聯合太平洋集團 (UNP) 2011 Q1 法說會逐字稿

Greetings and welcome to the Union Pacific first-quarter 2011 conference call.

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 now my pleasure to introduce your host, Mr.

Jim Young, Chairman and CEO for Union Pacific.

Thank you, Mr.

Young, you may begin.

Good afternoon, everybody.

Thanks for joining us on the call.

Before we get started I just wanted to thank you for bearing with us on our change in release schedule this time around as we work through some extra logistics in the holiday week.

We'll be back on our regular Thursday morning before market time slots next time around.

With me here today in Omaha are Jack Koraleski, Executive Vice President of Marketing and Sales; Lance Fritz, Executive Vice President, Operations; and Rob Knight, our CFO.

As you can see, we have started the year off strong reporting record results for the first quarter.

Earnings were a record $1.29 per share, a 28% increase over 2010.

Driving this gain was a 15% increase in operating income to a first-quarter best of $1.1 billion.

This is the first time UP's first-quarter operating income has topped the $1 billion mark.

Drivers behind the year-over-year improvement include a 5% volume increase and core pricing gains.

Jack will provide commentary on our top-line growth, but we again achieved volume gains in all six business groups for the fourth consecutive quarter.

Intermodal, industrial products and chemical shipments drove about two-thirds of the volume growth.

We did face some challenges in the quarter, including extreme winter weather across most of the nation and a significant rise in fuel prices.

The team will provide more details in both of these areas in a few minutes.

Despite these challenges, though, we remain focused improving profitability.

We achieved a record first-quarter operating ratio of 74.7% and that includes 2.4 points of negative fuel price impact.

The strong performance enabled us to generate record free cash flow after dividends.

Throughout the quarter, we remained focused on delivering safe, efficient, high quality service.

As Jack will show you, these efforts were recognized through record customer satisfaction.

Strong service levels deliver value for our customers, while supporting our price gains and attracting new business to the railroad.

So with that, I'll turn it over to Jack.

Thanks, Jim, and good afternoon.

So, let's lead off with a look at how customers view the service and the value they're getting from the Union Pacific as measured by our customer satisfaction and I'm pleased to say that the news is good.

For the quarter, customer satisfaction came in at 91 topping the previous quarterly best of 90 and along the way we hit 92 in February setting a new best-ever monthly mark.

The strength of our value proposition, great service and continued slow improvement in the economy drove our first quarter volume up 5%, with gains in all six of our businesses.

The first quarter is often marked by challenging weather and as Jim pointed out this year was no exception.

You can see from the chart in the upper right the impact on our seven day car loadings resulting from the large storm that swept across the plains and the Midwest in early February, ultimately dumping two feet of snow on Chicago before heading east.

The chart also highlights the resiliency of our network as volume quickly rebounded.

Core price improved 4.5%, with each of the groups posting gains, with the pluses and the minuses of mix offsetting in total those price gains combined with increased fuel surcharge revenue to produce an 8% increase in average revenue per car.

The stronger volume and improved revenue per car drove freight revenue up 13% to $4.2 billion, a new first-quarter best.

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

We'll start with ag products where volumes grew 4%, which combined with a 6% improvement in average revenue per car to produce revenue growth of 11%.

Global demand for whole grains accounted for most of the volume growth, with a 69% increase in export wheat leading the way.

Export demand drove a 36% increase in frozen meat and poultry shipments.

Now the meat exports were up due to various local issues that reduced supply in Australia, Korea and Brazil, while the poultry gains were a function of a shift to export markets that favored rail.

Import beer volumes increased 10%, with a boost from some new business.

Ethanol volumes grew 4% and soybean meal stayed flat as new domestic business offset a decline from last year's strong export demand that resulted from the South American crop failures.

Turning to automotive, our automotive revenue grew 12% as contract price increases drove an 8% improvement in average revenue per car and volume grew 4%.

Volume growth was hampered by the February storms that restricted shipments and closed auto plants.

Although vehicle sales were stronger than expected throughout the remainder of the quarter, equipment shortages were seen across the national rail network as industry car cycles slowed due to the lingering impact of the severe winter weather.

To improve fluidity and car supply for our customers, early in February we started pulling the entire automotive fleet out of storage and by March 1, we had that process pretty well complete.

In addition we began a series of special moves to reposition empties for loading and we also launched a couple of multi-modal routes to bypass congestion and help accelerate vehicles to market.

Increased vehicle production and anticipation of stronger sales in 2011 is driving the growth in both the vehicle and parts shipments.

Our finished vehicle volume grew 5% with the strongest increases coming from the Detroit Three.

Our parts shipments increased 4% with growth in tier suppliers and the Detroit Three offsetting the continued negative impact of the closing of the NUMMI plant in April of last year.

Our chemicals revenue grew 13% as volume climbed 10% and average revenue per car was up 3%.

As I mentioned earlier, mix changes across the group netted out overall, but our chemical business did see a couple of points of negative mix driven in part by an early start to the short haul faux rock business and growth in movements of plastics to storage and transit yards.

Growth in petroleum products, which increased 34%, was largely driven by increased crude oil shipments, with asphalt and refined petroleum products also posting gains.

Strong seasonal demand boosted fertilizer volume 16%, with a 29% increase in export potash leading the way, but this quarter export potash represented less of the overall market than we had seen in previous quarters.

Plastic shipments increased 9%, with growth in both domestic and export markets and improved industrial production drove industrial chemicals volume up 6%.

In energy, a volume increase of 4% combined with an 8% improvement in average revenue per car resulting in revenue growth of 13%.

Southern Powder River Basin tonnage was up 5%, driven largely by the three new Wisconsin utilities and the carryover impact of the new San Antonio unit that also came online during the second quarter of last year.

Colorado, Utah tonnage declined 5% as export demand was more than offset by weakened demand in the Eastern market.

Additionally, a long wall move in one of the mines will continue to reduce volumes until the third quarter.

Now we don't always highlight our other coal origins, but 4300 car loads or 65% growth out of Southern Illinois to river ports, utilities and industrial customers was worth highlighting for the quarter.

Industrial products volume grew 9%, which combined with a 6% improvement in average revenue per car to drive a 15% increase in revenue.

Non-metallic mineral shipments increased 36%, as strong drilling activity continues to drive demand for frac time, barytes and bentonites.

Production of pipe for drilling as well as steel coils and bars for the strengthening auto industry reflected a 15% increase in steel and scrap and although the packaging paper market is showing only a slight increase so far this year, our paperboard volume is up 21% with the growth coming from inventory replenishment and highway conversions.

Our Intermodal revenue grew 15%; that's an 11% improvement in average revenue per unit combined with a volume growth of 4%.

International Intermodal volume increased 6%, reflecting improved consumer demand and overcoming the timing impact of the Chinese New Year, which this year fell entirely in the first quarter, while in 2010 the holiday slowdown was spread between the first two quarters.

