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Union Pacific (NYSE:UNP)

Q2 2009 Earnings Call

July 23, 2009 8:45 am

Executives

James Young – Chairman, Chief Executive Officer

Jack Koraleski – Executive Vice President Marketing and Sales

Dennis Duffy – Vice President Operations

Robert Knight – Chief Financial Officer

Analysts

Randy Cousins – BMO Capital Markets

Jason Seidl – Dahlman Rose

Thomas Wadewitz – J.P. Morgan, Chase

Matthew Troy – Citigroup

Walter Spracklin – RBC Capital Markets

Ken Hoexter – Bank of America, Merrill Lynch

[Alison Landry – Credit Suisse]

John Larkin – Stifel Nicolaus

Edward Wolfe – Wolfe Research

Gary Chase – Barclays Capital

Operator

Welcome to the Union Pacific second quarter 2009 earnings conference. (Operator Instructions) As a reminder, this call is being recorded and the 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.

James Young

Good morning everyone. Welcome to Union Pacific's second quarter earnings conference call. Joining me today in Omaha are Rob Knight our CFO, Jack Koraleski, Executive Vice President of Marketing and Sales, and Dennis Duffy, Vice President, Operations.

The second quarter, we're reporting earnings of $0.92 per share, a 10% decline versus 2008. Included in that number is approximately $0.14 per share from a land sale in Colorado.

Similar to the first quarter, the business environment over the last three months was extremely challenging with volumes down nearly 22%. Although we typically see car loading increases from the first and second quarter the seasonal growth was notably absent this year, in particular coal volumes were at their lowest level in nine years.

Our operation ratio for the second quarter best at 77.3% a more than two point improvement from last year. Lower year over year fuel prices contributed to this performance but we also worked diligently to size our resources with demand and align spending priorities with today's economic reality.

While aggressively reducing costs in the organization, we're also pursuing new business opportunities in markets benefit from UP's outstanding service product. Our safety performance, operating metrics and customer satisfaction are all at best ever levels.

We ended the second quarter in a strong cash position with a very solid balance sheet. Although the economy appears to have stabilized over the last month or so, it's important to maintain financial flexibility in such uncertain time.

With that, let me turn it over to Jack to walk you through the business groups.

Jack Koraleski

Good morning. I thought a good place to start this morning would be by taking a look at some of the market indicators that touch several of our business segments from a 47 point drop in steel capacity utilization to a 10% reduction in electrical generation by coal. I think these give you a pretty good indication of the broad impact this recession is having on our business.

So let's take a look at how these economic undercurrents played out in our second quarter volume. Volume fell 22% in the second quarter as the weakness of the overall economy was reflected in declines across most of our businesses. Domestic intermodal is the only major market segment to post a gain.

Lower fuel prices drove a significant decline in fuel surcharge revenue and along with a little negative mix, resulted in an 8% decline in average revenue per car even as our core price improvement stayed within our 5% to 6% range, reflecting the value proposition that our improved service brings to the market. The end result was a net year over year price decline for many of our customers.

With both volume and average revenue per car down, total freight revenue declined 28% to $3.1 billion for the quarter. This out looked across each of our six businesses.

A 14% decline in ag products car loadings combined with an 8% decrease in average revenue per car, lowered revenue 21% for the quarter. Export demand for whole grains was well below last year as export shipments of feed and wheat both declined over 40%.

Weak demand lowered domestic wheat shipments 30% while domestic feed volumes were down 13% due to the continued decline in animal inventory. The decline in animal feeding is also a significant driver of the reduction in the U.S. soybean crush and that led to a 15% drop in meals and oil shipment.

On the positive side, two of the ethanol plants that were shut down by the [Varison] bankruptcy resumed production under new ownership and that contributed to a 4% growth in ethanol shipments for the quarter while DDG's grew 11%.

Auto volumes fell 47% which combined with the 12% decline in average revenue per car resulted in a 54% reduction in revenue. Continued efforts by the manufacturers to align vehicle inventories with slumping sales levels along with the bankruptcy proceedings for Chrysler and GM led to plan shutdowns and production cuts across the industry. As a result our finished vehicle shipments declined 49% and our parts volumes were down 44%.

In chemicals, 24% decline in revenue was the result of a 22% decrease in car loading and average revenue per car reduction of 2%. Fertilizer volumes fell 43% with weak overall demand and a sharp drop off in the Canadian potash moves, both the export and the domestic moves.

The economy took its tool with a 23% decline in liquid and dry chemical shipments, a 22% drop in soda ash and an 11% fall off from plastics with strength in exports partially offset weak domestic demand.

The slumping construction markets' impact on asphalt shipments and lower refinery utilization led to a 25% decline in petroleum volumes. With volumes down 16% and average revenue per car off 7%, our energy revenues declined 22%.

Southern river basin tonnage declined 14% due to lower demand and the contract losses that we talked about last quarter. Reduced demand is a function of the recession's impact on industrial production above normal inventory levels from utility outages and to a limited degree, lower natural gas prices.

In addition to soft demand, coal quality problems and production issues resulted in 366 fewer trains out of Colorado and Utah, 35% reduction in tonnage.

Our industrial products volume was down 34% which combined with a 9% decrease in average revenue per car resulted in a 29% decline in revenue. Our steel shipments declined 64% as production ran at only 45% of capacity during the quarter, half of what it was a year ago and scrap steel shipments fell 50%.

Housing starts ran 45% last year, so our lumber car loadings were off 41%. With weak demand for residential and commercial construction products, cement and stone volumes also dropped almost 30%.

Non metallic mineral shipments decline 34%. The U.S. drilling rig counts are down by 50% from last year as natural gas prices remain low, reducing the demand for sand, pipe and the other minerals used in the drilling process. Last but not least, our paper volumes were down 24% for the quarter.

Turning to intermodal, with intermodal volume and average revenue per unit down 18% and 6% respectively, revenue declined 23%. West coast imports drove the decline in international intermodal and the bright spot for the quarter was a 4% growth in our domestic segment where our capital investments, process improvements and service performance are supporting a wide variety of new truck competitive services.

During the quarter our IMC business grew 26% and our streamlined subsidiary saw volume grow 60% with over 40% of that business coming from highway conversions.

So what do we see for the second half? The economic outlook appears to have stabilized as Jim said, but the economy is still somewhat fragile. That being said, here's some of the opportunities that should produce a stronger run rate for us.

The fall crops are looking pretty good right now and the harvest should lead to an increase in grain shipments and soybean processing. The drought impacted bean crop in Argentina looks like it could create some opportunity for U.S. meal exports, probably in the fourth quarter.

