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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Welcome to Union Pacific's first-quarter 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 $1.2 billion, or $1.30 per share for the first quarter of 2015. This is a 9% increase in earnings per share compared to the first quarter of 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%. 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. With that, I'll turn it over to Eric.
Thanks, Lance. Good morning. In the first quarter, 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 softer coal demand. Lower crude oil prices reduced demand for shale-related shipments. 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. Solid pricing gains across our business led to a core price improvement of 4%, which combined with the 1% mix and drove average revenue per car up 1%. Overall, freight revenue was down 1% as our strong pricing gains in mix were offset by lower volume and fuel surcharge revenue.
Let's take a closer look at each of the six 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 continued 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 increased gasoline consumption 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 first quarter 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 16.6 million vehicles in the first 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 first 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 first quarter 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 first quarter. Coal revenue declined 5% in the first quarter. 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 a 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 first quarter. 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 up 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 first quarter, setting an all-time first-quarter record for volume. We continued 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, 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 third quarter, we 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, DDGs will remain steady throughout the year. Finally, we anticipate continued strength in our import beer business, we see potential upside in refrigerated shipments. In Automotive, finished vehicles and auto shipments should continue to benefit from strengthened 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. The latest inventory figures show that stockpiles are significantly up from last year and are now above the five-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 first quarter, 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, 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, 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 first quarter 2015 reportable personal injury rate improved 23% versus 2014 to a record low of 0.85. These results are a validation that our 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 on enhanced TE&Y 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 first-quarter record mark of 1.88.
Our strategy of reinforcing public awareness through community partnerships and public safety campaigns is generating results. 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 of 2014. During the latter part of the fourth quarter, our available resources were largely aligned with demand, helping generate a 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 first quarter that provided more favorable weather conditions. One that also saw more extensive track renewal programs on key corridors.
While our velocity in the first quarter was almost one mile an hour faster than the first quarter of 2014, our service performance still fell short. As reported to the AAR, first quarter velocity and freight car dwell were about flat when compared to the first quarter 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 first quarter. 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%.
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 on the way up last year, it's been a different story in the first part of 2015, with some softer volumes we've seen thus far. To balance our resources to current demand, we have placed around 500 TE&Y employees into furlough or alternative work status. We've also reduced our original TE&Y hiring plan downward by 400 and are now planning to hire around 2,400 TE&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 475 units back into storage and continue to look at every opportunity to further reduce our active fleet. Also, our planned acquisition of 218 units this year will further improve our overall reliability and efficiency. We have experienced a timing lag in getting our resources aligned with demand, 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 million to approximately $4.2 billion. We will continue to invest to improve the safety and resiliency of the network, including more than $1.8 billion 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 $1.7 billion 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 $2.5 billion. 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, 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 strengths of our franchise to improve network performance. We will invest in the resources and network capacity needed to overcome congestion and generate productivity gains, 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. Good morning. Let's start with a recap of our first quarter results. Operating revenue was flat with last year at just over $5.6 billion. Strong core pricing was offset by declines in fuel surcharge revenue and total volumes. Operating expenses totaled just over $3.6 billion, decreasing 4% when compared to last year. The net result was operating income growing 7% to about $2 billion. Below the line, other income totaled $26 million, down from $38 million in 2014. Interest expense of $148 million 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 million, 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. Turning to our top line. Freight revenue of about $5.3 billion was down 1% versus last year. In addition to a 2% volume decline, fuel surcharge revenue was down about $200 million 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 first quarter 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 second quarter. Slide 23 provides more detail on our core pricing trends. First 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 fourth quarter of last year. Of this, about half a percent reflects the benefit of legacy business that we renewed earlier this year. This includes both the 2015 and 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. 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&Y 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 first quarter, driven primarily by agreement wage inflation. It will likely continue to be in the 6% range for the second quarter as well. Keep in mind that the first and second quarters include the 3% agreement wage increase effective the first 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 million, 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 first quarter 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, purchased services and materials expense increased 6% to $643 million. Increased locomotive and freight car material costs were the primary drivers. Depreciation expense was $490 million, up 6% compared to 2014. We expect depreciation expense to increase about 6% for the full year. Slide 27 summarizes the remaining two expense categories. Equipment and other rents expense totaled $311 million, which is flat when compared to 2014. Other expenses came in at $259 million, up $33 million 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% and 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 three 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 first quarter, cash from operations increased to just under $2.1 billion. This is up 17% compared to 2014, primarily driven by higher earnings and the timing of cash tax payments. We also invested about $1.1 billion this quarter in cash capital investments.