Truck out service continues to support highway conversions in our domestic Intermodal world, which was up 1% compared to a strong 2010.

Our streamline subsidiaries door to door product grew 17% with nearly all of that growth coming off the highway.

So let me wrap up with a look at what's ahead for the rest of 2011.

Although Global Insights forecast has softened a bit, it's still a solid growth outlook and improved projections for industrial production and unemployment are actually encouraging signs for us.

Here is kind of an overview of what we see happening in each of our six groups.

We will start with automotive, which is the only group where we're experiencing significant impact from the recent disaster in Japan.

There's still a lot of uncertainty as to the full impact on the auto industry, but our current take is that the second quarter's going to bear the brunt of the disruption, with overall upside potential in the second half as managers work hard to fill the market void.

While we anticipate that this will slow growth in our automotive segment in the second quarter, we still expect strong growth in the second half if the industry recovery continues and sales ramp up.

In industrial products the markets that have been the strongest during the first quarter, especially those that are tied to energy demand and the recovering auto industry, should stay strong as the year progresses.

Unfortunately, housing and construction continue to lag, but we're cautiously optimistic given the recent report of stronger than expected housing starts in March.

While one month doesn't make a trend, we're hoping to see at least the start of the recovery in housing and construction as we move towards the end of the year.

Chemicals is off to a good start for the year and most of the strength should continue, driven by energy demand and the stronger economy although we do expect to see fertilizer shipments slow a bit following kind of a more normal seasonal pattern.

Strengthening industrial production along with growing export demand should be good news for our coal franchise, especially with the SPRB stockpiles recently estimated to be slightly below normal.

We'll also continue to see benefit from those Wisconsin utilities.

The biggest gains in ag are expected to be in whole grain exports, as demand for US wheat remains strong and feed grains have solid potential against a relatively low second-quarter comp.

And last but not least, import volumes that drive our international Intermodal business should grow, if consumer demand improves as predicted, and our excellent service should continue to support highway conversions in domestic Intermodal.

On balance with the first quarter behind us, most of the markets are shaping up as we pretty much expected.

The diversity of our business mix continues to serve us well and with our relative fuel efficiency, higher fuel prices should further strengthen our competitive advantage, as long as they don't tank the economy.

Across all six groups, the strong value proposition remains the foundation of our business development efforts, positioning us to deliver both the economy plus volume gains and improved pricing that we discussed last November to drive overall revenue growth.

With that, I'll turn it over to Lance.

Thanks, Jack, and good afternoon.

Safety is our number one focus.

In the first quarter of 2011, we achieved a best ever quarterly performance in employee safety.

The continued penetration of the peer to peer safety process that we call total safety culture, or TSC, and enhanced training drove the improvement.

This had a positive impact on our bottom line and Rob will touch on it in a few minutes.

In terms of customer safety or derailments we improved 10% to a record first-quarter reportable incident rate.

Derailment costs decreased over 20% with a lower incident rate and a decline in the severity of those incidents.

Investments in infrastructure, technology and training created a safer operating environment.

And despite increases in rail and highway traffic during the quarter, we also achieved a best ever quarterly mark in public safety.

Our crossing accident rate declined 13% in the quarter versus 2010.

We continue to focus on risk reduction, including closing grade crossings and helping local communities address risky driver behavior.

Safety, service, and productivity are co-dependent goals that reinforce one another, which is reflected in our service results.

For the first quarter, we handled a nice step up in volume while maintaining strong service levels.

Jack showed you the impact of the February winter storms.

We really felt it in the Chicago area, which is our largest gateway and effects about 25% of our rail traffic.

Heavy snowfall and high winds impacted our operations and our employees and caused some loss in network velocity.

Our team did a tremendous job responding to the challenge.

We deployed surge resources and quickly adjusted service plans.

By applying the principles of the unified plan and utilizing available resources, we absorbed the 5% volume growth and overcame the weather challenges, while maintaining solid customer service.

Both volume and service performance quickly rebounded in March to a run rate of 174,000 weekly car loadings and 88 service delivery index.

Handling more throughput at a consistent high level of service and efficiency drives productivity and creates capacity.

We leveraged the growth in train sizes, as you'll see on the next chart.

Looking at our manifest business, which accounts for over one-third of our network capacity or activity, excuse me, and is predominantly our industrial products, chemical and some of the ag business, we experienced solid car load growth this quarter.

We were able to leverage volume, handling 11% more car loads with just 5% more starts.

We achieved similar results in unit grain trains, absorbing 9% more volume with 6% more starts.

This is a product of a collaborative effort working with shippers and receivers to develop and fully utilize our grain network.

We also drove train length productivity in our coal and Intermodal shipments.

We achieved these gains through plan design, equipment management, and by working with our customers and interchange partners.

Further deployment of distributed power contributed to our success in train size growth and I expect further upside in the premium bulk and manifest products.

As volumes increase, we use the unified plan process to run more trains across our network to destination without an intermediate stop.

This is captured in the metric at the bottom right, which shows the number of times each day trains stop to pick up or set out cars.

Fewer work events means more throughput at higher levels of service.

As volumes grow, we continue to put surplus resources back to work, while maintaining our surge capabilities.

We recalled around 700 TE&Y employees so far in 2011, which brings furloughs down to around 820.

We continue to hire TE&Y employees to offset projected attrition, as well as for volume growth this year.

Recall it takes about six months to fully train and deploy a new hire.

Despite having several hundred more new hires in the training pipeline and more employees working on capital projects, our workforce productivity improved around 1% from 5.31 million to 5.34 million gross ton miles per employee.

Adjusting for those two factors, our productivity improved about 2.5%.

While we have placed around 220 locomotives and thousands of freight cars back into service this quarter, we still have roughly 800 locomotives and 26,000 freight cars available to meet growing demand.

My team has also touched or rotated around 200 of the stored locomotives to be available on demand for weather disruption and demand spikes.

Even though the equipment we returned to service was older and generally less reliable than the fleet average, productivity is measured by GTMs per horsepower day and freight car utilization matched last year's excellent performance.

Another vital part of our improvement plans are the capital investments that we're making to provide great service for our customers, while handling more of their business.

For 2011 our capital plan totals around $3.2 billion; more than half of that is replacement spending to harden the infrastructure making the network safe and resilient.

Spending for service, growth and productivity will total close to $1.1 billion.

Capacity, commercial facilities and equipment are the primary drivers.

Major projects include additional double track on the Sunset Corridor, the Blair cutoff project on the East West main line, siting extensions, Intermodal terminal expansion.

We're also acquiring 100 new road locomotives, close to 5,000 new containers, some additional covered hoppers, and new auto flex auto racks, which were designed and are being built by a UP car shop.

The bulk of these acquisitions are designed to meet expected business growth.

