Apr 23, 2015
Executives
Lance Fritz - President & CEO Eric Butler - EVP, Marketing & Sales Cameron Scott - EVP, Operations Rob Knight - CFO
Analysts
Tom Wadewitz - UBS David Vernon - Bernstein Research Rob Salmon - Deutsche Bank Bill Greene - Morgan Stanley Brandon Oglenski - Barclays Chris Wetherbee - Citigroup Scott Group - Wolfe Research Ken Hoexter - Bank of America Merrill Lynch John Larkin - Stifel Allison Landry - Credit Suisse Group Tom Kim - Goldman Sachs Jason Seidl - Cowen and Company Ben Hartford - Robert W. Baird Jeff Kauffman - Buckingham Research Matt Troy - Nomura Asset Management John Barnes - RBC Capital Cherilyn Radbourne - TD Securities Cleo Zagrean - Macquarie Brian Ossenbeck - JPMorgan Keith Schoonmaker - Morningstar
Operator
Welcome to the Union Pacific First Quarter Earnings Call. [Operator Instructions].
It is now my pleasure to introduce your host, Mr. Lance Fritz, President and CEO for Union Pacific.
Thank you. Mr.
Fritz, you may begin.
Lance Fritz
Good morning, everybody and welcome to Union Pacific's First Quarter Earnings Conference Call. With me here today in Omaha are Eric Butler, our Executive Vice President of Marketing and Sales; Cameron Scott, Executive Vice President of Operations; and Rob Knight, our Chief Financial Officer.
This morning Union Pacific is reporting net income of $1.2 billion, or $1.30 per share for the first quarter of 2015. This is a 9% increase in earnings per share compared to the first quarter of 2014.
Solid core pricing gains in the quarter were partially offset by a sharp drop in volume. While we took actions during the quarter to adjust for the volume decline, we did not run an efficient operation.
Total first quarter volumes were down 2%, with particular softness in coal, industrial products and intermodal. Throughout last year, we worked to add the people, locomotives and capacity needed to meet a dramatic increase in demand.
By the end of 2014, we had seen full-year volume growth of 7% and we were fully resourced to meet this demand. Over the last few months, however, volume has shifted negative.
As a result, our operation is in catch-up mode and not as efficient as it should be. Managing a network is a constant balancing act to ensure you have the right resources in the right place at the right time.
This balancing act becomes more difficult during significant volume swings. We're taking the steps to align our resources with current demand, while remaining agile in an ever-changing environment.
We remain committed to safely providing excellent service for our customers while improving that service and our financial performance. With that, I'll turn it over to Eric.
Eric Butler
Thanks, Lance and good morning. In the first quarter our volume was down 2%, driven by challenges in some key markets.
Automotive and ag products volume grew with declines in coal, industrial products, intermodal and chemicals. Milder winter weather and natural gas prices drove softer coal demand, lower crude oil prices reduced demand for shale-related shipments and we also experienced the effects from the drawn-out west coast labor port dispute.
I'll talk about more specifics as we walk through each group. Fuel surcharge revenue reduction negatively impacted average revenue per car and was a 4% head wind on freight revenue.
However, solid pricing gains across our business led to a core price improvement of 4%, which combined with a 1% mix and drove average revenue per car up 1%. Overall freight revenue was down 1% as the strong pricing gains and mix were offset by lower volume and fuel surcharge revenue.
Let's take a closer look at each of the six business groups. Ag products revenue increased by 3%, on a 3% volume increase and a 1% improvement in average revenue per car.
Grain volume was down 2% this quarter. We continue to see strong demand for overseas export feed grain shipments, particularly through the Gulf and Mississippi River.
Those gains were offset primarily by declines in wheat exports and to a lesser degree, softer demand for domestic feed grain. Grain products volume was up 4% for the quarter.
Ethanol volume grew 7%, driven by increased gasoline consumption and export demand. We also saw increased export demand for soybean meal and a strong canola crop drove increases in canola meal shipments.
Food and refrigerated shipments were up 3%, driven primarily by continued strength in import beer, partially offset by slightly lower refrigerated food shipments. Automotive revenue was up 6% in the first quarter on a 7% increase in volume, partially offset by a 1% reduction in average revenue per car.
Finished vehicle shipments were up 11% this quarter, driven by continued strength in consumer demand and reduced impact from winter weather. The seasonally adjusted annual rate for North American automotive sales was 16.6 million vehicles in the first quarter, up 6.4% from the same quarter in 2014.
Auto parts volume grew 3% this quarter, driven primarily by increased vehicle production. Chemicals revenue was flat for the quarter, with a 2% improvement in average revenue per car offsetting a 1% volume decline.
Plastics shipments were up 8% in the first quarter, as stability in resin prices resulted in improved buyer confidence in the market. Strength in fertilizer demand this quarter drove volume up 10%.
The slight delay in last fall's harvest pushed some application into the first quarter of this year. We also saw strength in export markets, particularly to China.
Finally, lower crude oil prices and unfavorable price spreads continue to impact our crude oil shipments, which were down 38% for the first quarter. Coal revenue declined 5% in the first quarter.
Volumes were down 7%, partially offset by a 3% improvement in average revenue per car. Southern Powder River Basin tonnage was down 1% for the quarter.
We experienced a very mild winter this year, which combined with low natural gas prices to reduce demand for coal. Colorado Utah tonnage was down 32% for the quarter, as a mild winter and low natural gas prices drove receiving utilities to switch to other fuel sources.
Colorado Utah tonnage was also impacted by soft demand for coal exports. Industrial products revenue was up 1%, as a 3% decline in volume was offset by a 3% improvement in average revenue per car.
We continue to see strength in construction products, where volume was up 4% for the first quarter. Demand for rock was strong in the quarter, particularly in the southern part of our franchise.
Metals volume was down 17%, as lower crude oil prices significantly reduced new drilling activity. In addition, the strong U.S.
dollar drove increased imports, which reduced demand from domestic steel producers. Our government and waste shipments declined 8% in the quarter, primarily driven by a temporary reduction in short-haul waste shipments.
As a side note, our minerals business was not a key driver in industrial products this quarter; but I wanted to mention the fact that our frack sand volume was up 3%. Demand remains strong in January, but tailed off significantly in March.
I will talk more about our outlook in a moment. Turning to intermodal, revenue was down 5%, driven by a 3% decrease in both volume and average revenue per unit.
Due to the structure of intermodal fuel surcharge programs, there was a greater average revenue per unit impact to intermodal this quarter than seen in other commodities. Domestic shipments grew 9% in the first quarter, setting an all-time first-quarter record for volume.
We continued to see strong demand from highway conversions and for our new premium services. International intermodal volume was down 12%, driven by the west coast port labor dispute, which stretched late into the quarter.
We're encouraged that the parties have come to a tentative agreement and we're working with our customers to reduce the backlog and return to normal. Let's take a look at our outlook for the rest of the year.
In ag products, we expect grain volume to return to normal seasonal patterns through the third quarter and we anticipate exports will favor shorter-haul shipment to the Gulf and river in the near-term. As always, we're keeping a close eye on planning reports and the weather to determine what the next crop will look like.
In grain products, we think the ethanol market will remain strong and DDGs will remain steady throughout the year. Finally, we anticipate continued strength in our import beer business and we see potential upside in refrigerated shipments.