Ethanol will also benefit from two additional former [Varisun] plants that will resume production here in the third quarter.

With record low auto inventories, resolution of bankruptcies and new models should provide traction in the second half. Sales rates are strengthening with June coming in at 9.8 million vehicles, so that plus the government's Cash for Clunkers program, that's got some manufacturers actually adding to planned production schedules for the first time in 18 months.

Chemicals will depend heavily on strengthening down stream markets. Liquid, dry and soda ash have both shown some modest improvement here recently and we expect them to kind of retain their current run rates. Fertilizer which has been disappointing both in the fall last year and spring this year could actually be an opportunity for us.

For all the reasons I mentioned earlier, our coal volumes will likely be off as much as 10% from 2008's record level. We expect to see some seasonal strengthening of that run rate during this high demand summer months, but it will certainly be at lower levels than prior years. In fact if you look year over year, energy faces some of the toughest comps in the third quarter last and a record fourth quarter as well.

Fuel production has been strengthening lately with at least three mills starting back up and an early July production rate topped 50% for the first time since late last year. We've also seen an increase in brown paper production with additional paper machines being brought back online so strengthening in steel and paper are hopeful signs, which if they are sustained, could also help drive some recovery in the industrial demand for electricity which would give us an additional coal boost.

We're starting to see some stimulus project activity, but so far it's still hard for us to tell whether it's generating the incremental projects or just shifting the source of funding.

Intermodal, like energy and ag should see some seasonal strengthening although international volumes will continue to run softer than last year, but we look for continued growth in our domestic segment with the added business from Hub and the continued success in new services.

Now we've seen some of these opportunities reflected already in the recent strengthening of our run rate. While we expect it to continue strengthen, I think the chart clearly shows that a year over year challenge that we face and we're going to continue to pace below last year.

Let me wrap up with a look at customer satisfaction, in the second quarter again averaged a score of 87, matching last quarter's best ever performance and up four points from last year.

With that, I'll turn it over to Dennis for the service performance report.

Dennis Duffy

Good morning. The priorities of the operating team are two-fold; run a safe, efficient volume variable railroad, and provide a high quality service product.

Our second quarter results demonstrate we are performing well on both fronts. Let's start with service. These are four key service metrics; train speed at 27.4 mph, was a quarterly best and up 27% versus last year highlighting the progress we've made through our network management initiatives.

Lower car load volume also helped to create a fluid network which we are leveraging into better asset productivity. Freight car utilization at 8.6 days between loads was another record quarterly rate. Despite fewer yard starts and reduced yard operations, terminal dwell time remained steady at 24.5 hours and matched last year's second quarter best level.

Consistent with the high customer satisfaction scores that Jack just showed, our internal service delivery index reached a best ever quarterly quarter at 93%. While enhancing service and efficiency, we also improved employee, customer and public safety, reducing incident rates, 16%, 13% and 12% respectively.

Along with safety and service improvements, we continue to drive productivity gains across the board using organized, well defined processes. Let me share a couple of examples. UP's re-crew rate improved to 3.8% in the second quarter, a record performance, reducing overall staffing requirements and crew related costs.

We reached another best ever in our fuel consumption rate, beating last year by 6% and setting all time records for the second quarter in the month of June. In the first half of '09, we saved over 35 million gallons of diesel fuel by better locomotive technology and increasing employee engagement with our fuel masters program.

These efforts enhancing productivity and performance also create capacity for the future when volume returns. In the meantime however, we continue making the operation more volume variable.

With second quarter gross ton miles down 22%, we were fully volume variable with our train starts and resources. We reduced train starts 25%, our working TE&Y train, engine and yard workforce 22%, and our road locomotives and inactive car fleet by 27% and 30% respectively.

As volume in April and May fell below first quarter results, we increased furloughs and stored more assets. In June we recalled a few employees and brought back some assets into service as we saw some increased volumes and entered the peak period for vacations and summer maintenance.

We're managing volume variability, keeping in focus our dual challenge of improving both productivity and service. I talked with you last quarter about how we're using our unified plan to shift work from smaller, less efficient yards to more efficient network yards. We reduced shifts and overtime at virtually all yards on our network to size the operation for current volumes.

To date we have also closed or significantly reduced operations in 24 of UP's 114 principal yards. At the same time we achieved a dual goal of improving customer service, improving car load SDI's, service delivery index, by 10 points versus 2008. Also, industry spot and pull which captures our first and last interface with the customer reached an all time best of 97% on time in the second quarter.

Our productivity and performance initiatives are supported by our capital investments. We invest for safety, service, growth and productivity improvement. As we told you in April, we reduced our '09 capital plan by $200 million to the current outlook of $2.6 billion.

The pie chart shows the split between the placement, spending and investment for productivity and growth. The engineering replacement spend was reduced by $88 million on the basis of better productivity and material prices, yet protects our long term goal of improving the infrastructure. Results are encouraging. Miles of main line slow orders are down 20% year over year, and we're beating our production plan, running at 111% of goals through the second quarter.

As we discussed before, the capital plan also includes $290 million for 125 new locomotives that include a three year purchase agreement. Although demand does not warrant these, we are putting them to good use in distribute pair operations, saving fuel and storing less efficient locomotives.

The majority of the growth spend is on the Joliet and the Mobile facility plus select rifle shots where commercial opportunities such as wind energy, and a few high leverage productivity projects including signal upgrades along our central corridor.

Looking forward through the second half, for the second half the operating team is committed to achieving further safety improvements, meeting the dual challenge of improving efficiency and service, progressing our summer capital programs with great productivity and being ready to leverage the upside potential when volume returns.

With that, let me turn it over to Rob to talk about the numbers.

Robert Knight

Good morning. Let's start the second quarter financial discussion with a look at our summary income statement. The 22% fall off in car loadings and lower fuel surcharges drove a 28% year over year decline in operating revenue to $3.3 billion.

Second quarter operating expenses totaled $2.6 billion, down 30% from a year ago. The company's ongoing initiatives to increase efficiency and operating volume variable network played a major role in reducing quarterly costs. We also benefited in the second quarter from a 68% decline in fuel costs and a reduction in casualty expense.

Another factor is that our 2008 expenses included over $20 million of higher costs associated with Oregon mud slide and Midwest flooding, so we have a favorable expense comparison versus last year. Lower year over year operating revenue and expenses combined to produce $751 million in second quarter operating income, a 19% decrease.

