聯合太平洋集團 (UNP) 2010 Q1 法說會逐字稿

Good morning, and welcome to Union Pacific Corporation's first quarter earnings conference call held at eight forty-five AM Eastern time on April 22, 2010 in Omaha, Nebraska.

This presentation and the accompanying materials contain statements about future expectations, or results of the corporation that are not statements of historical fact.

These statements are or will be forward-looking statements as defined by the federal securities laws, and generally include without limitation, expectations, projections, estimates, and similar statements regarding the corporation and it's operations and financial performance, customer demand and economic conditions.

Forward-looking statements should not be read as a guarantee of future performance, and are subject to risks and uncertainties that could cause actual performance and results to differ materially from those expressed in the statements.

The corporation assumes no duty to update any statements or information provided in this presentation, or the accompanying materials.

More detailed information regarding forward-looking information and such risks and uncertainties are contained in the materials accompanying this presentation, and in the filings made by the corporation with the Securities and Exchange Commission which are available from the SEC at www.sec.gov and on the corporation's website.

In addition, during the presentation, the corporation will refer to certain non-GAAP measures.

Management believes these measures provide an alternative presentation of results that more accurately reflect ongoing operations.

These measures should be considered in addition to, and not as a substitute for the reported GAAP results Please refer to our website for a reconciliation of these measures to GAAP.

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Greetings, and welcome to the Union Pacific first quarter 2010 earnings.

(Operator Instructions).

As a reminder, this conference is being recorded, and the slides for today's presentations are available on Union Pacific's website.

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 Union Pacific's first quarter earnings conference call.

With me in Omaha today are Dennis Duffy, Vice Chairman of Operations, Jack Koraleski, Executive Vice President of Marketing and Sales, and Rob Knight, our CFO.

We're starting off 2010 with a record quarterly performance, as earnings grew 40% to a first quarter record of $1.01 per share.

This includes the one-time cost impact of the announced CSXI deal which totaled roughly $0.06 per share.

Rob will give you more details on that when he discusses the financials.

A major contributor to the year-over-year gain was a 13% volume increase, our first quarter of car load growth in two years.

Jack will provide commentary on the volume picture, but we clearly saw a pick up in demand across the network.

For example, although coming off of a low base in 2009, steel, lumber, soda ash and fertilizer, all experienced solid quarterly growth.

Equally important to our quarterly results was the volume leverage we generated by running a safe, service focused, efficient operation.

We're utilizing our capital investments, technology and productivity enhancements to move increased car loadings with fewer resources.

Strong service levels continued to deliver value for our customers, which also supported our pricing gains, and attracted new customers to the railroad.

The net result of increased volume, solid pricing and operating efficiency was a record first quarter operating ratio of 75.1 This achievement is consistent with our commitment to significantly leverage any volume growth in our network.

Operating income was also a record, totaling $988 million, up 47% versus 2009.

Our record financial performance enabled us to achieve strong free cash flow after dividends in the first quarter, further demonstrating the power of our operating leverage and the great UP franchise.

Now we'll hear from Jack with the discussion about our volume growth.

Jack?

Thanks, Jim, and good morning.

With the more stable economy the first quarter marked the long-awaited swing back to volume growth.

Against last year's recession impact to business levels, our volume grew 13%, with five of our six businesses posting gains.

Energy were slightly down, they were the lone exception.

Average revenue per car increased 3%, with core pricing gains of 3.5%, and higher fuel surcharge revenue partially offset by some negative mix that was largely the result of volume growth in intermodal.

Negative pricing in the intermodal, that's the lingering effect of the domestic legacy contracts that have now been replaced, once again impacted overall price performance, and produced what will be our weakest reported price gains in 2010.

The growth in volume and increased revenue per car combined to drive freight revenue up 16% to $3.8 billion, with each of the six businesses posting revenue gains.

So let's take a more detailed look at each of the six groups.

Agricultural products revenue grew 10%, as 8% growth in volume, combined with a 3% improvement in average revenue per car.

Whole grain export car loads increased 28%, led by a near doubling of wheat shipments through Gulf ports.

The continued impact of damaged South American crops last year boosted soy bean exports 13%, and also drove a 48% increase in soy bean meal exports.

Our ethanol shipments grew 28% as the federal mandate ramped up and California blending increased.

And DDGs also saw continued growth with volumes up 15% in the quarter.

Automotive revenue increased 88%, as a 21% improvement in average revenue per car, combined with a solid increase in shipments.

Volume was up 56% from last year, when the auto industry was struggling with high inventory levels as sales slumped.

Average revenue per car received a boost from the renewal of the last auto legacy contract, as well as some other contract increases.

Increased production and sales was reflected in growth for all manufactures with vehicle shipments increasing 67%, and our parts volume growing 42%.

Our chemical revenue grew 14%, as volume climbed 13% and average revenue per car was up 2%.

Fertilizer and industrial chemicals were the primary drivers of the volume growth, although car loadings were up in all major chemical markets.

After a couple disappointing seasons, our fertilizer shipments grew 39% with a 126% increase of export potash leading the way.

Compared to a weak first quarter a year ago, a modest increase in demand, coupled with a more balanced inventory level position, produced a 14% increase in our industrial chemicals business.

Soda ash volume grew 19%, as both expert and domestic demand increased.

And LPG shipments were up 16%, and plastic volumes were up 4%.

Turning to energy, while stronger economic activity increased electrical demand, it wasn't enough to drive year-over-year growth in energy, where volume decreased a little less than 1%.

However a 6% improvement in average revenue per car produced the 5% increase in revenue.

A trend out of the Powder River Basin was encouraging, posting year-over-year increases in February and March, after running below 2009 levels in January, with tonnage up 1% for the quarter.

Our Colorado Utah tonnage was down 4%, as high stockpiles curtailed shipments for a few large customers.

Train size productivity improvements continued in both markets.

And if you flip to the next slide, we can talk for a second about coal stockpiles.

Shown on this graph is the monthly coal stockpile data for the Powder River Basin.

The gray line shows you normal stock, in terms of normal days of burn, the blue line shows how stocks are actually tracked.

The most recent data available is for February.

But you can see how sharply the severe winter weather cut into coal stockpiles, dropping the Powder River Basin stockpiles to 59 days of burn, compared to what would be a more normal level of 52 days.

I suspect that when the March report comes out, it is going to show continued improvement as well.

A more stable economy, a pick up in industrial production, particularly in energy-sensitive industries like steel, improvement in the export markets for coal as world wide demand increases, and the reduction of the stockpiles are all encouraging signs for the coal business.

So if we have a normal summer burn, our coal business could actually strengthen as the year progresses.

Industrial products volume grew 9%.

It's the first year-over-year growth since the first quarter of 2006.

Revenue grew 10%, as the volume increase combined with a 1% improvement in average revenue per car.

Average revenue per car was impacted by the significant growth of our uranium tailing shipments for the Department of Energy, volume for the short haul move in Utah grew nearly 450%.

Improvement in the automotive industry and energy drilling, as well as restocking by metal service centers, pushed steel mill capacity utilization to 68% in the first quarter, that was up from 43% a year ago.

That improvement was reflected in a 28% increase in our steel and scrap business.

Increased drilling activity also helped drive a 20% increase in non-metallic minerals, with growth in frac sand shipments.

And although our lumber business grew 8%, we're still looking for some real significant signs of recovery in our cement and rock businesses, both of which declined, largely a reflection of a lack of demand, tight credit and shrinking state and local budgets.

