Burlington Northern Santa Fe Corp. Q1 2008 Earnings Call Transcript

Burlington Northern Santa Fe Corp. (BNI)

Q1 FY08 Earnings Call

April 29, 2008, 8:45 AM ET

Executives

Matthew K. Rose - Chairman, President, and CEO

Thomas N. Hund - EVP and CFO

John P. Lanigan, Jr. - EVP and Chief Marketing Officer

Carl R. Ice - EVP and Chief Operations Officer

Analysts

Ken Hoexter - Merrill Lynch

Randy Cousins - BMO Capital Markets

William Greene - Morgan Stanley

Thomas Wadewitz - J.P. Morgan

Ed Wolfe - Wolfe Research

Gary Chase - Lehman Brothers

Walter Spracklin - RBC Capital Markets

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the BNSF Corporation Conference Call hosted by Matt Rose. At the request of your host all lines are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to BNSF's Chairman, President, and Chief Executive Officer, Mr. Matt Rose. Please go ahead, sir.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you Sandy. Good morning everyone and welcome to our first quarter financial presentation. With me here in Fort Worth today are Tom Hund, EVP, Chief Financial Officer; Carl Ice, EVP, Chief Operations Officer; John Lanigan, EVP and Chief Marketing Officer. Our presentation today is available by webcast. I'll start by directing everyone's attention to our first slide regarding forward-looking statements.

The statement basically cautions everyone that any forward-looking information presented here today could be affected by a number of factors which cause the actual results to differ materially from any forecasted information we provide. I would also like to mention that we'll be providing non-GAAP measures today in our commentary and ask that you refer to our Investor Relations page on our website for a reconciliation to GAAP.

All right, taking a look at our results for the first quarter, we are pleased to report earnings per share of $1.30. That represents a first quarter record and an increase of 18% from adjusted first quarter earnings per share last year of $1.10 in spite of an $0.11 per share fuel headwind. We clearly exceeded the guidance that we provided during our Analyst Day in Fort Worth on March 6th as a result of the stronger than anticipated ag and coal volumes throughout March combined with a very fluid network.

Freight revenue increased 17% to $4.1 billion due to continued strong yields, increased escalators, and higher fuel surcharges driven by higher fuel prices and increased participation. John will give you a detailed report of the results for each of our business units in his review. Our operating ratio for the first quarter was 78.9% and would have been almost 400 basis points lower if you exclude the impact of fuel surcharge on both the revenues and the expenses. Tom will provide you with the details of fuel and the other expense categories and then Carl of course will provide an operational update. Now I'll turn it over to Tom.

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Thank you, Matt. Earnings per share was first quarter record of $1.30. The left side of the slide shows our GAAP results for EPS. For the first quarter of 2007 earnings per share included a $0.14 per share charge for environmental costs and the write-off of our technology system. When adjusting for these items earnings per share for the first quarter of 2008 is up 18% over 2007 as shown on the right side of the slide. This increase is despite a $65 million or $0.11 per share of fuel headwind that Matt referred to.

The left side of this slide shows our GAAP results for operating income. The 2007 unusual charge I just reviewed are excluded on the right. The first quarter operating income for 2008 was $875 million, and after adjusting for the unusual items in 2007 this was an increase of $100 million or 13% over 2007.

Our operating ratio was 78.9 for the first quarter and as Matt mentioned if you adjust for the impact of fuel surcharge on both revenue and expenses, our operating ratio would have been 75. As always John will cover revenue and I'll give the detail on expenses.

Operating expense was $3.386 billion for the quarter, $435 million or 15% higher than first quarter 2007 on a GAAP basis. After adjusting for the unusual items in 2007, this was an increase of $516 million or 18% over 2007 and consistent with last quarter's guidance. Fuel made up more than 80% of the year-over-year expense increase on a GAAP basis or about 70% on an adjusted basis. And for the first time quarterly fuel expenses above the $1 billion and additionally for the first time ever, fuel became our largest expense category.

Compensation and benefits expense was $983 million up $51 million from 2007. Head count declined about 2% for 2007, while compensation and benefits expense per employee increased about 7%. Comp and benefits per employee was impacted by wage and benefit inflation along with higher incentive compensation accruals for both our exempt and scheduled employees.

Purchase service expense was $525 million for the first quarter, up 5% from 2007. About 30% of the increase is driven by our growing BNSF Logistics Company which is offset in other revenues. The remainder was due to higher haulage expense as well as higher freight car and locomotive maintenance. Depreciation expense was $341 million up about 11% from last year as a result of our continuing capital investment as well as from depreciation studies on existing assets and these studies have generally increased our depreciation run rate modestly due to our increased velocity and volume growth over the past few years.

Equipment rent expense was $230 million for the first quarter down 1% in 2007 due in part to improved velocity and asset utilization. Material and other expense of $298 million was down, $28 million over the first quarter of 2007 on a GAAP basis. After adjusting for the environmental and technology charge in 2007, expense was about $50 million higher than 2007. This increase was mainly the result of higher casualties, property taxes, and environment accruals. Additionally non-locomotive fuel expense increased about $15 million. And finally fuel expense of $1.009 billion was about 55% higher than the first quarter of 2007. $357 million increase was principally driven by significantly higher fuel prices and a $16 million of reduction in hedge benefit.

