Union Pacific Corporation (UNP) Q1 2012 Earnings Report, Transcript and Summary

John J. Koraleski - Acting Chief Executive Officer and Acting President Eric L. Butler - Executive Vice President of Marketing and Sales Lance M. Fritz - Head of Operations and Executive Vice President of Operations - Union Pacific Railroad Company Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance

Brandon R. Oglenski - Barclays Capital, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Scott H. Group - Wolfe Trahan & Co. William J. Greene - Morgan Stanley, Research Division Christian Wetherbee - Citigroup Inc, Research Division Cherilyn Radbourne - TD Securities Equity Research H. Peter Nesvold - Jefferies & Company, Inc., Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division Keith Schoonmaker - Morningstar Inc., Research Division

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

Thanks, Rob. Good morning, everybody, and welcome to Union Pacific's First Quarter Earnings Conference Call. With me in Omaha today are Rob Knight, our CFO; Lance Fritz, our Executive Vice President of Operations; and I also want to introduce Eric Butler in his new role as our Executive Vice President of Marketing and Sales. Now before we get started, I want to quickly thank all of you for the support you've expressed for Jim and his family during this time. I know Jim and the entire company greatly appreciate your thoughts and well-wishes. So turning to the quarter, you can see that Union Pacific delivered record financial results across the board this quarter, generating a first quarter earnings milestone of $1.79 per share, an increase of 39% compared to 2011. First quarter record operating revenue, operating income and operating ratio performance drove our improved bottom line results. We're clearly delivering on the benefits of our diverse franchise, even as we saw the current coal headwinds start to build in the quarter. We remain focused on delivering safe, efficient, high-quality service that creates value for our customers and increased financial returns for our shareholders. These efforts were recognized with record marks in customer satisfaction and employee safety. So let's get started this morning, and I'll turn it over to Eric Butler.

Thanks, Jack, and good morning. Let's start up with a look at customer satisfaction. For the quarter, customer satisfaction came in at 93, a new best-ever mark and up 2 points from first quarter last year. Along the way, we also set a new monthly record as well when he hit 94, both in January and March. We appreciate this continuing recognition from our customers, and our focus in the future is to continue our passion for service and strengthen our value proposition. This strong value proposition and strengthening in some markets produced volume growth of 1%, even as a weak coal market drove a large decline in Energy carloadings. If you excluded Energy, our other 5 businesses grew 5% -- grew 4% during the quarter, even with lower demand for grain exports. Note that with a Leap Day this year, buying comparisons got a boost from an extra day of loadings. Core price improved 5%, with all 6 businesses posting gains. Those price gains, combined with an increased fuel coverage and some positive mix, resulted in a 12% increase in average revenue per car. Volume growth and the improved average revenue per car combined to drive freight revenue up 14% to a first quarter record of $4.8 billion. Let's take a look at each of the groups in a little more detail and heading off with Energy. Although Energy volume declined 8%, a 14% improvement in average revenue per car produced revenue growth of 5%. We indicated, going into this year, that with a couple of contract losses, growth for the Southern Powder River Basin was expected to be slow to negative. Our expectation was that new business across our Energy portfolio would help offset those losses. While business wins and losses play a role, volume decline in our…

Thank you, Eric. Starting with safety, our reportable personal injury rate set an all-time record low in the first quarter of 2012, improving 10% from last year. Training, process improvements and capital investments combined to reduce both environmental and behavioral risks. I'm particularly encouraged by a steep reduction in severe injuries, which have the greatest human and financial impact. Moving to rail equipment incidents or derailments. Our first quarter reportable rate was a record, down 1% from 2011. An increase in derailments caused by grade-crossing accidents and weather was fully offset by a decrease in most other categories, notably those caused by track condition and human factors. In public safety, the grade-crossing accident rate was 28% higher than the first quarter of 2011 despite continued focus on community and driver behavior related to grade-crossing safety. I remain confident our activities will result in improvement in this measure as the year progresses. While I'm very pleased to report 2 of 3 safety measures at record lows, our ultimate goal is to eliminate all safety incidents. Before we move on to UP's network performance, I want to spend a moment talking about the market shifts we experienced this quarter. We continued to see a shift in traffic mix towards our manifest and premium business, up 5% and 3%, respectively, with most of the growth occurring in the southern region. Pulp volumes declined only 4% as an increase in crude oil unit trains partially offset the 8% decline in coal. We've realigned resources to accommodate these shifting traffic flows. Car routings were adjusted to leverage available capacity at terminals, and we modified train starts to maintain fluid operations and increase local service frequency. During the quarter, we also realigned our employee base and our hiring patterns and repositioned about 200 locomotives from our…

