聯合太平洋集團 (UNP) 2010 Q2 法說會逐字稿

Greetings and welcome to the Union Pacific second quarter 2010 earnings.

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 available on Union Pacific's website.

It is my now 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 second quarter earnings conference call.

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

Union Pacific set a new quarterly earnings record of $1.40 per share, a 52% increase over last year's reported earnings of $0.92 per share.

Last year's second quarter included about $0.14 per share from a land sale so on a more apples-to-apples basis we actually increased earnings almost 80% versus 2009.

Operating income was a record $1.3 billion, a 71% increase.

A key contributor to our strong earnings performance was the return of business volume to our railroad.

In fact, this is the first time in six years that we've reported volume growth in all six of our businesses in the same quarter.

Beyond the strong earnings growth, the real quarterly highlight was achieving a 69.4% operating ratio.

This is our first ever quarter under 70% and it's a tremendous achievement for the men and women of UP.

We are demonstrating great volume leverage, efficiently handling an 18% increase in business, with little incremental cost.

It's really a team effort beginning with our employees who are dedicated to running a safe, efficient railroad.

Our commitment to rail infrastructure investment, a disciplined yet flexible train station plan and our continuous safety improvement efforts are all paying off in the form of enhanced productivity and resiliency.

These are the keys to delivering high quality service for our customers.

Customers increasingly recognize the great value that UP franchise has to offer, allowing us to reach new markets and supporting our pricing plans.

Not only are customers rewarding us with their business, second quarter customer satisfaction scores were an all time best.

With another record quarter in the books we feel good about the direction of our Company and the opportunities we have in front of us.

With that, let's turn it over to Jack for a review of our business teams.

Jack?

Thanks Jim and good morning.

I thought I'd lead off this morning with a look at our customer satisfaction which came in at 89 for the quarter.

As Jim said, that is a new best ever result and we believe it's a pretty good indicator of how customers view the value proposition that Union Pacific is offering them today.

I wanted to lead off with this slide because it's not only the stronger economic activity that drove our growth in the second quarter, but also a stronger value proposition that's been driven by excellent service and our new product offerings as well.

The second quarter last year marked the low point for volume as the impact of the recession was felt across the business.

This year, with all six commodity groups posting gains, overall line climbed 18%.

We saw stronger core price improvement driven in part by our reversal of Intermodal's recent trend of negative pricings.

With our major domestic legacy deals behind us, Intermodal joined the other five groups in posting core price gains during the second quarter.

Overall core price improved about 5% which combined with the increased fuel surcharge revenue and a little negative mix to produce an 8% increase in average revenue per car.

The volume gains and improved revenue per car combined to drive freight revenue up 27% to just shy of $4 billion.

So let's take a closer look now at each of our six businesses.

Our Ag products volume grew 5%, which combined with an 8% improvement in average revenue per car to produce a 13% increase in revenue.

Ethanol volume grew 24% as US production expanded to meet the government mandate.

Soybean meal shipments declined 5% with a stronger South American crop now finding its way into world markets at the expense of a higher priced US production.

Whole grain exports increased 16% with shipments of both corn and wheat up in all three of our markets -- Mexico, Pacific Northwest and Gulf.

Domestic feed grains grew 9% with a boost from corn shipments to [forward] ethanol plants in both California and Idaho that have now resumed production.

Overall, our whole grain shipment were up 9% against record low volumes a year ago.

Our produce rail express perishable service in conjunction with the CSX grew 16% attracting business off the highway with a strong value proposition.

Automotive revenue was up 105% driven by a 71% growth in volume and a 19% increase in average revenue per car that reflects some contracts that have been repriced over the past several years.

US vehicle production is estimated to be up just over 70% in the second quarter, reflecting the industry's continued recovery from last year's low sales level and financial turmoil.

For Union Pacific, that recovery was reflected in a 77% increase in finished vehicle shipments and a 67% growth in auto parts volume.

Our chemical volumes grew 11% which, with a 6% improvement in average revenue per car produced a 19% increase in revenue.

Fertilizer volume increased 36% with export shipments accounting for two-thirds of that growth.

With inventory levels more balanced than a year ago, improved demand resulting from the stronger economy translated into an 11% growth in our industrial chemical segment.

The results are stronger demand for both export and domestic soda ash but a 35% increase in export is what really drove the segment -- the 18% increase in volume.

LPG volumes increased 13% and petroleum products shipments grew 11% even as asphalt demand remains relatively weak.

Energy revenue increased 13% as a 3% growth in volume combined with a 13% improvement in average revenue per car.

First overall volume growth we have seen in our energy business since we saw the economy start to slide in late 2008 was driven by a 5% increase in tonnage out of the Southern Powder River Basin.

The largest driver was a new coal-fired unit that came on line in San Antonio but shipments to other Midwestern and Southern utilities have picked up as stockpiles reached near normal levels, economic activity picked up and the summer burn kicked in.

Our Colorado/Utah tonnage was flat impacted by continued soft demand and production downtime associated with the mines relocating equipment to some new reserves.

We expect that that process is going to continue well into 2011.

Our industrial products revenue grew 30% as a 25% increase in volume combined with a 4% improvement in average revenue per car.

Drilling demand along with the recovery in the automotive industry are the major drivers of increased capacity utilization for US steel mills and that translated into stronger volumes in our steel and scrap business with shipments up 87% in the second quarter.

Our short haul movement of uranium tailings from Moab, Utah for the Department of Energy drove the 157% increase in hazardous waste volume.

And if we exclude the negative mix effect of this short haul move, average revenue per unit in our industrial products business would have been up 9% for the second quarter.

Increased drilling activity is also the driver behind a 49% increase in our non-metallic mineral volumes, primarily frac sand and some of the other drilling-related products.

It also drove an 18% increase in rock where road and related construction tied to oil drilling is growing.

Unfortunately, we haven't seen much improvement in other construction, whether it's commercial, highway, or housing.

Our lumber was up 11% for the quarter but that pace actually slowed following the expiration of the housing tax credits.

Intermodal volumes grew 24% which when combined with a 10% improvement in average revenue per unit drove revenue up 35%.

Volume for our international Intermodal segment increased 23% as import growth starts to reflect the positive economic trends over the past year.

We were able to capitalize on a stronger economy in our domestic Intermodal market as well, leveraging a strong value proposition for highway conversions in many of our major lanes.

Although we lapped last year's win with the Hub Group late in the quarter, growth in their business also contributed to gains in our domestic segment.

