Greetings, and welcome to the Union Pacific 4th Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. 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.
Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may now begin.
Good morning, everybody, and welcome to Union Pacific's 4th quarter earnings conference call. With me here today in Omaha are Eric Butler, Executive Vice President of Marketing and Sales Cameron Scott, our Executive Vice President of Operations and Rob Knight, Chief Financial Officer. This morning, Union Pacific is reporting net income of $1,100,000,000 for the Q4 of 2015. This equates to $1.31 per share, which compares to $1.61 in the Q4 of 2014. Another quarter of solid pricing gains were not enough to offset the 9% decrease in total volumes.
Carload volume declined in 5 of our 6 commodity groups with coal and industrial products down 22% 16%, respectively. Automotive continued to be a bright spot for us in the quarter with volume up 8% versus 2014. On the cost side, we continued to adjust resources throughout the quarter and also made solid progress with our productivity initiatives. You'll hear the team talk about some of the highlights here this morning. As a result of these efforts, we achieved a quarterly operating ratio of 63.2%.
We continue to be laser focused on running a fluid and efficient network, while safely providing value added service to our customers and delivering solid returns for our shareholders. So with that, I'll turn it over to Erika.
Thanks, Lance, and good morning. At the Q4, our volume is down 9% with continued gains in automotive more than offset by declines in other business groups. While we generated core pricing gains of 3.5%, that was not enough to offset decreased fuel surcharge and significant mix headwinds as average revenue per car declined 8% in the quarter. Overall, the decline in volume and lower average revenue per car drove a 16% reduction in freight revenue. Let's take a closer look at each of the 6 business groups.
Ag Products revenue was down 12% on a 5% reduction and a 7% decrease in average revenue per car. Grain was down 12% in the 4th quarter. High worldwide production and the strong U. S. Dollar reduced grain exports by 23%.
Solid growth in domestic grain shipments partially offset the export decline. Grain products decreased 4% for the quarter, driven primarily by soybean meal and DDG demand. Ethanol shipments were down 3% driven by lower exports. These declines more than offset 14% increase in canola meal shipments due to another strong canola crop. Food and refrigerated product volumes were down 1% for the quarter as strength in beer was offset by declines in fresh and frozen food shipments.
Automotive revenue was up 1% in the 4th quarter as an 8% increase in volume was largely offset by a 6% reduction in average revenue per car. Finished vehicle shipments were up 8% this quarter driven by continued strength in consumer demand. 2015 annual sales in the U. S. Were 17,500,000 vehicles, levels last reached 15 years ago.
The seasonally adjusted annual rate for the Q4 was 17,800,000 vehicles, the 4th highest quarterly sales pace on record. On the parts side, strong vehicle production increases and a continued focus on over the road conversions drove an 8% increase in volume. Chemicals revenue was down 7% for the quarter on a 2% reduction in volume and a 5% decrease in average revenue per car. Lower crude oil prices and unfavorable price spreads continued to impact our crude oil shipments, which were down 42% in the Q4. Partially offsetting this decline was continued strength in the LPG markets, including propylene, propane and butane demand.
Finally, petroleum products volume was down 6%, primarily due to weaker residual fuel oil shipments as a result of a slowing in China's production and export sectors. Coal revenue declined 31% in the 4th quarter on a 22% volume decline and 11% decrease in average revenue per car. Southern Powder River Basin tonnage was down 24% in the quarter as mild weather and low natural gas prices dampened cold demand. Temperatures in the fall were 3.3 degrees warmer than average and set a record for the lower 48 states. Coal inventory levels are 105 days through December, 39 days above normal and 43 days above last December.
Colorado, Utah tonnage was down 40%, driven again by soft domestic demand and reduced export shipments. Nationwide, electricity generation by coal dropped from 37% market share in the Q4 of 'fourteen to 32% in 2015 as natural gas captured the share loss from coal. Industrial Products revenue was down 23 percent on a 16% decline in volume and an 8% decrease in average revenue per car during the quarter. Reduced rig counts and shale drilling resulted in a 42% decline in minerals volume, primarily driven by 52% decrease in frac sand car loadings. Metal shipments were down 27% from softening industrial production, reduced drilling activity and the strong U.
S. Dollar. Specialized markets were up 7% in the quarter, driven by increased waste shipments. Intermodal revenue was down 14%
in the 4th quarter on a
7% lower volume and an 8%
decrease in average revenue per unit. Full year 2015 domestic intermodal achieved its 7th consecutive year of record volume. However, our 4th quarter results were down slightly as continued highway conversions were offset by the discontinuation of Triple Crown business and sourcing shifts. International intermodal volume was down 12% in the quarter in a challenging market environment, primarily due to market volume headwinds for several of our ocean carrier customers. Imports in the Trans Pacific's trade remained sluggish due to weaker than expected domestic U.
S. Retail sales. Let's move to how we see our business shaping up for 2016. In ag products, we expect high global grain inventories and the strong U. S.
Dollar to have a continued impact on the export environment. Food and refrigerators should continue to see growth in import beer. We expect soybean meal to have another strong export year, but will likely fall short of the record level reached in 2015. Turning to autos, we expect low interest rates and gasoline prices to continue to positively impact demand, driving both finished vehicles and parts shipments. However, we are cautious as to auto sales sustaining these record levels.
We expect the coal market will continue to be dampened by low natural gas prices and high inventory levels. As always, weather conditions will continue to influence demand. In chemicals, we expect most of our markets to remain solid in 2016 with particular strength in LPG markets. Low crude oil prices and unfavorable spreads will continue to present significant headwinds for crude by rail shipments. Fertilizer shipments will also be impacted by grain export headwinds.
In Industrial Products, low crude oil prices will also challenge our minerals and metros volumes. We expect our lumber franchise to grow with demand from the slowly strengthening housing market and demand for construction products in specialized markets should be solid. In intermodal, we anticipate highway conversions will continue to drive domestic intermodal volumes. However, high retail inventories and sluggish retail demand are expected to mute growth in our international intermodal volumes. Wrapping up, while the strong U.
S. Dollar, low energy prices and sluggish retail sales will continue to drive headwinds and uncertainty in some of our markets, we're optimistic in others. Mexico continues to be an opportunity driven by energy reform and Mexico's autos manufacturing market. With our growth dependent on both the national and global economy, we will continue to strengthen our customer value proposition and develop new business opportunities across our diverse franchise. With that, I'll turn it over to Cameron.
Thanks, Eric, and good morning. Starting
with our safety performance, our full year reportable personal injury rate improved 11% versus 2014 to a record low of 0.87. Successfully finding and addressing risk in the workplace clearly having a positive impact as we achieve annual records on a way to an incident free environment. With respect to rail equipment incidents or derailments, our reportable rate increased 14% to 3.42, percent driven by an increase in yard and industrial reportables. While our reportable rate took a step backwards in 2015, we are confident that our strategy aimed at eliminating human factor incidents and hardening our infrastructure will lead to improved results going forward. In public safety, our Gray Crossing incident rate improved 3% versus 2014 to 2.28.
