聯合太平洋集團 (UNP) 2011 Q4 法說會逐字稿

Greetings and welcome to the Union Pacific fourth quarter 2011 conference call. At this time, all participants in a listen-only mode. A brief question-and-answer session will follow the formal preparation. (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 morning, everyone. Welcome to Union Pacific's fourth quarter earnings conference call. With me in Omaha today are Rob Knight, our CFO, Jack Koraleski, Executive Vice President, Marketing and Sales, and Lance Fritz, our Executive Vice President of Operations.

As you can see, we finished 2011 with an all-time record quarter, achieving a quarterly earnings milestone of $1.99 per share, that's a 28% increase compared to 2010. Our outstanding fourth quarter results demonstrate the capabilities of this diverse franchise and contributed to the most profitable year in Union Pacific's 150-year history. Record top and bottom-line results achieved historic marks and generated record financial returns on investments. Rob will provide the details here in the financials in a minute. We remain focused on delivering safe, efficient high-quality service that generates value for our customers and translates into record financial returns for our shareholders. These efforts were recognized with best ever 2011 marks in customer satisfaction and employee safety. So, with that, we'll turn it over to Jack to cover the marketing details.

Thanks, Jim, good morning. We'll start this morning with a recap of our record-setting customer satisfaction scores. For the quarter, customer satisfaction came in at 92. That equals our best ever mark set in the second quarter and along the way, October tied our best month at 93. In terms of how our customers view the value proposition that Union Pacific brought to them in 2011, we closed the year with a record-setting score of 92, three full points better than the previous record set last year at 89. While we still have plenty of room for improvement, faced with growing volumes, the Union Pacific team delivered even while our operating team was out there battling blizzards, flooding and droughts.

The advantage of a diverse franchise was again evident in the fourth quarter as volumes grew 3% despite our declines in AG products and Intermodal. Core pricing improved 5% with gains in all six of our businesses. Those price gains, higher fuel surcharge revenue and some positive mix as our Carload business grew while Intermodal was a little soft drove average revenue per car up 13%. The growth in volume and improved revenue per car produced a 16% increase in freight revenue to $4.8 billion. So let me take you through each of our six groups in a little more detail.

On slide 4, you can see, well it's slide 6 -- slide 6, you can see AG products revenue grew 2%. As a 7% improvement in average revenue per car more than offset a 5% decline in carloadings. The softer volume wasn't unexpected as increased world crop production, high US corn prices and plentiful crop storage reduced US grain exports. Against 2010's record levels, our export grain shipments actually declined 43%. That decline was partially offset by a 22% growth in domestic grains boosted by drought damage to crops in west Texas and forward ethanol plants that reopened in the year. Our biofuels volume grew 18% in the fourth quarter. We saw a record number of ethanol unit trains shipped in December and biodiesel shipments surged as customers ramped up production to take advantage of the tax credits that expired at the end of the year.

With pent up demand, improving inventory levels, aging vehicles across the country and improving credit terms, the automotive industry continued to gain momentum pushing US vehicle sales to their highest level since the second quarter of 2008. That strengthening was reflected in a 10% increase in our Automotive volume which combined with the 13% improvement in average revenue per car to produce a 26% increase in revenue. Our finished vehicle carloadings grew 14% and our part shipments were up about 7%. Our Chemical business continued the strength we saw throughout the year with volume up 10%. Which, along with the 7% improvement in average revenue per car, produced an 18% increase in revenue. Petroleum revenue increased 46% driven primarily by increased crude oil shipments from the Bakken and Eagleford Shale regions. Supporting that growth was our strong delivery network that combines geographic reach with flexible service options. Increased shipments of polypropylene and polyethylene produced a 7% growth in plastics and all other segments of our Chemical business also saw volume increase including a near doubling of phos rock shipments as favorable weather and strong demand extended the shipping season.

Energy volume was up 8% which combined with the 12% improvement in average revenue per car to drive revenue up 21%. The volume gains included some small makeup of missed loads from the second quarter flooding. That pretty much completes the recovery of that business. Tonnage from the Southern Powder River Basin increased 7% with the new business to the Wisconsin utilities again being the primary driver. With few production issues, some strong growth in International shipments, Colorado Utah tonnage posted its second consecutive growth quarter up 10%, that capped solid improvement in the export coal market in 2011. Our export tons totaled 5.2 million for the year, which was up from 1.4 million tons in 2010.

Industrial Products volume was up 7% combined with a 16% improvement in average revenue per car and drove a 24% revenue increase. Just as our Chemicals business benefits from growth in the shale place by offering outbound transportation solutions for crude oil, our Industrial Products group is positioned to provide reliable transportation for inbound materials used in drilling like frac sand and steel pipes. In the fourth quarter, that was reflected in 40% growth in nonmetallic mineral shipments which is primarily frac sand and a 9% increase in our steel volume with growth in pipe and steel coils. Steel also got a boost from continued strengthening of the auto industry. Metallic mineral shipments increased 73%, driven by growth in our iron ore unit train business from Utah to California ports for export to China. Offsetting some of the strength was a 38% decline in hazardous waste volume driven by a reduction in our short haul uranium tailings move for the Department of Energy as government funding was reduced after the stimulus money ran out.

Slide 11, our Intermodal volume (sic - see Presentation Slides) grew 13% as a 16% improvement in average revenue per unit more than offset a 3% decline in volume. The lower volume was driven by the International segment where soft import levels produced a 7% decline. Also contributing was the continued impact of the contract loss that we won't wrap until May 1st. While the weak international peak season was disappointing, the news was better in the domestic segment where highway conversions drove 3% growth. That topped the previous quarterly volume record we set at the end of last year. Last but not least, we closed the year with strong performance in our Mutual Commitment Program. As we discussed last quarter, we were able to provide customers participating in the program with all their needed box capacity throughout the domestic peak. So, that pretty much wraps up 2011.

I'm going to turn focus now to 2012 starting with Global Insights most recent economic projections which reflect the continuation of a relatively slow-growing economy. GDP is expected to be a little stronger in [2011]. But industrial production growth will be a little slower. Vehicle sales are pegged at 13.5 million, which is about where they came in the fourth quarter so that seems pretty reasonable to us. We entered 2012 once again looking for some signs of recovery in the housing industry and time will tell whether this is the year where we finally start to see some signs of life there. Imports and exports are expected to grow more slowly this year. And even with some projected improvement, continued high unemployment adds uncertainty to the economic outlook.

