Kansas City Southern
Q1 2015 Earnings Call Transcript

Published: 21 Apr 2015

[Operator:]

Greetings, and welcome to the Kansas City Southern First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. 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, 2014, 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 KCS website, www.kcsouthern.com. It is now my pleasure to introduce your host, David Starling, Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

[David Starling:]

Thank you. Good morning, and welcome to the Kansas City Sothern's first quarter conference call. Today's presenters joining me on the call are Pat Ottensmeye, our recently named President, who will primarily be concentrating on the performance of our business units today. Jeff Songer, our Chief Transportation Officer; Mike Upchurch, our Chief Financial Officer and on the phone from Mexico will be Jose Zozaya, our President and Executive Representative, who will be able to answer questions specific to Mexico. Let's look at the first quarter overview. As we disclosed in our earnings preannouncement on March 23rd, we are facing some challenges so far in 2015. Some of the challenges were expected going into the year and some quite frankly have been a bit more difficult than we anticipated. Due to the combined impacts of foreign exchange, lower fuel surcharge revenues and carload declines in a few commodity areas, KCS consolidated revenue declined 1% from the first quarter of 2014. Without the impact of weaker peso and lower fuel surcharge revenues consolidated revenues would have been up 4%. The performance of our key strategic growth areas was a mixed bag. On the positive side, crude revenues were up 94%, so of course that was off a very small base. Lázaro Cárdenas was up 30% and automotive was up 4%. Automotive revenues were certainly impacted by a lower peso. If the peso's value versus the dollar was where it was a year ago, our automotive revenues would have been up 15% for the quarter. Cross-border intermodal, while up 2%, they experienced considerably lower growth than in previous quarters, mainly as a result of service and equipment issues that are being worked out. Jeff Songer will provide more color. On the negative side, frac sand revenues were down 12%, primarily due to the reduction of drilling in the Eagle Ford Basin. The combined revenues for the five strategic growth areas grew by 8% in the first quarter. At last year's peso-dollar exchange rate the combined growth rate would have been up 14%. Finally, weaker than expected volumes resulted in KCS's first quarter operating ratio increasing slightly from a year ago to 68.9, compared to 68.7 in 2014. The update for the first quarter, back in January, we gave full year mid-single digit volume guidance for the year. Our first quarter volumes trail that projection growing only 1% in the quarter. The main culprit was utility coal. There was also weakness in the few other areas, which Pat will discuss more in depth in a few minutes. When we laid out the guidance for you in January, we actually thought that we might come in on the upper level of mid-single digit volume growth. That belief was seemingly validated by our January carloads which came in up 7%, but the environment changed quickly and dramatically in February and March. While we see a path that can get us to a mid-single digit carload growth for the year, we certainly have to acknowledge the uncertainty surrounding the energy market, particularly with respect to utility coal, crude and frac sand. In addition, service issues and equipment availability still persist on our railroad as well as in other parts of the U.S. rail systems that are exerting pressure on our intermodal and automotive traffic, especially on our cross-border business. In light of these challenges, we have begun to take actions to scale back expenses both, operating and capital spending. To ensure that KCS achieves maximum possible profitability during what we hope is a relatively breath period of market turbulence. Jeff Songer will have more comments on our cost controls and efforts to improve service and equipment availability, especially with respect for our cross border traffic. Because volumes were strong in January, we did not begin to scale spending meaningfully until mid-March. Therefore, the positive impacts of our actions will be seen over the remainder of the year. In our March 23 pre-announcement, we lowered the 2015 revenue estimate for mid single-digit to low single-digit reflecting the decline in volume from our January guideline, along with further impacts from foreign exchange and lower fuel prices. As I noted earlier for the first quarter, consolidated revenues were 1% lower than last year. Uncertainties in the energy market will certainly impact our revenues for the remainder of the year. Finally in January, we provided a three-year operating ratio targeted low 60s. With 11 quarters still to go, we feel there is absolutely no reason we should back off that projection at this time. Barring economic downturn, we still feel good about moving into that neighborhood by the end of 2017. With that, I will turn the presentation over to Jeff Songer for an operations' update.

[Jeff Songer:]

Thank you, Dave, and good morning. Beginning with Slide 8, productivity as measured by carloads per employee fell by approximately 4% in the first quarter versus the first quarter of 2014. As indicated in the slide, we typically see production dip in the first quarter. Further illustrated on Slide 9, this drop in productivity was pronounced in February of volume shifted from a 7% increase in January to a 2% decline in February. Actions to reduce crews lag the sudden decrease in volume for February. The productivity rebounded through March as crew management efforts took effect. Turning to Slide 10, operating metrics were sustained in Q1, and we continue to rebound some depressed 2014 levels. While we continue as an industry leader in the operating metrics of velocity and dwell, our numbers have not rebounded forward to those of Q1 2014, primarily in the metric of Bluffs [ph] Impacts to service in Q1 were primarily related to maintenance away work in our Southwest corridor, including work on the International Bridge at Laredo Texas and across the Laredo subdivision. This work impacted dwell and yards in both, the U.S. and Mexico. Ongoing maintenance away work by interchange carriers in the same region also had an impact. Mexico prove availability also had an impact of hiring lag or higher than anticipated attrition. The north end of our railroad, including the Kansas City interchange, continues to improve as the industry has felt less of an impact of the mild Chicago winter. Weather did have an impact to our intermodal operation in the Dallas area, where the winter ice storm created a backlog across highways and restricted the flow of equipment into the market and subsequently impacted our ability to flow equipment to the domestic market as well as into Mexico. Slide 11, outlines additional cost management activities we are pursuing. Currently, we have furloughed T&E personnel in those areas impacted by energy volumes, but we will continue to staff adequately to support the growth our [ph] business units. Locomotive purchase in 2014 and 2015 have provided greater flexibility to manage our overall power position. Our upgraded fleet will allow us to reduce maintenance costs through storing less efficient and higher maintenance units and has provided this additional capacity to surge as business requires. Cross-border fueling initiatives have allowed us to capitalize on lower price of fuel in the U.S. We have added additional fueling resources at both of our Laredo and Matamoros gateways to handle more southbound fueling. In addition, northbound trains are moved to the border with lower fee levels and refueled in the U.S. New locomotive fuel optimization test have been conducted this quarter and we will begin with a larger scale implementation of these products throughout the year. Initial results were promising for greater fuel efficiencies. Contractor conversions in our IT department and mechanical shops will allow for reduce costs in those areas. Regarding capital expenditures, we have delayed the start for some capacity expansion projects related to energy. However, we will complete the engineering design and obtain required permits for those projects, so that they are shovel-ready when the additional capacity is required. We will monitor our capital spending as the year progresses, but we will continue to support our growth such as with the purchase of new automotive and grain equipment and we will continue to invest in our core mainline infrastructure. Before I close, I would like to briefly discuss our two largest ongoing projects. Our new intermodal facility in Dallas, Texas will open in July. Once complete, we will move operations of our existing facility, which is inefficient given the track layout and limited parking capacity. This new facility will provide 75% more parking capacity and 75% more track space. Additionally, we will have a state-of-the-art gate system to facilitate traffic flow in and out of the facility. The second project is expansion of our yard at Sanchez, Mexico, just south of the border at Laredo. The construction of additional receiving and departing tracks has begun with additional classification tracks and mechanical facility slated for 2016 and 2017. This expansion will allow for improved fluidity for cross-border movements and will reduce dwell time at our current new Laredo and Sanchez facilities. I will now turn the presentation over to our President, Pat Ottensmeye.

