Q3 2019 Earnings Call
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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 factor section of the company's Form 10-K for the year ended December .
31, 2018 filed with the FCC the company not obligated to update any forward looking statements in this presentation to reflect future events.
Well reconciliations to GAAP can be found on the case, yes website www dot Casey Southern Dot com. It. It's now my pleasure to introduce your host Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern.
Okay. Thank you and good morning, everyone and welcome to our third quarter earnings call.
I will start the presentation you obviously are once all the press release that came out earlier.
Slide four we just with the folks who are on the call today.
Actually and hopefully this won't be all that noticeable, but I'm actually not with the rest of the team in Kansas City.
Oh, yes, we from from New York.
Sure Brian .
You have Dan.
Accepting an award last night for Kansas City Southern.
For the Latino corporate Directors Association.
Exceptional speak specifically the number of let pino's on our board of directors.
Here in New York So.
Before we get through any not not having any technical issues here, but.
[noise] hot in the room with the rest.
[noise] Jose Zozaya is also on the phone.
[laughter].
Let's move on slide five the punch line of fly for our third quarter earnings and I think we feel like we had a really good quarter.
Revenues up 7% I'm like math, we'll talk about.
The revenue side of the business and the outlook, which Ah that the steel mikes Thunder, but we still feel that about 70% of our business units looks set to be positive.
For the remainder of the year in spite of Watson [laughter] about.
State of the economy, and U.S. and Mexico and around the World, We still feel that there's a reason to be hopeful and see signs of strength in a number of our business units.
Great So [noise].
Free stuff.
Not a real number when we exclude b.
The impact of impairment charges, we took in the quarter that Mike Upchurch, we'll get into in greater detail in a few minutes.
Put us at 16.7 270 basis point last year, and then when we back out certain jobs for the impact of the the loss of V. I chips credit in Mexico, a we could take that down by another 80 basis points. So you can do the math in.
Your head and what that results in as a operating rates there will be put us in a below six feet.
For the third supportive.
Earnings per share of $1.81 adjusted again for the impact of impairment charges $1.94, which is a 24% increase from fear [noise].
Yes, so really really good about the operating metrics the suburban [laughter] [noise].
Yep.
It into this and much greater detail, but oh.
Oh, no and I'll admit that Oh, yeah here quarter over quarter from the third quarter of last year, a the term easy comp would would certainly applied to our performance a year ago.
We are just making a exceptional progress in terms of service [noise].
Yes, yes, operating metrics and Ah Onez I'll say in a couple of minutes or there's we feel equally but there is there was no I'm in the out in the quarters I had.
So moving on flights fix a we're not changing any of our guidance at this point.
So we're sticking with.
The same guidance.
That we had in the third quarter, we are in the process of updating.
We're going through as you've heard some as you've heard US talk about previously this a white boarding exercise with respect to our transportation service plan.
We're making great progress or Sammy we'll talk more about bad in a few minutes.
Right and we certainly expect that when we finish that in a in the next few weeks or a couple of months that we will get better visibility and clarity on what that is going to produce in terms of operational savings and perhaps further improvement in.
Operating ratio, obviously, a with the operating ratio that we just put up for the quarter.
We know we're gonna get a lot of questions about the guidance there were giving here on this page and yes, we do expect that to change and and improve but we're not prepared to give more specifics there are different guidance at this point until we get through that process, we complete our plan for 2020 and.
And look look beyond so we will be updating that most likely or all the fourth quarter call in January .
Possible that we won't give some.
Earlier indications out a couple of conferences that were scheduled to speak at but at this moment, we're not changing the guidance for.
Any of these metrics that are shown on slide six so with that I will.
Path the the present.
[noise], Okay. Thank you Pat and good morning.
Starting with a review of key operating metrics for the quarter on slide eight Roche velocity of 13.9 miles per hour improved 32% year over year, and 11% sequentially dwell of 20.3 hours improved 23% year over year and 4% sequentially.
We continue to see strong year over year improvements in our key metrics acknowledging the impact of 22 congestion on year on year over year comps, we continue to execute sequential improvement illustrating our PSR efforts are maturing well keep you guys are reaching historically high levels.
Resiliency has been another key outcome of our PSR efforts september's record breaking floods in the southeast, Texas had relatively little impact all not to our operation our ability to quickly adjust train plans that provide adequate resources crews and equipment. During this event allowed us to remain more fluid versus other whether that weather.
Batch and our recovery was timely.
Border initiatives continue to support oversize growth of 12% for the quarter in cross border volumes.
To date, we've operated over 2500 trains with international cruise greatly improving trends at times.
As another benchmark of strong performance, we have grown our cross border business by 34% in the past two years as compared to Q3 2017.
Turning to slide nine we continue to see positive trends in all key metrics.
Year to date velocity has improved 17% and we should achieve full year velocity close to 14 miles per hour.
Further illustrating sick, which sequential improvement October month to date velocity is over 15 miles per hour as velocity remains the primary focus of our PSR transition.
As you can see all other metrics are tracking at or above goal for the year and our improvement is accelerating into the fourth quarter.
Oh, no fuel efficiency has improved 3% year to date and 5% for the quarter again illustrating continual improvement.
As you will see in Mike's material fuel is the largest category PSR savings with $22 million projected annualized benefit.
Produced train starts technology proper assignment of locomotives and better enforcement of locomotive utilization all contribute to the improvement.
For the quarter, we've realised $3 million and labor efficiencies through a combination of T.S.P. adjustments train start reductions improved crew costs and reduced overtime.
Looking forward, we're actively working with our Mexican Union to progress those work rules not consistent with other north American railroads.
Access crew size and greater operational flexibility are the main areas and we intend to modernize [noise].
I'll now turn the presentation over to Sami to provide detail on other PSR efforts [noise].
Thank you Jeff.
I've covered the velocity and dwell improvements and they are significant and are.
They have been done as all the stuff the execution side up VSR.
As a fuel waves of Ah TSB changes design changes you know that training schedule.