As Cameron just noted, we now intend to spend about $4.2 billion in capital for the full year, down about $100 million 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%-17% of revenue, assuming, of course, that fuel returns to somewhat higher levels. One housekeeping item to note on the cash flow statement. As you know, in the first quarter, 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 two dividend payments during the quarter, one for the fourth quarter of 2014 and one for the first quarter of this year.
This is the only time we'll see this year, together, these payments totaled about $922 million. We also increased our first 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 $15.6 billion at quarter end, up from $14.9 billion at year-end. This takes our adjusted debt-to-capital ratio to 42.6%, 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+. 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 first quarter, we bought back about 6.9 million shares, totaling $807 million. Between the first quarter dividend and our share repurchases, we returned about $1.3 billion to our shareholders in the quarter. This represents roughly a 23% increase over 2014, demonstrating our commitment to increasing shareholder value. That's a recap of the first quarter results. As we look towards the second quarter 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. We remain committed to solid core pricing above inflation. As for 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 second 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 second quarter will likely still reflect some impacts of operating inefficiencies, although as Cameron noted, we will see gradual improvement in productivity over time.
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, we will continue our unrelenting focus on safety, service, and shareholder returns. 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, 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, 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 wild cards from the next grain harvest to the strength of the U.S. dollar, it all adds up to a dynamic environment. 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. Let's open up the line for your questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we will be limiting everyone to one primary question and one follow-up question to accommodate as many participants as possible. Thank you. Our first question is coming from the line of Tom Wadewitz with UBS. Please proceed with your question.
Good morning. First I wanted to ask you on coal, it seems like the macro backdrop's pretty challenging. You acknowledged that, particularly low natural gas prices. I'm wondering, your mid-single digits decline seems somewhat optimistic versus the trend we've seen recently. That's been more like a, I don't know, down 10%, 15%. 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?
Yeah. 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%-10% versus last year. We are assuming more normal weather patterns for the balance of the year. 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 the spring. Again, we're 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, a lot of factors, but that's our best assessment at this time.
Okay. Thanks. 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'll play through in the second quarter? Do you catch up pretty quickly and see a reduction in resources? Do you expect train speed to improve? How do you think that plays out in terms of the margin performance? Does that really kick in and support margin improvement? 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, we talked to you all last year about trying to catch up with the volume, then in the fourth quarter, we indicated we had finally caught up and were fully resourced. Then coming into the first quarter of this year, volume shifted, what I would consider fairly dramatically, to being negative, ending up 2% down. It's really all about kind of being caught in a rip tide, being behind the curve in terms of getting our resources right sized. When we look forward into the second quarter, 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.
Rob or Cam, any additional comments?
Well, I would just add to that, Tom, to your margin question. Of course, we're always focused on improving the margins. 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 second quarter and beyond. Even with all that activity, we're 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 questions.
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 second quarter?
Yeah. 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. Maybe just as a quick follow-up, the core pricing gains of 4%. I think Rob, you mentioned that the inflation was going to be on 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? How do we think about that pricing inflation relationship? Do we think that pricing maybe gets better in the second and third quarter than the 4% you reported?
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. Whatever, either Eric or Rob you want to comment on, it's in that context. Our pricing in the marketplace is our value.
Yeah. I would just say, David, that our long-term view is pricing above inflation. It's not necessarily a quarterly pricing activity directly tied to inflation. As I called out, we expect the first half of this year to have a little higher labor inflation. Overall, for the year, we expect our overall company inflation to be in that 3%-4% range. 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%-4% inflation rate for the full year.
Okay. That 4% includes the legacy reprice, right? For first quarter?
The 4% reported for the first quarter 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 first quarter, and I think you had mentioned that roughly half of that was attributable to legacy. Was that half of the step up from three to four, or just half of the four in aggregate?
Yeah, let me clarify that. Of the 4% core pricing we reported in the first quarter, a half a point of that, so three and a half to four, 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 full year volume outlook is positive. I guess, given the drop-off that we've seen in terms of the frac-related business, some of the coal challenges that you indicated, as well as uncertainty in terms of the ag crop, 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?