Thanks, Lance, and good morning. Before I get started, I'd like to make everyone aware that the 2011 Fact Book will be available tomorrow morning on the Union Pacific website, under the Investors tab. So with that, let's start by summarizing our first quarter results. Operating revenue grew 14% to an all-time quarterly record of $5.1 billion, driven by core pricing gains, fuel surcharge recoveries, positive mix and volume growth. Operating expense totaled $3.6 billion, increasing 7% compared to last year. Higher fuel prices contributed to over 1/3 of this increase. Operating income totaled $1.5 billion, a 33% increase and a best-ever first quarter performance. Other income totaled $16 million, up $1 million compared to 2011. Interest expense of $135 million was down 4% versus last year. Income tax expense increased to $528 million. Higher pretax earnings and a higher income tax rate in 2012 drove the 42% increase. Net income totaled $863 million, a first quarter best, up 35% versus 2011. Earnings grew 39% to a first quarter record of $1.79 per share. The outstanding share balance declined 3%, reflecting our share repurchase activity. Turning to our top line. Revenue grew 14% to a first quarter record of $4.8 billion. Carloadings drove a 1% increase. And we saw an unusually large positive mix impact, driven by stronger growth in higher average revenue per car move, such as the shale-related shipments versus Intermodal traffic. Fuel surcharge revenue added nearly 5% to our top line growth, driven by higher fuel prices and improved fuel surcharge coverage. Our focus on improving fuel recovery in recently negotiated legacy contracts generated a meaningful step up in fuel recovery, contributing over 1% in freight revenue growth and roughly $0.05 in earnings per share compared to 2011. In addition, we achieved solid core pricing gains of…

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

[Operator Instructions] Our first question is from the line of Brandon Oglenski with Barclays Capital.

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

Rob?

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

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

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

Our next question is from Tom Wadewitz with JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Wanted to ask another question on, I guess, the demand side. How much -- on the coal, how much visibility and conviction do you have in that kind of low- to mid-teens decline in second quarter? I think, through first quarter, as you talked about coal, it seemed to get worse at a couple of times when you talked about it. I think you had said down 5, down 7, and it ended up down a little bit more than that. So are you -- you feel like you have good visibility that it's not going to be down more than, say, 15%? And then I don't know if you have any thoughts on second half, how we might look at that as well?

Well, at some point in time, Tom, we're predicting the weather here. So that makes it a little bit iffy on our part. When we look at our coal situation right now, here's how we think about it: The gas capabilities in our served territory have already played their cards. So there's not really a lot more opportunity in the utility that we serve to shift anymore production to gas. So that's really running full out at this point in time. We've seen the fall off now in volumes. We think that's going to stay. And so we think that low to mid-teens is probably a fairly solid number. If you have a normal summer, by the time we get to the end of the second quarter, we should start to see our volume kind of pick up and then it will grow in the third and fourth quarter, and you'll start to see overall coal volumes come back. And in the meantime, we think we've got enough upside on our other business, like the shale plays, the Automotive business, the domestic Intermodal side, that, by the time we get to the end of the year, we should still be in positive territory for total volumes. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. Let's see. The second question, just in terms of the thinking about margins and incremental margins in second quarter. You had some coal headwind already in first quarter, and you had the 400, over 400 basis points margin improvement. I know you're saying be a little more cautious on a difficult comparison in second quarter. But given the mix of business, I would think your incrementals could still be quite strong in terms of where you're growing in the merchandise network, maybe running longer trains and getting good pricing on that shale-related business. Is that kind of a fair way to look at it to say, all right, be a little careful, but incrementals should still be pretty strong in second quarter?

