聯合太平洋集團 (UNP) 2012 Q1 法說會逐字稿

Greetings and welcome to the Union Pacific First-Quarter 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. Jack Koraleski, CEO for Union Pacific. Thank you, Mr. Koraleski, you may begin.

Thanks, Rob. Good morning, everybody, and welcome to Union Pacific's first-quarter earnings conference call. With me in Omaha today are Rob Knight our CFO; Lance Fritz, our Executive Vice President of Operations; and I also want to introduce Eric Butler in his new role as our Executive Vice President of Marketing and Sales. Now before we get started I want to quickly thank all of you for the support you've expressed for Jim and his family during this time. I know Jim and the entire Company greatly appreciate your thoughts and well wishes.

Turning to the quarter, you can see that Union Pacific delivered record financial results across the board this quarter, generating a first-quarter earnings milestone of $1.79 per share, an increase of 39% compared to 2011. First-quarter record operating revenue, operating income, and operating ratio performance drove our improved bottom-line results. We're clearly delivering on the benefits of our diverse franchise, even as we saw the current coal headwinds start to build in the quarter. We remain focused on delivering safe, efficient, high-quality service that creates value for our customers and increased financial returns for our shareholders. These efforts were recognized with record marks in customer satisfaction and employee safety.

So let's get started this morning, and I'll turn it over to Eric Butler.

Thanks Jack, and good morning. Let's start off with a look at customer satisfaction. For the quarter, customer satisfaction came in at 93, a new best-ever mark, and up two points from first quarter last year. Along the way, we also set a new monthly record as well when we hit 94 both in January and March. We appreciate this continuing recognition from our customers, and our focus in the future is to continue our passion for service and strengthen our value proposition.

This strong value proposition and strengthening in some markets produced volume growth of 1%, even as a weak coal market drove a large decline in energy car-loadings. If you excluded energy, our other five businesses grew 4% during the quarter, even with lower demand for grain exports. Note that with a leap day this year, volume comparisons got a boost from an extra day's loadings. Core price improved 5%, with all six businesses posting gains. Those price gains, combined with an increased fuel coverage and some positive mix, resulted in a 12% increase in average revenue per car. Volume growth and the improved average revenue per car combined to drive freight revenue up 14% to a first-quarter record of $4.8 billion.

Let's take a look at each of the groups in a little more detail heading off with energy. Although energy volume declined 8%, a 14% improvement in average revenue per car produced revenue growth of 5%. We indicated going into this year that with a couple of contract losses, growth for the Southern Powder River Basin was expected to be slow to negative. Our expectation was that new business across our energy portfolio would help offset those losses. While business wins and losses play a role, volume decline in our energy business during the quarter was largely the result of a dramatic weakening of demand for coal, driven by near perfect storm of the very mild winter weather and low natural gas prices that together lowered electrical use in the US by 4%, and electricity generated from coal by 16% during the quarter.

You can see from the chart on the upper left how softening demand has played out in our weekly car loadings, with the volume shortfall growing as the quarter progressed, coming down 19% in March. The most significant impact has been in the Southern Powder River Basin, where tonnage declined for the quarter 8%. The rapidly changing market conditions are reflected in rising coal stockpiles, for which the Powder River Basin were an estimated 17 days above normal in February, quite a swing from the levels several days below normal as recently as October. Colorado, Utah tonnage fared better, declining 3% as strong International demand and new business helped offset the impact of utility outages increased use of fuels other than coal by utilities in the southeast and the mild weather.

Ag products revenue grew 6% as an 8% improvement in average revenue per car more than offset a 2% decline in volume. Ag space is a tough comp against strong export grain volumes through the first half of last year. As expected, with increased world production and higher US corn and wheat prices, our grain exports declined 39% from last year's record first-quarter levels. Growth in other ag markets helped to partially offset the weakened exports. Drought damaged crops in the South and shipments to reopen forward ethanol plants contributed to the increased domestic shipments of grain, which were up 15%. Biofuels volume increased 13% as a rising mandate in exports spurned ethanol shipments. Biodiesel growth continued with strong market demand, despite last year's expiration of the tax credits. Our food and refrigerated segment grew 7%, with new business in barley and flour, along with growth in import beer leading the way.

Automotive volume increased 15%, with a combined 10% improvement in average revenue per car, drove revenue up 26%. With the nation's vehicles aging, and numerous new models available, consumers are driving sales level higher, with the SARS rate hitting 14.5 million for the quarter, the highest level since first-quarter 2008. The industry gains came despite rising gas prices, which appear to be shifting the mix towards more fuel-efficient vehicles, but not deterring overall sales levels. The auto industry's continued momentum translated into 16% growth in our finished vehicle shipments, while parts volume to support the growing production and sales level was up 12%.

Chemicals volume grew 8%, which combined with a 7% improvement in average revenue per car produced a 16% revenue increase. Petroleum products loadings increased 63% driven primarily by the rapid growth of crude oil shipments, mostly from the Bakken and Eagle Ford shale plays to the UP-served terminals at St. James, Louisiana. A slowly strengthening economy was reflected in improved demand for industrial chemicals, which grew 8%, while plastic shipments increased 4%. Partially offsetting overall strength in chemicals was the 22% decline in fertilizer, driven by soft potash demand that led to temporary shutdowns or reductions at several mines during the quarter.

In industrial products, a 10% increase in volume and a 13% improvement in average revenue per car drove revenue growth of 25%. Energy-related drilling continues to drive strength in industrial products, with new frac sand origin and destination facilities coming online to support shale development, resulting in 36% growth in non-metallic minerals. Energy markets, along with the auto industry, were the key drivers of a 14% increase in steel. Favorable weather during the quarter allowed unseasonably high construction activity, boosting rock shipments 16%, and the ramp-up of our iron ore move for export to China drove metallic mineral volume up 48%. Construction-related volumes are still well below what we would consider normalized. Once again this quarter, some of the strength in other segments was offset by a 51% decline in hazardous waste shipments, which have softened as government funding ramped down after the stimulus money ran out. Intermodal revenue grew 15%, as a 13% improvement in average revenue per car -- average revenue per unit, combined with a 1% increase in volumes. International intermodal volume declined 3%, with a soft import market with a continued impact of a contract loss which we won't wrap until May 1. The international volume decline was more than offset by gains in domestic intermodal, where continued growth in high-rate conversions drove volume up 6%.

Let me wrap up with a look ahead at 2012. External forecasts for the US economy have improved slightly since the start of the year, but the overall outlook still points to a continued slow recovery. Clearly, the biggest challenge to our growth is the significant weakening of coal demand. With coal stockpiles well above normal, near-term prospects for improvement in the domestic market seem low without unseasonably hot weather or a higher price for natural gas. As a result, coal volumes are expected to be down throughout the year. With normal softening of demand in the mild spring months, our second-quarter decline is expected to be in the low to mid teens.

