Union Pacific (UNP) Lance Fritz Q2 2016 Results - Earnings Call Transcript

| About: Union Pacific (UNP)

Union Pacific Corp. (NYSE:UNP)

Q2 2016 Results Earnings Conference Call

July 21, 2016, 08:45 AM ET

Executives

Lance Fritz - Chairman, President and CEO

Eric Butler - EVP and CMO

Cameron Scott - EVP and COO

Robert Knight - EVP and CFO

Analysts

Brian Ossenbeck - JPMorgan Securities LLC

Scott Group - Wolfe Research LLC

Allison Landry - Credit Suisse Securities

Chris Wetherbee - Citigroup Global Markets, Inc.

Cherilyn Radbourne - TD Securities, Inc.

Ravi Shanker - Morgan Stanley & Co. LLC

Thomas Wadewitz - UBS Securities LLC

Kenneth Hoexter - Bank of America Merrill Lynch

Eric Morgan - Barclays Capital, Inc.

Jeffrey Hoffman - Buckingham Research Group

Justin Long - Stephens, Inc.

David Vernon - Sanford C. Bernstein

Rob Solomon - Deutsche Bank

Jason Seidl - Cowen & Co. LLC

John Barnes - RBC Capital Markets LLC

Ben Hartford - Robert W. Baird & Co.

Mark Levin - BB&T Capital Markets

Donald Broughton - Avondale Partners LLC

Keith Schoonmaker - Morningstar Inc.

Scott Schneeberger - Oppenheimer

Presentation

Operator

Greetings and welcome to the Union Pacific Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded 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. Thank you, Mr. Fritz. You may begin.

Lance Fritz

Good morning, everybody, and welcome to Union Pacific's second quarter earnings conference call. With me here today in Omaha are Eric Butler, 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 billion for the second quarter of 2016. This equates to $1.17 per share, which compares to $1.38 in the second quarter of 2015.

Total volume decreased 11% in the quarter compared to 2015. Carload volume declined in five of our six commodity groups, with coal, Intermodal and industrial products all down double-digits. Agricultural products was the only group to show positive year-over-year growth, with volumes up 2% this quarter, reflecting stronger grain shipments versus 2015.

The quarterly operating ratio came in at 65.2%, up 1.1 percentage points from the second quarter last year. As positive core price and continued productivity improvements helped to somewhat offset the double-digit increase -- decrease in total volumes.

While the second quarter was again challenging from a volume perspective, we continued focusing on initiatives that are squarely in our control, such as being productive with our resources, providing our customers with excellent service, and improving our safety performance.

Our team will give you more of the details, starting with Eric.

Eric Butler

Thanks, Lance, and good morning. In the second quarter, our volume was down 11% with gains in Ag products more than offset by declines in each of the other business groups. Our volume sequentially improved through the quarter, with volumes down 15% in April and 6% in June.

While we generated core pricing gains of 2%, it was not enough to offset decreased fuel surcharges, average revenue per car declined 2% in the quarter. Overall, the decline in volume and lower average revenue per car drove a 13% reduction in freight revenue.

Let's take a closer look at each of the six business groups. Ag products revenue was down 3% on a 2% volume increase and a 4% decrease in average revenue per car. Grain volume increased 10%, primarily due to stronger than expected export volumes, driven by South American harvest delays and strong corn demand to Mexico.

Wheat shipments also increased, driven by global and U.S. demand for higher quality Canadian wheat. Grain product shipments were down 6% in the quarter, primarily due to soft DDG exports and increased inclusion of DDGs in domestic markets. Soybean meal carloads were down 6%, driven by declining export demand following 2015 record levels.

Ethanol volumes were flat year-over-year. Food in refrigerated carloads grew 2%, as strong demand for import beer was partially offset by volume declines in refrigerated markets, resulting from abundant truck supply.

Automotive revenue was down 13% in the quarter, driven by 2% decrease in volume and 11% reduction in average revenue per car. Revenue in all were negatively impacted by mix of stronger parts growth, which has a lower average revenue per car then finished vehicles. Finished vehicle shipments decreased 10% driven by mix, production levels of passenger vehicles impacting key Union Pacific plants and contract changes.

The seasonally adjusted annual rate for the second quarter automotive sales were 17.1 million vehicles; however, June finished at 16.6 million, perhaps indicating softening consumer demand. Auto parts volume increased 9%, driven primarily by new over the road conversions.

Chemicals revenue was down 5% for the quarter on a 3% decrease in volume and a 2% decline in average revenue per car. Plastics volume was down 5%, driven by lower polyethylene shipments and softening exports as the U.S. dollar remained strong. Fertilizer was down 6% as a result of weak exports on potash shipments, resulting from depressed global demand and softness in domestic Ag markets.

Strength in other areas including growth in industrial chemicals partially offset these declines. We continue to see significant headwinds on crude oil shipments, which were down 46% during the quarter due to lower crude oil prices and unfavorable price spreads. Excluding crude oil shipments, chemicals volume was up 1% in the quarter.

Coal revenue declined 27% for the quarter on a 21% decrease in volume and an 8% decline in average revenue per car. Powder River Basin and Colorado Utah rail shipments were down both 23% in the quarter, again driven by low natural gas prices and high inventory levels. Export coal shipments were lower due to depressed international coal prices combined with a strong U.S. dollar.

PRB coal inventory levels in June were 105 days, down six days from May, but still 35 days above the five year average. 32 million tons of PRB coal were burned in June, which was 47% higher than what was burned in May. Industrial products revenue was down 14% on an 11% decline in volume and a 4% decrease in average revenue per car during the quarter.

Minerals volume was down 32% for the -- in the quarter. Frac sand shipments declined 43%, driven by weakened demand from low oil prices and market shifts to short-haul brown sand alternatives. Metal shipments declined 11% year-over-year as a result of reductions in shale drilling activity and strong import levels associated with the strength of the U.S. dollar.

Construction products volume was down 4% as severe wetting and flooding in Texas delayed construction activity. Intermodal revenue was down 16% on a 14% decline in volume and a 3% increase in average revenue per car.

Domestic volume declined 6% in the quarter, driven by sluggish demand for consumer goods and a tough prior year comp resulting from the discontinuation of the Triple Crown business late last year.

Market dynamics due to excess ship capacity resulted in ocean carrier financial challenges and shipping industry consolidation. As a result, international shipments were down 22%, driven by slow trans-Pacific trade and a volume loss by UPMI containership carriers.

To wrap-up, let's take a look at our outlook for the second half of the year. For the third quarter, we expect continued sequential volume improvement as we soar towards the end of the second quarter.

In Ag products, we expect high grain inventory levels, strong domestic crop expectations, and weakness in South American crops to drive strength in second half grain shipments.

Grain products will continue to face year-over-year comp headwinds and the global soybean meal market, as exports will not match the record levels set in 2015. Strength in import beer is expected throughout 2016.

Moving to autos, recent economic forecasts suggest annual light vehicle sales for the full year 2016 will be 17.5 million vehicles, driving both finished autos and parts, including over the road conversions.

We expect low gasoline prices will help sustain demand. However, we are carefully watching second half production and sales levels. We expect coal volumes will continue to be impacted by natural gas prices, high inventory levels, export demand, and weather.

We remain optimistic about most of our chemicals markets despite the persistence of headwinds created by low crude oil prices. We expect continued growth in LPG and industrial chemicals volumes will be partially offset by softness in the fertilizer market.

