Apr 27, 2017
Executives
Lance M. Fritz - Union Pacific Corp.
Elizabeth F. Whited - Union Pacific Corp.
Cameron A. Scott - Union Pacific Corp.
Robert M. Knight, Jr.
- Union Pacific Corp.
Analysts
Diane Huang - Morgan Stanley & Co. LLC Eric Morgan - Barclays Capital, Inc.
Thomas Wadewitz - UBS Securities LLC Amit Mehrotra - Deutsche Bank Securities, Inc. Scott H.
Group - Wolfe Research LLC Ariel Luis Rosa - Bank of America Merrill Lynch Jeffrey A. Kauffman - Aegis Capital Corp.
Chris Wetherbee - Citigroup Global Markets, Inc. Bascome Majors - Susquehanna Financial Group LLLP Jason H.
Seidl - Cowen & Co. LLC J.
David Scott Vernon - Sanford C. Bernstein & Co.
LLC Allison M. Landry - Credit Suisse Securities (USA) LLC James Allen - JPMorgan Securities LLC Justin Long - Stephens, Inc.
Zax Rosenberg - Robert W. Baird & Co., Inc.
(Broker) Brian Adam Konigsberg - Vertical Research Partners LLC
Operator
Greetings and welcome to the Union Pacific first quarter 2017 conference call. At this time, all participants are in a listen-only mode.
A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.
It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific.
You may begin.
Lance M. Fritz - Union Pacific Corp.
Good morning, everybody, and welcome to Union Pacific's first quarter earnings conference call. With me here today in Omaha are Beth Whited, our Chief Marketing Officer; Cameron Scott, Chief Operating Officer; and Rob Knight, our Chief Financial Officer.
This morning Union Pacific is reporting net income of nearly $1.1 billion for the first quarter of 2017. This equates to a first quarter record $1.32 per share which is up 14% over last year.
Total volume increased 2% in the quarter compared to 2016, carload volume increased in three of our six commodity groups, led by a 16% increase in coal. The quarterly operating ratio came in at 65.1% which is flat with the first quarter of 2016.
This is a very solid start to the year, especially given the weather challenges we encountered on the Western part of our network earlier in the quarter. In keeping with our strategic value tracks, our engaged employees worked safely and productively under very difficult circumstances during the quarter.
As a result, operations were restored quickly as we continued to focus on providing an excellent customer experience. Our team will give you more of the details on the quarter, starting with Beth...
Elizabeth F. Whited - Union Pacific Corp.
Thank you, Lance, and good morning. In the first quarter, our volume was up 2% driven primarily by Coal, Agricultural Products and Industrial Products, offset by declines in Automotive and Chemicals.
We generated positive net core pricing of 1% in the quarter, with continued energy related and Intermodal pricing pressure. The increase in volume and a 4% improvement in average revenue per car drove a 6% increase in freight revenue.
Let's take a closer look at the performance of each our six business groups. Ag Products revenue increased 7% on 6% volume growth and a 1% improvement in average revenue per car.
Grain carloads increased 19% year-over-year driven by ample U.S. grain supply and global market competitiveness increasing demand for grain exports, primarily wheat and corn.
Grain product carloads were flat, with strengths from DDG exports to Mexico and soybean meal shipments in the U.S. offset by a drop in canola meal and oils volume.
Food and refrigerated carloads were down 3% driven by declines in canned goods. Refrigerated markets were also down due to Western region weather challenges and ample truck availability.
Looking at the remainder of the year, the strong South American crop and continued abundance of grain stocks will create uncertainty in the grain markets. Weather and crop health will also continue to be factors.
We expect food and refrigerated shipments will see strength as the year progresses. Automotive revenue was down 1% in the quarter on a 2% decrease in volume and a 1% increase in average revenue per car.
Finished vehicle shipments decreased 8% as a result of previously referenced contract changes which we have now largely lapped and lower production levels. These changes were partially offset by increased West Coast imports and new production in Mexico.
The seasonally adjusted average rate of sales was 17.2 million vehicles in the first quarter, down 1% from first quarter 2016. On the parts side, over the road conversions and growth in light truck demand drove a 5% increase in volume.
The U.S. light vehicle forecast for full year 2017 is 17.4 million units, down 1% from the 2016 record rate of 17.6 million.
We remain cautious with respect to auto sales due to high inventory, dealer incentives and rising interest rates. On the parts side, however, over the road conversions will continue to present opportunities for growth.
Chemicals revenue was up 1% for the quarter on a 4% decrease in volume and 5% increase in average revenue per car. Petroleum and LPG shipments declined 23% as we continued to see headwinds on crude oil shipments which were down 87% to about 2,000 carloads in the quarter due to the lower crude oil prices and available pipeline capacity.
Chemicals volume excluding crude oil was up 1% in the quarter. Partially offsetting the declines in crude oil was strength in plastics which was up 3% in the quarter due to increased polypropylene shipments.
For the rest of 2017 our Chemicals franchise is expected to remain stable, strength is anticipated in plastics with new facilities and expansions beginning to come online as well as in industrial chemicals driven by improvement in industrial production. Both of these will continue to help offset the expected continued decline in crude oil shipments.
Coal revenue increased 25% for the quarter on a 16% increase in volume and 8% improvement in average revenue per car. On a tonnage basis, Powder River Basin and other regions were up 21% and 5% respectively from higher natural gas prices and stronger West Coast exports which benefited from favorable global economics for Western U.S.
coal. Overall, coal stockpiles were down in the quarter and they are nearing the five-year average.
Looking forward, we expect Coal volumes will continue to benefit from favorable 2016 comps in the second quarter. For the second half the year we expect sustained volume, assuming natural gas prices remain in the $3 range.
As always, weather conditions will be a key factor of demand. Industrial Products revenue was up 9% on a 1% increase in volume and a 7% increase in average revenue per car during the car.
Minerals volume increased 32% in the quarter, driven by a 59% increase in frac sand shipments, through increased shale related drilling activity, and profit intensity per drilling well. Construction products volume was down 9% due to projects completed in 2016 that did not continue into 2017, largely in South Texas.
This market was also impacted by Western region weather challenges. Specialized markets were impacted by reduced project-based waste shipments partially offset by strength in our wind and government markets.
For the remainder of the year, we anticipate continued strength in frac sand shipments as rig counts in our served territory continue to increase. The strength of the U.S.
dollar negatively impacts a number of Industrial Products markets, especially metals, and creates some uncertainty in our outlook. Intermodal revenue was up 3% with flat volume and a 3% increase in average revenue per car.
Domestic volume declined 1% in the quarter driven by a challenging competitive environment and abundant truck capacity. International volume was up 1% in the quarter from stronger westbound shipments, inventory restocking and volume pushes prior to the ocean carrier alliance changes effective April 1.