Our streamlined subsidiaries door-to-door product grew 67% with half of that growth coming off the highway and the new Pacer arrangement in the UMAX program improved price performance and provided better fuel surcharge recovery, helping to drive the increased average revenue per unit.

So let me wrap up with a look ahead at what we're seeing here in the second half.

The economy began to recover during the second half of 2009 and it doesn't look like the slow improvement trajectory is going to change much over the last half of this year.

From an overall perspective, low inventory to sales ratio throughout the supply chain are an encouraging sign for transportation demand and the tightening truck and container availability that we are seeing today are encouraging signs for the rail industry.

With the Powder River Basin coal stock piles back essentially at normal levels, growth prospects have improved for our largest business segment.

And if there is a dark cloud, it's the continued lack of recovery in housing and construction, which along with continued high unemployment, is keeping alive the question of just how engaged the consumer is in this recovery.

Our growth opportunities over the next six months are most likely going to come from the same segments that posted gains in the first half.

Those would include ag, for instance, ethanol growth should continue.

Shipments into forward plants should boost domestic corn volumes.

The fall crops are looking pretty good right now.

However, we did see strong feed grain and meal exports late last year and we don't expect those markets to be quite as strong for US in 2010.

While vehicle sales forecasts for the year have been trimmed slightly, manufacturer inventories are still pretty well aligned with demand and production is projected to be up from last year so we're going to continue to see growth in this segment.

As we started the third quarter, our autos business has seen the greatest impact from the devastating rains from Hurricane Alex in Mexico and the bridge out is just on the KCSM.

While we don't expect a significant impact to the quarter, it's obviously affecting our customers.

Across all six of our businesses, it's an all hands-on deck here working with our international customer service center in both Mexico Railroads to identify rail reroutes and alternative solutions like trucks and the transloads or Intermodal facilities north of the border to keep our customers' shipments moving and avoid plant shutdowns.

Chemicals is benefiting from improved demand in downstream markets.

Fertilizer inventories are still low and demand should be strong including export potash and we expect export soda ash to continue its current pace as well.

Southern Powder River Basin coal prospects have brightened with the stockpiles down and the summer burn helping to drive demand.

The Colorado/Utah stockpiles still remain relatively high and the opportunity is expected to be further dampened by production downtime.

We are still waiting for signs of recovery in a number of our industrial products markets but drilling activity should continue to drive growth in non-metallic minerals.

And with the help from anticipated growth in autos, steel shipments should stay ahead of last year.

We expect growth in our uranium tailings move, but we have now lapped the start-up of that business so the year-over-year comparisons aren't going to be quite so strong.

Stronger import level should drive growth in international Intermodal.

We are expecting a normal peak season this year.

Excellent service is attracting highway conversions in domestic intermodal, especially as truck supply tightens and our equipment supply improves, so we should see a strong second half with improving margins.

So, overall, increased economic activity, strong value proposition that underpins our growth prospect across all six groups and core price improvement should all combined with volume gains, to drive revenue growth in the second half.

With that, we'll turn it over to Dennis for the operations report.

Thank you Jack and good morning.

In the second quarter, we continued to see overall improvement trends in safety, service and value.

Even with an 18% increase in volume, we maintained a strong performance with our service delivery index coming in at 92.1 in the quarter.

We achieved over three points of SDI improvement versus the first quarter as this measure continues to be highly correlated with the record customer satisfaction Jack discussed earlier.

Behind those results is the hard work we do in every facet of the operation to deliver consistent service to our customers.

For example, industry spot and pull was a record 93.2% in the quarter.

This is one of the most visible measures for our customers as it represents their first and last events of each car cycle.

Car connection performance, which measures whether we put the right cars in the right trains, was maintained at very high level.

Terminal operations remained fluid, enabling good execution of the transportation plant and second quarter velocity was 26.4 miles per hour, up slightly from first quarter levels.

We demonstrated great resiliency and recoverability in our operations during the quarter, which enabled us to achieve these strong results.

In particular, our trains experienced significant weather-related delays, 15 out of 30 days in June.

By comparison, last June operations were impacted by only one day.

In the face of those challenges, we improved our overall safety performance, setting a new second quarter mark for employee reportables and an all-time best for reportable derailments.

Running a safe and resilient network also allows us to generate strong volume leverage.

In the second quarter, with an 18% increase in carloadings, total train starts only increased 7%.

One source of our volume leverage is productivity.

Across all of our asset classes, we are doing more with less.

Employee productivity, measured by gross ton-miles per employee, reached its highest level in nearly two years.

Freight car utilization was a second quarter best at 8.4 days and locomotive productivity improved 3% year-over-year.

Another source of leverage is our excess working resources.

Today, we have roughly 2,300 employees furloughed, 39,000 stored freight cars and 1,200 excess locomotives.

Although every category is down from peak levels, we still have ample resources to handle current demand.

We are, however, hiring and transferring some conductors over the next couple of months to supplement locations where the combination of volumes and attrition require it.

We are also in the early phases of thinking about our 2011 capital plan including the possibility of starting locomotive purchases next year, maybe around 100 units.

Although our stored locomotives are functional, new units would improve fuel efficiency, reduce emissions, increase reliability and expand our distributive power capability.

They will also provide flexibility in advance of yet to be developed locomotive technology to meet Tier 4 EPA requirements.

Increased productivity generates capacity in terms of throughput on our network and one of those areas we've been concentrating intently on is train length.

Compared to 2009, we've increased train length on almost every major train type, establishing new records with some.

For example, our [MO] train length averaged 164 boxes per train in the second quarter, an increase versus 2009 of more than 15 boxes per train.

To illustrate the power of train size, the 1% improvement in coal doesn't sound like much, but one car more per train saves a 100 loaded coal trains per year.

The Unified Plan continues to find opportunities to run longer trains more productively.

We are also working with our customers to identify and eliminate length constraints.

Beyond that, our increased use of distributed power and targeted capital investments give us the physical capability of running longer trains.

This is further enhanced by the terminal of performance improvement initiative that facilitates throughput in performance in major terminals.

As we look ahead to the back half of 2010 in peak season, we will be ready and committed to exceed customer expectations with excellent service.

We will also continue our efforts to operate in a volume variable manner, incurring additional expenses more slowly than volumes increase.

Our robust capital programs are essential for maintaining both safety and service and we are always working to increase our overall capital efficiency, completing more work with less dollars spent.

Finally, we never take our eye off safety as we strive to make every decision have a safety component built into it.

With that, let me turn it over to Rob to discuss the financials.

