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Edited Transcript of KSU earnings conference call or presentation 18-Oct-19 12:45pm GMT

Q3 2019 Kansas City Southern Earnings Call

KANSAS CITY Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Kansas City Southern earnings conference call or presentation Friday, October 18, 2019 at 12:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian D. Hancock

Kansas City Southern - Executive VP & Chief Innovation Officer

* Jeffrey M. Songer

Kansas City Southern - COO & Executive VP

* Michael J. Naatz

Kansas City Southern - Executive VP & CMO

* Michael W. Upchurch

Kansas City Southern - CFO & Executive VP

* Patrick J. Ottensmeyer

Kansas City Southern - CEO, President & Director

* Sameh Fahmy

Kansas City Southern - EVP of Precision Scheduled Railroading

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

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

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

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

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* 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

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* 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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Good morning, and welcome to the Kansas City Southern Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. This presentation includes statements concerning potential future events involving the company, which could materially differ from events that actually occur. The differences could be caused by a number of factors, including those factors identified in the risk factors 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.

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

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Okay. Thank you, and good morning, everyone, and welcome to our third quarter earnings call. I will start the presentation, obviously, everyone saw the press release that came out earlier. Slide 4, we just list the folks who are on the call today. I'll mention hopefully this won't be all that noticeable, but I'm actually not with the rest of the team in Kansas City, calling in remotely from New York and I'm -- been very proud to have been accepting an award last night for Kansas City Southern for the Latino Corporate Directors Association for exceptional diversity, specifically the number of Latinos on our Board of Directors here in New York. So hopefully, we'll get through any -- not have any technical issues here, but I am not in the room with the rest of the team. José Zozaya is also on the phone from the road.

So let's move on to Slide 5, the punch line slide for our third quarter earnings. And I think we feel like we had a really good quarter. Revenue is up 7%, Mike Naatz will talk about the revenue side of the business and the outlook, which -- not to steal Mike's thunder, but we still feel about 70% of our business units look to be positive for the remainder of the year. And in spite of lots of concern about the state of the economy and the U.S. and Mexico and around the world, we still feel that there is a reason to be hopeful and see signs of strength in a number of our business units. Operating ratio, 62.3%, that's not a real number when we exclude the impact of impairment charges that we took in the quarter that Mike Upchurch will get into in great detail in a few minutes. Put us at 60.7%, 270 basis points from last year. And then when we back out and adjust for the impact of the loss of the IEPS credit in Mexico, we could take that down by another 80 basis points. So you can do the math in your head and what that results in as an operating ratio, they put us in the low 60 (inaudible) for the third quarter. Earnings per share of $1.81, adjusted again for the impact of impairment charges $1.94, which is a 24% increase from the prior year. And I feel really, really good about the operating metrics, the service metrics, Jeff and Sameh will get into this in much greater detail. But (inaudible) and I'll admit that year-over-year, quarter-over-quarter, from the third quarter of last year, the term easy comp would certainly apply to our performance a year ago. But we are just making exceptional progress in terms of service, (inaudible), operating metrics and as I'll say in a couple of minutes, there is -- we feel equally confident that there is more to come in the quarters ahead.

So moving on to Slide 6. We're not changing any of our guidance at this point. So we're sticking with same guidance that we had in the third quarter. We are in the process of updating. We're going through as you've heard -- some of you've heard us talk about previously this whiteboarding exercise with respect to our transportation service plan. We're making great progress, Sameh will talk more about that in a few minutes. And we certainly expect that when we finish that in the next few weeks or couple of months that we will get better visibility and clarity on what that is going to produce in terms of operational savings and perhaps further improvement in operating ratio.

Obviously, with the operating ratio that we just put up for the quarter, we know we're going to get a lot of questions about the guidance that we're giving here on this page. And yes, we do expect that to change and improve, but we're not prepared to give more specific or different guidance at this point until we get through that process. We complete our plan for 2020 and look beyond. So we will be updating that most likely on the fourth quarter call in January, possible that we will give some earlier indications at a couple of conferences that we're scheduled to speak at. But at this moment, we're not changing the guidance for any of these metrics that are shown on Slide 6.

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

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

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Okay. Thank you, Pat, and good morning. Starting with a review of key operating metrics for the quarter on Slide 8. Gross velocity of 13.9 miles per hour improved 32% year-over-year and 11% sequentially. Dwell of 20.3 hours improved 23% year-over-year and 4% sequentially. We're continuing to see strong year-over-year improvements in our key metrics. Acknowledging the impact of 2018 congestions on year-over-year comps, we continue to execute sequential improvement, illustrating our PSR efforts are maturing, while KPIs are reaching historically high levels. Resiliency has been another key outcome of our PSR efforts. September's record breaking floods in the South East Texas had relatively little impact on -- to our operation. Our ability to quickly adjust train plans and provide adequate resources, crews and equipment during this event allowed us to remain more fluid versus other weather events and our recovery was timely. Border initiatives continue to support oversized growth of 12% for the quarter in cross-border volumes. To date, we have operated over 2,500 trains with International Crews, greatly improving transit times. As another benchmark of strong performance, we have grown our cross-border business by 34% in the past 2 years as compared to Q3 2017.

Turning to Slide 9, we continue to see positive trends in all key metrics. Year-to-date, velocity has improved 17%, and we should achieve full year velocity close to 14 miles per hour. Further illustrating sequential improvement, October month-to-date velocity is over 15 miles per hour as velocity remains a primary focus of our PSR transition. As you can see, all other metrics are tracking at or above goal for the year, and our improvement is accelerating into the fourth quarter.

Of note, fuel efficiency has improved 3% year-to-date and 5% for the quarter, again, illustrating continual improvement. As you will see in Mike's material, fuel is the largest category of PSR savings with $22 million projected annualized benefit. Reduced train starts, technology, proper assignment of locomotives and better enforcement of locomotive utilization all contribute to the improvement. For the quarter, we have realized $3 million in labor efficiencies through a combination of TSP adjustments, train start reductions, improved crew costs and reduced overtime. Looking forward, we are actively working with our Mexican union to progress those work rules not consistent with other North American railroads. Excess crew size and greater operational flexibility are the main areas that we intend to modernize. I will now turn the presentation over to Sameh to provide detail on other PSR efforts.

