Genesee & Wyoming (GWR) John C. Hellmann on Q4 2015 Results - Earnings Call Transcript

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Genesee & Wyoming, Inc. (NYSE:GWR)

Q4 2015 Earnings Call

February 09, 2016 11:00 am ET

Executives

Thomas D. Savage - Treasurer & Vice President-Corporate Development

John C. Hellmann - President, Chief Executive Officer & Director

Timothy J. Gallagher - Chief Financial Officer

Michael O. Miller - Chief Commercial Officer for North America, Genesee & Wyoming, Inc.

David A. Brown - Chief Operating Officer

Analysts

Allison M. Landry - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Alexander Vecchio - Morgan Stanley & Co. LLC

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Scott H. Group - Wolfe Research LLC

Robert H. Salmon - Deutsche Bank Securities, Inc.

Justin Long - Stephens, Inc.

Jason H. Seidl - Cowen & Co. LLC

Bascome Majors - Susquehanna Financial Group LLLP

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter Earnings Call for Genesee & Wyoming. At this time, phone lines are on a listen-only mode. Later on, we will have a question-and-answer session with instructions given at that time. And as a reminder, today's conference call is being recorded.

At this time, we'll turn the conference over to our first speaker, Tom Savage. Please go ahead.

Thomas D. Savage - Treasurer & Vice President-Corporate Development

Good morning. Thank you for joining us today on Genesee & Wyoming's Q4 2015 earnings call. Please note that we will be referring to a slide presentation during today's call. These slides are posted on the Investors page of our website, www.gwrr.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measure are likewise posted on the Investors page of our website.

We will start with the Safe Harbor statement and then proceed with the call. Some of the statements we will make during this call, which represent our expectations or beliefs concerning future events are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a Safe Harbor for such statements. Our use of words such as estimate, anticipate, plan, believe, could, expect, targeting, budgeting or similar expressions are intended to identify these statements and are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from our current expectations including, but not limited to, factors we will discuss later and the factors set forth in our filings with the Securities and Exchange Commission.

Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We do not undertake and expressly disclaim any duty to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. And you should recognize that this information is only accurate as of today's date.

On the call today, we have four speakers, our President and CEO, Jack Hellmann; our Chief Financial Officer, T.J. Gallagher; our Chief Operating Officer, David Brown; and our Chief Commercial Officer, Michael Miller.

I'll now turn the call over to our President and CEO, Jack Hellmann.

John C. Hellmann - President, Chief Executive Officer & Director

Thank you, Tom, and welcome to G&W's earnings call for the fourth quarter of 2015. As always, we will start our call this morning with safety. On slide number three, you will see the G&W same railroad safety index was 0.51 injuries per 200,000 man hours in 2015 leading the rail industry for the seventh consecutive year. Meanwhile, our newly acquired Freightliner operations operated at the safety index of 2.1 in 2015. So that obviously remains a key priority for us.

After a recent run of more than 40 days injury free at Freightliner, we are confident that we are headed in the right direction. I should also note that it took us more than two years to bring RailAmerica's safety performance down to G&W's pre-acquisition levels.

Now let's turn to financial results for the fourth quarter 2015 and slide number four. Our adjusted diluted EPS of $0.85 were in line with our revised guidance. Compared to the fourth quarter of 2014, our adjusted diluted EPS were down 24%; or 21%, excluding foreign currency. Driving the weakness in our business were the same three trends that have affected us since early 2015. First has been the collapse in the price of global commodity such as iron ore, copper, manganese and crude oil, which has reduced or eliminated shipments from multiple customers.

Second has been the rapid shift of U.S. and UK power generation away from coal to cheaper natural gas, as well as other renewable alternatives, which has significantly reduced our coal shipments. And third has been the strong U.S. dollar, which is making our industrial customers such as steel producers as well as our agricultural customers less competitive in global markets.

Turning to slide number five, our results versus our original guidance in October are helpful in highlighting the trends in our business. As you can see, our operating income was around $9 million below our original expectations, with shortfalls in two of our three geographic segments. Roughly, 70% of the shortfall came from North America, primarily due to weakness in steam coal caused by mild winter weather; weaker steel, due primarily to a customer bankruptcy in Canada; and lower grain shipments due to low crop prices and a strong U.S. dollar.

On the cost side, we were also impacted by a bridge fire in our Pacific region and the derailment in Canada. About 30% of our fourth quarter shortfall came from Australia where a manganese mine closure caused us to seize shipments in November. Turning to the UK/Europe, while it is not evident in the Q4 numbers, we also had a shortfall in our UK coal business as a result of an extremely mild winter and the impact of low natural gas prices.

So now let's turn to slide number six and North American performance in the fourth quarter. Overall, you'll see that our same railroad revenues were down 11% due primarily to a 37% decline in steam coal shipments and a 23% decline in steel shipments. However, our margin loss on same railroad revenue was just 43% despite of being high-margin traffic; thanks to cost cutting efforts that help keep the operating ratio at 75.5%.

Now let's turn to slide number seven and Australian performance in the fourth quarter. Our revenue declined nearly 29% on a same railroad basis, excluding Freightliner Australia and the impact of the weaker Australian dollar. The reason for the sharp Australian revenue decline was largely due to the previous closure of two iron ore mines, as well as the recent closure of the manganese mine. We continue to make cost reductions in Australia. However, the revenue losses have been significant and resulted in a 56% decline in our fourth quarter operating income.

Now let's turn to slide number eight and the UK/Europe performance in the fourth quarter of 2015. Our results were consistent with our expectations, with the exception of UK coal shipments. Coal stockpiles have remained stubbornly high due to warm winter weather and cheap natural gas, which is causing us to lower our coal expectations and to restructure the UK coal business in 2016, which I will detail in a moment. Note that UK intermodal shipments generally track normal seasonality with the peak season ending in the middle of the fourth quarter.

Now before I move on, let me make an observation about G&W's earnings guidance, which we've provided for the past 15 years. Despite our recent poor track record of accuracy, we plan to continue providing guidance. Our thinking is simple. We manage our railroads to a budget and/or an outlook, and we think that investors are better off with an understanding of those expectations than without. And while our earnings may be more volatile in an uncertain macroeconomic environment, we continue to think it is valuable to explain variances to our expectations and how we manage the business in response. Meanwhile, providing annual and quarterly earnings guidance doesn't in any way affect our strategy, how we invest or how we manage our business for the long-term.

