Kansas City Southern (KSU) 18 Jan 192018 Q4 Earnings call transcript

Company Profile

Participants

Pat Ottensmeyer	President and CEO
Mike Naatz	Executive Vice President and CMO
José Zozaya	President and Executive Representative, KCSM
Brian Hancock	Executive Vice President and CIO
Mike Upchurch	Chief Financial Officer
Jeff Songer	Chief Operating Officer
Justin Long	Stephens
Chris Wetherbee	Citi
Amit Mehrotra	Deutsche Bank
Bascome Majors	Susquehanna
Tom Wadewitz	UBS
Matt Reustle	Goldman Sachs
Sam Allen	Credit Suisse
Brian Ossenbeck	J.P. Morgan
Ken Hoexter	Merrill Lynch
Jason Seidl	Cowen and Company
Scott Group	Wolfe Research
Fadi Chamoun	BMO

Call transcript

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Operator

Greetings. And welcome to the Kansas City Southern Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. concerning differ events actually from statements which the occur. includes materially could the presentation potential involving future company This events that including filed company’s Form The number for the the caused be December XX-K SEC. Factors those XX, ended factors, XXXX, Risk the differences in the factors of by section year identified with could of a or any presentation to this company The developments. statements forward-looking is not obligated in future to events update reflect reconciliations KCS All GAAP website, found can the on to be www.kcsouthern.com. to pleasure Chief my now your Kansas host, Southern. and is It President Ottensmeyer, introduce Executive City Pat for Officer Mr. Ottensmeyer, you may begin.

Pat Ottensmeyer

Happy Okay. revenue five Year. going to Thank the quarter. side you. am And Good and morning, to four, change speaking in presentation. Slide be see will everyone, sorry, Slide this sales and in on will Naatz the and line-up marketing presenters. New of you Mike start is I the business with I the or one our

Zozaya the also us on in here the José Mexico; Hancock is in phone room We have and with Q&A. for Brian

is to was quarter share earnings led it operating for record XXXX. the adjusted revenue X% record we for XX.X%. Fourth to as with were adjusted XX.X%. full about increased results. and earnings reported which X% adjustment that the relates Full $XXX the from Mike ratio ratio billion, XX% operating year quarter into six, fourth a are the $X.XX, to from takes going talk five, Volumes quarter, over volume year the improvement about year. X% Again, Upchurch Harvey interesting $X.XX, Fourth XX.X%, in also crude insurance basically will per last in flooding from seven, get share of the was Revenue to to year. fourth the XXXX to XX% but XX.X%, $X.XXX growth. the a a from adjustment, into Slide details adjusted million record a Hurricane I insurance today. which recoveries increase being of per the a presentation of mentioned EPS record year Mexico. XXXX. recovery Moving quarter $X.XX, strength and slide increased refined minute most to fourth flat the ago. primarily oil Full ratio products $X.XX, in was previous quarter and that adjustment by results, Slide the operating a probably Slide

when plan planning We our keeping where with long-range with have is made process. XXXX commitment our a November forthcoming up this more and our being that update, finished finished plan sharing of guidance, year we full in -- we little ended we and

in say the are that For Railroading. at a are range, a that understanding the mentioned just work and the growth of our are minutes. thinking PSR performance, here. terms XXXX, very growth and in questions magnitude of completing XXXX ratio some probably, about we saw principles and are answering XX% some to operating of mentioned more of in our looking about timing not will volume the early apply of will, will Jeff target a of XX% X% and Again, be out there details. we XXXX. will in by we putting more -- term on that. in Scheduled into Precision we detail of implementation I focus stages and excellence in principles the in few early Jeff very will some how get for press and X% operational you we revenue release, heightened we X% of longer We talk and to to operational X% of

million looking for million the XXXX, per we at earnings the here, next migrating beyond And XXXX, $XXX guidance down purchases in to to below previous mid-teen to -- to low in three CapEx further high-teens rate reports. share and something locomotive talked EPS. have are over we $XXX years some compound then that the range million, which And XX%. growth are $XXX about looking but includes So annual CapEx we

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

Jeff Songer

nine, XX.X performance and key these Thanks, improvement has Pat. metrics terminals Peak Good normal Inventory quarter returned morning. dwell over the have metrics and Starting velocity Sanchez. slide improvement. XX, quarter are on to slowdown dwell overall peak other improved on December show normal out for congestion of showing QX. in quarter. to current January terminal the state last general third Coming on showed substantial metrics reported on at dwell levels of slide at review with levels third Monterrey and operating eased holiday the in hours. operations continued of improvement week’s at significantly our since year-to-date Expanding the period,

to equipment by right-size for Cross-border in continue another this customers increased continue fluidity to optimize and work QX with region initiatives XX%. service region. was quarter the cross-border that in and We to volume strong support

across continue We this operate with in to crew crew more and as transit progress overall time the reduction bridge are international initiatives seeing our trains base. a

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

locomotives XX the new receive to of track January. on are horsepower higher in we units late Additionally, first

of quarter, transaction. we additional momentarily. as on this lower will horsepower provide color part XX locomotive our units fleet selling are I last mentioned As