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Sameh Fahmy, Kansas City Southern - EVP of Precision Scheduled Railroading [4]

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Thank you, Jeff. As Jeff covered the velocity and dwell improvements and they are significant, and they have been the result of the execution side of PSR with a few waves of TSP changes -- design changes to the train schedule. When I talk about the execution, I mean discipline, compliance, accountability, peeling the onion every morning on low velocity trains and delays and failures. So these things have allowed us to move forward with that velocity and dwell, and we still have room to go. We get on some days now in the U.S., 18 miles per hour. In Mexico, we get 15 miles per hour. So a combination of the 2 is now beginning to get us into a higher range of velocity and as well as dwell. These improvements allowed us to take assets out.

So you have a lot of numbers here on this slide. We took out 14% of our locomotives. So now we have an active fleet of 903, when we started the PSR exercise it was 1046. We also took out a lot of cars. When you look at the active car count, we now run at about 58,000 cars. We used to be at 64,000 cars on line this time last year. And clearly, the less cars you have in a network, the better off you are because that's a sign of fluidity and less congestion.

The car mile, Jeff touched on it. We are getting -- actually in Mexico, we got an improvement of about 41% in our car miles per day, but we still have a lot of room to go. Like, we went from 70 miles per day to 100 miles per day. But if you look at the statistics even on KCS and U.S. but also on other Class Is, we know that we can get to 150 and even higher than that. So we still have room to go there. When you take out a lot of assets and typically we take out the worst, least reliable assets, you improve reliability. So failures, mechanical failures have reduced by 31%. And also when you have less cars on line, especially foreign cars that cost us daily, car hire, you end up with significant improvement in -- significant savings in the equipment cost. So our equipment costs have gone down by 24% in Q3. At the same time also crew cost have come down and Jeff has touched on that. They have come down 9% in this quarter compared to the same quarter last year. And that's in spite, by the way, of the rate increase in Mexico of 5%. So essentially, it's like 14% improvement in productivity. And things like dead-heading have come down by about 40%.

Fuel efficiency, Jeff touched on that, we have improved by 5%. When you have long trains and heavy trains, they are beautiful for fuel efficiency. And we are monitoring every morning now the HPT, which is horsepower per ton, so that you don't have too many locomotives for the tonnage. And we take every train that has a high HPT and challenge people and question why do we have that many locomotives, like 5 locomotives for 800 tons as an example, a few days ago, and -- in the same way as we check the velocity on every train. So that's a lot of what we have done so far.

Now looking forward, the biggest thing coming up is going to be the whiteboarding exercise. Brian Hancock and his team, Olivia Daily and her team, they have done a superb job. I attended a full-day meeting yesterday with the commercial team to make sure that the changes are going to be very well communicated to the customer so that everything will be smooth when we implement this TSP change.

Now the genesis of our whiteboarding is that we went to San Luis Potosí on a field visit and it became clear to us that people were not compliant with the current TSP. And part of running a good railroad is that you comply with the plan. You don't ad hoc, you don't run extra trains, you don't just do things by the seat of the pants because you can end up improving what's happening in your yard but you generate a lot of problems downstream. Now what became clear to us is that the guys were doing that because of deficiencies in the current TSP. So we wanted to improve the TSP and no need for ad hocing but put that in the plan itself. I'll give 2 examples of the new TSP that illustrated a bit what we are doing. Right now we have an area very important in Mexico, it's called the Saltillo area. We have Encantada, Santa María, Rojas, Saltillo, these are small yards that are always in 50 miles and they service a lot of customers. So we have 2 intermodal trains that each one of them every day was set out 3 blocks to these areas. And one manifest train that also drops 3 blocks. So you have a total of about 9 blocks that come out of these trains every day. That switching, which is one of the things that are targeted by PSR as you want to reduce touching cars and reduce switch and you want to reduce work events on line. Now these 3 trains are going to be replaced by one train that will combine the intermodal and manifest going to that area and will set out the blocks that will be combined. So if it's Santa Maria intermodal manifest, it will all go together, Rojas the same way. So you drop 3 or 4 actually because you have 4 locations. So 4 set out instead of today 9 set outs of blocks. So a significant improvement in reducing the work events, reducing train delays, improving velocity and reducing car dwell.

That's an example, another small example is Escobedo, where we had another field visit in July and we are -- instead of building 16 blocks in that small yard, which is very tiny, we are going to build 10 blocks by moving some of the work to Mexico City where there is a very huge yard that is already building these blocks. So these are 2 examples that show that we'll touch the cars less, which is one principle of PSR, and run fewer and longer trains, which is also an example of a target of PSR. We will also move gradually to big yards, like Sanchez and Mexico City and try to do less work in these small yards where they have trouble handling big long trains and a lot of switching.

2 last points on my slide, we've put in place trip plan compliance, measurements so that we know a car from the time we get it, until we deliver it, the exact time and seeing if that matches the expectation of the customer. So this is doing it through the eyes of the customer so that our commercial people when they sit with the customer, they are showing numbers that match what the customer wants to see. And right now we have about 68% trip plan compliance, we have room to grow. We have room for improvement. We should be at 85% or 90%. And thankfully, there is a survey that was done by the commercial team that shows that 77% of our customers are seeing a significant or moderate improvement in our transit time and our service.

Last point, we want to leverage capacity, we are freeing capacity without spending money, which is another principle of PSR. And we want to use that to grow our business. And the best example of that is grain. Our cycles for grain, our trips per month went from 1.20 to 1.42. That means instead of doing a trip -- a round trip, complete round trip in 28 days, we do it in 21 days. Every day means $9 million increase annually in revenue, and we have seen that in grain. The revenue in Q3, and Mike Naatz is going to talk about that, went up by 15%. So this is a big demonstration of what PSR is all about, we generate -- we improve service, we grow the business, we improve the revenue and actually right now we have about 800 cars surplus grain hoppers that we hopefully will get more business with or if partially we get more business than the rest I guess we'll have to dispose of. So on that, I will pass it to Mike Naatz.