Intermodal revenue increased 25%, as a 21% increase in volume combined with a 4% improvement in average revenue per unit.

While intermodal pricing should improve as new contracts take effect, I would remind you that the benefits of the new Pacer arrangement are phased in between now and the original contract expiration.

Furthermore, some of that benefit will be in the form of fuel surcharge recovery which still results in improved margins, but it's not reflected in our core price calculation.

Improved consumer demand and inventory restocking led to a 12% increase in our international intermodal volume.

Domestic intermodal volume grew 33%, aided not only by an improved economy but also by business converted from the highway and our year-over-year growth with hub.

Our Streamline subsidiary, door-to-door product grew 77% in volume, with almost half of that growth coming off of highway conversions.

Also during the quarter we announce the creation of the new UMAX container program.

The new UMAX program replaces our old CSXI legacy contract, and it strengthens our domestic intermodal value proposition, better positioning us for highway conversions and other growth opportunity.

Like the Pacer deal last fall, the CSXI renegotiation was pulled ahead, and with it's completion there are no remaining legacy contracts in our domestic intermodal business.

This is significant, because it allows us to work directly with the majority of our intermodal customers.

The new UMAX program provides those customers with access to more than 20,000 containers.

And expanded market reach across North America with over 600 service lanes, supported by faster and more frequent train schedules.

Our intermodal franchise positions us to offer the most complete coverage of domestic intermodal lanes.

And our strategic investments and process improvements that support excellent service, allowed us to improve our transit time in 60 of those lanes during the first quarter.

And the good news is, it's only going to get better when we open our new Joliet intermodal terminal late this summer.

The new facility will increase both our international and domestic capacity, it will improve our efficiency, and it will further strengthen our intermodal value proposition.

Without question, customers have come to expect a high level of performance from us, so we're pleased that customer satisfaction stayed strong coming in at 87 matching last year's score, as we continued to offer strong value proposition underpinned by excellent service, and backed up with strategic investments and our strong customer relationships.

So let me wrap up with a look of where we are.

A more stable economy has produced a stronger run rate so far this year, and external forecasts predict continued year-over-year improvement in key areas like industrial production, imports and exports.

Since the beginning of the year, the outlook for vehicle sales has strengthened, but the projection for housing starts has weakened a bit.

Taken all together, we think the economy is going to stay the course, as we look ahead to the second quarter, and beyond to the rest of the year.

A continued slow recovery will likely keep our business stronger than last year, but below the levels we've seen in the past.

Here's a look at some of the drivers that we see for each of our businesses in the second quarter.

In Ag, the South American grain harvest and normal seasonality have already begun to soften grain export volumes.

Although we may see some recovery later in the year with the North American harvest, exports could run below 2009 levels.

Providing some offset, the Federal mandate and increased blending in California should drive continued growth in ethanol and DDGs.

Obviously the second quarter last year was a tough time for the automotive industry.

Expectations this year are for significantly stronger production and sales levels, and external forecasts projects strengthening through the year.

Apart from the anticipated seasonal slowdown in fertilizer, demand in most of our chemical markets should remain stable.

In terms of energy, increased industrial production should spur further recovery in electrical demand and our Southern Powder River Basin business will also benefit from the startup of a new unit in San Antonio during the quarter.

Colorado Utah volumes are expected to be about flat for the year, but should post growth against last year's coal quality and production challenged second quarter.

Continued strength in the auto industry and drilling activity should translate into growth in steel and non-metallic minerals.

And we're watching for some signs of life in that construction area, as we move into the second quarter seasonal ramp up in construction activity.

International intermodal should benefit from stronger imports, while a strong value proposition should continue to attract highway conversions to our domestic intermodal business.

We'll also benefit from the shift of the hub business.

Our strong value proposition, not just in domestic intermodal but across all our businesses, will allow us to take advantage of the opportunities that arise as the economy recovers.

Stronger economy should be good for pricing, which along with excellent service, strategic investments, and innovative product offerings will drive a stronger price plan over the balance of 2010.

Although it's still early in the quarter, we have already seen price up about a point, versus our first quarter.

So with that, I will turn it over to Dennis for the operations report.

Thank you, Jack, and good morning.

With volume growth starting to return, we operated a safe and efficient railroad that continued to deliver the quality service customers have come to expect from Union Pacific.

First quarter 2010 metrics illustrate that performance.

Starting with safety, both employee incidents and grade crossing accidents were at record first quarter lows.

Our internal service measure, the service delivery index at 89 is close to last year's record mark of 92.

In fact, we tightened the windows around our service commitments beginning in the second quarter of last year, so the 89 was achieved against a higher standard.

On a more apples to apples basis, we would have been closer to 93 without the reset.

This illustrates how as we take variability out of the network.

We are holding ourselves to a more rigorous service standard, and delivering consistently better service to our customers.

Although velocity declined one mile per hour year-over-year, much of the decline related to the winter weather and an aggressive engineering program on the sunset corridor, and across large portions of our single track railroad in the south.

Importantly, running a safe, fluid railroad generated excellent operating leverage in the quarter, as evidenced by volumes increasing 13%, while through freight train starts increased only 1%, and yard and local starts actually decreased 7%.

Our core track infrastructure is built to handle 190,000 to 200,000 weekly carloads.

So, with today's volume running around 170,000, we have capacity for growth.

We're also creating capacity through an evergreen approach to improvement.

A key fundamental component of this is inventory management.

First quarter freight car inventory declined 3% versus 2009.

With this productivity improvement, we handled 235,000 more carloads in first quarter 2010, with nearly 9,000 fewer cars versus first Q 2009.

Train design efforts are helping us maximize throughput across our network.

This work, in combination with greater utilization of locomotive technologies, such as distributed power, enabled us to significantly increase train length.

For example in the first quarter, we achieved a 15% increase our intermodal train size, saving roughly 900 intermodal train starts.

Locomotive technology also drives better productivity and lower fuel consumption.

Additionally, our engineers play a key role in conservation.

Through our Fuel Masters Unlimited Program, which shares some of the Company's costs savings with the employees, we are seeing continuous improvements in our consumption rate, again, setting a new first quarter record.

We're also ready with the necessary work and resources to handle the growth.

We've recalled about 1600 employees so far in 2010, bringing furloughs down to around 2800 remaining.

Our retention rate remains nearly 90%, which is very good considering most of these folks haven't worked for a year or more.

We're anxious to get everyone back to work, and are even using voluntary transfers to relocate employees to areas where additional crew resources are needed.

This is a win-win, saving hiring and training costs for the Company, and putting a paycheck back in the hands of the employees sooner.

We anticipate additional engineer training and transfers in 2010, the extent to which will depend on volume return.

While we have placed some locomotives and freight cars back into service, we still have a good supply in storage.

Beyond having the available resources, improved utilization is essential to delivering on our volume leverage opportunities.

We are seeing productivity gains across the board.

In particular, freight car utilization was a first quarter best.

So going forward, the key for the operating team continues to be agility.

We have to be prepared to meet and beat customer expectations, regardless of what happens with volumes.

To that end, we followed the principles that have driven our improvement, focusing on safety, hardening the infrastructure, thus reducing operational variability, efficiently leveraging the network volume, and delivering excellent service and creating value for our customers.

With that, I'll turn it over to Rob to discuss the financials.

Thanks, Dennis, and good morning.

