Greetings. Welcome to the Union Pacific First 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, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may now begin.
Good morning, everybody, and welcome to Union Pacific's Q1 earnings conference call. With me here today in Omaha are Eric Butler, our Executive Vice President of Marketing and Sales Cameron Scott, Executive Vice President of Operations and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting net income of $1,200,000,000 or $1.30 per share for the Q1 of 2015. This is a 9% increase in earnings per share compared to the Q1 2014. Solid core pricing gains in the quarter were partially offset by a sharp drop in volume.
While we took actions during the quarter to adjust for the volume decline, we did not run an efficient operation. Total first quarter volumes were down 2% with particular softness in coal, industrial products and intermodal. Throughout last year, we worked to add the people, locomotives and capacity needed to meet a dramatic increase in demand. By the end of 2014, we had seen full year volume growth of 7% and we were fully resourced to meet this demand. Over the last few months, however, volume has shifted negative.
As a result, our operation is in catch up mode and not as efficient as it should be. Managing a network is a constant balancing act to ensure you have the right resources in the right place at the right time. This balancing act becomes more difficult during significant volume swings. We are taking the steps to align our resources with current demand, while remaining agile in an ever changing environment. We remain committed to safely providing excellent service for our customers, while improving that service and our financial performance.
So with that, I'll turn it over to Eric.
Thanks, Lance, and good morning. In the Q1, our volume was down 2%, driven by challenges in some key markets. Automotive and Ag Products volume grew with declines in coal, industrial products, intermodal and chemicals. Milder winter weather and natural gas prices drove soft to cold demand, lower crude oil prices reduced demand for share related shipments and we also experienced the effects from the drawn out West Coast Labor Port dispute. I'll talk about more specifics as we walk through each group.
Fuel surcharge revenue reduction negatively impacted average revenue per car and was a 4% headwind on freight revenue. However, solid pricing gains across our business led to a core price improvement of 4%, which combined with a 1% mix and drove average revenue per car up 1%. Overall freight revenue was down 1% as our strong pricing gains and mix were offset by lower volume and fuel surcharge revenue. Let's take a closer look at each of the 6 business groups. Ag Products revenue increased by 3% on a 3% volume increase and a 1% improvement in average revenue per car.
Grain volume was down 2% this quarter. We continue to see strong demand for overseas export feed grain shipments, particularly through the Gulf and Mississippi River. Those gains were offset primarily by declines in wheat exports and to a lesser degree softer demand for domestic feed grain. Grain products volume was up 4% for the quarter. Ethanol volume grew 7% driven by and increased export demand for soybean meal and a strong canola crop drove increases in canola meal shipments.
Food and refrigerated shipments were up 3%, driven primarily by continued strength in import beer, partially offset by slightly lower refrigerated food shipments. Automotive revenue was up 6% in the Q1 on a 7% increase in volume, partially offset by a 1% reduction in average revenue per car. Finished vehicle shipments were up 11% this quarter driven by continued strength in consumer demand and reduced impact from winter weather. The seasonally adjusted annual rate for North American Automotive sales was 16,600,000 vehicles in the 1st quarter, up 6.4% from the same quarter in 2014. Auto parts volume grew 3% this quarter, driven primarily by increased vehicle production.
Chemicals revenue was flat for the quarter with a 2% improvement in average revenue per car offsetting a 1% volume decline. Plastic shipments were up 8% in the 1st quarter as stability in resin prices resulted in improved buyer confidence in the market. Strength in fertilizer demand this quarter drove volume up 10%. The slight delay in last fall's harvest pushed some application into the Q1 of this year. We also saw strength in export markets, particularly to China.
Finally, lower crude oil prices and unfavorable price spreads continued to impact our crude oil shipments, which were down 38% in the Q1. Coal revenue declined 5% in the Q1. Volumes were down 7%, partially offset by a 3% improvement in average revenue per car. Southern Powder River Basin tonnage was down 1% for the quarter. We experienced a very mild winter this year, which combined with low natural gas prices to reduce demand for coal.
Colorado, Utah tonnage was down 32% for the quarter as mild winter and low natural gas prices drove receiving utilities to switch to other fuel sources. Colorado, Utah tonnage was also impacted by soft demand for coal exports. Industrial products revenue was up 1% as a 3% decline in volume was offset by a 3% improvement in average revenue per car. We continue to see strength in construction products where volume was up 4% for the Q1. Demand for rock was strong in the quarter, particularly in the southern part of our franchise.
Metals volume was down 17% as lower crude oil prices significantly reduced new drilling activity. In addition, the strong U. S. Dollar drove increased imports, which reduced demand from domestic steel producers. Our government and waste shipments declined 8% in the quarter, primarily driven by a temporary reduction in short haul waste shipments.
As a side note, our minerals business was not a key driver in Industrial Products this quarter, but I wanted to mention the fact that our frac sand volume was 3%. Demand remained strong in January, but tailed off significantly in March. I'll talk more about our outlook in a moment. Turning to intermodal, revenue was down 5%, driven by a 3% decrease in both volume and average revenue per unit. Due to the structure of intermodal fuel surcharge programs, there was a greater average revenue per unit impact to intermodal this quarter than seen in other commodities.
Domestic shipments grew 9% in the Q1, setting an all time first quarter record for volume. We continue to see strong demand from highway conversions and for our new premium services. International intermodal volume was down 12% driven by the West Coast port labor dispute, which stretched late into the quarter. We are encouraged that the parties have come to a tentative agreement and we're working with our customers to reduce the backlog and return to normal. Let's take a look at our outlook for the rest of the year.
In Ag Products, we expect grain volume to return to normal seasonal patterns through the 3rd quarter and anticipate exports will favor shorter haul shipments to the Gulf and river in the near term. As always, we're keeping a close eye on planning reports and the weather to determine what the next crop will look like. In Grain Products, we think the ethanol market will remain strong and DDGs will remain steady throughout the year. Finally, we anticipate continued strength in our import beer business and we see potential upside in refrigerated shipments. In automotive, finished vehicles and auto shipments should continue to benefit from strength in sales, driven by a healthy U.
S. Economy, replacement demand and lower gasoline prices. Coal volume will largely be dependent on the weather this summer and natural gas prices. If natural gas prices remain in the current range, it will be a headwind throughout the year. Also the latest inventory figures show that stockpiles are significantly up from last year and are now above the 5 year historical average, which will likely lead to continued softness.
We think most of our chemicals markets will remain solid this year, though we expect that crude oil prices will remain a significant headwind for crude by rail shipments for the rest of the year. Lower crude oil prices will also impact some of our industrial products markets. We expect metals to continue to experience headwinds as capital investments for new drilling activities are reduced. As I mentioned earlier, frac sand shipments were up modestly in the Q1, but we expect to be meaningfully lower year over year starting in the second quarter as demand softens and we come up against tougher comps. On the positive side, we think continued strength in the construction and housing market should drive growth in aggregates and lumber.
Finally, we anticipate strong demand for domestic intermodal to continue throughout the year, primarily from highway conversions. For international intermodal, we expect the backlog recovery to continue for the next few weeks, then we then return to normal seasonal patterns for the remainder of the year. Both domestic and international intermodal should benefit from the strength in consumer demand in the U. S. To wrap up, we are experiencing some volume headwinds created by uncertainty in the coal market and crude oil prices, but we see opportunities in other markets.
