Union Pacific Corporation (UNP) Q3 2012 Earnings Report, Transcript and Summary

John J. Koraleski - Chief Executive Officer, President and Director Eric L. Butler - Executive Vice President of Marketing and Sales Lance M. Fritz - Head of Operations, Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance

Scott H. Group - Wolfe Trahan & Co. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division William J. Greene - Morgan Stanley, Research Division Christian Wetherbee - Citigroup Inc, Research Division Erin Lytollis - RBC Capital Markets, LLC, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Brandon R. Oglenski - Barclays Capital, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Cherilyn Radbourne - TD Securities Equity Research Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division Keith Schoonmaker - Morningstar Inc., Research Division Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Kevin Crissey - UBS Investment Bank, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division A. Brad Delco - Stephens Inc., Research Division

Greetings. Welcome to the Union Pacific Third Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jack Koraleski, CEO for Union Pacific. Thank you. Mr. Koraleski, you may begin.

Thank you, Rob. And good morning, everybody, and welcome to Union Pacific's Third Quarter Earnings Conference Call. With me here in Omaha today are Rob Knight, our Chief Financial Officer; Eric Butler, Executive Vice President of Marketing and Sales; and Lance Fritz, our Executive Vice President of Operations. Union Pacific achieved an all time record quarter, generating an earnings milestone of $2.19 per share, an increase of 18% compared to the third quarter of 2011. Despite a 12% decline in coal volumes and significantly weaker steel and scrap metal markets, we generated best-ever financial results this quarter across the board. We achieved solid core pricing gains, we managed our network efficiently and we delivered on the benefits of our diverse franchise with growth in many of our other markets. In addition, our focus on providing safe, efficient, high-quality service is reflected in the substantial achievements made this quarter in both employees' safety and customer satisfaction. Putting it all together, we're creating value for our customers and we're driving increased financial returns for our shareholders. So with that, we're going to get started this morning. We'll start off with Eric Butler. Eric?

Thanks, Jack, and good morning. Let's start with a look at customer satisfaction, which came in at 94 for the quarter. It's up 3 points from third quarter last year, and it sets a new best-ever mark, topping the 93 received in the first 2 quarters earlier this year. We appreciate customer recognition of the strength of our value proposition, and we're working to make it even stronger. In the third quarter, volume came in at about flat versus last year as the diversity of our franchise provided enough opportunities for growth to offset volume declines in 3 of the groups. Chemicals and Automotive continued to lead the way with very strong growth, and Intermodal was also up. Offsetting that good news was continued weakness in Coal and Ag and the first down quarter this year for Industrial Products as the global steel markets softened. The Coal decline continues to have a significant impact on overall volume. Setting Coal aside, the other 5 groups were up 3%. Core price improved 5%, but with the lower fuel surcharge offsetting expanded fuel surcharge coverage, average revenue per car grew 4%. The combination of flat revenue and improved average revenue per car pushed freight revenue to the $5 billion mark for the first time. Let's take a closer look at each of the 6 groups. Ag Products revenue was down 4% as the 2% drop in volume combined with the mix driven 2% decline in average revenue per car. Third quarter saw a record low UP grain shipments, with the decline driven by weak corn volume. Corn shipments were off due to reductions in livestock feeding, increased feeding from local crops that were less likely to move rail and a decline in ethanol production that impacted volume to forward ethanol plants. Record soybean shipments in September, a result of strong world demand, only partially offset the weakness in corn. Grain products shipments also declined, down 7%, largely driven by ethanol and DDGs. Ethanol volume was down 12%, with producer's margins under pressure due to reduced demand for gasoline, lower exports and higher corn costs. DDGS fell 28% with an increased consumption by feeders close to the point of production, favoring movement by truck. Food & Refrigerated shipments again provided some good news, growing 9%, with import beer, barley and canned goods leading the way. Automotive volume grew 13%, which combined with the 2% improvement in average revenue per car produced the 15% increase in revenue. Growth rates in auto production and sales remained strong in the third quarter, driven by pent-up demand and improved credit availability. The average age of cars on the road remains high by historic standards, and consumers are replacing them with new, more fuel efficient and technologically equipped models. For the quarter, UP finished vehicles shipments increased 13% and parts volume grew 12%. Chemicals volume grew 18%, which combined with the slight mix driven decline in average revenue per car to produce a 17% increase in revenue. Petroleum carloads were up 95%, with continued robust growth in crude oil where volume increased 300%. Plastics shipments grew 8%, supported by increased market demand and new business. Industrial Chemicals and LPG again posted solid gains. And fertilizer shipments were up 1%, the first quarterly growth that we've seen this year. Now turning to Coal. You could see from the chart of weekly loadings that volumes picked up from the second quarter levels as expected, but continued to tracked below last year. Low natural gas prices and high stockpiles continue to challenge the coal market, and as a result, our volume was down 12%. That comparison was made a little tougher by the boost last year as volume got from the makeup of flood impacted shipments. Revenue declined 5% as the 9% improvement in average revenue per car only partially offset the drop in volume. Southern Powder River Basin coal shipments reflected a soft demand, with tonnage down 13%. Also contributing to the decline was the continued impact of 2 contract losses last year, which more than offset business wins. While Colorado/Utah coal faces the same challenges in the U.S. market, demand for this high BTU coal in the international market led to increased shipments to Europe and Mexico, driving tonnage up 2%. Industrial Products revenue grew 2% as the 4% improvement in average revenue per car overcame a 2% decline in volume. Although overall drilling activity has slowed, growth to new sands facility and continued expansion of horizontal drilling, which requires more sand per well for frac-ing, drove an 11% increase in our nonmetallic minerals shipments. Our rock shipments were up 6%, with strong demand into the Eagle Ford Shale play and construction activity in the Houston area. The housing market also continued to show some signs of life, boosting lumber shipments to 12%. Unfortunately, the strong shelling in those markets was offset by declines in steel and scrap, export ore and hazardous waste. Export scrap steel shipments to the Pacific Rim have declined as global steel demand has softened, and the slowdown in drilling activity has slowed the rapid growth in shipments by drillers that we saw earlier this year. As a result, steel and scrap shipments declined 11%. Production issues at the mine led to a significant drop in our export iron ore move, driving a 31% decrease in metallic minerals shipments. The iron ore shipments recently resumed, and we expect a slow return over the coming months. Finally, as in prior quarters this year, a ramp down in government funding impacted our uranium tailings move, leading to a 35% decline in hazardous waste shipment. Intermodal revenue grew 8% as a 7% improvement in average revenue per unit combined with the 1% increase in volume. With the economic recovery continuing its slow pace, retail has proceeded cautiously in the third quarter. As expected, that produced a muted peak season, with our third quarter international volume up 1%. Continued success converting highway business to rail, both in containers and trailers, puts domestic Intermodal volume up 1%. Let me close with the look at what we see for the fourth quarter. While you can probably find support for a wide range of economic scenarios, we expect the economy to at best hold steady, and it wouldn't be a surprise to see some slight weakening as we move toward year's end. Given that, here's what we see for each of our businesses over the next few months, both the good news and the challenges. As we've seen with strong September loadings, world demand for soybean and soybean meals should give Ag and export opportunity in our refrigerated and beer business should continue to grow. Unfortunately, the diminished corn crop is expected to impact opportunity in both export and domestic markets, and we expect to see third quarter challenges that dampened ethanol and DDGS to continue. As a result, Ag will likely be down in the low single-digit range. Seasonally adjusted auto sales in September hit 14.9 million, the highest level since March 2008 despite lower incentives offered to purchasers compared to last year and the previous month. We take that as an encouraging sign that the auto industry momentum will carry through the fourth quarter. Crude oil should continue to drive Chemicals growth, and most other chemicals markets are expected to continue the solid performance we've seen throughout the year. Export demand is a bright spot for Coal, but low natural gas prices and high stockpile levels should keep overall Coal volume tracking below last year, with the decline expected to be in the low- to mid-teens. Although the pace has slowed, shale energy-related growth should continue in Industrial Products, with the softening in the global steel market expected to continue to be a challenge. International Intermodal should stay ahead of last year, and we expect continued success converting Highway business to rail in domestic Intermodal. Put it all together, and the fourth quarter will look likely much like the third. While the diversity of our franchise will help offset the challenges, we will again look to expected price gains to drive revenue growth. With that, I'll turn it over to Lance.