Rob, you want to take that?

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

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

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

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

Okay, that makes a lot of sense. When I look at the 4-week moving average and kind of economically sensitive carloads, if I strip out Ag and coal, it feels like you've seen maybe a little bit of deceleration in growth rates here in April. And I just wanted to see how that jives with what we've seen from some of the other economic data out there. We had extremely strong West Coast port imports in March, and I was wondering if you've seen follow-through in terms of that in your network here in April. Maybe if have any color on whether or not those strong imports were some of the customers getting ahead of steamship line GRIs. I was curious to see if you had any color on what's going on, on that end of things.

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

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

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

Oh, interesting.

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

Our next question is from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: Why don't you ask on the legacy contracts first? What percent of the repricing in '12 is reflected in first quarter? I'm wondering if some of it gets layered in throughout the year or even over the next couple of years. And then can you talk about the timing? I know it's early, but talk about the timing for the contracts in '13. And does the situation in coal, in your mind, kind of limit the upside for future legacy repricings on the coal side?

Sure, Scott. Eric, you want to take a first shot? And I can help you out if you...

Yes. As has been said in the past, we expected to see a 1- to 2-point percent benefit from our legacy pricing, and that's what we're seeing this year. Certainly, the volume mix or the volume shortfall in coal and some of the volume shortfall in our International Intermodal business has had a negative impact on our legacy pricing mix. But we are seeing it still in that 1% to 2% range that we had expected. We do not have any layered pricing plans in our late -- in our legacy contracts throughout the year, but we are firmly committed and looking forward to meeting, exceeding the price expectations that we had out there. Scott H. Group - Wolfe Trahan & Co.: But it sounds like if the coal volumes come back next year, that the impact to the legacy will kind of fill a second leg to that. Is that fair?

If I can just add, this is Rob, Scott. As Eric pointed out, yes, if the coal volumes came back. Because what we experienced in the first quarter, both on coal and also on International Intermodal, is some of the repriced business didn't move. So, yes, if that volume came back, that would be a positive for us if that repriced business came back. The other thing I wanted to respond to you, Scott, was your question on the legacy in 2013. The bulk of that is front-end loaded.

So again, Scott, if you just think about it, we have one of probably the most conservative assessments of core price. Because if the car doesn't move, regardless of how high we raise the price, we don't get credit for it. And so the core price of 5% is a solid number for us. The mix did hurt us, as everybody pointed out, in terms of coal and International Intermodal, because that is where the bulk of our -- where all of our legacy renewals from last year were housed. So hopefully, we'll see those volumes improve as we get through the year and we'll start to see a greater contribution from. I think the best assessment of it though, the total impact, you just to go back to the operating ratio and see that 70.5 to 4 points of improvement. Scott H. Group - Wolfe Trahan & Co.: Sure. And just second question, it's a newer market for us, so we don't have the history. How should we think about the yields in margins in the frac and the crude oil business relative to the overall book of business?

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

Our next question is from Bill Greene of Morgan Stanley.

Jack and Rob, when we -- when you first gave your long-term guidance on OR, I guess it was in 2010, I think a lot of us on the Street sort of viewed it as being conservative. And you cautioned us at the time and said, "Listen, these are long-term numbers, and so a lot can change." And obviously, natural gas changed. So if natural gas stays at 2, and I know there's a lot of people that'll say, "Well, that isn't going to be the case," but just as an assumption, do you still feel comfortable about that long-term guidance that the coal franchise is materially smaller?

Rob?

Yes, Bill. We're staying with that 65% to 67% operating ratio target, full year operating ratio target by 2015. And you hit the nail in the head. When we gave that guidance, a lot of things have changed. But we have not changed in our conviction, in our commitment. We may get there a different way, and I think we're walking our talk in terms of making the kind of progress we did, even without the benefit of coal in the first quarter with that 4-point improvement. And as I've said all along, and I said this when we set the original 75% target, in the low 70s operating ratio target, we're going to get there as efficiently as we can, as quickly as we can. It's not an endpoint. It's just a next step along the game here. And so we're not changing our conviction. We're going to get there as soon as we can, but we still feel confident about that, even though it may come in a different way.

