Jan 25, 2017
Executives
Katie Cook – Director-Investor Relations James Squires – Chairman, President, and Chief Executive Officer Alan Shaw – Chief Marketing Officer Michael Wheeler – Chief Operating Officer Marta Stewart – Chief Financial Officer
Analysts
Chris Wetherbee – Citi Investment Research Amit Malhotra – Deutsche Bank Danny Schuster – Credit Suisse Ravi Shanker – Morgan Stanley Bascome Majors – The Susquehanna Financial Group Ken Hoexter – Bank of America Merrill Lynch Brian Ossenbeck – JPMorgan Thomas Wadewitz – UBS Securities Scott Group – Wolfe Research Brandon Oglenski – Barclays Capital Justin Long – Stephens Jason Seidl – Cowen Securities Ben Hartford – Robert W Baird David Vernon – Sanford Bernstein Cherilyn Radbourne – TD Securities Walter Spracklin – RBC Capital Markets Scott Schneeberger – Oppenheimer Jeff Kauffman – Aegis Capital Rick Paterson – Loop Capital Brian Konigsberg – Vertical Research
Operator
Greetings. And welcome to the Norfolk Southern Corporation Fourth Quarter 2016 Earnings Call.
At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Cook, Director of Investor Relations.
Thank you, Ms. Cook.
You may begin.
Katie Cook
Thank you, Devon and good morning. Before we begin today's call, I would like to mention a few items.
The slides of the presenters are available on our website at norfolksouthern.com in the Investor section, along with our non-GAAP reconciliations. Additionally, transcripts and downloads of today's call will be posted on our website.
During this call, we may make certain forward-looking statements which are subject to a number of risks and uncertainties and may differ materially from our actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important.
Now, it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.
James Squires
Good morning, everyone, and welcome to Norfolk Southern's fourth quarter 2016 earnings call. With me today are NS's Chief Marketing Officer, Alan Shaw; and our Chief Operating Officer, Mike Wheeler; and our Chief Financial Officer, Marta Stewart.
Our results summarized on slide four, are a testament to the dedication of our employees. In 2016 their efforts were instrumental in the achievement of a record operating ratio for Norfolk Southern, as well as in meeting and exceeding our other financial and operational goals even in a tough economic climate.
We have stayed focused on our core mission of safety, service and productivity while also driving positive changes throughout our organization. The significant progress we achieved in 2016 will power Norfolk Southern's success in delivering shareholder value both in the near and the long-term.
For the fourth quarter, our discipline cost focus and successful initiatives to enhance efficiency, drove a 69.4 operating ratio, yielding a 510 basis point or 7% improvement compared to the fourth quarter of 2015. Even if you exclude last year's restructuring costs, the operating ratio improved by 310 basis points.
Earnings per share for the quarter increased to $1.42, up 18% compared to the prior year period, as operating expenses came in 8% lower relative to a 1% decline in revenue. For the full year, we achieved a record 68.9 operating ratio, which was 370 basis points or 5% better than 2015.
Earnings per share increased 10% to $5.62. In recognition of these results as well as the confidence we have in our strategy, the Board approved a $0.02 per share, or 3% dividend increase effective with our first quarter 2017 dividend payment.
Slide five highlights the important components of our success in 2016. Our measure of network performance, the composite service metric increased to above 80 for the year versus 72 in 2015.
We achieve this improved performance while accomplishing strategic network and organizational changes, such as the line and yard rationalizations that Mike described on our last call, as well as divisional and regional consolidations, the reorganization of our Pocahontas Land Corporation subsidiary and proactive management of capital spending. Asset utilization improved as we rationalized our locomotive fleet, improve the efficiency of our freight cars and increased utilization of other roadway assets.
Simultaneously, we reduced our average employee count for the year by 7%, exceeding the 3% decline in carloads, and we also reduced overtime by 38%. In total, these initiatives generated 250 million of productivity savings for the year.
We continue to invest in the health of the railroad, adapting to the economic environment by judiciously investing $1.9 billion in capital, well below our initial $2.1 billion plan. Over year-ago, we anticipated that Norfolk Southern would achieve a sub 70 operating ratio for 2016 and our team delivered, producing a record 68.9 OR.
Likewise, we are committed to delivering on our longer-term targets and I'll update you on our strategic plan after Alan, Mike and Marta fill you in on the fourth quarter results. Alan?
Alan Shaw
Thank you, Jim. And good morning, everyone.
Thank you for joining us today. On slide seven, I’ll begin with an overview of our fourth quarter.
Revenue of $2.5 billion was down 1% versus fourth quarter 2015. Due to strong intermodal growth our year-over-year grew for the first time this year in the fourth quarter.
Both intermodal and coal revenue and volume increased sequentially over the third quarter. The Triple Crown restructuring continue to impact year-over-year comparisons, though to a lesser extent in the fourth quarter, an increase in export coal tonnage, softens the decline in coal volume and revenue.
The utility volumes were negatively impacted by continued high stockpile levels. Merchandise revenue was affected by the ongoing decline of crude oil volume.
Overall revenue per unit declined 3% in the fourth quarter as positive pricing was offset by mix associated with increased intermodal and decreased coal volume. Revenue per unit, excluding fuel, increased for both merchandise and intermodal, excluding Triple Crown.
Our merchandise revenue on slide eight declined 1% to $1.5 billion as a result of a 3% decline in volume. Metals and construction volume benefited from increased steel shipments.
Agriculture shipments grew due to increase soybean export and corn volumes. Declines in our chemicals market were driven by lower crude oil volume.
Automotive volume was negatively impacted by the previously announced market share loss and flat year-over-year U.S. vehicle production in the fourth quarter.
Paper and forest products volumes decline as a result of increased truck competition. Merchandise revenue per unit increased 2%, excluding fuel, reflecting some pricing games.
Intermodal revenue as shown on slide nine increased 4% versus last year to $583 million, with a 7% increase in volume. Excluding the impact of the Triple Crown restructuring, intermodal volume and revenue were both up 10%.
Improved service and increase consumer spending resulted in a 10% increase in our domestic intermodal volume versus a soft fourth quarter 2015. Market share gains, an increase import, and export shipments via East Coast ports drove an 8% increase in international volume.
Despite rate pressure from the trucking industry, intermodal revenue per unit excluding Triple Crown and fuel increased 1% in the fourth quarter. Coal revenues declined 7% to $403 million in the fourth quarter with an overall 4% volume decline versus last year.
Coal, revenue and volume increase sequentially for the second quarter in a row, primarily driven by fourth quarter export gains. We handle 16.9 million utility tons in the fourth quarter inline with our recent guidance of slightly below 17 million tons, but 10% below fourth quarter 2015 volumes, due to continued stockpile overhang from the mild 2015 to 2016 winter.
We handled 4.7 million export tons in the fourth quarter, as demand for U.S. coals improved a mid tightening international supply and greatly increased seaborne pricing.
Coal revenue per unit, excluding fuel, declined 2% in the fourth quarter compared to the prior year with positive price improvement offset by negative mix related to reduced volume to our longer haul southern utilities and increased export volume via Baltimore. Revenue per unit was up sequentially versus the third quarter.
On slide 11, our full year 2016 revenue of $9.9 billion was 6% -- was down 6% versus the prior year with a 3% decline in volume and a 3% decrease in revenue per unit. Utility coal volume and revenue decreased sharply due to the impacts of mild winter weather in late 2015 and early 2016, and low natural gas prices which contributed to the buildup of stockpiles.
