Jan 13, 2016
Executives
David Baggs - VP, Treasurer and IR Officer Michael Ward - Chairman and Chief Executive Officer Frank Lonegro - Chief Financial Officer Cindy Sanborn - Chief Operating Officer Fredrik Eliasson - Chief Sales and Marketing Officer
Analysts
Ken Hoexter - BofA Merrill Lynch Brandon Oglenski - Barclays Brian Ossenbeck - JP Morgan Chris Wetherbee - Citi Tom Wadewitz - UBS Allison Landry - Credit Suisse Rob Salmon - Deutsche Bank Alex Vecchio - Morgan Stanley Jason Seidl - Cowen Matt Troy - Nomura Securities Cherilyn Radbourne - TD Securities Ben Hartford - Baird David Vernon - Bernstein John Larkin - Stifel Bascome Majors - Susquehanna Jeff Kauffman - Buckingham Research Scott Group - Wolfe Research Justin Long - Stephens Cleo Zagrean - Macquarie Keith Schoonmaker - Morningstar
Operator
Good morning, ladies and gentlemen and welcome to the CSX Corporation Fourth Quarter 2015 Earnings Call. As a reminder, today’s call is being recorded.
During this call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr.
David Baggs, Vice President, Treasurer and Investor Relations Officer for CSX Corporation.
David Baggs
Thank you, Carlos, and good morning, everyone. And again, welcome to CSX Corporation’s fourth quarter 2015 earnings presentation.
The presentation material that we’ll be reviewing this morning along with our quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the Investors section. In addition, following the presentation, a webcast replay will be available on that same website.
This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer. In addition, Cindy Sanborn, our Chief Operating Officer; and Fredrik Eliasson, our Chief Sales and Marketing Officer along with Clarence Gooden, our President, will be available during the question-and-answer session.
Now, before I turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company’s disclosure on the accompanying presentation on slide two.
This disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition, at the end of the presentation, we will conduct a question-and-answer session with the research analysts.
With nearly 30 analysts covering CSX and out of respect for everyone’s time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on that same topic. And with that, let me turn the presentation over to CSX Corporation’s Chairman and Chief Executive Officer, Michael Ward.
Michael?
Michael Ward
Thank you, David. Good morning, everyone.
Yesterday, CSX reported fourth quarter net earnings of $466 million or $0.48 per share, down 2% from the same period in 2014. Revenue declined 13% in the quarter.
A strong pricing was more than offset by the impact of lower fuel recovery, a 6% volume decline and the continued transition in the Company’s business mix. Expenses also decreased 13%, primarily the result of lower fuel prices, lower volume related cost and efficiency gains.
As a result, operating income decreased 12% to $791 million while the operating ratio improved 20 basis points to 71.6%. In addition, CSX remains an industry leader in safety and service measures continue to progress well as we enter 2016.
In fact, Chicago operations have now been fluid for nearly 12 straight months. Now, turning to the next slide, I’ll discuss full year performance.
Over the past five years, CSX has transformed its business to continue delivering solid results despite the global energy transition. As you can see on the left side of the chart, during that period, CSX coal revenue alone declined from $3.7 billion to $2.3 billion a cumulative reduction of $1.4 billion.
CSX has overcome that loss by significantly diversifying its market mix, improving service and investing in long-term growth opportunities. As a result, in 2015, coal represented only 19% of CSX’s revenue, down from more than 30% in 2011.
During that same period, shareholder returns including dividends and repurchases have continued to reward the owners of our Company, reflecting the steady growth in earnings per share which reached $2 in 2015. Our 2015 performance was achieved despite the challenges in the energy market, low commodity prices and a strong U.S.
dollar that impacted many of our markets. Revenue of $11.8 billion reflected growth in intermodal, automotive and minerals that partially offset the continued declines in coal.
Improving service, aligning resources and costs against the lower demand environment and driving efficiency gains of more than $180 million helped generate operating income of nearly $3.6 billion and our first sub-70 full-year operating ratio at 69.7%. Those results reflect the employees’ relentless focus on safety and delivering service that supports strong pricing and ever increasing operational efficiency as well as the benefit of lower fuel prices.
We will continue to leverage our core strategy, superior network reach and diverse market mix to create long-term value for our shareholders. Now I’ll turn the presentation over to Frank who will take us through the quarterly results and future outlook in more detail, Frank?
Frank Lonegro
Thank you, Michael, and good morning everyone. Let me begin by providing some more detail on our fourth quarter results.
As Michael mentioned, revenue was down 13% or $411 million versus the prior year. This was driven mainly by $198 million decline in fuel surcharge recoveries and about $175 million from the impact of lower volume.
At the same time, core pricing gains were more than offset by the impact of negative business mix. Volume decreased 6% from last year with coal driving the majority of the decline.
Low natural gas prices coupled with the impact of significant flooding in South Carolina impacted domestic coal volumes while low commodity prices and the strong U.S. dollar challenged export coal in many of our merchandise markets.
We continue to see strong core pricing, which for the fourth quarter was up 4.1% overall and 4.5% excluding coal. Other revenue increased $19 million from last year, driven primarily by unfavorable adjustments to revenue reserves in the prior year period.
Expenses decreased 13% versus the prior year, driven mainly by $117 million in lower fuel prices, $107 million in lower volume related costs and $59 million in efficiency gains. In order to further drive efficiency, we closed two facilities in our coal network and completed a new union labor agreement in the fourth quarter.
As a result of these actions, we incurred a $48 million or $0.03 EPS impact in the quarter. These short-term restructuring costs will drive future benefits as we gain greater workforce flexibility and continue to adjust to lower demand in our coal market.
Operating income was $791 million in the fourth quarter, down 12% versus the prior year. Looking below the line, interest expense was up slightly from last year with higher debt levels partially offset by lower rates.
As we highlighted on our last earnings call, a property sale closed in the fourth quarter for a gain of $80 million or a $0.05 benefit to earnings per share. This gain was associated with a non-operating property and was booked below the line in other income.
And finally, income taxes were $275 million in the quarter with an effective tax rate of about 37%. Overall, net earnings were $466 million, down 5% versus the prior year and EPS was $0.48 per share, down 2% versus last year.
Now, let me turn to the market outlook for the first quarter. Looking forward, we expect volumes to decline in the first quarter.
We expect the challenging freight environment to continue as the headwinds associated with coal, low commodity prices and a strong U.S. dollar more than offset the markets that will show growth.
Automotive is expected to grow consistent with light vehicle production and especially in comparison to a year ago when the auto network experienced weather and service related congestion. Minerals will benefit from continued highway and non-residential construction activity and new business.
Intermodal is neutral as continued secular domestic growth and our strategic network investments that support highway to rail conversion are essentially offset by customer losses in international. Agricultural products is unfavorable due to low corn prices coupled with weakness in export grain and import sourcing in ethanol driven by a strong U.S.
dollar. While core chemicals is expected to again be flat, the overall chemicals market is expected to be down as energy markets continue to reset to an environment marked by low crude oil prices and challenging spreads.