CN, like that implementing XX, the Fanny our we slide To process XX is for former a would XX network. plans part this assist of I into on XXXX those our to Entering Turning operating provide most National as some team. to [ph]. a to are relevant principles Executive Harrison’s Hunter of working are we with Fanny years PSR in spent focused insight PSR. at Mr. entered of into consulting Sammy Executive Management have experience agreement Canadian with years

all focus addition In management has and train City of and St. a in redesigned worked asset between of and executive include three Initial brings Kansas life start Fanny financial several rationalization starts manifest product of with to other real similar week have for and and goals. toward The our improved and savings. save labor reduction. of start and structure Mexico Combined, work locomotive, in Mr. areas also as we over done experience among with PSR to compensation GE some Providing railroads initiatives million Intermodal of initial locomotive equipment we with he with year years. utilization, per in alone will efficiency examples that in have fueling CN, eight wealth shared an roles. Fanny’s knowledge has two week XX line Louis, trains these train recent our fuel others. network cost provided addition segment. Mr. are working in reduced team He $X per additional rationalization this is initiatives, our per labor his

strategy, reduce the PSR Turning to initiatives locomotive allow us back fleet. overall our will to locomotive

additional are the number [ph] with units of total a to XXXX, returned our of reducing number XX process While not have an locomotives units. in new compared the active have units in PSR of time, identified for of another initiatives failures. XX we XX at peak in is [storing] we Acquisition and as this reduction leased of line locomotive

provides unit this failures. refined reliable acquisition the reducing products by allow additional high the for support segment. our to train unplanned increased units same At growth New will time, fleet horsepower units utilization in

continue with interchanges look will and improvements. PSR the at performing about work interchange networks Mike who partners will will help we for of drive Naatz. now efficiencies other will we over road from network continue turn target should rail to that to end, more local the and implementing our yard, work prevent to We PSR I In also parts poor overall efficient closely presentation to see disposition. units are Nothing initiatives. on

Mike Naatz

will Jeff, you, morning, I Thank on good page everyone. start comments XX. my and

up on revenue quarter year-over-year flat fourth the volumes. see will was You X%

you If in most continue to from carloads respectively. cross-border growth and appendix, fourth notably excuse at quarter, the and products full at volume In growth you’d revenue were revenue, the refined were see me, business. cross-border strong see cross, we and look and to X% year X%, Intermodal

half we challenged However, QX, Mexico during were an first the have of on congestion in Northern as and our business. impact Jeff discussed, by this did

strong revenue healthy unit to and from During loss the what growth we expect environment in Core business long-haul Petroleum remains grew by pressure moving southbound utility and the unfavorable into of products The Mexico. quarter, was consistently of unit inflation. of despite FX. our Chemical primarily refined and outpace revenue some coal we mixed reported XX%. QX, volumes This growth pricing driven business pricing with per experienced

the grew our Min business, times energy the Texas higher of tougher congestion a largely unit’s sourcing slightly was was announced by Consumer revenue growing $XXX crude decrease the business truck-to-rail year, with within and cross-border driven grain This in increased metals from on mixed were full driven grew military business in Revenue and at border. mentioned improvements contributed moves million by down quarter. of unit Industrial of at conversions. length at previously in revenue a which were pricing The of then the energy our revenue cycle recap by previously was gains. closure moves, did franchise growth a volume year-over-year in Other in Ag significantly declines we generation revenue a mentioning sand. X% by year-over-year. challenged year-over-year revenue carloads at in fourth Mexican appendix. business business, a XX%. comps. shift in We declines in congestion haul this at in pricing X%, XXX% by turn oil X% the attributable reduced full by those continuing in It’s partially the year frac location XXX%, included our by our shipments. customer For facility driven power Revenue crude by was respectively. topic primarily positive offset and due see lanes lane. solid and worth primarily also that reform driven plastics Intermodal nearly decline with The of was our performance domestic business These and This to and timing and and Canadian X% growth to and

Additionally, plant shutdowns provide a we and congestion, business move And unit. America availability prior on XXXX. business like while our Revenue we volumes. our taken restore year-over-year, driven improvement Automotive Lázaro volumes the over meaningful sequential business did Lázaro down actions in in slightly this I’d outlook XX, continued equipment Intermodal from segment now Border lane where this by to the year. North impacted slide X% to unplanned see Cárdenas declined issues was to for

As full unique reform our be Pat approximately Starting a with X% year-over-year Chemical X% focus significant to Petroleum and and a to continues outlook opportunity is growth year X%, Mexico to the mentioned, revenue KCS. business, volume for projection. X% energy with the

We products expect year, capacity as refined increases comes volume online. to continue storage growth and next from demand

demand. We increased with to grow XXXX expect Plastics in

Mexico along fuel Additionally, are production. oil higher to heavy expected shipments with in grow also

see plant in We closures solid elongated were business, unexpectedly expect certain performance though Automotive even holidays. to the the following

grow estimates of volume slightly for Mexico to expect We production. third-party most ahead

to production easing from equipment. to gains, additional may congestion market Mexico, volume addition In benefit increasing share growth and

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

mentioned trucking evaluate earlier, volume-based regulations of our as positive our Lázaro are and short-term to pricing trends business As sequential as take in our additional customers to Mexico implemented and advantage expect in we strategy. continue see

on in interest help best that believe to focusing pragmatic business sustainable a pricing. and of customers focus and However, both rational us We taking deliver drive we this is volume product our shareholders. approach will strong future are and the service that growth the

Energy, in increased business gas should for coal and As with our the prices higher natural Texas demand grow market.

production around Government Canadian On corresponding and by the crude the potential we things, crude implications Canadian the of our are mandatory cuts monitoring on developments side business.

