Union Pacific Corporation (UNP) Q1 2013 Earnings Report, Transcript and Summary

Greetings. Welcome to the Union Pacific First Quarter 2013 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.

Good morning, everybody, and welcome to Union Pacific's First Quarter Earnings Conference Call. With me today here in Omaha are Rob Knight, our CFO; Eric Butler, Executive Vice President of Marketing and Sales; and Lance Fritz, Executive Vice President of Operations. This morning, we're pleased to announce that Union Pacific achieved record first quarter financial results, leveraging the strengths of our diverse franchise despite significantly weaker coal and grain markets. Earnings of $2.03 per share increased 13% compared to 2012. We efficiently managed our operations in the face of dynamic volume shifts across our network as evidenced by our record first quarter operating ratio and customer satisfaction results. Putting it all together, it translates into greater financial returns for our shareholders. And with that, I'll turn it over to Eric.

Thanks, Jack, and good morning. Let's start off with a look at customer satisfaction, which came in at 94 for the quarter, tying an all-time quarterly record. It is up 1 point from the first quarter last year, setting a new first quarter record, and along the way, March tied our best ever month at 95. We appreciate customer recognition of the strength of our value proposition and continue to work to make it even stronger. As expected, some key markets were a challenge in the first quarter, and as a result, overall volume was down 2%. While Chemicals, Intermodal and Automotive grew and Industrial Products was flat, it wasn't enough to offset the challenging market conditions that drove steep declines in Coal and Ag products, whilst the coal demand have continued to have the largest impact on overall growth. Setting the decline in the coal loadings aside, the other 5 groups grew 2.5% despite the drought related to shortfall in Ag. Note that the volume comparisons were subject to last year's leap year which included an extra day of carloadings. Core price improved 4%, which combined with the modest benefit from positive mix and increased fuel surcharge revenue produced nearly a 6% improvement in average revenue per car. With the price-driven average revenue per car gains outpacing the volumes decline, freight revenue grew to 3% to $5 billion. Let's take a closer look at each of these groups, starting with the 2 that saw declines. Coal volumes were down 19%, as high coal stockpiles created by last year's low natural gas prices continued to impact demand. Core pricing gains and positive mix led to a 16% improvement in average revenue per car, holding the revenue decline to 6%. High stockpiles and inventory reduction initiatives by specific utility drove the decline in the Southern Powder River Basin shipments, with tonnage down 19%. Although coal stockpiles started to decline from last year's peak, they remain above normal levels. Also contributing to the decline was a previously mentioned loss of a legacy customer contract at the beginning of the year, which more than offset business gains. Colorado/Utah coal shipments also declined, soft domestic demand, mine production problems and the weak international market for Western U.S. coal limited shipments, with tonnage down 15%. Before we move on to Ag, please note that this slide shows the ease in comp we had year-over-year in the second quarter. Ag Products revenue declined 9%, with volume down 9% and a 1% improvement in average revenue per car. Last summer's drought continued to impact grain carloadings, with first quarter down 19% from last year. Domestic feed grain shipments declined as tight U.S. corn supplies, especially in UP served territories led to reductions in livestock feedings and increased reliance on local feed crop. Export feed grain shipments also declined with improved world production and lower U.S. supplies. Grain product shipments were down 4%, as reduced demand for gasoline has increased use of lending credits from previous years to meet the mandate to over 10% decline in ethanol shipment. A reduced supply and greater emphasis on meeting local demand impacted DDG volumes, which fell 26%. Food and refrigerated shipments also declined 3%, driven by lower sugar imports from Mexico and new restrictions in Russia and China that imported limit -- that limited import of U.S. meat and poultry. Automotive volume grew 2%, which combined with an 11% increase in average revenue per car drove a 13% increase in revenue. The growth rate of the Automotive industry continued to outpace that of the overall economy during the first quarter. Drivers that helped the momentum in the Automotive market last year continued into the first quarter, largely pent-up demand and an improving overall economy. New fuel-efficient models equipped with more features and technology appeared to be compelling consumers to replace vehicles. In addition, a rebound in the housing and construction market have increased demand for light trucks. While sales continued to grow, our finished vehicles shipments lag as OEMs had unscheduled downtime to deal with product refreshes and dealers sold off existing inventories to support sales. Parts volumes increased 5%, while pricing gains and the previously announced Pacer network logistics management arrangement increased average revenue per car. Chemicals revenue increased 14%, reflecting a 12% increase in volume and a 1% improvement in average revenue per car. Crude oil volume increased 11% from the previous quarter, more than doubled when compared to the first quarter of 2012. Growth was driven by increased shipments from Bakken, Western Oklahoma and West Texas shale plays UP served terminals, primarily in St. James, Louisiana and the Texas Gulf Coast. Plastics volume was up 3%, driven by the increased domestic demand and new business. Growth in the export market was the primary driver of the 4% growth in soda ash. Strong demand from Eastern Origins, Louisiana, as well as new business at the Gulf Coast led to growth in LP Gas, with shipments up 13%. Industrial Products revenue increased 6% even as volume remains flat, driven by a 7% improvement in average revenue per car. Nonmetallic materials volume was up 11%, as continued growth in shale-related drilling increased fracs and shipments. Growth in housing starts and residential improvements increased the demand for lumber, with shipments up 18%. Hazardous waste shipments declined 63%, as costs on government spending resulted in production curtailments during the first 2 months of the year, impacting uranium tailing shipments. The slow start for pipeline projects, lower steel production and softer demand for export scrap was reflected in the 10% decline in steel and scrap. Continued mining production issues continued to hamper our expert iron ore shipments, leading to a 5% decline in metallic minerals. Intermodal revenue grew 9%, as a 4% improvement in average revenue per car -- per unit, combined with the 4% increase in volume. Although the pace of recovery is slow, continued strengthening of the economy drove International Intermodal up 8%. While we continued to secure highway conversions with multi-carrier and premium LTL customers, overall domestic Intermodal shipments were flat, as these gains were offset by declines in select markets. A closer look at the remainder of 2013. Most economic projections continued to forecast slow economic growth. Although we face continued challenges in some markets, our diverse franchise still provides opportunity to grow in others. Despite softness in coal demand and the previously announced loss of a customer contract at the beginning of the year, we expect coal volumes in the second quarter to see slight gains against an ease in comp last year. This assume the continuation of recent trends in natural gas prices and further coal stockpile reductions. For the full year, we still expect coal volumes to be down slightly. We'll continue to feel the impact of the drought on last year's grain crop through the first half of this year, with second quarter Ag product volume expected to be down in the low double digits. Expectation for a more normal crop harvest in 2013 should provide opportunity later in the year. First quarter Auto sales were at a seasonably adjusted annual rate of $15.2 million, the highest quarterly level in 5 years. The steady pace is expected to continue throughout the year, which combined with declining dealer inventories, should be good news for our Automotive business. Crude oil should continue to drive Chemicals growth, but the pace will ease against the ramp up of volumes realized throughout 2012. Most other chemical markets are expected to remain solid. Industrial Products should also continue to benefit from shale-related growth, with increased drilling activity and a ramp up in pipeline projects after a slow start to the year. The housing recovery continues to gain momentum, which is expected to drive demand for lumber. Iron ore moves are expected to decline due to softer export demand and mining production issues. Successful conversion of highway business is expected to drive Domestic Intermodal growth, while modest economic growth and the strengthening housing markets should ease International Intermodal ahead of last year. For the full year, our strong value proposition and diverse franchise will again support business development opportunities across our broad portfolio of business. Assuming the economy cooperates, we will see a more normal summer weather patterns, we expect a slight volume increase combined with price gains to drive profitable revenue growth. With that, I'll turn it over to Lance.