[Pat Ottensmeye:]

Thanks, Jeff, and good morning, everyone. I will begin my comments on Slide 13. As you saw earlier, total revenue for the quarter was $603.1 million or about 1% below first quarter of last year. You will notice on this slide, we have added a gray bar for each business unit showing the impact of declining U.S .fuel prices and a weakening peso. On a consolidated basis, these two factors combined for about a 5% revenue reduction, so core line haul revenues for the quarter were about 4% higher than last year. We moved 540,000 carloads during the quarter or about 1% more than last year. Revenue per unit was 2% below 2014. Again, you can see the impact of fuel and foreign-exchange and RPU in the chart on this slide. Core pricing continue to be strong at 4.2%. I will talk more about that in a few minutes. Before I get into detail for each business unit, let me start by saying that in addition to fuel and foreign-exchange, a significant driver for the weakness during the quarter was related to lower oil and gas prices, which adversely impacted revenues and volume in utility coal, frac sand and metals used for drilling pipe. The decline in utility coal and frac sand together represented about $15 million of revenue reduction from last year or about 2% on a consolidated basis. Going back to the slide, our chemical and petroleum business was strong during the quarter with revenues increasing by 9% and volumes by 8%. We had strength across most segments of this business unit with petroleum and plastics showing the largest gain. As you can see from the gray bar, fuel and FX combined for 4% reduction in revenue and the majority of this was foreign-exchange as one of our largest and fastest-growing customers in Mexico is a peso denominated account. Moving to industrial and consumer business revenues and volumes both decline by 3% and 2%, respectively, from last year. Metals and scrap more than accounted for the total reduction in both, revenue and volume in this business unit. As I mentioned earlier, reduced demand for drilling pipe was a significant factor to that decline. In addition, we saw weakness due to higher level of foreign steel imports into both, U.S. and Mexico. On the positive side, our pulp and paper and lumber business were both strong during the quarter, driven by increased demand and improve boxcar supply for paper shipments compared to last year. Ag and minerals, revenue and volumes declined by 7% and 3%, respectively. Grain was a headline story here as we did see strength in food products in ores and minerals segments. Grain more than accounted for the entire reduction in this business unit with revenues and volumes declining by 17% and 13%, respectively. There are a few key drivers for the declining grain during the quarter, including higher seasonal purchases of domestic corn in Mexico, which display some of the cross-border business that we would normally have expected to handle in the first quarter. There was a loss of business that was available to KCF last year, due to the congestion issues across the North American rail network and that business has now moved back to other historical routing patterns. Third, the amplified impact of lower fuel prices as a number of our cross-border grain contracts are tied to WTI, which as you all know experienced a more rapid decline in highway diesel. These three factors combined accounted for about 75% of the total reduction in grain revenues during the quarter. I will talk about the outlook for this business in a few moments, but we do expect improvement for this business over the course of the year. Our energy business units saw revenues fall by 15% on a 9% reduction volume. Our utility coal revenues fell by about 26% over last year and that was driven, primarily by reduce shipments to one of our larger customers from stronger than anticipated first quarter volume last year to very low volumes this year. This was the function of the dramatic drop in natural gas prices over the past year, making coal uncompetitive for this customer's. Our frac sand business also saw decline with revenues and volumes lower by 11% and 7%, and this was due to lower drilling activity in the South Texas, primarily the Eagle Ford areas Dave mentioned. Our crude oil business showed good momentum in the quarter with a 90% increase in revenues, admittedly from a fairly small base last year. We still expect crude oil shipments to strengthen over the course of the year, however as we stated in our March 23rd press release at a reduced level from our January outlook. Obviously, there are many factors beyond our control here, including the price of crude oil which remains a complete wildcard and the ramping up the facilities that we are serving, so our forecast for the remainder of the year may be continued to be a moving target. Moving onto intermodal, we saw revenue grow by 8% on a 4% increase in volume. As you will see in a couple minutes and as Dave mentioned, our cross-border revenue grew by only 2% during the quarter. While it is difficult to quantify as Jeff Songer mentioned, some of the weaknesses related to winter storm in Dallas, which disrupted the availability of containers and railcars flowing into Mexico needed to support our cross-border business. This also affected our domestic intermodal service in the Dallas to the Southeast lanes during the quarter. As Jeff mentioned, service issues caused by maintenance work around the border and crew availability in Mexico also negatively impacted our growth during the quarter. The bright spot here was in our Lázaro Cárdenas business, where we saw a 30% revenue growth from last year, due to an overall increase in import and export activity at Lazaro, as well as some market share gains relative to truck. Finally, our automotive business saw revenues grow by 4% on an 8% increase in volume. As you can see, again on that on the gray bar, FX had a significant impact on revenue in this business as the majority of our contracts are denominated in pesos. As Dave mentioned, if the peso had remained flat to last year, our revenue growth would have been 15% in this business over 2014 levels. Mexico finished vehicle production continues to be strong and expected to grow by about 10% for the full-year as new plants opened in 2014 to continue to ramp up their production. We know that high capacity utilization and extended cycle times in the entire North American railcar fleet had a negative impact on our business during the quarter. Finished vehicles on the ground in Mexico are running well above desired levels and if cycle times and equipment availability improve, we believe, some of the business that we may have missed