And when I when I talk about execution, I mean discipline compliance accountability.
Eating the omni on every morning.
A little bit lofty drains and delays and failures.
So these things have allowed us to move forward was that the loss and blood and we we still have room to go a we got on Sundays now in the U.S. 18 months, what dollar in Mexico, We got 15 miles per hour. So a combination to do is now beginning to get us into a higher how range of velocity and.
And as well as Glenn.
These improvements allowed us to take assets out. So you have a lot of numbers here on this slide.
We took out a 14% I thought locomotives. So now we have an activity. It up 900, then three when we started.
Yeah I thought it is our size it was a thousand 46.
We also took out a lot of course, you know when you look at the active card account.
We now run at about 58000 cars, we used to be 64000 cars online. This time last year and clearly you know that's causing having that work.
I thought off you ought to because that's a sign of fluidity and and less congestion.
Hi.
Jeff touched on it we are getting a actually in Mexico, we got an improvement of about 41% and our car miles a day, but we still have a law firm to go like we went from 70 miles for a day to 100 might start date.
If you look at.
You know the statistics, even on on case, yes in the U.S., but also on other class ones. We know that we can get the hot around 50, an even higher than that so we still have room to go there.
When you take out a lot of assets and typically we take out the worst lease reliable assets you improve reliability, so failures mechanical failures have reduced by 31%.
And also.
When you have less cars online, especially for him cars that cost us Dany caught higher.
You end up with significant improvement in significant savings in the equipment costs. So our equipment costs have gone down by 24% in Q3.
The same time also crew costs have come down and and Jack has touched on that they have come down 9% in this quarter compared to the same quarter last year.
And that's inspired by the way <unk> rate increase in Mexico, a 5%. So essentially gets like 14% improvements in productivity and you know things like that adding have come down by about 40%.
Fuel efficiency.
Jeff thoughts on that we have improved by 5%.
When you have long trains and have you trains they are beautiful for fuel efficiency and we are monitoring every morning now the HBT, which is the horsepower ports on so that you don't have too many locomotives for the funny and we take every train that has a high HPG and Shannon people on question why do we have that many locomotives like five of them all just how to quantify.
Sample.
A few days ago and at the same way as we checked the velocity on everything so that's a lot of what we have done so far now looking forward a the biggest saying coming up is going to be the white boarding a group is our size you know, Brian Hancock and his team.
Well, maybe ideally and her team they they have done they have done a superb job.
I attended a full day meeting yesterday it was a commercial team.
To make sure that the changes are going to be very well communicated to the customer so that.
You know everything would it be smallish when we implement this TSP change.
You know the Genesis of our white boarding is that we went up two sided do we policy on the field visit.
And it became clear to us that people are not compliant with the current TSB.
For running the blood railroad is that to comply with the plan you don't AD hoc you don't try an extra trains you don't just do things by the state of the past because you you can end up improving what's happening and you already arbitration during its a lot of problems downstream.
Well I became clear glass is that the guy who are doing that because deficiencies in the current DSP. So.
We wanted to improve the TSB and and no need for hocking, but put that in the plan itself.
I would give to do examples of the new TSB that illustrate a bit what we are building.
Right now we have an area very important domestically, it's called US on the T. Rowe area, we have a income Todd or something about he out all Haas SaaS deal. These are small yard stuff that old within 50 miles and they service a lot of customers. So we had joined intermodal trains.
That each one of them every day well set out three blocks you know to just do these areas and won many past strain that also drops three blocks. So you had to pull up about nine blocks that come out of these trains everyday that switching which is one of the things that are targeted by PSR as you want to reduce production costs.
I do switch and you'll have to reduce look events online now. These three trains are going to be replaced by one trend. That's what combined the into more than a medifast going to that area and we set out in all the blocks that we'd be combined and also if somebody a into them all the money Thats. It will all go together, but all house.
Same way. So you drop you know three or four actually because you have four locations. So four satellites is set up today nine set out a blocks. So a significant improvement in reducing the work events, reducing trained delays improving velocity and reducing Caldwell. That's an example.
Other small example is escobedo what do we had a another field visits in July and instead of building 16 blocks and not small yard which is very tiny.
We are going to been 10 blocks by moving some of the look to Mexico City, where there is a very huge yard that has already building. These blocks. So these are two examples that show that will touch the dollars less which is one principal up yes, our and Ron fewer I loved our fans, which is also an example, if it started up yes, we will.
It also gradually to big yard like Sanchez, and and Mexico City and tried to do less work in the small yard where they have traveled handling.
Big long trains on a lot of switch.
Two last points on my slide we we put in place trip time compliance measurements. So that we know it car from the time, we got it did we deliberate they the exact time and and and seeing if that matches the expectation on the customer. So this is.
Doing it through the eyes on the customer so that our commercial people when they settle the costar they are not.
Showing numbers that match, while the customer wants to see and right. Now we have about 60, 868% checked lack of last week for growth, we have room for improvement, which would be at 85%, a 90% and and thankfully there isn't a survey that was done by the commercial team that shows.
77% of our customers are seeing.
A significant or moderate improvement in our transit time in our service last point, we want to leverage capacity, we are freeing capacity without spending money, which is another principle of VSR and we want to use that the broad business and the best example of that is green.
Our cycles for Green our trips per months went from 1.20 to 1.42.
That's that means and set up doing it trip round trip companies round trip and 28 days, we do it in 21 days everyday names 9 million dollar increase annually in revenue and we have seen that in grain the revenue in Q3, and Mike NASS is going to talk about that went up by 15%. So this is.
This is a big demonstration of what PSR is all about we generate we improved service we grow the business, we improved the revenue and actually right now we have about 800 cars surplus green Hopper cars that we hopefully when you get more business with us or if you know if partially we go.
More business than the rest I guess would have to dispose off.
So on that I would pass it to Mike nets.
Thank you very much Danny good morning, everyone.
My comments on page 13.
You'll see our year over year, a third quarter revenue was up 7% on a slight increase in volumes.
