Jan 18, 2017
Executives
David Baggs - VP, Treasurer & IRO Michael Ward - Chairman & CEO Frank Lonegro - CFO Cindy Sanborn - COO Fredrik Eliasson - Chief Sales & Marketing Officer
Analysts
Christian Wetherbee - Citigroup Tom Wadewitz - UBS Danny Schuster - Credit Suisse Amit Mehrotra - Deutsche Bank Ravi Shanker - Morgan Stanley Ken Hoexter - Merrill Lynch Brandon Oglenski - Barclays Brian Ossenbeck - JPMorgan Bascome Majors - Susquehanna Scott Group - Wolfe Research Jason Seidl - Cowen & Company Cherilyn Radbourne - TD Securities David Vernon - Bernstein Jeff Kauffman - Aegis Capital Scott Schneeberger - Oppenheimer Justin Long - Stephens Walter Spracklin - RBC Brian Konigsberg - Vertical Research Partners Donald Broughton - Avondale Partners
Operator
Good morning, ladies and gentlemen, and welcome to the CSX Corporation Fourth Quarter 2016 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, Sherlyn, and good morning, again everyone and welcome to CSX Corporation's fourth quarter 2016 earnings presentation. The presentation material that we'll reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the Investor section.
In addition, following the presentation, the 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 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 and 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 over 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 one follow-up question.
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, and good morning everyone. Yesterday CSX reported fourth quarter earnings per share of $0.49, up from $0.48 per share in the same period last year.
You will note that fourth quarter of 2016 included two offsetting items. In addition, the quarter included an extra accounting week resulting from the company's 52, 53 week fiscal reporting calendar.
This benefited EPS by $0.03 in the quarter. On a reported basis, revenue increased 9% in the quarter driven by the benefit of an extra accounting week and strong pricing gains that reflect the value of our service products.
Turning to operations, safety performance remained strong, service levels continue to meet or exceed customer expectations, and the company drove nearly $100 million in efficiency gains in the quarter. As a result, CSX produced $1 billion of operating income and a 67% operating ratio.
Both of these results reflect the benefit of the extra week and a gain on a recent operating property sale. Now, I'll turn the presentation over to Frank, who will take us through the fourth quarter and full-year 2016 results in more detail as well as providing our initial views on the outlook for 2017.
Frank?
Frank Lonegro
Thank you, Michael, and good morning everyone. Revenue was up 9% or $256 million versus the prior year driven primarily by higher volumes as a result of the extra week.
Total reported volume increased 5% in the quarter, but declined 1% excluding the extra week. We continue to deliver strong core pricing from an improved service product.
Same-store sales pricing for the fourth quarter was up 2.8% overall and 3.2% excluding coal. In addition, fuel recoveries declined $10 million in the fourth quarter, but were more than offset by a $13 million increase in other revenue.
Expenses increased 2% versus the prior year, driven mainly by the impact of the extra week. Excluding the extra week, expense declined 4%.
In the fourth quarter CSX delivered $98 million in efficiency gains and we also recognized a $115 million gain from the sale of an operating property. Further year-over-year expense details can be found in our quarterly financial report.
Operating income was just over $1 billion in the fourth quarter. Looking below the line, interest expense was up slightly from last year, reflecting the impact of the extra week.
Other income decreased to $72 million driven primarily by an $18 million gain related to a non-operating property sale in the prior year's fourth quarter. In addition, we incurred $115 million of debt repurchase expense in the fourth quarter associated with the call of $1.4 billion of debt that was maturing between 2017 and 2019.
Finally, income taxes were $293 million in the fourth quarter with an effective tax rate of about 39%. This included a $10 million unfavorable adjustment related to the apportionment of state income taxes, which impacted EPS by $0.01.
Overall net earnings were $458 million, down 2% versus the prior year and EPS was $0.49 per share, up 2% versus the prior year. Now let me provide an adjusted view of our full-year EPS.
Beginning with our full-year GAAP EPS of $1.81 we have provided the EPS impact of certain items that all occurred in the fourth quarter. You can see that the $0.08 property gain I mentioned previously was equally offset by the $0.08 impact from the debt repurchase expense in the fourth quarter.
In addition, our 2016 EPS benefited $0.03 from the impact of the extra week. Excluding the impact of the extra week and the two offsetting items CSX's 2016 non-GAAP EPS is $1.78, which reflects a more normalized base for year-over-year comparisons.
Now let me turn to the market outlook for the first quarter. We expect volume to be flat to slightly up year-over-year in the first quarter, as the industrial economy is stabilizing and energy related headwinds are moderating slightly.
That said, a number of our markets are returning to year-over-year growth in the quarter as we cycle the challenging conditions of early 2016. As you can see on the slide nearly 80% of volume falls in the neutral or favorable category in the first quarter, while a little over 20% of the portfolio is expected to be unfavorable.
Agriculture and food is expected to grow as the record grain harvest and new customer facilities are expected to more than offset the strength in U.S. dollar and a strong South American crop which curtails the U.S.
grain export season earlier than normal. Export coal will continue to benefit from China's production cuts driving increased demand for U.S.
coal. In particular, the metallurgical benchmark has strengthened year-over-year attracting increased production from U.S.
coal producers entering 2017. We expect export tonnage in the quarter to be about 8 million tons.
For the full-year 2017, we expect export coal to be in the mid-to-high 20 million ton range. Metals and equipment is favorable as imports moderate compared to last year and domestic steel production increases following successful trade cases.
Additional infrastructure projects, increasing rig counts, and wind energy moves, are expected to provide additional volume opportunity. Intermodal is expected to be neutral.
On the domestic side, secular growth will continue spurred by new service offerings and our highway to rail program. However, this growth is mostly offset by domestic competitive loss that occurred mid last year.
On the international side, volumes are also expected to be roughly flat as we just finished cycling prior year competitive losses earlier this month. Chemicals will be down as the economics of crude-by-rail remain unfavorable.
These headwinds are partially offset by higher volume in the fly ash business, which began moving a year ago and ramped up over several quarters to current levels. Domestic coal is also expected to be down, although we are seeing moderating inventory levels and slightly increased coal demand with winter weather, a shortfall competitive loss will result in lower volume for the quarter.
As a result, we expect domestic coal tonnage to be around 15 to 16 million tons for the first quarter. Overall the industrial economy is more stable and energy headwinds are moderating.
However, we continue to face a strong U.S. dollar and low commodity prices which constrains growth in some markets.
As we think about the full-year 2017, we anticipate a healthier volume environment. As a result, we expect the combination of merchandise and intermodal to grow on a comparable 52-week basis in line with the economy.
In addition, excluding the short haul competitive loss of about 6 million tons, we expect domestic coal tonnage to be roughly flat to 2016. Turning to the next slide, let me talk about our expectations for expenses in the quarter.
As a result of aggressive cost actions taken in 2016, we achieved nearly $430 million of efficiency savings and about $175 million of volume related cost saving. As we turn to 2017, our intense focus on driving cost reductions across the Company is unchanged and we are targeting full-year efficiency savings of more than $150 million.
Looking at the first quarter outlook for labor and fringe, we expect average headcount to be down slightly on a sequential basis. Labor inflation is expected to be around $35 million in the first quarter.
In addition, we expect our pension expense to decrease about $15 million versus the prior year in each quarter of 2017. This reduction is driven primarily by adopting the spot rate accounting methodology for applying the discount rate, as well as the benefit associated with $250 million pension contribution completed in the fourth quarter.
The combination of efficiency savings and lower pension costs is expected to more than offset labor inflation. For MS&O expense, we expect efficiency gains in the quarter to help offset inflation.
However, we will also be cycling some positive reserve adjustments, for example, improved safety performance in last year's first quarter favorably reduced personal injury reserves. As a result, we expect MS&O in total to be slightly up versus the prior year.
We expect fuel expense to increase in the first quarter, driven by the higher cost per gallon year-over-year reflecting the current forward curve. This price increase is partially offset by our continued focus on fuel efficiency.
We expect depreciation in the first quarter to increase around $10 million versus the prior year reflecting the ongoing investment in the business. This is partially offset by the favorable impact from an equipment life study.
Finally, equipment and other rents in the first quarter are expected to be relatively flat to the prior year with the benefit of improved car cycle times offsetting higher freight car rates and the increase in volume related costs associated with automotive growth. Now let me talk about our capital investment plan for 2017.
