Apr 28, 2008
Executives
James R. Young - Chairman, CEO and President John J.
Koraleski - EVP, Marketing and Sales Dennis J. Duffy - EVP, Operations Robert M.
Knight, Jr. - EVP and CFO
Analysts
Ken Hoexter - Merrill Lynch Tom Wadewitz - JP Morgan William Green - Morgan Stanley John Barnes - BB&T Capital Markets John Larkin - Stifel Nicolaus & Company Randy Cousins - BMO Capital Gary Chase - Lehman Brothers
Operator
Greetings, ladies and gentlemen, and welcome to the Union Pacific First Quarter 2008 Earnings Release Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. [Operator Instructions].
As a reminder, this conference is being recorded. Slides for this webcast will be user controlled.
It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific.
Thank you Mr. Young, you may begin.
James R. Young – Chairman, Chief Executive Officer and President
Good morning everyone. Welcome to Union Pacific's first quarter earnings conference call.
Joining me today are Rob Knight, our CFO, Jack Koraleski, Executive Vice President of Marketing and Sales, Dennis Duffy, Executive Vice President of Operations. I'm happy to report a strong start for the quarter here.
We're reporting record first quarter earnings. Union Pacific earned a $1.70 per share in the quarter, a 21% increase over 2007.
A key factor in this game was a 10% increase in operating income, the first quarter best of $788 million. Despite a variety of challenges in the quarter from continued economic weakness, ongoing turmoil in the financial markets, the endless climb in fuel prices and weather challenges we remain focused on improving profitability.
If you look at what drove our performance in the first quarter, it was really the strong fundamentals of our company. Despite a soft economic environment, UP's franchise diversity provided a solid demand base.
Record shipments of coal and strong grain movements allowed us to offset double-digit volume declines in products such as lumber, finished vehicles. And cement.
Our continued focus on price produced record first quarter operating revenue of $4.3 billion. That's up 11% to a year ago.
Offsetting a portion of our strong revenue growth was another quarter of record diesel fuel prices. Although we can't do much to influence commodity markets we are working to minimize the impact to our fuel surcharge programs as well as improve our fuel efficiency.
The benefits of ongoing operating initiatives were evident as we improved employee productivity, asset utilization and overall network fluidity. In addition, the railroad's operating resiliency enabled us to improve customer service despite a tough operating environment.
We are delivering a more valuable service product to our customers and in turn they are rewarding us with profitable business. Overall, it was a good quarter for us as we converted record revenue and reliable efficient service into strong bottom line growth.
These results are a testament to the hard working men and women of Union Pacific. As many of you know, a stretch of our main line in Oregon was out of service for the majority of the first quarter.
Thanks to the commitment and dedication of our operating team who literally moved a mountain. We resumed limited operations on that line a few weeks ago.
We also appreciate our customers’ patience during this time. So with that let me turn it over to Jack now for a break down of our first quarter revenue.
Jack?
John J. Koraleski - Executive Vice President, Marketing and Sales
Thanks Jim. Good morning.
By way of overview, all six of our businesses posted best ever records for average revenue per car in the first quarter, driving on a 11% growth in freight revenue to $4.1 billion even as the economic softness held our volume flat. Our Ag products team, chemicals and energy set their best ever revenue marks, while the other three groups had record first quarter and at the same time, customer satisfaction again showed year-over-year improvements.
And turning the chart to page 6, chart makes it pretty easy to see which markets were impacted by the economic softness. Our automotive business declined 6% with growth in parts partially offsetting the effect the sluggish vehicle sales.
But in addition to the economic softness, the American Axle Strike, which began in late February has also lowered volume and it reduces our revenue by about $15 million every month if that strike continues. Bumping construction markets continued to impact the industrial products.
But the good news in our Industrial Products business was a 17% increase in steel shipments. Low inventories creating a strong domestic market and high prices for foreign steel limiting imports.
Intermodal volumes also continued to be impacted by the economy. Ag products revenue grew 10% with strength in grain shipments especially in the export market.
Demand for coal remains strong and a 34% increase in export potash allowed chemicals being deferred to slight gain. I'm going to take you through a look at three of the businesses a little more closely.
That will be Ag products, Energy, and Intermodal. We'll start with Ag products.
That business posted the largest revenue gain as a 10% growth in volume combined with a 13% improvement in average revenue per car to drive revenue up 24%. Wheat shipments increased over 50% with favorable commodity prices, above average production, and a weak US dollar all combining to nearly double exports.
A weak dollar also helped drive feed grain exports up 32% and much of the growth coming in milo destined to European market. Both wheat and feed benefited from improved shuttle train productivity.
We expect that the export markets are going to stay strong and be a key driver of Ag products growth throughout 2008. Ethanol and DDGs continued their growth as well with volumes up about 19%.
And about the only area of softness that we did see in our Ag products business was import beer where high inventory levels were still being worked off in the first quarter. Our energy revenue was up 17%, with volume up 6% and a 11% increase in average revenue per car.
Continued strong demand along with more normal coal production and improved network efficiency drove the Southern Powder River Basin volume up 7%, setting new records for trains, tons and carloads. Colorado Utah volumes were up 4% for the quarter and were also aided by better production and improved service performance.
Now in January we talked about the fact that although demand in the Colorado Utah market looked flat, emerging export opportunities could drive a more favorable outlook. So with the shortfall of coal to meet demand in the global market and the weak dollar, we now expect that, that business will be about a 4% increase.
The SPRB outlook remains unchanged at about 5% with strong demand from existing customers. With an 8% improvement in average revenue per unit intermodal revenue grew 5% even though volume ran 3% below year ago levels.
Overall west coast port volumes were down due to the continued softness of the US economy and we saw that impact in our international segment where volumes declined 5%. Volume in our domestic business was flat year-over-year as growth in the legacy contract business offset other business losses.
We expect the intermodal to gain some strength here in the second half and to be flat versus last year when 2008 wraps up. Continued service improvements supports yield gains and helps us capitalize on business opportunities but most importantly it leads to higher levels of customer satisfaction.
Our customer satisfaction index climbed to 81 in the first quarter, which was up 2 points from last year. Our outlook calls for the second quarter that it's going to look a lot like it did in the first.
Ag products and energy should continue strong offsetting continued weaknesses in the automotive and industrial products segments. It looks like chemical volumes will stay pretty solid and intermodal should run closer to year-ago levels.
Put it altogether and we expect overall volume in the second quarter to be down 1% to flat versus the year ago. Our full year outlook remains unchanged from the range of down one to plus one by year-end.
The primary driver of revenue growth is going to be our continued focus on yield and we expect our core price increase to stay in the 5% to 6% range throughout the year. With that, I'm going to turn it over to Dennis for the operating review.
