Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jim Young - Chairman, President and CEO

Jack Koraleski - EVP, Marketing and Sales

Dennis Duffy - EVP, Operations

Rob Knight - EVP of Finance and CFO

Analysts

William Greene - Morgan Stanley

Jason Seidl - Dahlman Rose

Ed Wolfe - Wolfe Research

Walter Spracklin - RBC

Matt Troy - Citigroup

Ken Hoexter - Merrill Lynch

Tom Wadewitz - J.P. Morgan

David Feinberg - Goldman Sachs

Randy Cousins - BMO Capital Markets

Chris Ceraso - Credit Suisse

Gary Chase - Barclays Capital

Union Pacific Corporation (UNP) Q4 2008 Earnings Call January 1, 2008 8:45 AM ET

Operator

Greetings, ladies and gentlemen and welcome to the Union Pacific Fourth Quarter 2008 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded and the slides today will be presenter controlled.

It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific. Thank you Mr. Young, you may begin.

Jim Young

Good morning, everyone. Welcome to Union Pacific’s fourth quarter earnings conference call. With me today are Rob Knight, our CFO; Jack Koraleski, Executive Vice President of Marketing and Sales and Dennis Duffy, Executive Vice President of Operations.

Union Pacific’s fourth quarter earnings grew 41% year-over-year to $1.31 per share, as operating income totaled $1.1 billion, up 32%. We’re posting strong earnings for the quarter as we completed an outstanding year for our company. The fourth quarter was clearly a challenge with carloadings off nearly 12%.

Our profitability was driven by improved safety, productivity, great service for our customers, positive pricing and lower energy cost. Falling fuel prices were a nice reversal after paying higher diesel fuel prices over the last seven quarters.

Looking back at 2008, we achieved these results despite facing the challenges of a weak economy and record high fuel prices. Our success stands from consistently executing our long-term strategy. Although rail is already the safest form a ground free transportation, we’re committed to improve, which we did across the board in 2008.

We provided our customers with excellent service as we offered truck competitive products in key market corridors. Their employee innovation, technology and hard work will increase the efficiency of our railroad and we’ve made strategic capital investments that support our long-term growth as well as [Audio Break] drive further safety, service and efficiency.

These efforts produced recorded financial results for our shareholders, increasing returns through a two-for-one stock split, a 23% dividend increase and share repurchases totaling $1.5 billion.

Our 2008 results were one for the record books, providing a solid foundation for the challenges we face in 2009. Obviously, one of the biggest challenges we face this year is economic uncertainty. Jack, Dennis and Rob will all give you some prospective on 2009. But, as you will see from their comments, our ability to forecast demand is very limited. As a result, we will not affirm or provide specific financial guidance for the year. Although our confidence in the long-term opportunities for Union Pacific is undiminished, the current environment will be very difficult.

With that, I’ll turn it over to Jack to talk to you about our revenue results. Jack.

Jack Koraleski

Thank you, Jim and good morning. Our revenue grew 2% to a fourth quarter record $4.1 billion as price improvement and fuel surcharge tailwinds drove a 16% improvement in average revenue per car more than offsetting the sharp decline in volume. The economic problems that dominated the news throughout the quarter clearly impacted volume with the greatest declines in the groups most sensitive to the strength of the overall economy.

Each of our groups set best ever or best fourth quarter records for average revenue per car, but only Energy and Ag products were able to overcome the volume shortfall to post revenue gains. There was an anticlimactic end to a year that saw revenue climb 11% to a record $17.2 billion. Automotive was the only business group failing to set of a new full-year revenue mark. All fixed groups set records for average revenue per car and energy posted record carloadings as well.

So, now let’s take a closer look at how the fourth quarter played out for each of our businesses. Ag products revenue grew 10%, as a 16% improvement in average revenue per car more than offset a 5% decline in volume. We indicated in October that we expected to see our grain volume soften from the very strong levels we saw during the previous crop year.

During the fourth quarter feed and wheat shipments declined in both the domestic and export markets with overall whole grain volumes down 16%. On the positive side, growth in ethanol and DDG’s continued with growth up more than 20%. Expansion of our produce rail express product with the startup of the California Origin early in the quarter drove volume growth of nearly 70% for this truck competitive refrigerated service.

I doubt there is any surprise in the weak showing of our automotive business during the fourth quarter, but the only good news was that our progress in renegotiating legacy contracts helped drive a 12% improvement in average revenue per car, partially offsetting to 26% volume decline and holding the revenue shortfall to 17%.

For the quarter, finished vehicle volumes were down 29%, while parts declined 21%.

Our chemical revenues were down 1% as a 14% decline in volume was nearly offset by a 15% improvement in average revenue per car. The residual impact of the September hurricanes and the downturn in the economy drove weakness in the two largest segments of our chemicals business.

Liquid and dry, which declined 21% and plastics, which was up 18%, refinery issues resulting from the hurricanes, volatile crude oil prices and economic conditions impacted petroleum products. Fertilizer volume was down as industry sales declined driven by tightening credit and unstable market prices that led many farmers to delay or even to skip their fall fertilizer application.

Volume for carloads increased 26%, largely the result of some new unit train business and a strong export market drove increase soda ash volume even as domestic shipments declined due to continued weakness in the housing and automotive markets.

Energy revenue grew 20% on the strength of a 22% improvement in average revenue per car. Strong demand in continuing productivity improvements in our network performance drove a 2% growth in Southern Powder River Basin tonnage. Establishing fourth quarter records for cars, for tons, for trains and tons per train and closing out a record year for the SPRB. Unfortunately, widespread problems among the Colorado mines lead to a 5% decline in Colorado Utah tonnage and resulted in the overall 1% decline in volume.

In industrial products, we saw 15% falloff in volume partially offset by a 14% improvement in average revenue per car, unfortunately mix worked against us and resulted in a 3% reduction in revenue overall for the quarter. Our lumber volume fell 30%, as housing starts dropped to their lowest level since the [census bail] began tracking 50 years ago. The slump in housing and commercial construction is also impacting roofing, cement and stone and the ladder too were also hit by reduced funding for highway projects.

Market softness cooled the steel and scrap markets that were running strong earlier in the year. Industrial products saw customers across many of their markets take extended holiday shutdowns to allow for inventory adjustments during the quarter. On a brighter note, [Inaudible] and other drilling materials provided some good news with volumes up over 20%.

Intermodal revenue was down 7% as a 16% decline in volume offset a 10% improvement in average revenue per unit. As we have highlighted in the past, significant portions of the international Intermodal business are tied to the housing and automotive industries. The deepening contraction of the overall economy was the primary driver of a 19% decline in our international volume.

The weak economy also impacted the domestic side where volume declined 9%, despite the continued success of our EMP revitalization effort, which filled volumes with Intermodal marketing companies up over 20%. If you exclude the contract loss that we incurred earlier in the year, our improved service helped hold truckload volume flat versus last year, which is actually pretty good performance in this economy.

We closed the year with record setting customer satisfaction as our customers recognized the value being delivered given our significant service improvements. Satisfaction came in at 85 for the fourth quarter that’s the highest quarterly score in the 22 years we’ve been measuring satisfaction. For the full-year, we improved four points to 83, which is also our best ever mark.

Okay. Looking to the future, I thought maybe a good place to start with, with a recap of our legacy contract status. Last year, including contracts that expired on December 31, we renegotiated legacy contracts totaling about 8% of our revenue base. Well, at this point, we have now been able to reprice 82% of our business.

Unfortunately, 2009 will take a little less than one percentage point off the table, but we will get the benefit of the price improvement from those December 31 expirations throughout the coming year and we’ll also have a nice carryover price impact from the other contracts we repriced earlier in 2008. On the right, you can see the mix of business tied to our remaining legacy deals, half of that business is still in energy, 29% is in Intermodal, autos and chemicals are both 10% and Ag and industrial products shared just one percentage point between them.