These factors, coupled with global oversupply and weak seaborne coal prices in the export market led to an 18% decline in coal revenue. Fuel surcharge losses of $241 million were driven by the depressed oil prices.
Quarterly declines lessen sequentially throughout the year as we left higher oil prices in 2015. And we anticipate that the recent rise in oil and diesel prices will lead to increased fuel surcharge revenues in 2017.
The mid-November 2015 restructuring of our Triple Crown subsidiary also reduced revenue while improving our efficiency and productivity. Our 2016 pricing gains were offset by the negative mix impact of decreased coal volume and increased international intermodal volume producing a 1% decline in revenue per unit less fuel.
Overall, 2016 was challenging for many of the markets we served with freight energy prices, weaker than anticipated economic growth, elevated inventory levels and increased truck capacity, all impacting our top-line performance. Although we saw stabilization as the second-half progressed leading to volume growth in the fourth quarter.
Recent improvements in manufacturing and consumer spending, as well as overall expectations for a stronger 2017 economic environment provide upside potential for the year ahead. Within intermodal, a strong service product will continue to enable highway conversions and drive organic growth.
We expect intermodal volumes and RPU to benefit from tightening capacity within the trucking market due to improved demand and increased regulation, particularly, later in the year. We expect weather related normalization within utility coal as well as the market share gain to generate between 17 million and 19 million tons of utility coal per quarter in 2017.
Our guidance is contingent upon normal weather conditions and natural gas prices consistent with the current forward curve. Export coal tonnage growth will be driven by tightening international coal supply and improved seaborne pricing, which should support incremental production.
We expect to handle 3.5 million to 4.5 million export tons on a quarterly basis with a significant amount of volatility as evidenced by the benchmark price. Merchandise volume is predicted to be relatively flat in 2017.
Pipeline development will negatively impact crude oil, natural gas liquids shipments. Automotive volume will be affected by extended retooling efforts at several NS served assembly plants and an expected 3% decline in U.S.
vehicle production in 2017. Improving construction activity will benefit lumber, steel, cement and other housing related commodities.
As in 2016, we will focus intensely on our pricing efforts. A solid pricing improvement seen over the past year will benefit our 2017 revenue.
We are confident in our ability to leverage the value of our service product to attain pricing in excess of rail inflation. We are well-positioned for growth and have the flexibility to align resources and service capabilities with demand.
We are steadfast in our commitment to meet evolving customer expectations which supports long-term growth and shareholder value. I will now turn the presentation over to Mike for discussion of our operational performance.
Michael Wheeler
Thank you, Alan. And good morning to our listeners.
Our charge for 2016 was to provide a high level service product and aggressively pursue cost-cutting initiatives to drive productivity and efficiency. We accomplish this is evidenced by 2016 being the first year on record that we had both a service composite above 80 and an operating ratio below 70.
And we believe we are well-positioned to leverage this momentum in 2017. As shown on slide 14, there were significant milestones achieved in 2016 that were key drivers of our success.
The efforts towards driving fuel efficiency, train length and locomotive productivity all helped to drive a record operating ratio. We accomplished this, thanks to the hard work of our employees in executing our strategic plan.
Moving to Safety on slide 15, while our entry ratio slightly increased in 2016, as compared to last year, our train accident rate improved 19% and as previously noted 2016 was our best year since the Conrail consolidation, even more encouraging, this improvement was across the board in transportation, engineering and mechanical. Turning to Service on slide 16.
You see, we continued to execute at a very high level as evidenced by our service composite, train speed and terminal dwell while dwell was higher in the fourth quarter as compared to the same period last year. This was a result of an extended holiday shutdown due to the majority of our customers observing December 26 as a holiday.
This allowed us to control costs without affecting customer service, which was a charge we successfully executed on for the entire year. Now on slide 17, our productivity initiatives coupled with our ability to keep the railroad operating at a high level continued to result in significant productivity savings.
For the fourth quarter, as compared to the same period last year, we achieved a reduction in crew starts even with an increase in volume, which was driven in part by leveraging the capacity on our current trains. We also continued to improve on our overtime and train length although recruits were affected by an earlier start to winter weather.
Together this resulted in continued improvement in employee productivity. For the full year 2016, we achieved our highest average train length on record which also aided a record fuel efficiency.
Even with this continuous improvement in train length, our velocity has been roughly as high as our record levels of 2012 and 2013. In all, we had a very successful year and we are confident in our ability to continue this momentum in 2017.
I now will turn it over to Marta to cover the financials.
Marta Stewart
Thank you, Mike and good morning everyone. The fourth quarter results demonstrated our continued efforts on cost control and execution of strategic initiatives.
Let’s take a look at the financial details, starting with operating results on slide 19. While revenues were down slightly, operating expenses declined by $147 million or 8%, resulting in a 69.4 operating ratio for the quarter, a 510-basis-point-improvement over last year's fourth quarter.
As you’ll recall, the 2015 quarter included $49 million of restructuring costs, which added 200 basis points to OI. Slide 20 shows the expense reductions by income statement line-item, marking the fourth consecutive quarter of year-over-year reductions in overall operating expenses.
Now let’s take a closer look at the components. Slide 21 depicts Purchase, Services and Rents which was down $41 million, or 9% year-over-year.
The largest reduction was attributable to $21 million in the lower Triple Crown costs associated with the curtailment of those operations in the fourth quarter of 2015. Next were $12 million of lower Transportation and Engineering related purchase service cost.
Finally, Equipment rents decreased by $3 million, notwithstanding the 2% increase in traffic volume. Slide 22 highlights the major drivers of the variance in compensation and benefits, which overall declined by $40 million or 6%.
Reduced employment levels down over 2300 employees versus 2015, along with lower overtime resulted in $42 million of year-over-year savings. In addition, we lapped the lump sum payment of $13 million and $10 million of lower pension expense.
These items were partially offset by increases in public accruals of $21 million, wage inflation $16 million and Health and Welfare rate increases of $12 million. The bonus variance was due to the fact that we had reversals of accruals in last year's fourth quarter.
The wage and health and welfare inflationary increases were similar to the run rates experienced in the third quarter. As we look to 2017, we expect that total headcount will remain steady despite the anticipated increases in volumes that Alan described.
However, higher health and welfare rates, particularly in our unionized programs, will result in approximately $65 million of additional expense and as a result, we expect all-in wage and medical cost inflation of about 5% versus the 3.5% we guided to and experienced in 2016. Slide 23 details our materials and other category, which decreased $38 million or 15%.
Lower usage of locomotive and engineering materials totaled $16 million and travel costs were down by $6 million. Next is fuel expense as shown on slide 24.
Mike described how we improved fuel efficiency and you can see that consumption declined by 6% despite the 2% increase in traffic volume. The improvement in efficiency completely offset the 8% increase in diesel fuel price versus the fourth quarter of 2015.
Moving onto income taxes on slide 25, the effective rate for the quarter was 35.1% versus 31.1% in the fourth quarter of 2015. The effective rate was slightly below the forecasted 36% due to the effects of stock-based compensation.
For 2017, we expect an effective income tax rate of approximately 37%. Summarizing our fourth quarter earnings on slide 26.
Net income was $416 million, up 15% versus 2015 and diluted earnings per share were $1.42, up 18%. Restructuring costs affected 2015's net income by $31 million and EPS by $0.10.
