聯合太平洋集團 (UNP) 2013 Q1 法說會逐字稿

Greetings, welcome to the Union Pacific first quarter 2013 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.

Good morning everybody and welcome to Union Pacific's first quarter earnings conference call.

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

This morning we are pleased to announce that Union Pacific achieved record first quarter financial results, leveraging the strengths of our diverse franchise despite significantly weaker coal and grain markets.

Earnings of $2.03 per share increased 13% compared to 2012.

We efficiently managed our operations in the face of dynamic volume shifts across our network as evidenced by our record first quarter operating ratio and customer satisfaction results.

Putting it all together it translates into greater financial returns for our shareholders and with that I'll turn it over to Eric.

Thanks, Jack, and good morning.

Let's start off with a look at customer satisfaction, which came in at 94 for the quarter tying an all-time quarterly record.

It's up one point from the first quarter last year, setting a new first-quarter record and along the way March tied our best ever month at 95.

We appreciate customer recognition of the strength of our value proposition and continue to work to make it even stronger.

As expected, some key markets were a challenge in the first quarter and as a result overall volume was down 2%.

While chemicals, intermodal and automotive grew and industrial products was flat, it wasn't enough to offset the challenging market conditions that drove steep declines in coal and Ag products.

Softer coal demand has continued to have the largest impact on overall growth.

Setting the decline in coal loadings aside, the other five groups grew 2.5% despite the drought related shortfall in Ag.

Note that the volume comparisons were subject to last year's weak year, which included an extra day of car loadings.

Core price improved 4%, which combined with a modest benefit from positive mix and increased fuel surcharge revenue produced nearly a 6% improvement in average revenue per car.

With price driven, average revenue per car gains outpacing the volume declines, freight revenue grew to 3% to $5 billion.

Let's take a closer look at each of the six groups, starting with the two that saw declines.

Coal volumes were down 19% as high coal stockpiles created by last year's low natural gas prices continued to impact demand.

Core pricing gains and positive mix led to a 16% improvement in average revenue per car, holding the revenue declined to 6%.

High stockpiles and inventory reduction initiatives by a specific utility drove the decline in the Southern Powder River basin shipments with tonnage down 19%.

Although coal stockpiles started to decline from last year's peak, they remain above normal levels.

Also contributing to the decline was the previously mentioned loss of a lexi customer contract at the beginning of the year, which more than offset business gains.

Colorado/ Utah coal shipments also declined, soft domestic demand, mine production problems and a weak international market for Western US coal limited shipments with tonnage down 15%.

Before we move onto Ag, please note that this slide shows the easing comp we had year-over-year in the second quarter.

Ag products revenue declined 9% with volume down 9% and a 1% improvement in average revenue per car.

Last summer's drought continued to impact grain car loadings, with first quarter down 19% from last year.

Domestic feed grain shipments declined as tight US corn supplies, especially in UP served territories, led to reductions in livestock feedings and increased reliance on local feed crops.

Export feed grain shipments also declined with improved world production and lower US supplies.

Grain product shipments were down 4%, as reduced demand for gasoline has increased use of lending credits from previous years to meet the mandate, drove a 10% decline in ethanol shipments.

A reduced supply and greater emphasis on meeting local demand impacted DDG volumes, which fell 26%.

Food and refrigerated shipments also declined 3% driven by lower sugar imports from Mexico and new restrictions in Russia and China that limited imports of US meat and poultry.

Automotive volume grew 2%, which combined with an 11% increase in average revenue per car, drove a 13% increase in revenue.

The growth rate of the automotive industry continued to outpace that of the overall economy during the first quarter.

Drivers that helped the momentum in the automotive market last year continued into the first quarter, largely pent-up demand and an improving overall economy.

New fuel-efficient models equipped with more features and technology appear to be compelling consumers to replace vehicles.

In addition, a rebound in the housing and construction market have increased demand for light trucks.

While sales continue to grow, our finished vehicle shipments lag as OEMs had unscheduled downtime to deal with product refreshes and dealers sold off existing inventory to support sales.

Parts volume increased 5%, while pricing gains and the previously announced Pacer network logistics management arrangement increased average revenue per car.

Chemicals revenue increased 14% reflecting a 12% increase in volume and a 1% improvement in average revenue per car.

Crude oil volume increased 11% from the previous quarter, more than doubled when compared to the first quarter of 2012.

Growth was driven by increased shipments from Bakken, Western Oklahoma and West Texas shale plays UP served terminals primarily in St.

James, Louisiana and the Texas Gulf Coast.

Plastics volume was up 3% driven by the increased domestic demand and new business.

Growth in the export market was the primary driver of the 4% growth in soda ash.

Strong demand from eastern origins, Louisiana, as well as new business to the Gulf Coast led to growth in LP gas with shipments up 13%.

Industrial products revenue increased 6% even as volume remained flat driven by 7% improvement in average revenue per car.

Nonmetallic minerals volume was up 11% as continued growth in shale related drilling increased frac sand shipments.

Relative housing starts and residential improvements increased the demand for lumber with shipments up 18%.

Hazardous waste shipments declined 63% as custom government spending resulted in production curtailments doing the first two months of the year impacting uranium tailing shipments.

The slow start for pipeline projects, lower steel production and softer demand for export scrap was reflected in the 10% decline in steel and scrap.

Continued mine production issues continued to hamper export iron ore shipments leading to a 5% decline in metallic minerals.

Intermodal revenue grew 9% as a 4% improvement in average revenue per unit combined with the 4% increase in volumes.

Although the pace of recovery is slow, continued strengthening of the economy drove international intermodal up 8%.

While we continue to secure highway conversions with motor carrier and premium LPL customers, overall domestic intermodal shipments were flat as these gains were offset by declines in select markets.

I'll close with a look at the remainder of 2013.

Most economic projections continue to forecast slow economic growth.

Although we face continued challenges in some markets, our diverse franchise still provides opportunity to grow in others.

Despite softness in coal demand and the previously announced loss of a customer contract at the beginning of the year, we expect coal volumes in the second quarter to see slight gains against an easing comp last year.

This assumes the continuation of recent trends in natural gas prices and further coal stockpile reductions.

For the full year, we still expect coal volumes to be down slightly.

We will continue to feel the impact of the drought on last year's grain crops through the first half of this year with second-quarter Ag products volume expected to be down in the low-double digits.

Expectations for a more normal crop harvest in 2013 should provide opportunity later in the year.

First quarter auto sales were at a seasonably adjusted annual rate of $15.2 million, the highest quarterly level in five years.

This steady pace is expected to continue throughout the year, which combined with declining dealer inventories should be good news for our automotive business.

Crude oil should continue to drive chemicals growth, but the pace will ease against the ramp-up of volumes realized throughout 2012.

Most other chemical markets are expected to remain solid.