Yeah, Rob, this is Lance. I'll let Rob answer that a little more in detail. 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, over time, we've seen that there are always areas where we can develop more business and grow. We feel still quite bullish about, in the long term, being able to grow based on this great franchise.
Yeah, 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. The 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. You add on top of that what's happening in the chemical franchise, the opportunity's 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 six border crossings, you look at all the opportunities that are still taking place there. You look at our strong auto franchise.
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 William Greene with Morgan Stanley. Please share 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 first quarter? I think last year, you sort of estimated we had about a $35 million headwind from weather. Can you sort of estimate what the headwind is from some of the inefficiencies that occurred in the network this quarter?
Yeah, Bill, you're right. Last year, we called out about $35 million of inefficiency tied to the significant weather events, primarily in the Chicago area. This year, clearly our cost performance in the first quarter is not what we'd like it to be. I'd say, if you take fuel off the table, our costs were about $200 million up year-over-year. It's a combination of things that we all have talked about this morning. We had some timing issues. We've 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. Then, as we pointed out, we had some inefficiencies in the network. Without 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 things timed up a little bit better, it probably had a negative impact in the quarter of about one to two points on our operating ratio. That's the way I would kind of look at it.
Okay. Your point about second quarter is it'll still take some time for the network to get to the operating efficiencies that you want. Maybe it'll be less than the first quarter impact, but still meaningful. Is that what you were trying to communicate?
Yeah. Cameron, why don't you kind of walk us through a little bit about the activities that are underway to get these things right-sized and get your service back?
Well, we still have work to do, we think we can eventually right-size the network in the second quarter. As Rob mentioned, we do think there'll be some inefficiencies throughout the quarter. The right-sizing of our locomotive fleet, weekly, we review opportunities to store additional locomotives, and several times a month, we're also right-sizing our hiring plans as we look out for the remainder of the year.
Okay. Rob, let me ask you one last question too here. Just on share buybacks, how opportunistic can you be, or is the first quarter run rate kind of what we should expect? 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, Bill, as you know, our approach has always been and will continue to be, we'll be opportunistic in the marketplace. We don't have a set number of dollars or shares that we'll buy back in any quarter, 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.
Lance, in context, your first quarter actually wasn't that bad. Earnings were up 9%, even with all the challenges that you had. Yet, it sounds like the tone from everyone on the call here is that we're not too happy with it. Obviously, we could have done better. It did miss Wall Street expectations here, and I think, over the long run, you guys have been better at setting expectations relative to some of the other stocks in the space. I think investors have definitely rewarded your company for that. As I hear it, from some of the questions here and the answers, it sounds like we still have 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.
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, you're exactly right. We're not going to speak specifically about what to expect out of the year from a percentage perspective. I think you've got the tone pretty well right. When I look at the first quarter, 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. We've said before, it gets more difficult. From a 65% or 64% or 63% operating ratio, margin improvement gets more difficult. 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 and benefit headwind just given the wage increases. 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?
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 core pricing gains looks good. Cam and team are working on right-sizing the business and generating efficiencies through the UP Way and by taking variable out of the network. Then we're looking for all other opportunities to generate margin improvement. Rob, is there anything else you want to add?
Yeah, 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. 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 this year with volumes. We've got challenges with mix, as I called out, we're going to continue to be relentlessly focused on cost control and cost management, as Lance and Cam have outlined. As Eric talked about, pricing is another key driver here. We're going to improve the value proposition in the marketplace, pricing will continue to be a strong driver of that.
To get to our longer term guidance of a 60 ± 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. 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 it's maybe a little bit bigger of a change than I was anticipating, so I just want to kind of make sure I understand that.
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. 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?
Yeah, I think what Lance said is accurate. The big swing factor is coal. Certainly the first quarter, we talked about the international intermodal West Coast port labor dispute that we think will kind of normalize throughout the year. The big swing factor is coal. As you know, Chris, if you go back really probably four months, oil price outlook for the year was still up in the 90s. It's now in the 50s. 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 certainly makes sense. Maybe sticking on that coal question, and maybe one for you, Eric, in terms of the mid-single digit outlook for the second quarter that you are thinking about. Colorado, Utah obviously underperformed pretty meaningfully relative to PRB in the first quarter. Is that sort of inherent in the second quarter 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 2Q.
Yeah, 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.
