Union Pacific Corporation (UNP) Q4 2011 Earnings Report, Transcript and Summary

Robert M. Knight - Chief Financial Officer, Executive Vice President of Finance, Chief Financial Officer of Pacific Railroad Company and Executive Vice President of Finance of Pacific Railroad Company Lance M. Fritz - Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company John J. Koraleski - Executive Vice President of Marketing and Sales - Union Pacific Railroad James R. Young - Chairman, Chief Executive Officer, President, Chief Operating Officer, Chairman of Union Pacific Railroad Company, Chief Executive Officer of Union Pacific Railroad Company and President of Union Pacific Railroad

Scott H. Group - Wolfe Trahan & Co. William J. Greene - Morgan Stanley, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Garrett L. Chase - Barclays Capital, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Christian Wetherbee - Citigroup Inc, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Benjamin Hartford Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Cherilyn Radbourne - TD Securities Equity Research

Greetings, and welcome to the Union Pacific Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific. Thank you, Mr. Young, you may begin.

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

Thanks, Jim, and good morning. We will start this morning with a recap of our record-setting customer satisfaction scores. For the quarter, customer satisfaction came in at 92. That equals our best ever mark set in the second quarter. And along the way, October tied our best month at 93. So in terms of how our customers view the value proposition that Union Pacific brought to them in 2011, we closed the year with a record-setting score of 92, 3 full points better than the previous record set last year at 89. And while we still have plenty of room for improvement, faced with growing volumes, the Union Pacific team delivered even while our operating team was out there battling blizzards, flooding and droughts. The advantage of a diverse franchise was again, evident in the fourth quarter as volumes grew 3% despite our declines in Ag products and Intermodal. Core pricing improved 5% with gains in all 6 of our businesses. Those price gains, higher fuel surcharge revenue, and some positive mix as our carload business grew while Intermodal is a little soft, drove average revenue per car up 13%. The growth in volume and improved revenue per car produced a 16% increase in freight revenue to $4.8 billion. So let me take you through each of our 6 groups in a little more detail. On Slide 4, you can see -- well, Slide 6. Slide 6, you can see Ag products revenue grew 2% as a 7% improvement in average revenue per car more than offset a 5% decline in carloadings. Softer volume wasn't unexpected as increased world crop production, high U.S. corn prices and plentiful crop storage reduced U.S. grain exports. Against 2010's record levels, our export grain shipments actually declined 43%. That decline was partially offset by…

Thank you, Jack. I'll start with safety. Our reportable personal injury rate was a record low in 2011. Training, process improvements and capital investments combined to reduce our environmental and behavioral risks. I'm particularly encouraged by a steep reduction in severe injuries that have the greatest human and financial impact. Regarding rail equipment incidents or derailments, our full year reportable rate increased 10%. Increases in mainline track incidents, which were driven by weather and human factor derailments, were partly offset by a decrease in yard and industry-lead derailments. In public safety, the grade crossing accident rate improved 9% versus 2010, and tied 2009's best ever performance. We closed 269 at-grade crossings on the UP system during the year, and our community and driver-focused approach to grade crossing safety continued to generate long-term improvement. While I am very pleased to report 2 of 3 safety measures at all-time record lows, our ultimate goal is to eliminate all safety incidents. Moving onto UP's network performance. Last quarter, I noted the negative impact that Midwest flooding and the Texas drought had on our operation. We forecasted a return to normal by the end of the year, which is exactly what happened. We fully recovered our service capability by using a mix of surge resources, alternative routes and aggressive maintenance work. As a result, velocity climbed to average 25.6 miles per hour in the fourth quarter, 25.9 miles per hour in December, and is well over 26.5 miles an hour so far in January. We're well positioned for growth with about 1,000 employees furloughed and around 600 locomotives in long-term storage, which includes about 250 units ready for surge utilization. The value of surge resources was demonstrated yet again in 2011, helping us maintain fluidity and service in the face of major network disruptions.…