in the first quarter could be made up in the next few weeks. The longer-term outlook for automotive growth remains very strong give recent announcements by Volkswagen, Toyota and Ford, regarding new investments in Mexico. Moving Slide 14, you can see our cross-border revenues decreased by 4% over last year. However, adjusting for fuel and foreign-exchange, we would have shown a 2% increase. Cross-border volumes fell by 1%. Again, grain more than accounted for the total reduction in cross-border revenues for some of the same reasons I mentioned earlier. On the positive side, our cross-border automotive volumes increased by 23% and FX adjusted revenues were up 35% higher than last year. Cross-border petroleum shipments also increased as we gained new refined product shipments from Mexico. On Slide 15, we show you the growth in our strategic growth areas. As Dave mentioned earlier, which was 8% versus last year, again Dave mentioned, this was a mixed bag and you can see the significant impact that foreign-exchange had on our automotive growth during the quarter. Again, adjusting for the FX impact, total revenue growth from these five businesses would have been 14% higher than last year. As I mentioned earlier, cross-border intermodal growth was impacted by equipment availability, maintenance and service issues, which we are confident will improve in the month ahead. The decline in frac sand is a function of reduced drilling activity in Eagle Ford area. On Slide 16, we show the full-year outlook for line haul revenue by business unit. As I mentioned earlier, for the first quarter, line haul revenue excluding fuel and foreign-exchange increased by 4% from 2014. The column on the far right on this slide shows the business unit outlook, if we include the expected impact of reduced fuel surcharge revenue and further deterioration of the peso in accordance with current futures curves. This is consistent with the way you see the business unit reports on Slide 13. You can see going back to line haul revenue that we have made two changes to our outlook compared to what we reported in January. Based on weaker forecast for utility coal, frac sand and crude oil, we are reducing the full-year outlook in our energy business units from double-digit to single-digit line haul revenue growth. We are expecting growth in crude oil business that as we reported in March at a reduced level from our original outlook. As we have all learned, there is probably more uncertainty in this business than perhaps any other segment of our portfolio, so this could continue to be a moving target over the remainder of the year. We are also reducing our full-year outlook for intermodal based on actual first quarter performance, which was weaker than we expected and some continued equipment and crew availability challenges, which will likely have a lingering impact on second quarter growth rates, particularly for our cross-border product. You can see we are expecting ag and minerals business to turn positive for the full year as we believe some of the timing factors that I mentioned earlier will turn into positives. In addition, our expectation is the comps later in the year could be stronger, due to additions to our hopper car fleet and service improvements from last year. All of the other business units are very much in line with first quarter results and previous guidance. Finally, on Slide 17, you can see a little more color on the outlook by business for the remainder of 2015, and I will mix in some longer-term perspective here as well. As I mentioned before, the pricing environment continues to be strong and we expect that to continue. Core pricing based on contracts renewed during the quarter was a positive 4.2%. As we show on this slide, we feel there are positive trends and about 60% of our total portfolio of business that we expect will drive revenue and volume improvements for the rest of the year. I have already touched on equipment and maintenance and crew issues that negatively impacted our cross-border intermodal business and we believe all of those factors will improve in the next few months. Lázaro Cárdenas growth has been strong, and while growth rates may decline from first quarter levels, we expect solid gains for the full year. The long-term outlook for Lázaro remains very positive as we believe there will be opportunities for diversion of traffic from LA Long Beach, particularly to the Houston market, beginning in 2016. In addition, the new APM terminal is expected to open in May of next year and will bring substantial new capacity to the port. The opening of our Wylie, intermodal terminal outside of Dallas that Jeff mentioned, is scheduled for July of this year and will put us in great position for growth in our domestic intermodal product Dallas to the Southeast to and from the Southeast with that facility. Immediately upon opening the facility, our capacity will increase by about 75% for the Dallas market and then substantially improve the efficiency and service components of that operation as well. Demand for finished vehicles continues to be strong and near-term improved equipment availability to provide a bit of a surge in volumes in first quarter levels. Recent announcements of new facilities in Mexico should drive automotive growth for many years to come. New crude oil facility should put us in a growth position for the rest of the year, but as I mentioned earlier there is tremendous amount of uncertainty in this area and we just do not know what the future holds for crude oil pricing and how that will impact our business. On the unfavorable side, we see continued weakness in coal, frac sand and metals. These three business units represent about 30% of our total portfolio and we are large contributors to our weakness in the first quarter. Based on current commodity prices, we see no basis for significant improvement in utility coal, frac sand or steel for drilling pipe, so we are expecting these businesses to remain unfavorable for the rest of the year. Before I turn the presentation over to Mike, I would just like to reiterate that we continue to believe the long-term growth prospects for Kansas City Southern are very good. Positive long-term fundamentals are still in place for automotive growth, cross-border trucking conversion Lázaro Cárdenas expansion and growth, new ethylene plants being built in the Gulf coast among other areas. Clearly, lower energy prices are having a negative near-term impact on some of our businesses, but should be positive for future economic growth. We still believe that KCS is very well positioned for growth for many years to come. Now, I will turn the presentation over to Mike.