Full-year results are shown on slide 27. While revenues were 6% lower than 2015, our focus on cost control and improving asset utilization allowed us to lower expenses by 11%.
The resulting income from railway operations of $3.1 billion was a 7% improvement, and as Jim noted, led to a record full year operating ratio of 68.9. Earnings per share were $5.62, an increase of 10% over the prior year.
Slide 28 depicts our full-year cash flows. Cash from operations totaled $3 billion, amply covering capital spending and generating $1.1 billion in free cash flow.
Returns to shareholders in 2016 totaled $1.5 billion through $700 million of dividends and $800 million in share repurchases. As Jim noted, our Board of Directors increased the quarterly dividend to $0.61 a share, a 3% increase.
On stock repurchases, we plan currently to continue at about a $200 million per-quarter run rate in 2017. Moving on to this year's capital budget on slide 29, we project total spending of $1.9 billion, roughly even with 2016.
This budget is supportive of the growth areas Alan described while continuing to invest in our core assets. We have expansions planned at various terminals and infrastructure targeted at increasing capacity on our network to provide high service levels to support long-term growth.
As you can see from the chart on the slide, the majority of our spending is on roadway and while at a dollar amount similar to the past few years, those dollars are stretching further in terms of units due to efficiency in our engineering forces. Locomotive capital includes new units, as well as the conversion of locomotives from DC to AC power.
Thanks for your attention and I'll turn the program back to Jim.
James Squires
Now, as promised, an update on our five-year strategic plan, which I conveyed in detail on last January's earnings call. You will recognize slide 31, which is the summary page of financial targets that I shared with you at that time.
The employees of Norfolk Southern more than delivered on the 2016 targets. Additionally, we are on track to reach our 2020 targets, including pricing above rail inflation, a sub-65% operating ratio and double-digit compound annual growth in earnings per share.
2016 demonstrated our flexibility as we adapted our approach to capital spending to the evolving business environment. The same proactive approach will allow us to manage our capital spending to 17% of revenue, post the 2018 positive train control installation.
Throughout, we will return significant capital to our shareholders by targeting a 33% dividend payout ratio, and will continue to imply share repurchases as a significant component of our capital allocation strategy. Our management's adaptability illustrated by our capital program applies to all aspects of the railroad.
Volumes for NS and the industry did not develop for 2016 as expected, particularly in the energy markets. As a result, we were swift in taking actions to streamline operations and enhance service, bolstering our productivity and supporting growth in certain opportune markets.
With this nimbleness and strong momentum, we are well-positioned to guide Norfolk Southern into the future. So with that in mind, I'll update you on key aspects of our long-range plan.
Slide 33 highlights our expectations for each of our major revenue groups. Overall merchandise is anticipated to track the economy generally in line with GDP.
The forecast for intermodal growth is about 4% on a compound annual basis as our strong service product positions us for growth. Coal is projected to increase in 2017 from our 2016 base as inventories and weather normalize, coupled with higher natural gas prices.
It is then expected to decrease slightly from 2017 levels resulting in a modest 1% increase on a compound annual basis over the combined period. Slide 34 highlights some of the strategies that we have in place to support key resource flexibility as volumes develop.
We will continue to proactively manage our workforce to right size our resources as demand evolves. We have established minimum employee levels at certain core locations where it has been more difficult to recruit new hires in the past.
In addition, we have an active hiring model that we are continuing to enhance. On the locomotive side, we continue to invest in the reliability of our fleet.
We will take receipt of 50 new locomotives beginning in late February with the majority of them coming online in March and April. In addition, our DC-AC rebuild program significantly accelerates in 2017.
Now, moving on to slide 35 and expenses, we will build on 2016's productivity initiatives by for example, rationalizing our locomotive fleet by increasing our reliance on AC units. By increasing utilization and efficiency of our freight cars through a more homogeneous and flexible fleet composition and utilizing technology to optimize distribution of MTs, by continuing our line rationalization initiatives and by improving fuel efficiency.
Last year we provided a framework for our overall $650 million five-year plan productivity target, as reflected on slide 36. With $250 million of productivity savings achieved in 2016 and $100 million targeted for 2017, I remain fully confident in our ability to deliver on our longer productivity objectives.
At the beginning of our journey, we designed an approach that would be dynamic and flexible and 2016 certainly put that to the test. Our achievement of $250 million in productivity in 2016, clearly demonstrated that we would take the measures necessary to achieve that goal, creating new pass to savings when needed.
We will apply that same flexibility over the next four years in order to align resources with demand, achieved 650 million in productivity savings, provide quality service and drive shareholder value. Wrapping up on Slide 37, at Norfolk Southern we know that the key to our success is world-class service that brings value to our customers, thereby supporting profitable growth that leverages our improving cost structure, culminating in exceptional returns to our shareholders.
Thank you for your attention, and with that we will now open the line for Q&A.
Operator
Thank you. We’ll now be conducting a question-and-answer session.
[Operator Instructions] Our first question comes from the line of Chris Wetherbee with Citi Investment Research. Please proceed with your question.
Chris Wetherbee
Hey, great. Thanks and good morning.
Wanted to touch base a little bit on the operating ratio as you look out for 2017, so Jim you just kind of ran through some of the productivity opportunities that you see going forward and what you think that you can achieve in 2017. I just want to get a sense of maybe how that translates to an OR.
You made nice progress this year. Should we expect similar type of stair-step progress in 2017 or any color would be helpful?
Michael Wheeler
Good morning, Chris and thank you for your question. Before I answer it, I want to again emphasize how much we appreciate the contributions of our employees in 2016 to our outstanding performance.
We are the efforts of our employees and we certainly recognize that. Now in 2016 we generated a record operating ratio.
This morning, we outlined and reaffirmed our plan to achieve a sub-65 operating ratio by 2020. We expect to make progress toward that goal each year between now and then.
And we expect to produce an operating ratio in 2017 below 2016s operating ratio.
Chris Wetherbee
Okay. So improvement, but necessarily ready to quantify at this point?
Michael Wheeler
Correct.
Chris Wetherbee
Okay. And if I could just ask a follow-up.
Just when I think about, sort of, the competitive environment in the Eastern half of the United States, we've heard over the course of last couple of weeks, a couple of sort of contracts moving back and forth and I think there is some regular jockeying of market share within you know, between railroads and also you know with the trucks. But wonder you get a sense or maybe how you view the competitive dynamic entering 2017?
We haven't had a lot of volume growth. But volume is coming back.
You see this changing or is this sort of normal or is it a little bit more hiked?
Michael Wheeler
Certainly, we operate in a competitive environment so we face modal competition across the spectrum of our volumes. Let me turn it over to Alan for some more specific commentary on the environment today
Alan Shaw
Yeah, Chris I would suggest that the in kind of the share shifted you’ve seen recently are not unusual. Ultimately, our firm goal is to provide a service product that allows us to compete for business and one that our customer’s value which will allow us to continue our efforts to move business from the highway to rail.
As we saw markets stabilize in the second half of the year, we saw growth in the fourth quarter. And we expect that to continue in the 2017.
Chris Wetherbee
Okay. Thanks for the time.
I appreciate it.
Operator
Thank you. Our next question comes from the line of Amit Malhotra with Deutsche Bank.
Please proceed with your question.
Amit Malhotra
Yeah. Thanks so much.