Domestic coal will continue to be unfavorably impacted by low natural gas prices and an inventory overhang due to mild weather. For 2016, we expect domestic coal volume to be around 19 million tons per quarter.
Export coal will continue to be pressured by the strong U.S. dollar and global oversupply.
Our full year outlook for export coal volume is around 20 million tons with some downside sensitivity. Metals is unfavorable as the strong U.S.
dollar and high levels of imports continue to negatively impact steel production levels. Overall, despite a slow growing economy, the freight environment continues to have pronounced challenges with low commodity prices, low natural gas and a strong U.S.
dollar. Turning to the next slide, let me talk about our expectations for expenses.
Overall, we expect first quarter expense to benefit from the low fuel price environment as well as continued productivity and volume related cost savings. Looking at labor and fringe, we expect the first quarter average headcount to be down approximately 2% on a sequential basis, driven primarily by the structural changes in our coal network that we announced in the fourth quarter.
This reflects about a 10% reduction from the prior year. We expect labor inflation to be around $25 million per quarter throughout 2016, in line with the level seen here in the fourth quarter.
Looking at MS&O expense, we expect inflation to be offset by efficiency gains and volume-related savings, in line with the trends we have seen in the second half of 2015. In addition, the first quarter will reflect a shift in our northern Ohio coal operations.
Here, we took action early in the fourth quarter to consolidate freight from a facility in Ashtabula to CSX’s Toledo Docks, which further streamlines our coal operations. Fuel expense in the first quarter will be driven by lower cost per gallon, reflecting the current price environment, volume related savings, and continued focus on fuel efficiency.
We expect depreciation in the first quarter to increase around $15 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the first quarter is expected to stay relatively flat for last year with higher freight car rates offset by improved car cycle times.
Now, let me talk about our capital investment plan for this year. In 2016, CSX’s total capital investment will decline over $100 million from the 2015 level to $2.4 billion, which includes $300 million for PTC.
Similar to 2015, we expect 2016 core capital investment to be higher than our long-term guidance of 16% to 17% of revenue due to our locomotive purchase commitment. This investment in new locomotives expands our ability to run longer trains and we’ll continue to storing older locomotives to maximize the efficiency of the fleet.
Looking at our capital allocation for 2016, you can see that over half the investment will be used to maintain infrastructure to help ensure a safe and fluid network. The majority of our 2016 equipment investment is focused on upgrading our locomotive fleet.
We took delivery of 200 new locomotives in 2015 and expect to receive another 100 new locomotives in 2016 which will complete our existing locomotive purchase commitment. In addition, we will continue to focus on strategic investments that support long-term profitable growth and productivity initiatives.
Here we are prioritizing these investments in our intermodal business, infrastructure projects that support network fluidity, and technology initiatives to enable productivity. Finally, looking at our investment in Positive Train Control, we have invested $1.5 billion through the end of 2015 and we plan to invest an additional $300 million in 2016.
CSX is committed to meeting a new legislative timeline for PTC. As we look at the path to achieving this goal and with PTC now extending over a longer period of time, we now believe the total cost of PTC implementation will be about $2.2 billion.
Now, let me wrap up on the next slide. Overall, CSX delivered solid financial performance in 2015 despite significant market challenges.
Full year EPS increased 4% from the prior year, while our operating ratio improved 180 basis points to 69.7%. Revenue in 2015 was lower than we initially expected with volume declining 2% for the full year.
But our continued focus on pricing for the relative value of rail service, driving efficiency gains and aligning resources to the softer demand environment helped to offset those volume headwinds. Looking ahead, we expect the coal headwinds to continue in 2016.
As I mentioned earlier, domestic coal volume in 2016 is expected to be around 19 million tons per quarter, while full year export coal volume is expected to be around 20 million tons, again with some downside to the export estimate. In addition, for the full year, we’ll be operating in a more challenging freight environment than we saw in 2015.
Natural gas and broader commodity prices are expected to remain at low levels and the strength in the U.S. dollar is expected to persist during the year.
Furthermore, in 2016, we’ll be cycling a couple of large items that benefited our 2015 results, mainly we received about $100 in liquidated damages and had an $80 million property gain in 2015 which are not expected to recur in 2016. As a result, we currently believe that 2016 earnings per share will be down from last year.
Looking at our expectations for 2016, we will continue to right-size resources with lower demand and pursue structural cost opportunities across our network. In addition, we expect to deliver productivity savings of around $200 million in 2016, which builds on the $184 million of productivity that we achieved in 2015.
Overall, we remain intensely focused this year on delivering a service product that meets or exceeds our customers’ expectations, achieving strong pricing to support reinvestment in the business and driving efficiencies across our entire cost structure. With that, let me turn the presentation back to Michael for his closing remarks.
Michael Ward
Well, thank you, Frank. CSX has continued to deliver solid results for shareholders, despite the transformational decline in the energy environment and the challenging market conditions.
The efforts of our dedicated employees combined with the diversified business mix and the premier network in the east have helped us to overcome the significant losses in coal. As Frank mentioned, 2016 will be a more challenging year.
Volume in the first quarter and for the full year will decline as growth in some markets continues to be offset by the significant impact of continued coal declines, low commodity prices and the strong U.S. dollar.
We are taking necessary actions to manage our business in that environment, including making structural and network-wide changes to manage resources and cost with business demand, driving further efficiency gains and remaining focused on strong pricing that reflects the value of CSX’s service. In response to the further challenges expected in 2016, we have also decreased the capital budget by more than $100 million.
We expect to invest $2.4 billion this year, as we remain competitive to reserving safety, service and efficiency for customers and communities alike while positioning CSX for the future. As we look to the future, this Company will continue to transition its business toward long-term profitable growth opportunities in the merchandise and intermodal markets.
In that regard, we remain focused on achieving a mid-60s operating ratio longer term as we execute our core strategy of meeting or exceeding customer needs to support strong pricing for the value of our rail service, and continuously improving operational efficiency. With those efforts, we are confident that CSX will continue to be a preferred service provider for customers who face a growing population of more integrated global economy and the need for more reliable more sustainable supply chains.
Now, we would be glad to take your questions. Operator?
Operator
Thank you. We will now begin the question-and-answer session.
Our first question comes from Ken Hoexter from Merrill Lynch.
Ken Hoexter
Michael, good job in a difficult environment. If I can just talk to you about the outlook here, when you think about earnings going down, I guess can you -- do you have comfort when you look at the economy putting any scale on that?
And I guess within that, it seemed like coal and intermodal rate declines were over 8%. I understand fuel and mix were a big part of that.
But can you talk about the competitive losses? Is that something where you’re seeing increasing price pressure with that, are we seeing the competition increase their focus on pricing to win some of those intermodal contracts that you noted had been lost?
It seems like that the volume or amount of those have been accelerating. Maybe if you can just talk a little bit about that and the outlook.