Clearly, we’re going to have our work cut out for us in 2009. On the chart, we have highlighted some of the biggest hurdles that we faced as well as opportunities that will drive some strengthening as the year plays out.

Looking at the full-year; let me take you through how we think these and other factors are going to influence growth potential in each of our groups. Start with Ag products, Ag products is going to face some tough comps, at least until the new crops are harvested. Increased world grain production will impact whole grain exports and a decline in animal feeding will slow the domestic grain business.

As a result, we expect whole grain volumes to slide back closer to the levels we saw in 2007. The soybean crush is forecasted to be down over 6% for the crop year, but we do anticipate that ethanol is going to grow, although the pace maybe a bit slower as lower gasoline prices and higher corn prices squeeze margins. Continued market softness and production cutbacks drive the automotive outlook for 2009, but it should run better than it is now. The ramp up however, is going to be slower than normal this year as some plant shutdowns will extend all the way until March.

In chemicals, the poor economy will likely lead to some further softening of plastics and domestic soda ash will continue to mere demand in the building and automotive markets. However, we remain cautiously optimistic about export soda ash. We think that liquid and dry is going to hold its own and fertilizer should see an up tick with the spring planning season. Continued low crude prices could also create some opportunities for us in asphalt.

Our energy volume in 2009 is expected to decline slightly from last year’s record setting performance. We successfully renegotiated quite a few legacy coal deals last year, but there were a few that wound up not going our way. The good news is that continued demand for SPRB coal should allow us to offset most of that loss. So far there’s been an issue for Colorado Utah, but that production is going to ramp up as the mine’s start to get squared away with those production issues.

With housing starts expected to decline somewhat from their already low levels and overall economic weakness impacting many of their markets, industrial products faces a real uphill battle. The one bright spot is still energy related markets, which appear to maintain their strength.

Growth with IMCs driven by the EMP revitalization program and continued service improvements is expected to spear growth in our domestic Intermodal, but the weakness of the overall economy still going to take its toll on the international side. Current economic projections anticipate growth and imports by the fourth quarter although admittedly against 2008 to current levels.

So, with the free fall and economic indicators over the past few months an uncertainty about how quickly the new administration can get their plans in place; let alone how quickly those plans will have an impact. An honest assessment of 2009 is that at this point, we probably have more questions than we have answers.

Our volumes have started off slowly, but as I just outlined they should strengthen. Extended shutdowns, inventory right-sizing combined with a comparison against a relatively strong first quarter volume a year ago makes things look weaker right now than we believe they really are.

It seems likely that an economic stimulus bill will be coming across much of our business. A successful stimulus package offers some upside to the extended focuses on rebuilding infrastructure in energy development. Ultimately, the key to strengthening demand is job creation. The government stimulus check more money in your pocket from low gas prices, low mortgage rates and zero percent financing for automobiles, probably isn’t going to make much of the difference if you’re not employing.

We still expect that our core price improvement will be in that 5% to 6% range for the year, although it appears the impact to that improvements going to be masked by the decline in fuel surcharge, when you’re looking at it from an average revenue per car perspective. Keep in mind though, that from a customers’ point of view, that decline of fuel surcharge is going to result in lower transportation charges year-over-year.

So, with that I’m going to turn it over to Dennis, for the operating review.

Dennis Duffy

Thanks, Jack and good morning. Today, I’d like to wrap up the operating team’s performance in ‘08, as well as talk a little bit about our plans for ‘09. Let’s start with safety. We think of safety as it relates to our key constituents; employees, public and customers and over the last several years and in ‘08, we made significant improvement in each category.

The tools we used to improve safety; communication, technology, process improvement, engineering and investments are universal across the three areas and all contribute to our gains. Of course, our goal with each of these categories is to reduce to zero, so we’ll continue our efforts in ‘09 to operate an even safer railroad.

Turning to service, as with any year we had some bumps along the way with an assortment of natural disasters, but the resiliency of our infrastructure and our network resources allowed us to quickly recover and achieve record performance levels, but also we finished the 23.5 miles per hour for the year and 25.1 in the fourth quarter. In a declining volume environment, like we’ve experienced in the last two years, operating’s role is critical in driving cost out of the business through streamlined operations and increased asset utilization. These objectives must be balanced however, against our customer commitments.

Our 2008 service delivering index, a composite metric of all customer commitments, set all-time records for the year and the fourth quarter 84 and 89 respectively. The increasing levels of customer satisfaction that Jack just discussed, mere the improvements in the SDI.

Lower volumes have certainly contributed to these results, but we have significantly improved the fundamentals of our railroad, largely due to our evergreen unified plan process, our continuous focus on inventory management and technology also plays a big role. Increased usage of distributed PRO locomotives, which currently move about 55% of our gross ton-miles allowed for a more efficient use of our locomotive and crude resources as well as saving fuel.

Finally, our work to operate as a volume variable network; volume variable means managing our cost in line with our demand volumes even in a down economy and the results can be seen in productivity.

In the fourth quarter, we reduced our total starts by 9% compared to 9% fewer gross ton-miles year-over-year. For full-year, our start reduction was more than proportional to the volume decline. This was achieved concurrent with improving asset terms. You can see freight car cycle time, the number of days between loads reached record levels in 2008. Our train size initiatives played a role, a key role in our productivity results by reducing train starts.

The manifest network was a particular challenge, where we managed to increase train size and service levels despite the declining volumes. The end result was leveraging lower volumes into fewer starts and also lower fuel consumption. For 2009, we have a menu of productivity initiatives covering all major classes of spending and asset utilization all managed under the umbrella of our operating productivity counsel process.

The combination of following demand in greater efficiency has generated extra resources. When you compare year-end of 2008 with ‘07, we have reduced our working level of critical resources significantly. From a locomotive standpoint, we have reduced the working fleet by more than 1500 consisting of lease turn backs, retirements and storing more than 1200 locomotives, partially offset by 179 new deliveries in 2008.

Likewise on the freight car side, our working inventory has been reduced by more than 67,000 or 21% including 48,000 cars and storage. Demand from the train and engine workforce shown in the upper right is down by nearly 3900 including approximately 3,100 furloughs. It is our intention to get these folks back to work in the near future, but that will be driven by volume demand and attrition.

We continue to make short-term adjustments in our critical resources to reflect current economic conditions. However, as we’ve discussed before, we have built some level of surge capability into our network to handle network outages and volume spikes.

Turning to capital for a moment, our proposed ‘09 plan will total around $2.8 billion, nearly 80% of the spend represents replacement and renewal of existing capital assets. This includes 125 new locomotives for nearly $290 million. Current market demand does not warrant this purchase, but they conclude the third year of a three-year purchase agreement. We will put these to good use expanding distributed power usage and retiring older less efficient locomotives.

The engineering spend continues our commitment to hardening the core infrastructure for safety, productivity and performance business reasons. With soft demand, we are reducing gross spending by more than $300 million in capacity and commercial facilities. We are slowing down spending on the Sunset Route, while making strategic investments for long-term growth.

An example is the new Joliet Intermodal facility, which we will continue to work on in 2009. Emerging market opportunities such as ethanol, wind power, and drilling materials are protected in our ‘09 plan. The technology portion includes strategic investments in computed aided dispatching and positive train control systems.

Our operating plans for ‘09 built upon the progress made in 2008. Specifically, solid safety improvements in the employee, public and customer areas, the service record set in 2008 are now the benchmark and we will make further gains from here. We will remain volume variable in an uncertain environment and finally, we will be disciplined in our efficient use of capital.

With that, let me turn it over to Rob for the financial review.

Rob Knight

Thanks Dennis and good morning. We’ll start today with a look at our fourth quarter income statement. Quarterly operating revenue grew 2% to nearly $4.3 billion. Fourth quarter operating expenses came in at $3.1 billion, a 6% decrease versus 2007. The primary driver of the expense decline was lower fuel expense, which decreased 19% in the quarter.