Dennis J. Duffy - Executive Vice President, Operations
Thank you, Jack and good morning. The operating team continued its efforts in the first quarter to drive better service to our customers and bring efficiency gains to the bottom line.
The starting point for operations is safety where we continue to drive improvements in the employee, public and derailment prevention areas. The main emphasis here is our total safety culture and zero tolerance mentality.
From a train operations and service delivery standpoints, we had another quarter of strong improvement. We are running a more resilient network today as a result of our capital programs, unified plan efforts and continuous process innovation.
We are also using our resources more efficiently reducing train starts, increasing train length, and speeding asset turns. In the first quarter, we held 1% more gross ton-miles with 4% fewer first crew starts and 7% less yard and local starts.
In the Powder River Basin, train length grew to nearly 131 cars per train in the first quarter, which will move more than a 100 additional load of coal trains of coal in '08 versus '07 without any additional crews or locomotives. We achieved these results despite a challenging winter environment.
As Jim mentioned, we were without the use of our main line between Klamath Falls and Eugene, Oregon for the majority of the quarter. While our engineering team was dedicated to the task of reopening this line, the rest of the operating group focused on maintaining service to our customers in the most efficient expeditious manner.
The results of those efforts can be seen in our overall network performance metrics. As you can see by the bars in the upper left corner, we had a significant increase in the level of network disruption, up 22%.
Despite that we made a nice pickup in system velocity gaining a half-mile per hour during the quarter. We also managed the slight improvement in our terminal dwell and reduced our inventory levels by 1%.
As Jack just showed you, we continue to improve the service product we are delivering to our customers’, two measures that are very visible from a customer perspective are industry spot coal and freight car utilization. The spot coal metric measures our first and last interface with the customer, did we pull the car from the customers’ facility and did we deliver the car to the customer within the designated time period.
Freight car utilization, which measures the days between originated carloads, was our first quarter best 9.9 days. Union Pacific and our customers benefit from this in the form of lower costs with both reduced daily equipment rents as well as long-term capital expenditures.
We are also managing our unit cost with greater employee productivity and fuel efficiency. Other efforts to reduce train starts and increased train length are reflected in a 4% increase in gross ton-miles hauled per employee.
We talk with you quarterly about fuel efficiency and our efforts to move more freight with less diesel fuel. Given the huge step-up in fuel prices, those efforts have never been more important.
In the quarter, we achieved the first quarter best level of 1.28 gallons per thousand gross ton-miles. Again this is something that benefits both UP and our customers.
Rails are roughly three times more fuel-efficient than trucks, so we have a natural cost advantage. For a combination of our conservation efforts and technology improvements, we have the ability to further enhance fuel efficiency and related bottom line results.
As demonstrated in our network efficiency and customer service performance, we are achieving greater asset productivity, which in turn gives us flexibility in our resource planning. Although we want to ensure the railroad is resourced to handle whatever the economy, our customers or Mother Nature brings our way, we plan for this in the most productive and cost efficient manner.
From a crude standpoint, we currently plan to hire about 2,000 new conductors, although this hiring level would be backfill for the preponderance of this, we expect attrition to take somewhere more than 2,000 and we have the ability to scale that hiring up or down depending on demand. Because we still have a couple hundred employees furloughed today, we have some volume variability with our current employee base.
On the locomotive side, we also have a good plan in place to update the fleet, bringing on 175 fuel efficient environment friendly new road locomotives and at the same time we are also turning back more than 200 older leased units and parking up to 400 in our surge fleet. If we look further at where we plan to spend our capital and capital dollars in 2008, the plan is somewhat similar to what we did last year.
Our maintenance spend budget is $1.6 billion. Those dollars allow us to improve safety, increase service reliability, provide for growth and enhance productivity.
On the locomotive side and freight car side I've already discussed 175 locomotive ads for the year, this is 125 fewer locomotives than we bought in ‘07. So the total locomotive spend is less versus last year.
For freight cars, we are going to add 300 covered hoppers to support our agriculture business, which is clearly in strong demand. Capital spending both in terms of new track and terminals is expected to total about $840 million, that's capacity spending.
Approximately 85% of this spending is devoted to adding capacity in the sunset corridor and the RED-X areas of the central corridor. So as we move forward into the second quarter of '08, our operating priorities are unchanged; operate a safer railroad, provide an enhanced service product to our customers, and continue to drive productivity and throughput to create value for all of our stakeholders.
With that, I'll turn it over to Rob.
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
Thanks Dennis, and good morning. Before I get into the details on the first quarter I'd like to call your attention to a couple changes in our income statement.
As a result of system enhancements and to improve the clarity of our financial statements we have reclassified the components of operating revenue into freight revenue and other. We have also revamped our expense categories to give everyone a better view into our business.
We are reporting fuel as a stand-alone category and have combined purchase, services, and materials into one line. In addition, certain other expenses were reclassified among the operating expense categories.
Of course, none of these changes impact previously reported earnings. On the Investor Relations page of our web site, we have provided reclassified quarterly numbers for 2007, 2006, and 2005 as well as a brief description of the account changes.
This information should be helpful for you in updating your models. So, turning to the income statement summary, first quarter operating revenue grew 11% to $4.3 billion.
Quarterly operating expenses increased $352 million to just under $3.5 billion. The primary driver of the higher expense was a 45% increase in fuel expense.
We also experienced higher costs associated with the Oregon mudslide, which added around $20 million of operating expense to the quarter. The mudslide will also have a capital impact.
Although, there's still work being done we currently are estimating between $60 million and $70 million of capital to repair that line. We do have some insurance that should help offset a portion of this, so we will be pursuing that over the next several months.
The net result of our operations was 10% growth in operating income to a first quarter best $788 million. The primary driver of operating revenue growth was a $404 million increase in freight revenue to $4.1 billion.
Our continued focus on price as well as increased fuel surcharge revenue was associated with rising diesel fuel prices drove the year-over-year gain. Splitting up the 11% increase in freight revenue, we would say about half was core price and half was from our fuel cost recovery.
Today, roughly 25% of our total book of business is still under legacy contracts. And in the near-term, as we experience strong volume growth under those old legacy deals it holds back our overall yields.
As you know, legacy contracts do not reflect current market prices and lack adequate fuel surcharge mechanisms. Our quarterly business mix was better than originally anticipated.
Greater than expected movements of long-haul export grain as well as increased Colorado, Utah coal moves added to our first quarter growth. First quarter other revenue increased 9% or $17 million to $211 million.
The primary driver of this increase was higher revenue from subsidiaries. First quarter compensation and benefits expense declined 3% in the quarter to $1.1 billion.
Greater employee productivity allowed us to lower work force levels by 3%, primarily through attrition. Fewer train starts and lower training costs contributed to greater efficiency across our company.
