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Union Pacific Corp
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Greetings and welcome to the Union Pacific Fourth Quarter 2017 Conference Call. At this the time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operation Instructions] As a reminder, this conference is being recorded and the slides for today's presentation are available in the 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 the Union Pacific's fourth quarter earnings conference call. With me here today in Omaha, are Beth Whited, our Chief Marketing Officer; Cameron Scott, our Chief Operating Officer; and Rob Knight, our Chief Financial Officer.
This morning Union Pacific is reporting net income of $7.3 billion for the fourth quarter of 2017 or $9.25 per share. These reported numbers include the previously disclosed adjustments reflecting the impact of corporate tax reform which Rob will discuss in more detail in a few minutes. Excluding these adjustments 2017 fourth quarter net income was $1.2 billion or $1.53 per share. This represents an increase of 5% and 10% respectively when compared to 2016. Total volume increased 1% in the quarter compared to 2016 driven primarily by 17% increase in industrial products and a 5% increase in chemicals. Partially offsetting these volume increases were declines in agricultural products, automotive and coal. Intermodal carloads were flat for the quarter.
Overall force levels decreased in the fourth quarter both sequentially and year-over-year as we continue to make meaningful progress on our productivity initiatives. The quarterly adjusted operating ratio came in at 62.6% which was up 0.6 points from the fourth quarter of 2016. This increase was driven by an increase in fuel price. I'm pleased with the results the men and women of Union Pacific achieved by focusing on our six-track value strategy. While we have room for improvement in many areas that does not include the dedication and hard work of our employees as they build America.
Our team will give you more of the details on the fourth quarter, starting with Beth.
Thank you Lance and good morning. This will be our final reporting on six business groups as we announce during the third quarter. Effective January 1 we will transition reporting to our newly established four business groups agricultural products, energy, industrial and premium. For the fourth quarter our volume was up 1% driven primarily by industrial products and chemicals, we generated positive net core pricing of about one and three quarters percent in the quarter with continued energy in intermodal pricing pressure. Despite these challenges our focus continues to be on achieving core pricing gains that counterbalance inflation and coincide with our value proposition. The increase in volume and 4% improvement and average revenue per car drove a 5% increase in freight revenue.
Let's take a closer look at the performance of each business group. Ag products revenue was down 4% on a 7% volume decrease partially offset by 3% increase in average revenue per car. Grain carloads were down 19% driven by high global supplies and reduced US competitiveness in the world export market. Grain products carloads were down 2% as growth in ethanol exports were offset by reduced mill [ph] shipments to the east. The delayed implementation of the biodiesel tax credit also negatively impacted our oils business. Food and refrigerator volumes were up 2% driven by continued strength in import beer. Growth in refrigerated shipments for frozen fries in Cold Connect.
Automotive revenue was down 1% in the quarter on a 4% decrease in volume and a 3% increase in average revenue per car. Finished vehicle shipments decreased 5% as a result of lower production levels in response to softer vehicle sales high inventories as well as planned outages for model changeovers. These reductions were partially offset by new West Coast import traffic and strong shipments into the Texas market for hurricane replacement.
The seasonally adjusted average rate of sales was 17.1 million vehicles in the fourth quarter, down only slightly from fourth quarter 2016. On the parts side, over-the-road conversions and growth in light truck demand minimized the impact of lower overall production levels resulting in a 1% reduction.
Chemicals revenue was up 7% for the quarter, on a 5% increase in volume, and 2% increase in average revenue per car. Petroleum and LPG shipments increased 15% driven by stronger diesel and crude oil shipments coupled with strengthen in propane due to Mexico demand, hurricane recovery and inventory build for seasonal winter demand. Plastics carloads were down 4% due to resin tightness and increased commodity prices as a result of residual impact from Hurricane Harvey. Fertilizer was up 11%, driven by continued strength in potash exports.
Coal revenue decreased 5% for the quarter, on a 3% decrease in volume, and 2% decrease in average revenue per car. On a tonnage basis, Powder River Basin was down 2%, while other regions were down 1%. Natural gas prices were down 8% from a year ago driving the decrease in domestic demand. Colorado Utah Loadings benefited from strong export shipments to the West Coast and to the Gulf Coast. Coal stockpiles have been below the five-year average for the majority of the year.
Industrial products revenue was up 28%, on a 17% increase in volume, and a 10% increase in average revenue per car during the quarter. Minerals volume increased 71% in the quarter, driven by a 100% increase in sand shipments, due to improving well completions and increased proppant intensity per well. Specialized markets volume increased 20% in the quarter, driven by a 15% increase in waste, as a result of West Coast remediation projects and a 60% increase in military shipments, due to increased deployments and rotations.
Intermodal revenue was up 4% on a flat volume and a 4% increase in average revenue per quarter. The domestic market increased 1% driven by strong parcel shipment. International volume was down 2% driven by continued headwinds from industry challenges due to overcapacity and consolidations which resulted in increased transloading and changing vessel ports of call.
Going forward we'll be begin to report on our four business groups agricultural products, energy, industrial and premium. For agricultural products we anticipate continued strength in ethanol exports driven by demand from China, Brazil and India. Continued growth in food and refrigerated shipments due to Cold Connect penetration tightening to our capacity, frozen fries expansions and continued strength and import beer. We anticipate continued uncertainty in the grain market as high global supply and unknown weak crop quality potentially affect our ability to participate in the export market.
For energy we anticipate continued strength in frac sand with more uncertainty in the second half due to the viability of local sand. As always for coal, weather conditions will be a key factor of demand. Industrial is expected to remain stable. We anticipate an increase in plastics as new facilities and expansions come online and resin supply increases. In addition we expect to see strength in both rock [ph] and cement markets. For premium, we truck capacity to continue to tighten providing an opportunity to drive higher levels of over the road conversions. Despite challenges within the international intermodal market, we anticipate new products benefiting the supply chain will drive growth. As for automotive the US light vehicle sales forecast for 2018 is 16.9 million units down 2% from 2017. Production shifts will create some opportunity to offset the weaker market demand and over the road conversions will present new opportunities for additional parts growth.
With that, I'll turn it over to Cameron for an update on our operating performance.
Thanks, Beth and good morning. Starting with safety performance, our reportable injury rate was 0.79 slightly higher than the full year record of 0.75 achieved in 2016. Although we continue generating near record safety results, we won't be satisfied until we reach our goal of zero incidents, getting every one of our employees home safely at the end of each day. With regards to rail equipment incidents or derailments, our reportable rate improved 3% to 2.94.
In public safety, our grade crossing incident rate increased 5% versus the 2016 to 2.55, as we continue to reinforce public awareness to community partnerships and public safety campaigns.
Moving on to network performance, as reported to the AAR, velocity declined 5% and terminal dwell increased 12% compared to the third quarter of 2016. We're not satisfied with this operating performance. Multiple factors play in the network fluidity and we intently focus every day on improving service from these levels. We also have the resources and capacity needed to make this happen.
In addition as I mentioned on our last earnings call implementation and testing a positive trend control across a growing number of routes in our network continues to drive part of the negative impact on velocity. For a quick update on PTC, by year end about 60% of the total wrap miles requiring PTC were fully implemented and operational. The western region has been completed. The northern region is near completion and we're well underway on the southern region. With these new regions come a new set of challenges both from a technological and training perspective.