Michael Ward
Good broad question there, Ken. So, Fred, maybe address some of the market conditions.
Fredrik Eliasson
In terms of the pricing for the quarter, as you saw, our ex-coal pricing actually improved from the third quarter; went from 4.4% in the third quarter to 4.5% here in the fourth quarter. All-in went down and that really is the reflection of what we did in the export coal market here as we’re now in a position to actually have some surplus asset, again as we get the network running a lot better and very strong service performance, we do have some excess locomotives.
We’ve seen the export market deteriorate and as a result of that we felt this is time when we went back and revisited what we could do to optimize our bottom line. And this is one market where we actually don’t have fuel surcharge in.
And as a result, the fuel prices have declined throughout the year. We did feel that it was still an opportunity to do a little bit more there and still make money on it.
So, what you’re seeing in the pricing side in the all-in is really a reflection of what we do in export coal market. The core pricing actually sequentially improved quarter-over-quarter.
Frank Lonegro
Ken, on the EPS, for the year, you’re right, we did guide to EPS being down on a reported basis versus the record $2 a share that we delivered in 2015. We tried to give you guidance in terms of the onetime items that we’re cycling in terms of the liquidated damages in the property sale, the continued transformation in the energy sector.
So, we updated the coal guides, both on the domestic side and the export side and then tried to give you some view into the broader economy. And clearly those are on the industrial side being suppressed by the combination of low commodity prices and the strong U.S.
dollar. But this Company’s remained relentlessly focused on driving the things that are most within our control, as you saw our performance this year or 2015 I should say in terms of the rightsizing that we did and the efficiency gains that we delivered in 2015 and the projections of 200 million as we get into 2016.
We’ve got an improving service product and Fredrick just mentioned the strong pricing for our shareholders. So, it’s likely going to be a unique year for us in 2016 and after that we fully anticipate EPS growth toward that path of mid-60s longer term.
Fredrik Eliasson
And then Ken, in this one very broad question that you asked, I’ll come back to the international losses that we referred to. We’ve had several now over a period of time with us throughout 2016 and as we think about where we are, we’re growing with our existing customers very well but there has been some customers that we’ve lost.
And clearly from our perspective, we feel that we have a very strong service product right now. We have what we think is a superior network reach.
So, the only thing we can assume is that there are factors outside of our control that has allowed us to lose that traffic.
Operator
Thank you. Our next question will be coming from Brandon Oglenski of Barclays.
Your line is open.
Brandon Oglenski
Thanks for taking my question, and similarly pretty good results in a difficult environment. So, can we talk more broadly about what could become a manageable level of volume declines where we could think earnings get back to flat; we can get back to operating ratio improvement, or maybe you’re not even suggesting, you can’t get operating ratio improvement this year?
But can you talk to levels in the network where you would feel comfortable saying our cost performance and our efficiency plan can get earnings to right-size if not even go up a little bit?
Frank Lonegro
I think on a 2016 basis, obviously as I mentioned, it’s going to be a bit of a unique year, continuing resets in the energy environment. And on the operating ratio question for 2016, obviously, it’s going to be difficult to sustain a sub-70 performance especially giving what we’re cycling and the coal projections that we’ve given you and the uncertainty in the industrial economy.
But then again, it’s January the 14th, it’s the middle of the first month of the year. We got a great network, as Fredrik’s mentioned we got a track record of success, we have improving service products.
So, we’re going to be relentless in terms of our focus on the things that are most within our control. And so those are the things that give us confidence that the future beyond 2016 is a positive one.
Brandon Oglenski
Is there any way though to quantify for folks on the call just at a broad level? If volume is down low single digits or mid single digits, does that become more problematic than -- trying to quantify for folks where the loss in earnings [kicks out] [ph].
Michael Ward
Well Brandon, not to be repetitive but obviously the one-timers, clearly those could be easily defined. I think we’ve given very strong guidance as to where we see the coal market this year.
Obviously a little bit of potential downside in the export; it’s a little hard to gauge this early. I think probably the wildcard is the rest of the economy.
And it is very early in the year to try to gauge that. Obviously I think if you look at most prognosticators, they’re saying the first half of the year probably looks weak on the industrial side but potentially it recovers.
And I guess we don’t really have a better crystal ball than that a couple of weeks into the year and that’s probably the wildcard in the entire thing. And we’re going to drive the efficiencies over $200 million; we will take actions to also reflect lower volumes which would be in addition to what we do on the productivity side.
And I think with those parameters, this should be able to give you some relative idea of what the expectations could be.
Operator
Thank you. Our next question will be coming from the line of Brian Ossenbeck of JP Morgan.
Your line is open.
Brian Ossenbeck
I was curious in the 19 million tons per quarter guidance we have in domestic, what level of destocking from inventories do you have kind of reflected in there and whether you’ve outlined some downside risk to export coal? I was just wondering what your thinking is on the domestic side from the utility stockpile and also what level you think natural gas will be?
Fredrik Eliasson
Yes, I mean obviously we don’t foresee natural gas rebounding significant than from where it is today. And as a result most likely for the rest of the year, we expect our coal plants that we serve to be dispatched last.
We are seeing obviously excess stockpiles right now. If we look at where we are, we are probably in the 110s or so in terms of the south and more in the 80 range in the northern part of our network; we should probably be in the 55 to 70 range.
So, as we think about that 19 million of domestic coal, it really breaks down into two components, one is the utility coal which is about 14 million tons and steel industrial about 5 million tons to make up the 19. We did about [13.6 here] [ph] in the fourth quarter.
And so we’re essentially saying we will continue that run rate. And we expect some destocking to occur over the year but how much really will be dependent on the weather since we now -- dispatch last were essentially peakers, so we’re very much weather dependent.
If you have favorable weather conditions from a railroad perspective or utility perspective, then you can see a more significant destocking. If you have continued sort of weather pattern we saw in the fourth quarter where heating degree days were actually off by about 25% to 30% of normal, then that will be much more challenging.
But hopefully we won’t see that and we will see some destocking occur within the guidance that we provided.
Brian Ossenbeck
And the other one related to gas, that would be coal to gas switching, difficult to tell but from a structural perspective, are there any pockets of the network perhaps in the north near the Marcellus and Utica shale where you would expect to see some more gas plants being built that could perhaps provide a little bit of incremental pressure on the rest of the networks?
Fredrik Eliasson
No, I think that all the switching that can occur already occurred back in March or April of last year. What we have seen is in some instances we are seeing some of the coal burners actually now burning some natural gas in conjunction to coal firing it with natural gas that has to have a little bit of an incremental additional negative impact on us.
But all the switching that can occur has already occurred. And we are being dispatched last or the utility that we serve are being dispatched last.
Operator
Thank you. Our next question will be coming from Chris Wetherbee from Citi.
Your line is open.
Chris Wetherbee
I wanted to ask about the coal network and sort of where you are in terms of potential structural changes that you’re doing. You took some actions in the fourth quarter.
