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Edited Transcript of KSU earnings conference call or presentation 18-Jan-19 1:45pm GMT

Q4 2018 Kansas City Southern Earnings Call

KANSAS CITY Jan 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Kansas City Southern earnings conference call or presentation Friday, January 18, 2019 at 1:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey M. Songer

Kansas City Southern - COO & Executive VP

* Michael J. Naatz

Kansas City Southern - EVP & CMO

* Michael W. Upchurch

Kansas City Southern - CFO & Executive VP

* Patrick J. Ottensmeyer

Kansas City Southern - CEO, President & Director

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Conference Call Participants

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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Fadi Chamoun

BMO Capital Markets Equity Research - MD and Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Matthew Edward Reustle

Goldman Sachs Group Inc., Research Division - Senior Equity Analyst

* Samantha Ariel Yellen

Crédit Suisse AG, Research Division - Research Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Kansas City Southern Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

This presentation includes statements concerning potential future events involving the company, which could materially differ from the events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factor section of the company's Form 10-K for the year ended December 31, 2018, filed with the SEC. The company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.

It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern.

Mr. Ottensmeyer, you may begin.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [2]

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Okay. Thank you. Good morning, everyone, and happy new year. We'll start on Slide 5 -- 4, I'm sorry, with the presenters, and you'll see one change in our lineup this quarter. Mike Naatz is going to be speaking to the sales and marketing and revenue side of the business in the presentation. We'll have José Zozaya on the phone in Mexico and Brian Hancock is here in the room with us for Q&A.

Moving to Slide 5. Fourth quarter results revenue increased 5% to a record for the fourth quarter, $694 million, led by strength in crude oil and refined products into Mexico. Volumes were flat from the previous year. Fourth quarter operating ratio of 63.1%, adjusted operating ratio of 64.3%. Mike Upchurch will get into details about the adjustment that basically relates to insurance recoveries from the Hurricane Harvey flooding in 2017.

Fourth quarter earnings per share of $1.59, adjusted earnings per share of $1.56, which was a record for the fourth quarter and 13% improvement over last year.

Slide 6, we talked about for the full year results. Revenue increased 5% from 2017 to a record $2,714,000,000, 2% volume growth. Full year operating ratio reported as 63.7%. Again, the adjustment takes that to 64.3%, with the adjustment primarily being the insurance recovery that I mentioned a minute ago.

Full year EPS of $6.13, adjusted to $5.97, which was also a record and a 14% increase from 2017.

Slide 7, probably the most interesting slide in the presentation today. We have finished our full year 2019 plan and long-range plan update and speak -- keeping with our commitment that we made in November of sharing -- being a little more forthcoming with guidance. This is where we ended up when we finished our planning process.

For 2019, we're looking at volume growth in the 3% to 4% range. Revenue growth of 5% to 7% for 2019, and we're putting a longer-term operating ratio target out there of 60% to 61% by 2021. Jeff will talk more about that. You mentioned -- you saw in the press release, we mentioned a heightened focus on operational excellence and operational performance, and implementation of some of the principles of Precision Scheduled Railroading. Jeff will get into that in more detail in a few minutes. I'll just say that we are in the very early stages of our work and understanding how PSR principles will apply. And we will probably not be complete in terms of answering some questions about timing and magnitude of some of the details. Again, we're very early in our thinking here.

So further guidance here, earnings per share over the next 3 years low to mid-teen compound annual growth rate in EPS. And CapEx for 2019, we're looking at the $640 million to $660 million range -- $660 million, which includes some locomotive purchases that we've talked about in previous reports. And then beyond 2019, we are looking to CapEx migrating down to something in the high teens but below 20%.

So with that, I will turn the presentation over to Jeff.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [3]

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Thank you, Pat, and good morning. Starting with a review of operating metrics for the quarter on Slide 9. Overall, dwell and velocity showed general improvement over Q3. Peak third quarter congestion eased in December and January, year-to-date metrics continued to show improvement. Coming out of our normal holiday slowdown period, last week's reported dwell has returned to normal levels at 22.5 hours.

Expanding on the current state of operations on Slide 10, other key metrics showing substantial improvement are the terminal performance at Monterrey and Sanchez. Inventory and dwell at these terminals have significantly improved since peak levels in the third quarter. We continue to work with customers to rightsize equipment and optimize service in this region.

Cross-border initiatives continued to support fluidity in the region, and Q4 was another strong quarter for cross-border volume that increased by 16%. We continue to progress our international crew initiative and are seeing a reduction in overall transit time across the bridge as more trains operate with this crew base.

Turning to Slide 11. I will provide a quick update on capital spend. 2018 capital was 19% of revenue or 5% below guidance. Reductions attributed primarily to cost savings in PTC and other capacity projects coming in below budget. Highlights for 2019 capital include continued investment in cross-border line-of-road capacity and infrastructure improvements to support the growth in this region. Segments between Houston and the border as well as Monterrey to Matamoros continue to be a priority to support strong cross-border demand and new refined products terminal coming online in Houston and Gulf regions.

Additionally, we are on track to receive the first of 50 new high horsepower locomotives units late in January. As mentioned last quarter, we are selling 33 lower horsepower units as part of this transaction. I will provide additional color on our locomotive fleet momentarily.

Turning to Slide 12. I would like to provide some insight into our plans for PSR. Entering 2019, we are focused on implementing the PSR operating principles that are most relevant to our network. To assist in this process, we have entered into a consultant agreement with Sameh Fahmy. Mr. Fahmy is a former Canadian national executive with 27 years of experience at CN, 12 of those years spent working as part of Hunter Harrison's executive management team. In addition to his experience with CN, Mr. Fahmy has done work with other railroads in similar PSR roles. He also brings a wealth of locomotive knowledge as he worked with GE for 3 years. Initial areas of focus include improved labor and asset utilization, train start rationalization and fueling efficiency, among several others. Mr. Fahmy's compensation structure is in line with that of our executive management team, and we are all working towards shared financial goals.