Thanks, Lance, and good morning. We'll start by summarizing our fourth quarter results. Operating revenue grew 16% to an all-time quarterly record of $5.1 billion, driven by fuel surcharge recoveries, core pricing gains and volume growth. Operating expense totaled $3.5 billion, increasing 13% compared to 2010. Higher fuel prices drove over half of the expense increase. Operating income totaled $1.6 billion, a 23% increase and a best-ever quarterly record. Other income totaled $54 million in the quarter, up $45 million compared to 2010. Higher income from real estate sales and increased cost in 2010 due to a settlement on an environmental site, drove the year-over-year increase. Interest expense of $141 million was essentially flat versus the previous year. Income tax expense increased $566 million. Higher pretax earnings, and an unusually low income tax rate in 2010, drove the increase. Net income totaled $964 million, a quarterly best, up 24% versus 2010. Earnings per share grew 28% to an all-time record of $1.99 per share. The outstanding share balance declined 2%, reflecting our share repurchase activity. Turning to our top line. Freight revenue grew 16% to a fourth quarter record of $4.8 billion. Carloadings were up 3%. We also saw a positive mix impact driven by strong growth in higher average revenue per car moves. We achieved core pricing gains of 5%, which includes RCAF fuel escalators. And as Jack just mentioned, we've been successful with the legacy renewals, which drove a small uptick in our pricing numbers in the fourth quarter. Fuel surcharge revenue added 6% to the top line, driven by higher fuel prices in the quarter versus 2010. Slide 24 illustrates our solid pricing and productivity gains in 2011. We closed out the year on a high note, with an incremental margin of 59%, after adjusting for higher…

Thanks, Rob. And before I wrap up, I want to provide a quick update on National Labor negotiations. As many of you know, 10 of the 13 unions have ratified agreements, and 2 of the 3 remaining unions have tentative agreements out to their members for vote. The Brotherhood of Maintenance Way Employees is the only union without an agreement. The industry is making every effort to reach an agreement before the cooling-off period ends in February 8. We're making progress and are committed to getting a deal done. Now, when you think about our financial outlook for this year, our outstanding 2011 performance clearly sets the stage. The bar has been raised in terms of future expectations, and I believe our prospects have never looked better. Economic indicators generally point to slow continued growth in 2012. Excellent service though is the key to our future success, supporting our customer value proposition and helping us drive increased productivity. Our capital investment strategy will be another key part of UP's success, making investments today, building capacity for tomorrow. We believe very strongly in the opportunities to grow our financial returns in the future. So with that, let's open it up to your questions.

[Operator Instructions] Our first question is from Jason Seidl, Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: A couple of quick questions. When you break down your volume growth potential, you have solid, moderate and slow to negative, can you give us sort of a range, what you consider a moderate growth is at sort of the 2% to 3%, and solids, 3% or above?

Yes, Jason. We've -- we're obviously not giving specific numbers on those. And -- I mean if you look back in time, you can kind of get some feel for the way some of these commodities grow. And we'll -- I think you're going to continue to see in growth, kind of what we've seen this year, good, consistent growth, but on a slow basis. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Okay. And when I look at your 5% growth on the core pricing, obviously. There is some of that RCAF in there. Could you talk what it would look like x RCAF, and what was the timing like in terms of the renewals on your legacy business? Did they happen earlier in the quarter or later in the quarter or they're evenly spread out?

Jack, do you want to take that or Rob?

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

I would also say, Jason, as we go through the process of continuing to renegotiate and renew and compete for these legacy deals, that RCAF component becomes a lesser piece of the pie for us in terms of how it influences our escalations. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Okay. And the timing of the legacy?

Go ahead again, Jason. What was your question? Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: No, I'm saying that the timing of the legacy for the quarter, was it evenly spread out as you renegotiate the legacy deals in 4Q? Or was it sort of more in the beginning of the quarter?