Now let's turn to slide number nine and take a high level look at 2016. As T.J. will detail in a moment, on a consolidated basis we expect adjusted diluted EPS to decline roughly 10%. Meanwhile our free cash flow in 2016 is expected to increase 10% to $285 million prior to capital for new business investments. Please note that our earnings and free cash flow outlook do not include any one-time expense for workforce restructuring in the UK and Australia.

Also in 2016 we expect to deleverage from 3.7 times net debt to EBITDA to 3.4 times net debt to EBITDA, assuming no share repurchase or acquisitions and investments.

Now let's turn to a high-level view of our three business segments. In North America, which is roughly 81% of our operating income, we expect total carloads to be down 3% for the year with core pricing up around 3%. The result is our outlook for North American operating income is slightly down in 2016.

A few points to highlight. First, we expect North American coal revenue to decline 15% to 20% to a total of $75 million to $80 million in 2016, primarily due to natural gas competition and the mild winter. Second, we expect the strong U.S. dollar to continue to adversely impact our volumes due to cheaper imports of commodities such as steel and less competitive exports of commodities such as paper and agricultural products.

Turning to slide number 10. In Australia, we expect our operating income to be down roughly 25% in 2016. This decline is due to weaker iron ore and manganese shipments, as well as the income translation of a weaker Australian dollar.

A few points to note. First, our remaining iron ore exposure in Australia is approximately US$44 million of revenue in 2016. Second, an additional round of cost reductions is underway in our Australian business, following the closure of the manganese mine. On the positive side I should note that we are bidding on several new commercial opportunities, and one new contract is expected to start shipments in the second quarter.

In the UK/Europe segment, we expect operating income to be flat in 2016. In a moment I will walk you through the restructuring of the UK coal business, after which we expect the operating income in the UK and Europe to be up over 15% in the second half of 2016, or nearly 20% excluding currency.

A few points to note. First, we expect UK coal revenue to be down from an annualized run rate of approximately US$30 million in 2015 to less than US$15 million in 2016. The first quarter of the year is typically one of the stronger periods for UK coal, but we do not expect that to be the case in 2016, hence the need to restructure.

Second, we're expecting growth in both aggregates and UK intermodal in 2016 due primarily to the partial redeployment of coal equipment to serve new customers. And we are actively bidding on other new business as well.

Third, in continental Europe we have been eliminating unprofitable lanes in Freightliner's intermodal business, which will create a small uplift in financial performance in 2016.

Slide number 11 details the restructuring of our UK coal business in 2016. This is a low-margin business segment that we originally expected to fade through 2022, but the pace of the fade has been much faster than we expected due to cheap natural gas. Overall, the slide tells you that we have an annualized US$15 million drag on our EBITDA in 2016 versus our original acquisition plan, due primarily to fixed labor and lease costs. We have plans to reduce that drag to an annualized US$10 million by mid-2016 after the workforce restructuring.

Not in our outlook is our plan to redeploy all or a portion of US$5 million of leased equipment, which would otherwise mostly expire by 2018, to generate additional business. When the restructuring and redeployment of equipment are complete, what this means is that we have a roughly US$5 million shortfall in EBITDA from UK coal. But we are actively working to fill that gap with other new business in the near-term and have made good progress over the past few months.

Now let's turn to slide number 12 and our priorities for 2016. Our first priority is the safety of our people and our railroads. We continue to make significant advancements in our culture of safety and expect to further integrate Freightliner into G&W's culture over the course of 2016.

Our second priority is to maximize our efficiency and generate strong free cash flow. We are expecting to increase our free cash flow prior to new business investments by 10% to $285 million in 2016.

Our third priority is commercial growth. Despite the tough environment we are bidding on several major new contracts in four different countries right now.

Our fourth priority is an extension of the U.S. Short Line Tax Credit that expires in 2016. One legislative possibility that may present itself is in a lame-duck Congress after the presidential election.

Our fifth priority is acquisitions and investments. We will use our unique global rail platform to identify the best opportunities for investment amidst economic dislocation worldwide. We remain confident that significant new opportunities will continue to emerge. And we will weigh those alternatives versus the intrinsic value of our own shares.

And I'd now like to turn the call over to our Chief Financial Officer, T.J. Gallagher. T.J.?

Timothy J. Gallagher - Chief Financial Officer

Thanks, Jack, and good morning everyone. I'll be going through the results for each of our segments in greater detail followed by our guidance for full-year and first quarter 2016.

Let's get started with North American Q4 revenues on slide 13. Fourth quarter revenues in North America decreased $39.7 million or 11.7%. FX and lower fuel surcharges reduced revenues by approximately $17.5 million and accounted for nearly half the variance, with the remainder primarily lower coal, metals, and agricultural products.

Slide 14 shows the comparison of same railroad carloads by commodity. For North America, the variances directly correlate with two of the themes that Jack noted in his remarks, reduced coal demand given low natural gas prices and the impact of the strong dollar. Coal is down 40,000 carloads or 43%, and the strong dollar impacted agricultural products, auto and auto parts, metals, and pulp and paper, which collectively were down 24,000 carloads.

Moving to slide 15. Same railroad North American average revenues per carload in the fourth quarter increased 3.3% versus fourth quarter of 2014. Excluding the impact of changes in the mix of commodities, changes in fuel surcharges as well as currency, average revenues per carload increased 7.9%. Results in the fourth quarter, however, benefited from a favorable customer mix in metals and other commodities; and so the increase in North American same railroad core pricing was closer to 3.5%.

Now moving to Australia on slide 16. Australia revenues declined $17.2 million or 24% compared with the fourth quarter of 2014. Similar to the decline in the third quarter, the two largest variances were the weaker Australian dollar and iron ore, partially offsetting was $11.8 million of revenues from Freightliner Australia.

Now let's turn to slide 17. Given the Freightliner acquisition occurred in March 2015, we show the sequential change in revenues for our UK/Europe segment from the third quarter to the fourth rather than a year-over-year comparison. The pound weakened in the fourth quarter, which reduced revenues sequentially by $3.5 million.

In addition, intermodal weakened seasonally and coal traffic increased slightly, although by much less than expected due to mild winter weather and low natural gas prices, although the revenue increased by net $3.5 million.

Now moving to our outlook on slide 18. Let me refer you to our earlier safe harbor statement that noted that these statements are subject to a variety of factors that could cause actual results to differ from our current expectations. These statements represent management's expectations regarding future results as of today, February 9, 2016, and we do not undertake any obligation to update this information.