Looking ahead at the year, we will continue to align our hiring plans and work force levels with anticipated volume and productivity. Turning now to fuel expense.
This category increased $295 million to $957 million. Despite moving 1% more gross ton-miles, we consumed 2 million fewer gallons of diesel fuel as we continue our focused efforts on conservation.
Unfortunately, this improved consumption was more than offset by a 47% increase in prices during the quarter. Average first quarter diesel fuel prices increased nearly $1 year-over-year from $1.93 per gallon in 2007 to $2.84 a gallon this year.
Of course as you all know, prices have increased dramatically in the last month and remain at historically high levels. In fact, we're currently paying around $3.40 per gallon and could average close to that price in the second quarter.
This would be more than a 50% increase from last year's quarterly price of $2.20 per gallon. And as we've said, we are focused on obtaining 100% fuel surcharge recovery but until we reprice all of our legacy contracts, we are not fully protected from rising fuel prices.
As a result, fuel costs will be a challenge to earnings throughout the year. Purchased services and materials expense were up 6% in the quarter to $469 million.
We would attribute roughly one-third of the increased cost to the Oregon mudslide as third party contractors were employed to help us reopen that line. In addition, we experienced increased joint facility expenses as well as higher crude transportation and lodging expenses.
Equipment and other rents expense totaled $342 million in the first quarter, up only 1%. Although we continue to improve our equipment utilization during the quarter those gains were offset by higher locomotive leased expense related to our 2007 acquisitions and car hire reclaims.
Other expense increased 23% or $46 million in the first quarter to $242 million. The majority of the increase relates to last year's actuarial study, which resulted in the $30 million casualty expense reduction and although we continue to benefit from our improved safety performance in the form of lower quarterly accrual rate, the year-over-year comparison is unfavorable.
We also experienced cost inflation related to increased utility cost and higher state and local taxes. Moving now to slide 28, we illustrate the drivers of our first quarter operating ratio.
Our first quarter 2008 operating ratio was 81.5%. The effective increased fuel expenses, net of fuel surcharges added 3 points in the quarter.
We also had the impact of last year's casualty accrual and the Oregon mudslide. Against these combined headwinds we made great progress.
Strong operating revenue growth and overall efficiency gains took over 4 points off the operating ratio, nearly offsetting the cost challenges. Importantly, if you set aside these costs, we basically held our quarterly unit costs flat versus last year.
Turning now to the full income statement. First quarter other income totaled $25 million, up $10 million year-over-year as a result of increased gains from real estate sales and higher leased income.
For the full year, we now expect other income to be in the range of $75 million to $100 million. Interest expense increased $13 million or 12% to $126 million driven by higher debt levels.
Income taxes grew 4% to $244 million as a result of higher pretax income. The effective income tax rate of 35.5% was 2.3 points lower than last year's rate as a result of a state tax law change.
For the balance of 2008, we expect our effective tax rate to be around 37%. Net income grew 15% to $443 million, a first quarter best.
Our diluted shares outstanding declined 4% year-over-year contributing to the 21% increase in first quarter earnings per share of $1.70. We continue to produce solid earnings growth in a challenging business environment.
During the first quarter, we continue to purchase shares, buying back 3.3 million shares of UP common stock for a total cost of around $400 million. Since inception, we've repurchased roughly 15.9 million of our 20 million-share program returning nearly $1.9 billion in cash to our shareholders.
Turning now to slide 31 and our balance sheet. We remain comfortable with our current balance sheet strategy.
Over the last 12 months, our total debt increased nearly $1.7 billion and added over 3 points to our debt-to-capital ratio. We continue to generate capacity on our balance sheet through improved profitability and we are using that capacity in a balanced approach to invest in our business, pay dividends, and return cash through our share repurchase program.
As we look out at the second quarter and the remainder of the year the two biggest variables are carload volumes and fuel prices. As Jack discussed earlier, we expect second quarter volumes to be in the range of down 1% to flat versus last year.
Combining that volume outlook with diesel fuel prices around $3.40 per gallon, we expect second quarter earnings to be between $1.80 and $1.95 per share or 9% to 18% growth. The impact of fuel alone in the second quarter could increase locomotive fuel costs by $180 million or more from the first quarter level.
Although we will recover a portion of that through our surcharge programs, the two-month lag will push some of that recovery to the third quarter. Setting aside the impact of higher diesel fuel prices, pricing gains and productivity will continue in the second quarter and increase overall profitability for our company.
For the full year 2008, we had originally expected annual fuel prices to increase 15% to 20%. Today, it seems likely that annual diesel costs will be substantially higher than that.
Despite that headwind however we are not changing our full year earnings guidance of $7.75 to $8.25 per share. Clearly, higher fuel prices will impact our earnings, but fuel generally has a greater impact on a quarterly basis than it does over the course of the full year.
As I just mentioned this is because of our two-month lag in our surcharge programs. High fuel prices will also affect our ability to show operating ratio improvement in 2008.
As we consume over 1 billion gallons of diesel fuel annually, rising diesel prices make fuel expense a bigger and bigger part of total operating expense, over 27% for us in the first quarter. And just the math of rising fuel surcharge revenue and fuel expense results at a higher operating ratio even if we had a 100% recovery, which we do not.
So although 2008 is shaping up to be a challenging year, we are confident that our ongoing initiatives to improve profitability and drive efficiency will result in solid earnings growth. So, with that I'll turn it back over to Jim.
James R. Young – Chairman, Chief Executive Officer and President
Thanks, Rob. When we laid out our 2008 plan for you back in January, our message was pretty simple.
Although we expected external factors such as the economy, high diesel fuel prices to challenge us, we're committed to deliver a record year for our shareholders. Our opportunities are clearly within our control and we have initiatives underway that will help us achieve our objectives.
Being specific we will continue to improve safety, drive greater productivity across the organization, and increase customer value. So, with that we have got some time here to take a few of your questions.
Question and Answer
Operator
Thank you. [Operator Instructions].
Our first question comes from the line of Ken Hoexter with Merrill Lynch. Please go ahead with your questions.
Ken Hoexter - Merrill Lynch
Great. Good morning.
Just to start off, great job in covering despite the network downside in the upper west. But just looking at the coal side, you talked about how the continued growth you are expecting from the shipments, can you talk a little bit about how if we are seeing any of the PRB volumes make up what is now moving export from the east coast, or are you seeing more and more of that PRB shipments go east?
James R. Young – Chairman, Chief Executive Officer and President
Ken, I'll let Jack take this in a minute, but I don't... it's overall the export impact really it has an indirect influence in PRB.
We are not seeing a surge in terms of request that it would displace eastern coal. We've got enough demand here just domestically that… out of PRB now we're talking about that we see… can be pretty strong here going forward here.