While top line revenue will be impacted by lower fuel surcharge revenue, we expect solid core pricing gains for the year. As always, our strong value proposition and diverse franchise will support new business development efforts throughout the year. With that, I'll turn it over to Cameron. Thanks, Eric, and good morning. I'll start with our safety performance, which is the foundation
of our operations. The Q1 2015 reportable personal injury rate comprehensive safety strategy is working and that we are focused on the right things. I'm very proud of the team's commitment to find and address risk in the workplace. In rail equipment incidents or derailments, our reportable rate increased 6% to 3.16%. To make improvement going forward, we continue to focus enhanced TEOI training and continued infrastructure investment to help reduce the absolute number of incidents, including those that do not meet regulatory reportable thresholds.
In public safety, our grade crossing incident rate improved 27% versus 2014 to a 1st quarter record mark of 1.88. Our strategy of reinforcing public awareness through community partnerships and public safety campaigns is generating results and we will continue our focus in these areas to drive further improvement. In summary, the team has made a nice step function improvement in several areas that is generating results on our way towards an incident free environment. Moving to network performance. As we discussed, we worked hard in 2014 to match network resources with the robust volume levels in 2014.
During the latter part of Q4, our available resources were largely aligned with demand, helping generate the sequential velocity improvement in the network. While we have largely held those velocity levels made in December, we still have more work to do as we exit the Q1 that provided more favorable weather conditions, but one that also saw more extensive track renewal programs on key corridors. And while our velocity in the Q1 was almost 1 mile an hour faster than the Q1 of 2014, our service performance still fell short. As reported to the AAR, our first quarter velocity and freight car dwell were about flat when compared to the Q1 of 2014. However, the team continues a relentless push to improve service and reduce cost.
While productivity was not where we wanted it to be, we did generate some efficiencies even with the decline in volumes during the Q1. We achieved record train lengths in nearly all major categories, including in automotive where we leveraged an 11% increase in finished vehicle shipments with a 5% increase in average auto train length. Our terminal productivity initiatives also continue to generate positive results as cars switched per employee day increased 3%. But our suboptimal service performance and timing issues with readjusting resources led to inefficiencies during the quarter. One example of this is locomotive productivity as measured by gross ton miles per horsepower day, which was down 6% versus 2014.
As for
our efforts to readjust resources, while we chase volume up while we chase volume on the way up last year, it's been a different story in the 1st part of 2015 with some softer volumes we've seen thus far. To balance our resources to current demand, we have placed around 500 TEOI employees into furlough or alternative work status. We have also reduced our original TE and Y hiring plan downward by 400 and are now planning to hire around 2,400 TE and Y employees for the year. Of course, we will continue to monitor and adjust our workforce levels and hiring plans throughout the year as volume dictates. The same process is underway with our locomotives.
By the end of the quarter, we had already moved 4 75 units back into storage and continue to look at every opportunity to further reduce our active fleet. Also, our planned acquisition of 2 18 units this year will further improve our overall reliability and efficiency. We have experienced a timing lag in getting our resources aligned with demand, but we're intently focused on balancing our resources and reducing our costs as the year progresses. We are also adjusting our 2015 capital program down $100,000,000 to approximately $4,200,000,000 We will continue to invest to improve the safety and resiliency of the network, including more than $1,800,000,000 in infrastructure replacement programs. Our capital program also includes continued investment for service, growth and productivity, which are primarily concentrated on the southern region of our network, but which also include corridor strategies that reduce bottlenecks across the system.
This reduction does not impact our core investment strategy, which is to maintain a safe, strong and resilient network and to invest in service, growth and productivity projects where returns can justify the investment. I'd also like to give a quick update on positive train control. As most of you know, the rail industry has been required to install PTC by the end of 2015. The required development and testing of this new technology has been challenging. Nonetheless, we've been moving forward investing approximately $1,700,000,000 thus far to complete the mandate.
Now that the scope of the project has been better defined, we've updated our total project investment in PTC to approximately $2,500,000,000 Although UP will not meet the current 2015 deadline, we have been making good faith effort to do so, including field testing since October 2013. The industry has been working to extend the deadline, and I think there is general understanding on Capitol Hill that this has to happen. While we remain hopeful that an extension will be passed, our overall investment in the program will not be contingent on the deadline. To wrap up, as we continue on in 2015, we expect to continue generating record safety results on our way to an incident free environment. We expect to leverage the strength of our franchise to improve network performance.
We will invest in the resources and network capacity needed to overcome congestion and generate productivity gains. And we will remain agile, balancing and adjusting resources depending upon demand to drive improved cost performance. Ultimately, running a safe, reliable and efficient railroad creates value for our customers and increased returns for our shareholders. With that, I'll turn it over to Rob. Thanks and
good morning. Let's start with a recap of our Q1 results. Operating revenue was flat with last year at just over $5,600,000,000 Strong core pricing was offset by declines in fuel surcharge revenue and total volumes. Operating expenses totaled just over $3,600,000,000 decreasing 4% when compared to last year. The net result was operating income growing 7% to about $2,000,000,000 Below the line, other income totaled $26,000,000 down from $38,000,000 in 2014.
Interest expense of $148,000,000 was up 11% compared to the previous year, driven by increased debt issuance during 2014 and at the beginning of 2015. Income tax expense increased to $704,000,000 driven primarily by higher pre tax earnings. Net income grew 6% versus last year, while the outstanding share balance declined 3% as a result of our continued share repurchase activity. These results combined to produce quarterly earnings of $1.30 per share, up 9% versus last year. Now turning to our top line, freight revenue of about $5,300,000,000 was down 1% versus last year.
In addition to a 2% volume decline, fuel surcharge revenue was down about $200,000,000 when compared to 2014. The decline in fuel price was partially offset by the positive lag in the fuel surcharge programs. All in, we estimate the net impact of reduced fuel prices added about $0.08 to earnings in the Q1 versus last year. This includes both the fuel surcharge lag and lower diesel costs. In the second quarter, we expect the net earnings impact of reduced fuel prices to be closer to neutral.
Business mix was slightly positive for the quarter driven by a decline in lower average revenue per car international intermodal shipments. Looking ahead, given the volume shifts between our commodity groups, business mix is likely to have a negative impact on freight revenues beginning in the Q2. Slide 23 provides more detail on our core pricing trends. 1st quarter core pricing came in at 4%, reflecting a more favorable pricing environment in 2015. This represents a full point of sequential improvement from the Q4 of last year.
Of this, about 0.5% reflects the benefit of legacy business that we renewed earlier this year. And this includes both the 2015 2016 legacy contract renewals. Moving on to the expense side, Slide 24 provides a summary of our compensation and benefits expense, which increased 9% versus 2014. Lower volumes were more than offset by labor inflation, increased training expense and lower productivity. Looking at our total workforce levels, our employee count was up 6% when compared to 2014.