In addition to our investments for growth and efficiency, we plan to spend around $250 million on positive train control this year.

All in all, our projected capital spend is up significantly compared to 2010.

We're investing for safety, growth, service, and productivity gains.

The end game is delivering the full potential of the great UP franchise translated into these deliverables -- world class safety results as we build total safety culture; leveraging growth to the bottom-line with network productivity; growing the value proposition for our customers; and positioning for growth as we provide excellent service.

So, going forward, the key for the operating team is agility in delivering on UP's value proposition.

We are meeting and will be prepared to continue to meet customer expectations regardless of the economic circumstances.

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

Thanks, Lance, and good afternoon.

Before we go through Union Pacific's record first-quarter earnings, I'd like to make everyone aware that the 2010 fact book will be available tomorrow morning on the UP website under the investors tab.

So with that let's move on to our financials.

Slide 21 summarizes our first-quarter results.

Operating revenue grew 13% to a record first-quarter $4.5 billion on the strength of core pricing gains and volume growth.

Operating expense totaled $3.4 billion, increasing 13% or $376 million compared to the first quarter of 2010.

If you consider that higher diesel fuel prices added $200 million of expense, you can see we demonstrated solid operating leverage.

Also you'll recall that our 2010 operating expenses included a onetime payment of $45 million to CSXI as part of the restructuring transaction.

Operating income totaled $1.1 billion, a 15% increase and a first-quarter record.

Other income totaled $15 million in the first quarter, $14 million higher year-over-year, mainly due to early debt redemption costs incurred in 2010.

Quarterly interest expense declined 9% versus the first quarter of 2010 to $141 million, driven by lower average debt levels.

First-quarter income tax expense increased to $372 million.

Higher pretax earnings drove the increase, but was somewhat offset by a lower tax rate, which was driven by state income tax rate changes.

Net income totaled $639 million, a first-quarter best and a 24% increase versus 2010.

Earnings per share increased 28% to $1.29 per share, as the outstanding share balance declined 3% versus 2010, reflecting our share repurchase activities.

Turning to our top-line, we achieved 13% freight revenue growth to a first quarter record of $4.2 billion.

This slide provides a walk across of the first-quarter growth drivers.

First-quarter volume was up 5%.

Unlike the last few quarters, business mix did not have much of an impact year-over-year.

Our solid price improvement of 4.5% was in line with our first-quarter expectation.

Fuel surcharge revenue added another 3.5% and as you'll recall, there's a two-month lag in our fuel surcharge recovery mechanism.

So although our fuel surcharge revenue increased, we did not recover the full amount of the increased fuel costs due to the continued rise in fuel prices throughout the quarter.

We view this as a timing issue and I'll talk a little bit more about that in a minute.

Core pricing gains in the first quarter of 4.5% were driven by solid demand, our value proposition, and ARCAF fuel escalators.

As we've stated before, we have roughly $750 million worth of business in our legacy portfolio to compete for and reprice this year, but the majority of these contracts don't come up for bid until the fourth quarter.

If you look at our incremental margin for the first quarter, after adjusting for higher fuel prices and the 2010 CSXI payments, revenues were up nearly 10%, while costs grew only 7%.

That relationship equates to an incremental margin of about 45%.

As we noted in the fourth quarter, we continue to take the necessary steps to prepare for the future.

We believe that our proactive initiatives implemented today will result in improved margins as we approach peak seasons.

Turning now to the expense side, first-quarter compensation and benefits totaled $1.2 billion up 10% from 2010.

Breaking down the year-over-year change, roughly half of the increased expense can be attributed to inflationary pressures that we discussed with you back in January, health and welfare, unemployment taxes, wage increases, and pension costs.

The other half was driven by volume growth.

Our workforce levels increased 5% in the quarter compared to 2010.

Half of the increase was driven by more TE&Y employees in the training pipeline and more individuals working on capital projects.

The other half was driven by our 5% volume growth, partially offset by productivity.

We will likely see similar patterns in the next quarter or so, but we are optimistic about the future and plan to stay ahead of the game.

As you would expect, training costs were higher in the quarter as new employees were brought on to prepare for the expected 2011 attrition and volume growth.

Conductor and engineer training costs increased $16 million year over year.

First-quarter fuel expense totaled $826 million, by far our second largest expense item in the quarter.

The average diesel fuel price, which increased 33% year over year, was the primary driver of the quarterly change.

In fact, the $2.88 per gallon of diesel fuel paid in the first quarter was our third highest quarterly fuel price on record.

I'd like to make two key points about the fuel price impact.

First, the math alone of higher fuel prices inflates the operating ratio.

And secondly, the lag impact of our fuel surcharge mechanism also creates an additional headwind on both our operating ratio and our earnings.

When we combine these two factors, the end result was a 2.4 point increase in our operating ratio and an $0.08 reduction in earnings per share compared to the first quarter of 2010.

The impact is a bit larger than the $0.05 impact that I talked about in March, as fuel prices continue to climb throughout the month.

Fuel expense was also higher as a result of a 5% increase in gross ton miles.

Slide 26 summarizes first-quarter expense for two additional categories.

Purchase services and material expense increased 10% or $43 million to $475 million.

Similar to the two previous quarters, the biggest driver of the increase was greater use of contract services associated with our higher volumes.

This includes transportation expenses incurred by our subsidiaries.

Crew lodging and transportation costs also increased and locomotive maintenance costs were up year-over-year, as we returned stored units to active service.

When you add it all up, about one-third of the increased spending in this line is associated with expected volumes in the second half of the year, reflecting the amount of time it takes to position our assets for full deployment.

Depreciation expense increased 8% or $28 million to $395 million, which is in line with the previous guidance that we gave.

Increased capital spending and higher depreciation associated with hauling more gross ton miles drove the increase.

Looking at the second quarter, we expect depreciation expense to increase around 9% or so compared to 2010.

Slide 27 summarizes first-quarter expenses for the remaining two categories.

First-quarter equipment and other rents expense totaled $302 million, up 4%.

The biggest contributor was container lease expense, which was higher in the quarter as we increased our container fleet.

Car hire expense also increased, driven by volume growth.

Lower freight car lease expense partially offset these increases.

Other expense came in at $188 million, down $58 million or 24% from 2010.

Cost pressures, including volume-related expenses, and increased operating taxes drove expenses up in the first quarter, but spending was lower than expected across the board, allowing us to beat the $225 million target that we discussed with you in January.

One of the bigger drivers of improvement in this cost line was lower personal injury expense, again reflecting positive experience from our continued safety gains.

And we've already talked about the $45 million CSXI payment that was made in the first quarter of 2010.

Going forward, we expect continued safety performance, but we believe there will be less positive impact from personal injury actuarial studies.

All in, we still expect the other expense category to average around $225 million per quarter for the rest of the year, but we remain committed in our efforts to offset cost pressures.