Providing some real-life examples of recent initiatives, we have redesigned our intermodal and manifest product between Kansas City and St. Louis, and have reduced 8 train starts per week in this segment. Initial rationalization of our Mexico network has provided an additional 28 train start per week reduction. Combined, these 2 initiatives will save over $2 million per year in labor cost alone in addition to locomotive, fuel and equipment savings.

Tying back to our locomotive strategy, PSR initiatives will allow us to reduce the overall locomotive fleet. While we have not identified a total number for reduction at this time as compared to the peak number of active locomotives in 2018, we have returned 25 leased units and are in process of storing an additional 20 units.

Acquisition of the 50 new units is in line with another of our PSR initiatives of reducing locomotive failures. New, reliable units will allow for increased fleet utilization by reducing unplanned failures. At the same time, this acquisition provides additional high horsepower units to support the growth in our refined products unit train segment. We will continue to target other yard, local and poor-performing road units for disposition.

Nothing about our network should prevent implementing parts of PSR that will help drive efficiencies, and we will continue to work closely with interchange partners who are also at work on PSR initiatives. In the end, we look to see more efficient interchanges from overall rail network improvements.

I will now turn the presentation over to Mike Naatz.

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Michael J. Naatz, Kansas City Southern - EVP & CMO [4]

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Thank you, Jeff, and good morning, everyone. I'll start my comments on Page 14. You'll see the fourth quarter year-over-year revenue was up 5% on flat volumes. If you were to look at the appendix, you'd see full year revenue and volume growth were up 5% and 2%, respectively.

In the fourth quarter, we continued to see strong growth in cross-border carloads and revenue, most notably from refined products and cross-border Intermodal business. However, as Jeff discussed, during the first half of Q4, we were challenged by congestion in northern Mexico and it did have an impact on our business.

During the quarter, our revenue per unit grew consistently with what we experienced in Q3, despite mix pressure from the loss of some long-haul utility coal business and unfavorable FX.

Core pricing environment remained healthy, and we expect pricing to outpace inflation.

The Chemical & Petroleum business unit recorded revenue growth of 19%. This growth was primarily driven by strong southbound volumes of refined fuel products moving into Mexico. For the full year, the Mexican Energy Reform business contributed nearly $100 million of revenue, with carloads and revenue growing at 156% and 120%, respectively. We included a full year recap on this topic in the appendix. It is also worth mentioning that Plastics grew at 14%.

Revenue from our Industrial & Consumer business unit was down 5% year-over-year. This decrease was primarily attributable to timing of military moves, a shift in a customer sourcing location within our metals business, which in turn significantly reduced the length of haul on those moves, and then the previously mentioned congestion at the border.

Revenue in our Ag and Min business grew at 8% in the fourth quarter. This growth was driven primarily by our grain business due to improvements in cycle times and we did see positive pricing gains.

The Energy unit's revenue decline of 7% was driven by a previously announced closure of a power generation facility in Texas and by continuing declines in frac sand. These declines were partially offset by higher volume and pricing in our crude oil business, driven largely by Canadian crude shipments.

Intermodal revenue increased slightly year-over-year with mixed performance by lane. The cross-border franchise revenue growth was solid at 8%, driven by truck-to-rail conversions. Other domestic lanes were challenged by congestion and tougher year-over-year comps.

Additionally, while Lázaro intermodal volumes declined 5% year-over-year, we did see meaningful sequential improvement in this lane, driven by our actions taken to restore Lázaro Cárdenas volumes.

Revenue from the Automotive business was down slightly over the prior year. Border congestion, unplanned plant shutdowns and continued equipment availability issues in North America impacted this business unit.

I'd now like to move on to Slide 15, where we provide a business segment outlook for 2019. As Pat mentioned, our full year volume outlook is approximately 3% to 4%, with a 5% to 7% year-over-year revenue growth projection.

Starting with the Chemical & Petroleum business, the Mexico Energy Reform continues to be a significant focus and unique opportunity for KCS. We expect volume growth from refined products to continue next year as demand increases and storage capacity comes online. We expect plastics to grow in 2019 with increased demand. Additionally, heavy fuel oil shipments in Mexico are also expected to grow along with higher production.

We expect to see solid performance in the Automotive business, even though certain plant closures were unexpectedly elongated following the holidays. We expect volume to grow slightly ahead of most third-party estimates for Mexico production. In addition to increasing production in Mexico, volume growth may benefit from market share gains, easing congestion and additional equipment.

We expect to see continued, but moderated growth in our intermodal business. Our cross-border and U.S. domestic business has started slowly, but we expect to benefit from truck-to-rail conversions, tight truck capacity and expanded capacity at some key intermodal terminals.

As mentioned earlier, we expect to see positive sequential trends in our Lázaro business as additional trucking regulations are implemented in Mexico and as our customers continue to evaluate and take advantage of our short-term volume-based pricing strategy. However, we are taking a pragmatic approach to the business, focusing on strong service product and rational pricing. We believe that this focus will help us deliver future volume growth that is both sustainable and in the best interest of our customers and shareholders.

As for Energy, our coal business should grow with higher natural gas prices and increased demand in the Texas market. On the crude side of things, we are monitoring developments around mandatory production cuts by the Canadian government and the corresponding potential implications in our Canadian crude business. Additionally, we expect continued declines in frac sand due to sourcing pattern changes.