should pattern Industrial and Ag in XXXX sand cycle declines and improve times. due neutral continued to slightly in for expect and outlook we our although Consumer changes. to positive, to And due Additionally, Min business lastly, sourcing business our frac capacity improved metals is and expansions the

the that, of Upchurch. turn We with And trading CFO, patterns are tariffs watching to impact very things changes the to closely. I over Mike will and global

Mike Upchurch

Thanks, Mike, and morning, good everyone.

ratio to operating of Hurricane surcharge $X.X overview our the to were results. summary a with related was predominantly down an per was of of recovery fourth remarks fourth up XXXX, a benefits share million per quarter the recorded recovery, my we start basis, me diluted Tax primarily XX% XXXX a of due XXXX Reform. earnings $X.XX to Let Revenues the slightly share Harvey. insurance the impact $XXX adjusted of earnings million than insurance ratio quarter fourth revenues. XXXX. to operating Reported improved for quarter one-time X% worse diluted the of better excluding due in higher fourth from On as Reported XX.X% XX.X%, to positive of $X.XX XXXX. quarter fuel from an than was due $X.XX result a Adjusted

Our and XXXX, with XX%. XX.X% tax for of adjusted guidance the in quarter rate XXXX our for XX.X% effective line the year fourth full of was

will for tax XX% you and the an more standpoint tax our rate cash appendix we page have For estimating effective find included to be expect XX% XXXX and to and XXXX on tax been through would rates XXXX XX%. XXXX on of XXXX, XX%, a we XX. And from adjusted details are approximately in

expenses. operating claim and to adjusted base. by by in expense more $XX expenses quarter prices higher Mexico joint costs. expense for a recovery our hire. general $X owning equipment due million down Operating million, from in and services in-servicing million. Hurricane the driving driven Fuel costs the from dredging security slightly were increased Purchase X%. increase in fuel of car increased $X both to $XX our lease lower and Equipment facility, our up increased U.S. payments million, up Turning were of and the IT, lower from Depreciation in PTC assets asset the insurance result Harvey

of and We offset of higher incentive $X actuarial Wage Mexico. large quarter million, partially quarter to early inflation injury million. lower and an estimates in the respectively, personal also by from study million derailment the costs and changes due experienced higher experienced costs was the in $X compensation in and headcount in $X benefit

like thoughts by to overall a lowered you expense million. FX provide expense also $X XXXX Finally I’d around few levels.

to and efficiencies slightly First, labor based we X% due Jeff work. and we our about as But earlier, expect expect wage also increase to produce higher benefits compensation and headcount. inflation on benefit mentioned PSR early to

Excluding the expense would inflationary have and services XXXX. settlement, continued for other, M&O in and insurance expect normal expense increases purchase materials type we credit

in expect the for We tax Mexico be estimate moderate have also slide prices XXXX the estimated XXXX, continue included fuel the to million increase be to to and in appendix in and on fuel $XX we we will but prices believe currently in for credit do to we $XX excise XX which eligible million. U.S., fuel

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

Finally, allocation of let capital some me capital structure cover our and priorities.

did As come our for Jeff quarter XXXX, $XXX third guidance. CapEx mentioned million in revised and original below earlier, is substantially

growth. a prudent spent ensure to capital manner in to will continue We support our

would XXXX slightly capital capital decline due XX both of to levels XX% to and to XXXX increase we expenditures While new revenue. purchasing locomotives, in expect XXXX will below

in finally our our October, by And repurchase plan of stock in upgraded Pat. flat. approximately now will to we continue to back in quarterly million the And $XX capital rating Cumulatively, I the improvement approximately structure stock, and of the with was the repurchased Board stock call S&P We we billion stock. our that, repurchase our turn our repurchased million $X BBB prior XXXX. ahead of under have recognized to credit XX% of $XXX which In common pace. our our August quarter, approved

Pat Ottensmeyer

Okay.

of while revenues, expectations the and operating Obviously, meet will statement a adjusted we a finishing performance own I press comments. in actually it performance. EPS, quarter, did will the a a in record open we a bad the operational not I for formal year make our I adjusted the financial our release, but the quarter, XXXX questions. remarks bad record income levels, before release to couple record and said terms to in the press as not about just up refer think of year. maybe I delivered not closing of that results, in quote on number

meet particularly customers and owners or In addition, not growth. share of in we the customer did the of service our areas expectations

about of we things Sammy, we with U.S. we good very I real and quick us And I the have us sustained Mexico, then a prioritize growth initiative, outlook. pretty kind got on start, are we team, we the very those we are we pleased, recovery, know and key So to as have experienced quarters opportunities that new the the growth we because particularly I the feel the good positive have help few is growth into the quarters the about been the in we want to of performance of around know still we been Q&A, and the think, we performance improvement about feel pleased could both last that are transparency opportunities, and presentation, while feel number precision from the a underway will several I to past done about and service good the where performance worst a talking that railroad the of altogether and and get oversized that The better. year. think areas opportunities I into head border, the on feel congestion the service over off The deliver happy with some think, basis. pretty give the few we not have points for of can good the the have engagement is am railroading well of we help

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

Operator

Instructions] you. Thank you. [Operator Thank

Please of with today coming is line Stephens. with your the Justin Long proceed first question. question The from

Justin Long

morning. good and Thanks

Pat Ottensmeyer

Justin. morning, Good

Justin Long

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

Mike Upchurch

Yeah.