Thanks, Eric, and good morning. Let's start with safety. Year-to-date, we've achieved an all-time record low reportable personal injury rate, 10% better than last year through 3 quarters. The improvement accelerated in the third quarter, which was 23% better than last year's third quarter. Moving to rail equipment incidents or derailments. Our year-to-date reportable rate improved 1% compared with 2011. While not visible in this number, we have made progress in our focus area of yard and industry track derailments. In public safety, the grade-crossing incident rate increased 15% year-to-date. The combined effects of higher rail traffic in the South, which has more great crossing density than our overall network, and our growth in highway commercial traffic has increased our grade-crossing incident exposure. On the positive side, we've made progress in isolating high-risk areas and have taken steps to improve or remove crossings of concern. And we continue to focus on community support and driver behavior to address this increased risk. Our safety strategy helps keep our network strong and resilient, and as a result, our network remains fluid and continues to operate efficiently. During the quarter, Hurricane Isaac disrupted operations in the eastern portion of our network. We were well-prepared and sustained little damage, and quickly restored operations. In comparison to last year's drought, the weather impact this quarter was minor. In addition to milder weather, the operating team adapted the TE [ph] plan, locomotives and crews to manage shifts in mix including growth in manifest and premium volumes in the South. In Texas and Louisiana, we are effectively utilizing the existing infrastructure and building new capacity. As a result, velocity improved 6% to 26.1 miles per hour. Our service scorecard illustrates UP's customer value proposition. The local operating teams continue to provide great service as reflected by Industry Spot & Pull, which tied the second quarter record of 95%. The third quarter Service Delivery Index, a measure of how well we are meeting overall customer commitments, also improved from 2011 levels. While the UP team is successfully managing the carload surge in the South, we have growth capacity in other parts of the system with about 500 employees furloughed and around 870 locomotives in storage. Moving on to network productivity. Record low third quarter slow order miles were down 35% from last year. Our network is in excellent shape, reflecting the investment in replacement capital that has hardened our infrastructure and reduced service failures. Moving to the upper right, car utilization improved 6% year-over-year and reflects the improvement in network velocity and fluidity. In the lower left, Intermodal train lengths grew to an all-time quarterly record of 176 boxes per train, improving 2% on a 1% increase in Intermodal volumes compared to 2011. And holding our own in manifest train lengths is noteworthy given that much of the manifest growth occurred in the South, which is the most train size constrained area of our network. The chart in the lower right demonstrates our team is effectively leveraging volumes through UP's extensive manifest terminal infrastructure to generate a 2% improvement in the number of cars switched per employee day compared to last year. We've used the UP way to reduce variability on our operation while increasing the role every employee place on their work teams. Employee engagement is an important part of our operating strategy and has had a significant impact. Our employees are bringing their expertise to bear on standardizing their work and removing variability. To expand a bit more on growth in the South, third quarter volumes in the South were up 5% versus last year and up 6% year-to-date. In fact, traffic in the South is back to pre-recession volumes. We've met the challenge with agility, repositioning horsepower and manpower to adapt to shifting demand. We've adjusted car routings to leverage available terminal capacity and modified train starts to maintain fluid operations and to increase local service frequency. In addition, the capital investments we continue to make in the South are generating an excellent return and are having a positive impact. They support our diverse book of business, including increased shale related volumes, growing Mexico and Intermodal business and export grain shipments to the Gulf. So with that, we remain positive on our operating outlook for 2012 and our ability to achieve network improvements on various fronts. A more mature total safety culture, stronger relationships with local communities and improved infrastructure position us well to achieve our goal of another record safety year. We will provide customers with a value proposition that supports growth, with high levels of service. And we are well-positioned to react to dynamic shifts in volume while generating productivity, and to invest a record amount of capital that generates attractive returns. With that, I'll turn it over to Rob.