Thank you, Eric. And good morning. Let's start with our safety results. Our first quarter reportable personal injury rate increased from first quarter 2012. The reportable incident rate was abnormally high in February but moderated substantially in March, and continued to show improvement year-over-year at the start of this quarter. Severe injuries declined sharply in the first quarter, reflecting our work to reduce the risk of critical incidents and the growth and maturation of our Total Safety Culture. Rail equipment incidents or derailments improved to an all-time quarterly record. This improvement is largely the result of reduction in track cost derailments, which is a direct reflection of the investments we've made to harden our infrastructure. We also reaped the benefits from technological advancements and equipment defect detection. Moving to public safety. Our grade crossing incident rate increased about 14% from the first quarter 2012. Our grade crossing incident exposure is increasing due to growing rail and highway traffic in the South, which has a higher grade crossing density than our overall network. Driver behavior was a meaningful contributor, with an increase from vehicle striking our trains or not properly stopping at crossings. As I've said in January, we continued to focus on identifying and improving or closing high-risk crossings, and reinforcing public awareness and safe driving practices. Now let's take a quick look at the traffic pattern shifts we continued to experience on the network. volumes on the southern region of our network continued to grow. In the South, we are near all-time peak carload volume last seen in 2006 and we are moving it more efficiently, with train speed up about 14% compared to 2006. While service was good by historical standards in the South, we experienced modest operational challenges during the first quarter, which were reflected in our monthly velocity and terminal dwell numbers. We responded aggressively by leveraging our fluid routes and terminals and realigning critical resources. As a result, we completed an aggressive first quarter capital renewal program in the South, and I am pleased to report fluidity has improved substantially over the last few weeks. We are also making continued capacity investments to support volume growth across our diverse portfolio of businesses in the South. We expect 2013 capacity spending to top 2012, which includes critical double track additions, siding extensions and terminal capacity. These projects, along with continued process efficiencies, should support further improvement in network fluidity and service performance. The first quarter service results were solid, and our network is well-positioned to handle future volume growth. Velocity was basically flat compared to the first quarter of 2012, with the modest slippage I mentioned in the South, offset by a strong results in other parts of the network. We continued to provide outstanding local service to our customers with the first quarter best 95% industry Spot & Pull, which measures the on-time delivery of pulling of a car to or from a customer. Our Service Delivery Index, the measure of how well we are meeting overall customer commitments, declined modestly compared to the first quarter of 2012. The decline reflects tighter service commitments to our customers, with service challenges discussed earlier and the mix shift from coal to manifest. Network fundamentals remained solid. We are increasing capacity in the southern region and we have available capacity in many other parts of the network, as well as roughly 450 employees per load and about 800 locomotives in storage. Moving on to network productivity. Slow order miles declined 25% to a best-ever quarter -- first quarter level. Our network is in excellent shape, reflecting the investments in replacement capital that has hardened our infrastructure and reduced service failures. And we continued to leverage existing resources as our Intermodal and Manifest business volumes grow. During the first quarter, we turned the 4% growth in Intermodal volume into an average train size increase of 2%. Intermodal, Manifest, Coal and Grain Train Size lengths offset new first quarter records. Continued deployment of DPU locomotives, our capital investment strategy and process improvements should continue to drive efficiency gains going forward. Car utilization was 1% unfavorable versus the first quarter of 2012 due to mix. Mix being equal, our car utilization rate would have been unchanged from last year's first quarter. The UP Way is playing a vital role in these results. Employee engagement is critical to the success of our average strategy, and as the team's doing the work to take ownership of improving the process and outcomes. We remain optimistic on our full year operating outlook for 2013, and our ability to achieve continued network improvements on various fronts. Our first quarter results were solid, and there is room for improvement. I am encouraged by what I am seeing at the start of the second quarter, and for the full year, my expectation is that we will operate at record safety levels, while improving service and bringing more productivity to the bottom line. We are committed to operate a safer railroad for the benefit of all of our stakeholders, our employees, customers, the public and our shareholders. We will remain agile managing network resources in response to dynamic market shifts while handling growth with efficient and reliable service. Our continuous improvement efforts, particularly the UP Way, will generate further efficiency improvements that add value for our customers. And we will continue to make smart capital investments that generate attractive returns by increasing capacity and high-volume quarters, while also supporting our safety, service and productivity initiatives. With that, I'll turn it over to Rob.

