聯合太平洋集團 (UNP) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the Union Pacific third quarter 2007 earnings release conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Jim Young, Chairman and CEO for Union Pacific.

Thank you, Mr.

Young, you may begin.

Good morning, everyone.

Welcome to our third quarter earnings conference call.

With me this morning are Rob Knight, our CFO, Jack Koraleski, our Executive Vice President of Marketing and Sales, and Dennis Duffy, Executive Vice President of Operations.

We are reporting quarterly results today.

Union Pacific's quarterly earnings totaled $2.00 per share, a 30% increase versus last year's earnings of $1.54 per share.

The drivers of our strong third quarter performance came from both sides of the earnings equation, as we set volume and revenue records in the environment of improved operating deficiency.

The third quarter operating revenue totaled a best-ever $4.2 billion.

Union Pacific's franchise diversity allowed us to overcome some economic softness and produce all-time record quarterly carloading.

Five of our six business groups achieved year-over-year carload growth with Energy and Intermodal hitting quarterly records.

Despite a slow start in July as a result of flooding in Kansas, we moved a record 70 million tons of coal to our utility customers in the third quarter.

Operationally, we improved all of our key service metrics, velocity, dwell time, and inventory in the face of record volume.

Driven by our operating initiatives, as well as the capital investments we are making for safety, growth and efficiency, customers benefited from our service enhancement.

Our productivity efforts clearly gained momentum in the quarter helping us increase our labor productivity and freight car utilization, as well as improve our fuel consumption rate.

Volume growth, continued pricing gains and better operational efficiency all came together in the third quarter to produce the best-ever quarterly operating ratio of 76%.

More than a 5-point gain versus last year.

As you will hear from Rob in a minute, our improved safety performance resulted in lower year-over-year casualty expenses, accounting for about 1 point of our ratio improvement.

Although this was a one-time adjustment, we do expect ongoing benefits from our safety gain.

Our earnings also included the one-time negative impact of a state tax law change in Illinois.

As we discussed with you back in July, that adjustment reduced our third-quarter earnings by roughly $0.10 per share.

For the positive, casualty adjustment and negative tax items offset each other for the quarter.

With that, let's turn it over to Jack to talk about our revenue performance and outlook.

Jack.

Thanks, Jim, good morning.

Well despite the soft economy, our volume grew 1% in the third quarter, making it our highest volume quarter ever.

The quarter finished strong as we set a new record for car loadings in any seven-day period several times through the last week of September, with a new benchmark set just over 205,000 cars, which is about 4,000 higher than the old record that we set in June of 2006.

Our average revenue per car was up 5% as our core price improvement of about 6% was partially offset by negative mix.

The combination of volume and average revenue per car resulted in revenue growth of 5% to a best-ever $4 billion.

With the exception of industrial products, where demand was soft, each of our commodity groups had the best third quarter or best-ever record performance.

With the exception of Automotive, each group posted new revenue for car records well, at the same time, our customer satisfaction continued it's year-over-year improvement trend.

Now what I would like to do is take a look at the volume drivers for the quarter, and then we will drive down a little bit more deeply into Ag products, Energy and Intermodal.

As you would expect, the economic softness continues to impact many segments of our business.

The slow economy resulted in an 8% decline in Industrial products and held our Intermodal products flat year-over-year.

New vehicle sales remain sluggish, but growth in auto parts produced an overall 5% increase in our automotive volume.

Ag products grew 2% as strong wheat exports offset declines in feed grains and some food products markets.

Chemicals has been a solid performer all year, up 4% this quarter with plastics and fertilizer leading the way, and continued strong demand for coal and a break from the extreme weather that impacted the supply chain throughout first half of the year enabled energy to grow 3%.

Let's take a closer look at our Ag products business.

Ag posted the largest revenue gain at 2% growth in volume, combined with the 9% improvement in average revenue per car to drive revenue up 12%.

With a plentiful crop and strong demand, wheat shipments were up 17,000 cars, with the largest growth coming in Gulf exports, where we handled record volume.

We expect the wheat market to remain favorable throughout the fourth quarter.

Some of that growth was offset by a decline in feed grains, primarily driven by reduced exports through the Gulf.

Grain products volume declined 4%, as we saw some falloff in volume for sweeteners, oils and gluten as a result of pricing actions that we have taken over the past year, partially offsetting that decline was a 13% growth in ethenol, and a 28% growth in DDG.

Our Food and Beverage volumes were down 5%, as high inventory reduced third quarter import beer shipments, and the harvest for potatoes and onions were delayed.

Energy revenue up 8% ,with volume up 3%, and a 5% increase in average revenue per car.

We mentioned in July that the quarter was off to a slow start in our Energy business, as supply chain issues impacted volume..

You can see however that trains per day grew stronger through the quarter with September's 31.7 Daily average setting a new record, topping the market we set in February of 2005.

On the strength of that improving performance, we set a quarterly record for tonnage out of the Southern Powder River Basin.

Colorado-Utah volumes were up 2% for the quarter.

Cooler weather allowed activities to make up a little ground on their stockpiles in Texas and Oklahoma, and while there are some reports showing stockpiles to be relatively high in parts of the U.S., most of our customers are either where they want to be, or below their targeted stockpile.

So we still have plenty of opportunity to continue moving coal.

With a boost from improved service to the southeast, the growth in our legacy contract business, domestic Intermodal volumes grew slightly, even in the face of a lackluster market and plenty of available truck capacity.

The overall softness in the international market has produced a relatively mild peak season, with volume up about 5% from the second quarter, but only marginally better than last year.

Softness in the LTL market drove a decline in the premium segment, that held overall Intermodal volume flat, but average gains in all three segments resulted in revenue growth of 3%.

We expect volume to continue at about this level as we finish up the year, which should make Intermodal one of our fourth quarter growth drivers, compared to last year's disappointing peak season.

Customer satisfaction set a new third quarter record at 79.

That is 5 points better than last year, keeping us in that 79 to 80 range as customers continue to see service improved, as a result of the many process improvements our operating team has implemented, and the overall strength of our network.

As 2007 draws to a close, we are really not seeing any signs right now of economic improvement, but as we said in the past, one of our real strengths of our franchise is the diversity of our traffic mix, so while demand in Industrial products and Automotive remains soft, expected growth in Energy and Chemicals should offset that weakness.