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

Eric?

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

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

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

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

Our next question is from Chris Wetherbee with Citigroup.

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

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

Yes. And again, just to make sure everybody's following what Chris is asking, the way we calculate price, and I would say, again, the financial organization, our conservative looks at it, it's all in yield, and we calculate it across our entire book of business. So as Jack pointed out, if something doesn't move, it doesn't get counted, obviously. And also, what doesn't get counted in our price is if there's new business that comes on board, which we've seen a lot of that. So you see that positive mix in our operating ratio, but you don't see that in the price. But specific to your question on the negative impact that we saw in the first quarter from price, I would say it was about 0.5 point. And what that is, is a result of the repriced, mostly coal and International Intermodal business that made up the bulk of that billion dollar legacy end of fourth -- or end of 2011, beginning in 2012 that we talked about. That did not move. So the volume wasn't there, we didn't get credit for it in the way we calculated the price. And that was about 0.5 point, if you will, from a core price impact.

Okay. And did the delta between that and the 3 percentage points of mix, favorable mix, is, to your point, the new business that's coming on, which is likely the crude-by-rail, frac sand, those kinds of things, which are coming in at a higher revenue per carload?

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

Okay, that's helpful. And then just a follow-up on the headcount side. Just want to get a sense roughly, assuming we hit your target for coal in the low to mid-teens for the second quarter and we see how it plays out going forward. But how do you think about kind of headcount and where your staffed? I mean, should it be basically flat from where we are as average employee per quarter going forward? Or do you think you need to do anymore furloughing or anything like that going forward?

Rob?

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

Lance, you and your team have been working at those headcount levels and kind of making adjustments as we see volume changes. Do you have anything to add do that?

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

Okay. It's fair to assume that you're going to have a slightly higher headcount per carload because of that mix shift that we're seeing into manifest?

That's fair.

Our next question is from Cherilyn Radbourne of TD Securities.

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

Eric?

Well, as you know, we have a tough comp in the first quarter, first half of this year. Intermodal volumes -- International Intermodal volumes last year were very strong, and they're off compared to last year. And then we also have a tough comp throughout the first half of the year with the contract loss that we discussed in the past. So we have those 2 factors that are putting some caution in our outlook for some early part of this year. In terms of your question about East Coast issues, there are a lot of factors that impact whether a steamship carrier decides to land on the West Coast and use a land bridge or go through the East Coast. We think that our value proposition and the strength of our franchise still allows the West Coast option land bridge to be a very strong option, and we still see a very competitive outlook in our business from that factor, vis-a-vis East Coast ports.

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

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

And Jack, you can see the constraints, if any. It's basically being paced right now by facilities.

Right.

Meaning the terminals?

Yes, meaning the terminals. There was a press release yesterday or the day before, that our partner, US Development, down at St. James, just opened up, added capacity that will allow 2 trains a day. So as we talked earlier about some of the ramp up we're seeing here, April and beyond, that's kind of a good news piece of the factor for us.

Our next question is from Peter Nesvold of Jefferies & Company. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: So earlier, you talked about how you're still committed to getting to the 65% to 67% OR, even if PRB does go into secular decline, and there other things that you can do. Are there a few things that you point to? What actions, what changes would you make to the network in order to continue to improve the OR if that business does continue to shrink from here?

Lance?

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

If I can just add to that, in addition to all the operating ships and improvements that Lance just walked through at a macro level, what will continue to also drive our operating ratio improvement are: continue to focus on adding the capacity and the changes that Lance talked about; providing great service to our customers, which enables us to continue to get price in the marketplace; continue to improve our surcharge recovery mechanisms. All of that adds up into our operating ratio target. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: But is there capital that you typically would allocate to the coal business that you might reallocate to other businesses in order to get those productivity improvements or the benefits? Because I would suspect that you would be doing these productivity benefits regardless of whether coal is growing or not growing. And so is it redeploying the resources to other parts of the business so those businesses can grow faster than what they would do in a base case scenario?