Establish records for both revenue and volume.
Similar to our prior quarters, our cross border business was a key contributor to our performance with revenue, increasing 17% and volume increasing about 12% year over year.
During the quarter, our revenue per unit grew 7%, which was led by growth in our chemical and petroleum and hagman business units.
You may recall that these segments tend to have longer length of haul and higher revenue per unit.
In addition, our fuel program also benefited our revenue per unit.
And our pricing renewals overall were consistent with our year to date performance.
As has been the case all year, the chemical and Petroleum segment was our primary growth driver.
Year over year in third quarter revenue was up 21% on a 12% volume increase.
Mexico Energy reform revenue grew 71% on a year over year volume increase of 59%.
We didn't know sequential decline and as traffic, which was driven primarily by a reduction in LPG shipping.
Just had to be influenced by seasonal and commodity based pricing fluctuations.
Refined products business was relatively flat sequentially as we saw some delays in storage permitting and some overall demand softness. However, we remain very optimistic about the growth opportunity in the long term and frankly, our year over year refined product growth remained strong at 67%.
Driven largely by cross border grain and fund products business. Our AG men segment had a great quarter seeing a 15% increase in revenue on a 10% increase in volume.
During the quarter, we continue to see improved cycle times and Sam you mentioned simply put we handled more volume with less equipment, which helped us realize improvements in both revenue and cost again, a great case study PSR.
On the energy side of things volumes and revenues were down due to decreases in frac sand and Canadian crude which was partially offset by.
Year over year growth and utility coal volumes.
Our industrial consumer business unit revenue was up slightly on flat volumes.
In this segment, our metals business was up year over year due to sourcing shifts, but these gains were partially offset by declines in our paper business, which continues to see pressure from alternative packaging solutions and available truck capacity.
With respect to the intermodal business revenue was up slightly on a 3% decrease in volumes are cross border franchise volumes grew at 8% while revenues remained flat duty shorter length of haul.
Domestic intermodal volume decreased on yield a weak demand an ample trucking availability in the U.S.
And our lateral revenue was up 10% on lower volumes, primarily due to the impact of our fuel program.
Revenues and volumes were down in our automotive segment, primarily due to unplanned plant shutdown and year over year shift production and I'll talk more about that in a moment.
I guess with by the slide 14.
We will see our revenue outlook for the fourth quarter 2019, as Pat mentioned, we're maintaining our revenue growth guidance of 5% to 7% and flat to slightly lower volumes.
We do remain very positive on the chemical and petroleum business unit and the Mexican energy Reform story.
Additionally, we expect to see favorable year over year growth in the AG men and industrial and consumer segments and this is primarily due to the continuing service improvements were experiencing.
However, we are monitoring recent trends in the paper market, which continues to be saw and we are monitoring available truck capacity.
We are adjusting our automotive segment to neutral for the fourth quarter.
But the positive impact of a new plant opening being largely offset by lower production forecast in plant shutdowns and very specifically, we're currently being impacted by the GM strike, which idle the assembly and transmission plan since a lot.
And if you may remember us allow is one of Threeg implants, we serve in Mexico.
So to say, though we are pleased to see that WGN have reached a tentative labor agreements. So we'll see how that plays out of the ended the month here.
And finally, our expectations for energy and.
Modal segments remain below last year for reasons already mentioned.
I guess in summary, we will continue to monitor the overall economic environment and I'm happy to reiterate Pat's comment earlier that our outlook is favorable for 70% of our revenue.
And with that thank you for your attention I will turn things over to our CFO Mike Upchurch.
Thanks, Mike I'm going to start my comments on slide 16, as Mike indicated third quarter 2019 revenues increased 7% over the prior year on a 7% increase in revenue per unit.
Joel revenues increased 13 million or 19%, primarily due to the loss of the fuel excise tax credit that resulted in higher fuel prices in Mexico.
The reported third quarter 2019 operating ratio was 62.3 slightly worse than the 62% in the quarter a year ago.
However, operating ratio on an adjusted basis, excluding the 12 million dollar PSR restructuring charge was a record 60.7, and a 270 basis point improvement over the third quarter 2018, adjusted operating ratio.
Included in the 60.7 operating ratio was a negative 80 basis point impact from the loss of the fuel excise tax credit.
Adjusted expenses increased only 2% evidence of strong cost control across all of our expense categories.
Adjusted operating income increased 15%, leading to strong incremental margins in the quarter of 78%.
Kfcs associates delivered a unique blend of topline growth improving service and strong cost control that led to outsized EPS growth in the quarter.
I'll speak more to expense details.
The next two slides.
Third quarter 2019 reported EPS of $1.81 was a 6% increase over third quarter last year.
However, on an adjusted basis, our EPS of $1.94 was at 24% increase over third quarter 2018, with the majority of that increase coming from real operating income.
A more detailed PML and adjusted EPS details are contained in the appendix on slides 22 and 24.
And finally, our third quarter 2019, adjusted effective tax rate was 28.2% and for the full year, we expect our effective tax rate to be approximately 27% to 28% you can find more details on our taxes in the appendix on slide 25.
So turning to slide 17, let me provide a little bit of detail on our PSR update relative to the expense savings. We now expect to generate 58 million of expense savings in 2019 that is up from the 40 million dollar estimate we provided in July our second quarter earned.
This call.
On an annualized basis, we now expect $75 million of operating expense benefits from our implementation of PSR.
In the compensation and benefits area. We now expect about 8 million of savings in 2019, and 14 million on an annualized basis due to a variety of actions, including train consolidation, resulting crew start reductions.
Reductions in debt as mechanical labor savings from the reduction of locomotives any equipment and some gionee savings from restructuring efforts.
In the depreciation expense line, we expect 5 million of savings in 2019, and 8 million on an annualized basis. The direct result of disposing idled and excess assets.
In fuel expense, we now expect 19 million a fuel expense savings for 2019, and 22 million on an annualized basis, our year to date fuel efficiency has improved from 1.34 to 1.30 gallons per gross ton mile.