Industrial products should also continue to benefit from share related growth with increased drilling activity and a ramp-up in pipeline projects after a slow start to the year.

The housing recovery continues to gain momentum, which is expected to drive demand for lumber.

Iron ore moves are expected to decline due to softer export demand and mining production issues.

Successful conversion of highway business is expected to drive domestic intermodal growth, while modest economic growth and the strengthening housing market should keep the international intermodal ahead of last year.

For the full year, our strong value proposition and diverse franchise will again support business development opportunities across our broad portfolio of business.

Assuming the economy cooperates and we see a more normal summer weather pattern, we expect a slight volume increase combined with price gains to drive profitable revenue growth.

With that I'll turn it over to Lance.

Thank you, Eric and good morning.

Let's start with our safety results.

Our first quarter reportable personal-injury rate increased from first quarter 2012.

The reportable incident rate was abnormally high in February, but moderated substantially in March, and continues to show improvement year-over-year at the start of this quarter.

Severe injuries declined sharply in the first quarter reflecting our work to reduce the risk of critical incidents and the growth and maturation of our total safety culture.

Rail equipment incidents, or derailments, improved to an all-time quarterly record.

This improvement is largely the result of reduction in track-caused derailments, which is a direct reflection of the investments we've made to harden our infrastructure.

We also reaped the benefits from technological advancements in equipment defect detection.

Moving to public safety, our grade crossing incident rate increased about 14% from the first quarter 2012.

Our grade crossing incident exposure is increasing due to growing rail and highway traffic in the South, which has a higher grade crossing density than our overall network.

Driver behavior was a meaningful contributor with an increase in vehicles striking our trains or not properly stopping at crossings.

As I said in January, we continue to focus on identifying and improving or closing high-risk crossings and reinforcing public awareness and safe driving practices.

Now, let's take a quick look at the traffic pattern shifts we continue to experience on the network.

Volumes on the southern region of our network continue to grow.

In the South we are near all-time peak carload volume, last seen in 2006.

We are moving it more efficiently with train speed up about 14% compared to 2006.

While service was good by historical standards in the South, we experienced a modest operational challenges during the first quarter, which were reflected in our monthly velocity and terminal dwell numbers.

We responded aggressively by leveraging our fluid routes and terminals and realigning critical resources.

As a result, we completed an aggressive first quarter capital renewal program in the South and I am pleased to report fluidity has improved substantially over the last few weeks.

We are also making continued capacity investments to support volume growth across our diverse portfolio of businesses in the South.

We expect 2013 capacity spending to top 2012, which includes critical double-track additions, siding extensions and terminal capacity.

These projects along with continued process efficiencies should support further improvement in network fluidity and service performance.

The first quarter service results were solid and our network is well-positioned to handle future volume growth.

Velocity was basically flat compared to the first quarter of 2012, with the modest slippage I mentioned in the South offset by strong results in other parts of the network.

We continued to provide outstanding local service to our customers with a first-quarter best 95% industry spot and pull, which measures the on-time delivery or pulling of a car to or from a customer.

Our service delivery index, a measure of how well we are meeting overall customer commitments, declined modestly compared to the first quarter of 2012.

The decline reflects tighter service commitments to our customers, the service challenges discussed earlier, and a mix shift from coal to manifest.

Network fundamentals remain solid.

We're increasing capacity in the southern region and we have available capacity in many other parts of the network as well as roughly 450 employees furloughed and about 800 locomotives in storage.

Moving on to network productivity, slow order miles declined 25% to a best ever first-quarter level.

Our network is in excellent shape reflecting the investment in replacement capital that is hardened our infrastructure and reduced service failures.

We continue to leverage existing resources as our intermodal and manifest business volumes grow.

During the first quarter we turned a 4% growth in intermodal volume into an average train size increase of 2%.

Intermodal, manifest, coal and grain train size lengths all set new first-quarter records.

Continued deployment of DPU locomotives, our capital investment strategy and process improvements should continue to drive efficiency gains going forward.

Car utilization was 1% unfavorable versus the first quarter of 2012 due to mix.

Mix being equal, our car utilization rate would've been unchanged from last year's first quarter.

The UP Way is paying a vital role in these results.

Employee engagement is critical to the success of our operating strategy, and as the teams doing the work take ownership of improving the process and outcomes.

We remain optimistic on our full-year operating outlook for 2013 and our ability to achieve continued network improvements on various fronts.

Our first quarter results were solid and there is room for improvement.

I am encouraged by what I am seeing at the start of the second quarter.

For the full year, my expectation is that we will operate at record safety levels while improving service and bringing more productivity to the bottom line.

We are committed to operate a safer railroad for the benefit of our stakeholders, our employees, customers, the public and our shareholders.

We will remain agile, managing network resources and response to dynamic market shifts while handling growth with efficient and reliable service.

Our continuous improvement efforts, particularly the UP Way, will generate further efficiency improvements that add value for customers.

We will continue to make smart capital investments that generate attractive returns by increasing capacity in high-volume corridors while also supporting our safety, service, and productivity initiatives.

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 2012 Fact Book will be available tomorrow morning on the Union Pacific website under the Investors tab.

So with that, let's start by summarizing our first quarter results.

Operating revenue grew 3% to a first-quarter record of nearly $5.3 billion, driven mainly by solid core pricing gains.

Operating expense totaled $3.7 billion, increasing 2%.

Operating income grew 8% to $1.6 billion, also setting a best ever first-quarter mark.

Below the line, other income totaled $40 million, up $24 million compared to 2012.

A one-time land lease contract settlement added roughly $0.02 in earnings per share compared to last year, which we do not expect to repeat going forward.

For the full year, we're projecting other income to be in the $100 million to $120 million range barring any other unusual adjustments.

Interest expense of $128 million was down $7 million driven by lower average interest rate of 5.6% compared to 6.1% last year.

Income tax expense increased to $588 million, driven by higher pre-tax earnings.

Net income grew 11% versus 2012 while the outstanding share balance declined 2% as a result of our share repurchase activity.

These results combined to produce a first quarter earnings record of $2.03 per share, up 13% versus 2012.

Turning now to our top line, freight revenue grew 3% to nearly $5 billion.

Volume was down a little over two points, partially offset by more than 0.5 point of positive mix.

Fuel surcharge recovery added roughly 0.5 point in revenue compared to 2012.

We also achieved solid core pricing gains of 4%, which was a key contributor to our record first quarter financial performance.

Lower coal volumes again hindered further pricing gains.

Moving onto the expense side, slide 22 provides a summary of our compensation and benefits expense, which was about flat compared to 2012.

Lower volume costs and productivity gains mostly offset inflationary pressures of about 2.5%.

As Lance just discussed, ships and traffic mix and significant capital replacement work in the South had an impact on operations and associated costs during the quarter.