We continue to focus on reinforcing public awareness through community partnerships and public safety campaigns to drive improvement in the future. Moving on to network performance. After making a step function improvement in our operating metrics during the Q3, we've continued to make solid incremental progress. As reported to the AAR, velocity and terminal dwell improved 13% and 5%, respectively, when compared to the Q4 of 2014. Record 4th quarter velocity of 27 miles per hour was at the best ever at a level of volume handled during the quarter.
In fact, the last quarter we ran at this velocity was 6 years ago when our network was handling 7% fewer carloads. The strength and resiliency of our network allowed us to mitigate the impact from flooding events in the eastern portion of our network during late December, thereby minimizing service delays to our customers. While we've made significant improvement in our metrics, we know there is still more work to do as the team continues a relentless push to further improve service and reduce cost. While we noted back in October that our resources were more closely in line with demand at that time, further declines in volume prompted us to make additional resource adjustments in the Q4. In addition to adjusting to lower volumes, our improvement in network performance has translated into fewer re crews, lessening resource demands of our network.
By the end of the year, we had around 3,900 TEOI employees either furloughed or in alternative work status compared with 2,700 at the end of the 3rd quarter. Overall, our total TD and Y workforce was down 18% in the 4th quarter versus the same period in 2014. Around half of this decrease was driven by fewer employees in the training pipeline. Our active locomotive fleet was down 13% from the Q4 of 2014. As always, we'll continue to adjust our workforce levels and equipment fleet as volume and network performance dictate.
In addition to efficiently rightsizing our resource base, we also realized gains on other productivity initiatives such as TrainLink. And while we are unable to overcome the volume decline within intermodal, we ran record train lengths in all other major categories. We were also able to generate efficiency gains within terminals as productivity initiatives led to record terminal productivity even with an 8% decline in the number of cars switched. In addition to process improvements, capital investments have also enhanced our ability to generate productivity and increase the fluid capabilities of our network. In total, we invested $4,300,000,000 in our 2015 capital program.
For 2016, we are targeting around $3,750,000,000 pending final approval by our Board of Directors. More than half of our planned 2016 capital investment is replacement spending to harden our infrastructure, replace older assets and to improve the safety and resiliency of the network. The plan includes 230 locomotives as part of a previous purchase commitment. This commitment wraps up with the acquisition of an additional 70 units in 2017. We also plan to invest an additional $375,000,000 in positive train control during 2016.
In summary, we finished 2015 on a solid note. In 2016, we're carrying that momentum forward as we continue to focus on those critical initiatives that will drive future improvement. Above all, this includes safety, where we expect once again to yield record results on a way towards 0 incidents. In the face of uncertain volume environment, we will continue to adjust our resources to demand while also focusing on other productivity initiatives to further reduce cost. And where growth opportunities arise, we will leverage that growth to the bottom line through increased utilization of existing assets.
As a result, we will create value for our customers with an excellent customer experience. With that, I'll turn it over to Rob.
Thanks, and good morning. Let's start with a recap of our 4th quarter results. Operating revenue was just over $5,200,000,000 in the quarter, down 15% versus last year. Significantly lower volumes, an even more challenging business mix and a negative fuel comparison more than offset solid core pricing gains achieved in the quarter. Operating expenses totaled just under $3,300,000,000 decreasing 13% compared to last year.
Significantly lower fuel expense along with volume related reductions and productivity improvements drove the expense reduction. The net result was a 19% decrease in operating income to $1,900,000,000 Below the line, other income totaled $28,000,000 down $43,000,000 versus the previous year, primarily driven by 20 fourteen's real estate gains. Interest expense of $164,000,000 was up 12% compared to the previous year, driven by increased debt issuance during the year. Income tax expense decreased 23% to $665,000,000 driven primarily by lower pretax earnings. Net income decreased 22% versus 2014, while the outstanding share balance declined 4% as a result of our continued share repurchase activity.
These results combined to produce quarterly earnings of a DIRR, which fell well short of last year's record $1.61 per share. Now turning to our top line. Freight revenue of approximately $4,900,000,000 was down 16% versus last year. Volume declined 9 percent and fuel surcharge revenue was down $438,000,000 when compared to 2014. All in, we estimate the net impact of lower fuel price was an $0.11 headwind to earnings in the Q4 versus last year.
And keep in mind, we did report a $0.05 positive fuel benefit in the Q4 of 2014, and this includes the net impact from both fuel surcharges and lower diesel fuel costs. As we expected, a challenging business mix did have a negative impact on freight revenue in the 4th quarter. The primary drivers of this mix shift were significant declines in frac sand, steel shipments and bulk grains, partially offset by a decline in international intermodal volumes. A 3.5% core price increase was a positive contributor to freight revenue in the quarter. Slide 22 provides more detail on our pricing trends.
Pricing continued to be solid throughout 2015 and represents the strong value proposition that we provide our customers in the marketplace. Of the 3.5% this quarter, about 0.5% can be attributed to the benefit of the legacy business that we renewed in 2015. And with the exception of a few smaller contracts in the out years, 2015 marks an end to any further legacy repricing opportunities. Moving on to the expense side, Slide 23 provides a summary of our compensation and benefits expense, which decreased 5% versus 2014. The decrease was primarily driven by lower volumes and improved labor efficiencies.
Labor inflation was around 4% in the 4th quarter, driven primarily by agreement wage inflation. Looking at our total workforce levels, our employee headcount declined 7% when compared to 2014. Reductions in TE and Y, training related activities as well as employees associated with capital projects all contributed to the workforce decline. At this point in time, given current volume levels, we are being very cautious with our hiring plans for 2016. On average for the year, we would expect overall force levels to be down somewhat depending, of course, on how volume ultimately plays out for the year.
Labor inflation is expected to come in around 2% for the full year. This is driven primarily by agreement wage inflation, partially offset by lower pension expense. This is also consistent with our all in inflation expectations in the 2% range for the full year. Turning to the next slide, fuel expense totaled $424,000,000 down 48% when compared to 2014. Lower diesel fuel prices along with a 14% decline in gross ton miles drove the decrease in fuel expense for the quarter.
Compared to the Q4 of last year, our fuel consumption rate increased 1%, driven by negative mix, while our average diesel price declined 39% to $1.61 per gallon. Moving on to our other expense categories. Purchased services and materials expense decreased 11% to $589,000,000 The reduction was primarily driven by lower volume related expense and reduced repair costs associated with our locomotive and car fleets. Depreciation expense was $517,000,000 up 6% compared to 2014. In 2016, depreciation expense is expected to increase slightly compared to last year.
