Union Pacific Corp., Q1 2009 Earnings Call Transcript

Apr.23.09 | About: Union Pacific (UNP)

Union Pacific Corp. (NYSE:UNP)

Q1 2009 Earnings Call

April 23, 2009 8:45 am ET

Executives

Jim Young - Union Pacific - Chairman and CEO

Jack Koraleski - Union Pacific - EVP Marketing and Sales

Dennis Duffy - Union Pacific - EVP Operations, Railroad

Rob Knight - Union Pacific - EVP, CFO

Analysts

William Greene - Morgan Stanley

Walter Spracklin - RBC Capital Markets

Ken Hoexter - Merrill Lynch

Matt Troy - Citigroup

Thomas Wadewitz - JPMorgan Chase

Randy Cousins - BMO Capital Markets

Edward Wolfe - Wolfe Research

Gary Chase - Barclays Capital

Christopher Ceraso - Credit Suisse

John Larkin - Stifel Nicolaus

Jason Seidl - Dahlman Rose

Arturo Vernon - MacQuarie Capital

David Feinberg - Goldman Sachs

Operator

Greetings, and welcome to the Union Pacific First Quarter 2009 Earnings 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 slides for today's presentation are user 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 first quarter earnings conference call. Joining me today in Omaha are Rob Knight, our CFO, Jack Koraleski, Executive Vice President, Marketing and Sales, and Dennis Duffy, Executive Vice President, Operations.

Our first quarter earnings totaled $0.72 per share, a 15% decrease versus last year's quarterly earnings of $0.85 per share. Strong service, productivity, pricing, and lower fuel prices helped drive our results.

In the first quarter, we experienced one of the most challenging business environments we have ever seen. Jack will talk in more detail about each of the groups, but the weak global economy played a role across the board. Even our bulk commodities, which tend to be less economically sensitive, were impacted by weak export grain demand, reduced animal counts for feeding, and reduced electrical consumption by industrial manufacturers.

Given the sharp volume decline, our efforts in the quarter focused on reducing costs while improving customer service. We are taking advantage of the lower volumes to increase operating fluidity and efficiency. Regardless of what measure you look at, we have never run better.

First quarter velocity increased more than 20% year-over-year, but was an all time quarterly best. These productivity efforts, along with lower fuel price, helped us achieve a record first quarter operating ratio of 80.3%.

In addition to increasing efficiency, we are focused on further improvements in safety and customer service. First quarter safety measures were better in all categories, while our customer satisfaction scores hit a new high.

In times like these, customers are focused on improving their supply chain efficiency. This provides us a great opportunity to show both current and potential customers the excellent value and service Union Pacific has to offer.

Finally, we ended the quarter with a strong balance sheet while maintaining a high degree of financial flexibility in today's world of low business volumes and uncertain credit markets.

With that, let me turn it over to Jack to give you the marketing perspective. Jack?

Jack Koraleski

Thanks, Jim. Good morning. Our first quarter volume fell 21% as the economy took its toll on each of our businesses. Our core price was at the top end of our target range, but our average revenue per car was only up 1%, as lower fuel prices drove a decline in our fuel surcharge revenues.

Total freight revenue declined 20% to $3.2 billion for the quarter. What I will do now is take you through a walk through of each of our six businesses.

We'll start with Ag. Our Ag products carloadings were 12% below last year's strong first quarter showing. With a 1% decline in average revenue per car, it lowered total revenue for Ag products 13% for the quarter. Whole grain exports were down 34% against stronger worldwide supply and a stronger US dollar. Domestic grain and meal shipments also saw some due to a reduction in corn shipments to ethanol plants, a weakening of the wheat market, and reduced animal feeds.

Our DDG business grew 9% while ethanol volume fell about 1% as four plants were closed by the VeraSun bankruptcy. These plants are expected to resume production over the next couple of months.

Frozen meat and poultry and sugar beet shipments also were down. Food and refrigerated products were the bright spots with our produce rail express leading the way with a 50% volume increase resulting from our new California unit train start. Import beer, canned goods, and wine shipments also increased.

Looking ahead, we expect grain exports to show modest improvement in the second half. An increase livestock and poultry should give a boost to domestic grain, and higher gasoline usage during the summer vacation season should lead to stronger ethanol volumes later in the year.

Auto volumes dropped 48%, resulting in a 55% revenue decline, as negative mix and lower fuel surcharges dropped average revenue per car 13%. Finished vehicle shipments declined 54% while our parts volume was down 40%.

Thirdly, there is a lot of uncertainty in the auto industry. Most forecasts suggest production will remain low through the second quarter. Some strengthening in the second half. We are just now in the process of digesting the GM announcement from yesterday. We will have to see how that plays out in terms of their additional plant closings.

Growth opportunities, our strong service performance, and our Insight Network Logistics team are allowing us to penetrate both the parts market and used car market. And we are particularly excited about the used car markets. Today that's growing much faster than new cars. Through INL, we have developed capabilities to manage truck-to-rail transportation of autos nationwide providing a retail channel for door-to-door transportation.

So this summer, we are going to be launching a fully transactional e-store called shipcarsnow.com, which in combination with our new co-loading capabilities will allow us to blend used cars into our existing new car delivery network.

Our chemical revenues were down 15% as a 6% improvement in average revenue per car partially offset a 20% decline in carloadings. Reduced downstream demand in the automotive and construction industries, along with the decline in consumer spending has impacted our liquid and dry business, plastics and soda ash. Fertilizer volumes were also off with reduced demand both in the export and US markets.

Sulfur shipments were the bright spot. They were up 21%, largely the result of some new unit train business that we put on the railroad. Improvement in liquid and dry plastics volumes will largely depend on the strengthening of the economy. Soda ash export volume should improve in the second half, and there continue to be some spot opportunities in petroleum markets with crude oil, asphalt, and diluence.

A 10% decline in energy volume was partially offset by a 5% improvement in average revenue per car, resulting in a 6% revenue decline in our energy business.

In January, we indicated there were a couple of legacy deals that got away. Those losses cost us 2.8 million tons out of the Powder River Basin in the first quarter. Our SPRV volume was also hampered by utility outages, lower electrical demand, and relatively high coal stockpiles.

Mine and coal quality issues continue to impact Colorado Utah tonnage and resulted in us losing about 200 trains during the quarter leading to a 21% decline. We knew it was going to be a tough year and that those contract losses would hold energy below 2008's record volume, but the deepening economic slowdown in the high stockpile levels have dampened our outlook a little further for coal markets.

Continued weak demand across industrial products market led to a 27% drop in volume, which with the 3% decrease in average revenue per car resulted in a 29% decline in revenue.

Weakened demand has steel production at 43% of capacity, compared to 91% last year. So we have seen our steel volumes about cut in half. Lumber shipments were down 37% as the market showed no signs of recovery during the quarter.

Slow demand for highway projects and commercial and residential construction impacted stone carloadings. However, we are starting to see an increase in the Texas DOT project lettings. That's over and above the normal seasonal lettings or pickup that we would expect at this time. Largely the result of some of the stimulus funding finding its way into the market. Paper mills continue to reduce inventories, driving a 29% decline in our paper volume.

Looking ahead, it looks like our best prospects for significant improvement are later in the year in our construction segment, driven by stimulus-related infrastructure projects.

Our intermodal volume fell 22% with a slight improvement in average revenue per unit offsetting some of the impact of a 23% volume decline. Volume in our international segment was down 30% while domestic was down 9%. There are some good things happening on the domestic side.

Our Streamline subsidiary, which offers door-to-door intermodal services, saw volume grow 113% for the quarter with about 30% of that growth coming off the highway. Great service drove our EMP volumes up 18% with intermodal marketing companies, and it is also supporting new truck competitive products including our LA to Dallas and Memphis markets and some refrigerated service in several lanes that again were targeting highway conversions. That success helped drive some strengthening as the quarter progressed with our domestic intermodal volumes closing March down only 2%.

Looking ahead, international could very well continue to trail 2008 volumes, but we expect domestic business will benefit from our EMP product offering and strong service. That's supporting some additional truck competitive products, including our new LA to Tacoma doublestack service, that was made possible by our investments to clear the tunnels along our [I-5] corridor.

So while inventory levels have dropped significantly, they have not come down enough to match the falloff in sales. Top chart shows average retail trade inventories during the first quarter from 2006 through 2009. And for '09, we used only January and February since that's what's been reported so far.

