Q4 2019 Earnings Call

you know, hopefully in in

20/20 you know, we're hitting the ground running like we we we are on operating calls on January 2nd and and and we got going right away. So in June 2019 including you know, Q4 implemented, you know waves of service design changes from or waves, you know to consolidate manifest and Intermodal trains will be restructured supplier relationships. There are things that are outsourced like labor in in shops, which should never be outsourced. So in source that on the other hand material enforce warehouses, we Outsource that as an example. We also made changes to management in operation to put solid people in the key positions, you know, like running the operation in my life as an example. And then we we analyze and we drill down and every delay every day and and that took us down quite a bit in we we improve delays from 130.

39000 hours

On an annual basis to 86,000 hours, you know, that's a reduction of 40% You know, there's all that scrutiny every train and why did it go in the yard and set for ten hours as an example as a result of all this we took out a lot of assets. We took out locomotive 16% We took out, you know cars 12% fuel efficiency improved 5% because of the longer have you ever trained and and and the tonnage on them? We reduce the cars online by 17% particularly foreign cars and that affected things like Car Hire which one down by twelve million dollars in 2019. We also improved the locomotive, you know, the locomotive failures reduced by about 54% I mean when we reduce the fleet we talked about the 200 Old locomotives when you take $200 locomotives rid of the worst ones and by definition we improve in a disproportionate manner the the the faith.

And reduce the workload and shops.

Well on Karma's improved Jeff cover death. We also put a lot of emphasis on crew efficiencies and reduce overtime recruits that heads you have all the numbers on the slide off. They are staggering, you know, 24% 43% 16 percent. We also improve training lengths in Mexico where we have put a lot of focus by by 6% and the crew starts went down by 7 p.m. All this improved service. When you improve service you got customer confidence, you are seeing it or revenues growing we're winning back customers. And you know, Mike Nets will be will be covering off or on that and on the commercial side. So what are we going to do now in twenty-twenty? Well would continue the the the momentum and actually will accelerate it because like I said, you know, we did not waste any time, you know during the Christmas. We didn't stop trains two days before and start two days after we were watching the stuff and we started in January right away, and we had actually our first.

update the first week of

Of January , you know to make sure that all the initiatives are going so that we can we can get the savings as fast as as we can. So the first thing you know, the white boarding is our size wage was pretty much completed at the end of 2019. But there is a phase-3 that will take place, you know, this month's we we expect fifteen percent reduction in a group events, you know examples and I give that before so that's three trains, you know working in the South Hill area setting out cars and picking up cars 1 Train will have all the Manifest and Intermodal area and the others will go through we are seeing already one mile per hour actually are seeing two miles per hour increase in velocity in Mexico the velocity like I said used to be eight nine miles per hour yesterday. We had fifteen miles per hour in Mexico. And by the way in the US we had eighteen miles per hour, so we're really getting there but we still are aiming for for higher velocity we own no.

last classifications last witch

You know for for a car but also are doing the switching in the large yards like Sanchez, but we have a very large yard and in Mexico City instead of you know, these yards that you see on the map Escobedo and San Luis Potosi, where are the hours are really small and it's it's a lot tougher to classify. There's going to be more asset accounts and more crude reductions. We also started making an effort in the US which you know, we finally are getting there and actually when you make efforts in us and you start taking out trains and crew starts, the benefit is disproportionate to hire because of the you know, the labor cost is much higher in the US. So we are doing one where we had trained, you know from Intermodal. You see that Wily on the map Dallas no cars were coming from and a Sam Jackson from c n going all the way to Wiley. So going west come back East to Shreveport. That's what you call out of Route. We are we are reducing that and and we are taking out some training Club.

That is going to be significant reduction in crew cost was that but putting a lot of focus on crew Management in twenty-twenty much higher than in 2019.

And we're looking at the pool, you know a a crew pool through base in a place called. Yeah, you know, which is more of Monterey where we are going to really dead. Stop slapping trains. We have about 24 trains that stop every day at all or no way to stop them anymore because when you think about it if it rain makes it in 14 hours now instead of 36 hours because of the velocity of the network, but you don't need to change Crews because we are allowed to run sixteen hours in Mexico with the same pool. So that's a pool of about 145 people that are going to do something about were putting again emphasis on fuel. We are at 1.31 gallons per kg TM. This is very very high. We have improved a lot but we still have a lot of room to go, you know some other railroads I was associated with you know, they have one point zero so we have a lot of work there and the idea is to reduce the horsepower.