Looking a little closer at fuel in the first quarter, average fuel price per gallon was $2.80 before hedge and after hedge the price was $2.77. Now we expect second quarter 2008 total operating expense growth rate to be in the mid teens compared to the second quarter of 2007, about three quarters of the expected increase is due to fuel. Interest expense for the first quarter was $134 million, up $13 million over 2007 due to increased debt levels. Other expense in the first quarter was flat. The first quarter tax-rate was 38.6% and we anticipate the second quarter tax-rate to be about the same. Our capital plan for 2008 is $2.575 billion which is consistent with what we discussed at the analyst meeting in early March and we anticipate free cash flow after dividends to be around $1 billion for 2008.

Turning to share repurchases we bought back 4 million shares in the first quarter under the share repurchase program. And now I will turn it over to John for a detailed review of revenues by business unit.

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Thank you Tom and good morning everyone. During the first quarter we achieved a 17% year-over-year freight revenue increase and a first quarter record for revenue with and without fuel. These results highlight the value of our diverse franchise. Coal and ag achieved all time freight revenue records and quarterly volume records, while industrial and consumer had first quarter freight revenue records.

Overall we delivered an improved revenue performance driven by yield quality despite the slowdown in the U.S. economy. Total fuel surcharge revenue in the first quarter was about $280 million more than a year ago driven by higher fuel prices as well as increased customer participation in the fuel surcharge program. The strong yield quality includes mix changes within our businesses as well as a decline in international revenue empties.

Turning to the individual business units, the first quarter was an all time record quarter for coal and revenue. It was also a record first quarter for units and tons. We had an all time record loadings per day in the first quarter of 57.1 system wide and 52.4 on the Powder River Basin. This record was achieved in spite of challenging weather conditions.

In our Agricultural Products business unit we produced an all time record quarter for revenue and units with a 15% volume increase led by growth in wheat, milo, soybeans, and ethanol. Overall PNW export volume was up 28% for the quarter.

Gulf exports were up 57% during the quarter driven by milo and wheat exports. Corn volumes grew by 5%. Strong corn exports mitigated weakness in other corridors. West Texas and Mexico were down because large local crops in both areas reduced the need for inbound rail shipments. Ethanol volume grew by 70% as plants continue to come online.

Despite the sluggish economy, Industrial Products achieved a first quarter revenue record driven by improvement in yield quality. For the second consecutive quarter Industrial Products saw positive unit growth with a 3% increase for the first quarter. Construction products produced 26% revenue growth led by a record quarter in steel, taconite, minerals, and clays. We saw a strong demand in petroleum products driven by fuel by rail, petroleum coke, and asphalt traffic. Building products units were down 12% as we saw the continued impact of the housing declines. Lumber and panel volumes were down over 30%.

Consumer Products revenue was up 6% on a 9% decline in units. International posted a revenue increase despite a 14% decline in volumes. The volume decrease was driven by fewer East-bound loads due to the slowing U.S. economy and weak U.S. dollar. Additionally we continued to be impacted by last year's reduction in Trans-Pacific service by a major international customer.

West-bound loads were up on strong demand for U.S. exports. However, total West-bound units were down due to fewer revenue empties. Domestic intermodal reported a 9% increase in revenue on a slight different volume as overall softness in the trucking market continues. Our automotive segment achieved an 11% revenue growth on a 5% decline in volume.

Due to the soft economy, we are continuing to see slower volumes in specific sectors and looking forward we expect to see this trend continued during the second quarter of 2008. Additionally as a result of higher fuel prices, fuel surcharge revenue will also increase. In coal PRB burn is expected to increase over last year and BNSF is well positioned to handle growth. In Ag we expect to see continued strong PNW corn exports. Weak PNW and Gulf exports are expected to be flat as U.S. carry out approaches record lows.

Domestic shipments will pick up beginning in second quarter as new ethanol plants come on line. Industrial products should continue to feel the impact of the economic slow down in the building product sector offset by growth in construction and petroleum products. And despite soft consumer products business levels driven by the weakening economy, we expect to see positive revenue growth based on continued deal management. So overall we expect revenue growth in the mid teens and now I will turn it over to Carl for a review of operations.

Carl R. Ice - Executive Vice President and Chief Operations Officer

Thanks John, good morning everyone. Over the next few minutes we will be highlighting our ongoing improvement in velocity service and productivity.

We again saw improvements in velocity highlighting the fluidity of our network. First in locomotives we saw a 2% improvement over the second... the first quarter of 2007 and the best performance we have seen in two years. In car velocity we had 3% improvement over the same quarter in 2007. As you would expect from those results we also saw improvement in our on time performance primarily driven by coal and consumer. Going forward we continue to need to drive improvement in our service and we expect our ongoing velocity initiative will drive that improvement.

Turning to productivity, in the first quarter our work force was down about 2% versus the first quarter last year taken with the almost 5% increase in gross 10 miles we saw a 6.8% improvement in GTMs per employee driven by our initiatives as well as the business mix. As we move through out the year we expect to continue driving improvement in GTMs per employee.

In equipment overall our comparison of inventory to units were slightly unfavorable although we did see solid results in ag and coal. The unfavorable comparison was driven as it was in the fourth quarter by a reduction in our fastest turning assets in our intermodal fleet. And finally in fuel efficiency, we saw a 3.6% improvement over the first quarter of 2007 again driven by our initiatives as well as the favorable business mix.