In 2016, we expect revenues of approximately $2 billion and an operating ratio around 81%. We expect our diluted earnings per share to be in the range of $3.60 to $3.80 with diluted shares at 58 million. Free cash flow is expected to be approximately $250 million or $285 million excluding new business investments. In the appendix, there is an additional support information including an outlook for each segment for 2016.

On slide 19, we show a revenue bridge from 2015 to 2016. The big picture is that revenues are flat year-over-year as the full-year impact of the Freightliner acquisition is offset by FX, lower fuel surcharges, lower Australia iron ore and manganese revenues, as well as lower U.S. and UK coal.

On slide 20, we have an operating income bridge. Operating income is expected to decrease roughly 5% from 2015 to 2016. The revenue items noted on the previous slide will reduce operating income $44 million, but are partially offset by cost saving measures that are expected to yield approximately $70 million.

Now let's move onto segment specific outlooks starting with North America on slide 21. In North America, we expect revenues down roughly $40 million or 3% primarily due to the weaker Canadian dollar, lower fuel surcharges and coal, which is expected to decrease $15 million year-over-year. All other commodities are expected to be, net, flat.

On slide 22, we have an outlook for North American operating income. Operating income is expected to decrease 2% year-to-year. We expect the net impact of lower fuel surcharges to be approximately $7 million; and we expect lost margin on coal revenues of approximately $10 million, offsetting our expense reductions of $12 million.

Now let's go to Australia on slide 23. In Australia, we expect revenues to decline roughly 10% year-over-year. The combined $42 million impact of the lower Australian dollar and Australian mining is partially offset by the full-year impact of Freightliner Australia, as well as several other new customers.

Slide 24 shows the operating income bridge for Australia. Operating income is expected to decline 25% or 20% excluding the impact of FX. The margin on lost revenue from Australian mining is estimated at $15 million and the full year impact of Freightliner Australia and all other changes bridges to the outlook of $42.5 million.

On slide 25 is the revenue bridge for our UK/Europe segment. Starting with $516 million from 2015, we expect a $32 million decline in revenues due to FX, primarily the weaker pound. The revenue impact of the continental Europe intermodal route rationalization and weaker coal, both of which were discussed by Jack earlier, are estimated at $30 million and $15 million respectively. Offsetting these declines are the full-year impact of the Freightliner acquisition and all other growth.

On slide 26, there is an operating income bridge for our UK/Europe segment. Our operating income is expected to be relatively flat year-over-year, as the weaker currency and impact of the decline in coal is offset by cost savings in the second half of 2016, growth in intermodal and the full-year impact of the acquisition.

Note that next to our 2016 outlook, we also show the 2016 run rate, post restructuring of the UK coal business. On an annualized basis, 2016 run rate operating income is $37 million or nearly 20% higher than 2015 operating income, excluding the impact of currency.

On slide 27, we show our 2016 for capital expenditures. Our core capital spending is estimated at $175 million, which is $58 million lower than last year. In addition to approximately $10 million in core track savings from our new internal engineering department, we are reducing overall CapEx to correspond with the declines in traffic. In addition, we have approximately $15 million of grant-matching spend and $35 million of capital for new business, bringing the total CapEx for this year to be approximately $225 million.

On slide 25 (sic) [28] (22:18), we show our outlook for free cash flow. Starting with $215 million in net income and add $260 million of D&A and deferred taxes. Excluding the impact of any working capital timing, we expect operating cash flow of $475 million. We expect capital expenditures of $190 million, which includes both the $175 million of core capital and the $15 million of grant-matching spend. And therefore our free cash flow before new business investments is expected to be $285 million. Including new business, our free cash flow is expected to be $250 million.

Now let's move to first quarter guidance on slide 29. We expect revenues of approximately $475 million and operating income of approximately $76 million. Net interest expense in the first quarter should be approximately $18 million, and we expect D&A of approximately $54 million. Our effective tax rate should be around 29% and diluted shares at 57.9 million. The bottom line is we're expecting the first quarter diluted EPS in the range of $0.70 to $0.75.

If you look sequentially from the fourth quarter of 2015, Q1 revenues are declining by approximately $40 million and operating income is decreasing by $18 million. I'll walk through the changes by segment.

First, in North America revenues are declining sequentially by approximately $10 million with softness in most commodities including coal, paper and minerals and stone. Operating income is expected to be $9 million lower, which is the function of margin loss on the lower revenue and higher winter operating costs. In Australia, first quarter revenues declined sequentially by approximately $5 million. Of this total, roughly one-third is FX; another one-third is seasonally lower intermodal traffic due to the wet season in the northern territory; and the remaining one-third is lower manganese shipments due to the mine closure in November. Operating income decreases sequentially by roughly $2 million.

In our UK/Europe segment, revenues declined sequentially by roughly $25 million, one-third of which is FX as the pound and euro weakened sharply in January. Coal and aggregates revenues are expected to decline approximately $7 million in total, given the seasonal weakness in aggregates and the weaker UK coal.

Finally, continental European intermodal is expected to decline approximately $7 million, primarily due to rationalization. UK/Europe operating income is expected to decline sequentially by approximately $5 million to $6 million using the Q4 2015 adjusted operating income as a starting point. Keep in mind that the majority of this projected decline is fixed cost related to the coal business that we expect to eliminate in the second half of the year.

Let me close with slide 30 and a snapshot of our balance sheet. Our net debt was $2.3 billion as of year-end and our debt to adjusted EBITDA was 3.7 times.

And with that, I'll open up the call for questions.

Question-and-Answer Session

Operator

Thank you. And our first question today will come from the line of Allison Landry with Credit Suisse. Please go ahead.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Good morning. Thanks for taking my question. Thinking about the coal guidance in North America, the implied decremental margins on the lost coal revenue are around 67%, which seems a little elevated given the unit train nature of the business. So I was wondering if you could walk through your assumptions here and maybe if some of the cost associated with lower coal train starts are reflected in the $12 million of cost saves?

Timothy J. Gallagher - Chief Financial Officer

Allison, if you noticed the bridge, the numbers very round. So if you just do the straight math of – you get 65% or so. The margins are a little bit up, a little bit down. So I would not do the straight math.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's helpful. And then in terms of your commentary also in North America surrounding yield management, was that sort of a comment with respect to pricing or freight mix? Just want to understand what you meant by that just not...

John C. Hellmann - President, Chief Executive Officer & Director

Allison, I'll kick it to Michael Miller, our Chief Commercial Officer. But our business is a mixture of rates where we're participating pro rata with Class I. Some rates where we can't do anything because there's an inflationary price mechanism; and then there's others where we have outright pricing power. And we've invested a lot in our business. And therefore in those places where those investments are yielding efficiency gains for customers, we've been taking price. Michael, you want to elaborate at all?

Michael O. Miller - Chief Commercial Officer for North America, Genesee & Wyoming, Inc.

No. I think that's right. I mean, Allison, probably 65%, 70% of our business we had pricing freedom and we focused really hard on providing a really high-quality service product. And where we can, where the market allows, we'll focus on price. And we've had some advantages on mix that's helped us on price, but overall we're trying to price to market, do what we can do to recover our investments.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

That's helpful. Thank you.

Operator

Thank you. Next we'll go to the line of Alex Vecchio with Morgan Stanley.

Alexander Vecchio - Morgan Stanley & Co. LLC

Good morning. Thanks for taking the question. Jack or T.J., could you maybe expand a little bit more on the cost reduction initiatives you have in place for North America and Australia this year? Is it kind of largely on the labor front? Maybe just a little bit more color there would be helpful?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. I mean, it's a mixture. It's a whole mixture of things. I mean, we've got Dave – well, we've got 7% of the locomotive fleet part right now, is that right?

David A. Brown - Chief Operating Officer

That's right, Jack. 7%.

John C. Hellmann - President, Chief Executive Officer & Director

And our workforce is down about 5% as well. And we're turning over any stone we can to continue reducing costs in places which have had – in North America – and then places that have had shocks to the business, such as Australia. We've got formal programs in place of – places for expense reduction, where we think we can take much more out. So hopefully that gives you some sense.

Alexander Vecchio - Morgan Stanley & Co. LLC

Yeah. No, that's helpful color. I appreciate that. On the guidance for Australia OR to be kind of in the low 80s% range in 2016, is this kind of the new normal for the business? Or can we expect the margins to kind of gradually improve back to the low 70s% over time? Or is it just as the – presumably as the commodity headwinds and the FX headwinds stabilize? Or how we should we kind of think about that a little bit longer-term?

John C. Hellmann - President, Chief Executive Officer & Director

I wouldn't think about it as a new normal, because you're still handling a commodity, which I alluded to at about $44 million of revenue, which remains under pressure. And so I don't know how one defines a new normal in that context.

What I would tell you – so I wouldn't necessarily frame it in terms of the upside, although we are bidding on a lot of new commercial contracts right now. But I would say you're probably better off thinking about, well what's your downside exposure in that market?

And you can – under sort of a scenario where you're not serving anymore iron ore, and you're not serving anymore junior miners of any kind for manganese, and there's no track access revenue, and there's none of all the stuff that we've had the benefit of in past years. And so if you look at kind of a worst case baseline business, you're looking at one with roughly about AUD 70 million of EBITDA versus an AUD 90 million – we'll call it AUD 90 million to AUD 95 million EBITDA right now, which is implicit in our budget.

And so that's sort of – that's a cycle. I think that's the right way to think about it in terms of – so you've got under a worst case scenario AUD 70 million EBITDA and about AUD 15 million to AUD 18 million of long-term CapEx. So you got a good strong business there from which to grow.

Now what's the – I didn't – that EBITDA margin, I don't know what the math is, it's probably 35%. But it looks like a normal – it looks like what it might have looked like four years, five years ago. If you were to extrapolate that into an operating ratio at the end of the day, you'd probably end up in the mid-80s%. And then the objective from that low is to add new business. And that is where we're commercially active and trying to add off of that base line.

So I think I sort of answered your question. I just wanted to share with you how I think about it.

Alexander Vecchio - Morgan Stanley & Co. LLC

Yeah. I know that's great. That's very helpful color. And okay, I appreciate the time gentlemen. Thank you.

John C. Hellmann - President, Chief Executive Officer & Director

Thanks.

Operator

Our next question comes from the line of Chris Wetherbee with Citi. Please go ahead.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Hi. Thanks. Good morning.

John C. Hellmann - President, Chief Executive Officer & Director

Morning.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Just thinking about the U.S. cost efforts and maybe specifically about the coal business. And obviously some restructuring going on in the UK, and you're clearly making some efforts on the cost side. In terms of the coal franchise in North America how much more is there to do potentially on the cost side to pull – to strip sort of resources or infrastructure out of the business. Is that something we're considering as we move forward here through 2016?

John C. Hellmann - President, Chief Executive Officer & Director

In the U.S. there hasn't been much that's gone away, per se. It's been more reduced volumes to plants that we think are going to be around for the long-term at some level. They may be better viewed long-term as peaking plants rather than base load plants, which has been historically their position. But there are some smaller plants that kind of fade over the long-term, which are sort of not the big drivers here, but it's more just reduced volumes to existing plants.

So I mean if you look at it from a good news standpoint is that we don't think a lot of those plants are going to go away, period. The bad news is, is that the volumes seem to be – shipment levels have been lower. And they seem like they're going to be more volatile going forward. They're going to behave more like peaking facilities is what our experience has been thus far.

And so when you look at that core decline of 15% to 20% – by the way, we've taken some huge costs out of the coal railroads. Good chunk of – we've – our guys in our Midwest region have done an outstanding job in that regard. But when you look at the decline, we're looking at next year, I would just view that as a sheer reflection of high stockpiles at our utilities and what has been an extremely mild winter. T.J., would you add anything to that or is that?

Timothy J. Gallagher - Chief Financial Officer

No.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. I appreciate that color.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Michael O. Miller - Chief Commercial Officer for North America, Genesee & Wyoming, Inc.

Switching gears quickly just to the North American pricing side, T.J., I think you mentioned that there was some positive mix included in the number. And I think the guide for North America is plus 3% on the core number.

Timothy J. Gallagher - Chief Financial Officer

Right.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

When we think about the mix, is there any guidance you can help us with in terms of mix in 2016?

Timothy J. Gallagher - Chief Financial Officer

Well, the 3% guide is really sort of where we think the market is across all of our railroads in North America. And I'll let Michael Miller provide some more color. But I've deliberately stripped out mix in there, so that's sort of the core number you should be thinking about. The reported numbers we'll have next year will be impacted by currency, fuel surcharges, et cetera. But in terms of negotiations with customers, that's the number we're focused on. Michael?

Michael O. Miller - Chief Commercial Officer for North America, Genesee & Wyoming, Inc.