Colorado Utah has been a little bit of a surprise to us. As you know, I think Jack mentioned, we were expecting flat volumes, we were about 4% up.
Some of that could have some impact particularly, going west but Jack, is there anything I missed.
John J. Koraleski - Executive Vice President, Marketing and Sales
Ken, actually what we are seeing is the more likely impact is in Colorado Utah. We are moving probably somewhere in the neighborhood of 3 million tones in our exports heading primarily to the river and then beyond, but we are getting more phone calls as Europe gets tight and the coal imports come off of east coast mines moving to Europe due to a lot more interest being generated.
But right now, the interest is more for the higher Btu Colorado Utah coal than it is for PRB.
Ken Hoexter - Merrill Lynch
Is there a capacity to handle that that increased demand?
John J. Koraleski - Executive Vice President, Marketing and Sales
I think, we're in fairly good shape and actually the mines have held up, you know we from time to time have had problems with some of the Colorado, Utah mines in terms of their geology and things like that but they're right at the moment, mines are doing well, we are doing well and the market is pretty hot. So, we're feeling pretty good about it.
James R. Young – Chairman, Chief Executive Officer and President
PRB has the capacity. Colorado, Utah will be stretched.
When you look at, I mean the potential you see any kind of a major surge coming out of, there’s a little bit of upside but not significant.
Ken Hoexter - Merrill Lynch
The network interruption days, that was an interesting one on the slide, I don’t think I have seen that before on your slide. How do you measure that?
John J. Koraleski - Executive Vice President, Marketing and Sales
Ken, we look at any time that we incur 50 or more greater train hours, any one particular day from an incident then we characterize that as a service interruption day.
Ken Hoexter - Merrill Lynch
That's great.
John J. Koraleski - Executive Vice President, Marketing and Sales
So, it’s a significant advantage usually.
Ken Hoexter - Merrill Lynch
Yes. Now that the exposure on the insurance from the problems in upper west, are you still exposed about $25 million of that total amount that you'd given?
James R. Young – Chairman, Chief Executive Officer and President
Well, Ken again, I think we should be careful the timing of the insurance recovery. We're not assuming anything in our financials right now.
That will be a long drawn out process out there going forward. Most of it will hit capital and the pressure we'll see from this thing for the year, it will be the $60 million, $70 million capital hit we're going to take.
Rob, if you want to --.
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
That's right. Generally the deductible is 25, but Jim is right it will be a long drawn out process here, which is as I mentioned a majority of that cost that we incurred is on the capital side.
Ken Hoexter - Merrill Lynch
Great. One last question if I may.
On the line of locomotives, it sounds like you're turning back in a lot of older locomotives the 2 into 22, you mentioned and you only adding 175. Should we see kind of, can we see a sizable decrease in your rents going forward because of that?
James R. Young – Chairman, Chief Executive Officer and President
Well, You'll see a lower, by the end of the year, here we'll have fewer locomotives operating in our property. You should see some reduction going forward.
On the other hand, and I hope volume picks up in terms of the need to may be go back in the short-term lease market.
Ken Hoexter - Merrill Lynch
Okay. Great, thanks for the time.
James R. Young – Chairman, Chief Executive Officer and President
Okay.
Operator
Our next question comes from the line of Tom Wadewitz with JP Morgan. Please go ahead with your question.
Thomas Wadewitz - J.P. Morgan
Hey, Good morning.
James R. Young – Chairman, Chief Executive Officer and President
Good morning Tom.
Thomas Wadewitz - J.P. Morgan
I wanted to drill down a little bit on fuel and try to understand the impact in the quarter and then going forward. In fourth quarter clearly had the timing impact with maybe a greater effect.
In first quarter, if you look at surcharge and increase in expense, do you think that it was kind of neutral or headwind or tailwind. How do you look at that and then I guess second quarter just look like it's much greater headwind?
James R. Young – Chairman, Chief Executive Officer and President
Rob, do you want to take that.
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
I mean it was clearly a headwind for us the first quarter, Tom. I mean rough numbers, our expense was up roughly $300 million on the cost side and recovered roughly $200 million more if you look at it in terms of the yield.
So, clearly it was a headwind for us. The second quarter, we'll see what fuel prices do but as I mentioned we're looking at currently high spot levels or prices that we’re paying around $340 million.
That's going to create headwind for us of which we are always, with that two-month lag, we are always behind when it's in a rising price environment. Now, that it goes both ways, when the prices soften we will see the benefit, in a rising price environment it equates a headwind.
James R. Young – Chairman, Chief Executive Officer and President
With our legacy contracts as we talked about there is no question, we are challenged to recover fuel and it is just going to take time and focus to as these things come up get the right fuel recover mechanism in there. But as long as prices continue to go up, we're going to have a problem with each quarter.
As Rob said, you bet... who knows, I mean it’s simply a guess where at some point, things seemed in a little bit of cycles and then you get the reverse effect.
But our goal is to get 100% fuel recovery and may get mutual in our business going forward.
Thomas Wadewitz - J.P. Morgan
Right. Okay.
In terms of the 11% yield, was there any mix or was it purely $5.5 from price and $5.5 from year-over-year increase in fuel surcharge?
James R. Young – Chairman, Chief Executive Officer and President
There is some mix in there when you look at it and if you recall, Rob was talking a little bit about our legacy contracts that we saw some... pretty decent growth on those legacy contracts which quite honestly, there is not much in there in terms of price or what reflects in the market.
So it did hold down, actually it negatively impacted our overall yields. But I will tell you, 5% to 6% is what we had set earlier for the year on our core price, we are sticking to that.
There are some markets today that are hotter than that. You look at some of these commodity markets like coal, Ag, that are out here, the margin is pretty hot.
On the other side, domestic intermodal pretty weak, international intermodal pretty weak. So we are in some of the markets, but the pricing opportunity is little bit stronger than others but we are sticking to our 5% to 6%.
Thomas Wadewitz - J.P. Morgan
Okay. And do you care to quantify the legacy contracts if you look at your volume growth for business under those contracts versus what total volumes were?
What was the volume growth in the legacy contracts, do you have a sense of it?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
You know I really don't, I haven't broken it out that way.
James R. Young – Chairman, Chief Executive Officer and President
We aren’t looking at it that way but we know that the legacy growth was on higher than average cycle. We haven't given that the number precisely.
Thomas Wadewitz - J.P. Morgan
Right. Okay.
And then on the opportunity that comes from high fuel prices, I guess, your franchisees has been tremendously leveraged, do you think like domestic intermodal but it would seem that truckers are extremely challenged with the high fuel prices and I'm wondering where do you see potential opportunity for us in business to come to the railroad versus truck just as the fuel prices are really hurting the truckers a whole lot.