The team is doing an excellent job troubleshooting and building upon the lessons learned from those locations where PTC has been implemented. We will continue working through these challenges as we progress towards the 2018 PTC deadline. Taking a look at our resources, all in our total operating workforce was down more than 200 employees in the quarter when compared to last year. Our TE&Y workforce was up 6% when compared to the fourth quarter of 2016 primarily driven by an increase of approximately 600 employees currently in TE&Y training. This is predominantly a timing issue with the six and nine-month lead time required for new hires who becomes service eligible. We've begun refilling the training pipeline to accommodate our resource needs for the coming year.
Our engineering and mechanical workforce was down more than 800 employees driven by a smaller capital program in 2017 and because our G55 and zero initiatives have resulted in greater labor productivity. As always we will continue to adjust our resources as volume and network performance dictate. Moving onto productivity, although a decline in our velocity in terminal dwell metric did negatively impact productivity in certain areas. I'm pleased with the progress we experienced driving productivity elsewhere. We achieved best ever train size performance in our grain and manifest train categories during the fourth quarter. Marking the tenth consecutive quarter of best ever performance in our manifest network.
The team also achieved fourth quarter records in our automotive and intermodal train categories and with 2017 complete I'm proud to announce that the team achieved four year records in every single train category. We were also able to generate productivity gains within our terminals as car switched for employee day increased 1% during the fourth quarter.
Turning to our capital investments, in total we invested about $3.1 billion in our 2017 capital program. For 2018, we're targeting around $3.3 billion pending final approval by our Board of Directors. About 70% of our plan 2018 capital investment is replacement spending to harden our infrastructure, replace all their assets and improve the safety and resiliency of the network. Our 2018 capital program also includes about 60 new locomotives which will complete our multi-year purchase commitment.
We also plan to invest some additional $160 million in Positive Train Control. On accumulative basis we still expect to spend approximately $2.9 billion on PTC. Additionally we plan to begin construction of new classification yard in Hearne, Texas. This facility will be named Brazos yard and will help support expected volume growth from our customers in the southern region. We will improve service by decreasing car handlings and car cycle times. It will also be the most efficient hump yard in our rail network with the lowest operating cost. Construction is expected to cost approximately $550 million with operations schedule to begin in 2020.
To wrap up, looking into 2018 we expect network fluidity to return to normalized levels as we work through PTC implementation and shifting volume growth. We will continue to create productivity opportunities through initiatives, design to increase train length, balance resources and improve assets utilization. With the ultimate goal of enhancing the customer experience and creating value for our shareholders. And we'll continuous driving for positive safety results on a way to an incident-free environment.
With that, I'll turn it over to Rob.
Thanks and good morning. Let's start with the recap of our fourth quarter results. I want to first remind everyone of a couple of non-cash items impacting the fourth quarter and it's full year 2017 as a result of the Tax Cuts and Jobs Act legislation passed prior to yearend. As we initially disclosed back on January 9, the fourth quarter includes a non-cash reduction in income tax expense resulting primarily from the revaluation of the company's deferred tax liabilities to reflect the recently enacted 21% federal corporate tax rate. After further analysis of the effects of the tax reform, we have revised this estimate upwards to just over $5.9 billion compared to $5.8 billion that we disclosed in our 8-K filing.
In addition, we also recognize a non-cash reduction to operating expense of just over $200 million related to income tax adjustments at equity method affiliates. This adjustment is primarily driven by our equity ownership in TTX and is reported in the equipment and other rents line of our income statement. Slide 20 shows our adjusted results for the fourth quarter and full year 2017 reflecting the impact of these items.
With that in mind, let's take a look at our core performance in the fourth quarter excluding the impact of the corporate tax reform. Operating revenue was $5.5 billion in the quarter up 5% versus last year. Positive core price, increased fuel surcharge revenue and a 1% increase in volume with the primary drivers of the increase in revenue for the quarter. Operating expense totaled $3.4 billion up 6% from 2016. Operating income totaled $2 billion a 4% increase from last year. Below the line, other income totaled $29 million down $11 million from 2016. Interest expense of $188 million was up 8% compared to the previous year and this reflects the impact of higher total debt balance partially offset by a lower effective interest rate.
Income tax expense decreased 2% to $676 million. Net income totaled $1.2 billion up 5% versus last year, while the outstanding share balance declined 4% as a result of our continued share repurchase activities. These results combined to produce adjusted fourth quarter earnings per share of $1.53. The adjusted operating ratio was 62.6% up 0.6% points from the fourth quarter of last year. The combined impact of fuel price and our fuel surcharge lag had a 0.6 point negative impact on the operating ratio in the quarter compared to 2016. Fuel had a neutral impact on our earnings per share year-over-year.
Freight revenue of just under $5.1 billion was up 5% versus last year. Fuel surcharge revenue totaled $293 million up $106 million when compared to 2016 and up $66 million versus the third quarter of this year. The business mix impact on freight revenue in the fourth quarter was a positive 0.5%. The primary drivers of this positive mix were year-over-year growth in frac sand and base chemical shipments partially offset by a decrease in grain carloadings. Core price was about 1.75% in the fourth quarter slightly down from the third quarter. However, if we set coal intermodal aside, our core price was around 2.75% in the quarter. And for the full year as we expected the total dollars that we generated from our pricing actions exceeded our rail inflation cost.
Turning now to operating expense, Slide 23 provides a summary of our operating expense for the quarter. Compensation and benefits expense increased 4% to $1.2 billion versus 2016. The increase was driven primarily by a combination of higher wage and benefit inflation along with higher volume and partially offset by productivity achieved in the quarter. Full year labor inflation came in at about 4%, while overall inflation was approximately 2.5%. Productivity gains and a smaller capital workforce resulted in total workforce levels declining 1.5% in the fourth quarter versus last year or about 625 employees.
For 2018, we expect force levels to adjust with volume especially with respect to TE&Y workforce that Cam just mentioned. But our overall workforce levels will also reflect ongoing productivity initiatives as well. Fuel expense totaled $547 million up 27% when compared to last year. Higher diesel fuel prices and 3% increase in gross ton miles drove the increase in fuel expense for the quarter. Compared to the fourth quarter of last year, our fuel consumption rate was flat while our average fuel price increased 23% to $2.03 per gallon.
Purchase services material expense increased 6% to $585 million. The increase was primarily driven by higher cost associated with subsidiary contract services. Turning to Slide 24, depreciation expense was $532 million up 2% compared to 2016. The increase is primarily driven by a higher depreciable asset base including our positive train control assets. For the full year 2018, we estimate that depreciation expense will increase about 5%. Moving to equipment and other rents, this expense totaled $276 million in the quarter which is down 1% when compared to 2016. This excludes the equity income tax adjustment of $212 million that I mentioned earlier.
Other expenses came in at $239 million up 3% versus last year. The primary driver was an increase in state and local taxes and other expenses partially offset by a decrease in personal injury expense. For the full year 2018, we expect other expense to increase around 10% versus 2017 driven in part by the anticipation of higher state property tax expense resulting from the corporate tax reform changes.
On the productivity side, our G55 and zero initiatives yielded about $75 million of productivity in the fourth quarter. This brings our full year total to just under $350 million. Slide 26 provides the summary of our 2017 earnings with a full year income statement again excluding the impact of our corporate tax reform. Operating revenue increased about $1.3 billion to $21.2 billion adjusted operating income totaled $7.8 billion, an increase of 8% compared to 2016. And adjusted net income was just over $4.6 billion while adjusted earnings per share were up 14% to a record $5.79 per share.