And lastly, our outlook for Industrial & Consumer and the Ag and Min business is neutral to slightly positive, although our metals business should improve in 2019 due to capacity expansions and improved cycle times. We are watching the impact of changes to the global trading patterns and tariffs very closely.

And with that, I'll turn things over to CFO, Mike Upchurch.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [5]

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Thanks, Mike, and good morning, everyone. Let me start my remarks with a summary overview of fourth quarter 2018 results.

Revenues of $694 million were up 5%, primarily due to higher fuel surcharge revenues. Reported operating ratio improved to 63.1%, predominantly due to an $8.5 million insurance recovery related to Hurricane Harvey. On an adjusted basis, excluding the positive impact from the insurance recovery, our operating ratio was 64.3%, slightly worse than 2017.

Reported diluted earnings per share for the fourth quarter of 2018 was $1.59, down from $5.33 in the fourth quarter of 2017, due to the onetime benefits we recorded as a result of tax reform. Adjusted diluted earnings per share of $1.56 was 13% better than fourth quarter of 2017.

Our adjusted effective tax rate for the fourth quarter of 2018 was 28.3% and for the full year 2018 28.9%, in line with our guidance of 29%. For 2019 through 2021, we are estimating an adjusted effective tax rate of 29% to 30%.

And from a cash tax standpoint, we would expect 2019 to be approximately 17% and for 2020 and 2021, 23%. And you'll find more details on our tax rates that have been included in the appendix on Page 31.

Turning to operating expenses. Operating expenses in the quarter adjusted for the insurance recovery from our Hurricane Harvey claim increased 6%. Depreciation expense increased $10 million, the result of in-servicing PTC assets and from a general increase in our asset base.

Fuel prices increased both in the U.S. and in Mexico, driving up fuel expense by $10 million.

Equipment costs were down $6 million, driven by lower lease payments from owning more of our equipment and lower car hire. Purchase services were up $4 million due to slightly higher IT, joint facility, dredging and security costs.

We also experienced higher personal injury costs in the quarter due to changes in estimates from an actuarial study and experienced a large derailment early in the quarter in Mexico.

Wage and benefit inflation and higher headcount of $4 million and $3 million, respectively, was partially offset by lower incentive compensation costs of $3 million.

Finally, FX lowered overall expense by $5 million.

I'd also like to provide you a few thoughts around 2019 expense levels. First, we expect compensation and benefits to increase about 5% due to wage and benefit inflation and slightly higher headcount. But as Jeff mentioned earlier, we also expect to produce labor efficiencies based on our early PSR work. Excluding the credit for insurance settlement contained in materials and other, we would expect M&O expense and purchase services to have normal inflationary-type expense increases in 2019.

We've also included estimated fuel prices for 2019 in the appendix on Slide 25, and we currently believe fuel prices will moderate in the U.S. but increase in Mexico. And we do expect to continue to be eligible for the fuel excise tax credit in 2019, which we estimate to be $35 million to $40 million.

We expect our equipment expenses to be down slightly as a result of owning more of our equipment and from better cycle times. Depreciation is expected to increase approximately 9% and is inclusive of PTC depreciation headwinds of $13 million. In total, we will see PTC expense increases of approximately $17 million for the full year 2019.

Finally, let me cover some of our capital structure and capital allocation priorities. As Jeff mentioned earlier, CapEx of $512 million for 2018 did come in substantially below our original and revised third quarter guidance. We will continue to ensure capital spend in a prudent manner to support our growth.

While 2019 capital will increase due to purchasing 50 new locomotives, we would expect capital expenditures to decline both in 2020 and 2021 to levels slightly below 20% of revenue.

We continue to repurchase our stock under the $800 million stock repurchase plan approved by our board in August of 2017. In the quarter, we repurchased $80 million of our common stock, which was approximately 50% ahead of our prior quarterly pace. Cumulatively, we have now repurchased approximately $1 billion of our stock.

And finally, in October, S&P recognized our improvement in the capital structure and upgraded our credit rating to BBB flat.

And with that, I'll turn the call back to Pat.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [6]

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Okay. I think that's maybe a record in terms of finishing our formal comments. I'll just make a couple of closing remarks before we open it up to questions.

I'll refer to a statement, a quote actually in the press release about the results for the quarter, the year. Obviously, not a bad quarter, not a bad year and record performance in a number of levels. But as I said in the press release, while we delivered record revenues, adjusted operating income and adjusted EPS, 2018 did not meet our own expectations for our financial and operational performance.

In addition, we did not meet the expectation of our customers, our shareowners, particularly, in the areas of customer service and growth. So while we feel good about the performance and we know we're not altogether pleased because we know we could have done better. The key points I think from the presentation and happy to get into the Q&A of the service recovery, particularly around the border where we've experienced the worst congestion over the past few quarters is well underway, and we feel good about the performance of the railroad as we head into the new year, the growth opportunities, the oversized growth opportunities that we've been talking about for several of the last few quarters are real, and we feel that we've got pretty good transparency on a number of those opportunities and still feel very positive about the growth outlook.

And the precision railroading initiatives, I think, is off to a good start. I've been very pleased with the engagement of the team, both in the U.S. and Mexico. And with the help of Sameh, I think we can prioritize some things that will give us some pretty quick performance improvement areas and help us deliver the kind of service that we want to on a sustained basis.

So with that, I will open the microphone for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today is coming from the line of Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [2]

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So I wanted to start with a question on the OR guidance for 2021. And I wanted to see if there was any color you could provide on the cadence of margin improvement that you're expecting over the next 3 years? Is it going to be a consistent pace or more front-end loaded? And then along those lines, how much of this improvement is a function of PSR implementation versus operating leverage in the business with volume growth?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [3]

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Justin, this is Mike. Let me take a quick stab at that. Obviously, the guidance implies somewhere around 100 to 150 basis point improvement in OR. We think we still have 1 major headwind going into 2019 and those are the incremental PTC expenses which are about $17 million. We're very early in the process here of identifying initiatives to reduce expenses, so I would probably guide you to may be an acceleration as we get into '20 and '21, and you get the full year benefit of some of those initiatives. So hopefully that helps.