So in summary we had another good quarter. As we go forward we know we have the right initiatives in place and expect to see improvement across all of our key metrics.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

All right, thanks Carl. Turning to the outlook for the second quarter, we anticipate freight revenue growth in the mid teens, on flat unit volumes. Drivers of this growth should be similar to the first quarter with continuing strong yield improvement across our four major business segments. We expect second quarter earnings per share growth in the high teens over 2007 earnings of $1.20 per share.

Turning to the full year we are increasing our freight revenue outlook from high single digit to low double-digit growth particularly partially reflecting higher fuel surcharges. This outlook continues to assume unit volumes remain about flat give or take a percent or two for the rest of the year and pricing remains firm. This is in spite of the economic weakness that continues to affect our consumer products business and parts of our industrial products businesses. We're clearly benefiting from the diversity of our franchise and expect EPS for 2008 to approach $6 per share. We continue to expect free cash flow after dividends to approach $1 billion and we are committed to resuming our trend of improving our return on invested capital.

We continue to be optimistic about the long term prospects for BNSF and we're well positioned to meet increased demand when the consumer economy strengthens. With that Sandy, I think we are ready to take some questions.

Question And Answer

Operator

[Operator Instructions]. Our first question will come from the line of Ken Hoexter with Merrill Lynch. Please go ahead.

Ken Hoexter - Merrill Lynch

Hi, good morning.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Good morning Ken.

Ken Hoexter - Merrill Lynch

I guess John, just a quick question on the corn plantings, it seemed to be off to a slow start, I just wanted to see how does that impact your outlook on the ag side if at all just because of some of the weather issues they are having in the Midwest right now?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Yes, it's a little too early to tell, Ken. We're obviously a little concerned that they are behind on the plantings but if we get, little bit of dry weather here they will get out in the fields pretty quickly. So it really is too early to tell.

Ken Hoexter - Merrill Lynch

Okay. Can you talk a bit about the elasticity of demand on these increased surcharges. You know at some point are you seeing any volumes slow, are you seeing a pick-up because the truckers can't move it at these prices. Can you talk a bit about that?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

You know, there really is not a big short-term swing. The trucking industry obviously is very concerned about their driver situation and hanging on to the drivers that they do have. So as you've seen in some of their reports they are being very aggressive in the marketplace but we're not seeing big swings back and forth. The freight that is coming to us is the freight that really should be coming to us the long haul type of volume. And we are having some increased discussions with some of the truckers who are realizing the benefits of working with rail as well but those things take some time to develop.

Ken Hoexter - Merrill Lynch

Okay can I... on the comp per employee was up 8%, last year it was about flat, are there some numbers in there Tom that we can... you can detail a little bit more?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Yes, I mean in my comments I described it as combination of the normal increases that are going on as well as the incentive compensation accruals for both our scheduled and exempt employees and remember that we've got a significant number of our scheduled employees included in the same compensation goals that the management employees are. And you pointed out correct, actually I think it was up about 7.5% and it was flat year-over-year the year before. So over the two year period that's kind of up in the 3%, 3.25%, 3.5% range which was pretty reasonable, spread differently because of the lack of incentive compensation last year and restoring to more normal levels this year. That probably accounts for about half of it and the rest of it is wage inflation and other... wage and benefit inflation and simply other activity and noise in the quarter.

Ken Hoexter - Merrill Lynch

And then on fuel it looked like you had about a $280 million coverage I think John mentioned on a $357 million increase that Matt mentioned. So, it is about 78% coverage, where do you anticipate that moving toward maybe to the end of the year, are there enough contracts coming up for renewal that you can increase that coverage?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes. They come up periodically Ken. It's kind of a longer slow slog at this point. Actually our overall coverage rate is more in the low 80s right now and we will be approaching mid 80s by the end of the year.

Ken Hoexter - Merrill Lynch

And last question just a numerical one but, looked like on the on-time performance sheet you improved but it looks like the ag fell pretty steeply and coal is now near perfection, is there... is it just the increased demand causing so much more volumes on the ag side or is there anything more to that?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

The only thing I would add to what you said is that a lot of the velocity improvement in ag came on the empty side which is important because they were in position to handle the... have the empties in place to handle loadings. We expect we're going to drive improvement on the loaded side, we are reviewing all of our transportation service plans and that will improve as the quarters go forward.

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

And I think also as you said that ag coal really, while we would never say we are perfect, the coal fleet's been running very well, and that's in spite of some really tough flooding issues we have had in the southeastern part of our railroad. The whole coal network from the rail standpoint is working very well.

Ken Hoexter - Merrill Lynch

On the flooding Matt, you avoided all the issues of the flooding that I guess UP had in that Pacific Northwest region?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Well, specifically in the Northwest we had some flooding. Our big flooding has really been in the Southeast. We still have two major subdivisions out of service today underwater. These are typical, I mean one of the subdivisions called the river subdivision and it's not by accident it's called the river. So we expect this every couple of years. We know that this is going to happen and we have just been able to work around it but it will be about another 30 days probably before we get that, that portion of the railroad back into shape. We do have a specific amount of snow in the PNW in the quarter which was I think most of the impact that you saw although we... again our team did a good job working around through that.

Ken Hoexter - Merrill Lynch

Great quarter, thanks for the time guys.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Randy Cousins with BMO Capital Markets. Please go ahead.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Hi Randy.