As I’ll discuss more in a moment, lower fuel prices contributed to the decline, but the sharp fall-off in business volumes in our efficiency efforts also played a major role. Higher revenue and lower expenses resulted in fourth quarter operating income of $1.1 billion an increase of 32%.

Fourth quarter freight revenue totaled $4.1 billion, a 2% increase from 2007. Against the 12% drop in carloadings, our pricing gains and increased fuel surcharge recovery drove the yearly growth. Core price increased roughly six points in the quarter and although our fuel prices actually declined year-over-year, the two-month lag in our fuel cost recovery programs drove higher year-over-year recoveries. Similar to the third quarter, our mix of business was positive, adding six points of growth to our average revenue per car.

Turning to the expense detail; slide 27 shows fourth quarter compensation and benefits expense down 2% in the quarter to $1.1 billion. Increased productivity and a significant decrease in volume were the primary drivers of the year-over-year decline.

As Dennis described for you, increased velocity as well as our efforts to increase the efficiency of our crews, drove savings in the form of our lower crew costs. We also continued actions taken throughout 2008 to better align our workforce with demand, reducing both operating and non-operating personnel, a total of 4%. Offsetting some of the productivity is the ongoing wage inflation associated with the 4% increase that became effective for our union employees on July 1.

There were also added costs in the quarter related to pension and post retirement benefits. For fuel expense, our cost declined by 19% to $732 million as fuel prices declined 6% in the quarter. Our fourth quarter average diesel price per gallon was $2.46 compared to $2.62 per gallon in 2007. This lower price saved roughly $47 million in the quarter, although lower prices help drive quarterly fuel expense, the 9% decline in gross ton-miles was actually a bigger contributor, saving $77 million in the fourth quarter.

The 5% improvement in our fuel consumption rate also contributed to the savings. As we moved through 2009, we should see the benefit of lower year-over-year fuel prices. In fact, we’re currently paying about 40% less $2.84 per gallon we paid for diesel in the first quarter of 2008. Our customers are also seeing the benefit of lower fuel in the form of lower surcharges.

Purchase services and materials expense totaled $458 million, up only $2 million. Although below third quarter levels, year-over-year costs were higher as a result of component price inflation. This increase was largely offset by a lower expenses related to our improved productivity and volume decline. For example, expenses for crew transportation and lodging, as well as Intermodal ramp fees declined year-over-year.

Equipment and other rents expense decreased $13 million in the fourth quarter or 4%. Lower freight volumes particularly for finished vehicles, industrial products and Intermodal shipments resulted in less car hire expense. Locomotive lease expense also declined year-over-year.

Fourth quarter other expense declined 1% or $2 million, there were a number of pluses and minuses in this expense line during the quarter. Adding to the quarterly expense, were several unfavorable year-over-year changes such as an increased provision for bad debts, higher state and local taxes while equity income was lower in the quarter. We also received an insurance settlement in 2007 that contributed to the tough year-over-year comparison. Many of these item should be considered quarter-specific and do not indicate a change in our expense trend.

Balancing out some of these unfavorable changes was a reduction in our casualty expense. We continue to see solid improvement in our safety performance as well as a benefit of lower estimated settlement costs. We also completed a review of our asbestos liability in the fourth quarter, which demonstrated better than expected claims experience. Together, causally costs were lower in the quarter by roughly $65 million.

Looking now at our operating ratio, the bars on the left illustrate year-over-year fourth quarter progress. The bars on the right show our full-year improvement. As we discussed with you in our May analyst meeting, we are using project operating ratio to focus the entire organization on our efficiencies. These efforts enabled us to drive steady improvement culminating in a 73.4% operating ratio in the fourth quarter a best ever mark.

Lower fuel prices certainly contributed to our improvement, although offset somewhat by the volume declines. Our efforts to drive greater efficiency and improve the returns on our business enabled us to make a nearly 12-point gain since the fourth quarter of 2005.

On a full-year basis, we also made great strides. The 77.3% operating ratio in 2008 was the best annual mark we’ve achieved and nine point five points better than 2005. This performance really highlights all the hard work that’s taken place across our company to improve profitability.

Moving onto the full income statement; fourth quarter other income was $15 million lower year-over-year, primarily as a result of lower interest income. Interest expense increased $2 million to $127 million driven by higher average debt levels in 2008.

Fourth quarter income tax expense increased, 31% or $90 million. Although, taxes were higher year-over-year as a result of increased income, the effective tax rate was slightly lower at 36.4% in 2008 versus 37% in 2007. Fourth quarter, net income totaled $661 million up 35%. Earnings per share increased 41% to $1.31 per share, reflecting both stronger earnings and the impact of our share repurchase program.

Slide 33, shows our full year income statements. Operating revenue grew 10% to nearly $18 billion. Operating expense increased 8% to $13.9 billion. Higher year-over-year fuel expense contributed nearly 90% of this increase. Other income was $24 million lower in 2008, as a result of fewer real estate sales and less interest income. With a tough credit market, we are likely to continue in 2009 our real estate sales could be challenged in that market.

Interest expense grew 6% to $511 million; the driver of this increase was higher average debt levels offset somewhat by lower interest rates. The combination of higher income and a lower effective tax rate for the year produced 2008 income taxes of $1.3 billion a 14% increase. Our 2008 tax rate was 36.1% which was 2.3 points lower year-over-year primarily related to a change in Illinois state tax legislation in 2007.

2008 net income grew 26% to a record $2.3 billion. Full year earnings per share was $4.54, a 31% increase. From an overall financial standpoint, one of the key measures of our performance is the cash we are generating. In 2008, cash from operations increased $793 million, a 24% gain. As we improved our returns, increased productivity and drove strong bottom line results, we are generating more cash. In 2008, cash from operations was also favorably impacted by bonus depreciation, which added about $225 million. On the flipside, we made $200 million voluntary pension contribution at year-end.

Cash generation is especially important in today’s tight credit markets, as we will rely more heavily on this cash to sustain our business going forward. In terms of our uses of this cash, we will continue to take a balanced approach. Obviously in this uncertain environment, we will be conservative with our cash management. In fact, we ended 2008 with more than $1.2 billion of cash on the books, which will help us with our payment obligations in the first part of 2009.

Let’s talk about some of the other uses of cash in 2008. We closed our 2008 capital spend at roughly $3.1 billion. The breakdown on this spend was nearly $2.8 billion in cash capital and $315 million in non-cash capital for equipment leasing. As Dennis just mentioned, our current plans target 2009 capital at around $2.8 billion likely all in cash.

Looking at share repurchases, we bought back $3.4 million shares in the fourth quarter returning nearly $200 million to shareholders. This run-rate is slightly down from previous quarters reflecting our desire to maintain the liquidity in the current environment.

On a full year basis, 2008 repurchases totaled $1.5 billion bringing the program total up to $3 billion of cash return to shareholders since, January 2007. Although, the price of UP shares are certainly attractive today, we are not currently buying back stock. We are monitoring our cash flows as we start the year to ensure adequate liquidity, as we start to generate more cash; we look forward to making additional share repurchases.

Slide 37, illustrates UP’s adjusted debt balances at year-end, which totaled $13.9 billion or a 47.4% adjusted debt-to-capital ratio, consistent with how our ratio is viewed by the credit agencies. Increased debt levels as well as higher pension and OPEB liabilities contributed to the year-over-year increase.

Throughout the current credit crunch UP has maintained good access to the credit markets. We do have a $250 million debt retirement coming up in the next couple of weeks and we will fund that from the cash we currently have on the books. So, to wrap up 2008, it was a great year for UP in many ways and our financial performance was no exception. We made tremendous progress with our efficiency and returns and significantly increased our profitability.

As we turn the discussion to 2009, we are no less optimistic about the potential for our company. We do however face tremendous uncertainty. As Jim mentioned, we will not provide specific financial guidance for 2009. Instead, I would like to spend the next couple of minutes talking qualitatively about our approach to the year.