In automotive, finished vehicles and auto shipments should continue to benefit from strength in sales, driven by a healthy U.S. economy, replacement demand and lower gasoline prices.
Coal volume will largely be dependent on the weather this summer and natural gas prices. If natural gas prices remain in the current range, it will be a head wind throughout the year.
Also, the latest inventory figures show that stockpiles are significantly up from last year and are now above the five-year historical average, which will likely lead to continued softness. We think most of our chemicals markets will remain solid this year, though we expect that crude oil prices will remain a significant head wind for crude by rail shipments for the rest of the year.
Lower crude oil prices will also impact some of our industrial products markets. We expect metals to continue to experience head winds, as capital investments for new drilling activities are reduced.
As I mentioned earlier, frack sand shipments were up modestly in the first quarter, but we expect to be meaningfully lower year over year, starting in the second quarter, as demand softens and we come up against tougher comps. On the positive side, we think continued strength in the construction and housing market should drive growth in aggregates and lumber.
Finally, we anticipate strong demand for domestic intermodal to continue throughout the year, primarily from highway conversions. For international intermodal, we expect a backlog recovery to continue for the next few weeks, then return to normal seasonal patterns for the remainder of the year.
Both domestic and international intermodal should benefit from the strength in consumer demand in the U.S.. To wrap up, we're experiencing some volume head winds created by uncertainty in the coal market and crude oil prices, but we see opportunities in other markets.
While top-line revenue will be impacted by lower fuel surcharge revenue, we expect solid core pricing gains for the year. As always, our strong value proposition and diverse franchise will support new business development efforts throughout the year.
With that, I will turn it over to Cameron.
Cameron Scott
Thanks, Eric and good morning. I'll start with our safety performance, which is the foundation of our operations.
The first quarter 2015 reportable personal injury rate improved 23% versus 2014 to a record low of 0.85%. These results are a validation that our comprehensive safety strategy is working and we're focused on the right things.
I am very proud of the team's commitment to find and address risk in the work place. In rail equipment incidents or derailments, our reportable rate increased 6% to 3.16.
To make improvement going forward, we continue to focus on enhanced TE&Y training and continued infrastructure investment to help reduce the absolute number of incidents, including those that do not meet regulatory reportable thresholds. In public safety, our grade crossing incident rate improved 27% versus 2014 to a first-quarter record mark of 1.88.
Our strategy of reinforcing public awareness through community partnerships and public safety campaigns is generating results and we will continue our focus in these areas to drive further improvement. In summary, the team has made a nice step function improvement in several areas that is generating results on our way towards an incident-free environment.
Moving to network performance, as we discussed, we worked hard in 2014 to match network resources with the robust volume levels of 2014. During the latter part of the fourth quarter, our available resources were largely aligned with demand, helping generate the sequential velocity improvement in the network.
While we have largely held those velocity levels made in December, we still have more work to do as we exit the first quarter that provided more favorable weather conditions, but one that also saw more extensive track renewal programs on key corridors. While our velocity in the first quarter was almost one mile an hour faster than the first quarter of 2014, our service performance still fell short.
As reported to the AAR, first-quarter velocity and freight car dwell were about flat when compared to the first quarter of 2014. However, the team continues a relentless push to improve service and reduce costs.
While productivity was not where we wanted it to be, we did generate some efficiencies, even with the decline in volumes during the first quarter. We achieved record train lengths in nearly all major categories, including in automotive, where we leveraged an 11% increase in finished vehicle shipments, with a 5% increase in average auto train length.
Our terminal productivity initiatives also continue to generate positive results, as car switch per employee day increased 3%. But our sub-optimal services performance and timing issues with readjusting resources lead to inefficiencies during the quarter.
One example of this is locomotive productivity, as measured by gross ton miles per horsepower day, which was down 6% versus 2014. As for our efforts to readjust resources, while we chase volume up -- while we chased volume on the way up last year, it's been a different story in the first part of 2015, with some softer volumes we have seen thus far.
To balance our resources to current demand, we have placed around 500 TE&Y employees into furlough or alternative work status. We have also reduced our original TE&Y hiring plan downward by 400 and are now planning to hire around 2,400 TE&Y employees for the year.
Of course, we will continue to monitor and adjust our work force levels and hiring plans throughout the year as volume dictates. The same process is under way with our locomotives.
By the end of the quarter, we had already moved 475 units back into storage and continue to look at every opportunity to further reduce our active fleet. Also, our planned acquisition of 218 units this year will further improve our overall reliability and efficiency.
We have experienced a timing lag in getting our resources aligned with demand, but we're intently focused on balancing our resources and reducing our costs as the year progresses. We're also adjusting our 2015 capital program down $100 million to approximately $4.2 billion.
We will continue to invest to improve the safety and resiliency of the network, including more than $1.8 billion in infrastructure replacement programs. Our capital program also includes continued investment for service, growth and productivity, which are primarily concentrated on the southern region of our network; but which also include corridor strategies that reduce bottlenecks across the system.
This reduction does not impact our core investment strategy, which is to maintain a safe, strong and resilient network and to invest in service growth and productivity projects where returns can justify the investment. I would also like to give a quick update on positive train control.
As most of you know, the rail industry has been required to install PTC by the end of 2015. The required development and testing of this new technology has been challenging.
Nonetheless, we have been moving forward, investing approximately $1.7 billion thus far to complete the mandate. Now that the scope of the project has been better defined, we've updated our total project investment in PTC to approximately $2.5 billion.
Although UP will not meet the current 2015 deadline, we have been making good faith effort to do so, including field testing since October 2013. The industry has been working to extend the deadline and I think there is general understanding on Capitol Hill that this has to happen.
While we remain hopeful that an extension will be passed, our overall investment in the program will not be contingent on the deadline. To wrap up, as we continue on in 2015, we expect to continue generating record safety results on our way to an incident-free environment.
We expect to leverage the strengths of our franchise to improved network performance. We will invest in the resources and network capacity needed to overcome congestion and generate productivity gains; and we will remain agile, balancing and adjusting resources depending upon demand to drive improved cost performance.
Ultimately, running a safe, reliable and efficient railroad creates value for our customers and increased returns for our shareholders. With that, I'll turn it over to Rob.
Rob Knight
Thanks and good morning. Let's start with a recap of first-quarter results.
Operating revenue was flat with last year at just over $5.6 billion. Strong core pricing was offset by declines in fuel surcharge revenue and total volumes.
Operating expenses totaled just over $3.6 billion, decreasing 4% when compared to last year. The net result was operating income growing 7% to about $2 billion.
Below the line, other income totaled $26 million, down from $38 million in 2014. Interest expense of $148 million was up 11% compared to the previous year, driven by increased debt issuance during 2014 and at the beginning of 2015.
Income tax expense increased to $704 million, driven primarily by higher pre-tax earnings. Net income grew 6% versus last year, while the outstanding share balance declined 3% as a result of our continued share repurchase activity.
These results combined to produce quarterly earnings of $1.30 per share, up 9% versus last year. Now turning to our top line, freight revenue of about $5.3 billion was down 1% versus last year.
In addition to a 2% volume decline, fuel surcharge revenue was down about $200 million when compared to 2014. The decline in fuel price was partially offset by the positive lag in the fuel surcharge programs.