In industrial products, reduced drilling activity will continue to negatively impact our minerals and metals rock volumes for the remainder of the year. The improving construction and housing market should drive growth in our lumber and rock volumes.

Finally in Intermodal, we expect international lines will continue to be negatively impacted by excess ship capacity, ocean carrier financial challenges, and the resulting ocean carrier industry consolidation.

On the domestic side, we continue to be optimistic about growth opportunities from highway conversions. While there are a number of uncertainties in the worldwide economy, our diverse franchise provides opportunities for growth in the slowly strengthening economy. We will continue to intently focus on strengthening our customer value proposition and developing new business opportunities.

With that, I'll turn it over to Cameron for an update on our operating performance.

Cameron Scott

Thank you, Eric, and good morning. Starting with our safety performance, our year-to-date reportable personal injury rate improved 15% versus 2015 to a record low of 0.70. Included in this was a record low number of severe injuries which have the greatest human and financial impact. The team's commitment to successfully finding and addressing risk in the workplace continues to generate positive results as we improve toward our goal of zero incidents.

With respect to rail equipment incidents or derailments, our first half reportable rate of 3.43 decreased 1% versus last year. While we made only a slight improvement on the reportable rate, enhanced TE&Y training and continued infrastructure investments helped significantly reduce the absolute number of incidents, including those who did not meet the reportable threshold to a new record low.

In public safety, our grade crossing incident rate increased to 2.40. While this was a step back from last year's solid performance, we're confident with our efforts and initiatives to successfully identify those crossings where incidents were more likely to occur.

Combined with our focus on reinforcing public awareness through community partnerships, and public safety campaigns, we fully expect to drive improvements in the future.

Moving to network performance, after experiencing relatively mild winter weather conditions to start off the year, flooding events in the southern region of our network did present some challenges during the second quarter. Weather events always generate variability in the network, but it's something that we are accustomed to dealing with.

Utilizing the diverse strengths of our franchise, we rerouted traffic where possible; temporary utilized a portion of our surge locomotive fleet and recalled TE&Y crews as our employees worked diligently to restore operations.

These efforts kept the impact to a minimum including the delays of disruptions experienced by our customers. Overall velocity and terminal dwell improved 8% and 5%, respectively, when compared to the second quarter of 2015.

Moving on to resources. Coming into the quarter, our resource position was efficiently balanced for the volume levels we were experiencing at the time. Throughout the quarter, as part of our ongoing business planning process, we fine-tuned our resource levels to continually account for volume changes and productivity gains.

As a result, our total TE&Y workforce was down 22% in the second quarter when compared to the same period in 2015. Almost half of this decrease was driven by fewer employees in the training pipeline.

In lieu of hiring new employees, we have recalled furloughed employees to backfill attrition where needed to mitigate the impact from weather incidents and to handle the sequential volume uptick we experienced toward the tail end of the second quarter.

We also continue to evaluate all other aspects of the business to lower demand. This includes our engineering and mechanical workforce, which was down a combined 1,500 employees, or 7%, versus the second quarter of last year. In addition, our active locomotive fleet was down 14% from the second quarter of 2015.

While adjusting our resource to demand will always be a key focus area, overall productivity for us goes well beyond this effort. One primary area we continue to make progress is train length. While we're unable to overcome the volume decline within the scheduled Intermodal network, we did run record train lengths in all other major categories.

The fluidity and productivity our network has also reflected in the second quarter lower re-crew rate. A failure cost incurred when the first crew has inefficient time to complete the trip and the second crew is needed.

In summary, we made solid progress on several fronts in the second quarter. As we move into the back half of the year, we expect our safety strategy to continue yielding record results while we make further operational improvements by leveraging the strengths of our diverse franchise to enhance the customer experience.

And we will continue to intensify our focus on productivity and efficiency across the network to reduce costs. As a result of these efforts, our network is in a solid position to leverage volume growth to the bottom-line to increase utilization of existing assets.

With that, I'll turn it over to Rob.

Robert Knight

Good morning. Let's start with a recap of our second quarter results. Operating revenue was $4.8 billion in the quarter, down 12% versus last year, significantly lower volumes and lower fuel surcharges more than offset positive core pricing achieved in the quarter.

Operating expenses totaled about $3.1 billion. Lower fuel costs, volume-related reductions and strong productivity improvements drove the 11% improvement compared to last year. Partially offsetting some of the productivity was the impact of weather on our southern region operations as well as the unfortunate Oregon derailment in June.

The total operating expense impact from these two events was approximately $16 million or about $0.01 per share. In addition to the impact on earnings, we also incurred about $15 million in capital expenditures as a result of these disruptions. Operating income totaled $1.7 billion, a 15% decrease from last year.

Below the line, other income totaled $77 million, down $65 million versus 2015. The $113 million California real estate sale gain recorded last year was partially offset by a $50 million real estate sale gain in the second quarter of this year.

Interest expense of $173 million was up 13% compared to the previous year. The increase was driven by additional debt issuance over the last 12 months, partially offset by lower effective interest rates. Income tax expense decreased 20% to $585 million, driven primarily by lower pretax earnings.

Net income totaled nearly $1 billion; down 19% versus 2015 while the outstanding share balance declined 4% as a result of our continued share repurchase activities. These results combined to produce a quarterly earnings of $1.17 per share.

Now turning to our topline, freight revenue of $4.4 billion was down 13% versus last year. Volume declined 11% and fuel surcharge revenue totaled $87 million, down $240 million when compared to 2015. All in, we estimate the net impact of lower fuel prices was a $0.06 headwind earnings in the second quarter versus last year.

Remember, we have about 60 different fuel surcharge recovery programs in place with our customers and coming into the second quarter, diesel fuel prices were below entry thresholds for many of these programs. By the end of the quarter, this situation was starting to reverse as fuel prices have edged up.

Assuming fuel prices remain where they are today, we will collect fuel surcharge revenue at some level on most of our programs going forward once we get past the two-month lag. The business mix impact on freight revenue in the second quarter was about flat, moderating from the last couple of quarters as we expected.

The primary drivers of mix this quarter were significant declines in frac sand and finished vehicles, offset by a decline in Intermodal volumes. Core price was a positive contributor to freight revenue in the quarter at about 2%.

Slide 21 provides more detail on our pricing trends. Although a smaller increase than the first quarter, pricing continued to be a positive and above inflation. For the full year, we estimate inflation to be about 1.5%.

Moving on to the expense side, slide 22 provides a summary of our compensation and benefits expense, which decreased 11% versus 2015. The decrease was primarily driven by a combination of lower volumes, improved labor efficiencies, and fewer people in the training pipeline.

Labor inflation was about 1.5% in the second quarter, driven primarily by health and welfare, which is partially offset by some favorable pension expense. We expect full year labor inflation to be around 2%.

Looking at our total workforce levels for the quarter, our employee counts declined 12%, or almost 6,000, as a result of lower volumes and our G55 + 0 productivity initiatives. Sequentially, total work force levels were down a little more than 1% from the first quarter of 2016.

And excluding employees associated with our capital projects, workforce levels were down almost 3% from the first quarter and down about 6% from the fourth quarter of last year.

For the remainder of the year, we expect our force levels will continue to trend with volumes, as we have experienced thus far, but we also expect to continue generating G55-related labor productivity as well.