[Mike Upchurch:]

Thanks, Pat. Good morning, everyone. I am going to start my comments on Slide 19. First quarter volumes grew 1% and revenue declined 1%. As Pat previously discussed, our revenue growth rate when adjusting for a constant foreign currency exchange rate in fuel price would have been 4%. Adjusted operating ratio did increased 20 basis points to 68.9% and is reflective of an environment of declining year-over-year volumes in February and March, while operating costs scaling lags. As Jeff indicated earlier, we are intensely focused on scaling our cost while keeping longer-term growth opportunities in our sites. Adjusted diluted EPS declined from $1.5 a year ago to $1.3 for the first quarter of 2015. This decline is primarily related to the decline in revenues in the deferred impact of scaling costs. We have included more income details in the appendix related income taxes, FX hedge gains and losses, and the resulting offsetting income tax benefits experienced in the first quarter and would expect to see throughout the remainder of the year and I would be glad to answer any questions once we get to Q&A. On Slide 20, I did want to quickly remind investors and analysts as we discussed contrast earnings conference is investor conferences. We have a natural hedge in our operating section of our income statement, where peso denominated revenues and expenses largely offset each other as you can see in the second column and that the operating income impact of changes in foreign currency had a net $100,000 benefit to the first quarter. Moving to Slide 21, adjusted operating expenses decreased 1%, but were up 2% when excluding the effects of foreign exchange. Declines in fuel prices in the U.S. were offset by higher compensation expense from increased headcount and wage inflation, higher casualty expense and increased appreciation due to capital expenditures. We continue to experience lower equipment costs as a result of our leased asset conversion program and I will make some additional comments on that on the remaining slides. We would point out that the higher casualty expenses were combination of slightly increased cargo damage expense, increased environmental expenses, reserves and the impact of the favorable credit in the first quarter of 2014. Moving to Slide 22, compensation expense increased 6%, primarily from higher headcount, wage inflation and slightly higher incentive payments related to prior year performance. Compensation expense did benefit by $4 million from weaker peso and the bar chart, you can see our average quarterly headcount was up 4%, due to increases in transportation, engineering and mechanical. As Jeff mentioned earlier, we continue to monitor, demand and staff accordingly, and we currently have approximately 5% of our US transportation employees under furlough [ph] today. Moving to Slide 23, fuel expense declined $23 million or 22% largely the result of lower U.S. fuel prices and weaker peso. The average price per gallon as you can see in the bar chart, in the U.S. and in Mexico were $1.85 and $3.05, respectively. Government policies have not kept pace with global fuel prices and thus we haven't experienced the same benefit to fuel expense as other U.S. and Canadian rail carriers may have seen during the quarter. Moving to Slide 24, our fuel lag benefit was $6 million for the quarter on a consolidated basis. That represented $7 million positive in the U.S., but $1 million negative in Mexico. As you know, we have been experiencing monthly price increases in Mexico over the past one to two years, but that price increase did stop in February and we would expect fuel prices to stay at current levels for the foreseeable future until any new policy may be adopted, thus we would expect the negative lag we have been experiencing in Mexico to subside during the second quarter. Moving to Slide 25, equipment costs continued to decline as a result of the benefit of purchasing equipment under lease, partially offsetting the equipment expense declines was depreciation, but the net impact of the quarter was $3 million favorable. We did experience a $2 million increase in our car hire expense, due to more equipment online in Mexico from some congestion issues as Jeff indicated. Lastly, depreciation increased $5 million, due to a larger asset base from our capital expenditure program. Lastly, on Slide 26, let me review our capital structure and cash flow priorities. In response to declining volumes, we are reducing our capital expenditures for 2015 from our original guidance of $700 million to $720 million, down to $650 million to $670 million. Most of the reductions were due to scaling back capacity project to better match when that anticipated volume growth will experience. Our Board of Directors did approve the first quarter dividend, which was paid on April 8th. Our annualized dividend is now a $1.32 per share, which is up 69% from the dividend we initiated back in 2012. Finally, we purchased another $54 million of leased equipment in the first quarter, which brings our ownership equipment to 55%. To remind you when we started this program a few years ago, we were under 20%. We continue to believe, we have more room to purchase equipment during 2015 and move closer to industry averages of 65% to 70% ownership. Since we initiated or improved our capital structure a few years ago, we have now acquired nearly $700 million of rolling stock and lowered our OR by close to 200 basis points. With that, let me turn the call back over to Dave.

[David Starling:]

Thanks, Mike. This closing comment goes without saying that our first quarter was not everything we had hoped it would be, but without discounting the secular challenges we faced in the quarter and still face today, I think it is important to put the negatives into context. As we have noted this morning, the single biggest factor impacting our quarter was utility coal and really within that commodity group, there was only one customer on the unregulated Texas electric energy market struggled to compete against low natural gas prices. The fact is, this may continue to be a challenge for them and for us, but we have already scaled back our costs related to that business. We have also been faced with challenges coming from our metal and steel commodity group from the effect of lower crude prices on certain commodities, particularly frac sand and steel. As Pat stated, imports are also affecting our steel sector. There is no question that the unsettled energy markets have had a significant impact on the first four months of 2015. Unfortunately, there is no crystal ball that can tell us what the impact of energy will be in the next eight months. All I can say is that KCS will manage the situation in a way that will provide the best financial results possible, no matter what the circumstances end up being. As we have done in the past, we will do what we need to do to make sure that KCS will end 2015 stronger and more profitable than it was when we entered. Finally, and most importantly, we are not backing off at all from our belief in commitment to our longer-term growth. Last week's announcement from Toyota, their intention to build a plant in Mexico and [ph] groundbreaking ceremony in late March for their Lake Charles ethylene plant represents a kind of business expansion opportunities that continue to excite us about KCS's future. With that, I will open the presentation up to questions.

[Operator:]

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question today is coming from Tom Kim from Goldman Sachs. Please proceed with your question.

[Tom Kim:]

Thanks very much. I have a longer-term question. Can you update us on the energy reform within Mexico? Then given what has happened oil prices has interest sort of future investment changed at all? Thanks.

[David Starling:]

The energy reform in Mexico, the timing of some of the activities is still bit unclear. They are proceeding with the first offshore bid package. What we are hearing is that there is still significant interest in part potential participant in that market, but too early to know how the bids are going to work out. Again, most of the companies that are looking at getting into those areas are taking extremely long-term views as a lot of the other energy-related investments so again it's a little too soon to tell how the results of some of the bids will go, but we still feel that there is substantial interest.

[Tom Kim:]

Okay. Then I have a question with regard to coal. Can you talk about where you think inventories are with regard to one of your key customers? If you can help us try to frame out what the coal outlook would be like if for example nat gas prices were to stay where they are could we assume that there is further coal sort of cuts, some expectations or do you think that the baseline in Q1 is sort of a sustainable rate going forward and the declines are off of that. Thank you.

[David Starling:]

I think it is the latter comment that I think for the full-year this may be kind of a baseline. We could see some - a lot of it depends on the weather in Texas, particularly what kind of summer we have that they could change the burn rates, but based on our current expectations, we do not see a lot of improvement to our coal business for the full-year versus the first quarter.

[Tom Kim:]

Thanks a lot.

[Operator:]

Thank you. Our next question today is coming from Allison Landry from Crédit Suisse. Please proceed with your question.

[Allison Landry:]

Thanks. Good morning. I was wondering if you could help us think about the cadence of volume growth for the balance of the year to get to your mid single-digit growth target, recognizing comps are more difficult in the second quarter, and thinking about sort of the weakness in utility coal and shale-related commodities exclude. Would you expect volumes to be down potentially in Q2 and then rebound in the second half?

[David Starling:]

I think, we will see strength for the rest of the year, Allison. As I mentioned in the ag and minerals business. I think, particularly in the second half, we could see some improvements there. Intermodal and automotive, because of some of the issues that both, Jeff and I mentioned with the maintenance and crews and equipment, we feel that there will be some strength over the course of the year there; and even in energy, and I know the crystal ball on crude oil is very cloudy for everyone, notwithstanding what you said about coal, we are still expecting to see crude oil growth over the course of the year based on the facilities that has opened the Edmonton facility that is going to open in May, I believe, so we still expect to see some growth in crude oil offsetting some of the decline in coal and ag, intermodal and automotive, based on improved cycle times and service.