The good news is that our diverse franchise provides a wide range of opportunities for growth that helped offset the weakened demand for coal. Here's a look at what we see across the other groups. The booming shale energy market was reflected in the strong growth of our industrial products and chemicals groups during the first quarter, and the opportunity should continue to grow. Shale development and the resulting low natural gas prices also makes US chemical producers more competitive in the global market. This should be good news both in 2012 and in the future. Low feed stock prices have been a significant factor in recently announced expansions by US plastics producers. In addition, our fertilizer business and potash production are expected to ramp back up. A number of our construction-related markets also got off to a fast start in industrial products, but we'll have to see if that momentum carries over into the construction season.

Global Insight has upped their full-year SARS estimate to 14.2 million vehicles, compared to a 13.5 million outlook at the start of the year, which will be good news for our automotive business. We expect domestic intermodal growth from continued highway conversions, supported by expected market growth and the pricing and capacity benefits of our mutual commitment program. In international intermodal, we are still cautious, and as result, only expect slow growth. Ag space is a tough comp, driven by last year's strong export wheat market, but as in the first quarter, they'll look to offset at least most of that shortfall with opportunities in other markets. Across all of our businesses, our strong value proposition positions us to win new business and grow with existing customers. Expected increases in volume should combine with price gains to drive revenue growth despite the headwinds in energy.

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

Thank you, Eric. Starting with safety, our reportable personal injury rate set an all-time record low in the first quarter of 2012, improving 10% from last year. Training, process improvements, and capital investments combined to reduce both environmental and behavioral risks. I'm particularly encouraged by a steep reduction in severe injuries, which have the greatest human and financial impact.

Moving to rail equipment incidents or derailments, our first-quarter reportable rate was a record, down 1% from 2011. An increase in derailments caused by grade crossing accidents and weather was fully offset by a decrease in most other categories, notably those caused by track condition and human factors. In public safety, the grade crossing accident rate was 28% higher than the first quarter of 2011, despite continued focus on community and driver behavior related to grade crossing safety. I remain confident our activities will result in improvement in this measure as the year progresses.

While I'm very pleased to report two of three safety measures at record lows, our ultimate goal is to eliminate all safety incidents. Before we move on to UP's network performance, I want to spend a moment talking about the market shifts that we experienced this quarter. We continued to see a shift in traffic mix towards our manifest and premium business, up 5% and 3%, respectively, with most of the growth occurring in the southern region. Both volumes declined only 4%, as an increase in crude oil unit trains partially offset the 8% decline in coal. We've realigned resources to accommodate these shifting traffic flows. Car routings were adjusted to leverage available capacity at terminals, and we modified train starts to maintain fluid operations and increase local service frequency.

During the quarter, we also realigned our employee base and our hiring patterns, and repositioned about 200 locomotives from our coal network into other parts of the system. Our team leveraged the growing manifest business well, using the UP's excellent route density and terminal infrastructure to generate a 3% improvement in the number of cars switched per employee day. And because our network is a shared resource, the capital investments we're making in the South to support current growth patterns support other service products like grain shipped to the Gulf ports and premium intermodal to and from Mexico. Our agility is reflected in our network performance measures. Starting in the upper left on slide 16, train size improved with record first-quarter manifest and intermodal train length. Intermodal train size grew 2%, despite a modest 1% increase in intermodal volumes compared to 2011. Gross ton miles per employee declined 1% versus 2011, which includes the productivity headwind of 800 additional employees working on capital projects and PTC. Excluding those employees, GTMs per employee improved about 0.5% percent, with gains in terminals and train size partly offset by increased manifest and local train starts.

Moving to the lower left, slow order miles were down almost 30% from last year, which was a best-ever record for any quarter. Our network has significantly improved over the last few years, and is in excellent shape. In the lower right our fuel consumption rate improved by about 2% compared to last year, driven by targeted operating practices, reduced network variability, and a rewards program we call FuelMasters. Overall, our network is operating well. Mild weather contributed to more favorable operating conditions this quarter, but that is not the complete story behind our solid network performance. The operating team demonstrated agility by successfully adapting the T plan, locomotives, and crews to a rapid shift in mix towards manifest and the South. In Texas and Louisiana, it has been a complete team effort to effectively utilize the existing infrastructure while we build new capacity.

In other areas of the network we took advantage of the warmer climate to continue work on capital projects when we normally would've throttled back, creating a modest headwind to network velocity. Even so, velocity remains in that consistent range of 26-plus miles an hour, increasing 1% compared to last year. Compared to 2010, average speed was essentially flat despite a 5% growth in system seven-day car load volumes. Our service scorecard illustrates UP's customer value proposition. The local operating teams continued to build the fundamental elements of great service, as reflected by industry spot and pull, which hit an all-time best first quarter at 95%. The first-quarter service delivery index, which is a measure of how well we are meeting overall customer commitments, improved from 2011. Even as we meet the challenge of handling a carload surge in the South, we continue to have capacity for growth. We have plenty of network capacity in other parts of the system, with about 600 employees furloughed and around 800 locomotives in storage.

To sum it up, we remain positive on our operating outlook for 2012 and our ability to achieve continued network improvements on various fronts. We are well-positioned for another record year in safety as we continue to mature our total safety culture, strengthen our relationships with local communities, and harden the infrastructure. We continue to provide excellent service, providing customers with a value proposition that will enable growth as the economy recovers. We are well-positioned to react to dynamic shifts in volume while generating productivity, and we are investing a record amount of capital to alleviate network constraints across the system on projects that generate attractive returns. In summary, we will use the six critical operating initiatives, including the UP Way, to achieve growth with service excellence.

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

Thanks Lance, and good morning. Before I get started, I'd like to make everyone aware that the 2011 Fact Book will be available tomorrow morning on the Union Pacific web site under the Investor's tab. So with that, let's start by summarizing our first-quarter results. Operating revenue grew 14% to an all-time quarterly record of $5.1 billion, driven by core pricing gains, fuel surcharge recoveries, positive mix, and volume growth. Operating expense totaled $3.6 billion, increasing 7% compared to last year. Higher fuel prices contributed to over a third of this increase.

Operating income totaled $1.5 billion, a 33% increase, and a best-ever first quarter performance. Other income totaled $16 million, up $1 million compared to 2011. Interest expense of $135 million was down 4% versus last year. Income tax expense increased to $528 million. Higher pre-tax earnings and a higher income tax rate in 2012 drove the 42% increase. Net income totaled $863 million, a first-quarter best, up 35% versus 2011. Earnings grew 39% to a first-quarter record of $1.79 per share. The outstanding share balance declined 3%, reflecting our share repurchase activity.

