聯合太平洋集團 (UNP) 2009 Q2 法說會逐字稿

Greetings and welcome to the Union Pacific second quarter 2009 earnings conference.

At this time all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded, and the slides for today's presentation are user-controlled.

It is my pleasure to introduce you host, Mr.

Jim Young, Chairman and CEO for Union Pacific.

Thank you Mr.

Young you may begin.

Welcome to Union Pacific's second quarter earnings, call.

Joining me today in Omaha are Rob Knight, our CFO, Jeff Koraleski, Executive Vice President Marketing and Sales, and Dennis Duffy, Executive Vice President Operations.

For the second quarter, we're reporting earnings of $0.92 per share, a 10% decline versus 2008, and included in that number is approximately $0.14 per share from a land sale in Colorado.

Similar to the first quarter, the business environment over the last three months was extremely challenging, with volume down nearly 22%, although we typically see car loading increases from the first to the second quarter, that seasonal growth was notably absent this year, in particular, quarterly call volumes were at their lowest level in nine years.

Our operating ratio was the second quarter best at 77.3%, a more than two point improvement from last year.

Lower year-over-year fuel prices contributed to this performance, but we also worked diligently to size our resources with demand and align spending priorities with today's economic realities, while aggressively reducing costs in the organization, we're also pursuing new business opportunities in markets that can benefit from UP's outstanding service product, our safety performance, operating metrics, and customer satisfaction are all at best ever levels.

We ended the second quarter in a strong cash position with a very solid balance sheet.

Although the economy appears to have stabilized over the last month or so, it's important to maintain financial flexibility in such uncertain times.

With that, let me turn it over to Jack to walk you through the business groups.

Thanks Jim and good morning.

Thought a good place to start this morning would by taking a look at some of the market indicators that took several of our business segments.

From a 47-point drop in steel capacity utilization to a 10% reduction in electrical generation by coal, I think these give you a pretty good indication of the broad impact this recession is having on our business, so let's look at how these economic under currents played out in our second quarter volume.

Volume fell 22% in the second quarter as the weakness of the overall economy was reflected in declines across of our business.

Domestic intermodal was the only major market segment to post a gain.

Lower fuel prices drove a significant decline in fuel surcharge revenue, and along with a little negative mix resulted in a 8% decline in average revenue per car, even as our core price improvement stayed within our 5 to 6% range reflecting the value proposition that our improved service brings to the market.

The end result was a net year-over-year price decline for many of our customers.

With both volume and having a revenue per car down, total freight revenue declined to 28% to $3.1 billion for the quarter.

This outlook across each of our six businesses.

A 14% decline in Ag products car loadings, combined with an 8% decrease in average revenue per car lowered revenue 21% for the quarter.

Export demand for whole grains was well below last year as export shipments of feed and wheat both declined over 40%.

Weak demand lowered domestic wheat shipments 30% while domestic feed volumes were down 13% due to the continued decline in animal inventories.

The decline in animal feeding is also a significant driver of the reduction in the US soybean crush and that led to a 15% drop in meals and oil shipments.

On a positive side, two of the ethanol plants that were shut down by the VeraSun bankruptcy resumed production under new ownership, and that contributed to a 4% growth in ethanol shipments for the quarter while DDGs grew 11%.

Auto volumes fell 47% which combined wait 12% in average revenue per car resulted in a 54% reduction in revenue.

Continued efforts by the manufacturers to align vehicle inventories with slumming sales levels along with the bankruptcy proceedings for Chrysler and GM led to plant shutdowns and production cut across the industry.

As a result our finished vehicle shipments declined 49% and our parts volumes were down 44%.

In chemicals, 24% decline in revenue was the result of a 22% decrease in car loadings and an average revenue per car reduction of 2%.

Fertilizer volumes fell 43% with weak over all demand and a sharp drop off in the Canadian pot ash moves, both the export and the domestic moves.

The economy took its toll with a 23% decline in liquid and dry chemical shipments, a 22% drop in soda ash and an 11% falloff in plastics where strengths in exports partially offset weak domestic demand.

The slumping construction markets impact on asphalt shipments and lower refineries utilization led to a 25% decline in petroleum volumes.

With car loadings down 16% and average revenue per car off 7%, our energy revenues declined 22%.

Southern Powder River basin tonnage declined 14% due to lower demand and the contract losses that we talked about last quarter.

Reduced demand as a function of the recessions impact on industry production above normal inventory levels, some utility outages and to a limited degree lower natural gas prices.

In addition to soft demand, coal quality problems and production issues resulted in 366 fewer trains out of Colorado and Utah, a 35% reduction in tonnage.

Our industrial products volume was down 34% which combined wait 9% decrease in average revenue per car resulted in a 39% decline in revenue.

Our steel shipments declined 64% as production ran at only 45% of capacity during the quarter.

Half of what it was a year ago, and scrap steal shipments fell 50%.

Housing starts ran 45% last year so our lumber car loadings were off 41%.

With weak demand for residental and commercial construction products, cement and stone volumes also dropped almost 30%.

Nonmetallic mineral shipments declined 34%.

The US drilling rig counts are down 50% from last year as natural gas prices remain low reducing the low for frac sand, pipe, and other minerals used in the drilling process.

Last but not least our paper volumes were down 24% for the quarter.

Turning to intermodal.

With intermodal volume and average unit per revenue down 18% and 6% respectively, revenue declined 23%.

West Coast imports drove the decline in international intermodal.

And the bright spot for the quarter was a 4% growth in our domestic segment, where our capital investments, process improvements and service performance are supporting a wide variety of new truck competitive services.

During the quarter our IMC business grew 26% and out streamline subsidiary saw volume grow 60% with over 40% of that business coming from highway conversions.

So what do we see for the second half?

The economic outlook appears to have stabilized, as Jim said, but the economy is still somewhat fragile.

That being said, here are some of the opportunities that should produce a stronger run rate for us.

The fall crops are looking pretty good right now, and the harvest should lead to an increase in grain shipments and soybean processing.

The dry impact bean crop in Argentina looks like it could creat some opportunity for US meal exports, probable in the fourth quarter.

Ethanol will also benefit from two additional former VeraSun plants that will resume production here in the third quarter.

With record low auto inventories, resolution of bankruptcies and new models should provide traction in the second half, sales rates are strengthening with June coming in at 9.8 million vehicles, so that, plus the government's new "cash for clunkers" program, that has some manufacturers actually adding to planned production schedules for the first time in 18 months.

Chemicals that depend heavily on strengthening and down stream markets liquid and dry and soda ash have both shown some modest improvement here recently, and we expect them to maintain their current run rates.