No, T.J., I think that's right. We'll pay very close attention to market conditions, what our competitive over-the-road solutions are. But we'll focus on pricing at the customer level and look at the commodities. And I think we'll kind of end up in that 3% range.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. So it's not to suggest that the fourth quarter sort of mix dynamic has the potential – or you're not suggesting that it continues into 2016, just sort of look towards that 3% number?

John C. Hellmann - President, Chief Executive Officer & Director

That's right.

Michael O. Miller - Chief Commercial Officer for North America, Genesee & Wyoming, Inc.

Yes. Yes.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. Thanks for the time guys. Appreciate it.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Operator

Our next question will come from the line of Scott Group with Wolfe Research. Please go ahead.

Scott H. Group - Wolfe Research LLC

Hey, thanks. Morning, guys.

John C. Hellmann - President, Chief Executive Officer & Director

Morning.

Scott H. Group - Wolfe Research LLC

So, Jack, I think you mentioned that there's four specific commercial opportunities you guys are in some process of bidding on. Can you maybe give us a little bit more color in terms of the size of these opportunities? And any perspective on like historical hit rates on these things and potential capital that maybe required?

John C. Hellmann - President, Chief Executive Officer & Director

Well, every one on them is different; every one of them is different. And each one of them – I mean, in my own mind, I wouldn't have said it out loud if I didn't view it as being material to each of the geographies. There are pieces of businesses we're bidding on in continental Europe that could enhance the franchise significantly. There are pieces of business in the UK. Now the UK is a little bit different animal there because you got excess equipment. And so that $5 million of lease overhang that I alluded to earlier, that equipment is being deployed into other service now. And so we're actively bidding that business.

And so that's kind of upside from where we are now because we think we can find a home for it. You can see if you look at one of T.J.'s bridges, you can see some of the other new business, I think it's what he called the category. Embedded in that is some of our success in the redeployment of equipment; and we think we're going to – our guys are hustling really hard to add new business in that area too.

In Australia, there are potential projects both on the corridor, believe it or not, in the current environment, as well as outside of our footprint in New South Wales with the Freightliner business that we've added. And we've melded the commercial functions between Freightliner Australia and G&W Australia and are getting good traction in some new geographies. Some of those projects have no incremental equipment required because we get excess – you can do things like share excess locomotives from South Australia and put it into New South Wales at no incremental capital – would require no incremental capital.

There are few that are bigger that would require some capital. I don't want to quantify it, but there are some bigger projects; and then let's see what else. And then in the United – then there is projects that we're working on upside in the United States as well. I mean, the shame is you can't see in our outlook some of the great works that's been done on the commercial side because it's been – a lot of the new carloads that that have been added over the past few years and that we're bidding on today have been sort of dwarfed by these other trends that have been just so overwhelmingly dominating the numbers, but there is some economic activity in U.S. as well that we're bidding on.

So as you work through, we've been focusing on costs, we've been focusing on our efficiency. It's been a kind of a dismal period for the past almost 12 months, but the commercial side of things is active and is increasingly active today. And so there is reason for some optimism that's independent of the macro economy. We can drive some additional volume here in multiple geographies.

Scott H. Group - Wolfe Research LLC

So, I mean, there is a lot of good color there, but maybe just kind of one follow-up like is there any way to frame like – meaning, are you bidding on $1 million of revenue, $50 million of revenue, I'm just not even sure how to think about it.

John C. Hellmann - President, Chief Executive Officer & Director

Think of it like acquisitions. I'm not going to give you a satisfactory answer, because I don't want to get into too many specifics, but it's a whole range of opportunity. It could be a $5 million opportunity or it could be a $50 million opportunity.

Scott H. Group - Wolfe Research LLC

Okay, okay. Got it. And then just second question, where do you want to take the leverage down to before you would consider either buying back stock or an acquisition? And then maybe just with that, I know you're not maybe active in terms of buying right now, but where do you think the acquisition market is? Are there more opportunities, fewer opportunities than a year ago?

John C. Hellmann - President, Chief Executive Officer & Director

In the current environment, there are a lot of opportunities in every – I mean, as far as I reflect back on my – I give our board a quarterly update on what we're looking at in which geographies, and you'll find an opportunity in every geography that we serve. And in times of distress, the number of opportunities probably increases. But the tricky balancing – to your point, the balancing act that you're dealing with is the relationship between the value of those investments, your intrinsic value of your own shares and your relative leverage.

And given the uncertainty that's been in the world, you're right, we've not repurchased any shares yet; and it's not because we don't think our shares are of good looking value, it's because we're conservative and we like to have a nice amount of a cushion in our leverage profile, which is, remember, we thought we're going to be at 3.5 times, going to 3 times at the time of Freightliner and then the world got very difficult on us. So we wouldn't have been a year-ago thinking 3.7 times was where we would end up.

And so we're focused intently near-term on continuing to delever. At some point, and I'm not going to quantify that moment, but at some point you can see we're going to be throwing off a lot of cash. And perhaps there will be some signs of stabilization in a few markets that would give us the trajectory that might lead us to move more quickly either on an acquisition or on a share repurchase.

Now what I think is fair to say is that on larger acquisitions, given our leverage profile, the most probable way for those to eventuate is in partnership with financial sponsors. So that will be the logical way to do that, because given the way we see the intrinsic value at G&W, it's not a time we're looking to – we're not looking to taking out more leverage, we're not looking to issue equity. And so the right near – short-term solution for large deployment of capital is in partnership with someone. So hopefully that provides kind of the broad parameters.

Scott H. Group - Wolfe Research LLC

No, no, it does. And given how the market's treating companies with leverage right now that makes sense. Okay. Thank you guys.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. Sure.

Timothy J. Gallagher - Chief Financial Officer

Thanks, Scott.

Operator

Next question will come from the line of Rob Salmon with Deutsche Bank. Please go ahead.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Hey. Good morning guys. I guess...

John C. Hellmann - President, Chief Executive Officer & Director

Good morning.

Timothy J. Gallagher - Chief Financial Officer

Hey, Rob.

Robert H. Salmon - Deutsche Bank Securities, Inc.

...following up with kind of Scott's line of questioning there is obviously we've seen a paradigm shift in terms of the commodity marketplace. Jack, has the investment philosophy in terms of the types of properties you're willing to invest changed as the result of this backdrop, if you were to kind of undertake a partnership with another financial institution on M&A deal?

John C. Hellmann - President, Chief Executive Officer & Director

Well, I mean, the key to it is the competitiveness of the quartile of the industrial plant or the mine or of course if you have intermodal opportunities that you like and are sustainable – we like those too in terms of diversification. But I don't think it rules outright railroad's haul (44:02) commodities. And the key is to be holding the commodities to the most cost competitive in the global marketplace, and they're going to be there through thick and thin.

And so, yeah, it certainly affects how one looks at new investments in terms of what quartile, whatever the commodity might be sits in. But that was our approach going into – so for example what we've done in Australia is, our Australian results I realize look dismal. But when you think about what we did, we had a range of counterparty risk profiles and we deployed incremental capital depending on how we saw that counterparty risk; and that's why we haven't had a huge problem, because in situations where we thought a customer might go away we deployed no new equipment and just became a toll road in Australia.

And then in other cases where we thought there was either a very solid contract in place and a solid counterparty in place, we put in slightly more capital. And so that approach to investing is sort of an implicit in how we've sort of supported development along our corridor. So it's in the past. I wouldn't say we're visualizing a shock of the magnitude that we've experienced here. That's certainly not the case. But the way we played our hand with the deployment of capital, I would still do in the same way.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Got it. That makes sense. And I guess kind of continuing along with Australia, you had called out kind of AUD 70 million of continuing EBITDA if you're seeing kind of the worst case scenario.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Is that including the benefit of the new contract that I think you had alluded to in your prepared remarks and can you give us any sort of timing for 2015 or 2016 on that?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. That number has been a little bit bigger than AUD 70 million, and so there is like a partial period. There is a little bit of it in there, but really not much.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Okay. And I would assume...

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. I mean embedded in that number is what your long-term cost structure is going to look like and some baseline assumption of business, but it's got basically no minors left in the corridor.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Got it. And that would not be assuming the deployment of locomotives that were, for example, sitting idle?

John C. Hellmann - President, Chief Executive Officer & Director

That's exactly right. That's truly – no, no, no. That's exactly right. So you're sitting on a tremendous amount of equipment under that scenario that you can either sell or more likely redeploy for other new business. We're at redeployment mode right now.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Yeah. That makes a lot of sense. And I'm assuming the iron ore exposure that includes both the freight revenue and the freight related revenues.

John C. Hellmann - President, Chief Executive Officer & Director

Correct. That's the...

Robert H. Salmon - Deutsche Bank Securities, Inc.

With the drop-off probably coming in both.

John C. Hellmann - President, Chief Executive Officer & Director

You got it. That's it. That's everything, that's everything.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Okay. And the final question, which I'm assuming is going to be the same answer you just gave me about Australia. In Europe, you had called out a lot of cost saves. It sounds like those are back half loaded. And once they're fully finalized, it'll be a $5 million headwind to continuing EBITDA. But this is on lower margin business than your average if you adjust for the asset exposure. So if you do redeploy that, EBITDA and margin should be accretive. Am I thinking about that the right way?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. So what you're going to get is you've only got half of the savings in 2016 because of when the timing is going to take place. You're going to pick up another $5 million in the back half. I mean U.S. dollars, not any right now. We'll pick up another $5 million in the back half of the year. You've got – yes, you have that equipment and plus – and to the extent that incremental $5 million gets redeployed, you'll cover both that $5 million plus any incremental margin on that equipment deployment. So you're thinking about it correctly.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Perfect. Thanks so much.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Operator

Thank you. Next we'll go to the line of Justin Long with Stephens, Inc.

Justin Long - Stephens, Inc.

Thanks, and good morning.

John C. Hellmann - President, Chief Executive Officer & Director

Good Morning.

Timothy J. Gallagher - Chief Financial Officer

Hi, Justin.

Justin Long - Stephens, Inc.

Jack, so just a follow-up on the earlier question about Australia. If you assume the worst case scenario that you walk through, is Australia a region where you can still earn your cost of capital? And as we think about capital deployment opportunities going forward, would you feel comfortable growing the consolidated businesses exposure to Australia?

John C. Hellmann - President, Chief Executive Officer & Director

Yes and yes.

Justin Long - Stephens, Inc.

Okay, easy enough. And also the AUD 70 million in EBITDA you referenced, I just wanted to clarify, that was based on Australian dollars?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. That's Aussie dollars.

Justin Long - Stephens, Inc.

Okay, great. Secondly, I had a question on the volume guidance for North America. So you gave guidance for volumes to be down 10% to 12% in the first quarter, but then down only 3% for the full year. This would imply relatively flat volumes on a year-over-year basis from 2Q to 4Q?

John C. Hellmann - President, Chief Executive Officer & Director

Yes.

Justin Long - Stephens, Inc.

Is that the right way to think about your outlook? And if so, what are the commodity groups you expect to drive this incremental improvement over the course of the year?

Timothy J. Gallagher - Chief Financial Officer

Well, if you look at North American carloads, our expectation is it's down 3%. The coal is basically all of that. So all the rest of the commodities are really net flat. That's the way the math works. And the relative changes, they're small. It could be up or down a little bit. We expect some growth in NGLs. We've got plants coming online in Western Pennsylvania and Eastern Ohio. These are plants that are built that are ramping up as we speak.

We expect paper to be a little bit stronger. We had a lot of unplanned outages; and it's slightly stronger in 2015. Lumber and forest products, we expect a little strength given housing. We've also done some business development work in the Pacific Northwest that should increase traffic. I mean there's stories for every different commodity, some small positive, some small negative. But again other than coal it's net flat.

John C. Hellmann - President, Chief Executive Officer & Director

And structurally, Justin, the comps just get easier because as we – I mean if you reflect back, so our January comps will still be bad. But if you reflect back at the time we were doing our earnings call last year, our business didn't start – we didn't feel the deterioration that we just had talked about until probably late February is when that deterioration began. So you'll begin to lap those comps over the course of – or I shouldn't say lap, you'll be just comparing yourself against that lower base as you get in kind of February and beyond.

Justin Long - Stephens, Inc.

Okay, great. That makes sense. Helpful color. And I appreciate the time today.

John C. Hellmann - President, Chief Executive Officer & Director

Thank you.

Operator

And now we'll go to the line of Jason Seidl with Cowen & Company.

Jason H. Seidl - Cowen & Co. LLC

Thank you, operator. Hey, Jack. Hey, T.J.

John C. Hellmann - President, Chief Executive Officer & Director

Morning.

Jason H. Seidl - Cowen & Co. LLC

Jack, when you're looking at your buckets, if you will, of potential acquisitions, you have Class I spinoffs, you have other short line holding companies, and then I think you have maybe, let's call it, industrial conversions. Are there any of them that may look more like probable in a market like this that we're looking at right now for 2016? Or is it all sort of evenly dispersed?

John C. Hellmann - President, Chief Executive Officer & Director

Well, I would just – I mean the only thing that's different today probably in terms of looking at those buckets is that historically – I mean, you followed us a long time. And I think probably we hadn't talked about any Class I spinoffs for a really long time, until the DM&E transaction that we did with Canadian Pacific.

And I think in the current environment, given some of the dynamics within the Class I railroads and the fall off in their volumes, you've probably got a slightly higher probability of some Class I opportunities entering the mix. I wouldn't say that's a certainty by any stretch of the imagination, but you've heard some comments by some Class Is with respect to the possibility of some spinoffs. And so we'll see how that transpires.

But that's sort of a new ingredient, which is logical, given that some of the challenges that we face with carloads have faced the Class Is as well. So these are the times when historically the spinoffs have happened.

Jason H. Seidl - Cowen & Co. LLC

Okay. That's very good color. And, T.J., just double-checking something I thought I heard you said. When you were going over your free cash flow estimates for 2016, I thought you said $50 million from government grants. But then when I look at the charts you have TBD down on that. Did I hear something wrong?

Timothy J. Gallagher - Chief Financial Officer

The grant spending is $15 million.

Jason H. Seidl - Cowen & Co. LLC

Oh. $15 million.

Timothy J. Gallagher - Chief Financial Officer

$15 million. But what we always have is a mismatch between – we spend the money, when do we get the money back from – we spend a gross amount. For example, in 2016 we have another $65 million of government funding in there. But we spend that money, and we get reimbursed by the government. And over the course of the year there's always some timing lag.

So this year we'll get reimbursements from governments from 2015 projects. And then some 2016 projects will get repayment in 2017. So there's some working capital, if you will, timing associated with that. So that's why we put TBD underneath there. It's really...

Jason H. Seidl - Cowen & Co. LLC

Okay.

John C. Hellmann - President, Chief Executive Officer & Director

And, Jason, the answer to the – there's a foot note I'm just looking at on page 27. That $15 million of grant match is linked to the $65 million of government grants. So there's an additional $65 million of improvements going into our infrastructure through government grants in 2016. So that's the raw economic number.

Jason H. Seidl - Cowen & Co. LLC

Okay. No, that makes sense. Guys, thanks for the explanation and thanks for the time.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Operator

Next we'll go to the line of Bascome Majors with Susquehanna.

Bascome Majors - Susquehanna Financial Group LLLP

Yeah. Thanks for the time this morning.

John C. Hellmann - President, Chief Executive Officer & Director

Morning.

Bascome Majors - Susquehanna Financial Group LLLP

Morning. So your cuts to your tracking structure CapEx for 2016 were pretty significant. Looks like they're down about 30% year-over-year, and it's the largest portion of your budget. And I assume it would be largely maintenance spending typically. So I was curious, can you talk in a little more detail about what's driving this cut?

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Bascome Majors - Susquehanna Financial Group LLLP

And how sustainable it can be if traffic does stabilize this year? Because I'm guessing there's FX and some other stuff in here that we might need to consider.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. That's in there too. But, no, the simplest way to think about it is that these levels are maintenance CapEx levels. And it has safety and efficiency as the primary priorities; and it does not incur any kind of a capital deficit. So that's the most important thing is that these are a granular bottoms-up analysis of what our maintenance capital should be.

So there's probably two different ways to come at the numbers that you're alluding to. You see the core capital number comes down by about $58 million. Of that number about $10 million of it is pure productivity improvements from an in-sourced track group. We haven't really talked much about this. But it's when your results aren't great, we're probably not focusing on some good things that we're doing when we should.

But we took a little construction company that came to us as part of the RailAmerica acquisition. We basically morphed it into what is now our internal maintenance capital group. And we've been able to schedule its capital works in a way – and in terms of the scope of works and geography of works. You do work in the southern states at one time of year, northern states another time of year. We've been able to unlock across G&W's footprint a huge productivity improvement that is a long-term sustainable one to the tune of – it's approaching $10 million a year. And we may expand it further to try and get some more productivity improvement.

So if you took that $48 million and you took – so if you took that $10 million off the $58 million – or $48 million, that's about a 20% reduction in capital, which is kind of – if you look at our car loadings, 16%, that correlates pretty well there.

Another way to think about it is the – we previously said, I don't remember what quarter, second or third quarter, that we had $200 million to $220 million was our new maintenance capital number. And with that productivity improvement, you probably should think of that as more like $190 million to $210 million. And so we're spending with grants at the bottom end of that band at $190 million. And so that's probably the other place that you can look.

So you're right in the ZIP code of what makes sense. I mean remember short line railroads, we're able to – in ways that higher density Class Is aren't able to adjust their capital with the volumes or it's more difficult to do so – are able to flex in a directly proportional way our track expenditures. I don't know, Dave Brown, do you want to talk a little about the difference between Class Is and short lines, so people understand why we are able to pull our free cash flow lever like this?

David A. Brown - Chief Operating Officer

Sure, Jack. I mean you explained it very well. I mean the Class Is tend to maintain to a higher class of track. There is a lot more generally density – lower densities higher than our density. So we have the ability to adjust class of track, adjust speeds. We're not nearly as speed oriented. And it's not – overall velocities are not nearly as critical or on short distance. So we have a lot more opportunities to adjust things that to a better level fit for purpose type level that is not part of the strategy with Class I.

Bascome Majors - Susquehanna Financial Group LLLP

Thanks. Thanks for that really comprehensive answer there. I appreciate it. Just one more from me, a quick one. If we think about modeling the non-freight side of your revenue going out 2017 and beyond, can you give us some rough timeline and maybe on a global basis for when your fixed contractual payments start to expire globally in these mining businesses?

John C. Hellmann - President, Chief Executive Officer & Director

I'm sorry, I was tuned out. I was doing something else. The question related to mining contracts rolling out?

Bascome Majors - Susquehanna Financial Group LLLP

Yeah. So if we think about the non-freight side where you are collecting the fixed portion on some of your mining contracts not just in Australia, but globally, can you give us a real high-level directional view based on with how things are contracted today and when those start to expire?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. I mean, we can't comment on any specific contracts, but there is some roll-off in the middle of 2017.

Bascome Majors - Susquehanna Financial Group LLLP

All right. Thanks for the time you guys.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Operator

Thank you. We'll go now to the line of Ken Hoexter with Merrill Lynch.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Great. Good morning. Hey, T.J., Jack.

John C. Hellmann - President, Chief Executive Officer & Director

Good morning. How are you?

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Doing all right. Never a great thing in the first year after acquisition, not what you want when you have to kind of think about restructuring right away. But how do you get a handle on Freightliner if – you were talking about doing some restructuring and cutting costs. If the initiatives are heading in the right direction at this point of what you want to cut versus what you may have to kind of restructure going forward, how did you kind of grab a handle on what you had to do so far?

John C. Hellmann - President, Chief Executive Officer & Director

Well, it's not really hard at all. I mean I'm really philosophical. But you are right, I mean of course in terms of timing when one makes an acquisition, watching a piece of its business evaporate within three months – or six months to nine months rather isn't normally what you want to have happen. Having said that, we knew what the margins were on it, we knew what's going to go away and we had a timeline for when it was going to go away. So we're actually pretty philosophical about – we're just accelerating what we were going to do anyway.

And so, in terms of knowing – I'm not sure I answered the question of knowing what to do – knowing what to do is know what your cost structure is and getting it done. And so, it's not a – there is nothing – there is no rocket science to it. Your only thing you can't control that you'd like to be able to are things like some of the timing on some of the leases on certain types of equipment. In this case here, the majority of it's off by 2018. That's that $5 million exposure. But you also have the ability to redeploy it. We've got a terrific management team in place. Same guys who've built the business are now making the adjustments necessary to who are our equity investor partners in the business, are making the necessary adjustments on a real-time basis.

In the case of coal, we hung in there a little longer to see how things were going to evolve and we finally decided that we were going to have to move dramatically because the outlook had worsened that much more. I mean the interesting question on coal is going to be a one that I'm not ready to talk about here now, but it's going to be winter of this year and into 2017.

If you look at the energy dynamics of the UK, there is going to be some power issues emerging here because you're not going to have efficient supply if all the coal goes. And so the public policy solution to that will be fascinating. We're not running our business wondering what that public policy solution might end up. We're going to take good care of ourselves, which is why we're restructuring. But that'll be something to watch coming into the coming winter. A year from now, remember that I said this.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

And just to clarify on your answer that when you talk about the restructuring you're doing this specific to coal....

John C. Hellmann - President, Chief Executive Officer & Director

Oh yeah. Solid coal. (01:03:07).

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Is there other restructuring you need to do in Europe or is this real specific to what you're seeing on the volume side?

John C. Hellmann - President, Chief Executive Officer & Director

No, no, no. It's just in coal. It's just in coal.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Okay. And then just two number questions for T.J. I guess just to confirm the diluted EPS target $3.60, $3.80, that's inclusive of the Short Line Tax Credit rate right?

John C. Hellmann - President, Chief Executive Officer & Director

Yes.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Okay. And then you were talking before about some investments that you may make, is that where the $35 million of new business investments on the CapEx side is from or is that related to different already incorporated projects?

John C. Hellmann - President, Chief Executive Officer & Director

Already incorporated.

Timothy J. Gallagher - Chief Financial Officer

Already incorporated projects.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Okay. So that's not the future ones you were talking about that may come?

John C. Hellmann - President, Chief Executive Officer & Director

No.

Timothy J. Gallagher - Chief Financial Officer

No.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Okay. And then lastly just another quick one, just to the iron ore, you'd – I think the prior question just – how much more is left that you still have in Aussie and Canada with the Tata contract that is I guess still firmed up here?

John C. Hellmann - President, Chief Executive Officer & Director

Again, we can't talk about specific contracts. But in Canada, in general, our Canadian iron ore is de minimis. And so it's we're – from a – Australia is the only thing we're focusing on which is why we've done so.

Kenneth Scott Hoexter - Bank of America Merrill Lynch

Okay. All right. I appreciate the run-through. Thanks for your time.

John C. Hellmann - President, Chief Executive Officer & Director

Absolutely.

Operator

And we have one follow-up question from the line of Scott Group with Wolfe Research.

Scott H. Group - Wolfe Research LLC

Hey guys. Thanks for the follow-up. I just want to clarify one last thing on the iron ore.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah.

Scott H. Group - Wolfe Research LLC

The $44 million that you said that's last – that does or does not include the liquidated damages or take-or-pays?

John C. Hellmann - President, Chief Executive Officer & Director

Includes. Includes take-or-pays, a proportion of which would run off.

Scott H. Group - Wolfe Research LLC

Okay. And have you assumed any incremental or additional mine closures, either iron ore, manganese in the guidance or maybe, Jack, do you think like it's realistic that we should start assuming additional ones to get you that kind of worst case EBITDA number you talked about for Australia?

John C. Hellmann - President, Chief Executive Officer & Director

Well, the manganese is out.

Scott H. Group - Wolfe Research LLC

Okay.

John C. Hellmann - President, Chief Executive Officer & Director

Kind of which – that's – frankly that is zero. And there is a stockpile on the ground there that's going to probably move this year, we'll see, because it's more valuable having them shipped than sitting on the ground. But we haven't assumed any of that. So we took that to zero. With respect to iron ore, yeah, I mean you've got as I said without speaking to anything specific to the extent that any fixed payment terms are fading out 2017, I think it's very reasonable to assume a fade to that end.

Scott H. Group - Wolfe Research LLC

How many operating mines are still left for you?

John C. Hellmann - President, Chief Executive Officer & Director

It's in a whole area – there is a – I think the answer is probably five or six, but there are smallish mines all in a given specific geography.

Scott H. Group - Wolfe Research LLC

Okay.

John C. Hellmann - President, Chief Executive Officer & Director

It depends on how you define it, but it's all within a specific geography.

Scott H. Group - Wolfe Research LLC

Okay. All right. Thank you guys.

John C. Hellmann - President, Chief Executive Officer & Director

Sure. Okay.

Operator

And Mr. Gallagher, there are no further questions in queue at this time. Please continue.

Timothy J. Gallagher - Chief Financial Officer

Thank you very much for joining our Q4 2015 earnings call. We will see next quarter.

Operator

With that, ladies and gentlemen, that does conclude our conference for today. And we do thank you for your participation, for using AT&T Executive Teleconferencing. You may now disconnect.

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