Before we go through UP's record first quarter earnings, I'd like to make everyone aware that the 2009 fact book is now available on the UP website under the Investors tab, so please feel free to check that out.

Slide 21 summarizes our first quarter results with operating revenues up 16% to nearly $4 billion, driven by double digit volume growth, increased fuel surcharge revenue, and pricing gain.

Operating expenses increased only 8% to $3 billion, demonstrating great operating leverage.

This leverage is especially evident, when you consider the fact that higher year-over-year diesel fuel prices accounted for nearly 75% of our quarterly cost increases.

Quarterly operating expenses also included a one-time payment of $45 million to CSXI, as part of the transaction to restructure our intermodal transportation relationship.

As Jim mentioned, that payment subtracted roughly $0.06 from our quarterly earnings.

Operating income totalled $988 million, a first quarter record, and a gain of 47%.

First quarter other income was only $1 million, as we incurred roughly $16 million in early debt redemption costs, plus higher environmental remediation charges.

Interest expense at $155 million, was up $14 million year-over-year, primarily as a result of higher debt levels.

Our effective tax rate was 38.1%, 3.6 points above the 2009 first quarter rate of 34.5%.

You might recall that last year's rate was lower, as a result of a newly enacted state tax legislation.

Taken together, first quarter net income totaled $516 million, or earnings of $1.01 per share, up 43% and 40% respectively.

On the pricing front, we're reporting core pricing gains of roughly 3.5% in the first quarter.

That number includes about 0.5 point related to the year-over-year increase in RCAF fuel escalators.

We recognize that consistent core price improvementsf are critical to improving our overall returns, and we are committed to that task.

Importantly, with the economy turning around, our continued strong service offerings, as well as the repricing of some major legacy deals, we believe pricing will improve over the balance of the year.

In other words, we believe the first quarter 2010 price numbers should mark the low price point for the year.

Our legacy renewals also provide us with better fuel cost recovery.

And although this does not contribute to our core price numbers, it definitely improves our intermodal and overall Company margins.

Let's look at the expense side now.

Starting with compensation and benefits at $1.1 billion in the first quarter, a 1% decrease versus 2009.

Although car load volumes grew nearly 13% in the first quarter, UP's workforce levels actually decreased 6% versus 2009.

As you might recall, volumes fell off very quickly last year, leaving us to play catch-up, as we worked to align our resource levels with demand.

To help put this in perspective, slide 23 shows both first quarter 7-day car load volumes, as well as our employment levels between 2008 and 2010.

With volumes off 10% over the two-year period, employment levels were down 14%, as we increased productivity in all areas of the business.

Labor productivity can be measured several ways, but the common measure of gross ton miles per employee increased an impressive 16% in the first quarter of 2010, versus 2009.

Offsetting some of our productivity gains were higher costs per employee, driven primarily as a result of the agreement side of last year's 4.5% wage increase, as well as health and welfare inflation.

Going forward, we'll continue recalling employees as needed to backfill attrition and handle business volumes.

As we've said before, however, this won't be on a one for one basis, as we expect to offset some of those needs with continued productivity.

First quarter fuel expense increased 51% to $583 million, as a result of higher year-over-year diesel fuel prices, and increased tonnage moving across the network.

First quarter prices averaged $2.16 per gallon, a 43% increase from 2009's $1.51 per gallon.

Although increased diesel fuel prices added $171 million to our quarterly expenses, we offset roughly $14 million through greater fuel efficiency.

Turning now to slide 25, we summarize the year-over-year change in three of our expense categories.

Starting on the left with purchase services and materials, this expense increased 7% in the quarter to $432 million.

Increased volumes led to the greater contract service expense in areas such as intermodal ramp operations and purchased transportation.

Offsetting a portion of that increase, was less material usage associated with fewer locomotive and freight car repairs.

You should also note a slight change in the amounts reported as purchased services and materials expense for 2008 to 2009.

As we reported in the 10-K, we changed our accounting policy for rail grinding costs in the first quarter of 2010 from a capitalization to a direct expense method.

We will show this change retrospectively in the quarterly earnings releases and SEC filings.

The annual impact of this change is very small, affecting only a couple of expense lines, and totaling a $0.01 for all of 2009.

But there are some minor differences, so please be aware of this change.

Equipment and other rents expense decreased $27 million dollars, or 9% in the quarter.

As discussed previously, $22 million of the decline is associated with locomotive leases restructured in the second quarter of 2009.

Expenses were also lower in the quarter, as a result of fewer leased freight cars and intermodal containers.

We did, however, see an increase in short term car rents versus last year, as both automotive and intermodal volumes made very strong gains.

Other expense grew $20 million in the first quarter to $246 million, an increase of 9%.

The biggest driver was the $45 million one-time payment to CSXI.

Reduced quarterly personal injury expense related to our ongoing safety improvements and lower bad debt expense helped offset a portion of this increase.

With volumes running higher year-over-year, and excluding the $45 million payment, the run rate for other expense should be more in the of the neighborhood of $200 million per quarter.

The key first quarter story line was the tremendous operating leverage generated from the volume growth.

Slide 26 illustrates that, and while our business volumes increased 13% in the first quarter, operating expenses only increased 2%.

On this chart, we've normalized 2010 operating expenses to reflect the year-over-year change in diesel fuel prices, which illustrates that we are only about 20% expense variable in the quarter.

In 2009, we were about 80% variable in a declining volume environment, but as volumes increase, you want to reverse that math, growing volumes faster than costs, and we did just that.

Although we're very early in the recovery cycle, we're clearly enjoying the leverage associated with adding cars to existing trains, improving the utilization of our locomotive and freight car fleet , as well as increasing employee productivity.

Going forward, it will be a challenge to add volumes faster than costs.

Costs won't necessarily come back in a linear fashion, so we'll likely see some step functions depending on how the volume actually returns.

Overall though, we believe that roughly a third of the cost reductions that we achieved last year should be permanent.

The strong efficiency, illustrated by our operating expense variability is also reflected in our operating ratio, which was a first quarter record at 75.1%.

We achieved 5.3 points of improvement versus 2009, more than offsetting the head wind created by higher diesel fuel prices and the CSXI payment, which together impacted our operating ratio by about 4 points.

The ongoing efforts of project operating ratio, strong volume leverage, continued operating efficiency and core pricing gains all contributed to this record mark.

Solid quarterly financials carry over to both our cash flows and balance sheet.

On the cash side, we achieved free cash flow after dividends of $426 million.

This is a substantial increase versus 2009, and is principally driven by improved first quarter earnings, lower cash tax payments versus 2009, and the timing of payments for some capital equipment.

We also continue to have a very strong balance sheet with our adjusted debt to cap solidly in the mid-40s range.

This balance sheet metric supports our goal of maintaining a solid investment grade credit rating.

With a record first quarter in the books, let's look ahead at the second quarter.

The primary driver of our quarterly earnings will be volume.

And as Jack discussed earlier, we are seeing stronger year-over-year demand.

As you'll recall, the second quarter 2009 was the low point for our 7-day car loading volumes, which came in a little over 143,000.

Although we aren't giving specific volume guidance, at the current run rate, we could again see double digit gains.

With a continued car load growth, we would expect to generate solid volume leverage.

The comparison will get tougher, however, as we move through the year.

We took costs out of the system throughout 2009, becoming more and more aggressive as the month passed without any economic improvement.

We will also face the added pressure of agreement, wage and benefit inflation.