Looking forward we expect international Intermodal volumes will continue to be impacted by ongoing ocean carrier financial stress, industry consolidation and potential trade policy changes. While trucking capacity is abundant currently making modal conversions challenging we expect a tightening of capacity late in the year with the implementation of electronic log books providing an opportunity to drive higher levels of over the road conversions.
To wrap up, this slide recaps our outlook for the remainder of 2017 mentioned in the previous slides. Favorable coal comps will continue into the second quarter.
We also anticipate strength in other key markets including continued growth in frac sand. Our diverse franchise remains well positioned for growth this year as the U.S.
economy continues to build momentum in the face of a number of uncertainties in the worldwide economy. Our team remains fully committed to developing new business opportunities and strengthening our overall customer value proposition.
With that, I'll turn it over to Cameron for an update on our operating performance.
Cameron A. Scott - Union Pacific Corp.
Thanks, Beth. And good morning.
Starting with safety performance our reportable personal injury rate increased to 0.89 versus the first quarter record of 0.75 achieved in 2016. While disappointed with the results, the team remains fully committed to successfully addressing risk in the workplace and I am confident in our efforts as we push towards our goal of zero incidents.
With respect to rail equipment incidents or derailments, our reportable rate of 3.18 increased 11% versus the first quarter of last year. To make improvement going forward, we'll continue to focus on enhanced TE&Y training to eliminate human factor incidents and making investments that harden our infrastructure to reduce incidents.
In addition, we're collecting millions of data points on the health of our track condition and are actively developing advanced analytical models to better identify and mitigate this risk. In public safety, our grade crossing incident rate improved 7% versus 2016 to 2.21.
As I mentioned on the fourth quarter call, our crossing assessment process or CAP couples our comprehensive safety culture with data analysis to help focus increased attention on the crossings where we can most substantially impact public safety. Moving on to network performance.
Severe weather throughout much of our Western region caused multiple track outages and service interruptions during the first quarter. As a result, velocity declined 6% while terminal dwell increased 7% when compared to 2016.
Despite the weather challenges, we were still able to generate efficiency gains within our terminals as cars switched per employee day increased 4% during the first quarter. I would like to take a moment to thank the team for their hard work and dedication as they did an excellent job of restoring the network quickly and safely in an effort to minimize delays so we could continue delivering an excellent customer experience.
Moving on to resources. Throughout the quarter as part of our ongoing business planning process, we fine-tuned our resource levels to account for volume changes, weather disruptions and productivity gains.
As a result, our total TE&Y work force was down 1% in the first quarter when compared to the same period in 2016. And our engineering and mechanical work force was down a combined 1100 employees or 5%.
At the end of the quarter we had approximately 1650 TE&Y furloughs. We do expect those numbers to decline throughout the year as we look to the furlough pool first to backfill attrition.
The active locomotive fleet was up 3% for the first quarter of 2017, primarily to help minimize the impact of weather related challenges and we had approximately 1400 locomotives in storage at the end of the first quarter. As always, we will continue to adjust our work force levels and equipment fleet as volume and network performance dictate.
In addition to efficiently right-sizing our resource base, we continued realizing gains in other key productivity initiatives such as train size. Our persistent focus on productivity once again resulted in train size performance improvement as we achieved best ever quarterly results in our Automotive and manifest networks and first quarter records in our Intermodal and grain networks.
To wrap up, despite some first quarter challenges, we expect to build positive momentum as we focus on critical initiatives that will drive improvement. First and foremost is safety where we expect our safety strategy will yield record results on our way to incident-free environment.
And our balanced resource base puts us in tremendous position to leverage volume growth to the bottom line as we maintain our intense focus on productivity and efficiency across the network. With that, I'll turn it over to Rob.
Robert M. Knight, Jr. - Union Pacific Corp.
Good morning. Let's start with a recap of our first quarter results.
Operating revenue was $5.1 billion in the quarter, up 6% versus last year. Higher volumes, an increase in fuel surcharges and positive core price all contributed to the increase in revenue for the quarter.
Operating expenses totaled $3.3 billion, up 6% from 2016. The increase in fuel cost represented a majority of the increased operating expense in the quarter.
Operating income totaled almost $1.8 billion, a 6% increase from last year. Below the line, other income totaled $67 million, up from $46 million in 2016.
This increase was primarily driven by a real estate pre-tax gain totaling $26 million or approximately $0.02 per share. Interest expense of $172 million was up 3% compared to the previous year.
The increase was driven by additional debt issuance over the last 12 months partially offset by a lower effective interest rate. Income tax expense increased about 5% to $616 million, driven primarily by higher pre-tax earnings.
Net income totaled nearly $1.1 billion, up 9% versus last year, while the outstanding share balance declined 4% as a result of our continued share repurchase activities. These results combined to produce a record first quarter earnings per share of $1.32 per share.
And as we discussed back in March, we encountered severe weather on the Western part of our network which negatively impacted earnings per share by about $0.03 in the quarter. A good portion of this was lost revenue.
The operating ratio was flat with the first quarter last year even with the fuel headwind we faced during the quarter. Higher fuel prices negatively impacted the operating ratio by about 1.3 points.
Now turning to the top line. Freight revenue of $4.8 billion was up over 6% versus last year, driven by a 2% increase in volume along with positive core pricing.
Fuel surcharge revenue totaled $212 million, up $99 million when compared to 2016 and up about $25 million from the fourth quarter of last year. All in, we estimate the net impact of higher fuel prices was a $0.02 headwind to earnings in the first quarter versus last year.
The business mix impact on freight revenue in the first quarter was a positive 1%. The primary drivers of this positive mix were year-over-year growth in frac sand shipments and grain carloadings along with a reduction in shorter haul rock volumes.
Core price was about 1%. Pricing in our energy and Intermodal business continues to be under pressure given the competitiveness in those respective markets.
We expect these challenges to continue throughout the first part of 2017 before beginning to strengthen later in the year, assuming market conditions improve. Excluding Coal and Intermodal, pricing in our other business lines was in the 2% to 3% range for the quarter.
And for the full year, we are on track with our pricing initiatives to generate a revenue benefit that exceeds our inflation costs. Our strategy of pricing our service product based on the value proposition it represents in the competitive marketplace at levels that generate a reinvestable return remains intact.
Turning now to the operating expense. Slide 20 provides a summary of our operating expenses for the quarter.
Compensation and benefits expense increased 4% versus 2016. The increase was primarily driven by a combination of higher wage and benefit inflation, higher volume, and weather-related costs.
Labor inflation was about 5% in the quarter. Partially offsetting higher volumes were solid productivity gains and a smaller capital work force resulting in total work force levels declining 4% in the quarter versus last year or about 1,600 employees less.
For the remainder of 2017, we do expect force levels to adjust with volume but will also reflect ongoing productivity initiatives. Fuel expense totaled $460 million, up 44% when compared to last year.
Higher diesel fuel prices and a 7% increase in gross ton miles drove the increase in fuel expense for the quarter. Compared to the first quarter of last year, our fuel consumption rate improved 4% while our average fuel price increased 40% to $1.75 per gallon.
Purchased services and materials expense decreased 1% to $566 million. The reduction was primarily driven by lower joint facility expenses and locomotive material costs.
Turning to slide 21. Depreciation expense was $520 million, up 4% compared to 2016, primarily driven by a higher depreciable base.
For the full year 2017, we estimate that depreciation expense will increase around 4% to 5%. Equipment and other rents expense totaled $276 million which is down 4% when compared to 2016.
Lower locomotive lease expense and a mix of traffic were the primary drivers for the reduction. Other expenses came in at $260 million, up 4% versus last year.
For 2017, we would expect other expense to increase slightly excluding any unusual items. Looking at our cash flow.
Cash from operations for the first quarter totaled about $1.9 billion, down $290 million when compared to last year. The decrease in cash was primarily related to a lower bonus depreciation benefit.
Taking a look at adjusted debt levels, the all-in adjusted debt balance totaled $17.8 billion at quarter end. This does not include the $1 billion of new debt which closed just after the quarter end.
We finished the first quarter with an adjusted debt to EBITDA ratio of around 1.9 times, and this keeps us close to our target ratio of just under two times. Dividend payments for the quarter totaled nearly $500 million, compared to $465 million last year.
This includes a 10% dividend increase per share which occurred in the fourth quarter of 2016. In addition to dividends, we also bought back over 7.5 million shares totaling $800 million, an increase of around 12% over last year.
And since initiating share repurchases in 2007, we have repurchased nearly 30% of our outstanding shares. And between our dividend payments and our share repurchases, we returned about $1.3 billion to our shareholders in the first quarter, which represented just over 120% of first quarter net income.
On the productivity side, our G55+0 initiatives yielded around $90 million of productivity in the quarter. A couple of examples of our productivity include effectively leveraging volume growth that we achieved in the quarter, reducing locomotive servicing and repair costs, turning back leased equipment no longer required, and furthering our efforts to be more efficient on our support functions.
With these results, we continue to progress as expected and we are on track to meet our $350 million to $400 million productivity goal for the full year. Looking forward, we still expect full year volume growth to be up in the low single digit range.
Second quarter volumes could be a little stronger driven primarily by the benefit of an easier comparison year-over-year. With positive volume, positive core price, and significant productivity benefits, we are still on track to have an improved full year operating ratio.
Longer term, we are still focused on achieving our targeted 60% operating ratio, plus or minus, on a full year basis by 2019 and we remain committed to reaching our goal of a 55% operating ratio beyond 2019 as we continued the momentum of our volume, pricing and productivity initiatives. With that, I'll turn it back over to Lance.
Lance M. Fritz - Union Pacific Corp.
Thank you, Rob. With a solid first quarter performance behind us, we'll continue to press ahead with our volume, pricing, and productivity initiatives through the remainder of year.
As Beth mentioned, we're seeing particular strength in a few markets such as frac sand. Coal seems to have stabilized and we're seeing some signs of gradual improvement in other areas of the economy.
Our six-track value strategy will keep us intensely focused on effectively leveraging volume growth while providing our customers an excellent experience and our shareholders a solid return on their investment. With that, let's open up the line for your questions.
Operator
Thank you. Due to the number of analysts joining us on the call today, we will be limiting everyone to one primary question and one follow-up question to accommodate as many participants as possible.
Our first question today comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your questions.
Diane Huang - Morgan Stanley & Co. LLC
Hi, this is Diane Huang on for Ravi. Thank you for taking my question.
So, a question here is the average number of employees was down about 4% year-over-year despite volumes growing 2%. So, with your full-year volume outlook of up low-single digits for the year, do you expect to hold the first quarter head count level flat sequentially for the rest of the year?
And then a second part to that question is in the past you guys talked about 50% incremental margins. So, with your G55 initiative and also positive volume growth, we can see higher levels of incremental margins for the rest of the year.
Thank you.
Lance M. Fritz - Union Pacific Corp.
Thank you, Diane. We'll let Rob answer those questions.
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, on the head count question, yeah, you're exactly right in what you pointed out in terms of the great productivity that we saw in the first quarter in the face of some of the challenges that we talked about. Full year, I mean, I'll just call you back to our guidance we've given, and that is head count will move with volume, but we obviously will achieve productivity along the way, so it won't be one-for-one, So, we stay away from giving a precise number, but rest assured, to achieve our objectives we're going to continue to drive productivity and it will be reflected in those numbers.
In terms of the incremental margin, as we look out to achieve both our 60% OR guidance by 2019 and then, beyond that, our 55%, it's going to require incremental margins in the 50% to 60% range, and that's kind of how we think about it and that's what we're focused on.
Diane Huang - Morgan Stanley & Co. LLC
Great, that's very helpful. And then a quick one here.
Can you quantify how much of the $0.03 to $0.04 EPS headwind from weather was related to revenues versus expense?
Robert M. Knight, Jr. - Union Pacific Corp.
We didn't break that out, but I would just say a large portion of the $0.03 showed up on the revenue line.
Diane Huang - Morgan Stanley & Co. LLC
Okay. Great, thank you.
Operator
Our next question is from the line of Brandon Oglenski with Barclays. Please proceed with your questions.
Eric Morgan - Barclays Capital, Inc.
Hey, good morning. This is Eric Morgan on for Brandon.
Thanks for taking my question. I wanted to ask about the pricing pressure you mentioned and the competitive environment in Intermodal.
Just wondering if you could elaborate on that a bit and talk about how the current level of competition compares to what you've seen historically and maybe how that's progressed throughout the quarter and into April and your expectations on that front?
Elizabeth F. Whited - Union Pacific Corp.
We are seeing ample truck capacity in the market as well as pretty significant pricing pressure in the Intermodal space. It has not abated as we've gone into April.
As we think about the rest of the year, we certainly are expecting to see capacity tighten as electronic logbooks come into play, and so our expectation would be that you would start to see some rationalization of capacity and an opportunity for better pricing.
Eric Morgan - Barclays Capital, Inc.
All right, appreciate that. And then maybe just on frac sand, can you just talk a little bit more about the fundamentals there?
It looks like you're seeing some acceleration in 2Q. I guess where are you relative to the prior peak in that business and has there been any significant change in the mix of business?
And I guess if you're able to quantify the positive mix impact that you mentioned earlier?
Elizabeth F. Whited - Union Pacific Corp.
Okay. So, we are seeing substantial increases in demand in Texas, specifically in the Permian Basin.
We'd mentioned that we were up 59% in the quarter. We were up almost 100% in the Permian Basin and we're up around 40% in Eagle Ford.
We're seeing some spiking demand as well in the Niobrara, but not as substantial. I would say that that is sustaining and maybe even growing a little bit as we enter into the second quarter.
And I don't see anything right now that changes that, so that's been a bright spot for us. You asked a question about mix.
We are starting to see some local brown sand come into play, especially in the Permian. So, we're looking at something like 85% white sand, 15% brown sand.
We expect the pie to continue to grow and it's possible over time brown sand will take up a larger piece of the pie, but still opportunity for us and we're participating in that market as much as we can.
Lance M. Fritz - Union Pacific Corp.
Hey, Eric, just stepping back a couple of kind of high-level things that are going on in that shale energy market. One is many of these shale energy exploration plays are competitive at $50 oil and so it looks like it's potentially a sustained marketplace.
And the second thing is the sand intensity per well has been increasing and that also looks like it's a favorable trend.
Eric Morgan - Barclays Capital, Inc.
Thanks for the time.
Operator
Our next question is from the line of Tom Wadewitz of UBS. Please proceed with your question.
Thomas Wadewitz - UBS Securities LLC
Yeah, good morning. So, I wanted to – I guess first I'll just ask about Coal.
I think, Lance, you mentioned stabilization in Coal. I know there are a lot of factors that affect the business, and probably natural gas price is one of the most important.
But how do you see the lay of the land maybe over the next year in terms of impact from facility closures, impact potentially from renewables capacity coming on. Do you think that from that perspective that you would have some stability and you're really kind of weather dependent?
Or are there some other faculties like that, new capacity or shutdowns, that we should consider over the next year?
Elizabeth F. Whited - Union Pacific Corp.
We do view that as being pretty stable over the next year. You called out exactly the right factors that will impact it.
Weather clearly will remain a factor and natural gas prices are really very key to keeping coal-generated electricity on the dispatch curve. So, with those couple of things in mind, we view it as being pretty stable over the horizon here.
Thomas Wadewitz - UBS Securities LLC
Okay, great. And one on the operating side.
How would you characterize -- I mean, seems like your growth is coming in, aside from the Coal growth, you're getting a lot of growth in what might be in the manifest network, not so much in Intermodal, so I think you get good operating leverage and seems like you're doing a good job of expanding train length. How much capacity do you have to run longer trains in the manifest network?
I know it's train by train, segment by segment, but overall, have you got another 10% you could add to train length in manifest or what's the right ballpark for that?
Cameron A. Scott - Union Pacific Corp.
Tom, I won't give you an exact figure, but there is plenty of headroom inside our network, almost across the board between our three regions for more train size opportunities and we will, on a case by case, lane by lane basis, take advantage of that.
Thomas Wadewitz - UBS Securities LLC
Okay. So that leverage should continue in the near term?
Cameron A. Scott - Union Pacific Corp.
Yes, sir, it should.
Thomas Wadewitz - UBS Securities LLC
Okay. Great, thank you.
Lance M. Fritz - Union Pacific Corp.
Thank you, Tom.
Operator
Our next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.
Amit Mehrotra - Deutsche Bank Securities, Inc.
Hey, thanks, everybody. Congrats on a good quarter.
Just following up on the incremental question, the first question. I wanted to just ask the underlying – trying to understand what the underlying incrementals were in the quarter after adjusting for the weather impact.
I don't have perfect information from the data you provided but it looks like it was in the mid 50% level and then if you can just confirm that or correct me if I'm wrong? And then if you look at the OR targets over the long-term, obviously this is an enormously capital intensive business.
What I'm trying to understand as you look at bridging where you are today to where you want to be, how much of that trajectory is I guess fully kind of in your control via net cost savings and how much of it is volume growth that's kind of out of your control? I would imagine the vast majority of it would be volume growth, but please correct me if I'm wrong.
Lance M. Fritz - Union Pacific Corp.
Rob, you want to handle that.
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah. In the first quarter, our incremental margins as reported were about 35%.
And if you adjust for the fuel, they were closer to like 65%. I didn't break out the impact of weather, but obviously that had a slight impact on that calculus.
But those are the numbers as reported. And as I said earlier, to drive to our stated goals we need to be in the 50% to 60% range on an annualized basis to get from here to there and that's how we're focused.
In terms of what will drive the incremental margins, what will drive the leverage, I would just say – you said volume's out of our control, somewhat that's true because we have to play the hand the economy deals us. But we also, as part of our G55+0 initiatives, are focused on developing business development opportunities where we can have some control over volume and obviously providing quality safe service to our customers is one of the key drivers to in fact encouraging volume growth on our railroad.
So we view a lot of that as in our control and we're focused on driving quality volume, continuing to focus on providing quality service so we can price it right above inflation and continue our focus on productivity initiatives which we have been successfully delivering. You add all that up, that's what's going to get us from where we are to the 60% and ultimately to the 55%.
Cameron A. Scott - Union Pacific Corp.
Amit, I thought I heard you ask a question on CapEx and as we look forward on CapEx that's driven, you mentioned growth that's driven part by about a $2 billion spend to maintain a robust network and then the rest is about finding investments that have a reasonable and attractive return. Positive train control of course is in its last couple of years of significant investment.
So that will start trailing off and we'll see what the future brings.
Amit Mehrotra - Deutsche Bank Securities, Inc.
Okay. That's helpful.
Thanks and if I could just follow up one question on pricing. Rob, you've kind of talked over the last couple quarters ad nauseam about core pricing dynamics and how you guys calculate it.
If you can just update us, some of the energy volumes are coming back online now and just if you could provide some color if the pricing pressure or the decelerating pricing environment has abated at all as some of those volumes have come back online and also the positive spread between price increases and cost inflation that you've talked about. Has that spread changed at all since the start of the year in a more positive direction in some of the export volumes of Coal and the energy volumes are a little bit better than expected?
Thanks.
Lance M. Fritz - Union Pacific Corp.
Yeah, I would just say you're right. We have attempted to explain how we calculate price and again I'm proud to announce, as you all have heard me say for many years, that we are very conservative in terms of how we accurately capture what we report on price.
But nothing's changed from the guidance we gave. And that is that we're focused on driving dollars that we yield from our pricing initiatives higher than for the full year, higher than the dollars we expend on inflation and coming into this year we called out that that gap this year was clearly going to be tighter than last year, largely driven by some of the pressures that you're asking about in our energy and Intermodal businesses on the one hand and on the other hand a higher inflation rate, which for the full year we still see overall inflation in that 3% range which is obviously is higher than what we ended up with last year.
So nothing has changed but I would just point out that, as Beth commented in her remarks, we are continuing to face competitive pressures in the energy and Intermodal businesses, so that has not abated. That continues.
Amit Mehrotra - Deutsche Bank Securities, Inc.
Okay. Got it.
That's very clear. All right, thanks for taking my questions.
Appreciate it.
Operator
Our next question's coming from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott H. Group - Wolfe Research LLC
Hey, thanks. Morning, guys.
Just wanted to follow up there. So, if I look at the segments, Coal had the best yield growth of any of the segments, and I'm wondering is that a mix benefit or change or maybe do some of the contracts have something tied to higher natural gas prices?