All in, we estimate the net impact of reduced fuel prices added about $0.08 to earnings in the first quarter versus last year. This includes both the fuel surcharge lag and lower diesel costs.
In the second quarter, we expect the net earnings impact of reduced fuel prices to be closer to neutral. Business mix was slightly positive for the quarter, driven by a decline in lower average revenue per car international intermodal shipments.
Looking ahead, given the volume shifts between our commodity groups, business mix is likely to have a negative impact on freight revenue's beginning in the second quarter. Slide 23 provides more detail on our core pricing trends.
First quarter core pricing came in at 4%, reflecting a more favorable pricing environment in 2015. This represents a full point to sequential improvement from the fourth quarter of last year.
Of this, about 0.5% reflects the benefit of legacy business that we renewed earlier this year. This includes both the 2015 and 2016 legacy contract renewals.
Moving on to the expense side, Slide 24 provides a summary of our compensation and benefits expense, which increased 9% versus 2014. Lower volumes were more than offset by labor inflation, increased training expense and lower productivity.
Looking at our total work force levels, our employee count was up 6% when compared to 2014. About a quarter of this increase was in our capital-related work force.
As Cam just discussed, we're adjusting our total hiring downward to better balance our resources. The largest hiring area will continue to be in the TE&Y ranks.
In total, when you factor in attrition, training, furloughs and volume levels, we expect our net overall work force levels to be around 48,000 by year end, about flat with year-end 2014. Labor inflation was about 6% for the first quarter, driven primarily by agreement wage inflation and will likely continue to be in the 6% range for the second quarter, as well.
Keep in mind that the first and second quarters include the 3% agreement wage increase effective the first of this year, on top of 3.5% wage increase from last July. For the full year, we still expect labor inflation to be about 5%, including pension.
Turning to the next slide, fuel expense totaled $564 million, down 39% when compared to 2014. Lower diesel fuel prices, along with a 1% decline in gross ton miles, drove the decrease in fuel expense for the quarter.
Compared to the first quarter of last year, our fuel consumption rate improved 1%, while our average fuel price declined 38% to $1.95 per gallon. Moving on to our other expense categories, purchased services and materials expense increased 6% to $643 million.
Increased locomotive and freight car material costs were the primary drivers. Depreciation expense was $490 million, up 6% compared to 2014.
We expect depreciation expense to increase about 6% for the full year. Slide 27 summarizes the remaining two expense categories.
Equipment and other rents expense totaled $311 million, which is flat when compared to 2014. Other expenses came in at $259 million, up $33 million versus last year.
Higher state and local taxes and casualty costs contributed to the year-over-year increase. For 2015, we still expect the other expense line to increase between 5% and 10% on a full-year basis, excluding any unusual items.
Turning to our operating ratio performance, we achieved a quarterly operating ratio of 64.8%, improving 2.3 points when compared to 2014. Our operating ratio benefited about three points from lower fuel prices, including the fuel surcharge lag.
Keep in mind, however, we also lost the revenue benefit from our energy-related volumes as energy prices declined. Turning now to our cash flow, in the first quarter, cash from operations increased to just under $2.1 billion.
This is up 17% compared to 2014, primarily driven by higher earnings and the timing of cash tax payments. We also invested about $1.1 billion this quarter in cash capital investments.
As Cameron just noted, we now intend to spend about $4.2 billion in capital for the full year, down about $100 million from our previous estimate. Given the sharp decline in fuel surcharge revenue, capital spending well likely be greater than the 17% of revenue this year.
Longer term, however, we still expect capital spending to be about 16% to 17% of revenue, assuming of course that fuel returns to somewhat higher levels. One housekeeping item to note on the cash flow statement.
As you know, in the first quarter we changed the timing of our quarterly dividend payments so that the cash outlay occurs in the quarter for which the dividend is declared. As a result, we had two dividend payments during the quarter -- one for the fourth quarter of 2014 and one for the first quarter of this year.
This is the only time we will see this, this year. Together, these payments totaled about $922 million.
We also increased our first-quarter dividend by 10%. This is in line with our commitment to grow the dividend payout target to 35%.
Taking a look at the balance sheet, our adjusted debt balance grew to $15.6 billion at quarter end, up from $14.9 billion at year end. This takes our adjusted debt-to-capital ratio to 42.6%, up from 41.3% at year-end 2014.
We remain committed to an adjusted debt-to-cap ratio in the low to mid- 40% range and an adjusted debt to adjusted EBITDA ratio of 1.5 plus. We feel our current cash outlook positions us well to execute on our cash allocation strategy.
Our profitability and strong cash generation enable us to continue to fund our strong capital program and to grow shareholder returns. In the first quarter, we bought back about 6.9 million shares, totaling $807 million.
Between the first-quarter dividend and our share repurchases, we returned about $1.3 billion to our shareholders in the quarter. This represents roughly a 23% increase over 2014, demonstrating our commitment to increasing shareholder value.
That's a recap of the first-quarter results. As we look towards the second quarter and the remainder of the year, there are a number of factors that we'll be watching very closely.
On the revenue side, we expect a favorable pricing environment to continue, supported by improving service and our strong value proposition. We remain committed to solid core pricing above inflation.
As for volume, the outlook is a little more uncertain. The recent challenges that we've seen in coal and in the shale-related markets are likely to continue.
At this point, we think coal volumes in the second quarter could be down in the mid-single-digit range versus 2014, with ongoing softness throughout most of the year, as Eric discussed earlier. For the year, strength in other areas could offset these headwinds, depending on what happens to the drivers, ranging from consumer spending to the size of the 2015 grain harvest.
Of course, as I previously noted, the volume mix shifts could also have a negative revenue impact. We will just have to see how it all plays out this year.
From the cost perspective, the second quarter will likely still reflect some impacts of operating inefficiencies, although as Cameron noted, we will see gradual improvement in productivity over time. As I mentioned earlier, if fuel prices stay close to where they are today, the net impact on earnings should be neutral for the remaining quarters of the year.
Taken together, we have our work cut out for us again in 2015, but we will continue our unrelenting focus on safety, service and shareholder returns. With that, I'll turn it back over to Lance.
Lance Fritz
Thanks, Rob. As you've heard from the team, we've had some challenges to start off the year; but we're taking the steps needed to work through those challenges and realize the opportunities we see ahead.
As Eric mentioned, weakness in our coal and shale-related markets could persist for some time; but we continue to see gradual improvement in the underlying economy, which should be a positive for other parts of our business. When you consider other wild cards, from the next grain harvest to the strength of the U.S.
dollar, it all adds up to a dynamic environment. That's the nature of our business.
Our goal is to provide our customers with excellent service wherever the need arises. We expect to see solid improvement in network performance and cost efficiency over the coming months.
As we leverage the strengths of our diverse franchise, we continue to be intently focused on safety, service and shareholder returns. Now let's open up the line for your questions.
Operator
[Operator Instructions]. Our first question is coming from the line of Tom Wadewitz with UBS.
Please proceed with your question.
Tom Wadewitz
First I wanted to ask you on coal, it seems like the macro backdrop's pretty challenging. You acknowledge that -- particularly, low natural gas prices.
But I'm wondering, your mid-single-digit decline seems somewhat optimistic versus the trend we have seen recently. There's been more like, I don't know, down 10%, 15%.