I guess I’m curious what else can be done as you move forward to 2016, given the outlook. And then maybe how that ties into productivity and benefits that you’re getting as a great run rate in the fourth quarter.
I’m kind of curious what could potentially give upside to that 200 number in 2015.
Cindy Sanborn
This is Cindy. As far as structural cost, you did mention the actions that we took in the fourth quarter.
And as I talked in our third quarter release, everything is on the table, not just in our coal network but also in our broader footprint and our opportunity that we’re looking forward to drive density, maximize asset utilization and drive out costs. Facilities are still maybe some opportunities there.
I think line segments will take a little bit more time; they involve customers and other constituencies there that make those a little bit more longer term. But we are looking at all of these.
And as we find opportunities and make announcements, we’ll obviously share that publically. But we have not given up on continuing to find ways to make our footprint much more consistent with the demand that is put on.
And you asked another question about productivity, can I ask you to repeat that?
Chris Wetherbee
Sure, just wanted to get a sense of maybe how the coal network ties into the productivity, the $200 million of productivity and then given the run rate that you had in the fourth quarter which was bit above that level, how do you think about maybe potential upside; is there more that maybe we could see from productivity in 2016? Thanks.
Cindy Sanborn
So, thinking about productivity, we’ve said we’re going to be able to achieve $200 million in productivity savings, in addition to the right-sizing actions that we’re taking. I think when you look at the $200 million in productivity, about $100 million is already -- those initiatives have already been completed and we feel really good about that.
And the other initiatives are in slide and we feel good about that. There isn’t necessarily tie or non-tie to the coal network; it’s all -- it’s broad-based and it’s everywhere.
And as far as the rightsizing initiatives, I’ll comment on that even it’s not necessarily your question, it might be something you’re thinking about. The way to think about that is fourth quarter is the past is [ph] we’ll be restless on driving out costs that are volume related, as we see demand go down.
And then in the opposite, as Michael mentioned, as we see opportunities where demand comes back, we will be able to bring back these resources.
Operator
Thank you. Our next question will be coming from Tom Wadewitz from UBS.
Your line is open.
Tom Wadewitz
I wanted to ask you, I guess that how maybe train starts, just a brief follow-on on that and then maybe on pricing. I don’t know if you want to me give me two but the train -- just a quick, how much were train starts down in the fourth quarter, maybe what that could be in 2016?
And then on the pricing, I don’t know if you’ve answered this when Ken was on earlier. But did you give us a sense of what core price and same store price might be in 2016 or is that something that you cannot comment on?
Thank you.
Fredrik Eliasson
Let me just take the pricing question because that’s probably the simplest one. We don’t forecast pricing we’re going to provide you each and every quarter where we come out.
The key thing is that you should know that we always focus on pricing and make sure that we get the appropriate value, so we continue to reinvest in our business. As we think about our pricing right now, we have an incredibly strong service product; it’s improved significantly over the last six months as we now have the resources in place.
There is a lot of contracts that we still haven’t been able to touch since really the step function change that occurred in early 2014. The contract side on the trucking side, it’s still holding up, even the spot market is very soft.
And the key thing for our team is to continue to sell through this down cycle and make sure we provide value to our customers by selling a longer term commitment in terms of making sure they have access to our network. And so that we work through this down cycle right now and sell for the long-term.
Cindy Sanborn
And Tom on starts, I would say probably about thousand starts per week that are scheduled starts will be -- are out. And obviously starts will come out that are volume related more on the unit train side.
Tom Wadewitz
Can you give that percentage, like how much -- what percent train starts were down maybe in fourth quarter and what they might be in ‘16?
Cindy Sanborn
I don’t have a percentage right in front of me there, Tom. But I can tell you that our train length initiatives have obviously driven a lot of this opportunity and…
Michael Ward
From the beginning of the year, Cindy, about 15%.
Cindy Sanborn
For the total year of 2015, they’re up 8% from ‘14 versus ‘15 and in the fourth quarter, they are up 14% from the fourth quarter of ‘14 to the fourth quarter of ‘15.
Tom Wadewitz
The decline year-over-year in train starts, you’re saying.
Cindy Sanborn
I’m saying train lengths in terms of…
Tom Wadewitz
Train lengths, okay.
Cindy Sanborn
Which then translates into the thousands starts per week which we talk about.
Tom Wadewitz
Okay.
Cindy Sanborn
It gives you percentage and gives you some sense of where we stand on a percentage basis.
Tom Wadewitz
Okay, yes. I mean those are strong gains, especially given the volume headwind.
So, okay, alright. Thank you for the time.
Operator
Thank you. Our next question will be coming from Allison Landry from Credit Suisse.
Your line is open.
Allison Landry
So, given all the debate surrounding M&A and both of the eastern rails talking about getting to a 65 OR over the next few years and some others saying 60 should be bogie. First, could you help to look in the timeframe for when do you think you can achieve the 65 and what if any your plan is from a longer term perspective to close the gap with your peers to ultimately achieve a 60 OR
Frank Lonegro
Allison, it’s Frank. Obviously we can’t comment on what other railroads are projecting into the future.
But the challenging environment that we see in 2016 does not in any way diminish our confidence and the ability to deliver the mid 60s operating ratio longer term that we have guided you toward in the past. And again today, as you know, we’ve got an awfully good network, a world-class network in the east.
And you’ve seen our success over time, both in terms of delivering margin improvement and the cost takeout that Cindy referenced in addition to the operating side, on the G&A side. So, the effort that we’re taking now especially in an improving environment in the future is going to help us improve margins in a meaningful basis, as that improves.
But as we sit here today, based on the forward view of 2016, it just seems a little inappropriate for us to guide on a specific time frame right now.
Allison Landry
And I guess just sort of clarification question, do you think that at some point in the future, is there anything structural that would prevent CSX from achieving a 60-OR?
Frank Lonegro
We don’t see anything structural that would impede us from getting to the mid-60s and through the mid-60s. Obviously it’s going to depend on a whole host of things.
And again as Michael said, the crystal ball is a little cloudy in ‘16. And obviously as that clarity improves, we’ll be able to give you more guidance around that.
Operator
Thank you. The next question will be coming from Rob Salmon from Deutsche Bank.
Your line is open.
Rob Salmon
Fred, if I could take it back to the intermodal discussion, you had alluded in some international contract losses that have happened through the year. In the guidance, it’s implying roughly 70,000-unit sequential decline which is much more than normal we would see in Q1 versus Q4.
Was there an incremental contract loss in the fourth quarter or are you guys contemplating additional inventory destocking that we should be thinking about in the first quarter?
Fredrik Eliasson
We have the intermodal business flat, is that what you’re referring to?
Rob Salmon
It’s in aggregate intermodal carloads being roughly flat. And so I was just thinking of flattish number and comparing that sequentially to the fourth quarter carloads that we saw.
And just curious what’s driving the worse than normal drop off in Q1, whether it’s an incremental international loss or some inventory destocking that you’ve got contemplated or something you’re hearing from customers?