While inventories are back to 2006 levels, the inventory sales ratio is significantly higher than in any of the prior years as the falling inventories couldn't match the pace of falling sales.

Bottom chart shows that the same is true for automotive industry. The extended shutdowns have significantly reduced inventory, but sales have dropped even more quickly.

Until these inventory levels and these and other segments of the economy align with demand, there is not much pull in the supply chain. And of course, that impacts the demand for transportation services.

Many of our customers are telling us that their inventories are already at very low levels. But until consumer confidence returns, I do not think we are going to break that cycle. That makes the timing of a recovery pretty hard to judge. However, some customers believe that the deeper that inventory sag, the greater the potential for more of a v-shaped recovery when, in fact it does come back.

So here are some of the leading indicators that we are watching in our business. In the upper right, gondola orders are show no signs of life, which fits with what we are seeing going on in our steel markets.

In the upper left, we have plotted orders for center beam flat cars which handle lumber. We've seen some seasonal strengthening here of late. Of course in this economy, even a seasonal upturn is starting to feel encouraging for us. Boxcar orders appear to have stopped their slide and have even shown a slight uptick the past few weeks, while this time last year we were actually trending down. And in the lower right, our southern rock carloadings are trending up, although not as strongly as a year ago.

So we've got down decidedly. Boxcar showing some signs of life, and the other two following their seasonal patterns. I guess you could say that these leading indicators reinforce the general uncertainty that remains with perhaps some faint signs of life. The good news is that the favorable economics of rail combined with the great value we can provide with our service is a competitive advantage for us, and it's one that our customers are recognizing.

Our first quarter customer satisfaction ratio came in at 87, topping the fourth quarter of last year as our best ever. The satisfaction index of 88 in March equals our best ever month, hit only one time before back in February of 1994. So we're pretty pleased with those results.

With that, I will turn it over to Dennis who's going to talk about our service

Dennis Duffy

Thank you, Jack. Good morning. The operating department took on the challenge of the lower volume environment working throughout the quarter to align resources with demand while increasing network efficiency. This chart highlights four different service metrics, each attaining new bests in the first quarter.

Starting in the top left quadrant, network velocity increased 5 miles per hour to 27.2, a 23% increase. This is our highest quarterly speed ever and drove better asset productivity and strong customer service.

As we have said before, lower volumes do help, but unified plan initiatives, lean management principles, and strict inventory controls are helping us leverage today's lower volumes into capacity for tomorrow.

Velocity and productivity gains also led to a [recrue] rate of 3.8%, another best. As well as a 5% improvement in our fuel efficiency rate. Our first quarter dwell times were almost a full hour lower year-over-year at 24.3. We are consistently making our car connections minimizing inventory in our terminals.

Freight car utilization, measuring the days between loads, was a first quarter best at 9.1 days. Faster asset turns allows us to reduce short-term rental expenses. It also adds capacity.

Service delivery index reached a best ever level in the quarter at nearly 92. This is a composite metric of all customer commitments and correlates directly with the improvements Jack discussed with customer satisfaction. Importantly, we achieved this high performance level while making safety gains in all categories employee, customer, and public.

A key question is, how volume variable can UP be in a declining volume environment? The concept of volume variability can best be illustrated by this chart.

Our working resources, crews, locomotives, freight cars coupled with our fixed plan, determines capacity in terms of network throughput, which is the most appropriate definition of capacity in the rail industry. Although seven-day carloadings have been running about 145,000, we believe today our physical plant has fixed capacity for roughly 200,000 weekly car loads.

We needed to adjust our working resources to reflect the current economic conditions. To achieve that, we employed a number of levers that impact each category, such as furloughs, lease returns, retirements, and network redesigns. These steps work in a down economy, but we have also built in recall steps should volumes increase. To date, those efforts have yielded strong results.

In the first quarter, UP's gross ton-miles declined 20% year-over-year. As we have discussed in the past, one of our primary objectives has been to match train starts with the freight demand, and with the first quarter starts down 21% against the 20% tonnage decline, we again achieve that goal.

For the quarter, we averaged 18% fewer train engine and yard employees. Used 24% fewer road locomotives and 26% fewer freight cars. So our working resources lined up well against the first quarter volumes.

As we enter the second quarter, resource storage rates exceed first quarter averages as we have taken additional actions. Currently on the right-hand side of the chart, you can see we have roughly 26% of our train in furlough, 31% of our road locomotives stored, and 31% of our freight car fleet parked. We have also furloughed about 700 employees in other crafts as the overall network work load has declined. Moving forward, we will continue to make adjustments as warranted by demand.

Beyond these adjustments in our working resources, we are also making changes in the use of our fixed plant, adjusting terminal operations and train networks to maximize efficiency.

We are using our unified planned process to shift workload to our most efficient yards and to dramatically scale back or close other less efficient facilities, as represented by the pyramid on the left. Through this approach, we have significantly reduced activity at the regional and local yards in our manifest network.

For intermodal and automotive traffic, we are combining the two networks to match volumes and maintain or enhance service performance. Then we aggressively are controlling costs within these scaled-back networks through the applications of remote control locomotives, shift eliminations, reducing staff levels, and other cost-related actions across all terminals.

So as we look ahead to the rest of 2009, the operating team's objectives are unchanged. Safety is always a top priority, and we expect continuous improvement. The work of being volume variable is evergreen.

In fact, we believe the operational changes we are making today are creating capacity and service consistency for our customers in the future. As we enter the summer capital maintenance season, we have the opportunity to work very efficiently on our unit costs with the lower trade volumes.

When the economy turns around and volumes return, we are ready. We will apply the principles of volume variability to generate upside leverage to the growing volumes.

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

Rob Knight

Thanks, Dennis. Good morning. Let me start today with our first quarter income statement. Operating revenue declined 20% in the quarter to $3.4 billion. Lower revenue was primarily driven by the 21% drop in carloadings.

In addition, fuel surcharge revenue decreased more than $300 million year-over-year as a result of lower diesel fuel prices. Operating expenses also decreased 21% to $2.7 billion. The company's cost-saving initiatives associated with the lower volumes and increased efficiency helped hold down expenses.

Another contributor was the 47% year-over-year decline in average quarterly diesel fuel prices.

In addition, last year's first quarter included roughly $20 million of higher costs associated with the Oregon mud slide. So we have a slightly favorable comparison year-over-year.

The combination of lower revenue and expenses resulted in first quarter operating income of $672 million, a 15% decrease. First quarter freight revenue totaled $3.2 billion, down 20% year-over-year on lower carloadings.

On the pricing front, our results were consistent with our outlook for average increases in the 5% to 6% range. In fact, in the first quarter, we were at the higher end of that range. Average revenue per car also increased year-over-year, up only 1% to $1,755 per car, as lower fuel surcharges nearly offset the positive pricing.

In fact, if you look at average revenue per car over the last five quarters, it peaked in the third quarter of 2008, when diesel fuel prices were at their highest. Customers see the benefit of lower fuel prices in their freight bills, which have decreased on average 9% over the last six months.

Our opportunity in today's depressed carload environment is to align expenses with volumes, while at the same time increasing efficiency. As carloadings started falling off last November, we have taken action to better align supply with demand. And those actions aren't just confined to operations. We have acted across the company to reduce spending.

Our efficiency has also improved significantly in the last several months. Although it's difficult to separate how much of this is driven by volumes, the gains are evident in our costs and in our service.

Back in January, we discussed that roughly 30% of our costs are linked to quarterly volume changes. We also stated that the share of costs that vary with volume increases to about 50% over the course of a couple of quarters. Longer term, over a number of years, costs are increasingly variable as we size our business to match volume levels.

With first quarter volumes declining 21%, quarterly operating expenses adjusted for the change in fuel price, declined 12%. We combine the impact of lower volumes and greater overall productivity to achieve 55% expense variability in the quarter. As we walk through each of the different expense categories, we'll point out areas where volumes, efficiency gains, or both, helped drive lower costs.

Let's start with compensation and benefits, down 5% to $1.1 billion. An 8% reduction in our workforce, enabled by lower car load volumes and record operating efficiency, were the primary driver of the year-over-year decline. As you heard from Dennis, our [TE and Y] workforce declined 18% in the first quarter.