Turning to our top line, revenue grew 14% to a first-quarter record of $4.8 billion. Car loadings drove a 1% increase, and we saw an unusually large positive mix impact, driven by stronger growth in higher average revenue per car moved, such as the shale-related shipments versus intermodal traffic. Fuel surcharge revenue added nearly 5% to our top-line growth, driven by higher fuel prices and improved fuel surcharge coverage. Our focus on improving fuel recovery in recently negotiated legacy contracts generated a meaningful step-up in fuel recovery, contributing over 1% in freight revenue growth, and roughly $0.05 in earnings per share compared to 2011.

In addition, we achieved solid core pricing gains of 5%. Slide 22 provides more detail on our core pricing and fuel coverage gains for the quarter. As I mentioned, fuel coverage improved this quarter, largely driven by recent legacy negotiations, adding over a full point to revenue growth. Overall, we feel very good about the progress that we've made moving these contracts more to market. We also achieved strong core pricing of 5%; however, our pricing gains were somewhat mitigated by declines in coal and international intermodal volumes this quarter. That said, the combination of solid core pricing and fuel coverage gains reflect the value of Union Pacific service offerings and contributed to a record profitability this quarter.

Moving onto the expense side. Slide 23 provides a look at our compensation and benefits expense, which was up 4% compared to 2011. Consistent with our previous guidance, more moderate inflation drove a 2% increase in cost. Workforce levels increased 4% in the quarter compared to 2011. Increased capital activity, including positive train control, contributed about half of this growth. Base business activity drove the remaining increase, which was also impacted by the mix shift and additional resources that we deployed to the South. In 2012, we still anticipate attrition in the 8% to 10% range. We will continue to hire new employees to back fill for attrition and to support volume growth. Excluding growth on the capital side, we expect workforce levels to increase, but not at a one-for-one rate with volume growth.

Slide 24 shows fuel expense, which totaled $926 million, increasing $100 million versus last year. The average diesel fuel price was $3.23 per gallon, which increased 12% year over year. Drivers included the average barrel price of $103, which increased 11%, and a $5 per barrel increase in the conversion spread. Fuel expense was also up as a result of a 2% increase in gross ton miles, but this was mostly offset by a 2% improvement in our fuel consumption rate. Purchased services and materials expense increased 11% to $526 million, driven in part by higher subsidiary contract expenses. Of course you need to match the higher subsidiary expense with a 20% growth in subsidiary revenue, which is reflected in the other revenue line.

We also saw higher locomotive and freight car repair expense this quarter, driven by increased material usage and inflation cost. Other expenses came in at $216 million, up $28 million, resulting from higher property taxes and personal injury expense. As we said in January, the other expense line will be challenged in 2012 with higher property taxes and personal injury expense. As Lance just showed you, we continue to see improvement in our safety performance, which drove a lower current-year accrual. But remember, our comp was more difficult due to a large favorable prior-year adjustment in 2011. Going forward, we expect other expenses to be in this neighborhood for the remaining quarters of the year, barring any unusual items.

Slide 26 summarizes the remaining two expense categories. Depreciation expense increased 8% to $427 million, driven by increased capital spending and volume growth. Looking at the full-year 2012, we expect depreciation expense to be up around 9% compared to last year. Equipment and other rents expense totaled $296 million, down 2% from 2011. Lower locomotive lease expense was the primary driver, due to the early buy-out of equipment under long-term leases.

Bringing it all together, slide 27 reflects our operating ratio performance, highlighting the improvements and profitability that we've achieved over the last several years. Despite higher fuel prices in the quarter, we achieved a record first-quarter operating ratio of 70.5%, improving over four points compared to last year's first-quarter record. Core pricing gains improved fuel surcharge coverage and modest volume growth all contributed to this improvement. For 2012, we continue to target a record full-year operating ratio performance.

Union Pacific's record earnings drove strong free cash flow in the first quarter. While cash from operations increased compared to last year, free cash flow was lower due to increase capital spending and a 55% increase in cash dividend payment. And as we discussed in January, we still expect bonus depreciation to be a net benefit to cash flow this year, but it will result in a headwind compared to 2011 due to the catch-up of prior year's programs, and a 50% bonus depreciation rate in 2012, compared to a 100% rate in 2011.

Our balance sheet remains strong, supporting our investment-grade credit rating. At March 31, 2012, the adjusted debt to cap ratio was 40.1%. Opportunistic share repurchases continue to play an important role in our balanced approach to cash allocation. Union Pacific's increasing returns over the last several years have enabled us to drive greater shareholder value. In the first quarter, we bought back 3.9 million shares, totaling $433 million, up $185 million compared to last year. Since 2007, we've purchased nearly 83 million shares at an average price of around $74. Combining dividend payments and share repurchases, we returned over $720 million to our shareholders in the first quarter of 2012, up more than 65% versus last year. Looking forward, we have 23.9 million shares remaining under our current authorization, which expires March 31, 2014.

That's a recap of our first-quarter results. Solid pricing gains, improved fuel coverage, and volume growth drove a 39% increase in earnings. In addition, favorable weather conditions this year and a large fuel headwind in the first quarter of 2011 also contributed to year-over-year earnings growth. Looking ahead, we still expect record earnings in 2012, but our quarterly comps will get a little bit tougher, particularly in the second quarter. We expect second-quarter earnings to improve sequentially and on a year-over-year basis, but not at the same rate that we saw in the first quarter. And as Eric just discussed, softer coal demand will pose an even greater challenge for us in the second quarter.

That being said, we still expect volumes to be on the positive side of the ledger for the full year. Continued growth in domestic intermodal, energy-related shale moves of crude oil, frac sand, and pipe, in addition to strong automotive and chemical shipments, should offset the coal decline. Again, this clearly highlights the benefits of our diverse franchise. Our prospects for 2012, supported by Union Pacific's strong value proposition, should allow us to reward our shareholders with even greater returns.

With that, I'll turn it back over to Jack.

Thanks, Rob. With a strong first quarter behind us, we are totally focused on the prospects that lie ahead. Although coal volumes remain a challenge, we expect that continued opportunities in other areas of our business are going to allow us to drive financial -- record financial results for the year. We're moving forward with our capital investment strategies. We're investing today to strengthen the network and build capacity that'll drive improved customer service and shareholder returns for tomorrow. We believe very strongly in the opportunities for growing our financial returns for the future.

With that, let's open up the phone and take your questions.

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

(Operator Instructions)

Brandon Oglenski, Barclays Capital.

Good morning, everyone. Maybe if we can just come back to that comment on the second quarter, I'm sure a lot of people are wondering here. When you said that earnings growth isn't going to be as great in first quarter, are we thinking on an EPS level? Is that what you're guiding to?

Rob?

What I'm saying there is yes, on an earnings basis the rate of improvement won't be as great as the rate of improvement that we saw in the first quarter. However, as I pointed out, we do expect it to be sequentially stronger, and still growth year-over-year, which is not quite at the same rate -- again, the main challenge is the coal that we talked about.