Fertilizer, which has been disappointing both in the fall last year and spring this year could actually be an opportunity for us.

For all of the reasons I mentioned earlier, our coal volumes will likely be off as much as 10% from 2008's record level.

We expect to see some seasonal strengthening of that run rate during this high demand summer months, but it will certainly be at lower levels than provide years.

If you look year-over-year, energy faces some of the toughest comes in the third quarter last year, and a record fourth quarter as well.

Fuel production has been strengthening lately with at least three mills starting back up, and early July production rate top 50% for the first time since late last year.

We've also seen an increase in brown paper production with additional paper machines being brought back on-line so strengthening in steel and paper are hopefull signs, which if they are sustained could also help drive some recovery and the industrial demand for electricity which would give us an additional coal boost.

We're starting to see some stimulus project activity, but so far it's still hard for us to tell whether it's generate incremental projects or just shifting the source of funding.

Intermodal, like energy and Ag should see some seasonal strengthening, although international volumes will continue to run softner than last year.

Though we look for continued growth in our domestic segment with the added business from hub and the continued success of new services.

Now we've seen some of these opportunities reflected already in the recent strengthening of our run rate, and while we expect it to continue to strengthen, I think the chart clearly shows that the year over year challenge that we face and we'll continue to pace below last year.

Let me wrap up with a look at customer satisfaction.

Second quarter again average, a score of 87, matching last quarter's best ever performance, up and four points from that year.

With that I'll turn it over to Dennis for the service performance report.

Thank you, Jack and good morning.

The priorities of the operating team are two-fold.

Run a safe efficient volume variable railroad and provide a high-quality service product.

Our second quarter results demonstrate we are performing well on both fronts.

Let's start with service.

These are four key service metrics, train speed at 27.4 miles per hour was a quarterly best, and up 20% versus last year.

Highlighting this progress we've made through our network management initiatives.

Lower car load volume also helped create a fluid network, which we are leveraging into better asset productivity.

Brake car utilization at 8.6 days between loads was another record quarterly rate.

Despite fewer yard starts and reduced yard operations, terminal dwell time remain steady at 24.5 hours, and matched last year's second quarter best level.

Consistent with the high customer satisfaction scores that Jack just showed, our internal service delivery index reached a best ever quarter at 93%.

While enhancing service and efficiency, we also improved employee, customer, and public safety, reducing incident rates 16%, 13%, and 12% respectively.

Along with safety and service improvements, we continue to drive productivity gains across the board, using organized well-defined processes.

Let me share a couple of examples.

UP recrew rate improved to 3.8% in the second quarter, a record performance, reducing overall staffing requirements and crew related costs, we reached another best ever in our fuel consumption rate, beating last year by 6%, and setting all time records for the second quarter and the month of June.

In the first half of '09, we saved over 35 million gallons of diesel fuel by better utilizing our locomotive technology and increasing employee engagement with our fuel masters program.

These efforts enhancing productivity and performance also create capacity for the future when volume returns.

In the meantime, however, we continue making the operation more volume variable.

With second quarter gross turn miles down 22%, we were fully volume variable with our train starts and resources.

We reduced train starts 25%, our work in TE&Y, train engine and yard workforce 22%, and our road locamotives and active car fleet by 27 and 30% respectively.

As volumes in April and May fell below first quarter results, we increase furlough and stored more assets.

In June, we recalled a few employees and brought back some assets into service as we saw some increased volumes and entered the peak period for vacations and summer maintenance.

We're managing volume variability keeping in focus our dual challenge of improving both productivity and service.

I talked with you last quarter about how we are using our unified plan to shift work from smaller less efficient yards to more efficient network yards.

We reduce shifts and overtime at virtually all yards on our network to size the operation for current volumes.

The date, we have also closed or significantly reduced operations in 24 of UP's 114 principal yards.

At the same time, we've achieved a dual goal of improving customer service, improving car load SDI, Service Delivery Index by 10 points versus 2008.

Also industry pot and pull which captures our first and last interface with the customer reached an all time best of 97% on time in the second quarter.

Our productivity and performance initiatives are supported by our capital investments.

We invest for safety, service, growth, and productivity improvement.

As we told you in April, we reduced our '09 capital plan by $200 million to the current outlook of $2.6 billion.

The pie chart shows the split between replacement spending and investment for productivity and growth.

The engineering replacement spin was reduced by $88 million on the basis of better productivity and material prices, yet protects our long-term goal of improving the infrastructure.

Results are encouraging.

Miles of main line [flow orders] are down 20% year-over-year, and we're beating our production plan, running at 111% of goal through the second quarter.

As we discussed before, the capital plan also includes $290 million, for 125 new locomotives that conclude a thee-year purchase agreement.

Although demand does not warrant these, we are putting them to good use in distributed operations, saving fuel, and storing less efficient locomotives.

The majority of the growth spend is on the Joliet Intermodal facility, plus select rifle shots for commercial opportunities such as wind energy, and a few high-leverage productivity projects including signal upgrades along our central corridor.

Looking forward to the second half for the operating team, it's committed to achieving further safety improvement, meeting the dual challenge of improving efficiency and service.

Progressing our summer capital programs with greater productivity, and being ready to leverage the upside potential when returns.

With that, live return it to Rob to talk about the numbers.

Thanks, Dennis, and good morning.

Let's start the second quarter financial discussion with a look at our summary income statement.

The 22% falloff in carloading and lower fuel surcharges drove a 28% year-over-year decline in operating revenue to $3.3 billion.

Second quarter operating expenses totaled $2.6 billion, down 30% from a year ago.

The Company's ongoing initiatives to increase efficiency and operating volume variable network played a major role in reducing quarterly costs.

We also benefited in the second quarter from a 68% decline in fuel costs and a reduction in casualty expense.

Another factor, is that our 2008 expenses included over $20 million of higher costs associated with the Oregon mudslide and Midwest flooding, so we have a favorable expense comparison versus last year.

Lower year-over-year operating revenue and expenses combined to produce $751million in second quarter operating income, a 19% decrease.

Second quarter freight revenue fell 28% to $3.1 billion as a result of lower car loadings and reduced fuel sir charge revenue.

Interestingly, this quarterly revenue amount is more than $100 million below first quarter levels.

Further highlighting the depth of the current economic recession.

Average revenue per car declined 8% in the quarter as we continued to pass on the benefit of lower fuel prices to our customers in the form of reduced fuel surcharges.

In fact, fuel surcharge revenue declined more than $500 million in the quarter.