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Justin Trennon Long, Stephens Inc., Research Division - MD [4]

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That does. And also wanted to ask about the headcount assumption that's embedded in that long-term guidance. I think you said this year up slightly, but how do you expect headcount to trend in 2020 and 2021?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [5]

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Well, I think with volume growth that we're expecting this year, we would typically see a little bit of increase in variable headcount to move that traffic. But again, I think, Jeff mentioned it, and I made a comment on it, we would expect to continue to gain labor efficiencies. Jeff gave some pretty good examples, and we're just so early in the process that we're not really fully baking in all of those potential opportunities. We'll continue to do that as we move throughout the process, but expect us to try to manage headcount as judiciously as we can.

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Operator [6]

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The next question is from the line of Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [7]

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I wanted to sort of pick up where we left off there, just sort of coming down to the EPS slides, obviously, a CAGR issue in 2021. Based, Mike, on some of the things that you're talking about there, should we assume that maybe we're on the lower end sort of early in the process or maybe '19 is in the lower end of that CAGR? Just want to get a sense of maybe how you're thinking about it as it drops down to the bottom line because it sounds like there are some incremental expenses that we should think about this year.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [8]

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Yes. Chris, this is Mike again. I think that's a safe assumption. Again, I'd point to the step-up in PTC expenses as we're now in service on our entire network. So you're going to have a little bit of a further benefit as you get into '20 and '21, so I think it's probably reasonable for you to model it that way.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [9]

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Okay. Okay. That's helpful. And then, I guess, I wanted to maybe get a sense of the CapEx profile. So you've an elevated year in 2019 as you're bringing in some new locomotives onto the network and then sort of a step down below 20%. As we see PSR implemented for some of the other railroads, there has been a really meaningful drawdown in capital spending as a lot of assets get parked. How should we think about it? Is it the potential for a little bit further of a step-down or what is the dynamic that might keep you from, say, mid-teens to an upper teens on a percent of revenue for CapEx?

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [10]

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Yes. This is Jeff. I'll talk about that. Maybe the locomotive purchase, I think, I explained kind of the rationale around that in promoting more high horsepower units as we transition off. I think we'll look to continue to park or divest some of our older yard locomotives. I think, in general, other maintenance such as engineering and maintenance away, I think those things remain pretty much in line and pretty much steady state. I think the difference probably remains to be other growth opportunities, be it capital investments in various refined products, opportunities or similar that I think we're leaving ourselves some room to continue to look at how we invest and then play in that space more from a growth capacity type scenario.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [11]

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So we probably won't see that sort of mid-teens. It's probably fair to say that, that might be a little bit ambitious because of the opportunities you have on the top line.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [12]

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I think that's right, Chris.

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Operator [13]

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The next question is from the line of Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [14]

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So the company has put out long-term guidance in the past that has not been met. And even more recently, the volume expectations have not come in nearly as expected. So if you could just help us like what's different this time. You have this 2021 target there. What's different in terms of accountability or whether it's conservatism in the planning in terms of how you roll up to the 60% to 61% OR? I think that would just be helpful because a lot of the conversations I have, it's really some sort of long-term targets, may be met with some skepticism. So I think it would be helpful to just put some context around how you get there and what the robustness or conservatism that you baked into the plan?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [15]

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Yes. Amit, this is Mike. I guess, the prior guidance that you referred to, I think, what we predominantly missed with that guidance was the Energy sector meltdown that we saw in '15 and '16 that seemed to be the source of the mess that we had. In terms of commitment to those numbers and what we have at stake, these are all numbers that are tied to our incentive compensation plans. And as you saw in some of the slides in 2018, we didn't meet those expectations and therefore, we had lower incentive compensation. So we're all in on these targets, and they'll be tied to our incentive plans that the compensation committee of the Board of Directors will hold us accountable for.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [16]

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I'll just say we've completed -- as I mentioned at the beginning, we have completed our 2019 budgeting process and update of our 3-year plan that, as Mike mentioned, is going to be the basis of our incentive comp targets. And this plan is just based on the best information that we have available at this time, feedback from customers, as we learned in the Energy situation that Mike referred to in 2014, 2015. That was also the case. I mean, we met with our largest crude oil shippers in January of -- I guess, it was 2015, looked them in the eye and asked them are you serious about this? Is this really what you're planning to move? And they said yes, and we built into our plan and built it into our guidance expectations. And it proved to be wrong. So we're always going to have risk in our plan and in the guidance, but we have sanity checked this as thoroughly as we can. We've had tight dialogue with our major customers to elevate our visibility into the revenue and volume side, and so we feel that this is grounded in reality and based on the best available information that we have at this time.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [17]

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Okay. I appreciate you entertaining that question. I know it's a little bit of a tough question. I appreciate that. One, with respect to the PSR announcement, I was wondering if you could just help us think about what part of the network are you guys going to attack or address first? When Union Pacific did it, it addressed this kind of mid-American network where a lot of the frac sand was moving through and obviously, volumes are going down there. Any part of the network that you may actually attack or address first either through pilot programs or just all-in? Maybe where are some of the volume weakness. Any color there, I think, would be helpful.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [18]