Thanks Dennis and good morning.

UP's second quarter financial performance was exceptional by almost every measure.

Slide 19 summarizes second quarter revenues and expenses.

While operating revenue grew 27% to $4.2 billion, operating expenses only increased 14% to $2.9 billion.

An 18% increase in carloads, strong core pricing gains and our ongoing commitment to cost efficiency helped drive a 71% increase in operating income to a best ever $1.3 billion.

Similar to the first quarter, the biggest driver of the expense increase was the rising price of diesel fuel which accounted for more than half of the year-over-year exchange.

Second quarter other income totaled $19 million compared to $135 million in 2009.

As you recall, last's year results included $116 million pre-tax gain on a land sale in Colorado.

Interest expense totaled $152 million, up only $2 million versus 2009.

Income taxes increased 62% to $435 million as a result of increased earnings and a higher tax rate.

Our second quarter 2010 effective tax rate was 38% versus 36.6% in the year ago quarter.

The result was a best ever quarterly net income of $711 million or earnings per share of $1.40 per share.

On a reported basis, net income grew 53%.

But if you strip out the 2009 land sale, earnings on a more comparable basis actually grew 81%.

Turning now to price.

Slide 20, we are reporting an almost 5% core price gain in the second quarter.

As we discussed back in April, this sequential quarterly improvement was supported by our legacy renewals.

Increased freight demand and consistent high quality service contributed.

Similar to the first quarter, the second quarter pricing gains included about a half point of fuel-related increases associated with [RCAP].

Looking beyond the second quarter, we continue to feel very positive about the pricing opportunities we have over the rest of 2010 and beyond.

Supported by UP's strong service and our remaining legacy contracts, we are committed to achieving real pricing gain that will drive higher returns.

Moving onto operating expenses, we'll start with compensation and benefits at $1.1 billion in the second quarter, an 8% increase versus 2009.

The story line here continues to be strong employee productivity which allowed us to grow volumes nearly 18% with a 3% year-over-year decrease in our workforce.

As you heard from Dennis, we are driving efficiency gains by returning resources to the railroad more slowly than volumes.

Offsetting productivity were several factors.

Second quarter 2010 is the last quarter of the current labor agreement which provided a 4.5% wage hike.

And as we discussed at the beginning of the year, higher agreement health and welfare cost added roughly $25 million to the quarterly expense.

Volume costs were higher as increased carloadings required more train starts and greater fuel, excuse me, greater crew expenses.

In addition, equity and incentive compensation expense was somewhat higher year-over-year.

Slide 22 helps illustrate how we think about employment levels over the remainder of 2010.

As shown on the left, seven day carload volumes have seen a slow, steady climb since the third quarter of 2009, up almost 8% over that period.

And since the fourth quarter, we've also started to see a sequential increase in our workforce but at a slower pace.

We look forward to putting more of our employees back to work as needed for volumes and attrition.

But this won't be on a one-for-one basis as we continue efforts to further improve employee productivity.

Second quarter fuel expense totaled $608 million, a 64% increase versus 2009.

Higher year-over-year fuel prices and increased volume were the drivers, adding $186 million and $48 million to the quarter, respectively.

A portion of these increases were offset, however, by continued improvement in our consumption rate.

Our fuel conservation efforts produced a 1% savings in the quarter, achieving a second quarter best ever level.

Slide 24 summarizes the year-over-year change in three of our expense categories.

Purchased services and materials expense increased $73 million in the quarter, or 18%.

Growing business volumes resulted in greater use of contract services in the second quarter, particularly for purchased transportation associated with automotive and intermodal shipment.

We also saw increased usage of joint facility operations and intermodal ramps.

Second quarter equipment and other rents expense decreased 8% or $25 million.

Roughly $14 million of a decline is associated with locomotive lease restructured in May of 2009.

So we have now lapped that expense change.

In addition, better asset utilization, in the form of improved cycle times and lower lease expense for freight cars, intermodal containers and locomotives, contributed to the year-over-year decline.

Offsetting a portion of these savings was increased car hire expense associated with the strong demand for automotive expense and intermodal equipment.

Other expense totaled $122 million, $31 million lower than in 2009.

This expense line came in well below our expected range primarily as a result of our continuous safety improvements which reduced casualty costs across the board.

Although on a year-over-year basis, the change in personal injury expense was minimal, ongoing progress in our safety efforts was reflected in a semi-annual actuarial study.

Freight and property claims were also better in the quarter, saving roughly $15 million versus 2009.

In addition, less bad debt expense and reduced costs for environmental remediation contributed to the year-over-year lower expense.

Going forward, although there are several moving parts associated with this category, our current thinking is that other expense will be closer to $170 million or so in both the third and fourth quarters.

This assumes some ongoing benefit from casualty performance but not at the same level as we achieved in the second quarter.

Although we are reporting a number of bests in the second quarter and very strong earnings growth, if you want to take away just one number from the quarter it should be 69.4 -- UP's first ever sub-70 operating ratio.

This was a full eight points of improvement versus 2009 despite the impact of higher diesel fuel prices.

We are delivering on the goals established as part of Project Operating Ratio as we convert stronger volumes, better pricing and greater efficiency into record bottom line results.

The combination of carload growth returning to our railroad, and the resulting strong cash flow supported our decision to resume share repurchases back in May.

We are being opportunistic in our approach and recent stock market volatility certainly gave us some attractive entry points.

We bought back roughly 6.5 million shares for $466 million in the second quarter and we have repurchased close to $200 million of additional shares in July.

We also increased the quarterly dividend to 22%.

Our balance sheet remains strong, with an adjusted debt-to-cap ratio of 43.5%.

The comparison to 2009 is somewhat skewed, however, since last year's June 30th ratio was the high point for the year.

This year, it's likely the low point as our 2010 debt maturities were more front-end loaded.

As a reminder, we finished 2009 at 46.1%.

An adjusted debt-to-cap ratio that is in the mid-40s range supports our solid investment grade credit rating which we continue to believe is appropriate for our business.

Let me wrap things up with a few thoughts on the third quarter.

As we see the world today, volumes continue to be somewhat of a wild card but they are also the key to earnings.

And assuming volume growth continues, we expect to move the increased volumes in a highly leveraged manner.

Volume comparisons do get slightly more difficult in the third quarter but even if we run flat with second quarter seven-day volumes, we'd still be in the range of 7% to 8% volume growth versus 2009.

Expense comparisons will be tougher as well.

You'll recall last year's third quarter operating ratio was 73.8%, a quarterly record at that time as we achieved best in a number of our efficiency measures.