Mike. is this Justin,

have We implies PTC in million. incremental the which Let into that, obviously, the basis guidance point me are we and think take still expenses, a stab XXXX XXX OR. about to major around quick those XXX are headwind at somewhere improvement going one $XX

We are very initiatives identifying to the of in early expenses. here process reduce

So to I get you acceleration get some into the full of maybe would an we and probably of as year ‘XX, and benefit guide those initiatives. ‘XX you

So helps. hopefully that

Justin Long

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

Mike Upchurch

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

Justin Long

Okay. at for that. I Thanks will it the time. leave

Pat Ottensmeyer

Okay.

Operator

proceed questions. next of with Chris is line Wetherbee your the from Citi. The Please with question

Pat Ottensmeyer

Chris. Good morning,

Chris Wetherbee

things should assume of to early about are the I that there, the on sort the process you there Hey. of on are off where XXXX. lower pick in so of coming the end issue we Thanks. to obviously of Good so maybe CAGR XXXX morning. we Good the just up a that sort is EPS [Indiscernible] line, left wanted of talking we sort lower CAGR. some guys. down in end maybe morning,

it need sense this maybe a the to to to about thinking there’s get it year? down of wanted you bottomline, as for some how incremental think sounds because that drop like about expenses it Just are

Mike Upchurch

Chris, Yeah. again. this Mike is

assumption. entire up on I in now point think safe in we expenses the a that’s are our step network. I’d service Again to as PTC

going further ‘XX are have to you bit you So into of and benefit as little ‘XX. get a a

So I to way. you reasonable it think for it’s model probably that

Chris Wetherbee

Okay.

I I guess, to Okay. sense That’s wanted CapEx the profile. of get helpful. And maybe a then,

some year XXXX elevated you in as of and locomotive bringing new the network are on sort that XX%. So to below step-down

revenue PSR what [ph]. there’s seeing it about, [hard] How other in mid-teens a that or implemented of potential really CapEx? should assets are is down dynamic lot further might seeing of capital a as the think teens been step-down we draw little spending the of you we from the meaningful for a for is gets some As for an bit on a upper keep percent a to of railroads,

Jeff Songer

the horse I is look I divest think, older we Jeff. [indiscernible] high of will of and purchase, This about that our we locomotive that talk I the Yeah. promoting Maybe locomotives. to more transition or to will that. explain around power rationale yard units all continue kind some as can

such I in general much other and I think, state. line in those as much remain engineering things steady pretty pretty away, maintenance and think maintenance

various I opportunities, growth in continue it ourselves difference capacity capital how look play refined investments be products and the room space, type that we a more then think similar scenario. be remains at some that in think or other to invest I to are leaving opportunities probably growth from to we

Chris Wetherbee

of of that little fair sort that bit in around the be is, see have a mid-teens opportunities won’t you topline. probably, that say probably, to because might the So, ambitious,

Pat Ottensmeyer

right, Chris. I think that’s

Chris Wetherbee

Thanks Appreciate much. it. very Okay.

Pat Ottensmeyer

Okay.

Operator

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

Amit Mehrotra

Excuse thanks. me, morning. Good

past expected. been the the expectations more And have not even recently, has volume in met. in as come guidance long-term out that put has company the So not nearly

to it’s us conservatism what’s how terms You help terms the What’s this XX the up in different in time? you could or whether XX OR. different target XXXX you there. planning if like in of roll have to this So of accountability you just know

some just of a lot think the it’s conversations helpful sort skepticism. met maybe that with because really of have, targets would I some long-term I be

think I to and you helpful get would conservatism into baked just put or there around be So the how the what that robustness you it plan? some context

Mike Upchurch

is that we to, was the what Yeah. guidance seemed Amit, we with the prior to missed I sector of you in energy guess the Mike. this that ‘XX saw and that think, meltdown guidance ‘XX the refer predominantly we miss I source that that had. be

all In to and to expectations, tied in terms XXXX, and commitment of therefore, that these lower are meet stake, we numbers those have numbers we those at you we slides as saw are of what our the and incentive compensation plans some incentive didn’t in compensation. had

So incentive for. us they our This accountable -- tied targets of committee of the are will will be in hold on Board these compensation to we Directors and plans. all

Pat Ottensmeyer

have proved them was was have guess, Mike at largest just say case. and of three-year the And January to with I’d beginning, and I our in on we it as basis mentioned is oil Mike said guidance the and targets. be be we yes in time, into into process it and going our to asked I at incentive update serious customers, our the energy completed, I Looked it is expectations they met XXXX. learned budgeting feedback wrong. about are are you this, available we crude to completed what that our plan mentioned, That XXXX, and that and have built is eye it shippers them we as we situation mean, plan this also XXXX. the in we this just referred built move, our in comp really plan you as planning of, to this XXXX based the of our information best the that, from

So the we always thoroughly plan as going as to we risk this and in check we in have can. our are have but guidance, sanity

information side, at major tight best on the this elevate grounded revenue based we have volume the to so in and we dialogue that available this feel our into visibility time. We and is with had have our reality that and customers

Amit Mehrotra

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

Jeff Songer

have to Jeff. say already This provide tangible Yeah. a of try I is couple examples fruit we -- I would some identified. hanging low

and of where is a think just we Mexico, look to our you due of and opportunities train train this that’s setting Mexico or perspective at that’s kind PSR related from service service look Intermodal these priority manifest, to our we at more the you the rationalization. I probably, network some of are complexity specifically start design at as the look think in really a length, I site design

taking As in closely have customers. climbing seen out working to further strides we that area rationalize continue the those also to work an able made have and good we But with here. the terminal directly have and some equipment customers that out some the been of of with Monterrey congestion example, of as we