You have on the train to be as low as possible compared to the tonnage. We are going also to put some effort on the engineering side, you know the maintenance of way, but we have a lot of contractors we have about 300 off the equivalent of contractors that are supporting the production gangs. Well instead of that. We are going to use our maintenance people who are on that on the same subdivisions when they have Capital programs to do with that. They we use them, you know between repairs instead of getting contractors and last the you know, the mechanical facilities obviously was the reduction in the fleet. We have to start looking more at reducing shops and reducing line repair points for cars the SRP shop two days ago the San Luis Potosi shop, which is one of our largest ones had one locomotive two days ago and we have a staff of five. So there is room here and the last point, you know, streamlining the Border operation, you know, we can talk more about that maybe in the question-and-answer. So, I'll turn it now to like Nets. Yep.

To Sammy and good morning everybody like the start my comments on page fifteen or fourth quarter. Revenue was up 5%

Year-over-year on a 1% decline in volume and for the full year 2019 are 6% Revenue growth and 1% volume decline fell within previously provided guidance of five to seven percent rev and flats is slightly declining volumes. Our Revenue per unit was 6% higher during the quarter with positive pricing mix and fuel Revenue favorably affecting our results on a fuel surcharge Revenue increased about nine million dollars driven primarily by rate increases associated with the loss of the Mexico fuel excise tax credit, which was partially offset by lower prices are key themes remained consistent all year long, very nice cross-border growth led by our Mexico energy reform volumes favorable pricing and mix in a standing service improvements resulted in strong revenue and margin game.

We are pleased to report that our customers are seeing the benefits of the PS are initiatives both internal and external surveys highlight the same results and those our customers like our version of PSR off State experienced improvements in service, and they want to move more afraid on case.

Our ability to handle growth efficiently without compromising service is a key goal of our PS are implementation and these surveys provide valuable feedback that's important indicator that we are indeed heading right direction. I would like to move on to our queue for business unit results beginning with chemical and petroleum the chemical in petroleum business unit experienced a 13% wage increase and a 7% volume increase our Mexico energy reform related revenue is up 43% on a 37% increase in volume. We did note that business remained relatively flat sequentially and found that this was largely due to seasonality of our LTG volume. In fact looking at our refined products. We note that they grew year-over-year and sequentially as additional storage capacity came online.

That being said we are.

During softer overall demand in this segment and a full year basis the business delivered eighty-five and ninety percent volume and revenue growth respectively and this remains a great long-term growth opportunity for us our industrial and consumer Revenue grew by 11% on a 5% increase in volume. We saw strong military shipments and continued favorability in our metal business, which resulted primarily from shifting sourcing patterns are Agnon volumes Rose slightly in Q4. We saw lower Revenue due to mix impacts and tougher 2018, I would like to note. However that we continue to see Healthy cross-border Growth in the segment with service improvements supporting our key franchise customers.

Our energy volume is rough slightly on Lower revenues. The segment is a mixed bag, seeing strong utility cold performance being offset by lower Frac sand and crude business am looking forward. We are monitoring some uptick in crude volumes and changes to the overall crude Market.

For mobile segment of lambs were down 5% contributing to a 1% decline in Revenue across border Intermodal volumes remain positive delivering a very nice 12% year-over-year growth thoughts are us and domestic markets that remain challenged due to truck availability and pricing pressures.

As expected in our Automotive segment our Automotive volumes, we're down driven by a lower plant production levels. This is more than offset by positive pricing Fuel and mix and taxes, which actually resulted in a 4% year-over-year increase in Revenue.

Moving on to page sixteen we are providing our 2020 Revenue Outlook as Pat mentioned. We are expecting low single-digit volume growth and mid-single digit Revenue growth. And as you can see, we have a positive outlook for approximately 70% of our Revenue portfolio with the remaining 30% of the portfolio expected to be neutral.

are chemical

Petroleum segment will continue to see strong growth bye-bye refined product exports to Mexico. In addition. We do expect plastic volumes to benefit from new production out of South Salt Lake Charles facility and burn plastic exports into Mexico. We are keeping an eye on Trends in the broader petrochemical Market, including potential saturation and shifts and Global demand.

We see steady demand and cycle time improvements contributing to a positive outlook and our admin business are industrial and consumer business unit will benefit from changes in metal sourcing patterns as well as easy. 2019 Thompson Forest Products.

Our Intermodal revenue is expected to be neutral with continued growth and our cross-border franchise segment being somewhat offset by us and Mexico domestic volumes again pricing and truck availability wage Usher's persists. Although we do believe that they bottomed out. There are two key drivers of performance in our energy segment the first being utility cold, which is expected to be flat year-over-year and we actually bought this favorably considering the strong year-over-year growth. We saw in 2019.

Secondly as I mentioned earlier.