Thanks, Lance, and good morning. Before I get started, I'd like to make everyone aware that the 2012 Fact Book will be available tomorrow morning on the Union Pacific website under the Investors tab. So with that, let's start by summarizing our first quarter results. Operating revenue grew 3% to a first quarter record of nearly $5.3 billion, driven mainly by solid core pricing gains. Operating expense totaled $3.7 billion, increasing 2%. Operating income grew 8% to $1.6 billion, also setting a best-ever first quarter mark. Below the line, other income totaled $40 million, up $24 million compared to 2012. A onetime land lease contract settlement added roughly $0.02 in earnings per share compared to last year, which we do not expect to repeat going forward. For the full year, we're projecting other income to be in the $100 million to $120 million range barring any other unusual adjustments. Interest expense of $128 million was down $7 million, driven by lower average interest rate of 5.6% compared to 6.1% last year. Income tax expense increased to $588 million, driven by higher pretax earnings. Net income grew 11% versus 2012, while the outstanding share balance declined 2% as a result of our share repurchase activity. These results combined to produce a first quarter earnings record of $2.03 per share, up 13% versus 2012. Turning now to our top line. Freight revenue grew 3% to nearly $5 billion. Volume was down a little over 2 points, partially offset by more than a 0.5 point of positive mix. Fuel surcharge recovery added roughly 0.5 point in freight revenue compared to 2012. We also achieved solid core pricing gains of 4%, which was a key contributor to our record first quarter financial performance. Lower coal volumes, again, hindered further pricing gains. Moving on to the expense side. Slide 22 provides the summary of our compensation and benefits expense, which was about flat compared to 2012. Lower volume costs and productivity gains mostly offset inflationary pressures of about 2.5%. And as Lance just discussed, shifts in traffic mix and significant capital replacement work in the South had an impact on operations and associated costs during the quarter. Workforce levels increased 2% in the quarter, mostly driven by a shift in traffic mix to more Manifest business, which require additional resources. Increased capital and Positive Train Control activity also contributed to the growth. Turning to the next slide. Fuel expense totaled $900 million, decreasing $26 million versus 2012. A 5% decline in gross ton-miles drove the reduction in costs. Although our average fuel price was flat year-over-year, our consumption rate increased 3%, mainly driven by lower coal volumes. Moving on to the other expense categories. Purchased services and materials expense increased 6% to $557 million due to higher locomotive and freight car contract repair expenses. In addition, under the new Pacer agreement, we're seeing higher costs in the form of logistics management fees and container costs not incurred under the previous agreement structure. These costs, both the purchased services and equipment rent expense line, and are recouped in our Automotive freight revenue line. Depreciation expense increased 2% to $434 million. The impact that increased capital spending in recent years was partially offset by a new equipment rate study that we discussed with you earlier this year. Looking at the full year 2013, we expect depreciation expense to be up in the 2% to 3% range versus 2012. Slide 25 summarizes the remaining 2 expense categories. Equipment and other rents expense totaled $313 million, up 6% compared to 2012. Increased container expenses and growth in Automotive and Intermodal shipments resulted in higher freight car rental expense. Lower freight car and locomotive lease expense partially offset these increases. Other expenses came in at $237 million, up $21 million versus last year. Higher property tax expense and increased equipment and freight damage costs were the primary drivers. Lower personal injury expense partially offset these increases. For the remainder of 2013, we expect the other expense line to moderate slightly, more in the neighborhood of $225 million a quarter barring any unusual items. Turning now to our operating ratio performance. For the first time in our history, we achieved sub70 first quarter operating ratio of 69.1%, improving 1.4 points compared to last year. Our performance highlights the positive impact of solid core pricing gains and network efficiency, and is also noteworthy given the fact that we had 2% decline in volume levels this quarter. Looking ahead, we remain committed to achieving a full year sub-65 operating ratio by 2017. Union Pacific's record first quarter earnings drove strong cash from operations of more than $1.5 billion. Free cash flow of $401 million reflects the 12% increase in cash dividend payments versus 2012. Our balance sheet remains strong supporting our investment-grade credit rating. At quarter end, our adjusted debt-to-cap ratio was 40.2%, which includes our March debt issuance of $650 million. Opportunistic share repurchases continued to play an import rant role in our balanced approach to cash allocations. In the first quarter, we bought back nearly 2.9 million shares, totaling $394 million. Since 2007, we purchased over 94 million shares at an average price of around $80 per share. Looking ahead, we have about 12.2 million shares remaining under our current authorization, which expires March 31, 2014. So that's a recap of our first quarter results. Looking at the second quarter. Although our full comparison is much easier, we'll see ongoing challenges with weak grain volumes. However, assuming continued growth in the other market sectors, we would expect our second quarter volumes to be flattish year-over-year. Aside from volume levels, we'll continue to target inflation-plus pricing gains. We'll also realize the benefits from continued productivity and network efficiency. For the full year, assuming the economy continues along its positive trend with industrial production growth of around 2%, we would expect to see volumes on the positive side of the ledger. We're well-positioned to achieve yet another record financial year, with best ever marks in earnings and operating ratio, driving even greater shareholder returns this year. So with that, I'll turn it back to Jack.

Thanks, Rob. While there is still much uncertainty in the year ahead our diverse franchise does really support our continued focus on profitable growth opportunities. We continued to pursue evolving business development prospects supported by our value proposition and the efficiencies that rail transportation provides. We're also well positioned for upside, but we are just as prepared if our environment should take a turn for the worse. We remain committed to providing safe, efficient, reliable service for our customers to drive greater customer value, and increase shareholder returns in the future. So with that, let's open it up for your questions.

[Operator Instructions] Our first question is from the line of Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you about one of the popular topics, the crude-by-rail here. How would you view the potential impact of a decline in oil prices and also changes in the WTI brand spread? Or if you look at other spreads that might be helpful for inland crude moves, is that a material source of risk in the near term to volumes? Or are your contracts set up in a way that you have commitments, and so you don't have much sensitivity to the price and the spread moves?

Tom, I think certainly, it depends on the order of magnitude of the moves that were to take place. We don't see anything in the horizon at this point in time that gives us any concern. But Eric, why don't you explain on those?

Tom, there are couple of factors. We've said previously, crude-by-rail provides a great value proposition to the producers in terms of agility, in terms of being able to get to destinations that they previously couldn't get to. So all of that -- those value factors remain. Certainly, if the price of oil goes to levels, pick a number, below 70s, mid-60s, that's going to impact the amount of production, which, as the total production numbers come down, the total numbers that will go crude-by-rail will come down. So that clearly will have an impact if price of oil goes down. In terms of the spreads, we're probably less concerned about the spreads narrowing. Again, as the value proposition we've talked several times in the past publicly with crude-by-rail that, again, gets you to destinations, allows -- the producers flexibility and agility. So we think that even if the spreads get to some narrow -- some low single-digit numbers, there are still a value proposition for crude by rail. The biggest factor is if crude production goes down, then certainly, that impacts us. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. And what about the structure of the contracts that you have in place into the St. James market? Are there some commitments that are multi-year where you would have some minimum volumes into those markets? Or is it set up in a way that, if things really changed, that there would necessarily be volume commitments?

Yes. We said, we don't really talk about specific customer agreements. What I would say that you can look at is the fact that the destination providers and the origin producers, they're investing huge dollar amounts of capital to do crude-by-rail, both in terms of freight cars and facilities. So that should be a comforting indicator in terms of their long-term commitment to crude-by-rail.

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

Rob, can you just talk about the outlook there that you just ran through? If you look at truck carloads for the second quarter, do you still see coal moderating? Is Ag accelerating on the downside? Maybe if you can give a little bit more insight onto some color on what's in that in your targets there.