What is it that leads you to say mid-single-digit instead of worse and how much visibility do you have to that?
Lance Fritz
Eric, do you want to take care of that?
Eric Butler
Yes. As you know, Tom, a lot of factors go into play, as there was a relatively mild winter, a narrow serving territory of our utilities.
The heating days were down 5% to 10% versus last year. We're assuming more normal weather patterns for the balance of the year.
That clearly is a factor. The other factor, as you know, is this is typically the shelf months.
We see this every year where you don't really have heating or cooling during the spring. Again, we're assuming we're going to get back to normal, seasonal weather patterns.
As we mentioned, natural gas prices -- what happens with that will have an impact. A lot of factors, but that's our best assessment at this time.
Tom Wadewitz
The second or the follow-up question on the resource levels, you indicated a number of times that inefficiency, or let's say a time lag in resource production versus volume. How do we think about how that will play through in second quarter?
Do you catch up pretty quickly and see reduction in resources? Do you expect train speed to improve?
How do you think that plays out in terms of the margin performance? Does that really kick in and support margin improvement, or is that something where the revenue head wind is more the dominant factor in terms of, again, looking how that affects the OR or the margin performance?
Lance Fritz
Sure, Tom. Thinking about the time lag.
We talked to you all last year about trying to catch up with the volume. Then in the fourth quarter, we indicated we had finally caught up and were fully resourced.
Then coming into the first quarter of this year, volume shifted what I would consider fairly dramatically to be negative, ending up 2% down. It's really all about being caught in a rip tide, being behind the curve in terms of getting our resources right-sized.
When we look forward into the second quarter, we have indicated that we're anticipating better service and better efficiency. We haven't put a stake in the ground and said exactly how that happens, but we anticipate -- and I see it happening right now on the network -- we anticipate continuous improvement as Cameron and his team get the business right-sized.
Rob or Cam, any additional comments?
Eric Butler
I would add to that list them. We're always focused on improving the margins.
As Lance pointed out, we're focused on continually spruce bit on the cause the balancing the network. We will have challenges as I pointed out of the mix yet we anticipate taking hold in second quarter and beyond.
Even with all of that activity, we're always going to be focused on improving are margins of where we're today.
Operator
Next question comes from David Vernon with Bernstein Research. Please proceed with your question.
David Vernon
First question on the top-line. If you think about the range of potential downside on the frac business, have you guys try to look into that at all as far as how much demand maybe down as we get into second quarter?
Lance Fritz
Yes so a lot of things can change that or drive that, as you know, particularly, coal prices. We look at the outlook right now.
We see a mid- teens kind of a range. We see our business to look more like '13 volumes than '14 volumes.
David Vernon
Okay and then maybe a quick follow-up, the core pricing gains of 4%, I think, Rob call you mentioned inflation is going to be on the labor side, unusually high this year because of the new labor agreement. How do we think about that in terms of your expectation about pricing above inflation?
Are you expecting more productivity for back half of this year? How do we think about the pricing inflation relationship?
Or do we think that pricing that he gets better in the 2nd and 3rd quarter as reported?
Lance Fritz
David, just to [indiscernible] question, we have been consistent and clear that when we're pricing in the marketplace we're pricing for our value proposition. Whatever either Eric or Rob want to comment on, it's in that context, our pricing in the marketplace is our volume.
Lance Fritz
I want to say, David, long-term view is pricing above in place in. Not necessarily core pricing [indiscernible] to inflation and we expect higher labor inflation.
Overall, for the year, expect overall company inflation to be in the 3%, 4% range. That gives you a guiding light in spite of the challenges we know we're going to face on the labor line.
Overall, companywide we think about 3% copper% rate for the year.
David Vernon
The 4% includes the legacy reprice, right?
Lance Fritz
To make the first quarter does include legacy for pricing, yes.
Operator
Our next question is coming from the line of Rob Salmon with Deutsche Bank. Please proceed with your question.
Rob Salmon
As a clarification to David's last question in you're prepared remarks, Rob. You had indicated that the core pricing accelerated to 4% in the first quarter.
I think you had mentioned that roughly half of that was attributable to legacy. Was that half of the step up from three to four or just half of the four in aggregate?
Rob Knight
Let me clarify that. Of the 4% core pricing reported in first quarter one-half of a point of that.
3.5% to 4%. .5% was attributable to the legacy renewals.
Rob Salmon
I appreciate the clarification. Kind of taking a step back to going back to investor day, toward the end of 2014, you had indicated that your longer-term full-year volume outlook is positive.
I guess given the drop-off that we have seen in terms of shale-related business and coal challenges you indicated, as well as uncertainty in terms of [indiscernible] you still have confidence that the volume growth in aggregate will be positive or do you see that a little bit more challenging as we look out from here?
Lance Fritz
I will let Rob answer that in a little more in detail but, the thing that we think about is the beauty of our franchise, the strength of our franchise and all of the opportunity that it represents. We've have got a diverse book of business and over time we have seen that there are always areas where we can develop more business and grow.
And so we feel still quite bullish about in the long term being able to grow based on this great franchise.
Rob Knight
Lance, I would add your comment caught we know we have some challenges right now but if you look at the UP franchise, it's a fabulous franchise that has great optimism long-term. .
inventories are high right now, gas prices are low, energy prices are low which is impacting our frac business. All of those are going to balance out over the long-term.
You add-on top of that what's happening in the chemical franchise, the opportunities still in front of us longer-term with the investments being laid in the Gulf. You look at Mexico franchise and we're the only rebel that interchanges at the six border crossing and look at all of the opportunities taking place there.
You look at our strong auto franchise. You add it all up.
The diversity of our business mix and strength of our franchise caught long-term supervised a stronger optimism which is why we make think longer-term expectation still is volume will be on positive side of the ledger.
Operator
Our next question is from the line of Bill Greene with Morgan Stanley. Please proceed with your question.
Bill Greene
Rob can I ask you to put, maybe if you can little bit finer point on some of the challenges on the cost side in the first quarter? I think, last year, the sort of estimated we had about a $35 million headwind from the weather.
Can you estimate what the headwind is from some of the inefficiencies that occurred in the network this quarter?
Rob Knight
Bill, you are right. Last year we pulled in about $35 million of a deficiency tied too significant weather events, primarily in Chicago area.
This year clearly our cost performance in the first quarter is not we would like it to be. If you take fuel off of the table, our costs were about to enter billion dollars up year-over-year.
It's a combination of things that we all had talked about this morning. We had some timing issues.
We've resourced for unexpected coming into the quarter higher level of volume. We had some mechanical activities that we took on that I would categorize as timing.
And then as we pointed out with had inefficiencies in the network. Without putting a splitting hairs in terms of where those dollars are, we think they are all there for us to right-size the network.
If you look at what you would have expected if you are running optimally and had you had things timed up a little bit better, you probably had a negative in the quarter of about 122-point in operating ratio. That's how I would look at it.
Bill Greene
Okay and then your point about second quarter is it will still take some time for the network to get to the operating efficiencies that you want. Maybe it will be less than the first quarter impact but still meaningful.
Is that what you were trying to communicate?