You've seen a recent uptick in Canadian crude shipments and continuation of favorable spread May provide an upside to our twenty-twenty crude Outlook the expect our Automotive Revenue to be neutral aging some downward pressure on volumes over pricing mix and new plant volumes will have a favorable Revenue impact here are monitoring estimates indicating lower Automotive exports to the us from our kcsm for plants and lower Auto Imports into Lazaro Cardenas. And finally as you know, trade development and economic conditions remain top-of-mind and twenty20 can be difficult to predict the developments in these areas and our Revenue estimates, of course may be positively or negatively impacted by changes in this area. We are however optimistic you just think that given continued mixed economic signals. We feel that an element of caution is prudent. I for one am happy to see that is almost behind us and that should provide us some favorable benefits and wage.

And with that I'll turn things over to our CFO like Upchurch. Thanks, Mike and good morning everyone. I'm going to start my comments on slide eighteen.

Fourth-quarter results highlighted on this slide has been previously covered in this presentation, but just simply want to highlight that once again the combination of record fourth quarter revenues in a strong cost controls, let outstanding financial performance 5% Revenue growth and 11% growth in adjusted operating income gross 74% adjusted incremental margins are adjusted operating ratio of sixty 2.4 190 basis points Improvement, despite a negative impact too RoR of approximately 90 basis points.

Resulting from the loss of the tax credit reported EPS was a dollar Thirty while adjusted EPS of a dollar eighty two grew 17%

I will also note that tax and other below operating income items are impacting. Our adjusted earnings per share this quarter. We've provided you a Reconciliation on page twenty-five in the appendix, but let me talk about a couple of the key components here first equity in earnings from Affiliates and other income and expense declined by 6 million or 4 cents per share primarily from A non-recurring Loss that our affiliate recorded from the cancellation of the Mexico City Airport project.

interesting

Events from the new notes that we issued in November drove a 3% year-over-year reduction two four Q eps.

We also realized the $0.06 your your benefit from a reduction to Share account as I will discuss in a moment increasing shareholder returns is a key focus of the company going forward.

And then finally a decrease in our fourth quarter adjusted effective tax rate the 24.9 resulted in an eight Cent benefit primarily from the seven million dollar tax benefit that we received as a result of the extension of the Short Line track maintenance credit, which was enacted in late December . I was reading actively react enacted so that we saw benefit of 3 and 1/2 million for 2018 and three and half million for 2019 for a total of $7 off credit will also be available to us in the future or through 2022 along with this credit and favorable changes to guilty tax offset by the loss of the Mexican fuel excise tax credit. We expect our adjusted effective tax rate to be approximately 28% over the next few years, and we've provide birth

a few more details on taxes

back in the appendix on slide 32

turning to slide 19, you will see that improvements. We're making to our operations or driving significant and structural improvements to our p&l as Sammy discussed would continue to make excellent progress. Our PS are initiatives and we are once again able to provide a positive update to our estimated PSR Savings in Agra Thursday. We're now expecting annualized PSR savings by 2021 to be approximately $125 million dollars comprised of $58 million. I realize Savings in 2019 and incremental 61 million of savings in 2020.

And a six-million-dollar carry forward impact into twenty twenty-one.

Covering each one of these line items briefly comp and benefits. We expect fifteen million dollars of reductions in 2020 primarily from labor efficiencies in club changes to service design that we made during our whiteboarding effort Fleet reductions and Mexican labor negotiations depreciation is expected to benefit by for a million as a result of a reduced locomotive and Railcar Fleet fuel expense is Sammy commented lots of opportunity. We expect that to decline by $21,000 from gains in efficiency as we focus on HPT assignment compliance further investments in technology and cross-border fueling strategies.

in the equipment

Area we expect to benefit by $17 from Improvement in Car Cycle times and we will continue to optimize our carport car portfolio took line with improve Network performance.

Finally purchased services and materials and the other is expected to benefit by four million dollars during the quarter. We did incur a 38.3 million-dollar impairment charges related to PSR that is comprised of $27 related to locomotives five million related to Freight cars five million related to parts inventory and the remainder resulting from contract restructuring and I might note that we would expect the fourth quarter of 2019 to be the end of our PS are impermanent.

Turning to slide twenty adjusted operating expenses increased 2% The largest driver of this increase was lost of the Mexican fuel excise tax credit which resulted in 11 million dollar year-over-year increase in objects without that increase we would have seen our expenses down two million despite higher and incentive calm the remaining drivers in the year of your variance are primarily comprised of fuel and comp and bend which I'll cover on the next slide.

but also like to

To take this opportunity to provide just a couple of reference points on twenty-twenty expenses. We do expect depreciation expense to increase mid single-digits money driven by a larger asset base the full year impact of new locomotives purchased in 2019 and the purchase of least locomotives, which we just completed in early January and that will be partially offset by savings from PSR impairments and then with respect to interest expense, you know, we did raise some money in the market in November and we would expect our interest expense to go up approximately twenty million dollars year-over-year turning to slide 21-month comp and benefits expense increased 7% driven by wage and benefit inflation incentive, and sourcing and wage.

use increases

Is were partially offset by a six million dollar reduction driven by lower headcount and work hours or lower headcount and work. Our hours are the result of train consolidations reducing crew starts hours worked overtime cruise and deadheads.