For example, fuel costs are expected to be higher year-over-year.

Our current spot price is about $2.20 per gallon which is 18% above last year's third quarter price.

Beyond the cost discipline, we'll achieve real pricing gains that support higher returns creating a powerful combination to drive strong financial results for our Company.

Of course, we can't control the economy so we will have to remain flexible and play the hand that we are dealt but we are looking forward to our next quarterly report and the opportunity to build off of our record second quarter results.

With that, let me turn it back to Jim.

Thanks Rob.

Before we open it up for questions, I'll make a quick comment on the future.

Our second quarter results are an indicator of the true potential the UP franchise when safety, great service, pricing and productivity all come together.

While many of our metrics reflect best ever results, we still have significant upside.

Our network infrastructure is built to handle 190,000 to 200,000 weekly carloads and we have the working resources needed to efficiently provide great customer service as volumes return.

Although there is still uncertainty around the state of the economic recovery, we are encouraged by the current demand levels and see the potential for slow steady growth in the months ahead.

So, with that, let's open it up for your questions.

Thank you.

(Operator Instructions) Our first question is from the line of Justin Yagerman of Deutsche Bank.

Please proceed with your question.

Mr.

Yagerman, your line is live for question.

Hey, this is Rob Salmon on for Justin Yagerman.

Hey guys, my first question is focused on the intermodal segment.

Can you give us a bit more color on how the UMAX agreement has impacted the intermodal pricing and profitability?

And can you also give us a sense of the type of benefits we should be thinking about as your Joliet Intermodal Terminal becomes operational in Q3, ie, where should we see the biggest benefit?

Will this be a network capacity asset productivity or network fluidity?

Rob, probably not going to talk a lot about the pricing associated with the UMAX program.

I will tell you that it is improving our margins and doing what we had hoped for in terms of helping us to recover additional fuel surcharge and so both of those are quite positive and you saw the impact of that.

Customer receptivity to the UMAX program has been awesome and it's growing in volumes and service has been great.

So all around, we are quite happy with that.

The Joliet facility is going to do all those things.

It's going to be a combination of fluidity.

It's going to be asset utilization.

It's going to improve schedules for our customers.

It's going to give them closer access to the consumption markets there in Chicago and we will also have improved throughput in our interchange business with both eastern carriers.

So it's going to be the whole package from our customers' perspective.

Rob, the key here -- UMAX is a piece of an overall strategy in Intermodal but the bottom line in Intermodal is great service.

We've got a lot of different products, all those corridors and we are really seeing what can happen when you put great service products in the markets.

Great.

Thanks.

Should we still be thinking about late third quarter Joliet coming on?

August 1.

August 1, great.

And then I guess shifting gears a little bit to Dennis.

Could you give us a sense how much further you believe the train length can be expanded from current levels before you need help from customers or make structural changes like extending sitings across your network?

And how much improvement on the train lengths do you believe is possible across your manifest network and unit trains by working with your customers longer term?

And what timing should we be thinking about the potential to get those trains extended?

Rob, that's a continual focus for us and we are already addressing those issues that you mentioned, working with our customers and we have some strategic [ethel] points directed toward our siting extensions more in the PNW and then across our Southeast from El Paso East.

But to answer your question specifically, we expect continuous improvement in our train length.

We took it up 6.5% Q-over-Q a year, 2Q versus 2Q.

On the Intermodal side, you saw the numbers, we said 164.

We are already up at the 170 currently.

We think we can go well north of 200 without taxing any additional locomotives on those particular trains.

And the respective answer would rest on the commodity corridors and the commodity types.

You can rest assured that you're going to see continuous improvement in the train length in across all categories, the premium service, the manifest service, and the bulk service.

Thanks for the time guys.

Our next question is from Ed Wolfe with Wolfe Trahan & Co.

Please proceed with your question.

Hey, good morning guys.

Good morning Ed.

Is there any reason why a 69.4% can't be at least that good in third quarter?

Normally third quarter is a better quarter than second.

You mentioned the casualty one-time benefit you didn't quantify that.

Maybe if you could help with that, that would help.

Is there any reason that you see right now why you shouldn't be operating at this going forward?

Well, if you historically, second half is generally our highest earning potential.

So you can extend that out and it's going to be a function of how we see business volumes moving.

The personal injury accrual clearly helps some but keep in mind the higher fuel cost also penalized this.

So that's a pretty good performance rate.

So I'm optimistic about third and fourth quarter but, again, just watch the volumes.

When you think about headcount down 3% and volumes up 18%, obviously volumes can't last like this much longer if the comps get tougher but when do you think about those two starting to converge where you start to have to grow heads again and volumes come down and they get more similar to each other?

Is that a couple of quarters out or is that something that's further out than that?

No, I think you can potentiality third quarter you might see it up a little bit.

Again, we've started some hiring although the numbers are relatively small overall, and again we are going to hire to support volume.

We clearly have the leverage as Dennis was talking about that we'll still see good leverage going forward here, but I think our numbers will continue to pick up.

Now that doesn't say we're not continuing to focus on productivity.

We've have some great projects underway,technology, a lot of the process initiatives that are underway that's there, but again if we are hiring, that means our outlook and volume looks pretty darn good.

Okay.

Can you break out the yield the 7.7% in terms of price fuel and mix?

I think what we said is -- both Jack and Rob have said pricing number, when you take the fuel and everything out of it, it was about 5% overall.

You may have to look at if there's negative mix.

Rob, you want to --

Yes, I would just add that the high level numbers would be the price, as Jim said, is about 5%ish, fuel call it 6%, and negative mix of about 3% on the (inaudible).

Okay.

Could you give us a number on the casualty impact?

Yes.

It was similar to last year's number which is about a $40 million positive.

So year-over-year it was about a wash and roughly in the $40 million range.

Okay.

Thanks for the time guys.

Thank you.

Our next question will be coming from the line of Walter Spracklin of RBC Capital Markets.

Please proceed with your question.

Thanks very much.

Good morning, everyone.

Good morning, Walter.

I just wanted to zero on pricing as we start to look out to 2011, perhaps you can give us a sense what your -- the tone is with your customers right now in terms of rebounding economy, are they feeling a little bit better and is pricing a little more easier to drive through than perhaps this time last year?

And what percentage of your book in 2011 has already been negotiated if you can give us that?

I'll start with the first part of that and Jack can handle that.

The pricing environment is stronger today than it's been in a long time.