Second quarter freight revenue fell 28% to $3.1 billion as a result of lower car loadings and reduced fuel surcharge revenue. Interestingly, this quarterly revenue amount is more than $100 million below first quarter levels, further highlighting the depth of the current economic recession.

Average revenue per car declined 8% in the quarter as we continue to pass on the benefit of lower fuel prices to our customers in the form of reduced fuel surcharges. In fact, fuel surcharge revenue declined more than $500 million in the quarter.

Our pricing efforts in the second quarter yielded results just north of 5%. For the full year, we are still comfortable with our outlook of 5% to 6% core pricing gains.

The mix of business in the quarter was slightly negative as a result of significant declines in carloads of finished vehicles, lumber and steel.

Turning now to the quarterly expenses, as I walk through each category, I'll highlight the impact of both volume and efficiency. Starting with compensation and benefits, this expense category declined $125 million in the quarter of 11% to $976 million. Second quarter work force levels were 10% lower year over year as we continue to furlough employees and reduce overall employment through attrition and management actions.

In fact, UP's average quarterly employment levels are the lowest since the Southern Pacific merger. Strong network fluidity and lower car load volumes, enabled us to make these reductions and drove a 1% decline in average compensation per employee.

Also contributing to the decrease was lower expense related to our incentive program. Offsetting a portion of this productivity was the 2008 union wage increase of 4% and effective July 1, 2009 the union wage increase becomes 4.5%. For the remainder of 2009, we will continue to manage work force levels with demand.

Second quarter purchase services and materials expense declined 21% to $391 million. On the purchase services side, lower volumes and increased operating efficiency contributed to both decreased contract service expense as well as reduced crew transportation and lodging.

From a materials standpoint, we performed fewer locomotive repairs in the quarter as a result of lower volumes and having a significant portion of our fleet in storage. This category also benefited from the favorable year over year comparison to last year's mud slides and flooding.

Turning to fuel, this chart illustrates the impact of changing fuel prices. The solid blue line shows our actual monthly fuel price. The dashed black line is our monthly fuel price lag by two months to illustrate our fuel surcharge programs.

The areas shaded in red with the solid line is above the dash line, represents periods where the lag in our surcharge had a negative earnings impact. Conversely, the areas shaded in green, shows the periods when fuel prices declined and earnings benefited from the surcharge lag.

For the second quarter of 2009 the impact within the quarter was negligible. Although we had a slightly positive lag to start the quarter, the lag turned negative as diesel fuel prices increased in May and June.

Looking at fuel on a year over year basis however, the surcharge lag added about $0.20 per share to our second quarter 2009 earnings. As you can see from the chart fuel prices spiked in the second quarter of 2008 where a significant earnings headwind was experienced in that quarter.

As we look ahead, it's hard to say what might actually happen with fuel prices. It's a little like trying to predict the economy, but if you assume prices remain at current levels through the end of 2009 which is around $1.90 per gallon, you get some idea of how fuel might impact earnings. Assuming fuel prices don't fluctuate much, the earnings impact within the third and fourth quarters is minimal.

The more meaningful perspective is how the year over year comparison is likely to shape up. For the third quarter of 2008 it was about a wash as prices receded in the back half of the quarter. But in the fourth quarter of last year, we had a substantial tail wind to earnings from the surcharge lag.

In addition to the lag impact of fuel, we consumed 84 million fewer gallons of diesel fuel in the second quarter. A portion of the lower consumption relates to the 22% reduction in second quarter gross ton miles which saved us approximately $234 million. Improved consumption was also the result of our ongoing efforts to conserve fuel which saved $65 million in the quarter.

As Dennis mentioned, the operating team is having great success reducing fuel consumption with more to come.

Second quarter equipment and other rents expense declined $31 million in the quarter or 9% to $307 million. Similar to what we've experienced over the last couple of quarters, lower volumes of industrial products and intermodal are driving down short term car rent. Better asset utilization as fewer leased assets reduced quarterly expense as well.

Other expense declined $46 million in the quarter to $153 million. The primary driver of the decline was a semi-annual actuarial study completed in the quarter which reduced expenses by $38 million year over year. Our strong safety record and lower estimated settlement cost contributed to the lower expense.

In addition, expenses for employee travel, utilities and other miscellaneous expenses decreased in the quarter. Offsetting a portion of these reductions were higher property taxes and an increased provision for bad debt expense.

Turning now to Slide 30, we've summarized our expense performance in relationship to the quarterly volume decline. The casualty expense reduction and last year's weather related expenses helped our overall expense performance in the second quarter, but with volumes remaining at historically low levels, we took actions throughout the quarter to align resources with demand.

Reduced work force levels, stored locomotives and freight cars, as well as ongoing efficiency gains, combined to achieve a roughly 70% expense variability rate in the second quarter. Of course, this analysis of variability normalizes for the year over year change in fuel prices.

Our ability to operate in a volume variable manner contributed significantly to achieving a record second quarter operating ratio of 77.3%, 2.3 point of improvement versus last year. Lower year over year fuel prices, pricing gains and the casualty reduction also played a role and helped offset the impact of lower car load volumes.

Taking a look at the full income statement, second quarter other income totaled $135 million driven by the $116 million pre tax gain on the land sale to the Colorado Regional Transportation District. Excluding that one time item, other income in the quarter was $19 million, equal to last year's amount.

Quarterly interest expense increased $22 million or 17% to $150 million. Higher year over year debt levels drove the increase, although offset somewhat by lower effective interest rates in the second quarter of 2009.

Second quarter income tax expense declined 8% or $23 million to $268 million as a result of lower quarterly earnings. The effective tax rate in the quarter was 36.4%, a point higher than the year ago rate. We expect the full year effective tax rate to be around 27%.

Net income in the second quarter declined 12% to $468 million for reported earnings of $0.92 per share. However if you exclude the RGD land deal that we talked about, adjusted second quarter net income would be $396 million or earnings of $0.78 per share, a 24% quarterly decrease.

Slide 33 shows our quarter end cash position and current debt levels. As we've discussed over the last several quarters, we are continuing to maintain a strong liquidity position as the recessionary economic environment lingers and business volumes remain low. Adjusted debt levels increased moderately to $14.8 billion, reflecting new debt issuances over the past year.

As we think about the remainder of 2009, what happens with the economy will clearly be the driver of our earnings. Our current seven day car loads are running about $150,000 a roughly 19% decrease versus last year.