James R. Young – Chairman, Chief Executive Officer and President
Well, Tom, there is not question, the pressure is there. We are seeing more interest, I think you have to be careful, on the one side there is a lot of pressure but I will tell there is also a lot of these truckers are just basically trying to get some positive cash flow.
So they can put some pressure on pricing in the short-term which we see. But long-term, I’d tell you again, we look at intermodal and coal is our highest growth potential.
I just don't see the cost pressure changing on the truck side and that in my mind really bodes well for us in terms of or intermodal network. Jack, do you want to add anything?
John J. Koraleski - Executive Vice President, Marketing and Sales
No, I think that’s right and I think as we move into peak season, you will see things perk go up again. Obviously, we could put a lot more business on the railroad if we wanted to change our pricing strategy, which we don't.
So that's it?
Thomas Wadewitz - J.P. Morgan
Yes. Okay.
Great. Good quarter and thanks for the time.
James R. Young – Chairman, Chief Executive Officer and President
Thanks Tom.
Operator
Our next question comes from the line of Ed Wolfe [ph] with Wolfe Research [ph]. Please go ahead with your question.
Unidentified Analyst
Hi, good morning.
James R. Young – Chairman, Chief Executive Officer and President
Good morning Ed.
Unidentified Analyst
Can we get an update Dennis on the Oregon outage what exactly is going on in terms of, I get the sense you are mostly through it, but there’s still a little bit of digging out?
Dennis J. Duffy - Executive Vice President, Operations
Yes, that's a fair characterization Ed. What we did was we restored the service.
On a night-time basis we take about a 10-hour window at night to run trains through there. What we are in the process of doing now is cleaning up the unsuitable material that possess risk to be able to come down on us in future operation.
So, we think we're gaining on that and we should get that behind us here hopefully within the next 30 days and we'll be back with full regular operation.
Unidentified Analyst
So, assuming another 30 days, you know such two-thirds your quarter something like that what's the impact with a drag that we should think about from Oregon this quarter?
Dennis J. Duffy - Executive Vice President, Operations
Well, It cost us about a nickel in the first quarter. I would, my guess there’s may be half that you think about for second quarter.
Now there’s several components of it, lost revenue with some business, intermodal moved in the highway. You had out of route miles that came through in terms of running it where we could run through the [inaudible] and back up.
And then again lost asset utilization. So, there is both an operating cost and revenue component in there and again I would, my guess is may be half of what we saw in the second quarter.
Unidentified Analyst
And on the auto side, if I look at the strike which seems to be have done worse not better recently what's the impact as you think about that, as it would have last the whole quarter?
Dennis J. Duffy - Executive Vice President, Operations
Well, it cost us $14 million in the first quarter, it’s cost us $14 million a month and anybody’s guess where that will come back.
Unidentified Analyst
Okay. So, $14 million if we did that times three that's kind of a worst case scenario?
Dennis J. Duffy - Executive Vice President, Operations
It's right.
Unidentified Analyst
Now, that's revenue what was the earnings impact to that?
Dennis J. Duffy - Executive Vice President, Operations
You know, in the short-term Ed, a lot of that falls to bottom line.
Unidentified Analyst
Why you are laughing on me?
Dennis J. Duffy - Executive Vice President, Operations
Well, I'm not going to give you the margins on the auto business.
Unidentified Analyst
Fair enough. Labor headcount down 3.3 and you made some comments about hiring but also attrition, how should we think about that moving forward?
Dennis J. Duffy - Executive Vice President, Operations
Right now, it looks like, we’ll hire about in total 4,000 employees for the year. We're going to lose about 4,200, 4,500 employees.
So net net you’ll see… you see that differential there. Again part of this is a really a function of how we look for volume going forward.
I expect our productivity numbers, they need to continue to improve and so again it’s a wildcard. What we have to be careful of here is you can take a lot of cost out pretty quick in an organization but when that business comes back we're very focused on maintaining our surge capability.
We've got what we have 300, 400 locomotives sitting in storage right now. We’ve got about 15,000 freight cars in storage.
We have on our train and engine crew size, the total there is about 300. Now that’s down from the peak where we are in the round about 800 to 900.
But we want to make sure and we have the right balance between surge recovery and efficiency.
Unidentified Analyst
Jack had mentioned in intermodal strength that couple of times expected for at least it to improve in the second half and also said that it's not going to be based on going there to get it on price. What's the confidence, is it just easier comps, it is fuel being at these prices, why are you so confident in intermodal?
John J. Koraleski - Executive Vice President, Marketing and Sales
I think when we just look at the supply demand situation that's out there Ed, I think it's going to be okay. I think you will actually see volume levels pick up during kind of the peak season, kind of thing.
Although, it probably won't be as robust as we have seen in the past but I think it'll be there for. I also think that you will see some trucking, there are some pressures in the tracking industry and I do think you will see some of those guys starting to hold up.
And you will see some of that kind of take pressure off and put more opportunity for us in the domestic world for the rail side. So, just everything that we look at kind of tell us is it's going to perk up out here a little bit, it's not going to be an outstanding season but the domestic side of the business, it is going to help.
James R. Young – Chairman, Chief Executive Officer and President
There is another factor we didn’t really talk about which is our really very good service. As we put in service products into the market we show that consistency, customers don’t automatically switch.
We have proven that, we can provide a good consistent service in the market and that's where we are also seeing more calls not only the truck, the cost from the trucking side of pressure. But good service products are put in the markets.
Dennis J. Duffy - Executive Vice President, Operations
We are also extending some service out of northern California and other places and taking advantage of the new train service with MS and things like that. So we've got some growth opportunities there that are pretty attractive from us.
Unidentified Analyst
That was my follow-up, has the Meridian Speedway starting to open up a little bit for you?
Dennis J. Duffy - Executive Vice President, Operations
Actually it is, we lost a little bit from this fare that we talked about I think in the last quarter with the contract, but we are rebuilding it fine and customers like the service, it’s great performance, very reliable and I think that's going to be one of our growth features for the rest of the year.
Unidentified Analyst
Last question and I will pass it off. Just could you give an update on the Sunset quarter and the timing for when you think the double track will be done from here?
John J. Koraleski - Executive Vice President, Marketing and Sales
We are sticking to our original timeframe on that Ed, we're doing what we said we will do this year and that is about 36 miles additional construction, we are doing somewhere about 140 miles of additional rating and we are on target to get all that accomplished. And we are working with Arizona to get our permitting issues that behind us there as well as the local communities in Arizona.
So, we are staying with the original timeframe, we'd like to be somewhere in that first part of 2011 and have it behind us.
Unidentified Analyst
Thanks a lot for the time everybody.
James R. Young – Chairman, Chief Executive Officer and President
Thanks Ed.
Operator
Our next question comes from the line of William Green with Morgan Stanley. Please go ahead with your questions.