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

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

Our next question is from the line of Tom Wadewitz of JPMorgan Chase. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: On the pricing, as a point of a lot of interest in 2012. I guess I look at -- and I think simple logic could be core price that you had in first 3 quarters of this year without much legacy with 4.5%. I think that you've commented in the past that kind of strong legacy pricing, maybe you can get 2 points a year in a relatively good year. So if I look at 2012, I think you fairly easily get to 6.5 as kind of a low end. And maybe above that in terms of the core price, I'm sure you don't want to be specific, but is that appropriate logic or am I missing something in terms of thinking about core price in 2012?

Well, Tom, we're not going to confirm your numbers. I would be a little bit careful on how high you move it up here. Remember, some of these agreements have pricing phased in over time. You get some mix effect in here, but it will be a good year for us. I mean we said we were legacy light in 2011. We have been successful, as Jack said, renegotiating about 90% of the legacy deals. So it should be a pretty good year for us this year. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. And then in terms of the follow-up. Rob, if I recall, on your fourth quarter 2010 conference call, you had -- I think it was probably 5 or 6 discrete items, training costs, state taxes, depreciation, accrue -- casualty accrual, a bunch of different things that were cost headwinds in 2011. It sounds like maybe depreciation's still at a -- growing at a fairly strong rate. But is it fair to think that your inflation is at a pretty -- a lot lower rate in your cost side in 2012? And I guess other than depreciation, are there other things to be aware of?

Yes, a couple of points I would make, Tom. Recall that labor inflation coming into the year, we said for 2011 would be -- and it was in that 4% to 5% range. We think the labor inflation will moderate below that, as I said earlier. You're right, depreciation is a bit of a headwind, as you point out. The other item I would call to your attention is other expense. And as you know, there's a lot of items in there. But one cost pressure we know we're going to face in 2012 in the other line is going to be our property taxes, which again are driven by higher earnings and volume-related costs, or some volume-related cost are in that category as well. Plus, we do face some fairly challenging comps year-over-year in our personal injury expense line. So those will be the challenges that I would point out at this point. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: But it -- but you think it's fair to say cost inflation overall is less of an issue than 2011?

Yes, that's a fair statement.

Our next question is from the line of Walter Spracklin of RBC Capital Markets.

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

Jack?

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

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

Rob?

Yes, Walter, a couple of things. One, as we've said before and as you point out, there was some timing in our -- because we're full ahead on the financing item. But we are comfortable being in that low 40s debt-to-cap ratio. So we don't have a specific set number target that I would share with you other than to say we are comfortable in that range. In terms of what we're going to do with cash, I think it's similar to what you saw us do this year. As you heard Lance talk, number one, we're increasing our capital spend, and we've increased our dividend. We want to continue to stay in that 30% payout ratio, and continue to be opportunistic with share repurchases going forward. And that's how we're approaching it.

Our next question is from the line of Justin Yagerman of Deutsche Bank.

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

Jack?

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

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

Yes. In terms of coal, Powder River Basin, in particular, kind of the way I think about it that might be helpful for you, Justin, is I take what I -- with the contracts that I lost, and I lay that against the contracts that I've gained, the new business and also some incremental international business, that's about a wash. That's about a breakeven for me. So when I look at coal business going forward, I'm looking right now at a very, very mild winter. I'm looking at stockpiles that are growing in November. The Powder River Basin stockpiles matched where they should be for normal. And since then, the winter weather has been relatively mild. So there's not much burn going on. So I see a stockpile issue burning or building for us that we need to work our way through. And then, we have a couple of customers that have told us to expect somewhat lower demand, and that was tied to some of the environmental regulations. Although now with staying of Casper, I think the jury is out as to just how much that will play. I think the bigger factor for us, hands down, is how hot is it going be this summer. So if the mild winter translates into a very, very hot summer, we should be okay. The other one is the low natural gas prices that are out there. That's not a real big impact for us right at the moment. But of course, you could always watch that and just see -- I mean if you saw -- I suppose if you saw natural gas prices go down to $2 and actually stay there, we could see some of the merchant plants lose some business to the grid. But typically, gas is not a big negative factor for us in our served territory.

Okay. And on the International Intermodal?

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

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

Not that I can say.