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. Rob, I wanted to ask you about some of the yield drivers in terms of how much of a negative do you think mix could be in the second quarter? On the pricing, the 50 basis points from the legacy pricing, maybe is a little lower than would have expected. I'm 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. 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 first quarter, 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 each contract is the same. They're all different. That's what those contracts gapped to market, and that is what we took them up to.
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. I view that as actually a positive. As the volumes recover, we would expect to enjoy the improved returns on those business volumes that we've been able to reprice.
Okay. The contracts that you repriced for 2016, is that showing up in this number already? Were they just priced but the actual impact doesn't show up until next year?
It's also in that number.
Okay. Last thing, just going back to the question about the buybacks. 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 first quarter? 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 two 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 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?
As you know, our chemicals business net crude-by-rail actually was pretty good in the first quarter. We were up one, two percentage points in the first quarter net crude-by-rail. 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. Our plastics business was up in the first quarter, as we mentioned. We think that all of those trends indicate the strength in the North American economy. As Rob said earlier, we had some headwinds in coal, some headwinds with shale stuff. If you net that out, we feel pretty good about some of the underlying strength of the economy.
Thanks for the insight. Just to follow up, Lance, there's a lot of discussion out East and in Canada about industry consolidation. Can you kind of address Union Pac-- I know we did this a couple of quarters ago, but perhaps revisit your thoughts on how the market's changed over time and your thoughts given some of the activity or discussions at least on the Eastern and Canadian half of the country?
Yeah, Ken.
I'm not sure about Canada.
Current discussions have not changed our position on industry consolidation. We are not in favor 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 receive your question.
Good morning, gentlemen. Thanks for taking my question. You mentioned that grain exports in some cases were still pretty strong, but that export coal was getting hit. 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?
Sure. The grain exports really were driven by milo and soybeans. We had a great soybean crop. China is really pulling those into China. Spreads between Gulf Coast, West Coast have narrowed in terms of ship spreads. 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 and exports across probably a pretty good chunk of the economy. When you think about 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 our machinery exports, our 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 export markets, partially due to the strong dollar. The strong dollar is, as you would expect, impacting exports on pretty wide swaths of the economy beyond just coal, and it's helping imports. You should see our intermodal import business and other import business strengthen as you go throughout the year. The strong dollar is having an impact.
Thanks for that. 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? 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 than today. 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. I think there's a spread there. Again, conventional wisdom on natural gas is somewhere in the $300, $325, $350 is probably a crossover range. 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. Clearly, that would be better for us.
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. 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 % of volume or revenues.
Yeah, I think historically, we've said between 5% and 10%, we still think that that's a good estimate. Housing starts were down in February and 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, the existing home sales number was very strong, as you say. Again, we tend to factor that into our optimism about the underlying strength of the economy.
Okay. That's helpful. Thanks. 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, BNSF yesterday actually made some comments that it has regained some lost ag business. I just wanted to get your perspective there.
Yeah, 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. 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, would likely go back. I think you see that in the ag line in terms of our reported volumes. Eric, you want to add anything to that?
Nope.
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 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?
Yeah. Eric?
Yeah, our international intermodal volume was down kind of low teens in the first quarter. Again, we expect that as you catch up throughout the year, 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 first quarter a little bit more than the rest of the book of business.
Yeah, Tom, we don't break out by commodity, Tom, the specific surcharge contributor to each individual commodity. There are timing differences by different contracts, and we have some 60 plus different mechanisms. There can be, and there are timing differences actually on the intermodal line than versus some of the other lines.
Okay. 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 your RTMs were down about 4% in the first quarter, and carloads were down about 2%. I would think that this is going to impact your overall productivity, unit cost, and ultimately margin. 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, I would just say that mix is something we deal with. From a cost standpoint, that just presents challenges and opportunities depending on what the volume actually is for the operating team, 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.
We do anticipate, as I called out, that there will be a headwind for the balance of the year. 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. A lot of it's the recovery with that intermodal business we just talked about, and softness in coal and the frac markets or the negative drivers, if you will, on that mix headwind that we anticipate. 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. 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. 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've said before, a certain % 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. 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. We see strong opportunities to price our value across our book of business.
Does it get any easier to price an intermodal product once the port clears up, or did that not really have much of an impact on 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. To piggyback on Allison's question as a follow-up, you obviously benefited from BNSF 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. 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 the longer length of haul. Let's assume that the crude does stabilize here around $50-$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?