Just had quick question on some of the strategic discussions brewing in the Eastern rails over the last couple of weeks. I know you guys can’t comment, you know, probably directly.
But if you look at what occurred at Canadian Pacific under the previous managed team, there are number of significant inefficiencies taken out of the system. Things like, you know, the number of crew changes on certain routes, reductions in the number of pump yards and terminals.
Just trying to understand you how much of an opportunity that is for Norfolk today, bearing in mind that you have already achieved so much in terms of productivity and whether there is maybe some scope to accelerate any of that to realize your OR targets even sooner? Thanks.
James Squires
Good morning. We don’t comment on market rumors.
We are single-mindedly focused on driving shareholder value through successful execution of our strategic plan, which as you know does include significant additional productivity improvements. We view – having achieved 250 million in productivity in 2016, we've set a goal of 100 million in productivity for 2017.
We believe that number is achievable, realistic and sustainable and will allow us to continue providing an excellent level of customer service. If we discover additional productivity opportunities we will certainly go after them.
Amit Malhotra
Okay. Well, I thought I tried to ask that question anyways, I appreciate the answer.
Let me ask you one maybe, you can answer a little bit more directly as related to your comments about being more dynamic and flexible like. I maybe wrong, but I feel like you're really talking about maybe making the cost structure a little bit more dynamic and flexible, so you can flex down and flex up as volumes change.
First of all, is that correct? And second of all, I guess with that imply that essentially your cost structure is in fact becoming more variable, which may impact you know perspective incremental margins and where do you think those incremental margins could go under this maybe new dynamic and flexible cost structure?
Thank you.
James Squires
We certainly demonstrated our flexibility and adaptability in changing business conditions in 2016 by producing record results despite some headwinds from the economy. And we will continue to adhere to that very flexible and adaptable approach going forward, particularly in our use of our resources.
Let me turn it over to Mike to talk about some of the resource strategies we have in place for 2017 and then maybe Marta can comment on the incremental margin question.
Michael Wheeler
Sure, Jim. Well, we stay in close contact with marketing and they let us know what's going on out the marketplace and on our volumes.
And we are quick to adapt to whether business is going up to make sure we handle that or we’re seeing areas that are that are not coming online like we thought. We're going to take the cost out.
We’re very flexible on that. On the resource side, two big drivers are locomotives.
We continue to look at rationalizing our locomotive fleet. We’ve got a lot of good plans in place.
We still have some search units out there. So we’re comfortable that we can handle any upside as well.
But we continue to look at what we can take out and reduce costs on the locomotive fleet. On the resource side of manpower, we have committed to making sure we protect the train crews to ensure that that we have the service product we need and again going back to our conversations with marketing, we're very flexible on what’s happening with what they are telling us.
On the rest of the railroad, we continue to look at every opportunity where we can take cost out but still protect safety and service.
James Squires
Marta, would you address the question about incremental margin?
Marta Stewart
Yes. Alan described how we expect some growth in 2017.
We do expect to have very good incremental margins on all of that business. As you may know, our incremental margins depend on where, which segment of our business they come in.
All of them, as I said, had good margin. The hierarchy, though, as we had the highest incremental margins on merchandise because those travel largely on existing trends and don't have too many incremental variable cost.
Next is coal and then intermodal as it has the highest proportion variable cost.
Amit Malhotra
But this is it safe to say that on a blended basis at least incremental margin should at least be $0.50 of every incremental revenue dollars you drop to the bottom line. Is that a good number on the blended basis?
Marta Stewart
We haven’t guided to a specific number, but we do expect very good incremental margins on all of our business.
Amit Malhotra
Okay. Great, thanks for taking my question congrats on a good quarter.
Marta Stewart
Thank you.
Operator
Thank you. Our next question comes from the line of Allison Landry with Credit Suisse.
Please proceed with your question.
Danny Schuster
Hi good morning. This is Danny Schuster on for Allison.
Thank you for taking our questions this morning. So we wanted to dig in a little bit to coal.
You know you're now guiding to kind of a Cold growth CAGR of 1% over the next few years with a step up this year and a deceleration thereafter. So we just wanted to get a sense.
Are you – does this kind of imply that you are expecting something like a 4% or 5% step up this year and kind of benefit a decelerate - a decline from there. And then from there we’d love to dig in a little bit to see if we can get a little bit more color on what the split across your different coal businesses are?
Thank you.
James Squires
Sure. Alan provided some specific guidance with respect to our coal volumes as projected in 2017.
Alan, why don’t you go back over that and then provide a little bit of additional commentary.
Alan Shaw
Danny. We talked about utility coal volumes 17 to 19 million tons per quarter for the year dependent upon normalized weather patterns and natural gas prices following the forward curve.
And note that today natural gas prices are about a dollar per million BTU above where they were this time last year. And as you're aware, and from February to May of last year, natural gas was below $2 a million BTU.
So that in and of itself will provide more support for our coal-fired utility customers and would provide year-over-year growth in our coal markets. We've also talked about export coal volumes between 3.5 million to 4.5 million tons quarterly resulting from improved seaborne pricing and demand for US coals.
There's a lot of volatility in that. As you have seen, the benchmark pricing for hard coke and coal shift from $92.50 a metric ton in the third quarter up to $285 a metric ton in the first quarter and then the latest spot price was about $185 a metric ton.
So that is going to be one that we are watching closely and we'll be sure to update our outlook for that on our next call.
Danny Schuster
Okay. Great.
That's very helpful. And then within utility coal, how should we think about the mix between your Southern utility customer base and Northern utility customer base and is there a length-of-haul mix we should be thinking about associated with the growth within that line this year?
Thank you.
Alan Shaw
In the fourth quarter, we saw a somewhat slight mix shift from our Southern utility base to our Northern utility base. We expect that to continue in 2017 as a result of stockpiles generally being lower in the North right now than they are in the South.
Danny Schuster
Okay. So would that infer kind of a negative RPU mix just from that phenomenon?
Alan Shaw
Danny, generally, our Southern utility shipments have a longer life of haul.
Danny Schuster
Great, great. That's very helpful.
Well, thank you very much for my questions. Thank you.
Operator
Thank you. Our next question next question comes from the line of Ravi Shanker with Morgan Stanley.
Please proceed with your question.
Ravi Shanker
Good morning. So you've said that you are expecting RPU of about 2.5% through 2020 versus CPI of 2.2%.
That's closed a little bit from your prior guidance. And also just wanted to check if that is going to be a similar gap for 2017 just given some of Marta's comments on labor seemed like inflation could be a little higher for 2017.
James Squires
Let's talk about the rejected RPU trend in the five year plan going forward first. Alan, would you take that one?
Alan Shaw
Yes, absolutely. We are going to continue to price above rail inflation.
We are committed to doing that. We are confident in our ability to leverage the value of our service product, so you will continue to hear us talk about that.
We had a lot of negative mix shifts in 2016 as we talked about the declines in utility coal and the declines in crude oil and the declines in natural gas liquids and frac sand. So we have started to see stabilization on that front; it's one of the reasons our volumes grew in the fourth quarter and we expect that stabilization and some improvement in truck and energy markets to manifest itself into growth in RPU in 2017.
Ravi Shanker
Got it. And as a follow-up, I apologize if I missed this, but did you give us your natural gas price assumptions for 2017 and through 2020?
I just wanted to see where that is and how much that will help move the needle on coal for you.