As we previously discussed, health and welfare expenses are driving costs higher in 2010.

We don't accept this as an excuse, however, and we will continue to work to offset a portion of this increase through productivity.

Another cost increase that we're already seeing is higher diesel fuel prices, which pressures margins and impacts earnings as a result of the surcharge lag.

Our current spot price is running over $2.40 per gallon which compares to an average price of only $1.57 per gallon in the second quarter of last year.

Because of the inflationary pressures we face, as well as our need to increase shareholder returns, pricing continues to maintain a focus within our organization.

As we mentioned earlier, core pricing is expected to improve through the year as we achieve real pricing gains, plus the benefit of legacy renewals and excellent service.

Assuming the economy continues to grow, we look forward to building off of our first quarter momentum with continued operating ratio improvement, as well as solid cash generation from the business.

Those gains support our balanced approach to deploying cash, which involves investing in the business as warranted by returns, maintaining a strong balance sheet, and rewarding our shareholders.

With that, let me turn it back to

Thanks, Rob.

What a difference a year makes.

A year ago, everyone was trying to find the bottom, and we were focused on idling assets and reducing operating costs.

Despite some lingering uncertainty, we are feeling better today about our opportunities for volume growth in a more stable economy.

The visibility to a future demand is still a little clouded, however, so we need to remain flexible, and be ready to act if the economy loses steam.

We have significant volume leverage remaining in the system, so we look forward to additional growth.

Fluid operations are key to delivering upon our customer commitments.

Customers rely on the strong value proposition of UP's service product, allowing us to extend our supply chain reach and compete in new markets.

We're also continuing to make the critical, long-term capital investments that support the Company's growth strategic.

Union Pacific is becoming more profitable, producing stronger cash flows, and generating higher financial returns, which will enable us to reward shareholders for their investment in the great UP franchise.

With that, it's time to open it up for your questions.

Thank you, Mr.

Young.

(Operator Instructions).

Thank you.

Our first question is from the line of Matt Troy from Citigroup.

To dig deeper on the intermodal side, I wanted to be clear on the UMAX renegotiation, what kind of implications that would have either for volumes, revenues and ultimately profit?

Do you have any estimates in terms of us putting together our models so we can minimize confusion on this end in 2010?

Matt, we're not going to get into the details.

I think just suffice it to say, it's a positive for both of us in terms of our ability to put new products, we've got some great service schedules, our customers are going to have access to a great container fleet, and it gives us direct access to many of the customers to help sell their propositions.

And you have to think about this long-term in terms of the way the new agreement is structured.

Okay.

Then I guess, tying it back on the follow-up to the pricing, core pricing story in the 3%, 3.5% range you said in the quarter, feeling that was a low point, can you help us in terms of just climbing out of that to a higher number for the year, which you indicated would be your outlook?

What are core pricing gains X legacy, X these intermodal deals, are we pacing higher than that, or are we being dragged down by those two facts?

Or how do we get from where we are today, what are the parts and pieces that help us get to a level that's higher than the 3%, 3.5% that you reported for the quarter?

Just some detail there would be very helpful.

Thank you.

Well, Matt, again, you have a lot of factors that play into this.

Obviously the mix, the timing of legacy agreements, the length.

Jack had indicated, our legacy deals are spread out over time.

As Jack said, we are running about a point higher so far April, in terms of what we saw in the first quarter.

The question really becomes one also, of what do you assume in volume?

As volume and demand pick up, it should create even stronger pricing environment.

Jack, you want to add to that?

Yes, Matt, here's kind of like three things that I think you could kind of think about.

Number one is, we've said in the past that the Pacer contract basically increases over time.

And this will be the last quarter that we have negative pricing in our intermodal franchise, so that's a good thing for us.

Secondly, some of our legacy contracts, including the largest which was an automotive deal, was a mid-quarter, first quarter transaction.

So there's greater strength moving forward from that.

The third thing is as we look to the pricing environments to the future, we have tariff business in place right now that is still reflective of last year's softer economic terms.

Those will change over time as we go through the year with strengthening of the economy.

We're feeling good about what our price picture looks like going forward.

I imagine you're some 80% negotiated for 2010, so you do have fairly clear line of sight visibility?

Yes, for the contract deals but for the -- for the tariffs, we have greater flexibility.

And already, as we start to see truck capacity tighten and truck pricing going up, those kinds of things, we are back at the table looking for opportunity.

Thank you.

Okay, Matt

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

Please go ahead with your question.

Yes, good morning.

And, just great performance on the cost side, very impressive.

Let's see, the operating leverage was very good.

And it sounds like you have more room in the network to continue handle volume growth with limited additional expense.

I was wondering if you could give average train length and the car load network, and average train length in the intermodal network.

And then a sense kind of what the potential train length would be, just giving us a sense, of more of the operating leverage?

Duff, do you want to take that one?

Yes, you bet Tom.

The average train length that we have is for the entire system, all of our network is about 5500.

We grew that over 10% year-over-year, quarter-over-quarter.

Our biggest growth obviously was in the intermodal side.

Jack showed you the 21% growth.

We added about 20 boxes per train there, and with very minimal crew starts.

As you saw there, we only added 1% crew starts there against the 14% volume.

And when we look at our overall network, we think that we have another 15% on train length, at a macro perspective.

Obviously that would differ by commodity group somewhat.

But we think overall, that's a pretty safe measure for us.

and would have to look at the corridors where the growth occurs.

But we still see a good upside for our leverage opportunity on train length.

Hey, Tom and I would be careful though on taking the first quarter, and extrapolating it out.

As Rob said, this is more of an exponential relationship, than linear.

As you start moving up towards that theoretical capacity we have in our system, you get a little more cost pressure.

But we clearly have, we've got, Dennis has shown 1300, 1400 locomotives in storage, we have 2600 employees furloughed.

We are in some locations starting to do some hiring.

But again, I think first quarter is outstanding.

We hold our operating team to a high standard in terms of what they do the next three quarters.

But again, you will get a little cost pressure as you move up the curve.

Okay.

Just I guess to drill down a little bit on that, what in intermodal specifically, Dennis, can you tell me how many containers per train you were on average in the first quarter?

About 160.

160.

Okay.

And I guess in theory that number could go up to 260, 270?

You're close.

Right around the 250 range, Tom.

Tom, keep in mind, we can build very big trains, and have a negative impact on service, and there's a serious consequence to that in our market.

So Dennis' task is to drive that productivity, but drive this service to new levels here.

And you have to be careful of the mix in there, Tom between domestic and international.

Obviously international is the pure double stack play.

Domestic is more of a hybrid, but with Jack's help and the marketing team's help, we are transitioning most of that to double stack also.

Okay, and then just a quick follow-up, and I'll pass it on.

On the pricing, do you think you can get to 5% base rate increase when you get in the second half, third quarter, fourth quarter, is that a reasonable way to think about it?

Tom, we're not going to get into the guidance an where we're going.

We believe we have the upside, a lot of variables.

If you have a hot economy moving out here, obviously, we have more flexibility.

Okay.

Great.

Thanks for the time.

Thanks, Tom.

Our next question is from the line of John Langenfeld with Robert W.

Baird.

Please go ahead with your question, sir.

Good morning.

Hi, John.

Jim, you talked about in the past, over time, longer period of time your goal is to offset half the inflation through productivity.

Just wondering, how much of that opportunity have you eaten into here over the last 12, 18 months, and is that still a realistic goal as you think out over the next three to five years?