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [5]

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Thank you very much Sameh. Good morning, everyone. I'm going to begin my comments on Page 13. You'll see our year-over-year third quarter revenue was up 7% on a slight increase in volumes. This established records for both revenue and volume. Similar to our prior quarters, our cross-border business was a key contributor to our performance with revenue increasing 17% and volume increasing about 12% year-over-year. During the quarter, our revenue per unit grew 7%, which was led by a growth in our Chemical & Petroleum and Ag/Min business units. You may recall that these segments tend to have longer lengths of haul and higher revenue per unit.

In addition, our fuel program also benefited our revenue per unit, and our pricing renewals overall were consistent with our year-to-date performance. As has been the case all year, the Chemical & Petroleum segment was our primary growth driver. Year-over-year the third quarter revenue was up 21% on a 12% volume increase. The Mexico Energy Reform revenue grew 71% on a year-over-year volume increase of 59%. We did note sequential decline in this traffic, which was driven primarily by a reduction in LPG shipments, which tend to be influenced by seasonal and commodity-based pricing fluctuations. Our refined products business was relatively flat sequentially as we saw some delays in storage permitting and some overall demand softness. However, we remain very optimistic about the growth opportunity in the long term, and frankly our year-over-year refined product growth remained strong at 67%.

Driven largely by cross-border grain and food products business, our Ag/Min segment had a great quarter seeing a 15% increase in revenue on a 10% increase in volume. During the quarter, we continued to see improved cycle time as Sameh mentioned, simply put, we handled more volume with less equipment, which helped us realize improvements in both revenue and cost, again, a great case study for PSR.

On the energy side of things, volumes and revenues were down due to decreases in frac sand and Canadian crude, which was partially offset by year-over-year growth in utility coal volumes.

Our industrial consumer business unit revenue was up slightly on flat volumes. In this segment, our metals business was up year-over-year due to sourcing shifts. But these gains were partially offset by declines in our paper business, which continues to see pressure from alternative packaging solutions and available truck capacity.

With respect to the intermodal business, revenue was up slightly on a 3% decrease in volumes. Our cross-border franchise volumes grew at 8%, while revenues remained flat due to shorter length volumes decreased on the heels of weak demand and ample trucking availability in the U.S. And our Lazaro revenue was up 10% on lower volumes, primarily due to the impact of our fuel program. Revenues and volumes were down in our automotive segment, primarily due to an unplanned plant shut down and year-over-year shift reductions, and I'll talk more about that in a moment.

I guess with that I'll move on to Slide 14, where you'll see our revenue outlook for the fourth quarter 2019. As Pat mentioned, we are maintaining our revenue growth guidance of 5% to 7% on flat to slightly lower volumes. We do remain very positive on the Chemical & Petroleum business unit and the Mexico Energy Reform story. Additionally, we expect to see favorable year-over-year growth in the Ag/Min and Industrial & Consumer segment, and this is primarily due to the continuing service improvements we're experiencing. However, we are monitoring recent trends in the paper market, which continues to be soft, and we are monitoring available truck capacity. We are adjusting our automotive segment to neutral for the fourth quarter with the positive impact of a new plant opening being largely offset by lower production forecast and plant shutdowns. And very specifically, we're currently being impacted by the GM strike, which idled the assembly and transmission plants in Silao. And if you may remember, Silao was 1 of the 3 GM plants we serve at Mexico. Suffice it to say that we are pleased to see that UAW and GM have reached a tentative labor agreement. So we'll see how that plays out at the end of the month here. And finally, our expectations for energy and intermodal segments remain below last year for reasons already mentioned. I guess in summary, we'll continue monitor the overall economic environment, and I'm happy reiterate Pat's comments earlier that our outlook is favorable for 70% of our revenues. And with that, thank you for your attention, I'll turn things over to our CFO, Mike Upchurch.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [6]

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Thanks, Mike. I'm going to start my comments on Slide 16. As Mike indicated, third quarter 2019 revenues increased 7% over the prior year on a 7% increase in revenue per unit. Fuel revenues increased $13 million or 19%, primarily due to the loss of the fuel excise tax credit that resulted in higher fuel prices in Mexico. The reported third quarter 2019 operating ratio was 62.3%, slightly worse than the 62% in the quarter a year ago. However, operating ratio on an adjusted basis, excluding the $12 million PSR restructuring charge was a record 60.7% and a 270 basis points improvement over the third quarter of 2018 adjusted operating ratio. Included in the 60.7% operating ratio was a negative 80 basis point impact from the loss of the fuel excise tax credit.

Adjusted expense increased only 2%, evidence of strong cost control across all of our expense categories. Adjusted operating income increased 15%, leading to strong incremental margins in the quarter of 78%. KCS associates delivered a unique blend of top line growth, improving service and strong cost control that led to outsized EPS growth in the quarter. And I'll speak more to expense details in the next 2 slides. Third quarter 2019 reported EPS of $1.81 was a 6% increase over the third quarter last year. However, on an adjusted basis, our EPS of $1.94 was a 24% increase over third quarter of 2018 with the majority of that increase coming from real operating income. A more detailed P&L and adjusted EPS details are contained in the appendix on Slides 22 and 24.

And finally, our third quarter 2019 adjusted effective tax rate was 28.2% and the -- for the full year, we expect our effective tax rate to be approximately 27% to 28%. You can find more details on our taxes in the appendix on Slide 25.

So turning to Slide 17. Let me provide a little bit of detail on our PSR update relative to the expense savings. We now expect to generate $58 million of expense savings in 2019 that is up from the $40 million estimate we provided in July on our second quarter earnings call. And on an annualized basis, we now expect $75 million of operating expense benefits from our implementation of PSR. In the compensation and benefits area, we now expect about $8 million of savings in 2019 and $14 million on an annualized basis due to a variety of actions, including train consolidation resulting in crew start reductions, reductions in dead heads, mechanical labor savings from the reduction of locomotives and equipment and some G&A savings from restructuring efforts. In the depreciation expense line, we expect $5 million of savings in 2019 and $8 million on an annualized basis, the direct result of disposing idled and excess assets. In fuel expense, we now expect $19 million of fuel expense savings for 2019 and $22 million on an annualized basis. Our year-to-date fuel efficiency has improved from 1.34 to 1.30 gallons per gross ton mile -- 1,000 gross ton miles, but currently stands at 1.26. And we've seen improvements from various actions we have taken, including train consolidation and technology investments and the utilization of tools such as Trip Optimizer and Smart HPT. Equipment savings are expected to be $13 million in 2019 and $19 million on an annualized basis. Overall, we've seen a 15% year-to-date improvement in cycle times, meaning, we're getting equipment off of our network much faster and paying less car hire.