About a quarter of this increase was in our capital related workforce. And as Cam just discussed, we are adjusting our total hiring downward to better balance our resources. The largest hiring area will continue to be in the TE and wide ranks. In total, when you factor in attrition, training, furloughs and volume levels, we expect our net overall workforce levels to be around 48,000 by year end, about flat with year end 2014. Labor inflation was about 6% for the Q1, driven primarily by agreement wage inflation and will likely continue to be in the 6% range for the 2nd quarter as well.
Keep in mind that the first and second quarters include the 3% agreement wage increase effective the 1st of this year on top of the 3.5% wage increase from last July. For the full year, we still expect labor inflation to be about 5% including pension. Turning to the next slide, fuel expense totaled $564,000,000 down 39% when compared to 2014. Lower diesel fuel prices along with a 1% decline in gross ton miles drove the decrease in fuel expense for the quarter. Compared to the Q1 of last year, our fuel consumption rate improved 1%, while our average fuel price declined 38% to $1.95 per gallon.
Moving on to our other expense categories, purchase services and materials expense increased 6% to $643,000,000 Increased locomotive and freight car material costs were the primary drivers. Depreciation expense was $490,000,000 up 6% compared to 2014. We expect depreciation expense to increase about 6% for the full year. Slide 27 summarizes the remaining 2 expense categories. Equipment and other rents expense totaled $311,000,000 which is flat when compared to 2014.
Other expenses came in at $259,000,000 up $33,000,000 versus last year. Higher state and local taxes and casualty costs contributed to the year over year increase. For 2015, we still expect the other expense line to increase between 5% 10% on a full year basis excluding any unusual items. Turning to our operating ratio performance. We achieved a quarterly operating ratio of 64.8%, improving 2.3 points when compared to 2014.
Our operating ratio benefited about 3 points from lower fuel prices, including the fuel surcharge lag. Keep in mind, however, we also prices declined. Turning now to our cash flow. In the Q1, cash from operations increased to just under $2,100,000,000 This is up 17% compared to 2014, primarily driven by higher earnings and the timing of cash tax payments. We also invested about $1,100,000,000 this quarter in cash capital investments.
And as Cameron just noted, we now intend to spend about $4,200,000,000 in capital for the full year, down about $100,000,000 from our previous estimate. Given the sharp decline in fuel surcharge revenue, capital spending will likely be greater than the 17% of revenue this year. Longer term, however, we still expect capital spending to be about 16% to 17% of revenue assuming of course that fuel returns to somewhat higher levels. And one housekeeping item to note on the cash flow statement, as you know, in the Q1, we changed the timing of our quarterly dividend payments so that the cash outlay occurs in the quarter for which the dividend is declared. As a result, we had 2 dividend payments during the quarter, one for the Q4 of 2014 and one for the Q1 of this year.
This is the only time we'll see this this year and together these payments totaled about $922,000,000 We also increased our 1st quarter dividend by 10%. This is in line with our commitment to grow the dividend payout target to 35%. Taking a look at the balance sheet, our adjusted debt balance grew to $15,600,000,000 atquarterend, up from $14,900,000,000 at year end. This takes our adjusted debt to capital ratio to 42.6 percent, up from 41.3% at year end 2014. We remain committed to an adjusted debt to cap ratio in the low to mid 40% range and an adjusted debt to adjusted EBITDA ratio of 1.5 plus.
We feel our current cash outlook positions us well to execute on our cash allocation strategy. Our profitability and strong cash generation enable us to continue to fund our strong capital program and to grow shareholder returns. In the Q1, we bought back about 6,900,000 shares totaling $807,000,000 Between the Q1 dividend and our share repurchases, we returned about $1,300,000,000 to our shareholders in the quarter. This represents roughly a 23% increase over 2014, demonstrating our commitment to increasing shareholder value. So that's a recap of the Q1 results.
As we look towards the Q2 and the remainder of the year, there are a number of factors that we'll be watching very closely. On the revenue side, we expect a favorable pricing environment to continue, supported by improving service and our strong value proposition. And we remain committed to solid core pricing above inflation. As per volume, the outlook is a little more uncertain. The recent challenges that we've seen in coal and in the shale related markets are likely to continue.
At this point, we think coal volumes in the 2nd quarter could be down in the mid single digit range versus 2014 with ongoing softness throughout most of the year as Eric discussed earlier. For the year, strength in other areas could offset these headwinds depending on what happens to the drivers ranging from consumer spending to the size of the 2015 grain harvest. Of course, as I previously noted, the volume mix shifts could also have a negative revenue impact. We'll just have to see how it all plays out this year. From the cost perspective, the Q2 will likely still reflect some impacts of operating inefficiencies, although as Cameron noted, we will see gradual improvement in productivity over time.
And as I mentioned earlier, if fuel prices stay close to where they are today, the net impact on earnings should be neutral for the remaining quarters of the year. Taken together, we have our work cut out for us again in 2015, but we will continue our unrelenting focus on safety, service and shareholder returns. So with that, I'll turn
it back over to Lance. Thanks, Rob. As you've heard from the team, we've had some challenges to start off the year, but we are taking the steps needed to work through those challenges and realize the opportunities we see ahead. As Eric mentioned, weakness in our coal and shale related markets could persist for some time, but we continue to see gradual improvement in the underlying economy, which should be a positive for other parts of our business. When you consider other wildcards from the next grain harvest to the strength of the U.
S. Dollar, it all adds up to a dynamic environment. And that's the nature of our business. Our goal is to provide our customers with excellent service wherever the need arises. We expect to see solid improvement in network performance and cost efficiency over the coming months.
As we leverage the strengths of our diverse franchise, we continue to be intently focused on safety, service and shareholder returns. Now let's open up the line for your questions.
Thank you. We'll now be conducting a question and answer Our first question is coming from the line of Tom Wadewitz with UBS. Please proceed with your question.
Yes, good morning. So first I wanted to ask you on coal. It seems like the macro backdrop is pretty challenging. You acknowledge that, particularly low natural gas prices. But I'm wondering your mid single digits decline seems somewhat optimistic versus the trend we've seen recently.
And that's been more like, I don't know, down 10%, 15%. So what is it that leads you to say mid single digits instead of worse? And how much visibility do you have to that?
Eric, you want to take care of that?
Yes. As you know, Tom, a lot of factors go into play. There was a relatively mild winter in our serving territory of our utilities. The heating days were down 5% to 10% versus last year. We are assuming more normal weather patterns for the balance of the year.
So that clearly is a factor. The other factor as you know is this is typically the shelf months. We see this every year where you don't really have heating or cooling during kind of the spring. And again, we're kind of assuming that we're going to get back to normal seasonal weather patterns. As we mentioned, natural gas prices what happens with that will have an impact, but a lot of factors, but that's our best assessment at this time.
Okay. Thanks. And then the second or the follow-up question, I guess, on the resource levels, you indicated a number of times that inefficiency or let's say a time lag in resource reduction versus volume. How do we think about how that will play through in Q2? Do you catch up pretty quickly and see reduction resources?
Do you expect train speed to improve? And how do you think that plays out in terms of the margin performance? Does that really kick in and support margin improvement? Or is that something where the revenue headwind is the more dominant factor in terms of again looking at how that affects the OR or margin performance? Thank you.
Sure.