Slide 26 summarizes the remaining two expense categories. Equipment and other rents expense totaled $305,000,000 which is up 3% compared to 2014. Lower volumes and improved cycle times were more than offset by a favorable one time item in 2014. Other expenses came in at $235,000,000 up 3% versus last year. Higher state and local taxes and increased personal injury expense were partially offset by a reduction in general expenses.
Other expenses for the full year were flat when compared to 2014, consistent with our full year guidance. For 2016, we expect the other expense line to increase between 5% 10%, excluding any large unusual items. Turning to our operating ratio performance. The 4th quarter operating ratio came in at 63.2%, a 1.8 points unfavorable when compared to the Q4 of 2014. For the full year, I'm pleased to report an operating ratio of 63.1%, which is 0.4.
Improvement from 2014. Even with the sharp decline in volumes, rightsizing our resources to current demand, ongoing productivity initiatives and solid core pricing have all been key drivers to improving our overall margins. Slide 28 provides a summary of our 2015 earnings with a full year income statement. Operating revenue declined about $2,200,000,000 to $21,800,000,000 Operating income totaled almost $8,100,000,000 a decrease of 8% compared to 2014. And net income was just under $4,800,000,000 while earnings per share were down 5% to $5.49 per share.
Turning now to our cash flow. In 2015, cash from operations totaled more than $7,300,000,000 down slightly when compared to 2014. After dividends, our free cash flow totaled $524,000,000 for the year. This is down just under $1,000,000,000 from 2014, primarily driven by lower earnings along with higher cash capital and dividend payments. This includes the 2 dividends that we incurred in the Q1 of 2015 resulting from the timing change in our dividend payments.
As expected, the net impact of bonus depreciation on 20 fifteen's cash flow was close to neutral as the benefit from 20 14 bonus depreciation offset cash tax payments associated with prior years. Taking a closer look at 2016, we will see the benefit from both 20152016 bonus depreciation since the legislation was passed just before year end. With factoring in the 2 years' worth of benefit in 2016 against payments from prior years, the expected net impact from bonus depreciation will be a tailwind of roughly $400,000,000 on this year's cash flow. Slide 30 shows our 2015 capital program of $4,300,000,000 And as Cam just mentioned, we are targeting a capital plan in 2016 of about $3,750,000,000 pending final approval from our Board of Directors in February. This would be a reduction of over $500,000,000 from last year's capital program.
The chart on the right shows the returns on these investments over the last few years. Return on invested capital was 14.3% in 2015, down 1.9 points from 2014, driven primarily by lower earnings. Taking a look at the balance sheet. While cash from operations was down slightly year over year, we increased our balance sheet debt balance of about $17,400,000,000 at year end 2015. We also finished the year with an adjusted debt to EBITDA ratio of 1.7, which increased from 1.4 at year end 2014.
Longer term, we are continuing to target a debt to EBITDA ratio of less than 2 times. While we did increase our debt levels to reward shareholders, we also maintained a strong balance sheet, which is a valuable asset, particularly in the face of economic and strategic uncertainties. In 2015, share repurchases exceeded 35,000,000 shares and totaled about $3,500,000,000 up 7% from 2014. Over the past 5 years, we have repurchased 15% of our outstanding shares. Adding our dividend payments and our share repurchases, we returned more than $5,800,000,000 to our shareholders in 2015.
This represents roughly a 20% increase over 2014, continuing our strong commitment to shareholder value. That's a recap of our Q4 and full year results. Looking ahead to 2016, we do have some significant hurdles. Our energy related volumes will continue to be a challenge. Compared to last year's strong Q1, we expect this year's Q1 coal volumes to decline around 20% or so.
And given the headwind we currently see with coal, it is likely that total volumes for the Q1 will be down in the mid single digits. For the full year, we currently expect total volumes to be slightly negative depending on coal and the strength of the overall economy as the year plays out. Fuel prices will have a negative impact on earnings at least in the Q1 given the $0.08 positive fuel benefit that we reported in the Q1 of 2015. While it is still early, we are preparing ourselves for volume and mix pressures, particularly in the Q1 and likely throughout much of 2016. We are counting on record productivity and solid pricing to drive an improved operating ratio again this year as we work towards our longer term operating ratio target of 60% plus or minus on a full year basis by 2019.
And as always, no matter what the environment, we remain committed to running a safe, efficient, productive railroad for our customers, while generating strong returns for our shareholders. So with that, I'll turn it back over to Lance.
Thanks, Rob. As we discussed today, this past year was a difficult one in many respects, but our team did outstanding work in the face of dramatic declines in volumes and shifts in our business mix. Overall economic conditions, uncertainty in the energy markets, commodity prices and the strength of the U. S. Dollar will continue to have a major impact on our business this year.
However, our velocity is at an all time best for the current level of demand. The network is fluid, and we're driving toward further improvement. We're well positioned to efficiently serve customers in existing markets as they rebound. The strength and the diversity of the Union Pacific franchise also will provide tremendous opportunities for new business development as both domestic and global markets evolve. When combined with our unrelenting focus on safety, productivity and service, these opportunities will translate into an excellent experience for our customers and strong value for our shareholders in the years ahead.
So with that, let's open up the line for your questions.
Thank you. We'll now be conducting a question and answer session. Our first question is from the line of Rob Salma with Deutsche Bank. Please go ahead with your question.
Hey, good morning and thanks for taking the question. Rob, with regard to your comments about the legacy pricing, clearly we saw about 0.5 point in the 4th quarter. When you reprice some of the legacy contracts, you had pulled forward some from 2016. Should we still be considering some sort of incremental benefit in
2016 to the core pricing metric as we look out? Or should
that effectively to the core pricing metric as we look out or should that effectively be a 0 for next year?
Yes, I would say basically effectively 0. I mean there might be a tad bit of a little carryover, but I think for your modeling purposes those are pretty much behind us.
Got it. And then I guess shifting gears, Eric, to the Intermodal segment. You had called out some headwinds in the Q4 related to Triple Crown and some sourcing shifts. Can you kind of quantify how we should be thinking about that Triple Crown headwind for 416 or do you call out specifically the volume challenge that you guys saw and should those sourcing shifts that we saw in the 4th quarter continue to weigh on intermodal load growth for the domestic volumes as we look out?
Rob, as we indicated, we still we always expect our highway conversion strategy, which we are firmly focused on to continue to drive growing domestic intermodal volumes. And so we continue to see growing domestic intermodal volumes despite headwinds from Triple Crown and other things that occur all the time. We do expect as I called out to see headwinds on the international intermodal side just because of all of what's going on with the transpacific trade in the China markets. But on the domestic intermodal side, we continue to see our strategy working, which is growing volumes through highway conversions.