When you add in the potential of the record corn harvest and the strong quarter in Intermodal, we have got a little upside that could drive as much as a 2% increase year-over-year in the fourth quarter.

Given the economy, we are feeling pretty good about our forth quarter potential, and when you roll our outlook into the full year, we expect overall volume to be down about 1%, making up a little ground from the first half.

With that, I will turn it over to Dennis for the operating report.

Thanks, Jack.

Good morning.

The operating key made continued improvement in the third quarter, particularly in the key areas of safety, service performance, and productivity.

Third quarter safety results continued their improvement trend, through September year-to-date, employee reportables improved 2% versus last year, rail equipment safety improved 15% versus a year ago, and grade crossing incidents are also on the decline, better by 6% versus '06.

Everyone sees our weekly service metrics, and can track our progress, which shows we have improved in each key area.

I will talk about those in just a moment.

We continue to progress our 2007 capital programs.

We are nearing the end of a very intense period of maintenance on our network, which positions us well to make further service improvements, and prepares us for the winter months ahead.

As Jim mentioned earlier, our productivity efforts really gained momentum in the third quarter.

We have reduced our train starts by 5% for on a 1% volume growth.

This improvement highlights the benefits of our various operating initiatives, unified plans, LEAN projects, and filling an income statement mentality throughout the operating department.

Complementing the train start reductions, we are continuing to drive down freight car dwell and system inventory.

We shaved an hour off our dwell time to a third quarter best, 25.2 hours.

This enhanced asset utilization flow is directly to our income statements in the form of lower rent expense, and also lowers car costs for our customers.

We improved freight car productivity, reducing car cycle times by over a half day to 9.8 days, topping the previous mark set in the fourth quarter of '02.

Another area of direct cost savings is our fuel consumption or C rate, consuming 1.22 gallons of diesel per thousand gross ton miles.

Verses last year, this saved us more than 10 million gallons of fuel, or roughly $25 million in the quarter.

Network velocity increased 0.2 of a mile an hour year-over-year, although not the level of improvement we would like to see.

The trend is favorable.

In particular after experiencing slower speeds in July and August, as we dealt with the flooding and maintenance, we rebounded significantly in September, while we set several seven-day car loading records.

Another productivity story can be see seen in our coal network.

As you heard from Jack, we set several new production records out of the southern Powder River Basin during the third quarter, especially with a very strong September close.

We set a single day loading record on September 29th out of the PRB, moving 45 trains out in fact, a joint line production record was with UP and BNSF, averaging 68.7 trains daily.

Beating the previous mark by more than a train and a half per day.

The key factors have been our innovative in-trained wheel repair process in North Platte, and our focus on increasing train lengths jointly with utility customers.

This enables record coal productivity and tonnage in the third quarter, and more to come come the train length area.

The results I just showed you are what we are accomplishing, and I would like to give you a little more feel for how.

Increasing productivity is a constant focus for the operating team.

We take a rigorous approach to improvement that starts as a basic of process initiative, and adherence to our transportation plans.

Our year-to-date train plant compliance measure stands at 94%.

This is improved by 10 points from 2006.

Greater discipline in our train operation translates into better on-time performance, asset utilization, and more reliability for our customers.

Greater management accountability through tools such as our operating income statements, or OIS, are helping our terminal managers understand the cost of idle assets.

Since last October when I first talked to you about OIS, we have rolled it out to every service unit and terminal on our system, now we are taking it into our maintenance shops.

Our managers can see on a real-time basis, their individual unit costs, and the relationship between their management decisions, and the Company's bottom line.

As I mentioned earlier, we are winding down a major portion of our capital maintenance work.

The focus has been in our heavy haul central corridor, across Wyoming and Nebraska to Chicago and St.

Louis, often referred to as our Red X.

40% of UPs gross ton miles move through this corridor, a significant challenge during maintenance season.

One of the most immediate outcomes of the maintenance programs is a reduction in our temporary speed restrictions, or slow orders, which in September ran about 14% better than last year.

On the capacity side, a few enhancements during third quarter include, additional main line in the Powder River Basin joint line, another installment of new signal system across West Texas, to facilitate the Blue Streak performance as Jack mentioned, sidings and yard tracks in Iowa and Minnesota for ethanol growth.

On the Sunset, we cut over 20 miles of double track into service year-to-date, with another 20 by year end.

We have encountered some delay as a result of some permitting issues in Arizona, but remain hopeful those issues can be worked out with minimal delay.

So when you look at the remainder of '07, the network is resilient, well-resourced, and positioned to handle additional volume.

Productivity gains are expected to continue, with several network and local initiatives underway to drive efficiencies and lower unit costs further, and we are finalizing our preparations for winter operations, and incorporating lessons learned from prior years into our contingency plans.

Finally, our total safety culture and zero tolerance strategy are laying the foundation for continued improvement in all areas of safety.

With that, I will turn it over to Rob for the financials.

Thanks, Dennis and good morning.

Let me start with a summary of our income statement.

Operating revenue grew 5% in the third quarter to nearly $4.2 billion.

Operating expenses actually declined 1% in the quarter, driving a 34% increase in operating income.

This is a new milestone for Union Pacific, earning more than $1 billion in operating income for the quarter.

An intense focus on productivity and cost control throughout the organization, allowed us to convert solid top-line revenue growth into record earnings.

As I walk you through the individual expense line, I will detail a couple of areas that include some favorable results that were largely one-time in nature.

Setting those items aside, this was a great quarter for our Company.

We still have more work ahead to meet our return targets, but we are clearly making progress.

Let's look closer at the top-line and third quarter commodity revenue.

We achieved 5% growth off of last year to nearly $4 billion, record carloadings up almost 1% year-over-year, and yield improvements drove the increase.

Average revenue per car increased 5%, with growth in all six business groups.

We continue to achieve solid core pricing gains, up about 6% in the quarter, through contract renewals and spot business.

Offsetting some of that growth is the timing of fuel surcharge recoveries and business mix.

For fuel, you will recall, last year diesel fuel prices peaked in August, declining through the rest of the year, while this year we have seen a steady rise in fuel prices since June.

On the mix side, we had a couple of negative drivers in the quarter.

First, the combination of record coal carloads, which have a lower average ARC, with an 8% decline in industrial products volume, which has above average ARC, resulted in a negative quarterly mix.

The other factor, as Jack mentioned, was the strong volume growth in business moving under some of our legacy contracts.

Turning now to the individual expense line, we have salaries and benefits down 4% in the quarter to $1.1 billion.