Justin, the real wildcard here is where do you think the consumer will come play out next year? Housing actually has, can have a pretty big impact on International Intermodal. There's some positive signs there. So we're -- it's really bet on how you think the economy consumer will play during the year.

Our next question is from the line of Ken Hoexter with Merrill Lynch.

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

I think overall, Ken, we're looking at the world demand and saying, "It's going to continue." It could be choppy. You see prices ebb and flow from time to time that might cause some. But overall, we still see world demand growing and creating a great export opportunity for us. We had 5.2 million tons, up from, I think, what did I say, 1.4 million last year. We'll do better than that, again, this year. We'll continue to see growth in that marketplace for us, and it will -- our primary focus right out of the box is for the bituminous coal out in Colorado and Utah, because that's where the world demand seems -- the higher energy coal is more in demand than the SPRB. But we're all over SPRB opportunities as well. We're scouring every port potential, every opportunity that we get, we're working with the mines. And we see that as a continuing to develop as a good opportunity for us.

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

No, I recognize that, but it's just, we've been seeing obviously some metcoal cutback announcements lately. And it's a positive sign that you're expecting that to grow into 2012.

Well, we're in different markets.

Meaning who you're serving?

Well, the metcoal, that's not a big player for us.

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

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

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

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

It won't be a negative.

Our next question is from the line of Chris Wetherbee of Citigroup.

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

Lance?

Sure. Let's start with the drivers. So recall that PTC, when it was mandated, was not an off-the-shelf technology. So what you're seeing reflected is exactly what I mentioned in my comments. And that is, as we develop both the hardware, the software and the overall systems technology, we're discovering more complexity, more interactions, and it's more costly. So the reflection of going from $1.4 billion to $2 billion is mostly about technology development and getting a more finite cost on that. So then looking forward, by the mandate, we've accelerated spending in 2012 to this anticipated $335 million. I anticipate there could be modest acceleration from that point in future years. But it'll be predicated on having developed technology to implement. So spending is going to be paced somewhat by making sure the technology's developed.

Sure. And I guess that kind of goes into the idea of ultimate timing for 2015 implementation, I mean any sense of leeway around the timing? I mean, there has to be some discussions? I'm guessing you guys are working towards the '15 goal, but how do you think about that from a realistic perspective?

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

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

At this point in time, it's harder to tell, just less than that 4% that I indicated. Yes, and that's -- if I can, just, Chris, on that, that's on inflation. The inflation rate in our labor line, I'm saying, is going to less than 4%. The headcount net-net, that will depend upon where volumes end up. And as I said, we expect volumes to be a steady slow growth. So we'd expect headcount to increase, but at a less than one-for-one rate.

Our next question is from the line of Matt Troy with Susquehanna International Group.

I just wanted to follow-up on the Casper issue. Obviously, it was stayed, but it's something that's not going away. We can all track the weather, I guess, for the next coming months and keep our fingers crossed. But I was wondering the longer-term implications of this environmental regulation, you kind of see the chessboard shaping up. Is it a net positive for UNP, or let's call it, an immediate term in the PRB coal can bridge some of the less viable Central App coal? Are you getting inquiries to that effect? Or just help me think about the impact to your franchise specifically as you sketch out the roadmap over the next 3 to 5 years of the Casper rig?

Matt, when you look at it, I do actually look at it as a potential opportunity for UP and Southern Powder River Basin coal because the coal will be more amenable to meeting those standards. I think we probably were getting some inquiries about moving coal, particularly to the east with the stay. It's probably dead right at the moment. And I think the other question in a lot of our customers' minds is just the emission credits and what value will be assessed to them by the market, and how does that play itself out. So a lot of questions that are out there, but it does present an opportunity, I think, for UP. And the other side of it is, both in terms of moving limestone and also trona, as a couple of different approaches towards reaching those requirement levels would also be a good business opportunity for us.