For sure, reallocation of fungible assets happens, and that will benefit, as Rob mentioned, both growth rates and service. And from the standpoint of capital, in the current outlook, there's just not a lot of capital that we've got planned for coal-specific operations. I mean, I just don't think there's a lot of adjustment there. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Okay. And then a quick follow-up. You talked about inflation moderating. If the contracts are all structured as inflation plus, does that mean that, that core pricing, at least nominally, will start to level off or maybe come down a little bit as the year progresses? Of course, maintaining a positive spread. But does the headline number start to come down a bit?

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

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

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

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

If I can just make one comment on that. Remember, and Eric showed it on his slide earlier, that there was a little bit of uniqueness in terms of the comps last year. Remember, we had the flood last year that hit in the second quarter, then we came out of that strong, and it strengthened throughout the balance of the year. So just keep in mind, as you look year-over-year, that there was that unusual activity last year. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Right. And second, you've commented on this a couple of times, about pricing in the market and staying the course. But to the extent that pricing is market-based, some of your -- or your main competitor in the West has made some public comments about trying to work with customers and lowering price. Does that not factor into your plans on pricing?

Chris, our commitment is to make every carload on this railroad re-investible over time and get to that level. And if we can't achieve those kinds, where we can re-invest in the locomotives, the track capacity and things like that, we will probably pass on the business. Christopher J. Ceraso - Crédit Suisse AG, Research Division: And just one housekeeping one. The other revenue was up pretty strongly, and you did make a comment about some liquidated damages. Is that where that would show up?

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

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

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

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

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

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

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

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

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

Amen.

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

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

Okay. Eric?

Yes, that's -- well, that's a good question. Certainly, from a Canadian standpoint, everyone's familiar with Prince Rupert. And Prince Rupert is certainly looking to position itself as an alternative port. And if you look at the U.S. West Coast ports, particularly the Port of L.A. Long Beach, that is, and we foresee for the foreseeable future, to be the predominant port for imports onto the West Coast from a value standpoint, from a cost standpoint, from a productivity standpoint, from a size standpoint. And we don't really see a lot of risk to that, the Port of L.A. Long Beach position or the other U.S. West Coast ports. Certainly, there are ports in Mexico that are also attempting to position themselves as options, but we really don't see that. In terms of the Panama Canal, lots of points of view out there. I think some of the experts would suggest that if you look at the expense of the Canal and what is already happening with the Canal fees, if you look at the fact that there are not many current U.S. East Coast ports that could handle the larger ships, and there would be an expense that would be required to do dredging and decks expansion to handle those ships, we think the Canal might have a minor impact. I think the market numbers today, roughly about 30% of the freight goes all water. That may increase a couple of percentage points as you look at the opening of the Panama Canal. But we're not expecting it to be, at this point in time, a significant impact on our going-forward strategic plans.

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

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

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

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

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

Sequentially.

Our next question is from Jason Seidl of Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: First, Jim, if you're listening, hang in there. We're all pulling for you. Back to business. I promise, no coal questions from me. I think that's been beaten to death here, and I think you guys will be probably happy with that as well. I want to actually turn back to one of your responses to a question. You mentioned that some of the potential new ports in Mexico that you might be able to win some of that business, I'm assuming you're talking about APM's expansion down there in Lázaro. Are you guys in talks with them? Is there a big opportunity to start bringing some of that business into the U.S. through your Mexican ports? And then I have a follow-on in a different segment.

Yes, I think most of those comments were referred to the ports on the west coast of Mexico. We are actually having in-depth conversations with a number of port officials and with our partner railroads in Mexico, to look at product and service offerings, both export and import and not just Intermodal, but also bulk products, export and import in a variety of ports down there. So we think there is some upside. There are some capacity things we're working through, but we believe there is an upside. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Does that bulk include coal?