Thanks, Lance, and good morning. Let's start by summarizing our third quarter results. Operating revenue grew 5% to an all-time quarterly record of $5.3 billion, primarily driven by core pricing gain. Operating expense totaled $3.6 billion, increasing 1%. Operating income totaled $1.8 billion, a 13% increase and a best-ever quarterly performance. Below the line, other income totaled $28 million, up $11 million compared to 2011. Interest expense of $137 million was down 4% versus last year, driven by lower average interest rates. Income tax expense increased to $635 million, mostly driven by higher pretax earnings. Net income was up 15% versus 2011, setting an all-time best for any quarter. The outstanding share balance declined 3%, reflecting our share repurchase activity. These results drove a best-ever quarterly earnings record of $2.19 per share, an 18% increase versus last year. Turning now to our top line. Freight revenue grew 4%, topping the $5 billion mark this quarter. Volumes were down slightly, about 0.5 point. The revenue mix impact was flat-ish year-over-year. Growth in higher ARC shale related moves was offset by lower steel and scrap shipments, in addition to shorter length of haul moves including stone. In addition, rising fuel prices throughout the quarter resulted in a negative lag impact on our fuel recovery, creating a headwind of roughly 1% in freight revenue. As you may recall, we benefited from a tailwind on fuel recovery in the third quarter last year. Similar to the first half, we saw the benefit from renegotiated legacy contracts, with a meaningful step up in fuel surcharge coverage, offsetting the 1% fuel recovery headwind and contributing roughly $0.05 in earnings per share compared to 2011. In addition, we achieved solid core pricing gains of 5%, which was a key contributor to record profitability this quarter. The 0.5 point improvement from the second quarter pricing gains resulted from the sequential uptick in our coal volumes. Moving on to the expense side. Slide 22 provides a summary of our compensation and benefits expense, which was about flat with last year. Lower volume, reduced new hire training costs and solid operations mostly offset labor inflation. And you'll recall that last year in the third quarter, we incurred about $18 million of drought-related labor expenses, making for an easier comp this year. Workforce levels increased 1.5% in the quarter compared to 2011, driven primarily by increased capital and positive train control activity. Slide 23 shows fuel expense, which totaled $880 million, decreasing $36 million versus last year. Lower volumes and a lower consumption rate drove the reduction in fuel expense. The average diesel fuel price of $3.19 per gallon was basically flat with last year. However, we saw fuel prices rise substantially throughout the quarter. Charting out fuel prices on a monthly basis, this graph illustrates the negative lag impact that we discussed on the fuel surcharge side. Purchased Services & Materials expense increased 7% to $542 million due to the higher contract expenses incurred by our logistic subsidiaries. The revenue generated from these expenses is reflected on our Other Revenue line. Locomotive and freight car repair expense also increased this quarter, driven by increased contract expenses, material usage and inflation costs. Depreciation expense increased 10% to $447 million, mainly driven by increased capital spending. Looking at the full year 2012, we expect depreciation expense to be up around 9% compared to 2011. Slide 25 summarizes the remaining 2 expense categories. Equipment and other rents expense totaled $300 million, up 2% from 2011. Growth in Automotive and Chemical volumes drove an increase in short-term freight car rental expense, which was partially offset by lower locomotive and freight car lease expense. Other expenses came in at $200 million, down $7 million compared to 2011. It was a bit better than what we had projected back in July, in part due to lower than expected volumes. Lower equipment and freight damage expense, as well as other cost control measures, also contributed to the decrease. These reductions more than offset the higher property tax and personal injury expenses. And as Lance just showed you, we continued to see improvements in our safety performance. But remember, our comp was more difficult this quarter due to a more favorable prior year adjustment in the third quarter of 2011. For the fourth quarter, we expect the other expense line to be similar to the third quarter results, barring any unusual item. Now let's turn to our operating ratio performance. We achieved an all-time best quarterly operating ratio of 66.6%, improving 2.5 points compared to last year and nearly 0.5 point better than our previous record set last quarter. Our performance highlights the positive impact of core pricing gains, growth in attractive new business and continued focus on productivity initiatives, which more than offset the 0.5 point headwind on fuel recovery versus last year. Union Pacific's record earnings drove solid free cash flow of $640 million year-to-date, which reflects $625 million more in capital spending and a 42% increase in cash dividend payments versus 2011. In addition, cash from operations of $4.4 billion dollars includes more than $450 million in higher cash tax payments driven by the catch-up of prior year's bonus depreciation programs and a lower bonus depreciation rate in 2012 versus 2011. Our balance sheet remains strong, supporting our investment grade credit rating. At quarter end, our adjusted debt to cap ratio was 40.2%. We continue to make opportunistic share repurchases, which play an important role in our balanced approach to cash allocation. In the third quarter, we bought back 3.1 million shares at an average purchase price of around $122 per share. Year-to-date, we've repurchased almost 11 million shares averaging around $114 per share. Combining dividend payments and share repurchases, we've returned over $2 billion to our shareholders year-to-date, up more than 27% compared to last year. Looking ahead, we have about 17.1 million shares remaining under our current authorization program which expires March 31, 2014. That's a recap of our third quarter results. Closing out the year, we're all mindful of the potential financial cliff, consumer sentiment and global economy driving uncertainty in the marketplace. That said, we'll play the hand that the economy deals us. We'll continue to be nimble and agile, aligning resources with demand. With respect to the fourth quarter, we're facing by far the toughest comparison for any quarter that we've seen this year on a number of fronts. With the additional challenges of coal down in the low- to mid-teens, lower Ag shipments and weakness in steel and scrap moves, overall volume in the fourth quarter will likely be flat to modestly negative compared to last year. Yield could also create a headwind again if prices remain at their current high levels. Although our fourth quarter operating ratio will likely be challenged by higher fuel prices and potentially lower volumes, we're confident that solid core pricing gains and our ability to leverage our diverse franchise will drive at least a sub-70 operating ratio again this quarter. Combine that with our 68% operating ratio year-to-date which was achieved with flat volume, it's safe to say that we're well on our way to outpace a full year sub-70 operating ratio for the first time in our history and to achieve record earnings again this year. Going forward, we remain positive on the longer-term prospects and our ability to generate increased shareholder returns. We look forward to discussing these opportunities with you at our Investor Day conference in Dallas later this month. So with that, I'll turn it back over to Jack.

Well, thanks, Rob. And as Rob said, as we look out over the next several months, the political and financial challenges in the United States and abroad have increased the economic uncertainty. In this environment, we're going to continue to be agile, just like we were in the third quarter; we'll adapt to changing market conditions; and we'll leverage our diverse franchise. But longer term, we are very positive about future prospects for the Union Pacific. We continue to make strategic investments that strengthen and enhance the franchise, supporting future business opportunities. Going forward, we remain confident in our ability to provide excellent service, increase customer value and generate strong returns for our shareholders. So with that, let's open it up for your questions.

[Operator Instructions] Our first question is from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So one for, I'm not sure, Jack or Eric, on the coal side, so can you give us just a sense on where stockpiles are with your customers? And as you think about coal volumes next year, I understand another big decline on fourth quarter, but when you look out to next year with gas prices where they're at, what are you hearing from customers and about maybe switching back to coal with gas at $3.50? Directionally, what are you thinking for coal volumes next year? And if there's any color also you can give with respect to pricing and the legacy contracts next year if there is less upside given kind of the structural issues with coal that you see out there.

Okay, Scott, we'll let Eric take a shot at that. Eric?