As in the past, with so many ins and outs in this line, it's not unusual to see quarterly fluctuations.

Bringing both the revenue and expense sides together, UP's record first-quarter 2011 operating ratio illustrates the substantial improvements in profitability that we achieved over the last several years.

We improved our operating ratio to 74.7% in 2011.

The ongoing efforts of project O.R., solid volume growth, continued operating efficiency, and core pricing gains all contributed to this record mark.

These improvements more than offset the net headwind created by higher fuel prices and the 2010 CSXI payment.

Together, those two items negatively impacted our operating ratio by 1.3 points compared to 2010, masking a 1.7 point improvement in our base business.

Union Pacific's record profitability in the first quarter of 2011 also drove record free cash flow after dividends.

Growth in cash from operations more than offset increased capital spending and higher dividend payments.

In fact, cash dividends paid in the first quarter of 2011 were up 38% from 2010 levels.

Bonus depreciation contributed positively to cash flows in both years.

Union Pacific's balance sheet continues to be in good shape consistent with the goal of maintaining an investment-grade credit rating.

At the end of the first quarter the adjusted debt-to-capital ratio was 41.7%, just slightly down from year-end 2010, as earnings added to our equity balance.

We've continued to generate strong cash flow to return to our shareholders in the form of share repurchases.

During the first quarter, we bought back 2.6 million shares totaling $248 million.

We've recently renewed our share repurchase authority for a new repurchase program of up to 40 million additional shares by March 31, 2014.

The new program went into effect April 1.

Dividend growth and opportunistic share repurchases continue to be key components of our balanced approach to cash allocation for the long-term benefit of our shareholders.

Looking ahead, we see continued opportunities to grow and improve our profitability.

As Jack discussed, we are optimistic about the prospects for solid growth and pricing gains in 2011, particularly in the second half of the year.

Of course, this assumes that the economy continues to cooperate.

We remain committed to achieving real pricing gains in 2011, driven by the increased value of Union Pacific's service, strong market demand, and the added benefit of competing for and repricing our legacy business later in the year.

As we look to the second half of the year, the combination of stronger revenue growth, our ongoing productivity initiatives and current resource investments should produce improved incremental margins and drive higher returns.

In January of this year we targeted a record operating ratio for the full year of 2011.

The oil price at that time was around $85 a barrel.

At today's price of $110 a barrel, this will be a challenge, but we remain committed to achieving improvement from last year's 70.6% record operating ratio.

Even with high fuel prices and the pressure it puts on our margins, we still believe 2011 will be another record-setting year for earnings, allowing us to reward our shareholders with greater returns.

With that, let me turn it back to Jim.

Thanks, Rob.

Obviously there's still some uncertainties for the balance of the year, such as the impact of higher fuel prices on the overall economy.

So far the economy continues to gradually improve and we expect to see this reflected in stronger business volumes as we move back into peak season later in the year.

We feel good about our prospects for strong performance in this environment and we're taking the necessary steps to ensure that UP will be ready to successfully meet this demand.

When you look at it, our plan for 2011 remains very straightforward.

We'll continue to deliver on our customer commitments by running a fluid and efficient railroad, focused on safety and high levels of customer service.

We'll leverage our volume opportunities to drive productivity and financial results and we'll continue to make the critical capital investments that support our long-term strategy for profitable growth.

Taken together, these efforts will translate into increased value for our customers and stronger cash flows and financial returns for our shareholders.

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

(Operator Instructions) Justin Yagerman with Deutsche Bank.

Wanted to get a sense.

We've heard from the two West Coast dominant truckload carriers that the western half of the United States was weaker in the first quarter and we saw that in your Intermodal volumes.

And I was wondering if you guys had any real explanation for what was going on on a relative basis.

Is that just seasonal and I guess when you think about how that's proceeded, are you starting to see increased either flows or expectation that those volumes are going to begin picking up as we move through the second quarter?

Jack, why don't you take that?

Justin, I think first of all you're correct in that there is always a seasonal downturn or falloff after the end of the year and as you get into the first quarter and we saw that.

Volume is picking up.

It's getting stronger.

I always look at the number of containers we have in storage and even with some incrementals that we bought last year we only have about 4500 left in storage and that's in April.

So, we're already starting to ramp up towards what looks like to be with continued economic growth a fairly decent peak season for us.

So, we're very comfortable with our plan.

We're seeing it play itself out and we're not seeing anything at this point in time that's concerning us.

Okay.

Rob, you did a good job at getting at the incremental margin question, but I guess given that the thought is is that it will be difficult to see that OR improvement year-over-year this year because of fuel, obviously, coming in at 0% margin, that's optical but does it create a difficulty in reaching the longer term OR goals that you guys have of getting to a 65 to 67 by 2015?

In terms of the underlying momentum of the business is there anything that changes there if we're in a heightened fuel environment?

Justin, I'll take that one.

No, I don't see that as a challenge in our long-term goal.

In fact, if you think about what it does to on highway costs, I think it helps you in terms when you think about your volume story that's out here and our team is doing a good job in terms of fuel recovery.

But I really don't see it as a -- sure I'd like to have $85 a barrel fuel.

My concern is, not so much in the ratio, but what it may do to consumer demand long-term, but we're not backing off our commitments.

All right, great.

And I guess last one and I'll turn it over to someone else.

Just curious on the capital spend, decent size program this year, how much of that is eligible for bonus depreciation and how much was potentially pull forward because of that 100% depreciation?

Rob?

Yes.

Justin, we will benefit from the continuation of the bonus depreciation, but we really didn't change our capital planning so much around the result of that bonus depreciation.

So we will benefit from it, but it didn't cause us to pull ahead.

And just a reminder, remember the guidance that we've previously given going forward is that our capital spending should be we expect in the 17% to 18% of revenue as we move forward over the next several years.

But Justin, keep in mind that that is only if we see our returns continuing to improve.

We're making a bet here long-term and when you look at some of our investments here, and I feel good about what's happening with our profitability, our return on invested capital, but I'll tell you if we start to see that move the other way you're going to see capital go back the other way.

I mean the math is pretty straightforward.

Appreciate the time.

Thanks a lot.

Okay, Justin, thanks.

Tom Wadewitz with JPMorgan.

Wanted to see if we could start off with one on the core price.

The 4.5% is certainly a good number.

It is a little bit lower than what you saw for most of last year.

I wonder if you can give a sense is that the run rate that we should assume until you get into fourth quarter when you get a bigger legacy impact?

Jack, do you want to take that one?

Tom, it really kind of depends on the marketplace.

It's certainly not going to get any worse than that and if the market continues to improve and we start to see an even faster ramp up in things like peak season, we could do a little better than that.

You understand clearly that our big legacy push isn't really going to impact us much this year.

It will do more to support 2012 than it does 2011, but we feel very good about our pricing plan.