Yes. Ken, just kind of reiterate what both Eric and I talked about. Keep in mind, as I think you know, the coal falloff that we saw year-over-year in the first quarter being down 19%. Last year, you recall, we sort of hit the trough on coal, so we do have clearly an easier comp on coal as we head into the second quarter. But as Eric mentioned, we do envision that the Ag drought will continue certainly through the second quarter, and we estimate that's going to be down in the, call it, low double digits, which is a little bit worse year-over-year, if you will, compared to what we saw last year. So when you add it all up, the guidance that we're giving is -- assuming all the other markets remain about constant with what we saw in the first quarter, that feels flattish to us. But full year, again, if the economy continues to cooperate, which thus far it is, all of those things will sort of neutralize, if you will, when we get to back half of the year. We think at the end of the day, at the end of the year, we'll have volumes that, overall, on a positive side of the ledger.

Okay. And If I can do my follow-up on pricing. Was there any -- on the coal side, were there any contract settlements within that -- within the yields? And then also within pricing, you mentioned the Pacer agreement a couple of times. Can you kind of talk about or walk through the level of increase? I know you don't like talking about specific contracts, but maybe just magnitude of what we're looking at or continued to go forward on that contract? And then similarly on pricing on Domestic Intermodal side, I think you mentioned it was flat. Can you just kind of run through what you're seeing impact on those -- on that as well?

Ken, this is Rob. Let me take the first point, and you asked about the settlements in the Coal line. There's a little bit in there. We're not calling out precisely what it is. But it's a little bit of an impact on the ARC and the coal. And in terms of the other pricing discussions, we don't break out by -- we don't talk about pricing on particular arrangements or agreements. So Ken, I'm not sure what your question was.

I guess you mentioned that the Auto pricing was up significantly because of the Pacer agreement, so you kind of called it out on there. I mean, can you give us, I guess, an understanding of what Auto would be like without the agreement? I mean, it was a big number in terms of the 10% increase. Is it half of that in terms of magnitude?

Ken, this is Rob again. I mean, the impact on the Autos ARC of that new agreement, it's a 50-50 [ph] in that number. So clearly, it's deflated [ph], if you will, the ARC number. But that pacer agreement, as I think, everybody is aware, as previously announced, is really kind of a neutralizing effect. I mean, it's showing up both on the revenue and expense line, but it doesn't change the full year economics to us, the bottom line. But there is a positive impact that's showing up in that ARC number on the Autos line. And you will see that, full year.

Okay. And then lastly, just on the Domestic Intermodal, as you had mentioned, something on [ph] flat there. I just wanted to understand that as well.

Domestic Intermodal.

Yes. We are continuing to see strength in our Domestic Intermodal business at the minute [ph]. I think I mentioned our conversion strategy is going well. We're continuing to price with the market, and we're continuing to be pleased with the performance in that business.

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

Oh, it's volume, okay. It's not price, yes.

It's volume, not price.

Ken, this is Rob. If I can just make one clarifying point on the Pacer questions you asked. I said that the Autos ARC reflected that this new agreement, but it's not reflected in our 4% core pricing number that we report. That's not -- that doesn't factor anything related in that number.

Our next question comes from the line of Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So I just wanted to follow-up on a couple of those things from the last question. With the coal yields being so strong, if it's not legacy repricing, can you give us a sense of maybe what's driving that strength and if you think it's sustainable? And then, Rob, you mentioned that you're getting good coal yields even without the volume. As the volume starts to come back, can the coal yields -- or should they get even better from what we found in the first quarter?

Scott, when you look at the pricing of our coal overall, there was some legacy impact from prior contracts that have been settled, and there was also -- that's the normal escalations that we have in our new contracts going forward. There were some incremental fuel surcharge. There was a little bit of liquidated damages, but not very much. So that's really it.

Scott, if I can just make one comment. The ARC number that we reported in the first quarter for -- in addition to the comments that Jack just mentioned, there is the mix effect in there. So that -- again, if you look at our overall pricing as an enterprise, we report a 4% price. And as I mentioned in my comments, it's hindered somewhat by the lack of volume in coal. But if you're searching [indiscernible], we don't break it out by commodities what the pricing actually was. But it is appropriate to take into consideration that the ARC number we reported in coal did have some mixed effect in it. Scott H. Group - Wolfe Trahan & Co.: So when you add up all those kind of moving parts of maybe some liquidated damages that don't continue, and maybe coal coming back in some parts of the network, is this kind of double-digit run rate on ARC still sustainable for the year?

It will depend upon the mix. Again, what we're looking at overall in our pricing is to be inflation plus kind of pricing overall, and that's how we approach the business overall. But when you look any individual commodity groups ARC, you can get swings either way depending on the mix of traffic that we move that quarter. Scott H. Group - Wolfe Trahan & Co.: That makes sense. And just last thing on the Domestic Intermodal. I'm a little confused if you're talking about the highway conversions going well, but domestic volumes were flat. What's offsetting that in the quarter? And just any color you can give us there would be great.

Eric?

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

Hey, Scott, let me take you back to our past comments, which is, as we take our prices up, there are some business is that's going to fall away from the railroad because it doesn't meet our reinvestable standards. And so we saw some of that. So we were taking some prices up, we've got some new business in highway conversions and we lost some business that needed our reinvestability threshold.

Our next question is from the line of Brandon Oglenski with Barclays.

I wanted to ask a question on the cost side. When we look at compensation and benefits, it's actually been flat to down for the last 4 quarters or so. How should we think about headcounts and wage inflation, and some of the offsetting efficiencies that you're getting in the network for the rest of the year?

Rob?

The way we -- the guidance that we've given on the head -- let's me start with the headcount question first. Overall headcount for the year, we would expect to float with volume. So again, our projection is that, assuming the economy cooperates, that our volume will be on the positive side of ledger. So the way I would look at it is that we expect volume to be up year-over-year, but not necessarily 1:1 because there is certainly productivity savings we will achieve throughout the year. On the cost side, the way I think I would guide you to look at, the way I would expect cost to flow through is we think our labor inflation is going to be around 3%. There were some timing issues that resulted in it being flat, you're right, this quarter end, a previous couple of quarters. But probably the right way to look at it is expect that, that inflation on the wage lines would be around 3% going forward.

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

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

I think that's the right way to look at it.

Okay. And then quickly on purchase services. You mentioned that the Pacer agreement did escalate costs there. Is that the new run rate that we saw in the quarter for the rest of the year as well?

There could be lots of factors. Obviously, volume overall will play a part in there. But that particular item that we saw in the first quarter will repeat throughout the year.

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

Jack or Rob, can I just ask you to comment a little bit on the return of capital approach? When you think about sort of the circumstances that might cause you to be a little bit more aggressive there or maybe change the way you think about leverage, because I know you do debt-to-capital. But I think if you look at it on a debt-to-EBITDA basis or in interest coverage basis, you've been pretty conservatively levered. So maybe you can just comment a little bit on what's circumstance you might be willing to be more aggressive in that regard?