As Jack discussed, the demand forecast is very uncertain and our current volume levels are weak. In fact, we believe, we maybe seeing the toughest comparison for the year right now in the first quarter. When you consider that the first half 2008 volumes were down a little more than 1% while the second half volumes fell off 8%. We should at least see an easier comparison in the back half of the year.

Another factor to consider for 2009 is that our reported revenues could actually be lower year-over-year due to the combination of declining volumes and less year-over-year fuel surcharge revenue. For example, in January 2008, our rate-based surcharge was 21.5% versus only 16.5% this January, a five point difference and as we move to February, the year-over-year decline grows to nine points. It’s important to keep in mind that although the absolute dollar amount of revenue may be lower, the quality is higher.

Since we do not have 100% fuel surcharge recovery, lower fuel price has actually helped our bottom line. In fact, less volume and lower fuel surcharge revenue could mask the impact of the 5% to 6% core pricing gains we still expect for 2009. We have already priced the bulk of our legacy business for 2009 and we’ll see the benefit of that pricing throughout the year.

From a productivity standpoint, we know we have further opportunities ahead. Dennis discussed with you how throughout 2008, we operated our railroad to match resources with demand. Although, it’s clearly more of a challenged increased productivity with declining volumes, we are working to operate as a volume variable railroad. From an earning standpoint, the key variable is economy, which will drive volumes.

For the first quarter, we have volumes running well below last years’ levels it’s unlikely that we will be able to reach last years’ first quarter earnings of $0.85 per share. Beyond the first quarter, if volumes improve earning should also improve. We are clearly in a very strong position to utilize our network resources more efficiently in a stronger demand environment, but of course, if current volume trends continue it will obviously be a challenge for us.

We are being very cautious in our approach to the year. Although, we are still very confidents about the positive fundamentals of our business that optimism is clearly tempered in the near-term by the economy. We also believe that the key long-term goals that we established last May are still intact. Our volume growth will be challenged even if you assume some reasonable level of economic activity returns, but a lot can happen over the next four years and we are unwavering in our commitment to improve. In particular, the objective of obtaining a low 70’s operating ratio by 2012 is still our goal.

So, with that let me turn it over to Jim.

Jim Young

Thanks Rob. I’d like to add a couple of points to the discussion on 2009. First, although this will be a difficult year for our company, our customers and employees. We will act carefully to avoid short-term decisions that could impact strong long-term opportunities we see ahead for Union Pacific, but we are responding aggressively to the significant shortfall on demand we see today.

Building off, our success in 2008, we’ll make further improvements to our safety and productivity also providing customers with great service. Quality of service supports our pricing plans, generates assets for our customers and opens up new markets. Part of that service commitment involves our capital plans, as Dennis discussed, the majority of this investment is for ongoing track replacement and renewal supporting safety service and efficiency. In addition, we’ll continue to make strategic investments for long-term growth.

Although, we are providing specific guidance; I can assure you that we are challenging ourselves to deliver another strong year. We set the bar higher in every category during 2008 and 2009 and beyond. We are focused on delivering an even higher level of performance than ever before.

So, with that we’ll open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Greene - Morgan Stanley.

William Greene - Morgan Stanley

I’m wondering if you can comment a little bit on the tradeoff between volume and price. In the past you have said, A; we would be willing to walk from business if it’s going to do the right thing for returns and margins, but with volumes doing what they are doing at some point, the negative operating leverage from volume, I would think is going to have to play a role in your thinking. Can you just talk about how that’s evolving?

Rob Knight

Well, we’re still sticking with our philosophy here, if it doesn’t meet our minimum return, we’re willing to walk from the business and we have lost some business, we have won some when you look backwards here. Of course, when you’re running down 18% on volume, which is what we’re running right now, we’re going to take a hard look at the future here, but our concentration right now is efficiency, getting costs out, making certain we are still very competitive, but again I think long-term we have to be very careful here in terms of taking a short-term view at the expense of the long-term viability of our company here.

William Greene - Morgan Stanley

So, now does that apply as well to the cost side? So, if you’re dealing with down 18% to 20% volumes now, what are you resourcing for, in terms of a volume change, I would think not that level because, that would mean you’ve taken quite a bit more.

Rob Knight

I don’t, listen 18% right now through 21 days with slow start up of the auto sector and many of our customers and autos are obvious, but we sold really across our whole customer group. There was a real slow start up going forward here. I’ve said before, again to try to predict the future here, I don’t think 18% is realistic and where we are going to end up the year here at all, but you could end up with a smaller network with higher quality revenues and better returns.

We are being very aggressive; we are assuming right now that this, again it’s going to be a very tough year. We are aggressive on the cost, but I’ll also tell you, we’ve got to protect, but when the business does come back and it will and as you know, we learned a pretty hard lesson in 2003 and 2004, where we were short of resources. So, we are managing this thing to be aggressive, but be smart and when business comes back.

William Greene - Morgan Stanley

All right, just one quick question in the end then. Well I guess two. Stockpiles how are they? And number two, how much of your revenues are locked in for 2009 and for 2010?

Rob Knight

You are talking about coal stockpiles I assume?

William Greene - Morgan Stanley

Yes, correct sorry.

Jack Koraleski

Stockpiles are about where they should be at this time of the year and maybe while, across our broad base, I would say they’re about where they should be. We have some customers that have more coal than what they wanted at the moment. We also have some customers that would be interested in taking a little more coal. So, it’s a kind of a balanced look. At this point in time, we think coal demand is going to be fine and the second question was…

William Greene - Morgan Stanley

Revenues that are locked in for ‘09 and ‘10?

Jack Koraleski

Revenues that are locked in, I would say at this point in time that we probably have 80% locked in and 53% is just new legacy deals that we dealt with in 2008 that have a 2009 impact and then the balance of that would be either pricing decisions from the fourth quarter or previous legacy contracts that have escalation causes that kick in, at various points in times throughout the year. So, we’re probably 80-85% of our price in the market where it should be at this point time.

William Greene - Morgan Stanley

And for 2010, there is very much or no?

Jack Koraleski

No, it is a little better than 2009, but it’s a relatively small piece.

Operator

Your next question comes from Jason Seidl - Dahlman Rose.

Jason Seidl - Dahlman Rose

A couple of quick questions here, you mentioned you weren’t entirely successful on some of the coal contract pricing. I was wondering, if you could elaborate on that a little bit, was that the reference of the Great Plains Energy ruling and maybe a loss in a little bit of business to CP or is that something else?

Jack Koraleski

You know Jason, I didn’t say that we were unsuccessful in pricing, what I said was that some of the contracts didn’t go our way. In the old legacy deals that we had. We had some business that basically was a winner take all deal that ended upon our franchise, but when you really look at it, route structure and everything else that goes into it, it’s not our strong suite. So, the fact that we lost some business was not surprising, there were a couple of contracts that we didn’t renew some of it CP, others it just kind of plays out over the life of the deal. We’ll get another shot at those in a couple of years, but overall it really wasn’t a surprise for us.

Jim Young

Jason, we do as Jack indicated even with some of that loss, it looks like we’re going to be able to offset a big piece of that long-term. Again it boils down to the return, some of these deals you’ve got some pretty big spreads on the original legacy price than we are today and we’re going to stay disciplined and what we expect in railroad.

Jason Seidl - Dahlman Rose & Co.

Because sometimes it’s just you guys showing a willingness to walk away from some business at a certain price?

Jim Young

No. As said early, we’ve lost some and we won some last year.

Jason Seidl - Dahlman Rose & Co.

Okay. If I could go back to the fuel surcharge lag, I don’t know if missed this or not, but did you guys give the amount of lag impact for the fourth quarter?

Jack Koraleski

I don’t believe we did. Rob?

Rob Knight

No. Jason, we did not. It was a contributor clearly, but we didn’t give that number specifically.