Let me talk about stockpiles first. I think the industry stockpile number is somewhere around 20 days above normal. If you dissect the eastern versus the western utility, I think you'll see a significant difference. We think, in our serving area, most of our customers are seeing stockpiles about 5 to 10 days above normal, that's significantly lower than what the likely stockpiles are in the east. There's a lot of uncertainty in the market in terms of coal market share versus natural gas and other sources. Certainly, as the price of natural gas increases, that makes it more favorable for coal, and so the futures market for the price of natural gas is going up, and logically, that should make it more favorable for coal. A lot of uncertainties out there, a lot of uncertainties in terms of the current utilities have put in, agreements to use natural gas for a period of time. So over the long-term, if natural gas goes up, coal improves its competitiveness against natural gas.

Yes. And I think Scott, as you think about it, your question about pricing, we're not going to get into the details of it. But I can tell you right now, we are not straying away from our strategy which is to price to reinvestable levels. And if we can't get to reinvestable levels, we'll walk away from the business. And we've stayed strong with that. It's paid a great -- a bit benefit for us overall. And we're still -- that's where our head is. We'll win some, we'll lose some. We feel very good about our capability to take legacy contracts, bring it up to market levels, and that's where we're going to stay.

Our next question is from the line of Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you a bit about the trend you see in crude oil. I think through the year, you've had some capacity, I think some receiving terminal capacity that's come on that has given you step ups in your crude oil activity. What do you think the near term view would be on crude oil? Do you see a further step up in fourth quarter or would you see kind of stability the next couple of quarters relative to what you had in the third quarter?

Eric?

We're not giving volume guidance for crude oil, but we are seeing -- we have seen a ramp-up throughout the year, as you mentioned, and there are investments that are continuing to be made, particularly at St. James. We think as the investments come online, that provides the capacity for growth. And we will see ourselves being able to continue to take advantage of the growth opportunity. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. And I guess as a second question or a follow-up. Rob, you've seen some, I think, favorable effects this year, probably productivity, but also I think maybe contract-related in terms of some of the benefit expenses on the employee costs, sort of, per worker. And I wonder if you could get some commentary looking maybe to 2013, would you expect some of those effects to continue or do you think the inflation on a per worker basis is likely to step up a bit?

Yes. Tom, I think, generally speaking, that the trends you're seeing right now should continue. And just to kind of elaborate a little bit, our labor line inflations, we'll call around 3%, but we challenge ourselves every year to offset 100% of inflation with productivity. We don't always get 100%, but we strive to get at least half -- offset half of the inflation with productivity initiatives. So that mindset will not change as we head into 2013.

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

Rob, in your remarks in the first and second quarters, you noted the negative impact on pricing from the loss of coal because, if I remember correctly, you repriced a fair amount. I realized there was a sequential improvement, but was it still a negative hit in the third quarter given how much coal was down?

It depends on what you're comparing it to, Bill. What I pointed out is that -- and you're exactly right, in the second quarter -- just to remind everybody what we said, in the second quarter, we reported 4.5% core price, and of course, the way we measure price, frankly, the most conservative way I can think of measuring it, is an all-in yield calculation against our entire book of business. And we said that, that second quarter 4.5% core price was negatively impacted by the falloff in coal volumes to the tune of about 0.5 point. What we then saw in the third quarter was as coal volumes still below last year, but coal volumes sequentially improved from the second quarter, that picked up about 0.5 point. So if you looked at the difference between the 4.5% in the second quarter and the 5% that we just reported in the third quarter, that variation is driven largely by that increase in coal. So to your point, we're still not running the same levels of volumes that we ran last year but I didn't put a number around that, but it clearly was a negative impact versus had we run 36 trains per day out of the Powder River Basin, for example.

The interesting thing about that, Bill, is in the tough coal environment, as Rob said, we're conservative in terms of our outlook on or how we calculate the price. What happens when the calendar flips is we now go year-over-year and we won't see the full potential of that pricing show up as core price, but where you'll see it is on our operating ratio and our bottom line improvements.

Meaning, that as coal -- if coal came back next year?

Absolutely.

But you would still show it as core price, I think, right? That it would grow if that business comes back at higher prices, no?

It's a year-over-year comparison. So for the legacy business that we repriced this year, that becomes the new base for next year. And so, what you'll see is just the incremental increase from next year over this year. You won't see the full benefit of the step-up in core price. Where you'll see it is in the operating ratio and in the bottom line improvements margin.

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

Just maybe a question on incremental margins. You guys have done a really nice job for the last couple of quarters with incremental margins even in the absence of volume. As you look out to the next quarter or 2 in a kind of flat or maybe modestly negative environment, can you sustain that type of incremental margins just given how strong the core pricing is? I mean, how should we think about that a little bit in 4Q and then even maybe into 1Q?

Rob, why don't you take that?

Yes. I mean, you're exactly right, Chris. We've turned in fabulous incremental margins and really what will -- what would drive that as much as anything is the volume swings that can occur from quarter-to-quarter. But we're focused, as I've said before, on core pricing gains, productivity initiatives. And to get to our 65% to 67% OR guidance that we have out there by full year 2015, it assumes that we'll get 50%-ish or better incremental margins from here to there. And so, we aren't giving specific quarter-by-quarter incremental margins, but that -- you can take that to mean we're going to continue to be as focused on all of those initiatives that help drive those incremental margins between now and then and then beyond that.

And then just switching gears onto the pricing side, just when you think about the Intermodal market and obviously a lack of a beginning of a peak so far, how do you think about the pricing dynamic and the competition with truck, I mean, has there been any pressure on that as we moved into October or even in the third quarter for that matter?

Eric?

We still are hugely excited about our Intermodal strategy. We think there's lots of upside in terms of conversion from truck to rail. We believe our rail value proposition has a value proposition to truck and over the road moves. And we're committed to pricing to the market and ensuring a reinvestable return. And our outlook in terms of the opportunities for conversion and the value associated with that remains.

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

This is Erin Lytollis in for Walter. Just on the Intermodal again, what would you characterize as the addressable market for truck load conversions within your network area? Can you provide some color around that?

Anne, in the past, what we've said is as we looked out at the potential truck market, that would be susceptible to rail conversion in the west. It's about 11 million annual truck load benefit. It's a really big number. So we have a lot of opportunity there. Eric, do you want to expand on that?

Yes. The number as a whole is very large, and what we do is we narrow that down to the potential volume moving within a radius of our Intermodal ramps, both on the origin and the destination side. And if you kind of narrow that down and look at what we think -- what portion of that 11 million we think is really attainable, it's probably closer to a 3 million to 4 million number.

Our next question is from the line of Ken Hoexter, Bank of America.

But when you talk -- Eric, when you talk about the lost coal contracts, when do you loop those 2, and can you give an idea of -- if you're down low-double digits, what percent do those lost contracts represent?