Our pricing efforts in the second quarter yielded results just north of 5%.

For the full year, we are still comfortable with our outlook of 5 to 6% core pricing gains.

The mix of business in the quarter was slightly negative as a result of significant declines in car loads to finish vehicles, lumber, and steel.

Turning now to the quarterly expenses, as I watch through each category, I'll highlight the impact of both volume and efficiency.

Starting with compensation and benefits.

This expense category declined $125 million in the quarter, or 11%, to $976 million.

Second quarter workforce levels were 10% lower year over year as we continue to furlough employees and reduce overall employment through attrition and management actions.

In fact, UP's average quarterly employment levels are the lowest since the Southern Pacific merger.

Strong network fluidity, and lower car load volumes enables us to make these reductions and drove a 1% decline in average compensation per employee, also contributing to the decrease was lower expense related to our incentive program.

Offsetting a portion of this productivity was the 2008 union wage increase of 4%, and effective July 1, 2009, the union wage increase becomes 4.5%.

For the remainder of 2009, we will continue to manage work force levels with demand.

Second quarter purchase services and materials expense declined 21%, to $391 million.

On the purchase services side, lower volumes and increased operating efficiency contributed to both decreased contract service expense, as well as reduced crew transportation and lodging.

From a materials standpoint, we performed fewer locomotive repairs in the the quarter as a result of lower volumes and having a significant portion of our fleet in storage.

This category also benefited from the favorable year-over-year comparison to last year's mudslides and flooding.

Turning to fuel, this chart illustrates the impact of changing fuel prices.

The solid blue line shows our actual monthly fuel price.

The dashed black line is our monthly fuel price lag by two months to illustrate our fuel surcharge programs.

The areas shaded in red with a solid line is above the dash line represents periods where the lag in our surcharge had a negative earnings impact, conversely the areas shaded in green shows the periods when fuel prices declined and earnings benefited from the surcharge lag.

For the second quarter of 2009, the impact within the quarter was negligible, although we had a slightly positive lag to start the quarter, the lag turned negative as diesel fuel prices increased in May and June.

Looking at fuel on a year-over-year basis, however, the surcharge lag added about $0.20 per share to our second quarter 2009 earnings.

As you can see from the chart, fuel prices spiked in the second quarter of 2008, where a significant earnings headwind was experienced in that quarter.

As we look ahead, it's hard to say what might actually happen with fuel prices.

It's a little like trying to predict the economy.

But if you assume prices remain at current levels through the end of 2009, which have around $1.90 per gallon, you get some idea of how fuel might impact earnings.

Assuming fuel prices don't fluctuate much, the earnings impact within the third and fourth quarters is minimal.

The more meaningful perspective is how the year-over-year comparison is likely to shape up.

For the third quarter of 2008, it was about a wash, as prices receded in the back half of the quarter.

But in the fourth quarter of last year, we had a substantial tailwind to earnings from the surcharge lag.

In addition to the lag impact of fuel, we consumed 84 million fewer gallons of diesel fuel in the second quarter.

A portion of the lower consumption relates to the 22% reduction in second quarter gross ton miles which saved us approximately $234 million.

Improved consumption was also the result of our ongoing efforts to conserve fuel, which saved $65 million in the quarter.

As Dennis mentioned, the operating team is having great success reducing fuel consumption, with more to come.

Second quarter equipment and other rents expense declined $31 million in the quarter, or 9%, to $307 million.

Similar to what we've experienced over the last couple of quarters, lower volumes of industrial products and intermodal are driving down short-term car rents.

Better assets utilization has fewer leased assets reduced quarterly expense as well.

Other expense declined $46 million in the second quarter, to $153 million.

The primary driver of the decline was a semiannual actuarial study completed in the quarter, which reduced expenses by $38 million year-over-year.

Our strong safety record and lower estimated settlement cost contributed to the lower cost.

In addition, expenses for employee travels, utilities and other miscellaneous expenses decreased in the quarter.

Offsetting a portion of these reductions were higher property taxes and an increase provision for bad debt expense.

Turning to slide 30, we have summarized our expense performance in relationship to the quarterly volume decline.

The casualty expense reduction and last year's weather-related expenses both helped our overall expense performance in the second quarter.

But with volumes remaining at historical low levels, we took action throughout the quarter to align resources with demand.

Reduced work force levels, stored locomotives and freight cars, as well as ongoing efficiency gains combined to achieve a roughly 70% expense variability rate in the second quarter.

Of course this this analysis of variability normalized for the year-over-year change in fueling prices.

Our ability to operate a volume -- in a volume variable manner contributed significantly to achieving a record second quarter operating ratio of 77.3%, 2.3 points of improvement versus last year.

Lower year-over-year fuel prices, pricing gains, and the casualty reduction also played a role and helped offset the impact of lower car load volumes.

Taking a look at the full income statement.

Second quarter other income totaled $135 million, driven by the $116 million pretax gain on the land sale to the Colorado Regional Transportation District, excluding that one-time item, other income in the quarter was $19 million, equal to last year's amount.

Quarterly interest expense increased $22 million, or 17%, to $150 million.

Higher year-over-year debt levels drove the increase, although offset somewhat by lower effective interest rates in the second quarter of 2009.

Second quarter income tax expense declined 8% or $23 million to $268 million as a result of lower quarterly earning.

The effective tax rate in the quarter was 36.4%, a point higher than the year-ago rate.

We expect the full year effective tax rate to be around 37%.

Net income in the second quarter declined 12% to $468 million, or reporting earnings of $0.92 per share.

If you exclude the RGD land deal that we talked about, adjusted second quarter net income would be $396 million, or earnings of $0.78 per share, a 24% quarterly decrease.

Slide 33 shows our quarter end cash position and current debt levels.

As we've discussed over the last several quarters, we are continuing to maintain a strong liquidity position as the recessionary economic environment lingers, and business volumes remain low.

Adjusted debt levels increased moderately to $14.8 billion, reflecting new debt issuances over the past year.

As we think about the remainder of 2009, what happens with the economy will clearly be the driver of our earnings.

Our current seven-day car loads are running about 150,000, a roughly 19% decrease versus last year.

Although this is slightly better than what we experienced in the first half of 2009, as you heard from Jack, volume levels will remain challenged for the remainder of the year.

As I mentioned earlier, at current fuel prices, we will likely lose the positively fuel tailwind we enjoyed in the first and second quarters.

In total, lower fuel prices and the resulting surcharge lag added about $0.40 to earnings in the first of 2009 versus last year.

While low business volumes in fuel will pressure our second half results versus last year, the entire UP team has done a great job playing the hand that the economy has dealt us.