Frame men, which accounted for roughly 30% of our workforce, are clearly the most variable part of our employee base. All UP departments experienced workforce reductions in the quarter.

Furlough levels increased throughout the first quarter and are continuing today. As a result, we have a timing difference with our quarterly averages and the actual reduction trends. Offsetting a portion of these reductions was wage inflation, associated with a 4% increase last July for Union employees as well as higher benefit costs. As we move through 2009, we will continue to align our workforce levels with demand and productivity.

Purchase services and materials expense declined 15% in the quarter, or $70 million. This category benefited from decreased contract service expense, as well as reduced crew transportation and lodging. Lower volumes and increased productivity were the primary reasons for less usage of purchase services.

First quarter fuel expense totaled $386 million, a 60% decline versus last year. We saved $335 million in the quarter, as fuel prices decreased from an average of $2.84 per gallon in 2008 versus only paying $1.51 per gallon on average this year.

Interestingly, the $1.51 per gallon is the lowest quarterly average price we've paid in four years.

Fuel expense was also lower year-over-year as a result of consuming 78 million fewer gallons of diesel fuel in the quarter. The 20% reduction in gross ton-miles saved approximately $177 million while our continued fuel conservation efforts contributed another $45 million in savings.

Although diesel fuel prices have inched up some in the last few weeks, we're still only paying about $1.55 per gallon today. At that level, fuel prices could be as much as $2 per gallon lower in the second quarter of 2009 versus last year. If these prices hold, similar to the first quarter, customers will continue to see the benefit of declining fuel prices in the form of lower fuel surcharges.

Depreciation expense increased $5 million year-over-year to $345 million. This reflects increased capital spending in recent years. However, effective January 1, 2009, lower depreciation rates for rail and other track material offset most of the increase. The lower depreciation rate is associated with longer asset lives in reduced track usage.

First quarter equipment and other rents expense declined to $317 million, down $25 million from 2008 levels. Lower carload volumes of finished vehicles, industrial products, and intermodal, continue to drive down short-term car rents. Fewer leased assets also reduced rental costs in the quarter.

Other expense declined $16 million in the first quarter to $226 million. Freight and property damage expense decreased in the quarter along with our volume levels. In addition, first quarter casualty accruals were lower in 2009 as a result of ongoing safety improvements. Somewhat offsetting these reductions were higher state and local taxes, as well as an increased provision for bad debt.

A 21% decrease in operating expenses against a 20% decline in operating revenue resulted in a first quarter operating ratio of 80.3%. This record operating ratio was driven by lower year-over-year fuel prices, pricing gains, and increased productivity, offset somewhat by low are volume. In fact, year-over-year, we improved 1.2 points on our operating ratio. Over the last four years, despite declining volumes, we've taken 3.4 points off of our first quarter operating ratio.

Moving on to the full income statement, first quarter other income was $2 million lower versus 2008 at $23 million. Gains from real estate sales declined in the quarter, while interest income was also down reflecting lower interest rates. Interest expense increased 12% in the quarter to $141 million. Although UP's effective interest rate was slightly lower year-over-year, higher average debt levels drove then increased expense.

First quarter income tax expense declined $52 million, or 22%. Lower pre-tax income and a slightly lower effective tax rate of 34.7% contributed to the expense reduction. Similar to last year, our effective tax rate includes a deferred tax benefit associated with newly enacted state legislation. On a full-year basis, we would expect an effective tax rate closer to 37%.

Net income for the quarter totaled $362 million, an 18% decline versus last year's record first quarter. Earnings per share came in 15% lower year-over-year at $0.72 per share. Slide 32 illustrates UP's adjusted debt balances at the end of the first quarter, which totaled $14.4 billion, or a 47.9% adjusted debt to cap ratio.

In February, we retired $250 million of debt, and we took advantage of a favorable capital markets window issuing $750 million of additional debt. First quarter ending cash balances totaled nearly $1.5 billion, reflecting the proceeds of the debt offering I just mentioned. We are continuing to maintain a strong liquidity position through these tough and uncertain economic times.

We are also taking a hard look at our capital spending in 2009. Although we initially budgeted $2.8 billion, we now plan to trim that back to about $2.6 billion. As Jack discussed with you earlier, there is still a great deal of uncertainty in the marketplace, although we can point to certain inventory figures in leading carload indicators that hold the potential for trends to improve, but timing is unclear. It does feel, however, like we've reached a point of stability in our volumes.

With little visibility to near-term change and demand, we will work to further align resources with volumes, while also improving efficiency. Keep in mind, however, that we've already achieved over 50% cost variability. Lower year-over-year fuel prices should continue to help drive a decline in quarterly operating expenses. Since we don't yet have 100% fuel surcharge recovery, lower prices help.

We are also committed to achieving strong pricing gains for 2009, which are necessary to earn a return on our investment. While we are not providing quarterly earnings guidance today, it is safe to say, however, at these continued low volume levels we won't reach last year's second quarter earnings of $1.02 per share.

With that, I'll turn it back to Jim.

Jim Young

Thanks, Rob. As we look ahead at the year, there continues to be a great deal of uncertainty regarding business volumes. Although we are watching for signs of a recovery, we don't anticipate a turnaround any time soon.

With business volumes continuing to run down more than 20% versus last year, we are taking additional steps to take costs out of the network. Included in this, as Rob mentioned, is a reduction in our 2009 capital budget to $2.6 billion. Although we are slowing some of our capacity additions, we're still investing for the future when the volume returns.

This cost focus does not, however, reduce our commitment to increasing safety and providing excellent customer service. The performance record we have built in these areas is fundamental to increasing the value we provide to our customers and our shareholders.

Customers are looking for supply chain solutions that can help them meet their business objectives, and our network is poised to meet that need. In fact, we believe we will leverage volumes more strongly than we have in the past cycles as a result of our unified plan efforts, lean management, and other network initiatives. UP's safe, fuel-efficient, environmentally friendly transportation offerings further increase the already strong value of rail.

Today's balanced, regulatory environment supports our ability to invest and advance the value we can provide our customers, our shareholders, and the nation's economy. UP 's goals of investing and growing with our customers will be challenged if regulations change and limit our ability to earn an adequate financial return. We are dedicated to increasing shareholder value, and we look ahead optimistically to a growing global economy that will benefit from the strong rail franchise UP has to offer. With that, let's open it up for your questions.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions) Our first question is coming from the line of William Greene of Morgan Stanley. Please go ahead with your question, sir.

William Greene - Morgan Stanley

Good morning. I'm just wondering if we can talk a little about incentive comp. Sorry I jumped on late, so I wasn't sure if you had mentioned it. Incentive comp, I don't think, came down very much. So is that suggesting that maybe you feel like the first quarter is perhaps the trough for the year? Or how should we think about what incentive comp trends suggest?

Jim Young

Bill, I think first thing you have to be careful looking at maybe what you saw at some other railroads. Our program is not similar in terms of the way you do mark-to-market. Ours is a little more consistent. It's out here incentive comp is down a little bit to a year ago. Or, take a look at it each quarter in terms of our performance going forward, and we will adjust according to how our performance will work.

William Greene - Morgan Stanley

Alright. So Jim, UP used to be one of the best railroads, if not the best before the SP merger. Can you get back to that level? And if you can, what's the philosophy? Importantly what's the CapEx requirement for you to get back there? Because I look at the locomotives stored, and I look at what you've done at CapEx. And I say, CapEx maybe can come down materially from where we are. And yet, if you want to get back to those operating levels, and you have improved a lot. I would think you still might have to spend quite a bit from here.

Jim Young

Well, Bill, we used to be one of the best. I think we are one of the best right now, but we can debate that another time. We are being smart about our capital investment, and if you look at it again, you have to go back to the SP-CN&W merger. We bought some properties that needed capital. We have been putting it in. I think you see the results in several areas. Customer service. Clearly, we have substantially changed the mindset of customers. I will tell you, that does not happen overnight.

You have got to work at it. Consistently show what you can do. Our efficiency. Granted, we are benefiting from lower volumes, but I will tell whether you we're running 145,000 cars or 190,000 cars, our productivity is going to be very good. We still have some needs going forward, and I have got to keep an eye on the long-term here.

Now is the time to put capacity in. I will tell you, we are seeing our productivity in terms of capital efficiency is we are up almost 20%. So we are going to be smart about our capital long-term, and we have adjusted. You heard we cut it back about $2.6 billion. You'll recall I have 125 locomotives in that number right now that, quite honestly, I don't need another locomotive for several years. But we'll be smart going forward.

