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Operator
Greetings and welcome to the Norfolk Southern third-quarter 2015 earnings call.
At this time, all participants are in a listen-only mode.
(Operator Instructions).
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Katie Cook, Director of Investor Relations for Norfolk Southern.
Thank you, Ms. Cook.
You may now begin.
Katie Cook - Director of IR
Thank you, Rob, and good morning.
Before we begin today's call, I would like to mention a few items.
First, slides of the presenters are available on our website at NorfolkSouthern.com in the Investors section.
Additionally, transcripts and downloads of today's call will be posted on our website.
Please be advised that during this call we may make certain forward-looking statements.
These forward-looking statements are subject to a number of risks and uncertainties and our actual results may differ materially from those projected.
Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important.
Additionally, keep in mind that all references to reported results, excluding certain adjustments, that is non-GAAP numbers, have been reconciled on our website in the Investors section.
Now it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.
Jim Squires - President and CEO
Thank you, Katie.
Good morning, everyone and welcome to Norfolk Southern's third-quarter 2015 earnings conference call.
With me today are our Chief Marketing Officer, Alan Shaw; our Chief Operating Officer, Mark Manion; and our Chief Financial Officer, Marta Stewart.
Earnings for the quarter were $1.49 per share, which was 17% lower than last year's record of $1.79 per share and included $0.08 per share of expenses related to restructuring initiatives.
The results also reflect softness in the commodities markets, most significantly in coal where our revenues were down 23% in the quarter.
Alan, Mark and Marta will cover the various moving parts of the quarterly results momentarily, but before delving into that, let me highlight the progress we made on some longer-term initiatives during the third quarter.
First, we began restructuring our Triple Crown Services subsidiary.
With the restructuring, Triple Crown will focus on transporting automobile parts while NS will work with other supply chain partners to bring non-auto parts business into our conventional intermodal network.
Second, our headquarters consolidation initiative is mostly complete with employees formerly in Roanoke, Virginia now working in Atlanta or Norfolk.
This initiative allowed us to combine some functions while reducing management headcount and G&A expenses from having three back office locations.
It will give us a more cohesive and focused approach.
For example, in sales and marketing where all managers not in the field are now co-located.
Third, we completed the acquisition of the Delaware and Hudson Railway Company's line between Sunbury, Pennsylvania and Schenectady, New York from Canadian Pacific on September 18.
This relatively small scale but highly complementary transaction gives us full operational control of an important network segment and greatly enhances our ability to serve markets in the Northeast.
Implementation has gone very smoothly.
These three long-term initiatives are in addition to our ongoing and continual efforts to improve service, asset utilization and returns.
In that regard, I'm pleased to report that service improved in the third quarter and we are in good shape moving into the fall season this year with the onset of winter weather just a few months away.
As you will hear from Mark, key resources like crews and locomotives are reasonably well-balanced with demand right now while at the same time we are looking hard at underutilized assets in some parts of our network.
Without further ado, I will turn the program over to Alan, Mark and Marta, and we will return with some closing comments before taking your questions.
Alan?
Alan Shaw - EVP and Chief Marketing Officer
Thank you, Jim, and good morning to everyone.
We appreciate you taking the time to join us today.
There are four significant factors influencing our 2015 revenue.
First, fuel surcharges are the primary driver of the revenue decline we have been discussing since the first quarter.
The third quarter marks our largest expected quarterly drop in fuel surcharge revenue with a $255 million decrease.
Second, low commodity prices and the strength of the US dollar adversely impacted volumes of coal, steel, frac sand, crude oil and export traffic.
We estimate that almost 50% of our revenue base is tied to commodity pricing for foreign-exchange rates.
Additionally, inventory builds have softened freight shipments since the second quarter.
Despite these challenges, international intermodal, automotive and natural gas products all had large gains in the quarter.
Third, increased truck capacity, low diesel prices and service levels reduced the pace of highway conversions in 2015.
We expect truck capacity to tighten which coupled with continued improvement in rail service and Norfolk Southern's network reach will allow us to secure additional demand moving to rail.
Fourth, we've employed solid pricing that's demonstrated by gains in our revenue per unit excluding fuel overall and for all three primary business groups.
We achieved these positive results despite the negative mix associated with declines of several commodities previously referenced and in increased international intermodal.
Now our continued focus on pricing has allowed us to improve total revenue per unit excluding fuel each quarter of this year despite continued negative mix.
During contract negotiations, we focus on both price and the fuel surcharge program for the best overall long-term result for Norfolk Southern recognizing that the average duration of our contracts is in excess of three years.
We have emphasized market-based price increases and will continue with this focus reflective of the long-term benefit of rail transportation.
The strength of our diverse network including our intermodal and automotive system, transfer terminals and alignment with our short-line partners and the customers they reach gives us the opportunity to continue to provide ripe opportunities for growth.
Our service continues to improve and as it does, and as aggregate demand strengthens thereby negatively impacting trucking availability, we anticipate a return to strong domestic intermodal conversion in tandem with pricing strategies that are sustainable.
As our business mix changes, we continue our focus on the bottom line by evaluating our network for opportunities to increase earnings per share.
A good example of these strategic structure and efforts is our recently completed acquisition of the D&H South Line, streamlining operations in the Northeast and offering a more service competitive product.
Similarly, we recently announced the restructuring of our Triple Crown subsidiary which will reduce revenue beginning in the fourth quarter but is expected to be accretive to our bottom line next year and allows a more efficient use of capital.
Turning to the third-quarter results on slide three, our revenue declined $310 million primarily due to a combined $342 million decrease in coal and fuel surcharge revenue.
Focusing on our coal franchise, revenue declined by 23% due to a decrease in fuel surcharge revenue followed by lower export and utility coal volumes.
Utility reductions were driven by materially lower natural gas prices that impacted the dispatch position of coal plants on our network.
This, combined with stockpiles above target levels, led to a 10% decline in our utility market to 22 million tons; above our previous guidance of 20 million tons per quarter.
Export coal tonnage of 3.5 million tons was challenged by weak macroeconomic conditions, low benchmark prices and a strong US dollar.
While risk in this market exceeds that of utility, we continue to guide to 3 million tons per quarter through 2016.
Our domestic intermodal volume declined 5% due to network service challenges, lower fuel prices and increased truck capacity.
Domestic intermodal pricing remains strong and despite short-term truck capacity increases and softer truck spot pricing, we maintain a long-term projection of continued pricing gains and conversions to rail due to the value of the intermodal product as service improves.
Driver availability, hours of service, electronic logging devices have positively influenced pricing leaving shippers to lock in capacity for next year.
Our international intermodal volume grew by 9% due to growth at both East and West Coast ports as well as freight shifting from the West to East Coast ports taking advantage of our network reach and alignment with shipping partners.
Closing with our merchandise markets, the strong dollar and low commodity price environment negatively impacted steel, frac sand, crude oil and export grain.
Conversely, strong consumer spending assisted with gains in automotive, ethanol, construction materials and plastics.
Lastly, volumes of natural gas liquids improved due to increased fractionator activity on our network and domestic grain shipments grew due to regional crop opportunities.
Moving into the fourth quarter, we anticipate volume declines in our commodity and export markets.
Sequentially, most of these markets will remain flat compared to the third quarter although steel has the potential for further decline and export coal will likely be closer to our guidance of 3 million tons.
These continued declines in commodity prices and the Triple Crown restructuring will lower fourth-quarter volumes compared to last year with the year-over-year rate of decline expected to be similar to that of the third quarter.
Next year, we will clear the negative comps in the utility franchise, which was influenced by significantly higher natural gas prices and stockpile replenishments in 2014.