Overall, since the beginning of 2019, we have reduced cars on line by 17%, and more importantly, we have reduced the cars we pay car hire on, namely foreign and TTX cars, by 22% over the same period. And finally in purchase services and materials and other expense savings are now expected to be $13 million in 2019, which includes a onetime $5 million contract settlement from a vendor. On an annualized basis, we expect an approximate $12 million in savings in these expenses, mainly from reduced repair incidents from disposing of equipment and contract restructuring.

Turning to Slide 18. Adjusted operating expenses increased 2%, primary drivers of our expense increase were incentive compensation increase of $10 million and the $9 million third quarter year-over-year loss of the fuel excise tax credit. Fuel consumption was up $5 million, but efficiency gains offset the entire consumption increase. I'll discuss comp and benefits and fuel expense more on the next slide, but let me comment on a few other expense items. First, we experienced higher year-over-year derailment and casualty expense of $4 million, largely due to one incident late in the quarter. Offsetting that derailment expense was a onetime credit from a vendor resulting from poor performance. Second, equipment expense declined 24%. And as I mentioned before, it is the result of fewer cars on line, particularly foreign and TTX cars for which we pay car hire. In the third quarter, KCSM experienced a 25% improvement in cycle times.

Turning to Slide 19. Comp and benefit expense increased largely due to higher incentive comp expense in the quarter. In 2018, we were accrued well below target in the third quarter, while in 2019 we are well above target. We recognized $6 million of incentive expense in the quarter to reflect the increased payout. Wage inflation of $4 million was offset by a $3 million reduction in comp and benefits expense from lower headcount and fewer hours work. Headcount, excluding the insourcing of 91 FTE, was down 1%, and we continue to believe we will manage 2019 at reduced headcount levels from 2018.

And as of note, we're using average FTE for the quarter in bar charts, but at September 30, 2019, we were down 2% year-over-year. Comp and benefit savings at this stage of our PSR implementation have resulted from train consolidation that has reduced crew starts, reduced hours worked, including overtime and mechanical reductions due to fewer locomotives and freight cars and finally in some G&A areas.

As Sameh talked about our whiteboarding efforts and as we conclude those, we would expect to see some further reductions going forward. However, we will manage certain growth corridors, such as our cross-border network with more FTE in locations such as Laredo, Texas and Sanchez, to support the strong double-digit volume and revenue growth we have been experiencing for the past year. Simply put, we will continue to grow human resources in growth parts of our network while rightsizing FTE, where traffic volumes do not support the level of human resources. It's also important to remember that the furlough process in Mexico is not as flexible as it is in the U.S. And unless we can agree to more flexible work rules with the union, we will continue to have a scenario where FTE reductions may not be as great.

However, work hours will continue to decline resulting in reduced compensation expense. As approximately 75% of pay is variable. And I might remind the analysts and investors that back in 2009, when we saw a 25% reduction in revenue and a 19% reduction in volume, in Mexico, we've scaled comp and benefits expense extremely well showing a decline of 27%. With respect to fuel expense, fuel expense declined 3% as a result of efficiency improvements from our PSR implementation. We carried 6% more GTMs in the quarter compared to a year ago with essentially the same amount of fuel being burned. Lower prices in the U.S. also helped reduce fuel expense, but we did experience slightly higher fuel prices in Mexico.

And finally, on Slide 20, we have included our capital allocation priorities. We continue to believe investing in our network, particularly our cross-border network to support the high-growth rates we are seeing is the right priority. We expect capital expenditures of less than $600 million for the full year 2019. And on a longer-term basis, we would expect CapEx to revenue ratios of and around 18%.

During the quarter, we repurchased 816,000 shares of our stock at an average price of $1.22. Year-to-date cash flow has increased 76% for the 9 months ending September 30, 2019. Despite paying cash for 50 new locomotives that we acquired in the first half of the year. Accordingly, we will continue to look at ways to return excess cash to investors through both dividends and stock buybacks. And since we are on pace to complete the current $800 million stock buyback program by the end of this year, we are actively working with our Board to develop a new capital allocation policy that we intend to communicate to investors by the end of the year. And now I'll turn the call back to Pat.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [7]

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Okay. Thank you, Mike. I just want to circle back on -- quickly on a couple of things before we get into the Q&A. Again, we feel terrific about the performance of the quarter. Top line growth, significant progress and sustainable PSR-related cost savings. I think there is certainly more to come. We have a pretty positive outlook, certainly for the rest of the year and please don't ask too many questions about 2020 guidance, we're going to be pretty stubborn in our position of not talking about 2020 on this call. There'll be more to come over the course of the next few months and certainly on the fourth quarter call about our outlook for the coming year or for next year and beyond. But very pleased with the progress we're making on improving our service, most importantly. As Sameh talked about the -- we are seeing this -- everyone is familiar with my favorite phrase, Service Begets Growth, so we're seeing that play out, as we improve our service. As we are able to relieve congestion in our yards and on our network, we're putting assets they're freed up to use, to handle more business. We're confident that some of these oversized growth opportunities that we've been talking about for the last several quarters are real. And if we can do our part to provide the service that is required to handle that business, it's actually materializing.