Turning to the next slide, fuel expense totaled $346 million, down 36% when compared to 2015. Lower diesel fuel prices, along with an 11% decline in gross ton miles, drove the decrease in fuel expense for the quarter. Compared to the second quarter of last year, our fuel consumption rate improved 2% while our average fuel price declined 27% to $1.45 per gallon.

Moving on to our other expense categories, purchased services and materials expense decreased 5% to $570 million. The reduction was primarily driven by lower volume related expense and reduced repair costs associated with our locomotive and freight car fleets.

Depreciation expense was $504 million, up 1% compared to 2015, driven primarily by higher depreciable asset base. For the full year, we still expect depreciation expense to increase slightly compared to last year.

Slide 25 summarizes the remaining two expense categories. Equipment and other rents expense totaled $286 million, which is down 8% when compared to 2015. Lower volumes and reduced locomotive lease expense were the primary drivers of this decline.

Other expenses came in at $244 million, up 8% versus last year. Higher personal injury expense was the primary driver for the increase due to unfavorable results in a few prior year claims. For 2016, we expect the other expense line to increase about 5% or so, excluding any large unusual items.

Turning to our operating ratio, the second quarter operating ratio came in at 65.2%, 1.1 points unfavorable when compared to the second quarter of 2015. Fuel price negatively impacted the operating ratio by two points in the quarter.

Looking at our cash flow, cash from operations for the first half totaled more than $3.5 billion, down about $250 million when compared to the first half of 2015. The decrease in cash was driven by lower net income and was partially offset by the timing of tax payments primarily related to bonus depreciation on capital spending. After dividends, our free cash flow totaled about $760 million for the first half.

Taking a look at the balance sheet, our all-in adjusted debt balance increased to about $18.2 billion at quarter end. We finished the second quarter with an adjusted debt-to-EBITDA ratio of 1.9, up from 1.7 at year end, as we continue to target a ratio of less than two times. For the first six months of the year, we have brought back about 16.3 million shares, totaling over $1.3 billion.

Since initiating share repurchases in 2007, we have repurchased more than 27% of our outstanding shares. Adding our dividend payments and our share repurchases, we returned more than $2.2 billion to our shareholders in the first half of this year.

So, that's a recap of the second quarter results. Looking out to the rest of the year, we expect volume will continue to be a challenge, even though year-over-year volume comparisons do get easier in the second half. We would expect total third quarter volumes to be down around 6% or so. And coal could still be down about 20% or so when compared to the third quarter of last year.

We now expect total full year volumes to be down in the 6% to 8% range, depending primarily on how the demand for consumer goods plays out in the second half. While it is unlikely we would be able to improve the operating ratio this year with volume reduction in this range, we will of course continue to focus on achieving positive core pricing and strong productivity to drive the best margins possible. Longer-term, however, we still expect to achieve our 60% operating ratio guidance, plus or minus, on a full year basis by 2019.

On the capital front, we're still targeting $3.675 billion for this year, which is down over $600 million from 2015. As for next year and beyond, we are taking a hard look at our future capital spending requirements and it is likely that we will need less than the 16% to 17% of revenue that we have been targeting. In fact, it could be closer to 15% or so, but we are still working through the details.

We are diligently continuing to drive productivity improvement throughout the company. Our entire organization is energized and intensely focused on finding more efficient ways to run our operations and safely serve our customers. Many of our productivity initiatives are well underway and several others are scheduled to ramp up in the coming months.

We're confident that our new G55 mindset will provide our customers with an excellent service experience and will drive financial performance for our shareholders well into the future.

With that, I'll turn it back to Lance.

Lance Fritz

Thank you, Rob. As you've heard from everyone here this morning, we continued to experience a challenging business environment in the second quarter, resulting in weak demand across many of our commodity groups.

A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year.

That said, we see potential bright spots in certain segments of our business if key economic drivers continue to strengthen, as they have in recent weeks. For example, energy prices, especially natural gas, have been recovering somewhat from previous lows, which is positive for our coal and shale-related business.

We're also cautiously optimistic that the overall grain market will strengthen in the second half, of course, depending on the outcome of this year's crop harvest and global agricultural economic conditions.

Beyond the impact of the current macro environment, we are implementing a strategy that will make us a stronger company for the future. This strategy comprises six primary value tracks and you've heard these themes woven throughout our comments today.

These tracks include our unrelenting focus on achieving world-class safety while delivering an excellent customer experience. They include striving for innovation and resource productivity, both designed to improve our work processes so we can make the most out of what we have.

Finally, the tracks are about maximizing the franchise with an engaged team, empowering our employees to effectively utilize our assets, our service products, our market reach, and our proprietary technology. And, of course, our G55 and Zero initiatives cut across all six of these tracks.

In the months and years ahead, we will continue our intense focus on these value tracks to create competitive advantages for our customers, enhanced safety and satisfaction for our employees, strength in the communities that we serve, and solid returns for our shareholders.

With that, let's open up the line for your questions.

Question-and-Answer Session

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]

Thank you. Our first question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your questions.

Brian Ossenbeck

Hey good morning, and thanks for taking my call.

Lance Fritz

Good morning Brian.

Brian Ossenbeck

I just had a couple of quick questions, one on coal and Chris the weather and natural gas inventories are affecting demand there. Can you see anything from -- pressure from renewable energy specifically from wind, is that continuing to take a little bit of share here and we've seen the production tax credits -- investment tax credits were extended at the end of last year. So, I'll be curious to see if you're seeing the impact your utility customers?

Eric Butler

Yeah, Brian, this is Eric. So, you're correct, there is continued expansion of wind capability kind of in the energy space throughout the country. Most of wind has to be backed up by some other source of power because you can't depend on it completely as you know. It is not a material year-over-year impact for us in terms of our coal burned or coal space.

Brian Ossenbeck

Okay. And then just one quick one on Intermodal and clearly you've outlined some of the challenges on the international side. Just wondering if the safety [Indiscernible] mandate hit constant volatility maybe on the volume side as we heard some shippers were moving volumes ahead of the July 1st mandate. So curious to see if you have seen any of that which would perhaps be weighing on volumes now and if you had to make any adjustments for the on duck rail to satisfy that weight certification requirements when that rolled out earlier this month?

Eric Butler

Yeah, Brian the sole-less [ph] thing as you said was effective July 1. As you know the shippers are responsible for certifying all of those weights. As far as we can tell that has not been impact on the supply chain, so it is not been an impact on us and we can't tell yet any significant impact on the full supply chain.

Brian Ossenbeck

Okay. Thanks Eric. Thanks for your time.

Operator

Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your questions/

Scott Group

Hey, thanks. Good morning guys.

Lance Fritz

Morning Scott.

Scott Group

So, Rob, why don't you just follow-up on your comments about the operating ratio that you don't necessarily expect improvement this year. I get that as a full year comment maybe can you talk about the second half of the year as the volume declines or moderating, do you think that margin improvement in the second half of the year is possible? And then just with that I don't think I heard a guidance for headcount sequentially in 3Q if you have any color there.

Robert Knight

Yeah, Scott, a couple of comments. One, yes my commentary on the operating ratio was a full year comment because as you know we have previously said our expectation earlier in the year was call it mid-single-digit volume decline for the full year and with that assumption improvement year-over-year on the operating ratio and with the revised volume guidance for the full year what we're saying there or signaling there is that we are very focused on continuing to improve our margins, but the year-over-year improvement looks less likely at this stage of the game.