Okay. Thanks for the clarification on that. Obviously, there's going to be a lot of questions on coal today, and I think I'll open it up with this -- a lot of people are asking in the West, transportation costs are a much larger piece of delivered cost to utilities. With gas prices as low as they are, if they stay here for a while, some people are connecting the dots and saying well, the rails could actually cut their rates to keep coal moving. Is that a fair statement, and how would you address that?

Brandon, I would tell you that for the most part transportation rates are not going to make or break the productivity and the efficiency of coal electric utility generation. If there is a utility that is so close to the edge that the transportation rates are making the difference, we're probably not going to be in a position of being able to save that utility, nor would we go down that path with our pricing strategy.

Okay. Thank you very much. I'll keep it at two.

Tom Wadewitz, JPMorgan.

Yes, good morning and impressive results certainly for first quarter. I wanted to ask another question on I guess the demand side. How much on the coal, how much visibility and conviction do you have in that kind of low- to mid-teens decline in second-quarter? I think through first quarter, as you talked about coal it seemed to get worse. A couple times when you talked about it, I think you said down 5%, down 7% and it ended up down a little bit more than that. Are you -- do you feel like you have good visibility that it's not going to be down more than say 15%? I don't know if you have any thoughts on second half, how we might look at that as well?

At some point in time, Tom, we're predicting the weather here. That makes it a little bit iffy on our part. When we look at our coal situation right now, here's how we think about it. The gas capabilities in our served territory have already played their cards. There's not really a lot more opportunity in the utilities that we serve to shift any more production to gas, so that's really running full out at this point in time. We've seen the falloff now in volumes. We think that's going to stay, and so we think that low to mid teens is probably a fairly solid number.

If you have a normal summer by the time we get to the end of the second quarter, we should start to see our volume kind of pick up, and then it'll grow in third and fourth quarter, and you'll start to see overall coal volumes come back. In the meantime, we think we've got enough upside on our other business like the shale plays, the automotive business, the domestic intermodal side. By the time we get to the end of the year, we should still be in positive territory for total volumes.

Okay. Let's see, the second question, just in terms of the thinking about margins and incremental margins in second-quarter. You had some coal headwind already in first-quarter, and you had the 400, over 400 basis points margin improvement. I know you're saying be a little more cautious on a difficult comparison in second quarter, but given the mix of business, I would think your incrementals could still be quite strong in terms of where you're growing in the merchandise network, maybe running longer trains and getting good pricing on that shale-related business. Is that kind of a fair way to look at it, to say all right, be a little careful, but incremental should still be pretty strong in second quarter?

Rob, you want to take that?

Yes, Tom in the first-quarter let me set the stage there. You're right, incremental volumes were -- margins were outstanding in the first quarter, at over 60%, which was driven by all the positives that we spoke about. How it will play out? I would expect that incremental margins will continue to be very positive. Exactly how it will play out will be as dependent as anything on the mix effect. We expect, as Eric walked through, positive strength to continue in things like the new shale-related activities. We expect international -- excuse me, domestic intermodal, to continue to strengthen. The mix will play fact in that, but I would expect that incremental margins will continue to be strong.

Okay, great. Thank you for the time.

Justin Yagerman, Deutsche Bank.

Hi, guys. Jack, I just wanted to follow-up on the first question on coal. It sounded like you pretty much were saying that you guys wouldn't use price as a way to stimulate growth in volume on the thermal coal side. Is that the way to that? It doesn't sound like it makes economic sense for you guys to do that, and I just wanted to follow up and get clarification there.

Again Justin, you've been with us a long time and you know that our strategy has been to ensure that every piece of business that moves on our railroad is re-investable. We're going to continue to go down that path. We don't think the transportation rates -- if you have a utility that is on the edge of economic viability, we don't believe transportation rates is going to save that utility, and it has further implications for us in all of our other customers, so we don't want people trading on the basis of transportation contracts, we want them trading on the basis of their own productivity efficiency and manufacturing capabilities. We would stay with my earlier answer.

Okay. That makes a lot of sense. When I look at the four-week moving average and kind of economically sensitive carloads, if I strip out ag and coal, it feels like you've seen maybe a little bit of deceleration in growth rate here in April. I just wanted to see how that jives with what we've seen from some of the other economic data out there. We had extremely strong West Coast port filing imports in March, and I was wondering if you've seen follow-through in terms of that in your network here in April. Maybe if you have any color on whether or not those strong imports were some of the customers getting ahead of steamship line GRIs. I was curious to see if you had any color on what's going on, on that end of things?

Okay, Eric, do you want to take a shot at that?

As we look at ramp-up in April, clearly April started off soft from a trend standpoint. Part of that is due to the holiday weekend that we saw, but we are seeing a good ramp-up here in the latter part of April, and we feel pretty good about our outlook for the demand in the other businesses as we've discussed earlier, both the domestic businesses and our opportunities on the import side. We still are pretty confident looking at our outlook and looking at our current rate and run rate and ramp-up.

My finance team would tell me that April is historically our lowest month of the year.

Interesting.

We're hoping that's the truth this year, too.

All right. I appreciate the color, thanks.

Scott Group, Wolfe Trahan.

Thanks. Good morning, guys, and first just please send our best to Jim.

Will do, Scott.

I wanted to ask on the legacy contracts first. What percent of the repricing in 2012 is reflected in first quarter? I'm wondering if some of it gets layered in throughout the year, or even over the next couple of years? Then can you talk about the timing -- I know it's early -- talk about the timing for the contracts in 2013, and does the situation in coal, in your mind, kind of limit the upside for future legacy re-pricings on the coal side?

Sure, Scott. Eric, do you want to take a first shot and I can help you out if you--

Yes, as has been said in the past, we expected to see a 1% to 2 % benefit from our legacy pricing, and that's what we're seeing this year. Certainly the volume mix or the volume shortfall in coal, and some of the volume shortfall in our international intermodal business has had a negative impact on our legacy pricing mix. But we are seeing it still in that 1% to 2% range that we had expected. We do not have any layered pricing plans in our legacy contracts throughout the year, but we are firmly committed and looking forward to meeting, exceeding the price expectations that we had out there.

But it sounds like if the call volumes come back next year that the impact to the legacy will kind of feel a second leg to that, is that fair?

This is Rob, Scott. As Eric pointed out, yes, if the coal volumes came back, because what we experienced in the first quarter, both on coal and also on international intermodal, is some of the re-priced business didn't move. So yes, if that volume came back, that would be a positive for us, if that re-price business came back. The other thing I wanted to respond to Scott was your question on the legacy in 2013. The bulk of that is front-end loaded.

Okay, great.