Yes, that includes coal. Coal and other exports, yes. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: My last question is also going to be in response. You said there were no capacity constraints for your crude-to-rail projects, which I found interesting. Everyone I seem to talk to right now can't seem to find any tank cars, and I'm even including some of the larger shippers out there as well. Is this just because there's enough tank cars on backorder that you expect to come through for the remainder of the year? And then maybe if you could just touch on sort of hopper car demand right now and where we sit with that compared for frac sand?

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

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

If I can just add? Yes. Jason, you probably know this, but the investment in the tank car itself is not our investment. That's the investment of the producer, of course. Yes. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: So in other words, I guess, the way I should read this is there might be some maybe near-term potential constraints, but you guys are helping improve throughput, which will help run existing equipment that's out there right now. And as we move throughout the year on the crude-to-rail, the stuff that's on backlog right now that's coming in the market should help alleviate some of the constraints that are out there?

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

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

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

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

Yes. So I mentioned earlier the port development projects that we referred to in the West Coast and also in Mexico, those are really being driven by the inquiries for coal for -- [ph] coal for Asia. So we are still seeing a significant amount of potential demand for export coal.

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

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

Our next question is from the line of Jeff Kauffman, Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Just a quick -- a couple of detailed questions. On your coal franchise, can you give me an idea what the length of haul on the utility businesses is this year versus last year?

Eric?

I don't think there's a substantial significant difference in length of haul this year versus last year. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. How does your length of haul compare in your coal franchise out of PRB relative to the Bakken franchise? Because you mentioned that, that is offsetting some of the bulk business to some degree. I just want to get a sense of difference in distance.

Lance?

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

Yes. I would say coal is probably longer. We're -- the interchanges for us on the crude oil out of the Bakken would be Kansas City, St. Louis, Chicago, St. Paul. So -- and then you would add beyond that the coal. So I would say, the oil transfer, a little shorter in terms of length of haul. Maybe 100, a couple of hundred miles max. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: All right. And just what is the domestic utility length of haul across your network right now?

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

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

Our next question is from David Vernon of Bernstein Research. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Within Industrial Products, can you talk a little bit about how the mix change within that might have affected the average revenue per car that was reported? It was a very strong number for the segment.

Okay. Eric?

Yes. Industrial Products had very, very strong growth in terms of the drilling-related things as we [indiscernible] as we mentioned. So frac sand, steel. Very, very strong growth. Moderate growth in some of the other base of construction products like our rock business, our lumber business. And we actually saw a significant decline in volume, as I referred to in some of our hazardous waste business. We had a very short-haul contract that we've talked about in the past where the stimulus funding ran out, and so there was a significant reduction in that business. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then just one short follow-up. In terms of pulling forward CapEx, Rob, are you -- are we going to keep the same guidance for the full year?

We are. $3.6 billion. No change.

Our next question is from Tyler Brown of Raymond James. Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division: I had just a question on your crude-by-rail franchise. Have you guys really seen any noticeable change in the interest for rail transportation, given kind of the Seaway reversal and the potential of a WTI Brent spread narrowing? And do -- or do you think that those rail transportation decisions really are made just given a simple lack of pipe capacity in place such as the Bakken?

Eric.

We are still seeing a strong interest in crude-by-rail. And one of the things that we have seen is that we are providing a very strong value proposition, not only in terms of the value in terms of cost, but also the time. There's some assessment that suggests crude by rail is faster to market and certainly has the ability to change markets vis-a-vis crude by pipeline. We do not forever foresee taking over the haul market, but we do see, for a long-term play, the opportunity to have markets move crude by rail, as long as we continue our value proposition. Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division: So you think there is a pretty good longevity to this business?

That's our assessment. Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division: Okay. And then, Rob, I just have a quick cash flow modeling question, but can you help us bracket the magnitude of the bonus depreciation step down this year? And then would it also step down again in 2013 if it goes to 0?

Let me take the second part of that first. Yes, it would continue to step down as it goes to 0 because you got to pay back a portion of the prior years and, of course, the current year fall off. I think the order of magnitude of the change is in the couple of hundred million range year-over-year.

Our final question today is from the line of Keith Schoonmaker of Morningstar.

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

Lance?

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

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

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

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

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