We're not using the excuse of a slow economy to stop improving our overall profitability, and produced solid results despite it the challenges.

Through our ongoing commitment to pricing, strong operating efficiency and focused efforts to right size the organization, we will continue to increase UP's future earnings power.

With that, let me turn it back to Jim.

Thanks, Rob.

Although we expect it will be some time before the economy recovers, our business levels as we said have appeared to have bottomed out with a few opportunities for improvement as we move into the back half of the year.

This feeling is supported by the latest round of economic indicators which seems to support the view that the economy has stabilized.

With that in mind, we're managing the company under the assumption of a continued low volume environment, advancing efficient efforts while, at the same time, providing excellent service to our customers.

We're fully prepared to handle more business when the demand returns.

We're running the network very well, which positions us to generate stronger volume leverage going forward.

Talking more strategically for a moment, we're well aware of the activity in Washington regarding rail regulation, because of the potentially negative consequence that this increase government regulation could bring to our industry, we're spending a great deal of time on Capitol Hill.

We are talking to legislators and educating them about the benefits of rail.

Everyone understands and agrees that rail needs to play a vital roll in solving America's transportation infrastructure problem.

We are optimistic that the leaders in DC also understand the importance of a financial healthy rail industry.

Union Pacific and the entire industry is uniquely suited to help our nation's economy grow and compete in the 21st Century.

Our fuel efficient, environmentally friendly and safe transportation products helps customer compete globally, saves taxpayer dollars, and as our business grows creates good paying US jobs.

While our Company is challenged by these unprecedented economic times, we remain confident in our long-term strategy which is still firmly in place.

We are focused in improving safety, increasing efficiency and delivering price driven value for our customers which will enable growing fans to returns.

Now with that, let's open it up to your questions.

(Operator Instructions)

Our first question is from the line of Randy Cousins with BMO Capital Markets.

Go ahead with your question, sir.

Good morning.

Good morning.

Jack, wonder if you could comment on your Mexican business.

How has it been doing, how is the trance stuff performing.

Has it been hit harder than your domestic?

You know, it probably has been hit a little harder.

It's down 30, 32%, something like that the quarter,and our largest piece of business typically would be the auto franchise, so with the turn oil there for both Chrysler and General Motors, that hit it hard.

On the brighter side an a lot of business opportunities coming out of Mexico, the [Milltilladory] industry is show something signs of revival.

We increased our sales forced a tad there in Mexico, and worry going after those new business opportunities.

So do you see the Mexican business coming back fairly strong in the second half,or do you see the Mexico business lagging your domestic US?

I hadn't given that too much thought, but I think mirror what we'll see in the US.

I think the automotive industry coming back will help us to some extent, and I think we should see a little improved grain movement between the US and Mexico.

Okay.

And then Rob, just for you, I guess it comes back to Jack's, as well, you bad debt.

How big a number was it?

And I believe you guys and some leg see contract's.

Did the bankruptcies of a couple of the auto related companies to get at those contracts earlier than otherwise would have been the case?

As I mentioned, we increased the bad debt research, and it was relatively small, $2 million or $3 million in the quarter, so not a material item.

What about the legacy business?

is there a chance to get at the auto legacy business a little quicker due though ?

Keep in mind that Chrysler was already a new contract when we looked at it, and General Motors has just a short time left.

We're in discussions over it in.

Okay.

And then last question, in terms of cash balances, you guys are sitting with about $1.6 billion in cash.

Do you have a sense of sort of what do you think is a suitable level, and if the cash continues to build, do you put it towards share buyback?

Well, Randy, obviously $1.7 billion is not the going run rate we think is going times.

We estimate that the 400 million range, kind of better.

We're because conservative now until we see the economy.

We're in a good position.

Our share purchase program off the table right now, but when we see this thing start to turn around, we'll consider what is best for shareholders.

Thank you.

Thank you.

Our next question is from the line of Jason Seidl with Dahlman Rose.

Good morning, everybody.

Good morning, Jason.

Let's talk about pricing a little bit.

You mentioned just north of 5%, and you're sticking with your guidance for the full year.

Can you talk about what your signing contract is at right now, currently, and, also, what percentage of your 2010 business is looked up?

Jason, we're -- I'm not going to talk about individual contracts, or next year, other than we're seeing real value we're providing in the market.

We are getting price for our service.

You start looking at some of these corridors.

I won't get into the specific customer, but we -- the cycle time when they look it a it, pretty big book of business, had improved 20, 25%.

They assigned a very significant value of that to them, also inventory carrying cost, this time they owned the equipment.

Were able to get a very good price in that new contract that has been consistent with where we're going.

And again it's hard to look out to next year, and where anything is going to be, but even you look at where we're at today in this very tough variety, I'm confident that 5 to 6% range we looked at starting the year will be there for this year.

Okay.

And again what percent of next years is already signed up, forget percentage wise in terms of the prices you've gotten, but what percentage is already booked?

Jason, we're not going to get into that right now.

Okay.

Could you expand a little bit on some of your new intermodal offers, some of the we talked to are very excited about some of them, and wow get a lot of people being able to sell this versus truckload business because of your improved cycle times.

Can you elaborate sort of what services were launched in the quarter?

California down to Texas was the market that we had exited , we brought back, we opened 7 lanes of refrigerated boxes, including now an interline program with the Norfolk Southern that's gaining a lot of attention.

The improved service on our blue streak network, Norfolk Southern is also doing quite well.

Service levels just all over the network are really doing

And Jason, we're not done here.

Keep in mind if you go back three or four years ago, we we walked away from many of these markets.

We were struggling in terms of our business volumes, so we've been consciously and slowly looking at new markets to re-enter.

You've got to prove yourself.

This isn't a business that you open it up one day, and it's full.

You have to prove your service offering.

We have a good track record that many customers are willing to, one, reconsider UP, or two are looking to ship on a railroad for the first time.

So we're pretty excited about it that as you saw within our only book of business that grew in the second quarter was domestic intermodal, and that directly relates to our strategic approach on the domestic markets.

Is and as you look towards service levels, how are they going to be impacted by the eventually turnaround in the economy without turn to put a time frame on it?

Do you think you could maintain levels near where you have them now?

We're running 28 miles per now.

My goal is when year running 190,000 cars were at 28 miles an hour.

One more question and I'm turn it over to somebody else.

Could you just refresh my memory when those ethanol plants you talked about came back on-line?

Was that I late in the quarter, or early?

They were kind of mid-quarter and then the third one just came back up now, so it's up and running, and the fourth one, I'm not completely sure when it's coming back, Jason.