Workforce levels increased 2% in the quarter, mostly driven by a shift in traffic mix to more manifest business, which required additional resources.

Increased capital and positive train control activity also contributed to the growth.

Turning to the next slide, fuel expense totaled $900 million, decreasing $26 million versus 2012.

A 5% decline in gross ton miles drove the reduction in costs.

Although our average fuel price was flat year-over-year, our consumption rate increased 3% mainly driven by lower coal volumes.

Moving onto the other expense categories.

Purchased services and material expense increased 6% to $557 million, due to higher locomotive and freight car contract repair expenses.

In addition, under the new Pacer agreement, we are seeing higher cost in the form of logistics management fees and container costs not incurred under the previous agreement structure.

These costs hit both the purchased services and equipment rents expense lines and are recouped in our automotive freight revenue line.

Depreciation expense increased 2% to $434 million.

The impact of increased capital spending in recent years was partially offset by a new equipment rate study that we discussed with you earlier this year.

Looking at the full-year 2013, we expect depreciation expense to be up in the 2% to 3% range versus 2012.

Slide 25 summarizes the remaining two expense categories.

Equipment and other rents expense totaled $313 million, up 6% compared to 2012.

Increased container expenses and growth in automotive and intermodal shipments resulted in higher freight car rental expense.

Lower freight car and locomotive lease expense partially offset these increases.

Other expenses came in at $237 million, up $21 million versus last year.

Higher property tax expense and increased equipments and freight damage costs were the primary drivers.

Lower personal-injury expense partially offset these increases.

For the remainder of 2013, we expect the other expense line to moderate slightly, more in the neighborhood of $225 million a quarter, barring any unusual items.

Turning now to our operating ratio performance, for the first time in our history, we achieved a sub 70% first quarter operating ratio of 69.1%, improving 1.4 points compared to last year.

Our performance highlights the positive impact of solid core pricing gains and network efficiencies and is also noteworthy given the fact that we had 2% declined volume levels this quarter.

Looking ahead, we remain committed to achieving a full year, sub 65% operating ratio by 2017.

Union Pacific's record first quarter earnings drove strong cash from operations of more than $1.5 billion.

Free cash flow of $401 million reflects the 12% increase in cash dividend payments versus 2012.

Our balance sheet remains strong supporting our investment grade credit rating.

At quarter end, our adjusted debt-to-cap ratio was 40.2%, which includes our March debt issuance of $650 million.

Opportunistic share repurchases continue to play an important role in our balanced approach to cash allocations.

In the first quarter, we bought back nearly 2.9 million shares totaling $394 million.

Since 2007, we've purchased over 94 million shares at an average price of around $80 per share.

Looking ahead, we have about 12.2 million shares remaining under our current authorization, which expires March 31, 2014.

So that's a recap of our first-quarter results.

Looking at the second quarter, although our coal comparison is much easier, we will see ongoing challenges with week grain volumes.

However, assuming continued growth in the other market sectors, we would expect our second-quarter volumes to be flattish year-over-year.

Aside from volume levels, we will continue to target inflation plus pricing gains; we will also realize the benefits from continued productivity and network efficiencies.

For the full year, assuming the economy continues along its positive trend with industrial production growth of around 2%, we would expect to see volumes on the positive side of the ledger.

We are well positioned to achieve get another record financial year with best ever marks in earnings and operating ratio, driving even greater shareholder returns this year.

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

Thanks, Rob.

Well there is still much uncertainty in the year ahead, our diverse franchise does really support our continued focus on profitable growth opportunities.

We continue to pursue evolving business development prospects supported by our value proposition and the efficiencies that rail transportation provides.

We are well positioned for upside, but we are just as prepared if our environment should take a turn for the worse.

We remain committed to providing safe, efficient and reliable service for our customers to drive greater customer value and increase shareholder returns in the future.

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

(Operator Instructions)

Due to the number of analysts joining us on the call today, we will be limiting everyone to one primary question and one follow up question to accommodate as many participants as possible.

Thank you.

Tom Wadewitz, JPMorgan.

Good morning and congratulations on the strong results.

Wanted to ask you about one of the popular topics of crude by rail, here.

How would you view the potential impact of a decline in oil prices and also changes in the WTI Brent spread or if you look at other spreads that might be helpful for inland crude moves?

Is that a material source of risk in the near term to volumes?

Or are your contracts set up in a way that you have commitments and so you don't have much sensitivity to the price in the spread moves?

You know, Tom, I think certainly it depends on the order of magnitude of those moves that were to take place.

We don't see anything in the horizon at this point in time that gives us any concern.

But, Eric, why don't you expand on that?

Yes, Tom, there are a couple of factors.

We said previously crude by rail provides a great value proposition to the producers in terms of agility, in terms of being able to get to destinations that they previously couldn't get to.

All of those value factors remain.

Certainly, if the price of oil goes to levels, pick a number, the low $70s, mid $60s, that is going to impact the amount of production, which as the total production numbers come down, the total numbers that will go crude by rail will come down.

So, that clearly will have an impact if price of oil goes down.

In terms of the spreads, we are probably less concerned about the spreads narrowing.

Again, there's a value proposition we have talked several times in the past publicly with crude by rail that, again, gets you to destinations, that produces flexibility and agility.

We think that even if the spreads get to some low single-digit numbers, there's still a value proposition for crude by rail.

This biggest factor is if crude production goes down, then certainly that impacts us.

Okay and what about the structure of the contracts that you have in place into the St.

James market?

Are there some commitments that are multi year where you would have some minimum volumes into this market or is it set up in a way that if things really change that there wouldn't necessarily be volume commitments?

Yes, as we say, we don't really talk about specific customer agreements.

What I would say, that you could look at, is the fact that the destination providers and the origin producers, they are investing huge dollar amounts of capital to do crude by rail both in terms of freight cars and facilities.

So, that should be a comforting indicate in terms of their long-term commitment to crude by rail.

Ken Hoexter, Merrill Lynch.

Good morning and again congrats on some solid performance.

Rob, can you just talk about the outlook there that you just ran through.

If you look at flat carloads for second quarter, do you still see coal moderating?

Is Ag accelerating on the downside?

Maybe if you can give a little bit more insight onto some color on what is in that -- in your targets there?

Yes.

Ken, just to reiterate what both what Eric and I talked about.

Keep in mind as I think you know, the coal fall off that we saw year over year in the first quarter of being down 19%, last year you recall we sort of hit the trough on coal, so we do have a clearly an easier comp on coal as we head into the second quarter.

But as Eric mentioned, we do envision that the Ag drought will continue certainly through the second quarter and we estimate that is going to be down in the low double digits, which is a little bit worse year over year if you will compared to what we saw last year.