Looking at our cash flow, cash from operations for the full year totaled about $7.2 billion down 4% when compared to last year. The decrease in cash was primarily related to a lower bonus depreciation benefit in 2017 compared to 2016 which was mostly offset by the increase in net income. Our capital spending program in 2017 totaled around $3.1 billion. Adjusted return on investment capital was 13.7% in 2017 up a full point from 2016 driven primarily by higher earnings. Taking a look at adjusted debt levels, the all in adjusted debt balance totaled about $19.5 billion at year end 2017 up $1.6 billion since the end of 2016. We finished the fourth quarter with an adjusted debt to EBITDA ratio of around 19 times. Dividend payments for the full year totaled nearly $2 billion up from just under $1.9 billion in 2016. This includes a 10% increase in our declared dividend per share which occurred in the fourth quarter.
In addition to dividends, we also bought back 36.4 million totaling $4 billion during the full year 2017. This represents 29% increase over 2016 in terms of dollar spent. In the fourth quarter we bought back 9.2 million shares at a cost of about $1.1 billion. And since initiating share repurchases in 2007, we have repurchased over 32% of our outstanding shares. And between our dividend payments and our share repurchases, we returned $6 billion to our shareholders in 2017, which represented 129% of adjusted net income over the same period.
I want to provide you some commentary on how we believe the new tax law changes will impact Union Pacific in 2018 and beyond. Our federal statutory income tax rate will decline from 35% to 21% all in when you include state taxes, our effective income tax rate will be about 25% and from a cash perspective we expect our 2018 cash tax rate to be between 17% and 18%. This cash tax rate reflects the benefits from the lower federal tax rate and immediate expensing of eligible capital expenditures partially offset by the negative impact of prior year bonus depreciation programs.
In later years, our cash tax rate will likely trend in the direction of the statutory rate. We expect these changes will result in free cash flow by approximately $1 billion in 2018 and we're still in the process of developing specific plans for the uses of cash in 2018 and as you know these plans including our capital budget must be reviewed and approved by our board. But for now, I can assure you that our basic philosophies and priorities regarding cash allocation and distribution have not fundamentally changed. We will continue to employee a balanced approach to capital expenditures, dividends and share repurchases.
First and foremost, we will approximately invest in the business with an eye on earning adequate returns on capital employed. And as Cam mentioned earlier, we plan to spend around $3.3 billion in capital in 2018 and our guidance of reinvesting around 15% of revenue remains unchanged. At this time, after capital expenditures we will continue returning cash to shareholders in the form of dividends and share repurchases. Looking ahead to 2018 from a fundamentals perspective. We expect volumes in the first quarter and the full year to be up in the low single-digit range. And as Beth commented on earlier, we should see strength in several business categories along with uncertainty in other areas.
We will price our service product to the value that it represents in the market place from an all in pricing perspective we're confident the dollars we generate from our pricing initiatives should well exceed our rail inflation cost in 2018. As for inflation this year, we expect both labor inflation and overall inflation will be under 2% driven primarily by lower expected health and welfare costs. On the productivity side, we plan to achieve approximately $300 million to $350 million of savings this year as we continue to focus on G55 and zero initiatives.
To wrap it all up, in addition to the significant incremental cash benefit that we expect as a result of the corporate tax reform. Positive full year volume, positive core price and a significant productivity benefits will all contribute to another year of strong cash generation in an improved full year operating ratio in 2018. We're still focused on our targeted 60% operating ratio plus or minus on a full year basis by 2019 and we're confident in our plans to get there.
In longer term, we're firmly committed to reaching our goal over 55% operating ratio beyond 2019 as we continue to momentum of our volume pricing and productivity initiatives. So with that, I'll turn it back over to Lance.
Thank you Rob. As we discussed today we delivered solid fourth quarter and full year results setting the table for 2018. We're optimistic the economy will favor a number of our market segments leading to another year of positive volume growth. Increased unit volume combined with inflation plus core pricing and G55 and zero productivity initiatives should result in another year of revenue growth and improved margins. We'll continue to execute our value track strategy to benefit our employees, partner with the communities we serve, provide our customers with an excellent experience and generate strong returns for our shareholders. With that, let's open up the line for your questions.
[Operator Instructions]
Our first question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.
This is actually Van Kegel on for Brandon. Thanks for taking my question. Lance, Beth could you just kind of give us post mortem on 2017. Your volume was up around 2% versus the industry up about 4% and your competitor being up 5% and historically UNP haven't seen a lot of growth. Could you just talk through some of the headwinds that maybe we don't appreciate from this year and some of the most compelling market opportunities going forward?
Sure, Van this is Lance. I'll start with just a very broad overview of 2017 and then turn it over to Beth for more specific market discussion. So you're right, we had about 2% volume growth. You combine that with core pricing growth and are about $350 million in productivity and it generates a record EPS of $5.79 now within that. there are some things that we're particularly proud of that is continued productivity improvement, the ability to get price in some of our markets that are relatively difficult having a franchise that makes us open and accessing to number of markets that are looking pretty sharp and good. And then there are some things that I would say I'm either not happy with or disappointed in and that is, in the second half of the year. We saw our operating kind of service product and overall operating performance slip a bit and that's a place that we're not comfortable in and we're working very hard to remedy as we speak. Beth?
Lance mentioned we're very focused on ensuring that we're generating great value and margins for the company and we're maybe less focused on volume as we end and all be all, so we had great growth, wonderful business that we enjoy in frac sand. We saw coal return in the year overall to levels that are probably a little bit more normalized. We had really strong Ag in the first half not so much in the second half compared to the year before and that's really just a global markets perspective and then on the intermodal side, while our domestic parcel business went gangbusters, we continue to see competitive pricing scenarios in both international and domestic intermodal for most of the year that really dampened our growth potential compared to others. We remained really focused on improving margins in intermodal and so we didn't see maybe the same kind of growth that you saw from others.
Great. And then on just quick follow-up on intermodal. I mean domestic up on and international on two and kind of wanted to strongest global trade environment we're seeing. Could you just give some more context around the drivers behind that and maybe either contract loses or some of the shifts that happen with the streamliners and then what you're doing on the sales and marketing side to maybe improve those outcomes. Thank you.
So as I mentioned we were - we had really strong parcel growth in the last quarter, a lot of that ecommerce driven as you would expect. The domestic market seems to be significantly improving with the tightening of truck availability so I would - we're certainly very hopeful that ends up being a good market for us in 2018, on the international side. We did see some decline in the fourth quarter and I think that is largely due to some shifting from the Pacific Northwest US ports into some of the Canadian ports where you've seen some pretty significant capacity expansion.
Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
So wanted to ask you Rob about just the pricing metric. I think people surprised that it decelerated this quarter even if you exclude coal intermodal decelerated a little bit. So maybe if you can give us some thoughts on why it decelerated. Beth, I think last quarter you said that the coal intermodal competitive pressure maybe starting to ease a little bit and maybe if you can give us an update there. And then Rob, you talked about inflation - pricing dollars well exceeding in inflation so I think that sounds a little bit better than what you've been saying in the past. Maybe do you have, is that just the inflation dollar amount slowing a lot or do you have confidence that the pricing dollars accelerates this year.