So the third one came back in July then?

Yes.

Thanks a lot, guys.

Appreciate the time as always.

Thanks, Jason.

Thank you.

Our next question is from the line of Tom Wadewitz with JPMorgan Chase.

Wanted to see if you could give some comments on the coal perspective.

Wonder if that could help your coal volumes in the third quarter, and also just in terms of stockpiles, if you could give us a sense where you think they are.

Tom, I think the latest information we have says stockpiles are down a tad from their record high levels in May, but still substantially higher than what they participate year ago, maybe to the tune of 16, 17% greater than where they participate year ago.

I'm not -- I'm not as bullish on the idea that the customer commitments are going to drive business volume.

What we're seeing right now is just that the burden of proof rate from the summer season is much higher, so we're seeing customers put more train sets back in service again, we've seen our volumes kinds of pick up here, and we would expect that that will continue through the September, maybe even October, kind of depends on the weather, but that's what we see right now.

So does that give you a little better year-over-year performance in coal, looking forward, or is that just kind of normal seasonality and year-over-year looks similar?

It's normal seasonality, but it's going to be well below last year's pace.

We set records in the third and fourth quarter last year, and we're nowhere even close to that this year.

Okay.

And a broader demand question.

I think there's some degree of optimism about turning the industry economy, the idea that they've been producing below the consumption levels, and you would at a pretty line level on inventories, but it seems like there's a lot of caution about the outlook for volumes.

Are you seeing that with steel customers, automotive, chemicals, and that something you would see and would lead you to be optimistic, or you really just don't have any sense that volumes are going to get better in the near-term?

Our optimism is one of it looks like things have stabilized.

You know, Jack had indicated there are a couple of areas, steel is up, we're going to reopen two or three plants.

We had talked about, but we're a long ways to go to get back in that market where you -- I'm going to feeling good about it.

So, again, but you have to stabilize at some point before we can actually turn things around, and we'll see.

I think the stimulus money, I think most people were maybe overly optimistic on its effect.

What we see -- on the timing.

What we see with some of our local groups we work with, most of them aren't going to see real dollars spent until the latter part of the year.

And if you think about the timing it takes to prove the Fed get it to the states and get it out in bids, that's realistic.

But we're going to be pretty cautious about it, we are position told hand handle it.

This thing turns a run with the assets we have in place and the leverage, we will lever very nicely on the bottom line with just a little kick in volume.

Okay.

And the last one, I'll pass it along to someone else.

When you look at the third quarter earnings, they -- seasonally they're higher than second, that's kind of normal, but I'm wonder be giving some of the comments you've got, do I you think the expectation of a pretty being ramp in the third quarter versus a second, does that seem realistic in terms of $1.07, $1.08 that is out there versus the $0.78?

Tom, you can get a wide range on the numbers right now.

You're going to see our car loadings, they are picking up some.

I can get a pretty wide rain in the numbers, and really the bottom line there is going to be the volume.

Again, we will lever very nicely any volume impact.

I'm just not going to be real optimistic right now on -- you will see it.

I mean, watch the car load numbers that are produced every , and you see those start to move, you feel see we leverage very

Okay.

Thanks for the time.

Thanks, Tom.

Thank you.

Our next question is from the line of Matt Troy with Citigroup.

I was wondering tactically and strategically how you can resource or re-resource the network.

You went into this a downturn a little bit over resourced, down a great job right sizing, tactically, whether it's deploying locomotive, or cars back on line, or getting furloughed employees back, if you could just help us in terms of getting comfortable that there's a plan in place to accommodate whatever value ramp we might see, how do you look at that versus past cycles, how are you confident it's going to look better?

Duff, why don't you take that one.

Matt, that's a -- that's a great opportunity for us.

Everyone of the resources we have, whether locomotives, freight cars, or personal on the operating craft side have recall plans that we have for 30, 60, 90 days that we can do, and we think right now we've got at least 10% capacity in our 10 to 15% capacity in our existing network, but I can assure you that we spend a large amount of time looking at the cyclicality of our business, and how can we respond to that immediately.

So there are very well defined plans, well rehearsed this they were terms of how we recall these resources back.

We're not going to overspend in making that protection to abundant, either.

I think one thing you might want to think about here is you've got the fixed structure, as Dennis said, the fixed infrastructure is probably a 200,000 car load per week number, in terms of what's built in there, is the variable operating resources, as Jeff said is 10 to 15%, but there are other thing.

We introduced that alternative work program where we keep employees at least current on training, their benefits are paid.

That was -- has worked very well for us, as we've started to call them back.

I will tell you, I'm very confident in the processes we have put in place, and our ability to respond.

I'm going to respond in the context I want to handle that volume and provide great service.

That is what we will lean to here when we think about recovery, so we're ready to handle it when it comes back.

Got it.

Second question is relating to the safety and casualty adjustment in the second quarter of 38 million.

Was that a true up and look back for prior periods like we saw with CSX in the east in their second quarter, or to what -- I'm trying to get a sense of the economic impact allocated between them relevant period.

Is that true up, or is that a run rate savings going forward?

How should we think beauty the net year-over-year savings and impact going forward in contribution to the other expense line?

Rob?

Yes, it's a look back.

A look over a number of years looking back.

We do get an ongoing benefit, Matt, in the neighborhood of 2 million or 3 million kind of number, but the adjust independent the actuarial study that we took in the second quarter was primarily a look back over the last several years.

And that 2 million to 3 million you mentioned that was per quarter going forward?

Rough numbers, yes.

Okay.

Great.

Last question for me, then, on agricultural, obviously, the export story there is impacting everyone in the industry.

Just wondering, in terms of looking for signs of of return in Ag, there are one, two, or three things that you can point to to that should leads out of this down you can point to to that should leads out of this down turn, you know, be it exports, be it on the fertilizer side?

Just in terms of barometers, what too your Ag guys watch for in terms of the more meaningful turn of what would be a more macro driven weakness in the industrial segments?

So here is what we monitor.

The first thing is global crop situation.

That plays a big role.

Last year we had record-setting performance, because the rest of the crops around the world had not fared all that well, and the US dollar was weaker.

So with the strength -- some strength back in the dollar, not to be a mercenary about this, but the good news was when we see the drought in Argentina, and their soybean crop substantially reduced, that says our soybean harvest, and then going forward in the fourth quarter, you should see some opportunity from that hitting the US markets just from tan overall economy is situation.

The second thing we look at is animal counts.

We've been surprised that the animal count across the US has not increased more.