Fredrik Eliasson
Sequentially fourth quarter to first quarter is a very different story obviously with the peak that we’re seeing in the fourth quarter, especially around some of our partial business and so forth. So, I think that’s more of a normal thing.
If you think about our intermodal business, there is two components to it. We’ve talked about the international side where we have had some competitive losses and you can continue to see that throughout ‘16.
However, on the domestic side, we are having good continued success with our H2R initiative, and we’re also seeing some additional outsized growth here over the last probably six months and will probably continue in the first half of next year. But we have one domestic customer that is continuing to shift additional traffic to us which is really a decision that they had made, it’s nothing that we have done to incentivize that.
They seem to have wanted to diversify their portfolio. And as a result, we think the domestic business will continue to be strong, at least for the first half of the year and probably beyond that we still think there is opportunity to grow even if that shift subsides.
Rob Salmon
And as a follow-up, when do you lap the final piece of the international competitor losses, should I think about that as Q4 of ‘16, or earlier?
Fredrik Eliasson
Yes, that is correct, Q4 of ‘16.
Rob Salmon
And is that the end or beginning?
Fredrik Eliasson
No, so, we will have one account that we’re just really kicking and having lost here in the first quarter, so you will see it to hold through all of ‘16.
Operator
Thank you. The next question will be coming from Alex Vecchio from Morgan Stanley.
Your line is open.
Alex Vecchio
My question is with respect to the guidance for earnings to be down next year. You guys had called out about $180 million of tailwinds in 2015 from property gains and liquidated damages, which is roughly $0.11 to $0.12 a share.
So my question is if we were to normalize for those numbers, would you still expect your core, if you will, EPS to be down in 2016 or would it be roughly flat, if we were to normalize for those figures?
Frank Lonegro
So, I think we gave you a couple other data points to look at. Clearly, we gave you a new coal guidance today that is down from what we had telegraphed on the third quarter call.
So that’s clearly something to think through. And then on the broader merchandise side with the industrial sector a little sluggish here, so that’s in thoughts.
But then again on the other side, continued strong pricing for an improved service product and efficiencies and rightsizing, so there is going to be some pluses and minuses as we go forward. But in terms of your original way of thinking about it, I mean you do have to normalize it and then really look at the pluses and minuses from there.
Michael Ward
And the other thing I would add to that Alex is obviously over the last couple of years, we’ve been able to grow our other markets to offset the declining coal. So, we’re going to have continuing declining coal here and as uncertain industrial economy.
So again, that’s the piece that’s least clear but I think it really depends on what happens with the rest of that market. We know we’ll get the productivity; we know we’ll continue network size properly, we know we’re doing the pricing.
So really, the wildcard in that question would be what does the rest of the economy do.
Alex Vecchio
And then just a quick follow-up on the first quarter guidance. Can you may be help us quantify little bit how much of year over year tailwind you’d expect lower incentive comps to be on the labor expense line in the first quarter and maybe through 2016.
Frank Lonegro
Yes, so obviously on the incentive comp, the plan resets at the beginning of every year. So, we had favorability in the back half of 2015 as the year played out differently than we had originally projected.
And we disclosed that to you on a quarterly basis. So, be on the lookout for that one.
In terms of the Q1 EPS, obviously based on the cycling of the 100 million in liquidated damages in a different demand environment of the first quarter of ‘15 versus the first quarter of ‘16 especially in coal, that’s going to impact us and the demand environment that we talked about. But again, you’re going to have to look at the improved service and the rightsizing and the efficiencies and the pricing performance, and that will ultimately help us give some guidance in terms of how far quarter one of ‘16 will be down versus reported ‘15.
Operator
Thank you. Our next question will be coming from Jason Seidl from Cowen.
Your line is open.
Jason Seidl
Fred, I want to go back to something I think you commented about your truck competitor pricing. You mentioned that although truck spot pricing was down, contract was holding up.
If contract starts to roll over to sort of meet where spot is, how much pressure is that going to put on intermodal pricing; how should we look at that?
Fredrik Eliasson
I do think that we are seeing holding up okay; it’s clearly gotten softer throughout the year on the contract side. And intermodal side, it’s where we do see most of that direct pressure.
Now you know that still we have probably 10% to 15% gap between what the truck prices are and what our prices are. And one of the key things in intermodal space is the strong service product.
And as we think about our service product here this year entering into ‘16, it is clear that it’s very different than it was a year ago and that is also going to be very helpful as we approach contract season and we put new contracts in place.
Jason Seidl
Okay, but in terms of if you just say you make some service improvements and you see the truck pricing take a step down, is it going to be tougher to maintain your pricing even with a superior service product?
Fredrik Eliasson
I think we’ve tried to stay away from forecast pricing but directionally you’re right. Obviously the longer this softness is there, the harder it’s going to be to maintain the key challenge for our team is to make sure that our customers are aware that while there’s a softness here right now in ‘16 I think all of us still know that the macro drivers that we talked about for a long time are still prevalent.
If we think about some of the productivity challenges that the trucking industry will face is we get to ‘17 with the electronic logs, as unemployment continues to come down, it’s going to be harder to retain the drivers without outsized increases in driver pay. So, we are facing softness; I think also though our customers are acknowledging that that is probably temporary, as some of these macro factors will come back into play.
Jason Seidl
Fantastic, and my follow-up, Michael, given the recent comments by the STB on mergers and also the proposed merger or the talked about merger I guess between CP and NS, what’s the likelihood that you see that the current board would approve a combination?
Michael Ward
That’s a very timely and difficult question to answer, Jason. As you know, there hasn’t been any mergers under the current regulatory environment.
That is a really complicated question; it’s probably better addressed by the STB. But as you saw by their letter last week, they’re going to be very focused on one, the public interest of the potential merger, potential downstream effects.
And I think the thing that’s probably the most uncertain but probably going to be there for sure, the question to the extent is what regulatory cost will be put on this merger.
Operator
Thanks. Our next question will be coming from Matt Troy from Nomura Securities.
Your line is open.
Matt Troy
I just wanted to ask with respect to pricing obviously, rail’s peripherally or tangentially tied to the commodity super cycle which is winding down; you’ve got some more bearish people out there talking about rail pricing being vulnerable, anecdotes of carriers cutting price to incent volume. I just wanted to hear from you or confirm with you that you still remain committed to inflation plus type pricing, consistent with similar years and that there hasn’t been in change in thought or philosophy that perhaps price might be a lever you might use to incent volume in 2016.
Fredrik Eliasson
No. I think our philosophy is still there hasn’t changed in terms of making sure that we do value price in the -- the value provide to our customers and being able to continue to reinvest in our business.
At the end of the day, it goes back to what is the second best option for our customers from a service and a price perspective. As we think through each one of them, we still think that we have an opportunity to continue to make sure we get the pricing that we need to getting to reinvest in our business, which benefits both our shareholders but also our customers as we continue to strengthen our infrastructure.
It’s one market where we have consistently said that it makes sense in this commodity downturn to be flexible because we’ve seen’ we’ve got additional demand by doing so. And that’s our export coal market.