Jason Seidl - Dahlman Rose & Co.

Okay. That’s fair enough. Also in your capital spending outlook, I know you are down a little bit here from 2008, but if you don’t see volumes recover how quickly can you cut again and in other words, how much of this spending is going to be in the first half of the year versus the second half of the year?

Jim Young

Well, you run out of time here and your ability to cut it back. We may have a little more room that’s out here, but again we’ve got to be careful. This is a great time for capital investment in the business. The efficiency, track time availability, price of materials that we see will start coming down. We’re going to take a hard look at it here, but we’ll be smart about it. Keep in mind, we’ve got 125 locomotives, but $250 million in that spend that as you saw from Dennis’s chart. I don’t need a locomotive next year and maybe the next couple of years, but we’re going to take them and try to get some value out of them.

Jason Seidl - Dahlman Rose & Co.

Okay and one more question, I’ll hand it off to somebody else. How much pushback have you been getting from some of the customers on some of the price increases? I mean obviously, the environment out there is not too good as we’ve all seen the numbers out of the railroads. I’m just curious as to sort of a real-time to update from you guys on pricing?

Jim Young

Jason, obviously and I have said this consistently, I haven’t met a customer yet that said thanks for the price increase, but what we’re selling is the value proposition here. In terms of our service products where we are delivering service that our customers haven’t seen in many, many years and there is a value proposition there. So, again it’s about service, our customers are under pressure, but we’ve got to continue to help them take out cost. Jack, you want to add anything?

Jack Koraleski

No, I think you covered it pretty well as you said.

Jim Young

There is one other item here Jason, which is the decline in fuel prices. At the end of the day, customers they don’t separate fuel surcharge for base rate, they just see their total rates and we had a lot of pressure when fuel hit $150 per barrel last year with the run up. Right now, they’re seeing their prices; real prices are moving down with the reduction of fuel surcharge.

Operator

Your next question comes from Ed Wolfe - Wolfe Research.

Ed Wolfe - Wolfe Research

Can you talk a little bit about RCAF and what percentage of your contracts are RCAF right now?

Jack Koraleski

If you look at our book of business right now only about 10% uses RCAF as an escalator. Most of that is in the remaining legacy deals that we haven’t been able to touch and for better or for worse quite honestly those don’t include 100% of RCAF. So, as it turns out RCAF is not a very big issue for me.

Ed Wolfe - Wolfe Research

And is that the mostly coal at this point?

Jack Koraleski

Yes, pretty much coal. If you looked at that pie I showed you, coal and Intermodal are the two biggest players and that’s where you see the RCAF impact.

Ed Wolfe - Wolfe Research

Okay. When you look at the pricing that’s already complete for this year? You obviously have pretty good visibility into it based on what you said. What is the RCAF look like both net and gross of fuel? Obviously, it’s going to be negative gross to fuel. What does is it look like net of fuel?

Jim Young

I’m not certain we can even answer that, that’s in terms of the details. So, what you know obviously, RCAF is moving down in total that’s out here. There is a strong fuel component of that. I think core inflation in the railroads though are still going to be positive then when you look at labor increases that have come through; some contract pricing that still have some pretty healthy price increases that are out here. So, I know that I can’t give you the percent change here, but the components clearly are moving in opposite directions, Jack you want to add.

Jack Koraleski

You just look at the first quarter RCAF and you see I think RCAF was down probably year-over-year in about the 3% range but [ALF] which is our RCAF without fuel was actually up about 0.5%. So, I think that kind of points out to you the fuel differential and says that the overall cost still had some inflationary impact for us.

Jim Young

Ed, to me RCAF should be zero some gain overtime, you’ve got it linked, if your inflationary costs are going up or down, you’re covering 100%, that’s the very 100% unfortunately with some of our contracts, we don’t have 100% recovery of our RCAF.

Ed Wolfe – Wolfe Research

No, I get the zero some gain and the reason I am asking is, we have gotten a lot of questions since [Inaudible] yesterday. They apparently reported it when you look at your 6% pure pricing that you talked about for the quarter. They had historically looked at that number including RCAF gross of fuel. When you look at that number at 6%, do you have included in that the RCAF contracts and if so, is it included in, I would guess it’s net of fuel not a gross of fuel?

Jack Koraleski

My 5% to 6% includes the contracts that are escalated by RCAF and that’s the core price increase that does not reflect what happens on the fuel side.

Ed Wolfe – Wolfe Research

Okay, and it’s cosmetics, but I think it’s important just so people understand the yields so that’s helpful. In terms of the operating ratio and direction, I know you haven’t given earnings guidance, but if we look at first quarter directionally I am guessing the operating ratio is going to be down year-over-year as you lose some of that headwind on the fuel, is that fair assumption?

Rob Knight

The operating ratio actually year-over-year, if you look anytime going from fourth to first it tends to go up.

Ed Wolfe – Wolfe Research

No, I am looking year-over-year and first-over-first. So, if I look at my model in first quarter ‘07 your OR was 81.3, I am assuming it’s going to be higher deteriorated from there given fuel, is that a fair assumption?

Jack Koraleski

Ed, we are not providing guidance here on the first quarter, but there will be some pressure. Again, when you look at what’s happening on volume that’s out here that will be tough to offset.

Ed Wolfe – Wolfe Research

Jack you talked about extended plant closings over holidays and things like that. Can you talk about the different industries and the timing of when you will start to see some of this stuff move or where you have visibility that things are going to reopen and where you don’t?

Jack Koraleski

Sure. Probably the most visible at this point in time is the automotive industry given the concern that everyone has and today in total we look at about 60 plants and today this week we see probably 37% of that is still shutdown, 63% open that will decline overtime, but it actually is a fairly moderate decline and it extends all the way into early March. We actually still believe based on what our customers tell us that we could have about 12 plants shutdown that first week in March.

Ed Wolfe – Wolfe Research

Okay and so by the end of March you think all 60 are open?

Jack Koraleski

By the end of March of course, there is a lot of time in between that and it depends on if people are going to start buying cars again, but the indications are that people intend to reopen those facilities and have them operating so that’s what we are counting on.

Ed Wolfe – Wolfe Research

How about other verticals, chemicals?

Jack Koraleski

The chemical plants are just starting to show some life. We just recently got some information from some plastic guys that they are resuming production and that’s a pretty big decision on their part from the perspective that, once you take a cracker down you don’t open it up until you are feeling pretty good about your business model. So we take that as a positive sign. The lumber side of the business, still we are not seeing much of an interest in opening up. Although, you have periodic pieces of information.

At this point in time, inventory levels are so low, but the thing that offsets that, if you look at the ratio of inventory to sales, we were making some great progress all the way down into November and then that ratio went way up again and it wasn’t because inventory sparked this, it is because sales disappeared. So, at the first sign of sales I think you could actually see some inventory rebuilt, start-up and things could be a little better than what everybody thinks.

Ed Wolfe – Wolfe Research

Do you have any utilities that are shut?

Jack Koraleski

I can’t think of anybody that shutdown.

Ed Wolfe – Wolfe Research

Okay. On the chemical side, once somebody makes the decision that we are going to reopen, how long does it take to physically reopen give or take?

Jack Koraleski

I don’t know the specifics on that, but I think it depends on what the facility as if it’s fertilizer, if it’s plastics, if it’s whatever and I don’t know the technical side of how long it takes to open, but the one experience we had it was about three weeks from the time they told us until the time things started moving so.

Ed Wolfe – Wolfe Research

Very helpful directionally. Can you talk a little about the timing, Dennis the Sunset line completion and if that’s been pushed out a little bit?

Dennis Duffy

Well as you remember Ed, we were looking to target that somewhere in the 2011 timeframe. What we have slowed down is the double tracking of that. So, we’ll do just 11 miles finish off 11 miles that we had started from ‘08 and ‘09, that leaves us at about 300 miles left to do, 60% done and obviously we’ll take a good hard look at that. Now we’ll greater to head about 80 miles, so that we can if we see business come back, go back out there and lay some more additional double track. Though, we probably pushed out at least two to three years, I would say Ed, right now, but we’re still going to be working on some of the terminal aspects of it particularly some of the run through facilities that we see are current bottlenecks.