It's still below year-ago levels, and at some point in time, we to expect that to pick up.

When that does, that will be another trigger point for us in my opinion third is the quality of the crops, and right now the crop quality in the US looks excellent.

There was an increase in corn acreage year over year, and also be a increase in soybean acreage, so that should help us as well.

And then the last thing that we look at in particular is wheat, in in the UP served territory, the wheat crop did well, and now we just need now is some demand to draw that into the market and we should see that turn around.

So we're hopeful we'll see a little bit of improvement in the fourth quarter, although we still tonight expect it to match last year's record-setting performance.

Got it.

Thank you very much for the time.

Thank you.

Our next question is from the line of Walter Spracklin of RBC Capital Markets.

Please go ahead with your question, sir.

Thanks very much, good morning, guys.

Good morning.

I just want to go to your intermodal and some of the price realization on that we're hearing some more about increased price competition, price discounting, and just -- and that some of the customers are looking at truck as a -- going back to truck from rail, and sort of counter to what we've been hearing from you guys, just want to hear your updates on how you're looking at the trucking competition, whether you think it's sustainable, and how you're approaching it.

Well, we've been consistent here that the intermodal market and trucks have been pretty tough for a half a year or more, many cases, when you look at the pricing, it's not sustainable, and the question we have to decide is whether we're going to chase it.

In several cases, we haven't.

So it really does vary by corridor and the markets we're in.

What we're focused on is kind of a long-term plan building those products that are in there, working with customers, helping then understand the long-term perspective of our market, but I will tell you, I'm not going chase it, and our pricing is still on the positive side, when you look at taking fuel off the table, but it is -- it is one that you have to decide kind of tactical versus strategic discussion with the customer.

That's good color.

Just moving on just on the pricing, but more on sort of the regulatory side, can you give us an update on what you're hearing out of Washington has sort of gone radio silent as they're working away on the bill, and just an update on the talks that you've had, if they're going well, and just your view on regulatory environment going into the next months.

Well, our industry and all the COs are very active back on the Hill.

Obviously there are, I think, other priorities in the current administration's agenda besides new regulations for us, but we're not going to let our guard down.

We're going to continue to be aggressive in terms of working with -- in terms of working with Chairman Rockefeller's staff, in terms of understanding the long-term values of our industry and economic realities.

I'll tell you a good example that I think is important.

We focus a lot on the potential new regulation side, but you have Chairman Rockefeller and Senator Lottenberg who wrote a bill proposal to shift 10% of the business movement on highways to the railroads.

Now, they weren't specific about how that actually is accomplished, but I think it give use little insight in terms of where their thinking is on the value of rail in the United States.

We are -- we've made it very clear on what -- I think where the points of real conflict are and what's needed for this industry to continue to invest.

Again, I can't predict.

You may see something come out of the House this week on antitrust, but at the end of the day, the thing is going to be handled over on the Senate as a starting point, and we'll see what happens.

Do you expect it in the next six months, three months, out of the Senate, or --

That's a tough call.

Listen, one thing, you can never assume anything when it comes to DC.

Our view is we're going to be very active.

We're going to be very aggressive on the consequences here, and we're going to be aggressive on telling the story in terms of the value of railroad.

That's great.

Thank you very much.

Okay.

Our next question is coming from the line of Ken Hoexter, Bank of America, Merrill Lynch.

Please go ahead with your question.

Rob, I just want to revisit.

You were kind of at the end of your presentation and gave a bit of an outlook for how things were trending, talked about fuel.

Were just trying to suggest that earnings deceleration would at a greater pace because of the $0.40 comp in fuel that you're not going to have that you had in the first half?

Ken, I was trying to make clear that thought impact of fuel on us has meant year-to-date, but, yes, look at last year's third and fourth quarters where there was dramatic difference in terms of how fuel played out in the third and fourth quarter of last year, versus the first and second quarter of last year.

So when you look at year-over-year, assuming the fuel stays about where it is, you kind of come up with a different equation in the back half than you did in the in the first half, assuming fuel prices stay where they are, which nobody knows what's going to happen with fuel.

Okay.

And then Jim I just want to revisit the -- looking that volumes down over 20%, and the record level, employment levels, I think Dennis kind of heighten, you're not nervous, that you're overdoing it on the employee side, but however volumes stay at these levels, is there more that you could continue to pull out on the cost side, if you kind of stay at this static volume level, let's say for the next six months?

There is.

Now, we are not going to see the kind of drop you had.

What we've seen the last six months.

But, we're trying to gauge and we're being a little conservative here in terms of when this thing will come back, but if we continue to sit at this kind of a level, you've see more costs come out.

You're not going to match, though, what you saw before, but clearly we've got kind of a tier three, four, and five kind of look at what we would do with our spending if this thing remains flat.

Okay.

And then just -- have you been approached by any of the unions to say, on that 4.5% wage increase, that jobs are more important than getting that wage increase?

Is that something you've had discussions at all?

No, Ken, I -- where we're spending our time with -- I do town halls all of the railroad, we get folks in the room there, and we talk about what's going on.

It's very clear in talking with our local chairman, the general chairman, the presidents of our unions, I just had lunch in DC with one of our presidents, they're all over jobs.

They're focused on what do we need to do in terms of turning the economy around.

I gets that whether you're the Head of the Union, or just were hired three or four years ago.

They understand the importance of safety.

They understand service in terms of products, what it means in the market place.

We somewhere not had any case is bout that trade off at this point that's out here.

I -- that will be part -- when you get into the next round of negotiations, all of these things will be on the table here, but my goal is to make them understand what they can do to help us on service and safety.

And then also on the political world in terms of where DC may be going with some new regulations.

And today does the president seem response initial getting involved at this point in those discusses, or do they want to wait to see what comes out?

Ken, they're more involved than they ever have been, the consequence -- I don't care whether you're talking about new regulations, or you're talking about cap and trade, one of the things, again, that we are doing, and I say this, the industry, is helping all of our folks understand the consequences of the legislation.

And you can call it what you want to, but its jobs, and I've seen a willingness where they want to be at the table with us talking about what the consequences are.

Great, thanks for the time, Jim.

Okay.

Our next question is from the line of Chris Ceraso with Credit Suisse.

Good morning this Alice Landry in for Chris.

Could you guys talk about the Colorado, Utah mine issues, what's going on there, and when you are expecting things to get a little bit better?

The Colorado-Utah mines right at the moment have been plagued with some really, really tough geology.

Coal quality with and limestone deposits in the coal seam, and just a variety of very tough issues for them to deal with.