I think it is, John, our productivity -- again you have to be careful here.

We've got a lot of excess capacity right now, with idle assets.

That's my definition of productivity, that's not great productivity when you look at asset utilization, with storage here.

If you get back into where, maybe the normal run rate on volumes that we were looking at long-term, I think assuming offsetting half of inflation is not unreasonable.

Okay.

All right.

And then on the intermodal side, can you talk a little bit about how, if at all, your strategy changes with regards to, not only pricing but just how you go to market?

I mean you significantly cleaned up the legacy deals.

You've really structured the market in a way that advantages you in a major fashion.

So how does that change how you market your product?

Jack?

It really allows us to deal now directly with the IMC community.

We're not changing our strategy, we're not pulling away from the IMCs.

In fact, what we want to do, is offer an even better product offering for them, and give them greater flexibility of choice, whether they want to go ramp to ramp.

Or whether they want to use our stream line door-to-door product, which gets them a lot more flexibility working with their customers.

I was just going to ask, does the end shipper see that, will they notice anything different on UP as they look out a year from now, than where they were a year ago?

They'll see it in terms of more consistent reliable service.

Okay, thank you.

Okay, John.

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

Please go ahead with your question.

Thank you, good morning.

You mentioned a few times the leverage storage, which is very clear on a year-over-year basis.

But if I look at the performance versus Q4, you had revenue up about $200 million on better carloads and some price, but profit only up about $30 million.

So that's about a 15% contribution.

Is it fair to look sequentially, as we think about some of that leverage as we work through the rest of the year?

And maybe you can help us on some of the puts and takes on the cost side that would restrained that leverage as you walk from Q4 to Q1?

Chris, I'd be careful about making a comparison to fourth quarter, you get a lot of variables in there, or out there.

I know we had, I guess or PI, we had some pretty favorable news on our personal injury accruals in that quarter that tended to help that number.

But I wouldn't look at it, as a negative.

I mean, Rob, you want to add anything?

Chris, don't forget the one-time CSXI payments in the first quarter, as well.

Yes, I excluded that.

Can you -- you mentioned export coal.

Can you give us a little color around that, how much of that are you doing, where is that going?

Chris, we're not a big player in the export coal market, so for us the attractive situation of an increasing demand around the world, as it really absorbs a lot of the eastern coal.

And then for us it gives us the opportunity to move western coal east.

We are, though, moving probably I would guess this year, maybe a million tons or so.

It's going to Long Beach and Roberts Bank up in Vancouver which are two key port locations for that coal.

It's mostly Colorado, Utah, although we are getting some pushing and shoving as to whether it makes sense whether it makes sense to move Powder River Basin coal to Asia, to China in particular.

And we're also starting now to see some greater interest in Mexico, moving coal out of the US into Mexico.

So, that's kind of our play in the international market.

Just one housekeeping one, what do you expect the tax rate to be on a go-forward basis?

Rob?

It's more normalized, 38%-ish.

38%?

Okay, thank you.

All right.

Our next question is from the line of Bill Greene of Morgan Stanley.

Please go ahead with your question.

Yes, good morning.

Hi, Bill.

If we think back, one of the questions we often get is, if we look at some of the rail's prior experience in the last upturn in 2003, service levels obviously deteriorated.

So what do you think are the right metrics for us to watch as, to kind of -- as a canary in the coal mine to look at things?

We saw the train speed slow a little bit, but so maybe that is not something to worry about.

So I don't know how to exactly how to think about the public metrics, what you would watch if you were us, to make sure that service levels are maintained.

Well, there is a good correlation to velocity, there really is.

We went backwards a little bit first quarter, but a big part that have was weather, and we're back up to 27 miles an hour right now through April, so we're feeling pretty good.

But the metrics you get that we reported are velocity, the inventory levels in cars, and do all time are operate good indicators of the health of our network.

Okay.

And then, if I can ask a question about inventories, if we look at the merchandise customers you serve, have you seen much in the way of restocking from them already?

Is that already past, or are we still to see that come as the economy picks up?

How do you feel their inventories are now?

Bill, they've been really balanced.

We have seen some inventory replenishment but I think the mood right now with our merchandise customers is, they're going to rely more on kind of a just in time inventory process.

They're being cautious about placing orders and overstocking, so there's a good management flow about watching the balance between inventory and sales.

If you look at the inventory-sales ratio right now, they're looking really good.

Even with the uptick in volume, we don't see a lot of inventory build in terms of overhang, that I would be concerned about.

I think it's been pretty much demand-driven, which is really healthy.

That's great.

One on buy-backs, what are the metrics you watch when you add those back?

Well, Bill, because I committed every quarter in here, our job's here is to create the financial performance, and the cash flow that put us in a good position.

And we said as we feel better about the business this year, we're going to take a hard look at what we do next in terms of returning cash to our shareholders.

Thank you.

Our next question is coming from the line of Scott Flower with Macquarie Securities.

Please go ahead with your question.

Yes, good morning, all.

Good morning, Scott.

Jim, I wonder if you could give us some flavor on what's going on in Washington.

Obviously you all are very well positioned to understand the dynamics.

Is that something that, there are just so many other priorities with what's going on with the bills on the rail side, are just not moving very quickly and there's too much other focus?

How do you see things playing out there?

Scott, we're continuing to be engaged with the -- with members in terms of the health of our industry and the value our industry creates.

I would view right now, that it's not in the top of the priority list when you look at all the other challenges DC is working with.

But you can never underestimate the is working with, but you can never underestimate the potential here.

And as we've said consistently, we're engaged.

And are helping -- every member I talk to, you go back, they value rail.

It's interesting when you sit across from a member who thinks about the rail, and the value that it brings in terms of jobs, the value it brings in terms of energy efficiency, so nobody wants to get this wrong here.

And we'll see what happens.

But right now, I don't see that the rail piece is the top of the list in terms of priority.

Is this something that you get pushed out past the election?

There's clearly a possibility there, but we're going to always be engaged.

Okay.

And then the other quick one for Dennis is, help me understand how you had the drop in yard and local starts, with the volume growth you had?

That's an impressive statistic.

A good portion of the growth, Scott, was in the intermodal and auto.

And we continued through the unified plan to make those efficiencies, and look for combinations of potential reductions.

And so we squeezed down the overtime, squeezed down starts and we were even able to take out days of the week.

I think I reported to you before, we idled up to almost 30 of our satellite remote yards.

If that's a give and take, we'll add back one or two very once in a while, depending on where we see the growth.

But overall productivity levels are up, as I said, across the board, particularly in our manifest yards.

Guys, we still have, if you think about our industrial products business, which is primarily the manifest, we're still substantial.

We had a growth, first time we've had growth in several years, we're still substantially below the kind of peak levels we saw back in 2007.

And I'll give you an example.

Lumber loadings, in the peak, second quarter 2005, we loaded in that peak quarter about 63,000 loads of lumber.

We hit a bottom here last year at about 18.

We loaded first quarter about 22,000.

So that just gives you a perspective of how low business got in some of these areas, and still have a long way to go.

Great.

Thank you, all.

Okay, Scott.

Thank you.

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

Please go ahead with your question.

Yes, good morning, guys.

Quick question, I'm just kind of looking at how you trend throughout the year normally, with the CSX payment being one time, you're really sort of sub 74 operating ratio.

Is that about right, the way I look at this thing?

It was about 1.1 points, if you do the math.