Although this is slightly better than what we experienced in the first half of 2009, as you heard from Jack, volume levels will remain challenged for the remainder of the year. As I mentioned earlier, at current fuel prices, we will likely lose the positive fuel tailwind we enjoyed in the firs and second quarters. In total, lower fuel prices and the resulting surcharge lag added about $0.40 to earnings in the first half of 2009 versus last year.

While low business volumes and fuel will pressure our second half results versus last year, the entire UP team had done a great job playing the hand that the economy has dealt us. We're not using the excuse of a slow economy to stop improving our overall profitability, and we produced solid results despite the challenges.

Through our own ongoing commitment to pricing, strong operating efficiency and focuses efforts to right size the organization, we will continue to increase UP's future earnings power.

With that, let me turn it back to Jim.

James Young

Although we expect it will be some time before the economy recovers, our business levels as we've said, appear to have bottomed out with a few opportunities for improvement as we move into the back half of the year. This feeling is supported by the latest round of economic indicators which seems to support the view that the economic is stabilized.

With that in mind, we're managing the company under the assumption of a continued low volume environment, advancing efficiency efforts while at the same time providing excellent service to our customers.

We're fully prepared to handle more business when the demand returns. We're running the network very well which positions us to generate stronger volume leverage going forward.

Talking more strategically for a moment, we're well aware of the activity in Washington regarding rail regulation. Because of the potentially negative consequence that this increased government regulation could bring to our industry, we're spending a great deal of time on Capital Hill.

We're talking to legislators and educating them about the benefits of rail. Everyone understands and agrees that rail needs to play a vital role in solving America's transportation infrastructure problem. We're optimistic that the leaders in D.C. also understand the importance of a financially, healthy rail industry.

Union Pacific and the entire industry is uniquely suited to help our nation's economy grow and compete in the 21st century. Our fuel efficient and environmentally friendly and safe transportation products, help customers compete globally, saves tax payer dollars, and as our business grows, creates good paying U.S. jobs.

While our company is challenged by these unprecedented economic times, we remain confident in our long term strategy which is still firmly in place, focused on improving safety, increasing efficiency and delivering price driven value for our customers which will enable growing financial returns.

With that, let's open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Randy Cousins – BMO Capital Markets.

Randy Cousins – BMO Capital Markets

I wonder if you could comment on your Mexican business. How has it been doing? How is the trans border stuff performing? Has it been hit harder than your domestic?

Jack Koraleski

It probably has been a little bit hit harder. It's down about 30%, 32% something like that in the quarter, and of course as you would expect a big portion of our largest piece of business typically would be the automotive franchise. So with the turmoil there for both Chrysler and General Motors, that kind of hit it pretty hard.

On a brighter side, a lot of new business opportunities coming out of Mexico. We've increased our sales force a tad there in Mexico and we're going after those new business opportunities so we're feeling good about that.

Randy Cousins – BMO Capital Markets

Do you see the Mexican business coming back fairly strong in the second half or do you see your Mexican business lagging your domestic U.S.?

Jack Koraleski

I hadn't given that too much thought, but I'm thinking it's probably going to mirror what we'll see on the U.S. I think the automotive industry coming back will help us to some extent, and I think actually we should see a little bit improved grain movement between the U.S. and Mexico. So I think it will probably mirror what we'll see on the U.S. side.

Randy Cousins – BMO Capital Markets

You mentioned bad debt. How big a number was it and I believe you have some legacy auto contracts. Did the bankruptcies of a couple of the auto related companies create an opportunity to maybe get at those contracts maybe earlier than otherwise would have been the case?

Robert Knight

As I mentioned, we increased the bad debt reserve and it was relatively small, $2 million to $3 million in the quarter, so not a material item.

Randy Cousins – BMO Capital Markets

And what about the legacy business? Is there a chance to get at that auto legacy business a little sooner as a consequence of the insolvencies?

James Young

Keep in mind, Chrysler is already a new contract when we look at it, and General Motors has just a short time left. We're in discussions over it.

Randy Cousins – BMO Capital Markets

In terms of cash balances, you're sitting with about $1.6 billion in cash. Do you have a sense of what you think of as a suitable level and if the cash continues to build, do you put to towards share buy back?

James Young

Obviously $1.7 billion is not the going run rate we think in normal times. We talked yesterday that $400 million kind of range would be better. We're being conservative now, till we see the economy. We're in a good position.

Our share purchase program is off the table right now, but when we start to see this thing turn around, we'll consider what's best for shareholders.

Operator

Your next question comes from Jason Seidl – Dahlman Rose.

Jason Seidl – Dahlman Rose

Let's talk about pricing a little bit. You mentioned just north of 5% and you're sticking with your guidance for the full year. Can you talk about what you're signing contracts at right now currently and also what percentage of you 2010 business is locked up?

Jack Koraleski

I'm not going to talk about individual contracts for next year other than we're seeing real value we're providing in the market. We are getting price for our service. You start looking at some of these quarters, I won't get into the specific customer, but his cycle times, when they looked at it, pretty book of business had improved 20% to 25%. They signed a very significant value of that to them internally, obviously inventory carrying costs.

In this case they owned equipment. We were able to get a very good price in that new contract that's been consistent with where we're going. Again, it's hard to look out to next year and where anything is going to be but even if you look at where we're at today in this very tough environment, I'm confident that 5% to 5% range that we look at will be there for this year.

Jason Seidl – Dahlman Rose

What percent of next year is already signed up? Forget percentage wise in terms of the prices you've got, but what percentage is already booked?

Jack Koraleski

We're not going to get into that right now.

Jason Seidl – Dahlman Rose

Can you expand a little bit on some of your new intermodal offerings, some of the contacts initiative that we talk to are sort of very excited about some of them and you've got a lot of people being able to sell this versus the truck load business because of your cycle times. Can you elaborate what services were launched in the quarter?

Jack Koraleski

Northern California down to Texas was the market that we had exited we brought back. We opened seven lanes of refrigerated boxes including now an interline program with Norfolk Southern that's gaining a lot of attention.

The improved service on our Blue Streak network with the Norfolk Southern is also doing quite well. Service levels just all over the network are really doing well.

James Young

We're not done here. Keep in mind if you go back three or four years ago, we walked away from many of these markets. When you recall we were struggling in terms of our business volumes and so we've been consciously and slowly looking at new markets to re-enter. You've got to prove yourself. This isn't a business that you open it up one day and it's full. You've got to prove your service offering.

We've got a good track record that many customers are willing to one, reconsider UP or two, are looking to ship on a railroad for the first time. So we're pretty excited about it. As you saw, our only book of business that grew in the quarter was domestic intermodal, and that directly relates to our strategic approach on the domestic market.