For this year, CSX's total capital investment would decrease to $2.2 billion, which includes about $270 million for Positive Train Control. As you will recall, our 2016 capital investment totaled $2.7 billion which included $307 million of payments in 2016 for locomotives purchased under seller financing and delivered in 2015.
As a result, we expect our 2017 capital investment to decline nearly $500 million from the 2016 level and begin returning to our long-term core capital investment guidance of around 16% to 17% of revenue. Looking at our capital allocation for 2017, you can see that over half of the investment will still be used to maintain infrastructure to help ensure a safe and reliable network.
In addition, our 2017 equipment investment is down significantly from the prior year due to the completion of our locomotive purchase commitment. A major shift in our 2017 capital plan from last year is the significant increase in strategic investments which support improved service, long-term growth and efficiency initiatives under the CSX of Tomorrow strategy.
Finally, looking at our investment in Positive Train Control, we have invested $1.8 billion through the end of 2016 and we plan to invest about $270 million in 2017. CSX is on track to meet the legislative timeline for PTC.
As we look at the path to achieving this goal, we now believe the total cost of PTC implementation will be about $2.4 billion before any third-party recoveries. Now, let me wrap up on the next slide.
Overall CSX has delivered solid financial performance in 2016 despite a dynamic freight environment that impacted nearly every market. This success was driven by pricing for the relative value of our service, driving record efficiency gains, and aligning resources to the softer demand environment which partially offset the 5% decline in total volume.
To mitigate the soft demand, we took significant action resulting in efficiency savings of nearly $430 million and rightsizing savings of about $175 million. Primarily as a result of these actions, CSX was able to improve its full-year operating ratio by 30 basis points to 69.4%.
Looking ahead, while we still face some specific market challenges from a strong U.S. dollar and low commodity prices, we expect overall conditions for the freight environment to be healthier in 2017.
As a result, we expect the combination of merchandise and intermodal to grow in 2017 on a comparable 52-week basis in line with the economy. As I mentioned previously, domestic coal tonnage is expected to decline again in 2017 on a comparable basis, primarily due to a shortfall competitive loss.
Excluding this 6 million ton loss we expect domestic coal tonnage to be roughly flat despite low natural gas prices that continue to challenge the competitiveness of Eastern utility coal. We continue to see favorable near-term market conditions for export coal and expect mid-to-high 20 million tons for this year.
We remain intensely focused 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. Again, we are targeting productivity savings of more than $150 million in 2017.
With CSX's continued focus on strong pricing and cost control, coupled with a stabilizing industrial economy and more moderate energy declines, we currently expect EPS growth in the low-to-mid-teens for the first quarter. For the full-year, we also expect overall EPS growth in 2017.
Of course growth will be stronger in the first half as we cycle our two more challenging quarters from 2016, but we will keep you informed on a quarterly basis as we progress through the year. Finally, we are reducing our capital investment by nearly $500 million to $2.2 billion.
In combination with the higher earnings, CSX will also improve overall free cash flow in 2017 for shareholders. With that let me turn the presentation back to Michael for his closing remarks.
Michael Ward
Well, thank you, Frank. In the year where the industry faced sustained low commodity prices and a strong U.S.
dollar that had broad based market impacts, CSX lost another $470 million in coal revenue and experienced declines in nearly every other market. Faced with these challenging business conditions, the company generated strong financial results driven by decisive actions to produce an all-time record of nearly $430 million of efficiency gains.
Our performance underscores this teams' ability to rapidly adapt to changing economic conditions and the restructuring of the energy markets. Looking forward, the CSX of Tomorrow strategy drives growth in the more service sensitive merchandise and intermodal businesses.
We will achieve this by emphasizing reliable and cost-effective service, realigning our far-reaching network, and deploying additional technology solutions to further improve safety, efficiency, and service. In addition, the more favorable economic conditions overall, and the prospects for more balanced regulation, coupled with the quality of our network, our team, and our strategy, lead us to expect full-year earnings per share growth in 2017 despite the overhang of the strong dollar and low global commodity prices.
Longer-term as we continue the company's transformation we remain committed to achieving a mid-60s operating ratio. And with that, we'll be pleased to take your questions.
Operator
Thank you. [Operator Instructions].
Our first question comes from Christian Wetherbee with Citigroup. You may ask your question.
Michael Ward
Hi, Christian.
Christian Wetherbee
Hey, thanks. Good morning, guys.
Wanted to see if you could talk a little bit more about the 2017 volume outlook. Frank, I know you mentioned I think merchandise and intermodal growth in line with the broader economy and you've talked a lot about coal, so that's helpful.
But could you give us some sense about how you're looking at the broader economy and maybe what are some of the puts and takes as you think about that merchandise and intermodal business for the full year of 2017?
Fredrik Eliasson
Sure. This is Fredrik.
I would say that if we look at our merchandise business, we feel pretty good now across the board in terms of being able to produce growth across essentially all of those markets, and as I said in line with overall -- overall economy. We've seen the economy obviously go through a pretty tough time here on the industrial side in 2016.
But as we move into 2017, I think we see a little bit, obviously each year comes, but also little bit momentum here. And so we feel good about what we're seeing on the merchandise side.
On the -- in the national side on the intermodal side, we are done cycling some of the losses that impacted us in 2016 and that will be helpful. And then on the domestic side, we continue to see the vibrancy that we've seen over the last decade or so being able to grow that market well above whatever the economy produces.
So if you add those pieces up, I do think on the merchandise intermodal side that we will be able to grow in line with whatever the economy is going to produce and hopefully it will get little bit of the tailwind that we're feeling right now to continue, may be even little bit better than that. But we'll see where we end up and we'll keep you informed throughout the year.
Christian Wetherbee
Okay. Okay, that's helpful; I appreciate it.
And then just wanted to touch on the 2017 outlook for the operating ratio. So great movement on efficiency savings in 2016; you have a target for 150-plus for 2017.
How do we think about that in terms of the operating ratio? How much progress do you think you might be able to make this year?
Frank Lonegro
Hi Christian, it's Frank. We should be able to make good progress there.
The challenge that we're going to have obviously is when you look at the numbers that we have on a reported basis there are things in there obviously that need to be pulled out in order for us to really look on a comparable basis. So you saw a two year run sub-70% but each of those years had something in there that helped on the operating ratio side.
So we're doing everything we can on the operating ratio certainly on the cost side, you're going to hear from Cindy that she'll do everything she can to pull productivity, Fredrik is going to continue to rely on that improved service product to drive pricing from the top-line side, you see an improving volume environment. And so with less coal declines that certainly sets us up for a positive 2017.
How much progress we make obviously we will give you some transparency as we get through the first quarter and get it before we know how long coal is going to help us.
Christian Wetherbee
But is the sub-70% OR sort of the target for this year?
Frank Lonegro
Well, we haven't really given any OR guidance, it certainly isn't lost on us but we'd like to go three years in a row with it and get it on a -- I'd say a more core basis obviously there has been help for last two years and so it's certainly something that we have our eyes set on.
Operator
Your next question comes from Tom Wadewitz with UBS. You may ask your question.
Michael Ward
Good morning, Tom.
Tom Wadewitz
Yes, good morning. I apologize for any background noise here; I'm in the midst of some travel.
But wanted to see if you could comment on the driver of the labor cost savings that ramped up nicely; I think it was $76 million fourth quarter versus $53 million in third. And so, as that -- your total productivity savings for 2017 is quite a bit lower than the big number you achieved in 2016, but the labor is ramping sequentially.
So what -- could that labor savings continue to ramp or how do you think about that? And may be if you can relate that to additions of sightings and longer trains.
Thank you.
Cindy Sanborn
Sure. This is Cindy.
So in terms of labor savings as you referenced at the fourth quarter specifically, we did see some benefit in volume that we did not have to add headcount back one for one and we expect to see that type of impact volume increasing environment. So what we have seen the past six quarters or so, is volume going down and product and we take -- we right sized a number of expenses specifically with headcount as one of them to reduce our expense.
But we've also taken out expense and headcount through structural changes that we've -- that you've heard us talk about as well. So you think about the structural changes going forward, you reference the sighting capacity and as you talked about that in the past we have to make some investments to continue to drive train length and that is true.