Yes, 73.9.

And with the pricing improving, and volumes still there, and you're still seeing some productivity, in fact, your train speed should pick up, as we're not going to assume the same type of weather impact for Q2 -- I'm wondering how quickly you think UNP can get back to the sort of 70 OR type of environment, given all the things we mentioned?

And given your productivity gains?

I don't mean a time horizon, but it doesn't seem like it's out of the question, when I look at the model.

Well, the only long-term guidance we still have hanging out there, is the view that we'll be net low 70 OR by 2012.

And we're feeling pretty good about it.

Seems like you're on your way.

Maybe this is a question for Rob.

Rob, I think you said in the other income you had $16 million from early debt retirement.

Did I hear that correctly?

That's correct.

What should we expect going forward?

Still sort of the $15 million to $25 million range for the rest of the year on a more normalized behaviors?

That's probably not a bad number, Jason.

I mean we had bad real estate sales were a little lower in the quarter as well, so that can fluctuate that number.

But your thinking is not off track.

Okay.

Fantastic.

I appreciate the time as always, guys.

I'll turn it over to somebody else.

Thanks, Jason.

Thank you.

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

Please go ahead with your question.

Thanks very much.

Good morning, guys.

Morning, Walter.

Going back to the back to the train length thing, I noticed that during the quarter, you tested a 3.5 mile long train, pretty long train there.

Just wondering what you might have gathered from that, any new information with that test?

And sort of as a follow on to that, there was some public back ash against the length of that train.

I think they were misunderstanding the whole reason you were doing it.

But what are your impediments?

You mentioned service as a limiting factors.

Is there are any other limiting factors, things like this kind of public opinion thing?

Dennis, do you want to answer that one?

Well, Walter, it was actually a proof of concept.

We had some new technology we were trying out, with our locomotives and our GPUs.

And we proved we could do it.

And that was a one-time deal.

and we're not going to repeat that kind of issue with those long trains.

But remember, the leverage in train length is on the average train length.

It's not on the maximum train length.

And we did prove we could do it.

We did learn some things.

We think we have, as we said earlier, adequate opportunity for upside leverage here in our train lengths.

We do -- and we're dealing with inside of our capital budget here.

And some of the impediments we may see, like siding length, and we do have a few siding extensions, our run-through track capacities.

We're addressing those as we go along.

So, as I said, we're around 5500.

We have plenty of upside left there, across the board.

And we continue to press the technology envelope here, to be able to accommodate those trains.

Perfect.

Just a follow-up question on the attrition side.

You mentioned attrition.

To what extent, can you remind us your yearly rate of attrition.

And to what extent is that helping new realigning your work force, and bringing people back to fill jobs due to attrition, as opposed to higher volumes?

Well, it's a key component and as you recall back about three years ago, we were running about 7%, 8% percent attrition.

That's fallen off here in the last year or so, which wouldn't surprise you where people are deferring retirements, or deferring maybe looking for jobs elsewhere.

But we expect this year to lose about 3,000 employees.

That's down from kind of the peak of 5,000 plus.

And it will continue.

I mean, you've heard us talk about the baby boomers are moving through the chain and are retiring.

So it's given us a good opportunity to manage our employee -- employment levels through attrition.

If you look at our numbers, we hit a peak on our employment of around 51,000, 52,000 employees a couple years ago.

We finished this quarter at around 42 or so.

A big piece of that was attrition, in terms of simply not filling jobs as they left.

Okay.

That's great answers.

Appreciate it.

Thanks.

Thank you, our next question is from the line of Justin Yagerman with Deutsche Bank.

Please go ahead with your question.

Hey, good morning, thanks for taking the time.

I guess a question going back to the pricing things of things.

I wanted to get you sense, you said you had a contract on the auto side mid quarter, this quarter, and that was part of the point bump that we're seeing in Q2 right now.

Are there any other timing guidance that you can give us throughout the year, in terms of when any of the other legacy contracts, or repricing that we could expect to model in to perhaps some improvement?

Jack, you want to take it?

Sure.

Justin, we have the one in the first quarter.

We have the fact that Pacer ramps up over the year.

So that will change over time.

The CSXI contract basically takes effect in the second quarter.

And then we do have a couple of mid-year legacy deals in the July, kind of mid-year time frame, not the biggest of deals but a couple there that will come on stream.

Okay.

That's helpful.

And I guess just vis a vis that.

and maybe giving a little context around it, you talked about better fuel surcharge recovery, and I'm assuming that comes with some of the intermodal change.

Can you speak to where you've been, where you are now, and where you expect to be on a full run rate basis, in terms of offsetting incremental fuel costs, as we kind of move through 2010 and move into 2011?

Rob, you want to take that?

Justin, we continue to make progress, and you're right as we continue to click off legacy contracts, and as Jack talked about in the intermodal, that improved our position.

We've done a great job on moving forward through the recovery, and minimizing the negative impact that comes with rising fuel prices.

We still, of course, have the risk or challenge from quarter-to-quarter, should there be swings in fuel prices with the lag effect.

But we've made great progress on our recovery.

We're going to continue to make progress as we move forward.

The other thing, just talking about fuel, when you look at the impact of fuel year-over-year, it cost us in the first quarter about $0.10 EPS.

And that's primarily as a result of the fact we got a $0.20 plus, as a result of favorable surcharge lag last year.

So it was -- you kind of get those swings from quarter to quarter depending on what's happening in the timing of the recovery.

But bottom line is, we continue to make progress.

We have made great progress in minimizing the negative impact as a result of the contract.

Is there a number that we should think of in terms of incremental fuel costs recovery that you guys are able to achieve now versus prior, and maybe where you think you're heading?

I can't give you a number, Justin, and there's 75-ish kind of fuel surcharge programs in our market.

So trying to tie it to a single number is not particularly useful at this stage.

It's just that we -- I think the bottom line here is we kind of removed that as being a major negative, a rising fuel price environment.

On an annual basis, as Rob said, we pretty much neutralized fuel either way.

You have to be a little careful on a quarter by quarter basis, particularly when you get a spike either way, that you can have a bigger impact on your earnings in that quarter because of timing.

But on the annual basis, we pretty much limited it, the majority of the fuel variability.

Sure.

As I'm looking through the year on the cost side.

The work force productivity is impressive, and getting the sense that you're starting to get though those friction points on productivity where you got to make some decisions.

When you guys are sitting there looking at that and trying to figure out how to bring on crews, and what have you.

What are the key metrics?

What should we be looking at, when we look at our labor costs, should it be more tied to volume, more tied to revenue?

More tied to what we think OR should be?

And I guess the balance of all three to some extent, but maybe if you could give us a little more color on how you make those decisions?

Justin, it's tied to volume.

We do look at productivity offsets.

But you start adding more volume, you'll eventually add more train starts, which means we'll eventually add more train crews.

Again more volume will drive more maintenance.

So our goal here is -- quite honestly, I want to get back, we've got a strong hiring program going on.

That means we've got good growth in our business, we see good opportunity, but at the end of the day, volume is the prime driver.

And lastly, and I'll turn it over to someone else, I just wanted to confirm that CapEx guidance still the same at $2.5 billion, no change on PTC fill ups?

Right now we're at the $2.5 billion range, PTC is still about $200 million in that number.

Okay.

Great, thanks a lot, guys.

I appreciate the time.

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

Please go ahead with your question.

Hey, great, good morning.

Good morning, Ken.