Rob?

Yes. Bill, I mean, as we've said before, we haven't changed our approach. We don't look at just debt-to-cap because we use that as one of the measures that we talk publicly about. We look at all the measures. But where it all starts is we're focus on generating the cash, to begin with. We'll continue then to deploy the cash by making investments in capital projects where we're confident the returns there. We expect [ph] the 30% payout on the dividends, so we would expect that as earnings continue to grow, we expect the dividends to continue to grow along with it. And then we will continue to be opportunistic on the share repurchase activities that, in fact, we've been deploying for the last X number of years. So in terms of when you add it all up, Bill, as you've heard me say before, we are still comfortable in that 40s -- low 40s debt-to-cap ratio. That's not how we drive our business, but that's the kind of resulting measure that we are still very comfortable with it.

Okay. Rob, you also made a comment in your comments about core price, and I just want to make sure I understood it, and that is that some of the coal that's repriced didn't move, and I think, if we think back to '12, that kind of caused the reported core price metric to be a little bit lower in light of otherwise been the case. Was that a material impact this quarter again? I would have thought we're certain to lap it, but maybe you can just give a little clarity there.

Yes, Bill, compared to sort of normal run rates, which is always the elusive part of that calculation, we call it about 0.5 point of price that did not materialize, had the higher levels of coal volume moved under those repriced contracts. So we reported 4% core price had it been sort of normal run rates of volumes in the coal world on those repriced contracts, it would've looked more like 4.5.

All right. And then one last one just on nat gas, how soon is it at nat gas prices like this when we see the customers start to react? Is that a lag of like 6 months or 12 months? How do we think about that?

Bill, actually, overall, we have seen customers start to make the shift back from natural gas to coal. The bigger problem right at the moment is there's not much demand for electricity or the demand for electricity is softer. So even though we've actually seen some customers start shifting back and taking more coal, we have not seen a substantial increase in coal shipments yet.

If -- this is Eric. If you look back at last year this time, coal market share of electrical generation was down in the low 30% -- it's probably 32%, 33%, 34%. Today, it's about 40%. So clearly coal has regained market share at 4, 4.20 natural gas. As Jack said, the demand for overall electrical generation is still down as the economy is still coming back. And we're in shelf months in terms of weather patterns. So both of those are impacting the overall electrical demand.

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

It's Rob on for Justin. Eric, could you talk a little bit more with regard to your coal outlook? This morning, Peabody raised their expectation in terms of the coal burn by about $20 million on both the high and low end for the U.S. What sort of growth are you guys expecting in terms of consumption across your utilities, and would that imply upside to what's baked into your guidance currently?

I think -- and, Rob, in our comments, we kind of indicated -- we said flat to slightly increase from the second quarter with the easier comps. The fundamental issue really is going to come down to the overall demand, and then how competitive coal will be against the natural gas. So you need the economy to come back strong. You need the large steel mills to start using electrical generation. You need normal weather patterns in the summer. And as all of those things happen, you'll see the demand for electricity go up. And again, as I said, current natural -- current coal market share has grown back to 40%. It will never get back to the 50%, that it historically was, but it's better than the low-30s. So I haven't seen that Peabody outlook. But my guess is that they're expecting normal weather patterns and continued economic growth in the economy to drive electrical demand.

No, that's fair. Coal's always a tough one to model. Looking forward, I guess, Rob, circling back on Bill Greene's prior question. When you're saying with coal getting back to kind of normal type burn levels, would flat year-over-year in Q2 imply normal coal levels and we should be thinking about kind of a 4.5% core improvement looking forward?

It's always difficult to predict what normal is. But we are assuming, as Eric said, the positive news of coal being a greater market share. We do have the easier comp. And if volumes materialize, we would hope to see that in our margins on that business that we've repriced. So I guess I would say that we are looking at things to be more normal as we look out for the balance of the year.

That's helpful. And I guess before I turn it over, Lance, if you could talk to the Intermodal train length extension, you saw over kind of 2% year-over-year improvement on Intermodal boxes. Could you talk how that played out on both the domestic and the international train starts across your Intermodal franchise?

Sure. Off the top of my head, I do not have the detail on how that splits out between the 2. I can tell you that we do have sized opportunities on both. I would say they're probably more on the domestic side. But we've got plenty of train size opportunity both sides.

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

Maybe just a question on the coal inventories. Eric, I know you mentioned that they're still elevated, could you just give us a rough sense of kind of where they stand relative to historical norms? I mean, are we still pretty far away from getting back to normalized levels?

Yes. So the numbers haven't come out for the latest month. But as of the numbers that came out in March, they still showed overall for the whole country, 11 days above normal. There's probably some pretty wide swings in that number between Eastern utilities and Western utilities. I would expect a large number of the utilities in our serving area are putting -- getting pretty close to normal. There are probably some that are below normal because they've taken some aggressive inventory actions. So I would expect that we can see next month as the number come out, you'll see some pretty normal and may even perhaps below normal inventory numbers.

Okay. And is there any reason to think that the level of what should be normal changes at all going forward just with the relationship between natural gas and kind of where we are currently with the shale activity, or kind of old normal is the right way to think about it?

Yes. I don't really see a huge change for the coal-centric utilities. They're still -- it's in their best interest to burn coal, and they're in essence competing against the natural gas-centric utilities. And so they're going to get their burn patterns up and they need a certain run rate to protect their burn pattern, to protect against outages. So I don't see a significant shift in what has been historical normal inventory patterns for coal-centric utilities.

Okay, that's helpful. And I just want to come back to, and I apologize, just on the mix aspect within coal yields. I'm trying to get kind of a handle on how to think about that. Can you give us a little bit of color of what kind of drives the big mix changes? It's just seeing more volume that had been repriced, legacy volume that have been repriced moving relative to other business within the commodity group, or I guess we're just trying to think about how to project this out in the next couple of quarters. So if there's any little bit of color around the positive mix dynamic in the first quarter would be helpful.

Yes. So when we talk about mix, we're talking about the mix of Southern Powder River Basin coal, Colorado/Utah coal, export coal, et cetera. And so if you look at some of the places where there are volume -- volume reductions, we've had positive mix in other areas because of some of the new Southern Powder River Basin coal opportunity that we have.

Our next question is coming from the line of Chris Ceraso of Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So not to beat a dead horse, but I do have a couple of follow-ups on coal. First of all, can you just give us a ballpark out of the, let's say, 19 percentage point decline that you had in coal in Q1? How much of that was associated with the loss business? Was it 5 points out of the 19 or something in that neighborhood?

Rob?