[Allison Landry:]

Okay. That is helpful. Then just sort of following up on that thinking about improvement towards the back half of the year and maybe pushing that out a little bit and thinking about the longer-term sort of earnings growth trajectory for the business. Could you help us sort of get comfortable with sort of your thoughts on can earnings get back to double digits next year? How do we think about that given all the puts and takes that we are seeing right now?

[Mike Upchurch:]

Well, Allison, this is Mike. I will take a stab at that. Obviously, we have a lot of pluses and minuses here as you can see in the release and with a lot of uncertainty around a significant part of the business that Pat indicated, but if there was a little bright lighting crude prices are interestingly enough moving back up a little bit. We will see whether that has any kind of positive impact, but given volume growth back to original levels, I do think that's feasible. It's been a challenging quarter as we talked about starting the year with some 7% volume growth in January. Then the dropped that we have seem in February, March and month to-date in April mix makes the scaling a little bit more difficult, but on the way up the incremental should be quite positive and I think that is possible.

[David Starling:]

Allison, this is David, if I might add on the crude, you know, we have been working hard to get all the destinations ready. In March, we install the switch, they gave us access to Genesis in Baton Rouge. We been down at the facility in the Port of Beaumont, and they have got multiple receiving tracks they are ready. We have been moving some product to Sunoco they are ready neither [ph] land is ready, so I guess all I can tell you right now the destinations are ready. We just need the price to get to a point where we start to see more movements, but from a physical standpoint there is nothing stopping us from moving a hell of a lot of crude.

[Allison Landry:]

Okay. Just sort of lastly if you think about the where current Street expectations are for 2016 is, is that a number that you are comfortable with?

[David Starling:]

We are not going to comment on 2016.

[Allison Landry:]

Okay. Fair enough. Thank you. All right. Thank you for the time.

[David Starling:]

Good try, Allison.

[Allison Landry:]

Thanks.

[Operator:]

Thank you. Our next question today is coming from Chris Wetherbee from Citigroup. Please proceed with your question.

[Chris Wetherbee:]

Great. Thanks. Good morning, guys.

[David Starling:]

Good morning.

[Chris Wetherbee:]

Just a quick question, I won't dwell on this too much, just want to maybe understand a little bit better sort of the difference between sort of the outlook in late March and kind how you came in for the full quarter. You were, I think, flat to slightly up and we were a little bit down. I guess, I do not want to dwell too much on it. It is just sort of a slight change, but was there anything that kind of changed in the last month of the quarter that may be impacted that?

[Mike Upchurch:]

Yes. Chris, it is Mike. You know, obviously, we did not close the books for the quarter on March 23rd when we did the preannouncement. At that point in time, we were flat in revenues and obviously based on the full quarter, things tailed off a bit in the back half and it is really just back half of the first quarter, just a continuation of some of the challenges that Pat referred to around the coal business and slowing the growth around crude and continued declines in frac sand, so it just that that last eight, nine days of the month were a little bit weaker than they were through the first 80-plus days in the first quarter.

[Chris Wetherbee:]

Okay. All right. That is helpful. I appreciate that. Then just thinking maybe Mike for your or Jeff, you know the actions that you have taken in terms of sort of rightsizing the resource allocation for the network and as that plays out over the course of the years, you can sort of help us with in terms of quantifying the potential benefit of that. Obviously, we have furloughs, we have a whole host of certain items that you have been doing as you try to sort of react to the way volumes are trending on the network. Any help that you can give us in terms of maybe what the impact would have been on the first quarter if you had made those changes at day one of the quarter or maybe what the full-year kind of benefit might be from a cost perspective would be helpful. Thank you.

[Jeff Songer:]

This is Jeff. As Mike mentioned on the T&E side, we are currently sitting at about 5% of TE on the U.S. side furloughs, so as the graph shown and I talked about that lagged a little bit, the decline of volume in February, but in March we are sitting strong, so really the full impact of those benefits you will see going in April. The Mexico side of the labor is different, because we are hiring and we are continuing to hire to get through some of the service issues I mentioned on the crew side down there. That has escalated overtime a bit, because your working some crews extra, so I think the balancing of all that here. We have got a lot of employees in the pipeline for Mexico, so I think we are better positioned to address those issues here going forward. In the U.S. just continued on the cost side on the management as we have outlined.

[David Starling:]

Chris. This is Dave, I might add a little more color. We compete with that same car fleet, so as the West Coast starts to flush out East-West, that took up some of the equipment that we would have been able to use in the - so that will start to write itself fairly quickly. Then the ice storm in Dallas, kind of caused us all of us surprise, because the carriers ran out of chassis, the truckers did, so we ended up having to ground containers and full traffic back in Atlanta, so we were really fighting for cars and chassis, so with the time that got itself worked out, we were setting on a huge number of empty containers that needed to be repositioned in New Mexico that we have been unable to do for several weeks. That's a natural flow of trucks. It is an inbound market, so the trucks come in, they are made empty and we try to load those up and pull onto Mexico for a couple of our major customers and that just literally stopped for three or four weeks, so it takes time to get it moved down, get it in Mexico, get it out the gate, create load and come back and give an order, so we should start to see some of that catch-up happening we would think fairly quickly.

[Chris Wetherbee:]

Okay. Is it fair to think that, sort of just to make sure I am sort of clear and is it fair to think that sort of where the resource allocation is today relative to the volumes that with pricing as good as it is and sort of the other factors being relatively neutral to the operating profit that you can post growth in the second quarter and beyond kind of with the resource allocation that we see right now, is that a fair assumption?

[Mike Upchurch:]

Chris, this is Mike. I think that is a fair assumption. Let me take just a slightly different stab at your question. About half of our expenses were directly variable to the traffic, so that is crew labor, fuel, car hire expenses and while you use a car in existing train start that does not necessarily save you that that crew labor, but I think we can scale that half of our expenses fairly well. Then you have about 20% that are semi-variable around equipment costs, maintenance so forth. As we park equipment, we will have some savings there, but that's not directly scalable. Then the other 30 are really more fixed costs while we can make some reductions there depreciation about half of that fixed costs, so there is not much w are going to be able to do there, but I think scaling properly we can regenerate earnings growth there.

[Chris Wetherbee:]

Okay. That's helpful. Thank you for the time. I appreciate it.

[Mike Upchurch:]

Thanks, Chris.

[Operator:]

Thank you. Our next question today is coming from Bill Greene from Morgan Stanley. Please proceed with your question.