You couple that with weak demand, and it creates the scenario that we have today, we're running basically 8 trains a day or so out of Colorado and Utah.

That's down from what I would say are kind of record setting levels of 12 or 13 trains a day, so it's pretty soft.

They're working to solve those problems.

I think they're working to get them resolved as quickly as possible moving forward, if the demand were a lot stronger, they would probably woke a little harder, maybe spend a little more to get them resolved more quickly, butter they're doing the best they can with the economic scenario they have.

There's still some -- ample demand for Colorado and Utah coal, and sooner or later, they'll get it behind them, and we'll be moving forward there.

Okay.

Is it still about 15% of you're coal business, or has that declined?

I would say that's roughly it.

It's not too far different than that, because the whole coal business has declined as well.

Okay.

And then in terms of natural gas, I know it's about $3.50, which is a little more competitive than the competitive PRB price, but have you guys seen an switching at utilities on the margin?

In our served territory, the natural gas capability to switch is not prevalent.

Most of the utilities that we serve they have peaking capacity in natural gas but the majority of them don't have the wholesale ability to switch over.

However, given that you have the grid out there, that doesn't completely insulate us from low natural gas prices, because other organizations and utilities that do consult to the grid, so depending on the pricing.

I think the switch has already happened.

We had some stories that you had natural gas at two bucks in some of the markets, so any meaningful shift has already happened.

Okay.

Okay.

Great.

Thank you for your time.

Thank you.

Thank you.

Our next question is from John Larkin with Stifle Nicolaus.

Please go ahead with your question.

Thanks for taking the questions.

Had a couple of questions on the domestic intermodal side which looked very good for you.

Congratulations, by the way, on winning that hub business.

That's a huge win.

How much of the hub business was included in the second quarter?

I got the impression that that was spooling up during the quarter?

What would domestic intermodal have been say without hub, and what would it have been in terms of growth if hub had been running full bore with you the entire quarter?

You want me to -- here, I'll take -- listen, if you look at that domestic market, hub started to come into play towards the end, in June.

Hub has actually been part of our business for a long time, and their core business was growing from -- in terms of what they had already had on us, so it did have an impact in terms of the -- I don't want to get into the specific numbers.

I think you have to keep in mind, though, in this market we have won some and we've lost some.

If you look at the year over year comps that are out there.

Again, I feel good about our domestic strategy that -- I think right now is just really starting to play.

This is one that there's, I think, much more upside for us going forward.

But fair to say that that growth rate with hub in the field for the entirety of the second half should be a little higher in the second half?

Right.

That's right.

Okay.

And then you talked about your streamline product, and how that has been growing very nicely for you, about 40%, if I heard it correctly, of that growth is coming from the highway.

The other 60%, is that coming from the other western railroad, or is that coming from other IMCs, or other folks that operate on your system?

You know what?

It is, John, it's coming, a lot of it, from our own system, where the IMCs are moving from a ramp to ramp product to the door to door product that streamline offers.

So it's a value-add in terms of the product that we offer, and also a margin enhancement for us.

So that's good business for us.

Got it.

And then maybe just one last question.

Is it fair to say that as you have done such a great job of variable your cost structure, thought you've been able to take to the 25 or 30% of the least efficient locomotives, the least efficient freight cars, maybe those that are closest to needing major maintenance, and laying those up, and then, at the same time, essentially furlough your least experienced or least productive workers?

is it possible to be that good about eliminating the most inefficient assets in people?

I think that's a pretty fair assessment, John.

I mean, we did put down our older most inefficient locomotives.

We did to the same thing west the freight cars as much as possible, and obviously it's a seniority-based system, so the younger employees too get furloughed first.

But as we've said, we try and keep them trained and ready to go, because we don't want to suffer any productivity loss when we do do the recalls, and the same way with our cars and locomotives.

So we're not totally neglecting them.

We're making sure they're work ready and ready to come back under our all three of those scenarios.

So there won't be a big lump of maintenance expense when you take them out of storage?

Will not.

Okay.

That's very helpful.

Thank you.

This is Jack one more time.

I just want to clarify.

Some of that 60% did come off the competition.

Clearly hub good customer of streamline as well, so I don't want to imply that none of it came from, but I just don't think that was a major drawing factor of the 60%.

Thank you.

Our next question will be coming from the line of Edward Wolfe of Wolfe Research.

Please go ahead with your question, sir.

Thanks, just a couple of clarifications.

You talked about price, real pricing up around 5%, which is down from 6% you were talking about last last quarter.

Can you talk about in the three months which segments that are feeling a bit weaker, and which ones are holding on bit firmer?

Ed, I would be careful about interpreting 3% weakens price.

You also have mixed impact in there, where you think about the examples in the auto business where we've been able to negotiate some legacy contracts, you have to book business off 50%, or you think bout coal is another one that you've got to book a business that has still outstanding, and some large legacy contracts that have been renegotiated, and that business is all down.

So it -- I would look at that more in the context of -- again, we said 5 to 6 for the year, we had a little bit stronger first quarter, but I'm on the bottom end of the range for the second quarter.

I think the majority of that, again, is mix.

Jack, do you want to --

That -- that is not what I would describe as same-store sales.

It is, in fact, what you would say is the actual price realization for it.

So to the extend the business didn't move, we weren't able to capture any price off of it.

There hasn't really been any substantive change if our pricing environment between first and second quarter.

Okay.

Jim, can you talk a little bit about the timing as you understand it for the regulatory bill think you said the antitrust could come in a week in the House, but the Senate Regulatory Bill, any sense that there's a chance that still happens before August recess, or at this point, is this a if it's going to come, it's at the end of this year at this point?

Before the August recess.

I would tell you one other think with this bill.

I didn't hear what out you said, Jim.

No, nothing will happen been August.

What is also important to understand about this bill, the members on the Hill that are involved with this discussion, understand the significance of this thing, and to complicated, and we made it very clear that if you go get it wrong, capital is going the other way, and they understand that, so I don't -- what I don't see a focus here to get something done quickly.

If something happens, they want to get it right, because they do understand the consequences, so, nothing will happen before August.

I think there's one side of me that says nothing happens the this year, but we can't take that assumption, we're going be to very active working our story.

And thank you for that.

Slide 17, where you talk about bringing pack some of the resources, and the April, May peaks for furlough and locomotives stored.

If I look at these numbers, you're bringing back 17% of your heads and 9.5% of your locomotives, and 15% of your cars, yet when I look at '08, there really wasn't much on an absolute change in volume between third and second quarter.

What's your assumption here of peak and, if it doesn't happen, is it easy to put this stuff back into the closet?