Alan Shaw
Yes, we talked about paying very close attention to the forward curve; that's what we are looking at now. Right now, that's about $1.20 above gas prices that we experienced in the first and second quarters of last year.
Ravi Shanker
Got it. Is there a breakeven level that you would like to see before your coal volumes start to really move?
Alan Shaw
Well, we saw coal dispatch mix improve relative to natural gas in the fourth quarter, particularly in December as natural gas prices got up into $3.50. We started to see support for some of our more efficient plants at $3 natural gas and maybe even a little bit lower.
It's dependent upon sourcing patterns. It depends on weather patterns.
The higher the better, obviously, but we are already seeing support for our coal franchise at $3.20 natural gas.
Ravi Shanker
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Bascome Majors with the Susquehanna Financial Group.
Please proceed with your question.
Bascome Majors
Yeah. Good morning.
Can you update us on how much of your book of business is now including fuel surcharge mechanisms that are still below that recovery threshold and remind us how far those are from being in the money where you start to get rising revenues as fuel prices rise?
James Squires
Bascome, we are now at about 40% of our fuel surcharge revenue is tied to WTI. That is generally out of the money.
The rest of it is generally tied to on-highway diesel or is in a tariff that doesn't have a fuel surcharge program and on-highway diesel has a strike price that is on average close to where we are now.
Bascome Majors
Okay. So maybe one time this to Marta, you know, how much of a bottom line or margin drag from diesel you begin in 2017 outlook as we see higher fuel prices on this portion of your business, but you aren’t seeing your revenue offset?
Marta Stewart
Well, as you saw in our 2016 results, we had of course several going the other way, but in our 2016 result, you saw both in the fourth quarter and in the year that our few revenues were down. For the full year you could see that the reduction in fuel – the fuel expense line about equal the reduction of fuel surcharge revenue.
So looking forward to 2017, as Alan has already mentioning and you noted, the fuel curve is up and indeed through January, we are – oil prices are quite a bit higher than they were in the first quarter of last year. So as long as we stay below $64 a barrel and be the curve even though now its projecting to be up, it’s not expected to go currently above that.
So we will expect to see increase, less of an increase in our fuel surcharge revenue than we have in fuel expense. However, I would note that we do not expected to have a significant effect on our operating income where you will see it have more effect will be on the operating ratio simply because of the math because the numerator and the denominator will be moving by similar numbers.
James Squires
I’ll add that generally higher energy prices are going to lift many of the markets we serve and expand the value proposition of rail relative to trucks. So it’s not just the fuel surcharge discussion, it will drive volume growth and pricing ability for us.
Bascome Majors
I appreciate the comments you may answer. Thank you.
Operator
Thank you. Our next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch.
Please proceed with your question.
Ken Hoexter
Hey, great. Good morning, and congrats on a record OR and good to see that the progress continue, but I want to focus on that Jim if we can because, want to get your thoughts on the 100 million in savings and perhaps define what's in there and understand, kind of where you're focused on this year and see the ramp?
Last year you raise that target up to 250; see what the possibility of to improve on that? And is it as simple as taking that 100 million and saying that's 60 basis points of improvement, so you're really targeting something like a 68 OR this year or would you suggest there's more to it?
James Squires
So as I went through Ken, we produce 250 million in productivity savings in 2016 and a record operating ratio for the full year. Of that 250 was above our original projection of our productivity savings in 2016.
In 2017, we’re targeting a $100 million in additional productivity savings. That number we view as realistic, achievable, and sustainable even while we run our network at a high service level.
Again, if we see additional opportunities for productivity savings, just as we did in 2016, we will go after them, and we could see them in all of the areas in which we achieve productivity savings in 2016.
Ken Hoexter
I got that but that wasn’t – I understand that’s what you said before. I just want to try and understand what’s in there.
Last year, you talked about the coal network shutting down some yards integrating divisions. Can you talk to us about what's in the target so we can understand where upside leverage can come from like you saw last year?
James Squires
Sure. We’re going to continue to push on all of those areas in which we achieved productivity savings in 2016.
Mike, why don’t you comment?
Mike Wheeler
Yeah. It’s across the board like Jim notes.
First of all, it’s in our fleet rationalization, both the locomotives that we talked about continuing to make sure we are getting the most out of those assets and looking at ways to take locomotives out of the fleet even though we’re handling greater volumes. On the freight car fleet, while we are bringing some new freight cars online, overall net, we’re planning on reducing the size of the fleet.
That's a fleet rationalization still being able to protect our customer service. Continue to look at ways to take costs out of the branch lines without hurting service.
Fuel efficiency, we’ve got a big push on fuel efficiency, both from technology and the locomotive productivity that we talked about. And the last thing is we continue to look at optimizing our training plan, whether it's to improve customer service or to get productivity in the network.
We do that every day and all of those things are baked into that $100 million.
Ken Hoexter
Wonderful and just a cleanup to Alan, you mentioned on coal inventory, it came off a bit. Can you talked about where they are now?
Alan Shaw
Yeah, coal inventories are still elevated above target. They are at about 86 days at this point.
I would say target is probably closer to 60 days. Importantly, they come down about 20 days since their high of last year.
The South is about at 82 days, North is about 90 days. The South has declined a little bit more as of recent.
And importantly PJM power pricing is up about 15% or was up about 15% in December which has really supported coal burn and coal deliveries in that area.
Ken Hoexter
Okay. Appreciate the time.
Thank you.
Operator
Thank you. Our next question comes from the line of Brian Ossenbeck with JPMorgan.
Please proceed with your question.
Brian Ossenbeck
Hey, good morning. Thanks for taking my question.
So Alan just going back to the mix impact for second, obviously it was negative for the year, if you just look at RPU less fuel when you talked about – also some of the reasons why the mix within export coal length of haul. Just want to circle back to confirm why - might be positive or least improving into next year for the intermodal being one of the – the only three big segments to really grow.
It sounds like you still have some more export coal to go? And maybe you can factor in how you see auto into that as well.
I think you mentioned there was kind of track production which was we thought was a 3% decline or so?
Alan Shaw
Yeah, we do believe our automotive franchise will declines with the with U.S. automotive production declining 3% and then there are some specific plans that we serve that are taking some retooling.
Importantly, we are continuing to get price. We are pricing above real inflation that would benefit 2017.
We're going to see growth in our coal network, which as you are aware put pressure on our RPU in 2016. And we're going to continue to price in our intermodal network reflecting the value of our service product.
So we see growth in RPU.
Brian Ossenbeck
Okay. Got it.
So it sounds like some of the buckets are changing it mostly from -- from price. I guess the other factor just to follow-up on overall volume in for next to the outlook.
How do you see FX playing into the strength of the dollar and some of you markets it has some pretty good numbers in MetCon. The dollars off a bit, but I was wondering how much you think that needs to move and you sustainably moving before you’d see some relief in some of those areas has been pressured for the last couple -- couple of years?
Alan Shaw
Well, our imports were out more than our exports and 2016 resulted in part from the foreign-exchange issues. You talked about our metals and construction.
Our steel customers are feeling pretty positive, right now. And they're looking for growth.
Steel prices are up year-over-year, capacity factors are up year-over-year. Our exports we think are going to be supported, at least in the near-term by export coal volumes.
So we're going to closely watch the dollar. It impacts trade and we’re heavily tied to trade.
There are some things going on that are going to support international volumes for us, at least in the near term.
Brian Ossenbeck
Okay. Thanks for taking my call.