Thousand gross ton miles, but currently stands at 1.26, and we've seen improvements from various actions, we've taken including train consolidation and technology investments and the utilization of tools, such as trip optimizer and smart HBT.
Equipment savings are expected to be 13 million in 2019, and 19 million on an annualized basis.
Overall, we've seen a 15% year to date improvement cycle times, meaning we're getting equipment off of our network much faster and paying less car hire.
Overall since the beginning of 2019, we have reduced cars online by 17% and.
And more importantly, we have reduced the cars, we pay car hire on.
Namely foreign and TTX cars by 22% over the same period.
And finally in purchase services and materials and other expense savings are now expected to be $13 million in 2019, which includes a onetime $5 million contract settlement from a vendor.
On an annualized basis, we expect that approximate $12 million in savings in these expenses, mainly from reduced repair incidents from disposing of equipment and contract restructuring.
Turning to slide 18, adjusted operating expenses increased 2%.
Primary drivers of our expense increase were incentive compensation increase of 10 million.
And the 9 million dollar third quarter year over year loss of the fuel excise tax credit.
Fuel consumption was up 5 million, but efficiency gains offset the entire consumption increase.
Discuss comp and benefits and fuel expense more on the next slide, but let me comment on a few other expense items.
First we experienced higher year over year to relevant in casualty expense of 4 million.
Largely due to one incident late in the quarter.
Offsetting that to realm and expense was a onetime credit from a vendor resulting from poor performance.
Second equipment expense declined 24% and as I mentioned before is the result of fewer cars online, particularly form and TTX cars for which we pay car hire.
In the third quarter K CSM experienced at 25% improvement in cycle times.
Turning to slide 19 comp and benefit expense increased largely due to higher incentive comp expense in the quarter.
In 2018, we were accrued well below target in the third quarter, while in 2019, we are well above target.
We recognize $6 million of incentive expense in the quarter to reflect the increase payout.
Wage inflation of 4 million was offset by a $3 million reduction in comp and benefits expense from lower headcount and fewer hours worked.
Headcount, excluding the in sourcing of 91, FTP was down 1% and we continue to believe we will manage 2019 at reduced head count levels from 2018.
And as a note we are using average ft for the quarter and bar charts, but at September 32019, we were down 2% year over year.
Up in benefits savings at this stage of our PSR implementation.
Resulted from train consolidation that has reduced crew starts reduced hours worked including overtime and mechanical reductions due to fewer locomotives and freight cars and finally in some GNS areas.
As Sam you talked about our white boarding efforts and as we conclude dose we would expect to see some further reductions going forward.
However, we will manage certain growth corridors.
Such as our cross border network with more ft in locations, such as Laredo, Texas and Sanchez to support the strong double digit volume and revenue growth, we've been experiencing for the past year.
Simply put we will continue to grow human resources in growth parts of our network, while Rightsizing ft were traffic volumes do not support the level of human resources.
It's also important to remember that the furlough process in Mexico is not as flexible as it is in the us and unless we can agree to more flexible work rules with Union. We will continue to have a scenario, where FTD reductions may not be as great. However work hours will come.
Continued to decline, resulting in reduced compensation expense as approximately 75% to pay is variable.
I might remind.
Analysts and investors that back in 2009, when we saw a 25% reduction in revenue and a 19% reduction in volume in Mexico, we scale to comp and benefits expense extremely well showing a decline of 27%.
With respect to fuel expense, Joe expense declined 3% as a result of efficiency improvements from our PSR implementation, we carried 6% more GTN ends in the quarter compared to a year ago with the sense essentially the same amount of fuel being burned.
Lower prices in the US also helped reduce fuel expense, but we did experience slightly higher fuel prices in Mexico.
And finally on slide 20.
We have included our capital allocation priorities, we continue to believe investing in our network, particularly our cross border network to support the high growth rates, we're seeing is the right priority.
We expect capital expenditures of less than 600 million for the full year 2019, and our longer term basis, we would expect capex to revenue ratios of around 18%.
Turning the corner, we repurchased 816000 shares of our stock at an average price of $1.22.
Year to date cash flow has increased 76% for the nine months ending September 32019.
Despite paying cash for 50, new locomotives that we acquired in the first half of the year.
Accordingly, we will continue to look at ways to return excess cash to investors through both dividends and stock buybacks.
And since we're on pace to complete the current $800 million stock buyback program by the end of this year. We are actively working with our board to develop a new capital allocation policy that we intend to communicate to investors by the end of the year and now I'll turn the call back the path.
Okay. Thank you Mike I, just want to circle back on to quickly on a couple of things.
Before we get into the queue in a.
Again, we feel terrific about the performance of the quarter.
You know topline growth.
No significant progress and sustainable.
PSR related cost savings.
I think there's there's certainly more to come we have a pretty positive outlook certainly for the rest of the year and please don't ask too many too many questions about 2020 guidance, we're going to be pretty stubborn in in our position of not.
Not talking about 2020 on this call will be more to come.
Over the course of the next few months then.
And certainly on the on the fourth quarter call about about our outlook for for the coming year for for next year and beyond.
But.
The.
Very pleased with the progress we're making on.
Improving our service most importantly.
As a sammy talked about the we are seeing this.
Everyone is familiar with my favorite phrase service begets growth that we're seeing that play out as we improve our service as we are able to.
To relieve congestion in our yards and on our.
Network, we're putting assets they are freed up.
To use to handle more business, we're confident that.
Some of these oversize growth opportunities that we've been talking about for the last several quarters are real and if we can do our part to provide the service that that is required to handle that business.
Actually materializing.
We'll go back to a comment that Mike talked about.
Look at the improvement in operating income that we had versus last year, 15% record operating income and if you sort of take that.
Down through the income statement about 70% of R F gain.
Year over year for for the quarter was due to actual improvement in operating income. So I think thats a significant fact to keep in mind you within our performance.