William Green - Morgan Stanley
Yes, just quickly the follow-up on the intermodal, there has been some fresh reports about [inaudible] shortages, has that limited your ability to grow intermodal at all?
James R. Young – Chairman, Chief Executive Officer and President
Not substantially at all. No.
William Green - Morgan Stanley
Okay. And then, when we think about the repricing story, you said you got 6% of the revenue that is repricing this year.
How does that... how is the timing of that work, did you have 6% repriced in the first quarter or does it kind of layer in?
Dennis J. Duffy - Executive Vice President, Operations
Most of it is back-end loaded into end of the year.
William Green - Morgan Stanley
So what are we really seeing in the first quarter, is it really, what you were able to reprice in 2006 then and then you will get the kicker the fourth quarter?
Dennis J. Duffy - Executive Vice President, Operations
There is some of that in there.
James R. Young – Chairman, Chief Executive Officer and President
’07 you mean.
William Green - Morgan Stanley
Sorry, sorry...' 07, right.
Dennis J. Duffy - Executive Vice President, Operations
Right.
William Green - Morgan Stanley
And then can I ask on fuel, do you see any sort of demand elasticity as the fuel surcharges keep rising, recognizing that truck should lose more than you do but also obviously, it is hard to change with the two-week move in oil that’s $17 per barrel you can change you whole supply chain. So, do you see shippers reacting at all from a volume standpoint or they just sort of accept it.
James R. Young – Chairman, Chief Executive Officer and President
Yes, I think in some cases we're again at the end of the day for our customer it’s the total cost, core price plus fuel surcharge and they're going to make their decision in terms of where there might be an alternative move that gives them more economics. In some cases, you can find some pretty low cost in the market but what we're trying to work with our customers on is long-term.
In some cases, there is some business that quite honestly probably shouldn't be moving on the railroad. Again you look at the efficiency, if you look at the density, you look at the length of haul, that's out here.
So we are losing and have lost some business that's out here, but nothing in terms of that I am overly concerned with. Again rationalizing the network and what business moves on here is a long-term process.
William Green - Morgan Stanley
Okay. Two quick detailed questions.
Leverage ratios, where do you see those going and do you expect that might have any impact on the second quarter call?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
Bill, the leverage ratio, you saw the debt-to-cap ratio was up. We think as we improve our profitability we have capacity on the balance sheet.
We haven't given the target since what we're aiming for other than being a solid triple B flat rated kind of metrics is how we look at it and as we mentioned earlier on the mudslide in the second quarter I think Jim said about half of the impact would be a reasonable assumption to second quarter, which slowed that about $0.02.
William Green - Morgan Stanley
Okay. Great.
Thanks for your help.
James R. Young – Chairman, Chief Executive Officer and President
Okay, Bill.
Operator
Our next question comes from the line of John Barnes with BB&T Capital Markets. Please go ahead with your question.
John Barnes - BB&T Capital Markets
Two questions. One, have you seen, given how lean truck freight has been in the last couple of quarters.
Have you seen the competitive environments pull over into any other commodity type other than intermodal in terms of more aggressive truck pricing for other types of commodity?
James R. Young – Chairman, Chief Executive Officer and President
Yes, we have... we have seen it in our industrial product.
Actually, John, the way you would looked at it is any business that is susceptible to truck which covers the widespread group of things, our industrial products business would be one in particular some of the non-specialty chemicals a little bit of impact there. But it really, really kind of broke down to Jim's comment of the total price when you had fuel surcharge and the freight rate together and what you find as the business that we tend to lose is the business where we were stretching to keep it on the railroad to begin with and that's what the starts to fall off.
John Barnes - BB&T Capital Markets
Okay. Jim, to your comment about there being some freight currently on the rails that may be shouldn't be some, is that causing you any issues in terms of operational performance I mean, could your operational performance be...
share step function better if some of that freight that may be should be on the highway or else where wasn’t in your system.
James R. Young – Chairman, Chief Executive Officer and President
No, John. I don't see a major a share step function there, we just have to keep at it in terms of process, capacity that's out here.
I would say, well we had a... and you know, we always reminded we have winter every year.
So, we don't want to make it a big issue. But I'll tell you, our network with the issues we had, we really showed a great capability to recover and I just don't see that on the...
taken a huge chunk of business off there’d be this step function.
John J. Koraleski - Executive Vice President, Marketing and Sales
You know John, Dennis and I, when we came into the 2003, 2004 and the problems that we had there our teams kind of sat down as we did the unified plan and really looked at places where they were operational issues associated with business and I think we pretty well cleaned the franchise up on those kind of things.
John Barnes - BB&T Capital Markets
Okay. Very good.
The barge companies and these are really struggling right now, I guess again winter did show up in the first quarter, I think it was some of the worst winter conditions I’d seen on the rivers on a couple of years and then one of the company's was talking about second quarter is going to be negatively impacted by higher river conditions, in the Mississippi. Is your bulk franchise doing a little bit better than you would have expected because of some market share gains from the barges right now or would you classify that as some of the business that may be should, either shouldn't be on the rails?
James R. Young – Chairman, Chief Executive Officer and President
You want to handle that one Jack.
John J. Koraleski - Executive Vice President, Marketing and Sales
I don't see the market share shift from barges being significant as they do the export market demand that's out there today and the cheap US dollar, we are just really not seeing a significant shift from barge.
James R. Young – Chairman, Chief Executive Officer and President
Actually I think there were some impact on our coal business because the high waters on the rail routes where we ended up backups and trains, so.
John Barnes - BB&T Capital Markets
Okay. And then lastly in terms of fuel, I guess, a year ago when oil was 75 bucks a barrel wherever it was, I can't keep up with it any more but the comments were made at the time that the forward curve on hedging and the type of thing wasn’t that attractive and obviously, nobody had the crystal ball to think that oil was going to $120 a barrel or whatever we make get to.
But I'm just curious given the rapid spike in and how fast it keeps going up and the fact that it just never seems to want give any back. Have you guys started to rethinking your strategy in terms of how you approach your fuel-cost and you're doing a great job, a better job at the recovery and surcharge programs but is there another mechanism out there that you need to start exploring again?
James R. Young – Chairman, Chief Executive Officer and President
John, at the end of the day our best strategy is on the fuel surcharge really, we have talked about it we don't ignore it but I’ll tell you in situation that I have locked in a future price and it falls and then I have got the worst of both worlds. I am refunding, you're cutting your revenues side and you lock the high price and it can work both ways.
So I just don't see that going forward here in as you said, I'm not sure anybody saw $118 crude at least the experts I followed very few of them had that on the agenda. So again our focus is on the fuel recovery, the fuel surcharge going forward.
John Barnes - BB&T Capital Markets
Is there a price level that does become attractive from the standpoint of doing something on a hedge basis. I mean if all was back into mid 70s would you look to hedge it that point, or is the hedges are kind off limits and you're going to do this all through the surcharge mechanisms?