Great job on the quarter, just but on the pricing side, you measured a little differently than the rest of the rails.

Everybody else kind of throws in same store sales basis, you do it if I recall right over the entire base, which maybe dilutes that number a little bit.

Do you have an idea what it would be if you just thought of it as on the same store basis?

Jack or Rob, do you want to take that?

Again, it's not a number we talk about.

But it would be logically a little higher, of course, than the way we report it.

And just to elaborate on the points you're making, you're exactly right.

The way we calculate our price is we take it across our entire book of business.

So it's a yield if you will, that takes into consideration every dollar of our revenue, even that we haven't been able to touch because of contracts.

So it's a conservative way of looking at price, and that's the way we look at it.

If you dissected just the same stores sales base, which we don't, we logically would be a little higher than that.

Hey, Ken, I think one thing to keep in mind on price, here we have to get price up.

At the ends of the day, the folks in productivity, you look at the amount of capital we're putting into our business.

We're working hard this year in temps of our performance.

And you got to work hard in terms of you look at return on capital.

We're working hard to get this thing above a double digit number.

So I don't -- you shouldn't hear from any of us, that we're satisfied with where price is, because it's got to go up.

You think about replacement costs, cash flow in the investment that this company is facing long-term, it has to go up, in terms of where we're at.

Or you just can't fly the kinds of investments we are putting into this business long term.

I'm actually going to come back to Rob on productivity, as well.

You talked about not bringing it back to one to one at this point.

But looking at the drawdown of the furloughs and your locomotives and cars, when do you need to start prepping the labor ahead of time?

When do costs -- I know you said it comes in stair step functions during the remarks before, but when do you think it needs to start leading the volume growth, and how long does it take -- remind us of kind of training the employees to be able to be proficient again.

Keep in mind, Ken, keep in mind we got a program, we call it Alternative Work, AWATS, kind of unique in the industry, where -- we didn't 100% furlough an employee.

We actually had several thousand at the peak, where we're paying 100% of the benefits.

And they're were getting about eight or nine days of work, so they were current.

We have a very disciplined process that looks at each territory.

We understand lead times.

We keep in touch with our furloughed employees.

We are not going to jeopardize safety.

If you have someone that's been off for a year, you don't call them to work, and they're operating a train that current day.

It's underway right now.

We have quite a few people that are out getting refreshed and trained.

Dennis, you want to add anything to that?

Just to add on a little bit to that, Ken, we try to keep six months of future attrition in that kind of a status, where we have them already training.

We have done this now for a couple years, since the downturn has been with us.

That, and on our locomotive side, we are rotating the stock.

So that we know these locomotives are good, and ready to go.

And we put the challenge to the locomotive and mechanical team.

We know what we are going to have.

And so we keep about 300 locomotives always in rotation, that coming out of storage.

And we have a reliability profile built for those locomotives, and we can anticipate what's going it happen, when we put them in service.

So we're ready.

Okay, Ken.

Appreciate it.

Thank you.

Our next question is from the line of Tom Marisco of Marisco Capital.

Please go ahead with your question.

Well, hi, Jim.

This is Tom Marisco.

I was just wondering if you could comment a little bit on what you're seeing from the economy, in talking to your customers, throughout the quarter.

I'm noticing a little different intonation.

And I am wondering if it's the case that you're feeling a little more confident about what you're seeing from your customers, and the viability of the recovery in the economy, given your comments around just in time inventory stocking versus restocking.

Am I reading that correctly?

That's right, Tom.

In fact, we just a last couple months between Jack and I, we probably talked to 150 to 200 customers.

I would say they're cautious.

They're a little more optimistic than they were fourth quarter and third quarter.

There are clearly some categories.

I was with one of our really large chemical customers who said this is inventory replenishment.

And by the time they get to mid-year they're going to see it fall off.

I've been with other customers, that they're struggling to keep up with demand.

There was one common theme that I did -- what I am always interested in too, and ultimately I think this is the measure of any business, are you out hiring?

Do you have enough confidence that there's legs to this thing that you're willing to go out and actively hire?

Most of my customers they've been utilizing as much overtime as they could, but they're right on the edge.

I think if this thing -- the answer, Tom is, not really many of us know.

If you look at our volume through April, just give you a benchmark here, our volume in April is holding in there.

We're up, I think 18% to 19% through the first three weeks, in terms of our volume, so I haven't seen it fall off at this point.

So but again, I think the key will be whether you start seeing hiring numbers getting stronger.

Thank you very much.

Thanks, Tom.

Thank you.

Our next question is from Edward Wolfe of Wolfe Trahan.

Please go ahead with your question, sir.

Good morning, guys.

Good morning, Ed.

Can you just give me a sense on the mix, the breakdown of the mix and the fuel you gave the pricing that makes up the 2.8% yield?

Rob, go ahead.

Ed, in rough numbers, average revenue of cars you see is up three, fuel was roughly three, and mix was roughly a negative three.

Okay.

The reason mix was so strongly negative is that of course we had such strong growth in our intermodal and automotive business groups.

Okay.

When I think about what Jack said about pricing tracking one point higher April than first quarter.

Jack, did you mean one percentage point above the 3% price, excluding R cap or excluding R cap?

I'm saying at the moment, it's about 1% higher, and that's against the core price number.

So the core price number --

The three is looking like four, so far in April.

Okay so, excluding the R cap.

If you think about -- I know there's a lot of people trying to get at pricing.

But I guess the thought is, if you look at pricing excluding R cap, it went from three and a half in fourth quarter, to three in first quarter, despite the 5% or 6% of the legacy contracts repricing early in the quarter.

And you actually have better absolute volume in first quarter than fourth quarter.

So is it a sense that that was lagging, that's pricing that was going down six months ago, nine months ago, and now we're starting to turn and inflect, and that's why it starts to go up in second quarter?

Or is there something else I'm miss something.

Again, Ed, it's mostly attributable to the domestic intermodal legacy overhangs, that are now going to shift.

And we're going to be in a better position here going forward in the second quarter and beyond.

So that's really kind of the key driver of that.

It's pretty much a timing issue.

So I guess the intermodal as a driver going forward, but the first quarter being worse than fourth, is that lagging stuff that just takes a little while to play through?

Yes, sir.

Okay.

And then on the share repurchase timing, and I guess back to your answer to the question before, do you back to your answer to the question before, do you not have confidence yet in the economy that the recovery is sound enough here to buy back stock at this moment?

Time?

Ed , we're feeling better.

I think everyone right now, is surprised at the strength in first quarter.

And what we're seeing so far in April, and if we see this thing sustained here as we're going forward, we committed to our shareholders, we're going to look at how we -- we return some

Fair enough.

Okay, Ed.

Thanks.

Thank you.

Our next question is from Scott Malat with Goldman Sachs.

Please go ahead with your question.

Hey, good morning.

We've just really seen some shipping rates increase out of China.

You talked a bit about coal, but can you talk about what you're seeing from Asian demand and outlook from some of the other categories, maybe grain, paper goods, metals, anything like that?

Thanks.

We're seeing some good strength in our international intermodal finally.

It's up 12, 13%.

So and it looks fairly sustainable, and it looks like we'll actually have a peak season this year.

So that's a good thing for us.

The grain business right now, the export market, the world supply is going to shift here, and that is going to hurt the US exports, but domestic, it looks good.

It's a little early to say in terms of getting the crops planted and the harvest in terms of potential.