So and again, we feel like there is there's there's runway ahead of us.
Both on the cost and service improvements side.
And and certainly on the on the revenue opportunities so with that I will.
Food, our comments and open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using these speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Due to the number of participants on this morning's call management will limit your question to one primary question and one follow up question.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Chris Wetherbee of Citigroup.
Hey, Thanks, good morning, guys.
Pat I just wanted to kind of asking question on slide six you had mentioned earlier in the call that guidance will change in improvement I guess I just wanted to make sure I understood. What you were kind of commenting there I'm guessing, it's sort of or EPS and capex targets that are beyond 2019, but it just any thoughts you could give on that would be helpful.
Yeah, I think it'll be.
Across the board, obviously as we finish our plan I think the key.
For us and why we're really going to be stubborn about talking about 2020 is this this white boarding exercise that Sammy and Jeff talked about Brian .
His team.
We're making great progress on that but we aren't at a point, where we really feel like we we know what that's going to result in in terms of.
Service improvements cost profile et cetera, so, but let us finished that so certainly.
The one number on slide six that I'm sure everyone looks at a with a quarter that we just produced in says that doesn't seem real is operating ratio but.
We expect to update that and you.
You know.
Expected to be certainly better than the guidance that we've given up to this point, but.
Well certainly fresh in the guidance on on everything.
Okay. Okay very helpful. I appreciate it and then just a follow up on the Mexican work rules and the progress there.
Can you give us a little bit as Dan said sort of what the timing might look like as you go through that process and maybe what a potential outcome might look like as well.
This is Jeff I'll take that one so we continue to have discussions with split the Mexican Union regarding just modernization rules more that more than anything I've talked to numerous times about crew size in Mexico.
A significant amount of three and four person crews, we know where we're heading in the U.S. and then for the rest of the North American freight.
System, So theres ample room from a crew size, but probably an equally and then maybe even more important are just our flexibility.
The way the Union sections are structured we have a lot of division within the network.
You have a lot of overlap and a lot of restrictions for example, coming into one of our yard you have three sections that it's kind of integrate into that same yard and when the train poles and.
We have to kind of arbitrarily stop a train swap out accrue and maybe do that in multiple times by the time that trend can run through the terminal.
So those types of work rule improvements.
As significant as maybe some of the head count initiatives was simply pulling off a a fourth break even and third brakeman, who literally don't have a lot to do if anything to do on these trains.
Nothing we're working on you know I would underscore what Mike said about the cost relatively if these road crews aren't aren't working there is relatively little costs associated with it. So that's why I wanted to highlight the cost benefit of the labor without necessary necessarily seeing all the head count reductions at this point Tom.
The wise I think it will be we're continuing to discuss their meeting in Mexico City last week and we're continuing to facilitate this I hope we have some break do here, which before the end of year, but it's something we're still we're working very hard on.
The next question comes from Justin Long of Stephens. Please go ahead.
Thanks, Good morning, and congrats on the quarter.
So as we think about that new run rates for PSR savings can you talk about how dependent these savings are on how that the topline trends I think it's pretty clear we've seen some weakness in the broader freight market in the economy. So do you think these savings or maybe something higher or.
Our still achievable if the demand backdrop.
And around where it is today.
Yeah. This is Mike I, certainly think so just and then.
We were really challenging ourselves here with excess equipment as Sammy said.
Our goal here is if we can deploy that excess idle equipment in the marketplace and sell more product like we did in the third quarter with grain, we absolutely want to keep that.
Equipment because of the margin that you generate on that is certainly a lot better, but if we see a macro downturn this more significant than where we're at today. When we may have to adjust if the demand for those assets isn't isn't out in the marketplace.
Okay and.
Secondly, I wanted to ask about revenue per carload. It seems like you're continuing to benefit from positive mix with chemical on petroleum and the AG segment, performing really well on the topline.
Can you just talk about the sustainability of this positive mix going forward and should we also be thinking about the oh are an incremental margin quarter being impacted fairly significantly from that mix tailwind.
Good morning. This is Mike take a crack at that so yes, we do anticipate that revenue per unit is going to continue to be healthy like you're seeing today and that is because as you said the mix changes.
The chemical and petroleum unit.
Definitely brings in more revenue per unit and as long as that continues to grow disproportionately to some of the other business units like intermodal that revenue per unit is going to continue to improve.
The next question comes from Com water with VBS. Please go ahead.
Yes, good morning in.
Patients on the strong results.
So you've got a lot of momentum.
Wondering if I know Pat you said, you're going to be pretty careful about 2020 commentary, perhaps if I oppose it a little bit more narrowly how are you thinking about the white boarding.
Process and I guess, what what the outcome might be are you looking at should we expect a pretty significant reduction in train starts from that or you know if so is that.
10% reduction in train starts what's kind of the I don't know if their broader framework for our expectations on the white boarding and also if you're on track on timing to implement at the end of fourth quarter.
Hey, Tom.
The I think I used the words stubborn.
Not careful and when I talked about.
2020 guidance.
I'd like to have.
And Brian since a lot of the work in the white boarding is taking place.
With his group, but talk about maybe some of the the the things we're focusing on the activities.
And the expected outcomes in terms of activities and not not financial results of the white boarding.
Yeah like I like I said this is Sami like I said earlier.
We are very focused on the two saying step out of the pillars of VSR one is reduce switching.
Which is a lot of people call that how many times you flush a car.
And the second one is reducing trains which is trained consolidation and that's where you'll reduce crew starts.
For example, I gave was very very illustrative of that.
I said that instead of three transit essentially go down to two.
One is going to do all the work and nice places around so feel the other online goals through without stopping so you reduce the switching.
Reduce it delays by the way these trains when they do that work setting out locks. They block. The main line. So when you go down from nine of these operations everyday to for you reduce obviously delays significantly and that would have the velocity of the network.
What what we need to understand is that on the on the Mexico network.
Yards are where we spend a lot of five yards is where the big potential and the big opportunity is and the less work you do in these yards and the factory can get trains through that yard the fast or the fluidity as a whole network is going to be so as an example, angie.