Ed Wolfe – Wolfe Research

Okay and last question total STE is down about 4% year-over-year, what should that look like as you continue to rightsize towards volumes? Is that a fair number going forward, is it going to be even lower when we look at first quarter?

Jack Koraleski

I think the first quarter number probably is going to be in that 4% or 5%. Again Dennis had shown you, we’ve got over 3,000 employee’s furloughed numbers probably going higher where we’re at, that’s out here. Again what you are trying to predict here is when you think there is going to be some turnaround, I am not real optimistic this year, so we are being pretty conservative on our assumption about a return, but again you have to be prepared for when this thing comes back you don’t just automatically turn it on and off but. So you will see first quarter probably 4% or 5% down.

Ed Wolfe – Wolfe Research

Okay, I am sorry I said that was my last one, one real last one. Jack you talked about losing some coal business because you are sticking to pricing, legacy stuff which is part of the plan, but can you talk about the timing and the magnitude where we might see that in the model of when those comp actually walked away from?

Jack Koraleski

It’s started January 1.

Ed Wolfe – Wolfe Research

January 1 of last year?

Jack Koraleski

January 1st, of 2009

Ed Wolfe – Wolfe Research

That’s when you’re starting to see contracts that you are walking away from, so going forward….

Jack Koraleski

No, wait I am sorry I misunderstood your question. I thought you’re asking about the contracts that I lost, when was the impact of that in terms of our volume and we lost those contracts effective January 1.

Ed Wolfe – Wolfe Research

Okay, so we will see that starting now going forward is what you are saying?

Jack Koraleski

It’s in your numbers Ed.

Jim Young

Ed, in fact if you look at coal right now you are running about 2% to a year ago, got a lot of factors in there but, that is where we are at.

Ed Wolfe – Wolfe Research

Okay that is in the numbers.

Operator

Your next question is comes from Walter Spracklin – RBC

Walter Spracklin – RBC

Just one clarification, you mentioned around 80%-85% your 2009 book is contracted or is priced in. A ballpark what percentage of your total book is contracted and balance that off against the remaining that is tariff?

Rob Knight

If you look at our mix of business we have between 40% and 45% that’s under our long-term multi-year contract. We have about, okay I am going to start guessing here about 20% to 25% it’s probably closer to 20% that is one-year contract kind of leather coats and things and then the balance 30 sum percent would probably be in the tariff.

Walter Spracklin - RBC

Okay, that’s good. Next question is just on the on some of the modal shift that you might be seeing regarding truck, fuel prices coming down significantly you mentioned that it is going to be a lower top line cost to your customer and clearly the truck reductions, because there is a higher fuel consumption and that mode is probably going to be even more pronounced to the extent that you might have seen some traffic flow over to truck when we saw 140 oil are you seeing any of that traffic going back to truck now that fuel costs are come down so significantly ?

Dennis Duffy

Yes, we have bought some business to track here recently and it’s interesting it’s for two reasons, one of which is the lower fuel prices has actually breathed some life into some small trucks that had been on the verge of going away. So, they now have new hope so, they have got some pretty sharp rates in the marketplace. We have seen that particularly up and down in the IFAD’s corridor and some of those locations.

So, that’s one factor that has impacted us and the rest of the business is holding pretty solid. We’re all kind of watching to see what happens here in terms of the registrations. They have to get a new license for their tractors at about $4000 a copy. So, we’ll see the staying power that we have there.

Overall, the other factor that we’ve seen that’s probably been interesting for us is, some business that shifted to track and when we push back on the customer to determine the reason, they basically said, “we can put four truck loads and one railcar”, but in today’s financial market, I don’t really want to carry the inventory from four truck loads, so, I’ll just buy the truck load at a time until things improve. So, we’re seeing both of those, we have lost some business, but we are watching it pretty carefully.

Walter Spracklin - RBC

Okay. That’s good color. Now moving sort of to the intra-rail competition; you’d mentioned that one of the contracts didn’t go your way. Is there any sense of risk here that we are seeing increased price competition between the railroads, based on what you’re seeing out there today?

Dennis Duffy

We’re not going to get into a lot of details on the specific pricing. Clearly, there are some markets that it’s softer. As Jack said, the domestic Intermodal, you’ve got some pressure there, that’s out here, but we’re staying firm on what we require. While we had a great year in 2008, you start looking at the capital needs, you look at replacement cost of assets here, these returns need to go up and we’re going to be smart about understanding where our sweet spots are in our network and our margins here, but so far we’re not seeing that, there is just pockets that are out here, but we’re sticking our outlook here.

Walter Spracklin - RBC

Okay, well that is good to hear that, I applaud that. On the volume [Technical Difficulty].

Dennis Duffy

I think we just lost the feed.

Operator

Your next question comes from Matt Troy - Citigroup.

Matt Troy - Citigroup

No, actually relating to the pension plan. We’ve started the year under-funded like a lot of folks with a heavy equity allocation; I think you were close to 70%. Can you just give us an update on the status of the pension expected funding in ‘09? When you need to start thinking about that and positioning for it, I guess it is still as early, but rough estimates would point to a significant contribution needed to top-off the plan. Any thoughts or update there?

Jim Young

Matt as I mentioned, the year-end ’08, we put a voluntary payment, a cash contribution of $200 million. In ’09, we’ll work through that during the year, likely will be a contribution, but we haven’t determined how much and exactly when.

Matt Troy - Citigroup

Is it fair to say that it would be higher than what we saw in 2008?

Jim Young

Probably not, but I can’t give a precise number on that.

Rob Knight

Matt, we’ve been putting some cash in pretty consistently for the last three, four or five years that’s out here.

Matt Troy - Citigroup

But, again I think everyone is in the same boat with the equity market being what it is, just looking for an update.

Jim Young

Keep in mind, our pension implies again the number of people that is a pretty small proportion, it actually I think implies to about 10%, 9% of our total workforce here?

Matt Troy – Citigroup

Okay. Second piece of the question, was the debt rate you’ve did late last year was the largest I believe of the class ones at 7.9%. Maybe a little higher than what we have seen from you guys in the past, is that debt rate cover what you’ve got expiring in 2009 or will you need to swap out that debt when it comes due or are you covered now given the size of the rate late last year?

Rob Knight

As I mentioned, we’ve got $250 million payment due in the next two, three weeks and we are covered with that. Beyond that, we’ll look at it and determine what the market is at this point in time that further debt is due.

Operator

Your next question comes from Ken Hoexter - Merrill Lynch.

Ken Hoexter - Merrill Lynch

Just a follow-up on that last question; do you have anything else due in ‘09 or is it just the $250 million?

Rob Knight

We do have additional debt; we can do during that later in the year, about $600 million or so in total.

Ken Hoexter - Merrill Lynch

In total, so different issues through the year?

Rob Knight

Correct.

Ken Hoexter - Merrill Lynch

Okay, you kind of talked about the 3000 employees you are going to furlough or have furloughed, what is the process to, how long do you keep them furlough, do you have to, is there a contractual agreement that you have to keep them in the furlough for a certain amount of time before you can reduce your staff overall just wondering what kind of ongoing costs furloughed employees have relative to your on-book employees?

Jim Young

It varies by group, I’ll have Dennis talk, but a majority of those folks right now are trained in engine crew, but go ahead Duff.

Dennis Duffy

Again and [Inaudible] side, which is preponderance of that number, they come off the direct cost obviously right away and we don’t incur anything there. Now there is some continuation of benefits out there for several weeks, which would be somewhere close to probably $1000 a month something like that per employee. And then we also have a temporary work arrangement that would put some of these under that we call AWAT’s, it’s an alternative work and training that we pay them eight days a month plus the benefits. So that we could always have a rate of reserve and what we tie that to the anticipated attrition rate for the next six months is what we are working through there.