And if you look at the legacy impact at the end of this year, I think, Rob, you gave us a number about the kind of the total revenue that you're repricing and then what happens in 2012.

Is it a similar amount in 2012 and I guess I think the timing in 2012 is relatively early in the year, so maybe just some comments on that as well?

You're going to see the benefit of the $750 million reflect itself in 2012 and then we have a number of year-end 12/31 contracts that will impact 2012 providing we're successful in renegotiating and keeping that business on our railroad.

And the 2012 number is not as big.

The 2012 actual in the year legacy contract is not as big as what we have with the combination of the year-end here and then the 2012 itself.

I don't have a specific number here with me right at the moment.

Tom, but keep in mind, legacy isn't the only place that we are able to get price and it's really across the board with all six of our business groups.

A big part of that is the value proposition.

I will tell you right now and again let's assume the economy continues on kind of slow growth as we've said.

You think about what's happening maybe in the trucking side, I think the pricing opportunities are pretty darn good for the rest of the year.

Do you have a sense, Jack, of how much smaller it is than the $750 million?

Is it like $500 million or $300 million or you just don't have the numbers in front?

I don't have the numbers in front of me.

Do you have them, Rob?

We'll get that here as we're talking.

Go on to your next question.

Okay, great.

That's good.

I appreciate it.

Thanks for the time.

Okay, Tom.

Chris Ceraso with Credit Suisse.

This may be kind of a simple question, but it did seem that several of your expense categories grew at a faster rate than your car load growth.

Is this something that you expect to persist throughout the year?

Rob?

As I pointed out, there is some inflationary pressures, like for example in the comp line, and half of that 10% growth in the quarter was what I would call and did call inflationary pressures.

The other half was related to volume.

Similar on the purchase services where we experienced bringing out locomotives from storage, bringing out other equipment, etc.

So, those are unusual pressures in that sense.

And I would expect that some of those pressures, particularly in the comp line, will continue throughout the year.

The component that's related to volume, as we've always said, headcount as it relates to volume will grow with volume, so we would like to see volume continue to grow.

We expect headcount then to continue to grow as a result, but not at a one for one basis, because it's offset by productivity.

But the other half, the inflationary pressures, are likely to stick with us throughout the balance of the year.

Chris, but you had a pretty big jump in I would call non-productive costs that we've got in our first quarter getting ready for the volume in the third and fourth quarter.

In fact, I think Rob in his numbers said about $35 million or so plus or minus is associated with training and pulling some locomotives out.

So, as you think about that we're going to lever that very, very nicely in the second half of the year as those people come out of training, get the locomotives ready to go, you start to see that business, that will be very nice leverage second half.

And, Chris, just one more point on another category.

Purchase services and other, which was up 10%, I would expect as we get into the second quarter that the run rate year over year would look more like a 5% than the 10%.

That 10% this year was as much a result of the more difficult comp from last year in the first quarter and I wouldn't expect that would continue in the second quarter and beyond.

Okay, so just to follow-up just to clarify, the compensation inflation for the full year, are you saying that it will be 5 points above and beyond volume growth?

Roughly around 5%.

5% all in?

Of the inflationary part.

Okay, and then some additionally on top of that for volume?

Correct.

But you should have some productivity on the volume side.

You're not going to see one for one with volume and wage increase.

Okay, thank you very much.

All right, Chris.

Matt Troy with Susquehanna Financial.

I wanted to ask about coal.

Specifically given the strong pull of export coal off the East Coast, I was wondering if you're seeing any inquiry from East Coast consumers as to an increased desire to import PRV coal further in our direction.

Secondarily, wanted to get a sense of what stockpiles look like in your area.

Jack?

Well, Matt, the phone kind of ringing off the wall, actually, in terms of inquiries both on eastern coal and actually we're getting some fairly decent calls on export, which is not our strong suit, but we do have access to the Mississippi River terminals and some West Coast.

So, we're actually seeing some interest there.

Both of those are good for us.

We don't really have any confirmed deals, but we're certainly talking to a lot of different customers who are interested and hopefully as time plays out and if the export market stays strong, we'll see more of that draw into the East.

And the stockpile question?

The stockpiles right now, the last reported information we had said that SPRB stockpiles are around 55.6 days.

Normal would be around 56.4, so just slightly below what would be normal, which sets us up quite nicely here for the summer burn season that should be coming up.

Excellent.

My second question would be just related to export coal more directly.

We've seen the announcement now for facility potentially looking to get permitted or expanded in the Pacific Northwest and Canada.

Is your sense that that's what we're going to see?

Is there more to come and what's your sense on timing?

It seems as if if all goes well, it's about a two year, three year thing, but you also have the EPA pushback and the environmentals pushback.

Just wondering is more to come and what's your sense on timing?

Thank you.

There's a lot of places that are looking for an opportunity, so I'm not sure it's completely done yet in terms of what the potential site locations are.

Some of them to us seem a little bit more extreme than others, but there is certainly a lot of interest in developing new port facilities and the capability to handle some coal exports at existing ports, including not only West Coast and Canada, but also down in Mexico as well.

So that's the first issue.

The second issue in terms of timing, we were actually hopeful to see some activity towards the end of this year and the beginning of 2012.

The one that we're probably most interested in is the one up in Longview, Washington, with the Australian mining firm; I think it's called Amber or Ambre; and they sounded good to go except for the EPA issues and that has posed a delay, but we're hopeful that we could still see some activity there by early 2012.

Really depends on what happens with the government and the EPA.

Thanks and just as a quick reminder, you're not outlaying any capital for these projects materially so to speak?

This is all paid for by the mines and the importers themselves, correct?

Yes, the only expenditure we would consider is the rail infrastructure to ensure that we could get the product there.

Okay.

Thank you.

Let me go back to Tom Wadewitz's earlier question where he asked about what the book of business or book of revenue is in our legacy for 2012.

It's $300 million.

So again, we haven't given precise timing of when that is.

I think it's pretty much throughout the year, but $300 million is the answer to Tom's earlier question.

Our next question is from Bill Greene with Morgan Stanley.

I'm curious just on your fuel surcharge coverage, we used to talk about this being around I think 85%.

Is that still where it is?

And if you had repriced this legacy, how much would that change it?

I think it would have materially affected how these results would have looked in today, but maybe you could just sort of weigh in a little bit on that?

Rob?

The amount of revenue that we have covered with a -- some sort of fuel mechanism, and remember we have like 75 different fuel mechanisms out there, is in the low 90%s.

It's not a precise number that we track as readily as you're asking, but it's in that low 90%s so we moved it up from that 85% mark.

And how much of the negative impact in fuel this quarter was because you didn't have a fuel surcharge on the rest of that 10%?

I don't have that number, but it would be a little bit.

Okay.