And we’ve taken some additional action here in the fourth quarter to reflect a very, very difficult and challenging environment for them. But in the rest of the markets, we’ll work with our customers in partnership and try to figure out what the best service product is and at the same time also make sure we get the appropriate price.
So, I would say that nothing has changed in terms of the philosophy that you’ve seen here from CSX for more than a decade.
Matt Troy
And then I guess my quick follow-up would be the intermodal growth, obviously you spoke at length about the loss in international but the domestic of ‘14 was a fantastic number. You kind of have tale of two railroads when you look at average volumes in fourth quarter, you guys were up mid single-digit; your competitors were down.
So obviously domestic, you alluded to a contract moving over on its own, not you incenting it. Just wondering if you could talk about that 14% really high level directionally, how much of that growth would be that singular contract which you have seen shift and how much of it would be what I’d refer to as more organic highway to rail conversion?
Thank you.
Michael Ward
It is a significant portion of that growth. I think that prior to last year, we’ve been growing our domestic intermodal business about 7% and we’ve guided long-term to about 5% to 10%.
And with a softer market, we’re probably at the low end of that range, if you exclude this shift. But nothing has changed in terms of our opportunity to convert what we’ve said is over 9 million units in our network territory that we think over time can be converted to a rail based solution in partnership with our truckers.
And so, we think it’s softer right now. But as I said to previous -- answered to previous question, the macro environment still favors a rail based solution longer term.
Operator
Thank you. Our next question will be coming from Cherilyn Radbourne from TD Securities.
Your line is open.
Cherilyn Radbourne
My first question is on your variable train scheduling initiative and just how much of an impact that had in the increase in train lengths that you saw and what inning you think we’re in, in terms of realizing whole benefit?
Cindy Sanborn
I think as far as the variable trains which that has -- that applies to our merchandise network, I think we’ve seen the biggest increase in train size in the merchandise side. So in the fourth quarter, we saw increase in the train side of 23%.
So, I think what the variable schedule does for us going forward is as we see softer demand we are able to right-size that network more effectively. In terms of what the components are of variable train that are in place, we pretty much got them in place but it does allow us to continue to shift and expand and contract on a more effective way than we’ve been able to do in the past in our merchandise network.
Michael Ward
And you’re doing a lot more in the bulk.
Cindy Sanborn
Yes, we’re also continuing train length initiatives on the bulk side as well. We’ve seen increases in train lengths across coal, grain and others in the 5% to 10% range also over the quarter.
So, it’s not just a merchandised -- train length is not just a merchandise initiative, it also follows the rest but merchandise has seen the biggest benefits.
Cherilyn Radbourne
And then to the extent that you expect earnings to decline in 2016 and see some volume uncertainty, can you just comment on whether that will have any impact on the pace at which you expect to execute on your share buyback program?
Frank Lonegro
You saw us repurchase 9 million shares in the quarter or just under 260 million which was essentially the same rate that you saw us in the third quarter and it’s consistent with the $2 billion program that we announced back in April. And we currently expect to complete that program ratably over the next five quarters, using balance sheet cash, free cash flow and debt.
So, I think you’re going to continue to see us based on what we see now to continue on that ratable program.
Operator
Thank you. Our next question will be coming from Ben Hartford from Baird.
Your line is open.
Ben Hartford
Just quick question on the export coal side. In your mind, what is the risk to further downside?
You obviously talked about some downside risk to the 20 million tons number this year but what provides any comfort that you have line of sight to a floor and that we shouldn’t be thinking about, the early 2000 levels of a number less than half, this guided 2016 number or even something above and beyond the 2002, 2003 levels? Is there any way to -- obviously the market is uncertain, but is there any way to frame up the likelihood of a 50% or even deeper cut to the export coal number over the course of the next few years?
Michael Ward
I think that over the last couple of years, as we provided you guidance at beginning of the year, we’ve been actually very, very close to those numbers. And while these are uncharted territory in terms of underlying commodity prices, both on the thermal side and the met side, we do work very closely with our customers, both on the producer side and also with some of the agent to sell for us and really try to go over and understand the markets themselves.
As we think about this ‘16 right now, out of the 20 million, we probably have about 6 million that we have very good visibility to, probably little bit lower than you normally would have at this time of the year but we still think that there is an opportunity to get to that about 20 million tons for the year. And one of the drivers here is also that you do have such a large excess surplus of domestic coal where the producers are very eager to push that out to the market and that is helpful as well as we move through 2016.
Ben Hartford
Frank, share buyback, what is the thought process there this year? And then, I want to confirm something on the CapEx side that the 307 million from the 113 locos that were purchased late last year; is that in the 2016 CapEx budget of $2.4 billion?
Frank Lonegro
So the answer to your last question is yes. And on the buybacks, it’s the same ratable methodology that you heard us talk about previously.
And so, the $2 billion program was intended to be over two-year period. And as we currently see things, we’ll continue to do it at about 260 a quarter.
Operator
Thank you. The next question will be coming from David Vernon from Bernstein.
Your line is open.
David Vernon
Fredrick, maybe just to put some more numbers on the issue around utility coal pricing, if you look back over the last couple of years when you’ve seen the utility business get cut by half or so. Can you talk about the trend you guys have seen in your distance neutral rate per ton; has that been moving up or have you seen some weaker years went because of the lower gas price?
Just trying again put some numbers around the utility coal pricing.
Fredrik Eliasson
So clearly, in mid part of last decade, there was a significant opportunity to a touch legacy pricing and that probably lasted from 2005 to 2011 or so. And then since then, it’s been much more normalized pricing.
As natural gas prices now come down as much as they have, there really isn’t much that we can do to incentivize incremental burn. We look at each and every contract when they come up to see if there are opportunities to optimize the bottom line but being more flexible in pricing.
And if there is, we will do that. But generally, at these natural gas prices, there isn’t really anything we can do to improve the burn rates with maybe one or two exceptions.
David Vernon
And then maybe Frank, just as a follow-up on the productivity, can you talk a little bit about how dependent the level of productivity you’re getting right now is on the CapEx budget? It sounds like some of the new locomotives that you’re getting are necessary to run a longer train.
And I’m just wondering about how much more upgrading of the fleet may be required over the next few years? And when that CapEx get down to 16%, 17%?
Frank Lonegro
So, on the locomotive piece, obviously we’ll complete the deliveries in 2016, as Cindy has mentioned, we’ve certainly looked at rightsizing the fleet and taking out the bad actors and the high fuel burn locomotives. So, it certainly helps but you’re talking about 300 engines on a 4,000 engine base.
On your tie between productivity and CapEx, there is always some in the CapEx budget that relates to productivity and it’s really I would say dog’s breakfast. You’ve got structural changes in the coal network; you’ve got G&A restructuring and downsizing; you’ve got terminal efficiencies; you’ve got training length which gives you lower crew stars as we mentioned earlier in the call; you’ve got technology initiatives which are funded through the CapEx process that relate into some of the productivity initiatives.