So much on that you know if you have a train that doesn't do any working that Don make it goes through that yard and that's part of the new white boarding as our size Jeff was talking about this will be in particular, the train goals through the odd because of some of these.
Labor Labor rules, and we hope to get that around around the out of not having to do not having to slow down everything and slowing getting that train it sounds to be slow down by the switching happening in the art.
One of one of the biggest delays we have an outdoor is strains held out off terminals because they cannot get in because there is no no space to get in so these things that team has been very very focused on like I said I spend today with him yesterday and the commercial people.
The a few days at all I spent a lot of time was willing to who is leading this this effort on that Brian Hancock leadership was sitting right next to me and and they are really doing a fantastic job and at the end of the day, we are going to reduce the number of blocks that we create would do the more outsource will do them into big yards.
Sanchez.
That has a lot of room and and it'll be more efficient. One thing you know that is contradictory between train consolidation of switching what do you have long trains at the end of the day, they will and yards. The odd have short tracks that are not necessarily that were not built.
For that kind of trade so that sequence of doing these things and doing them in a smart way is is very important and that's that's why the team is focused on the implementation will start November five which was part of your question.
Thats going to be phase one.
That is going to be three phases.
Third phase one stock towards the end up this quarter off this quarter.
In December .
So we would hopefully complete this exercise around I would say January February at the latest I don't know, Brian if you want to add and the only thing Tom that I would throw in as well as I think one of the differences in our work that we're doing and alleviates team is doing is we're continuing to try to build a network that can haul more freight so this white boarding.
Exercises not only taking out these these work events.
This this waste of time to Jeff talked about in the art, what we're trying to make sure that these trains have capacity to be able to to fill them with this additional freight whether it is manifest freight intermodal freight but there. We continue to believe we can grow the network and so it's a little bit different white boarding exercise because we really feel good about not only the cost side, but the revenue.
The next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.
Okay, operator, hi, everyone. Congrats again, so just.
Cost I guess costs related to.
Purchased services and equipment.
I have never been lower relative to the size of the enterprise or the revenue base. There does seem to be some further opportunity I guess the materials and other expenses. So just related to the white boarding exercise. If you could just help us think about how those costs can evolve maybe the right way to think about it or if you can express it in an absolute dollar basis, because those buckets together are higher than.
In total compensation and benefits.
On annual basis, So if you could just.
You can hold hold those costs flat to down as revenues continue to grow over the next few quarters I think that would just be helpful. On an absolute dollar basis.
Yes.
At this is Mike Yeah, I think we can continue to see this go down over the medium term I think going into fourth quarter. It may look a little bit more like flattish because we included in other is casualty expense and we had not so great quarter in the third quarter.
On casualties, but.
Generally the longer term trend would be down on that.
Fourth quarter, roughly flat, maybe from from third quarter, which implies some declines in the casualty expense.
Okay.
Helpful. And then just maybe pivoting a little bit to capital.
Deployment, I guess disclosure in the slide in terms of yearend.
Give me some more update on that you know I'm, we're certainly all going to wait till year end, but I guess, Mike. If you could just help us think about the philosophy of the company with respect to you know balancing the risk as was the returns to shareholders capital deployment is it a is it a debt based metric I know you talked about kind of leverage being a 2.2 times do you think you. If you could just talk about philosophy in.
Do you think your leverage profile needs to be any different than the larger class ones.
Just how you think about that on a relative basis.
Yeah No no. Good question I mean, we're going to have some more concrete answers for you before the end of the years I mentioned, we're working with our board right now and ultimately Thats a board decision but.
Specific to your leverage question, we feel quite comfortable with where we're out with leverage and you know.
If we can continue to manage this at a low two range with which is our desire.
That would imply with earnings growth that theres, some flexibility on the balance sheet that could be put to use but we don't want to get too far ahead of ourselves with specific actions, we may or may not take.
So it so that would be my sense only other comment I would make is our credit metrics look as good as anybody's in the industry, but.
Unfortunately, the rating agencies seem to think that smaller is.
Not as good as being larger but I have those debates with them probably twice a year and I think are numbers speak for themselves.
The next question comes from Allison Landry of Credit Suisse. Please go ahead.
Thanks, Good morning.
I just wonder if you could comment on what you're seeing in that pricing environment. Maybe first just sort of broadly speaking and then whether you're starting to see incremental yield benefits, resulting from the improved service levels and reliability.
Yeah.
This is my again.
In general we feel good about our pricing environment and going forward, we expect that we're going to perform at the level that you've seen this year. It certainly makes it easier to do so when we're improving our service product.
It gives us a little more confident is one of our going in there were having those discussions with our customer.
Okay.
I also adopt about the there was a result panes I believe that at the border where the that CBP from both the U.S. and Mexico are now sort of sitting in the same building and doing specs and just the common view. Our is this something we should think about our view as meaningful.
And how much of an in hot.
Perhaps longer term do you think that that's going out in terms of speeding up the time it takes curve for a train sets across the bridge, our just sort of overall bridged okay.
Thank you.
Hi, Allison this is Brian I'll take that one actually Jeff and I were at the bridge yesterday, we had a.
An outstanding trip and we had not only the CVP from the U.S., but thats a t. from Mexico, we went through our entire strategy with them in and they were in complete agreement and so what I would say right now at the border is you have a for organizations ourselves in the fee as well as our two border crossing a regulatory bodies.
I'm focused on really making that border as seamless as we possibly can I'm, making sure security is high but I would tell you it's going to have an impact that we're trying to create like Sammy said before we're trying to create capacity without needing to spend capital dollars one way to do that isn't take those pinch points like the bridge and make them more fluid you technology.
To make that happen and absolutely. That's it's an enormous focus for us and we just spent two days down there, making sure that everybody continues to be aligned so yes, you'll see more.
The next question comes from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks morning, guys.
So.
You talked about on the guidance slide that the or guidance sort of stands out now I'm wondering what the white boarding going on if you think the this applies to capex as well.
Yeah, no no doubt about that I mean, we obviously took our guidance down on the Capex last quarter.
I feel very confident.
That.
We will come in well below what below the 600 million that we talked about we didn't we didn't take or guidance down again, but I.
I think I think we're very confident that that will come in below that 600 million dollar level and you know were.
We're seeing areas Sammy talk a little bit about some of the yard work that we're doing in Mexico. There may be some capex required as we sort of rethink how we use the yards and how we use the network in Mexico.
Deemphasizing some of the smaller more congested yards could require some capital in the larger.
Kind of load centers that were going to be focusing on but.
We don't really have a.
Real clear idea on what that might involve probably not substantial enough to move the needle so.
Yes, as we continue to operate more efficiently do more frugal with less equipment.
It's a it's obviously you're going to have an impact on our capex going forward.
Okay. Good to hear and then I'm just wondering follow up on the mix question again on AG and Kens. So maybe your AG is growing when I don't think anybody else's is do you think that piece on AG is sustainable and then on the chemical side I know you don't Wanna get too much into 2020, but like do you are the pieces there.
A sustained double digit volume growth in that.
As a segment.
[noise] as Mike and.
Yes, we do continue to see.
So we expect to see continued strong growth on cross border, whether thats coming from the kind of chemical and petroleum business or the AG men are frankly other segments year over year comps may make it a little bit more challenging, but we feel very good about the cross border franchise.
The next question comes from Ravi Shanker of Morgan Stanley . Please go ahead.
Thanks, Good morning, everyone.
Better Mike.
Can you just give us an update on the intermodal competitive situation, both the fuel excise credit as that stabilizing and to what extent are you able to recover some of that pricing to feel buses.
Well as you know the fuel excise tax credit was taken away from all railroads at the end of April and has not been reinstituted, we continue to have ongoing conversations with.
Leadership government leadership in Mexico to try to get that reinstated because it is somewhat of a competitive disadvantage against the trucking.
That we compete with predominantly in the intermodal business.
I don't think we can handicap that I'm, probably not you know as optimistic that we're going to get that reinstated but there is a possibility that generally happens towards the end of the year.
But what other option the government has would be to level, the playing field and.
No longer provide the credit to the trucking industry. So.
That would be a favorable outcome as well and eliminate that disadvantage that we have with respect to putting those costs into our fuel program in Mexico.
We started that in May and.
It's had the intended consequences that we wanted to.
Offsetting the higher fuel prices that we were presented at the end of April .
Got it and if I get us walled off of that.
Would you want the excise credit did come back does does having a fuel surcharge mechanism actually benefit you in that there are certain times when you can actually.
Be and on the right side of the equation and maybe even make some money in terms of the the field lawsuit mechanism.
We do not make money on on the fuel program.
Trust me.
We would prefer to have that credit back because we have a structural difference there with higher fuel costs in Mexico, and when you gross that up in the fuel program, that's 100% know our business and as I indicated earlier had an 80.
Basis point negative impact to our operating ratio in the third quarter, so getting that credit back what would certainly help us from that standpoint.
The next question comes from Jason Seidl of Cowen. Please go ahead.
Oh, it's also offer to Rob Hello, everyone.
Looking at some of the trade.
On billing.
Sorry.
Well some of the alkali lets them before the does Mike.
Great political towards Mexico, one hubs.
So thats part of that's all those lessons.
One sort of signed.
As a blue solar business and then I'll have a follow up.
On your cross border business.
Jason I think Oh, we I can't give you a list of examples of.
Companies, who have made decisions and actually made investments are moving business operations to to Mexico as a result of the.
The fall out with China, I wasn't a conference a couple of weeks ago in Mexico City.
That.
Rafaella Marquez, who the of finance Minister in Mexico was us speaking and she mentioned that they are seeing.
More activity of companies, who are interested in relocating operations from Asia. So we're we're trying to engage with the Mexican government to help because logistics is a consideration and how those companies connect to the rest of North America certainly consideration.
For those decisions so.
We believe that that is likely to happen, but I can't give you a list of specific companies that that we're actually seeing do that and I think largely because there's still a cloud of uncertainty about u_s_m_c eight.
On the U.S.M.C.A. side, everything we hear and in discussions private public.
Media, you know put it all together everything that we here is that speaker pelosi is ready to bring into the floor.
And believes that this is a good thing for America.
So she's a if you look at some of the comments as he has made publicly she is a kind of denying the fact that the Democrats in Congress or trying to.
Deny a victory for President Trump.
This is a victory for the American people and that should be approved.
It hasn't it hasn't actually made it to the floor of the house, yet, but everything we hear is that it should move forward and we're certainly hopeful and doing everything we can.
To nudge it in that positive direction to try to get it done by the end of the year, Brian mentioned the event that they were at a.
At the border yesterday and earlier this week that was actually.
As a group that was hosted by Us and the Commerce Department.
Focused on trade facilitation border crossing issues.
And so I think we have full support and cooperation of everyone in Washington or in the in the White House, the West wing the Commerce Department.
Seem to be pushing forward with approval and fairly quick approval on us Mcf.
No.
That's great color, So Paul Washington gets up but so it's a real work.
In terms of cross border, obviously, you saw some nice growth in the quarter.
Theres a lot of opportunity as to how those don't call the to gain market share.
What's the key going forwards that market share is it more youre.
So this liability is it along with increased visibility for the shippers and where are you guys with sort of increase as a building for the origin destination.
This is my again I'll take that one I think you hit the nail on the head.
Our competitiveness on the cross border side being able to move market share from other modes of transportation is going to be service related.
As we get a more competitive product as we having more consistent reliable product. We believe we're much more efficient way much more secure way to move freight across the border and that will help us.
To the extent that we can provide greater supply chain visibility for our shipments that is something that Brian and the.
We are working on we're currently embarking on a rewrite of my case, yes system, which should improve many capabilities for our customers including visibility.