When you add it all up, the guidance that we are giving is, assuming all the other markets remain about constant with what we saw in the first quarter, that feels flattish to us.

But, full year, again if the economy continues to cooperate, which thus far it is, all of those things will sort of neutralize, if you will, and we'll get the back of the year.

We think at the end of the day, at the end of the year, we will have volumes that overall are on the positive side of the ledger.

Okay and then if I can do my follow-up on pricing.

Was there any -- on the coal side, were there any contract settlements within the yields?

Then, also within pricing, you mentioned the Pacer agreement a couple of times.

Can you talk about or walk through the level of increase -- I know you don't like talk about specific contracts, but maybe just magnitude of what we're looking at, or continue to go forward on that contract?

And then similarly on pricing on the domestic intermodal side, I think you mentioned it was flat can you just run through what you are seeing impact on that as well?

Ken, this is Rob.

Let me take the first point and you asked about the settlements in the coal line.

There is a little bit in there.

We are not culling out precisely what it is, but it was just a little bit of an impact on the ARC on the coal.

In terms of the other pricing discussions with don't breakout by --

We don't talk about pricing on particular arrangements/agreements.

So, Ken, I'm not sure what your question was?

I guess you mentioned that auto pricing was up significantly because of the Pacer agreement.

So, you kind of called it out on there.

Can you give us, I guess, an understanding of what auto would be like without the agreement?

I mean it was a big number terms of the 10% increase.

Is it 50% of that in terms of magnitude?

Ken, this is Rob again.

The impact on the auto's ARC of that new agreement, it is in that number.

So, it clearly inflated the ARC number, but that Pacer agreement, as I think everybody is aware has been previously announced, is really a neutralizing effect.

It's showing up both on the revenue and expense lines, but it doesn't change the full-year economics to us at the bottom line.

There is a positive impact showing up in that ARC number on the auto's line and you will see that all year.

Okay.

And then lastly just on the domestic intermodal, I think you had mentioned something on flat there, I just wanted to understand that as well?

Domestic intermodal?

Yes, we are continuing to see strength in our domestic intermodal business as I mentioned.

I think I mentioned our conversion strategy is going well.

We are continuing to price to the market and we are continuing to be pleased with the performance in that business.

The volume was flat in the first quarter, Ken, was that your question?

Oh, it was volume, okay, not price.

Yes.

Yes, volume not price.

Ken, this is Rob.

If I can just make one clarifying point on the Pacer questions you asked.

I said that the auto's ARC reflected this new agreement, but it is not reflected in our 4% core pricing number that we report.

That is not -- that doesn't factor anything related in that number.

Scott Group, Wolfe Trahan.

Just wanted to follow up on a couple of those things from the last question.

With the coal yields being so strong, if it's not legacy you are repricing, can you give us a sense of maybe what is driving that strength and if you think it's a sustainable?

And then, Rob, you mentioned that you are getting good coal yields even without the volume.

As the volume starts to come back, can the coal yields or should they get even better from what we saw in first quarter?

You know, Scott, when you look at the pricing of our coal overall there was some legacy impact from prior contracts that had been settled and there was also just the normal escalations that we have in our new contracts going forward.

There was some incremental fuel surcharge.

There was a little bit of liquidated damages, but not very much.

So, that is really it.

Scott, if I just one comment.

The ARC number that we reported in the first quarter for -- in addition to the comments that Jack just mentioned, there is a mix effect in there.

That, again, if you look at our overall pricing as an enterprise, we reported 4% price.

As I mentioned in my comments, we were hindered somewhat by the lack of volume in the coal, but if you're searching -- and of course we don't break it out by commodity group what the pricing actually was, but it is appropriate to take into consideration that the ARC number that we reported in coal did have some mix effect in it.

So, when you add up all those moving parts, though, maybe some liquidated damages that don't continue and maybe coal coming back in some parts of the network, does this double-digit run rate on ARC feel sustainable for the year?

It will depend upon the mix.

Again, what we are looking at overall in our pricing is to be inflation plus pricing overall.

That is how we approach the business overall, but when you look at any individual commodity group's ARC, you can get swings either way depending on the mix of traffic that we move that quarter.

That make sense and just last thing on the domestic intermodal, I'm a little confused that you're talking about the highway conversions going well, but domestic volumes were flat.

What is offsetting that in the quarter and just any color you can give us there would be great?

Eric?

Yes come as I mentioned, in a couple of select markets there were some competitive select markets that had some volume reductions.

Scott, let me take you back to our past comment, which is, as we take our prices up, there are some business that's going to fall away from the railroad because it doesn't meet our reinvestable standards.

We saw some of that.

So, we were taking some prices up.

We got some new business in highway conversions and we lost some business that didn't meet our reinvestability threshold.

Okay, that make sense.

Thanks a lot, guys, appreciate it.

Brandon Oglenski, Barclays.

I wanted to ask a question on the cost side.

When we look at compensation and benefits, it is actually been flat to down for the last four quarters or so.

How should we think about head counts and wage inflation and some of the offsetting efficiencies that you are getting in the network for the rest of the year?

Rob?

The way we -- the guidance that we've given on the -- let me start with headcount question first.

Overall headcount for the year we would expect to float with volume.

Again, our projection is that assuming the economy cooperates that are volume will be on the positive side of the ledger.

The way I would look at it is that we would expect volume to be up year over year, but not necessarily one for one because there is certainly is productivity savings that we will achieve throughout the year.

On the cost side, the way I think I would guide you to look at, the way I would expect cost to flow through, is we think our labor inflation is going to be around 3%.

There was some timing issues that resulted in it being flat, you are right, this quarter and previous couple of quarters.

Probably the right way to look at it is expect that that inflation on the wage lines to be around 3% going forward.

Rob, one other thing to note and we mentioned it in our commentary, headcount will also flux with CapEx and with mix shift to manifest.

Well then I take it from that guidance, Rob, then should we be looking for more normal comp and ben inflation of 3% throughout the year, depending obviously on the volume outlook then?

I think that is the right way to look at it.

Okay.

Then quickly on purchased services, you mentioned that the Pacer agreement did escalate costs there, is that the new run rate that we saw in the quarter for the rest of the year as well?

There could be lots of factors.

Obviously, volume overall will play a part in there.

That particular item, that we saw in the first quarter, will repeat throughout the year.

Okay, thank you.

Bill Greene, Morgan Stanley.

Jack or Rob, can I just ask you to comment a little bit on the return of capital approach?

When you think about the circumstances that might cause you to be a little bit more aggressive there, or maybe change the way you think about leverage, because I know you do debt to capital?

I think if you look at it on a debt-to- EBITDA basis or an interest coverage basis, UP's pretty conservatively levered.

Maybe, you can just comment a little bit on what circumstance you might be willing to be more aggressive in that regard?

Rob?