But having said that, that does imply -- our guidance on volume does imply and our guidance on our commitment to improving our margins does imply that we expect to making continued improvement from here on our operating ratio and not only this year but as we strive to continue to meet that full year 2019 60 plus or minus.

On the headcount question, yeah, we had very good performance as it relates to headcount in the second quarter. Volumes, obviously, play a role in that, but as you know, Scott, depending on what volumes actually are combined with of our focus on G55 productivity initiatives, our headcount will move up or down with volume and our expectations from this going forward backed up by our volume guidance is that sequentially we do expect our volumes to improve from where we are today that would suggest that headcounts will move up, but not one for one.

And by the time we finish the full year, I would expect that you'll see us clearly down year-over-year, but it will all depend upon exactly how the volumes play out.

Scott Group

Okay. And Rob, so you’re not making comments about third or fourth quarter operating ratio year-over-year?

Robert Knight

I am not. Other than we're very focused and expect particularly with improving volume that we'll continue to improve where we are today.

Scott Group

Okay. And then just quickly on the CapEx side, I think maybe if you could get to 15% of revenue or so next year is that something that we can expect for not just 2017, but for kind of a few years just given the excess locomotives and the lack of the need to buy locomotives for probably two, three, four years or something?

Lance Fritz

Yes, Scott, this is Lance. The basis for that guidance is as we look out into out years, call it the planning horizon, we think demand on our part for new locomotives is going to be pretty muted and we think PTC drops off to a very low level if any.

And you just account for those two line items in this year's capital plan and it’s a significant chunk of capital. So, that's the underlying thought process behind moving more towards 15% as opposed to 16% to 17%.

Scott Group

It sounds like it should be more than 17, it should be more ongoing.

Lance Fritz

Yeah. It's our planning horizon. So, I would say you're right, it's beyond 17.

Scott Group

Okay. Thank you, guys.

Operator

Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your questions.

Allison Landry

Thanks. Good morning. I was wondering if you could talk a little bit about the sequential downtick in the core pricing number and whether that was driven at all by contract renewals or changes in the inflation indices. And then do you think we're at a cyclical low point there?

Eric Butler

Yeah. So, Allison, this is Eric. There was some minus sequential softening in [Indiscernible]. We think the 2% price that we turned in is positive and it continues to be above inflation, but it also is reflective in of market that we have there is surplus capacity in the market on all modes of traffic.

We continue with our strategy. We continue to price to the value that we bring and we think we're bringing a substantial value and we're improving our value and we continue to take as you said in the past a targeted market-based approach on pricing. If you look in the future, you do see capacity tightening across all modes of traffic and we continue to be positive about our ability to price our value the future.

Allison Landry

Okay. Rob I think you mentioned in the prepared remarks that your expectations for full year inflation was about one and a half. Is that the right way to think about inflation in the second quarter, in other words spreads about 50 bps which is similar to Q1?

Robert Knight

Allison, that's directionally correct, but I would just kind of remind everyone while inflation is low against historical levels, we aren’t really -- it's not mechanically terms of how we price, but, yes, I think directionally those are probably not bad numbers.

Allison Landry

Okay. And then just maybe a question on coal, you mentioned the higher burn rates in June with obviously pretty hot summer. When we think about that versus the elevated inventory levels, do you think sort of the normal sequential increase in the 2H versus 1H for coal carloads similar to historical levels which I think is somewhere in the high single-digit range?

Lance Fritz

Allison, I don't think we can give an outlook on kind of what sequential changes we'll see going forward. We do expect the inventory levels to go down the burn rate is increased as you have hot weather. You are seeing volumes grow and I think we'll see those trends continuing. I don't think we could be any more precise than that.

Allison Landry

Okay. Thank you.

Operator

Our next question is coming from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Chris Wetherbee

Okay, thanks. I wanted to ask a question about mix. So, I think mix was flat in the quarter and has been improving the last couple of quarters. I guess just wanted to get a sense, I think the outlook for the full year a quarter or so ago was -- I think continue to state relatively negative, but maybe eases as the year goes on.

Can you give us any thoughts Rob maybe how to think about that as we go into the third and fourth quarter coal getting all better, maybe grain getting a little bit better? Is it possible to see a positive?

Robert Knight

Chris, I mean as you know we don't give guidance on mix because of the moving parts and I would just say as you've heard me say many times, I think that's basically true for our franchise because we have such a diverse set of business mixes that we in fact are playing in not only at a macro level, but mix within mix at the commodity level. So, as a result we can't and don't give specific guidance.

But we did say we knew certainly the fourth quarter of last year and the first quarter of this year were unusually high given some of the mix and we thought it would start to moderate throughout the year and it has.

So, I would expect that I wouldn't give guidance that will be plus or minus, but I think it was reasonable to assume that look sort of more normal if you will could be plus, could be minus as the year plays out depending on actually what volumes move.

Chris Wetherbee

Okay. But generally speaking some of those heavier bulk commodities generally are positive to the mix dynamic?

Robert Knight

Generally, but again, Chris, as I think you know and others perhaps as well, you can have mix within mix. So, using our example of coal you can have a mix of positive or negative even just within the coal line.

Chris Wetherbee

Of course, that's helpful, that definitely makes sense. I wanted to ask you about the competitive dynamic particularly on the Intermodal side but generally competitive pricing in the West. I know you guys compete every day for the business that you win, but over the course of the last couple of quarters, just wanted to get a sense of sort of where that -- how that competition has been sort of shaking out, particularly on the domestic Intermodal side which I think was down again this quarter. I just want to see how that's kind of playing out?

Has it gotten any more difficult to win business from a rail perspective as opposed to trucks, we obviously know what's going on with the truck pricing, but just want to get a sense of how that's playing out?

Robert Knight

Yeah, Chris I think you said it right, we compete vigorously every day for business we have strong real competitor, strong truck competitors. We have strong water barge shipping competitors and you're exactly right we compete vigorously.

We do think we have a strong value proposition and we think that with that strong value proposition we can compete effectively on that value proposition and price for the value that we're providing to the marketplace.

As I said earlier you're seeing capacity tighten and many of those modes and we think that's positive for the competitive environment, but, yes, we compete vigorously every day.

Chris Wetherbee

And that tightening is that a current event or something you would expect maybe in 2017, just want to make sure I'm clear about that?

Robert Knight

So, as you go forward you certainly know what's happening in terms of the trucking regulations that are out there like electronic logs and the impact that, that's going to have. I think you have seen in the last couple of months a number of large trucking companies as part of their public pronouncements discuss what they see with capacity trends and their predictions about tightening.

You see kind of in the ship space some of the consolidations that are going on. So, I think it is kind of across all volumes. Of course you see rail volumes picking up. So, I think across all modes, you see that tightening.

Chris Wetherbee

That's helpful. Thanks for the color guys. Appreciate it.

Operator

Our next question is from the line of Cherilyn Radbourne with TD Securities. Please go ahead with your questions.

Cherilyn Radbourne

Thanks very much and good morning. The first question I wanted to ask was on your optimism for the second half in grain. Up to now you've been a little bit cautious about being optimistic in that segment. Just given your view on storage in the U.S., I just wondered if you could update is there in your thoughts.

Eric Butler

Hopefully -- this is Eric, hopefully, I was sounding more balanced than optimistic, but if you look at storage right now, there is -- storage is about 30% higher, storage of all types, grain, beans et cetera than what the five year average has been.