Improved labor productivity was a key driver in UP's third quarter results, as we move 1% volume year-over-year, with 2% decline in our workforce level.

Wage inflation was more than offset by lower train crew expenses associated with fewer crew starts, and lower costs per crew.

Less year-over-year hiring and training costs, and favorable one-time adjustments associated with the structure of the recent labor contract ratification, and our long-term disability plan, also contributed to lower quarterly costs.

Looking ahead, we would expect continued benefits from our productivity gains.

Year-over-year, that should translate into roughly a 3% decrease in fourth quarter salaries and benefit expense.

Third quarter fuel and utilities expense declined $19 million, or 2%, to $802 million.

Although our quarterly diesel fuel price increased $0.02 per gallon year-over-year, we consumed 12 million fewer gallons of diesel.

Lower year-over-year gross ton miles, and a significantly improved fuel consumption rate drove the decline.

Looking out to the fourth quarter, we will likely experience significant cost headwinds from higher diesel prices.

You might recall that in late 2006, fuel prices actually declined.

In fact, last year's fourth quarter average diesel fuel price was only $1.94 per gallon.

Today, we are paying close to $2.47 per gallon, with very little expectations for relief through the end of the year, although we continue to add fuel surcharge provisions as our contracts are repriced, we are not yet offsetting 100% of the higher fuel prices.

Equipment and other rents is another good news productivity story, down $15 million year-over-year, a 4% improvement.

Lower freight car inventory and faster car cycle times helped drive year-over-year declines in car hire payments and freight car lease expense, which totaled about $16 million.

Rents expense also benefited from an $8 million one-time cost reduction, related to our fleet vehicle leases.

This savings is a direct result of our ongoing efforts to critically review each of our organizational activities and related expenses.

Partially offsetting these savings was a higher year-over-year locomotive lease expense of $9 million.

Let me wrap up the expense discussion with a look at purchased services and other, up 4% in the quarter to $404 million.

As you will recall, last year this category had $40 million of favorable items, a $23 million insurance settlement, and a $17 million casualty expense reduction resulting from an actuarial study.

This year, as Jim mentioned, a new study resulted in a $47 million casualty expense reduction, although both the 2006 and 2007 reductions were one-time in nature, they are the direct outcome of our continued emphasis on safety, as well as our improved safety performance.

Year-over-year, the one-timers net to a $7 million expense decrease.

That decline was entirely offset by expense increases related to contract and consulting fees, crew transportation lodging costs, as well as higher insurance costs.

For the fourth quarter, our ongoing safety improvement should continue to result in lower casualty costs, but other cost inflations will likely drive increases of roughly 3% or so.

Let's turn now to our operating ratio, which we are reporting at 76% for the quarter.

We converted record operating revenue and solid productivity into more than 4 points of improvement in our quarterly operating ratio.

If you factor in the impact of the $47 million casualty expense reduction, and a couple of other one-time items, the third quarter operating ratio could have been 1.5 points or so higher.

Regardless of how you view it, our continued efforts to drive productivity throughout the organization gained traction in the quarter, resulting in a best-ever quarterly operating ratio.

Looking at the full income statement, other income was up $3 million in the quarter to $25 million.

For the first nine months of the year, Other income totaled $76 million.

So we will likely finish the year close to the $100 million mark.

Third quarter interest expense increased $5 million to 124 million, as a result of higher year-over-year debt levels.

Higher pretax income and the impact of the new Illinois tax legislation, resulted in third quarter income tax expense of $374 million, a 59% increase.

Consistent with our July guidance, the Illinois tax law change added 27 million to the expense line for an effective quarterly tax rate of 41.3%.

For the full-year, our effective tax rate should be just over 38%.

Third quarter net income totaled a best-ever, $532 million, or $2.00 per share, a 30% increase over last year's $1.54 per share.

Although our earnings were impacted by both the casualty reduction and the tax law change, each basically cancelled out the other, leaving quarterly earnings at about $2.00 per share.

Our relentless focus on improvement across all facets of our business really came together in the quarter to produce tremendous results.

One way we are distributing our record earnings to shareholders is through our stock repurchase program.

In the third quarter, we purchased 4.5 million shares of UP common stock at an average purchase price of $115.93 per share.

In total, we have completed 50% of our 20 million share program, returning nearly $1.2 billion to our shareholders so far in 2007.

Dennis walked you through some of the progress we have made with our 2007 capital program.

Let me update you on how that work translates back to the original plan.

The 2007 capital budget totaled $3.2 billion all in.

That included $2.7 billion in cash capital, and an additional $500 million for equipment lease financing.

With only a couple of months left in the year, our cash spend could be about $100 million or so less, for a total capital of roughly $3.1 billion.

Weather issues in the early part of the year, and as Dennis mentioned, permitting delays in Arizona, have slowed some of our capacity projects.

We would expect to finish the year strong with fourth quarter earnings in the range of $1.90 to $2.00 per share, or 7 to 12% above last year's fourth quarter of $1.78 per share.

Key quarterly drivers will be our carload volume, diesel fuel prices, and our continued productivity gains.

Higher costs associated with rapidly spiking diesel fuel prices could add 2.5 points to our quarterly operating ratio.

And if prices stay at today's high levels, or even go up, the impact could be greater.

As you know, we still don't have 100% recovery for higher fuel prices, and our fuel surcharge programs generally have about a two-month lag.

Offsetting the fuel headwind should be another quarter of strong operating income gain, similar to our third-quarter run rate, we would expect fourth quarter operating revenue growth, and productivity gains to drive 3-plus points of year-over-year improvement in our operating ratio.

Of course, generally speaking, the operating ratio trends higher sequentially from the third to the fourth quarters.

So all in, our fourth quarter operating ratio should be in the range of 78.5 to 79%.

UP has gained momentum throughout 2007, driving strong full-year results despite a challenging volume environment.

For the year, our carloads will be down about 1% compared with 2006.

As you will recall, we started out the year looking for volume growth in the 2 to 3% range.

Weather disruptions in our coal network, and a softer-than-expected economy, resulted in a 3 percentage carload decrease in the first six months of the year.

And although we are seeing stronger volumes in the second half of 2007, it won't likely be enough to completely offset the decline.

Despite negative carloads, our continued focus on price improvements should drive roughly 5% growth in operating revenue.

Our full-year operating ratio should be roughly 79%, 2.5 points better than 2006.