We expect to invest in 2017 and 2018 to drive that; we should see some benefits of that in 2018 that you'll actually see in headcount from structural change on train length now. Having said that, we're always looking for opportunities to improve our expense control whether it's headcount, whether it's fuel, and other areas and we'll continue to do that and certainly with in mind of protecting service for our customers at the same time.
Tom Wadewitz
Okay, great and one for Fredrik, I think we've certainly you can see how the benchmark export coal prices, clean blend, or the API 2 in Europe have gone up. Can you frame for us a bit the magnitude of the benefit on your pricing for export coal in fourth quarter and if it's how much percentagewise they went up or revenue or any kind of broad frame and then do you think that will be a similar impact in first quarter or a stronger benefit in first quarter on export coal pricing.
Thank you.
Fredrik Eliasson
Yes. Sure Tom.
First of all, we really don't forecast price. Now I think you know that since 2012 when we saw the peak of the market has been coming down, we've been pretty public about the fact that we've both obviously want to continue to optimize the bottom-line for us, but also strategically do what we can in partnership with the producers to stay keeping investors in a very difficult time, which we're obviously going through.
Now clearly the market has come back here a lot faster than a lot of people had thought and certainly we expect the same sort of partnership on the way up as we saw on the way down, there are other factors that come into play than just index themselves. There is a spread between different types of quality of coal.
There is also the fact that there is, well the benchmark has going up significantly in first quarter. The spot market is a very different place.
So there's a variety of things that comes into play but overall that partnership that I think we've established over the last few years, we certainly expect it to go both ways.
Tom Wadewitz
So you think there is more sequential benefit in first quarter or similar or you just don't care to comment on that?
Fredrik Eliasson
I don't -- we don't forecast price but I think we've given you the philosophy of how to look at things. I think that pretty much all the visibility, we will -- we can give you.
Operator
Thank you. Your next question comes from Allison Landry with Credit Suisse.
You may ask your question.
Danny Schuster
Hey, good morning, this is Danny Schuster on for Allison. Thanks for taking our question.
Michael Ward
Hi, Danny.
Danny Schuster
We are hoping to dig in a little bit more on CapEx. So, Frank, you mentioned today that the strategic investments are stepping up a little bit this year and I know over the last decade or so you spent around 10% to 15% of your CapEx on commercial facilities.
So could you just provide us with a little bit more color on what's in the strategic investment bucket and whether we should expect this level of investment in that bucket to be sustained over the next few years.
Frank Lonegro
Sure. I think to answer the last part of your question around sustained investment in the strategic at roughly the percentage that you're seeing in 2017, over the next planning horizon, I think the answer to that is yes, that is very much aligned with our CSX of Tomorrow strategy.
As part of that there is certainly investments in intermodal facilities you've already heard us talk about Pittsburgh that we'll complete about halfway through this year and then you've also heard us talk about the Central Carolina Connector the big hub that we're going outside of Rocky Mount to serve the Mid Atlantic and the Southeast. So you'll see us continue to invest in facilities like that to expand the terminal footprint and be able to expand the existing terminal footprint to be able to handle the increase in domestic business -- that domestic intermodal business that we believe is a big part of the growth story for us longer-term.
Danny Schuster
Great, thank you.
Frank Lonegro
So the other things I ought to add in there, Danny, is when you think about what's in the CSX of Tomorrow investments that you're seeing in that increase to say 25-ish-percent of the portfolio is also all of the network investments and the technology investments that we're looking to make to support, train length and fluidity and long-term growth as well as efficiency and better service for our customers.
Danny Schuster
Okay, okay that makes a lot of sense. And then we were just hoping would you be able to provide us with a little bit more color on the buckets of the efficiency that you're targeting this year.
So is there a rough split you could provide us between what you expect in labor and fringe MS&O and the fuel.
Frank Lonegro
I think Cindy and I will tag team this one. I think what you'll find is that generally speaking; the productivity will follow the relative allocation in our cost bucket.
So probably more so on the labor side, which is roughly 50-ish-percent of our cost base and then fuel and MS&O will be important, but lesser parts of that and then really it's across the board approach on cost it's certainly, given the size of the operating cost that we have, it's a lot of that falls on Cindy's shoulders but the G&A side also pulls its way to an offsetting inflation every year as well, Cindy.
Cindy Sanborn
Yes, I would say, Frank summed it up, if there is no one area specifically that you're going to see outsized productivity, it's going to be across the board.
Operator
Thank you. Your next question comes from Amit Mehrotra with Deutsche Bank.
You may ask your question.
Michael Ward
Good morning.
Amit Mehrotra
Great. Good morning, thanks for taking the question.
So I had a question on mix and margins. Over the last couple years, it's clear that the mix of the business has changed pretty dramatically and you and the rest of the industry have adjusted remarkably well to that.
But maybe as we enter a relatively more stable mix environment; maybe see some potential disproportionate growth on intermodal, just wondering how this impacts contribution margins. Could we see structurally higher incrementals in that environment, given the progress you guys have made on the productivity and pricing front?
Just help us think about the moving parts there, maybe in a more stable and a controlled environment volume environment. Thanks.
Frank Lonegro
Let me hit the incremental piece and then Fredrik will hit the volume piece. Clearly when business comes back in the scheduled network, whether that's intermodal or we call classed merchandise traffic that set up well given all the productivity efforts that Cindy and her team have done as well as the pricing efforts that Fredrik and his team have done.
So what you're seeing is a good setup for incremental margins in those growth areas, when things come back in more the both network things that move in unit train quantities and we're going to add cost in order to handle that business.
Fredrik Eliasson
Yes and similarly what Cindy says in terms of never done, I think we have never done trying to grow the bottom-line whether that's through price, volume or helping Cindy drive productivity gains. I do think that as you look forward the next couple of years and hopefully you are right that we will have a more stable environment especially if we refer to coal, but I do think also that the growth opportunities that we're seeing a lot of that is in domestic intermodal and it's going to have the higher rate or higher volume growth than you would see in some of the other markets.
So you will have a continued mix impact on the top-line but it doesn't always transit is bad thing from a bottom-line perspective because a lot of that growth is going to come into fixed and fixed network where we do have a fair amount of opportunities also to drive train length, we have double-stack clearance and we just obviously we didn't have in the tunnel, a fair amount of automation products as well. So well there is a revenue negative mix, so to speak, it doesn't necessarily mean that is a negative mix from a bottom-line.
Amit Mehrotra
If I can just follow-up one quickly on that, I mean it looks like, in the fourth quarter at least; the incremental EBIT margin was around 38%. But that did include some higher stock comp expense, maybe $30 million or so, above what you were originally predicting.
So if you adjust for that, it looks like on an operating basis maybe it was closer to 50%. Would that be kind of the conversion you would expect on any revenue growth, at least in 2017 in the midterm around that 50% level?
Frank Lonegro
I think you're normalizing the fourth quarter in the way that we are as well when we are answering your question about incremental margins in the fourth quarter. Obviously you didn't see the flow-through that you would otherwise have looked for but I think there are some discrete parts in there that once you back those out then you're in the right neighborhood.
Amit Mehrotra
Okay. Let me ask one quick one, if I could, on taxes.
I know it's probably a hard question to answer, but obviously this has the potential I guess to be a significant positive to the bottom-line. So you can't answer, obviously, what's going to happen, but if you do get some tailwind on the corporate tax rate, how do you think this plays out?
I mean, do you think it gets competed away? How much do you think the keys to the Company?
And then I think you have a pretty sizable deferred tax liability that would, I would imagine, get revalued down. And so just trying to understand if you would change any capital allocation decisions given the leverage would look probably better, at least on a book capital basis.
Thank you.
Frank Lonegro
Sure. So in the tax proposals, obviously there are going to be moving parts in terms of what is the ultimate rate that applies to corporations as well as how bonus depreciation is going to be handled as well as the expensing of interest.
So if you just go all of that through the model and think through what is that imply from a cash flow perspective, it's certainly positive from a free cash flow perspective, we would have to revalue the deferred tax liabilities. But that would be sort of more of a one-time hit as we reset the EPS number based on that that revaluation.
In terms of use of cash obviously, we would continue to apply a balanced approach to capital deployment. We would look hard at capital investments that might be able to; to be pulled forward and certainly we would look at the shareholder return aspects of dividends and buybacks as well.
Operator
Thanks. Your next question comes from Ravi Shanker with Morgan Stanley.