And then if you look at the crop there was something like 6 million more acres of corn planted this year and it's still dependent upon kind of the weather and the harvest, but right now it looks like it's going to be pretty decent yields from the current crop.

And so if you look at the pretty decent yields from the current crop if you look at the high storage levels on a historical basis, if you look at some of the challenges -- in particular South American crops that have had, it suggests that there's going to be opportunity to move grain in the second half of the year at a higher run rate than what we saw in the first half.

Cherilyn Radbourne

Right. And in terms of thinking about how much of your Ag products segment is really sensitive to the size of the crop. Should we be thinking about that grain sub-segment or are grain products movements also very sensitive to their size of the crop?

Eric Butler

Grains clearly -- our grain products are from the standpoint. The driver in grain products is ethanol is a large portion of that and then next kind of the soybean meals. And so those are also very sensitive to the crops and basically the crop pricing and whether or not ethanol will be in the money.

Cherilyn Radbourne

Great. That's all for me. Thank you.

Lance Fritz

Thank you.

Operator

Our next question is from the line of Ravi Shanker with Morgan Stanley. Please go ahead with your questions.

Ravi Shanker

Thanks, morning everyone. You said earlier that you don't necessarily price -- set your price to be 50 basis points above inflation. Can you just talk about what might be any structure drivers that kind of keeps that margin and prevents pricing from closing the gap further to inflation?

Lance Fritz

Ravi, this is Lance. When you think about pricing for us you start at the highest level which is we try to provide excellent customer service and excellent experience which generates value for our customers when we price for that.

In that context, we're constantly looking to make a reasonable return, so that it's a re-investable piece of business. And then we have the reality of the dynamics of other competitive modes or competition.

You put that altogether and that's what informs our ability to price. So, when you think about it going forward, you know markets that have less modal capacity, markets that are robust and growing strongly those are better markets to price in than not. But that generally informs our pricing scheme.

Ravi Shanker

Okay. And I had a follow-up on coal as well. You touched upon this in response to pervious question. But the 3Q coal outlook looked somewhat soft given the step up in the burn; I'm wondering if you think that that's not sustainable or why that would not -- why inventories will not be drawn down further.

And also when you look out into 2017, there's some folks talking about a potential coal book where you see a V-shape recovery in 2017, just given drawdowns, how would you dimension that or what kind of probability would you assigned to case like that?

Lance Fritz

Ravi, I think you're right if you look at kind of the burn, the burn has stepped up, but the inventory still are high on a relative basis. They are still 35 days higher than a five year average. So, you have to burn off those inventories even as the burn has stepped up. And so that is a headwind to growing coal volumes in the third quarter.

As you look at the outlook for next year as we say always it depends on weather, it depends on natural gas pricing, it depends on energy consumption. So, that's what's going to drive in the future.

Ravi Shanker

Thank you.

Operator

Our next question is coming from the line of Tom Wadewitz with UBS. Please proceed with your questions.

Thomas Wadewitz

Yeah. Good morning. Quick one first on inventories, I don't think you've commented on inventories in the effect on Intermodal, does that situation seem to be getting any better or is that still an issue that makes it hard to see a lot of improvement in Intermodal volumes?

Eric Butler

Tom, inventories have gotten better -- have retreated from the seven year highs that we saw last month. They are still high in a relative basis, but they are coming down.

Lance Fritz

Tom, to add a little technicolor to that in that domestic Intermodal space something that Eric continually reminds us is that there's a lot of opportunity out there from a truck competitive perspective. And that really informs a pretty good portion of our ability to grow. That overall consumer demand and demand for goods is what is informed that retail to sales inventory ratio and inventory in general.

Thomas Wadewitz

Okay. Thank you. And then the second question how would you -- I was just wondering if you kind of frame the way we would think about operating leverage as volumes get less worse and then hopefully in 2017 they actually grow.

Given current train length and ability to expand that given the initiatives Lance that you mentioned, how would we think about the operating leverage and kind of how long you can go with handling volume without adding a whole lot of incremental cost?

Lance Fritz

Cameron?

Cameron Scott

With the amount of locomotives we have in storage, the locomotive productivity leverage is fantastic. On the employee side, depending on where growth shows up, we will continue to bring furloughed employees back and potentially transfer employees to the part of the network where growth is residing.

So, we continue to see our employee pipeline staying very, very lean and there is great opportunity in every category with train size. Our coal network is truly the only network that is optimized to a very large extent every other network we have has plenty of headroom to train size.

Thomas Wadewitz

Okay. Can you size that, is that 10% room or 20% or is there a way to kind of frame that train size opportunity?

Cameron Scott

I think you see as quarter-to-quarter making continued improvement and we feel very confident you'll continue to see that.

Lance Fritz

Hey Tom, this is Lance, again. We've done a nice job staying ahead of demand in terms of overall capacity whether it's fungible capacity or track capacity. Clearly at this point, given how we've built out the network and we're supporting hundred and 180,000 or 190,000 seven-day carloads a couple of years ago, we've ample capacity for growth at this point.

Robert Knight

We won't do this, I promise on to many questions, Tom. This is Rob and I have to pile on. All of that leverage that we're confident in that Cam and Lance just talked through are all embedded in that drive to that 60 plus or minus operating ratio and of course, as you know we're striving to even set our sights beyond that at 55. So, it's that confidence that we are well-positioned with positive volume growth to be in a great position of leveraging that.

Thomas Wadewitz

Great. Okay. Thanks for all the perspective. Appreciate it.

Lance Fritz

Thank you.

Operator

Our next question is from the line of Ken Hoexter with Bank of America. Please proceed with your questions

Kenneth Hoexter

Hey, Great. Good morning. Just want to follow-up on the international side of Intermodal. Eric you talked a bit about carrier consolidation, I wouldn't think that has much to do with the demand side that's been filling their slots or the oversupply in the market.

Would -- what you're thoughts on the state of global trade? Seems like we're starting to see some of the port volumes pick up a bit, just wanted to see if that's something you're seeing as well as any or is that a shift from the Panama Canal change or Suez Canal any thoughts on the state of global trade?

Eric Butler

Yeah, so I think if you look at the absolute volumes in the TT [ph] trait, they are not strong. There are some period-to-period kind of shifts going on and you do see some of the business that shifted to the canal because of the strike just gradually coming back there. So, that's kind of coloring some of the trend, but the TT trade volumes are relatively weak from a historical standpoint.

If you look at the carrier consolidation issues, there's huge volatility going on in there. As I mentioned at the last earnings release significant volatility in terms of mergers, acquisitions and that volatility does have impact to the supply chain depending on which carriers have what book of business that you're aligned with. So, that volatility is impacting what we see in the supply chain.

Kenneth Hoexter

Great. Rob any thoughts on the balance sheet, obviously, pretty strong situation here. Thoughts on increasing the buyback accelerating given the volatility in the stock just kind of your thoughts on cash flow?

Robert Knight

I mean Ken, as you know, it all starts with driving a stronger cash flow as we can and we're obviously committed on returning cash to shareholders and we'll continue to be opportunistic in terms of at what price and when and how much we actually buyback. So, same philosophy, focus on generating as much cash as we can, so that we're in a high class challenge of deciding what to do with that cash and I would expect it will continue to be opportunistic as we move forward on the share buybacks.

Kenneth Hoexter

Great. Thanks for the thoughts.

Operator

Our next question is coming from the line of Brandon Oglenski with Barclays. Please proceed with your questions.

Eric Morgan

Good morning. This is Eric Morgan on for Brandon. Thanks for taking my question. I just want to follow-up on some of your grain comments. Sounds like the set-up from harvest perspective is pretty constructive, I was just wondering if you could provide a bit more color specifically with corn prices coming down so much recently and the dollar still strong. If there is enough storage capacity could we be in a similar environment as last year where farmers just don't want to move the crops?

Eric Butler

Eric, I think you have piped all of the dynamics exactly correct quarter prices are coming down. They are projected to come down even more because of the strong harvest that is projected to come, but there is an issue where it will have to move, so that is exactly the dynamic that's going on.

There is probably some headwinds to farmers wanting to move it, but there's probably some physical logistics where they have to move it and that's some of I think what we're seeing in the outlook.

Eric Morgan

Okay, I appreciate it. And just a quick one is there kind of good way to think about land sales going forward?

Lance Fritz

I'm sorry, Brandon, could you repeat that?

Eric Morgan

Just on the other income line is there a good run rate to think about with respect to land sales.

Lance Fritz

I'm sorry.

Eric Butler

Eric, no, I mean other income plus or minus 150 is kind of a number, but no, those tend to be as you've seen lumpy and there's no straight-line way of thinking about that.

Eric Morgan

Okay. Thanks for your time.

Operator

Our next question comes from the line of Jeff Hoffman with Buckingham Research. Please proceed with your question.

Jeffrey Hoffman

Thank you. Hey Eric, I just wanted to ask you a question about in the money which I think something came up a few questions ago. If we look at Powder River Basin coal, say relative to Western markets, relative to some of the Midwest markets, just where prices are now, where prices may or may not be and if I look at ethanol with corn prices down and diesel fuel prices up how close are we to be in the money on these products in terms of the forward outlook?

Eric Butler

So, I assume you're asking a coal question and ethanol question separately? So, on the coal question I would say it depends on what energy region you're in, what ISO, what RT you're in; it depends on the utility that's within that region. So, it depends on a lot of different things.

I think it's instructive to look at the fact of the reference increase in burn month-over-month to indicate that clearly there are a lot more utilities and -- that are in the money just if you look at that increase burn. So, that would be my coal comment.

In terms of ethanol, I think ethanol from a use standpoint is "always in the money" because it is needed as a necessary oxygen and a replacement for the MBTEs for gasoline and so as gasoline volumes go, ethanol blending with that will go the question is how much margin the ethanol manufacturers are making. But ethanol is more driven by gasoline sales and then need to get the oxygenate and the replacement for the MBTEs.

LanceFritz

Hey, Jeff just one piece on that PRB answer and that is while natural gas where it is right now 270-ish plus or minus has put some additional units "in the money" I think in the context you're asking are weather in the central part of the country and in the Southeast is helping tremendously with increased electricity demand and that's putting more units online just from a raw demand perspective.

Jeffrey Hoffman

That's where I was going with this is to the extent you have incremental burn demand, are you more in the money and more likely to be moving coal. Just one last follow-up Eric on the brown sand comment that you made on the frac sand, are we getting to the point where we're seeing increased demand for the white frac sand or not yet?

Eric Butler

Yeah, so if you look at the number of drilling rigs they're up modestly -- I think the number is -- you're going from like 400 rigs to 430 rigs or something like that, that's close to probably what the number is compared to 1,000 rigs last year.

So, it's increased modestly because the price of fuel has increased and there is slightly more drilling activity. I think the amount of white sand we'll see will be a direct correlation to as drilling activity comes on you'll see white sand demand go up.

Jeffrey Hoffman

All right. Hey congratulations in a tough quarter and thank you.

Eric Butler

Thank you.

LanceFritz

Thank you.

Operator

Our next question is coming from the line of Justin Long with Stephens. Please proceed with your questions.

Justin Long

Thanks, and good morning.

LanceFritz

Good morning.

Justin Long

So, I wanted to ask about the volume guidance for a 6% to 8% decline for the full year. So, that's worse than your guidance last quarter for a mid-single-digit decline, but if we look at 2Q volumes, they finished fairly close to your initial expectation for a 10% decline. And it sounds like you're a little more incrementally positive on coal and grain. So, can you just help us understand what drove this guidance reduction in terms of the volumes seems like in the back half of the year?

Robert Knight

Yeah, Justin this is Rob, I would say the biggest piece and I totally understand your question because you're exactly right in the terms of the way you map through that is centers around the consumer. I mean it centers around the Intermodal product as much as anything else in the cautiousness that we're expressing today.

You're right, we did come in a little bit stronger in the second quarter, largely driven that pick up in coal. If you look at the difference in the second quarter where we finish what we had guided to, but the full year number simply said is largely driven by that consumer cautiousness that we're seeing in the Intermodal space.

Justin Long

Okay, great. That's helpful. And secondly I wanted to get your thoughts around how your core price increases in general merchandise are trending relative to your core price increases in Intermodal. I know you don't break that out specifically, but are you seeing general merchandise in Intermodal pricing trending up at similar levels or is the Intermodal increase something like 100 basis points less because of the excess capacity in truckload?

Robert Knight

Justin, you nailed it when you said you know we don't give that break out because we endeavor to price to market and drive value in every one of our commodity groups, but we don't break out by commodity as you're striving for.

Justin Long

But just from a high level can you say that general merchandise prices decreases are above what you're seeing in Intermodal?

Robert Knight

No, and I would say number one, it varies each sort of negotiation is separate, but I wouldn't even go so far as to say that.

Justin Long

Okay. Fair enough I appreciate the time.

Operator

Our next question is from the line of David Vernon with Bernstein Research. Please proceed with your questions.

David Vernon

Great. Thanks for taking the question. Cameron maybe a question for you. It looks like the volatility of ocean carrier alliances and some of the changing of vessel causes is bringing down that international Intermodal, and you still have like 5% reduction in train length. How long do you think it will be before you can get that back up or should we be expecting you to kind of have to deal with that lower train length because of the headwind?

Cameron Scott

We adjust our Intermodal program on a weekly basis looking at inbound volumes that Eric does his best to forecast. And so balancing customer requirements and productivity is always a tight rope. Our first priority is to take care of our customers. And so we will continue to make those adjustments on week-by-week basis.

David Vernon

Would you expect that train length to back up?

Cameron Scott

As we step into the second half of the year depending as Rob outlined on what the consumer does driving Intermodal, we absolutely can bring that train size metric right back in line.

David Vernon

Okay. And then maybe Rob as a quick follow-up. Could you comment a little bit about the cadence of the operating results through the quarter, it would seem like you have been aggressively kind of pushing down on the headcount and then saw that sequential improvement into the volume growth I guess did results, was there any kind of a certain infection forward in result and the trajectory result as we move through the quarter?

Robert Knight

I'm following your question David, I would say no, I mean it was a continuation of our focus on being as efficient and as productive as we can which I think our results reflect lined up well given the unfortunate downturn in 11% volume. So, I would say there's nothing unique about that other than it was a good hard work across the entire organization to make the right decisions.

David Vernon

So, the run rate profitability was kind of the same at the beginning of the month as at the end of the month or end of quarter?

Robert Knight

Yeah, yet fuel was a big -- I would say there's nothing to call it there other than the fuel which rose late in the quarter.

David Vernon

All right. Thank you.

Operator

Our next question is from the line of Rob Solomon with Deutsche Bank. Please proceed with your questions.

Rob Solomon

Hey, thanks. Cameron, actually just to dig in a little bit more of with regard to the Intermodal train sizes, can you describe kind of what was going on with the domestic Intermodal train size versus the international and kind of the factors that was driving relative weakness that we saw with regard to train lengths?

Cameron Scott

On the domestic front, we will pay attention to what is being indicated on a weekly basis. We have extreme sensitivity to UPS and some of our LTL customers that we will always preference for any of those trains as long as the volumes are adequate.

And as I said on the international side, we really depend on Eric's forecast on what is hitting our ports and we'll make the appropriate decisions on a week-to-week basis.

The good news on the Intermodal front, despite the decline, is that there is plenty of opportunity to increase train size as we see volumes coming back into that space.

Eric Butler

Yeah. Rob, this is Eric. I wouldn’t had a lot of focus on kind of the train size in Intermodal. We're always adding different products and services as part of our growth and value proposition as part of our conversion strategy. And so you could be adding a product or service in the line and it will start small because it adds the potential to grow and that's part of the mix in train size that you'll always see.

Rob Solomon

Right. That makes sense. I guess Eric to kind of follow-up with regard to just kind of market dynamics, can you give us a sense if we take about automotive kind of on a very holistic basis including kind of inbound parts to the manufacturers of the automotive as well as the automotive part producers how big that represents and then maybe which networks that's running on between unit train and manifest?

Eric Butler

Okay. So, trying to make sure I understand your question so auto parts network is a growing network, it grew about 9%, 10% in the quarter. It's smaller than our multilevel network, but it is growing. Probably two-thirds, three quarters of it does run as part of our premium Intermodal network running container shipments and that's a necessity because it is a premium product.

Rob Solomon

Yeah. And if I think about just how big it is as a percentage of total volumes just look at the automotive line segments, it's little over 10%. But if I could kind of the metals that are going to the factories as well as parts in Intermodal that would be going to the automotive parts producers, how much additional volume would that represent for your network? Good rule of thumb, not really.

Eric Butler

I don't know if there's a good rule of thumb there.

Robert Knight

Rob, this is Rob, I would say you're using the auto's examples which is a good one and there are other examples where we enjoy to your point. We enjoy the sort of multiple move and in fact, I would just -- using your example I would say we also supply coal to the utilities providing the electricity to make the car. So, there's a lot of moving parts there, specifically what percent autos, we don't have that.

Rob Solomon

Okay. Thanks for the time guys.

Lance Fritz

Yeah.

Operator

Our next question is from the line of Jason Seidl with Cowen & Co. Please go ahead with your question.

Jason Seidl

Thanks operator. Hey guys, apologize if this was covered, but our phone dropped you for a little bit here. Eric you mentioned that there was a sequential increase in the burn from June to May, I think you said from May to June, I think you said 47%, what's the historical increase in burn?

Eric Butler

I don't have the historical number right at my fingertips. That is larger than it typically historical norm. As you know you do have the shelf month there and the second quarter because you are not heating or cooling and then you have the pickup cyclically, but that is higher than what you typically see.

Jason Seidl

Okay. That's good color. Also, I'm looking at your stock obviously under a little bit of pressure today, I think based on some of the incoming calls, I received there is a little bit of worry of your core pricing falling down a little bit. If you had the bucket the pressure on core pricing between loose truck capacity and increased competition from other rail carriers, how would you do it on a percentage basis?

Eric Butler

As a said before you know they are all low competitive factors that are going on. I mentioned earlier there might've been while you dropped off the call that there was surplus capacity in all loads truck capacity, shipping capacity, rail capacity, and you do see that capacity tightening across all modes as you look into the future.

Jason Seidl

But there wasn't one that was more prominent than the other as you look at 2Q?

Eric Butler

All of those factors are factors that go into our pricing and we price to our value and those are all factor.

Jason Seidl

Okay. Guys, thanks for the time as always I appreciate it.

Eric Butler

Thank you.

Lance Fritz

Thank you.

Operator

The next question is from the line of John Barnes with RBC Capital Markets. Please proceed with your questions.

John Barnes

Hey good morning. I wanted to go back to your comment around maybe some of the logistics on the grain business. So, we had a couple of decent harvest over the last couple years and for whatever reason we keep hearing about storage is tight and yet the crop never seems to get moved.

Have we finally get that inflection point where you know the storage is tight enough there is too much you know the prior harvest still in storage, this one just absolutely you it has to get moved this year.

Eric Butler

I don't know if I'm an expert on kind of the inflection point of total storage, I do think if you look at the trends and you're seeing some of the trends materialize even now storage is tight, farm income is under stress given the lower pricing. And so there is a cash flow dynamic for farmers in terms of holding versus selling that comes into play here.

There is a demand that is picking up because of the weakness in some international markets like South American markets and then there is a big crop coming in. So, if you look at all of those things they do indicate that there is a high probability you are going to see strong moves.

John Barnes

Okay. And then you mentioned the difficulties in South America, strong U.S. dollar continues to plague the export activity. Is the domestic demand this year in domestic moves of grain going to be more important than they have been in years past? We see there may be less of this moving for export purposes?

Eric Butler

We do have a strong domestic franchise. As you know exports are picking up and they are all interrelated because to the extent you have strong export markets that takes the demand and we also participate in the export markets whether it's moving into the Gulf, moving into the River, moving into the West Coast particularly the P&W. So we have a strong domestic franchise, but the export markets also benefited us.

Lance Fritz

And Eric, recall John that Mexico is also an export market for us.

John Barnes

Okay, but you are saying that the export you actually are seeing some movement in the export side of the business.

Eric Butler

Export markets are picking up.

John Barnes

Okay. Very good. Thanks for your time.

Operator

Our next question is coming from the line of Ben Hartford with Robert W. Baird. Please proceed with your questions.

Ben Hartford

Good morning guys. Curious how you feel about service today relative to let's say the high water marks pre-2014 some of the metrics trends being one of them are back to those measures. Obviously, there is some mix and other elements of play but how do you feel about the "service across the network today" relative to prior to the issues that you in the industry experienced in early 2014?

Lance Fritz

Ben, this is Lance, when you think about our overall network in the service we are providing, absent the impacts of things like the flooding that we've experienced in Texas there's some just epic weather events, we're performing essentially at a 2013 or 2012 type level.

So, our service performance level on average in aggregate is about as good as it's been for this kind of volume level. Our intent and what Cameron and team are constantly working on is ways to improve that, right. So 2012 and 2013 are a benchmark, they are not the only benchmark. We think we can do better than that over time and his team is constantly working with the commercial team and other functions of the railroad to try to find ways to improve that service product.

Ben Hartford

That's helpful. Are there any specific elements or areas of service where you don't believe that you are back to those 2012, 2013 benchmarks for still have some room to go?

Lance Fritz

Yeah, I would tell you we have room for improvement virtually everywhere and that's not a statement of not as good as 2012 or 2013 that's the statement of -- we are never perfect. There is always an opportunity to run the network more on time from original terminal to making sure we don't leave any cars behind to running the premium domestic Intermodal product at greater speeds or at more significant -- significantly reduced span. All of those things are within our visuals and we're working on all of them.

Ben Hartford

Okay. Thank you.