Tom, thinking about the time lag, so we talked to you all last year about trying to catch up with the volume. And then in the Q4, we indicated we had finally caught up and we're fully resourced. And then coming into the Q1 of this year, volume shifted what I would consider fairly dramatically to being negative, ending up 2% down. And so it's really all about kind of being caught in a riptide, being behind the curve in terms of getting our resources right sized. When we look forward into the Q2, we've indicated that we're anticipating better service and better efficiency.
We haven't put a stake in the ground and said exactly how that happens, but we anticipate and I see it happening right now on the network, we anticipate continuous improvement as Cameron and his team get the business right sized. Robert, Cam, any additional color?
I would just add to that Tom to your margin question. Of course, we're always focused on improving the margins. And as Lance pointed out, we're focused on continuous improvement on the cost and balancing the network. We will have the challenges as I pointed out of the mix shift. We anticipate taking hold in the Q2 and beyond.
But even with all that activity, always going to be focused on improving our margins from where we are today.
Okay, great. Thanks for the time.
Our next question is coming from the line of David Vernon with Bernstein Research. Please proceed with your question.
Great. Thanks for taking the question. Just first question on the top line. As you think about the range of potential downside on the frac sand business, have you guys tried to bookend that
at all as far as how much you
think demand may be down as we head into the Q2?
Yes. So a lot of things could change that or drive that as you know particularly coal prices. If we look at the outlook right now, we see a mid teens kind of a range. We see our business to look more like 13 volumes than 14 volumes.
Okay. And then maybe just as a quick follow-up, the core pricing gains of 4%, think Rob you mentioned that the inflation was going to be in the labor side unusually high this year because of the new labor agreement. How do we think about that in terms of your expectation of kind of pricing above inflation? Are you guys just expecting a lot more productivity for the back half of this year? Or how do we think about that pricing inflation relationship?
Or do we think that pricing maybe gets better in the second Q3 than the 4% year quarter?
David, just to capstone that question, we've been consistent and clear that when we're pricing in the marketplace, we're pricing for our value proposition. And so whatever either Eric or Rob you want to comment on, it's in that context. Our pricing in the marketplace is our value.
Yes. I would just say David that our long term view is pricing above inflation. We don't it's not necessarily a quarterly pricing activity directly tied to inflation. And as I called out, we expect the first half of the year to have a little higher labor inflation. But overall for the year, we expect our overall company inflation to be in that 3% to 4% range.
So that kind of gives you a guiding light in spite of the challenges that we know we're going to face in the first half on the labor line. Overall company wide we think in that 3% to 4% inflation rate for the full year.
Okay. That 4% includes the legacy reprice, right, for Q1?
4% reported for the Q1 does include legacy repricing, yes.
Okay. Thank you. Thank you, David.
Our next question is from the line of Rob Salmon with Deutsche Bank. Please proceed with your question.
Hey, good morning. Thanks for taking my question. As a clarification to David's last question and in your prepared remarks, Rob, you had indicated that the core pricing accelerated to 4% in the Q1. And I think you've mentioned that roughly half of that was attributable to legacy. Was that half of the step up from 3% to 4% or just half of the 4% in aggregate?
Yes, let me clarify that. Of the 4% core pricing we reported in the first quarter, a half a point of that, so 3.5 to 4, the half point was attributable to the legacy renewals.
Thanks. Appreciate the clarification. Kind of taking a step back going back to your Investor Day toward the end of 2014, you had indicated that your longer term 4 year volume outlook is positive. I guess given the drop off that we've seen in terms of the shale related business, some of the coal challenges that you indicated as well as uncertainty in terms of the ag craft. Do you still have confidence that the volume growth in aggregate will be positive?
Or do you see that a little bit more challenging as we look out from here?
Yes. Rob, this is Lance. I'll let Rob answer that a little bit more in detail. But the thing that we think about is the beauty of our franchise, the strength of our franchise and all of the opportunity that it represents. We've got a diverse book of business.
And over time, we've seen that there are always areas where we can develop more business and grow. And so we feel still quite bullish about in the long term being able to grow based on this great franchise.
I would just Lance, I would just add to your comment that we know we have some challenges right now. But if you look at the UP franchise, it is a fabulous franchise that has great optimism long term. Coal is not going to inventories are high right now. Gas prices are low. The energy prices are low, which is impacting our frac business.
All of those are going to balance out over the long term. And then you add on top of that what's happening in the chemical franchise. The opportunities still in front of us longer term with the investments that are being made in the Gulf. You look at the Mexico franchise, the fact that we're the only railroad that interchanges at the 6 border crossings and you look at all the opportunities that are still taking place there. You look at our strong auto franchise.
I mean, so you add it all up, the diversity of our business mix and the strength of our franchise long term still provides us stronger optimism, which is why we think longer term the expectation still is that volume will be on the positive side of the ledger.
Appreciate it. Thanks for the time.
Our next question is from the line of Bill Green with Morgan Stanley. Please proceed with your question.
Hi, good morning. Rob, can I ask you to put maybe if you can a little bit finer point on some of the challenges on the cost side in the Q1? I think last year, you sort of estimated we had about a $35,000,000 headwind from weather. Can you sort of estimate what the headwind is from some of the inefficiencies that occurred in the network this quarter?
Yes, Bill, you're right. Last year, we called out about $35,000,000 of inefficiency tied to the significant weather events primarily in the Chicago area. This year clearly our cost performance in the Q1 is not what we'd like it to be. And I'd say if you take fuel off the table, our costs were about $200,000,000 up year over year. And it's a combination of things that we all have talked about this morning.
We had some timing issues. We resourced for unexpected coming into the quarter higher level of volume. We had some mechanical activities that we took on that I would categorize as timing. And then as we pointed out, we had some inefficiencies in the network. So without putting a splitting hairs in terms of where those dollars are, we think they're all opportunities for us to right size the network.
If you look at sort of what would you have expected if you were running optimally and had you had things timed up a little bit better, it probably had a negative impact in the quarter of about 1 to 2 points on our operating ratio. I mean that's the way I would kind of look at it.
Okay. And then your point about Q2 is it will still take some time for the network to get to the operating efficiencies that you want. So maybe it will be less than the Q1 impact, but still meaningful. Is that what you were trying to communicate?
Yes. And Cameron, why don't you kind of walk us through a little bit about the activities that are underway to get these things rightsized and get your service back? Well, we still have work to do, but we think we can eventually rightsize the network in the Q2. And as Rob mentioned, we do think there'll be some inefficiencies throughout the quarter. But the rightsizing of our locomotive fleet, weekly we review opportunities to store additional locomotives.
And several times a month, we're also rightsizing our hiring plans as we look out for the remainder of the year.
Okay. Rob, let me ask you one last question too then here. Just on share buybacks, how opportunistic can you be? Or is the Q1 run rate kind of what we should expect? I mean, can you if the shares are down a fair amount, can you ramp this up?
Or do you feel like, no, we'd rather just kind of have it be a consistent buyback each quarter?
Well, as you know, our approach has always been and will continue to be, we'll be opportunistic in the marketplace. So we don't have a set number of dollars or shares that we'll buy back in any quarter, but I can just assure you that we will continue to be opportunistic as we move forward and the current price is frankly an opportunity for us.
Okay. All right. Thanks guys for the time. Appreciate it.