Got it. Appreciate the color.
Our next question comes from the line of Brandon Oglenski with Barclays.
Lance or Eric, I mean, can you guys just give us some context here because I've only been covering the industry for about a decade, but the volumes seem pretty bad right now. I mean, maybe not quite as bad as 2,009, and yet we're still getting jobs growth in the U. S. So how do you look at the environment right now? Is the U.
S. Headed into a broader recession or is this just limited to energy and industrial? And are there specifics in your business that maybe look worse than the broader economy?
Brandon, this is Lance. The impact on our railroad has been acute, as you point out, in energy, in commodities affected by the strong dollar like export grain, the steel markets. And those are not necessarily indicative of a broader U. S. Reality.
I will share with you, though, there's also questions that we have about U. S. Consumers. There are indicators that the consumer is healthy, like the unemployment rate is at a comfortable 5% level. The consumers are buying automobiles, as Eric outlined.
But labor participation rate isn't that great and 4th quarter retail sales for goods was not that great. So I'll let Eric give you a little more technical color.
Yes. I'm not sure there's much else I would add to that. I would say the consumer is spending, there is consumer confidence, household income is going up. There appears to be a shift between consuming on products or goods to spending on services. There does appear to be that shift.
So it does some of the changes is impacting our business and the industrial space.
Yes, Brandon, one last thing. Early in the year, we talked about the impact on energy from low natural gas prices and the effect on coal, the effect on crude oil and natural gas exploration and development. And we said, ultimately, that should be a benefit to other industries we serve, like plastics manufacturing and consumers. And we just haven't seen yet the offset the positive offset from the headwinds that we've experienced.
Well, I know it's difficult for a lot of investors on the line here, too. Well, Rob, can you talk a little bit about the outlook for an improving operating ratio? What are the big drivers here, especially with the uncertainty on volume?
Yes. The big driver, I mean, volume obviously is our and I guided as you picked up that we expect full year volume to be slightly down. We'd obviously like to see that improve from there. But given that slightly down sort of view of the world and a positive improving operating ratio is our conviction around our ability and our focus on continuing to drive productivity and our ability to continue to provide quality service to our customers enables us to get price in the marketplace.
Okay. Appreciate it.
Our next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Hi, there. Good morning.
I wanted to touch a little bit on the outlook or stay on the outlook for 20 16. Rob, I know you don't give earnings guidance specifically, but if you can get sort of slightly down volumes, you have an improving OR, mix is going be negative certainly in the Q1 or so of the year. I mean how do we think about the other puts and takes that potentially sort of impact that whether you're sort of flat to down or flat to up? I'm just trying to make sure I understand how much you can control on the expense side to maybe offset some of this negative mix that we're expecting.
Yes, Chris. I mean and the reason that I'm not giving earnings guidance is because of all those unknowns. Again, we will we're confident we can control what we can control, which again is the productivity, quality service, continue to drive positive price. But there is so much uncertainty at this point in time in terms of what the absolute volumes will be and what the mix of those volumes will play out. So that's why we're not at a position right now to give earnings guidance.
But I assure you we're focused on driving improvement on every aspect that we can, and we certainly would like to see as positive of results as we can drive.
Okay. And then maybe just a follow-up on that. In terms of the expense side, what you can control. You talked about headcount a little bit in the outlook, and I think you said it would be down a bit. I guess you're entering the year with a down a little bit more than that and kind of trying to chase that volume number down.
I mean how do we think about sort of headcount for full year in a little bit more detail?
Yes. I mean, as Chris, as we've said all along and I'll say it here again for 2016 is that volume will drive what our headcount ultimately is, although there's still productivity. So if volumes are slightly down, I would expect that we would have down headcount driven by volume and layering on our expectation of driving further productivity. So it will flow with directionally with what volume is, but we're very focused getting to think on what the mix actually plays out, very focused on driving productivity in those numbers and being as efficient as we can.
Chris, we outlined for you the expectations for volumes in the Q1 in a few specific areas. I would say we're in a much better posture entering 2016 from a realizing productivity and a headcount perspective, getting the resources right for the volumes than we were entering 2015. We're just in a very different place.
Our next question is from the line of Allison Landry with Credit Suisse. Please go ahead with your question.
Good morning. Thanks. So following up on the previous question, how much of a volume decline do you think that you can handle while still generating positive earnings growth? You did mention expectations for a slight decline, but if carloads track down 5%, 6%, 7%, is that where you're thinking about the tipping point?
Allison, this is Rob. I mean I can't give you and not giving guidance on the earnings. So I mean I get the point of your question, but really the driver will be what's the mix, what volumes actually move and etcetera. But I can just assure you that there is obviously a tipping point at some point where if that were to go so negative, it would flip the other flip negative. But we're going to squeeze out productivity and continue to drive price where we can.
And so I can't give you a direct answer as to where that tipping point is, but we're focused on regardless of what the volume is on controlling what we can in driving positive OR and earnings.
Understood, thanks. And then my second question would be what your expectations for overall cost inflation are for 2016?
Yes. As I said, Allison, overall inflation assumptions for us in 2016 are around 2%.
Our next question is from the line of Scott Group with Wolfe Research. Please go ahead with your questions.
Hey, thanks. Good morning, guys. Good morning, Scott. Rob, just wanted to clarify a few things that you said. In terms of headcount down slightly or something like that, I mean, we're going to be starting the year down 9% or so year over year.
Are you talking about down slightly from kind of where you're ending the year at that $44,500,000 level?
Basically that guidance or that view of the world, Scott, where I say it's slightly down is a year over year assumption at this point in time and again full year. And again what will drive that is what the ultimate volumes end up being.
Got it. Just a little point of detail at the tail end of many years, there's a lot of moving parts that affect headcount, the absolute headcount number. That average is the one that's most useful.
Take where you are right now, I mean, it should imply a pretty meaningful drop in headcount?
We're going to continue to match headcount to whatever the volume situation is. The other thing to note is headcount comes in and out on capital programs as for instance in the wintertime we start shutting down capital spend because of weather and spooling it back up in the spring. There's just a lot of moving parts quarter to quarter sequentially.
Okay. In terms of pricing, wanted to ask, so I think BN has talked about giving up some price to incent some cold demand. Are you guys doing anything similar like that? And maybe if you can talk overall on pricing, it sounds like you expect solid pricing in 2016. Is it reasonable to expect some kind of deceleration in the pricing environment, just given what the volumes are doing?
Or can we do you think we can hold steady around this 3% range ex legacy?
Hey, Scott, this is Eric. So I cannot speak to what the BN does with pricing strategy. They do their own independent strategy and I cannot speak to what they do. We continue to hold on our strategy of pricing to our value. We are driving a value proposition that we want to be an industry superior value proposition and we're going to price accordingly for that.