Intermodal/manifest start, locomotive be will Mexico train of The more strategically. focus on. in area the arena our in that So touched product I have

cruise well. as suit follow starts start and locomotives rationalized, should suit the and as So train the headcount following should

first quickest in embark work and we where ongoing initial inning we see and as that’s starting benefit. on the most to the provide I So here, think,

Amit Mehrotra

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

Mike Upchurch

October flat and No. Nothing to provided, the know upgrade that sheet BBB we about that right have We very occurred focused pretty the now. feel that in you as in good getting now. officially balance we we of the and are on final Xs month were right low

gives flexibility. a I us bit think fair of it

Amit Mehrotra

guys. Okay. Thanks the of implementation. luck PSR much, Best so in it. Appreciate

Mike Upchurch

Thank you.

Pat Ottensmeyer

Thanks.

Operator

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

Bascome Majors

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

Pat Ottensmeyer

All and I take commentary. maybe Pat. one right. is ask Jeff This to little a then color in with that chime will

we are First to have we Sammy say of the any other much than more the with going with compensation about very are all, that that to objectives the specific his with mine. get not or performance arrangement -- aligned

how and all and in performance in of formalized of many but the sharing, Kansas kind information couple in as of question the the organization? of level the on asked a this City And excitement then in of a been but of fully But down engagement better. about idea We way long-term here comments, the of think in around kind will and he ago. with a very of I of feel my I of I team this team in We not and Monterey, has knows engaging those he a meetings, executives, them I said not embraced. executive that bit arrangement both face does time we in him -- And actually the terms started generation then think pleased lot was he everybody yesterday, the just working I with just here team, of weeks the lot us into with December an table, enthusiasm of engagement down targets. quite the management do he’s and team this the all here we let’s company and him can spent it, set just

a satisfied decent know of are pretty can a we had quarter it, with we better. in do said very pretty us I year, and As we decent comments, because but my none

So level very help am things to I and get that are we going engagement sustainability. already are some very tangible optimistic have I we toward high to going drive that some operational see performance is tangible very better think -- of us in the and improvement

focus As and know magnitude some far our I people don’t apply the as your our because belief of to a there question that there believe have PSR about of doesn’t interchange, maybe because size written out interchange. We that us to them of are to messages are is want of we and that. But we that do. of think our we and lot implement I a going think on the pleasurable there principles that are adopt PSR network really to most

then worked kinds focus, we that out about Pacific, interchange things. all certainly reliable work implement this and at it dozen the lot of benefit those accountability Sammy interchange all and is on apply for the of embrace I the just change the same is doing service particularly But at well. the we a in more. team other as of and it realize Union of also discipline, factor together think other the and the largest that other Jim, a important of border So this kind recent this, their effort would need the of railroads that follows to then is version point which railroads is is we the if to those at things point own aware we of to or and management regard result from will if their partner principles be side-by-side partners our and engage our of consistent sense certain interchange Venna prepared implementing that that of years executive and more be will it are makes interchange, adopting with to differently, us and are with

they will So, think, and the with of level coordination implement UP I own be that to will have of PSR communication enhanced. as their continue version

Bascome Majors

Thank you.

Operator

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

Tom Wadewitz

morning. Yeah. Great. Good

Pat Ottensmeyer

Tom. Hi,

Tom Wadewitz

this I patience you appreciate lot this topic. know I -- a topic hitting big a past, I so your we are know are on hitting but is we know

should of the a that And think of year, that I guess, it change bring and helpful associated the mean guess I kind typically to at is to as essentially time of you with to view at he’s next KSU of some initiatives. just resource I that? with how in the on we help thought years, PSR PSR help full essentially, is and two just know next but level further how initiative. for culture consultant kind the necessarily your about but not Sammy a maybe just you outside to then people important role to So, additional the with him he’s high --

that So, I just on guess, PSR? more some

Pat Ottensmeyer

additional incentive measurement he’s be have I it. not with not implementing has years team be may not we along see other full gauge we some know move from will and don’t experience to that resources, need get your engagement kind XX get has The see put when be Sammy, pretty but period engages. a we all to will we even will structure are far I other the am then just as going that of He if plus that for with we full question, as we time. activities two-year of and just to the got attention. happens us, hoping the And unrelated something are -- we have thinking think, communicating to as knowledge on things of not know we Sammy you engaged will commitments that us two doing here, years. but will sort unexpected we that transfer together we I here. momentum have some and his this we the I sure he’s his worry how that and and and have the team second about of that outside of he is unless

Tom Wadewitz

need great. give thought an us you give mean, hit follow continue to a That guess years to volume target and that if good yeah. do volume -- OR out the you to in just a is can ‘XX on for sensitivity that, I hit for target, can. I volumes OR is OR I flatter of could framework even multi-year the the the a a target time? and quick on quick On you -- it XXXX thanks OR XXXX, in kind kind target That’s of you or is view for XXXX if

Mike Upchurch

this improving Tom, in is Well, the part equation as XXXX, didn’t Mike. look Obviously, we that volume and volume OR on important growth. back is generate we an of

but we areas shutdown didn’t of facility, the the of Some just deliver. other of because it coal

over around some bit we are an how growth. to some to cost three-year like in targets into going consistent to unknown areas have were years we to kind are have we reductions. think that much just is path, generate we thank we have and little increase of next we that and period do we cost to few so the we suggested growth volume And a now now able take have outsized allow better I us -- that this get able assumption down we that do with what volume see right proceed as important will and visible that us that out more become to would will and always mid-year What’s do

offsetting the growth may So items some looks of that volume margin plan but deliver definitely there a help to couple to improvement. you have

Tom Wadewitz

Okay. Thanks for the time.