So, I think you’re looking at a lot of things that we did in 2015 that will carry over into 2016 and then there is a little bit of a tie between CapEx and productivity. But it’s small in the grand scheme of things, David.
In terms of long term and getting back down to 16% to 17%, if you were to normalize this year’s capital budget for the 300 million in locomotive payments, you’d be at that range now. So it’s certainly something that on a long term basis we’re going to continue to look at.
Fuel surcharge that’s come down has obviously been a bit of a headwind for us in the past as we look at that 16% to 17%.
David Vernon
And I guess just as a short follow-up to that, and in the number of the 300 locomotives you’ve taken against the 4,000 fleets, if you had a capital unconstrained world and you wanted to go and push trail lengths in other parts of the business, would there be opportunities to go ahead and continue to upgrade that fleet and operationally find opportunities to run longer trains in other parts of the network or are you nearing the end of the ability to get that extra productivity from train lengths?
Cindy Sanborn
The train length constraints really are not locomotive base; they are sighting capacity based in the southern part of our network. And in terms of capital, we’re looking at those types of investments going forward to allow us to unlock the value of longer trains.
So, it’s really not locomotive based.
Operator
Thank you. Our next question will be coming from John Larkin from Stifel.
Your line is open.
John Larkin
I wanted to dig a little bit more into the stated objective of producing another 200 million in productivity savings in 2016. Could we talk a little bit about how that might be spread over the year and how much of that is tied to the rationalization of the coal network and whether the rationalization of the coal network also would envision potential abandonments and/or sales to short lines on some wider density lines in the coal network?
Cindy Sanborn
So from a productivity perspective, the 200 million is again as I said initiative based, a 100 million is pretty much, those initiatives are in place. Two of those are one area that is included is the actions that we took in the fourth quarter on the reduction in volume across the Erwin gateway and the closure of the Corbin locomotive facility.
So to the extent those are obviously in the coal fields that is an impact to productivity in 2016 around both facilities reduction and facilities and headcount reduction. So that’s basically the way I see 2016 looking with productivity.
As far as continued rationalization in the coal fields, as I said, we’re going to look at that not just in the coal fields but broadly, whether it’s facility related and/or line segment. The line segments take a little bit longer to work through; they involve customers; they involve other constituencies.
So, as we make those determinations and make those decisions, we’ll be very public with that information but that’s more longer term.
John Larkin
So, the 200 million will be folded in pretty much evenly across all four quarters, is that a way to think about it?
Cindy Sanborn
I would say it’s right, John, yes. Easiest way to think about it.
Operator
Your next question will be coming from Bascome Majors with Susquehanna. Your line is open.
Bascome Majors
I wanted to take a directional look at the margin profile of the coal business; it looks like from your guidance, tonnage is going to be -- if you’re at your guidance for the year, tonnage will be down 45% or so. For the entire business, it’s 2011.
Can you just talk a little bit about the balance within the segment of the margin profile between the export business today after the price cuts you’ve taken over the several years, and the domestic business where you transition to the fixed-variable contract structure? And also more broadly where is coal comping versus the rest of the book today?
Is it still your premium business up there with chemicals or has the profile fallen down the ladder a bit as the revenues have fallen? Thank you.
Fredrik Eliasson
Back in 2012 or so, we used to say that our export and utility business was about the same level of contribution and on a margin basis. But since then as we have adjusted export rates significantly down, our utility book of business has a higher margin than the export business.
If you look at the overall portfolio of coal versus the rest of the business, I would say that it’s still clearly more profitable because of the fact that it’s such an efficient way for us to move the cargo have a tonnage, just the unit train back and forth is very-very efficient for us to operate that way. And so, it’s still at the high end of our business.
Bascome Majors
As my follow-up here and maybe for Michael or Clarence if he’s in the room, I understand you guys are railroaders; you’re not economists here but just looking at the volume declines you’re seeing today, both the depth of them and the breadth, have you ever seen an environment like this in your business or careers outside of a recession?
Michael Ward
It’s Michael; I’ll answer that although Clarence is here. So, if you take out the recession, no, we’ve not seen these kinds of pressures in so many different markets because you have multiple aspects working against you.
The low gas prices; the low commodity prices; the strength of the dollar, all three of those together are really pushing. And in some ways, I think you can almost think of it as a straight recession, except for say markets like automotive and housing related, you’re seeing pressure on most of the markets.
So clearly outside of a recession, this is one where we’re seeing lots of pressure in lots of different markets.
Operator
Thank you. Our next question will be coming from Jeff Kauffman from Buckingham Research.
Your line is open.
Jeff Kauffman
First of all congratulations, I mean just a very difficult quarter. I thought you guys did a great job on the cost side.
I wanted to zero in on the changing coal guidance for next year. If I look at kind of what’s changed, I think you were talking around kind of a 21 million ton domestic run rate going down to 19, so that’s about an 8 million ton change.
But it really looks like almost half of that drop was on the coking coal and domestic met side. So two questions, number one, when I look at domestic, how much of that change is your view on utility versus your view on kind of other domestic coal?
And when I look at the exports, you did about 31 million this year; the guidance is for 20 million. Can I look at end markets and can we think about it that way in terms of where has the incremental demand ebbed for your export coal geographically?
Fredrik Eliasson
Yes, you’re right. If you go back to the third quarter guidance that we did at the call, we essentially said 21 million tons per quarter of domestic which was 15 of domestic -- of utility and 6 of steel and industrial, and we said then about our export was about 6 million tons a quarter for 24 in total.
So, we’ve essentially seen a deterioration in all of those three markets by about 1 million tons a quarter. And it’s really reflection of the fact that natural gas prices and the very mild fourth quarter in the utility side has dampened our expectations.
On the steel and industrial side, it’s the reflection of the fact that when we look at the steel industry right now, having utilization of about 60% versus 75% a year ago and we saw it deteriorate throughout the fourth quarter. And on the export market, it’s also just reflection of the fact that underlying commodity indexes are telling us that market has gotten softer as global oversupply continues.
So, in terms of where the export market is going, we did about 60-40 split here between met and thermal. They’d probably be a little bit higher next year will be my guess at this point in terms of probably one-third, two-third, two-thirds in favor of met.
And traditionally over a half of our business goes to Europe. And I’d say that split is probably going to continue in terms of the end market as well.
And so, I think it’s just proportional between markets and I think you’re going to see relatively proportional count in terms of the end markets as well.
Operator
Thank you. The next question is coming from Scott Group from Wolfe Research.
Your line is open.
Scott Group
So, Fredrik, just wanted to ask about the coal yield, so I thought that the fixed-variable was supposed to help in environments like this when volumes are down so much and help the yields out, why aren’t we seeing that?
Fredrik Eliasson
Yes, in the third quarter, they were helpful actually. They were still helpful here in the fourth quarter but not as much because some of this also depends on who you are actually shipping to.