Thanks, Bill. Our next question is coming from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Lance, in context, your Q1 actually wasn't that bad. Earnings were up 9% even with all the challenges that you had. And yet, it sounds like the tone from everyone on the call here is that we're not too happy with that. Obviously, we could have done better. And it did miss Wall Street expectations here.
And I think over the long run, you guys have been better at saying expectations relative to some of the other stocks in the space. I think investors have definitely rewarded your company for that. But as I hear it from some of the questions here and the answers, it sounds like we saw some cost challenges. We're catching up for the new volume reality. We don't know where energy and coal markets are ultimately going to shape out or shake out.
So as your comps get more difficult on earnings growth this year, consensus definitely ramps up a lot in 2015. Is it getting more challenging to see double digit growth this year? I know you don't want to explicitly guide, but can you help folks on this call understand where this year could shake out?
Sure, Brandon. And you're exactly right. We're not going to speak specifically about what to expect out of the year from a percentage perspective. So I think you've got the tone pretty well right. When I look at the Q1, I'm proud of the hard work that the team did in terms of trying to get the costs adjusted to the volume reality.
I'm disappointed that we couldn't have done better because we here at the table see the opportunity of what the franchise really has the ability to deliver. Having said that, I am confident as I look forward that our operating team and all the teams are focused on doing the right thing. As we look forward, we're adjusting to current volumes at the same time as we're trying to determine what does peak season look like and what does the growth rate look like from here. I would tell you, there is no change in my confidence, both this year and over the long run of being able to generate out of this wonderful business, this beautiful franchise, the kind of financial performance and return generation that you've seen historically. And we've said before, it gets more difficult from a 65% or 64% or 63% operating ratio, margin improvement gets more difficult.
But we remain absolutely confident that it's there. We'll realize it.
Maybe talk a little bit more explicitly about some of the drivers of margin improvement this year outside of the benefit from the fuel surcharge, because it does sound like you have quite a bit of compensation benefit headwind just given the wage increases. And obviously, if volume could come in flat or maybe even negative for the year, just given some of the uncertainty, what's the ability to drive leverage in the business then?
So Brandon, I think Rob and the team have outlined a fair portion of that already this morning, which is as we look forward, Eric said, he's in an environment where pricing core pricing gains looks good. Cam and team are working on rightsizing the business and generating efficiencies through the UP way and by taking VeriBill out of the network. And then we're looking for all other opportunities to generate margin improvement. Rob, is there anything else you want to add on?
Yes. Brandon, I would just remind you that it's the same levers that have got us from where we were many years ago to where we are today. And while volume is our friend, we don't use it as an excuse. And you saw us perform well in years when volume did not play in our benefit. We know we've got some challenges here with volumes.
We've got challenges with mixes as I called out. But we're going to continue to be relentlessly focused on cost control and cost management as Lance and Cam have outlined. And as Eric talked about pricing is another key driver here. We're going to improve the value proposition in the marketplace and pricing will continue to be a strong driver of that. So to get to our longer term guidance of a 60 plus or minus operating ratio by full year 2019, it's going to take those same efforts and same focus from the organization that we're going to continue to focus on.
Thank you.
Thank you, Brandon.
Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Great. Thanks. Good morning.
I guess I just want to maybe try to understand a little bit better about sort of maybe what the outlook was internally as you guys thought about 2015 and in particular the volume opportunity. I know you were looking for I think positive volumes for the full year and that looks like that's a little bit in question. We've had tough comps sort of understood coming up in the next several quarters. So as you're trying to sort of adjust to the volume environment, I guess I'm just trying to make sure I understand sort of maybe where your heads were at coming into this year versus where we are now. It seems like maybe a little bit bigger of a change than I was anticipating.
So I just want to kind of make sure I understand that.
So we don't specifically address what our budgets or forecasts were coming into the year. What I will say is the big change is actual growth and then actual decline. And the biggest change there was coal, which was somewhat surprising in terms of how weak it turned out quickly. Of course, we had the difficulty with the West Coast ports and the labor dispute, but we had pretty good visibility to that. Looking forward, Eric, why don't you talk to us about what your markets look like as you look into the future?
Yes. I think what Lance said is accurate. The big swing factor is coal. Certainly the quarter we talked about the international intermodal West Coast port labor dispute that we think will kind of normalize throughout the year. But the big swing factor is coal.
As you know, Chris, if you go back really probably 4 months, oil price outlook for the year was still up in the 90s. It's now in the 50s. So of course, that had a swing factor that's impacting broad swaths of the market also.
Okay. No, that's helpful. And I guess that generally makes sense. Maybe sticking on that coal question and maybe one for you Eric in terms of the mid single digit outlook for the Q2 that you're thinking about Colorado, Utah underperformed pretty meaningfully relative to PRB in the Q1. Is that sort of inherent in the Q2 outlook?
Will you expect maybe PRB to soften a bit on the comps and then you still have weakness in Colorado, Utah? I'm just trying to get a rough sense of maybe how you think
about coal mix in Q2. Yes. The mid single digits assumes a continued profile with Colorado, Utah particularly because we are not expecting export markets to pick up significantly this year.
And so PRB roughly similar performance that we've seen?
Thereabouts driven again as we said by weather and natural gas pricing.
Okay. Thanks very much for the time. I appreciate it.
The next question is coming from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, thanks. Good morning. So Rob, I wanted to ask you about some of the yield drivers. And in terms of how much of a negative do you think mix could be in the Q2? And then on the pricing, the 50 basis points from the legacy pricing maybe is a little lower than would have expected.
And wondering if that's a timing issue and that ramps? Or is this a, hey, the volumes are down, so it just limits the impact of the legacy repricing and it's going to
Again, the beauty of our franchise is we have a lot of diverse business opportunities. And as a result, it's not uncommon to have a fair amount of mix. But we are highlighting that given the change anticipated in both the coal and the fracking environment and continued strength in our intermodal that they're likely versus the Q1 likely to be a bit of a mix headwind as the rest of the year plays out. How precise that will be? We'll have to see.
I'm not going to give precise guidance around that. In terms of your pricing question on the legacy contributor, as I've always said, you can't straight line. Don't take what we repriced in past years on legacy and assume that's each contract is the same. They're all different. So that was a that's what those contracts gapped to market and that is what we took them up to.
But to your point kind of broadly not just on legacy, but I'd say broadly, I'd say that the way we look conservatively at calculating our price as you know, the fact that volume was down in some key markets did have a negative impact on the way we contribute price and I view that as actually a positive. So as the volumes recover, we would expect to enjoy the improved returns on those business volumes that we've been able to reprice.
Okay. And the contracts that you repriced for 2016, is that showing up in this number already? Or were they just priced, but the actual impact doesn't show up until next year?
It's also in that number.
Okay. And last thing just going back to the question about the buybacks. So was your point about the extra dividend payment in the quarter, in your mind, does that have an impact on how much you bought back in the Q1? And there's in theory, then you go to a more normalized dividend just once a quarter there's more left for the buyback or they're independent?
They're independent. I was just calling out so that folks understood that there were 2 dividend payments in the quarter, but I would not make any correlation to that and share buyback pace.
Okay.
All right. Thank you, guys.
Thanks, Scott.