We do think that there are places in the market and the economy that are growing there and we think that those provide value for us to continue to price according to our long held strategy.
Our next question is from the line of Alex Vecchio with Morgan Stanley.
Rob, I know you didn't give explicit earnings guidance, but in the past 2 years, you had noted in your slide deck record earnings and that was note that comment was notably absent this time around. So I just want to confirm that we should interpret the lack of that expectation for record earnings to be what it is that you won't at this point, you do not expect to achieve at least the $5.75 in earnings per share that you had achieved in 2014, which was the last record. I just want to confirm, you're essentially expecting this year to be below that figure?
That is correct. Now nothing would please us more than to see the economy turn and things kind of go favorable. So we're going to fight like heck to do the best we can. But yes, you are correct. At this point in time, we do not see record earnings.
Okay, that's helpful. And then just to touch back on the pricing discussion, you noted that you expect inflation to be 2% in 2016. In the past, you've always kind of suggested nominal pricing above inflation. Is that still your expectation for 2016 to achieve pricing above that 2% inflation level?
Yes. But as you know, we don't set our prices based on what current year inflation numbers are. And as has been pointed out and we've discussed here today, we price to market. Every market is a little bit different. We clearly don't have the benefit of the call it half point legacy renewal that we'd enjoyed in 2016.
But having said all that, yes, we are still focused on pricing above inflation.
Okay. That's helpful. Thanks very much for the time.
Our next question is from the line of Tom Wadewitz with UBS.
I wanted to ask you a little bit about the volume side. So you've commented on Q1 and I think Eric in his slide with the 2016 outlook gave us the view by segment. If I look at that view by segment, it's either kind of plus and minus or I guess for coal, it's minus, minus. But it seems like by segment, it's pretty negative. But on a full year basis, you're saying it's down only slightly.
So I assume slightly is not down 3 or 4, it's maybe down 1 or 2. How do you kind of bridge those 2 together? Is it just a function of the comps get so much easier in Q2 or are you expecting kind of adjusted for seasonality improvement in demand later in the year or how do you put those 2 together because the kind of by segment looks a little more negative than the comment about a slight decline on a full year basis?
Let me just start off and Eric may want to comment further in terms of maybe more specifics, but this is Rob. I would just say that Tom to your point, we clearly are highlighting and as you know that the comps particularly in the Q1, is particularly challenging, and that's why we're calling out the down volume in the Q1 in coal clearly in the 20% or so range. So the comps do change throughout the year, but our view of the world right now is that the energy environment, which impacts our coal, impacts our shale, impacts our metals, it supports the shale activity on top of the continuing strong dollar. Those are going to continue to be hurdles and pressures for us. But the comps do change as the year plays out.
And I think that's what's driving sort of maybe the math that you're wrestling with.
Eric, you got anything else to add to that?
No, that's it.
So you would say it's more comps than anticipation of improved market later in the year?
I'd say that's a bigger driver.
Yes. Okay. I appreciate that. What about mix? If I look at your slides in Q3 mix, I think, was a 1% year over year headwind And that got a lot more challenging in Q4, which I think was the big thing we missed in our assumptions for Q4 with that 4% mix headwind.
I know it's a tough one to forecast, but is do you think mix in 2016 is more like the 4% or more like the 1 percent? Is that a pretty material consideration?
Yes. Tom, this is Rob again. I would say, again, as you know, we don't and it's very difficult, in fact, frankly, 15, it was about a 0.5 negative and you're right the 4th quarter was 15, it was about a 0.5 negative and you're right the 4th quarter was particularly bad at down at 4. We do expect to still see mix headwinds as 2016 plays out. I don't anticipate that it would be for the full year as bad as we saw in the Q4.
We do have a comp challenge in the Q1, but as the year plays out things should get easier. And while mix will be a headwind for the full year, it should sort of get better than what we saw in the Q1 we'll see in the Q1 and what we saw in the Q4 of last year.
Yes. Recall, Tom, Q1 of 2015, we grew frac sand shipments. Coal was still relatively healthy. Grain was healthier than what we saw as the year progressed into later quarters. So markets have really changed pretty dramatically from the Q1 of 2015.
So the mix comps might be similar to the volume comps that they get a
bit easier beyond Q1, maybe what you think about?
We'll see.
Okay. Thank you for the time. I appreciate it.
Our next question comes from the line of Jason Seidl of Cowen and Company.
I want to go back to on the pricing side and focus on intermodal and any of the truck competitive merchandise traffic that you're hauling. Clearly, right now, it seems that there's excess trucking capacity and all the data points at least we track are pointing to truck pricing going down both contractually and on a spot basis. How should we look at your ability to not only price, but grow the intermodal business ex some of the headwinds that we talked about with Triple Crown as we move throughout 2016?
Yes, this is Eric, Jason. So a big reason as you know for kind of the shrinkage in truck pricing is fuel is coming down, which is a major cost. So our customers are also seeing a cost reduction benefit as fuel goes down because of the fuel surcharge going down. So they're seeing that natural cost reduction benefit. So the gap, if you will, between the value proposition for intermodal rail service versus truck.
I think that that gap is still there in terms of intermodal providing a value proposition to manufacturers. We've talked in the past about just by laws of physics, steel wheel on steel rail is a lower cost than rubber tire on asphalt or concrete. So there still is a value proposition there that we think gives us the leverage to continue to drive highway conversions, which we demonstrated in 'fifteen and we're going to continue to focus on in 'sixteen.
And Eric, your team continually works with trucking companies themselves in terms of helping them with their cost structures, and they look at intermodal conversions as an opportunity to modify their own cost structures as they compete in their marketplace. And that those opportunities continue as well.
Okay. Now that's good color.
As I look on the ag side, it seemed like
there was a couple of
puts and takes, but net net for the year, would you guys say you were positive or slightly negative for ag?
Eric, I'm not sure I understand the question.
In terms of your outlook for 'sixteen.
We don't give volume guidance for 'sixteen. I think if you look at the ag markets overall, I think the ag producers are expecting pretty good yields for 2016, of course, depending on weather and number of acres planted and all of that, maybe not record levels, but pretty good levels. I think a large factor will depend on worldwide ag production, strong dollar and how competitive U. S. Ag is in worldwide markets.
There is a lot of corn, a lot of wheat in storage right now. And presumably as U. S. Ag becomes more competitive pricing wise in worldwide markets, that's got to move. And when that does move, presumably we as a transportation provider will have a benefit in moving in.
Okay. Gentlemen, thank you for the time as always.
Thank you. The next question is coming from the line of Ken Hoexter with Bank of America. Please proceed with your question.