Bill, as we've said before we haven't changed our approach.

We don't look at just debt to cap, we just use that as one of the measures that we talk publicly about.

We look at all the measures.

Where it all starts is we are focused on generating the cash to begin with.

We will continue then to deploy the cash by making investment in capital projects where we are confident the return is there.

We set the 30% payout on the dividends, so we would expect that as earnings continue to grow we expect the dividend to continue to grow along with it.

Then, we will continue to be opportunistic on the share repurchase activities, that in fact we have been deploying for the last X number of years.

In terms of when you add it all up, Bill, as you have heard me say before, we are still comfortable in that 40%s, low 40%s debt-to-cap ratio.

That's not how we drive our business, but that is the resulting measure that we are still very comfortable with it.

Okay.

Rob, you also made a comment in your comments about core price.

I just want to make sure I understood it.

That is that some of the coal that is repriced didn't move.

I think if we think back to '12, that kind of caused the reported core price metric to be a little bit lower than might have otherwise been the case.

Was that a material impact this quarter?

Again, I would've thought we are starting to lap it, but maybe you can give a little clarity there?

Bill, compared to normal run rate, which is always the elusive part of that calculation, we call it about 0.5 point of price that did not materialize, had higher levels of coal volume moved onto those repriced contracts.

We reported 4% core price.

Had it been sort of normal run rates of volumes in the coal world on those repriced contracts, it would have looked more like 4.5%.

Then, one last one on nat gas, how soon is it at nat gas prices like this, when we see the customers start to react?

Is that a lag of like 6 months or 12 months?

How do we think about that?

Thanks for your time.

You know, Bill, actually overall we had seen customers start to make the shift back from natural gas to coal.

The bigger problem right at the moment is there's not much demand for electricity, or the demand for electricity is softer.

So, even though we've actually seen some customers start shifting back and taking more coal, we have not seen a substantial increase in coal shipments yet.

Yes, this is Eric.

If you look back at last year this time, coal market share of electrical generation was down in the low 30%, probably 32%, 33%, 34%.

Today it's about 40%.

Clearly, coal has regained market share at $4, $4.20 -- natural gas.

As Jack said, the demand for overall electrical generation is still down as the economy is still coming back and we are in shelf months in terms of weather patterns.

So, both of those are impacting the overall electrical demand.

Justin Yagerman, Deutsche Bank.

Good morning, guys, it is Rob on for Justin.

Eric, could you talk a little bit more with regard to your coal outlook?

This morning Peabody raised their expectation in terms of the coal burn by about 20 million on both the high and low end of the US.

What sort of growth are you expecting, in terms of consumption, across your utilities?

And would that imply upside to what is baked in your guidance currently?

I think in Rob and our comments we indicated we said flat, slightly increased on the second quarter with easier comps.

The fundamental issue really is going to come down to the overall demand and then how competitive coal will be against natural gas.

So, you need the economy to come back strong.

You need the large steel mills to start using electrical generation.

You need normal weather patterns in the summer and as all of those things happen, you will see the demand for electricity go up.

Again as I said, current coal market share has grown back to 40%.

It will never get back to the 50% that it historically was, but it's better than the low 30%s.

I haven't seen that Peabody outlook, but my guess is that they are expecting normal weather patterns and continued economic growth in the economy to drive electrical demand.

No, that is fair.

Coal is always a tough one to model looking forward.

I guess, Rob, circling back on Bill Greene's prior question, when you are seeing with call getting back to normal type earn levels, would flat year over year in Q2 imply normal coal levels and we should be thinking about a 4.5% core improvement looking forward?

It is always difficult to predict what normal is, but we are assuming, as Eric said, the positive news of coal being a greater market share.

We do have the easier comp.

If volumes materialize, we would hope to see that in our margins on that business that we have repriced.

So, I guess I would say that we are looking at things to be more normal as we look out to the balance of year.

That's helpful and I guess before I turn it over, Lance, if you could talk to the intermodal train length extension.

You saw over 2% year over year improvement on intermodal boxes.

Could you talk how that played out on both the domestic and the international train starts across your intermodal franchise?

Thanks a lot for the time.

Sure, off the top my head I do not have the detail on how that splits out between the two.

I can tell you that we do have size opportunities on both.

I would say they are probably more on the domestic side, but we've got plenty of train size opportunity on both sides.

Chris Wetherbee, Citigroup.

Maybe just a question on the coal inventories, Eric.

I know you mentioned that they were still elevated.

Could you just give us a rough sense of were they stand relative to historical norms?

Are we still pretty far away of getting back to normalized levels?

The numbers haven't come out for the latest month, but as of the numbers that came out in March, they still showed overall for the whole country 11 days above normal.

There's probably some pretty wide swings in that number between eastern utilities and western utilities.

I would expect a large number of utilities in our serving area are getting pretty close to normal.

There are probably some that are below normal, because they have taken some aggressive inventory actions.

I would expect that when you see next month's number come out you will see some pretty normal and may even perhaps below normal inventory numbers.

Okay.

And is there any reason to think the level of what should be normal changes at all going forward, just with the relationship between natural gas and where we are currently with shale activity?

Or old normal is the right way to think about it?

Yes, I don't really see a huge change for the coal-centric utilities.

They are still -- it is in their best interest to burn coal and they are in essence competing against the natural gas-centric utilities.

So, they are going to get their burn patterns up and they need a certain run rate to protect their burn patterns to protect against outages.

I don't see a significant shift in what has been historical normal inventory patterns for coal-centric utilities.

Okay, that is helpful.

I just want to come back to, and I apologize, just on them mix aspect within coal yield, I'm trying to get a handle on how to think about that.

Can you give us a little bit of color on what drives the big mix changes?

Is it just seeing more volume that had been repriced, legacy volume that has been priced moving relative to other business within the commodity group?

Or I guess we're just trying to think about how to protect this out in the next couple of quarters.

So, if there's any little bit of color around the positive mix dynamic in the first quarter would be helpful?

When we talk about mix we are talking about the mix of Southern Powder River Basin coal, Colorado/Utah coal, export coal, et cetera.

If you look at some of the places where there are volume reductions, we have had positive mix in other areas because of some of the new Southern Powder River Basin coal opportunity that we have.

Chris Ceraso, Credit Suisse.

Not to beat a dead horse, but I do have a couple of follow-ups on coal.

First of all, can you give us a ballpark, out of the let's say 19 percentage point decline that you had in coal in Q1, how much of that was associated with the lost business?

Was it 5 points out of the 19 percentage point or something in that neighborhood?

Rob?

Yes, Chris, the contract that we've spoken about previously was about 5 percentage points on the volume.

Okay.

Then if I put together all the things you have talked about so far that coal is back up to 40% of the burn, that inventories at the utilities in the west are back to normal or maybe below normal, your comps are getting easier.