Again, you look at what is happening on the truck side but all of this is a function where we think volume of the economy is going here projecting out to 2011.

So you've got some positives, potential in the economy, but there is another factor here that don't underplay.

Our service metrics have never been better.

Our customers, when we do our -- we have a very robust customer satisfaction survey.

That value proposition has never been better.

So when I think about that, I feel very good about the potential on the pricing side going forward.

I'll let Jack talk on the legacy contracts.

Walter, first of all, I have to tell you it's never easy to get price.

So -- but the environment has changed.

There are some markets, obviously -- market demand is really what dictates your ability to pick price up.

But the contractual obligations.

So I would tell you right now probably somewhere in the neighborhood of 60% of our pricing is contractually tied up right at the moment for next year which is not unusual, we're only halfway through the year, so --

Is that at a rate that what you're getting in this quarter right now, is it roughly?

It is but it isn't.

There's no reason to see that it would be going down at least at this point in time.

That's excellent.

Second question here is on perhaps can you talk a little bit about capital return to shareholder.

Obviously, you bought your buyback in the second quarter.

That is great to see.

Can we look at -- is this going to be your average run rate for buyback, perhaps also talk about your dividends pay out ratio and your target debt levels just on that capital structure side when we are looking going forward?

Rob, why don't you take that one?

Walter, as you heard me say before, we take a balanced approach.

We are not giving guidance in terms of what the run rate is going to be on our share buyback other than we are going to continue to be opportunistic as we have been up to this point and that's what we will continue to do going forward.

As we said on our dividend, as you know, earlier this year we increased it to 22% and we would like to get into a position and be in a position where we are competitive with our dividends, steadily increasing it and being opportunistic on the share buyback.

In terms of what is the right level of the debt-to-cap ratio, the way we look at it is we want to maintain a solid investment grade rating which is in that mid-40% ratio when you look at it on a debt-to-cap.

So we are comfortable on that level.

That's great.

Great results guys.

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

Please proceed with your question.

Good morning, everybody.

Good morning, Gary.

I understand you made some comments in the prepared remarks or Dennis did about getting ready for peak season and I just wanted to ask Jack, I mean, Intermodal volumes have been so strong.

Is it reasonable to think that we're going to see a peak off the numbers that we've been getting more recently?

Yes, Gary, I think the potential is there and it's going to go up.

You are not hearing concerns about inventory or --

I think the indication that is you are seeing in the international markets today with the international ocean carriers, wanting their boxes returned back as quickly as possible and transloading into the domestic.

We have some containers coming on board that we will be able to utilize even with our new container acquisitions, there will still be stronger demand than what we'll have containers for.

So I think for this particular year the way things are shaping up right now, I think we will see a more traditional peak season and it will be up from where we are running today.

Rob, you have to throw in there the potential outlook on ag which could be an upside.

You look at -- right now, coal, in terms of where we are at with the burn so far.

So there's some real potential here to have a decent peak.

Okay.

Great.

And then Rob, just quickly on that 170 and other expenses that you are highlighting for the second half, there's nothing unusual in that.

That is the new run rate.

I am looking at the 246 from Q1 and wondering why it would have been that high to come down to a 171 run rate.

That category , as you know, has a lot of moving parts but what we are seeing, from Q1, remember we had the $45 million CSXI payment in there.

Looking at Q1.

The 170 number is, again, a lot of moving parts but we are looking at that as a more normalized level than the 122 this quarter.

Of course, among other things what impacts that other category is volume.

There are some volume related expenses in there.

So it will depend upon volume and other

I appreciate it guys.

Thanks Gary.

Thank you.

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

Please proceed with your question.

Great.

Thanks.

Good morning, guys.

Good morning Chris.

Maybe for Dennis you mentioned some potential locomotive purchases as you look out over the course of next year or so and when you think about from an asset perspective, is there anywhere else you need to maybe make some investments as we see business running at a better rate than it has been,obviously, over the last couple of quarters?

I know you bought a few boxes here and there on the container side but I'm just curious if there's anything else we should be thinking about from an investment standpoint?

Is Chris, I mentioned as part of our strategy was on the capital investment on the train lengths, we are continuing to press that issue here.

We want to continue to grow our train lengths, in these key corridors.

I mentioned a couple of them.

So we are after that.

I think, food grade covered hoppers, we are going to end up with a couple hundred of those here.

So there's some really targeted specific car types that we might augment, expand with, but other than that we are into the core replacement spending and we really don't see it other than, as I mentioned, the locomotives.

So we are working our infrastructure really hard to make sure that we are reducing, taking variability out, improving slow orders and providing for excellent run through capability and train length.

Hey Chris, keep in mind the step back from the locomotive potential here, these are really strategic investments long term.

We think about our network today, we are thinking about three, four, five years out.

You've got long lead times and these projects, so when you hear us talk about our capital budget which we are still putting together, you have to put that in the context of how you think three, four, five years out.

Sure.

Fair enough.

That certainly makes sense.

And I think I missed it.

You mentioned the locomotives that you currently have in storage right now.

What -- do you mind reminding me with that number is?

It's about 2300, 2200.

Right in there.

About 1200.

(inaudible) Got the employee number confused there.

Fair enough.

And then just thinking on the capacity question, when you think about the lengths and you had asked about train lengths before, but when you think about specific lengths, particularly when you're looking, you look at the coal business and you mentioned the real leverage you get from adding additional cars to existing trains.

Is there, other than that, are there other areas that really you may see better opportunities than others within the commodity group that you move forward for getting extra train lengths?

You're doing a great job on the Intermodals, I'm just curious about the other commodities right now.

There aren't -- we are pretty well set.

What we call the Red-X, that's our central corridor over where the corridor route is, that's not needing of any train length opportunity there but we are looking at the run through capability.

That would be at the major terminals -- Kansas City, North Platte.

The other corridors would be the Pacific Northwest.

I mentioned that.

That's again, intermodal growth, but that also facilitates grain and our manifest business out of PNW and we'll be looking at Sunset again and looking at the opportunities there to -- can we improve our efficiencies in specific locations?

Won't be any wholesale double track effort but there could be pinpoint efforts where we go in and look at, particularly, in and around our terminals to facilitate the throughput capabilities.

And then, as I mentioned, also, El Paso East, that is also a mixed corridor that we would look at this for some additional investments there.

Okay.

That's helpful.

One final question just for Jim, from your perspective.

Anything you have seen different from a customer standpoint the way they have been positioning themselves over the last four to six weeks with some of the choppiness we have seen on the economic front?