Go back to a comment that Mike talked about. Look at the improvement in operating income that we had versus last year, 15% record operating income and if you sort of take that down through the income statement, about 70% of our EPS gain year-over-year for the quarter was due to actual improvement in operating income. So I think that's a significant fact to keep in mind as you look at our performance. So -- and again, we feel like that there is runway ahead of us, both on the cost and service improvement side and certainly on the revenue opportunity. So with that, I will conclude our comments and open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Chris Wetherbee of Citigroup.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [2]

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Pat, I just wanted to kind of ask question on Slide 6, you had mentioned earlier in the call that the guidance will change and improve. And I guess I just want to make sure I understood what you're kind of commenting there. I'm guessing it's sort of the OR, EPS and CapEx targets that are beyond 2019? But just any thoughts you can give on that will be helpful.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [3]

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Yes. I think it'll be across the board. Obviously, as we finish our plan, I think the key for us and why we're really going to be stubborn about talking about 2020 is this whiteboarding exercise that Sameh and Jeff talked about. Brian, his team were making great progress on that but we aren't at a point where we really feel like we know what that's going to result in terms of service improvements, cost profile, et cetera. So -- but let us finish that. So certainly, the one number on Slide 6 that I'm sure everyone looks at with the quarter that we just produced and says that doesn't seem real is operating ratio. But certainly, expect to update that and I expect it to be certainly better than the guidance that we've given up to this point, but we'll certainly freshen the guidance on everything.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [4]

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Okay. That's very helpful. I appreciate it. And then just a follow-up on the Mexican work rules and the progress there. Can you give us a little bit of sense of sort of what the timing might look like as you go through that process? And maybe what a potential outcome might look like as well?

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [5]

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This is Jeff. I'll take that one. So we continue to have discussions with the Mexican Union regarding just modernization rules more than anything. I've talked numerous times about crew size in Mexico, significant amount of 3 and 4 person crews. We know where we're heading in the U.S. and then for the rest of the North American freight systems. So there's ample room for a crew size. But probably and equally and then maybe even more important, are just our flexibility, the way the union sections are structured, we have a lot of division within the network. You have a lot of overlap and a lot of restrictions. For example, coming into one of our yards, you have 3 sections that kind of integrate into that same yard and then when the train pulls in, we have to kind of arbitrarily stop a train, swap out a crew and maybe do that multiple times by the time that train can run through the terminal. So those types of work rule improvements as significant as maybe some of the headcount initiatives. We're simply pulling off a fourth brakeman and third brakeman who literally don't have a lot to do, if anything to do on these trains, it's something we're working on. I would underscore what Mike said about the cost that relatively if these road crews aren't working, there's relatively little cost associated with it. So that's why I wanted to highlight the cost benefit of the labor without necessarily seeing all the headcount reductions at this point. Timing wise, I think it will be -- we're continuing to discuss, there was a meeting in Mexico City last week, and we'll continuing to facilitate this. I hope we have some breakthrough here before the end of the year. But it's something that we're still working very hard on.

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Operator [6]

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The next question comes from Justin Long of Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [7]

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Congrats on the quarter. So as we think about the new run rate for PSR savings, can you talk about how dependent these savings are on how the top line trends? I think it's pretty clear we've seen some weakness in the broader freight market and the economy. So do you think these savings or maybe something higher or -- are still achievable as the demand backdrop just stays around where it is today?

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

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Yes. This is Mike. I certainly think so, Justin. And we were really challenging ourselves here with excess equipment as Sameh said. Our goal here is if we can deploy that excess idle equipment in the marketplace and sell more product, like we did in the third quarter with grain, we absolutely want to keep that equipment because the margin that you generate on that is certainly a lot better. But if we see a macro downturn that's more significant than where we're at today, we may have to adjust if the demand for those assets isn't out in the marketplace.

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Justin Trennon Long, Stephens Inc., Research Division - MD [9]

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Okay. And secondly, I wanted to ask about revenue per carload. It seems like you're continuing to benefit from positive mix with Chemical & Petroleum and the Ag segment performing really well on the top line. Can you just talk about the sustainability of this positive mix going forward. And should we also be thinking about the OR and incremental margin this quarter being impacted fairly significantly from that mix tailwind?

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [10]

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This is Mike. Taking crack at that. Yes, we do anticipate that revenue per unit is going to continue to be healthy like you're seeing today and that is because as you said the mix changes. The Chemical & Petroleum units definitely brings in more revenue per unit and as long as that continues to grow disproportionately to some of the other business units, like Intermodal, that revenue per unit is going to continue to improve.

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Operator [11]

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The next question comes from Tom Wadewitz of UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [12]

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Jeff, congratulations on the strong results. Seems you've got a lot of momentum. Wonder if -- I know Pat you said you're going to be pretty careful about 2020 commentary. Perhaps if I pose it a little bit more narrowly, how are you thinking about the whiteboarding process and I guess what the outcome might be? Are you looking at -- should we expect a pretty significant reduction in train starts from that? If so, is it 10% reduction in train starts? What's kind of -- I don't know, is there a broader framework for our expectations on the whiteboarding? And also if you are on track on timing to implement at the end of fourth quarter?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [13]

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Tom, I think I used the word stubborn, not careful when I talked about 2020 guidance. I'd like to have Sameh and Brian since a lot of work in the whiteboarding is taking place with his group. But to talk about, maybe some of the things we're focusing on the activities and the expected outcomes in terms of activities and not financial results of the whiteboarding.

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Sameh Fahmy, Kansas City Southern - EVP of Precision Scheduled Railroading [14]

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Yes. Like I said, this is Sameh, like I said earlier, we are very focused on the 2 things that are the pillars of PSR. One is, reduce switching, which is -- lot of people called it how many times you touch a car. And the second one is reducing trains, with train consolidation and that's where you reduce crew starts. The example I gave was really very illustrative of that. I said that instead of 3 trains, you're essentially go down to 2. One is going to do all the work in these places around Saltillo. So the other one will go through without stopping. So you reduce the switching, you reduce the delays, by the way, these trains when they do that work, setting out blocks, they block the main line. So when you go down from 9 of these operations every day to 4, you reduce obviously delays significantly. And that will help with the velocity of the network.