If we start to see increased volumes of coal, should we expect that the pricing gets better because you will start to move some of the stuff that you did move last year where you had re-contracted at higher rates?

It is really likely dependent on which customers grow and what areas and how those play themselves out.

Again, as we've talked in the past about her pricing calculations, certain things may not come up in our pricing calculations, but they will show in improved margins as repriced business that those volumes come back.

You will see that in our margins even if you don't see it in our pricing calculations.

Okay and then just one follow-up.

The bonus depreciation, Rob, how much of a drag on cash flow do you think that might be for UP in 2013 versus 2012?

Of course, as you know, we are getting still the benefit in 2013 of 50% bonus depreciation, which was what it was last year.

So, that is not a huge driver in 2013.

Starting in 2014 we will start to feel the impact of -- assuming there is no bonus depreciation beyond '13, we will start to feel more of an impact.

There is a slight benefit this year when you add it all up.

Walter Spracklin, RBC Capital Markets.

Just wanted to follow up again on the intermodal side.

I think when we look at the highway conversion opportunity, I think largely the assumption has been that given your length of haul, you have somewhat less of an opportunity than perhaps some of your eastern peers.

Have you looked at the market for halls of above say 500 or 600 miles to address what that upside opportunity is and can you share that with this if you've had a look at that?

Yes, we have.

Eric?

Yes, Walter, I guess were not necessarily tracking why a longer length of haul should result in fewer opportunities.

We actually think the opposite, that longer lengths of haul should result in more opportunities.

The current total size of our intermodal book of business is about 3 million units a year, closely equally divided between domestic and international.

We size the domestic attainable market opportunity -- and we've talked about this in Dallas, I think last fall.

We size that as somewhere around 10 million units.

Now, not all of that will be easy to convert.

If you look at customers, there is a stratification of large, midsize, and smaller customers.

The large customers, the Walmarts and Targets of the world, they are very intermodal centric already because they see the benefits of intermodal.

They can tune their supply chains to intermodal.

You go to the midsize and smaller customers, we certainly -- that is the target rich environment and we are working aggressively to sell the value of intermodal to them.

Some of that requires them to tune their supply chains a little differently, but that is the market opportunity, the business development opportunity and frankly why we are so excited about the future potential.

And, Walter, when Eric talks about the 10 million opportunity that does not include another 2.5 million to 3 million trucks that moves back and forth between Mexico and the United States.

As you know we're building a new intermodal facility done in Santa Teresa to really target that northern Mexico, the Maquiladora's and those kinds of things, which will hopefully make a dent in that 2.5 million to 3 million unit opportunity as well.

That is great color.

Can you give us a sense of the available capacity on average of your intermodal trains?

Roughly, how much incremental volume could we see go onto your intermodal network without at fairly high incremental margin?

Sure, how about Lance?

Sure, so again that depends very much on the lanes that the opportunities show up in.

Just giving you an aggregate sense, I think we've averaged, what, 170 units a train in the first quarter.

Most of our lanes could probably handle 250 plus/minus units.

Again, very dependent on where it shows up and lanes specific.

And you are fully double-stack capable, roughly your network?

Virtually everywhere.

Cherilyn Radbourne, TD securities.

I just had a question about your Ag business.

Obviously the USDA is forecasting some pretty large crops this year.

I just wonder, as you look out over your draw territory, what is your read on soil moisture conditions and I guess the risk of continued dryness in some areas and floods in others?

Well, I would tell you right here in Nebraska after the past month or so we are about ready to stick a fork in this drought.

We've had some nice heavy rains and heavy snows and things like that.

Hopefully, that is doing its job in terms of replenishing the moisture content in grounds.

Eric, you want to put some technicolor around that?

If you look at last year, Cheryl, the USDA said last year was going to be one of the five best years in all of history and then we know what happened.

So, I take forecasts with a grain of salt at this time of year simply because so much of it is weather dependent.

As Jack said, it appears to be a great start in our growing season, nice moisture in our key breadbasket.

We are all excited about that.

We are not out of the woods yet and we do need it to continue and you not only need it certainly for the spring planting season, but you also need moisture in the critical parts of the heat of the summer.

There is a long tail left before we can feel comfortable about predictions of what will happen in the harvests at the later part of the year.

Okay, and switching gears.

Just in terms of the public crossing accidents that you are experiencing in the South, which is really a function of your growth there and the whole region's growth.

How disruptive for you from an operational standpoint are those?

And how quickly do you think you can bring that back down?

Okay.

Lance?

Sure, excellent question and just to predicate this is an extremely frustrating statistic for us.

We have been working very hard on impacting the trend for the past several years, particularly down in Texas.

The short answer on how disruptive, it varies, but generally speaking, it is a couple of hours of downtime as the accident gets investigated and cleaned up.

So, they have an impact.

It's variability.

It's not same order of magnitude typically as a derailment.

In terms of when can we start moving the needle on the number, I am telling you we're doing everything in our power right now to try to impact that number.

As we look at it in large aggregate, we are about on top of last year's statistics.

They are pretty volatile, so what you saw in the first quarter is a little degradation.

In general, absolute number, we are a bit worse, but trying to navigate on top of last year's number.

It involves a lot of things like an audit and blitz of our railroad to find where the risk is.

The risk moves and grows rapidly with development of industry around us and in engaging the local authorities to care as deeply about the issue as we do to impact driver behavior.

So there is a lot of activity going on there.

Yes, it is a very difficult issue and sometimes you just -- I was surprised actually that we don't have the power to even put a stop sign up without getting the approval of local authorities and sometimes they just say no.

So, there are some pretty significant obstacles out there towards changing driver behavior and getting everybody on the same page we are as to how important this is.

Okay, thank you.

That is my two.

Thomas Kim, Goldman Sachs.

I would like to follow-up on the comment about cross border.

Can you just remind us how much Mexico contributes to the bottom line presently?

And given the tremendous growth prospects, what do you think it might look like over the next few years?

Rob?

Yes, Tom, we don't give the bottom line but I'll give you the top line.

It represents about 10% of our business levels currently, and it's been growing nicely the last several years across the board.

Mix of the commodities, it's been growing at a pace greater than our overall volumes have been growing.

Okay and then just a more housekeeping related question.

With regard to the $40 million in other income, we estimate that -- I think you mentioned land sales contributed about $0.02 a share?

What is the remainder of the $40 million?

Rob?

It is a miscellaneous transactions.

I wouldn't call anything out in particular that is driving that.

That is a relatively normal -- the balance would represent a relatively normal run rate for us.

Jason Seidl, Dahlman Rose.

I guess my question is more longer term here.

I look at your 65% OR target by 2017 and to me it seems fairly attainable.

You just reported a first quarter that had fewer working days in it.