Operator
Thank you. Our next question comes from the line of time of Thomas Wadewitz with UBS Securities.
Please proceed with your question.
Thomas Wadewitz
Yeah. Good morning.
I wanted to ask you to Alan a little bit about price. I think you had some commentary on pricing.
But what would you see the progression has been if you look at 2016 and say that you know, did you see much change in pricing through the year. I think some market share wins in the intermodal and coal, you know, beg the question of whether you are being a little more aggressive on certain pieces of business?
So you know, if you want to comment on that, but also just kind of the market dynamic overall, will you start change in pricing and what you think on '17, whether you just need to see truck market siding a bit that will be key driver or just how you look on the pricing overall and then, in particular related to some of the wins you had on intermodal and coal? Thanks.
James Squires
We are committed to price and above rail inflation. I’m completely confident in the ability of our team to continue to deliver a strong service product and the ability of our team to price to the value of that service product.
But there is anywhere we’re aggressive in 2016 it was on our service product. Our pricing throughout the year was consistently above rail inflation.
We saw our trucking markets start to tighten in the fourth quarter, some of our other markets stabilize in energy prices moved up, which allowed us to grow in the fourth quarter. And we expect that momentum to continue into 2017.
Alan Shaw
Tom, I too would like to emphasize our commitment to pricing above rail inflation, based on an excellent service product.
Thomas Wadewitz
Okay. Yeah, great.
What about this thought in terms of just 2017, 2018 kind of I guessed the pass on pricing, is it reasonable to say that this is just at the end of the day, you’re primarily going to be driven by capacity and demand in the market? So if we really see that you know truck spot market tightening and pricing rising, that that will help you accelerate pricing and if you do see some better volume overall on rail through '17, that is it reasonable defeated pricing accelerate along with that?
James Squires
The key to higher prices in our view is excellent service. And we operate in a competitive marketplace, we believe we provide an outstanding service and our goal is to obtain above rail inflation pricing going forward.
Thomas Wadewitz
All right. Okay Great.
Thank you.
Operator
Thank you. Our next question comes from the line of Scott Group with Wolfe Research.
Please proceed with your question.
Scott Group
Hey, Thanks, morning everyone.
James Squires
Morning.
Scott Group
So I know you don't have earnings guidance for this year but you’ve got multiyear guidance of double-digit earnings growth. If coal is going to be up high-single low-double-digits this year and then down in the subsequent years.
Is there a reason why we shouldn't have double-digit earnings growth this year? Is there something that we need to consider?
And then just along those lines, Marta, you gave us last year just very helpful kind of margin commentary on the coming quarter, any thoughts on first quarter operating ratio just given the tough comp versus year ago.
James Squires
Let me go back over Scott first our overall outlook. We outlined and reaffirmed our plan to get to a sub-65 operating ratio by 2020.
And we expect to make progress each year toward that goal. And therefore we expect to post an operating ratio in 2017 that is below 2016’s full year operating ratio, and we do not give quarterly guidance.
Scott Group
But is there anything that you would want us to consider in our models if this is a normal year of productivity and it's the one year we expect coal volume growth and you have a multi-year double-digit earnings growth expectation. It would seem that this should be year-over-year at least double-digit maybe even above trend.
Is there something you want us to contemplate and why it might not be that way?
James Squires
Certainly coal volume above the range that we have projected would provide additional upside to our plan.
Scott Group
Okay. And then Alan just on the coal yields, so CSX reported a pretty meaningful sequential increase in coal yields in the fourth quarter and you guys have just a small increase.
Can you just walk us through how your export coal pricing works? Is there a reason why you're not going to see that bump or is it more that the way you guys price will see that bump more or so in the first quarter than what we saw in the fourth quarter?
Alan Shaw
Yes, Scott we talked on the third quarter call about how we felt like our growth in export volumes in the fourth quarter would come at the lower length of our Baltimore business as opposed to Lambert's Point and in fact, you know, that's exactly what happened. Our growth in the fourth quarter in export volumes was associated with Baltimore, not Lambert's Point.
And so as a result, we had a negative mix with our export coal RPUs. We looked at our pricing on export in the fourth quarter as we said we would.
We told you we would do it in the first quarter, which we did and then we are closely monitoring the benchmark price and the demand going forward.
Scott Group
Maybe a better way to ask it, do you think you'll see coal revenue per car sequentially higher or lower in the first quarter than the fourth?
Alan Shaw
I think ultimately that's going to depend upon mix. I talked a little bit about how our volumes in the North would probably increase at a higher rate than our volumes in the South, which will put pressure on our coal RPU, but offsetting that is going to be some strong pricing in our export volumes.
Scott Group
Okay. All right, thank you.
Operator
Thank you. Our next question comes from the line of Brandon Oglenski with Barclays Capital.
Please proceed with your questions.
Brandon Oglenski
Good morning, everyone and thanks for getting me in. So Jim, I just want to come back to the structural opportunity on the cost structure because you guys have been running consistently with let's call it a 27%, 28% OR on labor costs.
A lot of the rest of the industry is now closer to 20% on a labor OR. And when I look at your results for the past decade, you have run with headcount between 28,000 and 30,000 folks and your productivity, and sorry I am getting nerdy here, but I do like to quantify this stuff -- I think your productivity is about 13 million GTMs per head per year right now.
CSX, which is a similar size network, arguably maybe little a bit bigger, running 15 million GTMs per head. Can you talk about -- is there something structural on the network where you can let attrition take headcount down and grow volume and grow productivity on the labor line because, as we look at it and I think as a lot of investors look at it, that's a big opportunity for you guys going forward?
James Squires
We certainly made progress on labor productivity in 2016. That was a key driver of our $250 million in productivity savings.
In 2017, as we have been through, we are targeting an additional $100 million in productivity savings, a number that we view as sustainable and a component of that will be additional labor savings. We have guided to basically flat headcount for the full-year 2017.
We think that's a level of human resources that will allow us to continue driving productivity and serve as a foundation for growth as well.
Brandon Oglenski
But is there anything in the network, Jim, that you look at that you think going forward, hey, we need to restructure the way we are looking at the world because we used to be more coal-focused and commodity-focused and now we want to be a little bit more nimble around intermodal? Is there something in the terminal infrastructure where you could see attrition rates, not necessarily layoffs or reductions, but really reducing the size of the employee base going forward relative to revenue?
James Squires
In 2016, we demonstrated our nimbleness and our agility in responding to business conditions with respect to the labor resource, as well as otherwise and we have additional opportunities going forward as well. Labor productivity, specifically, is the largest component of our overall $650 million by 2020 and we will continue to work on that.
Brandon Oglenski
Okay. Appreciate it.
Operator
Thank you. Our next question comes from the line of Justin Long with Stephens.
Please proceed with your question.
Justin Long
Thanks. Good morning and I wanted to ask about intermodal.
First, could you give us some sense for the level of intermodal volume growth you are expecting in 2017 and, second, I know you guided for consolidated pricing above inflation, but do you think above inflation pricing is achievable within intermodal this year?
James Squires
As we've been through our goal and our plan is to produce above rail inflation pricing for the duration of the plan period based on excellent customer service. Now let me ask Alan to comment specifically on the dynamics within the intermodal sector.
Alan Shaw
Sure. Hey, Justin, truck capacity, while it has tightened, is still relatively loose, particular compared to where we were in 2014.