William Greene - Morgan Stanley

And the CapEx number on locos is about $300 million?

Jim Young

About $300 million.

William Greene - Morgan Stanley

So that doesn't repeat in 2010, I assume?

Jim Young

Not unless we see one heck of a v-shape in this recovery.

William Greene - Morgan Stanley

Great, thanks for your help.

Jim Young

Okay, Bill.

Operator

Thank you. The next question is coming from the line of Walter Spracklin of RBC Capital Markets. Please go ahead with your question, sir.

Walter Spracklin - RBC Capital Markets

Thanks very much. Good morning.

Jim Young

Good morning.

Walter Spracklin - RBC Capital Markets

Just on the pricing side, it sounds like you got a pretty good 5% to 6% in on the high end of that, you were mentioning. I was just wondering how is the tone right now of your recent renewals? Are you still getting 5% to 6% in the first quarter? Or is it coming down because of the economy?

Jim Young

Jack, you want to take that one?

Jack Koraleski

There's really not been a substantial change in our renewals. I think what you would have to do is distinguish between our legacy contract renewals and then our other day-to-day contract renewals. The negotiations are ongoing. We're trying to be competitive. Trying to make sure customers recognize the value they are receiving. We really have not seen a substantial change.

Walter Spracklin - RBC Capital Markets

Okay. Do you have a sense of how much your 2010 book is priced in right now?

Jim Young

Right now, Walter, we are not providing any guidance on 2010 that's out here. Again, what we look at is keep in mind, go back to your first question here. There's still a significant spread between an old legacy contract and even a softer market that's out here. So I'm confident if we keep providing the service, the value proposition to customers that we have today, we're going to see positive pricing.

Walter Spracklin - RBC Capital Markets

Jim, some of your competitors have been talking a bit just yesterday about the risk of cutting too much too quickly. Can you talk to us about how you look at that? And what are the big challenges you see if volumes do start to come back, and you stored a lot of cars, furloughed a lot of workers. What's your biggest challenge if we do see that v-shaped recovery to getting things back online and be able to service the demand?

Jim Young

Walter, you may recall, we learned a pretty hard lesson in 2003 and '04 when we were short substantially when the economy came back. We were short locomotives. We were short people. And it hurt us in terms of in fact, we still have business that we lost then that hasn't come back. We've got a very disciplined approach. Dennis and his team. We know what the lead times are on each one of our resources. Every Monday morning, we have the team together looking for signs of recovery and ask the question if it's a v-shape how quickly can we respond? I will tell you right now though, at 143,000-142,000 cars a week with Dennis' slide that we'd shown or we've got fixed ability of 200,000. We've got a long ways to go before we're going to be stretched in terms of an economic problems of handling volume growth.

Walter Spracklin - RBC Capital Markets

This last question here, Rob, on the share buyback. Very quickly, what is your thought? I saw you cut that down this quarter. Any view on resuming that? Or, are you going to wait until the markets improve a little bit?

Rob Knight

Obviously, our price is very attractive, but you nailed it. We're going to take a hard look at economic recovery, and of course, our resulting business volumes. So we're taking a cautious approach at this point.

Walter Spracklin - RBC Capital Markets

Thanks very much.

Operator

Thank you. The next question is coming from the line of Ken Hoexter of Merrill Lynch. Please go ahead with your question, sir.

Ken Hoexter - Merrill Lynch

Great. Good morning. Jim, when we were talking a couple months ago, it sounded like you said if volumes stay down 20%, we may have to look at things a little bit differently. We're kind of still at that 20% level. How long, and what do you think needs to shift here? I mean, you said you made more cuts on the headcount reduction. Can you get the employee costs even down close to that? Do you want to? What other moves do you want to make longer term with volumes staying at these levels?

Jim Young

Ken, the question is how long. We are taking additional action. We have not stopped. We're, again, trying to I said in my summary here I don't see much of a recovery this year. So we're really looking next year, at best. I'm going to have Dennis address us here in a minute in terms of some other of the new things we're looking at. But we're after it. And again, we're down 20% in volume right now. Our force counts are down about 8%. I think second quarter you'll see that spread, even do a little bit better. You're not going to match a 20% reduction in volume with force counts in the short term, but I'll have Duff talk a little bit about some of the additional things we are looking at in our network right now.

Dennis Duffy

Obviously, Ken, what we've done is intent a job on the variable costs, and we continue to do that. As you saw on Rob's chart, we showed 55% variable. We really think we're in that 55% to 60%. What we're trying to do is move up into the fixed plant and see what economies we can derive there. I mentioned that just a few in our terminal operation, where we have it stratified between network, our regional, and our local yards in driving the efficiencies into the network yard.

We are doing that on the intermodal side, the auto side, and our manifest network so that we can leverage as much as possible out of the fixed plant and continue to take that percent variability higher and higher as we see these volumes erode. So the other thing is, we're trying to shorten the cycle time between the time we see the volume reductions and the time that we're able to take it to the bottom line.

In the past, that's been elongated. We always talk about the percent variable in each quarter. We like to get it down to days. So that we're totally responsive when we see those volume fluctuations. I will just reinforce, with Jim, that we do that on the downside, but we also build in recall steps [of fully] along the way. We don't take a down action that we don't have a recall step and be able to work our way back out of that with a predefined lead time so that we can recover volumes are there.

Jim Young

A couple quick points here. One, we're not going to jeopardize customer service. It's very important. We are seeing a lot of value there. Two, we still are seeing attrition. We expect our attrition and force counts this year while it slowed done a little bit, we'll still see 3,000 to 4,000 folks leave the Company. And that's down a little bit from what we saw in prior years. So we're trying to take advantage of that as much as we can.

Ken Hoexter - Merrill Lynch

Great. Just a quick financial question on the surcharge lag benefit. Was there what dollar, Rob, was the benefit this quarter? And then, I guess a Jack question. On intermodal yields were actually positive this quarter, how did you do that relative to what we have seen from the industry?

Rob Knight

Ken, on the lag benefit, it's roughly $0.20 on an EPS basis for the surcharge. So while prices were clearly down, in our surcharge number was down as you know, which drove our revenue down. We did get a benefit in the first quarter of about $0.20 on an EPS basis.

Ken Hoexter - Merrill Lynch

Okay.

Jack Koraleski

In terms of the intermodal pricing, Ken, we've got we did have some on the international side, legacy renewals last year that gave us some carryover benefit this year. We have, also, on our premium domestic business, with the service levels being what they are, some of the new products like our Streamline growth, that's actually been quite good for us. We have been able to get price on the market on those.

Ken Hoexter - Merrill Lynch

Okay. Then on coal, do you look for at the Transportation Coal Conference last week, it sounded like things are abysmal with export declining, no test burns east of the Mississippi. What is your outlook for continuing to push PRB coal east? Are there any opportunities? And what do you view as volumes going forward?

Jim Young

The phone has stopped ringing again for Eastern opportunities. There are occasional opportunities that we're continuing to work on, but it's not nearly as hot as it was a year ago. And so we're looking right now primarily at our own domestic franchise. We have said before, we're not a big player in the export market, so we didn't gain a lot from that. We're not going to lose from that, either.

Ken Hoexter - Merrill Lynch

Last question I have is, Jim, if you can just give an update on what you think is coming out of Washington? It sounds like everybody's in a huddle room right now with the AAR joining in. Do you think we see some legislation? Are you more confident that something is going to come down the pike?

Jim Young

We are active in Washington as we have been the last two, three years, and what my goal is to make certain if legislation comes down the pike. And, you can read the tea leaves. They're clearly with the new Congress up there, there's the higher potential. But again, one of the things that whenever I'm in a member's office, particularly the folks that want to push some new regulations, the discussion always ends up with how do we put more business on the railroad?

Our discussion, you've got to be careful where we're going because capital will dry up very quickly, and you have to take into account replacement costs of assets going forward. So I think we've got a good story to tell with our service, the value we're offering. We're a private industry that's putting capital into capacity. So we'll see what happens here. I would tell you, I feel pretty confident that the members understand the value of railroads, and that we're going to get this right going forward.

Ken Hoexter - Merrill Lynch

Thanks for the time.