Great. Good morning. Lance, I want to revisit one of the earlier questions in terms of looking back in market downturns and looking at the volumes, how do you figure out how to stay ahead of that in terms of furloughing employees and cutting or dropping locomotives in terms of then being not I guess not overdoing it so you can catch that rebound. How have you acted differently this time versus whether it was at the end of 'fourteen and beginning of 'fifteen when we ramped up maybe too much versus what you saw in 'eight, 'nine. Maybe can you give us a little feedback in terms of how you prep for that?
Sure, Ken. We've been clear historically about time lags in decisions that are just the nature of our business. In terms of hiring somebody to operate a train, that's about a 6 month process. So we have to, by nature, when we're planning crews, look out 6, 12, 18 months. And when we're talking about capital planning or locomotive acquisition, those lead times get longer.
So it all begins with our business planning process and making sure that we have tight connectivity between what Eric and the commercial team are seeing and then how we're boiling that into a transportation plan and the resources necessary to run it. Every time we see a significant shift in volume, whether it's significant growth or significant shrink, we try to learn from that situation. As we're going into 2016, we think our business planning process is tighter. We think our connectivity between what Eric sees in the place and secondary and tertiary indicators of demand, more of that is being absorbed into our estimating process. And so I and I shouldn't miss the opportunity to talk about also doing a better job of shrinking some of the timelines, let's say, in terms of hiring and bringing a crew on board or acquiring equipment.
We're also better candidly at when we have to store equipment, storing it quickly and efficiently. And we're also better at trying to find the right mix of the right employee base, where they're located and training them for alternative jobs. So we're just getting a little better in all those ways, and that adds up, I think, into a better posture overall.
And to clarify that, you don't see that as rounding into like the 2,008, 'nine, not that deep of a recession, but into, I guess, so far what you've seen doesn't seem a recession environment to you?
Ken, I can't it's hard for me to speak and predict on whether the economy is going into a recession. Certainly, our volumes drop off as the 2015 year progressed quarter to quarter and as we're entering 2016 is dramatic, and it's dramatic in historical reference. But it's nothing it's not approaching what we experienced in 2,008 to 2,009, Although, again, a 6% decrease year over year and a quarterly 6%, 7%, 8%, 9% decrease year over year is pretty dramatic volume change.
Great. If I could do the follow-up, just to quickly comment. I guess yesterday or a couple of days ago, one of the other rails noted your quotes on M and A and said that, I guess, prior you had talked about how it impacted Union Pacific and you were opposed to that. Maybe can you clarify your comments on your thoughts on industry M and A, Why it would or would not matter to you given you're operating in your own region? And does it an industry change impact Union Pacific?
Yes. Ken, we do not support mergers or consolidation in the current environment. We think that the regulatory outcomes, the regulatory impact would be substantial. The Service Transportation Board has been clear that in the next merger that they consider, it has to enhance competition, not just maintain it. It has to improve operations for customers, and they also have to consider downstream impacts, whether one merger triggers a string of consolidations.
We've shared with you, we're focused on safety, we're focused on efficiency, we're focused on an excellent customer experience. We don't think a merger enhances those efforts. As a matter of fact, we think it would have a negative impact on service and be a headwind, be disincentive to capital investment.
Our next question comes from the line of Brian Ossenbeck with JPMorgan Chase. Please go ahead with your question.
Yes, hi, good morning. Thanks for taking the question. So, autos was obviously one area of growth year over year, looks like it's going to continue into next year. But how much of that is attributable to Mexico? And what type of impact do you see when it to what we're seeing is some reported first half retoolings and changeovers south of the border?
And do you think this would really have an impact on your length of haul or mix of business in that vertical?
Brian, before I hand it over to Eric, I just want to say we are very bullish on Mexico in general in the long term. It's a vibrant economy. It's got a vibrant middle class and our access to the 6 primary rail gateways to and from Mexico give us a real great opportunity to participate in that economy. Eric?
Yes, Brian, historically, Mexico 2015, the number is probably close to about 2,900,000 vehicles of call it the 17.5 that was sold With all of the plant expansions, new plants, I think it's on its way to $4,000,000 or $4,500,000
in the next,
call it, year and a half to 2 years. As it's been said, we have a great franchise from Mexico and we think that that will be a strong part of our business portfolio going into the future. As always, the issue is when the sales drive total volume and so our total volume will be aligned with whatever sales are. And our strategy is to have a franchise to move it wherever it is manufactured.
Okay. And just quick on that, was it about 60% of your auto comes from is attributable to Mexico, I'm remembering correctly? Historically, we've said that, yes. And
that's about what it was, yes.
Okay. And then just one other quick one on TrainLinks. I think on the last call, you mentioned you have about 90% or about 7,000 foot capable, I guess, in terms of sidings. 3rd quarter is around 6,000 foot average train length. So clearly, you're highlighting some of the best ever lengths in 3 of the 5 areas.
How much further and I guess how much faster do you think you can take that up and when would you hit the upper limit? I know you're it's different in every market. And I guess the Intermodal has clearly got some headwinds here, but I think that's really the one for good economics to really work, that's the one you really need to get the longer trains. So maybe if you could focus on that and just some general comments about train lengths overall?
Tim, you want to
talk a little bit about the productivity opportunity in train lengths? Coal is about the only program that is nearly optimized, although there is opportunities still within coal. Every other commodity group has plenty of train size productivity opportunity, and you will see us continue to make progress balancing customer needs along the way.
Okay. Thanks for your time guys.
Thanks Brian.
Our next question is from the line of Matt Trewe with Nomura Asset Management. A
quick question about coal. Specifically, a lot of pushback we get from investors with respect to UNP specifically as you have a competitor who, due to some service issues and perhaps a much larger portfolio strategy has invested a significant amount of CapEx out West and there's concern given the structural market share loss in coal that the competitive dynamic has structurally changed in their favor. If I look at a 20 year market share chart of coal, you and the BN used to swap share and were about 50% each every year and then in 2011 we saw a split and then again in 2014. So there's been roughly 10% shift where what used to be fifty-fifty is now sixty-forty. I was wondering if you could just put some color around that.
I know that there were service issues on your line last year, but even if I normalize for that spike, the line and the trend is pretty consistent over a 5 year basis. I am just wondering how you can address structurally investor concerns that something hasn't changed in the West as it relates to coal?
Yes, Matt, I think if you go back historically and go back to the 80s when really the Powder River Basin franchise was developed for us certainly in addition to our competitor. I think it's been roughly call it a 50five-forty 5 split over time and as opposed to the fifty-fifty, but we don't look at markets in terms of what share we have in a market. We look at it in terms of what's the value of that market, what's the value of our franchise, where we think we have value, a value proposition to offer the market and we sell our value proposition and we're comfortable with the outcome in terms of the business that we win or lose based on the value proposition that we sell.
Right. So I guess, again, in the context of people choosing to invest or not invest in your stock, If I look at the dichotomy and volumes, Burlington Northern positive on volumes last year in coal, Union Pacific down double digit in coal. You're saying you're comfortable with that?