Randy Cousins - BMO Capital Markets

Hi, good morning. I am going to just turn on to the... focus on the Ag sector, I mean you guys had increase in RTMs per... RTMs in the Ag business that was better than the increase in car loads. And I wondered so, the length of hauls looks like it has increased, is it sustainable, in other words are we looking at permanent increases in the length of haul, what's happening in terms of length of haul in the Ag business?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Randy there is nothing permanent in Ag with world markets and crop rotations and things like that. So, I would never try to handicap any permanent increases in Ag. It's just been a very, very strong export market to both the PNW and the Gulf and quarter-to-quarter those length of haul can change in Ag depending upon market conditions.

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

If you look at the ocean spreads, Randy, it continues to favor heavy PNW flow. PNW was up 28% in terms of exports. The export market just continue to look very good and then you add to that the ethanol on the domestic goods [ph]. It's really just a phenomenal Ag market I mean, but it really it can best be summed up... anything to do with the commodity right now is really hot.

Randy Cousins - BMO Capital Markets

Okay, Carl you mentioned on the productivity growth 6%, that was just outstanding. You have said some of it was mix driven, can you give us a sense of how you guys view the productivity growth from a baseline prospect, was it 4% baseline and 2% mix, how would you think about that?

Carl R. Ice - Executive Vice President and Chief Operations Officer

All I would say it was about half and half maybe slightly more towards productivity. And the mix point of course is that our heavier commodities like coal and Ag grew more and when you come to some of our areas like train crews of course the heaviness of the product doesn't matter. But we had solid productivity as evidenced by the couple of percent reduction in workforce even though our volume was relatively flat. So, again about half and half.

Randy Cousins - BMO Capital Markets

Okay, and then last question, just with reference to the intermodal business, you guys have been putting in and investing a lot in logistics parks, are they helping you to preserve your competitive position in that business and what's happened to returns in the intermodal franchise with the loss of the revenue empties business and the need to reposition equipment without generating any revenues?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Well, the part of the revenue empties have been replaced by export loads. With the softness in inbound from Asia there is fewer East-bound movements and therefore the need for West-bound empties is less, because there is less inbound movements from Asia. So we are fairly balanced on an East West basis. We are just waiting for the consumer to come back in for those shipments from Asia to start to increase again.

Randy Cousins - BMO Capital Markets

And what about the returns in the intermodal business, are they rising, holding steady or are they coming down?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Right now they are holding pretty steady and one of the benefits of signing contracts with customers over a period of time is that you hope you weather the economic cycle on the downturn and catch it up back on the upswings, so right now we are doing alright.

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

On that Randy as we've talked many times in the past we've consciously introduced variability into our cost structure and clearly on some of the, especially intermodal with the lift on, lift off ramping activities, those we have variablized a lot of those costs. And so when those go slow down that has an impact to us. And then you mentioned the parks, on the capital side we have slowed our capital program down little bit from where it had been and even on the park some of which we own and some which lease, we slow those down a little bit.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

But on the parks Randy when those parks are open and they are up and running and those customers commit to building facilities in vicinity of those parks, unless they close the facility down that's a very long-term investment by customers as well as us and it portends well for us for the long term.

Randy Cousins - BMO Capital Markets

Okay, great. Thanks a lot, wonderful quarter.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thanks Randy.

Operator

Our next question is from the line William Greene with Morgan Stanley. Please go ahead.

William Greene - Morgan Stanley

Good morning. Tom, I'm just curious, if you look at cost per carload excluding fuel it looks like the costs were up about 8% by that metric and is that all just inflation or is there more that you can do to offset this, or does it just have to come through revenue?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

No, I mean I think there is a couple of things going on. First of all we have got depreciation, probably a quarter of the depreciation increase is related to the studies, so there is a bit of catch up there. Second, we probably got about $8 million to $10 million in costs that had been added because of the BNSF logistics company which has been an offset up in revenues. And so those are couple of I'll say unusual items and the rest of it as we say on a year-over-year basis as I explained before on comp and benefits which is a $1 billion expense. And you got the, I'll say the abnormality this year going against a much tougher comp year ago where the incentive compensation accruals for all of our folks who participate in those plans were lower. And if you look at that over a two year basis as I mentioned it's a very reasonable number. So I think it is all of those things going on when you look at just the 90 days of the first quarter.

William Greene - Morgan Stanley

Okay, and then if we look at fuel I realized that you are not yet getting a 100% coverage here but is there ever a world where we could see you getting sort of a margin, i.e. keeping the productivity or is fuel just always going to be pass through to just be basically a 100% OR on it?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Our intention that we've stated several times publicly is essentially we want to collect fuel surcharges that offset our fuel expense and that's our goal. It's not a 100% science because of how you track your fuel and your efficiency of fuel, gallons per gross ton mile, but conceptionally that's exactly what we are trying to do is just to collect what our fuel surcharges, what our fuel costs have increased.

Thomas N. Hund - Executive Vice President and Chief Financial Officer

And, yes that has increased over and above the threshold, right?

William Greene - Morgan Stanley

Right, right. And then on International intermodal, how much of this decline is related to shifts to all water?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

That's a little tough to really pinpoint. The shift to all water really started about five years ago when the port strike, the port lockout happened in LA Long Beach. And so there was a shift at that point as customers attempted to spread their risk. We've not seen an acceleration, there really is a downturn obviously in the consumer economy and so many of the commodities that were coming in related to the housing industry as well on the automotive industry. So until the consumer comes back we are not going to see an increase, but we don't think that there has been any acceleration of all water movements.