Operator

Thank you. Our next question is coming from the line of Matt Troy of Citigroup. Please go ahead with your question, sir.

Matt Troy - Citigroup

Appreciate the dashboard you provided in the slide deck about indicators you're watching for a turn. Just curious, looking at the AAR traffic that came out this morning. Both your numbers, the industry numbers over the last few weeks. They are a couple points worse than the first quarter rate of decline, which certainly doesn't point to anything improving any time soon. Was wondering, though, what are you hearing from customers? People have talked and speculated about the potential for destocking, and how that might drive a pickup. Wondering if your actual conversations, your boots on the ground are having those conversations, and showing that people are intending to do that or at least contemplating it?

Jim Young

Keep in mind what I said here is if you look at our numbers. I don't see it. You have to be careful about each week here. I think there's a little bit of carryover from Easter in the numbers. Traditionally, in fact if you look over time, when you in early April, the start of the second quarter is generally weak. I mean, we see a pickup toward the end of the quarter that it falls off then it picks up. What I see right now, and what I'm hearing from customers is, as Jack said, there's some sign of hope, but not a strong leaning toward things are getting worse. If anything, it's kind of balanced right now. Jack, you want to add anything?

Jack Koraleski

I would say, Matt, our customer conversations there's a lot of optimism for the second half. Nobody really sees much happening right at the moment. There's a lot of speculation as to what the stimulus bill will or will not do. We're working very closely with our customer base to make sure they understand opportunities within the stimulus bill. So there's some bright spots associated with that. But overall, I think our customer base is relatively realistic. They're not pessimistic in terms of it getting worse. They think, for the most part, it's kind of bottomed out. You can pick an industry, pick a customer to walk through it, but everybody's looking toward the second half as starting to really show substantive signs of recovery.

Matt Troy - Citigroup

Just the concern being is that in December everyone was looking towards the first half in the middle of 2009, that hope didn't materialize. But certainly, we're pulling for the stimulus to have some .

Jim Young

The way we're looking at resources, though, don't hear from us that we're saying there's a second half recovery.

Matt Troy - Citigroup

Right. No, I understand. And I appreciate that. The second question I had, and it relates to Washington. From a different perspective. Certainly the expectation is, we'll get some kind of regulatory update in the coming weeks. On the stimulus side, it seems that a lot of red meat was thrown to a lot of different industries in the rail freight industry which checks a lot of the boxes in terms of what the stimulus was trying to accomplish got just bread crumbs. I was just wondering is there a strong voice representing the rails in Washington? It would seem that you would be a natural beneficiary for more stimulus funds given the environmental benefit, given the infrastructure benefit. If you could just give us an update on the efforts there. Whether it's a tax credit? What might we work towards toward longer terms to get some of that money that is being thrown around in this industry?

Jim Young

Matt, I think there are two issues there. You have the long-term investment tax credit that we have been talking about for some time. Our objective there, obviously, is if we believe more rail capacity is needed to meet the country's needs in the future, which I do. One way of attracting capital and improving returns is investment tax credit. That's a long-term strategy. The stimulus money, quite honestly, we did not make a major ask. If you look at what came out for the overall transportation about $80 billion, $85 billion, I think, in total. Very little of that is for freight. Much of it's commuter. What we focused on were some of the city projects, like Chicago's Create, that we focused on communities where money would help in the communities. There's one big deal hanging out here though, which is positive train control, that is a huge investment for this industry. You can call it an unfunded mandate because that's what it is. That we're going to have to figure out how that's paid for long-term. Not only in the freight system, but the commuter operations.

Matt Troy - Citigroup

And I understand why direct government stimulus into the industry might not make sense. But the tax credit is certainly something that we have been hearing about for a while. Is there any kind of road map or process that that can happen sooner rather than later? Or is that just a work in process, and we should just stay tuned on this end?

Jim Young

I would say when it comes to rail industry right now, the number one focus in DC is new regulation.

Matt Troy - Citigroup

Okay.

Jim Young

Investment tax credit is someplace down the priority list, but it is still out there. I think everyone is focused right now on what happens the next two, three, four quarters. And that's where a lot of the energy is focused.

Matt Troy - Citigroup

Absolutely. Last question is just a one-off. In terms of the lower depreciation rate effective 1/1/2009? What was the impact of that in the quarter? In terms of just our modeling accuracy, what impact would that have in terms of benefiting depreciation rates through the balance of the year?

Rob Knight

Walter, it excuse me, I'm sorry, Matt. I think looking forward it should be a similar 1% to 2% kind of increase run rate.

Matt Troy - Citigroup

On D&A.?

Rob Knight

Yes.

Matt Troy - Citigroup

Okay. Thank you very much for the time.

Jim Young

Okay.

Operator

Thank you. The next question is coming from the line of Tom Wadewitz of JP Morgan Chase. Please go ahead with your question, sir.

Thomas Wadewitz - JPMorgan Chase

Good morning.

Jim Young

Good morning, Tom.

Thomas Wadewitz - JPMorgan Chase

I wanted to, and, I missed the beginning of the call. There was some overlap. I don't know if you talked much about the coal view. It seems like in the East, the volume outlook has gotten materially worse. And there's more sensitivity there due to low natural gas prices and some switching on the margin. What's your coal view looking forward? Do the volumes get worse year-over-year? Are inventory levels too high? Do you care about natural gas prices? Do you think things actually get a little bit better for your coal volumes? I guess the other factor there is that you had talked about production issues in your Colorado mines. I'm not sure how that could affect going forward as well.

Jim Young

If you look at the first quarter, tonnage is down about 10% or so. You can split it three ways. About a third was to some lost legacy business that we incurred. About a third to Colorado Utah, in terms of some of the production problems. And a third to overall demand. Right now, we're running about 27 trains a day, 28 trains out at PRB. So that's down a little bit from what we finished the quarter at. It's going to be weak, I think, the balance of the year. Unless, again the wild card here is what happens with summer heating that's out here. We're not again, we will see our volume, our coal volumes down for the full-year. Jack, you want to add anything to that?

Jack Koraleski

I think you are right, Tom. I think we're less sensitive to natural gas pricing. A lot of our customers have peakers, but they don't actually have the ability to convert massively to gas. So we tend to be cushioned a little bit from that, although you never say never. That tends to be more a Southeast and a Northeast kind of phenomenon for us. Stockpiles are relatively high. As Jim said, depending on weather and what happens. They can melt away pretty quickly if we have a really hot summer.

Thomas Wadewitz - JPMorgan Chase

Right. Okay. Jack, since you're I guess on the line. Can you give us a sense of the breakdown of yield in terms of fuel price and mix. I know you talked about price being toward 6%. What was yield impact from fuel and mix in the quarter?

Jack Koraleski

If you go back and you look at it from a yield perspective, I think fuel hit us for about 7%. We were on the high end of our price range, as I said, and then you probably got a point or so from positive mix.

Thomas Wadewitz - JPMorgan Chase

Okay. A little bit from positive mix. Okay. Good. The last question, I'll hand it off to someone else. From a higher level strategic view, I guess if you looked a few years back, you might have said that the way you ran your terminals. Let's say pick Houston as a point. There would have been some room to run the terminals more effectively in terms of, you've got a couple Houston terminals, and maybe the way you manage the flow could be improved. I think you did some work on that back a few years ago. Is there further opportunity to make major changes in the way you run terminals where you have more terminal density? And perhaps even shut down terminals and expand others? Is that the type of thing you can really do to make structural changes when you are in such a weak volume environment?

Jack Koraleski

Absolutely, Tom. That's exactly what we are doing with all of our terminal infrastructure. If you look at the slide that I showed that shows the hierarchy of our terminals, you're talking about those major network terminals, the Houstons of the world. Our impetus is to drive volume into those, and obviously take the economies from the lower level to our jobs. The local yards, the regional yards, and even within the major yards. We have still still, plenty of opportunities there to run those more efficiently. But we certainly want to take advantage of the economies of scale offered by those yards, and then make them as efficient as possible. That's exactly what we're doing. And redefining the transportation plan as we do that using the unified plan. So that we can at the same time, improve customer service and derive the efficiencies associated with it.

Thomas Wadewitz - JPMorgan Chase

Did you actually end up shutting some terminals as a result of that, or not necessarily?

Jack Koraleski

We have shut down some of the local serving ones, yes. And we continued to do that.