Yeah, I guess I'm not quite understanding the foundation of your question. I think actually truck pricing is increasing. 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. I think that suggests that instead of the gap narrowing, it might even be expanding or the minimum staying the same.
Okay. Well, yeah, 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 a 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 in 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, I think we focused 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?
Gary?
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 the most water to the least water, I think our customer base will probably be in the using the least water category. 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.
Ag products, particularly refrigerated products, do go export off West Coast ports, and they were similarly impacted just like the imports were impacted. Just like things couldn't get on, things couldn't get off, and they similarly had impacts fourth quarter of last year, first quarter of this year.
Okay. Thank you, and just to 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.
Yeah, 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 nat gas approaches $2.50 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. 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.
Gary, if I can 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.
Right.
That doesn't necessarily predict the future. 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. 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. 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 2015 of any of the various stakeholder groups. 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? 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.
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. 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, the 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.
I don't believe that's the way it's going to go, but we will be prepared for that very remote possibility as the year comes to a close.
Thanks. That's my two.
Our next question comes from the line of John Barnes with RBC Capital. Please proceed with your question.
Thank you, guys. First, on the port situation, 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?
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 cost/value proposition that makes those imports want to come into the West Coast. Eric, you want to add anything to that?
I think that about covers it.
You still view it as a couple of percentage points of market share?
Yeah. Currently, East Coast has about 31. Historically, we've said that could go to 33 with the Panama Canal opening. As Lance said, the largest ships that are being built today really won't even be able to go through the expanded Panama Canal. There is a value proposition to the West Coast. If you look at ship spreads in terms of the cost, West Coast versus East Coast, and if you look at the cost of over-land bridge, rail, transportation, there's a natural economic driver to the West Coast.
Okay. My other one is, I know you've got an uncertain volume environment right now. I get where the pressure points are. 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 re-accelerate, that you're not back in a similar situation as you were in 2014?
Cameron, you going to handle it?
In 2014, our locomotive surge fleet strategy served us very well. When business came on, we were able to match that business. 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, we make our moves appropriately.
Okay. Thanks for your time. I appreciate it.
Sure thing, 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 supply chain partners to cope.
Sure. Yeah, I'll start and then Cam could finish. You're right, there is going to be a challenge. Basically the 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. That is a challenge that the alliances are working through, that the challenge of terminals are working through. That was a challenge that was starting to be seen before even the port slowdown.
We, from our side, are working with our customers, developing planning practices and protocols, 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? 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 L.A. Basin to stay up against the intermodal business is locomotives. 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 L.A. Basin are in the mid-90s, and we feel very confident we can keep it there.
Great. Thank you. That's all for me.
Okay, thank you.
Our next question comes from the line of Cleo Zagrean 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 frack rather than international intermodal coming back? Thank you.
Rob?
Yeah. 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. As always, we're going to continue to focus on being as efficient as we can on the cost side. As Eric's been talking all morning, we're going to continue to price to the value proposition. We're not throwing the towel in terms of the margins, we know we're going to face the headwind of those mix changes.
Thank you. 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 first quarter 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.
Yeah, there were no material kind of contractual share shifts that we saw.
What about Colorado, Utah, Eric?
Yeah, there were no material share shifts.
Okay. We have seen BNSF up like mid-high single digits and your volumes down. I was wondering whether those are related in any way. It's just totally separate tracks, to speak?
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 first quarter than we had, simply we had more deliveries last year. It would not surprise me if they had an opportunity for greater inventory replenishment.
Sure. Thank you very much.
Our next question is from the line of Brian Ossenbeck with JP Morgan. Please go ahead with your question.
All right, thank you. Good morning. I just had one quick one on frac sand as you're adjusting to the current outlook down mid-teens in the second quarter. 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. 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.
I'm not quite sure 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 how you think about the second half of the year with frac sand, if that comes from your-
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 Schoonmaker 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?
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 six 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?
Yeah, I'd had nothing more to add with that. Mexico continues to be an upside for us. We 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. That question actually has been, in fact, what we've experienced probably for 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, Rob?
It can be. Again, I would say in the overall scheme of things, it's no different than our overall enterprise mix.
Great. Thank you.
The next question. I'd now like to turn the call back to Mr. Lance Fritz for closing comments.
Thank you, Rob. What you heard us talk about today was a first quarter, 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 second quarter, 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.