You may ask your question.
Michael Ward
Good morning, Ravi.
Ravi Shanker
Thanks. Good morning, everyone.
So question on merchandise intermodal pricing; that remains above 3% but has been decelerating a bit for the last few quarters. When do you expect an inflection there?
Do you need those markets to come back strongly or do you expect that to react to inflation? Also, if you can share your inflation expectations for 2017, that would be great.
Fredrik Eliasson
Sure. So I will just remind again, we really don't forecast pricing, it obviously has been a tough period, an extended period now from a pricing perspective and lot of excess capacity out there and our challenge to our team is of course to sell through this trough, make sure we sell the improved service product that we have, the unparalled network access that we have and provide innovative solutions to our customers and I think the fact that we, we've been able to do as well as we have I think is a good testament to both the fact that, it isn't value driver of ours and it is also a good testament to the fact that we really do need to make sure to continue to value price to be able to reinvest in the business the way we want to.
And so it has been a sequential downtick. We'll see when it when it turns, I think there's a lot of good things going on as the economy picks up.
I think is good thing if we continue to low unemployment that put pressure on the wages. We know that.
We see the deal demand is coming into play here as we get into the second half of 2017. So I think things are lining up for better pricing environment as move through the second half of 2017 but it might not fully be where we want to be until we get to 2018.
Frank Lonegro
Ravi on your inflation question I think in the prepared remarks, you heard the $35 million inflation on labor and fringe and there are some pretty key industry drivers as part of that, it's not really on the wage side of things, it's on health and welfare side so medical inflation obviously there's always going to be a little bit, little bit higher than we would like. And then when you think about how we fund the Union side healthcare through an industry trust, we had a surplus in the trust or a couple of years and with all of the headcount reductions that the industry has made with that surplus has been a really evaporated.
And as you also know as furloughed employees go off of the payroll that you get four month of incremental health and welfare coverage that again has the hit to the trust and then fewer employees across the industry, which means you can spread the catastrophic losses over as many people. So I'd say those are the big drivers on that one, if you were looking for inflation on MS&O and rent I think I would give you, just your sequential run rate from Q4.
If you have those in your model for the first quarter and probably throughout the year, you'd be pretty close. And then I think we've given you some guidance on interest and depreciation as well so that’s probably the full wrap on that one.
Ravi Shanker
Very helpful. So just wanted to confirm that you expect pricing above inflation for 2017?
Fredrik Eliasson
I said we don't -- we don't forecast price, we expect strong pricing. All our customers have options and we're going to make sure we price to market.
But I think our result speaks to itself in terms of trying to find that interplay between where the customer feels we provide a great service product. And at the same time allows us to reinvest in the business.
Ravi Shanker
Got it. And just one follow-up for Frank.
When you said the -- you expect the near-term market conditions for coal to remain favorable, what do you mean by near-term? Is that 2017; is that first half, first quarter?
Can you just help define that?
Michael Ward
Can you repeat that question please?
Ravi Shanker
I think Frank said in his comments that he expects the near-term market conditions for coal to remain favorable. Just wanted to get a sense of what near term means.
Fredrik Eliasson
Well, I mean, I think our -- what we've done on the coal side just to reiterate some of the things that Frank said, our view is that as we think about coal for the first quarter we said 15 to 16 million tons for coal on the domestic side. And on the export side about similar to what we saw in the fourth quarter about 8 million tons.
And for the full year, we said we will essentially be flat if it wasn't for the competitive loss, so and that is about as stable rate throughout the 2017 year.
Michael Ward
And that's for the year.
Fredrik Eliasson
On the domestic side. And export for the year, mid to the high 20s.
Operator
Thank you. Your next question comes from Ken Hoexter with Merrill Lynch.
You may ask your question.
Michael Ward
Good morning Ken.
Ken Hoexter
Hey, good morning, Michael. Just, Michael, maybe for you on CSX of Tomorrow, maybe you could help define it.
How do you define it? Is this a CapEx program or new network build plan like National Gateway?
Is this a CapEx plan that you're going to target? Maybe you can delve into that a little bit.
Michael Ward
Yes, what its mostly dimensional Ken, obviously it's building at the intermodal network as Frank's discussed earlier. It's also looking at our network, we've done some of this, where we deemphasize some of the investment in the less dense lines and we're putting investments in sidings to allow us to run longer trains to some of those key corridors, our primary corridors.
But in addition, we're really working on involving more technology deployment to automate things to make them more safe and so it's really reforming to looking at the opportunities we have are really in the intermodal and the merchandise and we're reshaping the network with that strategic capital to allow us to capitalize on that, so increasing the train length and service reliability on the primary routes, deemphasizing some of the local, but still keeping it safe and high service and investing in intermodal and technology.
Ken Hoexter
Great. And then on -- maybe Frank; have you started to return some of the furloughed employees?
I guess when you take your efficiency gains, should we, literally, be taking the $450 million -- or $420 million last year, the $150 million you're looking at and that's your -- you add $0.11 from that into earnings and that was offset by coal this year? Just want to understand how we should put those numbers that you give on the efficiency gains into our thought process for actual cost savings.
Frank Lonegro
Let me take high level and then Cindy will talk about the furloughed employees. When you look at us on a year-over-year basis, you really have to remember that we lost nearly $470 million of coal revenue.
So that was a huge impact both from a top-line and the bottom-line perspective. And you look at what we did both on the pricing side and the record productivity that we gain, that's the big story that you see in 2016 on a year-over-year basis.
The furlough count is really something that Cindy keeps an eye on as we look at headcount which was down on a sequential basis and down I think about 3,000 on the year-over-year basis, Q4 against Q4. We're going to continue to look at that.
We guided to headcount being down slightly sequentially as you think about the first quarter but that's some that Cindy is clearly focused on and making sure we have both enough resources to handle the expected demand but also that we're doing on efficient basis.
Cindy Sanborn
Yes on a furlough employee's piece, we got about 1,950 people furloughed right now and it's really location by location and still needing to recall, we do recall for attrition, we do seeing normal attrition. We are going to be training some locomotive engineers because that's where we see the most attrition this year.
But we will pull people back as we need to and if we end up getting to a place where we don't have furloughed at a specific location, we will try to move people that are furloughed to other locations and then as necessary we will have to hire to tech service. But we look at this closely and it's really hard to be very general about what we recall because some of attrition and then we furloughed some other areas at the same time.
So it's we keep a very close tabs on it and we also do so to keep our employees informed too. We want to know when they're going to return back to work.
Ken Hoexter
So just to clarify Fred's answer there then, even with volumes inflecting and coming back, you're still expecting -- I just want to clarify -- you're still expecting employees to be down on an absolute basis?
Cindy Sanborn
Yes I think when we Fredrik talked about it little bit, when we see volumes coming back in our scheduled network, we have opportunities to add additional cars to trains without adding additional locomotives or people associated with that on a unit train basis, if it were to come back there we may see a little bit more that we need to pull back. But we look at it based on how we see volumes come, where we see volume coming and in what form and then appropriately handle it.
Operator
Thanks. Your next question comes from Brandon Oglenski with Barclays.
You may ask your question.
Michael Ward
Good morning, Brandon.
Brandon Oglenski
Hey, good morning, Michael, and thanks for getting me on the call here. I want to come back to Ken's question on the CSX of Tomorrow, because I think your investors have heard snippets of what this new strategy is.
But, first off, does it include a mid-60%s OR target? And then we've been talking about that target since 2011, so about six years now, and we're just scratching the surface of sub-70%.
But when I think about some of the headwinds that have been in place the last six years with coal coming down, a lot of mix erosion in your business, doesn't 2017 set up to be a big potential year to show that OR expansion in the business? Because finally we have coal close to flat; you have gotten a lot of efficiency in the network.
Isn't this where we can really see the potential of the CSX network? And why not, if that's not the case this year?
Michael Ward
So Brandon yes we still are targeting the mid-60s operating ratio longer-term and you're quite right. We've had that out there for a number of years and we've lost about $2 billion worth of some of our most profitable business during that process.
So obviously that delays us giving there is quickly. I mean we love to have that $2 billion back and will be easily in the mid-60s, but that's not reality anymore.
So we're going to continue to march, we are not going to predict what the operating ratio will be for 2017, as Frank alluded to, we will continue to keep you posted as the year goes on but we are not going to make a prediction on OR for this year.