All right, thanks. And my second question or follow-up would be just the earlier timing of the Chinese New Year, kind of in a rough patch here, we've been destocking for several months. And now, everything shuts down for 2 weeks. You get about a 3-week lag before things can get here from Asia. So you were talking about the end of March before you could see a noticeable pick-up just from an economic perspective. Always interested in your guys' economic read. You cited some numbers, but everyone seems to be basing a lot of their hopes on just, I guess, just that hope. But are you actually hearing from customers and any pocket of the business you serve and intentions to restock? Or is it just more hope that we've bottomed and hope that things get better? Or is the rubber actually hitting the proverbial road?

Yes Matt, this is Jim. Maybe it's the new year, you always have more hope coming into it. But I'd say our perspective in meeting with customers, we're just with one of our very large customers here a couple days ago. They're a little more bullish. Now it varies by industry. The auto industry today, they're feeling much better than they were. There's still long ways from where they were in the peak, but that could be a pretty good year. You look at some of the areas where you're still significantly off from recession. Take the -- anything related to construction. In fact, I don't -- I can't remember if we said it or not. Well we had a little bit of an increase in our lumber shipments this year. Or in 2011, we're still 60% below where we were in the peak. So when you think about housing, some of the construction, it's a little more positive this year. So again though, I think it still all fits into the perspective of we will see positive growth, it will be something kind of the slow side.

Our next question is from the line of Bill Greene with Morgan Stanley.

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

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

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

I don't think -- we were still dealing with issues down south at the beginning of the quarter. You bet it was a little bit better weather wise for us, but that wasn't the difference maker. And at the end of day here, we really -- a couple of things to keep in mind. We cycled some of the cost. Remember, Rob, we're talking about training -- we got to employ productivity. We've been telling you all year that we had really kind of a one-off deal where we're building our training forces. That leveled out fourth quarter, and you had decent volume that came through. We managed our costs very well. Our pricing came in strong. You put those all those together, and boy, it can really lever that operating ratio.

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

Bill, we compete, we compete hard. And a lot of factors come into play when you look at your decision points. It can be the routes, the capability you have, the efficiency by corridor or long-term relationships you have. I don't like that word horsetrading, because it really is one we compete hard. And I'm sure the other guys would tell you the same thing that they have some internal dynamics. They look at where's the point to walk from. So again, we've had some very tough discussions with our customers in some cases. But the key for us, Jack just said, we renegotiated successfully 90% this year of those legacy deals. An absolute key is how the customer views value from its provider. And I will tell you, I've felt very good that we're in the legacy discussions -- negotiations when you also look at we have the best customer service in the history of our company.

Our next question is from the line of John Larkin of Stifel, Nicolaus. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Rob talked about the incremental margins looking very, very good in the quarter. And that sort of raised the question in my mind of how sustainable that is in terms of how much capacity you think you have on your existing manifest trains and the Intermodal trains where you can fill those trains out and really drive that strong incremental margin going forward.

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

Yes, just a comment I would make on that, John. What we've said, if that 65% to 67% target implies we've got to do about a 50% incremental margin improvement, and it will be lumpy, as Jim says. I think one point I would make is remember, our first quarter generally is our toughest, most challenged from an operating ratio standpoint. And second and third tend to be our best. So you get lumpiness within the quarter, but on an annualized basis, it's at 50% is our expectation. And that's what we have to do to hit that target. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: And then as a follow-on, we talked about earlier the notion of labor inflation may be coming in a little bit below 4. I'm guessing the overall cost inflation isn't going be too much different than that x fuel. I've heard Jim before talk about how much he challenges the managers at UP to sort of offset that inflation with productivity. Is there any kind of guidance you can give us in terms of what the objective is there? How much of that 4% plus or minus can be offset with additional productivity in technology applications?

Well, John, I believe -- we talked before. I mean, we set a goal offsetting all of inflation. Now realistically, about half of it, I think, you can sustain over time. And it's going be a function of technology, it's going to be a function of process improvement. It's going be a function of leveraging volume and operations. So I don't think that's unrealistic, at a minimum offset half of your inflation number.

Our next question is from the line of Cherilyn Radbourne of TD Securities.