So that if things do change, whether we do have that rate of reserve that we can put them right back in play immediately and we make adjustments to that on a monthly basis and can we chose.

Jim Young

And we chose to do the AWAT’s that was not a requirement in the agreements and again as Dennis said it’s an attempt. We try to bridge the time there that we furlough and get them back to work. Now we also have our attrition while it has slowed down a little bit. We are still going to probably see 5%, 6% this year.

So, again as we said before with an aging workforce as you have and attrition rates kicking up. We are hoping we can again we’ve literally or stop hiring other than couple of specialized areas here. We can get people back to work as quick as we can.

Ken Hoexter - Merrill Lynch

Okay and then is there I am just wondering if you are really seeing some increased costs from some of your competitors, is this an increasing amount of pricing competition you are seeing you noted on the coal side. I mean why not start calling out some of these I guess losses to whoever is being the more aggressive so investors can understand who is starting to see or lead the pricing competition within the group?

Dennis Duffy

Well Ken, it’s against the law here. I know you don’t literally mean call out what we are seeing here. We are very careful in terms of what we do internally here and again I don’t see any dramatic change. I want to be careful here, you are seeing pockets we compete, at the end of the day again, we have lost some but we have won some and but I don’t see a huge change right now in terms of price pressure at this point and again volumes in the railroad industry have been weak for three years, if you look at it the recession started quite some time ago. So, we are going to be smart about where we go here in terms of our returns long-term.

Operator

Your next question comes from Tom Wadewitz - J.P. Morgan.

Tom Wadewitz - J.P. Morgan

A question in terms of productivity going forward, you have already had a very good trend in headcount reduction. Your fourth quarter I guess train starts down 9% that’s a pretty impressive number and you are not quite keeping up with the decline in volumes, but you are not that far away, is there risks that its, you are not able to keep up the pace of productivity and you have already kind of you are getting a little bit to the end of some of the momentum on that? Or do you think that there is really continued ability to have the productivity momentum in 2009 that you had in 2008?

Jim Young

Tom reduced volumes are going to put pressure on the business, I mean there is just no question about it. Run an 18% down year-over-year on volume is going to put pressure on productivity. We are focusing on a lot of things, if you recall we have got a project OR operating ratio initiative that we are looking and that’s been in place for several years now. We are putting a lot of pressure there to take a look at our costs, that side had great success there, that’s out here. We have technology deployment that we are continuing to push on. Dennis, showed $150 million technology investment this year that pointed productivity.

Our process initiatives, we have as you know really it is called lean management [Inaudible] engineering that really continues to show us opportunities for our productivity. I would tell you the headcount reductions match with volume, we have to continue to do, but long-term our target here is we want to be handling more volume with fewer resources and but you have to go to slow, this whole industry, if the pace of falloff continues, we are not going to be able to keep up with it. We are going to be very aggressive on it. We are going to prepare ourselves when this thing turns back that we don’t wakeup someday and realize, I don’t have enough people to move trains so, and we are going to keep at it.

Tom Wadewitz - J.P. Morgan

Is there a way that you can think about the kind of ratio between the two, I know part of it is how well you can actually forecast the volume, so you can set the resources accordingly, but I mean if volumes end up down 10% on a full-year basis, would you expect headcount and let’s say train starts to be off at half that level or can you be closer to volume down 10, train starts down eight or nine?

Jack Koraleski

A rule of thumb is probably I think on variable cost maybe 30% to 50% when you think about it. Again, fuel is going to be highly variable to highly correlated to volume or other costs will be [Inaudible] a rule of thumbs 30% to 50%. I can tell you one of the things we are seeing right now not only capital investment, the productivity crude rates, cycle time you are generating assets here that’s out here and we are just going to keep very aggressive on our costs but be smart about it.

Tom Wadewitz - J.P. Morgan

Do you think there is maybe upside to I think you said maybe in first quarter headcount down 5%, but if you are down 10% in volumes for full year, do you think you can be down further than that in headcount?

Jack Koraleski

I think we we’re down 10%. We are going to down more than 4% or 5% on headcount.

Tom Wadewitz - J.P. Morgan

Right okay, and as you look at ‘09 you’ve got I guess some obvious unfavorables, but a few favorables you’ve got, do you think that you are still going to get 5% to 6% price you have got under-covered on fuel surcharge, so you should get some net benefit from lower fuel and then you have got the operating leverage and lower volumes. Is there a volume level where you would say, if we are in this range, we think those, positive and negative offset and we can have kind of flattish earnings? Is there a way you can think about that that if it’s kind of down 5% maybe you can get flat on earnings, if it’s down 10% then that becomes a lot harder?

Jack Koraleski

Tom, I said I wasn’t going to provide financial guidance here, but I would just ask you to think about the positive, you just listed them that are out here. Pricing, productivity out here, energy cost, I mean don’t forget, you not only have diesel cost, but we have got a lot of other energy costs in the business that are coming down. How that plays against volume it’s a tough call. We are going to do everything we can to have relatively speaking a very good year for us financially.

Operator

Your next question is comes from the David Feinberg – Goldman Sachs.

David Feinberg – Goldman Sachs

Most of my questions are asked, so I have just a few housekeeping questions. On the locomotive purchases in ‘09, can you just run through those numbers I saw the $400 million in locomotive and equipment, but I missed the number of locomotives and the dollars spent on those standalone?

Rob Knight

Well, it’s a 125 locomotives, I would figure a price tag about 2.1 or so 2.2

David Feinberg – Goldman Sachs

And then you’ve talked about some of the modal shift you’re experiencing in Intermodal losses to truck, can you talk about, is that peer price in other words traditionally we’ve thought about railroads being priced at some discount and when we put ranges anywhere, costs from the 15% to 40% relative to truck. The modal shifts that you are experiencing, is that purely based on price, in other words are the trucks coming down to the traditional rail rates and then losing it? Or is there service element there as well?

Rob Knight

Jackson, you want to take the price question there?

Jack Koraleski

David, for the most part as I said to the earlier question, some of it is price, some of it is they just don’t want the inventory carrying cost associated with a much larger shipment. The one thing we have going for us is our service and the service improvement that we’ve seen so, if we looking at discounts to market, if you look at something like over The Sunset Corridor, LA to Dallas and things like that, our discount to truck is probably in the ten, Chicago to Laredo our discount to trucks probably 15% something like that LA to Chicago more like 20% today. So, we’re watching the market price very carefully and I think that our service improvement plays very strongly in our favor.

Jack Koraleski

Yes, there is no question on the service piece, when you look at we’ll put new products into the markets, but also keep in mind with customers, you’ve got to prove it overtime, you got to be consistent in terms of your service delivery and I will tell you, it is making a big difference in terms of how our customers are viewing the real products that are out here in the industry.

David Feinberg – Goldman Sachs

Great and then one last question, you’ve talked about the percentage of your business to roughly 20% that are on one-year contracts. When we think about 2010, when will you start talking to those customers about the 2010 pricing on that 20% of your book of business?

Jack Koraleski

It goes all throughout the year, I can’t tell you that it’s any one quarter dominates I would say a lot of it probably comes most closely to year-end, but I wouldn’t say, it is anymore than 30%-40% of that amount.

David Feinberg – Goldman Sachs

Is it safe to assume that piece of your overall book of business those discussions might more vigorous in terms of re-pricing, I think you’d mentioned earlier, you never met a customer, who didn’t like a price increase, but are those the toughest conversation is that where you get the most pushback? Or is it pretty consistent across your book of business?

Jack Koraleski

I think all of my pricing discussions are vigorous with lots of pushback. So, I don’t see it very different, they are not a heck of a lot different than negotiating a multi-year contract or a tariff increase.