Well, I think there's a concern about sustainability here on the economy which we all have whether you're -- regardless what business you are in.

What we do see with customers, again, they really value the service.

You think about managing inventories, and the railroads been able to do.

We are in markets today that if you're going to try to run inventories you may not have been in three years ago.

Our job here is to make sure we really perform service-wise and sell that value proposition and get ready.

I'll tell you , while there's a concern on the economy, we still have many customers asking us are you ready for peak?

Are you ready to handle volume?

So I'm looking forward to continued growth

Okay.

Thanks for your time guys.

Appreciate it.

Is our next question is from the line of Jon Langenfeld with Robert W.

Baird.

Please proceed with your question.

Hi, good morning.

This is Ben Hartford in for Jon.

I wanted to first look at the leverage potential and when we think about incremental margins going forward in the coming quarters.

I expect that to slow, but do you believe that the opportunity remains to continue to drive outsized incremental margins, up to the previous peak, still down 10% to 15% below previous peak volumes?

So, how should we think about that margin potential here in the near term before we set into a run rate where we are capturing roughly half of the inflation on an annual basis?

Well, Ben, I think the way to think about this is the core infrastructure, that is track, terminals, capacity.

We are invested for that 190,000 to 200,000 carload level.

So you are going to leverage that as you move up.

Our working resources, I think we've said, we are probably in that 10% to 15% range or so.

We still have very good leverage.

As I've said consistently here, obviously as you move up the curve you are going to have to do more hiring when you look at it.

But I think the numbers are very good.

The key for us is to stay ahead of this.

Again, start thinking about 2011 and 2012 in terms of some incremental investment but we're going to have good leverage.

Okay, good.

And then on the intermodal side, from a strategic level, service is very good.

Obviously, you had mentioned tight truck and container capacity.

Is that putting any pressure on some of your smaller intermodal marketing partners from a pricing standpoint, and I guess when you look over the next 12 months to 18 months and look at domestic capacity shortages does that alter your strategy from a volume versus price balance?

We are always looking at the market implications and pricing and particularly in the intermodal world.

I would say that it's not -- just because they are smaller, it probably does put a little bit more pressure on our smaller intermodal but our IMCs -- but actually everybody is short of equipment.

The large IMC as well as the small and we are trying to ensure that everybody gets equipment to meet their needs.

So it's a tight market.

A tight market like that always says there's some pricing opportunity for us.

We still have some contractual obligations to work our way through here but we do see that as an opportunity for us going forward.

Okay.

Great.

Thanks for the time.

Thank you.

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

Please proceed with your question.

Good morning.

Good morning Tom.

So in terms of I guess a couple of things on the expense side, I understand you have good operating leverage still going forward.

How much do you think headcount goes up in third quarter?

I guess if you look at second quarter versus first quarter it was up, I think, 400 or so.

Is it a similar step up the next couple of quarters?

And then on train lengths just a sense of where you are at with carload train lengths and what that can get to?

Tom, it's not going to be anything significant on the headcount number again.

Part of this is, actually if you think about it right now, any hiring we are doing today much of that is probably looking fourth quarter, first half next year.

You think about bringing new employees.

I know we do have the furlough employees come back towards much quicker, but it will be up but nothing substantial unless the volume really runs.

We are going to accelerate our hiring.

I mean, don't confuse that with your loss of margin here.

We are going to have good margins and leverage on our business here at least for the foreseeable future.

And then I guess Dennis had talked about train length and intermodal 170 containers could go to 200.

What about in a carload network?

Is there any sense you can give in terms of average size of cars and what that could get to?

Well, Tom, the only thing I would tell you is you can expect to see continuous improvement in all our categories.

The manifest side, we have plenty of room for growth.

We are setting records on that now, what with our DPU trains and our longer trains.

We are doing the same thing with bulk, working with our customers and 'Jack' steam to extend those out.

That's not as rapid a growth rate but you can expect to see manifest trains and intermodal trains and auto trains continue to increase.

When I quote those numbers, I'm quoting you the scheduled network and that is -- that has increases expected across the board.

If I can slip one more here for Jack.

On the intermodal revenue per unit was up quite a bit, sequentially, I think almost 5%, you've got the ramp with Pacer and I don't know how much the UMAX ramps but you could have PCs and surcharges.

Is it fair to think that, that absolute number for intermodal keeps ramping up, Jack?

Yes, Tom.

I think that you are going to continue to see that improve over time.

Okay.

Thanks for your time.

Nice results.

Thanks Tom.

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

Please proceed with your question.

Good morning all.

Yes, a couple of questions.

And forgive me if you may have touched this, this small packaging company was recording at the same time.

Tell me a little bit with what you are seeing in Washington and where that stands.

Is rail reform just in holding pattern because there's so many other issues going on in Washington?

They're just more focused on the politicians' minds?

Help me a little bit where you see that going.

Well, I think they're -- the discussions have continued, but you are at a phase right now that they are reevaluating where they are at overall and we are ready to work with it.

We have been very active.

I think, again, the members I talked to involved with this know the stakes are very high in terms of any type of legislation what it can mean and nobody wants to get it wrong.

There's one thing this industry has done and we continue to show that, you've had more new investment go into the rail industry in the last six, seven years than in a long time.

So, we'll see what happens here.

You've got a lot of things going on in Washington today, and I would argue this clearly isn't on the top of the priority list but we take it serious and we are going to continue to work with them.

Got it.

And then I know that Jack gave us some nice charts on stockpiles.

Are we seeing more normal movement out of the PRB or is this going to be a lag effect to stockpiles coming down to more normal levels or might they even go slightly below normal before you start to see a greater pick up in the volume side of the PRB on the coal side?

Scott, we've already seen them, in second quarter we ran about 30 trains out of the PRB.

Today we are running 33, some demand pick up stockpiles.

We are having a great summer right at the moment in terms of heat.

That all plays in our favor.

So I think, I don't really see any strange or out of seasonal pattern.

I think we'll continue to see a nice run on coal for awhile --

I mean, do you think you're at normalcy now or does it pick up from here?

For the time being, we are at normalcy but as the stockpiles, I mean, for the last couple of --

Trust me, the last six weeks.

The last six weeks are any indication of what's to come, I think you would probably see a pick up.

Hey Scott, hold on here a minute.

You have to be careful on normalcy.

If you go back about three, four years ago we were running 38 plus trains a day out of the PRB.

We are invested for a number higher than that.

So we are sitting here running 33, 34 right now.

There's a huge amount of excess capacity out there.