Yes, Chris, the contract that we've spoken about previously was about 5 percentage points on the volume. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then if I kind of put together all the things that you've talked about so far that coal is back up to 40% of the burn, that inventories at the utilities in the west are back to normal or maybe below normal, your comps are getting easier. If we start to see increased volumes of coal, should we expect that the pricing gets better because you'll start to move some of the stuff that you didn't move last year, where you had recontracted at higher rates?

It's really largely dependent on which customers grow, and what areas and how those kind of play themselves out.

And again, as we've talked in the past about our pricing calculations, certain things may not come up in our pricing calculations, but they will show in improved margins as repriced business that those volumes come back, you'll see that in our margins even if you don't see it in our pricing calculation. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then just one follow-up. The depreciation, bonus depreciation, Rob, what -- how much of a drag on cash flow do you think that might be for UP in 2013 versus 2012?

Of course, as you know, we're getting still the benefit in 2013 of 50% bonus depreciation. So, which is what it was last year. So that is not a huge driver in 2013. But starting in 2014, we'll start to feel the impact of -- assuming there's no bonus depreciation beyond '13, we'll start to feel more of an impact. There's a slight benefit this year when you add it all up.

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

Just wanted to follow up again on the Intermodal side. I think when we look at the highway conversion opportunity, I think, largely, the assumption has been that given your length of haul, you have somewhat less of an opportunity than perhaps some of your eastern peers. Have you looked at the market for hauls of above, say, 500 or 600 miles to address what that upside opportunity is, and can you share that with us if you had a look at that?

Sure, we have. Eric?

Walter, I guess I'm not necessarily sure I'm tracking why a longer length of haul should result in fewer opportunity. We actually think the opposite that longer length of haul should result in more opportunities. The current total size of our Intermodal book of business is about 3 million units a year, closely equally divided between domestic and international. We size the domestic attainable market opportunity, and we talked about this in Dallas, I think, last fall. We size that as somewhere around 10 million units. Now, not all of that will be easy to convert. If you look at customers, there's a stratification of large, mid-sized and smaller customers. The large customers, the Walmarts, the Targets of the world, they are very intermodal centric already because they see the benefits of Intermodal. They could tune their supply chains to Intermodal. If you go to the mid-sized and smaller customers, we certainly -- that's the target rich environment, and we're working aggressively to sell the value of Intermodal to them, and some of that requires them to tune their supply chains a little differently, but that's the market opportunity, the business development opportunity, and frankly, why we're so excited about the future potential.

And Walter, when Eric talks about the 10 million opportunity, that does not include another 2.5 million to 3 million trucks that moves back and forth between Mexico and the United States. And as you know, we're building a new Intermodal facility down in Santa Teresa to really target that Northern Mexico, the maquiladoras and those kinds of things, which will hopefully make a dent in that 2.5 million to 3 million unit opportunity as well.

That's great color. Can you give us a sense of the available capacity on average of your Intermodal trains? Roughly how much incremental volume could we see go onto your new -- or Intermodal network without at fairly high incremental margin?

Sure, how about Lance?

Sure. So again, that depends very much on the length that the opportunity show up in. But just giving you an aggregate sense, I think we've averaged, what, 170 units a train in the first quarter, and most of our lanes could probably handle 250 plus/minus units. Again, very dependent on where it shows up and lanes specific.

And you're fully -- - double-stack capable roughly your network?

Virtually everywhere.

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

I just had a question about your Ag business. Obviously, the USDA is forecasting some pretty large crops this year. I just wonder as you look out over your draw territory, what's your read on soil moisture conditions and I guess, the risk of continued dryness in some areas and floods in others?

Well, I tell you what, right here in Nebraska, after the past month or so, we're about ready to stick a fork in this drought. We've had some nice heavy rains and heavy snows and things like that. And hopefully, that is doing its job in terms of replenishing the moisture content ground. Eric, you want to put some technical around that?

Yes, if you look at last year, Cheryl, the USDA said last year was going to be 1 of the 5 best years in all of history, and then we know what happened. So I take forecast with a grain of salt that this time of the year simply because so much of it is weather dependent. As Jack said, it appears to be a great start in our growing season, nice moisture in our key breadbaskets, we're all excited about that. We're not out of the woods yet, and we do need it to continue. And you not only need it certainly for the spring planting season, but you also need moisture in the critical parts of the heat of the summer. So there's a long tail left before we can feel comfortable about the predictions of what will happen in the harvest at the late -- latter part of the year.

Okay. And switching gears, just in terms of the public crossing accidents that you're experiencing in the South, which is really a function of your growth there and the whole region's growth, how disruptive for you from an operational standpoint are those? And how quickly do you think you can bring that back down?

Okay, Lance?

Yes, sure. Excellent question. And just to predicate, this is an extremely frustrating statistic for us. We've been working very hard on impacting the trend for the past several years particularly down in Texas. The short answer on how disruptive, it varies, but generally speaking, it's a couple hours of downtime as the accident gets investigated and cleaned up. So they are -- they have an impact. It's variability. It's not same order of magnitude typically as a derailment. And in terms of when can we start moving the needle on the number, I'm telling you we're doing everything in our power right now to try to impact that number. As we look at it in large aggregate, we're about on top of last year's statistics. They're pretty volatile. So what you saw in the first quarter is a little degradation. But in general, absolute number, we're a bit worse but trying to navigate on top of last year's number. It involves a lot of things like an audit and blitz of our railroad to find where the risk is. The risk moves and grows rapidly with development of industry around us and in engaging the local authorities to care as deeply about the issue as we do to impact driver behavior. So there's a lot of activity going on there.

That's a very difficult issue, and sometimes, you just -- I was surprised actually that we don't have the power to even put a stop sign up without getting the approval of local authorities, and sometimes, they just say no. So there are some pretty significant obstacles out there towards changing driver behavior and getting everybody on the same page as we are as to how important this is.

Our next question is from the line of Thomas Kim with Goldman Sachs.

I'd like to follow up on the comment about cross-border. Can you just remind us how much Mexico contributes to the bottom line presently? And given the tremendous growth prospects, what do you think it might look like over the next few years?

Rob?

Yes. Tom, we don't give the bottom line, but I'll give you the top line. It represents about 10% of our business levels currently, and it's been growing nicely the last several years across the board. The mix of the commodities has been growing at a pace greater than our overall volumes have been growing.

Okay. And then just a more housekeeping-related question. With regard to the $40 million in other income, we estimate that -- I think you mentioned land sales contributed about $0.02 a share, what's the remainder of the $40 million?

Rob?

Miscellaneous transactions. I don't -- I wouldn't call anything out in particular that was driving that. That's relatively -- the balance would represent a relatively normal run rate for us.

Our next question is from the line of Jason Seidl of Cowen.