And if not, does the rising natural gas environment – we understand how it helps volumes but how do you think that impacts Coal pricing?
Lance M. Fritz - Union Pacific Corp.
Rob, let's start with you and then we can have Beth...
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, Beth can talk about the pricing, but I would just say from a yield and depending on how you're calculating the yield, Scott, I would just say that a large part of what we saw in terms of the overall yields and we don't break it out by commodity group as you may like us to as finitely. But I would just say that the mix impact of the significant volume growth year-over-year in Coal really did impact the reported mix numbers on the yield that you're I think referring to.
In terms of the pricing dynamics, Beth.
Elizabeth F. Whited - Union Pacific Corp.
Yeah, the pricing dynamics remain, as Rob just said, it's really quite competitive but the length of haul helped us both coming out of the PRB and going into Texas as well as the export volumes which did grow a bit for us in the first quarter.
Scott H. Group - Wolfe Research LLC
Okay and then just maybe a bigger picture question, Lance. Relative to a quarter ago the big change in the industry is that you've got Hunter now at CSX and given what he does and the way he talks, I'm wondering does that in any way change the way that you guys think about the longer term margin opportunity?
Does it have any impact on the way you think about the business or manage the business or the pace in which you want to improve margins? Any kind of change in your thinking relative to a quarter ago?
Lance M. Fritz - Union Pacific Corp.
So, Scott, let's start by saying we have great respect for CSX, the management team there, their business. They run a good business.
They've got a great business model, and I'm sure Hunter is bringing significant change to that business model and he's got a great track record in our industry. Setting that aside, we run our business with an eye towards being as efficient as we possibly can be and driving our six value tracks.
Now we keep our eyes open, and we learn from anybody we can outside of our business, and we've done that historically, and we'll continue to do that. A great case in point is the 600-some-odd low horsepower locomotives we've taken out of our network over the past couple of years.
That was a lesson we learned from a couple of other entities, and we figured out how to apply it to ourselves, and we've done that effectively. So our focus is get to that 60%, plus minus, by 2019 and then get to 55%.
And we'll get there as quickly as we can, keeping in mind we've got a number of levers that we're moving in terms of growth on the top line, productivity and trying to drive core price. And again if somebody's got a great idea that looks like it can apply to our business model, we're going to use it, but it's not going to fundamentally change how we run our business or approach our strategy.
Scott H. Group - Wolfe Research LLC
Okay. Thank you for the thoughts, guys.
Operator
Our next question comes from the line of Ari Rosa with Bank of America. Please proceed with your questions.
Ariel Luis Rosa - Bank of America Merrill Lynch
Hey, good morning, guys. So just wanted to start on the balance sheet.
Obviously, you're getting closer to your level that you've set in terms of the target rate of two times debt to EBITDA but it seems like you're still able to access some very low cost debt. Has there been any internal discussion in terms of raising that cap and maybe increasing returns to shareholders?
Lance M. Fritz - Union Pacific Corp.
Rob, you want to take a stab at that.
Robert M. Knight, Jr. - Union Pacific Corp.
We're comfortable with the guidance we've given of that two times, but rest assured we're very focused on driving cash flow and that with higher cash flow we'll support higher levels of debt and that then supports higher levels of continued share repurchases. That's our focus.
Ariel Luis Rosa - Bank of America Merrill Lynch
So it sounds like, no, that two times cap is a pretty hard cap at the moment?
Robert M. Knight, Jr. - Union Pacific Corp.
We feel good with that as we look forward.
Ariel Luis Rosa - Bank of America Merrill Lynch
Okay. Great.
And then just turning quickly to crude by rail. The volumes are obviously down pretty dramatically this quarter.
Is that an area that's just not a viable area going forward for Union Pacific? You go back a couple of years ago, and everybody thought this was going to be a growth area for the rails.
It seems like pipeline has pretty much displaced that. Is there an opportunity that that growth could ever return?
Just would love to hear your thoughts on that.
Elizabeth F. Whited - Union Pacific Corp.
Yeah. So Union Pacific really doesn't have a crude oil franchise like some of the other railroads.
So we will continue, I think, to be spot players as opportunities open up for arbitrage. So you might see a little move to California out of Canada.
You might see a little bit move to the Gulf. But in terms of our core franchise lanes, I don't think that it's a big market for Union Pacific going forward.
Ariel Luis Rosa - Bank of America Merrill Lynch
Okay, fair enough. Thank you for the time.
Operator
Our next question is from the line of Jeff Kauffman with Aegis Capital. Please proceed with your question.
Jeffrey A. Kauffman - Aegis Capital Corp.
Thank you very much. Lot of focus on revenues and end markets.
I wanted to come back to capital investment and just get an idea on an updated basis where the CapEx guidance is, I'm assuming unchanged. And talk a little bit about what opportunities there may be going forward to take some of that capital investment down where need be.
Lance M. Fritz - Union Pacific Corp.
I'll take a stab at that and then we'll let either Rob or Cam add some technicolor. So our $3.1 billion for the year remains $3.1 billion.
Of course, there are moving parts in there, but that's what we're expecting for our full year. As we look forward, the moving parts again are about $2 billion of replacement capital annually.
We don't see much that changes that dramatically over time in order to maintain a really robust network. Positive train control is coming towards the end of its significant capital spend as we finally implement in its entirety of the project by 2018 and then work through 2020 to get the bugs kicked out and get it operating properly.
After that, it's all about growth and safety and productivity targeted investments. Rob's also talked about a ballpark of 15% of revenue, and I don't think there's much that we see that takes us off those numbers.
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, I would just reiterate that, Jeff, that that 15% is probably the best. Again, that's not how we build our capital plan.
That's the best way to kind of think about how we're thinking about it. But I would also just to Lance's comments that we are pleased with the disciplined approach we've brought to the capital planning process.
And, in fact, our $3.1 billion is down about $1.2 billion on an annualized basis from the last couple of years.
Jeffrey A. Kauffman - Aegis Capital Corp.
Looking at the 1,400 parked locomotives or locomotives in storage, I guess, I should think about, they're not all brand new locomotives. Some of them are older locomotives.
How much can you grow volume without having to make any kind of incremental investment in locomotive fleet?
Lance M. Fritz - Union Pacific Corp.
So, I'll let Cam add some, but bottom line is when you think about those 1400 parked locomotives, those are all the tail end of the fleet from the standpoint of we want to operate the most efficient, most reliable units, so those are generally going to be our newer units. You know, with that in mind, they're all serviceable and we did bring a fair number of them back, call it 400, at some point during the first quarter to overcome the impacts of those weather issues that we had on the West Coast.
So, we've got plenty of headroom for growth prior to really needing to acquire new locomotives. Cameron?
Cameron A. Scott - Union Pacific Corp.
And, Lance, we've had a lot of practice over the past several years in bringing that locomotive fleet back to life. It's reliable.
Doesn't require a lot of further investment and we've got a lot of headroom to bring on additional business without even thinking about new purchases.
Lance M. Fritz - Union Pacific Corp.
Yeah, I'll remind you we do have an obligation that's part of a long-term contract that includes purchases this year but absent the fact that we had a long-term contract, we would not be in the market.
Robert M. Knight, Jr. - Union Pacific Corp.
If I can, Lance, just to remind everybody what those numbers are that we've said. There's approximately 60 new ones this year and then 40 in 2018 and that completes that long-term commitment.
Jeffrey A. Kauffman - Aegis Capital Corp.
All right. Well, congratulations on a strong quarter and thanks, guys.
Lance M. Fritz - Union Pacific Corp.
Thanks, Jeff.
Operator
Our next question is from the line of Chris Wetherbee with Citigroup. Please go ahead with your questions.
Chris Wetherbee - Citigroup Global Markets, Inc.
Great, thanks. Good morning, guys.
Wanted to touch on mix a little bit and, Rob, I think I ask this question a lot and I'm not sure if you're ever able to answer it, but wanted to get a sense when you think about sort of the mix of the business in the outlook that looks solid, things like frac sand, I think Coal's got a decent outlook for the rest of the year. When we think about that, just sort of directionally speaking, we should be expecting some of the positive mix tailwinds that you've had over the last couple quarters to persist.
Is that fair way to look at it or is it a little bit too difficult to get into the weeds there?
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, Chris, you could probably write down my answer. That well could play out that way.
I mean, you're right, we had a positive mix this quarter of 1%, as you're pointing out, largely driven by growth in Coal and sand. But we stay away from giving guidance on the mix because there's a lot of moving parts.
And because we have such a diverse book of business, there's mix within mix in our varied business. But you're not thinking about it wrong.
I mean, if those are the commodities that continue to strengthen relative to the rest of the base throughout the year, then that's not crazy thinking.
Chris Wetherbee - Citigroup Global Markets, Inc.
Okay. That's helpful.
I appreciate that. And then just wanted to come back to sort of the competitive dynamic in the Western U.S.
between rail carriers. We've heard some anecdotal stuff about your competitor in terms of service degradation, mostly on the Intermodal side, but just a little bit around the margin there.
I know you guys compete very aggressively everyday against BN, but just wanted to get a sense of maybe how that dynamic, even if it has changed at all as we go forward here.
Elizabeth F. Whited - Union Pacific Corp.
I don't feel like anything about the competitive dynamic has significantly altered. We're competing every day with our direct competitor as well as all the other modes of transportation that are capable of handling the same sort of freight that we have.
It feels a little more intense on the Intermodal side in the first quarter, perhaps, than what we had seen, but it's an ongoing competitive situation that we are engaged in playing.
Chris Wetherbee - Citigroup Global Markets, Inc.
Okay. That's helpful.
Thanks for the time this morning, guys, appreciate it.
Lance M. Fritz - Union Pacific Corp.
Yes, thank you.
Operator
Our next question is from the line of Bascome Majors with Susquehanna. Please proceed with your questions.
Bascome Majors - Susquehanna Financial Group LLLP
Yeah, thank you. You just talked a little bit more about the competitive Intermodal environment with respect to pricing on the International side.
I'm curious, are you looking for up-pricing on the domestic side with your partners there this year? And how does that compare to the 2% to 3% range, ex Coal, ex International that you threw out earlier?
Elizabeth F. Whited - Union Pacific Corp.
Like we said before, if other things are up 2% to 3% then you're obviously having some pressure in other places to get to the 1% overall. So, we are very focused on what's going to happen with capacity as you move towards the end of the year and the electronic log books come into place, because we do think you'll see some rationalization at that time, providing an opportunity for pricing to improve in that truckload space.
But that's not the only thing that we're focused on. We want to make sure that we have a great product that's very competitive, so that as more freight wants to move away from the highway and onto rail, we're standing there ready to deliver it to our customers in the manner that they expect.
Bascome Majors - Susquehanna Financial Group LLLP
And to follow up on that latter comment, specifically with your domestic partners, how do you balance your desire to improve your pricing and returns while still leaving them enough margin to continue to invest in growing in their business and grow their volumes on your lines?
Elizabeth F. Whited - Union Pacific Corp.
I would say certainly there's no percentage in it for us if we don't all win together. So, our goal is certainly to have a viable competitive product that enables all the people who are part of that supply chain to participate in a manner that makes sense to them from a business perspective.
Bascome Majors - Susquehanna Financial Group LLLP
All right. Thank you for the time.
Operator
Next question is from the line of Jason Seidl of Cowen & Company. Please proceed with your questions.
Jason H. Seidl - Cowen & Co. LLC
Thank you, operator, and good morning, all. Wanted to stick on the Intermodal pricing a bit.
How should we expect it to start improving if, in fact, ELDs do, like most of us think, tighten up truck capacity? Is that pricing going to be a little bit of a lag?
So, should we expect like a 2018 improvement and not an improvement in 2017 in price?
Elizabeth F. Whited - Union Pacific Corp.
No, the ELDs come into play in late 2017. The requirement gets hardened.
I think you just have to see, depending on bid cycles and other things, where you start to see the impact of that. Hard to predict.
Jason H. Seidl - Cowen & Co. LLC
Okay. And I wanted to jump back to something on the cost side.
Rob, you mentioned labor inflation, I think, was about 5% in the quarter. Is that something that we should think about going forward about that number 5% for labor inflation?
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, I think it's a reasonable number to assume, Jason, both the 5% on labor and overall enterprise right around 3% for the full year.
Jason H. Seidl - Cowen & Co. LLC
Right. And so, head count, obviously will depend upon what's happening with the volume side.
Robert M. Knight, Jr. - Union Pacific Corp.
That's right. That's right.
Jason H. Seidl - Cowen & Co. LLC
Okay, fantastic. I appreciate the time, as always, guys.
Operator
Our next question is from the line of David Vernon with Sanford Bernstein. Please proceed with your question.
J. David Scott Vernon - Sanford C. Bernstein & Co. LLC
Hey, good morning, guys. Thanks for taking the question.
Lance, I wanted to ask you a question about some of the incentives that you guys maybe have put in place or are talking about putting in place through the board around the drive towards a 55% OR. One of the pushbacks we get in sort of recommending your stock is that there's a perception out there maybe management is a little bit taking their time on the margin side.
There isn't as much of a sense of urgency. I'm just wondering if you guys have had any discussions about trying to address that through some specific initiatives tied towards margin goals or margin achievement.
Lance M. Fritz - Union Pacific Corp.
Sure. I assure you management is not taking its time on trying to improve our margins.
If you look at our long-term incentive plan, our proxy lines out the fact that it's built around an improved ROIC, or encouraging us to improve our return on invested capital. And in that there's a kicker that's designed around improving our operating margin.