William Greene - Morgan Stanley

Due you think there will be a shift as a result of some of the truck fees that LA Long Beach are trying to put in?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes, Bill when you look at those fees, while we don't think that they should be assessed on a local basis, you're talking about $20 here, $15 there. Right now they are... I think they are still manageable. Certainly if they proliferate and you start to get to hundreds of dollars you'd see a significant diversion but right now I think they are more surgical and they're not impacting the overall supply chain.

William Greene - Morgan Stanley

All right, thanks for your help.

Operator

And our next question comes from the line of Tom Wadewitz with J.P. Morgan. Please go ahead.

Thomas Wadewitz - J.P. Morgan

Good morning, let's see a question for you Tom, I think on the head count and per worker you had few questions. Is it going to be similar going forward? It looks like you probably had a low bonus accrual throughout the year last year, is that correct? And then if so should we look at kind of a similar per worker increase in the next couple of quarters?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Yes, I think that's fair Tom. Being in the 70-ish% range I think that's about right. And if you look at last year overall for the year we were down 1%.

Thomas Wadewitz - J.P. Morgan

Right, okay fair enough and then I guess maybe for John or Matt on the coal outlook you had talked I think at the analyst meeting somewhat conservatively about utility stockpiles and the outlook for coal volumes, it looks like you have had pretty strong coal volumes in the last couple of weeks and I'm wondering if that... we should read that as a little bit of a change in potential demand where coal volumes might be up decently the next couple of quarters?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

What we really have to wait for Tom is to see what the late spring summer burn is going to look like. If you look at the reports on stockpiles, stockpiles appear to be coal are up. And so we're really in a situation where if the burns start to accelerate then we should be in pretty good shape. If we have a very mild spring and early summer then will have to reassess.

Thomas Wadewitz - J.P. Morgan

So you think the recent pattern is likely to continue or is that too optimistic?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

I think it's too optimistic at this point but again it depends on burn rate as we go into the summer cooling season.

Thomas Wadewitz - J.P. Morgan

Okay, and then just last one for Matt, I will pass it along to someone else, when you think about the railroad, you can't resource it today for volumes next month, you essentially have to have somewhat of a view on what volumes are going to be couple quarters down the road, right. And so I am just wondering what your outlook is for how you are re-sourcing the rail-road in terms of I guess primarily head count, I suppose you could look at locomotives as well, and what your sense is if volumes pick up a lot in second half?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes, you know Tom we believe that you resource the railroad for more in the four quarters to six quarters when you think about capital projects and including in that locomotives. And so as we always do we believe that we've got the ability through better operations more and surges of operations to always be able to handle that next uptick in business if it's intermodal, if intermodal wants to move up 5% to 7%. We will handle that through the same way that we handled in the past. We've got certain part of our resources specifically with the labor specifically in our transportation crews that we are able to put down in a temporary furlough status. We would immediately bring those folks back. We've got locomotives in storage that we would bring those back. We were trying to accelerate certain locomotives, things like that if we saw a significant surge. But I think we've got a pretty good record being able to flex up and flex down given the businesses and we don't really think that they will come in the coal business. We know, we pretty much see what's going on there, it's really the continued ag sector and I think given the significant volumes increase we're seeing in ag and how we handle it, we've proven it there and then finally intermodal is probably the biggest wild card, we will be able to handle those surges as I have just listed.

Thomas Wadewitz - J.P. Morgan

Okay, great. Very impressive results and I appreciate the time on the call.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thanks Tom.

Operator

Our next question is from the line of Ed Wolfe with Wolfe Research. Please go ahead.

Ed Wolfe - Wolfe Research

Thanks, good morning.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Hey Ed.

Ed Wolfe - Wolfe Research

Hey, Tom I don't want to beat this to a dead horse. But I was getting similar numbers that Ken Hoexter got with the average comp up over 8% in the quarter, I got 8.2%. I can get offline with you about that but the right answer is give or take 7% going forward for the rest of the year is a fair way to be?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Yes.

Ed Wolfe - Wolfe Research

Okay.

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Yes, through 7 and 8 I think it's fair.

Ed Wolfe - Wolfe Research

Okay, on the purchase services side in your remarks you talked about 50 million higher and you gave some reasons about what's going on, can you just go through that again I missed some of those?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

Sure, I think first of all we've got the impact of logistics company accounts for about third of it. I think in my comments I said about 30% and that's where we got the small logistics company that handles freight and has essentially a pass through so there's... you have seen the offset of that up in other revenue. I think other than that we have got additional haulage through some of our carriers. Part of it's related to the business going through Atlanta, part of it is related just to other business. There is some haulage on one of our coal contracts. And then other than that it's some of the maintenance activity that goes on while we have contract maintenance for lot of our activity. So those are probably the big three buckets that each account for reasonably comparable to size increases.

Ed Wolfe - Wolfe Research

And what's going on with the logistics company and what is that exactly and is that ongoing?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Yes, the logistics company we have had it for about five years now and it's a classic 3PL where most of the top line passes through to the carriers that they contract with to provide service to the customers. So that business has been growing nicely, it is still a very a small part of our overall business but, it's a big add on the other and a big subtract on the expense side.