So, with that, as a starting point, here's how we see 2012 volume growth shaping up in our major markets on slide 13. Our diverse franchise gives us a number of markets where we're expecting solid growth. The top of the list are minerals and petroleum which should continue to outpace the economy driven by the opportunity in shale energy to move both inbound materials and outbound products. We continue to see Intermodal as a long-term growth driver and in 2012, great service should bring new highway conversions in the domestic segment. Automotive volume should continue to grow as the industry's recovery continues. Prospects for growth in non-Powder River Basin coal look good with improved production and international demand boosting the Colorado Utah segment. Metals opportunities also look good in 2012. While the expected increase in housing starts, small though it is, should also give a boost to our lumber business. We also think that fertilizer and LPG should see solid growth.

You can also see the markets where we expect more moderate growth and those where we actually expect slow growth at best with the latter top by the Southern Powder River Basin coal and International Intermodal. The SPRB outlook is dampened by a couple of contract losses in 2011, including one small legacy deal that went to the competition. We'll lap the start-up of the Wisconsin utilities that fueled this year's growth and we have a few utilities that are telling us they're going to have somewhat softer demand this year. Of course, with our energy business, a lot really depends on the summer burn so we could have some upside if the summer really heats up.

For International Intermodal with an uncertain economy, we're actually taking a pretty conservative approach to volume prospects in 2012. So, as we look out over the coming year, our strong value proposition is going to again support our business development and underpin our growth. I mentioned the one legacy energy contract loss in 2011, but we successfully repriced over 90% of the $1 billion of legacy business we competed for, so that provides a solid foundation for our 2012 pricing plan. As a result, we expect increases in volume will combine with pricing gains to drive profitable revenue growth. With that, I'll turn it over to Lance.

Thank you, Jack. I'll start with safety. Our reportable personal injury rate was a record low in 2011. Training, process improvements and capital investments combined to reduce our environmental and behavioral risks. I'm particularly encouraged by a steep reduction in severe injuries that have the greatest human and financial impact.

Regarding rail equipment incidents or derailments, our full year reportable rate increased 10%. Increases in main line track incidents which were driven by weather and human factor derailments were partly offset by a decrease in yard and industry lead derailments. In public safety, the grade crossing accident rate improved 9% versus 2010 and tied 2009's best ever performance. We closed 269 at grade crossings on the UP system during the year and our community and driver focused approach to grade crossing safety continued to generate long-term improvement. While I am very pleased to report two of three safety measures at all-time record lows, our ultimate goal is to eliminate all safety incidents.

Moving on to UP's network performance, last quarter, I noted the negative impact that Midwest flooding and the Texas drought had on our operation. We forecasted a return to normal by the end of the year which is exactly what happened. We fully recovered our service capability by using a mix of surge resources, alternative routes and aggressive maintenance work. As a result, velocity climbed to average 25.6 miles per hour in the fourth quarter, 25.9 miles per hour in December and it is well over 26.5 miles per hour so far in January. We're well-positioned for growth with about 1,000 employees furloughed and around 600 locomotives in long-term storage which includes about 250 units ready for surge utilization. The value of surge resources was demonstrated yet again in 2011 helping us maintain fluidity and service in the face of major network disruptions.

Slide 17 illustrates our fourth quarter service and efficiency performance. Starting at the upper left, the condition of our network has literally never been better. In three years, we've reduced slow order miles by over 60%, enhancing customer service and generating capacity to support volume growth. Gross ton miles per employee accelerated from the first three quarters to finish 2% better than 2010 despite the impact of more than 700 additional employees working on capital projects or positive train control. Moving to the lower left, train size improved in the fourth quarter with record fourth quarter manifest and Intermodal train lengths. Intermodal train size grew despite a decrease in the fourth quarter Intermodal volumes compared to 2010.

In the lower right, our service scorecard illustrates UP's customer value proposition. We absorbed a 3% car load increase and weather disruptions while maintaining a solid service delivery index. The local operating teams continued to build the fundamental elements of great service as reflected by industry spot and pull which tied for an all-time best fourth quarter at 94%. As Jack discussed, manifest traffic grew dramatically in 2011 driven by increased industrial products and chemical shipments. While all regions experienced an increase in manifest volume, the southern region absorbed about half the growth.

The Union Pacific franchise is well suited for this business with excellent route density and terminal infrastructure. We've leveraged our terminal assets while absorbing the new volume which is reflected here as an increase in the number of cars switched per man day. The ability to handle the current shift in traffic emphasizes our network strength. It is a shared resource. It is well-positioned to support each of the six business groups. Capital investment keeps the network strong and adds new capacity where we can generate attractive returns on the new volume.

For 2012, our capital plan totals around $3.6 billion dollars, 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 over $1.3 billion. Capacity, commercial facilities and equipment are the primary drivers. Major projects include additional double track on the Sunset Corridor as well as the Blair project, work on the Santa Teresa, New Mexico facility and various projects in the south to support our diverse book of business, including the growth in energy exploration and production that Jack mentioned. We're acquiring 200 new road locomotives and close to 1,800 freight cars which includes covered hoppers, gondolas and new auto flex auto racks which were designed and are being built by a UP car shop. These equipment acquisitions not only serve as replacements for older assets but also to meet expected business growth.

In addition to our investments for growth and efficiency, we plan to spend about $335 million on positive train control this year. We originally estimated a capital spend of $1.4 billion through 2015 when PTC was first mandated. After three years into the project and with significant software, hardware and systems development remaining, we now think the price tag for Union Pacific could be in the $2 billion range. Through 2011, we've invested nearly $400 million of the $2 billion projected spend. The 2015 implementation date poses some pretty big challenges for us and the industry. That being said, we're making a good faith effort to meet the 2015 deadline while pacing capital based on proven technology.

In summary, I feel very good about the outlook for 2012. We're well-positioned for another record safety year as we continue to mature our total safety culture, strengthen our relationships with local communities and harden the infrastructure. The network is ready to provide excellent service as volumes grow and we should leverage that growth to the bottom line through increased utilization of existing assets. And we're going to invest a record amount of capital to support the new volume and to alleviate network constraints across the system. In summary, we'll use the six critical operating initiatives, including the UP way to drive our business up into the right, growth with service excellence. With that, I'll turn it over to Rob.

Thanks, Lance. Good morning.

Let's start by summarizing our fourth quarter results. Operating revenue grew 16% to an all-time quarterly record of $5.1 billion, driven by fuel surcharge recoveries, core pricing gains and volume growth. Operating expense totaled $3.5 billion, increasing 13% compared to 2010. Higher fuel prices drove over half of the expense increase. Operating income totaled $1.6 billion, a 23% increase and the best ever quarterly record. Other income totaled $54 million in the quarter, up $45 million compared to 2010. Higher income from real estate sales and increased costs in 2010 due to a settlement on an environmental site drove the year-over-year increase.