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Yes, this is Jeff. I'll try to provide a couple of tangible examples. of, I am going to say some lower hanging fruit we've already identified. I think as we look at this, the Mexico network, just due to the complexity or -- of our intermodal manifest, you look at train length, you look at service design in Mexico, probably more specifically related to some of these PSR opportunities. And I think that's where we're really kind of setting the site is that's our priority from a service and design perspective and a train start rationalization. As we have seen and continue to work with customers in the Monterrey area as an example, we've made some good strides climbing out of the congestion here, but also taking that further and we've been able to rationalize some of the equipment directly out of that terminal, working closely with those customers. So in the area of train start, that will be our focus, intermodal manifest product in Mexico more strategically. The locomotive arena, I've touched on. So as trains start to rationalize, locomotives should follow suit and the crews and the headcount should start following suit as well. So as we embark on in the first inning here, I think that's where we see the initial work ongoing and starting to provide the most quickest benefit.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [19]

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And Mike, is there any change in the pro forma leverage target for the company as you think about capital structure or no?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [20]

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No, and nothing that we've officially provided. As you know, we're in low 2s right now. We were very focused on getting that final upgrade to BBB flat and that occurred in the month of October, and we feel pretty good about the balance sheet right now. I think it gives us a fair bit of flexibility.

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Operator [21]

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The next question is from the line of Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [22]

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I just wanted to follow up a little bit on the PSR conversation. Can you talk a little bit about how long you've been working with the gentleman from CN in a consulting arrangement? And how particularly he is incentivized and what a desirable outcome would be over this time frame? And just operationally around that, could you just remind everyone the percentage of your business that either originates and is terminated on your network versus the carriers that you partner with to either originate or terminate shipments?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [23]

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All right. This is Pat. I'll take that one, and then maybe ask Jeff to chime in with a little color commentary. First of all, we're not going to get any more specific about the compensation or the arrangement that we have with Sameh other than to say that his performance objectives are very much aligned with the -- with mine, with all of us here around the table, the executive management team in terms of long-term performance targets. We started working with him actually in December, and he spent quite a bit of time both here in Kansas City and down in Monterrey, engaging with the team fully -- kind of a lot of information sharing, a lot of idea generation, and then we kind of formalized the arrangement here just a couple of weeks ago. But as I said in my comments, I sat in on not all of those meetings, but many of them. And I think the level of engagement and he -- I asked him this question just yesterday, how does he feel about the engagement of the team, not just the executive team but down into the organization? And I think he's very pleased with the enthusiasm and excitement, the way this has been embraced. And let's face it that everybody in this company knows that we can do better. As I said in my comments, we had a pretty decent quarter and a pretty decent year, but none of us are very satisfied with it because we know we can do better. So I think the level of engagement is very high, and I'm very optimistic that we're going to see some very tangible -- we already have tangible things that are going to help us get better and drive toward operational performance improvement and sustainability. As far as your question about interchange, there's a belief out there. I know some people have written that maybe PSR doesn't apply to us because of our size and because of the magnitude of our interchange. We don't believe that, but we really want to focus on the messages that we're going to adopt and implement principles of PSR that we think are most applicable to our network. And I think there are a lot of them that do. So a lot of this is just about discipline, focus, accountability, all of those kinds of things would certainly apply and we will embrace and implement those things. But the other factor is if all of the other railroads that we interchange with are adopting and implementing certain principles, their own version of this, then it makes sense that we need to be aware of and be prepared to engage with our interchange partners differently. And if the result of their effort is more consistent and reliable service to us at the point of interchange, then it kind of follows that we will benefit from the work that the other railroads are doing in this regard as well. I also think it's important to point out and realize the recent management change at Union Pacific, which is our largest interchange partner, particularly at the border. Jim Vena and Sameh worked together side by side on the same executive team for a dozen years or more. So I think the level of coordination and communication that we'll have with UP as they continue to implement their own version of PSR will be enhanced.

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Operator [24]

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Our next question is from the line of Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [25]

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Yeah, great. I know we're hitting on -- a lot on this topic, Pat, So I appreciate your patience, but it's a big topic. So I guess, just further to the, kind of, role of Sameh and how you think about, I guess, outside resource? And how important that is to your PSR initiative? I mean, should we view him as essentially -- he's the consultant, but he's essentially full time at KSU for the next year, next 2 years, what -- maybe just a thought on that? And then is it helpful to bring in additional people to, kind of, help with the -- not necessarily at high-level but just to help with culture change that's typically associated with some of the PSR initiative? So I guess, that -- just a more on PSR.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [26]

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I think Sameh will be with us unless something unexpected happens for 2 years. The incentive structure that we've put together has a 2-year measurement period on it. He will not be full time. I know he's got some other commitments and other activities unrelated to us, but I don't worry that we will not have his full attention. I'm pretty sure that even when he's not here, he's going to be engaged and communicating with the team and thinking about things that we're doing here.

And as far as your second question, we'll just have to see, if we get the kind of engagement and momentum that we're all hoping we get and, sort of, transfer of some of the knowledge that Sameh has from his 20-plus years of experience, implementing this then we may not need additional outside resources, but we'll just have to gauge that as we move along and see how the team engages.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [27]

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Yes, that's great. That -- I guess just for the quick follow-on if I can to -- on a multi-year OR target, can you give a quick thought on volume sensitivity to that? You gave us a volume view for '19 and an OR target through 2021. I mean is it -- is that a good OR target, even if you hit, kind of, flatter volumes in out-years? Or do you, kind of, need the '19 framework to continue in 2021 to hit the OR target?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [28]

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Well, Tom, this is Mike. Obviously, volume is an important part of the equation in improving OR. And as we look back on 2018, we didn't generate that volume growth, some of it because of the shut down of the coal facility but other areas we just didn't deliver. And so we do have an assumption in that 3-year period that we're going to see volume increase consistent with what we've always suggested we were able to do. And we do have some outsized growth areas that, we think, will allow us to generate that kind of volume growth.

What's unknown right now is just how much cost we are able to take out over the next few years, and that'll become a little bit more -- visible to us as we proceed down this path, and I would like to think that maybe we get into mid-year and have some better targets around cost reductions. So you know you may have a couple of offsetting items there but the plan definitely looks to volume growth to help deliver some of that margin improvement.

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Operator [29]

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Our next question is from the line of Matt Reustle with Goldman Sachs.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [30]

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Just to follow up on the OR target that you did provide, it's a bit lighter than what some of your peers have laid out and what some of the peers have achieved, is that just being conservative because you're at the early stages of analysis? Or is there something about the networks? Or your focus on growth that keeps you from guiding to sub- 60%?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [31]

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I think it's a bit conservative and reflects that we're pretty early on in perhaps some more aggressive improvements that might come out of the efforts here in the next few months. But it's pretty much in line, maybe a little bit higher but pretty much in line with our peers.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [32]

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Okay, yes, that makes sense. And you already mentioned the UNP implementing PSR, interchange partners implementing PSR, are you seeing any impact today? Any issues with service today as they go through that process?

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [33]

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Yes, this is Jeff. No, we're not really seeing any difference, as of yet, in service. I think, again, the opportunity, we'll continue to have to work, primarily, with Union Pacific with now joint kind of goals on streamlining, train starts, train-length initiatives, again, I see this as a positive as opposed to a negative necessarily on any changes that other interconnecting carriers may embark on.

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Operator [34]

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Our next question is from the line of Allison Landry with Crédit Suisse.

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Samantha Ariel Yellen, Crédit Suisse AG, Research Division - Research Analyst [35]

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This is Sam Yellen on for Allison Landry. You've spoken about working with customers to create more efficient unloading in order to improve car cycle times and fluidity. How does that fit in with the PSR implementation?

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Michael J. Naatz, Kansas City Southern - EVP & CMO [36]

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This is Mike Naatz, I'll take that one. If you think about the process, you've to pick it up, you've to transport it, you have to deliver it. Loading and unloading is critically important, if our assets sit too long at a customer origin or a destination, those assets aren't turning. If we have to wait for customers to load or unload, that's going to cause a disruption in the network. We believe that our customers will participate with us and many of them have already started to participate with us in terms of improving their loading and unloading times. It's going to work to everybody's benefit and improve service if everybody does their share of the work and does it on time.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [37]

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It's just also going to result in reducing congestion at some at the yards, improving the way we can operate for other customers and improving the overall velocity performance of our equipment, our locomotives, our crews, everything, so it ties in very nicely.

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Samantha Ariel Yellen, Crédit Suisse AG, Research Division - Research Analyst [38]

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Okay. And then, given that volumes came in later than expected in 2018, what gives you confidence in the 3% to 4% range?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [39]

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As I said earlier, just -- we know we could have done better than what we did in 2018 because of service. And then we've talked about some of the unexpected or the impact of customer-specific events like the coal customer, so if you set that aside, you believe that our service recovery is well on its way to being fixed to, kind of, back to normal and then further improvement. And then, feedback that we have gotten from customers and really analyzing these opportunities gives us a high degree of conviction that if we can sustain a higher level of service and operating excellence, and the customers continue to invest in the facilities that they're building, we think we've got pretty good visibility into what the volume growth outlook will be.

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Operator [40]

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Our next question is from the line of Brian Ossenbeck with JP Morgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [41]

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Just wanted to focus on volume for a second, and specifically, the Mexican Energy reform opportunity. Could you give us a sense of what's in your expectations relative to 2018? And more specifically, we've seen a lot of headlines with AMLO and the administration regarding fuel theft causing shortages, is that an opportunity to actually import more across border? Or are you, sort of, constrained by the infrastructure for the time being?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [42]

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Yes, and yes. It is an opportunity. I will tell you. And José is still on the phone here. But we've had a very high level of engagement with very senior cabinet-level officials in Mexico talking about developing a -- more for a longer-term, sustainable rail strategy for moving refined products. So we don't know exactly how that's going to play out, but if there was infrastructure available for loading storage, transloading, if there was more infrastructure available in Mexico, we would be moving more product than we are today. So there is a -- an opportunity, and I saw just yesterday that there have been some customs changes to facilitate and streamline the movement of refined products from the U.S. into Mexico. So we feel very good about that opportunity.

Don't have a good answer to your question about what's the upside, how much more could be moved because we're literally in the middle of those conversations with, particularly, with the government as we speak.

Mike, if you have anything to add to that?

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Michael J. Naatz, Kansas City Southern - EVP & CMO [43]

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I think there is certainly some uncertainty in that space. However, we're very much engaged, I mean AMLO has made it clear that PEMEX intends to compete in the marketplace. And our perspective is that KC will serve Mexico's needs whether that comes domestically or across the border.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [44]

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Okay. And then one more on the guidance of 3% to 4%. We've talked about Sasol a lot. I know you haven't really given anything specific, but it seems like recent news out there is they might be seeing some production delays, they've postponed one of their own updates. So can you give us any, sort of, context just to how you're thinking about that from a projection perspective in that 3% to 4% for next year?

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Michael J. Naatz, Kansas City Southern - EVP & CMO [45]

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Well, I think we're expecting strong growth in the plastics business unit. With respect to Sasol, yes, we are aware that the plant is mechanically completed, but they're working through bringing that plant online and we're not expecting to receive any material shipments from them until late in the year. And we don't expect that they will ramp-up to full production probably until 2020, but we really can't speak for Sasol, those are questions that are best answered by them. But that is what we're considering in our plan.

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Operator [46]

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Our next question is from the line of Ken Hoexter with Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [47]

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I know you've gone on for a bit here, I just wanted to say, Sameh, great hire or addition to the team, even if as a consultant, but maybe, Pat, just a little bit more on that. When you say certain principles, can you describe what is relevant to your network and maybe what's not? I just want to understand when you say you're going to adapt to certain parts of it, what should we expect?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [48]

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I think some of the examples that Jeff gave earlier, I'll ask Jeff to provide some more color commentary on that.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [49]

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Yes, certainly. For me, a, we've to get a more consistent service product. I think we perform well. We saw last year, we didn't perform as well as we historically or liked to. So a consistency is probably one of our keys and in doing so, again, train start rationalization, simplifying networks, total train starts, again, working with customers on rightsizing equipment, taking some excess equipment off the system. All will allow us to, kind of, flow better and, for me, consistency is really what we're -- what we need to achieve here most.

Other areas, we're touching a lot. I just mentioned a few, fueling, it's interesting to see how we've -- we have processes for fueling, and I'll give one more detailed example of locomotive shutdown process. We have technology that shuts down locomotives automatically. We have manual processes, and just the experience or viewpoints from Sameh or from Hunter, via PSR, on things like that is that we do save some money on how we shutdown locomotives, however, we probably increase our locomotive failures upon startup. So making decisions based on more experience and, kind of, what Hunter's methodology has been throughout his career may shift us one way or the other on technologies or pieces such as that, fueling.

I mentioned locomotive fleet, how we're going to look at that, how we're going to rightsize and have opportunities to look at locomotives and, kind of, rightsizing locomotive fleets. Equipment is another big one. So I think really what you're hearing from other PSR implementations, again, I look across these segments and I don't see any of those that aren't really, kind of, applicable to our network in some form or fashion. Again, I think, we do talk about the interchange as part of that then we are different in terms of interchange, but again the shared goals that we have to create more efficient interchange wherever may it be, through Houston certainly at the border, working with interchange partners better to improve fluidity there, is in everybody's mutual interest. I think of the things I'm excited about things is to see, from a Union Pacific perspective with PSR, kind of, streamlining efficiencies through Houston. We know that that's -- for an industry. That's important. That's an important segment, an important geographical region for the rail industry that is we can streamline and simplify operations collectively through areas like that, I think we're all going to benefit.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [50]

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Ken, this is Mike. Maybe just one other quick thought and Jeff, kind of, alluded to it earlier, and Pat may have made a comment, but there's been a lot written or said about "Do these principles apply to KCS because of our smaller network." and, yes, obviously we're interchanging a lot of traffic with UP, but Mexico looks and feels a lot more like the other rail's with originating and terminations on our own network there. So I think that gives us some additional confidence that we gained a lot of leverage there.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [51]

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I appreciate that. I don't think anybody has ever questioned whether it would work, I think, to prove that at his first stop, at [ICC]. But I guess I want to understand, Pat, as a -- do you view this -- with Sameh as a part-time consultant, I was a bit surprised by that, I mean I think it would be great addition to the team, but as Tom mentioned before, you typically see PSR as, kind of, a complete overhaul culture change. So do you see this more as a mechanical adoption and, kind of, as Jeff you were mentioning, kind of, doing piece parts versus a complete overhaul of the culture change, slashing employees, cutting CapEx, changing how customers behave. I just want to understand is this incremental? Or is it kind of a -- I mean, usually a PSR is, kind of, a shock to the systems, completely changed fundamentally how you operate?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [52]

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I think it's a bit more incremental in our case. And it just remind people that we're not coming -- going back to Hunter's experiences. We're not coming from, kind of, the distance to the pack in terms of operating ratio and performance. And I think if -- I'll even remind everyone thinking the one of the conference calls that Hunter had when he was at Canadian Pacific, talking about his desire to acquire, I think this might have been Norfolk Southern, but a question was raised, "What about if this doesn't work out? Would you pivot to the Kansas City?", and one of the comments he made was, well, they run a pretty good railroad there. So I don't know that -- the magnitude of the change that we see is such that kind of, as you referred to, a cultural shock is necessary or appropriate. We've done a lot of work here internally with our employee base in U.S. and Mexico over the last couple of years about culture, principles, values, accountabilities. I think all of this fits in with the work that we've done there. So I think it's much more of an incremental. We will do this in a manner that is consistent with the culture and values that we've been talking about with our employees for, really, the last couple of years. And so, I think, it is going to be a bit more incremental which doesn't mean that it can't be pretty powerful in terms of the magnitude of the impact. And at the core, Jeff mentioned, at the core of all of this is focus on service, serving our customers. Yes, we will probably have some change management to deal with customers as certain elements of this are rolled out, but getting our service to a level that is consistent, sustainable and allows us to realize the growth opportunities that we know are out there for us.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [53]

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Just a quick one, if I can sneak one in. The autos, you mentioned a positive outlook, but it started off pretty negative, is that significant closings or overhauls to start? Or anything? Just a quick one on the auto thing?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [54]

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Sure, this is Mike. The number of the automotive manufacturers of Mexico are going through plant shutdowns throughout the holiday. We got off to a slow start, 2 of those plants ended up taking a week longer to start up than we had expected and planned for. That's why we started a little bit soft. We are seeing a recovery now as those plants come back online.

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Operator [55]

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The next question is from the line of Jason Seidl with Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [56]

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Looking at '19 in terms of your OR outlook, how much of your conservatism is based in on the fact that 2 of the major interchange partners are implanting PSR, and that they might be [talking] Some blowback on operations because of that?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [57]

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Well, we haven't seen that. So I don't know.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [58]

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I was knocking on the wood, if you heard that.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [59]

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Sorry?