The next question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question. Great. Good morning. Just to kind of follow-up on some of the volume commentary.
Maybe Eric
just talk a little bit
about a little bit on chemicals given that that's usually a little bit of a precursor for the economy. We've seen them trend a little weak lately. And I know longer term, you're looking at a lot of plants opening up in the Gulf region, but maybe more in the near term this year. Is that a precursor for the industrial side of the economy? Can I maybe give a little bit of your insight there?
Yes. As you know, our chemicals business net crude by rail actually was pretty good in the Q1. We're up 1, 2 percentage points in the Q1 net of crude by rail. So we think that that is a good precursor to the economy. Plastics business really ties pretty closely to construction and automotive and all of those and even the consumer side, the retail side of the house and our plastics business was up in the Q1 as we mentioned.
So we think that all of those trends indicate the strength in the North American economy. As Rob said earlier, we had some headwinds and colds and headwinds with shale stuff. But if you net that out, we feel pretty good about some of the underlying strength of the economy.
Thanks for that insight. And then just a follow-up Lance, maybe if there's a lot of discussion out East and in Canada about industry consolidation. Can you kind of address union I know we did this a couple of quarters ago, but perhaps revisit your thoughts on how the markets changed over time and your thoughts given some of the activity or discussions at least on the Eastern and Canadian half of the country?
Yes, Ken.
I'm not country but Canada.
Current discussions have not changed our position on industry consolidation. We are not in favor of it. We don't think it's the right thing to do at this time.
Okay, great. Thanks for the quick answer.
Sure.
Our next question is from John Larkin with Stifel. Please proceed with your question.
Hey, good morning, gentlemen. Thanks for taking my question. You mentioned that grain exports in some cases were still pretty strong, but the export coal was getting hit and that was due to the very strong dollar. Could you give us maybe a more complete picture of the impact of the strong dollar on the exports across more than just grain and
coal? The grain exports really were driven by Milo and soybeans. We had a great soybean crop and China is really pulling those into China and spreads between Gulf Coast, West Coast have narrowed in terms of ship spread. So that really is driving Milo and beans from the central part of the U. S.
Into China, which was a positive for us. We still are seeing headwinds from the strong dollar in exports across probably a pretty good chunk of the economy. When you think about steel, steel is being impacted both with imports particularly from Asia coming into the country and domestic steel producers are struggling. It's also being impacted in terms of machinery exports, construction and farm machinery exports. Those are headwinds just because of the strong dollar.
On the wheat side, we're seeing some difficulty in the U. S. Wheat crop competing in the export markets partially due to the strong dollar. So, the strong dollar is as you would expect impacting exports on a pretty wide swath of the economy beyond just coal and it's helping imports. So you should see our intermodal import business and other import business strengthen as you go throughout the year.
But the strong dollar is having an impact.
Thanks for that. And then maybe a question on the ever changing energy market. Do you have a sense for where oil prices would have to go in order to sort of recharge the activity levels in the shales? And then related to that, how high would natural gas prices have to go in order for the utilities to switch from natural gas back to coal?
If I could predict energy markets, I would probably be sitting in a different spot today because I there's a lot of conventional wisdom out there. And I think the conventional wisdom was that you needed to be in the 70s for the U. S. Shale markets to be strong. I think even if you look today with oil in 50s, there are some shales that are still going pretty strong.
The Permian shale is still doing relatively well. The Eagle Ford shale is not. So I think there is a spread there. Again, conventional wisdom on natural gas is somewhere in the 3, 3.25, 3.50 is probably a crossover range. But again, that depends on a lot of different things by utility and by region of the country.
Hey, John,
just a little more detail. Clearly, we'd like to see oil prices back up in the 75 plus range. I mean, clearly, that would be better for us.
But all the guidance has been sort of wrapped around no change in energy prices going forward for 2015. Is that a fair assessment?
Yes.
Okay. Thanks very much.
Our next question comes from the line of Allison Landry with Credit Suisse Group. Please proceed with your question.
Thanks. Good morning. Following up on your earlier comments on the underlying strength in base chemicals and plastics, can you remind us how much of your business is tied to the housing and residential construction markets? Yesterday, we saw existing home sales numbers that surprised to the upside and new home starts are expected to be pretty solid for the year. So I just wanted to get a view sort of an all inclusive perspective of the commodities that you move that are tied to these markets and what that represents as a percentage of volume or revenues?
Yes. I think historically we've said between 5% 10% and we still think that that's a good estimate. Housing starts were down in February March. I think the housing start number comes out today or tomorrow. I think there's some expectations it's going to be up because weather impacted the number being down the last couple of months.
And the existing home sales number was very strong as you say. So again, we tend to factor that into our optimism about the underlying strength of the economy.
Okay. That's helpful. Thanks. And as a follow-up question, given that your main competitor has seen some modest improvement in velocity, albeit off of some easy comps. Do you think that the risk of losing some of the traffic that you gained last year as a result of their issues is now somewhat heightened?
It seems like there's plenty of traffic to go around at the West Coast ports. But BN yesterday actually made some comments that it has regained some lost ag business. So I just wanted to get your perspective there.
Yes, Allison, this is Lance. The BNSF has been showing some improvement in their service product. We would anticipate that would happen. They're a very good vibrant competitor. And Eric had said historically that some of the business that we had shipped last year, certainly in ag, maybe to a lesser extent in some other commodities was naturally a better fit for their franchise, their network and would likely go back.
And I think you see that in the ag line in terms of reported volumes. Eric, you want to add anything to that?
Okay. Excellent. Thank you for the time.
Our next question is coming from the line of Tom Kim with Goldman Sachs. Please proceed with your question.
Hi, thanks. I have a couple of questions. The first one on intermodal. Can you give us a sense of how much your intermodal volumes might have been impacted by the West Coast port congestion and how long you think it might take for that congestion to unwind and sort of filter into the Q2 numbers?
Yes, Eric?
Yes. So our international intermodal volume was down kind of low teens in the Q1. And again, we expect that as you catch up throughout the year that that will normalize and most of that will catch up. We do not expect to see any permanent deterioration of our West Coast international intermodal business.
Okay. Would it be possible to give us a sense of how much your fuel surcharge might have impacted the ARPUs for that commodity group? I know Rob you had mentioned that it impacted in the Q1 a little bit more than the rest of the book of business.
Robbie there are times we don't break out by commodity, Tom, the specific surcharge contributor to each individual commodity. But there are timing differences by different contracts and when we have some 60 plus different mechanisms. So there can be and there are timing differences actually on the intermodal line versus some of the other lines.
Okay. And then just with one Rob as a follow on, you had commented that you anticipate some potential mix shifts ahead, which could impact your revenues. Can you talk about how the mix shift is going to affect your RTMs versus carloads? Because I noticed that the RTMs were down about 4% in the quarter and carloads were down about 2%. I would think that this is going to impact your overall productivity unit costs and then ultimately margin.
So I'm just wondering if you could help us frame how we should think about the impact of the efficiencies that might be affected by RTMs potentially being weaker than carloads?