Brandon Oglenski
I mean, Michael, is this just a case that it's really not an absolute cost opportunity in the networks? You feel that costs are structurally where they need to be and it's hard to get costs lower; so therefore, we need a lot of revenue expansion on the top-line to get that mid-60%s OR?
Michael Ward
No, we're going to continue to pursue cost reductions. I mean, while we did this year, I think was extraordinary but Cindy and her team and the G&A groups are not going to be relentless in taking cost out.
We're certainly going to get at least $150 million this year, obviously we'll strive for more, but as we think about going to that mid-50s operating ratio is going to be a combination of efficiency, volume, and pricing to the value we create for our customers, all three of those levers going to be deployed to achieve that goal.
Operator
Thank you. Your next question comes from Brian Ossenbeck with JPMorgan.
You may ask your question.
Michael Ward
Good morning, Brian.
Brian Ossenbeck
Hey good morning, thanks for getting me on the call. Fredrik, if you can just talk about the competitive loss on coal that you mentioned.
Was that modal on price or was it something related to how utilities are sourcing some of their volumes in the New Year?
Fredrik Eliasson
Yes, it was a competitive loss that we believe we lost another railroad; it was relatively short haul, a very short haul business. So I think the tonnage is a little bit more severe than potential the bottom-line impact on it.
And that happens. There is business changing hands between us and other railroads on a continuous basis and this one is a little bigger than normal, which is why we highlighted it.
Brian Ossenbeck
Okay. And as you think of just pricing and coal in general, and the point-to-point was -- I think it's expected to roll out starting this year, how has that been received in your discussions with customers?
And your guidance for volume for the full year, do you expect any of this point-to-point pricing to actually impact your volumes negatively or positively?
Fredrik Eliasson
No, I think the point-to-point price is something structurally that we need to do to make sure that it was more in line with the work that was being done up there and it was -- it was -- it was time to change the way -- the way from kind of these rate district that we had before and it really doesn't impact I think in anyway should perform the amount of volume that we're going to be moving here in 2017. And I think we also have a lot of contracts that are out there but we haven't been able to implemented in yet but over time we will try to get into all of our -- all of our business --
Michael Ward
We have it in the tariffs.
Fredrik Eliasson
We have it in the tariffs but we haven't been able to touch in all in contracts yet so. It's something that we are doing to the network and through to make sure that is more reflective of the marketplace and the work that is actually being done out there.
Brian Ossenbeck
Okay. Sorry, one quick follow-up.
It sounds like, just to confirm, we probably shouldn't expect much more rationalization in the coal network this year. Is that correct?
Cindy Sanborn
Brian this is Cindy. We are always looking.
I think as we think about transforming our network and network of tomorrow that's something we look at, but to further good point we are going to make sure we serve the customers that are able to load, so efficiently and effectively and where we can make further reductions we will, we think coal, over time, we'll continue to shift and close working relationship between Fredrik and I will be there with structural changes that are appropriate for the time.
Operator
Thank you. Your next question comes from Bascome Majors with Susquehanna.
You may ask your question.
Michael Ward
Good morning, Bask.
Bascome Majors
Good morning. I know we're going to see plenty of detail in your proxy in the spring, but I was hoping that you guys could share how the Board has adjusted senior management's longer-term financial incentives to better align with the CSX of Tomorrow strategy.
Michael Ward
They have there is two years ago. I think what we did is we changed, we used to have a major driver of our long-term -- let me go backwards, our short-term incentive compensation is based on operating income as well as that's about 60% of the bonus opportunity with a minimum amount and then 40% is based on safety, service, and strategic type initiatives.
On the long-term incentive plan we for many years, we're strictly operating ratio we now are on the performance piece of blend of operating ratio and return on assets because they thought we really need to focus more on deploying the assets in an appropriate manner that's one of the reasons, besides the change in the marketplace that you're seeing more of our capital going towards strategic initiatives is to increase that overall return on assets. So they're trying to incent us to make sure that where we're really focused on getting a great return on the investments we make.
Obviously, we've always have got some amount of our investments, with capital investments we make or to keep the railroad in good shape, keep it safe and keep it running well. That's going to be 50% or more over time but more and more we're going to push towards strategic investments.
Bascome Majors
I appreciate that color. So it sounds like the changes that we saw last year -- we're not going to see significant changes this year; that was kind of the shift?
Michael Ward
That's correct, yes. One of things when you think about long-term incentive programs Bascome, if you change them too much too often, the employees lose the focus of what is important.
So I think the board wanted to keep some continuity and that the return on assets is still an appropriate focus as well as OR.
Frank Lonegro
Bascome it's Frank. I think one of the things you'll see within the annual cycle that Michael talked about where we do have a portion of the incentive opportunity against strategic goals, you will see us making sure that the things we're doing it in a given year to execute on that strategy will be part of the things that we're incented to accomplish.
Bascome Majors
I appreciate all that detail there. And just very high level, it sounds like you may have accrued above plan for 2016.
Should we think of incentive comp as a tailwind if we're at plan for 2017 and --? Thank you; I'll drop off.
Frank Lonegro
Bascome thanks. Good question.
Yes, you did see us take incentive comp up in the fourth quarter which is one of the misses, I think that several folks had when you look at it on an annual basis, it resets. I think if you're looking for tailwind, if we hit plan in 2017, it's going to be much more back-end loaded than impact in the first half.
Operator
Thanks. Your next question comes from Scott Group with Wolfe Research.
You may ask your question.
Michael Ward
Good morning, Scott.
Scott Group
Hey thanks. Good morning guys.
So wanted to ask, first, just about the overall yields. We saw nice yield growth in the fourth quarter: mix was positive; coal yields up a lot.
Are you assuming, Frank, in the first-quarter guidance, a deceleration in that yield growth and mix benefit? Because it feels like you kind of need to assume a mix -- a yield deceleration to get to the earnings numbers you're talking about.
Frank Lonegro
Well let me Fredrik and I will tag team this one. But I think what you're seeing is in the first quarter as you look at the guidance that we have out there for coal, you're seeing two things happen, you're seeing the impact on the domestic side of the competitive loss but you're seeing sequential stability and therefore year-over-year increase in the export coal.
So you got to take that into the mix equation. And then in terms of the other growth that we mentioned in terms of merchandise intermodal growing in line with the economy, we should see nice incremental margins associated with that.
So I don't know that I see any specific mix change that you're mentioning there as we about the first quarter.
Scott Group
I guess I was just thinking like just from an overall -- maybe I asked it poorly. But just from an overall yield growth perspective -- well, to the 4% in the fourth quarter, are you assuming a deceleration from that in the first quarter guidance?
Fredrik Eliasson
Well this is Fredrik. I say that again we don't forecast price and clearly this is a combination of both our same-store sales number and the mix of the business for that given quarter.
And so we'll give you transparency at the end in terms of how much was price and how much was mix and so that's, I think that's all the sort of insight we can provide you.
Frank Lonegro
What we try to do was to give you a blended view Scott in the way that we talked about low-to-mid-teens on EPS growth. And obviously that's going to be a combination of things.
It's going to be the top-line, it's going to be the expense line, it's going to be a couple of things below line is going to be share count and when you blend all of those things together, you can get to the numbers that we're talking about.
Scott Group
Okay, that makes sense. On the -- so we started to see a little bit of slippage in some of the train speeds and service metrics.
Are we at a point where we need to start thinking about bringing back people or broadly bringing back costs at a faster rate, or are you still very comfortable with where service is where we don't need to contemplate that yet?
Cindy Sanborn
Yes, Scott. I think where we are -- I think we are stable, when you look at network performance and when we break it down into our customer see it in the customer facing view our service sensitive business, intermodal automotive is running extremely well.
First Mile Last Mile service is also running extremely well. So Fredrik and I are very, very comfortable with where we have service and there is always room to improve, don't get me wrong.
And as you look across some of the different measurements there are opportunities there. I don't see resource adds as a lever that needs to be pulled relative to the measurements, you're looking at.
I mean you can get into velocity and it's kind of a mix issue when you think about the growth we have seen in the fourth quarter in colo and grains. Those are little bit slower speed services than the other.
So there's a little bit of mix there but we keep our eye on it. We make sure we're looking at payable days per load and other measures that we're still being very efficient and when we need to bring back resources we absolutely will.