You mean if -- oh, sure, there's not a -- what you have to be careful of, again, you don't want to -- you -- calling employees back -- it's tough, obviously for people here, it's personal in terms of what it means to you, so you have to be careful about calling them back and cutting them off again, so we want to make sure we see some trend here, but if this thing turns pack around and is start going south on us, we will put more assets back in storage and will unfortunately be forced to furlough employee.

And and and why, other than just historically there's a seasonal pickup, we didn't see it last year, obviously, you are think there's going to be a season pickup this year that you're doing that.

Is that a safe assumption?

Well, keep in mind, you also have attrition here.

We're going to lose, this year, I just looked that's latest numbers, in terms of our attrition rate, and we're going to lose 3,000 employees this year.

Now, that's done from where we were running, but we do have real attrition that we've got to keep up, and then, again, the seven-day run rate, you look at car loadings, has picked up.

We're running about 151 or so right now.

We were at 143.

So it -- and my gut says we'll see some seasonal, little more attrition seasonal pick up with a peak, but we watch it very closely.

Okay, and, Jim, and/ or Dennis.

Jim, you said before that volumes are the key because you can leverage them here, where do you think you can start to leverage volumes in terms of margin?

is it minus 15ish, is it minus 10ish, where directionally do you start to see some of that leverage?

Even the current train network we're running has capacity in terms of train size, so you think about -- again within coal would be different, because coal is incremental train starts, although you're not adding any capacity there, so it's immediate, when you look at, the first 5, 10% of bump in business volume.

You are not going to see much in terms of adding new train starts into our network, so it, I think, is pretty significant and pretty immediate when it starts to turn.

Okay.

And then just last question.

Cash before you said you've got a 1.7 billion and 400 million is more of a normal level.

Does that 1.7 keep going up?

is the some level, 2.2 billion, or some connect that you have in mind that you want too make sure you are covered for out a couple of years from is now, where do we think that you stop growing the cash and start to deploy it in other ways?

Well, we'll continue to grow cash as the business earns income here.

I don't see us doing any incremental addition of debt in terms of what's out there.

Again, we're being cautious on -- I just don't have a visibility.

You can see forecasts that say this is it stable, but this is just kind of a point before you turn down even more that's out here.

We're being cautious.

And, again, I want to -- I want put our company in good position that when it does turn around, we've got some great opportunity to return value to shareholders.

So at this point --

We have about 500 million of debt due next year, so that's all part of the equation.

But it sounds like if we're modeling for the end of the year, we're going to assume that you're going to continue to generate some free cash in that 1.7 goes up, not a substantial change to your dividend, or start to repurchase stock at this point?

It could, Ed, but it's a function of where the business is going here.

Okay.

Thanks so much for the time.

I appreciate it.

All right, Ed.

Thank you.

Our next question is from the line of Gary Chase of Barclays Capital.

Please go ahead with your question.

Good morning, everybody.

Good morning, Gary.

Just wanted to quickly clarify something Jim, first, and obviously I know you're not going to talk about the specifics, but somebody had asked you about GM and whether the bankruptcy allowed you to open that process.

My understanding would be they could open it, but you couldn't, and all I'm asking is should we expect that there's going to be some resolution on that business, or is it just as likely that you'll keep operating under the old contract until it renews?

Well, your assessment is right.

They have the option, we didn't, of changing the contract.

There's just -- there's a short time left.

I'm not going to get into the details, and we're in discussions right now.

And quite honestly with the service products and the value we're providing they -- I mean, they adopted the old contract, I guess is the point, but there's a pretty short time left on it.

Okay.

So it's just -- it's the way it was, there's nothing special that the bankruptcy creates and some

That's right.

Okay.

And you've talked a lot about the -- the unified plan, and the ability to better leverage volumes, and there have been a lot of questions when you were answering Ed a second ago, you mentioned attrition, and we can see that the headcounts, I guess as we see the volumes start to pick up, as it is depicted in one of your charts here, should we expect that head count could continue to go down on a net basis?

Is it going to be flat or are you going to need to take some heads back on period to period on a net basis, net of attrition, in order to handle that volume growth?

Well, we've got some actions under way right now that we're reducing employment that doesn't show in these numbers here.

Again, when you say, when it turns back up, how quickly will we respond, Europe going to lever very nice, but we're going to have to make the decision is this a sustainable trend.

That will be the decision point in terms of calling employees back.

So I don't -- it -- I'm not quite certain where that head count number will go.

I mean, quite honestly, I hope it starts to move up, as we continue to grow aggressively over the next several years.

Because if you look at it, it will be in the areas where you see the direct connection to volume, like our train and engine crews.

That is where the biggest reduction is coming into play, and it's -- over the -- over a quarter period, it's directly to volume.

Okay.

And then, just quickly, everybody's talking, you're no doubt aware of the auto production outlook as we move from the second to the third quarter, presumably that's going to have a significant impact on your volumes, and I assume network wide, you talk about capacity network wide, but obviously matters what you've got in specific lanes, presumably you're fully prepared to handle whatever you're expecting from that production increase.

The thing about these numbers, the first half of the year production was at about 3.8 million units, if I recall, 3.5 million out there.

I think the forecast of a 10 million year is about right, so if you think about that, we know inventories are at, I think, the lowest point they've ever been, about 64 days right now.

They were running as high as 118.

The 118 isn't realistic, but they're clearly very low, so you are the potential for the numbers to pick up quite nicely on the autos.

We are very well positioned.

We handle the -- we're the largest carrier of finished vehicles in the west.

We're very well positioned to handle the pick up.

I'm looking forward to it.

Okay guys.

Thank you.

Okay.

Our last question is coming from the line of William Green of Morgan Stanley.

Please go ahead with your question, sir.

Hey, guys, just a couple of quick questions.

On the follow up with the autos, inbound and outbound, does that matter from you?

Is it really about production and not kind of what you would send into plants?

No, it would be balance for us, but we're interested in inbound, outbound, certainly the auto parts, and then there's also, how does it impact the steel manufacturers, and everybody else that plays in.

So it is -- we have such a large piece of that business that the whole piece of it matters a great deal to us.

And do you have an estimate about what all automotive related traffic is on UP?

I don't.

How about on international intermodal, what did that move in a quarter base year over year?

It was down in the 28, 30% range.

Okay.

That's it.

Thanks, appreciate it.

Okay.

Bill, thank you expect

There are no further questions at it the time.

I would like to turn the call back to Mr.

Jim Young for closing comment.

We want to thank you all for joining us this morning, and look forward to talking to you again with our third quarter earnings.

Again, thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.