Operator

Our next question is from the line of Mark Levin with BB&T Capital Markets. Please proceed with your question.

Mark Levin

Hey guys, thanks for the time. Most of my questions have been asking and answered. I just wanted to see if there was any potential impact from the Mexican Excise Tax Credit benefit the one that KSU alluded to yesterday?

Robert night

No.

Mark Levin

No benefit whatsoever.

Robert night

Right.

Mark Levin

Okay, great. And then with regard to auto yield and the mix headwind that you mentioned this quarter, when you look forward is that something as we model RPU in the auto segment we should be mindful of what type of expectations should we have as that looking forward there?

Eric Butler

Our auto part businesses growing faster than our finished vehicle's business because that is the growth area as you saw that in the second quarter auto-parts business as a lower RPUs than the finished vehicle's business.

Mark Levin

And will the decrease moderate or is that sort of a way to think about that going forward this quarter?

Eric Butler

There aren't decreases, the auto-parts business is growing.

Mark Levin

Great. Okay. Thank you very much.

Lance Fritz

All right Mark.

Operator

Our next question is from the line of Donald Broughton with Avondale Partners. Please go ahead with your question.

Donald Broughton

Good morning gentlemen.

Lance Fritz

Good morning Don.

Donald Broughton

Help me understand better core pricing, obviously it's a very challenging environment as you reported your core pricing essentially cut in half over the last four or five quarters. Does your reported 2% core pricing represent the pricing achieved on all new contracts settled in that quarter -- for instance the 2% being just those settled in the second quarter or does that represent the amount of year-over-year gains made in your overall book of business?

Robert Knight

Yeah, Don, this is Rob. The way we calculate that core price number is what do we actually yield in the quarter from our pricing actions and as you think note when we calculations that I'm proud to say is ultraconservative and that is we take it across our entire book of revenue even as a work contracts that are being repriced in that particular timeframe it is what do we yield overall.

And would also just want to of course as you know given that calculation when we don't have the benefit of positive growth in commodities like coal, we obviously no longer have any of the legacy renewals, I mean that's part of the change if you look at where we are today versus where we were a year plus ago.

Donald Broughton

What a second Rob, I'm a little confused. So, it's the contracts reset in the quarter and their effect in the overall book is that what you mean?

Robert Knight

No, it's not necessarily what was reset in the quarter but what dollars. The calculus is simply what dollars to be a from price increases during the quarter. So, if perhaps was something that was reset prior to the quarter, but that's -- and again what did we yield against our entire book of revenue.

Donald Broughton

So, the denominator in the equation is the overall book of business?

Robert Knight

That's right

Donald Broughton

So, that means the core pricing to deteriorate from 4% to 3.5% to 3% to 2.5% to 2%, it means the pricing you are cheating on all new contracts is actually less than 2%.

Eric Butler

Don, there's a number of moving parts and Rob just walked you through them. One thing that's happening is we might've achieved incremental price on a piece of business that isn’t moving or isn’t moving at the same volume. So, we don't get the benefit of that price. It doesn't affect the topline. It could be that ALF is changing period-to-period there is a number of moving parts there you can't just presume the calculus is lower yields period-to-period.

Donald Broughton

Right. But if the -- for the overall -- if the denominator is the overall book of business in the rate increase has to be less than what the core is that you are stating no matter how perverse the mix gets?

Robert Knight

We're agreeing that the yield from the pricing this quarter for lots of different reasons was lower

Donald Broughton

Okay. So, then let me ask another question is there a floor -- is there a rate of core pricing at which you're going to simply draw the line and say no, we will not accept less pricing than that, we'll lose the volume if we have to, but we're not going to accept a lower level of pricing than say 1% or 1.5% or 2%.

Eric Butler

Don, we've stated even earlier in this call there is a floor and a floor is it re-investable and does it reflect the value that we are delivering to that particular customer market. So, we don't think of floors in terms of percent yield or percent price, with think of floors in terms of if that piece of business or book of business does not re-investable, it becomes much less attractive to us and we have demonstrated over a long period of time that we will choose not to pursue business that does not generate an attractive financial return over a long period of time.

Donald Broughton

That's absolute to. Fair enough. Thank you, gentlemen.

Operator

Our next question is from the lien of Keith Schoonmaker with Morningstar. Please proceed with your questions.

Keith Schoonmaker

Thank you. I'd like to ask a bit more about the automotive franchise, but with a long-term focus. First, what portion of the automotive portfolio consist of moves to or from Mexico? And could you describe the positive and negative impact to your franchise from production shift in New Mexico compared to prior production locations?

Eric Butler

Yeah. So, about half of our franchises to or from Mexico that's all unfinished vehicles and parts. We -- the Mexico volume is growing as you know. Historically, it was like 2 million vehicles, I think they are probably up to about 3.7 million vehicles produced in Mexico. The forecasts is they are going to get close to about 5 million vehicles produced in Mexico.

We think we have a great Mexico franchise. We're the only railroad that has real connectivity to all six rail border crossings. We have great interline business relationships with every railroad in Mexico. We also have multimodal relationships that we are working with and Mexico. So, we think we have eight great franchise and will partake in that uptake over time.

Keith Schoonmaker

And so the shift in general [Indiscernible] production in Mexico as opposed to in U.S. or Canada is a positive from revenue gains or is it negative due to other factors like length of hall?

Eric Butler

So, there's a lot of factors that go I would say generally we think the net shift is a positive for our franchise.

Keith Schoonmaker

Okay. Thanks very much.

Operator

The next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions/

Scott Schneeberger

Thanks very much. Any industrial production in the industrial product segment, you called out the severe weather in Texas in the quarter but otherwise, very strong construction activity. Could you just speak to kind of the 2Q to 3Q dynamic there and the trend in the back half assuming that we don't have bad weather events coming forward. Thanks.

Eric Butler

We see a normal cyclical pick up as you go through the 2Q to the 3Q just because the summer construction season that we see across most of our serving territory. Don't have as much construction in the winter as you do in the summer as we do expect to see sequential pick up.

You also are seeing some strengthening in housing starts not as much as you would expect waste on the demographic trends. We think that's a positive for the long-term for our business because the demographic trends are suggesting there has to be a stronger pick up than what we've seen. So you are still seeing that along with the cyclical trends so we think sequentially that will be positive for us.

Scott Schneeberger

Thanks. And then just on this the new potential minimum crew size rule as being considered, could you just discussed the company perspective and perceived timing on if shop should happen if you would approach that?

Lance Fritz

Thank you, Scott. Regarding the FRA's proposed rule on minimum crew size, historically that has been a topic for collective bargaining over the past number of decades and we believe that's where it belongs.

There is no evidence that criticize is related to safety. The FRA stated that in the preamble to their own rule. The NTSB, the National Transportation Safety Board has also stated that they see no empirical evidence between crew size and safety.

Having said that, we do not have any plan right now to reduce crew size in our locomotives. What we think should happen is we should allow technology to take its course and determine when it's appropriate for some of the work to be removed from the cab and to be placed somewhere else.

There is an amount of work that gets done for every train and that work needs to be done. It's just a matter of where it will be done. So, that's our perspective on that.

Scott Schneeberger

Thanks.

Operator

Thank you. At this time, I would like to turn the floor back to Mr. Lance Fritz for closing remarks.

Lance Fritz

Thank you, Rob, and thank you all for your questions and interest in Union Pacific this morning. We look forward to talking with you again in October.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.