And the big driver though in the coal yields was really the fact that we have made these accommodations on the export side and further adjusted our rates downward to reflect the reality of the underlying market and thing trying to optimize our bottom line.
Scott Group
And then Michael, I just want to ask, so a lot’s changed -- certainly a lot’s of changed in the market from year, year and half. Since your view or appetite on M&A changed at all or has it changed it all in that year and year and half?
Michael Ward
Not really, Scott. If you think about it, I think our position is the same, as it was a year or year and half ago.
We think there is tremendous opportunity for shareholder value creation with our existing portfolio. And if you think about any mergers, there’s going to be substantial regulatory cost, some of the synergies will be very limited because they are end to end mergers.
So, if you are going to offset those regulatory costs, you’ve got to have compelling interfaces of synergies. And I really have a hard time envisioning where that would be in any rail merger.
Scott Group
So that the challenge is that the markets don’t change your view on that.
Michael Ward
No, sir. I think we’ve done well in prior down periods; we think we will in this one as well.
And we think the long-term future with our existing customer base two thirds of the population we serve, pressures on the trucking, the service improvements we continue to make in the pricing, allows to create lots of value for the shareholders over the intermediate long-term.
Operator
Thank you. The next question is coming from Justin Long from Stephens.
Your line is open.
Justin Long
So you talked about cycling the benefits from liquidated damages and gains on sales this year. And just taking those items out to someone’s point earlier, you get to a mid single-digit EPS decline in 2016 along with anticipated volume declines, mix headwinds, your commentary that it will be difficult to improve the OR.
Is it fair to say that EPS should be down at least double-digits or low double-digits this year?
Michael Ward
Yes, all we’re prepared to talk you about today is the directional piece, what we try to do is to give you some clarity around the moving parts that we have, obviously certainty on the cycling piece and we have we think good insights into the coal sector. It’s really what happens in the industrial space, especially as we get out into the second half of the year.
And again it’s really, really early in the year in an uncertain environment to project full year EPS with specificity. At the same time, as you look at the things that we’re doing, the pricing performance, the productivity, the rightsizing, the service improvements and all of those things are the things that are most within our control.
And those are the things that you are going to see us be relentless about.
Justin Long
And as a quick follow-up, I wanted to ask about PTC, you mentioned the $300 million of anticipated spending this year and $2.2 billion in total but of that total amount, what’s remaining after 2016? And after you’ve fully installed the technology, do you anticipate any incremental maintenance cost associated with PTC that would be ongoing?
Michael Ward
So, let me give you the facts and the figures on PTC. So a $1.5 billion is what we spent through the end of ‘15, we’ve given you the $300 million guidance for ‘16 so that would take you upto the $1.8 billion through the end of this year.
Our project takes us to a hardware completion date of 2018 and fully operational by 2020. I think you will see the majority of the difference between the 1.8 billion and the 2.2 billion being spent between now -- excuse me, end of ‘16 and the end of ‘18.
In terms of the tail on OpEx and some refresh CapEx, we’re still working through that. Obviously there is a piece that’s embedded within depreciation as well as in departmental operating expenses.
And that’s still being worked on right now as we understand the support agreements that will go along with the hardware and the software as well as the useful life on those pieces of equipment.
Operator
Thank you. Our next question will be coming from Cleo Zagrean from Macquarie.
Your line is open.
Cleo Zagrean
So the follow-up already since the recent conversation, let’s imagine ourselves this time next year after the lower earnings base set by ‘16 and I am not asking for guidance but conceptually how do you see the new growth trend? Can we see double digit sustainable EPS growth or should we think of maturing into a pattern of lower growth, maybe more distributions for shareholders?
Because we’ve been talking about the structural changes not in a so called recession such as lower profitability from coal, consumer spending, shifting more towards services, probably sustainable strong dollar, sluggish industrial economy. So, what is the new normal and how can you grow in that?
Thank you.
Frank Lonegro
From just an EPS directional thinking beyond 2016, we see 2016 as again a unique year. And clearly we should be able to provide strong EPS growth off of a 2016 base.
And I’ll allow Fredrick to comment on some of the commercial items of your question in terms of where some of the various lines of business might be going?
Fredrik Eliasson
So, as we go through this year and cycle some of these headwinds that we’re going to be facing, clearly for the first half of this year and we look at where the macroeconomic indicators are and projection for the U.S. dollar, I think we’ll start seeing things stabilize, normalize and we can start seeing year-over-year growth as we move through hopefully late in 2016 and clearly move into ‘17.
Based on what we’re seeing right now, as Frank I think has said many times throughout the call today and Michael as well, the key thing for us right now is the focus on the things that we can hold the most. And then the macro headwinds are going to be whatever they are and the key thing for us is to adjust our infrastructure to reflect the reality of what they provide us.
Cleo Zagrean
And as a follow-up, can you talk to us about the rate at which you’d see investing in growth opportunities? And maybe what it would take for you to consider higher sustainable dividend yield to appeal to more broadly to dividend focused investors?
Thank you.
Michael Ward
On the capital side, clearly there is a portion of our capital budget every year that is geared toward growth investments. The majority of that over recent years has been focused on our growth engine and that’s on the intermodal, especially in domestic intermodal side.
So, you will continue to see us focused in that area. In terms of dividends, I would say currently where we are, we have a very healthy yield.
We have guidance out there in terms of what we’re willing to pay out on a trailing 12 months basis and that’s in the 30% to 40% of trailing 12 months earnings. And so we look at that every year, generally speaking after the first quarter and we’ll continue to do that and look at where we are against the broader environment.
Operator
Thank you. And the last question will be coming from Keith Schoonmaker from Morningstar.
Your line is open, sir.
Keith Schoonmaker
Your expectations for automotive are scarce bright spot as were actual auto shipments last year. Could you please add some color to this growth expectation, maybe particular locations where you’re seeing some strengths, as well as perhaps comment on general shifts of production to Mexico and how that affects your network?
Thank you.
Fredrik Eliasson
So if you look at the North America light vehicle production, I think we’re earning up about 17.5 here in ‘15 and the projection is for 18.2 next year, so that provides us good growth opportunities; U.S. sales also based on the projections that we’re seeing indicates good growth.
The Mexico shift is clear, so the North American light vehicle production numbers are probably skewed a little bit more towards Mexico which we don’t capture as much but we still capture some of that. And sometimes that is actually a length of how it vantage for us, so that is helpful.
So overall, if you go back in history over the last 30-40 years, I am sure that you will find our core relation in North America light vehicle production is probably in the very-very high 95%, 98%. So, we follow what producers tell us and then we adjust our fleet and service accordingly.
And right now, it looks like we’re going to have another year of growth but not anywhere closer to where it’s been since ‘09 but still nice growth and especially in this environment; we need these sorts of growth opportunities.
A - Michael Ward
Well, thank you everyone for joining us and we will talk to you again next quarter. Thank you.
Operator
Thank you. And this concludes today’s call.
Thanks for participation in today’s call. You may disconnect.