Again Scott, if you just think about it, we have one of probably the most conservative assessments of core price, because if the car doesn't move, regardless of how high we raise the price, we don't get credit for it. The core price of 5% is a solid number for us. The mix did hurt us, as everybody pointed out in terms of coal and international intermodal, because that is where the bulk of our -- where all of our legacy renewals from last year were housed. Hopefully, we'll see those volumes improve as we get through the year, and we'll start to see a greater contribution from it. I think the best assessment of it, though, the total impact -- you've just got to go back to the operating ratio and see that 70.5% with four points of improvement.

Sure. Second question, it's a newer market for us so we don't have the history. How should we think about the yields and margins in the frac and the crude oil business relative to the overall book of business?

Overall, when you look at the frac sand and the crude oil it's re-investable, it's at market rates, and we're very happy to have as much of it as we can bring on the railroad.

Okay, thanks for the time, guys.

Bill Greene, Morgan Stanley.

Hi, good morning. Jack and Rob, when we -- when you first gave your long-term guidance on OR, I guess it was in 2010, I think a lot of us on the street sort of viewed it as being very conservative. You cautioned us at time and said listen, these are long-term numbers and so a lot can change, and obviously natural gas changed. If natural gas stays at $2, and I know there's a lot of people who say well, that isn't going to be the case; but just as an assumption, do you still feel comfortable about that long-term guidance, that the coal franchise is materially smaller?

Rob?

Yes, Bill. We're staying with that 65% to 67% operating ratio target -- full-year operating ratio target by 2015, and you hit the nail on the head. When we gave the guidance, a lot of things have changed, but we have not changed in our conviction and our commitment. We may get there a different way, and I think we're walking our talk in terms of making the kind of progress we did, even without the benefit of the coal in the first quarter with that four-point improvement. As I've said all along, and I said this when we set the original 75% target, and the low 70s% operating ratio target, we're going to get there as efficiently as we can, as quickly as we can. It's not an end point, it's just a next step along the game here. We're not changing our conviction, we're going to get there as soon as we can, but we still feel confident about that, even though it may come in a different way.

Okay, good. The other question that comes up a fair amount is just trying to understand the dynamics of take or pay contracts from the coal industry -- for, that is, sorry, for you guys on the utility side for coal. First of all, do have any utilities sort of paying you for sort of take or pay -- i.e., they're not taking the coal but they're paying anyway. Is that something that happens now, how does that manifest itself? When you see these, when we see these sort of announcements of cuts from coal mines, like BTU today, do we have to take that into account when we think about your volumes? Is that sort of a leading indicator, or a lagging indicator? Thanks.

Eric?

We do have a small percent of our coal customers that are running at minimum, but it's a very small percent of our coal customers that are doing that, so we typically don't have a large portion of take or pay contracts.

We have customers that are operating at their minimum, but they're not falling below and then paying us the economic penalties.

Okay. When we see a mine is announcing cuts because they expect lower shipments, does that -- how does that play out for you? Is that an indicator we need to keep in mind, or are your volumes already ahead of what they're cutting?

I think our volumes are already ahead of what they're cutting, and customers many times have multiple mine sources, so they can move between mines.

Got it. Okay, thanks for the time.

Chris Wetherbee, Citigroup.

Great, thanks. Good morning, guys. I was wondering if you can give a little bit more color on the negative mix impact within the legacy business, just looking at kind of the year-over-year core price build. Just want to get a rough sense, if you can, kind of what that impact was, the softening on the growth there?

Sure, Chris. Rob, do you want to handle that?

Yes, and again, just to make sure everybody is following what Chris is asking, the way we calculate price -- and I would say again, the financial organization are conservative looks at it -- it's all in yield, and we calculate it across our entire book of business. As Jack pointed out, it something doesn't move, it doesn't get counted, obviously. Also, what doesn't get counted in our price is if there's new business that comes on board, which we've seen a lot of that, so that you see that positive mix in our operating ratio, but you don't see that in the price.

Specific to your question on the negative impact that we saw in the first quarter from price, I would say it was about a half a point. What that is, is a result of the re-priced mostly coal and international intermodal business that made up the bulk of that $1-billion legacy end of 2011, beginning of 2012 that we talked about, that did not move. The volume wasn't there. We didn't get credit for it in the way we calculate the price, and that was about a half a point, if you will, from a core price impact.

Okay. The delta between that and the three percentage points of mix -- favorable mix -- is to your point the new business that's coming on, which is likely the crude by rail, the frac sand, those kinds of things are coming in at a higher revenue per carload?

Chris, that's exactly right. The other thing I would point out that was a real plus, and shows up in our operating ratio improvement, but also shows up in our legacy renewal success, is the improvement in our fuel recovery mechanism. We're still not where want to be as a Company, we're not going to be at 100% until we finish off all of the legacy renewals, but we did make a nice step forward with improving our lot in live in recovering fuel.

Okay, that's helpful. Then just a follow-up on the head-count side. Just want to get a sense, roughly, assuming we hit your target for coal in the low to mid teens for the second quarter, and we see how it plays out going forward, but how do you think about kind of head count and where you're staffed? Should it be basically flat from where we are as average employee per quarter going forward, or do you think you need to do any more furloughing or anything like that going forward?

Rob?

I'll kind of address the overall, and there's a mix impact here as Lance point out in terms of the growth in the South versus less growth in the other parts of the region, so we're dealing with that. Lance and his team are addressing that. At a macro level, just reiterating, we would expect that head count will grow with volume. So volume's on the positive side of the ledger, which we expect it will be, for the full-year, we would expect head count to actually be up net-net as a result of the hiring that we will do for both attrition and hiring for growth, but not at a one-for-one level. In addition to that, headcount likely will grow as we continue to increase our capital spending, which is again the $3.6 billion spend this year, and the impact of positive train control. Net- net, I would expect that if volume plays out the way we expect it to on the positive side of the ledger, that head count will be slightly up.

Hey Lance, you and your team have been working at those head count levels and making adjustments as we see volume judges. Do you have anything to add to that?

Yes, sure. We are at a furlough number of about 600 right now, something like that. We have been adjusted both our hiring and our existing head count numbers. I expect those will continue to adjust. I think hiring is of course going to be pretty healthy, for mostly attrition. Mix is going to be driving some of that head count decision, as well, as we see manifest absorbing more of the business and requiring more head count than some of the coal business, for instance.

Okay, so It's fair to assume that you're going to have a slightly higher head count per carload because of that mix shift that we are seeing into manifest?

That's fair.

Okay. Thanks very much for the time, guys. I appreciate it.

Cherilyn Radbourne, TD Securities.

Thanks very much and good morning. The first question I wanted to ask was on international intermodal. You're still striking a fairly cautious tone there, so I wonder if you could just give us a bit more color on what you're hearing from customers, and comment on the potential for East Coast labor negotiations to influence flows through the West Coast?