[Bill Greene:]

Yes. Hi, there. Good morning. Pat, I am wondering if you can talk a little bit more on automotive side, so the 8% volumes goes pretty good. We hear all about these new plants opening up, but I do not know that have a good sense for '16 and '17, how to put that in context in terms of, does that accelerator the growth. 8%, it is actually pretty high, so I do not know how to think about how much more growth can come from automotive versus just a pretty good run rate of 8%.

[Pat Ottensmeye:]

It is a little unclear how some of these new plants are going to ramp up, particularly the ones that have just been recently announced. We know that Audi and Kia are going to be opened in 2016, some of the other announcements that are well beyond that out all the way to 2019 in the case of the BMW, so it's unclear how. As we have learned from the previous experience with the four new plants that have opened in last year-and-a-half, there are always issues at opening and quality holes other things that are that are totally unpredictable that will affect the rate of ramp up as those new plants open. Certainly, the fact that there are four new plants under construction today then there were major announcements from General Motors, Ford, Volkswagen and Toyota. There are rumors the well-publicized in the press about Hyundai, so there is a lot of activity and that has probably give you a very satisfying answer about the magnitude and timing of the ramp up, but there are just so many new things kind of on the radar screen that it's an unknown at this point.

[Bill Greene:]

Okay.

[Pat Ottensmeye:]

Not out of the question that it could be up above this level, I mean just looking at the expectations for finished automotive growth in Mexico this year is 10%. I mentioned, we had 8% growth in the first quarter. I believe it could have been higher.

[David Starling:]

We had car problems in the first quarter.

[Pat Ottensmeye:]

Equipment problems, cycle times, the North American automotive car fleet is very heavily utilized right now, so there's no doubt that we missed opportunities, because of the equipment availability and service issues during the first quarter.

[Bill Greene:]

Okay. Then Pat and also Dave, maybe you can comment on whether an IPO of Ferromex would affect the competitive landscape if they are not a product group of Mexico, do you think that changes anything or is this sort of a non-event you in Mexico and your market share opportunity there.

[David Starling:]

Actually, Bill, we really have not thought about it, so I would say to us it is a non-event. We kind of operate in different parts of Mexico, there are some points where we touch each other in interchange, but fortunately for both of us, we kind of have our own market strengths and we really do not see the IPO being other than part of the strategy of the whole mining group.

[Bill Greene:]

So, it was not that they acted sort of irrationally in the marketplace prior to the separation?

[David Starling:]

No. I think FXE has been a pretty good competitor and a good partner. We like in the U.S., when we get in trouble, we try to help each other. We certainly worked hand-in-hand with FXE one on the Mexican rail reregulation, so we have a good relationship with FXE and we do not expect them to do anything different because of the IPO.

[Bill Greene:]

Okay. All right. Thanks for the time.

[Operator:]

Thank you. Our next question today is coming from Matt Troy from Nomura. Please proceed with your question.

[Matt Troy:]

Great. Thanks, everybody. I just want to ask about the longer-term operating ratio goal below 60, so I think by 2017, some Eastern rails of thrown out longer-term OR targets and they have proven illusive given headwinds and coal. I know you have much more concentrated and smaller business in coal, but certainly a problematic customer, so it seems every 6 to 12 months. I was wondering can you contemplate hitting that low 60s OR target if this customer ceases to be a customer in the next two to three years. I mean, what kind of coal outlook does that margin expectation incorporate? I am just trying to figure out how attainable it is if coal remains in the doldrums.

[David Starling:]

I do not think over the last couple of years, we have had very high expectations for coal, so most of the growth that we are working on is still around automotive, intermodal and crude. We think energy still has a lot of room and I think we were all kind of surprised by the price of oil and what it did, the effect it had on drilling and also the movement of crude by rail, so I think that would be the bigger factor, it would be more on the crude side, but I do not see coal. Fortunately, we have been kind of unwinding ourselves and being cold for some time.

[Matt Troy:]

Plans of being and good thing over time, thank you for that color. The second follow-up would be simply, you mentioned before that on the crude by rail side that a lot of these major destinations were ready and you are capable of moving hell of a lot more crude. I just want to reconcile that with your comments on the reduced CapEx guidance. You said it was specific to some areas where growth may be deferred and you wanted to unwind the investment with kind of when the opportunities will emerge. If the crude destinations are ready, could you just help maybe put some level of specific in terms of what you are deferring on the CapEx side? What end markets commodities that might relate to and when that CapEx might come back? Thank you.

[Jeff Songer:]

Yes. This is Jeff. I will address that. The deferrals in the CapEx as I mentioned, we are continuing to move forward on design and permit, so we will have those as I mentioned shovel-ready, primarily those who are in the Kansas City interchange, but the decrease in the coal volume as [indiscernible] capacity to begin with. As the crude, we look towards primary the Kansas City interchange. You have already got some capacity developed, but as I mentioned the projects we have done over the past three to four years with capacity and infrastructure to support those crude oil routes, I think is certainly sufficient and we are in pretty good position for that. As we get the indication of the volume increasing, those projects we will be ready in the Kansas City interchange primarily to execute quickly.

[David Starling:]

I think the other thing I would touch on is, we have always run very lean and we have never really had a surge fleet, so for the first time this year, by the time we take all the deliveries of the locomotives that are due in 2015, we are going to have a surge fleet of maybe 50 to 100 locomotives. There will be older, less efficient, less fuel-efficient locomotives, but there is nothing wrong with them and we were running them every day, so we will have the capability when the crude comes. We got the power, we got the track structure, but as Jeff said there will be a few tweaks in Kansas City that will help us handle it, but they certainly do not prevent us from handling it today.

[Matt Troy:]

Understood. Thank you for the time.

[Operator:]

Thank you. Our next question today is coming from Scott Group from Wolfe Research. Please proceed with your question.

[Scott Group:]

Hey. Thanks. Good morning. I have a couple for Pat first, so at the current run rate, what percent of coal in total volume is this one customer now. Then I know there were some talk last quarter about potential risk with pricing in Mexico given the pace, so and has to do some changes there. Any update there on any changes you guys have felt compelled to do on the pricing side?

[Pat Ottensmeye:]

I will take the last one first. No. No changes compelled on the pricing side. We are still seeing a solid pricing environment on both sides of the border, 4.2% for the quarter was up from fourth quarter and we have got things in the pipeline, new pricing on contracts that are going to be expiring or renewed in the next few months even above those level, so capacity is tied everywhere as you know and the pricing environment looks very good for us both, in the U.S. and Mexico. Regarding the first question, at current run rates our exposure to this one particular customer is very low. I mean, not to be flipping about it, but it more than accounted this one customer, more than accounted for our total of 26% reduction in utility coal during the quarter. As we look out over the course of the year, the first quarter is certainly - second quarter, we do not expect to be stronger, maybe a little bit weaker. Then depending on heat in Texas and how much coal is required to keep the stockpiles and the plants burning. We could see some strength in the third and fourth quarter, but right now based on our overall view for the full-year for utility coal, it is going to be kind of in line with what we saw in the first quarter. Scott, do not hold me to these exact numbers, but they were roughly a third of our business a year ago in coal and they were about 2% of our business this quarter.

[Scott Group:]

Okay. That is very helpful.

[Jeff Songer:]

Okay.

[Scott Group:]

Then for I guess either Mike or Dave, do you have any view on when CapEx could come down closer to that 20% of revenue range. Given what we have seen in the stock, do you feeling like you are any closer to wanting to have a share buyback?

[David Starling:]

Let's see, now that four questions. This is will be it, Scott. You can't have another one. On the CapEx, we have been at a very high rate because of the growth. A lot of the things that we have done have positioned us with the crude, has positioned with the locomotives and the access to the facilities in the south, so we are going to be taking a real strong look at the CapEx next year and I do expect it to come down. I am not going to give you the percentage, but I do expect it to come down. We also run our network in good shape and that is something that was very important to us it has been reflected in our lower development costs and more efficiency in a lot of parts of in the railroad. The stock buyback, we are certainly not opposed to that. We are going to really take a look at this year to see what is going to happen in the back half of the year. We believe that this crude will write itself at some point and that as we have read in your article with the price going up the way it has gone that there should start to be some kind of movement in the crude, which we think we are well-positioned for. As cash flow improves and the capital comes down, it is certainly something we are going to be looking at.

[Scott Group:]

Thanks guys.

[Operator:]

Thank you. Our next question today is coming from Justin Long from Stephens, Inc. Please proceed with your question.

[Justin Long:]

Thanks and good morning.

[David Starling:]

Hi, Justin.

[Justin Long:]

Hi. Thinking about your revise 2015 guidance, I was just wondering if you could talk in a little bit more detail about the assumptions you made in the energy market. There has been some discussion of this, but you gave guidance for the entire segment to post revenue up single-digit, but could you talk about your revenue expectations if we were to break that out between coal, crude and frac sand in this for the full-year?

[Jeff Songer:]

Well, I think I have already covered coal just in terms of the outlook for the year. Frac sand, we continue to feel that is going to be weak at current prices. Then, obviously crude oil, we are still expecting growth based on the facilities that have open. Dave mentioned the one facility that we just connected to in March, the Edmonton terminal that is going to be open in May, so we still see growth. We have kind of moderated our expectations for crude oil since the January outlook, but still see growth there. As I stated, I think Dave has stated a couple of times, there is a lot of uncertainty there, price of oil, whether we have ramp up difficulties of some of these new terminals that open, so our crystal ball is not very clear when it comes to that particular market, but our expectations are that we will see growth over the course of the year. Two of the businesses still showing declines, although coal may get stronger in the summer and the fall, but crude oil, we are still showing growth. One thing I will just kind of mention and remind, unlike some of the other railroads, our crude oil businesses is so small today and driven by development and completion of these destination terminals in the Gulf that are fairly recent. We do not originate any crude oil, we get it all at interchange with the primarily the Canadian railroads, so our story is a little bit different, because we are so small and the destination terminals that we are serving are very new.

[Justin Long:]

Okay. To just sum it up, I guess, do you believe that the increase in crude traffic can offset the declines you expect in coal and frac sand. Is that correct?

[Jeff Songer:]

At this point, yes.

[Justin Long:]

Okay. Great. Then as my second question, you took down the full-year revenue expectation and intermodal, it sounds like that is mainly a congestion and equipment issue, but have you seen any slowdown in the underlying intermodal demand environment in the last few months, particularly given lower fuel prices. I am just curious if it would be a mid-single digit volume growth environment today in intermodal if we are operating in a fluid network?

[Jeff Songer:]

No. I think we would see intermodal growth in the double-digit range if we were operating in a fluid network. The market is there, there is no doubt about it. We are not seeing declining fuel prices. We do not feel has had a major - provided a headwind to the overall truck to rail conversion thesis. I think, the experience we saw in the first quarter is all related to equipment availability and network congestion.

[David Starling:]

I think just in the congestion issues on the West Coast ports are hurting us in the short-term, but there are going to be a benefit to us from a long-term, because people wanting to convert some of their traffic international carriers, we think Lázaro for the Texas area.

[Jeff Songer:]

Yes. Just look at the Lázaro growth for the first quarter. As I mentioned in my comments, we do expect that it will decline from the first quarter rates, but still see very solid growth at Lazaro this year. Driven to some degree by the recent automotive announcements, we are looking at the moving a significant number of inbound containers for materials for one of the plants that is under construction. Then as those plants get built, we will see an increase in import activity of the parts and other components.

[Justin Long:]

Great. That is all helpful color. I appreciate the time today.

[David Starling:]

Thanks.

[Operator:]

Thank you. Our next question today is coming from Ken Hoexter from Bank of America Merrill Lynch. Please proceed with your question.

[Ken Hoexter:]

Hi. Good afternoon. Long one, so I will be quick relatively. If we step back a little bit, you used to be maybe easily double the growth rate of the Class I peers and I think that is why you got such a strong valuation when you look at the stock. Is there something structural going on here in terms of your growth rate, how you think about that? Another question before earlier on the call was on your earnings outlook. I know extended to 2016, but when you think about your growth rate, are we looking at, hey this is one year right now or down 80% or 90% on coal from a customer, so that is what bring you to these flat single digits or are we more aligned now because of we have gone through this massive growth phase and we should think about being more aligned with kind of growth of the rail industry. Maybe you could just step back and once we get past maybe the coal and an issue right now, how do you think about the growth back for the company?

[Mike Upchurch:]

Still very positive, Ken, I think obviously coal. I guess one way that I would kind of characterize it as, due to the dramatic reduction in oil and gas prices, we have seen sort of a very prominent negative impact on some of our businesses at the front end. Still believe that longer-term low energy costs should be a positive for the economy, but that is going to play out over a much longer period of time and sort of much more gradually and that is sort of the macro comment. If you look at the opportunities that we have talked about in the past, automotive growth, four new plants, three recent announcements for expansions over the road to rail conversion for cross-border truck, ethane, ethylene plants Dave mentioned that’s all plant where they at the groundbreaking last month those plants are still being built. Mexican Energy Reform, good questions about how the price of oil is going to impact the interest in activity there. We do not know the answer to that, but still feel that that is going to be a long-term positive. All of those things are still very much intact.