Bill, the prime driver is the timing, about that two-month timing; it's that $0.08 a share.

Okay, fine.

And then, Jim, can I just ask you about your thoughts on being more aggressive with buybacks?

You have what I think is fair to say in -- at least in near history with UP a relatively under-levered balance sheet now.

How do you think about becoming more aggressive in that regard?

Well, I think our first job here is to generate the cash to put the position in the Company in terms of growth.

So, again, we'll look at long-term capital growth, we'll look at our dividend policy in terms of where we're going, and return cash to shareholders.

I don't see us levering up significantly in terms of borrowing to buy back stock.

but as you see from our first-quarter cash flow, we had a very good quarter, in fact a record quarter, and that really puts us in a very good position to continue to reward our shareholders.

Okay, thanks for the time.

Okay, Bill.

Scott Flower with Macquarie.

Wondered, just curious, given some of the shifts over the last several years in natural gas pricing versus oil pricing, I'm wondering if that changes your intermediate term perspective on the growth rates in your chemical franchise and how you may think about that longer term.

Jack?

As we looked at it, Scott, certainly having the lower natural gas prices is a benefit to US producers, North American producers.

So that's a real plus for us.

And I think one of the key criteria here that you have to look at is though the available capacity.

Our chemical customers are doing quite well right now in terms of overall production and to significantly improve on the long term means additional facilities will have to be built, which will take some time.

Okay, but I mean net-net, I remember you used to think that was sort of a almost a very low growth, no growth business.

You foresee probably better growth in that now.

I don't know if we ever believed it was no growth, Scott, but I--

Very low growth.

It was good growth.

Okay.

And then two other just maybe administrative questions sort of wrapped in one.

What was the total amount of the fuel surcharge in the quarter?

And is the tax rate that you booked in first quarter more or less what you think the run rate will be for this year, or what would be the right run rate on the tax rate?

This is Rob.

On the tax rate run rate around 38%.

Okay.

And what was the total amount of the fuel surcharge booked in the quarter?

Around $155 million, I believe, Scott.

Okay.

Thank you, all.

Okay, Scott.

Jon Langenfeld with Robert W.

Baird.

On the Intermodal side how should we think about your volume growth there relative to the market, which was a bit stronger?

Are there contracts shifting around or is this a function of some of the changes with the underlying Intermodal Marketing Company partners?

Jack?

John, that's a good question.

As we looked at the intermodal marketplace today and we look at some of where we stand, we're being very disciplined in our approach to going after business and looking at the market.

We're staying very focused on our re-investability threshold and looking to be opportunistic.

We're working with our IMC partners in terms of business availability and right now they're kind of going through bid season, so there's a lot of business up for grabs that everybody is vying for.

So, until we get through May and into June, it's still somewhat of a moving target for us.

And I will tell you, I think you have to be careful about looking at first quarter and extrapolating that out the rest of the year, particularly on the domestic Intermodal side.

We are seeing it start to pick up and -- but we'll be very focused on the financial returns in that business.

But no big contract shifts one way or another that you've seen?

Nope.

Okay.

And then on the coal side, absent the two or three wins here in Wisconsin, should we see the rest of that book of business grow with the existing customers as we move through the year here?

It sounds like with stockpiles being a bit lower we may actually see that growth in the existing customer base?

If you look at the existing customer base, if you assume that we have a normal summer burn and things like that, we should see a nice ramp up as we move into the summer season and see that business grow.

A lot of it still depends on economic recovery though too.

When you look at it, John, there still is some discount or some reduction that's taking place because of industrial production and some of those things, but we have not yet completely recovered to where we were before the economic downturn.

Sure, okay, thanks for the color.

Thanks.

Gary Chase with Barclays Capital.

Wanted to see if I could get you to put a little more color around some of the commentary we're getting on headcount growth.

Should we -- was there a weather component here?

Did you decide to pull some hiring forward as a function of some of the weather disruptions?

And then secondarily, should we be thinking, because a lot of the commentary seems to suggest that you're doing this in anticipation of volume growth.

Should we be thinking that there's some risk here if that growth doesn't materialize in the second half?

Well here is the math.

We're going to lose 4,000 plus employees this year through attrition.

Right now our current hiring numbers are around that 4,500 plus or minus range.

As Lance said, when you look at TE&Y and our conductors and engineers, you need, I'd say, minimum six months to get them hired and trained and on the ground.

So we clearly are making a bet on the second half of the year with peak season.

Now, if we move through the second quarter here and we see the economy start to falter, we will pull that back.

One of the things we do -- we've shown we've been able to take advantage of is the attrition.

Attrition in the Company actually peaks about May or June, because the way our agreements work is you need to work X number of days to qualify for your full vacation.

So we're a little bit ahead of that right now, but I think it's something that we -- you also have some higher capital spending that's out here, but I don't necessarily see it at a risk.

The risk to me is not being prepared to handle the growth and provide the service and provide that value.

I think that's the real risk, because we can cut back costs pretty quickly that's out here, but I'll tell you, we've got a great service proposition and we're getting great value out of it.

So you are confident you can dial back the cost and just let as it tread out pretty quickly?

No question about it, Gary.

What's the driver of the second-half confidence?

Is that just customer feedback?

Well, again, I believe that we're getting some feedback from customers in terms you would expect kind of the normal peak.

You have your international -- I mean if you look at trends and you assume somewhat of a normal economy, historically you should see peak start maybe July or so, early August.

You are going to build.

You have got the fall harvest that comes into play.

You have new auto production that comes into play.

All of those things happened in the second half of the year and that's where you get your traditional peak moving up.

Okay, thanks, guys.

Okay, Gary.

Christian Wetherbee with Citigroup.

Maybe just staying on the headcount side for a minute, I guess based on kind of the comments that you made I just want to make sure I understand as you see this progression going forward, I guess it seems a little bit front-half weighted, so maybe the year-over-year or sequential increases in headcount probably smoothed out a little bit as you progress through the rest of the year.

Is that the correct way of thinking about it?

Well it depends on volume in terms of what happens here.

Right now, my view of the rest of the year is you're going to see higher volumes in third quarter than we did the prior year, that's out here.

And we are front end loaded when you look at some of these costs.

The question is there will be a lot of people in training today.

We're spending a lot of money that's not generating a dollar of revenue, so you have to almost think of leverage in terms of the third quarter as it moves up, but it is to some extent front end loaded.

Okay.

And to that point in particularly as it regards to training expenses, so should we be thinking about when you look at the average cost per employee maybe smoothes out or comes down a little bit as you go forward as you start to get some of the leverage of these up front training costs in the rest of the year.

Yes, the big jump in cost has happened.

You're not going to see another spike up in costs because we've built -- we've got the plan in terms of the hiring program.

It's pretty well staffed right now, so you aren't going to see a huge jump in costs going forward.

Okay.