So we are a long ways away from what the production and investment capability is out of the mines.

Again, I think that's a good example as coal, if you believe coal will pick up over time here, you are going to lever that business very nicely.

Great.

Thanks very much.

Okay Scott.

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

Please proceed with your question.

Great.

Good morning.

Good morning Ken.

Hey, Jim, during the early part of the call you mentioned, I guess, maybe at least four or five times during the Q&A, you have to watch out for volumes but then you went, I think Jack went through one of them and highlighted all the stuff that's going on now building into peak.

So, I guess are you anticipating a big peak and then you are concerned with what drops off after?

I am just trying to get, or are you being conservative overall?

Just trying to get a read why that repeated commentary there.

Ken, I'm probably being conservative but on the other hand the visibility is very tough right now and Jack and talking with our customers, you can look as he talked through some of the positive variables out here, but we've been surprised before.

We have to be, we use the term 'very agile' in terms of economy, where it's going.

As Bernanke said yesterday, things are very uncertain going forward.

So, we are cautious in terms of our outlook.

I would say today though if you add up the positives right now, they lean a little more on the positive side on the volume than the negative.

That's great to hear.

That's great wrap up.

Jack, just you guys have been really aggressive, I guess, in getting some of these legacy contracts done, even earlier than expected which was I guess a good move over the long term for you, like the UMAX and the Pacer contracts.

Are there any of the big coal contracts or other legacy ones that are due in 2012, 2013 that any discussions that have opened up ahead of time?

Ken, we are always talking to our customers and without getting into specifics, if an opportunity opens itself up and Ken, we are always talking to our customers and without getting into specifics, if an opportunity opens itself up and a customer is interested and we can have a meeting of the minds, we would be more than happy to have those discussions with them but that's an ongoing process for us.

Okay, great.

Thanks for the time.

Thanks Ken.

Thank you.

Our next question is from Bill Greene with Morgan Stanley.

Yes.

Good morning.

I just wanted to come back to the OR.

So you suggest you feel pretty confident about the second half OR and I think as a longer term target, you've got for 2012, low 70s, it seems in light of this performance and the way things are trending that, that would be conservative.

Am I thinking about that the right way?

Well, at this point in time here, BIll, it's hard to argue that logic but we are not providing guidance going forward.

The potential is here.

We're, again, as I said in my conclusion, I think we are starting to see what the UP franchise can really do, and a key here, obviously, will be a continued volume growth but I feel good about our possibilities down the road.

Good.

I wanted to also ask about the Washington issue just one more time.

Just, as you think about this stuff potentially not going through because we are clearly running out of time left in this Congress, is there a risk that the rails would end up in the penalty box for having been involved in this discussion.

Where if you guys wanted to get something positive out of Congress, maybe the key legislators are going to say, "Sorry, you didn't play ball with us there and we're not playing ball with you here"?

I don't want to speculate in the mindset, particularly when you have new members sitting up there next year.

Our focus from day one is to work with the staff, help them understand our issues.

We have spent a tremendous amount of time and it's across the board.

The [COs] have been very active in terms of helping people understand really, very complicated issues and I tell you, BIll, I have not met a member yet that is not -- their goal is to figure how you put more business on the freight railroad and they don't want to screw it up, so we'll see.

I think our industry, I don't think -- we've got a great story to tell you.

Look at new investment.

Think about the jobs potential.

Last thing any member wants to hear up here is we are cutting capital and eliminating jobs and that's what's at stake here if this -- if whatever comes out is wrong.

Yes, I just wanted to make sure, I guess, that the rails weren't being viewed as obstruction in this.

I suppose you could probably find somebody that says we are but we're -- the stakes are too high.

I think overall, though, there's no question we have been at least cooperative in the discussion.

We've been very straight on the risks that are out there, and at the end of the day, though, the stakes are so high we have to take this very, very serious in terms of where we are going.

Okay.

That's great.

Thank you.

Our next question is from John Larkin with Stifel Nicolaus.

Please proceed with your question.

Good morning, gentlemen.

Can you hear me okay?

You bet, John.

Just following on the Washington line of questioning here.

You mentioned that in your conversation with some of the members of Congress that they would like to see a larger market share shifting over to the railroads.

Over the last couple of years, there's been some talk of an investment tax credit perhaps that you could apply to incremental capacity and investments and that thing.

Are there any other programs that come up in those discussions that could be advantageous in facilitating a transfer of market share from, say, the highway over to rail?

Well, I would tell you one thing right now is to take the uncertainty off the table in terms of when we think long term investment.

The only way you're going to grow here is you've got to think investments long term and one of the things I point out to members is when you create an environment that is uncertain in the long term, you start to get cautious in capital.

The investment tax credit is still on the table.

That is out there.

That's probably a long shot.

The fact of the matter is if they led this industry continue to move forward as we have, they will see more investment and more volume going forward.

And then just maybe on a longer term question involving the coal business, I know the AR is concerned that cap-and-trade light could get passed here perhaps even in a -- what would amount a to a lame duck session after election day.

Is that something you are concerned about?

It sounds to me like you feel you have a huge upside in terms of the capacity that is available in the PRB but could that be perhaps never utilized if some legislation gets passed later in the year?

John, we pay attention to it, obviously ,what is at stake with coal.

I'm not going to speculate what can happen at length.

That said, we take it serious.

Lots of things can happen.

I just have a tough time looking at this country walking away from coal when it generates half the energy -- electricity production in America.

So we are involved but we'll see what happens here.

Our focus has been one, coal has got to be part of the equation.

Technology has got to be also part of the solution to help coal go forward.

I appreciate the insights.

Thank you.

Our next question is from Cherilyn Radbourne of TD Newcrest.

Please proceed with your question.

Thanks very much.

Good morning.

Good morning, Cherilyn.

I wanted to ask a question about slide 15 where you detail your volume variability.

And I think if I've read this correctly, it looks like your yard and local starts were up only 1% versus that 18% gain in volume which would seem like a pretty exceptional result.

So I wonder if you can speak about some of your local initiatives.

Well, a good portion of that is related to the train length that we mentioned, Cherilyn.

They -- across the board we also have initiatives in all our terminals, you see the yard and local was only 1%.

We have huge terminal improvement initiatives using our continuous improvement group, our link concepts across all of our major terminals.

We have mentioned previously before we had shut down about or severely curtailed about 30 yards.

That is still in the 24, 25 area.

We've been all over-time curtailing that.

So car repairs, mechanical engineering on the transportation site, every one of them has a productivity initiatives that helped contribute to that and help us keep those crude starts and train starts down.