[Ken Hoexter:]

Pat, if could just jump in real quick there. I just want to understand are those things all like '17, '18, '19 or are they more kind of what can help you out in the '16, '17 like more on the closer end to get back growth?

[Pat Ottensmeye:]

I would say they are longer term.

[Ken Hoexter:]

Yes.

[Pat Ottensmeye:]

The thing that could really help us out this year, I think is obviously a real hot summer in Texas and get the coals moving a little bit more frequently. Then on the automotive and intermodal side, certainly equipment, capacity, service those things were noticeable headwinds in the first quarter. We think as Jeff mentioned, we are well on our way to solving some of those issues and should see some pickup there. Then in ag, we definitely had some impact. In the back half of the year, we had a huge harvest last year as you remember. We had some negative impact due to cycle times being extended and equipment availability that maybe look at it is the bright side the silver lining in the coal cloud may be that we have more network capacity this year to handle more grain. There is no doubt and I think we talked about this in the third and fourth quarter that we missed opportunities in the grain business last year because of the cycle times and capacity and congestions. Those are the, I would say the near-term things that we believe will take us from where we are in the first quarter to the full year guidance that we are giving.

[Ken Hoexter:]

Okay. I appreciate that and my follow-up was on the grain, which you kind of answer there, so I also appreciate the time.

[Jeff Songer:]

Okay. we are going long here, so I am going to ask folks to try to hold the question down to one and we are going to take three more and we are going to cut it off, because we have already gone about an hour to 15 minutes, so we appreciate all the interest, but we are going to take three more here, so go ahead please.

[Operator:]

Thank you. Our next question today is coming from John Barnes from RBC Capital Markets. Please proceed with your question.

[John Barnes:]

Thanks guys for taking the question. Hey, just real quick on the CapEx going back to this. I recognized that the year-end environment, where you are trying to right size the spending with the volume levels. However, your story has always been about some of the volumes kind of only come whether its automotive side, the oil side. How do you kind of balance the two pulling back in certain areas, but making sure you don't get behind in case the run rate of auto production in Mexico begins to surge faster than you anticipated or with the rebound and all you begin to just see more oil equipments. How do you balance those two?

[Jeff Songer:]

Yes. This is Jeff. I will address that. I specifically call that our two largest projects were which are growth related, this Wiley intermodal terminal. That has been a $50 million investment couple of years in the making and that will open in July and continue to support the growth in that segment. I can't underscore the probably important of the Sanchez project as well and that is a multi, multi-multimillion dollar project that unfortunately it took us two years to secure the permits and all the environmental permits for that, but we have broken around down and Sanchez. There is cross-border fluidity intermodal automotive everything driving in Mexico to from the states really, really moves to those facility down there and handling that volume now and on Laredo yard, which we kind of simply outgrown your landlocked. That is again shorter inefficient tracks the Sanchez continuation of the build out of the Sanchez facilities is going to support that.

[David Starling:]

Just to finish up, we have ordered a lot of cars. We got grain cars coming, we have got automotive cars coming and we have got 50 locomotives this year. We were concerned that locomotives would not be available next year, we are the smallest players, and we have to be careful. We can't run out of power, so we do not foresee needing any locomotives for next year as well, so that could be a big part of our reduction in the capital budget.

[John Barnes:]

Okay. Thanks for your time guys.

[David Starling:]

Okay.

[Operator:]

Thank you. Our next question today is coming from Tom Wadewitz from UBS. Please proceed with your question.

[Tom Wadewitz:]

Hi. Great. Thank you. I just wondered Mike if you could add a little more perspective on the headcount trend. I know you comment a little bit on kind of why U.S. down, Mexico up, but overall how might we think of that and how quickly you can really get some of the cost control and cost reduction that would support your margins? Thank you.

[Mike Upchurch:]

Well, Tom I think specifically on the furloughed comment, we are down about 80 in transportation and maybe I will have Jeff talk specifically about where we are headed with that number, but it is obviously going to be dependent on what happens with Carloads, with crude mainly and coal?

[Jeff Songer:]

Yes. Similar to the balancing the expenses with maintaining the growth, it is a little different story on the segments we operate, so the targeted teeny reductions, the 5% basically geared toward to coal and energy [indiscernible] and I mentioned in Mexico, you actually supporting with additional headcount to overcoming your services issues and to maintain the growth, so headcount for me is something we are seeing immediate benefits in targeted areas, but we are continuing to support to grow segments through hiring.

[Tom Wadewitz:]

Is that enough to give you potential for margin improvement given the stock revenues or not necessarily?

[Mike Upchurch:]

I believe, so yes.

[David Starling:]

We think it should. If you think about the time when this perspective, the crews that we are adding in Mexico are to handle more automotive and more intermodal so you are going to have direct benefit there by improved revenue and we are running a higher attrition rate in Mexico than we expected and it does take a longer to on board a crew in Mexico once we made the decision, so we have got to get a little more nimble and be able to get ahead of that a little quicker.

[Tom Wadewitz:]

Okay. Thanks for your time. I appreciate.

[Mike Upchurch:]

Thanks.

[Operator:]

Thank you. Our final question today is coming from Jason Seidl from Cowen & Company. Please proceed with your question.

[Jason Seidl:]

Thank you gentlemen and thanks for letting me back clean up here. The one question I have is really just on the pricing side. If you look at sort of your truck competitive business versus your non-truck competitive businesses, is there a vast difference in the pricing power that you have right now in the marketplace?

[Jeff Songer:]

There is a difference. I would say that for intermodal, we are still focused on building density, filling trains, adding, growing the business, so we are a little more focused on the growth than the necessarily pricing, which does not mean that we are not seeing price increases, but on the business it is not truck competitive, capacity is very tight and I would say that the rate increases we are seeing on that type of business are generally higher.

[Jason Seidl:]

Okay. Thank you for the color guys.

[David Starling:]

Thanks.

[Jeff Songer:]

Thanks, Jason.

[Operator:]

Thank you. We reached end of our question-and-answer session. I would like turn the call back over to Mr. Starling for closing comments.

[David Starling:]

Okay. Thanks for everyone's patients. I know it was a long call, a lot of questions. We appreciate everyone's interest in the company and we will see you next quarter. Thank you.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.