Lance Fritz
Yes and, Cameron, why don't you walk us through a little bit about the activities that are underway to get these things right-size and get your--
Cameron Scott
We still have work to do that we think we can eventually right-size the network in the second quarter. As Rob mentioned, we do think there was some inefficiencies throughout the quarter but the rightsizing of our locomotive fleet, weekly we review opportunities to store additional locomotives and several times a month we're also rightsizing our hiring plans as we look out for the remainder of the year.
Bill Greene
Okay. Rob, let me ask you one last wish into that here.
Just on share buybacks, how opportunistic can you be or is the first quarter run rate kind of what we should expect? I mean, if the shares are down a fair amount can you wrap this up?
Do you feel you would rather have a BA consistent buyback each quarter?
Rob Knight
As you know, our approach has always then and we'll continue to be opportunistic in the marketplace. We don't have a set number of dollars or shares we will buyback inning in any quarter but I will assure you will continue to be opportunistic as we move forward.
The current price is frankly an opportunity for us.
Operator
Our next questions is coming from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Brandon Oglenski
Lance, in context, your 1st quarter wasn't that bad. Earnings were up 9% even with all of the challenges you had and yet it sounded like the tone from everyone on the call here is that we're not too happy with that.
Obviously, we could have done better. It did miss Wall Street expectations here and I think over the long run, you guys have them better at staying at expectations relative to some of the other stocks in the space.
I think investors have reported your company for that. As I hear it from some of the questions and the answers here, it sounds like we still have crossed challenges.
We're catching up for new volume reality. We don't know energy and coal markets are going to shake out.
As your content more difficult on earnings growth this year, consistent reps a plop in 2015. Is a getting more challenging to see double-digit growth this year?
I know you don't want to explicitly guy but can you help folks on this call understand where these year could shakeout?
Lance Fritz
Sure, Brandon and you're exactly right. We're not going to speak specifically about what to expect from the year from percentage perspective.
I think you've got the tone pretty well right. When I look at the first quarter, I am proud of the hard work that the team did in terms of trying to get the cost suggested to the volume reality.
I'm disappointed that we couldn't have done better because we, here at the table, see the opportunity of what the franchise really has the ability to deliver. Having said that, I am confident as I look forward that are operating team and all of the teams are focused on doing the right thing.
As we look forward, we're adjusting to current volumes at the same time as we're trying to determine what this peak season and looked like and what the growth rate look like from here. I will tell you, there is no change in my confidence both this year and over the long run of being able to generate out of this wonderful business, this beautiful franchise, the kind of financial performance and return generation that you have seen historically.
As we have said before, it gets more difficult from 65% or 64%, 63% operating ratio, but we remain absolutely confident it's there, we will realize it and continue to realize it.
Brandon Oglenski
Could you maybe talk a little bit more explicitly about some of the drivers of margin improvement this year outside of the benefit from the fuel surcharge? It seems like you do have a bit of compensation benefit headwind given the wage increases.
Obviously, if volume could come in flat or maybe even negative for the year given some of the uncertainty, what's the ability to drive leverage in the business then?
Lance Fritz
So Brandon, I think Rob and the team have outlined a core portion of that this morning which is, as we look forward as Eric said, we're in an environment where pricing, core pricing gains looks good. Cameron and team are working on rightsizing the business and generating efficiencies through the UP way and taking variable out of the network and looking for all other opportunities to generate margin improvement.
Rob, anything else you want too at?
Rob Knight
I would just remind you that it's the same levers that have got us from where we were many years ago to where we're today. While volume is our friend how we don't use it as an excuse.
You saw us perform well in years when volume did not play to our benefit. We know we have some challenges here with volumes.
We've got challenges with mix as I called out but we're going to continue to be relentlessly focused on cost control and cost management, as Lance and Cameron have outlined. As Eric talked about, pricing's note key driver.
We improved by the proposition and marketplace and pricing will continue to be a strong driver of that. To get to are longer-term widens of a 60 plus or minus operating ratio by full-year 2019, it's going to take those same efforts and same focus from the organization that we're going to continue to focus on.
Operator
Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Chris Wetherbee
I just want to try to understand a little bit better about sort of what the outlook was internally as you guys thought about 2015 and in particular the volume opportunity. I know you were looking for any positive volumes for the full-year and that was rolled in question, we have had tough comps sort of understood coming up in that next quarters.
As you're trying to adjust to volume environment, I'm trying to understand where your heads were at coming into this year versus where we're now. It seems maybe a little bit bigger of a change than anticipated.
And what to make sure I understand that.
Lance Fritz
Chris, we don't specifically address what our budgets are forecast coming into the year. What I will say is the big change is actual growth and then actual decline.
The biggest change there was coal which was somewhat surprising in terms of how weak it turned out quickly. Of course we had difficulty with the West coast ports and labor dispute.
We have pretty good visibility to that. Looking forward, Eric, why don't you talk to us about what your markets look like as you look into the future.
Rob Knight
Yes, I think what Lance said is accurate. The big swing, especially first quarter, we talked about the international intermodal West coast port labor dispute and we think will kind of normalized throughout the year but the big swing factor is coal.
As you know, Chris, as you go back really probably four months, oil price outlook for the year was still up in the 90s and is now in the 50s. Of course, that had a swing factor that is impacting broad swaps of the market also.
Chris Wetherbee
I guess that certainly makes sense. Maybe sticking on that coal question and maybe one for you, Eric, in terms of mid- single digit outlook in the second quarter that you are thinking about Colorado Utah underperformed pretty meaningfully relative to PRB in the first quarter.
Is that inherit in the second quarter outlook would you expect PRB to soften a bit on comps and then you still have weakness in Colorado Utah? I'm just trying to get a rough sense of how you think about coal?
Lance Fritz
The mid- single-digit assumes a continued profile with Colorado Utah Copper to get her to come because we're not expecting export markets to pick up significantly this year.
Chris Wetherbee
So will be roughly more performance we have seen?
Lance Fritz
Thereabouts caught driven, again, by weather and natural gas prices.
Operator
The next question is coming from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group
Rob, I wanted to ask you about some of the yield drivers in terms of how much of a negative to you think makes could be in the second quarter? And then on the pricing, the 50 basis points from the legacy pricing, maybe is a little lower than would have expected.
Wondering if that's a timing issue and that Rams or is this the volumes are down which limits the impact of the legacy repricing and it's going to stay about 50 basis points the rest of the year?
Rob Knight
Yes let me address the mix comment. As you know, we don't give specific guidance around mix because there's come again , beauty of our franchise is we have a lot of diverse business opportunities.
As a result, not common to have a fair amount of mix. We're highlighting that given the change anticipated in both the coal and fracking environment.
And continued strength in our intermodal that's likely versus the first quarter, likely to be a bit of a mix headwind as the rest of the year plays out. How precise that will be, we will have to see.
I'm not going to give precise guidance around that. In terms of your pricing question on the legacy contributor, as I have always said, you can't straight-line.
Don't take what we repriced in past years on legacy and assume that each contract is the same. They are all different.
That was what those contracts on a GAAP to market and that's what we took them up too. To your point, broadly, not just on legacy but I would say broadly, the way we look conservative Lee at calculating our prices, you know, the fact that volume was down in some key markets did have a negative impact on the way we continued brute price.
I view that as positive as volumes recover we expect to enjoy the improved returns on those business volumes we have been able to reprice.
Scott Group
Okay and the contract you repriced 416, is that showed up in this number already? Were they just right at the actual impact does not show up until mixture?