Pat Ottensmeyer

Okay.

Operator

is the Please question with from Reustle questions. of Matt Goldman line with Sachs. next proceed your Our

Matt Reustle

for Thanks taking a question.

conservative, peers peers a on being you or you your laid what to on did provide, bit some there the than Just subsidiary? have just what you the something early a achieved, target that focus stages of are that out and it’s the guiding from or is because follow about OR at up keep analysis some the of have that lighter is growth your of network

Pat Ottensmeyer

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

Matt Reustle

they [ph] And through any any you partners Okay. Yeah. and issues sense. planning the implementing as process? U&P That impact mentioned service interchange today, you seeing already go that today makes with PSR. PSR, Are

Jeff Songer

Jeff. Yeah. This is

not any service. difference are we Now really of seeing yet as in

Union have interconnecting to them. streamlining opportunity continue this carries to see changes a the train joined again length to now will necessarily Again, other primarily as negative with that Pacific, starts, work any may opposed goals a embark positive which I on initiatives. on as of think I kind train on

Matt Reustle

my taking Thanks Great. for Okay. questions.

Operator

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

Sam Allen

on for question. Sam Landry. Hi. This Allison Allen is my for Thanks taking

with to and with more about spoken that times the in efficient You does car create loading working on implementation? How to in improve have order fit cycle fluidity. PSR customers

Mike Naatz

I take Mike. will is This that one.

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

Pat Ottensmeyer

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

Sam Allen

X% came than you gives XXXX, And then volumes range later X% in expected that given to what confidence the in in Okay.

Pat Ottensmeyer

customer we what specific impact events customer unexpected said could of or earlier, then service just so. have coal because done the we about of than know we of we better or As the talked the did XXXX, in have I like some and

invest building. volume to customers we we good continue set high will of operating to can in that facilities And aside fixed being into excellence, that a gives then our have the way its opportunities further you well and are visibility what you that feedback on outlook and pretty to growth and We the of If improvement. the normal, then really be. is kind back that of degree if and service believe analyzing they think higher that got customers we gotten sustain level from have these service us conviction recovery a

Operator

you. Thank

is Our next proceed your question. with of question Brian from Morgan. Ossenbeck, Please the line J.P.

Pat Ottensmeyer

Good morning, Brian.

Brian Ossenbeck

questions. for Thanks taking morning. my Good Hey.

in Mexico actually So administration the XXXX? set to I import to the and a have with seen fuel just border infrastructure that AMLO and the a constrained being? second sense time energy are volume present on more for And expectations of want relative lot or sort across by you more specifically you of a of an focus specifically opportunity. your give what’s Can us for the headlines shortages in to reform of opportunity being you

Pat Ottensmeyer

for a level it longer on developing yes, is and high engagement phone I and senior about a cabinet here. opportunity, Yes more is the moving tell had level term José a with very refined we officials of sustainable very an products. still rail will But in of strategy talking have -- Mexico you

would that’s be infrastructure was we product available exactly Mexico, moving in infrastructure we there than So today. play storage, more know available transloading, if are don’t more going But to how there was loading, for out. we

So I into saw Mexico. there facilitate there that some and to yesterday have customs been and changes the movement opportunity from of U.S. products just streamline is a refined the

how be opportunity, that answer you what’s don’t add to to about moved, the literally government are if more about speak. good as conversations very we with feel those much we to particularly with anything we upside, middle your a that? have in because of question the So -- good have Mike, the could

Mike Naatz

space. there’s I some certainly that in uncertainty think,

border. that the to we intends is serve needs made domestically Pemex our perspective that comes in I [inaudible] clear However, that whether will engaged. marketplace across much or Mexico’s the and KC are it very mean compete

Brian Ossenbeck

really Okay. might to seems continues And own at X%, of delays, postponed specific, and one least their but they anything given X% more the then it Sasol a of about there seeing like we you guidance talked on one they be as have production as haven’t have updates. it some lot

X% X% you. any give from how in as that you you about perspective So to are sort thinking us a Thank for that context to can projection of year? next

Pat Ottensmeyer

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

Brian Ossenbeck

lot. Okay. a Thanks

Operator

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

Ken Hoexter

Good what’s bit I bit certain a network maybe on not? are adapt just or just and describe of hire have Pat, a relevant your it, say, you for run know we want more but to Hey. But is want going you say here, morning. just to I addition certain parts expect? to say consultant. what should on to a when what as the Sammy, you maybe you I you When that. even great principles, to little team, understand if can

Pat Ottensmeyer

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

Jeff Songer

for have consistent Certainly we got a get to Yeah. -- me more service product.

well historically I we well, last had think or perform, we we to. year, as liked performed we saw as didn’t

process. start total and the starts, consistency off most. train rationalization, on of me interesting processes equipment, to us some So a and Other really keys all few. on locomotive consistency achieve areas equipment flow to more is again, working mentioned again, a we need train for right-sizing system, will probably of doing touching in excess are see for we and better here give one just I allow of lot, detailed what one customers networks, -- with are to taking we kind we have of example our what so Fueling, will fueling I one shutdown it’s simplifying is

viewpoints and from like just on that technology shut some we from that on we locomotives. that or we things how manual via is shuts money locomotives Sammy automatically, or PSR down We processes experience Hunter have have save the down do

locomotive upon our failures probably we increase However, startup.