Yes, Scott let me take all that in. first of all you noticed that we changed the refind [ph] if you will and I would say being crystal clear and trying to be as transparent as we possibly can the rounding convention to quarter points here. I would say that if you look at the difference between the just under two, that we reported in our pricing in the third quarter to the 1.75 that we're calling out here in the fourth quarter the difference between the third and fourth quarter is really quite small. So I wouldn't read that there is any pricing actions story to be told between the third and fourth quarter there.
Stepping back though, just to remind you and I know you, you know this but to remind everybody listening. How we calculate price? And we've been doing this for the 15 years that I've been the CFO and I'm very proud of this. It's a very detailed, analytical approach to what did we actually yield from our pricing action. So it's not representative of same store sales that took place this quarter versus last quarter or last year. it really is how many dollars did we yield from the pricing actions that we took since the last 12 months and how many dollars did we yield this quarter that actually went to the bottom line, so it's not again it's not a same store sales type, remember what we did really take to the bottom line and in the fourth quarter that was 1.75 pricing.
To your point, if you exclude as we called out in both the third quarter and now in the fourth quarter. If you exclude the coal intermodal where we continue to face some challenges I would say and Beth can perhaps elaborate on the intermodal piece of this. I would say that in the fourth quarter we still face those same challenges. Now as you look forward and Beth can comment on this, as you look forward particularly in the intermodal we're feeling better about that obviously but we're still in the competitive challenges I would say in the coal space and then there is one final comment before I let Beth comment on the intermodal on your question about the well exceeding comment that I made as we look to 2018 and what I'm saying there, is our expectation again remember how we calculate price, it's dollars yielded from the pricing actions that we took and comparing that to the dollars we anticipate expending on inflation, both pieces we think are moving favorably, yes we think inflation overall for 2018 will be lower than 2017, we think it's going overall be under 2% and yes, we do have some optimism as we look forward to 2018 in some of our pricing opportunity. So we believe that gap if you will of the pricing actions and yields from our pricing actions in 2018 versus the inflation dollars will be better in 2018, than it was in 2017.
Yes, just building on what Rob said. My perspective is that, our pricing in the fourth quarter versus the third quarter was not different. We were still seeing opportunities to price and I would say growing opportunities to price on the domestic intermodal side, international intermodal and coal continue to be challenges for us competitively, but we definitely do see that truck availability is tightening in the spot market, how that converts into long-term contracts we'll get more and more opportunity to see as we have bid season coming up in domestic intermodal, but it does feel like the pricing opportunities are flowing.
Okay, that's helpful and then Rob, I wanted to just ask you what about just the balance sheet and maybe the rationale for being a single A credit. It doesn't seem like there is any sort of meaningful reduction you're seeing in borrowing cost relative to maybe some of the other rail so, so it doesn't just feel like we're optimizing that the cap structure here and now with all the extra cash flow from tax reform. It would seem to be like there is a pretty dramatic opportunity here to ramp up leverage and then obviously would that really ramp up the buybacks for your shareholders. I know you can't give us like the specific numbers today and maybe that will come in May, but maybe can you just because what I'm saying makes sense to you or is there a reason why you feel like you need to be a single A credit relative to what you used to be.
Scott, duly noted. We totally understand your point and others point on this very issue. I would say that, with the new $1 billion of cash flow opportunity we have, it's frankly high class problem for us to evaluate how this is all going to play out. I know we and everyone including rating agencies are going to be digesting what does all this mean. We're comfortable being we drive towards cash flow measures and we've been comfortable with A rating, but even within that Scott to your point, we think there is a growing opportunity for us to both grow our cash flow from the fundamentals and the benefits of the tax reform act give us additional opportunities and as I stated. I'll reiterate it. We're not changing our philosophy we're going to contuse to be very focused on rewarding our shareholders in addition to spending capital, where the returns are there but we do believe this gives us a high class problem as we look at dividend and share repurchases going forward.
Okay, all right. Thank you guys.
Your next question is from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Rob, you've been at between 63%, 64% OR for four years now and you noted the workforce that was in your commentary will increase with volumes. Is that a change from growing the workforce but not at a pace with volumes and I guess just thinking about 60% OR does that include the shift in pension income and with the rise in the fuel prices impacting the operating ratio.
Yes Ken I mean your point is duly noted in terms of where we are and we're proud that we've, as you know over the years going from high 80s to the low 60s and we're very focused on getting that 60 and ultimately 55. The math behind why it may have kind of slowed the momentum here in the last couple of years is a lot of moving parts in there. But rest assured, we're very focused on continuing to improve year-over-year and we have to drive incremental margins to get to that 60 plus or minus by 2019. And what it's going to take continue focus on our G55 and zero initiatives which still is turning out stellar productivity numbers. High quality service product enables us to continue to get price in the marketplace. Specifically to your point on headcount that's not really a change. What I said here today on headcount and that is that, it will move with volume but not one for one that is not a change we've kind of had that philosophy now for several years and what I'm saying there, is if volume is up x% I would expect that will require us because we think we're right-sized right now that will require us to bring in additional employees depending on what business it is, what makes it etc., but it's not going to one-to-one because the G55 and zero focus on productivity, we're very confident that headcount will not grow at the same pace that hopefully volume does.
So it's really a combination of factors, but I take comfort that we're very focused and committed to continue to drive to that 60 plus or minus by 2019.
Ken, this is Lance just two other observations. One is that training pipeline is going to have to be filled just for attrition purposes. We have what mid to high single-digit percent attrition out of TE&Y workforce every year, so that's going to have to be filled for that purpose. As we look forward into next year in growth. The second thing is, growth is another levers that we focus on in making sure that we're able to drive long-term margin improvement and we're very pleased that we got margin improvement this year.
Okay, great thanks. Rob I think I was little confused I thought you were shifting and saying that you're going to one-for-one in the original computation. Thanks for that clarification.
Thank you for the clarification, no I'm not saying that.
And then my second one, I guess Lance maybe for you the - we've heard now three other rails move to kind of eliminate it seems like almost all of their hump yards and improved operating performance. Now you're looking to spend maybe $500 million on adding another one. Maybe can you just walk through the cost benefit analysis so we can understand the difference of why you looked to add, when other seem to cutting them.
Yes, absolutely so let's start from the top. Ken, right we use yards whether it's flat switching yards or hump yards to categorize cars in our manifest network and you know we have a very robust large manifest network. When we determined how we want to get that switching done it's all about how many cars can we aggregate and how deep into the network or somebody else's network we can send them that informs for us. The number of large network yards which are hump yards for us that's all driven by car count versus smaller, regional or local yards which are flat switching yards. The reason why we're building a new hump yard in the middle of Texas is that as we look forward both from the volume that's coming out of the petrochemical complexes along the Gulf Coast. Texas itself and overall manifest growth down in that part of our network. We see that our existing infrastructure is going to be overwhelmed at some point in the future. We're doing everything we can to incrementally improve productivity in those areas. You saw Cameron this morning talk about incremental productivity and car switch for employee. We also look for incremental capital that can be spent in existing network yards, but once that string runs out, we have built new capacity.