Jason Seidl – Dahlman Rose

As you look towards service levels, how are they going to be impacted by the eventual turn around in the economy without putting a time frame on it. Do you think you could maintain levels near where you have them at now with business coming back?

Jack Koraleski

We're running 28 mph right now. My goal is when we run 100,000 cars, we're running 28 mph.

Jason Seidl – Dahlman Rose

Could you refresh my memory when those ethanol plants you talked about actually came back on line? Was it late in the quarter or early?

James Young

They were kind of mid quarter and then the third one just came back up not, so it's up and running, and the fourth one I'm not completely when it's coming back.

Jason Seidl – Dahlman Rose

The third one came back in July then.

James Young

Yes.

Operator

Your next question comes from Thomas Wadewitz – J.P. Morgan, Chase.

Thomas Wadewitz – J.P. Morgan, Chase

I wanted to see if you could give some comments on the coal perspective. I think what we heard from CCS last week when they were talking about coal, that I think some of the utilities have contractual obligations with the coal producer and that would help their income lines in the third quarter maybe look a little better than they did in second quarter. I'm wondering if that would affect your customer base at all and help your coal volumes in third quarter and also just in terms of stock piles, if you can give us a sense of where they are.

James Young

The latest information we have is that stock piles are down a tad from their record high levels in May, but still substantially higher than what they were a year ago, maybe to the tune of 16% to 17% greater than where they were a year ago. I'm not as bullish on the idea that the customer commitments are going to drive business volume.

What we're seeing right now is just the burn rate from the summer season is much higher so we're seeing customers put more transits back in service again. We've seen our volumes kind of pick up here and we would expect that that would continue through the September maybe even October. It kind of depends on the weather, but that's what we see right now.

Thomas Wadewitz – J.P. Morgan, Chase

Does that give you a little better year over year performance in coal looking forward or is that just kind of normal seasonality and the year over year looks similar.

James Young

It's normal seasonality but it's going to be well below last year's pace. We set records in the third and fourth quarter last year, and we're no where even close to that this year.

Thomas Wadewitz – J.P. Morgan, Chase

I think there's some degree of optimism about a turn in the industrial economy, the ideal that they've been producing below actual consumption levels, taking inventories down and you would be a pretty lean level on inventories for at least part of your customer base, but it seems like there's a lot of caution about the outlook for volumes. Are you seeing that with steel customers, automotive, with chemicals? Is that something that you would see and lead you to be optimistic or do you really just don't have any sense when the volumes will get better in the near term?

James Young

Our optimism is one of it looks like things have stabilized. Jack had indicated there are a couple of areas. Steel is up. We're going to reopen I think two or three plants we talked about. But we're a long ways to go to get back in that market where I'm going to feel good about it.

So again, you have to stabilize at some point before we can actually turn things around and we'll see. I think the stimulus money, I think most people were pretty up, maybe overly optimistic on its affect on the timing. What we see with some of our local groups we work with, most of them aren't going to see real dollars spent until the later part of the year.,

And if you think about the timing it takes to prove it to Feds, get it to the State and get it out of bids, that's probably realistic. So I could say there's some optimism of balance there, but we're going to be pretty cautious about it.

I would tell you we're in a position to handle it. If this thing turns around with the assets we have in place and the leverage, we will lever very nice in the bottom line with just a little tick in volume.

Thomas Wadewitz – J.P. Morgan, Chase

When you look at the third quarter earnings, seasonally, they're higher than second. That's kind of normal, but I'm wondering given some of the comments you've got, do you think the expectation of a pretty big ramp in third quarter versus second, does that seem realistic in terms of a $1.07 versus the $0.78?

James Young

You can get a wide range on the numbers right now. You're going to see our car loadings. They are picking up some. I can get a pretty wide range on the numbers and really the bottom line there is going to be the volume. Again, we will lever very nicely any volume impact. I'm just going to be real optimistic right now.

You'll see it. Watch the car load numbers that are produced every week, and if you see those start to move, you're going to see we'll leverage very nicely.

Operator

Your next question comes from Matthew Troy – Citigroup.

Matthew Troy – Citigroup

I was wondering, tactically and strategically how you can resource or re-resource the network? You went into this downturn a little bit over resources. You've done a great job in terms of right sizing tactically whether its deploying locomotives or cars back on line or getting furloughed employees back. If you could just help us in terms of getting comfortable that there's a plan in place to accommodate whatever volume ramp we might see. How do you look at that versus past cycles? How are you confident that it's going to look better?

Dennis Duffy

That's a great opportunity for us. Everyone one of the resources that we have whether it be locomotive, freight cars, or personnel on the operating craft side have recall plans that we have for 30, 60, 90 days that we can do. And we think right now, we've got at least 10% to 15% capacity in our existing network.

But I can assure you that we spend a large amount of time looking at the cyclicality of our business and how can we respond to that immediately so there are very well defined plans, well rehearsed in terms of how we recall these resources back. We are not going to get caught short again and we've not going to overspend in making that protection too abundant either.

James Young

The other thing to think about here is you've got the fixed infrastructure. As Dennis said, the fixed infrastructure is probably a 200,000 car load per week number in terms of what's built in there, is the variable operating resources as Dennis said is 10% to 15%. But there are other things.

We introduced that alternative work program where we keep employees at least current on training. Their benefits are paid. That has worked very well for us as we start to call them back. I will tell you, I am very confident on the processes we put in place and our ability to respond.

I'm going to respond in the context I want to handle that volume and provide great service. That is what we will lean to here as we think about recovery. We're ready to handle it when it comes back.

Matthew Troy – Citigroup

Relating to the safety and casualty adjustment in the second quarter of $38 million, was that a true up and look back for prior periods like we saw with CSX in the east in their second quarter. I'm trying to get a sense of the economic impact allocated between the relevant period. Is that a true up or is that a run rate savings going forward? How should we think about the net year over year savings in impact going forward in contribution to the other expense line?

Robert Knight

It's a look back. It's a look at over a number of years looking back. We do get an ongoing benefit in the neighborhood of $2 million to $3 million kind of number, but the adjustment in the actuarial study that we took in the second quarter was primarily a look back over the last several years.

Matthew Troy – Citigroup

And that $2 million to $3 million you just mentioned, that was per quarter going forward?

Robert Knight

Rough numbers, yes.