going at to So another one the one. throughout Hunter’s or way his and have right-size rightsizing that, at experience shift mentioned has what or making such we been locomotive on kind more fleets, and that look to of I we technologies fleet, opportunities other may on locomotive based pieces are kind methodology us look fueling. and to how locomotives is of going as decisions are how big career equipment

of any the and more you what really do hearing or we again there in as form the in to we Again, other may interchange, these think our of it we that applicable that be see efficient I I working fashion. partners interchange as that, don’t different the goals think, again, across but those PSR some them wherever with from implementations, to really kind at segments I then of is are have terms create aren’t network of interchange fluidity it look interest. certainly talk to interchange use are part So in I better to shared mutual border, improve everybody’s about

use the know a efficiencies one Union collectively benefit. geographical PSR to an to areas important and will an think that, simplify that’s I rail and operations is all I that’s through important of we can streamlining about kind of from region -- think, for I that’s an segment for industry like the -- things Pacific is we that perspective streamline we them, that see industry, with am excited

Mike Naatz

to obviously, is to do with originating like a Mexico about the this been own and or Pat written interchanging other Mike. earlier our traffic network there. may and Ken, our network, and feels more one a with and Jeff are of thought alluded because these said on lot KCS But other UP, but of a that lot principles comment. Maybe made we smaller kind a there’s lot just have looks terminations quick and rails apply of

some that can we a gives So gain lot I of think leverage additional that confidence us there.

Ken Hoexter

a was I I mean would ever is part this with typically think I stop change. by do think consultant a bit you it overhaul complete PSR prove as whether it Sammy I I ICC. it and don’t of before, be to to a at think want his a team, that. view mean I understand, time anybody’s Pat, surprised see to appreciate questioned would I But that. culture is guess mentioned work kind the I but first great as I addition Tom that you

completely more parts a I of CapEx, changed as how a fundamentally of kind the mentioning, just want were behave? to you mechanical a changing So cutting kind do this how versus this this you incremental Jeff you employees, customers doing see understand operate? complete shock slashing is a kind of or as and is usually PSR overhaul to of kind change, piece of is culture adoption, systems

Pat Ottensmeyer

a back the I not I -- coming just think experiences. people bit our And remind in are that incremental case. more going it’s to we hunter’s

his the that run when a of calls distance had ratio was about the made the kind the desire from at performance. Hunter the pack talking doesn’t been about to of acquire, Southern. one well coming the I to raised of and even conference not the was work they good will But if he thinking City and are of everyone Kansas remind question I terms what We would Norfolk to you he operating was in pivot comments railroad I this Canadian And might have it think there. if pretty out, think one Pacific

is of shock we culture that I the appropriate. know of kind a you that see necessary don’t change the is that such to or refer magnitude So as

base done U.S. of values, about of here principles, have with years We of in accountabilities, a Mexico the that lot over fits couple and done internally all work with think, work we employee have culture, our this in there. I the last

So an much I of more incremental. think it’s

talking of be with service, bit this sustainable serving getting growth rolled and magnitude of of that with we going so the are years change consistent, as out, we course. in management which last do values the a mentioned, probably to can’t And manner this as opportunities core and terms powerful that incremental, pretty at a is level us I on realize mean doesn’t that we culture the to all certain to focused think couple do core, of our is impact. in customers customers, elements will out the to is it with for be more Jeff the will it at this the that have some really service have of been We about the consistent a employees allows our and there but yes, that our is of know of

Ken Hoexter

all appreciate of I you. Thank that.

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

Mike Upchurch

number two soft. Sure. start going to shutdowns expected taking plants the We Mike. bit manufacturers little a for up in got holiday. to off why those of had we planned are This a up and of The we is that’s automotive throughout plant a slow start Mexico through started longer week and ended the

We are online. recovery come seeing those a now back as plants

Ken Hoexter

Appreciate time for guys. Thanks the Great. it.

Pat Ottensmeyer

Thank you.

Operator

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

Jason Seidl

gentlemen. Good Operator. Thank morning, you,

Pat Ottensmeyer

morning. Good

Jason Seidl

two because Looking interchange takes outlook, that implementing that? and reminds are at your conservatism and blowback some ‘XX operations in of of of major your OR partners fact in on it PSR, the that much terms your of that how you

Pat Ottensmeyer

Well, we haven’t that. seen

So, know... I don’t

Jason Seidl

on that. you wood Knocking when the heard

Pat Ottensmeyer

Sorry.

Jason Seidl

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

Pat Ottensmeyer

Yeah. Yeah.