What we need to understand is that on the Mexico network, yards are where we spent a lot of time. Yards is where the big potential and the big opportunity is. And the less work you do in these yards and the faster you can get trains through that yard, the faster the fluidity of the whole network is going to be. So as an example and Jeff touched on that, if you have a train that doesn't do any work in that yard, don't make it go through that yard. And that's part of the new whiteboarding exercise. Jeff was talking about Escobedo in particular, the train goes through the yard because of some of these labor rules and we hope to get that around the yard and not having to do -- not having to slow down everything and slowing -- getting the train itself to be slowed down by the switching happening in the yard.

One of the biggest delays we have in the network is trains held out of terminals because they cannot get in because there is no space to get in. So these things -- the team has been very, very focused on -- like I said, I spend the day with and yesterday and the commercial people. The -- a few days ago, I've spent a lot of time with Olivia who's leading this effort, under Brian Hancock's leadership, who is sitting right next to me here. And they are really doing a fantastic job. And at the end of the day, we are going to reduce the number of blocks that we create, we'll do that more outsource, we'll do them in the big yards like Sanchez where there is a lot of room. And it will be more efficient.

One thing that is contradictory between train consolidation and switching, when you have long trains at the end of the day, they go in yards. Yards have short tracks that are not necessarily -- they were not built for that kind of train. So that sequence of doing these things and doing them in a smart way is very important and that's what the team is focused on. And the implementation will start November 5, which was part of your question. That's going to be phase 1, that's going to be 3 phases. The third phase will start towards the end of this quarter in December. So we will hopefully complete this exercise around, I would say, January, February, at the latest. I don't know Brian if you want to add anything to.

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Brian D. Hancock, Kansas City Southern - Executive VP & Chief Innovation Officer [15]

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The only thing I would throw in as well is, I think one of the differences in our work that we're doing and Olivia's team was doing is we're continuing to try to build a network that can haul more freight. So this whiteboarding exercise is not only taking out these work events, this waste of time that Jeff talked about in the yard but we're trying to make sure that these trains have capacity to be able to fill them with this additional freight whether it is Manifest freight, Intermodal freight, but there-- we continue to believe we can grow the network and so it's a little bit different whiteboarding exercise because we really feel good about not only the cost side but the revenue upside. So I think Sameh and Jeff will hit the points very well, but very proud of the work that the team is doing and looking forward to what we see here in the backside of the fourth quarter and in the first quarter.

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Operator [16]

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You're next question comes from Amit Mehrotra of Deutsche Bank.

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

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Congrats again. So just costs -- I guess costs related to purchase services and equipment have never been lower relative to the size of the enterprise or the revenue base. So it does seem to be some further opportunity, I guess, in materials and other expenses. So just related to the whiteboarding exercise, if you could just help us think about how those cost can evolve, maybe the right way to think about or if you can express it in absolute dollar basis because those buckets together are higher than total compensation and benefits on the annual basis. So if you could just -- do you think you can hold those costs flat to down as revenues continue to grow over the next few quarters? I think that would just be helpful on an absolute dollar basis.

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [18]

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Amit, this is Mike. Yes, I think we can continue to see this go down over the medium term. I think going into fourth quarter, it may look a little bit more like flattish because we included in other is casualty expense and we had not so great quarter in the third quarter on casualties. But generally, the longer-term trend would be down on that, fourth quarter roughly flat, maybe from third quarter, which implies some declines in the casualty expense.

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

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Okay. That's helpful. And then just maybe pivoting a little bit to the capital deployment. I guess disclosure on the slide in terms of year-end, giving some more update on that. We are certainly all going to wait till year-end, but I guess Mike, if you could just help us think about the philosophy of the company with respect to balancing the risk as well as the return to shareholders on capital deployment. Is it a debt-based metric I know you talked about kind of leverage being a 2.2x? Do you think -- if you could just talk about philosophy and do you think your leverage profile needs to be any different than the larger class ones? And just how you think about that on a relative basis?

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

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Yes. Another good question. We're going to have some more concrete answers for you before the end of the year. As I mentioned we are working with the Board right now and ultimately that's a Board decision. But specific to your leverage question, we feel quite comfortable with where we're at with leverage. And if we can continue to manage this at a low 2 range, which is our desire that would imply with earnings growth that there's some flexibility on the balance sheet that could be put to use. But we don't want to get too far ahead of ourselves with specific actions we may or may not take. So that would be my sense. Only other comment I would make is our credit metrics look as good as anybody's in the industry. But unfortunately, the rating agencies seem to think that smaller is not as good as being larger, but I have those debates with them probably twice a year. And I think our numbers speak for themselves.

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Operator [21]

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Your next question comes from Allison Landry of Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [22]

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I just wonder if you could comment on what you're seeing in the pricing environment maybe first just sort of broadly speaking? And then, whether you're starting to see incremental yield benefits resulting from the improved service levels and reliability?

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [23]

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This is Mike N. And in general, we feel good about our pricing environment, and going forward we expect that we're going to perform at the levels that you've seen this year. And certainly it makes it easier to do so when we're improving our service product. It gives us little more confidence when we're going in there and we're having those discussions with our customers.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [24]

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Okay. And then, I also was asked about the -- there's a recent change, I believe, at the border where the CBP from both the U.S. and Mexico are now sort of sitting in the same building and doing inspections with the common viewer. Is this something we should think about or view as meaningful? And how much of an impact perhaps longer-term if you think that this could have in terms of speeding up the time it takes for trains to cross the bridge or just sort of overall bridge capacity?

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Brian D. Hancock, Kansas City Southern - Executive VP & Chief Innovation Officer [25]

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Allison, this is Brian. I'll take that one. Actually Jeff and I were at the bridge yesterday. We had an outstanding trip, and we had not only the CBP from the U.S. but SAT from Mexico. We went through our entire strategy with them and they were in complete agreement. And so what I would say right now at the border, is you have 4 organizations, ourselves and the UP as well as our 2 border crossing regulatory bodies focused on really making that border as seamless as we possibly can, making sure security is high. But I will tell you, it's going to have an impact. We're trying to create -- like Sameh said before, we're trying to create capacity without needing to spend capital dollars, one way to do that is to take those pinch points like the bridge and make them more fluid, use technology to make that happen and absolutely that's -- it's an enormous focus for us and we just spent 2 days down there making sure that everybody continues to be aligned. So yes, you'll see more.