But a big leverage item and we'll continue to focus on is with that train length -- put that additional volume on existing trains.

Thank you.

And then last one from me, I believe that you mentioned last quarter that you wouldn't feel totally confident in the recovery unless some of your industrial product categories started to participate more fully.

And I just wonder if you could comment with one more quarter volume to look at, how you're feeling now versus at the end of last quarter.

I'm still -- I mean, our volumes up 25% to a year ago but again, a year ago was the bottom.

I'm still concerned if I think about with what is happening with housing, the housing numbers obviously have deteriorated in terms of new housing starts from where we were a quarter ago but we are feeling better.

We still have a long ways to go.

And I gave you an example.

If you take peak lumber loading, I think it was 2,500 in a quarter, we loaded about 70,000 loads of lumper.

At the bottom we loaded 19,000.

Now, it has picked up some but it's a long ways away.

As Jack mentioned, overall construction just right now is not looking real strong and again, I'm trying to predict the future here.

I still believe until you start seeing the hiring numbers improve, I think it's going to be a tough go for a while.

Thank you.

That's all for me.

Thank you.

Our next question is from the line of Jeff Kauffman with Sterne, Agee & Leach.

Good morning.

(inaudible) for Jeff Kauffman.

Just some quick questions.

First on the pricing side, so pricing ex [RCAP] was up 4.5%.

Last quarter, I think it was up about 3.5%.

Was there any -- what was the main driver of the ramp-up, any particular business segment?

The biggest change if you recall in our first quarter, we actually had negative pricing in our total intermodal business and that turned around in the second.

Okay.

Thank you.

On the expense side, is just looking at some of the items here like equipment rent that was down year-on-year and I think you mentioned that about $14 million was one time in nature.

What should we expect for the second half?

Should that pretty much grow with some relationship to volume?

What should we expect in terms of growth of that line?

That's going to be -- equipment rents are going to follow volume.

There is a direct correlation to how our business grows.

Okay.

And then just one last one, just a clarification on the other operating expense line.

You said going forward we should be looking at about $175 million or so.

I said around $170 million or so per quarter.

Okay.

$170 million or so per quarter.

I think you remember last -- on the first quarter call, I think the number that was mentioned was about $200 million per quarter and you mentioned that about $40 million was due to this, is it a true up for the casualty line?

And then I think you also mentioned that bad debt expense was -- that a positive or negative for the quarter?

I am trying to reconcile from that $200 million to the reported $122 million.

I got you.

That was a slight positive.

But the bigger driver when you compare the first quarter to the second quarter was the CSXI payment that we made which was roughly $45 million dollars in the first quarter.

Okay.

Thank you very much.

Thanks Mike.

Thank you.

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

Please proceed with your question.

Good morning.

This is [Allison Landry] in for Chris.

I was hoping to talk a little bit more about the productivity gains that you guys have seen specifically in terms of the gap between volume growth and train starts and GTMs.

For example, over the past couple of quarters we've seen train starts trending below volume growth in the range of about 11% to 12% and GTMs consistently at about 4% lower.

But my question relates to sustainability.

At what point will this gap narrow and where do you see these spreads trending as volumes come back into the network?

Jack, you want to take that one?

Well, obviously as line continues to increase, we are going to bring back our cost and our assets at a slower pace.

Rob said that, Jim said that, I said that.

And it's essentially process driven across the board.

We try and leverage everything that we can on our existing service offerings.

We use technology in our distributed power.

I think we increased our DPU gross-tonnes about 12% again quarter-over-quarter.

We continue to do that.

In the new service offerings, we emphasize with our customers productivity initiatives, putting the right equipment on the right trains.

So obviously, the leverage will gradually diminish but we see upside opportunities for us in the future here.

We don't see anything that would stop that from us at this point.

Allison, one of the ways to think about this also is what mix can do.

We've got a lot of -- the thing of our network you can run unit trains like a coal train.

Obviously, that grows.

You get a pretty good correlation between train starts and volume there.

On the manifest network which is mix freight, we still have a lot of capacity there.

As Dennis was saying, we have yards 24, 25 of our 115 primary yards that are any sense, really shut down.

You've got freight, car stored.

So mix can have a little bit of impact on this.

But again, what you've got to think here is as you move up that capacity curve, we're going to have great leverage but it will start to shrink some.

Okay.

That's great color.

My other question is, we've heard that Northeast Utilities stockpiles are closer to normal and the Southeastern ones are still pretty high.

But, just given the relentless heat wave that we have seen here in the Northeast, are you guys moving any of the PRB coal eastwards to backfill some of the coal there?

We actually do have a couple of moves that move all the way into the Northeast and those are moving quite strong, very strong demand for coal, so that's all good things for us.

Okay.

That's all for me.

Thank you very much for the time.

thank you.

Ladies and gentlemen, we have approached the end of our allotted time for Q&A session.

We just have time for one last question.

That question is coming from the line of John Mims of BB&T Capital Markets.

Please proceed with your question, sir.

Hi, thank you.

Good morning.

If you look back at intermodal and peak levels, can you talk -- can you give me a sense of what your total container pool is now with HUB and Pacer and everybody included?

If you look at the entire (inaudible), what we own plus what we have tied together with HUB and Pacer, we are probably in the 70,000 container range and, at the moment.

Maybe a tad higher.

And that is including the ones you have on order?

No.

The ones we have on order, as I look at it, John, by the time I get to the end of the year, we are going to have probably 57% of the container fleet tied to Union Pacific and that container fleet is expected to be about 150,000 units in total.

Great.

That's what I was looking for.

One last question.

Auto -- your auto industry is 8% of revenue.

It's the smallest group, but when you look at steel, plastics, and everything else that's feeding into auto production.

What is your total exposure?

I've never -- we've looked at it from time to time.

It really varies.

It's pretty hard for me to put my finger on that.

John, I think you ought to ask yourself the question, where do you think the auto and et cetera sector is going right now.

We said, when we came into the air, we thought 11-plus million new vehicle sales.

I think the forecast had come down a little bit in terms of the outlook.

So I would argue, right now, I think you have more upside than you have down side on vehicle sales over the next couple of years.

Okay.

Great.

I appreciate it.

Thanks for the time.

Thank you.

I would turn the floor back over to Mr.

Jim Young for closing comments.

Well, again, thank you everybody for joining us.

I hope you see the real potential here with Union Pacific Railroad and we look forward talking with you with our third quarter earnings release.

Thanks again.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.