Eric?

Well as you know, we have a tough comp in the first quarter, first half, of this year. Intermodal volumes -- international intermodal volumes last year were very strong, and they're off compared to last year. Then we also have a tough comp throughout the first half of the year with the contract loss that we discussed in the past. We have those two factors that are putting some caution in our outlook for the early part of this year. In terms of your question about East Coast issues, there are a lot of factors that impact whether a steamship carrier decides to land on the West Coast and use a land bridge, or go through the East Coast. We think that our value proposition and the strength of our franchise still allows the West Coast option, land bridge, to be a very strong option, and we still see a very competitive outlook in our business from that factor, vis a vis East Coast ports.

Thank you. In terms of your crude business, obviously it's still probably a small fraction of the business, but a lot of interest in just how big that might be. Just wondering if you could quantify that, and talk about how that may grow over the short-term and what the constraints are there. Is it terminal capacity? Is it tank cars? If you could just elaborate a bit?

Yes, I'll give you just a couple of benchmark points for you. Last year, our shale crude oil was about 3,900 carloads. Then the first quarter this year it was 20,400. That's order of magnitude just where we saw the volume growth. We think it's going to continue to grow as we go through the year. We were something like 26 trains as I recall last September, 72 trains in March, moving forward to 100 and beyond that as we go through the year. It's growing nicely for us.

(inaudible) constraints, if any. It's basically being paced right now by facilities.

Right.

Meaning the terminals?

Yes, meaning the terminals. There was a press release yesterday or the day before that our partner US Development down at St. James just opened up added capacity that will allow two trains a day. As we talked earlier about some of the ramp-up we're seeing here able and beyond, that's kind of a good news piece of the factor for us.

Okay, thank you. That's my two.

Peter Nesvold, Jefferies and Company.

Good morning. Earlier you talked about how you're still committed to getting to the 65% to 67% OR even if PRB does go into secular decline, that there other things that you do. Are there a few things that you can point to? What actions, what changes would you make to the network in order to continue to improve the OR, if that business does continue to shrink from here?

Lance?

Sure, yes, let's get started. Let's say coal does shrink over the long run going forward. Some of the first things we do is we reallocate resources, we right-size the business, which we have been doing in the first quarter, we'll continue to do. On the upside of productivity, as we've talked about before, we've got just a target-rich environment for improvement, whether it's train-size improvement, process improvement in terminals, process improvement over the road, and the benefits, the productivity benefits of our capital spend. We've got ample opportunity in operating side to continue to improve productivity and efficiency. Rob?

If I can just add to that. In addition to all the operating shifts and improvements that Lance just walked through, at a macro level, what will continue to also drive our operating ratio improvement, our continue to focus on adding capacity and the changes that Lance talked about, providing great service to our customers, which enables us to continue to get price in the marketplace, continue to improve our surcharge recovery mechanisms -- all of that adds up into our operating ratio target.

Is there capital that you typically would allocate to the coal business that you might re-allocate to other businesses in order to get those productivity improvements or other benefits, because I would suspect that you would be doing those productivity benefits regardless of whether coal is going are not going. Is it redeploying the resources to other parts of the business so those businesses can grow faster than what they would do in the base pace scenario?

For sure, reallocation of fungible assets happens, and that will benefit, as Rob mentioned, both growth rates and service. From the standpoint of capital, in the current outlook there's just not a lot of capital that we've got planned for coal-specific operations, so I just don't think there's a lot of adjustment there.

Okay, and then a quick follow-up. You talked about inflation moderating. If the contracts are all structured as inflation plus, does that mean that the core pricing, at least nominally, will start to level off, or maybe come down a little bit as the year progresses -- of course, maintaining a positive spread, but the headline numbers start to come down a bit?

I really don't see that happening, Peter. Rob, do you have any?

Yes, I would just add that Peter, while we've talked about sort of our general view of inflation-plus sort of philosophy, it's not like the contract spells out inflation-plus in the terms of the contract. The fact that inflation is high one year, like it was last year and as pointed out on the labor line alone, last year inflation was in the 4% to 5% range. This quarter, we turned it in 2%, we expect the full-year to be somewhere in the 2.5% range. We are not -- that does not impact our pricing decisions that we are making currently.

Great, thank you.

Chris Ceraso, Credit Suisse.

Thank you, good morning. Couple of follow-up items on coal, and then one other. Your comment about low- to mid-teens volume growth, does that assume that weather gets better, because currently it's running down in the high teens, so how do you get there? It looks like once we get into the second half of the quarter the comps start to get quite a bit harder, too.

As Jack said earlier, we're not capable of predicting the weather, but our assumption is that we're going to have a normal outlook for the second quarter. Again, second quarter is typically a shelf month, where there's a normal downturn in the second quarter, just because of the mild weather, but we're expecting our low- to mid-teens outlook assumes normal weather patterns.

Okay.

If I can just make one comment on that. Remember, and Eric showed it on his slide earlier, that there was a little bit of uniqueness in terms of the comps last year. Remember, we had the flood last year that hit in the second quarter, and then we came out of that strong, and it strengthened throughout the balance of the year. Just keep in mind, as you look year over year, that there was that unusual activity last year.

Right. Second, you've commented on this a couple of times about pricing in the market and staying the course, but to the extent that pricing is market-based, some of your -- or your main competitor in the West has made some public comments about trying to work with customers and lowering price, does that not factor into your plans on pricing?

Chris, our commitment is to make every carload on this railroad re-investable over time and get to that level. If we can't achieve those kinds, where we can reinvest in the locomotives, the track capacity, and things like that, we will probably pass on the business.

Just one housekeeping one. The other revenue was up pretty strongly, and you did make a comment about some liquidated damages, is that where that would show up?

No, that's not what that is. Chris, the driver of the other revenue was relatively small, but our subsidiary revenue, what we call subsidiary revenue was up nicely this quarter for us, not anything to do with any kind of liquidated damage discussion.

Okay, thank you.

Ken Hoexter of Merrill Lynch.

Great, good morning. You talked a bit about your coal contracts. Rob, are you seeing any kind of minimum commitments decrease in the renewed contracts that can dramatically lower the kind of commitment of those utilities to obtain in coal?

Ken, why don't we let Eric have a shot at that.

No, we don't see that. As I mentioned earlier, very small percent of our coal customers currently are operating at their minimum commitments, and we don't see any contract changes in the future that would adjust that or lower that.

As you went through the negotiations at the end of last year as they were seeing the low nat gas prices, you didn't see a sizable push to get those minimums reduced?

We did not have any significant contract changes that we implemented.

That's encouraging, thank you. A follow-up would be, if you can maybe walk through how much the weather aided your cost when you think about operations? Maybe that's a Lance question. In terms of the quarter, just what kind of tougher comps do you anticipate if we were to have a normal weather come next year, just as we move forward through the year? Thanks.