Interest expense of $141 million was essentially flat versus the previous year. Income tax expense increased $566 million. Higher pretax earnings and an unusually low income tax rate in 2010 drove the increase. Net income totaled $964 million, a quarterly best, up 24% versus 2010. Earnings per share grew 28% to an all-time record of $1.99 per share. The outstanding share balance declined 2% reflecting our share repurchase activity.

Turning to our top line, freight revenue grew 16% to a fourth quarter record of $4.8 billion. Carloadings were up 3%. We also saw a positive mix impact driven by strong growth in higher average revenue per car moves. We achieved core pricing gains of 5% which includes RCAF fuel escalators. As Jack just mentioned, we have been successful with the legacy renewals which drove a small uptick in our pricing numbers in the fourth quarter. Fuel surcharge revenue added 6% to the top line driven by higher fuel prices in the quarter versus 2010.

Slide 24 illustrates our solid pricing and productivity gains in 2011. We closed out the year on a high note with an incremental margin of 59% after adjusting for higher fuel prices. Our reported number of 44% also topped previous quarters in 2011, generated by strong, core business operations.

As slide 25 shows, our compensation and benefits expense was up 4% compared to 2010, another good news story for us. Inflationary pressures that we previously discussed drove a 4.5% increase in costs. Volume-related expenses were offset with solid productivity gains and as Lance mentioned, we leveraged the volume growth very efficiently in the quarter. Other factors also worked in our favor including a very mild weather condition. As expected, the number of new hires in the training pipeline was flat compared to 2010, thus not a driver of our year-over-year expense increase in the quarter.

Consistent with our previous guidance, work force levels increased 3% in the quarter compared to 2010. Base business activity contributed to about half of the growth while increased capital work including positive train control drove the remaining increase. In 2012, we expect another year of attrition in the 8% to 10% range. We'll continue to hire new employees to backfill for attrition and to support volume growth. As volumes grow, we expect our overall work force levels to increase but not at a one for one rate. Compensation and benefits expense will also increase in 2012 but will depend upon volume growth. On the positive side, labor inflation should moderate from the 4% to 5% range that we saw last year and training costs should not be a year-over-year driver as it was in 2011.

Slide 26 shows fuel expense which totaled $935 million, increasing $248 million versus 2010. The average diesel fuel price was $3.16 per gallon which increased 28% year-over-year. Drivers included an average barrel price of $94 which increased 10% and a $17 per barrel increase in the conversion spread. A 5% increase in gross ton miles and a 1% increase in our fuel consumption rate also drove higher fuel expense. Purchase services and material expense increased 9% or $41 million to $508 million. Higher costs for contract services and equipment maintenance from the primary drivers. Also, crew lodging and transportation costs increased with the growth in volume.

Other expense came in at $191 million which was better than our previous guidance. We again saw lower than expected personal injury expense reflecting positive experience from our continued safety gains. Versus 2010, other expenses were up $18 million, resulting from higher property taxes and lease buyout expenses. In 2012, the other expense line will continue to be challenged with higher property taxes and volume-related expenses. We're also facing tough year-over-year comps in our personal injury expense.

Slide 28, summarizes fourth quarter expenses for the two categories, the depreciation expense increased 9% to $413 million in line with our guidance. Increased capital spending and volume growth drove the increase. Looking at 2012, we expect depreciation expense to grow at a rate similar to the 2011 levels. Equipment and other rents expense totaled $289 million, up from 2010 due to increased short-term freight car rental expense and higher contract lease costs. Lower locomotive lease expense partially offset this increase.

Union Pacific's operating ratio on slide 29 reflects the substantial improvements in profitability that we have achieved over the last several years. On a reported basis, our operating ratio was a fourth quarter record of 68.3%. On-going productivity efforts, core pricing gains and volume growth all contributed to this mark more than offsetting the negative fuel price impact of nearly 1 point versus 2010. On a full-year basis, our operating ratio was 70.7%, only slightly behind our all-time 2010 record of 70.6%. We achieved real improvement this year, nearly offsetting the negative year-over-year fuel price impact of about 1.7 points. Looking forward, we remain committed to achieving our operating ratio target of 65% to 67% by 2015.

Slide 30 provides a summary of our 2011 earnings and a full-year income statement. I'll walk through a few of the highlights from our record-setting year. Operating revenue achieved an all time record of $19.6 billion. Operating income also set a new best ever mark of over $5.7 billion, topping 2010's record by 15%. Net income of $3.3 billion and earnings of $6.72 per share also set new historic annual records. Union Pacific's profitability in 2011 drove record free cash flow after dividends. Increased cash from operations more than offset the higher capital spending of nearly $700 million and increased cash dividends of $235 million.

We continue to see the benefits of bonus depreciation which created a $450 million tailwind in 2011 versus 2010. This year, that benefit will be significantly lower due to the catch up of prior year's programs and a reduced rate of 50% bonus depreciation in 2012 from the 100% mark in 2011. Our balance sheet remains strong, supporting our investment grade crediting ratings. At year-end 2011, the adjusted debt to cap ratio was 40.7%. There is some timing in this number since we accelerated around $475 million of debt maturities from the first part of 2012 into 2011 which we will likely refinance sometime this year.

Slide 32 shows our full-year 2011 capital investment of $3.2 billion, slightly below our targeted investment of $3.3 billion. As Lance discussed, our preliminary capital plan for 2012 is around $3.6 billion, up from 2011 but consistent with our guidance of 17% to 18% of revenue over the next several years. Increased spending on locomotives and positive train control are the major drivers. We'll also be spending more on capacity projects but less on equipment purchases given that we're not planning on buying any containers this year.

Slide 32 also reflects our achievements in generating returns on these investments. Return on invested capital was a record 12.4% in 2011, up 1.6 points versus 2010. Returns must continue to improve to support the significantly higher asset replacement costs and investments required to achieve our safety, service and growth initiatives. Our performance in 2011 generated record cash and we're returning that to our shareholders. For 2011, dividends per share increased a total of 58%, a significant step toward achieving our target declared payout ratio of 30%. In the fourth quarter, we bought back close to 3.9 million shares totalling $381 million. For 2011, our share repurchases totaled $1.4 billion. Looking forward, we have nearly 28 million shares remaining under our current authorization. With that, we've wrapped up a record-breaking year in 2011.