When you think about this specific yard, Brazos. It will be the most productive yard on our network. It will be the lowest cost per car switched and the most efficient. And what we will do is, we'll utilize it again for a lot of that two and from business that's down in the Southeast part of our network and we're pretty confident I would scratch that, very confident that now is the right time to build it and it's the right asset to build.
Thanks for the thoughts. Appreciate the time.
Your next question is from the line of David Vernon with Bernstein. Please proceed with your questions.
Rob, just real quickly in terms of that 10% growth in the other expense guidance. Could you clarify that a little bit more? It sounds like you guys are doing a lot of work on taking cost to out and yet this other line continues to kind of pop up a little bit. So I'm just wondering kind of what's behind that cost increase there.
Yes, David I mean there's a lot goes into the line item as you know and it includes state and local taxes. The equipment property damage, utilities, insurance I mean environmental. A lot of things going into that so it's one of the hardest if you will to try to nail to the wall is to exactly what that's going to be. Your point is duly noted. On every cost bucket rest assured as part of our G55 and zero initiative though we've got an eye on being as efficient and productive as we can and we got to include the other expense, but our best linking at this point in time largely driven by some of the unknowns around the state and local tax is in that 10% category.
Okay and then maybe just you guys have done a phenomenal job in terms of managing upper turns and evaluating new business opportunities based on their reinvestability [ph]. As you think about the lower tax rate sort of maybe changing the math on what is investible, what is not investible. Are there any opportunities where you see you might be able to get a little bit more aggressive in terms of driving some volume growth because of a lower tax rate?
David this is Lance. The lower tax rate and increased cash flow resulting from it does not change the calculus that we used for the returns that are attractive to our shareholders and for reinvesting in the railroad. So I think the short answer is, just because we have increased cash, it doesn't increase the pool of either projects or markets that are effective to us.
I mean I guess the one area that's come up in a couple of conversations with some industry folks is the West Coast intermodal freight where obviously the US rail industry is going to be getting a little bit of tax reform benefit that maybe the Canadian rails aren't and you've seen a bunch of freight diversion of north. Would that maybe impact some of the routing decision in some of those moves or is that just something you guys wouldn't even consider.
Well so those routing decisions right now as we compete for that business right now is all about the service product, the ultimate cost to the end user and which way they want to go, what's most attractive to them. So we compete aggressively for that today. We'll compete aggressively for it tomorrow. In the context of making sure we generate an attractive return outlook.
All right. Thanks for your time.
Your next question is from the line of Fadi Chamoun with BMO. Please proceed with your questions.
On the drill back into the productivity little bit. I mean looking back on 2017, we had a pretty good kind of revenue environment you achieved $345 million of productivity savings, the OR moved 50 basis points. So we're starting 2018 with 300 basis point to improve into your target. So 2019, if you can just kind of walk us through what is going to get better in 2018 and 2019 in order to kind of move the productivity momentum stronger and to get you to your target of 60.
Let me start with that and then I'll let both Rob and maybe Cam add technicolors [ph] appropriate. So Fadi, the game plan really doesn't change as we look forward. The levers continue to be productivity and we've talked about the amount of productivity we think we can get in 2018 and we're just laser focused on delivering that and then moving into 2019 for the same. We see market opportunity for growth and growth is always our friend in terms of leverage and dropping it to the bottom line and then price of course. The thing that gotten away a little bit for even better results from 2017 is that in the second half of the year, the fluidity of the network eroded to a certain degree in some part that's Positive Train Control and the impact of implementing it aggressively across the network you heard those stats. Part of it candidly was just execution in a certain spots around the network that we have all hands on and attention and I'm confident given that we've got the resources and the capacity that will remedy that. So my expectation is 2019, 60 plus or minus operating ratio is still eminently achievable and we have enough in front of us in activity and projects to make it happen.
Fadi I would just add, don't take anything I'm about to say here as excuses, but just recall notably in the third quarter we did have the hurricane impact, we had the force reduction impact, fuel for the full year was a little bit of headwind, so no excuses but some of those things notably the workforce reduction sizable we'll get the benefits of that more in 2018 where we incurred the cost in 2017 and of course things like the hurricane, which frankly we whether extremely well, those are things that we don't anticipate repeating, other than that it really is just a volume productivity and pricing levers that we're going to continue to pull.
Okay, thanks that's helpful and just one follow-up on the pricing side. International intermodal you said that market can remain very competitive, would attribute that competitiveness to the Canadian ports and the Canadian kind of railroads being more aggressive on the market. Was it US competition like?
Fadi, I would say that we see both things being pretty aggressive. It's pretty aggressive coming out as Pacific Southwest in terms of the pricing challenges and it's pretty aggressive coming on Pacific Northwest which is US railroads and Canadian railroads.
Thank you.
Our next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
I wanted to come back to the OR for a second just thinking about the fourth quarter and them maybe looking out to 2018. But within the fourth quarter, we know fuel was a headwind but it sounds like ex-fuel kind of OR was flattish. We had positive volume, positive price. Just want to get a sense from a 4Q perspective. If there is anything specific in the quarter going on from a cost standpoint. That you felt like maybe it was maybe a little bit one-time and make sure maybe that's recurring and then as you move into 2018 particularly the first half. I mean did those things kind of, are there other cost item that sort of drop away. Do you think you can get OR improvement in the first half of 2018? Just trying to get a sense of sort of how things are trending today.
Hi, Chris I'll let Rob speak to the details of the fourth quarter financials. But just at a high level. I think we would have been generating a better operating ratio and overall results with a more fluid network. Again there is a number of reasons for that, that Rob outlined that we've talked about this morning and there is no reason to think that that is systemic is anyway. That's a completely resolvable issue.
Lance the only thing I would add and Chris as you know, we are focused on improving our operating gross here in 2018, we're going to stay away from breaking out by quarter or first half versus second half. But [indiscernible] Lance from my perspective there is nothing really unusual, you called out fuel that occurred in the fourth quarter other than our disappointment on the cost side. I mean we frankly admit that there is opportunities and we are very focused on doing better on that and that's the big delta in my mind.
Okay, all right. And that's helpful. I appreciate it. And then just in the context of sort of pricing and it seems like the industry is getting better pricing gradually in 4Q and then moving forward into 2018 with the potential of the much tighter truck market, how much of your business is sort of available and open for repricing. So how much in other words do you think you can kind of capture what's going on in some of those markets, with contracts that are available to be repriced.
I think we've given guidance previously that roughly two-thirds of our business is under some sort of one year or longer term at any given point in time and then you have things that are under, everything else will be kind of under tariff and available for pricing and then you know of course you get roll off the one year deal, so.
Okay, so somewhere in the sort of the third range is kind of what the shot on goal is for 2018, maybe a little bit more than that.
No, so listen to what Beth was just saying, at a moment in time a third is available through tariffs overtime the other two-thirds a portion of that, maybe a fair portion of that is in short-term contract. So as they expire they become available for pricing.
Okay, thank you.
Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.
I guess just following up on the previous question. If we think about the bid season for trucking and assume that TL contract rates are up in the mid-single digits or high single digits during the bid season. Is it fair to assume that UNP would see a step function increase in price in the second half?
Well as you know, there definitely is a timing of the bid season on the intermodal side in particular and then of course we have other business that's truck competitive as well. so as we go into the bid season in the second quarter, we certainly hope that spot high rates that are happening right now and trucks convert to longer term contract capability, but you're right it won't show up until later in the year.