Rob Knight
It's also in that number.
Scott Group
Okay. And last thing, just to go back to the question about the buybacks.
Was your point about the extra dividend payment in the quarter, in your mind, does that have an impact on how much you bought back the first quarter? And as you go to a more normalized dividend just once a quarter, there's more or less for the buyback or they are independent?
Lance Fritz
They are independent. I was just calling out folks understood there were two differ payments in the quarter.
I would not make any correlation to that on my share buyback pace.
Operator
The next question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Ken Hoexter
Just kind of a follow up on some of the volume commentary. Maybe Eric, just talk a little bit, a little bit on chemicals given that usually a precursor for a comedy and we see trend week lately.
Longer-term your looking at plant opening up a Gulf region but more in near-term this year, is that a precursor for industrial side of the comment? Given set their.
Eric Butler
As you know chemicals business improved by rail was actually pretty good on the first quarter. We were up one percentage, two percentage points in the first quarter net accrued by rail.
We think that is a precursor to the economy. Plastics business really ties pretty closely to construction and automotive and all of those and even on consumer side and retail side of house call plastics business was up in first quarter as we mentioned.
We think that all of those trends indicate the strengthening North American economy. As Rob said earlier, we had some headwinds and coal, some headwinds we shale stuff that if you net that out, we feel pretty good about some of the underlying strength of the economy.
Ken Hoexter
Just a follow-up, Lance, maybe there is a lot of discussion at out east and in Canada about industry consolidation. Can you address union does we did this a couple of quarters ago but perhaps revisit your thoughts on how the market has changed over time and your thoughts given some of the activities or discussion on the eastern and Canadian half of the country?
Lance Fritz
Current discussions have not changed our position on industry consolidation. We're not in favor of it.
We don't think it is the right thing to do at this time.
Operator
Our next question is from John Larkin with Stifel. Please proceed with your question.
John Larkin
You had mentioned that grain exports in some cases were still pretty strong but export haul was getting it. That was due to be very strong dollar.
At you give us more complete picture of the impact of the strong dollar on the exports across more than just grain and coal?
Lance Fritz
The grain exports really were driven by milo and soybeans. We had a great soybean crop in and China is really pulling those into China and spreads between Gulf Coast, West Coast have narrowed in terms of ship spread.
That really is driving milo and beans from central part of U.S. into China which was a positive for us.
We're still seeing headwinds from the strong dollar in exports across, probably, a pretty good chunk of the economy. When you think about steel, steals being impacted, both with imports come particularly, from Asia coming into the country and domestic steel producers are struggling is also being impacted in terms of machinery exports, construction and farm machinery exports, headwinds because of strong dollar.
On the weak side, we're seeing some difficulty in the U.S. wheat crop competing in export markets partially being to the strong dollar.
The strong dollar is, as you would expect, impact the exports are pretty wide swath of the economy beyond just coal and it is helping imports. You should see our intermodal import business and other import business strengthen as you go throughout the year but the strong dollar is having an impact.
John Larkin
And maybe a question on the ever-changing energy markets. Do you have a sense for where oil prices would have to go in order to recharge the activity levels in the shales and then related to that, how high would natural gas prices have to go in order for the utilities to switch from natural gas back to coal?
Lance Fritz
If I could predict energy markets, I would probably be sitting in a different spot than today. There is a lot of conventional wisdom out there and I think the conventional wisdom was that you needed to be in the 70s for the U.S.
shale markets to be strong. I think even if you look today with oil in the 50s, there is some shale but it's still going pretty strong.
Permian shale is still doing relatively well. The Eagle Ford shale is not.
I think there is a spread there, again, conventional wisdom on natural gas is somewhere in the three, 3.5, 350 is probably in the crossover range but, again, depends on a pot of different things like utility by region of the country.
Eric Butler
John, just a little more detail. Clearly, we like to see oil prices back in the 75 cross-trained.
Clearly, that would be better for us.
John Larkin
But all of the guidance has been wrapped around no change and energy prices going for 2015, is that a fair assessment?
Lance Fritz
Yes.
Operator
Our next question comes from the line of Allison Landry with Credit Suisse Group. Please proceed with your question.
Allison Landry
Following up on your earlier comments on the underlying strength in base chemicals and prospects, can you remind us how much for business is tied to the housing and residential construction markets? Yesterday, we saw existing home sales numbers that surprised to the upside and new forms Tom starts are expected to be pretty solid for the year.
I wanted to get a view of sort of an all-inclusive perspective of the commodities that you move that are tied to these markets and what that represents as a percentage of volume or revenues.
Lance Fritz
I think, historically, we have set between 5% and 2%. We still think that's a good estimate.
Housing starts were down in February and March. I think the housing start number comes out today or tomorrow.
I think there is some expectation that weather has impacted the number being down the last couple of months and the existing home sales number was very strong, as you say. Again, we tend to factor that into our optimism about the underlying strength of the economy.
Allison Landry
As a follow-up question, given that your main competitor has seen modest improvement in velocity, albeit some easy comp's, do you think that the risk of losing some of the traffic that you gained last year as a result of their issues is now somewhat heighted? It seems like there's plenty of traffic as you go around at the West Coast ports but BNSF yesterday actually made comments it has regained some lost Ag business.
So I just wanted to get your perspective there.
Lance Fritz
The BNSF stuff has been showing improvement in their service product. We would anticipate that would happen.
They are very good, vibrant competitor. Eric had said, historically, some of the business we had shipped last year, certainly, in Ag maybe to a lesser extent some other commodities was naturally a better fit for their franchise, there network and would likely go back.
I think you see that in the Ag line in terms of reported volumes. Eric, do you want to add anything to that?
Eric Butler
No.
Operator
Our next question is coming from the line of Tom Kim with Goldman Sachs. Please proceed with your question.
Tom Kim
I have a couple of questions. First on intermodal.
Can you give us a sense how much your intermodal volumes might have been impacted by the west coast port congestion and how you think it will take that congestion to unwind to sort of filter into this Q2 numbers?
Eric Butler
So international intermodal volume was down to the low teens in the first quarter. Again, we expect that as you catch-up throughout the year that that will normalize and most of that will catch-up.
We do not expect to see any permanent deterioration of our West Coast international intermodal business.
Tom Kim
Okay. Would it be possible to give us a sense of how much your filter fuel surcharge might have impacted ARPUs for that commodity group?
Rob you had mentioned that impacted in the first quarter little bit more than the rest of the book of business.
Rob Knight
We don't break out by commodity in specific surcharge contributed to each individual commodity but there are timing differences by different contracts and we have some 60 plus different mechanisms. There can be and there are timing differences on the intermodal line versus some of the other lines.
Tom Kim
Okay. And then just with one, Rob, as a follow-up, you had commented that you anticipate some potential makeshifts ahead which could impact your revenues.
Can you talk about how the mix shift is going to affect your RTMs versus carloads? Because I noticed that your RTMs were down about 4% in the first quarter and carloads were down about 2%.
I would think this going to impact your real productivity unit cost and ultimately margins. So I'm just wondering if you could help us frame how we should think about the impact of efficiencies that might be affected by RTMs potentially being weaker than carloads?