Sure, Ken. We're used to operating outside, so the weather did have some favorable impact, right, where we're typically going to spend on snow removal or perhaps face some tough operating conditions during very inclement weather. We didn't have much of that repeat across the system the first quarter this year. That's really kind of minor in the grand scheme of things. What I would have much preferred is a cold winter and good coal demand, and I would have traded that in a heartbeat.

Amen.

Thanks, appreciate it.

Walter Spracklin, RBC Capital Markets.

Thanks for a much, good morning.

Good morning, Walter.

First question here is a follow-up on the intermodal question on the international intermodal. Rather than discuss your demand, can you talk a little bit about the market share on the ports you serve? It seems that we could see some shifts into Canadian northern ports, especially, even into Mexico. Are you seeing that occur, and could you also tie that into your view on Panama, when that starts to fully open up, and what that could mean to your international intermodal franchise?

Okay, Eric?

Yes that's -- Walter, that's a good question. Certainly from a Canadian standpoint, everyone's familiar with Prince Rupert, and Prince Rupert is certainly looking to position itself as an alternative port. If you look at the US West Coast ports, particularly the port of LA, Long Beach, that is and we foresee for the foreseeable future to be the predominant port for imports onto the West Coast from a value standpoint, from a cost standpoint, from a productivity standpoint, from a size standpoint. We don't really see a lot of risk to that port of LA Long Beach position, or the other US West Coast ports. Certainly there are ports in Mexico that are also attempting to position themselves as options, but we really don't see that.

In terms of the Panama Canal, lots of points of view out there. I think some of the experts would suggest that if you look at the expense of the canal, and what is already happening with the canal fees, if you look at the fact that there are not many current US East Coast ports that could handle the larger ships and there would be an expense that would be required to do drudging and depth expansion to handle those ships, we think the Canal might have a minor impact. I think the market numbers today, roughly about 30% of the freight goes all water. That may increase a couple of percentage points as you look at the opening of the Panama Canal, but we're not expecting it to be at this point in time a significant impact on our going-forward strategic plans.

The key thing for us, Walter, as Eric said, we haven't seen that shift taking place. One of the reasons is because we are doing everything we possibly can to deliver great service for customers. As long as our service package is excellent and stays excellent, that's our best defense. It's our best defense against port shifting on the West Coast, it's also our best defense against the new port capacity in Mexico, although we may actually benefit from that, I guess, depending on which port it would come across and the border, but also the shift to the Panama Canal. That's largely -- we can influence that greatly by the kind of service, and we are up to that challenge.

That's great color. I appreciate that. Keeping on the port theme here, if I remember correctly the last investor day there was -- you are alluding a little bit to the potential for coal port expansion that you would be able to service, but weren't in a position at the time to really elaborate on it. Can you give us any update on that, if you can?

Right now, so the one that we were probably most excited about was the one up in Longview, Washington, that's kind of run afoul of some of the EPA concerns. We're actually kind of watching that whole decision for the EPA to be kind of taking a more broad or blanket look at potential environmental situations. Certainly the one at Longview was important to us. We've been moving quite a bit of export coal now down through Houston, and we think there's some additional capacity there. We've been working with mines and the Ferromex railroad and looking at the port Guaymas down in Mexico. All of those things are still in play. The new added challenge or wrinkle for us is what happens with the EPA reviews.

To add to what Jack said, I think the current list of proposal projects -- some of which multi-year duration, and all of which certainly will be subject to various environmental permitting review processes, but the proposed list of projects really would expand export coal capacity to over 100 million tons annually. That's a huge number.

Yes, absolutely. I think you nailed it on the head there with the permitting as being a big problem, but if that can go through, you could see a lot of opening capacity. Just a final here clarification, you mentioned if you get a good nice warm summer you could see growth in the back half, did you mean growth sequentially or growth year-over-year in your coal shipments?

Sequentially.

Sequentially. Okay, that's it. Thank you very much.

Jason Seidl, Dahlman Rose.

Good morning, everybody. First, Jim if you're listening, hang in there. We're all pulling for you. Back to business, I promise no coal questions for me, I think that's been beaten to death here. I think you guys will be probably happy with that, as well. I want to actually turn back to one of your responses to a question. You mentioned that some of the potential new ports in Mexico that you might be able to win some of that business, I'm assuming you're talking about APM's expansion down there in Lazaro. Are you guys in talks with them? Is there a big opportunity to start bringing some of that business into the US through your Mexican ports? Then I have a follow-on in a different segment.

I think most of those comments were referring to the ports on the west coast of Mexico. We are actually having in-depth conversations with a number of port officials, and with our partner railroads in Mexico to look at product and service offerings, both export and import, and not just intermodal, but also bulk products, export and import, in a variety of ports down there, and so we think there is some upside. There's some capacity things we're working through, but we believe there is an upside.

Does that bulk include coal?

Yes, that includes coal -- coal, iron ore, and other exports.

My next question is also going to be in response. You said there were no capacity constraints for your crude to rail projects, which I found interesting. Everyone I seem to talk to right now can't seem to find any tank cars, and I'm even including some of the larger shippers out there, as well. Is this just because there's enough tank cars on back order that you expect to come through, through the remainder of the year? Then maybe if you could just touch on sort of hopper car demand right now, and where we sit with that compared for frac sand?

Yes, I'm not sure we said there were no capacity constraints. Lance will talk a little bit about our physical capacity. There are a significant, perhaps record number of tank cars coming on line as you may know. I don't have the exact number off the top of my head, but there's almost a record number of tank cars, so that is a significant investment that customers are making, third parties are making. I think enough tank cars will be coming on line to align with the demand that is out there. There's also significant investment in covered hoppers that are coming on line that handle the drilling materials for like frac sand for the drilling market. I think the car, there's some headwinds there, but there are enough cars coming on line to address the capacity issues, I think, over the mid-term. In terms of the physical capacity issues, I'm going to let Lance address that.

Sure. Jason, you might be referring to, I think what we said was the volume on crude was largely being throttled by destination facilities, but that's not to say that there aren't other capacity constraints or challenges. On the railroad side, we're largely overcoming those with incremental resources and we're building capacity rapidly as we speak.

Jason you probably know this, but the investment in the tank car itself is not our investment. That's the investment of the producer, of course.

In other words, I guess the way I should read this is there might be some maybe near-term potential constraints, but you guys are helping improve throughput, which will help run existing equipment that's out there right now, and as we move throughout the year on the crude to rail, the stuff that's on backlog right now that's coming in the market should help alleviate some of the constraints that are out there?

Absolutely, and we have very excellent cooperation with our customers. It's not just us. It takes the entire team, the customers, the destination facilities, the railroad, everybody working together to keep this thing moving on a fluid basis, and it's very heartwarming to see it happen.

All right. Guys, thanks for the time as always. Those are my two.

Matt Troy, Susquehanna International Group.

Yes, thanks. I was wondering if you could just give an updated sense of the landscape on pending and existing EPA regulations. It certainly seems to be a problem. More localized for Appalachian production, but to the extent there might be potential risks as you see it, or identified in your network, maybe just shed some light on that. I think more importantly, are you still getting inquiry from either southeast utilities, new utilities in the east, or even increased inquiry from Asian-based coal buyers about thermal coal in the PRB, and what those opportunities might be if they picked up? Are they about the same? Are they less than they were a year ago?

Sure, Matt. Overall, the EPA, we are just all over that. We're working with the utilities, with the mines, and watching very carefully as to what might happen with the EPA reviews and those kinds of things. I don't know that we could add any particular insight at this point in time, other than we're watching carefully, doing the things that we can to support our coal customers in the coal industry, and moving forward. It's a lot of jobs for this country, it's a lot of opportunity for us and for our shareholders and we don't want to see that go astray. In terms of the contacts on export, Eric, do you want to talk about what's happening?

Yes, as I mentioned earlier, the port development projects that we referred to on the West Coast and also in Mexico, those are really being driven by the inquiries for coal for met coke for Asia, so we are still seeing a significant amount of potential demand for export coal.

Right. But if I look at the list of proposed projects -- be it the Millennium Bulk, Port of Marrow, Port of St. Helen's, Grace Harbor, Port of Coos, Pacific Terminal -- the list hasn't changed. Some of the permitting, we've gone from 200 to 400 to 500 tons -- or excuse me, 20, 40, 50 tons at some. The permitting seems to be going in the right direction. I'm just wondering has there been a cooling from the folks actually will consume the coal, not actually have to build the terminal on the other side of the Pacific or in the southeast, or is the dialog consistent -- i.e., are people looking past this year in cold, and looking at --?

We have not seen any cooling, and I would say perhaps the opposite. We've seen some real-time higher level of interest for export coal out of Mexican ports that do not seem to have the same permitting process requirements, perhaps, that we have in the Pacific Northwest ports.

Okay. I will live it at that one question. Thank you.

Thanks, Matt.

Jeff Kauffman with Sterne, Agee.

Thank you and congratulations. Just a quick couple of detailed questions. On your coal franchise, can you give me an idea what the length of haul on the utility business is this year versus last year?

Eric?

I don't think there's a substantial significant difference in length of haul this year versus last year.

Okay, how does your length of haul compare in your coal franchise out of PRB relative to the Bakkan franchise? You mentioned that that is offsetting some of the bulk business to some degree. I just want to get a sense of difference in distance?

I can probably answer that. It's in the ballpark, on average, in a normal demand scenario, coal might be marginally longer.

I would say coal is probably longer. The interchanges for us on the crude oil out of the Bakkan would be Kansas City, St. Louis, Chicago, St. Paul. Then you would add beyond that the coal. I would say the oil trains are a little shorter in terms of length of haul, maybe a hundred, couple hundred miles max.

All right. What is the domestic utility length of haul across your network right now?

We can get back with an answer on that. Historically, it's in the 900 to 1,000 miles.

I would've told you 1,000 miles would be my best guess, but we can clarify that. We can have Michelle or someone --

Okay, I'll follow-up. That's it. Thanks, guys.

David Vernon, Bernstein Research.

Within industrial products, can you talk a little bit about how the mix change within that might have affected the average revenue per car that was reported? It was a very strong number for the segment.

Okay, Eric?

Industrial products had very strong growth in terms of the drilling-related things -- as we, materials, as we mentioned -- so frac sand and steel, very strong growth. Moderate growth in some of the other base construction products like our rock business, our lumber business. We actually saw significant decline in volume, as I referred to in some of our hazardous waste business. We had a very short-haul contract that we've talked about in the past where the stimulus funding ran out, and so there was significant reduction in that business.

Okay, and then just one short follow-up. In terms of pulling forward CapEx, Rob, are we going to keep the same guidance for the full year?

We are, $3.6 billion, no change.

Great.

Tyler Brown, Raymond James.

Good morning, guys. I had just a quick question on your crude by rail franchise. Have you really seen a noticeable change in the interest for rail transportation, given kind of the seaway reversal and the potential of a WTI-Brent spread narrowing? Do you think that those rail transportation decisions really are made just given a simple lack of pipe capacity in plays such as the Bakken?

Eric?

We are still seeing a strong interest in crude by rail, and one of the things that we have seen is that we are providing a very strong value proposition, not only in terms of the value in terms of cost, but also the time. There's some assessment that suggests crude by rail is faster to market and certainly has the ability to change markets, vis a vis crude by pipeline. We do not ever foresee taking over the whole market, but we do see for a long-term play the opportunity to have markets to move crude by rail, as long as we continue our value proposition.

You think there is a pretty good longevity to this business?

That's our assessment.

Rob, I just have a quick cash-flow modeling question, but can you help us bracket the magnitude of the bonus depreciation step-down this year? Will it also step down again in 2013 if it goes to zero? Let me take the second part of that first. Yes, it would continue to step down as it goes to zero, because you've got the payback, of course, of the prior years, and of course the current year fall-off. I think the order of magnitude of the change is in $200-million range year over year.

Okay. Perfect, thanks.

Keith Schoonmaker, Morningstar.

Thanks and impressive 60% incremental margins. Noting the train length improved even with velocity and service both up, I wanted to ask, can you envision intermodal trains longer than 170 units or manifest longer than about 90 cars, can this be accomplished without compromising speed?

Yes, both can be. Again, we typically, when we respond to train size questions, we remind you that it's very specific by quarter. But there is incremental opportunity on both, and without any negative impact on service parameters.

At the present business level, can you speak broadly, and I recognize this is going to be lane by lane, but about the relationship of train starts and incremental volume -- that is, can crew starts move in line with volume additions, or will there be an opportunity to improve or maintain the current incremental margin?

Yes, we can always -- I'm going to speak to the train starts as volume increases. We always have the opportunity to leverage volume through train starts by a size and with key plan changes. Mix does have an impact, but in the global sense, as we grow we would expect we should be able to generate some productivity out of train starts.

Thank you.

You bet. Okay, thanks everyone for joining us on the call this morning. Clearly our 150th anniversary year is off to great start. We do have some challenges ahead as we manage through a soft coal environment, but our franchise diversity has given us a lot of opportunities to help us do just that. We're going to keep doing what we know how to do. We're going to stay agile in a changing environment. We're going to stay focused on providing great service for our customers, and we're going to continue to improve returns for our shareholders. We look forward to being back with you again in July at the end of another strong quarter for Union Pacific. Thanks very much.

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