This improvement reflects our ongoing efforts to drive profitable top-line growth, as well as our ability to drive efficiency throughout the organization.

These results will translate into 2007 earnings of about $7.00 per share, or roughly 18% over the $5.91 per share we reported in 2006.

This is above our original forecast of 10 to 15% growth.

So even in an environment where the volumes have been less than planned, we are outperforming our earnings expectations.

So let me turn it back over to Jim for some closing comments.

Thanks, Rob.

Before I open it up for questions, I would like to spend a couple of minutes here talking about what we see ahead.

On the revenue side, we expect to continue our positive pricing trend, as a result of our legacy contract renewal.

We are also looking to expand our price potential through premium service offerings, such as our new Intermodal service with the Norfolk Southern, which allows us access to new markets through strong pricing opportunity.

Looking at the economy, we are not expecting much change from what we have experienced the first nine months of the year.

Ongoing declines in the housing market will continue to impact our industrial products business.

UP's franchise diversity should help mitigate that volume loss, as demand for coal, corn, wheat, and fertilizer remains strong.

On the cost side, we are facing a significant challenge in the fourth quarter from higher fuel prices.

As Rob just laid out to you, it could add more than 2 points to our operating ratio.

Beyond fuel, we will continue to focus on providing customers with consistent reliable service, as we increase our operating efficiency.

Overall, we look to finish 2007 the strong fourth quarter, building on the momentum we have gained throughout the year.

With that, we have got some time to take a few questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from the line of William Greene with Morgan Stanley.

Please go ahead with your question.

Yes, I am wondering if you can just give us an update on how much hasn't repriced since '04, of you will?

Overall by the end of this year, it will be a little bit under 30%.

27% has not been touched yet.

Okay.

And when you look at what is sort of going on in the volumes in your lines, is there something specific?

Is there new facilities that have opened up?

Why do you think you are sort of outperforming the industry so much more?

Well, I think our diversity mix in terms of the book of business is a key part.

You look at our Automotive business, volume was up 4%.

Our Chemicals business was up in the quarter.

We are also, quite honestly, getting some business back off the highway, when you look at what is happening with our service.

So I think there are some combinations of factors there that really contributed, but I would look at the franchise diversity as the key.

Okay.

And on employees, how low can they go?

We think of a GTM for employees, or whatever metric you want to think of in productivity, those seem to be the way to go versus VN, so how should we think about how much more that can go?

Can you actually obtain them, or is the mix of business not going to allow you to get there?

I think you need to be a little careful with the comparison of VN, because of the mix of business.

We have the largest manifest franchise, which requires much higher levels of employees out here.

We have a lot of opportunity.

You know, my view of the third quarter is we were really starting to see a lot of our initiatives kick in.

We are going to continue to focus on the efficiency here, but I think there is a bit of upside in terms of efficiency.

All right, last question, the 100 million in lower CapEx for '07, does that just shift to '08 ?

We are taking a look at '08.

Clearly if, you know, the Sunset corridor is one of the big drivers out here, and as Dennis mentioned, we are a little bit behind here in Arizona, and our intent is to still get that Sunset corridor double tracked here by 2010, so it could shift.

We are taking a hard look at our overall capital spend for 2008.

Thanks for your help.

Thank you, the next question is from Jason Seidl with Credit Suisse.

Please go ahead with your question.

Morning, everyone.

Good morning.

A couple of quick questions.

You talked a little bit obviously about the sluggish volume, and you guys have done a very good job on a lot of your operating metrics.

If you had to split it out, how much is coming from the unified plan, and how much is just letting you catch up with sluggish volumes?

Duff, you want to take a shot at that one?

I would say the majority of the side is process improvement from the unified plan, and also some of the other areas of productivity that we have been pushing real hard through, actually for the last few quarters.

There is no doubt, you know, that we set record volumes in the third quarter, so it really, volume did not give us a lot of breadth in terms of allowing us to improve.

So the majority of what you saw was process driven.

Okay, that is what I figured.

Also, can I just clarify something that was said.

You guys put up charts for the improvement in terminal dwell of freight cars, and velocity, but you mentioned that you had some increase in crew lodging costs.

What happened to recrew rates in the quarter?

Our overall crew rates were about the same as a year ago.

If you look at the numbers and a big piece of this, as Dennis mentioned, is the challenge we have with our maintenance program.

When you are running these programs out here on the Red X, which is our high-density piece of the railroad, we didn't do as well as we expected in terms of debt fluidity there.

To me, though, Jason, that is the opportunity we have going forward here.

While we had a good quarter productivity-wise, there is no question in my mind we have substantial opportunity in front of us.

Okay, and my last one before I let someone else have at it here, the Ag harvest coming up here looks like a good one.

When should we start seeing some of that really start to hit the network, and how long do you expect it to last?

Jack.

We are starting to see it pick up now, and I think it is going to last, we think wheat will last continued through the end of the fourth quarter, and we think that we are going to see this go in at least into the first quarter of 2009.

Okay, fantastic, guys.

Thank you.

The next question is from John Larkin with Stifel Nicolaus.

Please go ahead with your question.

Good morning, gentlemen.

Good morning, John.

You mentioned that the average delay on the fuel surcharge was two months.

Do you have any flexibility to perhaps tighten that down a little bit, given the volatility in fuel prices?

You know, John, we have spent a lot of time working with our customers on the fuel surcharge mechanism.

Remember, it works both ways.

Fuel is going up, you have the delay, when fuel is going down, you have the delay.

I think right now we need to kind of stabilize what is happening in the fuel surcharge methodology out there for our customer base.

So you are happy to leave it where it is?

Well again, if you have a continual, if you think fuel is going to continually go up, then we are always going to be behind about two months.

At some point here, I think it probably, it will come back down a little bit.

Again we are trying to make certain with our customers, even when we change over to the mileage base which covers about, I think 15, 18% of our business, it is a burden on our customers.

Any changes you make.

So again, I think it is important for us to keep it stable and see what happens with fuel going forward.

Okay.

Another question on the operational improvement during the quarter.

I think I heard someone mention that there were 5% fewer train starts on the 1% volume growth.

How did you accomplish that?

Do you think you have more or less played out the potential, in terms of reducing train starts?

Is there still more opportunity there?

Duff.

Let me answer your second question first, John.

Absolutely it is not played out.