Lance Fritz
I'm not going to break it out at this point as you are asking, Tom, but I would say mix is something we deal with. From a cost standpoint that just presents challenges and opportunities depending what the volume actually is for the operating team and Cameron's all over it improving the cost structure.
In terms of the top-line, the pricing line or the impact on revenue, again, it will depend out which markets are stronger than others. We do anticipate as I called out there will be a headwind for the balance of the year.
A simple explanation for why there is ahead hit headwind of it in our revenue line is we think there will be stronger growth and a lot of his recovery with intermodal we just talked about and soft as a goal and frac markets those are the negative drivers on that, if you will cap next headwind we anticipate. We're calling that out directionally as a challenge but we're not using that as an excuse not to continue to run as efficient operational the cost side as we possibly can.
Operator
Our next question is from the line of Jason Seidl with Cowen and Company. Please go ahead with your question.
Jason Seidl
When you look at your core pricing of 3.50%, kind of in line with what I expected but is it occurring in certain areas in terms of, are you getting more pricing now out of that truck competitive business then you were 1 year ago? Is that what is driving the improvement?
Eric?
Eric Butler
We're getting a good market waste pricing across our business. As we said before, a certain percentage of our business has been fixed on multi-year, longer-term contracts and you can't touch them.
We talked about that before but for the things that we're able to reprice, the demand is strong. The impacts in terms of the challenges of the trucking industry is having are in our favor and we see strong opportunities to price out value across our book of business.
Jason Seidl
Doesn't it get any easier to price intermodal products once the port clears up or did that not really have much of an impact on your pricing?
Eric Butler
Pricing is always difficult no matter when you do it. I would guess most of the international intermodal business would not be in spot pricing type of agreements.
Jason Seidl
Okay. And to piggy back on Allison's question as a follow-up, you obviously benefited from BN last year in several different categories and you locked up some of that business in some longer-term contracts.
One of those does when you those contracts start expiring?
Eric Butler
We don't talk about individual contracts. I don't think we mentioned that last year.
We don't talk about individual contracts.
Operator
Our next question is from the line of Ben Hartford with Robert W. Baird.
Please proceed with your question.
Ben Hartford
Eric, I did wanted to follow up on domestic intermodal pricing in particular given the decline in crude, I know there are certain lanes now where you can find intermodal pricing all-in that is competitive to trucks you guys are more insulated to that with the longer length of haul. Let's assume that crude does stabilize here around $50, $55 a barrel.
As you look into '16, do you see a situation where intermodal rate growth does have to lag, truckload rate growth going forward at current levels of crude because of the lower energy price? And some of that disparity, historical disparity between truck and intermodal might have narrowed over the past several years?
Can you provide some perspective there?
Lance Fritz
Yes, I guess I'm not white understanding the foundation of your question. I think actually truck pricing is increasing.
If you look at most of the truck pricing indexes, because of the challenges that the truck industry is having, they are getting high single-digit type price increases. So I think would suggest instead of the gap narrowing it might even be expanding rather than staying the same.
Ben Hartford
Yes got truck pricing has increased. I was asking as we go into '16, should we expect domestic intermodal pricing growth to mimic truck load or does it need to lag what the truck load rate growth is to make sure there is enough of an all-in price delta between truck and intermodal?
Lance Fritz
We have a value proposition and we're going to continue to price tag as strongly.
Operator
Our next question comes from the line of Jeff Kauffman with Buckingham Research. Please proceed with your question.
Jeff Kauffman
I want to go a different direction. We're hearing a lot about the drought in California, the lower water tables, the reduction water use and also during the quarter, we heard those I think we focused with port issues on inbound movement of products.
We also heard there was a fair amount of Ag and produce related products that could not get off the West Coast. Could you discuss how that affected you in the quarter and how you're thinking about this drought in California in terms of the growth of your Western business?
Eric Butler
The drought in California, as you know, the authorities right now in California are trying to insulate the Ag industry and really are putting the onus for water conservation on residential customers. Politically, how long that can sustain with the Ag industry being insulated is anybody's guess.
I do think that if you look at the Ag industry in California, you kind of profile who uses the most water to the least water, I think our customer base will probably be in the using the least water category. So we feel pretty good that the drought will not have near-term material impacts on our food and refrigerated business.
We feel pretty good about that. Short of some Armageddon type of scenario.
In terms of the export question, yes. So Ag products, particularly refrigerated products do go export off West Coast ports and they were similarly impacted just like the imports were impacted so just like things couldn’t get on, things couldn't get off and they similarly had impacts fourth quarter of last year and first quarter of this year.
Jeff Kauffman
As a follow-up thought last year we heard about truckers moving water into California on an as needed basis. Maybe I'm going off the deep end here but is that a potential revenue source for you over the long run?
Lance Fritz
I do not think that's material.
Operator
Our next question comes from Matt Troy with Nomura Asset Management. Please proceed with your question.
Matt Troy
I had a question, as you talk to your utility customers you mention natural gas switching impacting some of the Colorado Utah basin business. Just curious what the echoes of 2012 still lingering, how should we think about the potential for additional or incremental vulnerability in your coal business.
What's your sense in speaking with coal customers that as natural gas approaches to 250 now and potentially lower, how much has switched to how much remaining could switch? What is the vulnerability there?
Lance Fritz
I think the things that can switch probably have switched. As natural gas goes lower, there might be some incremental impact you would expect there would be.
But I think we have seen mostly--
Eric Butler
Comments on that, Matt, if you recall last time natural gas prices got to historically low levels. We really in our territory didn’t see materials switching until it got sub $2.
That doesn't necessarily predict the future but what we're seeing though and I think the bigger impact to date rather than our utility based switching from one source to another, they are able to buy electricity off the grid that is being produced by somebody else, perhaps, from gas. So we’re seeing that impact as opposed to a pure switch, turning off the coal plant and turning on the gas plant in our territory.
Matt Troy
And my follow-up would be, you mentioned PTC, I'm just curious there, I think when it was initially enacted, no one believed that it would be completed by 2015 in many of the various stakeholder groups but here we're knocking on the deadline. Curious in terms of your conversation with Washington, what it is it industry is proposing as the path forward in terms of either time frame or incremental expansion to the window?
And coming off the wall question here, what if Washington in all it's rational thought and reason decides to hold you to letter of law? What will be the implication if the industry does not make the deadline and they are not flexible?
Thanks.
Lance Fritz
I will start with a path forward. Cameron had mentioned, we believe that, virtually, everyone involved understand there has to be an extension because the industry is not going to make the date.
That extension is going to have to come through Congress. There are a number of different vehicles that could make that happen and we're monitoring all of those potentials.
And giving feedback and input into our thoughts to help navigate that process. From the perspective of having an extension occur, I remain confident that that will happen.
It just reflects the reality of the situation. From the perspective of what if we don't get an extension?
There are penalties outlined in the current regulation, current law and we've been discussing what our actions would be should an extension not occur. That would be a horrible outcome for the industry.
And I don't believe that's the way it's going to go but we will be prepared for that very, very, remote possibility, as the year comes to a close.
Operator
Our next question comes from the line of John Barnes with RBC Capital. Please proceed with your question.
John Barnes
First on the port situation, can you talk a little bit about -- you have been through this a couple of times before. Can you talk a little bit about your view of a return of market share to the western coast ports or do you think some of what's swung to the east coast and other ports is more permanent in nature?