James R. Young – Chairman, Chief Executive Officer and President
Yes the only time we might look at it is where you get down to where we have the base coverage. You look at where these things could kick in which is probably in more of the $50, $60 range.
But that’s out here, but even then I’ll tell you I’d be hard pressed to say let’s lock it up.
John Barnes - BB&T Capital Markets
Okay, all right very good. Nice quarter, thanks for your comment guys.
James R. Young – Chairman, Chief Executive Officer and President
Thanks John.
Operator
Our next question comes from the line of John Larkin with Stifel Nicolaus. Please go ahead with your question.
John Larkin - Stifel Nicolaus
Good morning gentlemen.
James R. Young – Chairman, Chief Executive Officer and President
Hi, John.
John Larkin - Stifel Nicolaus
I had a question probably best paying towards Jack, regarding the downturn International volume and how much of that do you think is a function of the slowdown of consumer consumption and how much of that is a function of fact that some of the retailers and the steamship companies running through the canals to the east coast directly, which presumably will now bounce back to the west coast if the consumer starts to purchase again?
John J. Koraleski - Executive Vice President, Marketing and Sales
You know John. I think primarily right now you are seeing the economic softness, high inventory levels and things like that.
You are not seeing the retailers really buying a lot or stocking a lot. We are still seeing some impact from the shift from the west coast from the previous ILWU negotiation problems that were there and you saw the big retailers in our ship distribution centers and things like that.
So, we are seeing some of that but that's working itself through the supply pipeline and I think what you are seeing right now is more of function of the economy than [inaudible].
John Larkin - Stifel Nicolaus
I guess it increases the likelihood that we will bounce back here eventually. For Rob, perhaps I was a little surprised with your locomotive order in particular that you didn't talk at all about drawing may be some of the '09 orders into '08 to take advantage of the bonus appreciation, any thoughts along those lines?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
John, we will take a look at it but at this point in time we don't have plans to pull ahead any capital spending as a result of bonus appreciation, but we will continue to look at and is really just a timing issue as you know, but we will look at that but we don’t have any plans do that at this time.
John Larkin - Stifel Nicolaus
Is it possible that perhaps take advantage of that savings with some of the work that perhaps you plan to do in the second half of the year that is not a contract yet, is that something that this is possible you’ve heard that some of the other railroads are contemplating that?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
We will definitely take advantage of the bonus appreciation. But the question would be whether not it causes us to pull something ahead is we haven't determined to do yet.
James R. Young – Chairman, Chief Executive Officer and President
John, we have got a pretty healthy capital spend, I am not, $3.1 billion I am not, we are not going to ignore the economics of bonus appreciation, Rob said it’s timing but that’s a pretty healthy spread particularly given where the demand is right now.
John Larkin - Stifel Nicolaus
Got it. I understand the caution.
Then maybe just one question on the regulatory front we’ve heard that sometime during the second quarter the railroad industry perhaps through the AAR has taken a lead, it is going to make it proposal to the STB to factor in replacement costs into the calculation of our ROIC, which presumably would take the ROIC down quite a bit below the new weighted-average cost of capital that’s just generated with the capital asset pricing model. Is that a fair assessment of where we are and it sounds to me like the STB is going to seriously consider, do you think there is a strong likelihood heard that this could be adopted and what sort of opposition might you get from some of the shipper groups?
James R. Young – Chairman, Chief Executive Officer and President
John, as you know when I testified I guess it’s about a year-ago now made a point of replacement cost and used several examples in terms of what it cost to replace bridges today and what I am pleased with this the STB is considering it. Rob and his team have been working very hard with the other railroads in terms of methodologies, we will see what happens.
I'd again my comments when I am on the hill, is that what we have to keep in mind here is whatever methodology is fit we will determine how much capital goes into the business, it’s going to be a function of returns and with our considering replacement cost in the equation you get to this point where you may save returns or cap, but you’re going to see capital pretty flat going forward. So I again, I think there will be a nice debate Rob, you want to--.
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
We believe in it very strongly and we are going to put forth our view on it. We believe the STB as Jim said has certainly opened the door and receptive to reviewing and evaluating it and will go from there.
James R. Young – Chairman, Chief Executive Officer and President
I think right now when you consider what's happened in this country, with trans station infrastructure the time is absolutely right to have this kind of discussion.
John Larkin - Stifel Nicolaus
Sounds perfect, very helpful. Nice Quarter.
Thank you.
James R. Young – Chairman, Chief Executive Officer and President
Thanks John.
Operator
Our next question comes from the line of Randy Cousins with BMO Capital. Please go ahead with your question.
Randy Cousins - BMO Capital
Good morning.
James R. Young – Chairman, Chief Executive Officer and President
Good morning Randy.
Randy Cousins - BMO Capital
Just in reference to your Ag business, I wonder if you guys could comment on the relative advantages of shipping out of the PNW versus the Gulf and whether more attractive shipping rate kind of PNW imply to the strength of the Union Pacific versus shipping out of the Gulf?
James R. Young – Chairman, Chief Executive Officer and President
You want to handle that Jack?
John J. Koraleski - Executive Vice President, Marketing and Sales
I think Randy the determinant is really the freight factors as we look at it today we did see a significant increase in the PNW. And that works out fairly well for us.
But what we are looking at right now is the balance between the Gulf and the PNW and the markets will shift depending on ocean freight rates and things like that and we can play in either of those markets and play pretty darn effectively.
Randy Cousins - BMO Capital
So you don’t have a preference one way or the other?
John J. Koraleski - Executive Vice President, Marketing and Sales
I guess it really depends on rate levels but I think intrinsically you would say that our franchise would probably favor the Gulf a little bit. But you know we are ideally suited to handle it either way.
Randy Cousins - BMO Capital
One other questions just on the revenue side, your Industrial Products Division was up about 9% which is relatively on the low end and I wonder what was going on there, was it a mix issue in terms of the arc increase or is it just complication from the truck?
John J. Koraleski - Executive Vice President, Marketing and Sales
Are you looking at the average revenue per car.
Randy Cousins - BMO Capital
Exactly.
John J. Koraleski - Executive Vice President, Marketing and Sales
I think Randy when you look at the marketplace right now in the industrial products world the price increases that we are getting, I mean that’s a big book of business for us, it’s heavily denominated by lumber and some of those. And they're just not moving much products so we are seeing a mix shift there number one, and number two in some of those markets you are probably seeing more like 2% to 3% price increases instead of the opportunities that we have in export wheat, and steel and some of the other.
So, I think it's a more a reflection of the market and what's happening there than it is anything else. The economic recovery will benefit us enormously.
Randy Cousins - BMO Capital
Okay. And then last question just for Dennis.