And then, Rob, just so I'm clear, I know you mentioned other expenses coming in below kind of target.

Do you have a sense of what that run rate might look like for the rest of the year now as we're past the $188 million you did this quarter?

Yes.

The net is at $225 million per quarter; that's still a number that I think is the right one to think through.

Okay, so still stick with that number?

Yes.

Okay.

And then just finally, I guess to follow up on the export coal side, Jack, you mentioned some opportunity maybe as early as next year for some export.

Can you just give us a sense just as far as total volumes what you think you may be able to see next year if you do get the demand there?

You know what, overall, Christian, typically when you think about UP, our run rate for export coal has been somewhere in the neighborhood of 1 million to 2 million tons.

I think this year we're probably going to be in the 4 million to 5 million ton range and I think that the potential is there, if all these environmental -- there's a lot of what if with the environmental stuff, but we could pick up another 2 million, 3 million tons, something like that for next year.

Okay, great.

That's very helpful.

Thanks for your time, guys.

Ed Wolfe with Wolfe Trahan.

Jim, I'm sorry to drive this headcount thing in.

I'm just a little confused.

I thought you had said attrition is 4,000, you were hiring 4500, so by the end of the year it's a net 500.

Did I hear that right?

That's the way the math would work, but you have to keep thinking about how the volume numbers and the timing of when the attrition hits that's out here.

I don't think you are going see -- we're ahead of the game right now and, again, in terms of when you look at the full compliment of hiring.

So I do think you've got your biggest spread right now, but it's again a function of volume going forward here.

So to me though, again, Ed, the key is handling that volume that comes at us and I'm pretty confident right now we're going to see a peak here this year.

Okay, fair enough, Jim.

On the Intermodal side, it feels like you've now taken a couple price increases in the last six or seven months and Burlington hasn't.

And I guess my question to you is do you sense that that is changing the balance of market share and -- or do you get a sense that pricing -- that everybody is going to start taking up pricing soon?

You know, Ed, we compete every day.

We win some and we lose some.

We pay attention to our strengths and our markets that are there.

When you look at -- you guys understand the truck industry as well as anybody and if you assume the economy is going to start picking up and you think about the cost on energy and the highway and some of the challenges they have, I think the market, the pricing opportunity is pretty good for us, but we're going to make our decisions based on what is best for the UP railroad here in our corridors and that gives us the greatest value.

So, if we see this strategy and it feels like truck pricing should continue to tighten throughout the year, certainly if it's tight now seasonally, the expectation would be there's more to go on domestic Intermodal and peak?

Could be.

You look, our first-quarter pricing in intermodal is pretty strong.

Okay.

And then last topic on the grain side, Jack.

What tariffs have you put in place earlier in the year and what's the opportunity for further tariffs?

Can you talk about grain pricing and if there's some mix that's impacting the way the reported yields look?

Yes, we hit in some pricing for fourth quarter and April and we'll kind of sit tight and watch what happens as the markets evolve, as with a tariff we can increase price on a 20 days notice.

So, we're just kind of watching to see what the market dynamics look like at this point in time.

What were the increases at the end of fourth quarter in April?

You know what, I don't have the specific numbers that we have, but they apply to different commodity groups.

Okay, thank you.

Appreciate it.

Okay, Ed.

Scott Malat with Goldman Sachs.

Just one on Mexico cross border.

Can you just talk about recent trends, any expectations there, and maybe the potential benefits, the new terminal you had announced for New Mexico?

Thanks.

Jack?

We had a solid quarter for Mexico.

I think our growth was up about 15% in the first quarter, which is good.

Business trends, as we look across the scope of the business in Mexico, the only one of our six businesses that's not really showing much action right at the moment is coal and that's because it's a very small portion of the business and there's a bid in place as it goes right now.

So, as we look across all of the rest of the businesses, whether it be ag, autos, industrial products, the chemical business and all that, we see great potential.

The Mexico economy is tending to be a little more robust than we are in the US.

We continue to see near terming or bringing business back from Asian Rim into the Mexico business environment, which is very supportive of our franchise then and we have a great working relationship with both of the Mexico railroads.

So, we see a lot of potential there.

And, Scott, regarding the announcement in Strouss, in fact I'll have Lance give you the operational perspective, but we see that as a very, very good opportunity to grow business and improve our efficiency.

Lance, why don't you talk about the operational side.

Yes, Strouss is going to do three things for us, Scott.

It's going to be an Intermodal yard that will serve El Paso and also south of the border business.

It's going to be a run through facility that will take some of the pressure off El Paso on our critical premium Sunset route and it's going to be an Intermodal block swapping facility that will allow us to grow outside of the LA Basin both on Intermodal and premium Intermodal products.

And on the Intermodal business can you talk about partnership opportunities and how you look at working with drayage companies?

Are they willing to -- it seems like a lot of them aren't willing to pick up the business because they can only get one way routes and they can't make money on the way back, that's what we had been hearing, so just wanted to understand do you have the partners in place?

Is that somewhat of a hurdle to growing the Intermodal cross border traffic?

Scott, I'll tag you as a perspective when we are down there talking to folks in New Mexico, the interest is huge, including the dray carriers, so this is going to be a very nice facility that I think is very much needed at that location.

I just see that.

Jack, you guys -- .

When we look at, Scott, and we have been spending a lot of time in Mexico on our business development focus and we see a lot of enthusiasm.

We see a lot of partners willing to work with us there as we think about it.

Of course we always -- we're a wholesaler in the Intermodal world, so it's some of our IMC partners that are arranging for drayage and those kinds of things for the most part, but we see a lot of cooperation and potential.

Okay, thanks.

Okay, Scott.

Ken Hoexter with Merrill Lynch.

If I could just follow-up with Lance.

You've used up a lot of useful locomotives and available furloughs.

Velocity is kind of held in here, but terminal dwell looks like it's starting to creep up.

How much more room capacity wise do you think is on the network and then as that starts running up are you looking at costs on the equipment side as well to help out with that congestion aside from the employees we've already talked about?

Sure, Ken.

In terms of how much capacity is remaining on the network, we've talked about historically being able to run fluidly, that with high service levels, 190,000, 195,000 seven day car loads.

We've managed to muscle through 205,000 seven day car loads historically, just not at the current service levels.

We remain confident in that and we have a capacity program this year that will continue to put us ahead of that growth curve.

In terms of network terminal dwell and other resources that are required to kind of manage the volume growth and keep dwell down, we've got a hiring plan that's going to help us.

Clearly in the first quarter in the south we might have had a few areas where we were a little tighter on cruising we would have liked to be.

We have got graduations of our trainmen coming out in those areas as we speak.

That would show up in a little bit of dwell.

Likewise, our capital investment in equipment and locomotives, while locomotives aren't required because we've got plenty in storage, they will help us as we're able to DPU more of our traffic.