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [60]

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I said that was me knocking on the wood when you said that.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [61]

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Yes, this is Jeff again. I mentioned earlier, we haven't seen any material change either way with major interchange partners. And I think, again, that the relationships that we have with UP remain strong. I think Sameh and his experience with Mr. Vena are also going to help support that here. Again, as we've talked, it's in our mutual best interest to run a more fluid network. And that depends on both -- kind of both sides or both partners whatever interchange partner we're working with, really looking at that and working together, better on how we can streamline flows. If we're able to reduce train starts, create longer trains through Houston complex, that's going to create better fluidity and help the overall network.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [62]

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Okay, that's understandable. Well, switch them out, next follow-up question's to Lazaro. You talked about your activity with respect to volumes and I know a lot of that, came around sort of -- give back to some of the shippers because the exchange rate was making it very unfavorable versus sort of the local shippers down there. Can you talk about those givebacks and the impacts on the reported pricing numbers? And how that would -- maybe would look ex that?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [63]

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Sure, I'm happy to talk about that a bit. So we do have a rebate program in place targeted to grow traffic out of Lazaro into Mexico City. The concept's relatively simple. If the shippers hit their growth rates then the rebate is applied accordingly. That rebate basically neutralizes the effect of some of the costing issues that we have that make us less competitive. These rebates are basically in operation, while the exchange rates are greater than 17 pesos per U.S. dollar. So they do fluctuate depending on value of the peso. And if they don't hit their growth rates, then no rebate is paid out. So we believe that it's making us competitive in the marketplace.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [64]

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And again what sort of an impact did that have on reported pricing?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [65]

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It was very immaterial.

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Operator [66]

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The next question is from the line of Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [67]

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So are you guys implementing any of the accessorial demurrage changes and Intermodal lane closures like we've seen from NS and UP this year?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [68]

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Well, yes, we are evaluating the rates that we provide or that we charge for services that we provide. So the answer is yes.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [69]

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We're evaluating at this stage. As far as the Intermodal lane closures, no, we haven't considered any of those.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [70]

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Kind of -- I think it's as we look at, again, our largest or kick-off, really, the opportunity for PSR's is, as I mentioned, Intermodal manifest, it's more of a probably consolidation of trains and if as look at train length and our ability to more merge or combine those types of traffic to reduce train starts as opposed to rationalizing an entire Intermodal lanes as an example.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [71]

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Yes, remember, Scott, we -- our Intermodal business is, kind of, in discrete categories. U.S. on the Meridian Speedway, with we're a bridge carrier, we have our cross border network, and then Lazaro. So there probably aren't huge opportunities to go walk away from segments of that business.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [72]

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Right, makes sense. And then, I wanted just to make sure I'm understanding, sort of, the message on this PSR cap. So as we've seen other models play out, right? Meaningful, sort of, 20%-plus reductions or improvements in labor productivity, meaningfully lower CapEx in locos and step functions in OR, CSX, CP 1,000 basis points from 2 years, right? I get the message, right, it's early and we're not really sure exactly. But like are these sorts of things in your mind in the realm of possibility? Or is it that, "Hey, our starting point in OR is better, we're doing a little differently and don't get too carried away here," I just want to make sure I'm really understanding the message.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [73]

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I would say you -- your final comment there. We're starting from a different perspective than some of the other examples out there. So we don't feel that the magnitude of that sort of initial pop is going to be the same in our case as it was at the -- couple of the other railroads.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [74]

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And I know you've shied from this a little bit in past, are you willing to say where the US ORs, because I did -- I thought that, like, historically, that was closer to the 70% than the low 60s%. So I would have thought there would be a big opportunity there.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [75]

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Scott, this is Mike. We're not going to go there. We've continued to make improvements in the U.S. and we'll continue to make improvements going forward. But we're going to stick to our consolidated business, our bread and butter is the cross-border, and it takes both sides of the U.S. and Mexico to generate the kind of profitability that we are.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [76]

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That is truly how we manage the network.

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Operator [77]

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Our final question, this morning, is from Fadi Chamoun with BMO.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [78]

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Just a couple of clarifications. Is there anything in the labor agreements in Mexico that might make the application of PSR like we've seen it elsewhere more difficult?

And the second question is just really clarification on your Slide 15, volume outlook slide, you say there's risk to the crude outlook, heavy crude outlook in 2019 due to Canadian crude production cuts? I was under the impression that these arguments were take-or-pay with volume commitment. Is that not the case?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [79]

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Yes, but it's not -- the arguments provide compensation if their -- if the volume commitments or targets are not met. But they don't have to ship the product. So it could -- it can have an impact on our volumes, but there is a mechanism to recoup, particularly, the capital investment that we've made to support that business.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [80]

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And then, said another way, the per car charge that we'll get for not moving the volume is less than the margin we would have received on the carload that would've moved full.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [81]

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I'll take the initial question on the labor. No, that the outlook of Mexico really doesn't prevent us from gaining efficiencies due to labor productivity. We'll probably go at it a little bit differently. We still have -- as we've talked about 3 and 4 person crews, in the cabin, some areas. So you might see target or you might see onetime restructuring activities as we negotiates with labor to try to maybe gain efficiencies in those areas as supposed to the other aforementioned activities on a train start rationalization. But, no, there's really nothing structurally different that would prevent us from rightsizing labor forces.

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Operator [82]

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Thank you. At this time, I will turn the floor back to Mr. Ottensmeyer for closing comments.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [83]

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Okay. Thank you, all, very much for your time and attention. We will be active here in the next few weeks on the conference circuit, and plan to provide updates and probably more details as we get further into this. So stay tuned to that. And I think the only thing I can think of to say as we close out is go Chiefs.

We'll see you all in about 90 days. Thank you.

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Operator [84]

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Thank you. This concludes today's conference, you may disconnect your lines at this time. Thank you for your participation.