What we're comfortable with, Matt, is the diversity of our franchise. Coal remains a nice book of business for us, generates an attractive return. That's how we look at all of our book of business in terms of can we generate an attractive return and we invest for that and we price for that. And I think our track record speaks for itself. We've done a pretty fair job of making that happen.
Okay. Understood. My quick follow-up would be then, if I look at cash flow, you yourself said reducing the CapEx budget by north of 500,000,000 dollars You've got some other tailwinds. You talked about bonus depreciation. It's pretty material numbers in terms of incremental cash flow potential.
You slowed the pacing of share repurchases in the Q4. Just wondering with that excess potential cash flow in 2016, is there an gating factors in terms of either debt ratios or whatnot in terms of how aggressively you're willing to use what should be some surplus cash flow in 2016? Thank you.
Rob, you
want to take that?
Yes.
Matt, you're right. I mean, our expectation coming off of certainly last year's low number from cash flow that we will hopefully positively generate increasing cash flow. And yes, we'll continue our philosophy of being opportunistic in the marketplace as it relates to shares. So I would expect that we will continue to do that. And as I called out, by the way, in the Q3, that was a high watermark if you will that we've seen at least in modern times of a rate of which we were buying back shares and that clearly was not our ratable rate in terms of shares.
But we are opportunistic in terms of when we buy and how much we buy and that attitude and that philosophy will continue in 2016. But if we can generate stronger levels of cash that gives us greater opportunities. And as we continue to walk up our debt to EBITDA as we said and as we have that gives us further opportunity.
Yes. Job 1 is generating cash from operations. It all starts there and we're laser focused on that.
Understood. Thank you for the time.
The next question is from the line of John Barnes with RBC Capital Markets. Please go ahead.
Hi, thank you for taking my questions. So following up on that question around cap or cash flow, I hear what you're saying in terms of your opposition to M and A, but if it were to take place, Burlington Northern has already said that they're going to be involved if there is a wave of consolidation. Given the cash flow that you're looking at generating in 2016, do you feel the need to maintain some of that as dry powder in the event that you were forced to react to a consolidation wave in the sector?
John, in addition to saying we don't support rail mergers at this time, we've also said we're paying close attention to the situation. We're monitoring it. And as things evolve, we'll do what's in the best interest of our shareholders and our stakeholders. If you look at our capital structure, we are in a solid position. Strategically if we were if we had to do anything.
But job what we're focused on right now is that in the current environment, we think mergers are not in the interest of our customers and just monitoring that and keeping close tabs on it.
Okay. All right. And then my follow-up is, look, I hate to ask you such a short term type of question, but Eric, you mentioned in your commentary from an intermodal risk perspective, record high inventories and you talked a little bit about your thoughts on the consumer. We've got the Chinese New Year kind of right around the corner. Normally, there's typically kind of a surge in activity ahead of that.
Do you anticipate or are you hearing from your shipper base, customer base yet that maybe there is some intention to use that period as an opportunity to kind of clear the decks a little bit, maybe clear the baffles on inventory. And so you come out of maybe 1Q in a little bit better inventory situation or do you anticipate that you'll still see maybe that normal pre Chinese New Year type of surge in intermodal volumes?
Yes, we're hearing nothing specific from our shippers surrounding the Chinese New Year to disclose here. I would say that every BCO is looking at rationalizing their inventories because they exited the holiday season higher than I think expected on inventories with sluggish retail sales. I think across the board, you hear every customer talking about trying to right size their inventories.
Very good.
All right.
Thanks for your time guys. Appreciate it.
Thank you, John.
Our next question is from the line of Justin Long with Stephens. Please go ahead with your question.
I was wondering if you could provide more color on the magnitude of the record productivity you noted in your comments. And how much of that is predicated on a slightly down volume environment? In other words, if volumes end up being worse than you expect this year, is record productivity still achievable?
I'll make one quick comment and that is what we saw in 2015 was both cost coming out because of volume, getting the structure right and a much more fluid network in the second half of the year generating excellent productivity opportunities.
Yes. Justin, I would just add this is Rob. I would just add that kind of what gives us that confidence, the marker that I would point you to is our improvement in our operating ratio throughout the full year and our confidence that we'll continue to do that. In terms of at what pace we can do it, I mean we're all about doing it as quickly and as efficiently and safely as we can, But what will drive sort of the timing of that productivity as we move with volumes is going to be the mix effect and the timing when there are volume changes. And as you know throughout 2015, the first half, we're kind of chasing volume down and then we were able to sort of take advantage as things neutralize or straighten out a little bit in the back half.
And so that will be a factor too in terms of what volume swings may or may not occur. But we're focused on squeezing out productivity as on everything we do and that's all I can point you to is that we'll look at every stone and uncover it and look for opportunities.
Okay, great. And I know you're not giving specific EPS guidance for 20 16, but just putting together the pieces here, slightly down volumes, core price increases, record productivity, better OR, the benefit of share repurchases. Just from a directional standpoint, would it be correct to say that you're thinking about EPS being up year over year?
Well, the reason I'm not giving guidance on the earnings is because there are so many uncertainties, of which mix, by the way, is another headwind I would remind you of that I did call out and that will dictate, I think, in large part exactly how this year plays out. So with all the uncertainties out there, we're going to certainly focus and fight like heck to take advantage of whatever the economy plays us to turn in as positive of earnings and returns and cash generation as we can, but we're not giving guidance as to exactly what the earnings will end up being for the year.
Okay, fair enough. Thanks for the time, Don.
Sure. Thanks, Jeff.
Our next question is from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your questions.
Thank you very much. A lot of my questions have been answered, but let me come back to the cash flow question if I can. Could you remind us of where you ideally want to have your debt levels, whether you think about them as a debt to cap or a debt to EBITDA? And when I think about the positives to your 2016 cash flow, you mentioned about $400,000,000 bonus depreciation, about $500,000,000 less spent on CapEx and for better or for worse with the shares down the way they are, you can buy back shares that won't cost as much to still picture numbers on the share repo. When you look at 2016, given the increased uncertainty, are you more likely to say, okay, we're going to buy back whatever shares we're going to buy back, but with the excess cash flow, we just may not need as much debt to fund it?
Or is your view that you're still under levered and you're willing to go to higher debt to cap levels?
Rob? Yes. Jeff, I would
just remind you the guidance that we've given, which we are comfortable with is working towards that debt to EBITDA of 2x. I mean we've said sort of that's a marker out there. I think we still have a little bit of room from the improvement we made on that metric in 20 15. So I would expect that we'll continue to march forward, if you will. And as I pointed out, we do expect largely because of the reduction in we hope to generate stronger cash on the front end, but we also have the benefit of lower CapEx and the benefit of the bonus depreciation that I outlined.