Jeff Songer

any is that remain UP seen relationships we Yeah. you with that we with again. This way And major that either change haven’t earlier, mentioned the partners. think material Jeff have interchange I strong. I again

working to a are depends both Sammy kind talked And again interest fluid it’s think whatever both on interchange to have our that’s going great help help as network support in more Mr. at If can I of run and both or overall [ph] Venna do the partner we able partners with to network. better best going that. together his we experience and also looking that train sides mutual to better really flows. and trains and on we streamline with longer we working reduce are in create just that how complex starts, fluidity are streamline,

Jason Seidl

right. All Okay. That’s to next to to my questions understandable. follow-up Lázaro. switch want I

down and making there. of of shippers the sort the about those back You the how and talked to versus down impacts rate that you and shippers, very around would pricing Can reported unfavorable about on your activities numbers of talk the I get sort exchange a was some were came local look Exa? maybe givebacks know spread the because that

Mike Upchurch

happy Sure. I a that about am to talk bit.

are rebate in basically of exchange The targeted neutralizes the Mexico have rates into relatively These traffic effect shippers growth the make City. Lázaro a less rebate issues hit in accordingly. of program concept’s that their is have do the we simple. If dollar. some that per That out rebates XX rebate greater we to U.S. operation, rates, than the basically competitive. grow costing us of then applied while pesos So place the are

if And rebate they fluctuate rates, on hit don’t depending is paid do the So their they then of value the out. peso. growth no

making believe we So it’s marketplace. that us competitive in the

Jason Seidl

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

Mike Upchurch

immaterial. very was It

Jason Seidl

always. up. it as I time appreciate the clears Gentlemen, That Okay.

Pat Ottensmeyer

you. Thank

Operator

Group the your of question. from Scott Please Thank proceed The with with next is you. question line Wolfe Research.

Scott Group

Hey. Thanks. Good guys. morning,

Pat Ottensmeyer

Scott. morning, Good

Scott Group

are demurrage of we changes lane So story the implementing S&P all year? any seen like this closures you in asset the from have guys intermodal

Mike Upchurch

Yes.

we are services that the or provide. evaluating we charge provide We that rates for that we

So the answer is, yes.

Pat Ottensmeyer

are evaluating We at stage. this

we intermodal far as As haven’t no, any those. enclosures, considered of

Mike Upchurch

consolidation entire we more intermodal as to to as types starts of of largest length or I those reduce at rationalizing if merge traffic an probably train look manifest. lanes opposed an combine ability off at for PSR’s, trains example. look train as again mentioned think our and our as intermodal to kick It’s we and I Scott, of more opportunity or really

Mike Naatz

then our U.S. carrier, we on of discrete have are and bridge intermodal Scott, Meridian a remember, Speedway business categories. kind And where our we cross-border in is Lazarro. network the

probably are a opportunity to go they away segments are from huge that walk business. So of

Scott Group

It Right. makes sense.

Okay. message And path. make then, sort on sure this am I understanding to the just of I want PSR

in meaningfully starting seen years, points the it’s lower message, So right. I improvements in two in early labor meaningful CP other as not plus in play reductions X,XXX functions of exactly these have we don’t OR, we away. right, want or CapEx that, out, and are step the sort get we locos our just of understanding basis too productivity about. point and models is right, XX% CSX, mind I possibility message? I sure things in sure Are really of it much your and hey, better, differently in make get really sorts to or the am carried realm bit doing little the are

Pat Ottensmeyer

you I comment would there. -- your say final

some We different examples there. than the from other perspective starting a of are out

in So was going we that case magnitude sort of is other be at that don’t of initial the pop the railroads. to couple as same feel it of the our

Scott Group

low from have XX is little maybe the I the are shied you U.S. bit, you this know willing like that say And thought a was I historically to I where did, than because but XX. closer to

I a big would there opportunity be thought would there? So

Mike Naatz

Scott, this Mike. is

We are -- are go we to not there. going

going generate to We forward, we cross-border U.S. and U.S. in stick business, takes Mexico both the bread will have that consolidated improve it sides to profitability -- going but are. we butters, kind the make of and to of to the continued improvements we continue improvements the and our our to and are make

Scott Group

Okay. sense. guys. It makes so Thanks much,

Pat Ottensmeyer

network. the is truly we how That manage

Operator

you. Thank

line this of question from your morning Chamoun with with final is proceed Please Fadi Our BMO. question. the

Fadi Chamoun

me Yes. squeezing Thanks in here. Good for morning.

clarification it is like And difficult? of your Mexico I there clarification, the over that question slide have is application we might just slide. the anything make second in of a PSR on XX think labor Just that really couple the in outlook elsewhere agreements seen more volume

take risk to due cuts. the say XXXX You is Canadian production outlook agreements I with the volume in under not Is that crude there commitment. pay crude or the the these were heavy to case? that crude impression a was outlook,

Mike Upchurch

Yes.

Pat Ottensmeyer

that that have volume have commitments there made agreements not met, investment there if have is but provide volumes ship the are so it’s the you particularly But product, recoup compensation, to or Yeah. to to support if capital on our -- targets we but mechanism an -- not the don’t they impact the a could business.

Mike Upchurch

means less That will would charge carload that moved way the volume received would on said car not is have margin another have full. the that get moving than that for the we we per

Jeff Songer

the take the on initial labor. question will I

restructuring But one-time on opposed that you us train might efficiencies to the and with see those different outlook right-sizing labor productivity, areas, still a will there’s We it labor that to prevent forces. about have or the really us gaining activities the activities maybe through in -- doesn’t Now we in rationalizations. we would gain as from cab bit from some try Mexico have areas, as structurally three in we aforementioned other efficiencies you go might four-person labor target crews to in as negotiate differently. really so nothing little prevent start probably at talked see

Fadi Chamoun

Thank Okay. you.

Operator

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

Pat Ottensmeyer

Okay. much for very Thank your you time attention. all and

will the provide updates, plan weeks to into active details we get the in circuit We be here this. conference further on few next and as probably, and more

tuned stay only So that. is is to And go think say chief. to out I the close can think I of thing we

all see days. will about We XX you. in you Thank

Operator

today’s concludes conference. Thank This you.

your may participation. your You Thank disconnect lines at time. you for this

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