You had a record OR.

Coal is under pressure.

Ag is under pressure.

Talk to me about that goal that you have out there, and what some of your underlying assumptions are in terms of some of the commodity groups and also your core pricing, which also seems fairly strong ex-coal at 4.5%?

Sure, we think it's attainable too.

Rob?

Jason, you have heard me say this over the years.

It is not an endgame, it is the next target that we have put out there, not unlike what we set the original 75% target and got there as efficiently as we could and got there a little early.

We set the low 70%s, got there as efficiently as we could and got there a little early.

We hope to get to this previous sub 67% earlier.

As we mentioned last fall, and I would say the same, make the same comment about the sub 65.% We're going to get there the same way we are going to get from where we are today to the sub 65% is the same way we got from that high 80%s down to where we are today.

That is efficient, safe operations, leveraging productivity, providing great service to our customers, allows us to price it fairly.

Fuel can obviously be a whipsaw on us, depending on what fuel does in terms of the calculation on the operating ratio.

I would just to cover take comfort that we are going to -- our assumption is a normal economy.

If the economy cooperates and fuel prices are normal, if you will, and we are going to go after it as efficiently and as quickly as we can.

And in terms of the assumptions for coal and its market share versus net gas in that 65% OR?

We don't get into that level of detail other than I would say it's sort of a normal.

We certainly think that Powder River Basin coal is here to stay, perhaps at lower levels than we historically have experienced, but our assumption is that it is a normal from here on out if you will.

Okay my follow-up question, on your southern region, it seems like you had a little bit of challenges operationally and is it starting to feel better already in 2Q?

And how should we look at that throughout the year?

Sure.

Lance?

Yes, it is starting to look better.

The actions that I mentioned in my comments regarding utilizing fluid routes, terminals, making sure we adjusted our resources rapidly, that made a difference in the tail end of March.

We are looking much more favorable in the South right now in the first few weeks of this quarter.

Plus we had our maintenance programs were very heavy in the first quarter.

That was planned.

Those are now starting to be completed and some additional capacity projects coming on as we go through the year with capital.

Each one of those adds a margin of fluidity and improvement in our variability.

Okay, so all things being equal, we should start seeing that come out in your weekly performance numbers?

Yes, I expect so.

Fantastic, gentlemen, thank you for the time as always.

Keith Schoonmaker, Morningstar.

This is probably related to Jason's question there on how the improvements were accomplished in southern region fluidity.

But, related of year's $1 billion or so growth in productivity CapEx, at this point can you cite a couple of progress that are perhaps the most material likely to impact income ROIC over the rest of the year and next?

Lance?

Sure, we've got some new capacity in commercial facility spending, that will have some impact.

We have got a very large facility in Santa Teresa.

It includes an intermodal ramp that we think is going to really aid what Jack talked about in terms of cross-border truck traffic and conversion to intermodal.

Plus the fueling facility.

We've got some excellent work going on in terms of more fluid operations to our crude oil destinations.

We should see benefit to that over the years.

We've got capacity that's being spent up in the northern tier of our network, as well as in Texas, to enable incremental more fluid frac sand movement.

We've really got it spread all over the railroad, largely concentrated in Texas and Louisiana but there are keep projects all over the railroad that are unlocking critical pieces of capacity for us.

There are some things, Keith, that we have scaled back given the volumes that we're seeing and the way the economy is running, like for instance the double tracking of the sunset corridor.

We are 70% done with that and we are pacing it a little differently to watch in terms of the volume.

Long-term potential is the ability to take that from 55 trains a day to 90, which would be a huge step forward for us.

We have the Mississippi River Bridge that we are continuing to work on that is a key bottleneck that would be eliminated as we go through that project.

We have a Blair cut off that is not order of magnitude that big, but anything that would save three to four hours of transit time on the trains that go through our central corridor to Chicago eventually helps the bottom line enormously.

Great, thank you and maybe one quick shorter-term question.

Perhaps for Eric, we're seeing stronger growth in housing at last, lumber improved 18% probably as a result of that.

Could you comment on where and how material housing improvements are showing up elsewhere be it light trucks, some intermodal, et cetera?

Great question.

We are excited about the housing improvement.

Finally, housing is actually running ahead of the original global insight estimates and I think the housing, the lumber producers are pretty positive about the trends that they are seeing in the housing start numbers they are seeing.

Housing, in addition to impacting lumber, is also going to impact our intermodal business.

As you know, once homes are built, you have to furnish them and so, both on the international intermodal business and the domestic intermodal business, we think that housing will have an impact on that.

We think housing will also have an impact on ancillary business like our steel rebar business which goes into construction.

Our cement business, our cement business we think that will strengthen as housing strengthens.

All of those are things that will go as housing goes.

Eric, it sounds like you're using future tense, though.

That those are still sort of pending improvements, am I reading that correctly?

No, I have been around here long enough where I remember when housing was regularly 1.7 million, 1.8 million starts a year.

So, even though we are back up to around 970,000 of the low of below 600,000, 970,000 still feel low to me.

I'll feel like it's back regular normal when it gets above 1.3 million, 1.4 million, 1.5 million.

But if you look, Keith, like at our cement business.

I think it was up about 6% in the first quarter.

Our plastics business, which would include things like PVC pipe and those kinds of things that are using in housing construction, we are also up in the first quarter.

So, we are seeing the residual impact that goes along with the incremental lumber.

John Mims, FBR Capital Markets.

Just one quick one for me this late in the call.

Eric, I stepped away for a minute, could you repeat what you were saying about international intermodal and maybe add to any comments related to outlook for any sort of a peak season in '13?

What I was talking about international intermodal is that as housing starts increase you need to furnish the homes and so we do see a trend between international intermodal upswing as housing starts improves.

That was the connection that I was making.

Last year, what we said was that it was a muted peak season.

I think we used those words last year.

It is early in the year and at this point in the year, what happens in peak will determine on the economic conditions, consumer confidence, retail sales, all of those things will determine what happens in peak volumes.

Right now we are expecting the intermodal peak to be stronger than last year.

The order of magnitude is -- we are not sure of yet.

It really depends a lot -- bidding season is just coming in right now for a lot of those international contracts.

Between the retailers and the ocean carriers and things like that, so there's still a lot to be determined in terms of how that will play out for summer.

Right.

Okay, so as of right now though, it is still just more of a read on the macro versus you having real conversations as far as staging capacity with the liners or with major shippers?

Right.

That is right.

Ben Hartford, Robert W. Baird.

To expand on that, I guess, this 8% growth in the first quarter, I'm assuming that is not a run rate for the balance of the year and that the first quarter you did benefit to some degree from certain shippers shifting away from the East Coast to the West Coast ahead of any sort of East Coast IOA strike during the first quarter.

Is that the right?