Scott Group
Okay. Thank you.
If I can just ask one, last one for Frank on CapEx. So I think the $2.2 billion in my model is closer to 19% of revenue.
I thought you said 16% or 17% of revenue. I guess I'm just surprised that it's not coming down more, if you I think 2016 you had $300 million of catch-up from 2015 and then you pulled forward $300 million from 2017 into 2016.
So I would have thought it would have been down, I know $800 million or $900 million but maybe I'm missing something there?
Frank Lonegro
Yes so when we calculate the percentage of revenue and we give you that guidance, we do what we call it core basis. In other words the PTC expense or the PTC CapEx is an overlay because at some point in time it's going to go way and it's really going to be just part of the -- the replacement cycle that we have on our assets.
In terms of the year-over-year, you're right there was about $600 million in the $2.7 billion for 2016 which was locomotive specific, some of that was deferred from 2015 and some of that was foregoing with seller financing to push it into 2017. So you do have that impact.
And I think the biggest driver that you have there is really looking at the inflection of the strategic investment towards the CSX of Tomorrow and that's where you're seeing in on a categorical basis anyway the increase we are being very judicious in terms of how we're investing in the infrastructure. We're looking very hard at equipment and obviously the longer we can go without buying new locomotives based on all the work you have been doing and all the locomotives that we have taken delivery up in the last couple of years should help us down that path.
But you are going to see us on a sustained basis through this planning cycle, make sure that we are transforming this company and transforming the network into what we need long-term.
Operator
Thank you. Your next question comes from Jason Seidl with Cowen & Company.
You may ask your question.
Michael Ward
Good morning, Jay.
Jason Seidl
Thank you. Good morning, guys.
I want to focus the first question here on the CSX of Tomorrow and talk about headcount a little bit. Now your headcount has come down drastically, and I don't want to underplay the real-life impacts that has on some people, but looking out, as you guys have adjusted your network and as new technologies come into play, where do you see the headcount going on the railroad?
Cindy Sanborn
I think this is a great question and when we think about some of the structural changes that we've made in train length and in the investments that we're making in sidings on the route from Chicago to Jacksonville allow us to further enhance those efficiencies and reduced headcount. Another big piece of it the CSX of Tomorrow with the highly automated railroad components around technology deployment.
And when I think about that, there are several ways to break that down into predictive analytics which makes us more reliable and more efficient with repairs that we need to make. Automated inspections even machine vision we have some of that deployed in our intermodal business now and looking in some other areas where we can deploy that.
And then also when I think about mobility and being able to interact in a more for employees interact globally as opposed to having be to fixed location as well as our customers being able to benefit from mobility technology. So those investments as we make them and they come in, we should see additional reductions in headcount while still maintaining safety and service to our customers.
Frank Lonegro
Jason one other piece of color, I will give you on that, it's Frank is within the guidance that we gave you on headcount, so for example, down slightly on a sequential basis, you would actually if you look at the details, see some uptick in technology hiring as we do things necessary to support highly automated railroad down the road.
Jason Seidl
Okay guys. That's great color.
I guess the next one is going to probably bump back to Fredrik, let me ask this a different way. I know you guys aren't going to forecast pricing but given what you know about the current market and sort of the outlook for truck competition, which I think everyone just assumes will naturally tighten as we get closer to the LD mandate, would you be surprised to see CSX pricing below rail inflation anytime this year?
Fredrik Eliasson
Yes we try to stay away from pinpointing exactly rail inflation because first of all rail has been very low over the last couple of years. So clearly, we like to be above that.
We think long-term; we have a lot of inflationary pressures that doesn't seem to be working out consistent with what the rail inflation numbers is. We have set 3%, 3.5% is what our rail inflation has been and probably will continue to be depending on what happens with the labor negotiations but hopefully will be lower as we move forward.
But overall, I think the key thing for us is to make sure that we continue to deliver excellent service to our customers, provide innovative solutions, and find a sweet spot where we can also reinvest in the business. And I think you know that pricing is a key value driver for us and it will continue to be as we move forward and where that's going to fall out is depending on where the economy is, where the capacity utilization is we will get, we have to price the market and the market changes from time to time.
And as you can see our pricing and if the market tightens that give us an opportunity to capitalize on that as we move forward.
Jason Seidl
Well, I tried; can't blame me. Guys, I appreciate the time, as always.
Michael Ward
Good try, Jason.
Operator
Thanks. Your next question comes from Cherilyn Radbourne with TD Securities.
You may ask your question.
Michael Ward
Good morning, Cherilyn.
Cherilyn Radbourne
Thanks very much and good morning. So productivity clearly a highlight of 2016, can you talk about how much of the $430 million was structural and give us some color on where you manage to find opportunities to exceed the target that was updated as recently as Q3?
Cindy Sanborn
Good morning, Cherilyn. Thanks.
Yes so when you look at 2016, think of productivity of the $430 million and above in two -- in three buckets. The first bucket about $100 million was structural that was primarily in the coalfields but we did also find some structural changes we can make in our merchandise areas.
Then when I look at the next bucket of about $150 million, it was in train length and being able to be more efficient it's structural in nature, but to be able to be more efficient with train size and other initiatives along those lines. And then the last $150 million, if you will, would be about relative to traditional productivity and initiative based type actions that we're going to take including technology and other enhancements and probably that's a little bit higher than $150 million to get to the $430 million.
You asked a question about the fourth quarter, specifically. Could you re-ask that one again to make sure I got that right?
Cherilyn Radbourne
Well if I memory serves, the productivity target as of Q3 was $400 million, so to finish up with $430 million is kind of nice performance relative to that most recent targets.
Cindy Sanborn
Yes I think there as we were coming into fourth quarter, we actually were able to enjoy some volume that we did not have to replace one for one on in terms of any resources, we did actually pull out some locomotives out of storage in the fourth quarter but the volume helped us be able to continue to perform with productivity.
Cherilyn Radbourne
Great. And then just a quick one on the revenue side.
I'd be curious about your thoughts on the new shipping alliances due to start up this spring. Does that impact visibility on the international intermodal side at all?
Fredrik Eliasson
We obviously follow very closely what is going on right now in the steamship line business, it is -- it is a very difficult time the lot of realignment. We do have our customers that we are aligned to very fortunate that most of them are very strong.
But we will see how this plays out there is additional rumors out there, but it's variety of different potential transactions and as they fold out -- as they're developing we will have a better sense of what the impact is on CSX.
Operator
Thanks. Your next question comes from David Vernon with Bernstein.
You may ask your question.
David Vernon
Hey, good morning everybody. Thanks for taking the time.
First question is around the moderation or deceleration in earnings growth towards the back half, is that just the lapping of some of the productivity in the train length initiatives or is there something else going on there in the cost side that we should be we thinking about?
Frank Lonegro
I think it's simply the costs that we have, when you look at the quarterly EPS from 2016 and you think about how that would normally adjust throughout the year. That's really what we said.
But obviously we're going to give you; we gave you good guidance on Q1. And as we did throughout 2016 given the dynamic environment that we're in, we are going to keep you updated and obviously if we can update those numbers for you as we get through the quarter we will do that.
David Vernon
All right. And then maybe just thinking longer term, obviously, the -- I'm just wondering if you guys are thinking any more optimistically about the possibility of moving from two- to one-man crews in some of the operations.
And if you've done any work to scope out what it would cost to implement that and what some of the benefits could be, or if maybe it's just still too early on the regulatory front.
Michael Ward
Well clearly as you look out technology is evolving David, there is going to be autonomous vehicles out there. There is no question, the only question is when and how much they will be deployed.
And if you think about us putting the Positive Train Control system in place, which we will have in place as required by law. One does have to question why there needs to be two people on the crew when you have that kind of safety overlay in there.
So over time, I think that will be an issue. I don't think it's in the near-term, but longer-term, that's certainly something we're going to have to address.
Frank Lonegro
And David from a model parity think about sort of policy perspective here and you think about the dollars that are being provided into the autonomous vehicle space whether it's governmental or private investment, I mean we're looking for that same concept to prevail as Washington re-looks at policy decisions going forward.
David Vernon
Yes, that's kind of the heart of what I'm trying to get at. When you think about a modal competition standpoint and intermodal, obviously truck price will get a huge benefit from autonomous vehicles.