But all of our incentives essentially line us up, whether it's our long-term incentive plan or the fact that we're all significant shareholders or our short-term incentive plan, they're essentially all lined up for us to improve our operating margin and our return on invested capital as quickly as we can. The payouts get better and grow the faster and better we make those improvements.
Robert M. Knight, Jr. - Union Pacific Corp.
And, David, I have to just jump in here. This is Rob.
We're actually – while we have every incentive, as Lance just commented on, and proud of the fact that everybody in our organization has 55% sort of on their mind, we're driving towards that. We are also proud, as the largest U.S.
railroad to have the lowest operating ratio of the U.S. rails.
That is something that we've worked hard at and are very proud of and we're going to continue that line of thinking to drive us to the 55%.
J. David Scott Vernon - Sanford C. Bernstein & Co. LLC
Yeah, and I just wanted to be clear that this is just a perception that I think some investors have in terms of maybe the radical change that's happening in the East and some of the targets that have been put out there, even for like Norfolk management around margin attainment. I was just wondering if you guys were going to be thinking about making that more front and center as far as trying to give the market a little bit of confidence that you guys are really pushing this target toward 55% and it's not just a target that's out there that you're going to drift towards, which is...
Lance M. Fritz - Union Pacific Corp.
A couple of other reminders, right? We generated over $400 million in productivity last year.
We talked about generating over $350 million in productivity this year. We are not just wandering around in the woods.
J. David Scott Vernon - Sanford C. Bernstein & Co. LLC
I appreciate that and thanks for the color.
Operator
Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your questions.
Allison M. Landry - Credit Suisse Securities (USA) LLC
Good morning, thanks for fitting me in here. Could you remind us what percentage of your book of business is under multiyear contract?
And with pricing flat versus Q4, first, do you think we're at a bottom here? And then second, could full-year core price be up versus 2016 on the increase in these inflation escalators alone?
Lance M. Fritz - Union Pacific Corp.
Beth, can you handle those questions on multiyear and what expect out of pricing?
Elizabeth F. Whited - Union Pacific Corp.
Yeah, so we have about 40% of the business that's in longer term deals with escalators of one sort or another on them. We also do expect to see, based on market conditions that we've been talking about this morning, some improvement as we get towards the end of the year.
Obviously, volume helps us, improvements in our customers' ability to get price in their markets, an improving economy helps us and volume can be our friend as well.
Allison M. Landry - Credit Suisse Securities (USA) LLC
Okay. And just a quick one on frac sand.
We've obviously seen some announcements from some of your customers for new facilities or expansions, so, with the significant increase that you've seen in the first quarter and thinking over the next few quarters, do you think that at some point during 2017, from a volume standpoint, that you could get back to a peak run rate that you saw back in 2014?
Elizabeth F. Whited - Union Pacific Corp.
I don't see us coming back to that sort of a peak in 2017. No.
We do see good investments happening and we feel positive about what's happening in those markets, but I don't think we'll get back to peak levels soon.
Allison M. Landry - Credit Suisse Securities (USA) LLC
Okay. Thank you.
Lance M. Fritz - Union Pacific Corp.
Thank you.
Operator
Our next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
James Allen - JPMorgan Securities LLC
Hi, guys, it's James Allen on for Brian. A question, my first question is on protectionism.
We noticed the softwood lumber penalties that the U.S. is imposing on Canada and the Canadians have responded proposing a ban on U.S.
thermal coal going into Canada, so, I guess we wondered if you had, first off, any direct exposure to the thermal coal? And then just what your view was on protectionism more broadly, if you thought there were any major risks or opportunities for your book of business as freight flows might change?
Lance M. Fritz - Union Pacific Corp.
I'll take the freight, the trade question and it's broader and you can talk about coal, Beth. So, in terms of trade overall, our perspective is the following: that the U.S.
economy is tightly connected to our trading partners. We understand that open global trade and more markets available to U.S.
manufacturers and producers is critical both for jobs in the United States as well as for the economic vibrancy of the United States. We believe that that's well understood also in our current administration and we believe that while there are opportunities to both enforce existing trade agreements, enhance them and negotiate new ones, that the long-term answer is more markets available to U.S.
manufacturers and producers is better than fewer markets available. That's essentially the pathway towards economic prosperity and job creation.
So, with that, I'll let Beth answer the thermal coal question.
Elizabeth F. Whited - Union Pacific Corp.
So, we do not access the export facility in Vancouver that's being referenced in the most recent discussions about access. The coal that we export off the West Coast is hitting locations in California.
James Allen - JPMorgan Securities LLC
Great. And then a quick follow-up question would be on the STB.
There's a slightly changing composition with a new chairperson and new board seats, so just wondering in your interactions with the STB, has there been any new flavor to your discussions? Or any changes that you'd expect as they progress with existing regulatory initiatives?
Lance M. Fritz - Union Pacific Corp.
Following the reauthorization in I think it was late 2015, the STB got very active at clearing a docket of a number of different items that were in front of them. We've seen that activity slow down a touch, which makes sense given that the current administration has the opportunity to appoint board members of that organization.
What we're encouraging the STB as they're thinking about their docket of work is to not simply just look at each individual item as a stand-alone item, but also bear in mind that they all work together as a quilt of overriding regulation on the industry, and to think about the kind of interactivity of all the regulation they are contemplating. We look at the STB historically and think the balance they've struck has been good for the industry, and mostly important is good for the customers, letting the market work where the market will work and in those unique circumstances that require it imposing regulations.
So, we keep encouraging them to be a deft hand when they're looking at their docket.
Operator
Thank you. Our next question is from the line of Walter Spracklin with RBC.
Please proceed with your questions.
Unknown Speaker
Good morning, this is [indiscernible (59:38) on for Walter Spracklin. Just want to come back to the competitiveness there in the market.
Your growth in grain volumes has remained strong. Is this a factor of the bumper grain crop moving and the export grain you mentioned?
Or are there other share factors that might be helping to maintain that growth rate?
Elizabeth F. Whited - Union Pacific Corp.
Yeah, I wouldn't call that a share play. We saw really strong demand for wheat, stronger than we've seen in a while, for export largely to Mexico, as well as good corn movements in the world markets.
So, not a share issue, I wouldn't say.
Unknown Speaker
Okay. That's very helpful.
And then just switching to your OR here. How should we be thinking about the cadence towards an OR improvement over the year?
Are there going to be more impactful initiatives that could land in one quarter? Or do you expect it to be a more even pace over the year?
Thank you.
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, this is Rob. We don't give guidance by quarter on operating ratio but, as a reminder, we are giving guidance that we expect to improve our operating ratio for the full year.
But it never is a straight line. Volumes will dictate largely exactly what that cadence ends up being, but we're very focused on continuing to drive productivity.