Ed Wolfe - Wolfe Research

And some of that I am guessing is not just because of fuel passing through?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

There is a fuel component of it but again it's a relatively small company so that is not a huge part of it but mostly the freight expense.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Just a modest acquisition in late last year, so obviously the costs of that acquisition are included in the quarter but they weren't a year ago.

Ed Wolfe - Wolfe Research

Okay, that's helpful. John, the decline in intermodal empties that you refer to, what's going on there?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Well one there is not as many loads coming in so there is just not as many containers available Ed, and part of that's being replaced with loads going back west on U.S. exports. And there has been... it's been widely chronicled in the business press how exporters are having trouble finding containers just because the consumer is not bringing as many containers into the country. So it's really just fewer containers coming in causing overall shift.

Ed Wolfe - Wolfe Research

If not for the impact of Maersk would intermodal volumes overall been positive?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

No.

Ed Wolfe - Wolfe Research

Okay and I'm guessing though with the lapping of that situation in second quarter as well as the lapping of down import volumes that we are getting closer to positive as you go out I'd guess?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Well we're not really... we're not lapping down import volumes. If you look at last year they were modestly up but in the first quarter of this year, for example LA Long Beach was down. I think was 8, 3 and 9 in the 3 months of the first quarter. So really depending upon what exports do... I'm sorry what imports do in the second half of the year, we will really drive, obviously a lot of what the comp looks like on a year-over-year basis.

Ed Wolfe - Wolfe Research

What I'm trying to get at is that, that comp gets negative as we get into May and June, so the comps are easier. Are you seeing any signs that, that's bottomed out or is it still getting worse on easier comps?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Well, it's kind of skittering along and it is too tough to call but it's bottomed out yet.

Ed Wolfe - Wolfe Research

Okay, similarly on the building products it seems like volumes have gotten less worse, they are down 4.5 the last three quarters. Should we infer from that, that you are starting to export some lumber?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

No. just the comps are getting less easier Ed.

Ed Wolfe - Wolfe Research

Okay, do I get you there eventually?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Yes.

Ed Wolfe - Wolfe Research

Hey Matt, just bigger picture, at this point should we assume that this Congress is not able to act for the rest of the year and that probably nothing in front of it gets done or is there a chance either positive or negative on a regulatory front, something actually gets done this year?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

I think it's hard to say Ed. There is one Bill with regard to our antitrust regulation that is being discussed a lot out there right now. It's a confusing Bill quite frankly for I think public policy makers. I've yet to meet a customer that's been able to articulate why something like this would be helpful to them. However, that's the one that is being debated in sub committees and within the House. And we will continue to demonstrate our story on the hill and it's a great story, record capital investments. And it's all working and it's not perfect as I've said many times but right now the model is sustaining significant capital investments with returns that quite frankly are not egregious at all that they are very respectful and responsible returns for this type of industry. So that's for our position that we'll continue to take with public policy, and continue to point out of why changes in this regulatory policy that would simply cause us higher costs from whether it's frivolous lawsuits or things like that are just not in the best interest of our customers in general.

Ed Wolfe - Wolfe Research

And I'm guessing that the way that happens through the anti-trust regulation it allows the State Attorney Generals to come at you that might not have been able before that, is that the issue with that potential?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes, we are not sure. I mean it depends on what. You know if legislation was passed what it would look like. But again this is a... the rail-road needs to be a federally preempted operation, it always has been, and it's just things that are just not... they would not provide any value and that's what we have to protect against. And we'll just continue to rely on what we believe are public policy makers that understand this issue and that want to see vibrant rail industry investing and reinvesting itself unlike some of the other industries that we have in our country right now.

Ed Wolfe - Wolfe Research

Right on, thanks for the time, I appreciate it.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

You bet.

Operator

Our next you comes from the line of Gary Chase with Lehman Brothers. Please go ahead.

Gary Chase - Lehman Brothers

Good morning everybody.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Hi Gary.

Gary Chase - Lehman Brothers

Just a couple for John and then maybe one for Matt. In the coal business did you hit any re-pricings in the quarter?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Yes, I think we had one contract if I recall correctly.

Gary Chase - Lehman Brothers

Okay and is there a sense that you can give us for how maybe some others would play out this year, are we pretty much done on the re-pricing side for coal?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

We may have one or two more, it's a fairly light year in coal this year.

Gary Chase - Lehman Brothers

Okay. And then you said you were up to the low 80s. What was the change incrementally in coverage on the overall fuel surcharge for the quarter?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Maybe two-tenths of a percent.

Gary Chase - Lehman Brothers

Okay. So nothing material.

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

No.

Gary Chase - Lehman Brothers

And then, Matt, for you, both in the press release and in your prepared remarks, you talked about being poised to meet demand. And I know somebody else was asking you about to elaborate a little bit about what you were thinking here. Should we be thinking that BNSF is carrying any excess costs now associated with being ready or the things you were talking about like furloughs mean there isn't really a cost penalty associated with it?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Well, I mean in some of the costs, it is variable and other costs like locomotives and storage are certainly a cost to that. And we didn't over resource the railroad intentionally. But on the other hand, in some businesses, I think if we go back to 6 and 8 months ago, it's softer than what we would have thought in some of our businesses specifically in our consumer business, anything related to housing. And then in our other businesses such as coal and ag and anything to do with the commodities is actually quite frankly stronger than what we thought. So we've got some resources that as they go through the ebbs and flows of the volume that if we could... if we had a perfect society today, we'd get rid of certain resources. And then if we could magically take a wand when the business comes back, we'd bring them all back. So that's just not the world we live in. So I think right now, it's not a significant cost that we would tell you that is getting in our way of being able to make the numbers produce the returns. And yet it also demonstrates that we are looking forward enough to see that the volume will return as GDP starts to rebound whenever that comes.