Every single one of the locomotives we're purchasing is going to be DPU capable and that will help us with productivity as well.

Ken, keep in mind we're seeing a lot of those costs in place right now.

The hiring, the training, to pull locomotives out of storage, getting them prepped, that is what we were talking about earlier that you're incurring these costs now that aren't generating a dollar of revenue that should really leverage here in the second half.

No, understood.

And you were talking or maybe Rob was talking about the rate being up 4.5%, but that's down sequentially from about 5.5%.

I just want to understand what you were answering before.

Is that something you anticipate will kind of decelerate until those legacy contracts come up for renewal toward the end of the year?

No, it's not going to decelerate.

What I was talking about you had 4.5% first quarter this year.

If you look a year ago first quarter we had 3.5% and that was down from what we had shown in third and fourth quarter, but be careful about assuming that's the trend.

I think it will not decelerate and depending on how the demand plays out, we're going to take advantage of the opportunities going forward.

Okay.

And you mentioned the $0.08 on fuel.

Did you mention any impact on weather specific costs?

No, we didn't.

I mean, we spent--

Ken, just remember, I did previously say, not on this call but in previous and it's still an accurate number, there was more of an item on our revenue and it probably cost us about a point on volume in the quarter, the weather did.

Great.

Appreciate the time.

Thank you.

Okay, Ken.

Walter Spracklin with RBC Capital Markets.

Lance, if you could come back to your distributer power can you give us a sense of how much of your fleet is currently equipped with DP and how much you want to go to essentially and as a (inaudible) to that like how much longer can we see those train lengths go?

Do you see them peeking at what kind of level?

Okay, Walter.

Let's start with the DPU question.

We've got a fair portion, a large portion of our road fleet DPU'd.

If you look at it from the percentage of gross ton miles that we run that are DPU'd, it's north of 60%.

We anticipate being able to grow that.

Every time we purchase a locomotive we are going to be able to grow that.

In terms of train sizes, we've talked about historically that depends on the corridor.

Having said that, we've got opportunity to grow train sizes in each one of the networks, premium, manifest, and bulk.

So it just depends on the corridor and we're making investments right now in our capital plan to be able to increase train sizes through this year and into the future years.

Yes, Walter, we still have a lot of single track railroad out there and the sidings can be, which are your passing tracks, can be a limiting factor on train size and that's what Lance is referring to is when we look at this capital investment piece in there, there's a productivity train size-wise as we get that capability in.

How long -- that was my next question actually on that is how long do you think out to what kind of timeframe when your entire network would be able to be optimally set up to handle these longer trains?

Are we talking one, two, three years?

I wish.

Go ahead, Lance.

We're constantly looking for opportunities using unified plan and investment to improve productivity.

One of those ways is through train size.

Continuous improvement in that area is the realistic goal and what we're achieving.

I don't think we look at that and think of one perfect balance at a moment in time.

We still have a lot of opportunity long-term though on this network.

We put a lot of money in in capital and capacity efficiency, but to me there are opportunities, at least, for the foreseeable future.

Yes.

That's exciting stuff for sure.

I appreciate that.

And just one last quick question for Rob here.

The $15 million in other income, you mentioned that there was a debt redemption cost in 2010 that didn't recur.

Is $15 million a good number then for us to use on a go-forward basis?

Yes.

The way we look at it, the guidance that I'd give on that is about $75 million to $100 million for the full year and it could be lumpy from quarter to quarter, so I'd look at it that way.

Got it.

Okay, thank you very much.

Thanks.

Donald Broughton with Avondale Partners.

Help me understand how you think about this with highway diesel now at $4.10 a gallon, how are you thinking about well cars or articulated wells versus [gladston].

Does the higher price of diesel, the ever shorter length of haul at which intermodal is becoming cheaper than over the road and the large potential incremental volume ever get to the level that you either change your view or dramatically expand your investment in flats and TOFC?

I'm trying to think here.

Your question is on increasing the dwell cars, the flat cars?

Yes, because I mean we're getting to a point at which there's just a bigger and bigger marketplace that's available to you.

Do you ever -- help me understand how you think about what you would do in changing your outlook on flats versus wells.

Oh, okay, you're talking about trailers?

Yes.

Trailers versus containers.

Right.

I'm sorry, all the really good questions have already been taken.(laughter)

Actually, I tell you now that's a pretty strategic question in terms of what you look at.

We have not had a real strong program on trailers over the years.

In fact, we've really pushed a lot into the double stack containers.

But where the economics are playing right now with fuel, you're going to see us start to move in that world in terms of putting products in place that are pure trailer products, because --

Well, with the marketplace, there's what, there's as many truckload movements in the 500 mille to 600 mile length to haul as there are in the 1000 mile to 1500 mile length to haul.

There's just an ever larger bite of the apple that you guys can make.

The question is does the price of diesel ever get to the point where you go, look, in order to take advantage of that opportunity, we're going to make much larger investments in TOFC.

I think you're there now in terms of the TOC and it's not only fuel.

It's the other pressures on the truck side that help drive this, so we're going to start moving down that road.

We still have a lot of opportunity on the container side though too.

Oh, sure.

When you look at it and I'm being very intelligent about the returns and the service and the product you put in place, because I tell you one thing on Intermodal, speaking of trailers, you put a product in, you better deliver.

There are no exceptions.

It's a very time sensitive market, but you're going to see more out of us on the trailer side in the future.

Fantastic.

Thank you, gentlemen, and good job in the quarter.

Thanks, Don.

Peter Nesvold with Jefferies & Company.

If I could flip to slide 22 for just one quick minute.

If the fuel surcharge revenue higher year-over-year 3.5% on a base of $3.8 billion roughly of revenue, when I just run that math it suggest that the fuel surcharge revenue was up about $130 million, $135 million year-over-year.

Fuel costs were up about $243 million year-over-year.

You've mentioned earlier you get about a 90% compliance rate on the surcharge.

It seems to suggest that fuel is more like a $0.12 hit to numbers rather than the $0.08 hit that you've cited and I guess I'm just trying to understand better what I'm missing.

I think you've stumped us.

Yes.

Is there anything like from higher terminals, well times or from weather or anything else that happened in the quarter that might have disproportionately impacted the fuel consumption this quarter?

Well, consumption rate was what, flat year-over-year?

Yes, it was flat as a result of weather and other situations.

So, you have stumped me in terms of the math you just ran through, but all I can say is that the lag is the driver of that delta between the recovery we had in the quarter and the fuel expense.

Okay, thanks for the time.

Okay, Peter.

Thank you .

There are no further questions at this time.

I'd like to turn the floor back over to Mr.

Jim Young

Well, again, thanks, everyone, for joining us this afternoon and as I said earlier, we will be back on our normal schedule next quarter, Thursday mornings before the market opens.

So, thanks for your patience this time and look forward to talking with you then.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.