So we think that as truck capacity tightens, particularly towards the second half of the year, then we are going to start to see more and more intermodal growth. So Jim had talked about 4% CAGR on intermodal growth over our next four years and we think that's within the ballpark of where we will be in 2017 and that's going to support that tightening truck market and reduced inventory levels will support more pricing in 2017.
Justin Long
Okay. That's helpful.
But just to clarify, you do feel like intermodal pricing can be above rail inflation this year?
James Squires
For the planned period going forward, we will certainly strive for above rail inflation pricing based on our excellent service.
Justin Long
Okay. Secondly, sticking on intermodal, I wanted to ask about the progression of intermodal margins over the course of the longer-term strategic plan.
Does that longer term outlook assume that intermodal margins improve to the point where they are inline with consolidated averages at some point before 2020? And if so, what's a realistic timeframe to think about when this can occur?
James Squires
Marta, why don’t you go back over the basic incremental margin characteristics of each of the businesses and then address the question with regards to intermodal?
Marta Stewart
All right. Justin, intermodal, although I mentioned earlier that it is third in a hierarchy of incremental margins.
It is still very good incremental margins and to answer your specific question, we definitely expect improving intermodal margins throughout the four year plan period that Jim described.
Justin Long
Okay. But you're not willing to say if those intermodal margins will be on par with consolidated margins at some point over the plan?
Marta Stewart
We’ve never split our incremental margin numbers between the three.
Justin Long
Okay. I'll leave it at that.
I appreciate the time today.
Marta Stewart
Thank you.
Operator
Thank you. Our next question comes from the line of Jason Seidl with Cowen Securities.
Please proceed with your question.
Jason Seidl
Thank you, operator. Hey Jim, hey team.
Real quickly looking out at your expected CAGR on the intermodal side, you said international growth above GDP. Is there anything built-in for continued share shifts of the west coast ports and some of the build out to some the eastern ports?
James Squires
Alan, why don’t you take that one?
Alan Shaw
Sure Jason that has been a support for our volumes over the last couple of years. It’s been a continuing trend.
We look for it to continue moving forward. But we’re looking at GDP plus growth within the international space.
There won't be a big hockey-stick there. We’re looking for sustainable organic growth.
Jason Seidl
Okay. So there's a little bit built in there, but probably not too much that we’ve seen like see in the past couple of years?
A - Alan Shaw Correct.
Jason Seidl
Okay. That’s all I have.
Guys, appreciate the time.
Operator
Thank you. Our next question comes from the line of Ben Hartford with Robert W Baird.
Please proceed with your question.
Ben Hartford
Thanks. I guess I’ll just build on that last point Alan on the intermodal side – international intermodal side specifically.
You had mentioned, you had emphasized organic. So when we think about some of the rhetoric around trade exiting TPP et cetera.
Perhaps if you could expound upon the opportunity from share shift in the context of perhaps trade – rising trade protectionism over that for your period and to what degree do you think that might present risk to your ability to grow international intermodal above GDP over the next four years? Thanks.
James Squires
Yes, if there were something that impacted international trade that would certainly have an impact on our business levels, and note that the impact on the headwinds that we faced in 2016 around inventory levels seem to be normalizing. Trucking markets seeing to be firmament and as a result we saw growth in the fourth quarter.
So there's going to be puts and takes, but clearly we’re watching anything that would impact international trade.
Operator
Thank you. Our next question comes from the line of David Vernon with Sanford Bernstein.
Please proceed with your question.
David Vernon
Hi, good morning and thanks for taking the question. Maybe just a Marta if you could talk a little bit about what we should expect about the cadence for the inflation, other step-up in inflation for next year.
I think you got this from the closer to a 5% than the 3.5% we saw in the current year.
Marta Stewart
Yes, and that’s 5% David is specifically just to the comp and benefit line.
David Vernon
Yes.
Marta Stewart
For the remaining items in our income statement those lines increase inflationary, but just general economic inflation, so at a lower rate than 5%.
David Vernon
Okay. And then as far as kind of the cadence of how that should be coming in it, is there anything we should be thinking about in terms of incentive comp or specific timing of payments or things like that.
Marta Stewart
Yes. For generally speaking that’s a good point for you to bring up.
Generally speaking the comp line is weighted somewhat to the first quarter of the year and that is because the incentive comps as you mentioned. So if you look at the cadence last year of the comp that should be a general guideline.
With regard to the health and welfare inflation, those new rates for the industry did start on January 1.
David Vernon
Okay, thanks. And then Mike maybe just a question for you.
The fuel productivity got like to the all-time high in the winter quarter, like a 5% jump. I'm just wondering like what is it that’s driving that?
Is it some sort of change in locomotive fleet, I know you’ve dozen things around, line rationalization and you mentioned also something about maybe holiday timing kind of running that a little lighter. Is this a new run rate from which we should be building our expectations until productivity, was there and is there - can you talk a little bit about what’s driving the significant improvement in that particular metric in terms of the fuel consumption?
Michael Wheeler
Sure. So the biggest driver is the fact that we continue to reduce the locomotive fleet that is a big push there.
In addition, we've got a lot technologies, a fuel management technology that we put out there and really leveraging that. And then additionally, we really focused on fuel shutdown compliance, other rules that we put on the operations to make sure that we are getting the best fuel efficiency.
All those pieces go into our record, fuel efficiency and we see more opportunity going forward this year as well.
David Vernon
So it just sounds like its a little bit execution in some of the prior investment around the fuel technology. Is there is nothing structural in terms of the change in mix of the fleet range with that?
Michael Wheeler
No, I don’t think. Well structurally yeah, the reduced fleet, we told you last year about how much of yard and local fleets - yard and local engines that we pulled out of the fleet and still was able to protect service that was a big driver of that.
We're continuing to look at that. So that's the structural pieces is reducing our yard and local fleet and then being able to handle increasing gross tone miles with kind of the current fleet gives you even more productivity.
So that's the structural piece, in addition to all the technology and execution that we focus on.
David Vernon
Thanks.
Operator
Thank you. Our next question comes from the line of Cherilyn Radbourne with TD Securities.
Please proceed with your question.
Cherilyn Radbourne
Thanks very much and good morning. So the dividend increase was a bit of surprise to me anyway.
Can you talk a little bit about your comfort level for being above your long-term target payout ratio for period of time and whether you think there might be room for that payout target to increase?
James Squires
Let me begin by saying that shareholder distributions including dividends and regular dividend increases are a major component of our capital allocation strategy. And I'll turn it over to Marta to discuss your payout ratio question
Marta Stewart
Absolutely. We definitely believe as Jim said that the shareholder should benefit as the company's profitability improved and board did raised the dividend by about 3%.
As you mentioned, we have a long-term payout target of 33%. The board believes that we can provide modest dividend increases as we managed that payout ratio to that one-third target.
As you recall, last year had a 46% target, so even with this increase, we are moderating the payout in total.
Cherilyn Radbourne
Okay, but 33 remains the long-term target?
Marta Stewart
Yes, that’s correct.
Cherilyn Radbourne
That’s all for me. Thank you.
Operator
Thank you. Our next question comes from the line of Walter Spracklin with RBC Capital Markets.
Please proceed with your question.
Walter Spracklin
Yeah. Thanks very much.
Good morning, everyone. So I just wanted to focus a little bit, perhaps its for Marta on the comp and benefit line, I know, Jim you mentioned that there was a 100 million in a normal year you would have most of that productivity savings coming from the comp and benefit or the labor line.