Is that the right way to think about the volume in the first quarter?

We do not expect to see that kind of run rate for the year.

There was some nominal impact of shifts from the East Coast, but very small.

The bigger factor frankly was the timing of the Chinese New Year this year versus last year.

There was some advanced shipping because of that.

That was probably the larger impact.

Plus we did see an impact, inventories were pretty thin after the holiday season last year and you did see an impact of inventory catch up in January.

Okay good and then on the coal side, I know you ear mark the number of different various items that drove RPU above expectations to the $2,300 level.

Is this a good level to be thinking about then?

You hit on mix, legacy, fuel surcharge and some liquidated damages, as well, driving that number.

Is this $2,300 level a good level to think about for coal as it relates to RPU for the balance of the year?

Rob?

As we indicated in some previous discussions, I'd be careful using a run rate of ARC because mix can have such an impact on that, up or down.

Again, we are going to aggressively go after providing the good service and repricing where we can, but the ARC number can move on you.

Okay, good.

Thanks.

John Larkin, Stifel Nicolaus.

Maybe more of a conceptual question on the intermodal side.

UP's service levels have improved dramatically over the last 10 years or so and have generally caught up to the other big western railroad.

I guess the question is, as you see the service levels right now, where do you think you have a competitive advantage versus the competitor?

Where do you think the competitor has an advantage?

Is that how you think of marketing this service in particular power lanes, where you might have better on-time performance or better velocity?

Based on some of the investment that you're putting into the ground now, will you see that competitive positioning change at all here over the next couple of years?

Eric?

Good question, to start with, as we look at our intermodal network, we are actually proud of the fact.

We go to many more places than our competitor in the West in terms of our franchise, in terms of origin, destination points, where we have service to.

That is really the power of the diversity of our franchise.

We just get to and from many more places than the customer base.

A large portion of the customer base does see value in that.

Having said that, for the places where we do compete head to head, we assess where we are very regularly.

We are pleased that in most of the places where we compete head to head, we think our service is as good or materially better in the majority of the places where we complete head to head.

There are a couple of places where our competitor has a slight advantage and we are continuing to put initiatives and strategies in place to ensure that we have the best service in the industry.

Thank you, Eric.

And then maybe one question you don't need to answer if you don't want to, but I'll ask it anyway.

With respect to operating ratio as the key metric to focus on for the future, you have said again here today that you believe you will get to a 65% or lower for the full-year 2017.

That seems like a very achievable target, as one of the other analysts mentioned.

What happens if in 2016, Eric comes to Jack with a $400 million project that has a 68% operating ratio on it?

Does that put you in the position of perhaps saying no to that project or do you feel as though you can still accommodate that and access that incremental traffic?

Would return on invested capital be a better measure, or some other measure that takes into account the generation of free cash flow?

Just conceptual thought in terms of whether operating ratio is the correct metric.

You know, John, when we look at business opportunities at a high level and at a specific level, we are really focused on the reinvest ability of the business, our ability to provide good, efficient, safe and consistent service for that customer.

Then, we deal with it on that basis in terms of the acquisition or whether we take on the business or not.

We don't really think about it in terms of the operating ratio, but I will turn that over to Rob in terms of a broader discussion of key measures.

John, I get your point and I would say that we set operating ratio target out there just as a way of speaking in organization as setting our mind towards making financial improvement.

At the end of the day, it is focused on returns.

So, we know we've still got room to go in improving our operating ratio, which will improve our earnings, which improves our cash, which if we do all the investments correctly, improves our returns.

They all go together, but at the end of the day it's the improving our returns.

It is really a portfolio ventures.

Jeff Kauffman, Sterne, Agee.

It has been a long call and most of mine have been answered, so let me just throw a quick one out there.

I see that carloads for the crude business, if I thought about that in terms of trains per day and how to allocate those carloads, roughly how many trains a day are you doing in the crude business relative to how many trains a day for the system total?

And is it fair to assume, this would be a follow-up, that it's longer haul business and therefore a higher RPU than your average chemical RPU?

Lance?

Trains per day, we are in the five plus/minus ballpark.

Length of haul --

750 miles.

Alright and how many trains per day for the total network?

In the total network, boy, varies by day of week and moment in time, but for instance right now, we probably have 820 trains on our network.

That's per day?

Excuse me, you are asking a question that I don't think I can answer, because the question I just gave you was terminating or originating trains per day on crude and the trains per day in the network I look at as inventory.

So, I really can't answer your question the way you've asked it.

Okay fair enough thank you.

David Vernon, Bernstein Research.

Rob, there's a note in here talking about a new equipment rate study on the depreciation line.

Did that lower the rate that you guys are depreciating the equipment at on a go forward basis or could you add some color to that?

Yes, the results of the study was elongated, if you will, with depreciation on those assets.

Combine that with the fact that we are running fewer gross ton miles resulted in a lower depreciation rate than what we previously experienced.

But I think it was -- the depreciation rate was 5.6% in the last Q, do you know the number of the top of your head, or should we just wait for the Q?

In the first quarter, the depreciation rate was 3%.

3%, okay.

And the fuel surcharge revenue in the quarter?

I'm sorry?

Fuel surcharge revenue in the quarter?

About 0.5 point on the revenue line.

0.5 point on the revenue line.

Okay, thanks that's it for me.

Justin Long, Stephens.

In the quarter your volumes were down a little over 3% sequentially, but operating expenses were up nearly 4% if you look on a sequential basis.

Just on a high level, can you talk about some of the puts and takes that drove that discrepancy and would you say that's not a trend you would expect going forward?

Rob?

Mix is always a factor in that particular calculation when you look at car loadings sequentially and expense going forward.

I guess I would say that take the guidance that we've given you in terms of the components as best you can as best way of looking at it rather than trying to calculate that particular sequential relationship.

Okay, fair enough.

And then as a follow-up, could you comment briefly on CapEx and remind me where you stand from a rail car equipment perspective and any investments you might need to make their given your volume outlook for the remainder of the year?

Sure, our current CapEx is targeted at about $3.6 billion for the year which is down just a bit from last year.

It does include some equipment acquisitions that are needed for business growth and replacement of retiring assets.

If you had some specific question beyond that?

Maybe specifically on the car types that you are looking to purchase this year?

Lance?

Sure, we are picking up some auto racks.

We are picking up some food grade covered hoppers.

We're picking up a handful of other types.

Refers, refrigerated box cars and some containers.

And, John, it is less than $200 million of the $3.6 billion.

Just to size it for you.

Okay, great that is helpful.

I appreciate the time today.

Thank you.

We've come to the end of our time for the questions and answers today.

I will now turn the floor back over to Mr. Jack Koraleski for closing comments.

Well, great.

Thanks so much for joining us on the call today.

We look forward to speaking with you again in July.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.