Thomas Wadewitz - JPMorgan Chase

Okay. Great. Thank you for the time.

Operator

Thank you. The next question today will be coming from the line of Randy Cousins of BMO Capital Markets. Please go ahead with your question, sir.

Randy Cousins - BMO Capital Markets

Good morning. Rob, for you, the first question. You don't have 100% fuel surcharge coverage. I guess the fuel surcharge drop was $300 million and the fuel cost drop was $570 million. Obviously, there's a volume factor in there as well. Could you give us some sense of what you thought the benefit was in the first quarter of the lower fuel prices juxtaposed against the issues of coverage that you have in some of your book of business? Does that benefit continue over the balance of the year, assuming fuel prices stay where they are?

Rob Knight

Randy, we don't break it out as precisely as I understand you're asking. The net was when you add it all in, the net benefit versus last year was at $0.20. Of course last year, we were facing a rising fuel environment. As you look forward into the second quarter, if fuel prices stay where they are and volumes stay down like what they're running, you won't get well, there might be we would expect some lag benefit moving forward. It won't be as material because now you're in a flatter environment.

So as time goes on and fuel prices stabilize, you don't see that kind of a lag benefit going forward. So it all depends on what fuel prices do in the second quarter. Again, assuming they just stay flat and everything stays as it is, while prices would be significantly down versus the previous year in the second quarter, you wouldn't see any kind of a material lag benefit.

Randy Cousins - BMO Capital Markets

So that $0.20 you're talking about? That includes the fact that some of the business just doesn't have a good fuel surcharge coverage number in it, right?

Rob Knight

That's correct.

Randy Cousins - BMO Capital Markets

I don't know whether this question should go to Dennis or Jack. But your RTMs were down a lot less than the GTMs. I noticed that the chemical ratio looked particularly a big difference between RTMs versus GTMs. Can you give us a sense as to what's going on there?

Dennis Duffy

It's primarily mix, Randy, and length of hall improving some of those kinds of issues.

Randy Cousins - BMO Capital Markets

That would be a good thing for you, not a bad thing, right?

Dennis Duffy

That's right.

Randy Cousins - BMO Capital Markets

Just with reference to the intermodal business. You talked about the domestic side being down 9% versus the international being down 30%. Can you give us some sense do you think you are picking up market share against the trucks? Or can you give us some sense as to some color within that 9%?

Jim Young

Randy, we definitely are picking up some market share against trucks. Again, what I said was it was down 9% for the quarter, but by the end of the quarter for March, domestic was only down 2%. And, we're continuing to see that strengthen. It's largely on the benefits of the service that we have today. We are very competitive with trucks. And some of our new service offerings, we opened up several lanes to run intermodal, refrigerated trailers that we haven't had in the past. The new doublestack service up and down the I-5 corridor on the West Coast. The Streamline door-to-door product is catching on in the marketplace. Very attractive to customers, as I said. About 4,000 they grew about 5,000 containers in the quarter, and about 1,700 of those came off the highway. We are definitely making some improvements against the trucks.

Randy Cousins - BMO Capital Markets

Okay. Some of your competitors have talked about RCAF being an issue in terms of price. I wonder if you could talk about whether that had any impact in terms of your arc in the first quarter?

Jim Young

RCAF is a pretty small factor for me. In total, RCAF-related is probably 3% to 4% of RCAF alone. And then, you would have another 8% or so associated with [ALIF]. But of course, there is a differentiation there. In total, only about 11% or so of my business is RCAF-related. So it's not a big factor.

Randy Cousins - BMO Capital Markets

Last question. Last May when you had your investor conference, you talked about what you could do in terms of operating ratio reduction. Going along with the expression necessity is the mother of invention. Obviously, we're taking a look at systems and approaches you never had to before because of the environment that we're in. Do you feel safe to say that there's another two or three points of OR to come out of this system simply because you found efficiencies you never realized you had?

Jim Young

Randy, I am not wavering from our long-term view that said our operating ratio should get down to the low 70s. While this is obviously, the volume environment is a challenge. We still have tremendous opportunity at both price, the service to value equation, and our productivity piece.

Randy Cousins - BMO Capital Markets

Jim, do you think you could even go even lower given that you have seen how the system performed through this downdraft?

Jim Young

Randy, I've said consistently, we could be a smaller railroad with much higher quality revenue. And we're humming in terms of asset turns and efficiency. You're seeing that to some extent right now. You have to have some volume, though. There's a point here we are running at 140,000 cars. We're resourced for 200,000. You have got to have some volume pickup. I believe it will pick up. The value proposition for railroads is there. And we're proving our we had a great example of how you prove that there. It says greater velocity drives efficiency. Better service drives efficiency. You can see it in our numbers this quarter.

Randy Cousins - BMO Capital Markets

Then I will flip it round and say, if the volumes went back up by 10,000 carloads or 20,000 carloads, could you give us some sense of what you think the torque would be to the EBIT line?

Jim Young

You know, I used the term your print money, but you really do. When you look at the way what we're resourced for today, we can take on a pretty significant increase in volume and lever the bottom line.

Randy Cousins - BMO Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question will be coming from the line of Edward Wolfe of Wolfe Research. Please go ahead with your question, sir.

Edward Wolfe - Wolfe Research

Thank you. Good morning, everybody.

Jim Young

Good morning, Ed.

Edward Wolfe - Wolfe Research

Hey Rob, can you talk to the headcount a little bit? You average 45,000 FTEs? Where did you end the quarter? And how should we think about that going forward?

Rob Knight

Ed, I don't know if you caught some of the detail that Dennis gave in going through his, but we finished the quarter at a lower run rate than the average was for the full first quarter. So we're off to a start here that would suggest that at this level of volumes, that we're lower than that first quarter average.

Edward Wolfe - Wolfe Research

That was my question. What is that number, if you have it?

Rob Knight

40 just under 45,000. 44,700ish.

Edward Wolfe - Wolfe Research

Directionally , are you done there? Or is it a process that you will expect more to happen in the second quarter, assuming no change in volumes right

Jim Young

This is Jim. As I said, we are we have additional activities underway. The way this process works, you don't put a plan out and then stop. We have been watching our carloadings and volume. We're continuing. You're going to see more reductions if this volume then starts to turn around.

Edward Wolfe - Wolfe Research

Fair enough. Can you talk a little about the Utah Colorado situation. Has anything come back? And do you have any visibility into the timing? I think you said, give or take, one third of your coal demand is a result of that. When should we see that third start to come back?

Jim Young

You know, we've seen some comebacks, and we have seen some setbacks. We're still sitting there today with about, I would say, two and a half mines down. We've got one mine that is working at about half-tilt trying to work through some coal quality issues. We have one mine that is trying to get through some issues with MSHA. And one that's working diligently to get their coal line back up again. With two and a half mines down, they're anticipating that certainly during the second quarter everybody will be back up and running. We're rooting for them. We want to see that happen. But that's kind of the place where we see it right at the moment.

Edward Wolfe - Wolfe Research

And has it been basically that same level, give or take, that we've been at for the last three or five months?

Jim Young

You know it has. It seems like, unfortunately, as one mine comes back, another one develops a problem. And we've been running about two and a half mines down since certainly since the beginning of the year.

Edward Wolfe - Wolfe Research

Hey, Jack, can you talk to, directionally, when you look relative to each other which end segments new pricing as you're in those negotiations right now. Where are you seeing relatively greater pressure? And where are you seeing relatively less pressure on pricing by segment?

Jack Koraleski

You know, the place where the truck competition is the most intense is probably the places where we're seeing the greatest pressure. That certainly is understandable. Particularly, as we look across our book of business, you work through those ebbs and flows. We are not chasing business by any stretch of the imagination money. We are working very diligently with our customers to provide good value and to help them get through these tough economic conditions here.

Edward Wolfe - Wolfe Research

One last big picture for Jim. I understand your thoughts on the regulatory environment and the need to make sure that DC understands the importance of the railroads. We certainly heard that kind of talk from everybody. To you at UP, assuming that something has got to change. What do you see is the main issue that is out there? What is the focus do you think that the regulators are looking at, and that the rails are going to have to come to terms with settling? Or, negotiating through? Is it bottlenecks? Is it switching? Is it a whole pricing scheme? What do you see as the main issues here?