Eric?

We don't talk about specific contracts with customers. I guess, I'm not sure.

Hey, Ken, I think we're going to lap those contracts in January. The ones from this year that we lost, we'll lap that in January.

So I know we're not talking about specific contracts, but can you give us an idea of what the run rate would be?

Ken, this is Rob. You're asking the run rate on volume or price or what? I'm not sure I understand.

On the volume side, if you lost 2 and you're going to start lapping those, what the underlying run rate would be?

We haven't given that guidance. I mean, it's really the factors will drive -- while we did have the loss of the contracts that we've referred to you before, of course, what will drive what our volumes actually end up doing, I realize this isn't exactly what you're asking, but what will drive that as Eric elaborated is the price of gas. Weather is a huge driver in terms of what our volumes will be in the coal business. And last year, recall, we had a very mild winter. We started the year off with very mild weather conditions. And so, weather will be as big a determinant as any in terms of where the volumes are.

Okay. If I can get my follow-up then on, in the south, you talked about Mexico cross-border -- can you talk about Mexico cross-border volumes and when you're done double tracking the Sunset Corridor?

Sure. If we look at Mexico in the third quarter, our Mexico business was up about 6% compared to being flat for the rest of the network. The primary growth factor was Automotive business which is performing nicely certainly given the start rate that we saw in September at $14.9 million. So that's all good. If we look at the Sunset Corridor, we are not on an accelerated Sunset Corridor double tracking any longer. We don't really need that capacity as much as we did in the past, so we're finding that out on a logical basis, on a need basis. We'll probably complete somewhere in the neighborhood of 40 to 50 miles this year, which would put us somewhere over the 70% double tracked by the time we get to the end of this year. And Lance, do you have anything to add to that?

You've got all those numbers right.

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

Could I just come back to the fourth quarter outlook for a sub-70 OR. It just sounds like you're a little bit more cautious there. And if I look at the average performance of your company in the last 10 years, it's about flat from where we were in the third quarter. So are there some unique items here? I know few of the headwind, but it should be less of a headwind than it was in 3Q. So what could be driving that OR a little bit higher from the third quarter then?

Brandon, we're not actually cautious. We think we'll have sub-70, and we think we'll have a great operating ratio for the year. Rob, do you want to expand on that?

Yes. Just a couple of points. Your comment that the fuel shouldn't be as much of a headwind, I mean, that we'll see. We'll see what the fuel prices. How that actually plays out would be caution number 1. Number 2, as Eric walked through the pluses and minuses in each of the commodities, we -- there's a lot of uncertainty out there and we gave guidance here that the fourth quarter volumes will be flat to slightly down. And so those all will be factors. I mean, you're right. On a historical basis, you're 100% right. But as we head into the fourth quarter this year, we'll see how those other factors play out.

The one added risk that we have, Brandon, for fourth quarter as you get into winter operations, and if we were to get dumped on with a major blizzard or something like that, we'd have to see what happens with that.

Okay. So maybe more cautious on the economy, but still delivering what you guys can, then?

Absolutely, absolutely.

And can I just ask a follow-up on pricing then, because I think, it sounded like you're saying the core pricing comps could be down just a little bit from where they are this year next year, and is that because you don't have a lot of legacy to be repriced early in the year?

Hey, Rob, why don't you take that?

Yes. We previously, as you all have seen, shown sort of a pie chart, if you will, of legacy renewals that come up because that's dependent upon what the volumes actually turn out to be. But we've said that there's roughly $350 million of legacy revenue that we'll be competing for and repricing next year, which frankly, a lot of that's front end loaded. But we haven't given guidance specifically on what our pricing will look like next year with and without that legacy, other than to say that we're going to continue to have a mindset of reinvestability. We'd say it's going to be an inflation plus kind of pricing environment, but we haven't changed our view of and our expectations of what we expect to achieve on pricing.

Our next question is from the line of Chris Ceraso of Credit Suisse Group. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Just wanted to ask a question about your expectations for Automotive. I understand sales have been strong, but is it fair to say that the comparisons on vehicles that are being produced than what you're carrying get notably tougher in the fourth quarter, so maybe we should expect a slower growth in Q4 than what you've seen year-to-date?

Chris, we're kind of looking at each other here. We're expecting if the economy stays the way it's planned, the SARS rate in September of 14.9 million, that would give us some nice momentum going in, and we're still in October doing well on the Automotive business. Eric, do you have any view?

No. I mean, the overall economic outlook, as I've said in terms of Automotive sales, is staying strong and recent SARS rate is still growing. I think the Global Insight in our Automotive industry is both projecting continued strong sales. And we have a huge Automotive franchise and we'll play in that and get the benefits of that.

Our customer base is very positive, very interested in service and making sure that we stand tall in terms of providing equipment and great turnaround times, consistent and reliable. So it's a good outlook for us for the fourth quarter. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then just a follow-up about the peak season. Any comments about how that's shaping up and what you're seeing with regard to surcharges, are those sticking?

The peak season, as we said, last quarter, we expected it to be muted, and it is muted. Our volumes in the third quarter, as we said, were up about 1%. October volumes, interestingly enough, month-to-date, you could see the public car loadings, they're up a little bit more. They're up about 3%, 4%. So the peak season is still muted. We are remaining focused on our strategy, and we're pricing for our value of our service. Our MCP program is still we think a great strategic advantage for us and we're going forward with it.

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

First question, I guess piggybacking way back on Tom Wadewitz's question on shale. I was curious in terms of how you're thinking about crude oil versus pipeline, obviously, a bigger issue in terms of takeaway from Bakken south to the Gulf, maybe less so Bakken East in terms of the interchanges as you head to eastern refineries. How should we think about the timeframe for some of that pipeline infrastructure supplanting the crude by rail opportunity that you have, what do you think your window is? And I mean in terms of the growth opportunity, how big a factor is that?

Go ahead, Eric.

Interestingly enough, you used the word supplanting. The oil companies have made huge investments, both in terms of infrastructure and in terms of railcars. And our view of the world is that people don't make those investments just for a short-term kind of swings and usage. So we think crude by rail is here to stay. We have a value proposition. It allows a lot of flexibility in terms of moving crude quickly to different destinations in terms of moving by rail versus moving by pipeline. There will be more pipelines that will be implemented, but we think crude by rail will play a role in the market for the foreseeable future.

Yes. Correct me if I'm wrong, Eric, but what we see is pipelines are going to come in and that may slow our growth rate, so you won't be seeing a 300% year-over-year improvement in oil shipments like you saw this year, but we don't expect our oil shipments to go down.

Right, that's accurate.