But now, we're focused on 2012 and the tremendous opportunities that we see before us. For 2012, we're targeting record full-year operating ratio performance. We believe there are continued opportunities for volume growth and pricing gains as Jack highlighted earlier. Of course, the economy will play a determining role. We remain focused on continued productivity gains which will provide additional leverage capabilities and further drive operating efficiencies. Our prospects for 2012 supported by Union Pacific's strong value proposition position us to take advantage of the unique opportunities offered by our diverse franchise. 2012 should also be another record year for earnings, allowing us to reward our shareholders with even greater returns. With that, I'll turn it back to Jim.

Thanks, Rob. Before I wrap up, I wanted to provide a quick update on national labor negotiations. As many of you know, 10 of the 13 unions have ratified agreements and two of the three remaining unions have tentative agreements out to their members for vote. The Brotherhood of Maintenance Way employees is the only union without an agreement. The industry is making every effort to reach an agreement before the cooling off period ends February 8th. We're making progress and are committed to getting a deal done.

Now, when you think about our financial outlook for this year, our outstanding 2011 performance clearly sets the stage. The bar has been raised in terms of future expectations. And I believe our prospects have never looked better. Economic indicators generally point to slow, continued growth in 2012. Excellent service though is the key to our future success, supporting our customer value proposition and helping us drive increased productivity. Our capital investment strategy will be another key part of UP's success, making investments today, building capacity for tomorrow. We believe very strongly in the opportunities to grow our financial returns in the future. So, with that, let's open it up to your questions.

Thank you. We'll now be conducting a question-and-answer session.

(Operator Instructions)

In the interest of time, and in order to allow as many as possible to ask their questions, please limit the number of questions to a primary and a follow-up. Thank you. Jason Seidl, Dahlman Rose.

Good morning, everybody. Guys, congrats on a good quarter. Couple of quick questions. When you break down your volume growth potential, you have solid, moderate and slow to negative. Can you give us sort of a range, what you consider moderate growth? Is that sort of the 2% to 3% in solids, 3% or above?

Jason, we're obviously not giving specific numbers on those. If you look back in time, you can kind of get some feel for the way some of these commodities grow. And I think you're going to continue to see in growth kind of what we've seen this year. Good, consistent growth but on a slow basis.

Okay. When I look at your 5% growth on the core pricing, obviously, there is some of that RCAF in there. Can you talk, what it would look like ex-RCAF and what was the timing like in terms of the renewals on your legacy business? Did they happen earlier in the quarter or later in the quarter or were they evenly spread out?

Let me start with maybe the first part of that question, Jason in terms of the RCAF impact. It is about 0.5 point on our pricing. That has been fairly consistent throughout 2011.

Okay.

I would also say, Jason, as we go through the process of continuing to renegotiate and renew and compete for these legacy deals, that RCAF component becomes a lesser piece of the pie for us in terms of how it influences our escalations.

Okay, and the timing on the legacy?

Right.

Go ahead again, Jason.

No, I'm saying the timing of the legacy for the quarter, was it evenly spread out as you renegotiated the legacy deals in 4Q or was it sort of more in the beginning of the quarter?

You know, we have -- some of the $1 billion from last year included some for this year. So, we got that completed and it is behind us. The remainder of our legacy deals for 2013 are going to be at the end of this year.

Jason, this is Rob again. In the fourth quarter, most of what you saw on the renewals were backend loaded in the quarter.

Were backend loaded, okay. That's perfect. Guys, thank you so much.

Thank you, Jason.

Tom Wadewitz, JPMorgan Chase.

Good morning. Congratulations on the great results. Another very strong quarter. Let's see, on the pricing, as a point of a lot of interest in 2012. I guess I look and I think simple logic could be core price that you had in first three quarters of this year, without much legacy was 4.5%. I think that you've commented in the past that kind of strong legacy pricing, maybe you can get 2 points a year in a relatively good year. So, if I look at 2012, I think you fairly easily get to 6.5 as kind of a low end. And, excuse me, maybe above that in terms of the core price. I'm sure you don't want to be specific, but is that appropriate logic or am I missing something in terms of thinking about core price in 2012?

Well, Tom, we're not going to confirm your numbers. I would be a little bit careful on how high you move it up here. Remember, some of these agreements have pricings phased in over time. You get some mix effect in here. But it will be a good year for us. We said we were legacy light in 2011. We have been successful, as Jack said, renegotiating about 90% of the legacy deal. So, it should be a pretty good year for us this year.

Okay. Then in terms of the follow-up, Rob, if I recall on your fourth quarter 2010 conference call, you had I think it was probably five or six discreet items, training costs, state taxes, depreciation, casualty accrual, a bunch of different things that were cost headwinds in 2011. It sounds like maybe depreciation still at a growing at a fairly strong rate. But is it fair to think that your inflation is at a pretty -- a lot lower rate in your cost side in 2012? And I guess other than depreciation, are there other things to be aware of?

A couple of points I would make, Tom. Recall that labor inflation coming into the year, we said for 2011, would be -- while it was in that 4% to 5% range, we think the labor inflation will moderate below that, as I said earlier. You're right, depreciation is a bit of a headwind as you point out. The other item I would call to your attention is other expense. As you know, there is a lot of items in there.

One cost pressure we know we're going to face in 2012 in the other line is going to be our property taxes, which again are driven by higher earnings, and volume-related costs, some volume-related costs are in that category as well. Plus, we do face some fairly challenging comps year-over-year in our personal injury expense line. Those would be the challenges that I would point out at this point.

But you think it is fair to say cost inflation overall is less of an issue than 2011.

Yes, that's a fair statement.

Okay. Great. Thank you.

Thanks, Tom.

Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, guys.

Good morning, Walter.

Just curious on the legacy repricing in terms of retention. Obviously some of this was -- is competitive business. Can you give us a sense of how much of that legacy that did you in November, December, was successfully retained by you guys?

Jack?

Well, what we said was over 90% has been repriced. I don't think we're going to get into very specific deals but I think that's a fairly good number for you.

Okay. That's great. Just looking at your capital structure, I think you've been trending down to about a 40% adjusted debt to total cap and, just curious, I know you're going to refi a little bit this year. How are you looking at that? Can you give us a sense of what your target level is and presumably you'll use your share buyback for any excess cash that you're generating now that you're getting really north of 12% on your ROIC. Any extra cash that you're generating, assuming outside of the dividends, would be going into that share buyback. Is that a fair statement?

Walter, a couple of things. One, as we've said before and, as you point out, there was some timing in our full ahead on the financing item. But, we are comfortable being in that low 40 debt to cap ratio. We don't have a specific set number target that I would share with you, other than to say we are comfortable in that range.