Okay, all right. And then I know that pricing is been - dead horse during the call, but I wanted to ask about the coal pressure. I know that you mentioned that the pressure was similar in Q4 to what it was in Q3. But if we think about new contracts signed in the second half of the year, was the pressure the same as it was for contracts signed in the first half of the year or was there some sequential easing that happened.
I would say that, we're the pressure in the coal markets remains pretty much the same.
Okay, so from the first half to the second half, it was the same.
Yes.
Okay, thank you.
Our next question is from the line of Bascome Majors from Susquehanna. Please proceed with your questions.
I wanted to focus on few of the CapEx budget items and how they might trend beyond 2018. Specifically the $460 million or so for locomotive equipment that you said this was the last year of your purchase commitment on locomotives. The 160 for PTC since we're at the tail end of that and the 445 that you allotted the capacity investment which seems to be up almost $200 million year-over-year and I'm assuming that's related to the Brazos project that you talked about earlier, but can you just give us sense for how some of those moving parts might move into 2019 and beyond, it would be helpful. Thanks.
I'll probably disappoint you, not getting into quite the level of detail that you're asking and let me just start out by reiterating that our guidance for the long-term is 15% of revenue and as I think you and everyone knows, that's not how we build our capital plan, but that still is a good way of thinking about what we're thinking here as to what the overall expenditures will be when you add it all up. Some of the moving parts so that I will call out. Yes, this is the last year's as Cam pointed out, this is last of our long-term commitment on buying locomotives, so we'll take 60 locomotives this year and we don't have plans at this point in time to take any more locomotives beyond that. We will still have some capital expenditures that go into locomotive programs etc. in there. So the number will come down, but it won't go to zero in our locomotive line PTC.
Clearly once that's up and running and behind us that number will change. It will go down to probably not zero in the near term, but it will go down as it has dramatically from where it started and beyond that again, so we just talk about Brazos being an opportunity where we're making an investment because we're confident the returns are there. And that's how we look at all investments, so you're right there is some pieces coming down and other than Brazos we're not saying it's necessarily going to be backfilled dollar for dollar, but our guidance at this point in time to kind of answer your question is still at 15% of revenue look.
I appreciate that color there. Just one more question someone earlier mentioned that the training pipeline will have to be filled to start to backfill some attrition based on the growth you expect over the next few years. Where is the TE&Y pipeline today and can you help size us how many hirers you might need to get that pick where you like it to be?
Bascome, I don't know we'll give you exact numbers, but I think Cameron can give you a sense for how we're thinking about it.
For the attrition that Lance mentioned earlier in the meeting, we have filled the pipeline appropriately to meet that attrition and some of the growth that has been highlighted for the southern region and we feel like that's time to pretty accurately. There will be a few additional hirers filtration in the locomotive and engineering side, but we think we've got that pipeline filled appropriately.
The operating team and we haven't received any questions about this morning, but it was a pretty start [ph] number. They've done a tremendous job on the engineering and mechanical side of achieving productivity both in central operations and in our distributed operations that are throughout the network and I anticipate there is even more opportunity there as we look into 2018 and beyond.
Great. Thank you for the time this morning.
Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your questions.
I'll start with one on the cost side. I guess when you talk about inflation I know that probably doesn't map precisely to total operating expense growth, but obviously some broad relationship in the way we model that. you're talking about 2% or less in inflation and on the high side you get the 5% rise depreciation 10% and other expense so, what would be the categories of operating expenses that would be less than 2% and we ought to model at kind of pulling that overall number down to 2% and if I'm thinking about it wrong tell me that, but just want to know where we should model, maybe favorable OpEx items on the P&L. thanks.
Tom, again I'll probably disappoint in terms of giving you the precise line items that you're asking, but I would just start out by saying, every cost bucket we're looking at opportunities to squeeze out efficiency and manage the cost. You've got your comp line, which again I called out that line overall should be less than 2% on the inflation side of the house. You look at rents I mean that's another category where we're hopeful of continuing to manage that effectively, but just and I know you know this. But just to kind of reiterate, when we less than 2% of course we're talking about inflation, the actual cost that flow through the income statement will largely be driven by what volume we actually enjoy and so volume costs albeit not one for one and all the efficiencies that we expect to squeeze out of that will clearly fill up on the line items as well, but as it relates to inflation. I call out I guess comp and rents of two lines that might be lower than overall average.
Okay and then, I know this has been a big topic on the call, but just headroom in pricing as well. how do you think about, like I think about the eastern rails is having more sensitivity to truck market so their pricing is kind probably going to move a little bit more close to the related to the rise in truck. How much of your book do you think is pretty sensitive to truck market, how much do you think that can flow through to help pricing. It seems like the truck markets are super, super tight and that it's kind of hard to resolve your cautious comments on price with that really tight truck market. How do we think about how much sensitivity you have to truck, what parts of the book or how much is the book overall?
We do have several markets that are very truck competitive, intermodal being one of them. Lumber, I think you probably saw the article in the Wall Street Journal yesterday that called out Reefer capability as being very tight right now and we participate in that to obviously lower volume for us, but we do have exposure to that and then of course we serve a lot of bulk markets that aren't as likely to be truck competitive. So when we put all that kind of together in the mixer and we think about what's happening there, we do see that there is a potential for us to have the opportunity to participate with some higher pricing in these markets that are truck competitive. The caution I give you is that, we are continuing to see quite a bit of competitive pressure in big books of business like international intermodal and coal.
Okay, so you want to put a number around it, like 20%, 30%, 40%.
Rob will not let me tell you a number.
Various categories, but we're going to stay clear of giving up precise point on that.
Yes, okay. Thanks for the comments.
Your next question is from the line of Jason Seidl with Cowen & Co. Please proceed with your question.
Well let me drag the horse out again, guys. Let me look at it at a different way, so obviously you're saying modest sequential decline and what you report as core price or essentially the same as the previous quarter. When you look at the contracts that you've signed this year or maybe late last year would those be above that core rate that you posted in the fourth quarter. so something similar to one of your competitors reported north of the border [ph].
We really don't talk about individual deals when we do this, we have a very purist mentality about how we calculate price. We are looking at the yields and so one thing you might want to think about is, it really kind of depends on what's going on in your book of business, right. So mix can be very important and the fourth quarter we had the virtually the same price as what we got in the third quarter and we had a lot of changes in that mix of business. So it matters in the way that we calculate price. We still feel good about the pricing that we're getting we're going to take advantage of the opportunities we have as these spot truck rates firm we hope into longer term capability to price there. And as I've mentioned like a few times it feels like a bunch, we still see headwinds in some of our big books international, intermodal and coal being two, I would call out for you.
Your description of firming at least intrigues me to some extent because what we're seeing in the marketplace on the spot side is really strong price increases and a lot of people talking about potential contractual increases, somewhere between 6% and 10% on the truckload side. Are you guys seeing something different because I would categorize at a strong rate increases is not firming, if you will.
Jason, this is Lance. We would love for the current truck pricing environment to continue all the way through bid season next year as a potential that it does and it's a great environment for us to be out in the market place pursuing business and repricing business. So I think that's probably the sum total of what we want to say about truck pricing.
My follow-up is on Mexico, could you talk a little bit about the total exposure in terms of traffic direct from you guys and then maybe any interchange as well as, do you feel that there's been any increase in shipping to and from Mexico ahead of any potential issues with NAFTA.