I'm just wondering if you think you can offset that in the same way or if you think there is some sort of longer-term disadvantage that may accrue from that.
Fredrik Eliasson
I think it's something obviously will have to be negotiated with our Unions that will be a challenge -- challenging negotiation. But I think if you look inevitably as the competition dictates the need to do that and there is a safety overlay called PTC in place, we have to make sure that the public is protected.
I think it's inevitable; it is just a question of when.
Operator
Thanks. Your next question comes from Jeff Kauffman with Aegis Capital.
You may ask your question.
Michael Ward
Good morning, Jeff.
Operator
One moment please and Jeff your line is open. You may ask your question.
Jeff Kauffman
Okay, thanks. Good morning, Mike.
How are you?
Michael Ward
Jeff, thank you.
Jeff Kauffman
Thank you. Congratulations.
A lot of my questions have been asked, so I want to kind of circle back to coal and how that mix is going to move around a little bit. With nat gas up where it is, we are getting a lot closer to Eastern coal being in the money.
I know you mentioned the utility short-haul loss. So when I sort all through it, we've got some met coal that's coming online and that should be more favorable, despite some of the international prices retreating.
Outside of the utility customer loss, it feels like utility coal inventory is coming down, shaping up a little bit, and it feels like there should be a positive mix effect in coal, because you're losing some short-haul business, you're gaining some met. Can you talk about how you're seeing the coal business?
And normally, you guys give an idea of where customer utilities are, so your northern region versus your southern region. Just kind of update us on how to think about the yields in the mix and where the inventory levels are in your service area.
Fredrik Eliasson
Sure Jeff. There's a couple of different questions in your question but let me see if I can address most of them.
So as we -- I've seen here over the last couple of months, the summer months were very hard and allowed for a beginning of drawdown of some very high inventory levels. And as we look at them right now, they are down significantly year-over-year probably slightly above target both in the North and in the South but have made significant progress over the last few months.
So that is helpful. In terms of natural gas prices, you're right we're seeing significantly higher than what we saw last year.
So that's a good thing. We, I think we've said publicly many times that we need about 350 or so for the first half of our portfolio to be in the money that that is being sourced from Illinois Basin and Western Sources and so we're getting, we are pretty close to that and utilities are making rational economic decision on a daily basis in terms of which utilities they are going to dispatch and we're seeing the impact of that year-over-year.
We got off to pretty cold winter in December, it has moderated here the first few weeks in January, but based on the preliminary numbers that we have seen so far this year, we are being dispatched little bit higher than we were last year which I think is a reflection of the natural gas prices. So we do feel much, much better than what we felt going into previous years about our coal businesses, as Michael alluded to close to $2 billion of revenue loss over five-year period.
We do think our domestic business; with the exception of the short-haul loss will be pretty close to flat. Clearly that can change as we go throughout the year, if we have a mild summer that could change to the downside and if we have a hot summer that can certainly change to the upside, which is also one of the reasons why as we think about the second half of the year.
So it's too early right now to give you too much more guidance that we provided. But we are just trying to give you the best guess based on normalized summer.
And then on the export side, we are, I have seen an incredible uptick here over the last six months, the forward curve is pretty clear that indicates that things will come back down as we move through the second quarter and into the second half and the spot market has already reflected that versus the very high benchmark that we saw. But there is no doubt that the coal business is in a much different place as we enter into 2017 than it has been the previous couple of years.
Jeff Kauffman
Okay, and just one follow-up and I'm done, because I know we're running over. On the yield side, could you help us think about how to look at or think about modeling yields given some of the mix changes going on in your coal base?
Fredrik Eliasson
Yes I think that as you said the short-haul business will obviously help RPU as we go in to 2017. The fact that we don't have that anymore.
We did have some pretty significant uptick in the yield there in the fourth quarter. Part of that is the fact that there was some sourcing changes that actually added to the length of haul and also the fact that some of the utilities started to rebuild inventories a little bit more aggressively than they've done before.
While on average, they're above there are certain utilities that needed additional coal and that helps the yields as well. And then on the export coal side, clearly as we've said when the benchmark is high, that helps our RPU but as we go through the year it is not impossible that that help will go the other way and will actually RPU as we move through the year.
But that really depends on where the benchmark ultimately ends up.
Operator
Thanks. Your next question comes from Scott Schneeberger with Oppenheimer.
You may ask your question.
Michael Ward
Good morning.
Scott Schneeberger
Thanks; good morning. In the chemicals segment, could you please discuss the expected drivers of non-energy growth in 2017?
And then also the potential for growth in crude volumes and how you think about the cadence of growth in the segment over this coming year? Thanks.
Fredrik Eliasson
Sure. So the good markets to begin with that piece which isn't our chemical business, we have seen a nice run up and now a nice run down and we are at the point now, we are running into fourth quarter less than a train a day of crude-by-rail.
So it's going down significantly and as we it's hard to predict what is going to be in 2017 but it's also very difficult to see that it's actually going to move up meaning that if anything I think the bias is towards less crude based on where we see the crude prices and the spreads. If we look at the non-crude piece of our core so to speak, our core chemical business, I think we continue to see that industry doing very well based on the feedstock advantage that they have versus the rest of the world.
So lot of investments have been made over the last couple of years and from our perspective we expect slow modest growth in that space as we move through 2017 and may be 1% or 2% I think is the official forecast. And then the other piece that we of course have is the input side to the energy side, the frac span and LPG and that also depends a little bit on where natural gas prices will be, if they stay strong that usually leads to additional input, if they go down that also could put pressure on that.
But as we said right now we seem to be in a little different place than we would be in the last couple of years.
Scott Schneeberger
Thanks very much. And then real quick, Cindy, with regard to the products or the efficiency savings, how should we think about the cadence for the year?
Consistent with the EPS cadence or maybe something different? Thanks.
Cindy Sanborn
It will be fairly ratable across the whole quarters, it won't be any one, any one quarter or any one area or time that you will see higher.
Operator
Thanks. Your next question comes from Justin Long with Stephens.
You may ask your question.
Michael Ward
Good morning, Justin.
Justin Long
Thanks, good morning. So I wanted to ask about export coal first.
Could you give some more color on the split between contracted volumes and spot volumes that you're assuming within that full-year tonnage guidance? And in addition, could you talk about the split you expect between met and thermal?
Fredrik Eliasson
Sure. Essentially because of the volatility in the marketplace over the last couple of years, everything is spot.
There is a few pieces of business that is on more than a quarterly basis, so it could be up to annual basis but essentially all of it is quarterly. So when we give you that guidance it's best in our best case based on what the customers are telling us and the visibility that they have and we obviously triangulate that with some other sources.
In terms of the split traditionally it has been around 70:30 in favor of met over the last couple of years to fourth quarter, we did have some opportunities to move some thermal into Europe because of nuclear shutdowns in France specifically that was very helpful. We'll see how much vibrancy we haven't in 2017 but the split came to 60:40 in the fourth quarter and as we but as a the best prediction right now, I would probably say it's close to that 70:30 as we think about 2017.
Justin Long
Okay, great. That's helpful.
And secondly, I was curious if you could comment on how much of your book of business for 2017 is already repriced at this point. And I know you don't give specific guidance on pricing, but just to get a sense for your high-level directional thought, given the visibility you have, does it feel like the pricing environment has likely hit the bottom and the rate of increases should improve over the course of the year?
I think earlier you referenced the second half potentially being a bit stronger.
Fredrik Eliasson
Sure, let me just tell you on an average, we probably have about a third of our book of business that we can touch. If you think about auto intermodal to generally three to five years coal and exports are obviously, we set a spot but the utility side, two to four years something like that.
And then on the merchandise business probably little bit over half and annual and the rest are two to three year contracts, generally. So that gives you about a third of the business that you can touch each and every year.
The significant portion of that is either coming up at the beginning of the year or the mid part of the year and with the majority of that coming in the beginning of the year or I guess the end of the year technically. And so we've done a fair amount of that third already.
And as I said I'm not going to get into specific details on it, but we're going to continue to price to the market and we alluded to before, we think that the truck market will get into better place as we move through the year for the right of fact, if you mentioned earlier driver wages should have a pretty significant pressure on it. We do think that the ELD mandate will have an impact as we get through the second half and we also think the economy is going to grow new construction or new build of trucks is down, I think about 35% to 40% year-over-year.