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

Jack?

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

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

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

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

Let me just give you -- kind of size the numbers, and then maybe Lance can give some technicolor on some of the initiatives. Remember, coming into 2011, particularly in the back half, we said that, that was going to be unusually high. And it was unusually high as we had more people in the pipeline, if you will, in terms of training. So we had that comp. And as we came in to 2000 -- back half of 2011, we said that we thought the fourth quarter would be a catch-up, if you will. So we experienced that. So we had fewer people in the hiring and training pipeline in the fourth quarter, particularly when you look at it year-over-year. And I'd say that was really what drove the financial variance that you're pointing out. In terms of some of the great initiatives that we were doing on the ground or in operation productivity, Jack should talk about that.

Yes, let's talk about it. And it kind of gets to the earlier question about train size and other -- what we can think about going forward in terms of incremental productivity. So we did have a good quarter on train size growth. We also had a good quarter in terms of improvement in the fluidity of the network. You saw in one of my charts, I showed you improvement in cars switched per man day. That's pure productivity through our terminals. And we've got, what we call, the UP way and downtime initiatives that are using process improvement and direct involvement by the people doing the work to design the work, standardize it, take out risk and take out waste. And all of that is helping us drive, not only productivity, but safety and service at the same time. And there is plenty more of that left in the network.

Is there anyway to sort of parse out the magnitude of contribution maybe for both of those with the training the more significant of the 2. It sounds like that would carry all the way through at least to the comps where you hit 4Q next year.

I think when you look at the employee count spreads, the training piece was a pretty big number year-over-year, but they all interplay. I mean, I think one of the keys, Lance mentioned, we start to see our velocity pick up, the fluidity of the network. I think it just shows you how sensitive these networks are, the challenges you have. So you had a little bit less issues with weather. You had some of the routes, the mix comes into play. They all really contribute. And what I think you need to understand, we were saying that for 3 quarters. What you were seeing in the prior quarters was more unusual. That wasn't the norm. And when you're looking at a 9% and 10% increase in labor cost year-over-year, that isn't sustainable in a business. And this is an area where I think it's more of a sustainable level that they're seeing in the fourth quarter.

Our next question is from the line of Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So it seems like mix was a nice positive in 2011, and when we think about the initial volume outlook for this year, losing some of the legacy business, I guess muted expectations for International Intermodal and what seems like stronger carload expectations, is it fair to think about mix as being a similar positive in 2012 like it was last year?

Jack?

I think that overall, that's what I would expect. I think mix should favor us this year. Scott H. Group - Wolfe Trahan & Co.: Okay. That's helpful. And then in terms of the domestic intermodal outlook and no plans to add containers this year, how much volume growth do you think you can get without adding containers? And then I guess it sounds like the plan is to keep capacity tighter, it sounds good for pricing. How do you think about pricing in 2012 on the domestic intermodal side relative to what seemed like pretty healthy increases in 2011?

Jack?

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

But Scott, I think there are other factors, external factors. What do you think is going to happen with capacity in the truckload sector? What's our perspective here in terms of the economy? All those come into play. We've achieved pretty darn good pricing with really a relatively weak economy. All those can come into play. So I would -- when I look at 2000 -- this year, if anything, there could be potential upside if the economy comes a little bit stronger going forward.

And we're also sometimes -- Scott, it wasn't a prolonged period of time, but we were sold out on our containers even this year with a relatively weak peak. So we'll see that happen again next year, but we think that the throughput and the better service -- you're not dealing with floods and things like that hopefully. We'll get a greater turn on that equipment, and so we can handle more freight. Scott H. Group - Wolfe Trahan & Co.: That's helpful. And just last thing real quick, what's the latest thoughts on timing to finish Sunset?

Well, we've got 2/3 finished right now. We'll do another, what do you think, Lance?

5%.