We continue to see opportunities for improvement in our productivity initiatives in the areas of train length and tons per train, and the way we did that principally is through the unified plan, #1, and then a very strong focus on train length.

We achieved a 6% increase in train length q-over-q, and we still see upside in that in all commodity areas.

The Intermodal side, the [Bolt] side and the Manifest side, and Auto, as far as that goes.

We like where we are, so we also see a huge upside there.

This was a total conversion to unit trains, it applied to the manifest trains as well?

Absolutely not.

It was across the board.

Every type of train we run we extended the length on those, and the tons per train.

Okay.

With the softness in Intermodal that we have seen here, which has been surprising to people over the last two or three quarters, is there any thought to perhaps rethinking the capital allocation away from the Sunset corridor, perhaps to other projects, where the growth might look more attractive here over the next few years?

The Sunset corridor, while Intermodal is the prime driver, all of our businesses move on that corridor, I think you have to step back and look at strategically where is the Intermodal business going in this country.

When we look at it, well you can debate short-term some of the softness issues we have right now, we think double tracking that Sunset corridor in the four-year timeline still makes sense.

Very good.

Thanks for your help.

Okay.

The next question is from Scott Flower with Banc of America Securities.

Please go ahead with your question.

Good morning all.

Hi, Scott.

A couple of questions, one is that Dennis mentioned, and maybe this is just more of the same that, obviously going forward, more focus on network and local initiatives, and I am assuming are those just more fine tunings of process improvement and some of the efforts in the terminals and the unify plan, or are there some other more tactical things you are doing, maybe if you could elaborate a bit?

Well, there are, and I think Rob mentioned to you that we looking at every aspect of the Company, but the focus will be on what we have laid in, Scott, for our operating initiatives with the unified plan, and all of those related initiatives.

There is huge opportunity in our train productivity.

We are looking at all of our car programs and the areas there.

Areas in the locomotive shops, I mentioned to you putting OIS into our locomotive shops, and into our system gangs on the engineering side, looking at industrial engineering, how we have our gang set up, what kind of productivity we are getting there.

Not only productivity, but the throughput around them.

As Jim mentioned, and has already been alluded to, our crew costs suffered as a result of some that of that.

We think there are upside opportunities there.

In every aspect we have got, the train productivity, cars, locomotive, engineering side, we have both Lean and productivity initiatives on-going now.

So it is going to be across the board.

We like our upside on the productivity side.

Okay, and Rob, I think you mentioned briefly and obviously you talked about the macro drivers on labor productivity, and just what is going on, obviously a lot of things, Dennis, but you talked about some one-off catch-ups, and I just wonder if can you give us a sense of order of magnitude.

I think there were a couple of items.

Give us a sense of what those bracket into, in terms of size of dollars?

Scott when you look at the overall, when you add it all up, if you look at the run rate I gave you for the fourth quarter on salaries and benefits being improved, up about 3% versus the 4% that we saw in the fourth quarter, I think that catches, that is probably the right way to look at it.

I mean this is down, something like 4%.

So you are saying the delta was up 3% and down 4% is the magnitude?

It is about a percent.

About 1%.

All right, got it.

Yes.

And then just last area, if it is on, to get a sense on, where are you on fuel surcharge coverage, in terms of total, I know it is sort of a combination of fuel surcharge and RCAF, but also where are we on a percentage of that?

Overall, again, the average is about 90% or so but what you will see in the fourth quarter because of the sharp spike in fuel, that will fall, and the fact of the matter is I don't have fuel surcharge in, still on many of our legacy contracts.

No, no, I understand the recovery percentage and I know that would drop, I just meant on the percentage of contracts, actually, as opposed to the effectiveness.

I don't know if that is 90% as well.

On contracts?

Yes, yes, the total percentage actually covered versus--

That is probably about right.

Still roughly about 90%?

Yes.

Actually related to that, when I think about mix, how negative was that in the third quarter?

A percent or two off of revenue?

Rob, I don't --

That could be Jack, too.

I think it was a good 1%, 1.5% kind of a number, Scott.

When you look at it, the shift between energy and industrial products was the big one for us, and then even within some of our commodities, for instance, we had nice improvement in some shorter haul pot ash fertilizer that impacted our chemical business, and then we have also seen our sit track on plastics, you know, the initial move into sit increase in the quarter.

Those are all things that took a toll on productivity.

Also the growth in the legacy business, I am assuming in Intermodal obviously--

You got it.

Okay, thanks very much.

Next question is from Tom Wadewitz with JPMorgan.

Please state your question.

Good morning.

Congratulations on the good quarter and the strong productivity.

When you look at 2008, help us think about, you know, what the potential is for the further margin improvement.

It seems like you built a lot of momentum this year, and a lot of that should continue next year, is it reasonable to that if you have modest volume growth, you have got the continued legacy opportunity, that this kind of trend we have seen can continue through next year, and we could extrapolate the margin improvement?

How should we think about that progression, and potentially margin performance next year?

Well, Tom, I think we have got very good opportunity, that legacy contracts that are out here, productivity, again should be a big piece next year, and I am not going to give you the numbers, so to speak.

But I think we have got very good opportunity for margin improvement next year.

Do you think that the impact of productivity on the margin, that opportunity is just as great in '08 as the opportunity you realized in '07?

Maybe not quite as significant as in '07, although I will tell you the first part of the year we were battling some external issues, in terms of weather and problems up in the coal mines, but we have got a good opportunity.

Okay.

When you look at capacity of the network, and let's say we get to midyear or something, the volumes really start picking up, do you think that the capacity you have added to the infrastructure will be sufficient, that even in the stronger volume environment, you continue to realize productivity?

How would you look at that when, you know, let's say the volumes pick up at some point next year?

Tom, one of the things we are doing, you know, in many cases, it is easy to cut costs, and there are a lot of examples around where you cut costs too far, and it costs you on the uptick.

We are taking a very strong focus that making certain what we are doing on the productivity piece is sustainable, but also doesn't jeopardize your ability, in terms of dealing with surges.

When we look at our hiring, our locomotive programs, our capacity, we need to continue to build search capacity in here.

You get a kick up in the economy in the second half of the year, I think we are going to be very well-positioned to handle it.

I have got today about 250 locomotives in storage, we have got 17,000 freight cars in storage.

I have got surplus train crews, and again, and then the capacity reporting in on the network also helps.

I think we will be in a good position to handle a jump in business.

Okay.

Great.

And the last question for you, is just your perspective on the activity going in D.C.