I'm not going to break it out as finitely as you're asking Tom, but I would just say that mix is something we deal with. And so from a cost standpoint, that just presents challenges and opportunities depending on what the volume actually is for the operating team and CAM is all over improving the cost structure. In terms of the top line, the pricing line or the impact on revenue, again, it will depend upon which markets actually are stronger than others. But we do anticipate, as I called out, that there will be a headwind for the balance of the year. And the simple explanation for why there is a headwind on the revenue line is we think there's going to be stronger growth in that.
And a lot of it's the recovery with that intermodal business we just talked about and softness in coal and the frac markets kind of offset or the negative drivers if you will on that mix headwind that we anticipate. So we're calling that out directionally as a challenge, but we're not using that as an excuse not to continue to run as efficient operation on the cost side as we possibly can.
Okay. Thanks, Rob.
Our next question is from the line of Jason Seidl with Cowen and Company. Please go ahead with your question.
Thank you. And gentlemen, thank you for the time as always. When you look at your core pricing of 3.5%, it's kind of in line with what I expected. But is it occurring in certain areas? I mean, in terms of are you getting more pricing now out of that truck competitive business than you were a year ago?
Is that what's driving the improvement?
Eric? We're getting good market based pricing. As we said before, a certain percent of our book of business is in fixed or multi year longer term contracts, so you can't touch them. We've talked about that before. But for the things that we are able to reprice, the demand is strong.
The impacts in terms of the challenges that the trucking industry is having are in our favor. And we see strong opportunities to price out value across our book of business.
Does it get any easier to price the intermodal product once the port clears up or did that not really have much of an impact in your pricing?
Pricing is always difficult no matter when you do it. I would guess most of the international intermodal business would not be in spot pricing type of agreements.
Okay. And to piggyback on Allison's question as a follow-up, you obviously benefited from BN last year in several different categories and you locked up some of that business in some longer term contracts. When do those contracts start expiring?
We don't talk about individual contracts. I don't think we mentioned that last year and we don't typically talk about individual contracts.
Okay. Fair enough. Again, thank you for the time, gentlemen.
Thank you, Jason.
Our next question is from the line of Ben Hartford with Robert W. Baird. Please proceed with your question.
Hey, good morning, guys. I know a lot have been asked. Eric, I did want to follow-up on domestic intermodal pricing in particular, given the decline in crude. I know there are certain lanes now where you can find intermodal pricing all in that is competitive to truck. You guys are more insulated to that with a longer length of haul.
But let's assume that crude does stabilize here around $50, dollars 55 a barrel. As you look into 2016, do you see a situation where intermodal rate growth does have to lag truckload rate growth going forward at current levels of crude because of the lower energy price and some of that disparity that historical disparity between truck and intermodal might have narrowed over the past several years. Can you provide some perspective there?
Yes. I guess I'm not quite understanding the foundation of your question. I think actually truck pricing is increasing. I mean if you look at most of the truck pricing indexes because of the challenges that the truck industry is having they're getting high single digit type price increases. So, I would I think that suggests that instead of the gap narrowing it might even be expanding or at the minimum staying the same.
Okay.
Well, yes, truck pricing has increased. I was asking as we go into 2016, should we expect domestic intermodal pricing growth to mimic truckload or does it need to lag what the rate of truckload rate growth is to make sure that there is enough of an all in price delta between truck and intermodal?
We think we have the value proposition and we're going to continue to price that as strongly.
Okay. That's helpful. Thank you.
Thanks, Ben.
Our next question comes from the line of Jeff Kauffman with Buckingham Research. Please proceed with your question.
Thank you. Thank you very much and congratulations on a very tough quarter. I want to go a different direction. We're hearing a lot about the drought in California, the lower water tables, the reduction in water use. And also during the quarter, we heard I think we focus with the port issues on the inbound movement of products, but we also heard there was a fair amount of ag and produce related products that could not get off the West Coast.
Could you discuss how that affected you in the quarter and how you're thinking about this drought in California in terms of the growth of your Western business?
Eric? Yes. So the drought in California as you know the authorities right now in California are trying to insulate the ag industry and really are putting the onus for water conservation on residential customers. Politically, how long that could sustain with the ag industry being insulated is anybody's guess. I do think that if you look at the ag industry in California and you kind of profile who uses customer base will probably be in the using the least water category.
So we feel pretty good that the drought will not have near term material impacts on our food and refrigerated business. We feel pretty good about that, short of some Armageddon type of scenario. In terms of your export question, yes. So, ag products, particularly your refrigerated products do go export off West Coast ports and they were similarly impacted just like the imports were impacted. So just like things couldn't get on, things couldn't get off and they similarly had impacts Q4 of last year, Q1 of this year.
Okay.
Thank you. And just a follow-up. Last year, we heard about truckers moving water into California on an as needed basis. Maybe I'm going off the deep end here, but is that a potential revenue source for you over the long run?
I do not think that's material.
Okay. Thank you. Our next question comes from the line of Matt Troy with Nomura Asset Management. Please proceed with your question.
I had a question. As you talk to your utility customers, you mentioned natural gas switching impacting some of the Colorado, Utah Basin business. Just curious with the echoes of 2012 still lingering, how should we think about the potential for additional or incremental vulnerability in your coal business? What's your sense in speaking with coal customers that as natgas approaches 250 now and potentially lower. How much has switched and how much remaining could switch?
What's the vulnerability there?
I think the things that can switch probably have switched. And as natural gas goes lower, there might be some incremental impact you would expect there would be, but I think we've seen most of it. Eric, if I could just comment on that. Matt, you may recall last time natural gas prices got to historically low levels. We really in our territory didn't see material switching until it got sub $2 What we are so I met that doesn't necessarily predict the future.
But what we are seeing though and I think the bigger impact today rather than our utility base switching from one source to another, they're able to buy electricity off the grid that is being produced by somebody else perhaps from gas. So we're seeing that impact as opposed to a pure switch turning off the coal plant and turning on the gas plant in our territory.
All right. Thank you. And my follow-up would be, you mentioned PTC. I'm just curious there. I think when it was initially enacted, no one believed that it would be completed by 20 15 of any of the various stakeholder groups, but here we are knocking on that deadline.
Curious in terms of your conversations with Washington, what is it that the industry is proposing as the path forward in terms of either timeframe or incremental expansion to the window? And kind of an off the wall question here. What if Washington in all its rational thought and reason decides to hold you to the letter of the law? What would be the implications if the industry does not make the deadline and they are not flexible? Thanks.
So Matt, this is Lance. I'll start with path forward. Cameron had mentioned we believe that virtually everyone involved understands that there has to be an extension because the industry is not going to make the date. That extension is going to have to come through Congress. There are a number of different vehicles that could make that happen, and we're monitoring all of those potentials and giving feedback and input into our thoughts to help navigate that process.
From the perspective of having an extension occur, I remain confident that that will happen. It just reflects the reality of the situation. From the perspective of what if we don't get an extension, there are penalties outlined in the current regulation, current law. And we've been discussing what our actions would be should an extension not occur. That would be a horrible outcome for the industry.
And I don't believe that's the way it's going to go, but we will be prepared for that very, very remote possibility as the year comes to a close.
Thanks. That's my 2.
Our next question comes from the line of John Barnes with RBC Capital. Please proceed with your question.