With the 5% increase, all in that you're pointing to and yes on flat headcount, I'm just wondering if the 100 million this year is factoring in perhaps a much lower component of labor productivity than in the years over your forecast period, am I right in saying that for this year?
Marta Stewart
Generally speaking, the ratios of reductions are similar to the full plan. So, Jim showed in the 650 million, roughly 65% of that is comp and benefits and that percentage holds true for the 100 million.
So we do expect the lion share of the $100 million of productivity improvement to come in the comp line. And one of the things we mentioned, I think Mike and I both mentioned with the – are keeping the headcount level but managing extra volumes there some productivity there.
In addition to just looking at the headcount, we also have productivity in that line and overtime and recruit and extra boards, so there's other specific areas other than just account that also lead to productivity in the comp line.
Walter Spracklin
So when we look at that line, we should offset the 5% increase with changes in other components of that line item being like you said overtime and so on so it's not necessarily the last year's labor times 5% higher average, average comp, we should also reflected in for overtime another aspects and do you have any sense of order of magnitude? If that's the case what impact that would be on the comp and benefit line in 2017, everything excluding the 5% and the flat labor account that you'd already mentioned?
Marta Stewart
How you describe it is just the right way to look at. You’re going to look at within those components.
You talked – look at the compensation benefits that we had last year. We do have the inflationary growth, which is one component and then separate from that we have the productivity which will then occur the other way.
Walter Spracklin
But order of magnitude not…
Marta Stewart
Order of magnitude is about the same percentage in the year as we guided to for the entire five-year period. It is the lion share of the $100 of productivity.
Walter Spracklin
Okay. Okay.
Thank you very much.
Operator
Thank you. Our next question comes from the line of Scott Schneeberger with Oppenheimer.
Please proceed with your question.
Scott Schneeberger
Thanks. Good morning.
Thanks for fitting me in and I’ll just ask one. Could you please elaborate on slide 33, the long-term outlook the expected pipeline related headwinds in crude oil and natural gas liquids pertaining to the merchandise segment?
And then if you could, kind of, hone in on your chemical segment view for 17 any additional color. Thanks.
James Squires
Scott, that is directly related to the Dakota Access pipeline and Mariner East 2 pipeline. Dakota Access will impact blocking crude to the East Coast, although will still participate in some heavy Canadian crude.
And the Mariner East will impact our NGO shipments out of Utica and Marshallese.
Scott Schneeberger
Thanks very much.
James Squires
You are welcome.
Operator
Thank you. Our next question comes from line of Jeff Kauffman with Aegis Capital.
Please proceed with your question.
Jeff Kauffman
Thank you very much and congratulations. Most of my questions have been answered.
Marta, can I focus a little bit on the pension component of the labor cost increase? You mentioned pension to become a tailwind versus a headwind.
I know there was a sharp up-tick in rates post-election. When was your pension expense re-leveled and what does that look like in terms of the tailwind for 2017?
Marta Stewart
So our pension expense, we think for 2017, to answer your last question first, we think it’s going to about flat with 2016. And you are correct that the interest rate change would push that up a little bit.
However, we also had asset gain in the plan. So net-net for 2017 we see pension expense staying relatively even.
Jeff Kauffman
Okay. And just a quick follow-up, if I run the utility coal and export coal numbers that you provided for 2017.
It looks like we are going to be up double-digit in both of those areas. Number one, am I thinking through that right in terms of 2017 volume?
And number two can I assume that’s going to be more heavily weighted in the first two quarters of the year?
James Squires
I am not seeing the double-digit growth in export coal when the guidance that we provided.
Jeff Kauffman
Okay. But the utility side?
James Squires
The utility side, you know what we’ve given you the guidance that’s our best look right now.
Jeff Kauffman
Okay. All right, well, thank you very much.
Operator
Thank you. Our next question comes from the line of Rick Paterson with Loop Capital.
Please proceed with your question.
Rick Paterson
Thank you. Good morning.
Could you please update us on the number of furloughed train crews and stored locomotives? And with regard to crews, when you recall furloughed employees, what percentage typically come back?
I would imagine that percentage also erodes over time as we move further away from furloughed dates. How should we think about that?
James Squires
Yes. So on the furlough, we still have right around 100 employees furloughed on the T&E side and it's primarily in the coalfields, though if there is continued upswing in coal, we could handle that, but it's down to about 100.
We started recalling them in the middle of last year across the network to handle the sequential volume increase and protect service, so we did that. And on the recalls, you are right.
When we first start out, we get up into the high 90% recall rate when we recall furloughs and the longer it goes, it starts declining after that. Although with some of the things we've put in place with our extra boards over the last year, overall, we got a higher return rate, which we are real pleased with.
On the locomotive side, we still have about 350 locomotives stored available to us.
Rick Paterson
Perfect. Thank you.
Operator
Thank you. Our next question comes from the line of Brian Konigsberg with Vertical Research.
Please proceed with your questions.
Brian Konigsberg
Thank you. Appreciate you fitting me in.
It's been a long call; a lot of questions have been answered. I have a couple small ones.
Marta, actually you mentioned in response to the pension question asset gains. Is that asset gains within the pension plan, or are you expecting to have asset sales in '17 elsewhere within the network itself?
Marta Stewart
That was within the pension plan that I was describing.
Brian Konigsberg
Okay. With the productivity initiatives going on, you did have an asset sale in '16.
Would you anticipate some assets to break loose as you work through rationalization of the network?
Marta Stewart
Our real estate department is always taking a look at where we have assets that we can sell. We especially described in the third quarter where we had a large operating asset sale.
In 2017, they will continue to look at it. As you know, looking over the last 3 years, that number can be somewhat variable, but 2 years before that, it was smaller, varying $10 million to $20 million and this year was a little bit higher, over $30 million.
So that will depend on the properties that they come up with. Alan, do you have anything to add to that?
Alan Shaw
Yes. They are distinct transactions and as we all know with real estate, the closing date can move forward or move back.
So it's an initiative of ours. It's been an initiative for several years.
It provided benefit in 2016 and we expect that it's going to do even more so in 2017.
Brian Konigsberg
But it's not explicitly in the plan, is that right?
Alan Shaw
We always do budget for a certain level of gain from sale of both operating and non-operating properties, so that's a standard item in our budgets.
Brian Konigsberg
Okay. If I could just add one more quick one maybe for Mike.
So you had a good - I guess you did very well on lengthening or expanding the train lengths and actually keeping up the velocity. Maybe just talk about what the opportunity is on lengthening more in '17 and how do you balance that with the velocity and the service metrics?
Michael Wheeler
Yeah. Sure.
It's something we focus on a lot. We feel like we've got -- not feel -- we know we've got capacity on our trains, particularly on the intermodal and merchandise networks, so we will continue to see it grow, a lot of work going on there to make that happen.
But we are doing it very thoughtfully so that, one, we keep our terminals fluid and be able to keep the overall velocity of all the assets to the railroad flowing. And we also spend time with our customers on working with them on how we can increase train lengths as well and we both benefit.
So a lot of initiative there and still opportunity going forward.
Brian Konigsberg
Thank you.
Operator
Thank you. There are no further questions at this time.
I would like to turn the floor back over to Mr. Squires for closing comments.
James Squires
Thank you very much for your time this morning. We will continue to push hard to drive shareholder value through successful execution of our strategic plan.
Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.