Jim Young

Ed, from the customer perspective, you can call it what you want to, but it's about pricing. They call it competition to some extent. At the end of the day, you're looking at some kind of added perspective on pricing that's out there. My view of this thing, again the other side, the complicated thing is every member I talk to, including the STB agree that replacement costs are also an issue. And how you think through it long-term.

So we've got a pretty big spread here. But all of them, again, even customers the representatives in Washington that are supporting new regulations want to see more investment in the railroad business. And I think there's, again, what I try to point out in this business when you look at cash flows and you look at return on capital, when you bring up replacement costs in. We don't have much room for there to be any error on new legislation.

Edward Wolfe - Wolfe Research

I appreciate the time and the honesty. Thank you.

Jim Young

Thanks.

Operator

Thank you. Our next question is coming from the line of Gary Chase of Barclays Capital. Please go ahead with your question, sir.

Gary Chase - Barclays Capital

Good morning, everybody.

Jim Young

Good morning, Gary.

Gary Chase - Barclays Capital

I just wanted to ask a couple of questions. First, a quick cleanup one for Jack. Coal pricing was a little better than we thought. Was the Colorado Utah mix change. Is that lower revenue per carload, was that mix positive to lose some of that volume?

Jack Koraleski

Gary, I think the biggest issue was the legacy renewals that we had last year.

Gary Chase - Barclays Capital

Rob, could I ask you also to just clarify. You said the fuel tailwinds were $0.20. Was that net year-on-year? Or was that in the quarter added $0.20?

Rob Knight

That's year-over-year.

Gary Chase - Barclays Capital

Could you just remind us what the year ago number was?

Rob Knight

About the same. You would have to look back at the transcript to get the exact .

Gary Chase - Barclays Capital

The important thing is it did .

Rob Knight

Gary, just one comment. In that environment with rising fuel prices. I think net-net, last year was a similar number.

Gary Chase - Barclays Capital

No real impact on the actual earnings you created this quarter?

Rob Knight

No.

Gary Chase - Barclays Capital

As you look at some of these slides that Jack put together. You look at the utilization level in terms of where you think you are at 75%. The mention that inventory really isn't the issue, and that what's required is a real shift in demand. How much how far through the cost reduction process are you? And does it not make sense to go further because it really does feel like it's an end market demand issue unless things come snapping back, feels like the volume isn't going to be up to that 200,000 plus carload throughput you're capable of.

Jim Young

We are not stopping. We are continuing, and don't hear from us that we believe 200,000 cars is in the near-term. Our assumption and what we're doing on the way we're running the business here, is this is number one, not much recovery, if any this year. And then a very slow recovery when you look out to the future. Could be wrong. We've got to protect that if we're wrong, we can respond. You are going to see continued progress on our cost numbers, efficiency, for the foreseeable future.

Gary Chase - Barclays Capital

Is there a way, Jim, to think about how much of that you were able to get through in the first quarter?

Jim Young

Well, Gary, long-term again. What Rob was talking about it was about 55% variable this first quarter. As things progress or don't progress, and it's neutral. That percentage starts to increase. We can get into a model here where we're closing yards. We are shutting down on weekends. There are a lot of things that you can start to deploy that we're actually looking at right now in terms of our cost structure. Again, mention. Keep in mind here, we're still seeing attrition. 3,000 to 4,000 employees a year which, again, we will manage as we're going forward here. Our capital spend we're not going to talk about next year. But again, where you look at, if you assume that this is a long haul. You're going to see substantially lower capital numbers going forward.

Rob Knight

A couple of comments, Gary. One, as you know, if we thought we're not predicting this but if you thought volumes were going to stay down forever at low levels, you would start to take those deeper bust actions. So you've got to balance that with a long-term perspective. I wanted to come back to your first question to me, Gary, where you asked about fuel. I looked up your question about what happened last year. Last year, actually the lag hurt us in the first quarter. So when you look at year-over-year, there was a $0.20 all-in benefit to us in the first quarter this year versus last year. Last year versus the year before that, lag was a negative. So you've got lots of moving parts there.

Gary Chase - Barclays Capital

I guess all I'm trying to get at is, would you have earned anything less or more than $0.07? So the answer sounds like no. That's a clean number for the quarter.

Rob Knight

Well, the other thing you have got to keep in mind is, offsetting volumes volumes were of course a much bigger drag on earnings. So while we got a benefit of fuel in quarter year-over-year, the bigger driver, of course, was volume. So we did a good job of overcoming. Fuel certainly helped us. Productivity and price were the other major players. So we were able to offset that rather significant volume drop.

Gary Chase - Barclays Capital

Okay, thanks very much.

Jim Young

Thanks.

Operator

Thank you. Our next question will be coming from the line of Chris Ceraso of Credit Suisse. Please go ahead with your question, sir.

Christopher Ceraso - Credit Suisse

Thanks. Good morning. Just a couple of quick follow-ups on the coal situation. First, I apologize if you mentioned this. How much of an impact over the past few weeks has weather been? We have seen a bit of a downleg in volumes there. How much of that is related to weather issues?

Jim Young

Chris, typically I would tell you that there was some impact associated with weather. But in this market with stockpiles being so high, I'm not sure I would say weather was a significant factor for us.

Christopher Ceraso - Credit Suisse

So it's more fundamental than that.

Jim Young

Yes.

Christopher Ceraso - Credit Suisse

And then, have you seen last year folks were talking about a potential knock-on benefit for western rails in the coal business as the eastern guys were making a lot of money shipping stuff out of the East Coast ports. And maybe you were doing some backfilling with western coal. Has that reversed at all with the sharp dropoffs in exports out of the East?

Jim Young

Well the enthusiasm has certainly gone out of the market. It has not, again, been a big factor for us. I think the bigger factor is just high stockpiles, energy consumption, electrical consumption being down. And then to some extent some of the mine issues that we have had in Colorado.

Christopher Ceraso - Credit Suisse

Okay, and then one quick one on the ag business. Did you see farmers holding inventory in the quarter because prices are low? Did that hurt the ag volumes? What is your outlook for that?

Jim Young

I think the bigger issue is that world supplies are so much stronger this year than last year was a record first quarter for us in the ag products business. World supplies were relatively weak. The dollar was weak, and so the US market was incredibly strong. It's very, very different the first quarter this year. World supplies are relatively strong. The dollar is higher value. We have been surprised that some of the Gulf exports have been stronger than what we have anticipated. We are watching pretty carefully. It looks like the soybean crops in Argentina may not be anywhere close to what the world had expected. That could actually provide greater export opportunity for us later in the year. That's where we see it right now.

Christopher Ceraso - Credit Suisse

Okay, thank you very much.

Operator

Our next question is coming from the line of John Larkin with Stifel Nicolaus. Please go ahead with your question.

John Larkin - Stifel Nicolaus

Good morning, gentlemen.

Jim Young

Good morning, John.

John Larkin - Stifel Nicolaus

I had a question on your Streamline product which you mentioned a couple of times. Very high growth off a relatively small base providing door-to-door intermodal on your own line. Is that correct? Hello?

Jim Young

Yes, that is correct, John.

John Larkin - Stifel Nicolaus

Can that product peacefully coexist with your intermodal marketing company customers? Truckload customers, and so forth? It seems to me that in some ways you are beginning to compete with your customers?

Jack Koraleski

Actually, the biggest users of our Streamline product are the intermodal marketing company. So we are not using it to aggressively go out and retail against our IMCs. The product is really focused at the IMC community.

John Larkin - Stifel Nicolaus

Okay. Do you provide your own chassis and boxes into that system? How does that work?

Jack Koraleski

We do. We use our EMP box fleet and chassis to provide the service.

Jim Young

Hey John, there is another factor that you have from Streamline which is market intelligence. Is what's happening in that truck sector. And there are several values, when you look at it, long-term.

John Larkin - Stifel Nicolaus

I'm sure that is right. We have heard during the first quarter that there was an awful lot of bidding of intermodal packages by big shippers. Who ends up absorbing any price decreases that might get built into those bids? Does that all get absorbed by the IMCs? Does the UP have to absorb some of that as well? Or does it depend on the particular circumstance?

Jim Young

It depends on the circumstance, and what the supply chain in some places it gets absorbed in the supply chain. It's difficult to say whether it is IMCs. I can just tell you from our price perspective, we are looking good.