Okay, that's really helpful. And then, it's kind of a follow-up, more of a second question. But Jack, in terms of what you're seeing from the broader economy, I just want to reconcile, I mean, when I look at West Coast port volumes in September, when I look at what ISM did in terms of reaccelerating off of the summer, even airfreight data. The economic data looks like you got a little bit better, and you could argue politics there probably a little bit, but not when it comes to ports and airfreight. How do you reconcile that with what you guys and most of your competitors are saying you saw in the economy, and are you seeing any inventory restocking taking place that would be beneficial in terms of a flow-through here into Q4?

Justin, so I'm going to give you Jack's view of the world and what I look at internally. So I kind of take my business and I say, okay, take the coal downturn off the table, take the shale business, set it aside because those really aren't the economic barometers. And to the level that I can, take out the global impact on the steel market because that was really the game changer, the difference point between third quarter and second quarter for us, and the rest of the business, things like lumber up 12%; things like the automobile business up 13%; rock business up 6%; domestic Intermodal which was a record for us last year, still trending higher again, so we're in all likelihood going to have a record performance again this year. That says that at this point in time, the consumers aren't really pulling their horns in and that the overall economic activity is kind of a slow growth, which is what we expected going into the year. And at this point in time, in our volume levels as we've gone into the fourth quarter, despite all the handwringing over the fiscal cliff and sequestration and all those other kinds of things in our fundamental kind of economic barometers. And also I should add to that, the Industrial Chemical business, which is all pretty solid for us. We're not in bad shape. The economy seems to be just kind of moving ahead in kind of a slow growth trajectory, and that's where we are.

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

I just wanted to ask a question with respect to the very strong growth you saw in your Logistics business in the quarter, just hoping you could give us a bit of an update on what's going on in that part of the business. And a comment directionally, if you would, on how the OR on that revenue compares versus freight revenue.

Eric?

I'm assuming you're referring to our union -- all of the -- our subsidiary businesses, Union Pacific Distribution Services, our streamline subsidiary. As we look at where that fits in our strategy, those are huge leverage values for us in our strategy, those entities are really looking to provide in addition to rail services for our Autos customers, our Intermodal customers, other transload customers. And we continue to see upside opportunity for those value-added services.

And when you look at that business, Cherilyn, it's not different than any of our other business. It's held to the same reinvestability standards, and that's how we look at those components as well. Rob, do want to add to that?

Yes, I just want to add to that. As that -- and because we're expanding our services here, as Eric just outlined, which is a great value-add to our customers, but in terms of the precise margins that we gain on that, it's a good question, and it isn't as good a margin, but it's asset light business. So...

It's for the railroad.

Yes. I mean, it's great business for the railroad, yes, but in terms of -- it does -- the reality of it is, and it's a great business for us, we love it, but in terms of the incremental margins overall and our overall financials, it can put a little pressure on that. But that's okay for us because again overall, we're making the progress as an enterprise that we're making, and this is all value-added, helps our customers and helps our bottom line.

Yes, those Logistics business are a core part of our growth strategy.

So for a 20%-plus growth in the quarter, that would have had at the margin some kind of a dampening impact on the -- both the OR and the incremental margin.

Very little, but yes.

Very little because, again, that business that moves on the railroad -- so we're distinguishing between the subsidiary company and the railroad, the business that moves on the railroad is at reinvestable levels.

Our next question is from the line of Anthony Gallo of Wells Fargo.

Headcount growth has been outpacing gross ton-miles. Could you speak to what you expect for headcount growth? And within the gross ton-mile movements, how much of that is the mix versus or -- well, could you elaborate on what might be driving the changes in gross ton-miles?

Rob?

Yes. Let me talk about the headcount first. I mean, let me remind everyone what we've said, we expect our overall headcount to move with volumes. So if volumes are up, we expect headcount to move up, but not necessarily one-for-one because of productivity initiatives. Now what drove our increase in headcount this quarter with flat volume was, as they had pointed out, stronger capital programs and included in those capital programs was a Positive Train Control work. So if you look at the headcount increases, they're really kind of going towards those capital projects as opposed to per se volume today. As you look at the -- your question on the sort of the revenue ton-miles and gross ton-mile question, really the bottom line answer is mix. And what you're seeing is less coal volumes, which are heavier freight carloads for us, and more, for example, autos volumes, which are lighter, if you will, from a gross ton-mile perspective. So really the answer to that question is a mix.

Okay. And then I guess a related question, fuel consumption was down more than gross ton-miles were down, what's going on with fuel consumption as it relates to those miles?

Lance, you want to handle it?

That C rate improvement is really just about traction in what we've talked about previously, which is, it reflects a fluid network. The better the network, the better our C rate, all else equal. Increased in continued traction with programs like Fuel Masters where we incent our engineers to run their trains in a fuel-efficient manner and the fuel efficiency of our locomotive fleet. So you see all of it getting traction in this quarter.

Our next question is from the line of Peter Nesvold of Jefferies & Company. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I just want to make sure I'm capturing your coal expectations accurately. So coal started to decline for you in the first quarter, down 8% or so year-over-year, and it was down 17% year-over-year in 2Q. Does it seem reasonable to expect that maybe coal volumes flattened out for you by second quarter of '13, and maybe we'd have to assume $3 gas and kind of 1.5%, 2% GDP on that? Or do you think where inventory stockpiles are right now that we could see year-over-year declines through the end of '13?

Yes, that's a really tough question for us to answer, Peter, because so much of it depends on weather, natural gas prices and all of those kinds of issues. Maybe, Eric, do you want to take a shot at that?

Yes. There's a lot of uncertainty out there. We're looking at it closely, trying to evaluate what '13 is going to be. And as Jack said, there's a lot of factors, and we're looking at them and trying to get our arms around them.

This is kind of reminiscent for me. A couple of years ago, we were at this time sitting on incredibly high stockpiles and thought we were going to be in trouble, and then we had one of the coldest winters on record and we saw those stockpiles dissipate very quickly, and we ended up having very strong coal loadings. So weather can have a big impact on us, and that certainly is a big point of uncertainty for us.

Our next question is coming from the line of Ben Hartford of Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Could you tell us how much of the business is contractually committed for '13? Or how many -- what percentage of the business is renewed for '13 at the moment? How much remains?

Sure, Ben. As we look at it right now, we have about 70% of our business that's already locked in place, and there's a 30% kind of a number that's out there. And as we look at that, that's pretty constant as we go throughout the year because of the way pricing takes its place and it's not all a year end, some things come up quarterly, different times of the year. So at any one point in time, we have about 70%, and I would say that's -- Eric, you want to add to that?