Gary Chase - Lehman Brothers

Okay, I appreciate the color guys.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you.

Operator

And our next question is from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.

Walter Spracklin - RBC Capital Markets

Thanks very much. Good morning guys.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Good morning.

Walter Spracklin - RBC Capital Markets

Just on you're forecast for the year, your guidance, seemed you ticked up your total revenue guidance for the full year. You had strong growth in the quarter, but you are keeping your guidance for volume growth for the year at flat. Any reason for that?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

No, I think it's just reflective of the uncertainty that we see in the second half of the year.

Walter Spracklin - RBC Capital Markets

Okay. So the 7%, we are... you are just being cautious on the volume side despite the 7% RTM growth in the first quarter?

Thomas N. Hund - Executive Vice President and Chief Financial Officer

I don't think it's so much cautious. It's a little bit of what we are seeing with the mix change that we talked about earlier with RTM growth versus unit growth. And we are... then you add all that up, and that's just our best indication of what we see.

Walter Spracklin - RBC Capital Markets

Sure. On the fuel surcharge, can you give us a sense of off the fuel surcharge that you have in place right now, how much is related to or based on WTI and how much is related to diesel or based off diesel?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

100% off of diesel. We have not used WTI at BNSF in a number of years.

Walter Spracklin - RBC Capital Markets

There was a question on on-time performance in ag. Just wondering, has there been any... the decline in on-time performance, has there been any pushback from customers and is there any thoughts of a higher CapEx or any program expenditure to sort of get that back... get that on improving?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

We think... I mean on-time performance is improving. So I think if you would talk to our customers and you see the surveys that that's all reflective of that and that typically customers will tell you that they are getting a pretty good ride on what we are doing right now. So we are seeing on-time performance in our charts. It's showing that it is increasing and will continue to increase. And we quite frankly believe that we'll continue to make improvements in that area.

Walter Spracklin - RBC Capital Markets

Sorry, I was referring to the agricultural, which has been coming down there?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Idon't think... with ag, I don't think that if you pulled our ag shippers, they would tell you that quite frankly as hard as it is for a group of ag shippers to complement a railroad, I think they would tell you that our service has been phenomenal given the size of volumes that they have moved and that the size of the harvest we had last year, they would... again, it's hard for them to say, but I think quietly they would tell you that they are delighted with the level of service that they have seen on this railroad given the capital investments that we've made in both cars and locomotives and physical plant for our ag shippers.

Walter Spracklin - RBC Capital Markets

So no expectation of a change in CapEx this year for your ag?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

No.

Walter Spracklin - RBC Capital Markets

Okay. Last question is just on your fuel consumed, look you had good progress on fuel consumed per RTM on a year-over-year basis. Just wondering was... is there... should we expect continued improvement in that through the year on a year-over-year basis or was there any reason why first quarter was low or last quarter... or first quarter last year was particularly high?

Matthew K. Rose - Chairman, President, and Chief Executive Officer

No, we've still got... I mean the programs that Carl and his team are putting forth to improve gross ton miles per gallon of fuel used are the same programs which are included in improvement in better locomotive efficiency as well as a lot of practices that we are doing with our locomotive engineers on fuel conservation that are profiling of trains. Things like that should continue to see what looks like kind of modest fuel efficiency improvement, but it's quite significant when you think about what we are trying to solve for.

Walter Spracklin - RBC Capital Markets

Great, that's a great quarter. Thanks guys.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Jason Seidl [ph], Independent Transport analyst. Please go ahead.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Hi Jason.

Unidentified Analyst

Hey, good morning everybody. A couple of quick questions. You talked a little about your overall fuel surcharge cover to being in the low 80s. How much of that is due to... there is about a two month lag, it's all fuel continue to rise in the quarter. And how much is due to the fact that you are just catching up on some legacy contracts?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Well, fuel, as you know, Jason, has been rising quarter-over-quarter for quite some time, so there has been a lag effect to each and every quarter. So it might be a percent or two at the most.

Unidentified Analyst

Okay, so it's not that significant?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

No.

Unidentified Analyst

And the ability to reach the upper 80s by the end of the year is more due to the repricing of some of the legacy business?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

That's correct.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

I'm not sure we will be... we won't be high upper 80s. I think what we said is we'll be mid-80s and it just, again, every year we'll get a higher fuel surcharge coverage, but it will realistically... I think this will take us out through 2012, 2013 before we complete them all.

Unidentified Analyst

Okay, fair enough. I appreciate that. And if I could just jump to the intermodal comments, John, that you made about you're starting to talk to more trucking companies. Can you give us a sense of how many trucking companies are in the network right now compared to the prior year?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

There is not really a material change at all in number of companies in the network right now.