John Larkin - Stifel Nicolaus

Okay. Your service from, let's say, LA to Chicago which I guess is the biggest intermodal market out there. It looks like that has improved pretty dramatically over the last few years and maybe even in the last six months. How does that stack up on a reliability and perhaps a transit time basis relative to [Brand X]?

Jack Koraleski

When you stratify it from a premium service down to the more general domestic product in the doublestack, it would be very, very competitive on all fronts now, John, when you look at transit times. With very little variability associated with each one of the services.

John Larkin - Stifel Nicolaus

Have you maxed out on the service improvements there? Or as you continue to more slowly build out the Sunset Corridor project, is there still more upside to the service?

Jim Young

Absolutely. We expect continuous improvement in every one of those lanes, and we have defined initiatives to make sure that happens.

John Larkin - Stifel Nicolaus

That's extremely interesting. Thank you. One last question. With fuel having dropped so dramatically and stabilized, is this a good time to consider laying in some hedges at this point? If you believe that the economy is going to recover and perhaps fuel prices recover along with the economic recovery.

Jim Young

John, we are looking at it, but we are not pulling trigger. Right now, if you look at it, where you have the natural hedge with the fuel surcharge. Quite honestly, I think you are just rolling the dice. But we're taking a look at it. It is attractive right now. I'm not ready to pull the trigger yet.

John Larkin - Stifel Nicolaus

If the economy started to improve and credit conditions improved, would you be more inclined to perhaps take a risk there?

Jim Young

We might.

John Larkin - Stifel Nicolaus

That's very helpful. Thank you very much.

Jim Young

Okay.

Operator

Thank you. The next question is coming from the line of Jason Seidl of Dahlman Rose. Please go ahead with your question, sir.

Jason Seidl - Dahlman Rose

Hey guys.

Jim Young

Good morning, Jason.

Jason Seidl - Dahlman Rose

Good morning. Quick question. You are talking about the stimulus at least showing up in Texas in some of the projects. Is that the only state that you are seeing action in? And could you give us a little bit more color about when that might be flowing through the system?

Jack Koraleski

Jason, it's not the only one. It is one of the larger ones right now because of their extensive highway program. So there has actually been some real benefit there. But actually we actually have a team of people that are going through the stimulus bill with a fine-tooth comb, carving out what we think our opportunities for our customers. And then we are sitting down with our customers to make sure they are aware of them. And we've actually started in some of the construction projects, (inaudible) sand, gravel, some of those actually seeing some dollars flow our way because of that effort. But again, one of the biggest markets is Texas and that's one of our biggest opportunities.

Jim Young

Although Jason, there is a lot of money flowing to California, also, on the stimulus plan, and I think there are obviously going to be opportunities for us there.

Jason Seidl - Dahlman Rose

That's very helpful. We have seen a lot, obviously in the press, regarding the problems Mexico has been having. We have seen some tariffs levied by the Mexican government to the US. But it appears to be more truck-like traffic. How is that impacting your business to and from Mexico? Or can you even parse all that out.

Jim Young

It's, at the end of the day, in terms of our service metrics it's having no impact. There are issues at the border that have been well publicized that we are working cooperatively with the US government on. But in terms of our service, it's the economy.

Jason Seidl - Dahlman Rose

Okay. Fair enough. Rob, not to beat a dead horse on the lag benefit. The number you quoted was $0.20 compared to the prior year. In the quarter itself, what was fuel like for you?

Rob Knight

Jason, the year-over-year, all-in benefit to us with all of the moving parts, year-over-year it was about $0.20.

Jason Seidl - Dahlman Rose

Right.

Rob Knight

Lag was a I don't split it out exactly as you're asking but lag was a piece of that. And in looking forward as I said, with a stabilized assuming stabilized fuel prices, that lag would be the component that we would not anticipate as great in the second quarter. There would be year-over-year price differences, obviously, because last year was a peak price point in the second quarter on the cost of fuel itself. But the lag benefit should dissipate.

Jason Seidl - Dahlman Rose

Right, and you should get a headwind in 4Q.

Jim Young

Which Q?

Jason Seidl - Dahlman Rose

4Q.

Rob Knight

Assuming everything was absolutely stable.

Jim Young

You must have a forecast for fuel prices for us, Jason.

Jason Seidl - Dahlman Rose

I'm not forecasting at the fall like I did in 4Q '08, I will tell you that.

Jim Young

Not a great time.

Jason Seidl - Dahlman Rose

Alright, fair enough. I appreciate the time, as always.

Jim Young

Okay, Jason.

Operator

Thank you. Our next question will be coming from the line of Arturo Vernon of MacQuarie Capital. Please go ahead with your question, sir.

Arturo Vernon - MacQuarie Capital

Thanks. I guess most of my questions are answered. So let me drill a little bit deeper on coal. Over the last four weeks, we have seen what looked like very weak core volumes. And there has always been sort of an explanation in terms of blizzards at the PRB or Holy Week, or this or that. But it seems to me across the nation and it seems to be just unusually low. And I just wanted to press a point and see whether you see anything unusual out there?

Jim Young

Arturo, it's demand. You are always going to have the issues weather we're in the spring season here. But, just fundamental demand is weak. We have a little bit of some issue with Colorado Utah production. We did I'll remind you we did lose some business on a legacy deal. But the real issue right now is just overall industrial demand. I think if I recall the numbers I think, electricity demand was down in the first quarter by about 1%-2%. I just don't see I think it's going to be soft all year.

Arturo Vernon - MacQuarie Capital

Correct. We are seeing electricity demand it was down 7% for February. Coal-fire demand was about 14% in [deflation]. And March demand was also down. And these numbers just seem very, very low. And not at all consistent with what we might hope is an economy that is doing better. But they just seem so darn low for something so status as power demand that I was just wondering whether there is something else going on?

Jim Young

You have got it right. Your question the issue you have right now is thinking long-term. When the economy turns, you are going to see electricity demand turn with it.

Arturo Vernon - MacQuarie Capital

Alright. That was it. Thank you very much.

Jim Young

Thank you. Okay.

Operator

Our last question is coming from the line of David Feinberg with Goldman Sachs Asset Management. Please go ahead with your question, sir.

David Feinberg - Goldman Sachs

Good morning. Actually, I'm on the sales side, just to be clear. I know you are not calling for the bottom in the second half of the year, but I just wanted to hear your thoughts in terms of your conversations with customers in terms of which lines of your business you might expect to lead us out of the current recession? Do you think it would be consumer-led? Do you think it would be industrial? And along those same lines, there has been a lot of conversation about inventory destocking and then the potential restocking. If you are having any of those conversations with customers hearing about anyone getting to low levels of inventory. Clearly not on the coal side, but perhaps some of the other products?

Jim Young

I think you have to ask the question what impact will the stimulus spend have? And to me, that says something about industrial demand. You look at, Jack, I think we were talking our lumber loadings right now are down almost 70% to the peak about three years ago. If there's any pickup toward the end other than some seasonal, like ag. If you think about some of those products, I think it's going to come on the industrial side. I don't see consumer spending picking up until you see some pickup on the industrial side because that is, obviously, jobs. And, some confidence there. I think in a very simple sense, that's about as good an outlook as we can see for the rest of the year.

David Feinberg - Goldman Sachs

One specific question on intermodal. I missed part of the call, so I apologize if you addressed this. You talked about domestic growing faster than international. When we look at your actual overall carloads for the intermodal carloading for the quarter you grew at a slower rate than your closest competitor in the region. I'm trying to get a sense if that was driven by mix? Or if there was in fact also share loss that might have been occurring. Particularly on the international side, and what might have been driving that?

Jim Young

We tend to be weighted a little bit heavier on the international side, and so that's an issue right from the get-go. The bigger you could look at our product itself and our total mix of business international was down 30%. Domestic down 9%. We're 60% international. So it hits us a little harder. We are still in the process of wrapping a contract, and that's a domestic contract that we lost last year. And that won't actually work its way completely through the system until probably June of this year. It's tailoring down here in the second quarter. But that is something that will lap here in the second quarter. So that will change the numbers somewhat.

David Feinberg - Goldman Sachs

Just to be clear. No contract issues on the international side.

Jim Young

No.

David Feinberg - Goldman Sachs

Great. Thank you.

Operator

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

Jim Young

Thank you, everyone, for joining us on our call. I hope you heard from us today. We're committed in terms of delivering for our shareholders. I'm confident you'll see good continued good performance here in the second quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

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