You know, what if some of the safety bills get implemented, if you think there is a meaningful potential headwind on your labor productivity, and then perhaps how the industry might respond if, you know, some of the draconian measures within say HR 2125, the competition bill, if that actually built momentum.

Do you think the industry would preemptively cut CapEx, or how do you think the industry might respond to some of the legislative issues in D.C.?

Tom, any new regulation is not going to be a positive for us.

That is pretty obvious.

We have a long ways to go, in terms of opportunity, when you look at some of the proposals out here.

What I have said consistently and again, these are long-term changes that will impact industry, we will size the capital according to the returns.

What is interesting, if you listen to the industry associations testifying for reregulation, the members of Congress that testified for added regulation, there is a common thing with every one of them.

They all said they need to put more business in the railroads.

There is a little bit of a disconnect in my mind when you think about some of these proposals, and what our customers want going forward, and again, if the returns aren't there or there is a cap, I will size our capital accordingly.

On the safety bill, do you think there is potentially a meaningful productivity impact from that or not?

We will have to sort through it.

You have the House version passed, I believe yesterday.

You still have a Senate version that is much different.

We will see what comes out of the Committees here.

There will be some hit ,depending on how you look at it.

What we need to is sit down and take a look at how we mitigate that impact.

Okay, great.

Thanks for the time, and nice quarter!

Thank you, the next question is from Ken Hoexter with Merrill Lynch.

Please go ahead with your question.

Sure, good morning and again congratulations on a solid result!

If we can dig into that a little bit.

Can you talk about the trend of employees coming down about 1.5 points.

Can you talk about what areas you are seeing the employees, you know, obviously as productivity improves, can you talk about where you are seeing that benefit slow through?

You are, really across the board in the 10 or 11 different categories we have, the majority were lower than a year ago, train and engine crew is probably the biggest piece when you look at it, which reflects your productivity, as Dennis was talking about, on our train size initiatives.

But back office force counts have improved.

So it really was pretty consistent across the board.

Is there a cost associated with that, or is that just not replacing early retirements?

You know, Ken, this is a different world than where we were six or seven years ago, and I am losing 3,500 to 4,000 employees a year through attrition.

That is why our focus on productivity is so important.

My tent here is that we are not going to backfill all those jobs.

What we will do is hire for growth, but we need to have productivity initiatives in place here, so that I don't have to replace all of that attrition.

How do you look at this, Jim, in looking at what happened in 2003, when volumes in the fourth quarter ramped up, and perhaps you cut a little bit too much?

How do you prepare for that return?

Can you handle that with these fewer employees?

Ken, that is what I was mentioning earlier.

That in all of our models where we are looking at resource requirements, we are factoring in surge capacity.

In other words, what happens if you get a jump of volume of 2, 3, or 4%.

What kind of surge capacity do you have in place, and we are building that into our resource planning.

Plus, you have, we are getting capacity put in the railroads, in terms of just basic infrastructure.

Okay.

And then coming over to the Sunset, can you talk about how many miles are now, you said you added 20, and 20 more you are looking to do in the quarter.

Can you talk about what is the total length of that, and what do you still have left to do, and these permitting delays, can you define what is going on with the delay, and what kind of extension you think that might have?

Yes.

We will be about 55% done, about 780 miles from L.A.

to West Colton.

We will have over half of that done, and the permitting days delays are principally from two sources.

One is the drainage permits that we have to work with with the various counties across Arizona, as well as the crossings in the double track territories, particularly across Arizona.

I must tell you we are not standing still waiting for that.

We have other areas that we can go in and get a very attractive rate of return there, particularly in the state of California, and we are aggressively pursuing those, and so at this time, as Jim said, we are not adjusting our end target here at all.

We are going to put our focus in other areas, and we have talked about also along the way, raising the competency and capacity of our terminals, so that we don't create constraints in other areas of that corridor.

So we are pursuing those, too.

So we are not backing off of our date to be done by the end of 2010 now with the double track.

Great.

My last one is just on the yield side.

You mentioned 6 to 7%, I think it was 6% pure pricing, if we normalize for the mix.

I forget if you have you mentioned this, what is your target for '08?

I have not at this point.

Would you expect that to come off in any significant way?

Can you look at the amount of contracts that are coming due, and see if it was similar to the same amount that was due in this year?

We have got a long ways to go in terms of many of our businesses, and getting them to a minimum target of return, so we have to continue to be very aggressive in our pricing if we are going to justify the kind of capital we are talking about putting in.

When you talk about minimum returns, are you talking on a replacement basis, or on a book value basis?

I think they are both related.

We look internally at replacement costs, we are looking at how we approach the business segment, in terms of the cost numbers.

Great, thanks for the time, gentlemen.

Next question is from John Barnes with BB&T Capital Markets.

Please state your question.

Hey, good morning, guys.

Jim, I just wanted some clarification here on your discussion about the employee hiring on a go-forward basis, and a question about, you know, you were kind of unable to meet demand when it surged last time, and I think you guys admitted that you had been a little harsh on the head count cuts that you had made in not replacing employees, do you see the total number of employees firm-wide continuing to decline, and if so, how much more do you think you have there, and as you look at the various buckets of employees, should we anticipate that your train crews are going to be kind of flat with where they are now, in order to meet the surge, and the reductions are coming out on all of the other buckets, or do you anticipate a new decline in the number of train crews as well?

You know, John, it really is a function of what you believe is going to happen with volume going forward here.

We handled the record volume in September when you look at it, came through with good productivity.

At the end of the day, I would like to hire more train crews because my business has grown.

That is the model you want to see, and then drive your efficiency here long-term, so I don't, I know I am dancing around that answer here, but really it is a function of what you think will happen with volume going forward here.

Okay.

We have again, we have substantial opportunity in front of us.

Okay.

All right.

In terms of, you know, one of the few rails thus far that has been able to kind of hold the lid on costs.

You know the industry had been relying on pricing to really drive the operating ratio performance here in the last couple of years, I am not saying they are doing a poor job on costs, but there has been a lot of banter about hey, they could be doing even better if they could hold the line on costs.

I mean you put up a phenomenal cost management results in the third quarter.

As you look out over the next couple of years, have you set a target in terms of non-fuel-related costs.

I will give you a wash on fuels.

That is not really something you can control, but the controllable discretionary costs.

Do you have a firm target in mind in terms of yearly growth of those costs?