Hey, thank you guys. Hey, first on the port situation, can you talk a little bit about you've been through this a couple of times before. Can you talk a little bit about your view of a return of market share to the West Coast ports? Or do you think some of what swung to the East Coast and other ports is more permanent in nature?
Yes. I'll start, and then I'm going to turn it over to Eric. We've said for quite some time that there maybe is a low single digit number of share transfer from West Coast to East Coast when the Panama Canal opens up. The reality from our perspective is the most efficient vessels and the ones that are being commissioned as we speak, A, won't go through the modified Panama Canal and B, there needs to be some significant work to occur on the East Coast ports in some circumstances to handle those. Having said that, there's also a natural costvalue proposition that makes those imports want to come into the West Coast.
Eric, you want to add anything to that?
No, I think that about covers it.
So you still view it as a couple of percentage points of market share?
Yes. Currently, East Coast has about 31. Historically, we've said that could go to 33 with the Panama Canal opening. But as Lance said, the largest ships that are being built today really won't even be able to go through the expanded Panama Canal. So there is a value cost of over land bridge rail transportation, there's a natural economic driver to the West Coast.
Okay. And then my other one is, I know you've got an uncertain volume environment right now. I get where the pressure points are. But if 2014 taught us anything is you can get caught on the other side in a more robust growth environment just as easily. How do you go about balancing where to pull in right now, where to pull the reins in, especially given what you experienced in 2014 where you really ran out of certain resources?
How do you make sure that you don't pull back so much trying to balance in this environment that should growth reaccelerate that you're not back in a similar situation as you were in 2014?
Cameron, you can handle it. In 2014, our locomotive surge fleet strategies served us very, very well. When business came on, we were able to match that business. So as we look into this year, redeveloping that surge fleet and being agile, as we mentioned, is a very critical asset and a very critical initiative for us. We take Eric's forecast on where he predicts business will be and then we make our moves appropriately.
Okay. Thanks for your time. I appreciate
it. Sure. Thanks, John.
Our next question is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.
Thanks very much and good morning. With respect to the West Coast ports, I was just wondering if you could comment on the challenges associated with big ships and the new shipping alliances, which may remain once the backlog is cleared, and what you're doing internally and with your challenge
is because the new challenge is because the new alliances as they bring their business together may bring it all to one terminal that then overwhelms the capacity of that individual terminal on the port vis a vis it being spread out between multiple terminals. So that is a challenge. The alliances are working through. That's a challenge. The terminals are working through.
That was a challenge that was starting to be seen before even the port slowdown. We from outside are working with our customers developing planning practices and protocols and capacity management protocols that we're sharing with them to basically say here's the capacity within this window that we can do and to the extent that there's a larger than that flood because of alliance activity through a terminal, what do you need to do to correct that? So we did see it in the past. We will see it in the future. We're working with them to spread that out.
Our most important asset in the LA Basin to stay up against the automotive business is locomotives. And we have spent over the last year developing a model that stays up against Eric's forecast of business week to week to week, and it's been very successful. Our originating on time departures out of the LA Basin are in the mid-90s and we feel very confident we can keep it there.
Great. Thank you. That's all from me.
Okay. Thank you.
Our next question comes from the line of Cleo Zagreen with Macquarie. Please go ahead with your question.
Good morning and thank you. My first question relates to the impact of mix on operating ratio. Can you please clarify for us whether you expect mix to be a headwind or a tailwind? If a headwind, is it mostly because of declines in coal and frac rather than international intermodal coming back? Thank you.
Rob? Yes. Cleo, the headwind that we would anticipate from the mix going forward is a result of we expect strong intermodal and softer coal and fracking related activities as you're calling out. But as always, we're going to continue to focus on being as efficient as we can on the cost side. And as Eric's been talking all morning, we're going to continue to price to the value proposition.
So we're not throwing the towel in terms of the margins, but we know we're going to face the headwind of those mix changes.
Thank you. And my second question relates to coal. Can you please discuss to what extent share shifts may have affected your volumes in a flat Western coal market in the Q1? And your outlook for Colorado, Utah, with any kind of detail you want to share on the market for that coal and whether your long term export outlook has changed? Thank you.
Yes. There were no material kind of contractual share shifts that we saw.
And what about Colorado, Utah? Yes.
There was no material share shifts.
Okay. Because we have seen BN up like mid high single digits and your volumes down. So I was wondering whether those are related in any way. It's just totally separate tracks so to speak?
Yes. We can't speak to their business naturally. We kind of described the dynamics we saw in our business. It would not surprise me if they had a much greater opportunity for inventory replenishment for their customers in the Q1 than we had simply because we had more deliveries last year. So it would not surprise me if they had an opportunity for greater inventory replenishment.
Sure. Thank you very much.
Our next question is coming from the line of Brian Ossenbeck with JPMorgan. Please go ahead with your question.
All right. Thank you. Good morning. So I just had one quick one on frac sands. So you're adjusting to the current outlook down mid teens in the second quarter.
But as opposed to something like coal where you have natural gas and inventories as you mentioned is a little bit of a leading indicator. With sand, it's a little bit tougher as the amount of sand per well continues to go up and different basins move ahead at different rates. So do you have any sense of the visibility into the second half of the year either in what you're seeing in actual orders or talking to your customers directly and what their completion programs might look like at this point? Thanks.
So I'm not quite sure where you are what you're asking, but it would basically be similar to what we kind of said before.
Brian, are you asking for kind of a crystal ball on frac sand in the second half of the year?
Yes, please.
I was just asking
if you have how you think about the second half of the year with frac sand if that comes from your
Yes. I think our frac sand volumes based on current activity will probably be more similar to 2013 volumes than 2014 volumes.
Okay. All right. Thank you.
Our next question comes from the line of Keith Spunaker with Morningstar. Please go ahead with your question.
Thanks. Noting the strength in autos in the period, will you please comment on how your expectations for trade with Mexico compare with maybe somewhat tempered overall growth rates, perhaps auto, grain and otherwise?
So Eric, let me jump in just on the very long term. And Rob mentioned this early on in a comment about our franchise, because we do serve all 6 rail gateways to Mexico and because of Mexico's opening up of some of their core industries as well as the significant foreign direct investment, From the very long term perspective, we feel very, very good about our business and growth with Mexico. Eric?
Yes. I'd add nothing more to add with that. Mexico continues to be an upside for us. We've got a great franchise and we're optimistic about the outlook.
If Mexico does grow outsized compared to the business in the U. S, would this be OR accretive?
Keith, not necessarily. I would we have that question actually has been in fact what we'd experienced probably about the last decade. Our volumes in and out of Mexico have grown at a slightly faster pace than the overall enterprise volumes. And I wouldn't try to draw any conclusion in terms of margin differential between those moves.
Is it longer haul growth?
It can be. But again, I would say it's in the overall scheme of things, it's no different than our overall enterprise mix.
Great. Thank you.
The next question is now like to turn the call back to Mr. Lance Fritz for closing comments.
Thank you, Rob. So what you heard us talk about today was a Q1 where we came into the year, volumes changed on us dramatically. And we've spent the quarter aggressively trying to right size and just fell short of that mark. As we look forward into the Q2, we're looking forward to continue that work and improve our service product and our efficiencies and we're confident that's going to happen. And we look forward to talking to you about it the next time we get together.
Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.