We continue with our guidance of 20 million tons of utility coal per quarter.
As stated earlier, the Triple Crown restructuring will allow Triple Crown to focus on its auto parts business with NS working with our shippers and channel partners to convert as much of their business as possible to the conventional intermodal network although the footprint of Triple Crown differs from our conventional network.
As Triple Crown provides a door-to-door retail service, the restructure is expected to negatively impact intermodal revenue per unit although be modestly accretive to earnings next year.
Reduced fuel surcharge revenue will continue to be a headwind in the fourth quarter although we will lap this comp after the first quarter of next year.
Long-term, we will continue to focus on market-based pricing gains while better aligning our fuel programs with expenses.
Despite the headwinds mentioned, our customers understand the value of rail transportation and as service continues to improve, we have the opportunity for market-based price increases and to grow our franchise.
We expect growth opportunities in our consumer based markets that include intermodal and automotive as well as housing and construction-related commodities, ethanol and basic chemicals.
We also expect the impact of inventory builds which will have a dampening effect in the fourth quarter will lessen by the first quarter of 2016.
Norfolk Southern sits at both ends of the economic spectrum -- production and consumption.
This diversity has helped us during economic downturns and is a continuing strength of our franchise.
Today, we are seeing growth particularly in automotive and the international side of intermodal.
The strong dollar is a challenge as is macroeconomic weakness overseas which contributes to lower aggregate demand.
Regardless, we are well positioned in multiple strategic markets for growth.
As we move forward through the fourth quarter and into 2016, we will continue to partner with our customers to pursue strategic solutions that capitalize on market opportunities that create efficiencies and improve network productivity while generating growth beneficial to the bottom line.
Thank you for your attention and I will now turn the presentation over to Mark.
Mark Manion - EVP and COO
Thank you, Alan, and good morning, everyone.
This morning I will update everyone on our operation which continues to trend positively.
Specifically we've seen year-over-year as well as sequential improvements in our service composite, speed and terminal dwell.
While we still have work to do, we are encouraged by these results.
But first let's take a look at our safety.
Our reportable injury ratio was 1.05 for the first nine months of 2015 as compared to 1.19 for the same period last year.
The train incidents for the first three quarters of this year were 143 versus 154 over the same period last year.
Grade crossing accidents through September 2015 were 255 down from 286 over the same period in 2014.
Turning to our service composite performance, we see services returning at a steady pace.
We are optimistic we will continue to experience improvement as our resources are largely in place.
With regard to manpower, we have a sufficient crew base.
In the third quarter, we added about 200 T&E employees.
We have modulated our hiring based on volume and we now expect our T&E count in the fourth quarter to be flat with the third quarter.
With regard to locomotives, we have a sufficient number of locomotives to handle our business and furthermore our locomotive availability continues to improve due to improved velocity.
Lastly, our operating plan in connection with our new yard expansion in Bellevue, Ohio is fully implemented and is benefiting us across the system.
Turning to the next slide, we see train speed and terminal dwell are improving as well.
Our speed for the quarter improved 3% year-over-year and our dwell has improved 6%.
These system improvements are important and it's also important to note we have seen solid improvement on our Chicago to Harrisburg line.
This line handles the highest volumes on our system with a heavy concentration of intermodal.
Our third-quarter premium intermodal speed for this route is nearly what it was in 2013 and recently that speed has actually exceeded 2013 levels.
In addition to the efficiencies we are seeing with our improving operation, we are continuing to make strategic reductions associated with our decrease in coal volumes.
We have made manpower reductions at our Lamberts Point Coal Pier as well as in the Central Appalachian and Northern Appalachian region which encompass all of operations not just transportation.
Furthermore, we continue to make changes to some of our coal routes with the most recent affected lines highlighted on this map.
We have also reduced capital spending on branch lines where we've seen lower coal mine production.
These contractions to our employee counts and infrastructure have been a result of our continual efforts to match our level of investment to a changing marketplace.
With that, I will now turn it over to you, Marta.
Marta Stewart - EVP of Finance and CFO
Thank you, Mark, and good morning, everyone.
Slide 2 summarizes our operating results for the third quarter.
As Alan has already discussed, the 10% decrease in revenues was largely related to lower fuel surcharge and to lower coal volume.
Operating expenses in total declined by $134 million or 7%.
Expenses benefited from significantly lower fuel prices but were unfavorably impacted by restructuring costs.
The net result was an 18% reduction in income from railway operations and a 69.7 operating ratio for the quarter.
The next slide shows the major components of the $134 million or 7% decrease in expenses.
As I just mentioned, fuel was the primary driver of the overall reduction and favorability in the compensation and benefits category also contributed to the decline.
Before we get into the detail of the operating expenses, let's take a look at the effect of the restructuring costs on slide 4.
The first column shows the Triple Crown related charges.
As Alan described, our Triple Crown Services subsidiary will beginning in mid-November be focused exclusively on its auto parts business.
Therefore, the bulk of the RoadRailer equipment used by Triple Crown will be surplus at that time.
The $26 million shown as accelerated depreciation is the third-quarter charge for Triple Crown equipment.
Turning to the Roanoke closure costs, they totaled $10 million in the quarter and consisted primarily of moving and office space expenses which are reflected in the materials and other and in the purchase services line item.
These costs added $37 million to the quarter and impacted the bottom line by $23 million or $0.08 per share.
Going forward, we expect these two items to total $45 million in the fourth quarter with Triple Crown restructuring costs of $36 million and Roanoke office closure costs of approximately $9 million.
Now let's take a look at the major expense line items.
As shown on slide five, fuel expense decreased by $166 million or 43%, the majority of which was driven by lower fuel prices.
Slide six details the $26 million or 4% decrease in compensation costs.
Bonus and stock-based compensation expenses were lower by $51 million resulting from the decline in financial results.
We expect fourth-quarter incentive compensation will be about $20 million lower than last year.
Pay rate and payroll tax increases as we discussed in the second quarter earnings call, began to moderate after July 1 and they were up $17 million and $9 million respectively.
And lastly, we continue to run with a somewhat higher level of trainees and that expense was up $6 million.
Next, materials and other costs decreased $3 million or 1%.
Material usage primarily associated with locomotive and freight cars declined by $10 million.
We also have lower derailment expenses.
However, these items were partially offset by the aforementioned restructuring costs.
As shown on slide 8, depreciation expense increased by $39 million or 17% due largely to the effect of accelerated depreciation of Triple Crown assets and also as a result of our larger capital base.
As Jim mentioned, we completed the acquisition of the D&H line during the quarter and this increased our capital base by $215 million.
Turning to slide 9, purchase services and rents were up $22 million or 5% reflecting higher costs associated with equipment rents, engineering expenses and the Roanoke closure.
As noted by Mark, velocity and terminal dwell have continued to improve and we expect these expenses to decline sequentially in the fourth quarter.
Other income reflected on slide 10 rose by $7 million or 22% aided by $19 million in higher gains from sales of property offset in part by decreased returns from corporate-owned life insurance and lower coal royalty.
Slide 11 depicts our income tax accruals and expected rate.
The 37.6% third-quarter rate is in line with our full-year guidance of 37.5%.
Wrapping up our financial overview on slide 12, net income decreased by $107 million or 19% and earnings per share was down $0.30 or 17% inclusive of the $0.08 of restructuring costs.
Thank you and I will now turn the program back to Jim.
Jim Squires - President and CEO
Thank you, Marta.
As you have heard this morning further softening in the commodities markets weighed on our third-quarter results and it has tempered our fourth-quarter outlook as well.
We now expect fourth-quarter volumes will decline versus last year at a rate similar to our third-quarter results.
This year obviously has been a challenging one.
We didn't deliver the kind of improvements you and we expect but looking to 2016, we are confident that with a reasonably stable economy and our own intense focus on service returns and growth, we are poised for better results.
Thank you for your attention and we are now happy to take your questions.
Operator
(Operator Instructions).
Tom Kim, Goldman Sachs.
Tom Kim - Analyst
Good morning and thanks for your time here.
Obviously this is an encouraging set of results and we're certainly pleased to see the improvements on the cost side.
I wanted to ask just a first-off question with regard to some of your cautious comments around the nearer-term demand outlook.
How do we reconcile that with some of the increased training costs and your headcount expectations nearer-term?
Jim Squires - President and CEO
Tom, let me answer that first.
Obviously we have some short-term headwinds in terms of the trend in commodities and business conditions generally offset by continuing strength in some of our consumer markets.
But our strategy is designed to carry us through economic cycles because it focuses on fundamentals.
First, service; excellent service will allow us to increase prices and reduce costs.
And second, return on capital because we are a very capital intensive business and every dollar that we spend must have revenue and profit generation potential.
And third, growth.
We do want to grow our topline and see opportunities to do so even in a so-so economy.
We will do that first through price increases; second volume growth, utilizing existing assets; and third and only as necessary, growth through capacity additions.
So that in a nutshell is our strategy.
We think that will carry us through changing business conditions.
Now let's talk about the short-term resource picture.
As I mentioned, we view key resources, crews and locomotives as essentially in balance with demand as we see it today.
With that said, we are going to be nimble with resources and if business conditions change so will our resource strategy.
Now, Marta, why don't you talk a little bit about the specifics around headcount trends and other efficiency-related spending?
Marta Stewart - EVP of Finance and CFO
All right, sure.
Tom, we have earlier guided that we thought we would increase headcount about 1000 for the full year.
But as Mark said, we're now up about 800 from the fourth quarter of last year to the third quarter of this year.
As Mark said, we now do not think we are going to add that additional 200 for the end of the year so we think we are going to stay flat through this year.
And looking into 2016 as Jim just described, we think that's the right level for the Company.
Tom Kim - Analyst
Just on that point if I could ask maybe a bit of a longer-term question.
As we have looked through your headcount and overall productivity, we've seen volumes affectively peak around 2006 and volumes even against last year's level are still below that prior peak.
But your overall headcount levels are still at the 2006 levels.
And I guess I'm wondering is there something structurally that has changed in your book of business that requires more headcount per carload or does this present perhaps an opportunity to improve productivity?
You kind of alluded to the fact that as velocity increases, you potentially have room to be actually driving productivity further.
So if you could just maybe elaborate a little bit more about the longer-term outlook for us because as we think about your OR, we certainly think and hope that there is opportunity to continue to drive that down.
But one of the areas I've been looking at is just on the labor productivity side and it looks like you have room there to improve.
And I just wanted to get your perspective on how do I think about the longer-term opportunity there carload to employee headcount?
Thank you.
Jim Squires - President and CEO
Sure.
Great line of questioning and we are absolutely focused on productivity and as the network velocity continues to increase, we will have opportunities to reduce headcount relative to the volume trend.
Mark, why don't you comment on that?
Mark Manion - EVP and COO
Yes, I'd be glad to and we actually started modulating our hiring on the T&E side particularly back last summer.
So we've been hiring more to attrition levels ever since mid-summer and anticipate that will continue to go on again based on -- dependent on the business volumes.
But as our velocity continues to increase, there are just great things that happen with that.
And aside from the customer service side which is favorably impacted as well, but those velocity increases really help us on the cost side and it helps us reduce our employment, it helps us reduce our overall asset base.
We will have the advantage of picking up more locomotives as a result of that.
Our expenses decrease as our asset turns increase.
And another thing that we see is re-crews go down and in fact they have been going down.
Even third-quarter, they were down -- re-crews were down 6% and we will continue to see that trend.
Our overtime was down on the T&E side, not overall, but I think we will continue to see favorable trend on the overtime piece as well.
So we will see that in fourth quarter.
We will continue to see that going into next quarter and even things like our engineering department.
As our fluidity improves, as our velocity improves, we can be more scheduled with our engineering department.
They get more track time, they get out on the track when they need to be.
They don't accumulate the overtime they otherwise would.
So in short, improved velocity just drives a lot of good things when it comes to cost reduction.
Tom Kim - Analyst
I appreciate that detail.
Thanks a lot.
Operator
Allison Landry, Credit Suisse.
Allison Landry - Analyst
Good morning.
Thanks for taking my question.
First, I was wondering if you could talk about the decline in domestic intermodal and particularly relative to your main competitor which saw a 15% increase in the business.
So what I was wondering is if you could quantify or help to frame any potential share losses there and whether you expect to fully recapture those volumes and over what period of time?
Jim Squires - President and CEO
Sure.
Alan, why don't you take Allison's question on that?
Alan Shaw - EVP and Chief Marketing Officer
Allison, the story for our domestic intermodal franchise is one that I highlighted earlier.
It has been fuel, it has been truck capacity and it's been a service product that is not conducive to shifts to rail.
That's going to get fixed and we're already seeing improvements in our velocity in our intermodal and we're starting to see an uptick in our intermodal volumes.
And on the domestic side and certainly on the international side, we've seen great strength this year with more volume through the East Coast and our alliance with our shipping partners who are adding more capacity from the Far East to the East Coast and we expect the same next year.
So we feel very good about our intermodal franchise going forward both domestically and internationally.
Allison Landry - Analyst
Okay.
And my follow-up question on coal, thinking about the RPU on an ex fuel basis being up slightly year-over-year, could you talk about some of the dynamics there that pushed that to the positive side of the ledger?
Was it mix, was it the lapping of rate cuts on the export side or a shift to fixed/variable contracts?
Alan Shaw - EVP and Chief Marketing Officer
Sure Allison.
Actually we've experienced negative mix within our coal franchise as we had a 37% decline in export which as you know tends to be longer haul which is effectively a proxy for RPU.
So despite that we've got increases and it's increases in RPU although very slight, it is a positive and we are going to hold onto that.
But it's a function of our long-term pricing strategy in the coal markets and we feel very good next year because we are not going to have that negative comp in coal with respect to the utility franchise that we did this year.
Allison Landry - Analyst
Okay, thank you.
Operator
John Barnes, RBC Capital Markets.
John Barnes - Analyst
A follow-up question on the domestic intermodal side.
In terms of the service that you are providing, I think I'm hearing you say you're not in a position yet where you are offering a truck like product.
Is that harming you more on the length of haul?
Are you still very competitive of the longer stuff but it's putting pressure on the shorter length of haul where at higher diesel fuel rates you were becoming more competitive?
Jim Squires - President and CEO
John, let me comment on our domestic intermodal strategy briefly and then I will let Alan address the specifics of your question.
We certainly do want to grow our domestic intermodal business and we have a service product that allows us to do that today.
Can we be even better and attract even more freight from the highway?
Absolutely and that's our goal.
Now with that said, our growth strategy in domestic intermodal is a combination of volume growth and pricing.
Pricing is absolutely critical in that franchise as it is elsewhere.
And so our strategy is to grow that business as with our other businesses through price increases, through volume growth using existing assets to the maximum extent possible and last through increases in capacity but only where necessary.
Alan, what about the specifics of John's question?
Alan Shaw - EVP and Chief Marketing Officer
John, to your question with respect to if there's a difference between length of haul and our ability to retain business or grow business through fuel, we have not seen that.
John Barnes - Analyst
Okay, all right, no worries.
In terms of network realignment, I guess just from the standpoint of you own more of your -- and I am thinking more on the coal export side -- you own more of your assets there, whether it is the coal loading facilities and things like that.
If we are now looking at a more permanently impaired export market, how are aggressive can you be on realigning the costs around the export side of the business?
And are their assets to shed things along those lines that may be better align those resources with the current volumes and then maybe even a little bit longer outlook which again looks to be maybe a bit more impaired?
Thank you.
Jim Squires - President and CEO
I will get Mark to comment on some of the specific moves we've made in our coal franchise following up on his commentary.
But let me just say we have fixed assets in our coal network as we do throughout our Company and we are looking hard at which of those is underutilized and we will continue to do so.
We have substantial fixed assets devoted to our coal franchise in the form of tracks and freight cars.
One thing we can do and have done already is to begin working down the size of our coal car fleet and we can redeploy locomotives.
So that's a fungible asset.
This is a notoriously volatile market.
We don't believe we have seen the best days of export coal.
We think that the commodity cycle eventually will turn and those assets will be fully deployed again.
Mark, talk a little bit more about what we're doing in the coal fields.
Mark Manion - EVP and COO
Yes, more current day, we are actually -- we've furloughed or are in the process of furloughing about 150 people and that is across all the departments and operations including transportation mechanical engineering.
We have as I mentioned in the remarks, we've got lines that we have more recently either taken out of service or have pulled back on the investment for those lines.
We continue to scrub Central App as well as other areas in our coal franchise.
But let's also keep in mind that we've got areas in our coal business where we've had some nice activity going on and continue to have promise for the Illinois Basin coal.
So it's a bit of a mixed bag but we will continue to scrub that Central App in order to ensure that we are reducing our costs commensurate with the level of activity out there.
John Barnes - Analyst
Thanks for your time.
Operator
Jason Seidl, Cowen and Company.
Jason Seidl - Analyst
I wanted to focus a little bit on intermodal.
Clearly, you've admitted you needed to get the service levels back up but it seems like that's happening.
So that should be a good thing for freight as we head into 2016.
However, longer-term, how do you think about investments in that network profitability of that division as it takes over a larger percentage of the business (inaudible)?
Jim Squires - President and CEO
It's good business, it's a growth opportunity and it has been the volume growth engine of the Company for years.
That's likely to continue given secular trends in trucking.
With that said, we're going to be very judicious with our investments and make sure that they are revenue and profit maximizing which is one of the foundations of our strategy.
That applies to the domestic intermodal business as it does to all other businesses we operate.
We should talk a little bit about international intermodal.
That's a real bright spot right now.
So Alan, why don't you expand on that a little bit?
Alan Shaw - EVP and Chief Marketing Officer
So as we discussed, it has grown in the upper mid-single digits for the year.
We anticipate a continued growth along that level in the near-term future as more volume matriculates over to the East Coast from the West Coast and folks with whom we've aligned are adding capacity into the East Coast and it allows us to build a lot of revenue density in our trains so it makes for a very efficient movement.
We're excited about that and the growth opportunities and the returns that that provides.
Jason Seidl - Analyst
Is there any way to quantify how much of that freight that moved over to the East Coast is sticky and how much either went back or will go back after this year?
Alan Shaw - EVP and Chief Marketing Officer
Yes, some of it has definitely gone back.
There's absolutely no doubt about that but still East Coast volumes are up.
And as the Panama Canal widens, we are going to see even more larger ships hitting the East Coast which are going to need to make multiple ports of call to discharge our cargoes.
So that's going to have a benefit for the ports that we serve all up and down the East Coast.
Jason Seidl - Analyst
Are we going to see more on dock rail at some of the ports do you think as that business comes in?
Alan Shaw - EVP and Chief Marketing Officer
At least one of the ports has announced that and have a structured plan for that.
Jason Seidl - Analyst
Okay, gentlemen, thank you for your time.
Operator
Tom Wadewitz, UBS.
Tom Wadewitz - Analyst
Good morning.
I wanted to see if -- Mark, I think in the past you have talked about productivity targets and I know with the big change in volume that it's an operating leverage effect.
But what do you think the kind of productivity number is that you might achieve this year and how would you frame that opportunity for next year in terms of how you would define productivity?
I think in the past you've said something around $100 million.
So I wonder if you could offer some thoughts on that topic.
Jim Squires - President and CEO
I'll take that one, Tom.
We absolutely have productivity opportunities as we've been through this morning and as the network picks up speed, we will start to throw off a lot of productivity.
We are also working on a number of business process initiatives and capital utilization initiatives that should lead to productivity benefits.
All of that should add up to a sizable offset to volumetric and inflationary pressure on our expenses particularly next year when operations are really humming.
Tom Wadewitz - Analyst
Okay.
And then in terms of coal, how do we think about -- I think you commented, Alan, that coal stockpiles are above target.
I don't know if you could comment on maybe how far above target and whether that's the source of risk to your 20 million tons per quarter view that it's possible a couple quarters you run below that to get the stockpiles down and then you get back to that 20 million a quarter.
But some thoughts on coal related to stockpiles.
Alan Shaw - EVP and Chief Marketing Officer
Yes, that's a good question, Tom.
We've actually seen stockpiles decrease in this quarter even though we exceeded our guidance by about 10%.
So while stockpiles do have an impact, it so far has not negatively impacted our ability to get our targets.
Right now we are estimating that stockpiles are about 15 days above target.
I would say about five days in the South and about 25 days in the North.
Tom Wadewitz - Analyst
Okay, great.
Thanks for the time.
Operator
Rob Salmon, Deutsche Bank.
Rob Salmon - Analyst
Another one here on coal.
It looks like the tons per car increased significantly in the third quarter up to about 112.
Can you give us a sense what's driving that?
Has this been the result of changes in the network or is this merely business mix because we haven't been at this level for a long time?
Alan Shaw - EVP and Chief Marketing Officer
We are always focused on tons per car.
So in the coal network, we are paid by tons.
So any time we can improve the revenue density on a coal train, it's very beneficial for us.
One of the factors that impacted the improvement in tons per car immediately in the third quarter was a continued decline in export volume.
Metallurgical volume to the ports typically has a lower tons per car than utility volume.
Rob Salmon - Analyst
Got it.
I guess we should be thinking about something around these levels looking forward given some of the challenges that are impacting the export book of business?
Alan Shaw - EVP and Chief Marketing Officer
To the extent mix stays the same, yes.
To the extent that we're continuing to work with our producers to get the optimum load level on the number of cars per train, then we will improve the profitability of the individual trains.
Rob Salmon - Analyst
Thanks, that's really helpful.
I guess turning it over back to intermodal as well as the pricing, we've been hearing a lot about truck capacity having loosened up which has negatively impacted the overall spot market from a pricing perspective.
Obviously with Norfolk, we are seeing better service across the network with the velocity having ticked up here as well as the service composite improved.
But how confident are you that we can see further improvement in price or just maintaining the level of pricing looking out to next year given a tough volume environment outside of the coal franchise as well as some weaker truck pricing that we are seeing in the marketplace?
Alan Shaw - EVP and Chief Marketing Officer
Can you clarify?
Are you asking about pricing in intermodal or overall?
Rob Salmon - Analyst
Just overall pricing just given what we are seeing in the trucking marketplace with capacity having loosened up somewhat offset by service improvement.
How are you guys thinking about the ability to maintain current pricing or potentially improve it as we look forward?
Alan Shaw - EVP and Chief Marketing Officer
We feel good about it and we feel good about what we've accomplished so far recognizing we have room to grow.
Our RPU ex fuel has grown each quarter of this year and our customers are taking a long-term view of this and they are recognizing the long-term value of the rail transportation and frankly when service is back to where we want it to be and we're making great strides to get there, then intermodal is a very easy sell even with a tightening between the truck market and intermodal pricing.
Lastly, I'll add that we are taking a long-term view of this.
And as Jim talked about, we are going to grow via price and we are going to grow via utilizing existing capacity.
And then any additional investment that we'd require is going to have to generate an acceptable level of return.
Jim Squires - President and CEO
Service led price increases are a key component of our strategy and that applies to our domestic intermodal segment as well as all other segments of our business.
Alan Shaw - EVP and Chief Marketing Officer
Rob, as you know, spot pricing has gone down in the trucking industry but contract pricing is still up year-over-year.
Now it has moderated but it is still up because shippers are concerned about long-term truck capacity.
So that certainly plays into the thesis for the value of rail transportation.
Rob Salmon - Analyst
Thanks.
I appreciate the thoughts.
Operator
Matt Troy, Nomura Securities.
Matt Troy - Analyst
Thanks and good morning, everybody.
I just wanted to ask about coal specifically related to your 20 million ton per quarter run rate going forward guidance.
It would imply something flattish to what you saw in 2015 a little bit more optimistic than the other railroads.
Just wondering if you could help us maybe from a bottoms up perspective how you get there, how much of that might be under contract because I am contrasting it with some pretty dire commentary from CONSOL and Peabody and other coal companies yesterday and earlier in the week about the outlook for domestic coal.
So I'm just wondering, be it mix shift, be it certain contracts you've secured, how you are confident that the coal volumes at 20 million per quarter will be flattish in 2016.
Some help there would be great.
Alan Shaw - EVP and Chief Marketing Officer
If you think about the current natural gas environment, most of the conversions from coal to gas have already occurred -- would have already occurred.
Natural gas I know right now is close to $2 per million BTU, but the futures curve for next year is about $2.65 on average, which is pretty similar to where we were in 2012.
So we can model our volumes at the plants and units that we serve versus 2012.
We also know that most of the near-term environmental headwinds associated with MATS.
We have already been impacted by that, so that's not going to be a headwind going forward.
Now longer term the clean coal plant will potentially have an impact and we are working with our customers to try to completely understand that and run scenarios within our own planning horizon.
But through 2016 based on our conversations with our customers and modeling how their plants perform in 2012, we feel good about our volumes of 20 million tons per quarter.
Matt Troy - Analyst
Understood.
I guess my follow-up would be if you could provide -- Triple Crown has had an interesting evolution under the Norfolk umbrella.
If you could just refresh us in terms of the rationale for the restructuring, the focus on auto parts and your commentary was interesting on how it would be mildly accretive next year.
Could you just help us get from where the thought process was on Triple Crown say a year or two ago to why this restructuring makes sense and tactically what's going to drive that accretion or efficiency or productivity relative to those assets?
Thanks.
Jim Squires - President and CEO
The strategy involves focusing Triple Crown on what Triple Crown does best and that is transport auto parts and re-channeling with other supply chain partners, non-auto parts business into the conventional intermodal network where those customers and that volume can enjoy maximum efficiencies.
Alan Shaw - EVP and Chief Marketing Officer
You'll recall Triple Crown was originally an auto-parts network.
Matt Troy - Analyst
Right so this is just after a little bit of scope creep, it is just doubling down on the core competency of the business (multiple speakers)
Alan Shaw - EVP and Chief Marketing Officer
And it's going to improve our capital utilization by re-channeling as much of the other business, the [Freight All Kinds] into our existing intermodal network where we already have the capacity.
Matt Troy - Analyst
Understood.
Thank you for the time.
Operator
Chris Wetherbee, Citigroup.
Chris Wetherbee - Analyst
Thanks.
Good morning.
Wanted to -- I think in the past you have recently talked about potentially volume increases in 2016.
I guess I just wanted to get a sense in light of what your view is on the fourth quarter and some of the challenges shorter-term in the business how should we think about that?
Is your thinking changing at all?
Obviously you have given the view on coal.
I just want to get a sense the rest of the business how you think about it for 2016 as the set up is right now.
Alan Shaw - EVP and Chief Marketing Officer
Absolutely.
We still feel very good about 2016.
Our volumes year to date are down 1.2% in an environment where we have had 20% declines in our utility coal franchise, 35% declines in our export coal franchise and we haven't been able to attract highway conversions to our intermodal network.
We are going to clear all of that next year.
There is some underlying growth in international intermodal.
We have talked about the automotive franchise is doing very well for us.
Consumer goods are doing well.
So once we clear some of these very visible comps or headwinds into next year, then you are going to see we are all going to see the benefits of the underlying growth in some of these other markets.
Chris Wetherbee - Analyst
Okay, that's helpful.
As a follow-up just switching to the pricing side, you mentioned earlier the focus on fuel surcharge adjustments and having to work through the book of business as it comes up for renewal.
If you could just give us an update on how that process has been playing out, receptivity of customers which I'm guessing is never great to a rate increase and potentially a surcharge in there.
But I want to get a sense what are the puts and takes and do you have to give it all in pricing in order to get the fuel surcharge and how you prioritize those?
Alan Shaw - EVP and Chief Marketing Officer
Chris, you bring up a great point.
We prioritize the price first and we always will.
So we are not going to give up on price just to shift to another fuel surcharge program.
Over time we are going to be working with our customers to align our fuel surcharge program more closely with expenses and also importantly take the volatility out of it.
It's a lot more difficult to do in this environment where the WTI-based fuel surcharge which is on about 50% of our business is out of the money.
Chris Wetherbee - Analyst
And the progress to that, it's sort of a multiyear effort is my guess?
Alan Shaw - EVP and Chief Marketing Officer
Correct and it will certainly be benefited as oil prices increase.
Chris Wetherbee - Analyst
Fair enough.
Thanks for the time.
I appreciate it.
Operator
Scott Group, Wolfe Research.
Scott Group - Analyst
Thanks.
Good morning, guys.
Just first thing real quick, Marta or Alan, did you guys give a composite mix number on the quarter?
Jim Squires - President and CEO
Are you referring to the trend in mix in overall RPU?
Scott Group - Analyst
Yes.
Jim Squires - President and CEO
Okay, so what is the change attributable to mix in total RPU?
Marta Stewart - EVP of Finance and CFO
It's a slight negative overall and that's because export coal went down slightly.
And it is almost flat.
Scott Group - Analyst
Okay, thank you.
In terms of coal again, there was a pretty nice sequential increase in coal yields.
Can you help us explain that, Alan?
I'm not sure if there's any liquidated damages in there or if that's mix and then just how to think about that going forward on a sequential basis for coal yields?
Alan Shaw - EVP and Chief Marketing Officer
Certainly we have had negative mix associated with export and so that has been an impact.
We have had more utilities South volume which tends to be a longer haul for us and so that has propped up the utility yield.
Scott Group - Analyst
With your comments about stockpiles in the South being closer to target than the North, would you expect that mix to Southern utilities to continue?
Alan Shaw - EVP and Chief Marketing Officer
We feel good about our Southern utility franchise going forward.
The North is sitting frankly right on our Marcellus natural gas play so spot natural gas prices are very low, even below the Henry hub published numbers.
So the opportunity exists for a greater percentage of new South and new North going forward than we've had in the past.
Scott Group - Analyst
Okay.
And then just last thing, I want to go back to the headcount question from earlier.
So we have seen all the other rails implement some pretty meaningful headcount reductions and I know your headcount was up sequentially.
I certainly understand your service metrics weren't and didn't improve as quickly as some of the others.
But now that the service is improving, I guess I'm not sure why you don't have an opportunity to take out a good amount of headcount like we have seen all the other rails do as their services caught up.
Marta Stewart - EVP of Finance and CFO
Well, as Mark mentioned, we have a small opportunity - maybe not the size you're talking about, a big opportunity -- we had a small opportunity and we took it incrementally.
In the fourth quarter, we think we are going to be flat.
Really, Scott, what we are looking at in 2016 in terms of productivity is not so much -- because as we said we've guided towards level headcount next year so it's not so much the headcount but it's the cost of those individuals.
So he pointed to the fact that we have costs now such as re-crews and overtime things like that, lack of track time because of the inconsistent velocity.
So it's the price per hour if you will that we think is where we are going to get the most productivity next year.
As we've said a couple of times, we believe absent a significant decline in volume which we do not foresee now that we think the headcount level where we are at now in the third quarter is a good run rate for 2016.
Scott Group - Analyst
And Marta, you think that you could see savings on a per employee basis even with higher incentive comp next year?
Marta Stewart - EVP of Finance and CFO
Higher incentive comp, I'm looking at separately.
So this year's incentive comp is down.
Assuming financial results are better next year, that will be up.
So absent the things that are stand-alone like incentive comp and pension and post-retirement, (inaudible), the actual cash cost to the employee per person we think will go down next year.
Scott Group - Analyst
Okay.
All right, thank you.
Operator
Alex Vecchio, Morgan Stanley.
Alex Vecchio - Analyst
Thanks for the time.
I hate to beat a dead horse but just back to the resource topic, specifically for the fourth quarter you guys are expecting total volumes to be down about 3% in line with the third quarter which would imply sequentially about down 4% yet you are not expecting to reduce the headcount.
Can you just speak a little bit more specifically to the fourth quarter itself and why the carloads are going to come down but the headcount you don't expect to?
Jim Squires - President and CEO
Listen, we are going to be nimble with our resource strategy and I said that earlier and if we see volumes deteriorate beyond where we think they are headed, then we certainly will begin addressing the labor side of the resource equation.
But we are also focused on maintaining and improving service and that requires a certain level of employment.
Moreover, we think we came into this a little bit leaner than others and therefore we have a little bit less to shift.
Alan Shaw - EVP and Chief Marketing Officer
I will also add that there is always a sequential fourth quarter decline in volume associated with holidays.
So while that doesn't impact the year-over-year comps, you are looking at sequential and so that does have an impact.
Alex Vecchio - Analyst
Okay, that's helpful.
Jim, back to the service levels, I think a few quarters ago you were talking about expecting them to get back to quote unquote normal by the end of the year and they certainly have shown improvement recently here.
But it looks a little bit still a ways away from the 2012, 2013 levels in terms of the metrics we see on the train speed and dwell.
Can you maybe talk to -- do you still expect the service to get to the normalized levels by the end of this year or maybe it might take a little bit longer into next year at this point?
Jim Squires - President and CEO
You are right.
We haven't made the kind of progress we said we would make on service as measured by network velocity and dwell, the metrics you see or internally.
But we have made substantial progress and we are in a lot better condition now than we were a year ago.
Using our internal metrics, our composite metric is more than 10 percentage points above where it was last year at this time and trending well versus a downward trend last year.
So we feel very good about where we are in terms of our service and our intermodal premium trains are running extremely well.
The network is in overall much better shape.
We still have a ways to go and we will continue to push on that composite metric and get velocity up too.
So that's our strategy.
It's taking a little bit longer for us to get there than we had thought but we are well on our way.
Alex Vecchio - Analyst
Okay.
That makes sense.
Just lastly a housekeeping question here for Marta.
I think you had mentioned earlier in the call you expected purchase services and rent expense to be down sequentially in the fourth quarter.
I was wondering maybe if you could maybe give us a little bit more quantification of how much you expect those buckets -- that bucket to be down sequentially?
Marta Stewart - EVP of Finance and CFO
Well we don't give guidance on specific dollar amounts but what I will say is we had a little -- two things mentioned there is we had some service related costs in purchase services because we didn't quite get the velocity we had hoped for the quarter.
So we had that in purchase services and in equipment rents to the tune probably of about $6 million, $5 million or $6 million in addition to the service related costs we had in compensation and benefits.
And the other item is after the November 15 or 18 Triple Crown changeover, the Triple Crown dray costs are in that line item.
So they will as the business transitions over to intermodal, the dray part costs will be in purchase services.
Alex Vecchio - Analyst
Okay, that's helpful.
Thank you for the time.
Operator
Ken Hoexter, Bank of America.
Ken Hoexter - Analyst
Great.
Good morning.
I know it's been a long call.
Jim, congrats on the chairmanship and Mark, good luck in your upcoming retirement.
Just maybe some clarification on a couple coal comments.
Alan, you talked about clearing the deck.
I just want to clarify to your answer before, do you have any more [MATS or Casper] closings that are mandated in 2016?
And then is the 3 million run rate what you are looking for on the export side?
I know you kept mentioning the 20 million on the domestic.
Are you looking at the 3 million to hold through 2016 on the export side?
Alan Shaw - EVP and Chief Marketing Officer
We've got about one or two plants, smaller plants that will be impacted by mats so it's not going to have that much of a material impact on what we are doing in our coal franchise next year.
On the export side, yes, we are continuing to guide to 3 million tons a quarter although I'll tell you that has more risks associated with it than utility guidance.
And we are, as I know you are, we are watching the worldwide indices and the spot market for puttings on coking coal is now down in the low 80s per metric ton.
Ken Hoexter - Analyst
Okay.
So even with the prices which doesn't really make sense to ship, you are still thoughts are that it kind of holds at these levels?
Are there contracts that lock that in?
I just want to get some idea of what level of confidence you have in that or is that just an aggressive or conservative view?
Alan Shaw - EVP and Chief Marketing Officer
To which are you speaking?
Ken Hoexter - Analyst
To the 3 million ton outlook on the export side.
Alan Shaw - EVP and Chief Marketing Officer
That has downside risk to it.
Ken Hoexter - Analyst
Okay.
Lastly, Jim, just stepping back and there been a lot of questions on employee and headcount and efficiency.
Your last sentence that you kind of noted that you came into this a bit leaner than others in the downturn.
Maybe just get your thoughts internally on the operating ratio at 69.7, finally moving below 70 but now the industry has moved far ahead that your peers are now over 500 basis points better in the third quarter.
You now have three carriers at or below 60.
Do you step back and kind of think about something needs to be overhauled or completely changed in the way you've been operating to adjust that operating ratio?
Just as the peers are moving, it looks like farther away on that metric, just what do you think needs to be done?
Jim Squires - President and CEO
Well I think we're going to make a lot of progress on the operating ratio and we have the ability to lower the operating ratio significantly and we are confident that we can do that.
Do I think we are going to post a 53 operating ratio next year?
Probably not.
Hats off to those who are at that point already.
But with that said, we have a lot of progress that we can make on our operating ratio.
We are keenly aware of where we stand in the peer comparisons and we are determined to improve our performance both in terms of lower operating ratio and higher earnings.
Ken Hoexter - Analyst
Okay.
So you don't step back as now in the Chairman CEO role and say wow we need to either gut programs or overhaul something?
I see this step on Triple Crown but there's nothing that you see needs to be overhauled to really make fundamental changes to get that lower?
Jim Squires - President and CEO
Nothing is off the table and we are having far-ranging strategic discussions inside the Company right now.
So we could certainly entertain different approaches to sizing our asset base relative to our revenue and income generation potential.
That's a strategy that takes a while to deploy and deserves careful consideration because any strategy that starts shaving off significant portions of the asset base entails the risk of revenue loss.
So we need to be very thoughtful about that but certainly we are open internally and talking about different ways to run this Company and are determined as I said to reduce the operating ratio and grow our profits.
Ken Hoexter - Analyst
Is there a certain level of OR if the industry approaches that you fear are more regulatory inside or overhang?
Jim Squires - President and CEO
Well look, the industry's view and I think it's the right view is we need to generate substantial profits and returns in order to justify reinvestment.
We are a very capital intensive business.
We have major reinvestment needs and the only way that's going to happen is if we generate adequate returns.
So that's our focus.
I think it's a compelling argument in the regulatory arena.
Don't cap our returns otherwise you will see reinvestment decline and I don't think anybody wants that.
Ken Hoexter - Analyst
Jim, I appreciate the time and insight.
Thank you, guys.
Operator
Justin Long, Stephens.
Justin Long - Analyst
I wanted to start maybe following up on that last question.
I wanted to ask about CapEx.
It sounds like there are several areas where you are improving capital efficiency.
So with that in mind, how do you expect your CapEx to trend next year?
Is there an opportunity on an absolute dollar basis for CapEx to be down in 2016?
Jim Squires - President and CEO
Absolutely.
Now bear in mind that CapEx in 2015 includes the D&H acquisition at or around $200 million.
So barring some more transaction next year, that would come off CapEx and we do believe we have room to bring CapEx down beyond even that component.
So yes, look for somewhat lower capital spending next year from us.
Justin Long - Analyst
Any initial order of magnitude that you are thinking about or is it still too early?
Jim Squires - President and CEO
Well, I will say this, it is early and we haven't completed our capital budget for 2016 yet but in my view the kinds of capital spending that we've been putting up relative to revenue or cash flow is not something we want to continue to do and we do see a need to bring CapEx down relative to sales and relative to cash flow.
That's our plan starting next year.
Justin Long - Analyst
Okay, great.
Maybe as my second one, I wanted to ask another one on pricing.
So as we look into 2016, do you think the magnitude of core price increases will look similar to what you've experienced this year or with uncertainty in the industrial economy, do you see downside risk to the current pricing environment?
Jim Squires - President and CEO
Price increases are a key component of our strategy.
We absolutely intend to increase our pricing commensurate with the value of the product that we are offering in the marketplace.
So there will be no let up in terms of our emphasis on price increases as a driver of revenue and profit growth.
Justin Long - Analyst
Okay.
I will leave it at that.
Thanks for the time.
Operator
Brandon Oglenski, Barclays.
Brandon Oglenski - Analyst
Good morning, everyone.
I know it has been a very long call so I'm just going to keep it to one.
But, Jim, it is kind of along the lines of what Ken was just discussing with you here.
I know you're talking about OR improvement but it just feels like maybe your franchise is a little bit more levered to higher commodity prices.
Previously you booked some profits in your fuel revenue which have obviously gone away.
You have historically made a lot of money in the coal markets.
Coal has gone from 30% of your revenue now down to 17%.
I know you think that things are going to be stable but natural gas prices are even lower this year.
So how do we just put all this together?
If natural gas stays here, if we don't get a rebound in fuel prices, how do you aggressively attack the OR with some of those headwinds?
Speaking to the CapEx side or even the asset side or restructuring, why not get more aggressive on restructuring the coal network?
Again it is down significantly from where it was even three or four years ago.
Jim Squires - President and CEO
You are right; we are a commodities hauler.
So you heard Alan say 50% of our loads are commodities-based and so it definitely is more challenging in this commodities environment.
But that doesn't mean we don't have any opportunities.
We are going to continue to push on revenue growth as Alan went through.
Fortunately we have a pretty diversified franchise levered to commodities as it is.
We still have other opportunities to grow.
We are going to push on those.
We are going to be very judicious with our spending.
We are going to watch our capital very, very carefully and focus on again service improvements, return on capital and good growth.
Brandon Oglenski - Analyst
Okay, thank you.
Operator
Brian Ossenbeck, JPMorgan.
Brian Ossenbeck - Analyst
Good morning and thanks for making some time here at the end.
I know it's been a pretty long call.
My question is basically the coal network rationalization.
If you can just give a little bit more context of -- obviously it been going on for 18 months or so -- 300 miles has been taken out of service or restricted.
Can you just give us a sense of how much of the network has been analyzed at this point?
You mentioned the labor savings obviously taking some assets but you are still abandoning them.
So I am assuming you're going to have to have some maintenance expense with that.
So if you can try to quantify that for us, that would be helpful and also how you approach that in general?
Is this is a proactive type of analysis where you get out ahead of volume cuts or you just take it as the mines start to slow down?
Jim Squires - President and CEO
It is a proactive approach and I would characterize what we have done as a good start.
There are maybe other opportunities as well.
We are very actively analyzing all opportunities to rationalize our asset base particularly in the coal network and there may be other rationalization opportunities ahead.
But by the same token, we do want to retain the ability to handle coal volume which we think we will garner in the future.
So we are not throwing in the towel on our coal business.
We are going to continue to be a coal hauler now and in the future and we want to make sure we have the assets on hand to do that.
Brian Ossenbeck - Analyst
Okay.
Just a quick follow-up, is there any sense you can give us in terms of how much the network has been looked at at this point in time and any savings rule of thumb per mile taken out that you are able to realize?
Jim Squires - President and CEO
We've focused up to this point on the Central App network in particular as Mark went through.
The savings will be meaningful and we'll see those both in terms of expense savings and capital avoidance.
Brian Ossenbeck - Analyst
Okay, thanks for your time.
Operator
Ben Hartford, Robert W. Baird.
Ben Hartford - Analyst
Good morning.
Real quick on the Triple Crown transition, can you give an update on the transition of the non-auto business?
I know that we are coming up toward the November 15 service cut first.
And then second, what was the logic in keeping the auto parts business intact?
Jim Squires - President and CEO
Well, I'll take the last part of that because that goes to the strategic rationale to the transaction.
I will let Alan talk about what's happening in terms of the rechanneling.
Triple Crown started out as an auto parts hauler and that is where they really excel.
The technology that we will continue to deploy in that service works really, really well in the lanes where they will continue to haul the auto parts.
So that is their forte and we made the decision to keep them going in that area while looking to rechannel the other freight.
Alan?
Alan Shaw - EVP and Chief Marketing Officer
We are working with our channel partners.
I will reiterate what I said before because I don't want expectations to get too high is that almost on purpose the Triple Crown network did not overlay the conventional network.
So it doesn't necessarily operate in the same lanes.
So it's going to be difficult to matriculate a bunch of the business over to our conventional network but it's still accretive to earnings and it still represents an improvement to capital utilization.
Ben Hartford - Analyst
Appreciate the time.
Operator
Jeff Kauffman, Buckingham Research.
Jeff Kauffman - Analyst
Congratulations in a tough environment.
Most of my questions have been answered but let me come back to Marta on capital spend and free cash.
I think it was you Jim that said that you could see CapEx lower next year.
You want to get back to a more normalized spend.
Including D&H, what are we looking at in terms of CapEx this year and how do you think about CapEx say over a two-, three-year period longer-term?
Where do you think it should be?
Jim Squires - President and CEO
I would like to respond to your free cash flow point first and I'll let Marta talk about the trend in capital spending.
Our free cash flow has been somewhat subdued this year and we are going to turn that around next year as well.
The formula for that obviously involves higher net income, bonus depreciation if that occurs.
It's the absence of the D&H transaction affecting capital expenditures and it's a somewhat lower non-D&H related CapEx.
So all of that gives you much more robust free cash flow we believe next year.
Marta Stewart - EVP of Finance and CFO
With regard to our capital program, at the beginning of the year, we announced a $2.4 billion capital program.
When the volumes didn't come in exactly with what we had been forecasting, we lowered it by about 5% or $130 million and then of course this year we have the $215 million that Jim described.
So going forward you should think about levels more like the original $2.4 billion minus the $130 million and it's just that we think the absolute number in 2016 will be lower than that normalized level this year.
Jeff Kauffman - Analyst
All right.
And just to follow up on that, you have increased the share buyback this year.
With the stock down at these levels, is there a better use of free cash after capital spending than shares right now?
Jim Squires - President and CEO
We certainly have to deploy both borrowing capacity, cash on hand, and free cash flow for share buybacks this year and we see good value on our shares.
We will continue to use excess free cash flow over and above our dividend and available borrowing capacity for that purpose in the future.
Jeff Kauffman - Analyst
All right, well, congratulations, guys.
Thank you.
Operator
David Vernon, Bernstein Research.
David Vernon - Analyst
Good morning, guys, and thanks for making time here.
Just kind of thinking broad brush here with a headwinds that might be with the Triple Crown business migrating off and obviously the export coal decline next year, would you expect volume overall to be positive or negative coming into 2016 off of 2015?
Alan Shaw - EVP and Chief Marketing Officer
We still have the potential for growth next year.
I think it's going to be more targeted towards the second half of the year.
David Vernon - Analyst
So more flattish maybe up a little?
Alan Shaw - EVP and Chief Marketing Officer
Yes.
David Vernon - Analyst
In aggregate.
And I guess Marta, as a question for you in terms of that lower rate of volume growth next year, do you think that that lack of volume driven productivity may offset some of your ability to recover the efficiency led costs or the efficiency added -- the inefficiency added costs of the last couple quarters and some of the things around Triple Crown?
Marta Stewart - EVP of Finance and CFO
Well we will definitely be pushing on efficiency next year.
Triple Crown is going to be one of the reasons how.
As Alan said, the moves that move on the intermodal network should be more efficient than the shorter RoadRailer trains we were running some of this year.
David Vernon - Analyst
It just seems like the operating income decline relative to the 3% decline in RTMs is pretty significant from a volume leverage standpoint which would seem to indicate that if you had gotten a flatter volume your next year might be tougher to get some of that leverage to fall through or some of the efficiency savings to fall through.
Am I thinking about that right or is there -- do you think there's going to be a strong prospect for organic earnings growth in a flat volume year?
Marta Stewart - EVP of Finance and CFO
Well one thing to remember for next year is this year thus far we have had all three quarters so far we have had service-related expenses and some weather-related expenses in the first quarter but they cumulatively total about $82 million.
So year-over-year, we don't expect those to recur in 2016 so that will begin our productivity improvement that we expect to increase on that.
David Vernon - Analyst
Okay, thanks.
Operator
Cleo Zagrean, Macquarie.
Cleo Zagrean - Analyst
Good morning and thank you for your time.
My first question relates to coal royalties.
We have seen them contribute about $0.04 this quarter.
When are they up for renewal and please remind us whether they relate more to domestic utility coal or other areas as well?
Thank you.
Jim Squires - President and CEO
It varies by contract with respect to the duration but much of our coal royalties is associated with metallurgical coal.
Cleo Zagrean - Analyst
I'm sorry?
Jim Squires - President and CEO
Much of our coal royalties is associated with metallurgical coal.
Cleo Zagrean - Analyst
Metallurgical, okay.
All right and then my second question comes back to fuel surcharges versus coal price.
You've commented on this call and recent other calls that your customers have been unwilling to give up fuel savings without a value exchange in terms of coal price and on your end you said you are unwilling to do that.
Is it best for us to model coal price increases offset by some negative mix and then leave surcharges unchanged into 2017 as the forward curve suggests?
Thank you.
Alan Shaw - EVP and Chief Marketing Officer
Model -- can you say that point about -- did you mention 2017?
Cleo Zagrean - Analyst
Yes, in the sense that on the current forward curves your surcharge programs are out of the money for some years out.
So if right now that change is not occurring and you are saying you are needing fuel prices to go higher for that to happen, should we assume that there is no change on the fuel surcharge and just model core price increases?
Alan Shaw - EVP and Chief Marketing Officer
Okay, I get your point.
Yes, it will be easier to accomplish this if WTI prices go up but it also gives us the opportunity to push price.
Cleo Zagrean - Analyst
Okay.
And your feedback from customers so far, can you tell us a little bit about that?
Alan Shaw - EVP and Chief Marketing Officer
Which?
Cleo Zagrean - Analyst
(multiple speakers)
Alan Shaw - EVP and Chief Marketing Officer
Can you help me understand, Cleo --?
Cleo Zagrean - Analyst
It's about how discussions are going in terms of getting core price because in my understanding that conversation is still tough as you are trying to get core but they don't want to give up the fuel.
So how is that all netting out?
Alan Shaw - EVP and Chief Marketing Officer
That's a good point.
Negotiations with customers, with respect to that, prices are always tough but they do recognize the long-term value of rail transportation.
There is a pause right now in demand in some commodity markets.
Jim talked about how 50% of our revenues are tied to commodity or foreign exchange.
That's a short-term pause.
Inventory drawdowns we believe will be complete by the end of this year and shippers are trying to line up capacity for 2016 and 2017 which is why you see in the trucking market spot prices declining but contract prices still moving up although moderating.
Cleo Zagrean - Analyst
Okay.
Is it true that at this time of year you are already starting to discuss the book for intermodal for next year?
How is that going given your improvement in service in terms of setting up prices for next year?
Thank you very much for your time.
Alan Shaw - EVP and Chief Marketing Officer
In terms of filling up what, Cleo?
Jim Squires - President and CEO
The book.
Alan Shaw - EVP and Chief Marketing Officer
The book, oh, (multiple speakers).
Our intermodal contracts aren't necessarily at the end of the year so we always have a mix of contracts whether it's commodity or customer base, they are up throughout the year.
So certainly we are discussing contracts for the remainder of this year and next year and we are pushing price and the long-term value of rail transportation.
Cleo Zagrean - Analyst
Thank you.
I appreciate your time.
Marta Stewart - EVP of Finance and CFO
And Cleo, if I could mention one more thing on the fuel surcharge revenue you asked about for modeling for next year, don't forget that in the first quarter of this year we still had a somewhat elevated level because the month of January benefited from the lag when oil prices were higher.
So each quarter of this year you've seen declining absolute numbers of fuel surcharge revenue.
We expect that to continue and have declining fuel surcharge revenue in the first quarter.
I just wanted to put that out there for when you are modeling 2016.
Cleo Zagrean - Analyst
Thank you, Marta.
Operator
Thank you.
This concludes the question-and-answer session.
I will now turn the call back over to Mr. Jim Squires for closing comments.
Jim Squires - President and CEO
Well thank you, everyone.
We appreciate all your excellent questions and we will talk to you again next quarter.
Operator
Ladies and gentlemen, thank you for your participation.
This does conclude today's teleconference.
You may disconnect your lines at this time and have a wonderful day.