I think one thing I would add to this if you go back to our script and thinking about our comments from a year ago, certainly third and fourth quarter of last year, We said things like we weren't happy with our own performance, we weren't satisfying our customer expectation we believe.
That there was more business that we can handle than we were able to handle because of services you.
Look at our service metrics I mean, they have improved substantially from this time last year and their sustainable. We've we've always felt very confident that if we did our part in terms of consistency reliability of service and resiliency of our network. These oversized growth opportunity.
These were real and that they would materialize so kind of the.
Back to my favorite quotes service begets growth, we're seeing it happen and if we sustain and improve and continue to improve this the consistency and reliability.
We feel very confident that these growth opportunities are real and we'll see it in volume and revenue growth going forward.
The next question comes from Brandon Oglenski of Barclays. Please go ahead.
Hey, good morning, everyone and.
Thanks for taking my question here.
Yes, Mike can you talk about actually the balance sheet here because you guys have at least give us an outlook on capex to be about.
18% of revenue looking forward. So at these margin levels, you guys are actually generating pretty decent cash flow whats the priorities here.
Below the low Capex I guess.
Returning to shareholders and as I indicated earlier, we'll provide that guidance before the end of the year as we're currently working with our board or a new capital allocation policy.
Okay, but I think in slide here you did say your target leverage ratios about 2.2 is that the right way to think about our with better conversion and lower tax rate should we think that could be higher in future.
Yeah, I think we're still low twos, but could go up a little bit from where we're at.
The next question comes from Ken Hoexter of Bank of America. Please go ahead.
Hey, great update on on PSR in the cost gains for the quarter. So thanks for that Jeff just a quick one you noted quickly you quickly adjusted to the whether it is that because of the new plan or were you, saying the weather was not near your network and then I guess in the same thing with the Mexican energy reform deceleration is that because of the lack that tank to try.
Permission or did it seasonal or are you, saying, it's now becoming more cyclical.
Well take the first part of that so the weather no. There is actually more rain in certain parts than than we saw on Harvey impacting basically Houston and trackage rights. So there were.
Multiple days of outages on are on track and write segments through Houston.
Again as I said, so it certainly was not near as impactful as something like Harvey, but there was there was outage time that because of how we've kind of re regenerator to service plan down there.
Mike indicated earlier, we've actually added some resources in some quarters to be able to to show through these things a little better now than they would probably havent. So I think it's a combination of TSP design resource allocation.
And just execution.
I'll take the portion of your question regarding the.
We're minutes of refined products are getting energy reform.
Again, our growth has been very strong there on a year over year base Thats why we didn't see a little bit of sequential weekend weakness Lpgs was really the driver of that as I mentioned in my comments that tend to be influenced by seasonal and price fluctuations.
The.
Refine product.
Demand softness is probably driving a little bit of what's going on in Mexico, coupled with the storage permitting and retail permitting delays as those.
Plays.
And we expect that we will be moving more product into Mexico, particularly as it relates to filling up all the storage tanks that are going to be built over the next couple of years and including our TCM facility, which we have approval to move product now in and out.
Of those tanks, which is a plus.
Your next question comes from Brian Ossenbeck of JP Morgan. Please go ahead.
Hey, Thanks for taking my question appreciate it.
Like maybe you can.
Size the opportunity for when those is permits come.
Down the pipe in terms of additional barrels I think that was in your slide deck, maybe last year. So maybe give us an update on some of the specific facilities.
As they stand now theres anything changed other than just waiting for the permitting.
No I'm flipping through my information here.
I believe that there's eight facilities that are opening up next year.
That will include stores I don't have the barrel information in front of me, but we believe there is openings in the second quarter third quarter in fourth quarter of those eight facilities. We have direct access to five of those facilities and then we have secondary access into the remaining three so again, we're very very often.
Domestic products ICL energy reform and our ability to drive revenue in that category.
Alright, thanks, Thanks, Mike.
Maybe one for use as we talked about.
I Miss call for Mexico, but obviously that the crew size in the U.S. is going to be a topic for discussion. The next couple of years.
Just give us some some thoughts on how you see that rolling out and extensive positive train control has to play a big impact a big factor in that rather how's that working on excuse me on your system, especially from interoperability standpoint, given the high level the interchange have with the other class.
So appreciate some thoughts on criticize and back to PTC just a basic comment on crew size. We are in the process. The collective bargaining process with the rest of the railroads eat.
Probably saw an announcement a couple of weeks ago that.
Involve the the railroads actually filing a suits that's really just.
Part of the normal choreography to get the process started so it was nothing unusual it was really just sort of the.
It was required to two to kind of.
Engage in the process for a new collective bargaining agreement Industrywide agreement.
Hopefully in the next few months as far as your other part of the question I'll defer that one too to Jeff.
So I guess as far as.
PTC.
You know implementation interoperability is moving along to schedule I don't think we look at ourselves in a different from the other railroads on any any less or greater impact with PTC interoperability something Brian the team or are working working very very hard against.
This concludes our question and answer session I would like to turn the conference back over to Pat Ottensmeyer for any closing remarks, okay. Thank you all very much for your time and attention.
I know there a lot of Casey as a associates and colleagues on the on the call here and I just want to make a comment that are very very pleased very proud with the performance that.
Weve posted here in the quarter and the outlook.
I appreciate everyone's as many of members of the the PSR very cross functional.
Deep into the organization effort here and appreciate all of your hard work in performance here. So.
For the analysts and investors on the call I know you have found my suggestions about headlines very helpful. In the past.
A few phrases come to mind, when we look at the quarter.
This is really a quality quarter quality beat if you want to put it in those terms.
With our performance driven by topline growth and a sustainable.
PSR related performance improvement and in cost savings and.
Perhaps most importantly, we believe that there is more to come.
We're not done yet or certainly with our transformation and we'll have more to say about that over the coming months and certainly on the fourth quarter call in January so with that I will conclude the call. Thank you very much for your attention.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.