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Operator [26]

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The next question comes from Scott Group of Wolfe research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [27]

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So Pat, you talked about on the guidance slide that the OR guidance sort of stands out now. I'm wondering with the whiteboarding going on, if you think this applies to CapEx as well?

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [28]

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Yes. No doubt about that. I mean we obviously took our guidance down on CapEx last quarter, feel very confident that we're coming in well below -- below the $600 million that we talked about. We didn't take our guidance down again. But I think we're very confident that we'll come in below that $600 million level. And we're seeing areas, Sameh talked a little bit about some of the yardwork that we're doing in Mexico, there are maybe some CapEx required as we sort of rethink how we use the yards and how we use the network in Mexico, deemphasizing some of the smaller, more congested yards, could require some capital in the larger kind of load centers that we're going to be focusing on. But we don't really have a real clear idea on what that might involve, probably not substantial enough to move the needle. So yes, as we continue to operate more efficiently, do more for with less equipment, it's obviously going to have an impact on our CapEx going forward.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [29]

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Okay. Good to hear. And then just wanted to follow-up on the mix question, again, on Ag and Chems. So your Ag is growing when I don't think anybody else is. Do you think that piece on Ag is sustainable? And then on the chemical side, I know you don't want to get too much into 2020 but like -- are the pieces there to sustain double-digit volume growth in that business segment?

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [30]

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This is Mike. And yes, we do continue to see -- do expect to see continued strong growth on cross-border whether that's coming from the Chemical & Petroleum business or the Ag/Min or frankly other segments. Year-over-year comps may make it a little more challenging but we feel very good about the cross-border franchise.

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Operator [31]

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The next question comes from Ravi Shanker of Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [32]

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Pat or Mike, can you just give us an update on the Intermodal competitive situation, both the fuel excise credit, is that stabilizing? And to what extent are you able to recover some of that pricing through fuel pass through?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [33]

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As you know, the fuel excise tax credit was taken away from all railroads at the end of April and has not been reinstituted. We continue to have ongoing conversations with leadership -- government leadership in Mexico to try to get that reinstated because it is somewhat of a competitive disadvantage against the trucking that we compete with, predominantly in the Intermodal business. I don't think we can handicap that. I'm probably not as optimistic that we're going to get that reinstated but there is a possibility that generally happens towards the end of the year. But one other option the government has would be to level the playing field and no longer provide the credit to trucking industry. So that would be favorable outcome as well and eliminate that disadvantage that we have. With respect to putting those costs into our fuel program in Mexico, we started that in May and it's had the intended consequences that we wanted it to, offsetting the higher fuel prices that we were presented with at the end of April.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [34]

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Got it. And if I can follow up with that would you want the excise credit to come back? Does having a fuel surcharge mechanism actually benefit you in that -- there are certain times where you can actually be on the right side of the equation and maybe even make some money in terms of the fuel pass through mechanism?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [35]

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We do not make money on the fuel program, trust me. We would prefer to have that credit back because we have a structural difference there. We have higher fuel costs in Mexico and when you gross that up in the fuel program, that's a 100% OR business. And as I indicated earlier, it had an 80 basis points negative impact to our operating ratio in the third quarter. So getting that credit back would certainly help us from that standpoint.

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Operator [36]

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Your next question comes from Jason Seidl of Cowen.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

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Just looking at some of the trade issues that's ongoing, both with China and U.S.M. C.A. With China I think you mentioned before that you guys might benefit with some freight moving towards Mexico. One, have you seen that? And two, do you think that's permanent? And on the USMCA, do you think once it is signed, you can see a boost in your business? And then I'll have a follow-up on your cross-border business.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [38]

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Jason, I think we -- I can't give you a list of examples of companies who have made decisions and actually made investments moving business operations to Mexico as a result of the fall out with China. I was at a conference a couple of weeks ago in Mexico City that Graciela Marquez, who's the finance minister in Mexico was speaking. And she mentioned that they are seeing more activity of companies who are interested in relocating operations from Asia. So we are trying to engage with the Mexican government to help because logistics is consideration and how those companies connect to the rest of North America, certainly consideration for those decisions. So we believe that is likely to happen, but I can't give you a list of specific companies that we're actually seeing do that. And I think largely because there still a cloud of uncertainty about USMCA.

On the USMCA side, everything we hear and discussions, private public, media, put it all together, everything that we hear is that Speaker Pelosi is ready to bring it to the floor and believes that this is a good thing for America. So she is -- if you look at some of the comments that she has made publicly, she is kind of denying the fact that democrats in Congress are trying to deny a victory for President Trump that this is a victory for the American people and should be approved. It hasn't actually made it to the floor of the house yet. But everything we hear is that it should be -- move forward. And we're certainly hopeful and doing everything we can to nudge it in that positive direction to try to get it done by the end of the year. Brian mentioned the event that they were at the border yesterday and earlier this week that was actually a group that was hosted by us and the Commerce Department focused on trade facilitation, border crossing issues. And so I think we have the full support and cooperation of everyone in Washington in the White House, the West Wing, the Commerce Department seem to be pushing forward with approval in fairly -- quick approval on USMCA.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [39]

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There are some great color. And let's hope Washington gets off its butt and starts doing some real work. In terms of cross-border, obviously, you saw some nice growth in the quarter. There's a lot of opportunity, at least, I believe, going forward to gain market share. What's the key going forward to that market share rate? Is it more your improved service reliability? Is it that along with increased visibility for the shippers? And where are you guys with sort of increased visibility from origin to destination?