Unidentified Analyst

And when you are having these discussions, what's the reluctance among the companies to choose the intermodal product?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Well it's their trucks and their drivers. I mean it's really... it's the business model that they have and really trying to come to grips with the best use of their resources longer term. And so it's really kind of getting over that emotional hurdle of what their heritage is with having a driver, a tractor and a trailer from point A to point B and giving part of that haul up to the railroad.

Unidentified Analyst

If you --

Matthew K. Rose - Chairman, President, and Chief Executive Officer

And Jason, if you think about, Jason, they've spent so may years trying to protect drivers trying to find drivers, retain them and everything else. And now as volumes are down, they have got drivers and they know intuitively what they really need to do is to reduce capacity in these periods. But it's really hard because they've worked so hard to get the drivers and quite frankly it's a very expensive proposition.

Unidentified Analyst

Well we've seen some of the larger carriers out there already starting to reduce capacity, particularly in the sort of mid to long haul routes. I would imagine that if fuel stays up at these levels, that some of these conversations are going to turn to contracts.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes, well, without a doubt. I mean but again, if you look at our fuel efficiency, if everybody is pricing fuel properly, a rail unit versus a truck unit, rail is going to win every time just because we are some much more efficient. So you'll see the supply chain start to refigure their half of their transportation that they are buying. And you are going to see I think more of a bias and more pressure for shippers to use more and more rail if fuel stays anywhere close to where it is today.

Unidentified Analyst

Yes. I would agree. Gentlemen, I appreciate the time as always.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you, Jason.

Operator

Our final question will come from the line of Scott Flower [ph] with Golden Spike Research. Please go ahead.

Unidentified Analyst

Yes, good morning all.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Hey Scott.

Unidentified Analyst

Just a few questions. How much of your fuel recharge is still tied to RCAP versus other metrics that may be diesel-based or otherwise?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

The percent on RCAP is almost totally within the coal area. So it's probably in the... I'm going to give a bit of a guess here, we are probably in the 10% to 15% range.

Unidentified Analyst

Okay. And then just how much did actually, on the intermodal side, how much did exports actually increase percentage wise?

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

5% or 6%.

Unidentified Analyst

Okay. And then... and maybe this is a question for Tom and/or John, obviously, when you look at the waterfall chart of revenue growth, mix was a negative, yet and I think about ag exports being up and revenue empties being down for intermodal. I would intuitively think mix would have been a positive. What I'm wondering is that just more a formulated chart looking at with the revenues per cars are for the different categories, or when I think about ag exports and intermodal empties being up and down respectively, I kind of think of mix should have been a positive. So I'm trying to understand that chart a little better? When you talk about mix being a negative 3% to revenue --

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

It's all based upon RTM both... and that chart is based upon volume is ton miles and rate is based upon rate per ton mile on same-store basis. So that may be where, because there was a pretty big difference between RTMs and units if you look at the page of first quarter investors report, that's probably what it is.

Unidentified Analyst

Okay. And then just the last one, and maybe this is for Matt, I am just wondering it seems to be weaved into your comments, and obviously this is something that's been going on for a while that as the industry gets healthier. Is CapEx going to be a little stickier in time on the downside when times are a little faster on volume because of the pricing and the need to continually push up service levels. In other words, part of the quid pro quo of getting improving returns and improved pricing is that the service product continues to have to march steadily upwards despite what may be going on with the broader cyclical economy. I just get the sense that between having some resources poised for the rebound, I guess which is more an operational comment and then CapEx. Is that fair statement that as the industry gets healthier that CapEx may be a little stickier on the downside.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Yes, I mean, Scott, a lot of those things are being debated within the halls of Congress of how much does a railroad have to invest and what happens when a railroad doesn't do well, i.e. we've got a couple of situations out there where you've got a line segment that's not reinvestable if you will. So I think these are all fair arguments. Our position is simply that what we have said all along as long as our returns exceed double-digit type returns that our investors want us to continue to invest.

And as your question is to timing, of course when we are thinking about our capital program for this year, and this is a great example this year where we've increased our capital modestly to take advantage of the bonus depreciation that's in the stimulus bill, we are doing that in spite of the fact that we have got slightly negative to slightly positive volume. So you would think, well, gee, you would be doing just the opposite, you would be reducing capital. But we've shown that we're a little nimble and we are flexible to be able to do that. But these locomotives that we are bringing forward have a 20-year life.

So it's not... we can't look at this year or next year. We've got to make sure that we're protecting both the capital side as well as the margin side over a longer period. And as long as we see improvement and as long as we see returns in the double-digit type range, we will intend to invest through the cycle. And that means as volumes go down modestly, you'll see our capital go down modestly. But even before we increase the locomotive purchase for this year, we had reduced capital by $100 million to $150 million versus the year before, reflecting lower volumes. Does that make sense?

Unidentified Analyst

It does. I don't know if you are there, but congratulations to Marsha; I think this is her last call, but congratulations to her.

Matthew K. Rose - Chairman, President, and Chief Executive Officer

Thank you, Scott. I was going to mention that. I asked Marsha how many of these she has done before we started the call, and her answer was this was my last one. So she refused to give me an answer. But we're awfully proud of Marsha and she's done a wonderful job and has had a wonderful career.

With that, I want to thank you for your interest and we'll talk to you next quarter. Thank you all very much.

Operator

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Comments

[tnelson642:]

You provide a great service because it is much faster and easier to read the transcript than to listen to the call!

2008 Apr 29 10:57 PM