Matthew Troy – Citigroup

On agricultural, obviously the export story there is impacting everyone in the industry. I'm just wondering in terms of looking for signs of a turn in ag, are there one, two or three things that you can point to that should lead us out of this downturn, be it exports, be it on the fertilizer side? Just in terms of barometers, what do your ag guys watch for in terms of a more meaningful turn away from what would be more macro driven weakness in the industrial segments.

James Young

Here's what we monitor. The first thing is the global crop situation. That plays a big role. Last year we had record setting performance because the rest of the crops around the world had not fared all that well and the U.S. dollar was weaker. So with some strength back in the dollar, not to be mercenary about this, but the good news was when we see the drought in Argentina and we see their soybean crop substantially reduced, that says our soybean harvest and going forward in the fourth quarter you should see some opportunity from that hitting the U.S. market, just from an overall supply situation.

The second thing we look at is animal counts. We've been surprised that the animal count across the U.S. has not increased more. It's still below year ago levels and at some point in time we do expect that to pick up. When that does, that will be another trigger point for us.

The third is the quality of the crops and right now the crop quality in the U.S. look excellent. There was an increase in corn acreage year over year and also an increase in soybean acreage. So that should help us as well.

And then the last thing we look at in particular is wheat, and in the UP service territory, the wheat crop did pretty well, and all we need now is for some demand to start drawing that into the market and we should see that turn around.

So we're kind of hopeful we'll see a little bit on an improvement in the fourth quarter although we still don't expect it to match last year's record setting performance.

Operator

Your next question comes from Walter Spracklin – RBC Capital Markets.

Walter Spracklin – RBC Capital Markets

I just want to go to your intermodal and some of your price realization on that. We're hearing some more about increased price competition, price discounting and that some of the customers are looking at truck as a, going back to truck from rail and sort of counter from what we've been hearing from you. I just want to hear your updates on how you're looking at the trucking competition and whether you think it's sustainable and how you're approaching it.

James Young

We've been consistent here that the intermodal market and trucks have been pretty tough for half a year or more. Many cases, when you look at the pricing, it's not sustainable, and the question we have to decide is whether we're going to chase it. In several cases, we haven't.

So really it does vary by quarter and the markets we're in. What we're focused in is the long term plan, building those products that are in there, working with customers, helping them understand the long term perspective of our market. But I will tell you, I'm not going to chase it.

Our pricing is still on the positive side when you look at taking fuel off the table, but it one that you have to decide kind of tactical versus strategic discussion with the customer.

Walter Spracklin – RBC Capital Markets

Moving still on the pricing but more on the regulatory side, can you give us an update on what you're hearing out of Washington, sort of gone radio silent there as they're working away on the bill and just any update on the talks that you've had, if they're going well and just your view on regulatory environment going into the six to twelve months.

James Young

Our industry as you know, and all the CEO's are very active back on the Hill. Obviously I think there are other priorities on the current administrations agenda besides new regulations for us, but we're not going to let our guard down. We continue to be aggressive in terms of working with Chairman Rockefeller's staff, in terms of understanding the long term values of our industry and the economic realities.

I'll tell you a good example that I think is important. We focus a lot of the potential new regulation side, but you have Chairman Rockefeller and Senator Lautenberg who wrote a bill proposal to shift 10% of the business moving on the highways to the railroads. Now they weren't specific about how that actually is accomplished, but I think it gives you a little insight in terms of where they're thinking is on the value of rail in the United States.

We've made it very clear on what I think where the points of real conflict are and what's needed for this industry to continue to invest. Again, I can't predict. You may see something come out of the House this week on anti-trust, but at the end of the day, this things is going to handled over on the Senate as a starting point and we'll see what happens.

Walter Spracklin – RBC Capital Markets

Do you expect it in the next six months, three months out of the Senate?

James Young

That's a tough call. One thing, you can never assume anything when it comes to DC. Our view is we're going to be very active. We're going to very aggressive on the consequences here and we're going to be aggressive on telling the story in terms of the value of railroads.

Operator

Your next question comes from Ken Hoexter – Bank of America, Merrill Lynch.

Ken Hoexter – Bank of America, Merrill Lynch

I just want to revisit. At the end of your presentation you gave a bit of outlook for how things were trending. You talked a bit about fuel. I just want to understand. Were you trying to suggest that earnings deceleration would continue at a faster pace because of the $0.40 comp in fuel that you are not going to have that you had in the first half?

Robert Knight

I was trying to make clear what the impact of fuel has been on us year to date, but yes, look last year's third and fourth quarters where there was a dramatic difference in terms of how fuel played out in the third and fourth quarter of last year versus the first and second quarter of last year.

So when you look year over year, assuming the fuel stays about where it is, you come up with a different equation in the back half than you did in the first half assuming fuel prices stay where they are, which nobody knows what's going to happen with fuel.

Ken Hoexter – Bank of America, Merrill Lynch

Looking at volumes down over 20% and the record level unemployment levels, you highlighted you're not nervous that you're overdoing it on the employee side, but however if volumes stay at these levels, is there more that you can continue to pull out on the cost side if you stay at this static volume level let's say for the next six months?

James Young

We are not going to see the kind of drop you had what we've seen the last six months. But we're trying to gauge and we're being a little conservative here in terms of when this thing will come back. But if we continue to sit at this kind of a level, you'll see more cost come out. You're not going to match though what you saw before, but clearly we've got kind of a their three, four and five kind of look at what we would do on our spending if this thing remains flat.

Ken Hoexter – Bank of America, Merrill Lynch

Have you been approached by any of the unions to say on that 4.5% wage increase job's are more important than getting that wage increase? Is that something that you've had discussions at all?

James Young

No. Where we're spending our time, town halls all over the railroad. We get folks in the room there and we talk about what's going on. It's very clear in talking with our local chairman, the general chairman and the presidents of our unions, I just had lunch in DC with one of our presidents. They're all over jobs.

They're focused on what do we need to do in terms of turning the economy around. I get that from whether you're the head of the union or you just were hired three or four years ago. They understand the importance of safety. They understand service, what it means in terms of putting products in the marketplace.

We have not had any discussions about that trade off at this point. That will be part of when you get into the next round of negotiations. All these things will be on the table here, but my goal is to make them understand what they can do to help us on service and safety, and then also on the political world in terms of where DC may be going with some new regulations.

Ken Hoexter – Bank of America, Merrill Lynch

Does the President seem responsive in getting involved at this point in those discussions or do they want to wait and see what comes out?

James Young

They're more involved than they ever have been. The consequence, and I don't care whether you're talking about new regulations or you're talking about cap in trade, one of the things again that we are doing, and I say this to the industry is helping all of our folks understand the consequences of the legislation.