You know, John, we do have targets we are setting.

As you know, looking backwards here, we put a lot of resource in our business here back in 2003 just to get the business running the right way.

We have a lot of opportunity going forward here.

I have said overall, you know, our productivity numbers, you know, 3-plus percent is not unreasonable, in terms of what you use, but we are going to be very aggressive on it.

I will also tell you with fuel, we have opportunities in fuel.

But what Dennis had shown in terms of consumption rate, I think we have got an opportunity there to continue and improve the efficiency on the consumption rate side.

Okay.

Is there anything else financial that you can do on fuel or, you know, at this juncture, you know, it doesn't pay to be hedged or anything at these levels, and it is really going to be through consumption, you know, gains or fuel recovery through surcharges?

I have got two forecasts from the the experts.

One said next year it's $100 a barrel, and the other one is said it is $70.

You know what we need to do is to take fuel off the table, in terms of the fuel surcharge.

Our customers, obviously don't like a fuel surcharge when it is going up, but again, they can get the benefit as it's going down here, so what we are trying to do is make fuel somewhat neutral in the financials going forward here.

Okay, and lastly, I mean, given some of the criticism of the industry on the overcharging with the surcharge, now that we are back in a significantly rising fuel price environment, are you feeling any pressure to moderate your stance on fuel versus, and especially given some of the issues with the reregulation discussion, or do you have a pretty firm stance in terms of hey, we just can't be exposed to fuel and everybody is going to have to share the pain here.

You know, John, the comment that we stole $6.4 billion of fuel really to me was a personal attack on our company here.

I would leave it at this.

The railroad industry is the only industry whose numbers were audited every year on the fuel surcharge when you look at it.

I know exactly what was involved when we put those in place working with our customers, and the facts are for UP when you look at the run-up in fuel, we didn't recover in excess of a billion dollars in higher fuel costs.

We have to stay at the fuel surcharge issue, or at the end of the day, we are not going to get the returns we need here to justify the capital we are looking at.

All right.

Gentlemen, thanks for your time.

Okay, John.

The next question is from Ed Wolfe with Bear Stearns.

Please state your question.

Hey, good morning.

Full time employees down 2.4%.

How do we think about that going forward?

Ed, we lost you for a minute.

Would you repeat?

Yes, the FTE is down 2.4% year-over-year.

How do we think of that going forward?

I know you are getting more productive.

But when we go to fourth quarter, is that a fair run rate?

Yes, that is a fair run rate for fourth quarter.

Okay, can we a talk a little bit more about yields.

Obviously there is some mix benefit.

But if I just look at what happened sequentially year-over-year and second quarter '07, your mix adjusted up 6.5, in this quarter, 4.4.

How much of that is fuel?

Well, I will let Jack tell you.

But the mix impact was negative, not positive.

I think you said positive.

I'm sorry.

I meant negative.

Yes, Jack.

You know, I am trying to follow your question, Ed, on how much was fuel.

I am just trying to understand why the yield is depressed that much.

I wouldn't think the mix would change that much from one quarter to the next.

Yes, actually our mix did change pretty substantially.

If you look in our second quarter, for instance, our energy business was down somewhere in the neighborhood of 25,000 to 30,000 cars.

This time around in the third quarter, it was up 15,000 cars, and you lay that against the industrial products shortfall.

That is a pretty big component.

As the peak season such as it is has increased, and Scott mentioned this before, we are seeing some fairly substantial growth in our legacy contract in our Intermodal business, and that is mixing us down.

In each of our businesses, you can kind of go through and you find places where mix has taken its toll here, and it is very different for us in the third quarter than it was in the second.

Okay, can you talk to pricing in Intermodal, domestic and international right now, just pure price on the Intermodal kind of thing?

Third quarter, pure price on the intermodal, our international business, and this would include both legacy and non-legacy was up about 4%.

The domestic business was up about 2%.

And without the legacy?

Can you give an idea of that?

No, I don't.

Okay.

In terms of the legacy contracts, obviously you have the most potential.

Jim, what is your sense.

It is also a lot of contracts that are potential out there that you can lose at some point.

Is the goal to as a bias, remain very firm on the pricing, or how do you imbalance keeping the business versus keeping the pricing?

Ed, I have said it consistently, and in fact we have lost a couple of big contracts here, that if we can't get the return, we won't handle the business.

You know, we have such a long ways to go here, in terms of what I would say even getting to kind of minimal returns.

And we have got to be very firm on our pricing.

When you look at those 27% of the business that is coming up, how much of it do you think is really competitive, or how much of it lends itself to yourself where you are pretty comfortable with it?

You know --

Is at risk, is what I am saying.

The majority of this is competitive.

Obviously everything is competitive.

But what is weak spot, versus not so much--

Well, --

If you looked at that 27%, how much of it would you expect to keep, is it 80%?

50%?

Is it directionally?

You know, Ed, I really haven't, if you look at the big opportunities, they are Intermodal and Coal.

Yes.

And autos.

I am assuming, the way we approach this, that unless we get the return we need, we will lose the business, and that is the way we are taking a look at it.

Because we have got such a long ways to go on some of these deals here.

I am losing money right now on these contracts with every carload I handle.

There is a substantial way we need to go here to get to the returns.

Okay, thank you.

I think it was Rob said that there was a slight benefit from a ratification of some of the labor contracts.

How did that play out, and what are you referring to?

That was in, you know, the timing of some of the labor agreements that we finalized, and the way to look at that, is we were 4% better on the salary wage line, and in the fourth quarter it should look more like a 3%.

You add it all up, that helps to contribute towards the 1%, you know, a good guy in the labor line.

Okay, is there a dollar benefit in that?

You know, I don't have that.

Okay.

Just one last kind of big picture question, Jim, CP and their purchase of DM&E.

If they do, assuming they do try to build out, is there a potential positive in there somewhere for UP?

Well, Ed I'm not, we're--

I mean could you partner with some of that theoretically over time?

You know, Ed, I think it is premature for me to comment on where they are going.

I have said consistently, we will compete for the business of the Powder River Basin, and and let's just leave it at that.

Okay, I appreciate it.

Thanks for the tim everybody.

Okay Ed.

The next question is from Randy Cousins from BMO Capital Markets.

Please go ahead with your question.

Morning, everyone.

I guess I will start with Rob, I guess it is slide 27.

You bought back 4.5 million shares.