About 5% this year. We're going -- it's really a function of how we're looking at volume and the economy in the next 4 or 5 years. So again, it's still years out. I'd like to accelerate it. If I accelerates, that says the economy is much stronger, and we're much more bullish on the outlook. But right now, when you look at kind of the slow growth economy, we're in pretty good shape down there and want to keep ahead of the curve. Scott H. Group - Wolfe Trahan & Co.: Are you seeing incremental benefits along the way, or is it more of a once it's done 4 years from now, it's kind of a step-function improvement in productivity?

Lance?

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

Our next question is from the line of Ben Hartford of Robert W. Baird.

Real quick, Rob, as we think about pension expense in 2012, where did the expense fall out in 2011? I think the expectation was close to $80 million, $79 million versus $51 million in '10. What was the final number for '11? And what should we be thinking about for '12 preliminarily?

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

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

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

Good. And then, I guess, Jack, just thinking about coal volumes. I know that in 2010, about 18% of your volumes were destined for Eastern U.S. customers in some form. How did that trend in 2011? And is that expected to change meaningfully in 2012?

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

Our next question is from the line of Chris Ceraso of Credit Suisse Group. Christopher J. Ceraso - Crédit Suisse AG, Research Division: A couple of items, it may be for Jim. Is there any concern, Jim, that as your returns improve and you posted a record here in the quarter that, that starts to impede or weigh on your ability to raise price with customers? Or is there a level at which your returns get so high that you have to start thinking about that?

Well, I think we're a long ways from that. Here's my point, and you know we spent a lot of time up in Washington talking to members of Congress. I spent time in front of my customers. Here's the key, we just reported the greatest financial in the history of UP in 2011. And we just came out and said, we announced the single largest capital spend in the history of our company. They are connected. And when you think about the replacement cost of assets in the railroad industry, the returns have to grow. And I will tell you if we get into a situation where somebody wants to cap us at the level we're at right now, return of capital, you will see capital shrink. The math is pretty simple. So we're making bets on capital investment today under the assumption that I can continue to grow the return on invested capital. The other thing is provide great service and value to the customer. All those things are important. And I mean I'm not going to kid you, we obviously think about it. But my board has supported me in terms of the capital we're putting in, and I think we have a good story to talk with our customers. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then to follow-up on headcount, you mentioned the high attrition rate still, but hiring to backfill that, and then keep up with growth, although not on a one-for-one. Can you give us any numbers on what the net increase in heads you expect for 2012? Is it 1%, 2%, 3%? What's the net headcount?

We came up this year up about 3%, 1,500. We finished about 45,000. Keep in mind though, you got a split -- that 1,500 increase was split about 50/50 between capital, which includes positive train control and OE. So as our cap, you got 2 things that will drive it. Volume will drive the OE number next year, offset by some productivity. It won't be 100% offset, but the capital spend including PTC should grow that. So I would tell you at the end of the year, assuming our economic outlook plays out, you're going to see more people working at railroad this time next year than we did the year earlier.

Ladies and gentlemen, we're nearing the end of our allotted time for question and answers. And we have time for one final question. That question will be coming from the line of David Vernon of Bernstein Research. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Maybe a question for Jack. On the Intermodal side, are you getting a little bit of a positive benefit from the faster growth in domestic relative to international? I guess I'm thinking that empty repositioning is a little bit less than the domestic business. And I just wanted to check and see if that was consistent with your kind of view of the business?

Yes, the domestic side, we had a great fourth quarter on the domestic business, record setting, so that was good. It reduces the repositioning. It would be nice to have the stronger international side as well, because there's some nice dovetailing that takes place, particularly, when they stuff the domestic containers on the West Coast. But overall, yes, your assumption is correct. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then maybe just a quick follow-up on weather. I think Jim, you mentioned that the weather wasn't a great impact on the record fourth quarter OR. And I guess I just wanted to kind of make sure I had heard that correctly, because I would've thought that the positive impacts on network fluidity, slow orders, all that kind of fun stuff would have actually kind of, been a benefit in the quarter.

Well, I didn't say it was a major driver. Although remember, we were still battling issues in Texas starting in the beginning of the first -- of the fourth quarter when you look at...

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

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

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

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

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