I guess my questions more longer term here. I look at your 65% OR target by 2017, and to me, it seems fairly attainable. I mean, you just reported a first quarter that had fewer working days in it, you had a record OR, coal's under pressure, Ag's under pressure. Talk to me about that goal that you have out there and what some of your underlying assumptions are in terms of some of the commodity groups and also your core pricing which also seems fairly strong x coal at 4.5%.

Sure, we think it's attainable, too. Rob?

Jason, I mean, you've heard me say this over the years. I mean, it's not an end game, it's the next target that we've put out there, not unlike when we set the original 75% target. We got there as efficiently as we could and got there a little early. Then we set the low 70s, got there as efficiently as we could and got there a little early. We hope to get to this -- the previous sub 67% earlier as we mentioned last fall, and I'd say the same -- make the same comment about the sub 65%. So we're going to get there the same way we're going from where we are today to the sub 65% is the same way we got from the high 80s down to where we are today. And that is efficient safe operations, leveraging productivity, providing great service to our customers allows us to price it fairly. Fuel can obviously be a whipsaw on us, depending on what fuel does in terms in the calculation on the operating ratio. But I would just take comfort that we're going to -- that our assumption is a normal economy. If the economy cooperates and fuel prices are normal, if you will, and we're going to go after it as efficiently and as quickly as we can.

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

I mean, we don't get into that level of detail other than I would say, it's sort of a normal. I mean, we certainly think that Powder River Basin Coal is here to stay perhaps at lower levels than what we historically experienced, but our assumption is that it's sort of a normal from here on out if you will.

Okay. And my follow-up question, on your Southern region, it seems like you had a little bit of challenges operationally. And is it starting to feel better already in 2Q, and how should we look at that throughout the year?

Sure. Lance?

Yes. It is starting to look better. The actions that I mentioned in my comments regarding utilizing fluid routes, terminals, making sure we adjusted our resources rapidly, that made a difference in the tail end of March, and we're looking much more favorable in the South right now in the first few weeks of this quarter.

Plus, we had our maintenance programs were very heavy in the first quarter, that was planned. Those are now starting to be completed and some additional capacity projects coming on as we go through the year with capital, and each one of those adds a margin of fluidity and improvement in our variability.

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

Yes, I expect so.

Our next question is from the line of Keith Schoonmaker of Morningstar.

This is probably related to Jason's question there, I guess, on how the improvements were accomplished in the Southern region fluidity, but related of years' $1 billion or so growth in productivity CapEx, at this point, can you cite a couple of projects that are perhaps most material likely to impact income or ROIC over the rest of the year and next?

Lance?

Sure. So we've got some new capacity and commercial facility spending, that will have some impact. We've got a very large facility in Santa Teresa. It includes an Intermodal ramp that we think is going to really aid what Jack talked about in terms of cross-border truck traffic and conversion to Intermodal, plus a fueling facility. We've got some excellent work going on in terms of more fluid operations to our crude oil destinations. We should see benefits of that over the years. We've got capacity that's being spent up in the northern tier of our network, as well as in Texas to enable incremental, more fluid frac sand movement. We've really got it spread all over the railroad, largely concentrated in Texas from Louisiana, but there are key projects all over the railroad that are unlocking critical pieces of capacity for us.

There are some things, Keith, that we have kind of scaled back given the volumes that we're seeing and in the way the economy is running like for instance, the double tracking of the Sunset Corridor, where we're 70% done with that and -- but we're pacing it a little differently to watch in terms of the volume, but long-term potential is the ability to take that from 55 trains a day to 90, which would be a huge step forward for us. We have the Mississippi River bridge that we're continuing to work on, that is a key bottleneck that would be eliminated as we go through that project. In the Blair -- we have a Blair cutoff that is not order of magnitude, that big, but anything that would save 3 to 4 hours of transit time on the trains that go through our Central Corridor to Chicago eventually helps the bottom line enormously.

Okay. And maybe a one quick shorter-term question perhaps for Eric. We're seeing stronger growth in housing at last. Lumber improved 18% probably as a result of that. Could you comment on where and how material housing improvements are showing up elsewhere, be it light trucks, some Intermodal, et cetera?

Great question. We're excited about the housing improvement finally. It -- housing is actually running ahead of the original Global Insight estimates, and I think the housing or the lumber producers are pretty positive about the trends that they're seeing and the housing start numbers that they're seeing. Housing, in addition to impacting lumber, it's also going to impact our Intermodal business. As you know, once homes are built, you have to furnish them. And so both on the International Intermodal business and the Domestic Intermodal business, we think that housing will have an impact on that. We think housing will also have an impact on ancillary business like our steel wheel book rebar business, which goes into construction. Our cement business, our cement business, we think that that will strengthen as housing strengthen. So all of those are things that will go as housing goes.

Eric, it sounds like you're using future tense though, that those are still sort of pending improvements, am I reading that correctly?

No. I've been around here long enough. I remember when housing was regularly 1.7 million, 1.8 million starts a year, so even though we're back up to around 970 off a low of -- below 600, 970 still feels low to me. So I will feel like it's back regular normal when it gets above 1.3, 1.4, 1.5.

But if you look, Keith, like in our cement business, I think it was up about 6% in the first quarter. Our plastics business, which include things like PVC pipe and those kinds of things that they're using in housing construction were also up in the first quarter. So we are seeing the residual impact that goes along with the incremental lumber.

Our next question comes from the line of John Mims of FBR Capital Markets. John R. Mims - FBR Capital Markets & Co., Research Division: Just one quick one for me just this late in the call. Eric, I stepped away for a minute, could you repeat what you were saying about International Intermodal, and maybe add to any comments related to outlook for any sort of a peak season in '13?

What I was talking about International Intermodal is that as housing starts increase, you need to furnish the homes, and so we do see a trend between International Intermodal upswing as housing start improves, that was the connection that I was making. Last year, what we said was that it was a muted peak season. I think we used those words last year. It's early in the year, and it's -- at this point in the year, what happens, and peak will determine on the economic conditions, consumer confidence, retail sales, all of those things will determine kind of what happens in peak volumes.

Right now, we are expecting the Intermodal peak to be stronger than last year. The order of magnitude is -- we're not sure we'll get it, really depends a lot -- bidding season is just coming in right now for a lot of those international contracts between the retailers and the ocean carriers and things like that, so there's still a lot to be determined in terms of how that'll play out for the summer. John R. Mims - FBR Capital Markets & Co., Research Division: Right. Okay. So as of right now, though, it's still just more of a read on the macro versus you having real conversations as far as staging capacity with the liners or with the major shippers?

Right, that's right.