You can call it what you want to, but it's jobs. And I've seen a willingness where they want to be at the table with us talking about what the consequences are.

Operator

Your next question comes from [Alison Landry – Credit Suisse]

[Alison Landry – Credit Suisse]

Could you talk a little bit about the Colorado/Utah mine issues? What's going on there and when are you expecting things to get a little bit better?

Jack Koraleski

The Colorado/Utah mines at the moment have been plagued with some really, really tough geology. Coal quality with some limestone deposits that's in the coal seam and just a variety of very tough issues for them to deal with.

You couple that with weak demand, and it creates the scenario that we have today. We're running basically eight trains a day or so out of Colorado/Utah. That's down from what I would say our record setting levels of 12 or 13 trains a day. So it's just down. It's pretty soft.

They're working to solve those problems. I think they're working to get them resolves as quickly as possible moving forward. If the demand were a lot stronger, they probably would work a little harder, maybe spend a little more to get them resolved more quickly, but they're doing the best they can with the economic scenario they have.

There still is ample demand for Colorado and Utah coal and sooner or later they'll get it behind them and we'll be moving forward there.

[Alison Landry – Credit Suisse]

Is it still about 15% of your coal business or has that declined?

Jack Koraleski

I would say that's roughly, it's not too far different from that because the whole coal business has declined as well.

[Alison Landry – Credit Suisse]

In terms of natural gas, I know it's about $3.50 which is a little bit more than the competitive PRB price, but even still have you seen any switching of utilities on the margin?

Jack Koraleski

In our serve territory, the natural gas capability to switch is not prevalent. Most of the utilities that we serve, they have peaking capacity in natural gas but the majority of them don't have the wholesale ability to switch over. However, given that you have the grid out there, that doesn't completely insulate us from low natural gas prices because other organizations and utilities that do consult to the grid depending on the pricing.

James Young

I think the switch has already happened. You look at the price of natural gas, we had some stories that you had natural gas at $2.00 in some of the markets so any meaningful shift has already happened.

Operator

Your next question comes from John Larkin – Stifel Nicolaus.

John Larkin – Stifel Nicolaus

I had a couple of questions on the domestic intermodal side which looked very good for you. Congratulations by the way on winning that Hub business. That's a huge win. How much of the Hub business was included in the second quarter? I got the impression that that was spooling up during the quarter. What would domestic intermodal have been say without Hub and what would it have been in terms of growth if Hub had been running full bore with you the entire quarter?

James Young

If you look at that domestic market, Hub started to come into play towards the end of June. Hub has actually been part of our business for a long time and their core business was growing in terms of what they already had on us, so it did have an impact in terms of the core. I don't want to get into specific numbers.

I think you have to keep in mind though in this market, we've won some and we've lost some if you look at the year over year comps and again, I feel good about our domestic strategy that I think right now is just really starting to play. This is one that there's much more upside for us going forward.

John Larkin – Stifel Nicolaus

But fair to say that that growth rate with Hub in the fold for the entirety of the second half should be a little higher in the second half?

James Young

That's right.

John Larkin – Stifel Nicolaus

You talked about your streamline product and how that has been growing very nicely for you, about 40% if I heard it correctly, that growth is coming from the highway. The other 60%, is that coming from the other western railroad or is that coming from other IMC's or other folks that operate on your system?

James Young

What it is, it's coming a lot of it from our own system where the IMC's are moving from a ramp to ramp product to the door to door product that streamline offers, so it's a value add for the product that we offer and also a margin enhancement for us. So that's good business for us.

John Larkin – Stifel Nicolaus

Is it fair to say that as you've done such a great job of variabilizing your cost structure that you've been able to take the 25% or 30% of the least efficient locomotives, the least efficient freight cars, maybe those that are closest to needing major maintenance and laying those up and at the same time essential furloughing your least experienced or least productive workers, is it possible to be that good about eliminating the most inefficient assets and people?

Jack Koraleski

I think that's an investment. We did put down our older, most inefficient locomotives. We did do the same thing with the freight cars as much as possible and obviously [audio break] under all three of those scenarios the employees, the locomotives and the freight cars.

John Larkin – Stifel Nicolaus

So there won't be a big lump of maintenance expense when you take them out of storage?

Jack Koraleski

Will not.

Robert Knight

Just one more time, I just want to clarify, some of that 60% did come off the competition. Clearly Hub is a good customer of streamline as well so I don't want to imply that none of it came from them, but I just don’t think that was a major drawing factor of the 60%.

Operator

Your next question comes from Edward Wolfe – Wolfe Research.

Edward Wolfe – Wolfe Research

You talked about pricing, real pricing up around 5% which is down from 6% you were talking about last quarter. Can you talk about in the three months which segments that are relatively feeling a big weaker and which one are holding up a big firmer?

James Young

I would be careful about interpreting the 5% that is a weakening price. You also have a mix impact in there. When you think about a good example, is in the auto business where we've been able to renegotiate some legacy contracts, the book of business is off 50%. When you think about coal is another one that you've got a book of business that has still outstanding and some large legacy contracts that have been renegotiated in that business, and that business is all down.

So I would look at that more in the context of again, we said 5% to 6% for the year. We had a little bit stronger first quarter, but I'm in the bottom end of the range for the second quarter. I think the majority of that again is mix.

Jack Koraleski

That is not what I would describe as same store sales. It is in fact what you would say is the actual price realization for us. So to the extent the business didn't move, we weren't able to capture any price off of it. There really hasn't been any substantive change in our pricing environment between the first and second quarter.

Edward Wolfe – Wolfe Research

Can you talk a little bit about the timing as you understand it for the regulatory bill? I think you said the anti-trust could come in a week in the House, but the Senate Regulatory bill, any sense that there's a chance that still happens before August recess or at this point is this a, if it's going to come, it's at the end of the year at this point?

James Young

Nothing will happen before the August recess. I would tell you one other thing with this bill. What is also important to understand about this bill, the members on the Hill that are involved with this discussion understand the significance of this thing, and it is complicated and we made it very clear that if you get it wrong, capital is going the other way.

I don't see a focus here to get something done quickly. If something happens, they want to get it right because they do understand the consequence. So nothing will happen before August. I think there's one sign that said nothing happens this year, but we can't take that assumption. We're going to be very active working our story.