4% productivity growth in the first quarter that's, I’m always impressed when that occurs in the winter, was that just either year-over-year comp or is that kind a sustainable rate in terms of label productivity?
Dennis J. Duffy - Executive Vice President, Operations
Well, we did have a nice year-over-year comp but we stressed that we want to have at least a minimum of 3% to 5% productivity and that's our internal, external target and we try and drive our whole organization that way.
Randy Cousins - BMO Capital
Okay. And then last Rob, the guidance that you have given is that now including a sort of 340 fuel price?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
Yes.
Randy Cousins - BMO Capital
Okay. So if the 340 is a bit of is obviously a drag relative to what you're originally looking for where is the offset to some, can you give me some sense just as to sort of where you are getting positive variance relative to drag that’s been created by this much higher fuel cost?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
Well, it’s the same thing you saw in the first quarter has continued improvement on the freight side and productivity, it’s really wrapped up on those few items.
Randy Cousins - BMO Capital
Okay. Great.
Thanks.
Operator
Our next question comes from the line of Jason Seidl with Independent Transport Research [ph]. Please go ahead with your question.
Unidentified Analyst
Thank you. Good morning everybody.
James R. Young – Chairman, Chief Executive Officer and President
Good morning Jason.
Unidentified Analyst
What kind of impact is going to... is the channel that’s going to have with some of the factory shutting down.
Is it possible that we're going to see a little bit of a double peak or may be too small hills?
John J. Koraleski - Executive Vice President, Marketing and Sales
Jason, are you talking about auto?
Unidentified Analyst
I'm just… and I know auto is going to be some of it but even some on the intermodal side, are we going to see sort of a spike in June and then may be a spike towards the latest September, October timeframe?
John J. Koraleski - Executive Vice President, Marketing and Sales
I wish I knew the answer to that. We're suspecting that it's going to get a little stronger here than normal in the second quarter that you're going to see a break and then it will resume after the Olympics and the key question, probably the speculative question is whether or not they'll come back from the Olympics as strong as they went into it.
Unidentified Analyst
Have you guys sort of done any research into the factories that are shutting down on some of those smog areas and how much of your business is exposed there?
James R. Young – Chairman, Chief Executive Officer and President
Jason a lot of those factories are heavy industrial around the area up there. So we haven’t… up there it’s a wildcard here.
At the end of the day, we are going to have to manage whatever happens here going forward in demand. That's what important for us, there is some surge capacity, there is some fluctuations here but I just don't see it at this point as a major issue for us.
Unidentified Analyst
Okay fair enough, and switching intermodal really quick given where fuel is at I mean have you had any thoughts to pushing up some more intermodal initiatives may be some new services to try to capture market share?
John J. Koraleski - Executive Vice President, Marketing and Sales
We actually have looked at extending some of the Blue Streak lines and opening up again some of this northern California business heading to Texas and other places. So we are evaluating opportunities where we can extend the product offering.
Unidentified Analyst
Okay. Fair enough, impressive quarter.
Thanks.
James R. Young – Chairman, Chief Executive Officer and President
Thanks.
Operator
Our next question comes from the line of Gary Chase with Lehman Brothers. Please go ahead with your question.
Gary Chase - Lehman Brothers
Good morning everybody.
James R. Young – Chairman, Chief Executive Officer and President
Good morning Gary.
Gary Chase - Lehman Brothers
Just a couple of quick ones and then may be one for Jack or Jim. Dennis or Rob, when you talk about these network interruption days rising is there a way you can generalize as to what the expense impact of that is or is it kind of all over the place?
What does it mean that you had 12 more network Interruption days this quarter than you did last year?
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
It depends on what the interruption is, kind of short answer will be kind of all the places in terms of what the dollar impact would be. I said that this mudslide cost us $20 million in the quarter but you can’t extrapolate every incident being exactly the same.
So it does kind of depends upon what the incident is.
Gary Chase - Lehman Brothers
Okay. And can you, you noted the $180 million which I took to mean the variance in fuel prices from the first to second quarter laid on top of the second quarter consumption is going to cost you $180 million right assuming 2Q is $3.40.
What's a good assumption for the incremental surcharge recovery that you would get from that given the lag that at $120 million or so?
Dennis J. Duffy - Executive Vice President, Operations
I mean Gary, the running up, it’s going to put pressure on us again, again if this keeps moving up Rob --.
Gary Chase - Lehman Brothers
I mean $180 million is obviously not zero that would be an enormous number so there has to be some significant portion.
Robert M. Knight, Jr. - Executive Vice President, Finance and Chief Financial Officer
We haven't given a number on that but again it is a similar dynamics, it depends on exactly what the price is, what you're chasing it, where it is. But generally speaking we got two-month lag so a two-third is kind of number rough estimate right in place environment.
Gary Chase - Lehman Brothers
Okay. Thanks for that.
And then Jack and/or Jim guys have talked and answered to a couple of prior questions about elasticity between modes as a result of some of the surcharges. Just curious if you've heard any color about or any instances of just the elasticity overall reaction to the total cost change and people saying well we've decided to ship less as the result of the transportation cost?
James R. Young – Chairman, Chief Executive Officer and President
It really varies by commodity group. This is obvious when you look at the coal, Ag, and ores that are out of year it's pretty hot and in terms of their pricing what we've seen in demand.
On the other side where they have the capability to maybe consider moving business from the highway there is some places again that we found that price elasticity point, but you have to... to me it’s important to understand the market, the competition in terms of what's driving this and whether it’s a short-term, long-term deal.
We could chase a lot of business by cutting prices right now, there is no question in my mind when we look at where we are seeing some business flow. But I will tell you I just and honestly I just don't think that's the right thing to do us for long-term and Jack.
John J. Koraleski - Executive Vice President, Marketing and Sales
You know Gary I have not seen any indication that a customer stops producing products because of freight rates. It's really the market, it's really the demand for their product, it's their own productivity and ability to manufacture and produce a product more efficiently or effectively than their competition and it is not freight rates that differentiate whether or not the product gets made or not.
Gary Chase - Lehman Brothers
Okay thanks guys.
James R. Young – Chairman, Chief Executive Officer and President
Okay.
Operator
Gentlemen there are no further questions in the queue, would you like to make some closing comments.
James R. Young – Chairman, Chief Executive Officer and President
I would, well thank you everyone for attending our call this morning. I would like to remind all of you that we do have our Analyst Meeting on May 15 in Chicago, which will give an update on our next five-year outlook.
I am pretty excited about the opportunities I see but we will talk to you about both opportunities and challenges and hopefully we’ll see… all there. So again thank you for attending this morning.
Operator
Ladies and gentlemen this does conclude today's teleconference call. Thank you for your participation.
You may disconnect your lines at this time.