Lance Fritz
We've said for quite some time that there may be as a low single digit number of share transfer from West Coast to East Coast when the Panama Canal opens up. The reality from our perspective is the most efficient vessels and the ones that are being commissioned, as we speak, A, they won't go through modified Panama Canal and B, there needs to be some significant work to occur on the East Coast ports in some circumstances to handle those.
Having said that, there is also a natural cost/value proposition that makes those imports want to come into the West Coast. Eric, you want to add anything to that?
Eric Butler
No. I think that about covers it.
John Barnes
So you still view it as a couple of percentage points in market share?
Eric Butler
Yes currently East Coast has about 31. Historically, we’ve said that could go to 33 with the Panama Canal opening but as Lance said, the larger ships that are being built today really won't even be able to go through the expanded Panama Canal.
There is a value proposition for the West Coast. If you look at ship spread in terms of the West Coast versus East Coast and if you look at the cost of over land, bridge, rail, transportation, there is a natural economic driver to the West Coast.
John Barnes
Okay. My other one is, I know you've got an uncertain volume environment right now at play.
I get where the pressure points are but if 2014 taught us anything is you can get caught on the other side in a more robust growth environment just as easily. How do you go about balancing where to pull in right now?
Where to pull the rings in, especially given what you experienced in '14 where you really ran out of certain resources? Can you make sure you don't pull back so much trying to balance in this environment that should growth reaccelerate that you're not back in that same similar situation as you were in 14?
Cameron Scott
In 2014, our locomotive surge fleet strategy served us very, very well. When business came on, we are able to match that business.
So as we look into this year, redeveloping that search fleet and being agile, as we mentioned, is a very critical asset and very critical initiative for us. We take Eric's forecast and where he predicts business will be and then we make our moves appropriately.
Operator
Our next question is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.
Cherilyn Radbourne
With respect to West Coast ports, I was just wondering if you could comment on the challenges associated with big ships and new shipping alliances which may remain once the backlog is cleared and what you are doing internally and with your supply chain partners to cope?
Lance Fritz
You are right, there is going to be a challenge and basically the challenges because the new alliances, as they bring their business together, they bring it all to one terminal and then overwhelms the capacity of that individual terminal on the port vis-a-vis being spread out between multiple terminals. So that is a challenge.
The alliances are working through that the challenge of terminals are working through. There was a challenge was starting to be seen before even the ports slow down.
We from outside are working with our customers developing planning practices and protocols in capacity management protocols that we're sharing with them to basically say, here is the capacity within this window that we can do into the extent that there is a larger than that flood because of alliance activity through the terminal, what do you need to do to correct that? So we did see it in the past.
We will see it in the future. We're working with them to spread that out.
Cameron Scott
Are most important asset in LA basin to stay up against the intermodal businesses is locomotives. And we have spent over the last year developing a model that stays up against Eric forecast of business week-to-week to week.
It has been very successful, are originating on-time departures out of the LA basin are in the mid-90s and we feel very confident we can keep it there.
Operator
Are next question comes from the line of Cleo Zagrean with Macquarie. Please proceed with your question.
Cleo Zagrean
My first question relates to the impact of mixed operating ratio. Can you please clarify for us whether you expect mix to be a headwind or tailwind, if a headwind is it mostly because of declines in coal and frac rather than international intermodal coming back?
Thank you.
Rob Knight
Cleo, the headwind that we would anticipate from the mix going forward is a result of, we expect strong intermodal and softer coal and fracking related activities, as you are calling out. But as always we're going to continue to focus on being as efficient as we can on the cost side.
And as Eric has been talking all morning we're going to continue to price to the value proposition. So we're not throwing the towel in terms of the margins but we know we’re going to face the headwind of those mix changes.
Cleo Zagrean
And my second question relates to coal. Can you please discuss to what extent share shifts may have affected your volumes in a flat Western coal market in the first quarter?
And your outlook for Colorado, Utah, with any kind of detail you want to share on the market for that coal and whether your long-term export outlook has changed? Thank you.
Eric Butler
Yes, there were no material contractual share shifts that we saw.
Lance Fritz
And what about Colorado Utah, Eric?
Eric Butler
There were no material shifts.
Cleo Zagrean
Okay, because we have seen been up like mid high single digits and your volumes down. So I was wondering whether those are related in any way, it's just totally separate tracks so to speak?
Eric Butler
We can't speak to their business, naturally. We kind of describe the dynamics we saw in our business, it would not surprise me if they had a much greater opportunity for inventory replenishment for their customers in the first quarter than we had, simply because we had more deliveries last year.
Operator
Our next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Brian Ossenbeck
I had one quick one on frac sand adjusting to the current outlook down mid-teens in the second quarter. But as opposed to something like coal where you have natural gas and inventories as you mentioned, a little bit of a leading indicator.
With sand it's a little tougher as the amount of sand per well continues to go up and different basins move ahead at different rate. So do you have any sense of the visibility into the second half of the year either in what you're seeing in actual orders or talking to your customers directly what the programs might look like at this point?
Thanks.
Eric Butler
I'm not quite sure where does what you are asking but it would be basically be similar to what we kind of said before.
Lance Fritz
Brian, were you asking for a crystal ball on frac sand in the second half of the year?
Brian Ossenbeck
Yes call please. I was asking how you think about the second half of the year with frac sand?
Eric Butler
I think our frac sand volumes based on current activity will probably be more similar to 2013 volumes than 2014 volumes.
Operator
Our next comes from the line of Keith Schoonmaker with Morningstar. Please go ahead.
Keith Schoonmaker
Knowing the strength in autos in the period, will you please comment on how your expectations for trades with Mexico compared with maybe somewhat tempered with overall growth rate?
Lance Fritz
Let me jump in just on the very long-term and, Rob mentioned this early on in a comment about our franchise because we do serve all six rail gateways to Mexico and because of Mexico's opening up of some of their core industries, as well as the significant foreign direct investment from the very long-term perspective, we feel very, very good about our business and growth with Mexico.
Eric Butler
I have nothing more to add with that. Mexico continues to be an upside for us.
We have a great franchise and we're optimistic about the outlook.
Keith Schoonmaker
Yes if Mexico does grow outsize compared to business in the U.S., would this be accretive?
Lance Fritz
Not necessarily. With that question actually has been in fact what we have experienced with last decade, our volumes in and out of Mexico have grown at a slightly faster pace than the overall enterprise volumes.
And I would not try to draw conclusion in terms of margin -- those moves.
Keith Schoonmaker
Is it longer haul though?
Lance Fritz
It can be, again, I would say overall scheme of things, it's no different than are overall enterprise mix.
Operator
Ladies and gentlemen this concludes our Q&A session for today. I would now like to turn the call back to Lance Fritz for closing comments.
Lance Fritz
Thank you, Rob. So you heard us talk about today was our first quarter where we came into the year, volumes changed on us dramatically and we've spent the quarter aggressively trying to write-size and just fell short of that mark.
As we look forward into the second quarter, we're looking forward to continue that work and improve our service product and our efficiencies and we’re confident that’s going to happen. And we look forward to talking to you about it the next time we get together.
Thank you.
Operator
Ladies and gentlemen thank you for your participation. This does conclude today's teleconference.
You may disconnect your lines and have a wonderful day.