, say, prolonged, over the next quarter, two, or three, do you get nervous and have to deal with price?

Or does that not come into the equation?

Well we will continue to have the pressure, but we've got to stick to it in terms of where we need to go here with our returns in this business going forward.

Okay.

And I think it would be hard to be more nervous than we are today.

Right.

We're all poised right now.

I guess as a second question, and this is relative to the issues in the Sunset corridor, Jim, you mentioned that you would take further action if necessary in dealing with the demand side.

And then also, I think I guess it was mentioned that April service levels are below first quarter -- or what are the trigger points?

Where do you take a more proactive stance?

Are you close to the next trick trigger point for looking at the year -- or is it just all incremental?

I will tell you what.

We look at this thing daily, obviously.

We get together once a week with the marketing teams to look at kind of the outlook for demand going forward here.

You know, right now, while our numbers are a little bit down from where they were, I feel that they're still pretty stable, and you know, we just look at it weekly here.

It may be targeted, you know, again the Sunset corridor is the key focus here.

And we're looking at individual -- like Tucson, Phoenix, the L.A. basin area and if we need to take some action or additional action, we will.

But you know, again we look at it a week at a time here.

And in the meantime, we've got about 100 new employees per week that we're placing in service.

We've got new locomotives coming on every single day.

So we are building the resources here that we know -- that we need to recover this railroad.

So you know, it is not a static environment at all.

We're adding resources rapidly.

Thanks very much.

Thank you.

Our next question is coming from Jennifer Ritter with Lehman Brothers.

Please pose your question.

Good morning.

Just wanted to get a feel for pricing.

You and many of the other rails have put up real nice pricing numbers this quarter.

And wanted to know, as someone who hasn't been following the industry for decades, is this typical in this phase in the economy as things are starting to really perk up?

Or is it -- is it really a new wave here, and you guys are just doing so much better?

On a normal basis, on service that you are able to push higher prices through.

Jim, do you want to --

Sure, you know, there are a lot of factors that -- out there that are driving demand.

I would say one of the things that is different from what you look historically is what is happening with just overall transportation capacity in the United States.

If you look at the truck segment, we know it is tough there, in terms of capacity.

Growth has been there.

We do need to get our service numbers improved.

But I think overall, I -- I believe this is a permanent change in terms of the pricing capabilities in the industry.

Again, up, we will go through business cycles out here and we debate that internally but at the end of the day here, I'm feeling very confident that we can continue to move this price curve up.

We're doing things we're assessing contracts, you know, as Dick mentioned, the close circular, we're seeing a shift away maybe from longer terms of contracts to shorter terms which gives you the ability to respond more quickly on pricing.

That's a change, in terms of if you look historically in the industry, and --

Pushing more business to tariff, too.

Right.

Which gives you the ability again to respond more quickly to increases in demand.

I also believe that we're seeing some -- well, Jim mentioned, the doubling of the import business from Asia perhaps in the next ten years, when you look at the infrastructure on the West Coast, it is clear that the railroads are the answer there.

Because we are the ones that have the infrastructure to deal with it.

The highway system out there, just really can't be expanded effectively and I think that same thing is true in many cases, and we are the efficient way to move it.

What we've got to do is produce returns adequate to expand the railroad, which is our absolute focus here.

And high fuel prices, while they have an impact on us, they even have a more devastating impact on trucks.

So it seems as though there is a convergence of forces here that would certainly favor our industry.

Great.

That's helpful.

And then just one more thing.

Did you -- or would you give it again, if you already gave it, because is missed it, an update on your fuel hedging program and where you are for the rest of the year?

Sure.

You want to deal with that Rob?

Sure what I said is right now we have got 77% of our revenue base covered with a fuel surcharge of one type or another, including the RCF component of the fuel.

For the first quarter we recovered against a normalized fuel price about 50% of the price, of the fuel Delta.

For the year, we anticipate we would get to about 60% of the recovery.

On the hedge side of the house, we have about 8% hedged with collars that protect us up to about 99 -- actually at 99 cents, on 8% of the volume for the balance of the year.

Great.

Thanks very much.

Thank you.

Our next question is coming from [James Valentine] with Morgan Stanley.

Please pose your question.

Good morning.

Good morning, Jim.

Back in the -- at the end of the last service disruption in the second quarter of 1998, there was about $255 million of shipper rebates and reimbursements, and I'm trying to get my hands around that given we're not obviously nearly in as deep a problem this time but I suspect at least I know -- it sound like UPS is being compensated for some of their disruptions, I'm trying to understand how much of the first quarter costs would include these types of costs, and should we expect an identifiable number here later this year, or next year, like we did back after the last service disruption?

Jim, I think the answer there is, if we have a contract that calls for some sort of an arrangement, we will honor that, but beyond that, we intend to put our money into the physical plan of the railroad.

So the first quarter didn't have any of those costs?

Jim, as I mentioned, there is -- in the failure costs that they talked about on the 90 million plus the 30 million court case, minor amount in there, but insignificant.

You won't see a visible item there.

Okay.

Good.

And the second question was, Rob, I'm a little confused on the labor cost and given that it is your biggest cost item I want to try to understand it a little better in that I think you made some reference how the labor cost would run higher in the future but I wasn't sure if you meant absolute terms or you're talking about just the training costs and when you said higher in the future I didn't know off of what base.

Would you give some additional color here please.

Jim what I was referring to was an absolute -- and it is tied almost entirely to additional hiring and training costs.