Jim Young

David the key on the discussion, like again keep the mind some of these, where is the value. Not only the service product, but what other products can be, what does it mean to the customer, when you turn in assets and many of these quarters like we are today, you have customers that who may own equipped real assets and step back and look at it where they can take millions of dollars out of their logistics costs. So, all that comes into play as Jack said, none of them are ever easy on the discussions, but we’ve got some great products that we have out there today that really do provide value.

Operator

Your next question comes from Randy Cousins – BMO Capital Markets.

Randy Cousins – BMO Capital Markets

A couple of questions for Rob, the tax rate this year was around 36%. Can you give us some sense as to 2009 and then you’ve mentioned about the $250 million or roughly that number that you got is sort of accelerated depreciation. How should we think about the deferred taxes for 2009?

Rob Knight

Randy for about tax, cash tax rate going forward I would just use similar what we had experienced here in 2008. From bonus depreciation, what I had mentioned on the benefit we got most depreciation in 2008 and of course what you are referring to is about $225 million, looking forward we haven’t given that number.

Randy Cousins – BMO Capital Markets

But, do you see for modeling purposes and we think about sort of what we should put in the deferred tax line, can you give us some help in terms of, should we go back to what we used in 2007 or should we assume that the ratio of deferred to the total accrual stays the same?

Rob Knight

Randy, I can’t give you any specifics, so I can’t suggest a change and I think it’s kind of the same as you look forward.

Randy Cousins – BMO Capital Markets

Okay the congratulations on the safety performance on and you guys made tremendous strides over the last few years on safety. Looking to 2009, is there some opportunity to again reduce the accruals for your safety? Or for workers’ compensation not workers’ compensation, but for the whole sort of accrual process that you got for employee injuries et cetera?

Jim Young

Randy there is, but again what we’ve got to continue to focus on our performance. Dennis has set some aggressive goals, we have got good programs in place, our total safety culture is one that we have introduced and we’re hoping we should see good trends.

Randy Cousins – BMO Capital Markets

So, Jim can you give us a scalar in terms of potential reduction?

Jim Young

Randy, I’m going to stay away from that in terms of the order magnitude. I would just tell you though that you still have within our company pretty substantial cost item related to safety failures, whether you talk about employees, whether you are talking about derailments, whether you are talking about public safety and we’ve got great progress, we are going to continue at it.

Randy Cousins - BMO Capital Markets

Jack, one question for you; there is a lot of skepticism about the railroad industries. The ability to get 5% to 6% of baseline price increases. When you think about your 5% to 6%, how much of that 5% to 6% would be repricing of legacy contracts from last year in terms of year-over-year comp issue and I guess the other thing I was kind of looking for is some sense of granularity in terms of the 5% to 6%? So for example, do you still see getting 5% to 6% in the Intermodal or do you make more in some category and less than others?

Jack Koraleski

As we look at it Randy, we’ve said before in our conference with Security Analyst’s last year that we expected to get 3% to 4% plus a 2% pick up from legacies. And so, in total that’s kind of the way we look at it. Our 5% to 6% right now about 55% of that comes from new legacy renewals that we did in 2008 and that’s their impact in 2009. So, it’s about 55% of my 5% to 6% through this year and then also in there you would have other legacies that were done before 2008 that have escalation and plus our tariff pricing and our other pricing.

In terms of the individual groups it’s pretty difficult to say. It’s really market-by-market, lane-by-lane that looks and so in some pricing corridors we are able to get more than 5% to 6% and others we are taking less and we’re just watching the market very carefully and working with our customers.

Randy Cousins - BMO Capital Markets

Last question, god I think we shot your stock last year in terms of floods, landslides and hurricanes. You guys mentioned to getting insurance recoveries as a benefit for previous years? Looking into 2009 are you in disputes with any of your insurance companies and do you see a situation where you’re going to get an insurance settlement in 2009?

Rob Knight

Randy, we always work through that. There is no disputes to share here, but we’re working through all those challenging insurance processes.

Randy Cousins - BMO Capital Markets

So, can you again give us a scalar in terms of sort of potential contribution?

Rob Knight

No.

Jim Young

It is not going to be material. At the end of the day, we don’t have any thing like that in our plan. So, I wouldn't, not the material.

Randy Cousins - BMO Capital Markets

Okay and then I’m going to squeeze one more, bonus accruals. Was there any change in bonus accrual in the fourth quarter? Did you reduce it; was it up year-over-year? Can you give us some sense as to what happened?

Jim Young

Randy, I still have my board meeting in a couple of weeks, but at the end of the day we had a great year, one of the best years in a history of the company. We’re going to do reward the management team for their performance that’s out here. 2009 is a different situation, in terms how you look. So, there are no changes in bonus accruals in terms for fourth quarter and we’re taken a hard look at, we are making some tough decisions right now in 2009.

Operator

Your next question comes from Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

Just a couple of quick one’s left. First, what do you expect the increase in pension expense on a book basis will be ‘09 versus ‘08?

Rob Knight

I would expect that the pension expense would be probably similar to that what we’ve experienced in 2008, which is around, $35 million or so.

Chris Ceraso - Credit Suisse

Okay and then can you give us a feel on an average basis maybe like-for-like in terms of routes and products on a year-to-year basis, what you are seeing right now in tariff pricing?

Rob Knight

I really can’t, it varies all over the place and again it depends on the market, it depends on the commodity, it depends on the competition as it just depends on so many things. It’s pretty hard to give you an average.

Chris Ceraso - Credit Suisse

There was no consistent team there?

Rob Knight

No.

Operator

Your last question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

Just a quick cleanup for maybe Rob or Dennis; when you talk about the folks on furlough I assume the folks in the AWAT’s program are immediately available that’s the whole point of it. For folks that aren’t, how long does it take to get them back into active service. Do they have to go through a full training regiment again?

Dennis Duffy

Well Gary, it depends on how long they’ve been off, but I’d say a maximum 30 days. We usually try and get them back and get them back into the fold so, that’s why we try and peg the immediacy of AWAT’s to the anticipated attrition rates, so we can have them readily available as you said and then the rest would probably be about a 30 day lag.

Gary Chase - Barclays Capital

Okay and then just two for Jack, if I could. Just want to clarify, you said earlier, I think it was Ed Wolfe asked you about, whether or not RCAF, if I can phrase this right. The impact of fuel on RCAF is included within your 5% to 6% core price increase and I think I heard you saying no, so that means whatever fuel does to RCAF positive or negative that’s not going to affect what you’ve report to us as your core price gain, is that accurate?

Jack Koraleski

Yes, we try to exclude fuel and try as best we can to come up with the core price calculation, but again RCAF is not a very big factor in our book of business.

Gary Chase - Barclays Capital

Okay and then so, good and to the last question. When you think about the business that is not RCAF, can you give us any color for what that is, is it RCAF ex-fuel plus the surcharge? Does it have nothing to do with RCAF? Or what’s in there, when you think about contracts that are not rolling, that are progressing year-to-year. How do we think about what the escalation clauses in there are?

Jack Koraleski

There is an RCAF component that’s about 10%, you’ve got an [ALF] plus fuel surcharge component and then you have fixed price increases that we’ve negotiated with customers in terms of just how over the length of the contract we would escalate the pricing of the deal.

Gary Chase - Barclays Capital

Okay, any sense of what [ALF] plus fuel surcharge is? Is that a significant percentage of the non-RCAF?

Jack Koraleski

My guess is ALF plus fuel surcharge is probably in the neighborhood of 10% to 15% of our base.

Gary Chase - Barclays Capital

Okay, so 10% for straight RCAF, 10% to 15% for that and then the rest is other escalation clauses you’ve negotiated overtime?

Jim Young

Yes.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Jim Young for closing comments.

Jim Young

Well, I’d like to thank everybody for joining us in the call and we will talk to you again in about three months. Thanks.

Operator

Ladies and gentlemen, this does concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Union Pacific Corporation Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts