聯合太平洋集團 (UNP) 2015 Q4 法說會逐字稿

Greetings and welcome to the Union Pacific fourth-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.

It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President, and CEO for Union Pacific.

Thank you, Mr. Fritz, you may now begin.

Good morning, everybody, and welcome to Union Pacific's fourth-quarter earnings conference call.

With me here today in Omaha are Eric Butler, Executive Vice President of Marketing and Sales; Cameron Scott, our Executive Vice President of Operations; and Rob Knight, Chief Financial Officer.

This morning, Union Pacific is reporting net income of $1.1 billion for the fourth quarter of 2015.

This equates to $1.31 per share, which compares to $1.61 in the fourth quarter of 2014.

Another quarter of solid pricing gains were not enough to offset the 9% decrease in total volumes.

Carload volume declined in five of our six commodity groups, with coal and industrial products down 22% and 16% respectively.

Automotive continued to be a bright spot for us in the quarter, with the volume up 8% versus 2014.

On the cost side, we continued to adjust resources throughout the quarter and also made solid progress with our productivity initiatives.

You will hear the team highlights here this morning.

As a result of these efforts, we achieved a quarterly operating ratio of 63.2%.

We continue to be laser focused on running a fluid and efficient network, while safely providing value-added service to our customers and delivering solid returns for our shareholders.

So with that, I will turn it over to Eric.

Thank you, Lance, and good morning.

In the fourth quarter, our volume was down 9%, with continued gains in automotive more than offset by declines in other business groups.

While we generated core pricing gains of 3.5%, it was not enough to offset decreased fuel surcharge and significant mix headwinds, as average revenue per car declined 8% in the quarter.

Overall, the decline in volume and lower average revenue per car drove a 16% reduction in freight revenue.

Let's take a closer look at each of the six business groups.

Ag products revenue was down 12% on a 5% reduction and a 7% decrease in average revenue per car.

Grain was down 12% in the fourth quarter.

High worldwide production and the strong US dollar reduced grain exports by 23%.

Solid growth in domestic grain shipments partially offset the export decline.

Grain products decreased 4% for the quarter, driven primarily by softer export soybean meal and DDG demand.

Ethanol shipments were down 3% driven by lower exports.

These declines more than offset a 14% increase in canola meal shipments due to another strong canola crop.

Food and refrigerated products volumes were down 1% for the quarter, as strength in beer was offset by declines in fresh and frozen food shipments.

Automotive revenue was up 1% in the fourth quarter, as an 8% increase in volume was largely offset by a 6% reduction in average revenue per car.

Finished vehicle shipments were up 8% this quarter, driven by continued strength in consumer demand.

2015 annual sales in the US were 17.5 million vehicles, levels last reached 15 years ago.

The seasonally adjusted annual rate for the fourth quarter was 17.8 million vehicles, the fourth highest quarterly sales pace on record.

On the parts side, strong vehicle production increases and a continued focus on over-the-road conversions drove an 8% increase in volume.

Chemicals revenue was down 7% for the quarter on a 2% reduction in volume and a 5% decrease in average revenue per car.

Lower crude oil prices and unfavorable price spreads continued to impact our crude oil shipments, which were down 42% in the fourth quarter.

Partially offsetting this decline was continued strength in the LPG markets, including propylene, propane, and butane demand.

Finally, petroleum products volume was down 6%, primarily due to weaker residual fuel oil shipments as a result of a slowing in China's production and export sectors.

Coal revenue declined 31% in the fourth quarter on a 22% volume decline and an 11% decrease in average revenue per car.

Southern Powder River Basin tonnage was down 24% in the quarter, as mild weather and low natural gas prices dampened coal demand.

Temperatures in the fall were 3.3 degrees warmer than average and set a record for the lower 48 states.

Coal inventory levels are 105 days through December, 39 days above normal, and 43 days above last December.

Colorado/Utah tonnage was down 40%, driven again by soft domestic demand and reduced export shipments.

Nationwide electricity generation by coal dropped from 37% market share in the fourth quarter of 2014 to 32% in 2015, as natural gas captured the share loss from coal.

Industrial products revenue was down 23% on a 16% decline in volume and an 8% decrease in average revenue per car during the quarter.

Reduced rig counts in shale drilling resulted in a 42% decline in minerals volume, primarily driven by a 52% decrease in frac sand car loadings.

Metal shipments were down 27% from softening industrial production, reduced drilling activity, and the strong US dollar.

Specialized markets were up 7% in the quarter, driven by increased waste shipments.

And the motor revenue was down 14% the fourth quarter on a 7% lower volume and an 8% decrease in average revenue per unit.

Full-year 2015 domestic intermodal achieved its seventh consecutive year of record volume.

However, our fourth-quarter results were down slightly, as continued highway conversions were offset by the discontinuation of Triple Crown business and sourcing shifts.

International intermodal volume was down 12% in the quarter in a challenging market environment, primarily due to market volume headwinds for several of our ocean carrier customers.

Imports in the Trans-Pacific's trade remained sluggish due to weaker than expected domestic US retail sales.

Let's move to how we see our business shaping up for 2016.

In ag products, expect high global grain inventories and a strong US dollar to have a continued impact on the export environment.

Food and refrigerated should continue to see growth in import beer.

We expect soybean meal to have another strong export year, but will likely fall short of the record level reached in 2015.

Turning to autos, we expect low interest rates and gasoline prices to continue to positively impact demand, driving both finished vehicles and parts shipments.

However, we are cautious as to auto sales sustaining these record levels.

We expect the coal market will continue to be dampened by low natural gas prices and high inventory levels.

As always, weather conditions will continue to influence demand.

In chemicals, we expect most of our markets to remains solid in 2016, with particular strength in the LPG markets.

Low crude oil prices and unfavorable spreads will continue to present significant headwinds for crude by rail shipments.

Fertilizer shipments will also be impacted by grain export headwinds.

In industrial products, low crude oil prices will also challenge our minerals and metals volumes.

We expect our lumber franchise to grow with the demand from the slowly strengthening housing market and demand for construction products and specialized markets should be solid.

In intermodal, we anticipate highway conversions will continue to drive domestic intermodal volumes; however, high retail inventories and sluggish retail demand are expected to mute growth in our international intermodal volumes.

Wrapping up, while the strong US dollar, low energy prices, and sluggish retail sales will continue to drive headwinds and uncertainty in some of our markets, we are optimistic in others.

Mexico continues to be an opportunity driven by energy reform and Mexico's orders manufacturing market.

With our growth dependent on both the national and global economy, we will continue to strengthen our customer value proposition and develop new business opportunities across our diverse franchise.

With that, I will turn it over to Cameron.

Thank you, Eric, and good morning.

Starting with our safety performance, our full-year reportable personal injury rate improved 11% versus 2014 to a record low of 0.87%.

Successfully finding and addressing risk in the workplace is clearly having a positive impact, as we achieved annual records on our way to an incident-free environment.

With respect to rail equipment incidents or derailments, our reportable rate increased 14% to 3.42, driven by an increase in yard and industrial reportables.

While our reportable rate took a step backwards in 2015, we are confident that our strategy aimed at eliminating human factor incidents and hardening our infrastructure will lead to improved results going forward.

In public safety, our grade crossing incident rate improved 3% versus 2014 to 2.28.

We continue to focus on reinforcing public awareness through community partnerships and public safety campaigns to drive improvement in the future.

Moving on to network performance.

After making a step-function improvement in our operating metrics during the third quarter, we have continued to make solid incremental progress.

As reported to the AAR, velocity and terminal dwell improved 13% and 5% respectively when compared to the fourth quarter of 2014.

Record fourth-quarter velocity of 27 miles per hour was at a best ever at a level of volume handled during the quarter.

In fact, the last quarter we ran at this velocity was six years ago when our network was handling 7% fewer carloads.

The strength and resiliency of our network allowed us to mitigate the impact from flooding events in the eastern portion of our network during late December, thereby minimizing service delays to our customers.

So while we've made significant improvement in our metrics, we know there is still more work to do as the team continues a relentless push to further improve service and reduce costs.

While we noted back in October that our resources were more closely in line with demand at that time, further declines in volume prompted us to make additional resource adjustments in the fourth quarter.

In addition to adjusting to lower volumes, our improvement in network performance has translated into fewer recrews, lessening the resource demands of our network.

By the end of the year, we had around 3,900 TE&Y employees either furloughed or on alternative work status compared with 2,700 at the end of the third quarter.

Overall, our total TE&Y workforce was down 18% in the fourth quarter versus the same period in 2014.

Around half of this decrease was driven by fewer employees in the training pipeline.

Our active locomotive fleet was down 13% from the fourth quarter of 2014.

As always, we will continue to adjust our workforce levels and equipment fleet as volume and network performance dictate.

In addition to efficiently right-sizing the our resource base, we also realized gains on other productivity initiatives such as train length.

And while we were unable to overcome the volume decline within intermodal, we ran record train lengths in all other major categories.

We were also able to generate efficiency gains within terminals, as productivity initiatives led to record terminal productivity, even with an 8% decline and the number of cars switched.

In addition to process improvements, capital investments have also enhanced our ability to generate productivity and increase the fluid capabilities of our network.

In total, we invested $4.3 billion in our 2015 capital program.

For 2016, we are targeting around $3.75 billion, pending final approval by our Board of Directors.

More than half of our planned 2016 capital investment is replacement spending to harden our infrastructure, replace older assets, and to improve the safety and resiliency of the network.

The plan includes 230 locomotives as part of a previous purchase commitment.

This commitment wraps up with the acquisition of an additional 70 units in 2017.

We also planned to invest an additional $375 million in positive train control during 2016.

In summary, we finished 2015 on a solid note.

In 2016, we are carrying that momentum forward as we continue to focus on those critical initiatives that will drive future improvement.

Above all, this includes safety, where we expect once again to yield record results on our way towards zero incidents.

In the face of uncertain volume environment, we will continue to adjust our resources to demand, while also focusing on other productivity initiatives to further reduce cost.

And where growth opportunities arise, we will leverage that growth to the bottom line through increased utilization of existing assets.

As a result, we will create value for our customers with an excellent customer experience.

With that, I will turn it over to Rob.

Thank you and good morning.

Let's start with a recap of our fourth-quarter results.

Operating revenue was just over $5.2 billion in the quarter, down 15% versus last year.

Significantly lower volumes, an even more challenging business mix, and a negative fuel comparison more than offset solid core pricing gains achieved in the quarter.

Operating expenses totaled just under $3.3 billion, decreasing 13% compared to last year.

Significantly lower fuel expense, along with volume-related reductions in productivity improvements drove the expense reduction.

The net result was a 19% decrease in operating income to $1.9 billion.

Below the line, other income totaled $28 million, down $43 million versus the previous year, primarily driven by 2014's real estate gains.

Interest expense of $164 million was up 12% compared to the previous year, driven by increased debt issuance during the year.

Income tax expense decreased 23% to $665 million, driven primarily by lower pretax earnings.

Net income decreased 22% versus 2014, while the outstanding share balance declined 4% as a result of our continued share repurchase activity.

These results combined to produce quarterly earnings of $1.31 per share, which fell well short of last year's record $1.61 per share.

Now turning to our top line.

Freight revenue of approximately $4.9 billion was down 16% versus last year.

Volume declined 9% and fuel surcharge revenue was down $438 million when compared to 2014.

All in, we estimate the net impact of lower fuel price was an $0.11 headwind to earnings in the fourth quarter versus last year.

And keep in mind, we did report a $0.05 positive fuel benefit in the fourth quarter of 2014.

And this includes the net impact from both fuel surcharges and lower diesel fuel costs.

As we expected, a challenging business mix did have a negative impact on freight revenue in the fourth quarter.

The primary drivers of this mix shift were significant declines in frac sand, steel shipments, and bolt grains, partially offset by a decline in international intermodal volumes.

A 3.5% core price increase was a positive contributor to freight revenue in the quarter.

Slide 22 provides more detail on our pricing trends.

Pricing continued to be solid throughout 2015 and represents the strong value proposition that we provide our customers in the marketplace.

Of the 3.5% this quarter, about 0.5% can be attributed to the benefit of the legacy business that we renewed in 2015.

And with the exception of a few smaller contracts in the out-years, 2015 marks an end to any further legacy repricing opportunities.

Moving on to the expense side, slide 23 provides a summary of our compensation and benefits expense, which decreased 5% versus 2014.

The decrease was primarily driven by lower volumes and improved labor efficiencies.

Labor inflation was around 4% in the fourth quarter, driven primarily by agreement wage inflation.

Looking at our total workforce levels, our employee headcount declined 7% when compared to 2014.

Reductions in TE&Y, training-related activities, as well as employees associated with capital projects all contributed to the workforce decline.

At this point in time, given current volume levels, we are being very cautious with our hiring plans for 2016.

On average for the year, we would expect overall force levels to be down somewhat, depending of course on help volume ultimately plays out for the year.

Labor inflation is expected to come in around 2% for the full year.

This is driven primarily by agreement wage inflation, partially offset by lower pension expense.

This is also consistent with our all-in inflation expectations in the 2% range for the full year.

Turning to the next slide, fuel expense totaled $424 million, down 48% when compared to 2014.

Lower diesel fuel prices, along with a 14% decline in gross ton miles, drove the decrease in fuel expense for the quarter.

Compared to the fourth quarter of last year, our fuel consumption rate increased 1%, driven by negative mix, while our average diesel price declined 39% to $1.61 per gallon.

Moving on to our other expense categories.

Purchased services and materials expense decreased 11% to $589 million.

The reduction was primarily driven by lower volume-related expense and reduced repair costs associated with our locomotive and car fleets.

Depreciation expense was $517 million, up 6% compared to 2014.

In 2016, depreciation expense is expected to increase slightly compared to last year.

Slide 26 summarizes the remaining two expense categories.

Equipment and other rents expense totaled $305 million, which is up 3% compared to 2014.

Lower volumes and improved cycle times were more than offset by a favorable one-time item in 2014.

Other expenses came in at $235 million, up 3% versus last year.

Higher state and local taxes and increased personal injury expense were partially offset by a reduction in general expenses.

Other expenses for the full-year were flat when compared to 2014, consistent with our full-year guidance.

For 2016, we expect the other expense line to increase between 5% and 10%, excluding any large unusual items.

Turning to our operating ratio performance.

The fourth-quarter operating ratio came in at 63.2%, a 1.8 points unfavorable when compared to the fourth quarter of 2014.

For the full year, I'm pleased report an operating ratio of 63.1%, which is 0.4 points improvement from 2014.

Even with the sharp decline in volumes, right-sizing our resources to current demand, ongoing productivity initiatives, and solid core pricing have all been key drivers to improving our overall margins.

Slide 28 provides a summary of our 2015 earnings with a full-year income statement.

Operating revenue declined about $2.2 billion to $21.8 billion.

Operating income totaled almost $8.1 billion, a decrease of 8% compared to 2014.

And net income was just under $4.8 billion, while earnings per share were down 5% to $5.49 per share.

Turning now to our cash flow.

In 2015, cash from operations totaled more than $7.3 billion, down slightly when compared to 2014.

After dividends, our free cash flow totaled $524 million for the year.

This is down just under $1 billion from 2014, primarily driven by lower earnings, along with higher cash capital and dividend payments.

This includes the two dividends that we incurred in the first quarter of 2015, resulting from the timing change in our dividend payments.

As expected, the net impact of bonus depreciation on 2015's cash flow was close to neutral, as the benefit from 2014 bonus depreciation offset cash tax payments associated with prior years.

Taking a closer look at 2016, we will see the benefit from both 2015 and 2016 bonus depreciation since the legislation was passed just before year end.

When factoring in the two years worth of benefit in 2016 against payments from prior years, the expected net impact from bonus depreciation will be a tailwind of roughly $400 million on this year's cash flow.

Slide 30 shows our 2015 capital program of $4.3 billion.

And as Cam just mentioned, we are targeting a capital plan in 2016 of about $3.75 billion pending final approval from our Board of Directors in February.

This would be a reduction of over $500 million from last year's capital program.

The chart on the right shows the returns on these investments over the last few years.

Return on the invested capital was 14.3% in 2015, down 1.9% points from 2014, driven primarily by lower earnings.

Taking a look at the balance sheet, while cash from operations was down slightly year over year, we increased our balance sheet debt by 24%, resulting in an all-in adjusted debt balance of about $17.4 billion at year-end 2015.

We also finished the year with an adjusted debt to EBITDA ratio of 1.7, which increased from 1.4 at year-end 2014.

Longer term, we are continuing to target a debt to EBITDA ratio of less than 2 times.

While we did increase our debt levels to reward shareholders, we also maintained a strong balance sheet, which is a valuable asset, particularly in the face of economic and strategic uncertainties.

In 2015, share repurchases exceeded 35 million shares and totaled about $3.5 billion, up 7% from 2014.

Over the past five years, we have repurchased 15% of our outstanding shares.

Adding our dividend payments and our share repurchases, we returned more than $5.8 billion to our shareholders in 2015.

This represents roughly a 20% increase over 2014, continuing our strong commitment to shareholder value.

So that's a recap of our fourth-quarter and full-year results.

Looking ahead to 2016, we do have some significant hurdles.

Our energy-related volumes will continue to be a challenge.

Compared to last year's strong first quarter, we expect this year's first-quarter coal volumes to decline around 20% or so.

And given the headwind we currently see with coal, it is likely that total volumes for the first quarter will be down in the mid-single digits.

For the full year, we currently expect total volumes to be slightly negative, depending on coal and the strength of the overall economy as the year plays out.

Fuel prices will have a negative impact on earnings at least in the first quarter, given the $0.08 positive fuel benefit that we reported the first quarter of 2015.

While it is still early, we are preparing ourselves for volume and mix pressures, particularly in the first quarter and likely throughout much of 2016.

We are counting on record productivity and solid pricing to drive an improved operating ratio again this year, as we work towards our longer-term operating ratio target of 60% plus or minus on a full-year basis by 2019.

And as always, no matter what the environment, we remain committed to running a safe, efficient, productive railroad for our customers, while generating strong returns for our shareholders.

So with that, I'll turn it back over to Lance.

Thank you, Rob.

As we discussed today, this past year was a difficult one in many respects.

But our team did outstanding work in the face of dramatic declines in volumes and shifts in our business mix.

Overall economic conditions, uncertainty in the energy markets, commodity prices, and the strength of US dollar will continue to have a major impact on our business this year.

However, our velocity is at an all-time best for the current level of demand.

The network is fluid, and we're driving toward further improvement.

We are well-positioned to efficiently serve customers in existing markets as they rebound.

The strength and the diversity of the Union Pacific franchise also will provide tremendous opportunities for new business development as both domestic and global markets evolve.

When combined with our unrelenting focus on safety, productivity, and service, these opportunities will translate into an excellent experience for our customers and strong value for our shareholders in the years ahead.

So with that, let's open up the line for your questions.

(Operator Instructions)

Rob Salmon, Deutsche Bank.

Rob, with regard to your comments about the legacy pricing, clearly we saw about 0.5 point in the fourth quarter.

When you reprice some of the legacy contracts, you had pulled forward some from 2016.

Should we still be considering some incremental benefit in 2016 to the core pricing metric as we look out?

Or should that effectively be a zero for next year?

I would say basically effectively zero.

There might be a tad bit of a little carryover, but I think for your modeling purposes, those are pretty much behind us.

Got it.

And then shifting gears, Eric, to the intermodal segment, you called out some headwinds in the fourth quarter related to Triple Crown and some sourcing shifts.

Can you quantify how we should be thinking about that Triple Crown headwind for 2016 or call out specifically the volume challenge that you guys saw?

And should those sourcing shifts that we saw in the fourth quarter continue to weigh on intermodal load growth for the domestic volumes as we look out?

Rob, as we indicated, we still -- we always expect our highway conversion strategy, which we are firmly focused on, to continue to drive growing domestic intermodal volumes.

And so we continue to see growing domestic intermodal volumes, despite headwinds from Triple Crown and other things that occur all the time.

We do expect, as I called out, to see headwinds on the international intermodal side just because of all of what's going on with the Trans-Pacific trade and the China markets.

But on a domestic intermodal side, we continue to see our strategy working, which is growing volumes through highway conversions.

Got it.

Appreciate the color.

Brandon Oglenski, Barclays.

Good morning, everyone, and thanks for taking my question.

Lance or Eric, can you guys just give us some context here.

I've only been covering the industry for about a decade, but the volumes seem pretty bad right now, maybe not quite as bad as 2009, and yet we're still getting jobs growth in the US.

So how do you look at the environment right now?

Is the US headed into a broader recession or is this just limited to energy and industrial and are there specifics in your business that maybe look worse than the broader economy?

Brandon, this is Lance.

The impact on our railroad has been acute, as you point out, in energy, in commodities affected by the strong dollar like export grain, the steel markets.

And those are not necessarily indicative of a broader US reality.

I will share with you though, there's also questions that we have about US consumers.

There are indicators that the consumer is healthy, like the unemployment rate is at a comfortable 5% level.

The consumers are buying automobiles, as Eric outlined.

But labor participation rate isn't that great and fourth-quarter retail sales for goods was not that great.

I will let Eric give you a little more technicolor.

I'm not sure there's much else I would add to that.

I would say the consumer is spending.

There is consumer confidence; household income is going up.

There appears to be a shift between consuming on products or goods to spending on services; there does appear to be that shift.

So it does -- some of the changes is impacting our business and the industrial space.

Brandon, one last thing, early in the year, we talked about the impact on energy from low natural gas prices and the effect on coal, the effect on crude oil and natural gas exploration to development.

And we said, ultimately, that should be a benefit to other industries we serve like plastics manufacturing and consumers.

We just haven't seen yet the positive offset from the headwinds that we've experienced.

I know it's difficult for a lot of investors on the line here too.

Rob, can you talk a little bit about the outlook for an improving operating ratio?

What are the big drivers here, especially with the uncertainty in volume?

The big driver, volume obviously is our friend, and I guided, as you picked up, that we expect full-year volume to be slightly down.

We'd obviously like to see that improve from there.

But given that slightly down view of the world and a positive improving operating ratio, is our conviction around our ability and our focus on continuing to drive productivity and our ability to continue to provide quality service to our customers enables us to get price in the marketplace.

Chris Wetherbee, Citigroup.

I wanted to touch a little bit on the outlook or stay on the outlook for 2016.

Rob, I know you don't give earnings guidance specifically, but if you can get slightly down volumes, you have an improving OR, mix is going to be negative certainly in the first quarter or so of the year.

How do we think about the other puts and takes that potentially impact that, whether you're flat to down or flat to up?

I'm just trying to make sure I understand how much you can control on the expense to maybe offset some of this negative mix that we're expecting.

Chris, and the reason that I'm not giving earnings guidance is because of all those unknowns.

Again, we will -- we're confident we can control what we can control, which again is the productivity, quality service, continue to drive positive.

But there is so much uncertainty at this point in time in terms of what the absolute volumes will be and what the mix of those volumes will play out.

That's why we're not at a position right now to give earnings guidance, but I assure you, we are focused on driving improvement on every aspect that we can and we certainly would like to see as positive of results as we can drive.

Okay, and then maybe just a follow-up on that.

In terms of the expense side, what you can control, you talked about headcount a little bit in the outlook, and I think you said it would be down a bit.

You're entering the year with a down -- a little bit more than that and trying to chase that volume number down.

How do we think about headcount for the full year in a little bit more detail?

Chris, as we've said all along and I'll say it here again for 2016, is that volume will drive what our headcount ultimately is.

Although there's still productivity.

So if volumes are slightly down, I would expect that we would have down headcount driven by volume and layering on our expectation of driving further productivity.

So it will flow with -- directionally with what volume is, but we're very focused, again, depending on what the mix actually plays out, very focused on driving productivity in those numbers and being as efficient as we can.

Chris, we outlined for you the expectations for volumes in the first quarter in a few specific areas.

I would say we're in a much better posture entering 2016 from a realizing productivity and a headcount perspective, getting the resources right for the volumes than we were entering 2015.

We're just in a very different place.

That's helpful.

Thank you for the time, appreciate it.

Allison Landry, Credit Suisse.

Following up on the previous question, how much of a volume decline do you think that you can handle while still generating positive earnings growth?

You did mention expectation for a slight decline, but if carloads truck down 5%, 6%, 7%, is that where you're thinking about the tipping point?

Allison, this is Rob.

I can't give you and not giving guidance on the earnings.

I get the point of your question, but really, the driver will be what's the mix, what volumes actually move etc.

But I can just assure you that there is obviously a tipping point at some point, where if that were to go so negative it would flip negative.

But we're going to squeeze out productivity and continue to drive price where we can, and so I can't give you a direct answer as to where that tipping point is.

But we're focused on, regardless of what the volume is, on controlling what we can and driving possible OR and earnings.

Understood, thank you.

And then my second question would be what your expectations for overall cost inflation are for 2016.

Thank you.

As I said, Allison, overall inflation assumptions for us in 2016 are around 2%.

Okay, excellent, thank you.

Scott Group, Wolfe Research.

Rob, just wanted to clarify a few things that you said.

In terms of headcount down slightly or something like that, we're going to be starting the year down 9% or so year over year.

Are you talking about down slightly from where you're ending the year at that 44.5% level?

Basically, that guidance or that view of the world, Scott, where I say it's slightly down is a year-over-year assumption at this point in time.

And again -- full year.

And again, what will drive that is what the ultimate volumes end up being.

Scott, just a little point of detail.

At the tail end of many years there's a lot of moving parts that affect the headcount, the absolute headcount number, but that average is the one that's most useful.

Are you thinking about adding headcount from where you are right now?

Because if you take where you are right now, it should imply a pretty meaningful drop in headcount.

We're going to continue to match headcount to whatever the volume situation is.

The other thing to note is headcount comes in and out on capital programs, as for instance in the wintertime, we start shutting down capital spend because of weather and spooling it back up in the spring.

There's just a lot of moving parts quarter to quarter sequentially.

In terms of pricing, wanted to ask -- so I think BN has talked about giving up some price to incent some coal demand.

Are you guys doing anything similar like that?

Maybe if you can talk overall on pricing, it sounds like you expect solid pricing in 2016.

Is it reasonable to expect some deceleration in the pricing environment just given what the volumes are doing?

Or can we -- do you think we can hold steady around this 3% range, ex-legacy?

Scott, this is Eric.

I cannot speak to what the BN does with pricing strategy.

They do their own independent strategy, and I cannot speak to what they do.

We continue to hold on our strategy of pricing through our value.

We are driving a value proposition that we want to be an industry superior value proposition, and we're going to price accordingly for that.

We do think that there are places in the market and the economy that are growing there, and we think that those provide value for us to continue to price according to our long-held strategy.

Alright, thank you, guys.

Alex Vecchio, Morgan Stanley

Rob, I know you didn't give explicit earnings guidance, but in the past two years, you had noted in your slide deck record earnings and that comment was notably absent this time around.

I just want to confirm that we should interpret the lack of that expectation for record earnings to be what it is.

That you won't -- at this point, you do not expect to achieve at least the $5.75 in earnings per share that you had achieved in 2014, which was the last record.

I just want to confirm you're essentially expecting this year to be below that figure.

That is correct.

Now nothing would please us more than to see the economy turn and things go favorable, so we're going to fight like heck to do the best we can.

But yes you are correct, at this point in time, we do not see record earnings.

Okay, that's helpful.

And then just to touch back on the pricing discussion.

You noted that you expect inflation to be 2% in 2016.

In the past, you've always suggested nominal pricing above inflation.

Is that still your expectation for 2016 to achieve pricing above that 2% inflation level?

Yes.

But as you know, we don't set our prices based on what current year inflation numbers are.

And as has been pointed out and we've discussed here today, we price to market.

Every market is a little bit different.

We clearly don't have the benefit of, call it, half point legacy renewal that we'd enjoyed in 2016.

But having said all that, yes we are still focused on pricing above inflation.

Okay, that's helpful.

Thank you very much for the time.

Tom Wadewitz, UBS.

I wanted to ask you a little bit about the volume side.

You've commented on first quarter, and I think Eric in his slide with the 2016 outlook gave us the view by segment.

If I look at that view by segment, it's either plus and minus or for coal was minus, minus.

But it seems like by segment it's pretty negative, but on a full-year basis, you're saying it's down only slightly.

So I assume slightly is not down 3% or 4% it's maybe down 1% or 2%.

What -- how do you bridge those two together?

Is it just a function of the comps get so much easier in second quarter or are you expecting, adjusted for seasonality improvement in demand later in the year?

How do you put those two together, because by segment it looks a little more negative than the comment about a slight decline on a full-year basis.

Let me just start off and Eric may want to comment further in terms of maybe more specifics.

This is Rob.

I would just say that, Tom, to your point, we clearly are highlighting and as you know, that the comp, particularly in the first quarter is particularly challenging, and that's why were calling out the down volume in the first quarter and coal clearly in the 20% or so range.

So the comps do change throughout the year.

But our view of the world right now is that the energy environment, which impacts our coal, impacts our shale, impacts our metals, it supports the shale activity on top of the continuing strong dollar.

Those are going to continue to be hurdles and pressures for us.

But the comps do change as the year plays out, and I think that's what's driving maybe the math that you're wrestling with.

Eric, you got anything else to add to that?

No, that's it.

You would say it's more comps than anticipation of improved market later in the year?

I would say that's the bigger driver.

Okay, I appreciate that.

What about mix?

If I look at your slides in third-quarter mix I think was a 1% year-over-year headwind.

And that got a lot more challenging in fourth quarter, which I think was the big thing we missed in our assumptions for fourth quarter were that 4% mix headwind.

I know it's a tough one to forecast, but is -- do you think mix in 2016 is more like the 4% or more like the 1%, because that's a pretty material consideration?

Tom, this is Rob again.

I would say, again as you know, we don't -- it's very difficult, in fact frankly, impossible to precisely predict exactly what mix is going to be.

But I would say directionally, if you look at the full-year mix impact in 2015, it was 1.5 point negative.

And you're right, the fourth quarter was particularly bad at down at 4.

We do expect to still see mix headwinds as 2016 plays out.

I don't anticipate that it would be for the full year as bad as we saw in the fourth quarter.

We do have a comp challenge in the first quarter, but as the year plays out, things should get easier.

And while mix will be a headwind for the full year, it should get better than what we saw in the first quarter, will see in the first quarter, and what we saw in the fourth quarter of last year.

Recall, Tom, first quarter of 2015, we grew frac sand shipments.

Coal was still relatively healthy.

Grain was healthier than what we saw as the year progressed into later quarters.

So markets have really changed pretty dramatically from the first quarter of 2015.

So the mix comps might be similar to the volume comps if they get a bit easier beyond first quarter?

We'll see.

Okay, thank you for the time.

I appreciate it.

Jason Seidl, Cowen and Company.

I want to go back to on the pricing side and focus on intermodal and any of the truck competitive merchandise traffic that you're hauling.

Clearly right now it seems that there's excess trucking capacity and all the data points, at least we track, are pointing to truck pricing going down, both contractually and on a spot basis.

How should we look at your ability to not only price but grow the intermodal business, ex some of the headwinds that we talked about with Triple Crown, as we move throughout 2016?

This is Eric, Jason.

A big reason, as you know, for the shrinkage in truck pricing is fuel is coming down, which is a major cause.

So our customers are also seeing a cost-reduction benefit as fuel goes down because of the fuel surcharge going down.

So they're seeing that natural cost reduction benefit.

So the gap, if you will, between the value proposition for intermodal rail service versus truck, I think that gap is still there in terms of intermodal providing a value proposition to manufacturers.

We've talked in the past about just by laws of physics steel wheel on steel rail is a lower cost than rubber tire on asphalt or concrete.

So there still is a value proposition there that we think gives us a leverage to continue to drive highway conversions, which we demonstrated in 2015 and we're going to continue to focus on in 2016.

Eric, your team continually works with trucking companies themselves in terms of helping them with their cost structures and they look at intermodal conversions as an opportunity to modify their own cost structures as they compete in their marketplace.

And those opportunities continue as well.

That's good color.

As I look on the ag side, it seemed like there was a couple of puts and takes.

But net-net for the year, would you guys say you were positive or slightly negative for ag.

Eric?

I'm not sure I understand the question.

In terms of your outlook for 2016.

Oh, we don't give volume guidance for 2016.

I think if you look at the ag markets overall, I think the ag producers are expecting pretty good yields for 2016, of course dependent on weather and number of acres planted and all of that.

Maybe not record levels, but pretty good levels.

I think a large factor will depend on worldwide ag production, the strong dollar and how competitive US ag is in worldwide market.

There is a lot of corn, a lot of wheat in storage right now.

And presumably as US ag becomes more competitive pricing-wise in worldwide markets, that's got to move, and when that does move, presumably we as a transportation provider will have a benefit in moving it.

Gentlemen, thank you for the time, as always.

Ken Hoexter, Bank of America.

Lance, I want to revisit one of the earlier questions in terms of looking back in market downturns and looking at the volumes.

How do you figure out how to stay ahead of that in terms of furloughing employees and cutting -- dropping locomotives in terms of them being not -- not over doing it so you can catch that rebound?

How have you acted differently this time versus whether it was at the end of 2014 and beginning of 2015 when we ramped up maybe too much and the versus what you saw in 2008, 2009?

Maybe can you give us a little feedback in terms of how you prep for that?

Sure Ken.

We've been clear historically about time lags in decisions that are just the nature of our business.

In terms of hiring somebody to operate a train, that's about a six-month process.

So we have to, by nature when we're planning crews, look out 6, 12, 18 months.

And when we're talking about capital planning or locomotive acquisition, those lead times get longer.

So it all begins with our business planning process and making sure that we have tight connectivity between what Eric and the commercial team are seeing, and then how we're boiling that into a transportation plan and the resources necessary to run it.

Every time we see a significant shift in volume, whether it's significant growth or significant shrink, we try to learn from that situation.

As we're going into 2016, we think our business planning process is tighter.

We think our connectivity between what Eric sees in the marketplace and secondary and tertiary indicators of demand, more of that is being absorbed into our estimating process.

And I shouldn't miss the opportunity to talk about also doing a better job of shrinking some of the timelines, let's say in terms of hiring and bringing a crew on board or acquiring equipment.

We're also better, candidly, at when we have to store equipment, storing it quickly and efficiently.

And we're also better at trying to find the right mix of the right employee base, where they're located, and training them for alternative jobs.

So we're just getting a little better in all those ways, and that adds up, I think, into a better posture overall.

To clarify, you don't see that as rounding into the 2008, 2009, not that deep of a recession but into so far what you've seen doesn't seem a recession environment to you.

Ken, I can't -- it's hard for me to speak and predict on whether the economy is going into a recession.

Certainly, our volume drop off as the 2015 year progressed quarter to quarter and as we're entering 2016 is dramatic and it's dramatic in historical reference.

But it's nothing -- it's not approaching what we experienced in 2008 to 2009.

Although, again, a 6% decrease year over year and a quarterly 6%, 7%, 8%, 9% decrease year over year is pretty dramatic volume change.

Great, if I could do the follow-up just to quickly comment, yesterday or a couple of days ago, one of the other rails noted your quotes on M&A and said that prior, you had talked about how it impacted Union Pacific and you were opposed to that.

Maybe can you clarify your comments on your thoughts on industry M&A.

Why it would or would not matter to you given your operating in your own region, and does it -- an industry change impact Union Pacific?

Ken, we do not support mergers or consolidation in the current environment.

We think that the regulatory outcomes, the regulatory impact would be substantial.

The Surface Transportation Board has been clear that in the next merger that they consider, it has to enhance competition not just maintain it.

It has to improve operations for customers, and they also have to consider downstream impacts, whether one merger triggers a string of consolidations.

We've shared with you we're focused on safety, we're focused on efficiency, we're focused on an excellent customer experience.

We don't think a merger enhances those efforts.

As a matter of fact, we think it would have a negative impact on service and be a headwind, be disincentive to capital investment.

Thank you for the time and thought, appreciate it.

Brian Ossenbeck, JPMorgan Chase.

Obviously one area of growth year over year looks like it's going to continue into next year.

But how much of that is attributable to Mexico and what type of impact do you see when it comes to overseeing some reported first half retoolings and changeovers south of the border?

And do you think this would really have an impact on your length of haul or mix of business in that vertical?

Brian, before I hand it over to Eric, I just want to say we are very bullish on Mexico in general in the long term.

It's a vibrant economy, it's got a vibrant middle class.

And our access to the six primary rail gateways to and from Mexico give us a real great opportunity to participate in this economy.

Eric?

Brian, historically, Mexico produced about 1.7 million vehicles.

I think full-year 2015, the number is probably close to about 2.9 million vehicles, of call it, the 17.5 million that was sold.

With all of the plant expansions, new plants, I think it's on its way to 4 million or 4.5 million in the next, call it, 1 1/2 years to 2 years.

As it's been said, we have a great franchise from Mexico, and we think that will be a strong part of our business portfolio going into the future.

It's always -- the issue is when the sales drive total volume, and so our total volume will be aligned with whatever sales are and our strategy is to have a franchise to move it wherever it is manufactured.

Okay, quick on that, was it about [60%] of your auto comes from -- is attributable to Mexico if, I'm remembering correctly?

Historically we've said that, yes, and that's about what it was, yes.

Okay, and then just one other quick one on train length.

I think of the last call you mentioned you have about 90% or about 7,000 foot capable in terms of [sidings].

Third quarter was around 6,000 foot average train length, so clearly, you're highlighting some of the best ever lengths in three out of the five areas.

How much further and how much faster do you think you can take that up?

And when would you hit the upper limit?

I know it's different in every market.

And the intermodal's clearly got some headwinds here, but I think that's really the one for good economics to really work, that's when you really need to get the longer trains.

So maybe if you could focus on that and just some general comments about train lengths overall.

Cam, you want to talk a little bit about the productivity opportunity in train length?

Coal is about the only program that is nearly optimized, although there is opportunities still within coal.

Every other commodity group has plenty of train size productivity opportunity, and you will see us continue to make progress balancing customer needs along the way.

Okay, thanks for your time, guys.

Matt Troy, Nomura Asset Management.

A quick question about coal.

Specifically, a lot of pushback we get from investors with respect to UNP specifically, as you have a competitor who due to some service issues and perhaps a much larger portfolio strategy has invested a significant amount of CapEx out west.

And there is concern given the structural market share loss in coal, that the competitive dynamics has structurally changed in their favor.

If I look at a 20-year market share chart of coal, you and the BN used to swap share and were about 50% each every year.

And then in 2011 we saw a split and then again in 2014.

So there's been roughly a 10% shift, where what used to be 50/50 is now 60/40.

I was wondering if you could just put some color around that.

I know that there were service issues on your line last year, but even if I normalize for that spike, the line and the trend is pretty consistent over a five-year basis.

I'm just wondering how you can address structurally investor concerns that something hasn't change in the west as it relates to coal.

Matt, I think if you go back historically and go back to the 1980s when really the Powder River Basin franchise was developed for us certainly, in addition to our competitor, I think it's been roughly, call it a 55/45 split over time and as opposed to the 50/50.

But we don't look at markets in terms of what share we have in the market.

We look at in terms of what's the value of that market, what's the value of our franchise, where we think we have value -- a value proposition to offer the market.

And we sell our value proposition and we're comfortable with the outcome in terms of the business that we win or lose based on the value proposition that we sell.

Right, so again, in the context of people choosing to invest or not invest in your stock, if I look at the dichotomy in volumes, Burlington Northern positive on volumes last year in coal, Union Pacific down double digit in coal, you're saying you're comfortable with that?

What we're comfortable with, Matt, is the diversity of our franchise.

Coal remains a nice book of business for us.

It generates an attractive return.

That's how we look at all of our book of business in terms of, can we generate an attractive return, and we invest for that and we price for that.

And I think our track record speaks for itself.

We've done a pretty fair job of making that happen.

Understood.

My quick follow-up would be then if I look at cash flow, you yourself said reducing the CapEx budget by north of $500 million.

You've got some other tailwinds, you talked about depreciation.

It's pretty material numbers in terms of incremental cash flow potential.

You slowed the pacing of share repurchases in the fourth quarter.

Just wondering, with that excess potential cash flow in 2016, is there an opportunity to step up share repurchases?

What are the gating factors in terms of either debt ratios or whatnot, in terms of how aggressively you're willing to use what should be some surplus cash flow in 2016?

Thank you.

Rob, you want to take that?

Yes.

Matt, you're right, our expectation coming off of certainly last year's low number from cash flow that we will hopefully positively generate increasing cash flow, and yes, we'll continue our philosophy of being opportunistic in the marketplace as it relates to shares.

So I would expect that we'll continue to do that.

And as I called out by the way, in the third quarter, that was a high watermark, if you will, that we've seen at least in modern times, of a rate of which we were buying back shares.

And that clearly was not our ratable rate in terms of shares.

But we are opportunistic in terms of when we buying and how much we buy, and that attitude and that philosophy will continue in 2016.

But if we can generate stronger levels of cash that gives us greater opportunities and as we continue to walk up our debt to EBITDA as we said and as we have, that gives us further opportunity.

Job one is generating cash from operations.

It all starts there and we're laser focused on that.

Understood.

Thank you for the time.

John Barnes, RBC Capital Markets.

Following up on that question around cash flow, I hear what you're saying in terms of your opposition to M&A.

But if it were to take place, Burlington Northern's already said that they're going to be involved if there is a wave of consolidation.

Given the cash flow that you're looking at generating in 2016, do you feel the need to maintain some of that as dry powder in the event that you were forced to react to a consolidation wave in the sector?

John, in addition to saying we don't support rail mergers at this time, we've also said we're paying close attention to the situation.

We're monitoring it, and as things evolve, we will do what's in the best interest of our shareholders and our stakeholders.

If you look at our capital structure, we are in a solid position strategically if we had to do anything.

But what we're focused on right now is that in the current environment, we think mergers are not in the interest of our customers, and just monitoring that and keeping close tabs on it.

My follow-up is, and look, I hate to ask you such a short-term type of question, but Eric, you mentioned in your commentary from an intermodal risk perspective record high inventories and you talked a little bit about your thoughts on the consumer.

We've got the Chinese New Year right around the corner.

Normally, there is typically a surge in activity ahead of that.

Do you anticipate or are you hearing from your shipper base, customer base yet that maybe there's some intention to use that period as an opportunity to clear the decks a little bit, maybe clear the baffles on inventory?

And so you come out of maybe 1Q with a little bit better inventory situation?

Or do you anticipate that you'll still see maybe that normal pre-Chinese New Year type of surge in intermodal volumes?

We're hearing nothing specific from our shippers surrounding the Chinese New Year to disclose here.

I would say that every BCO is looking at rationalizing their inventories because they exited the holiday season higher than I think expected on inventories with sluggish retail sales.

So I think across the board, you hear every customer talking about trying to right-size their inventories.

Very good.

Thank you for your time, guys.

Appreciate it.

Justin Long, Stephens

I was wondering if you could provide more color on the magnitude of the record productivity you noted in your comments.

And how much of that is predicated on a slightly down volume environment?

In other words, if volumes end up being worse than you expect this year, is record productivity still achievable?

I will make one quick comment, and that is what we saw in 2015 was both cost coming out because of volume, getting the structure right, and a much more fluid network in the second half of the year generating excellent productivity opportunities.

Justin, I would just add, this is Rob.

I would just add that what gives us that confidence, the marker that I would point you to is our improvement in our operating ratio throughout the full-year and our confidence that we'll continue to do that.

In terms of at what pace we can do it, we're all about doing it as quickly and as efficiently and safely as we can.

But what will drive the timing of that productivity as we move with volumes is going to be the mix effect and the timing of when there are volume changes.

And as you know, throughout 2015 the first half, we were chasing volume down and then we were able to take advantage as things neutralized or straightened out a little bit in the back.

That will be a factor too in terms of what volume swings may or may not occur.

But we're focused on squeezing out productivity on everything we do, and that's all I can point you to is that we'll look at every stone and uncover it and look for opportunities.

Okay, great.

And I know you're not giving specific EPS guidance for 2016, but just putting together the pieces here, slightly down volumes, core price increases, record productivity, better OR, the benefit of share repurchases.

Just from a directional standpoint, would it be correct to say that you're thinking about EPS being up year over year?

The reason I'm not giving guidance on the earnings is because there are so many uncertainties of which mix, by the way, is another headwind I would remind you of that I did call out.

And that will dictate, I think in large part, exactly how this year plays there.

So with all the uncertainties out there, we're going to certainly focus and fight like heck to take advantage of whatever the economy plays us to turn in as positive of earnings and returns and cash generation as we can, but we're not giving guidance as to exactly what the earnings will end up being for the year.

Fair enough.

Thanks for the time.

Jeff Kauffman, Buckingham Research

A lot of my questions have been answered, but let me come back to the cash flow question, if I can.

Could you remind us of where you ideally want to have your debt levels, whether you think about them as a debt to cap or a debt to EBITDA?

And when I think about the positives to your 2016 cash flow, you mentioned about $400 million bonus depreciation, about $500 million less spent on CapEx.

And for better or for worse, with the shares down the way they are, you can buy back shares that won't cost as much to still hit your numbers on the share repo.

When you look at 2016, given the increased uncertainty, are you more likely to say, okay, we're going to buy back whatever shares we're going to buy back, but with the excess cash flow, we just may not need as much debt to fund it?

Or is your view that you're still underlevered and you're willing to go to higher debt to cap levels?

Jeff, I would just remind you that the guidance that we've given, which we are comfortable with and is working towards that debt to EBITDA of 2X.

We've said that's a marker out there.

I think we still have a little bit of room from the improvement we made on that metric in 2015.

So I would expect that we'll continue to march forward, if you will.

And as I pointed out, we do expect, largely because of the reduction and we hope to generate stronger cash on the front end, but we also have the benefit of lower CapEx and the benefit of the bonus depreciation that I outlined.

So and we may do debt this year.

We will look at that.

That would not be an unrealistic expectation that you will see us take on additional debt this year.

All of that gives us additional -- gives us opportunities to generate stronger free cash flow and gives us opportunities to continue to be opportunistic in the marketplace.

Basically, you were saying we have, I think you're at 1.7 times debt to EBITDA.

And you're saying we can go to 2X, so we can take on a little more debt.

But more likely we would use the cash flow just to fulfill our obligations.

I don't think Rob said that.

I think he said we're going to generate cash, we've got room in our balance sheet, and we'll see how the year plays out.

Thank you very much.

That's all I have.

Ben Hartford, Robert W Baird.

Eric, could remind us what your percent of carloads yields are tied to the underlying price of the commodity that it holds?

I'm not quite sure what you're asking.

If you're asking about our pricing strategy, we don't really talk publicly about our pricing strategy.

We have historically said we don't think philosophically that we need to tie transportation to swings and commodity markets.

We've said that philosophically, but we don't talk about our pricing strategy publicly.

I'm not interested in the strategy specifically.

Is there a percentage that you provide of carloads that have the yield component that is specifically tied to the price of the underlying commodity?

Again, we don't talk publicly about our pricing strategy.

We don't talk about what our -- how our prices are developed.

Cleo Zagrean, Macquarie.

I wanted to talk about mix in terms of length of haul.

I've seen length of haul getting shorter this quarter, not just for coal but also chemicals and industrials.

Is there a structural change going on?

What are the drivers of that and where do you see that trend?

Thank you very much.

Eric, do you want to talk about that?

Our length of haul is down slightly this year, and again, there's other things that we have been talking about in terms of the mix headwinds with our coal business, some of the mix headwinds of our frac sand business, our long-haul grain export business.

Those are all mixed factors that has impacted our length of haul, which was down slightly this year.

I don't think we see anything structural that's some kind of long-term trend.

I appreciate that.

Then my follow-up is tied to one of your comments earlier that you haven't seen the benefit from lower oil prices that, not just you but many of us were talking about as some kind of silver lining.

So what are you hearing from your customers?

Do you get the sense that they are postponing decisions just due to uncertainty or they are signaling to you that there's simply lower demand?

And what do you think might trigger a boost of the industrial economy that would reflect in your volumes?

And I know that's a long question, but maybe tied to that, if you could discuss where you focus your business development as a result?

Thanks very much.

Cleo, so I will focus the answer on your question about not seeing the benefits of low oil.

There's multiple moving parts in there.

We are seeing capital investments occurring, specifically along the Gulf Coast in our chemical franchise.

Those investments just haven't yet turned over into operating units, and so that's a matter of time.

That's an end of this year, 2017, 2018 impact.

We're still hopeful for that impact.

The other part of it is consumers doing something with the windfall of lower energy costs, and that's where it's really hard to see that showing through in the goods that we ship for retailers.

And their feedback is, while maybe services consumption is relatively healthy, goods consumption isn't necessarily showing that.

Okay, so then your business development remains focused in the chemical Gulf Coast footprint?

Our business has a wonderful franchise that we've talked about.

One of the wonderful parts of that is this Gulf Coast franchise.

And with low, natural gas as a feed stock to many of those manufacturers, that's a benefit to them, and we think ultimately will be something we can participate when they increase production.

Sammy Hasbon, Investors Group.

With respect to the headcount reduction, I see that it's principally and obviously within the running trades, the TE&Y.

Taking that a level above, are there any plans to review the support and/or indirect headcount as a consequence of the volume environment?

And I have a couple other questions with specific volume things.

Sammy, this is Lance.

We -- in the third quarter of last year and into the fourth quarter, we announced and executed an involuntary force reduction on our non-agreement or our management ranks and that's been executed.

And then as we look forward, we continue to look for opportunity to get our overall structure sized right for the markets that we're serving.

Attrition is our friend in that effort.

We typically get an attrition rate of 7% or 8% year, and we will use that to our advantage as and if we need to continue to adjust our overall structural cost.

Thank you for that, Lance.

On the industrial side, with respect to frac sand, did you call out exactly how much that was down how much it now composes as a percentage of revenues?

Eric?

We did in both the prepared remarks and I think in the materials that were sent out.

So I just take minerals as mostly frac sand?

Yes, the minerals was down 52%, and then the majority of that is frac sand.

David Vernon, Bernstein Research

Rob, I think you called out an $0.11 headwind from fuel in the fourth quarter.

Have you guys thought about trying to range what we can expect from a fuel headwind for next year?

Obviously, there's a lot of moving parts to that as well, but if we were just to assume that oil prices stabilize here and we move forward, could you talk a little bit about how big the absolute fuel headwind could be in 2016?

I didn't put a number on the full-year, but it could well be a headwind.

I did call out that the first quarter, remember that we had about an $0.08 positive last year, so we clearly have that as a hurdle facing us as the first quarter continues to play out.

Of course, how fuel and the timing within any particular quarter will dictate exactly what that number ends up being year over year, but we do see that as a headwind certainly in the first quarter and could continue at some pace throughout the year.

But similar to the volume comp issue, you would say that if oil prices were to stabilize, the worst of the fuel impact would be front-end loaded?

Depending on what mix is and what volumes actually are, that's a fair assumption, yes.

And then a general question it seems that some of the published surcharge tariff tables, fuel prices are getting to the point where surcharges actually zero out.

Is that a correctory to those tables or do you think that the fuel revenue will still be positive as we get through most of 2016?

As I said, those are publicly seen and you could -- the calculations for those you probably have an accurate calculation.

David, this is Rob.

I would just remind you and others that remember, we have some 60-plus different surcharge mechanisms that have different starting points, different components, different timing mechanisms around them.

So it's very difficult to draw any straight line conclusion.

But clearly at these low prices, some of them are probably near the edge.

Excellent.

Thanks a lot for the time.

It's been a long call and good luck getting through the next couple of tough quarters here on the volume side.

Thank you.

This concludes the question-and-answer session.

I will now turn the call back over to Mr. Lance Fritz for closing comments.

Thank you, Rob, and thank you all for your questions and interest in Union Pacific.

We look forward to talking with you again in April.

Ladies and gentlemen, thank you for your participation.

This does conclude today's teleconference.

You may now disconnect your lines, and have a wonderful day.