Our next question comes from the line of Ben Hartford of Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Just to expound on that, I guess, this 8% growth in the first quarter, I'm assuming that's not a run rate for the balance of the year, and that the first quarter, you did benefit to some degree from certain shippers shifting away from the East Coast to the West Coast ahead of any sort of East Coast ILA strike during the first quarter. Is that the right? Is that the right way to think about the volume, the first quarter volume?

Yes. We do not expect to see that kind of run rate for the year. There was some nominal impact of shifts from the East Coast, but very small. The bigger factor frankly was the timing of the Chinese Lunar New Year this year versus last year, and there was some advanced shipping because of that, that was probably the larger impact. Plus we did see an impact -- inventories were pretty thin after the holiday season last year. And you did see an impact of inventory catch-up by -- in January. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, good. And then on the coal side, I know you kind of earmarked a number of different various items that drove RPU above expectations to the $2,300 level. Is this a good level to be thinking about then? I mean, you kind of -- you hit on mixed legacy, fuel surcharge and some liquidated[ph] damages as well driving that number. But is this $2,300 level a good level to think about for coal as it relates to RPU for the balance of the year?

Rob?

As we indicated in some previous discussions, I'd be careful using a run rate of ARC because mix can have such an impact on that, up or down. So again, we're going to aggressively go after providing the good service and repricing where we can, but the ARC number can move on you.

Our next question is from the line of John Larkin with Stifel. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Maybe more of a conceptual question on the Intermodal side. The UP's service levels have improved dramatically over the last 10 years or so and have generally caught up to the other big Western railroad. And I guess the question is, as you see the service levels right now, where do you think you have a competitive advantage versus the competitor, where do you think the competitor has an advantage? Is that how you think of marketing the service, in particular, power lanes where you might have better on-time performance or a better velocity? And based on some of the investments that you're putting into the ground now, will you see that competitive positioning change at all here over the next couple of years?

Yes, Eric?

Yes, so good question. To start with, we -- as we look at our Intermodal network, we are actually proud of the fact, we go to many more places than our competitor in the West in terms of our franchise, in terms of origin destination points where we have service, too. And that's really the power of the diversity of our franchise. We just get to and from many more places than the customer base. A large portion of the customer base does see value in that. Having said that, for the places where we do compete head to head, we kind of assess where we are very regularly. And we are pleased that in most of the places where we compete head to head, we think our service is as good or materially better, and the majority of the places where we compete head to head. There are a couple of places where our competitor has a slight advantage, and we are continuing to put initiatives and strategies in place to ensure that we have the best service in the industry. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: And then maybe one question that you don't need to answer if you don't want to, but I'll ask it anyway. With respect to operating ratio as the key metric to focus on for the future, you've said again here today, that you believe you'll get to a 65% or lower for the full year 2017, that seems like a very achievable target as one of the other analysts mentioned. But what happens if in 2016, Eric, comes to Jack with a $400 million project that has a 68% operating ratio on it, does that put you in the position of, perhaps, saying no to that project, or do you feel as though you can still accommodate that and access that incremental traffic? Would return on invested capital be a better measure or some other measure that takes into account, the generation of free cash flow? Just conceptual thought in terms of whether operating ratio is the correct metric?

John, when we look at business opportunities at a high level and at a specific level, we're really focused on the reinvestability of the business, our ability to provide good, efficient, safe and consistent service for that customer. And then we deal with it on that basis in terms of the acquisition or whether we take on the business or not. We don't really think about it in terms of the operating ratio. But I will turn that over to Rob in terms of broader discussion of the key measures.

Yes. John, I mean I get your point. And I would say that we set operating ratio target out there just as a way of kind of speaking in our organization as setting our mind towards making financial improvement. But at the end of today, it's focused on returns. So we know we still got room to go in improving our operating ratio, which will improve our earnings, which improves our cash, which if we do all the investments correctly, improves our returns. So they all kind of go together. But at the end of the day, it's the improving our returns.

It's a really portfolio of measures.

Our next question comes from the line of Jeff Kauffman of Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: It's been a long call and most of mine have been answered, so let me just throw a quick one out there. I see the carloads for the crude business, if I thought about that in terms of trains per day and how to allocate those carloads, roughly how many trains a day are you doing in the crude business relative to how many trains a day for the system total? And is it fair to assume, this would be the follow-up, that it's longer haul business, and therefore, a higher RPU than your average chemical RPU?

Lance?

Sure. Trains per day were in the 5 plus/minus ballpark. Length to haul...

750 miles.

Yes. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: All right. And how many trains per day for the total network?

In the total network, boy, varies by day a week and moment in time. But for instance, right now, we probably have 820 trains on our network. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Per day?

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

Our next question comes from the line of David Vernon of Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: So Rob, I noted here you're talking about a new equipment rate study on the depreciation line. Did that lower the rate that you guys are depreciating the equipment at for -- on a-go forward basis? So if you could add some color to that?

Yes. So I mean, the result of the study was elongated, if you will, the depreciation on those assets, combine that with the fact that we're running a fewer gross ton miles, resulted in a lower depreciation rate than what we've previously experienced. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: I think it was 5 -- the depreciation was 5.6% in the last Q. Is it -- can -- do you know the number off the top of your head, or should we just wait for the Q?

In the first quarter, depreciation rate was 3%. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: 3%, okay. And the fuel surcharge revenue in the quarter?

I'm sorry? David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Fuel surcharge revenue in the quarter?

About 0.5 point on the revenue line. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: 0.5 point on the revenue line, okay.

Our next question is from the line of Justin Long of Stephens.

In the quarter, your volumes were down a little over 3% sequentially, but operating expenses were up nearly 4% if you look on a sequential basis. Just on a high level, can you talk about some of the puts and takes that drove that discrepancy, and would you say that's not a trend you would expect going forward?

Mix is always a factor in that particular calculation when you look at car loading sequentially and the expense going forward. So I guess I would say that take the guidance that we've given you in terms of the components as best you can as best way of looking at it rather than trying to calculate that particular sequential relationship.

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

Sure. Our current CapEx is targeted at about $3.6 billion for the year, which is down just a bit from last year. It does include some equipment acquisitions that are needed for our business growth and replacements of retiring assets. If you had some specific question beyond that?

Maybe specifically, on the car types that you're looking to purchase this year.

Lance?

Sure. We're picking up some auto rack. We're picking up some food-grade covered hoppers. we're picking up a handful of other types. Some...

Refrigerated boxcars and some containers.

And John, it's -- it's less than $200 million of the $3.6 billion just to kind of size if for you.

Thank you. We've come to the end of our time for the questions and answers today. I will now turn the floor back over to Mr. Jack Koraleski for closing comments.

Well, great. Thanks so much for joining us on the call today. We look forward to speaking with you again in July.

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