So just those costs, you expect to continue to go up?

Yeah.

And based on volume, driven primarily by volume and we talked about the increasing attrition rates but it is driven by value volume and volume will dictate the amount of that absolute increase going forward.

Okay.

And if we assume that the first quarter revenue trends continue, to your point that you will need to hire -- obviously as you get growth as well, do we take the 1300 more crew members you plan to hire this year, the net amount, and add that to the year end number from last year, to get the year end this year number?

Or I'm trying to understand, to get a better feel or what the head count will look like at year end.

Jim, we're kind of losing you by the way on your phone here but if I understood your question, the head count number that I referred to at 1300 is a full-year average for '04 based on -- compared to a full-year average in '03, rather than year--end number a and that is also contingent upon volume.

So should I just add that number to the fourth quarter of last year to get to the end of this year.

I'm sorry.

I'm trying to figure out what your head count will be approximately at the end of this year.

If you're looking at a year end number it would be substantially smaller.

Year end to year end would be up maybe 3 to 500.

Okay, so it would be only up 3 to 500 and then for the last question here, on the second quarter Dick I think you said you guys are hiring about 100 employees per week, does that suggest that we should add 1300 more people in the second quarter versus the first quarter or is that a gross number that we need to net some of the attrition out.

Many of those people are already working today in a training status, Jim.

My comment was we would just graduate that many.

Oh, okay.

See it, takes about 14, 15 weeks of on the ground -- well classroom and on the ground training for them.

Many of them are already employed but we're hiring people every day as well that will go into training as the year goes along here.

We are going to graduate over 1300 in the third quarter as well.

Okay.

Good.

Thanks.

It is a gross number, Jim.

Right.

So there will be something -- do you have a ballpark figure for the head count for the second quarter?

Let's see if we can -- no, we don't.

It would be up a little bit, I presume, over the first quarter.

Okay.

Great.

Thanks, guys.

Thank you.

Our next question is coming from [Greg Burns] with J.P. Morgan.

Please pose your question.

Good morning.

Dick, just a question on the recovery plan.

It seems like, you know, you guys spend a lot of time looking at this.

What do you see as the biggest risk.

My memory is going back to the analyst meeting last fall when this issue popped up and it seems like that the volume sort of caught you guys by surprise.

Is the risk that as you alluded to that training resources might be thin, or that volume could just ramp up further than you expect?

I mean obviously we all hope that things go according to plan but what do you see as the big risk factors as you try to get back on track here?

Well, that's a great question.

We know that we have kind of got a cap on how rapidly we can produce trained employees because we're limited by the number of people available to train them.

We know that we've got a locomotive train coming on.

In fact, we've got another 125 locomotives out there that if we need to, new locomotives that we could pull ahead.

And we are going to meter growth.

The thing that is kind of -- I guess if there was an unanticipated event here that took its toll on us in the first quarter, that we had -- that we never plan on, was several bad derailments.

Or you could have floods as well.

We had both in the first quarter.

You know, we knocked out a 285-foot steel bridge, which was a major, major challenge to get that railroad restored and that bridge rebuilt, so that's I think more in the, you know, the kind of unanticipated things that might happen to you, but the controllable things that we can impact, I think we're doing the right stuff.

Okay.

And on the -- someone made a comment that engineers were being redeployed from I guess surplus areas to areas where they're thin.

Are you working with the union on that?

Is that just sort of a temporary stop gag measure; or is that really a small part of the puzzle at this point?

No it is a major piece.

Our labor unions recognize the seriousness of the issue.

They've been working with us closely.

And it can be a real benefit for our customers, and for the railroad until we get enough trained people in place.

And then I guess just switching gears to maybe Rob on the subject of price, you are getting some good price by rail, by historical standards but I guess, you know, assuming that the service issues get resolved, I guess I'm thinking, sort of looking out, we seem to have an unprecedented transportation pricing environment whether you look at the ocean carriers or the truckers or what's going on in air in Asia.

And just curious, you know, can we think outside of the box, and think that maybe rails, including UP, might get, you know, -- participate more aggressively than sort of the 1%, 1-2% target?

Or is that just unrealistic even in the best of both worlds?

Well, we’re going to be aggressive.

As Jim mentioned, the pricing environment is very strong.

And so I mean we -- we hear you.

And we feel real good about the environment going forward.

Great.

Thanks a lot.

Guys.

Thank you.

Our final question is coming from [Donald Broeham] with A.G. Edwards.

Please go ahead with your question.

Yeah, gentlemen my question was about safety.

I look at the incidents, the rise in reportable injuries it looks like you saw 15% change on a year over year basis.

What in particular is driving this?

And where do you expect this to go?

We expect it to improve going forward, I think the major driver this year has been the severe winter weather we had with all the ice and snow, and a number of our trainmen sustained slips and trips, and falls, this winter, compared to last winter, which was much more moderate.

But no, we are -- we do expect, we've got a rigorous safety program, and which everybody here takes a hand in.

I mean all of our men in the field and everyone, and women, and so we will look for improvement.

Great.

Thank you, gentlemen.

Thank you.

At this time, I would like to turn the floor back over to our speakers for any closing remarks.

Well, we just appreciate your interest in our company.

And we would urge you to follow our periodic reports over -- that Jack Koraleski sends out to our customers and the AAR statistics on velocity, and the detention time in our terminals, and we will be back in touch here in a few months.

Thank you much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.