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [40]

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This is Mike. I'll take that one. I think you hit the nail on the head. The key to our competitiveness on the cross-border side is being able to move market share from other modes of transportation is going to be service related. As we get in more competitive products as we have a more consistent reliable product, we believe we're much more efficient way, much more secure way to move freight across the border and that will help us. To the extent that we can provide greater supply chain visibility for our shipments that is something that Brian and the IT team are working on. We're currently embarking on a rewrite of the MyKCS system, which should improve many capabilities for our customers, including visibility.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [41]

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I think one thing I would add to this is if you go back to our script and think about our comments from a year ago, certainly third and fourth quarter of last year, we said things like we weren't happy with our own performance. We weren't satisfying our customer expectations. We believe that there was more business that we could handle than we were able to handle because of service issues. Look at our service metrics. I mean they have improved substantially from this time last year and they're sustainable. We've always felt very confident that if we did our part in terms of consistency, reliability of service and resiliency of our network, that these oversized growth opportunities were real and that they would materialize. So kind of the -- go back to my favorite quote, Service Begets Growth, we're seeing it happen and if we sustain and improve and continue to improve this consistency and reliability, we feel very confident that these growth opportunities are real and we'll see it in volume and revenue growth going forward.

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Operator [42]

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You're next question comes from Brandon Oglenski of Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [43]

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I guess Mike, can you talk about actually the balance sheet here because you guys have at least give us an outlook on CapEx to be about 18% of revenue looking forward. So at this margin levels, you guys actually generating pretty decent cash flow. What's the priorities here below CapEx, I guess?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [44]

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Return to shareholders and as I indicated earlier, we'll provide that guidance before the end of the year as we're are currently working with our Board on a new capital allocation policy.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [45]

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But I think in the slides here you did say your target leverage ratio is about 2.2, is that the right way to think about it? Or with better conversion, lower tax rate should we think that could be higher in the future?

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Michael W. Upchurch, Kansas City Southern - CFO & Executive VP [46]

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Yes, I think we're still low 2s, but could go up a little bit from where we're at.

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Operator [47]

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Next question comes from Ken Hoexter of Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [48]

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Great update on the PSR and the cost gains for the quarter. Jeff, just a quick one, you noted quickly -- you quickly adjusted to the weather. Is that because of the new plan or were you saying the weather was not near your network? And then I guess the same vein, with the Mexican Energy Reform deceleration, is that because of the lag to tank to truck permission or is it seasonal? Or are you saying it's now becoming more cyclical?

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

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I'll take the first part of that. So the weather now -- there was actually more rain in certain parts than we saw in Harvey, impacting basically Houston in trackage rights. So there were multiple days of outages on our -- on trackage rights segments through Houston but again, as I said, so it certainly was not near as impactful as something like Harvey but there was outage time that because of how we've kind of regenerated the service plan down there. Mike indicated earlier, we've actually added some resources in some corridors to be able to shove through these things a little better now than we probably had in the past. So I think it's a combination of TSP design, resource allocation and just execution.

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [50]

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I'll take the portion of your question regarding the movements of refined products or Energy Reform. Again, our growth has been very strong there on a year-over-year basis. While we did see a little bit of sequential weakness, LPGs was really the driver of that. As I mentioned in my comments, that tend to be influenced by seasonal and pricing fluctuations. The refined products, demand softness is probably driving a little bit of what's going on in Mexico coupled with storage permitting and retail permitting delays. As those delays -- and we expect that we'll be moving more product into Mexico. Particularly as it relates to filling up all storage tanks that are going to be built of over the next couple of years and including our TCM facility, which we have approval to move products now in and out of those tanks, which is a plus.

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Operator [51]

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The next question comes from Brian Ossenbeck of JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [52]

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Mike, maybe if you can size the opportunity for when those permits come down the pipe in terms of additional barrels? I think that was in your slide deck maybe last year. So maybe if you can give us an update on some of those specific facilities, anything changed other than just waiting for the permitting?

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Michael J. Naatz, Kansas City Southern - Executive VP & CMO [53]

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I'm flipping through my information here. I believe that there is 8 facilities that are opening up next year that will include storage. I don't have the barrel information in front of me. But we believe there's openings in the second quarter, third quarter and fourth quarter. Of those 8 facilities, we have direct access to 5 of those facilities and then we have secondary access into the remaining 3. So again, we're very, very optimistic by the Mexico Energy Reform and our ability to drive revenue in that category.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [54]

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All right. Pat, maybe one for you, since we talked about crew size on this call for Mexico. But obviously the crew size in the U.S. is going to be topic for discussion in the next couple of years. Could you just give us some thoughts on how you see that rolling out and to the extent that a positive train control have to play a big impact -- a big factor in that, rather. How is that working on -- excuse me, on your system, especially from an interoperability standpoint given the high level interchange you have with the other class ones? Will appreciate some thoughts on crew size and impact of PTC.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [55]

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Just basic comment on crew size. We're in the process, the collective bargaining process with the rest of the railroads. You probably saw an announcement a couple of weeks ago that involve the railroads, actually filing a suit that's really just part of the normal choreography to get the process started. So it was nothing unusual, it was really just sort of step that was required to kind of engage in the process for a new collective bargaining agreement, industry-wide agreement, hopefully in the next few months. As far as your other part of the question, I'll defer that one to Jeff.

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Jeffrey M. Songer, Kansas City Southern - COO & Executive VP [56]

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So I guess as far as PTC implementation. Interoperability is moving along to schedule. I don't think you look at ourselves any different from the other railroads on any less or greater impact with PTC and our interoperability, something Brian and the team are working very hard against.

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Operator [57]

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This concludes our question-and-answer session. I would like to turn the conference back over to Pat Ottensmeyer for any closing remarks.

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Patrick J. Ottensmeyer, Kansas City Southern - CEO, President & Director [58]

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Okay. Thank you all very much for your time and attention. I know there are a lot of KCS associates and colleagues on the call here. And I just want to make a comment that we're very, very pleased and very proud with the performance that we've posted here in the quarter and the outlook, and appreciate everyone's -- many members of the PSR, very cross functional, deep into the organization effort here and appreciate all of your hard work and performance here.

So for the analysts and investors on the call, I know you have found my suggestions about headlines very helpful in the past. A few phrases come to mind when we look at the quarter. We think this is really a quality quarter, a quality beat, if you want to put it in those terms with our performance driven by top line growth and sustainable PSR-related, performance improvements and cost savings. And perhaps most importantly, we believe that there is more to come. We're not done yet, certainly with our transformation, and we'll have more to say about that over the coming months and certainly on the fourth quarter call in January. So with that, I will conclude the call. Thank you very much for your attention.

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Operator [59]

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The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.