Edward Wolfe – Wolfe Research

Slide 17 where you talk about bringing back some of the resources and the April/May peaks for furloughs and locomotives stored, if I look at these numbers, you're bringing back 17% of your heads and 9.5% of your loco's and 15% of your cars. Yet when I look at '08, there really wasn't much on an absolute basis change in volume between third and second quarter. What's your assumption here of peak and if it doesn't happen, is it easy to put this stuff back into the closet?

James Young

What you have to be careful of again, is you don't want to, calling employees back, it's tough obviously to furlough people here. It's real personal in terms of what it means to them and you have to be careful about calling them back and then cutting them off again. So we want to make certain we see some trends here.

But if this thing turns back around and starts going south on us, we will put more assets back in storage and we'll unfortunately be forced to furlough employees.

Edward Wolfe – Wolfe Research

Why, other than just historically there's a seasonal pick up, we didn't see it last year. Obviously you think there's going to be a seasonal pick up this year that you're doing that. Is that a safe assumption?

Robert Knight

Keep in mind, you also have attrition here. We're going to lose this year, I just looked at the latest numbers in terms of our attrition rate, and we're going to lose 3,000 employees this year. Now that's down from where we're running, but we do have real attrition that we've got to keep up and then again, the seven day run rate when you look at car loading has picked up. We're running about 151 or so right now. We were at 143.

My gut says you will see some seasonal, the more traditional seasonal pick up with a peak, but we watch it very closely.

Edward Wolfe – Wolfe Research

You said before that volumes are the key because you can leverage the year. Where do you think you can start to leverage volumes in terms of margin? Is it minus 15? Is it minus 10? Where is kind of directionally you start to see some of that leverage?

James Young

Any time right now, even the current train network we're running has capacity in terms of train size, so you think about, again coal would be different because coal is in train starts, although you're not adding any capacity there, so it's immediate.

When you look at the first 5% to 10% of bump in business volume, you are not going to see much in terms of adding new train starts into our network. So I think it's pretty significant and pretty immediate when it starts to turn.

Edward Wolfe – Wolfe Research

On cash before, you said you've got $1.7 billion and $400 million's more of a normal level. Does that $1.7 billion keep going up? Is there some level, $2.2 billion or is there some debt that you have in mind that you want to make sure you have covered for out a couple of years from now? Where do we think that you stop growing the cash and start to deploy it in other ways?

James Young

We'll continue to grow cash as the business earns income here. I don't see us doing any incremental addition of debt in terms of what's out there. Again, we're being cautious. I just don't have a visibility. You can see forecasts that say this is stable, but this is just kind of a point before you turn down even more, that's out here.

We're being cautious and again, I want to put our company in a good position that when it does turn around, we've got some great opportunity to return value to shareholders.

We have about $500 million of debt due next year, so that's all part of the equation.

Edward Wolfe – Wolfe Research

But it sounds like if we're modeling for the end of the year, we're going to assume that you're going to continue to generate some free cash and that $1.7 billion goes up, not a substantial change to your dividend or start to repurchase stock at this point.

James Young

We could. But again, it's a function of where the business is going here.

Operator

Your next question comes from Gary Chase – Barclays Capital.

Gary Chase – Barclays Capital

I wanted to clarify something first, and obviously you're not going to talk about the specifics, but somebody had asked you about GM and whether the bankruptcy allowed you to open that process. My understanding would be they could open it, but you couldn't, and all I'm asking is should we expect that there's going to be some resolution on that business or is it just as likely you'll keep operating under the old contract until it renews?

James Young

Your assessment is right. They have the option. We didn't of changing the contract. There's a short time left. I'm not going to get into the details. We're in discussions right now and quite honestly with the service, products and the value we're providing, they adopted the old contract is the point, but there's a pretty short time left on it.

Gary Chase – Barclays Capital

It's the way it was. There's nothing special that the bankruptcy creates.

James Young

That's right.

Gary Chase – Barclays Capital

You talked a lot about the unified plan and the ability to better leverage volumes and there have been a lot of questions. When you were answering Ed a second ago, you mentioned attrition and we can see that the head count, as we see the volume start to pick up as it is, depicted in one of your charts here, should we expect that head count could continue to go down on a net basis? Is it going to flat? Or are you going to need to take some heads back on period to period on a net basis, net of attrition in order to handle that volume growth?

James Young

We've got some actions underway right now that we're reducing employment that doesn't show on these numbers here. Again when you say when it turns back up, how quickly will we respond, we'll lever very nice, but we're going to have to make the decision is this a sustainable trend.

That will be the decision point in terms of calling employees back. I'm not quite certain where that head count number will go. Quite honestly, I hope it starts to move up as we continue to grow aggressively over the next several years.

If you look at it, it will be in the areas where you see the direct connection to volume like our train and engine crews. That is where the biggest reductions come in play and it's over a quarter period, it's directly related to volume.

Gary Chase – Barclays Capital

Everybody is talking, no doubt you are aware of the auto production outlook as we move from the second to the third quarter, presumably that's going to have a significant impact on your volumes and I assume network wide, you talk about capacity network wide but it obviously matters what you've got in specific lanes. Presumably you're fully prepared to handle whatever you're expecting from that production increase.

James Young

The thing about these numbers, the first half of the year production was at about 3.8 million units if I recall, 3.5 million out there. I think the forecast of about 10 million a year is about right, so if you think about that, we know inventories are at I think the lowest point they've ever been, about 64 days right now. They were running as high as 118. The 118 isn't realistic, but they're clearly very low.

So you have the potential for the numbers to pick up quite nicely on the auto. We are very well positioned. We handled, we're the largest carrier of finished vehicles in the west. We're very well positioned to handle the pick up. I'm looking forward to it.

Operator

Your next question comes from William Greene – Morgan Stanley.

William Greene – Morgan Stanley

On the follow up with the autos, inbound and outbound, does that matter for you, because I think of you as mostly a destination railroad. So is it really about production not about what you would send into plants?

James Young

No, it would be balanced for us. We're interested in inbound, outbound, certainly the auto parts, and then there's also how does it impact the steel manufacturers and everybody else that plays in. So we have such a large piece of that business that the whole piece of it matters a great deal to us.

William Greene – Morgan Stanley

Do you have an estimate about what all automotive related traffic is on UP?

James Young

I don't.

William Greene – Morgan Stanley

How about on international intermodal, what did that move in the quarter on a volume basis year over year?

James Young

Down in the 28% to 30% range.

Operator

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

James Young

I want to thank all of you for joining us this morning and we look forward to talking with you again with our third quarter earnings. Again, thank you.

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Source: Union Pacific Q2 2009 Earnings Call Transcript
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