We talked about the pricing, a component of this being challenged in the first part of the year and hopefully improving later in the year. So, I wouldn't give you any indication that it would be a straight line.
It could be lumpy, but the focus is the full year number.
Lance M. Fritz - Union Pacific Corp.
This quarter is a great example, Rob, where, what'd we have, 1.3 percentage points impact by fuel lag.
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, good point. Fuel can always be a factor in that.
Unknown Speaker
All right. Thanks so much.
Operator
Our next question comes from the line of Justin Long with Stephens. Please proceed with your questions.
Justin Long - Stephens, Inc.
Thanks and good morning. So, just to follow up on Intermodal, I don't want to beat a dead horse here, but from a directional standpoint do you think domestic Intermodal pricing will still be up this year?
And you mentioned competitive pricing pressure in Intermodal, and really what I just want to get a sense for here is I want to understand how much of that is related to domestic Intermodal versus international Intermodal?
Elizabeth F. Whited - Union Pacific Corp.
The domestic and international Intermodal are both under pricing pressure. I would say we saw perhaps an acceleration of the pricing pressure in the domestic Intermodal space in the first quarter.
Again, depending on what happens in those markets and what happens as we see the tightening capacity that we expect with electronic log books will really be the things that will determine what ends up happening overall with your pricing for the year.
Justin Long - Stephens, Inc.
Okay, that's helpful, but do you still think there's a possibility for your domestic Intermodal pricing to be up in 2017?
Lance M. Fritz - Union Pacific Corp.
Justin, we don't guide on price specific to commodities.
Justin Long - Stephens, Inc.
Okay. Fair enough.
And then, secondly, I was wondering if you could give some additional color on the assumption you're making for Coal volumes within the full year guidance. What are you assuming for growth in Coal volumes in the second quarter?
And just to clarify some of the earlier commentary, were you suggesting that Coal volumes in the back half of the year are likely to be relatively flat on a year-over-year basis?
Robert M. Knight, Jr. - Union Pacific Corp.
Justin, this is Rob. Let me take a stab at that.
And, as you know, we don't give specific precise guidance by commodity for the year, but I would just – as it relates to Coal. I would just remind you of some of the comments that Beth made earlier, and that is it feels stable to us.
The things to watch in Coal, as always, will largely be what's happening with gas prices and what's happening with weather. That will dictate from quarter to quarter what's actually happening with volume.
The other thing we did point out is that we do have an easier comp as we head into the second quarter as it relates to our overall volumes, including Coal, and if you look at our last year numbers, that kind of flips later in the year, the third quarter gets a little more challenging. So, I think I would expect, all things being constant, that you'll see some changes from quarter-to-quarter as it relates to year-over-year volume growth in the Coal line.
Again, comps are easier in the second quarter and get challenged in the third quarter, and it feels like a stable environment for us.
Justin Long - Stephens, Inc.
Okay, great, I'll leave it at that. I appreciate the time.
Lance M. Fritz - Union Pacific Corp.
Thank you, Justin.
Operator
Our next question is from the line of Ben Hartford with Robert W. Baird.
Please proceed with your questions.
Zax Rosenberg - Robert W. Baird & Co., Inc. (Broker)
Hi, this is actually Zax Rosenberg on for Ben. Thanks for taking the question so late here.
Just wanted to – a couple for me. Just wanted to follow up first on the trade questions from before and see if you have any specific thoughts on the proposed lumber tariff from earlier this week and how that potentially impacts your guys business specifically.
And then secondly, flipping back over to Intermodal, there was a comment earlier about a volume push ahead of the some of the ocean freight, the carrier lines changes, and just wondering the expected impact of those alliance shifts and maybe possible diversion of ships to Canadian ports or what your thoughts are generally there? Thank you.
Elizabeth F. Whited - Union Pacific Corp.
Okay on the softwood lumber, we really feel like those tariffs were priced in, where you saw a very significant run-up in the lumber prices in the first quarter. So, that doesn't feel like that's going to be impactful in terms of volume to us.
And then, on the Intermodal side in terms of the alliances, that is still shaking itself out in terms of port usage and who's calling where and what size of ship and those sorts of things. Right now, it seems to be going pretty well.
We're not seeing any significant disruptions. Feels like the process is playing out well.
As you know, there is more capacity coming online in Canada later in the year. I would expect that a large amount of that could be utilized for Canadian shipping needs.
So, we're not really expecting to see significant shifts at this point, but we'll have to see how it plays out and it will be wedded with the alliances.
Lance M. Fritz - Union Pacific Corp.
Hey, Zax, going back to your softwood lumber question, what's really critical to us is getting housing starts and construction up. We have a wonderful franchise that kind of regardless of where the wood's coming from, we just need it to be consumed.
Zax Rosenberg - Robert W. Baird & Co., Inc. (Broker)
Great. Thanks for the color.
Operator
The next question is from the line of Brian Konigsberg with Vertical Research. Please proceed with your questions.
Brian Adam Konigsberg - Vertical Research Partners LLC
Hi, good morning. Thanks for taking my question.
A lot of ground has been covered already. Just curious on the performance on RTMs versus carloads.
Obviously, very good performance in RTMs, and also the relative difference in the carloads, presumably like the haul. Just curious should we expect that there's going to be that type of divergence for the remainder of the year or might those kind of come together as we progress through the year?
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah, Brian, this is Rob. That measure, and I kind of made this reference earlier in the Q&A, that RTM impact that you're referring to was largely driven in the first quarter by the upswing in the Coal volumes, and we're not going to give guidance in terms of how that's going to play out for the year because what will drive that is what's the mix of the volume that we, in fact, see come across the book.
Brian Adam Konigsberg - Vertical Research Partners LLC
Right, okay. And actually, this is more of a kind of theoretical-type question.
I'm not sure how many specifics you can provide, but just given the discussion around tax and proposals on rates and previously there was discussion on the treatment of deduction on debt interest in the P&L. So, I don't know if you ran these scenarios through and have some thoughts around if they do not allow or they disallow interest tax deductions, might that change the capital allocation policies that you currently have in place?
Lance M. Fritz - Union Pacific Corp.
Rob, you want to take that?
Robert M. Knight, Jr. - Union Pacific Corp.
Yeah. There's a lot of devil in the details on the tax proposals.
We, like everyone, are staying in tuned and watching what happens on that. But, so, yeah, there could be some impact.
I wouldn't envision that, depending on how the interest plays out, I wouldn't envision that would change our capital spending or our debt guidance that we've given. I wouldn't envision that that will be the result of any changes as it relates to the interest.
Brian Adam Konigsberg - Vertical Research Partners LLC
Got it. All right, thank you.
Operator
Thank you. There are no further questions at this time.
I would like to turn the floor back over to Mr. Lance Fritz for closing comments.
Lance M. Fritz - Union Pacific Corp.
Okay, thank you, Rob, and thank you for your questions and interest in Union Pacific. We look forward to talking with all of you again in July.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.