Yes. And the 70% is really the percent of business that's under some kind of customer specific agreement. It's either a 1-year contract, multi-year contract, a shorter-term contract. The 30% is what's under our public agreement or tariff. And as Jack said, we have -- we're repricing all year long, throughout the year. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Yes, that's helpful. And then back to a point that was made during the prepared remarks. Somebody had made the comment that 4Q will look like 3Q. I wanted to clarify what you were referring to, is that EPS, earnings, OpEx, something along those lines that you were referring to?

Rob?

Yes. I think, Ben, the reference that you're probably referring to was Eric's comments on the markets and the volumes that we're seeing because in his last slide, he went through sort of pluses and minuses within business group. But from a volume standpoint, we see sort of things continuing, and I further gave guidance on the fourth quarter volume that we've got to be flat to slightly negative. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. So I should interpret it as volumes, not necessarily earnings?

That's right.

Our next question is coming from the line of Matt Troy of Susquehanna.

I was wondering if you could just give us an indication of how much of a percentage of your coal book of business ex-legacy is up for renegotiation next year. I would guess, just based on the average contract duration, it's something maybe 20%, 25%, but just maybe trying to frame that for what might be up for negotiation. And then secondarily, given the fact that this is the second time in, let's call it, half a decade where stockpiles have been challenged, now we've got nat gas very low, what might be changing? Where are you getting pushback or sensitivities in the negotiations with the utilities in terms of contract negotiations? Are you looking for concessions on take or pay, or liquidated damages? Where are the touch points in this, we'd call it, new era of coal we find ourselves in today?

Okay, Matt. Hey, Rob, why don't you talk about the legacy and then we'll let Eric take the...

Let me just say we're out of gate. We're not going to get into as much specific that you asked. I mean, you asked a lot of kind of specific questions, negotiating strategies and things like that, that we're going to probably be very general here in terms of your questions. But in terms of the legacy, if you look at our coal book of business, our contracts are 3 to 5 years, so as Jack said earlier, we're constantly renegotiating contracts. We've got both legacy renewals next year. And I refer you to the pie that we've used in the past in terms of how much legacy renewal, overall enterprise-wide that come up for renewal next year. But behind even that, then there's just always negotiations taking place throughout the year in our coal business, in all of our businesses for that matter, so there's nothing unusual there. But if we have 3- to 5-year contracts, then yes, call it 20%, 25% kind of level of business that's up for renewal every year.

And in terms of negotiation, we've said before, our -- all negotiations are difficult negotiations. Our coal customers are very smart, savvy transportation providers, and they always negotiate every factor that they can negotiate, and they're always tough.

And I guess as a follow-up then. In terms of the threshold and switching threshold with natural gas in the low $3 range, is -- it would be nice to hear you folks say just given the periodic rumors you hear in the market that you remain committed to pricing at an inflation cost plus basis or have margin targets and would not be pricing to incent the movement of coal to bring it more competitive relative to that switching cost. The discipline is still there, is that fair?

Matt, not only is that fair, but again, let me just kind of reiterate for you that we need to get our business, every carload that moves on Union Pacific at a reinvestable level, and if it's not, we will walk away from it. We've had a number of customers come to us and say, if we don't lower coal rates, they're going to go out of business. Unfortunately, if their businesses is dependent on the value of their transportation contract and not on their intrinsic product that they're producing, they're probably going to go out of business anyway. And we also have to be sensitive to all of our other coal customers that are paying us. So we take a very pragmatic approach. And we are absolutely committed to pricing to market. We are absolutely committed to bringing legacy up to market rates. We're absolutely committed to our reinvestability threshold. And we think when that's all said and done, we will outperform inflation in terms of our total pricing.

Our next question is from the line of John Larkin with Stifel, Nicolaus. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Just was wondering about your comments with respect to the southern part of the network, could you just remind us how do you define the southern half of the network? Could you sort of review with us what's really driving that tremendous growth there, I guess you're back to where you were before the downturn? And then with respect to the comments about train length constraints in the South, have you contemplated, or are you, in fact, reallocating some capital dollars to relieve some of those constraints if in fact the growth down in that part of the world is sustainable here going forward?

Sure, John. Lance, you want to handle those?

Sure. So John, the southern region for us is essentially east of El Paso to New Orleans and south of Kansas City. When we're talking about the South and significant growth, it's mostly about Texas and Louisiana, and it's mostly about shale-related activity or Industrial Chemicals or the Petro-Chem industry that's benefiting from low natural gas feedstocks. And when we talked about capacity constraints in train size length in the South, the short answer is yes, we do know where our bottlenecks are and we are investing capital where -- when we relieve those bottlenecks, we generate an excellent return. As well as, the South is just our most significant concentration of single track, and it's a significant concentration of manifest traffic at its terminals. And those things tend to retard train length. But net-net, John, as we look forward, we will stay ahead of any of those constraints that meaningfully impact the ability to get solid productivity on that traffic growth. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: That's very helpful. And then maybe just a follow-on question. With respect to the great strides you've made in improving network fluidity, could you attribute any of that improvement to the reduction in sort of the heavy tonnage coal traffic? Does that make it easier to run the rest of the network more fluidly? Or are you just on the same trajectory you've been for many years in terms of continuous improvement in network fluidity?

Yes, I wouldn't attribute it to a decrease in coal movements. As a matter fact, our coal network tends to be one of our most highly productive networks that we run. So it's actually a headwind depending on what measures you're looking at when coal declines. I would attribute the improvement to, as we've mentioned, effective capital investment, the UP way and the full engagement of all of our employees on improving their workplace and improving the productivity of their work. And we're seeing that pay off, and that's got a very long run rate.

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

I think you mentioned a response to an earlier question, the cross-border traffic at Mexico is up 6% primarily in Autos. Could you please comment on potential for increased Mexico Intermodal traffic given your, what, 6 intersections I think?

Sure, Eric?

We -- if you look at the improvement of the Industrial Production and manufacturing in Mexico, we think Mexico is going to be a huge growth opportunity for us, both on the Automotive side, on the carload side and the Intermodal side. We have 6 gateways, as you mentioned. We are working with both Mexican rail carriers, and we have great franchise lanes from those border points to the consumption markets in the U.S. So we continue to see Mexico and the outlook for our cross-border business as being one of our growth stories.

And maybe just as a follow-up, taking a step back, revenue to and from Mexico this year is probably just under $2 billion for Union Pacific. If memory serves you on about 26% or so of Ferromex, and this has been for more than a decade. What would make you interested in owning more than this share, and is there any structural barrier to greater ownership stake?

Sure. Rob?