In terms of what are we going to do with the cash, I think it's similar to what you saw us do this year. As you heard Lance talk, number one, we're increasing our capital spend and we've increased our dividend. We want to continue to stay in that 30% payout ratio and continue to be opportunistic with share repurchases going forward. That's how we're approaching it.

All right. Those are my two questions. Thanks very much.

Justin Yagerman, Deutsche Bank.

Good morning, guys, Thanks for taking my call. I wanted to dig in a little bit. I know that petroleum was one of the high-growth areas. Could you talk a little bit about the experiences that you're seeing in these shale projects right now? How much of it is being served by unit trains and, besides Eagleford and Bakken, are there others behind that are starting to be developed that we should be aware of?

Yes, Justin, when you look at it, only about, I would say, 25% to 30% of our business is moving in unit trains today, but we're still actually in that start-up mode. So, moving a lot in manifests. We're shifting more towards unit trains. You'll see that trend continue as we work our way here through 2012. Clearly, the Bakken was the largest proportion of our business this year in terms of the crude oil. Eagleford started up, which is nice for us. We'll also, this year, be moving Permian Basin and, hopefully, out of the Niobrara as kind of the big ones.

It seems like it is a nice piece of growth business for you guys. I wanted to dig in a little bit on the Powder River Basin and International Intermodal. You know, calling those out as areas of softness, is it just the legacy contract in Southern Powder River Basin that gives you any kind of concern in terms of your growth rates this year, or are there other environmental issues that you're worried about, we had to stay with Casper but we'll find out more later this year? And then on the International side, you called out being a little cautious on the weak, or the uncertain economy. As we look out at that, you lapped the customer loss you said in May. Is there reason to believe that the back half could be better there than the first half?

In terms of the -- in terms of coal, Powder River Basin in particular, you know, kind of the way I think about it that might be helpful for you, Justin, if I take the contracts that I lost and I lay that against the contracts that I've gained, the new business and also some incremental international business, that's about a wash. That's about a break even for me. When I look at coal business going forward, I'm looking right now at a very mild winter. I'm looking at stock piles that are growing in November, the Powder River Basin stock piles matched where they should be for normal. And since then, the winter weather has been relatively mild. So, there's not much burn going on. I see a stockpile issue building for us that we need to work our way through.

Then we have a couple of customers that have told us to expect somewhat lower demand and that was tied to some of the environmental regulations, although now with staying of Casper, I think the jury is out as to just how much that will play. I think the bigger factor for us, hands down, is how hot is it going to be this summer. If the mild winter translates into a very hot summer, we should be -- we should be okay. The other one is the low natural gas prices that are out there. That's not a real big impact for us right at the moment. But, of course, you could always watch that and just see. If you saw -- I suppose if you saw natural gas prices go down to $2 and actually stay there, we could see some of the merchant plants lose some business to the grid but, typically, gas is not a big negative factor for us in our served territory.

Okay, and on the International Intermodal?

On the International Intermodal, you know, we had no peak season to speak of this year. And you know, we've watched inventory ratios, the inventory to sales ratios, we kept expecting them to see some build. It never happened. There is the potential there but there's also some questions as to just how aggressive will the retail sales be and how does that all play itself out. We're just looking at it and saying, we're going to plan for something that's kind of a repeat of what we saw last year. Yes, it could be a little stronger for us in the second half. We will wrap that contract loss on May 1 so we'll see a stronger second half, but we're not just seeing a lot of enthusiasm for a real strong international peak season again next year. So that's kind of how we forecasted it.

There's nothing related to the APL contract there, is there?

Not that I can say.

Justin, it's Jim. The real wild card here is, where do you think the consumer will play out next year. Housing actually can have a pretty big impact on International Intermodal. There are some positive signs there. So, it is really bet on how you think the economy and consumer will play during the year.

Great. Thank you for all of that color. Appreciate it.

Okay, Justin.

Ken Hoexter of Merrill Lynch.

Great. Good morning. Just following up on the coal for a minute. You mentioned on the domestic, the softness you're seeing on the PRB, you also threw in there on the export side, you went from 1 million to 5 million tons. Can you talk about your expectations for coal demand on a global basis and where are you moving that and your growth plans for that?

You know, I think overall, Ken, we're look at the world demand and saying it is going to continue. It could be choppy. You see prices ebb and flow from time to time that might cause some, but overall, we still see world demand growing and creating a great export opportunity for us. We hit 5.2 million tons up from I think, what'd I say, 1.4 million last year. We'll do better than that. Again this year, we'll continue to see growth in that marketplace for us. And it will.

Our primary focus, right out of the box, is for the bituminous coal out of Colorado and Utah because that's where the world demand seems -- the higher energy coal is more in demand than the SPRB. But we're all over SPRB opportunities, as well. We're scouring every port potential, every opportunity that we get we're working with the mines and we see that as a continuing to develop as a good opportunity for us.

Ken, keep in mind though, UP shipped total tonnage last year was about 250 million tons. We're talking about an export market of 5 million. It, again, is not a huge base for us. It will -- again, as we think to the future will offer some consistent growth. But it is not the main driver of our coal business.

No, I recognize that. It is just we've been seeing, obviously, some met coal cutback announcements lately. It is a positive sign you're expecting that to grow into 2012.

Well, we're in different markets.

Meaning who you're serving?

The met coal, that's not a big player for us.

Okay. And then can you provide any thoughts on the magnitude -- you know, you noted you kept 90% on the repricing. Can you provide any thoughts on the magnitude, somebody threw out before, you've noted in the past, it could add about 2% to pricing. Is that -- can you comment on the magnitude of what we would expect or, at this point, just based on what you've already renewed?

You know, Ken, we're not going to get into specifics. We feel good about what we're able to accomplish. We lost some business. I said right out of the box, if we could get the kind of returns we're looking for, we wouldn't handle it. What really helped reinforce it for us is the great service and value we're providing to customers. There's no surprise that there were substantial price increases in many of those, but we also heard very clearly about the value proposition coming through. So, again, we don't get into individual discussions on them. It was -- feel pretty darn good about what we accomplished this year.

One last one, just, Rob threw out that he expected the injury expenses to climb. Is there some driver of that because Lance started off talking about how safety had improved so much. Just wondering why the conflicting statements.

Yes, this is Rob. We don't expect the injury expenses to climb. What I was pointing out is that year-over-year, because of the sizable reductions in expenses in 2011, that just creates a difficult comp for us. We have every expectation that we'll continue to improve our safety performance and continue to improve the expense, perhaps just not at the same rate.

It won't be a negative.

Understood. Okay. Thanks for the clarification.

Okay, Ken, thanks.

Chris Wetherbee, Citigroup.

Maybe if I can start just on a question on PTC, what's the key driver primarily of the increase that you're seeing over your last projection and how should we think about layering that in from a timing perspective? You've given us the run rate through 2012 but how we think beyond that through 2015.

Lance?

Sure. Let's start with the drivers. So, recall that PTC, when it was mandated was not an off-the-shelf technology. What you're seeing reflected is exactly what I mentioned in my comments. That is, as we develop both the hardware, the software and the overall systems technology, we're discovering more complexity, more interactions and it is more costly.

So, the reflection of going from $1.4 billion to $2 billion is mostly about technology development and getting a more finite cost on that. So, then looking forward, by the mandate, we've accelerated spending in 2012 to this anticipated $335 million. I anticipate there could be modest acceleration from that point in future years, but it will be predicated on having developed technology to implement. Spending is going to be paced somewhat by making sure the technology is developed.

Sure. I guess that kind of goes into the idea of ultimate timing for 2015 implementation. Any sense of leeway around the timing? I mean, there has to be some discussions, I'm guessing you guys are working toward the 2015 goal. How do you think about that from a realistic perspective?

Well Chris, the industry, you have a key report due to Congress on March 1 that, obviously, the FRA will be required to report on the status. I'll be very honest with you, I don't see it happening in 2015. The complexity that we're faced with here, the requirements -- I mean keep in mind, if this system doesn't work, you don't move product. That's why when we look at implementing this thing, it's got to have a very high degree of reliability and you have no room to get it wrong. So, keep your eye out on the report that goes to Congress here on March 1.

Great. That's very helpful. And then just one final follow-up, just on the head count side, when you think about kind of the inflationary rate, I know you said it was going to step down, Rob, when you think about it for 2012, what's the order of magnitude we should expect? Is it somewhere in the neighborhood of kind of 3%-ish or is it a littler harder to tell?

At this point in time, it is harder to tell. Just less than that 4% that I indicated.

Okay. Great. Thanks for the time guys. I appreciate it.

If I can just Chris, on that -- that's on inflation. The inflation rate in our labor line, I'm saying is going to be less than 4%. The head count, net net, that will depend upon where volumes end up. As I said, we expect volumes to be steady, slow growth. We expect head count to increase. But at a less than one per one rate.

Okay, great. That's great color. Appreciate it. Thank you.

Matt Troy, Susquehanna International Group.

Yes, thanks. I just wanted to follow up on the Casper issue. Obviously it was stayed but it is something that's not going away. We can all track the weather in the next coming months and keep our fingers crossed, but was wondering the longer term implications of this environmental regulation, you can kind of see the chessboard shaping up. Is it a net positive for UP, let's call it in the intermediate term, and that PRB coal can bridge some of the less viable central app coal? Are you getting inquiries to that effect or just help me think about the impact to your franchise specifically as you sketch out the road map over the next three to five years at the Casper rig?

You know, Matt, when you look at it, I do actually look at it as a potential opportunity for UP in Southern Powder Basin coal because the coal will be more amenable to meeting those standards. I think we probably were getting some inquiries about moving coal particularly to the east. With the stay, it is probably dead right at the moment.

And I think the other question in a lot of our customers' minds is just the emission credits and what value will be assessed to them by the market and how does that play itself out. A lot of questions that are out there. It does present an opportunity, I think, for UP and, the other side of it is, both in terms of moving limestone and also trona as a couple of different approaches towards reaching those requirement levels would also be a good business opportunity for us.

All right, thanks. My second question or follow-up would be just with the earlier timing of the Chinese new year, kind of in a rough patch here, we've been destocking for several months, now everything shuts down for two weeks, get about a three week lag before things can get here from Asia. So, we're talking about the end of March before you can see a noticeable pickup just from an economic perspective. Always interested in your guys' economic read. You've cited some numbers. Everyone seems to be basing a lot of their hopes on just that, hope. Are you actually hearing from customers in any pocket of the business that you serve intentions to restock, or is it just more hope that we've bottomed and hope that things get better, or is the rubber actually hitting the proverbial road?

Matt, this is Jim. Maybe it is the new year. We always have more hope coming into it. I would say our perspective in meeting with customers, we were just with one of our very large customers here a couple of days ago. They're a little more bullish. Now, it varies by industry. You know, the auto industry today, they're feeling much better than they were. They're still a long ways from where they were in the peak. That could be a pretty good year.

You look at some of the areas where you're still significantly off from the recession. Take anything related to construction, in fact, I can't remember if we said it or not. While we had a little bit of an increase in our lumber shipments this year, or in 2011, we're still 60% below where we were in the peak. When you think about housing, some of the construction, it is a little more positive this year. Again though, I think it still all fits into the perspective of we will see positive growth. It will be something kind of on the slow side.

All right. Thank you for the time.

Okay.

Bill Greene, Morgan Stanley.

Hey, good morning. Rob, I just want clarification on -- you reiterated your long-term margin guidance for the OR targets. Just to clarify, those are not the adjusted numbers that you're referring to, right? These include fuel and everything, not sort of the adjusted for fuel numbers.

That's right. The 65 to 67 operating ratio, full year, all in by 2015.

Okay then the fourth quarter, obviously, seasonally weak but a really good OR nonetheless. Can we -- is there a way we should think about, well the weather maybe was a little bit easier this quarter or it was a little bit harder last year. Is there anything to keep that in mind, not really one-time but sort of unusual?

I don't think, --we were still dealing with issues down south at the beginning of the quarter. You bet, it was a little bit better weather-wise for us. That wasn't the difference maker.

Okay.

At the end of the day here, we really -- couple things to keep in mind, we cycled some of the costs, remember Rob, we're talking about training -- looking at employee productivity. We've been telling you all year, that we had really kind of a one off deal where we're building our training forces. That leveled out fourth quarter. You had decent volume that came through. We managed our costs very well. Our pricing came in strong. You put those all together. It can really lever that operating ratio.

Absolutely. Jim or Jack, just I'm curious your perspective on what's going on when we see contracts go back and forth between the competition. It sort of suggests there's more horse trading that goes on in the west than perhaps other regions and I'm not quite sure why. If you guys are willing to walk but the competition isn't, does that suggest a more aggressive pricing dynamic from them? How do we think about this?

Bill, we compete and we compete hard. A lot of factors come into play when you look at your decision points. It can be the route, the capability you have, the efficiency by corridor, long-term relationships you have. I don't like that word horse trading because it really is one we compete hard. I'm sure the other guys would tell you the same thing, that they have some internal dynamics. They look at where is the point to walk from.

So, you know, again, we've had some very tough discussions with our customers in some cases. The key for us, Jack just said, we renegotiated successfully 90% this year of those legacy deals. An absolute key is how the customer views value from its provider. And I will tell you I felt very good that we're in the legacy discussions, negotiations, when you also look at we have the best customer service in the history of our Company.

Okay. Nope. Very good points. Thank you for the time.

Thank you.

John Larkin, Stifel Nicolaus.

Good morning, gentlemen.

Hi, John.

Rob talked about the incremental margins looking very good in the quarter. And that sort of raised a question in my mind of how sustainable that is in terms of how much capacity you think you have on your existing manifest trains and the Intermodal trains where you can fill those trains out and really drive that strong incremental margin going forward.

Well, you know, at the end of the day for us to continue to improve the operating ratio, we have got to improve our margins, right, on the incremental side. I would be careful on a quarterly number. I mean, I kind of go around and around with my CFO on this in terms, I know you guys like to look at the quarterly numbers but there are a lot of factors that come into play. But the bottom line, if we are going to get to the operating ratio targets that we provided, those margins have to improve. Rob, go ahead.

Just a comment I would make on that, John, what we've said, to get to that 65, 67 target, implies we've got to do about a 50% incremental margin improvement. It will be lumpy, as Jim says. One point I would make is, remember, our first quarter generally is our toughest, most challenged from an operating ratio standpoint. And second and third tend to be our best. You get lumpiness within the quarter, but an on an annualized basis, 50% is our expectation and that's what we have to do to hit that target.

Thank you. And then as a follow-on, we talked about earlier the notion of labor inflation may be coming in a little bit below 4%. I'm guessing the overall cost inflation isn't going to be too much different than that ex-fuel. I've heard Jim before talk about how much he challenges the managers at UP to offset that inflation with productivity. Is there any kind of guidance you can give us in terms of what the objective is there. How much of that 4% plus or minus can be offset with additional productivity and technology applications?

John, we've talked before. We set a goal of offsetting all of inflation. Realistically, about half of it, I think, you can sustain over time and it is going to be a function of technology. It will be a function of process improvement. It is going to be a function of leveraging volume and operations. So, I don't think that's unrealistic to, at a minimum, offset half of your inflation number.

Appreciate it. Thank you very much.

Okay, John.

Cherilyn Radbourne, TD Securities.

Thanks very much, good morning.

Good morning.

A lot of questions have already been asked. I'm just going to ask one. Your Mutual Commitment Program was a pretty big change in terms of your go-to-market approach. And you've commented that your own performance has been very good. Could you just comment on customer receptivity and how that's evolved through the year?

Sure, Cherilyn. We started off the year, customers kind of were kind of looking at it and looking at the change and trying to determine whether or not they should or shouldn't participate. So, we kind of got off to a slow start. As we got into peak season though, we were right on with every commitment that we made during peak. We offered customers 110% of their committed volumes. We were able to meet every commitment. We came out of the peak season with some very favorable comments from customers and a lot more receptivity to the program so we're anxious. We will definitely stay the course here and continue to work the program for 2012 and beyond.

Thank you. That's all for me.

Thanks, Cherilyn.

Gary Chase, Barclays Capital.

Good morning, everybody.

Good morning, Gary.

I wanted to see if I could get Lance or Rob, or both, to just help us think a little bit about the -- the leverage you obviously saw in the comp and bend line for 4Q. It is pretty unusual for that to be down sequentially in dollars and also on a per head basis, and both of things happened this time. Just wondering if you could help us think through what some of the key drivers, and I know you mentioned a few possibilities, things like the training costs falling out. I was wondering if that had already started. Also, you know, Lance, the growth you pointed to in the manifest network, perhaps that's where you're really getting the leverage and that was an enabler. I guess, most important is about the sustainability of those trends. Should we expect to see favorable comparisons on that cost per head basis as we look forward?

Rob, why don't you start and Lance you can finish up.

Yes, let me give you -- kind of size the numbers and then maybe the color on some of the initiatives. Remember, coming into 2011, particularly in the back half, we said that was going to be unusually high. And it was unusually high. As we had more people in the pipeline, if you will, in terms of training so we had that comp. And as we came in to the back half of 2011, we said that we thought the fourth quarter would be a catch up, if you will. So, we experienced that.

We had fewer people in the hiring and training pipeline in the fourth quarter, particularly when you look at it year-over-year. That was really what drove the financial variance that you're pointing out. In terms of some of the great initiatives that we're doing on the ground or in the operations productivity, Lance can talk about.

Yes, let's talk about that. And it kind of gets to the earlier question about train size and other -- what we can think about going forward in terms of incremental productivity. So, we did have a good quarter on train size growth. We also had a good quarter in terms of improvement in the fluidity of the network. You saw in one of my charts, I showed you improvement in cars switched per man day. That's pure productivity through our terminals.

We have got what we call the UP Way and downtime initiatives that are using process improvement and direct involvement by the people doing the work to design the work, standardize it., take out risk and take out waste. All of that is helping us drive not only productivity but safety and service at the same time. And there is plenty more of that left in the network.

Is there any way to sort of parse out the magnitude of contribution maybe for both of those with the training, the more significant of the two? Sounds like that would carry all the way through at least to the comps where you hit 4Q next year.

I think when you look at the employee count spreads, the training piece was a pretty big number year-over-year. But they all interplay. I think one of the keys Lance mentioned, we start to see our velocity pick up, the fluidity of the network, it just shows you how sensitive these networks are to challenges you have. You had a little bit less issues with weather. You had some of the routes, the mix comes into play. They all really contribute.

And what I think you need to understand, we were saying it for three quarters, what you were seeing in the prior quarters was more unusual. That wasn't the norm. And when you are looking at a 9% and 10% increase in labor costs year-over-year. That isn't sustainable in a business. This is an area where I think it is -- that's more of a sustainable level that they're seeing in the fourth quarter.

Okay, guys, thanks.

Great, thanks, Gary.

Scott Group, Wolfe Trahan.

Thanks, good morning, guys.

Good morning, Scott.

So, it seems like mix was a nice positive in 2011 and when we think about the initial volume outlook for this year, losing some of the legacy business, I guess muted expectations for International Intermodal and what seems like stronger car load expectations, is it fair to think about mix as being a similar positive in 2012 like it was last year?

I think, Scott, overall, that's what I would expect. I think mix should favor us this year.

Okay. That's helpful. And then in terms of the domestic Intermodal outlook and no plans to add containers this year, how much volume growth do you think you can get without adding containers and then, I guess, it sounds like the plan is to keep capacity tighter. It sounds good for pricing. How do you think about pricing in 2012 on the domestic Intermodal side relative to what seemed like pretty healthy increases in 2011?

Jack?

I think we're continuing our focus on increasing our pricing. I don't think that's going to change in 2012 and I think that with great service, we have added capacity or availability capacity in our box fleet that gets us through the year just fine.

Scott, I think there are other factors, external factors there. What do you think is going to happen with capacity in the truckload sector? What's our perspective here in terms of the economy? All of those come into play. We've achieved pretty darn good pricing with really a relatively weak economy. All those can come into play. I would -- I look at -- this year, if anything, there could be potential upside if the economy comes a little bit stronger going forward.

There were also some times, Scott, it wasn't a prolonged period of time, but we were sold out on our containers even this year with a relatively weak peak. So, we'll see that happen again next year. But we think that the throughput and the better service, you're not dealing with floods and things like that, hopefully, we'll get a greater turn on that equipment so we can handle more freight.

That's helpful. Just last thing real quick, what's the latest thoughts on timing to finish Sunset?

Well, you've got two-thirds finished right now. We'll do another -- what do you think Lance?

About 5%.

About 5% this year. It is really a function of how we're looking at volume and the economy during the next four or five years. So, again, it is still years out. I would like to accelerate it. If I accelerate it, it says the economy is much stronger and we're much more bullish on the outlook. Right now, when you look at kind of the slow growth economy, we're in pretty good shape down there and want to keep ahead of the curve.

Are you seeing incremental benefits along the way or is it more of a, once it's done four years from now, it is kind of a step function improvement in productivity?

Lance?

Yes, we do see incremental benefits along the way. One of them that we don't talk about too much is, we're cutting over double track segments in areas where we'd have to perform maintenance on the existing single track. So, we've talked historically about this investing for maintainability and that's paying off in spades on the Sunset route.

Okay, great. Thanks for the time.

Thanks.

Ben Hartford of Robert W. Baird.

Thanks. Real quick, Rob, as we think about pension expense in 2012, where did the expense fallout in 2011, I think the expectation was close to $80 million, $79 million versus $51 million in 2010. What was the final number for 2011 and what should we be thinking about for 2012, preliminarily?

We would think that the pension expense will be up slightly from 2011's levels.

$79 million, $80 million was in the ballpark?

I think that was in the ballpark of what it was, I don't have the exact number, but I think that's in the ballpark.

Okay, good. And then I guess, Jack, thinking about coal volumes, I noted in 2010 about 18% of your volumes were destined for eastern US customers in some form. How did that trend in 2011 and is that expected to change meaningfully in 2012?

You know, Ben, I don't think it changed meaningfully in 2011. And staying the Casper rules and things like that, I don't think we'll see a significant change in 2012 either.

Okay, good. Thanks.

Chris Ceraso, Credit Suisse Group.

Thank you, good morning. A couple of items. It may be for Jim. Is there any concern, Jim, that as your returns improve and you posted a record here in the quarter, that starts to impede or weigh on your ability to raise price with customers or is there a level at which your returns get so high that you have to start thinking about that?

Well, I think we're a long ways from that. Here's my point and you know we spent a lot of time up in Washington talking to members of Congress, I spend time in front of my customers. Here's the key. We just reported the greatest financial in the history of the UP in 2011. We just came out and said we announced the single largest capital spend in the history of our Company. They are connected.

When you think about the replacement costs of assets in the railroad industry, the returns have to grow. And I will tell you, if we get into a situation where somebody wants to cap us at the level we're at right now, return on capital, you will see capital shrink. The math is pretty simple. We're making bets on capital investment today under the assumption that I can continue to grow the return on investment capital. The other thing is provide great service and value to the customer. All of those things are important and I mean, I'm not going to kid you, we obviously think about it. My Board has supported many terms of the capital we're putting in and I think we have a good story to talk with our customers.

Okay, and then to follow-up on head count. You mentioned a high attrition rate still but hiring to back fill that and then keep up with growth, although not on a one for one. Can you give us any numbers on what the net increase in heads you expect for 2012? Is it 1%, 2%, 3%? What's the net head count?

We came out this year up about 3%, 1500. We're finished about 45,000. Keep in mind though, you've got a split, that 1500 increase was split about 50/50 between capital which includes positive train control and OE. So, as our cap, you've got two things that will drive it. Volume will drive the OE number next year, offset by some productivity. It won't be 100% offset. But the capital spend including PTC should grow. So, I would tell you, at the end of the year, assuming our economic outlook plays out, you're going to see more people working the railroad this time next year than we did the year earlier.

Okay, thank you.

Great.

Ladies and gentlemen, we're nearing the end of our allotted time for question and answers. We have time for one final question. David Vernon, Bernstein Research.

Maybe a question for Jack. On the Intermodal side, are you getting a little bit of positive benefit from the faster growth in domestic relative to International? I guess I'm thinking that empty repositioning is a little bit less than the domestic business. I wanted to check and see if that was consistent with your view of the business.

Yes, the domestic side -- we had a great fourth quarter on the domestic business; record-setting. So, that was good. It reduces the repositioning. It would be nice to have the stronger international side as well, because there are some nice dove tailing that takes place particularly when they stuff the domestic containers on the west coast. But overall, yes, your assumption is correct.

Okay. Then maybe just a quick follow up on weather, I think, Jim, you had mentioned that weather wasn't a great impact on the record fourth quarter OR, and I guess I just wanted to kind of make sure I had heard that correctly. Because I would have thought that the positive impacts on network fluidity, slow orders, all that kind of fun stuff would have actually kind of been a benefit in the quarter.

Well, I didn't say it was a major driver.

Yes.

Although, remember, we were still battling issues in Texas starting in the beginning of the fourth quarter, when you look at --.

The Texas drought didn't really go away until October.

Yes. Well, my only point is there are a lot of factors that drove the operating ratio in the fourth quarter. The fundamental ones though are, to me are business, our volume, our pricing and our productivity.

Okay. Great. Thank you.

I will now turn the floor back to Mr. Jim Young for closing comments.

Well, thanks everyone for joining us this morning. We're looking forward to talking to you again in April. I hope what you see today with our results is the real capability and potential for the UP network. So, thanks again for joining us.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.