I'll take that Jason. So our Mexico business is about 11%, maybe a little bit more of our overall book. We enjoy about 70% of that business to and from Mexico that's shipped by rail and we've not seen anybody's behaviour in our served markets changing pending NAFTA. Having brought up NAFTA of course we're keeping a very close eye on current negotiations, you know we're in the penultimate negotiation up in Montreal. So they're down to the really difficult parts of the deal that need to be negotiated and while I still believe there is a good opportunity for the NAFTA agreement to be solidified, all three parties continue in it going forward. We've got a strong eye on all the what if's and contingency plans and agility to react to whatever would happen.
Okay, that's good color. Listen, everyone I appreciate the time as always.
Our next question is from the line of Matt Russell with Goldman Sachs. Please proceed with your questions.
Just going back to the productivity program and particularly in the context of the current cycle. Is there any trade off here where you think you'll capture less of the volume or the pricing upside and the cycle, just given you have this longer term focus on productivity.
I'll take a stab at that. so when we think about productivity we don't view that as a trade-off for price and volume productivity to a fair degree is in our control and things that we are consuming, paying for, organized for, in order to provide an excellent customer service which allows us to price in the market place. So I don't think we see it as a trade-off like that.
Okay and just to go back to one of your follow-ups to David's question on capital investment. I would think that the return on any project that you were considering on a previous tax reform would previously tax [indiscernible] would improve here tax and cash flow that are low rate, the immediate depreciation. I guess why wouldn't that increase the pool of investments that will be attractive to you and is it just a factor of even after you adjust for those returns, [indiscernible] hurdle rate.
Matt this is Rob. I would say clearly yes, that's a positive tax reform is a positive in that calculus. What we were saying and Lance addressed earlier is that alone is not going to cause us to, it's not like we have a bunch of pent up capital projects that were sitting on the sidelines just waiting for that extra couple of points have been improving on the ROI and by the way I would remind that we're improving or increasing our capital spend in 2018 versus s2017, so it's all in the mix of things but it's not like to ask opening a floodgate of additional investment that was pent up sitting on the sideline.
Matt, but so let's take a step back and take a little broader perspective of this tax reform. We do believe and we hear from our customers and our markets that tax reform fundamentally makes the United States more competitive both for direct investment whether it's foreign direct investment or domestic investment and for competing it with either import goods or for export goods. So from our perspective we believe the tax reform will result in more opportunity for us over the longer term which should result in more opportunity for us to invest and to grow and to hire. But that's the string that we see happening basically it will affect the competitiveness of the markets that we serve and then that will drive incremental investment opportunity and incremental hiring opportunity.
Makes a lot of sense, thank you very much.
Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Just one straggler here. There's been a change in Canadian grain regulation that potentially allows US rail to maybe access some of that market. Do you see that as an opportunity for you guys?
The change doesn't impact Union Pacific in particular, we do participate in some of the Canadian grain market that would come across desk from one of the Canadian railroads and go to export, but we don't see that - this change in the regulation materially changing anything for us.
Got it and just a follow-up on the frac sand market. You said the second half of the year is likely to be challenging given the emergence of some local alternatives. What's your game plan there? I think you guys can [indiscernible] to kind of make your business more competitive or help make white sand more competitive versus brown sand to kind of help defer that impact.
The reason that the brown sand is really emerging is because the logistics cost are so substantial coming from with constant in Minnesota and while there could be fringe markets that you can help make that worse, it doesn't seem like that's solvable by us. However I do think that there are other markets, other shale plays where white sand is desirable that will continue to emerge, so it's not just the Permian there's Eagle Ford, there's the Oklahoma markets are pretty hot you're seeing investment happening in the DJ Basin and Colorado as well.
And we're pursuing participation in the local markets to the extent that makes sense as well.
Got it. Thank you.
Your next question is from the line of Justin Long with Stephens. Please proceed with your question.
I wanted to ask about incremental margins as the fourth quarter was lighter than what we've typically seen in this type of environment, was there anything outside of the fluidity issues you've mentioned that drove this and as we look into 2018, what's your confidence incremental margins can return to levels that are 50% plus?
Justin, you're right on I mean as I pointed out earlier. We were not happy with our performance in the fourth quarter on couple of measures and that showed up in the incremental margins, but it was fully explained by some of the fluidity challenges that Lance and Cam addressed earlier. So there is nothing other behind the scenes on that. and as we look to get to our 60 plus or minus by 2019 we've got annually run in 50% to 60% incremental margin range and that's our focus and we understand that and we're confident in our ability to get there.
That's helpful and Lance, you mentioned a couple of times earlier that operating performance did flip in the second half and I wanted to ask if you could address when you think the network can get back to normal fluidity this year and what are the specific action items that are necessary to see this recovery.
Yes, I'll just briefly take a stab at that question and ask Cameron to provide more. We won't put date certain on when we think the network is “back to normal”. My expectation is, it happened sooner as opposed to later. This isn't something that I think we wait around and see what happens in the first and second quarter. I mean we're actively working on the handful of issues that we need to address and Cameron maybe you want to talk about those specifics.
Velocity at this particular time is so being impacted as we implement PTC in Chicago, in Kansas city and Houston that's really the last series of implementation that we've ahead of us. There are always challenges when we implement and those big network industrialized heavy areas and we'll work out way through this. We're shipping quickly from implementing PTC to problem solving PTC which requires a technical team to continue to problem solve and that really a human design team to help people become more familiar and try to adapt to the technology that we've asked them to use as they're running trains. So we'll continue to work that throughout 2018 and there are really no other critical issues that's impeding velocity other than that.
So we've got couple of discrete kind of execution areas that we've got to pick up on but the good news from my perspective is, we got all the resources we need, we got the right team and they're focused on the right stuff. So we - so I expect this to happen sooner not later.
That's helpful. Thank you.
Our next question is from the line of Brian Ossenbeck with JP Morgan. Please proceed with your question.
First following up on the PTC comments. You said you're going to the big metropolitan areas. Cam, if you can give us a guesstimate last quarter on how much PTC implementation shaved off velocity for the network so that would be helpful. And as you look ahead to beyond 2018 in the next couple of years, what's your early sense of the other rails, interoperability and is that going to be another potential challenge for rolling out this system after the first couple legs going through here now.
During the previous earnings call we estimated half of mile an hour to a mile an hour and that still looks like to be a very solid estimate, somewhere in that range. And as we mentioned some of that, as we troubleshoot, problem solve and train our employees will be recovered. You do highlight the challenge for the entire industry which is ahead of us, which is the interoperability, which we've all been working very closely with each other all along. I don't believe there will be any issues with executing that. it is little bit of unknown. We have yet to marry up with BNSF or Norfolk Southern or CN or CP and really run each other's products on each other's railroads that's ahead of us here this year.
Okay and their specific time on when you start to cross tracks or link up the systems as you mentioned.
I'll give you one example that is time certain if you think about Metra. Being a specific Metro in Chicago that cut over with each other is going to be this July.
Okay, thank you. And Lance just one quick one for you if I could. On just trade flows globally we've seen some news on tariffs being increased but on the flipside we've got a weaker dollar just been down I think 4%, 5% since you last reported earnings. So just what are you hearing from some of the bigger customers, bigger accounts and what's your view on kind of the upside and downside with potentially more tariffs but offset by what could be a continual weaker dollar which will be a pretty nice tailwind for you and for the industry in general.