So that is also helpful in terms of the fleet itself and then so absolutely throughout the year we hope that after having been a little bit of tougher period here for the last 18 months or so, that will get to better place.
Operator
Thank you. Your next question comes from Walter Spracklin with RBC.
You may ask your question.
Walter Spracklin
Hi, thanks very much. Two quick questions, both for Cindy here.
One on CapEx. I know, Cindy, you talked about the evolving mix change in your CapEx, where it's coming down, yes, but it's also -- the constitution of that CapEx is changing significantly as you convert some of your PTC and perhaps some of your coal spend into new technology.
You alluded to a few predictive analytics, mechanical division and so on. My question is how soon could we see the benefit of those?
And if you were to rank a couple that are expected to bring in the highest return, what would they be in and, again, how quickly could you see that impact your earnings in the next few years?
Cindy Sanborn
I think, Walter I think when we look at these investments and particularly the one around longer sidings for longer trains. It's going to be 2018 before we really see that.
So that is the long route that we need to re-sequence how we operate it based on longer trains in either sighting extensions or actual additional sightings. So that's a pretty good one that we see upcoming.
On the technology side, there's investments we're making now for this year that we'll see the benefits that are already in our plan are part of our -- our initiatives that we -- that we have in 2017. And of course we're building a longer and more broader sheet of longer-term benefits that we have to build core infrastructure processes within the technology space to then build on and layer on additional opportunity.
So and it is across the board, both from a customer facing piece as well the productivity piece and I cannot underemphasize overemphasize safety and not this is all helping us to be a safer railroad. So that's probably that the best color I can give you, Walter.
Walter Spracklin
And would you characterize any of these investments as purely CSX developed are these kind of supplier things that suppliers are brought into you as opportunities that might be available to your competitors as well.
Cindy Sanborn
I think it's a mix when I look at, for example in fuel, when I look at fuel management technology which is supplier driven, it certainly open to the rest of the industry. We've implemented that and are continuing to see benefits from that.
And then there's other technology that will be in-house that are part of our own core systems that will help us be more efficient, that will be more CSX centric so difficult to put a split on that , but it is -- it is a mix.
Walter Spracklin
Okay. And then my last question here is on capacity, certainly you have been growing your revenue well in excess of your growth in expenses and part of that productivity certainly some of it may be some use of available capacity.
If you look at the capacity in general on your network I guess the question comes, how much more growth, can you achieve where expenses will lag that growth before you get to the level where really the expenses catch-up, is there, is there any sense you have of that run rate of growth ahead of you that can comment that obviously expanding margins before you run into some capacity constraints.
Cindy Sanborn
Walter if I say when you think about on a carload basis and our scheduled network, we have plenty of room to grow, particularly between Chicago in the northeast in the Northeast and Florida. A little bit of a cha -- more challenge because of the siding impacts or siding constraints between Chicago and Florida although I will tell you that our variable training schedule concept when we built the longer -- larger train by running changing from a 24-hour dispatch to a 28-hour dispatch.
We can now go back to 24-hour dispatch and at a train a week as opposed to a train a day as we run against additional volume. So there are great levers on that side that we can pull, no matter what route we would use.
On the unit train side, there would be more that we would have to bring on to support the unit train growth but those are very favorable margins that we would -- that you would want us to do and so it's a bit of a mix based on how traffic comes on. But I feel really comfortable with looking out into 2017 and thinking about volume growth again that we will be able to be very, very efficient with our resource intensity to support volume.
Operator
Thank you. And your next question comes from Brian Konigsberg with Vertical Research Partners.
You may ask your question.
Michael Ward
Good morning Brian.
Brian Konigsberg
Yes, hi guys, good morning, thanks for taking the question. I know this is running long here so just a couple quick ones.
Just on -- so on intermodal, maybe can you just give us an update and characterize the level of competition you're seeing? Obviously, it's been a tough 12 to 18 months there.
With the prospect of firming conditions, at the margin at least and perhaps getting even better later in the year, has the competitive dynamic softened a little bit or is it still very tough out there?
Fredrik Eliasson
Yes so, I would say that in the fourth quarter, we did see the spot market tighten a little bit, certainly not where it needs to be, but we did see a little bit of a reversal there from the previous few quarters and that's an encouraging sign. I don't think that you're going to get to a significantly better place until you get into that second half of 2017 and probably into 2018.
Now having said that, we've been able to grow our domestic intermodal business for over a decade about 7% clip each and every year. Last year was a little bit lower than that, partly because of the market, but also because of the competitive loss.
As we think about 2017, I think we're comfortable to say that we're going to return to that kind of 5% to 10% domestic intermodal growth despite the fact that the environment is a little bit more challenged and we would like to see long-term and I think as a testament to the investments we made, the service improvements that Cindy and team has done new terminals opening up continue to work with alignment with some of our channel partners, and so we feel pretty good about where domestic intermodal businesses going into 2017 as well.
Brian Konigsberg
Great. That's helpful.
And secondly just coming back to the commentary about labor costs and the majority of the inflation related specifically to health and welfare may be this is a little bit hard to answer, but obviously there is a lot of debate right now with the Affordable Care Act. If that does in fact get adjusted could that have potential impacts on the outlook for inflation or is that not applicable.
Frank Lonegro
In our context it's not applicable, given the way that our industry, industry trust is set up to handle health and welfare claims from the Union employees.
Brian Konigsberg
Understood, great. And if I -- one last quick one.
Are there any potential property gains that we could expect in 2017?
Frank Lonegro
We always have real estate owned market. Nothing that would compare to the last two years, one was an operating property gain this year and non-operating property gain last year.
We try to provide visibility to the bigger ones. There is always going to be a little bit here there that we have on the market and happens.
But we will certainly keep you posted, if we have anything big.
Operator
Thank you. Our final question comes from Donald Broughton with Avondale Partners.
You may ask your question.
Michael Ward
Good morning.
Donald Broughton
Good morning, good morning gentlemen. Let me ask the CapEx question a completely different way.
Help me think about how you strategically think about the ebb and flow of CapEx. I mean, in my mind, isn't it in the long term strategically isn't it long term cheaper to spend more money on CapEx during periods of lighter or less traffic?
And isn't it -- doesn't a more well-invested, better maintained infrastructure make achieving a lower OR on a sustained basis more achievable? And if so, why aren't you taking the current lull in demand as an opportunity to increase CapEx instead of decelerating it?
Frank Lonegro
Well let me try to tackle the question in a couple of different ways. In terms of the CapEx that's deployed in any given year, the amount of work associated with that CapEx can change depending on how much volume is on the railroad.
When you look at 2015 and 2016, we got a lot of work done for the money that we had especially on the infrastructure side. In addition to the volume levels, all the work that we did on train length and reducing the number of active trains that we had out there gives our engineering forces the ability to get more work done.
We saw some good work by procurement department and really looking at how they can leverage lower cost environment that drives CapEx savings on the materials which again allows us to get more work done. So beneath the coverage there, there actually is a recipe that is really aligned with what you're talking about.
On the equipment side of the house, it really is going to depend on what types of traffic we have, what are our storage levels on equipment and both on the locomotive side and the freight car side. But what you're seeing us do is really strategically invest to transform the company and the network and the service products much more aligned with revenue portfolio that we expect in the future, which is very different than the revenue portfolio we've had for the last 10 years.
Michael Ward
And Donald we don't dramatically disagree with your theory, if you look back to the recession of 2008 and 2009, we kept our capital spend up during that period for the very reason as you have noted which is not defer maintenance, it is continue to maintain and be ready for upswings. So I think theoretically you have a valid point there.
Donald Broughton
So if maybe sure I heard what you just said, I think I just heard you say yes you're right to a certain degree, you have already done that over the last year or so.
Michael Ward
We have had a very consistent capital program especially during downturns, which is a change in the past many times when there is a downturn, you would cut back on your capital, we don't think that's the right thing to do. We think maintaining a pace, both in good times and bad times allows us to better utilize deploy the capital or see we are changing some of our orientation towards more strategic now to try to improve the return on assets.
But theoretically we try to keep a fairly constant 16% to 17% of our revenues as a measure.
Michael Ward
Thanks everyone. We appreciate your attention.
We will see you next quarter.
Operator
This concludes today's teleconference. Thank you for your participation in today's call.
You may disconnect your lines.