But at least the initial indications are you'll see larger corn and bean crops which should be good for it.

And certainly the ethanol business and DDGs associated with it are strong.

Autos as I said, continued strength is what everybody's looking for.

Energy we're feeling more bullish about.

We'll just have to see how that plays out.

What we need though is a nice strong hot summer, that would be useful.

Industrial products is turning for us in a good way, and that was my key benchmark.

The three things I was looking for was rock, cement and lumber.

And my theory is that an economic recovery isn't sustainable unless you see those three planned.

And we are actually seeing a nice uptick in lumber, and now the rock business is starting to show some good.

We're waiting for cement, and we already talked about intermodal.

I think, not only do we have the great upside on the domestic piece, because the service is excellent.

And we're seeing highway conversions at a much higher rate than we thought we would.

And the new UMAX programs has some great, competitive schedules going to the northeast, that's gaining share and off the highway, and the international is solid.

And, Scott,you need to look at also truck capacity.

As you know it has been tightening, pricing has been firming up, which again if this economy has some legs, that should give us additional opportunity rest of the year.

That's really helpful.

Just a quick data point, how much of your business is still on legacy contracts?

It's 12%, is I think where we're left for the rest of the year.

But you need to keep in mind that things like Pacer --some of those are ramping up over time.

So 12% is what's moving under a legacy deal that has not been repriced since 2004.

And we're making progress on all the others.

Okay.

Thanks.

Thanks, Scott.

Our next question is from the line of Chris Weatherbe FBR Capital Markets.

Good morning, guys.

Good morning, Chris.

Quick fuel question for you, just from a R cap perspective.

Would you give us of what that might look like in the second quarter if fr an escalation perspective, and how that kind of factors into the 4% growth you're talking about?

Chris, this is Rob.

Let me take a shot at that.

As you've seen the published projected Rcap of fuel component is expected to go up in the second quarter versus last year second quarter, because of the change in fuel price.

But it's all a part of our expectation and our confidence that we're going to improve our pricing going forward.

But keep in mind, our contracts that renew, that have a R cap fuel component in the index, it is not linear.

It can be lumpy, and not all of them reset, for example, in the second quarter.

But it is in our -- it builds into our overall confidence that things will improve from here.

Okay.

Great.

That's helpful.

I guess just one quick follow-up question sticking with you Rob, on the health and welfare the cost increases we're seeing --

Yeah, you may recall in our last quarter earnings we indicated that the health and welfare kind of costs increases that we are seeing on a year-over-year basis, can you give us a sense of what that trend looks like as we go forward over next couple of quarters, maybe on an absolute dollar perspective if you can get that granular?

That would be great.

You may recall on our last quarter earnings, we indicated that the health and welfare costs would be higher.

And as a result we projected, and did give guidance that we thought the inflation on our overall labor line would be closer to 5%-ish.

And in terms of absolute dollar amounts, that's roughly $25 million per quarter number.

Okay.

Great.

That's very helpful.

Thank you very much.

Thank you.

Our next question is from the line of John Larkin with Stifel Nicolaus.

Good morning, gentlemen, and thank you for taking my call.

On the health care front, maybe Rob can answer this one,have you factored in any costs associated with the healthcare reform package that Congress passed here recently?

Yes, but it's not going to be a major challenge to us, and it's not a hit to us in the first quarter as you noticed in our earnings.

So yes, but I guess, I hesitate because who knows what tomorrow brings in terms of the actual details of the bill.

But my number does take into consideration what we know about the health care bill.

We have to think about it two days, the direct impact on our programs right now at least in the short term, it's not a a big hit.

But what does it mean long-term to our customers and suppliers that we have to work through, so we're going to keep our eye on it.

Thank you.

And then, I think somebody mentioned the fact that you are continuing to work to convert what I'll call single stack intermodal service to double stack.

Where do you think you are in that conversion, and how much is left and how much just in very general terms more profitable is a double stack operation as opposed to a more traditional (inaudible) operation?

Do you want to take that one?

I'll be glad to answer Jack's profitability.

As far as the upside, John, what we have a good portion of -- depends on the lanes, obviously.

But in some lanes we're at 85% double stack, other lanes we're as high as above 95% to 100%.

So there is some obviously transition going on in some of these trailers to containers, John and Jack and the marketing team are working through, so I would say we have a few percentage points to go through on our intermodal network before we get to where we want to be.

If you think about operating efficiency, I mean you're doubling the volume, technically on a train, single stack versus double stack, it's a significant improvement in operating efficiency.

If you look at our data you'll see that trailer business is a very small portion of our total intermodal.

I forget what the actual number we're down to now, but I wouldn't be surprised to see it in the 5%, 6%, 7% kind of range.

And there is a price differential.

It's not exactly just because we double stack, the pricing on the trailer business is significantly higher.

And that reflects the market and the demand that's out there, the trucking competition and everything else we have to consider.

On a similar note, a couple years ago, I used to talk a fair amount about converting a lot of what I would call manifest car load business for unitrains..

Is that a lever still available to you?

Or have you converted everything that you can at this point?

It's really a growth cycle for us.

You start off with an opportunity, it's a small group of business over time.

That customer grows, service is good, and eventually we go to multicar blocks.

And eventually in places like pipe and in frak sand, and windmills and all of those kind of things, we're able to convert that into unitrain business, that then creates more opportunity for our manifest.

It opens up available capacity in the manifest, and we go out and get additional business to fill that.

I think we still have some opportunities.

How much of the volume currently moves in what I would call manifest trains versus unitrains?

Well, manifest is about a third of our business.

John, thank you.

Thank you.

Our last question is coming from the line of Jeff Kauffman with Stern Agee.

Please go ahead with your question.

Most of my questions have been answered.

I know this has been a long call, thanks for taking me.

Let me ask one question of Dennis.

Dennis, we talked about system capacity, you talked about the average number of cars per day you think you could go ahead on the system, 15, 20% higher than now but I know velocity helps that capacity.

Your management helps that capacity.

If I look at it in three buckets, how much capacity can the track handle, how much capacity volume you can grow before you really need to start making changes to the cars, the locomotives, and how much capacity you can grow before you really need to start adding the people and you mentioned you were doing some hiring now.

Can you give me a rough idea of where those start to kick in so I can get an idea of how the incremental margins grow.

Jeff, if you take a look at that upside leverage chart that I showed here, if you think about the track infrastructure, that's really the throughput category, that's the fixed resources.

And when I say we're sized from 190 to 200,000, that's the fixed plant, that's the main line.

When you look at the rest, on the cars and locomotives, that would be more on the train size discussion we had.

We've given out the number, 10% to 15% beyond where we are today.

And then the adding people, as Jim talked about, that's incremental.

As the volume comes back and we look at the train starts, we're anticipating them.

But remember, we're training ahead so we've got those costs already into our cost structure.

We do see that we may have to do more engineer training, if the volumes continues.

And we may have to do some more relocation as I indicated in there.

So the adding people part is incremental to the growth number, and that's the best surrogate that you can look at, is that 7-day number, to try and graduate what an estimate might be in terms of people coming back

Okay.

Thanks so much.

And terrific quarter.

Thanks, Jeff.

Thank you.

I would like to now turn the floor over to Mr.

Jim Young for closing comments.

Again, thank you for joining us this morning.

I hope you see we are keeping our commitments to our shareholders in terms of our performance, and we're looking forward to talking to you again in July.

So again, thanks for joining us.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.