Brian, thanks for that question. There's a lot of moving parts as regards to trade and trade is pretty important to us of course. First we need consumer in the United States to feel optimistic and feel wealthy so that they consume stuff, build homes etc. and that looks like it's set up pretty well as long as the risk and global environment don't kind of overwhelm that optimism. Right now consumers are saying they're pretty optimistic and we see wages starting to increase and they feel pretty wealthy. The second thing that needs to happen is we've got to have open markets and free and fair trade and more open markets is better.
While there is some rhetoric that isn't helpful to that, as we're negotiating NAFTA and as the administration observes other trade relationships as of yet. I've not seen it significantly negatively impact markets that we serve nor in conversations with my counterparts in those markets. Are they saying it's fundamentally changing their behaviour at this point? So there is a lot to pay attention to, now that it's, I think the power of tax reform is it almost can't be overstated to some degree. You think about this, every product produced in the United States that has any kind of supply chain to it, all along the way suppliers build in a 35% tax rate historically that drop in 21% fundamentally alters the landscape for cost of goods sold coming out of the United States and at the same time it makes us very attractive, more attractive for capital investment. All of that is positive for railroads.
And so I think in the net we're cautious and we're deliberate and diligent on all the moving parts, but I think there is a pretty fair chance that it turns out positive as oppose to negative.
Okay, thanks Lance. Cameron appreciated.
Our next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
First one is on the share repurchase, the company committed to 30 million I guess share buyback clip through 2020 back in 2016, you ran a little bit above 20% that rate last year by repurchasing a little more than 36 million shares. Now we have tax reform the share price is up more than 50%, since that target was announced. So just given all those factors moving parts can we assume maybe a bit of a cooling off on the pace of buybacks given those factors and also are you still committed to repurchase your 120 million shares by 2020 from the 2017 date. Thank you.
Amit this is Rob. We don't straight line our repurchases. It's - we're opportunistic in terms of the pricing and the opportunity and we will continue to operate that way. But I wouldn't take, I wouldn't interrupt anything that we've said or what the benefits of the $1 billion of additional cash flow from the tax to imply that we will slow down the pace of share repurchases I wouldn't look at it that way and we were still working through all the details of that, but we think it gives us a greater opportunity on dividends and share repurchases frankly.
So the 120 million targets in terms of share, if it's still very much intact maybe even, I don't want to put words in your mouth, but maybe even some upward bias to that, given the inflows and the tax reform.
I think we're still on track, we're still on track for that.
Okay, one other quick one for me and I don't mean to nit-pick on the core pricing, but I just wanted to be crystal clear on the movement as you move from 3Q to 4Q. you did talk about rounding and offering kind of that 1.75% number in the fourth quarter down from 2%. I just wanted to see was that 2% rounded. Again I'm not trying to nit-pick here but I just want to be clear, was it 2.00% or 1.8% or 2.05% any color there so we're just - we're on the same page in terms of that.
Yes fair point, Amit. And as I said earlier, if you recall in the third quarter I said our pricing when you look at what we yield in the third quarter with just under two, then we refined our convention in terms of the routings. So I would say again the story is not the big change from the third to the fourth quarter and it's probably in the 10 or two tenths kind of range in terms of the way the math flew, so it's not a full quarter of point different.
But the and the mix shifts that impacted, the headline number, I would just imagine would probably accelerate over the next 12 months in terms of the coal intermodal volume. So I know you talked about I guess in response to one of the previous questions that 50% to 60% is obviously the walk to get to your long-term target, but how do incremental margins get to accelerate from kind of back half of the year, when some of the mixed challenges accelerate in 2018.
Amit, I don't think we really talked in detail about mixed challenges. What we were referring or trying to refer to is that mix is a significant contributor to what happens sequentially quarter-to-quarter to pricing. And if you look at incremental margin which we only really talk to for purposes of kind of illustrating full year, last year was something like mid-60s. the fourth quarter was something like high 30s, right. So the fourth quarter from our perspective was all about fluidity and some incremental cost like little elevated recruise, some little elevated overtime, little elevated [indiscernible] more equipment than we would need normally all adding up expense that need to be there.
Got it. Okay. All right that makes sense. Thank you for taking my questions. Have a good day.
Our next question is from the line of Ben Hartford with Robert W. Baird. Please proceed with your questions.
I just to come back to service real quickly Lance and Cameron. When you with clears the economic outlook has improved the truck market is tighter. There were some headwinds across the rail space noted in the back half of the year that presented challenges to service you talked about the PTC. And I think Lance you said you expect improvement for the year sooner rather than later, but what in your mind is the biggest risk to service improvement historically would suggest that it's accelerating volume growth across the rail network and I think that's clearly a bias here as we started the year, but it's also well telegraphed. So is it the macro and if not then what is in your mind the biggest risk to incremental service improvement during the course of 2018.
Sure. I'll start and then turn it over to Cameron. I'll call it a service blip that was reflected in our fourth quarter again is not systemic. Historically when we would get into really difficult times, we get behind the resource curve for locomotives TE&Y other labor and it's really hard to catch up in those environments, it takes quite some time given the lead time, the kind of amount of time it takes to get incremental resources back into the network. We're not anywhere near place like that. we've got 800 or 1,000 locomotive stored. We've got a pipeline full of TE&Y that makes sense to us. So it's not that stuffed.
From this point going forward service will be about maybe some weather shocks that's always a possibility and making sure we navigate through Positive Train Control effectively that we're problem solving, things that are getting in the way of us being fluid and doing that rapidly. Cam?
To answer your volume question, which is a good one. Northern region looks sound, western region looks very sound. This really about the State of Texas and very positive growth not only this year but the next several years and that is what is Brazos is meant to address. Plus if you looked under the hood of where we're spending our capacity dollars, it is all pointed at Texas. So we have the right capacity projects pointed at growth to take care of the southern region.
Okay, that's great. Thank you. And the rather quick follow-up on the other income line item as you looked to 2018, in any direction relative to 2017 on an absolute basis.
Good question, Ben. Because 2017 was an unusually higher year if you remember the third quarter we had couple of larger transactions Kinder Morgan, Seabrook which we called out. So as we looked to 2018 a normal year is closer to call it $150 million range plus or minus rather than you know call it $300 million that we had this year.
Okay, that's helpful. Thank you.
Your final question is from the line of [indiscernible] with TD Securities. Please proceed with your question.
I just wanted to ask a quick one on network performance. Despite mentioning the transportation plan adjustments and I was just wondering if you could clarify whether that was intended to indicate that adjustments to plan impacted network velocity in Q4 or that you intend to make changes to the plan to improve network velocity.
We always take Beth's forecast and drop it into a model and take a look at a couple basic questions surrounding T plan, whether or not we have enough T plan to offload our terminals and we make adjustments as necessary. So we'll be watching that particularly down on the southern region. Again it's not really a western region or northern region exercise it is focused on the southern region.
Great. That's all from me. Thank you.
Thank you. I'll now turn the floor back to Mr. Lance Fritz for closing comments.
Great. Thank you. And thank you all for your questions and interest in Union Pacific. We're all looking forward to talking with you again in April.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.