So and we may do debt this year. We will look at that. That would not be an unrealistic expectation that you'll see us take on additional debt this year. All of that gives us additional gives us opportunities to generate stronger free cash flow and gives us opportunities to continue to be opportunistic in the marketplace.
Okay. And so basically you were saying we have I think you're at 1.7 times debt to EBITDA and you're saying we can go to 2x so we can take on a little more debt, but more likely we would use the cash flow just to fulfill our obligations.
I don't think Rob said that. I think he said we're going to generate cash. We've got room in our balance sheet and we'll see how the year plays out.
Okay. Thank you. Thank you very much. That's all I have.
Thank you.
Our next question is from the line of Ben Hartford with Robert W. Baird. Please go ahead with your question.
Thanks. Eric, could you remind us what your percent of carloads yields are tied to the underlying price of the commodity that it hauls?
I'm not quite sure what you're asking. You're asking about our pricing strategy. We don't really talk publicly about our pricing strategy. We have historically said, we don't think philosophically that you need to tie transportation to swings in commodity markets. We said that philosophically, but we don't talk about our pricing strategy publicly.
Yes, I guess I'm not interested in the strategy specifically. Is there a percentage that you provide of carloads that have the yield component that is specifically tied to the price of the underlying commodity?
Yes. Again, we don't talk publicly about our pricing strategy. We don't talk about what our how our prices are developed.
Okay. Thank you.
The next question is from the line of Cleo Zagreb with Macquarie. Please go ahead with your question.
Good morning and thank you. I wanted to talk about mix in terms of length of haul. I've seen length of haul getting shorter this quarter, not just for coal, but also chemicals and industrial. Is there a structural change going on? What are the drivers of that?
And where do you see that trend? Thank you very much.
Eric, do you want to talk about that?
Our length of haul is down slightly this year. And again, it is other things that we have been talking about in terms of the mix headwinds with our coal business, some of the mix headwinds with our frac sand business, our long haul grain export business, those are all mixed factors that has impacted our length of haul, which was down slightly this year.
I don't think we see anything structural that's some kind of long term trend.
Okay. Appreciate that. And then my follow-up is tied to one of your comments earlier that you haven't seen the benefit from low oil prices that not just you, but many of us were talking about some kind of silver lining. So what are you hearing from your customers? Do you get the sense or that they are postponing decisions just due to uncertainty or they are signaling to you that there's simply lower demand?
And what do you think might trigger a boost to the industrial economy that would reflect in your volumes? And I know that's a long question, but maybe tied to that, if you could discuss where you focus your business development as a result?
Cleo, so I'll focus the answer on your question about not seeing the benefits of low oil. There's multiple moving parts in there. We are seeing capital investment occurring specifically along the Gulf Coast in our chemical franchise. Those investments just haven't yet turned over into operating units. And so that's a matter of time.
That's an end of this year 2017, 2018 kind of impact. We're still hopeful for that impact. The other part of it is consumers doing something with the windfall of lower energy costs. And that's where it's really hard to see that showing through in the goods that we ship for retailers. And their feedback is, while maybe services consumption is relatively healthy, goods consumption isn't necessarily showing that.
Okay. So then your business development remains focused in the chemical Gulf Coast footprint?
Our business has a wonderful franchise that we've talked about. 1 of the wonderful parts of that is this Gulf Coast franchise. And with low natural gas as a feedstock to many of those manufacturers, that's a benefit to them and we think ultimately will be something we can participate when they increase production.
Thank you very
much. Thank you. Our next question is from the line of Sami Hasbourn with Investors Group. Please go ahead with your
question. Good morning all. Thank you for taking my question. And I apologize in advance if any of these questions have been asked. I missed part of the call.
With respect to the headcount reduction, I see that it's principally and obviously within the running trades, the TENY. Taking that a level above, are there any plans to review the support and or indirect headcount as a consequence of the volume environment? And I have a couple of other questions with specific volume. Thanks.
This is Sami. This is Lance. We, in the Q3 of last year and into the Q4, we announced and executed an involuntary force reduction on our non agreement or our management ranks. And that's been executed. And then as we look forward, we continue to look for opportunity to get our overall structure sized right for the markets that we're serving.
Attrition is our friend in that effort. We typically get an attrition rate of 7% or 8% a year, and we will use that to our advantage as and if we need to continue to adjust our overall structural
cost. On the industrial side with respect to frac sand, did you call out exactly how much that was down and how much it now composes as a percentage of revenues?
Eric? We did in both the prepared remarks and I think in the materials that were sent out
we So I'd stick minerals as mostly frac sand?
Yes. The minerals is down 52% and the majority of that is frac sand.
Great. Thank you. Thank you very much, gentlemen.
Thank you, Sami.
Our next question is from the line of David Vernon with Bernstein Research. Please go ahead with your question.
Hi, good morning. Rob, I think you called out an $0.11 headwind from fuel in the 4th quarter. Have you guys thought about trying to range what we can expect from a fuel headwind for next year? I mean, obviously, there's a lot of moving parts to that as well. But if we were to just assume that oil prices kind of stabilize here and we move forward, could you talk a little bit about how big the absolute fuel headwind could be in 2016?
Yes, I didn't put a number on the full year, but it could well be a headwind. I did call out that the Q1, remember that we had about an $0.08 positive last year. So we clearly have that as a hurdle facing us as the Q1 continues to play out. Of course, how fuel and the timing within any particular quarter will dictate exactly what that number ends up being year over year. But we do see that as a headwind certainly in the Q1 and could continue at some pace throughout the year.
But similar to the volume comp issue, you'd say that if oil prices were to stabilize, the worst of the fuel impacts would be front end loaded?
Depending on what mix is and what volumes actually are, that's a fair assumption, yes.
Okay. And then I guess just as a general question, it seems like on some of the published surcharge tariff tables, fuel prices are getting to the point where surcharges actually zero Is that kind of a correct read of those tables or do you think that the fuel revenue will still kind of be positive as we get through most of 2016?
Eric, Rob?
Well, as you said, those are publicly seen and the calculations for those, you probably have an accurate calculation. David, this
is Rob. I would just remind you and others that remember we have some 60 plus different surcharge mechanisms that have different starting points, different components, different timing mechanisms around them. So it's very difficult to draw any kind of a straight line conclusion. But clearly, at these low prices, some of them are probably near the edge.
All right. Excellent. Well, thanks a lot for the time. It's been a long call and good luck getting through the next couple of tough quarters here on the
volume side.
Thank you, David.
Thank you. This concludes the question and answer session. I will now turn the call back over to Mr. Lance Fritz for closing comments.
Thank you, Rob, and thank you all for your questions and interest in Union Pacific. We look forward to talking with you again in April.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.