Can you give us a suggestion about how we should think about modeling the share buyback on a go-forward basis?

You know, Randy, I can't.

We are going to continue the program.

You know it's a is 3-year authorization, and we are about halfway through it, but I can't give but specifics, in terms of how the model went.

Can you give me some, you have gone from 2.1 to 3.6 to 4.5.

How do you philosophically come at it in, at each quarter?

Is it a function of where the share price is, or do you allocate a certain amount of capital.

How do you think about how much you are buying in a particular quarter?

Randy, the way we look at it is the share price is clearly a factor, and the cash that we are generating from operations.

We balance that.

Okay.

On the tax rate, you know, it bounced around a little bit quarter-to-quarter, you know, with the Illinois change.

Should we be using a different sort of baseline modeling number for '08, or are we still sort of in the 38 to 39% range?

Still in that 38, 39.

Okay.

And the last one for you, Rob, on slide 21, you talk about a lower hiring and training costs.

Is there an issue, I guess on that particular point, is the Q3 reflective of a run rate on hiring and training costs, or was it unusually low?

It depends on what volume does going forward.

It was lower than it had been in previous quarters.

Hey, Randy, as part of that, as you recall, we were catching up over time here, and we are in good shape right now.

We have slowed down our hiring in terms of what we are doing here.

As Rob said, again, it is function of what you think volume will be going forward.

But in terms of sort of a swing variable, as we look forward to Q4 into 2008, whatever was imbedded in Q3 without a big upswing in volume, that would be descent no-show run rate to think about.

On that component, Randy, yes.

That is a fair look.

I guess for Jack, with reference to, and I guess it was slide 8.

On the Intermodal side of the equation, I was remembering in the second quarter you guys talked about, I think it was an Intermodal train with 550 boxes on it.

Could you comment on your ability to continue to take market share?

I am thinking about L.A./Long Beach, as a case in point.

8 million boxes going into that port.

Volumes have been weak the last couple of years, but there seems to be a desperate need or drive to get trucks off the road in the L.A.

area, and given where prices of fuel have gone, I would have thought that there was a huge opportunity for the railroad to take business from the truckers.

You know the answer is yes and no.

Last year the trucking industry took on about 2.5 years worth of capacity, to get ahead of some of the stiffer environmental regulations that took effect in 2007.

You kind of have at this point in time, a somewhat large available fleet of trucks that are pretty competitive out there from a price perspective, in terms of turning their assets to pay for the new rigs.

From our perspective, our business in and out of Los Angeles, we have some great opportunities.

Denny talked about the things we are doing to build train size, we are doing a great job of actually expanding the size of our Intermodal trains, and as you know that is a slot on the network.

So the most can you get out of every on of those train slots is a real opportunity from a productivity perspective for us, and we are continuing down that path.

We have got some ideas in terms of DPU on Intermodal to expand the train size, so our goal would be to continue to increase volume, and at the same time not bring on incremental train starts, unless we absolutely have to.

So I guess the question comes, you know, I wonder whether you guys are just being conservative in sort of your outlook for Intermodal, or is it really just a case of so much trucking capacity out, your ability to take market share just is not there?

You know when I look at it right now, when I look at my Intermodal business and assess it where I was, I am saying that about 50% of my issue is really just a softer economy, and that is going to come back.

There is probably about another 30% out there, that is kind of this structural shift, where some of the Intermodal companies have made some moves to Savannah and Norfolk on the east side, and going through the canal, and then there is about a 20% piece of it that is kind of competitive, and that competitive piece to me is more on the highway situation, with the available truck capacity that is out there today.

Okay, great.

Final question, with reference to the agricultural business, the outlook looks great.

The big export volumes out of the Gulf.

I wonder if you could comment on whether it is shipping rates that are influencing the Gulf rate, i.e., waterborne shipping rates, or do you see a situation where the Gulf is going to continue to see growth, say relative to the P&W?

You know, if you look at what happened to us, we did lose some market share to the Gulf, particularly in feed grain.

They had a great season for river navigation.

The rates were very sharp, and they were able to handle a lot of volume, because it was plentiful.

That did impact us to some extent on the feed grains business, but we continue to think the Gulf market is going to be a great market for us, and it will be very competitive with P&W.

Okay, great.

Thank you.

Thanks.

The next question is from Gary Chase with Lehman Brothers.

Morning, guys.

Morning, Gary.

I wonder if you can give us a quick reminder, how much of the 27% is going to be left at the year, rolls during the course of 2008?

By the time we get to the end of 2008, we should still have somewhere between 20 and 21% untouchable.

We will probably get to address another 6% in 2008, by the end of 2008.

Okay.

And then, Jack, you know, usually when we look at the Ag and Industrial businesses, I think that is closest to market given the amount of tariff moves in there.

If you take mix out of those businesses, what do they look like?

Is it still?

You are still getting 5% year-on-year pricing gain even on the businesses that are very close to market.

Is that fair?

You know, our pricing performance is solid, Gary, when you, you really have to take it a part and look at it by market.

You know, I will be very honest and say we are probably not getting 5% in the lumber market today.

Lumber is so soft.

That you have to be responsive to what has happened in the market.

There are a lot of truck rates out there and things like that.

We are watching that carefully.

There are other places in both industrial products and the ag products where we are able to get better than 5%.

Because the markets are allowing us to do that.

So that is where we really are.

And then you all -- sorry.

Were you going to say something, Jack?

No.

The other thing was you mentioned on the grain side that you took some pricing action and lost some business.

Can you give us a sense, do you have any color where that went?

It went to the river.

Okay, guys, appreciate it.

We have time for one last question.

The question is from the line of David Feinberg with Goldman Sachs.

Please go ahead with your question.

Can you hear me, gentlemen?

Hello.

Hi David, go ahead.

Sorry about that.

Question on the free cash flow front.

Very strong free cash flow characteristics in 3Q.

As we look forward to the rest of the year and '08, are there any other, from a working capital perspective, should we continue to expect strong free cash flow, or are you going to have to reinvest in the business as we look forward?

We haven't finalized those numbers but I think it should continue to be strong.

There is nothing to change the path we are on.

Thank you very much.

Okay.

I would now like to turn the call back over to management for closing comments.

Well, thank you for attending the call.

Hopefully what you saw here is again, good progress for the quarter here, particularly on the productivity side, and I do believe that we have a substantial opportunity going forward.

We will talk to you again in about 3 months.

Thank you, ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.