Yes. Keith, you're right, we own 26%, but it really is an investment. We have great partnership with the FXE, but if you look at our book of business, we interchange just as much, if not more, with the Kansas City, Southern Mexico. So we're agnostic, if you will, in terms of that relationship. And we're comfortable with that 26% ownership as it is. The other point I was going to just make about Mexico is, as you're pointing out, it is one of the strengths of our franchise. It's a differentiator between us and others in that we are the only railroad that crosses at those 6 border crossings. And if you look at our overall volumes, our Mexican business in the northbound and southbound is running about 6% positive volume growth versus our overall enterprise of being flattish in the third quarter. So it's outpacing our overall. And that's because of the great service relationship and the diverse franchise footprint that we have.

Your next question is from the line of Jeff Kauffman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: I just wanted to ask, if you looked at the changes in yield that were caused by product mix versus the changes in yield that may have been brought about by length of haul, whether it's carrying grain to the ports for export or chemicals a certain distance, what's your best guess at what the impact was to yield between the 2?

Rob?

Yes. Jeff, I'd say -- let me give you the mix answer because it really is a combination of things. Length of haul was down about 1% overall. But really in terms of kind of looking at the yield, it really is a mix within a mix story. I mean, if you look at each one of our commodity groups, there really is kind of a mix here. Mix, meaning length of haul within each commodity group and sometimes within each customer base. And our focus on repricing to reinvestability, there was mix within that in terms of what you saw in the coal business, for example. So I don't have a straight answer for you other than to say that overall, our length of haul was off about 1%.

Our next question is from Kevin Crissey with UBS.

I'm trying to reconcile what our utilities analyst is saying and some of the utilities have been saying in the West about the pricing that they're seeing from the rails relative to 2011 levels, kind of 25% decline in pricing overall, maybe not so much in the West or maybe it is. So I'm trying to reconcile that with the discussion of overall pricing and maybe with the -- some lost contracts. So have you seen -- how can we reconcile that with inflation plus pricing? And is it the length of contracts so that when we hit -- when we're lapping 2011, it's going to be -- you're going to see declining pricing at that point rather than today, and how is BNSF related to that?

Well, Kevin, that's an interesting question from the perspective that, again, just to kind of start at a high level and reiterate, our goal is to get business to market levels and to get business up into reinvestable territory. That's our threshold. And obviously, our goal would be to go past the reinvestable level. So -- and in the event that you see us lose business, I think you could assume from that, that we could not meet that criteria and we were prepared to walk away from it because our franchise gives us plenty of opportunities to fill the gap and take advantage of the capacity to move other freight with other customers. So I don't know how you reconcile what your analyst is reviewing and what customers are telling them. Eric, maybe you want to add a little bit to that?

Yes. I would say your question is a good one. We can't reconcile it either. So I mean, your question is a good one.

Rob?

Yes. Can I just reiterate that we say, overall, we look at our enterprise, as Jack has said several times, we're looking at an inflation plus sort of pricing environment. And the other thing I would -- your question reminds me to say here is that we're well aware of some of the reports out there that you're referring to about a 25% reduction, that is not us, I mean we're not confirming that, that was a comment, and I think frankly, the way I interpreted that comment that I know others have picked up on was somebody had an incentive to make that comment based on what they expected as opposed to there being an absolute rate reduction at 25%. But I can assure you, that's not what's happening in our book of business.

Okay. But let's say even if 25% was way out of the range of a real number, even if competitors were out there at a reduced rate, that wouldn't show up in the results really because maybe -- versus 2011, it's down, but versus the recontracting of 2007 pricing, it's probably still up, just not as up as much maybe people thought it would be. So would we see -- if that were the case, would we see a delay in the pricing affect because you're renegotiating 5-year old contracts?

This is Rob. I would just -- Kevin, I would just say that you've asked sort of theoretical questions. Again, we're not going to confirm or debate what theoretically could happen. And again, we're not giving specific guidance on our pricing other than to -- by commodity, other than to say that overall, we expect positive pricing, reinvestability based -- market based, and we expect that to be inflation plus kind of pricing overall, like we've seen looking backwards.

Our next question is from the line of David Vernon of Bernstein Research. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: So Eric, just a quick question on the Chemicals business. We're obviously seeing a lot of projects on the whiteboard or in the planning stages for the Chemicals manufacturing industry. And I wanted to get a sense from you about when that might actually turn into some volume. Is it a '13 or a '14 type of thing as far as your industrial development team is kind of working with those customers to look at rail capacity?

Yes, David, that's a good question. I think at the last quarterly release, what we talked about was with the relatively low natural gas prices, there were 6, 7, 8 large chemical companies that have announced expansions, particularly in the Gulf region, in our sweet spot. If you look at the ramp-up or the construction timeline for most of those, those are late '14, '15, '16 kind of timelines, which is I think what we talked about at our last earnings release. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Great. And just a quick follow-up, perhaps, Rob, could you let us know exactly what the fuel surcharge revenue line was for the quarter?

Fuel surcharge revenue line was -- let me look that up here real fast -- around $630 million in the quarter.

Our last question is from the line of Brad Delco with Stephens.

The focus on Intermodal, I was wondering, could you guys provide any color on the commentary about pricing to reinvestable levels? How close are you to that on the Intermodal side? Or maybe asked a different way, has your pricing changed at all on a year-over-year basis, maybe on a relative basis to what kind of price increases you were looking at last year?

Eric?

We don't historically talk specifically about pricing by commodity group. If we look at our kind of historic Intermodal book of business, Intermodal historically has been priced at, call it, a 30% discount to truck. We think that our value proposition allows us to narrow that discount to truck, and that's part of our strategy that we're doing. And then if you look at the kind of the impact of the trucking industry, the regulations changes on drivers, increased fuel, their costs are going up. So as their cost goes up, that gives us additional headwind in terms of our value proposition. So we are narrowing the gap between the historical discounts that Intermodal has had to trucks.

And then maybe one quick follow-up. Any plans or color you could give on capacity additions as it pertains to containers and the fleet for next year?

Eric?

I think quite honestly at this point in time, we're looking at it, but we haven't made any decisions.

That's right.

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

Well, great. Before we wrap up this morning, just let me reiterate that we recognize there are uncertain economy issues out there, and it's going to bring us some challenges over the next several months, but we're actually very confident that our team is going to remain agile, just as we were in the third quarter. We're going to continue to leverage the opportunities of our diverse franchise. We continue to see strong pricing for the balance of this year, and I think we're going to have a very successful end to the year. So thanks so much for joining us on the call today, and we look forward to seeing as many of you as we can in our Investor Day in Dallas at the end of this month.

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