Along with mechanical reductions due to a smaller Fleet and some optimization of certain G&A functions or quarterly average head count was down 2% wage excludes the in-sourcing of 91 FTE contractors.

Fuel expense declined 9% as reductions to fuel price and improvements to fuel efficiency more than offset an increase in the consumption from higher gross ton miles and foreign exchange.

And finally turning to slide twenty-two. I want to cover a capital allocation highlights free cash flow was up 54% in 2019. We also increased birth shareholder returns a hundred and 18% driven primarily by higher share repurchases, including the accelerated share repurchase program that we announced in November .

pcso

So announced in November a new capital allocation policy meant to help shareholders understand how the company plans to allocate its cash generated from operations and our Target leverage ratio going forward.

Is Jeff discussed earlier in the presentation? We continue to believe that investing in our Network particularly. Our cross-border network is important as those Investments Palm Drive returns. Well, in excess of our cost of capital going forward, we expect to allocate approximately forty to fifty percent of our available cash to capital projects and strategic Investments that will help support that growth. We also expect allocate fifty to sixty percent of our bill with cash shareholder returns primarily in the form of birth purchases and a modest dividend. We also expect to maintain our debt-to-ebitda ratio in the low to range I prudently using our balance sheet capacity. Just execute our share repurchase program.

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

Okay, thanks. Well, hopefully we've shared some really good information and detail a little bit more forthcoming with guidance information than perhaps you've seen in the past. I guess in summary comment might be something like what a difference a year makes. I I look back at our our transcript from the fourth quarter call one year ago January 18th of 2019 and we talked about some of you will remember this we talked about our performance for 2018 which you know on on a number of levels wasn't one that wasn't horrible. But we talked in terms of a year that did not meet our own expectations a year that certainly didn't meet our customers and shareholders expectations and the need to do some things differently to get back into a position where we could take advantage of the growth opportunities that we we had a high degree of confidence where they're in in front of us dead.

And I'll go back to one of the points. I I had on my initial slide, which is our implementation of PSR initiatives has exceeded our expectations at this point and hopefully the message that you hear today is that there's more to come Sammy gave you some pretty good detail of the things we are doing the level of detail the the the level of intensity and focus that Sammy has brought to the entire organization. This is a cross-functional effort. That way I feel is being done in a way that involves a large number of people across functions throughout the company us and Mexico and it's being done with a high level of intensity a high level of of learning that's going on institutionalizing in into the company and I feel dead.

is a recipe that's going to

Allow us to sustain this performance further improve it in 2020 and sustain it well into the future certainly the resolution of usmca which might be touched on is a is a positive we'll probably get questions about the magnitude of that and and and what to expect and you know it it's very difficult to quantify but it certainly is a positive it removes a very significant cloud of uncertainty for us and there is fairly high expectations in Mexico that resolving is going to provide a boost to the economy in Mexico, which certainly would be a welcome a occurrence for for us.

Is you know or or our Mantra with with PSR with service begets growth? We we have seen phenomenal a very extraordinary Improvement in service and and and and it is working out that we are winning customers back as as Sammy mentioned a year ago. We said on a couple of earnings calls that there was more business for us to handle than we were able to handle because our service was not up to standard. We have gotten a lot of that maybe most of that bag for gaining market share and we still have a high conviction in the new business opportunities that we see particularly cross-border opportunities that we see in in 2020 and Beyond so feel very good about where we are. But by no means do I want to convey that we feel like, you know, we're ready to say mission accomplished.

There's more to come.

And as you saw from Mike's the slides the the PS are benefits will continue to grow and and accelerate and we feel that again as long the reasons. I I discovered earlier that these will be sustainable in the future Beyond 2020 with that. I will open the call for questions. Think you will now begin the question-and-answer session to ask a question. You may press star one on your touchtone phone. If you're using the speaker phone. We ask that you please pick up your handset before pressing the keys. To recharge your question, please press star. We asked you please let me yourself to one question and a single follow-up. Today's first question comes from Allison Landry of Credit Suisse, please go ahead.

So answer your line is this morning?

Thanks. So I just wanted to know like to start with the the Top Line growth mid-single-digit sounds like about half of volume have come from healed. So is there a way to think about the the yield assumption and and what's underlying in terms of your expectations for your price versus mix, you know, I guess sort of will focus on next and you know, you've had some positive benefit in in 2019. So just curious to think through that cable.

Morning Allison, this is Mike Ness. I guess I look at it a couple of different ways. The first is we continue to believe that will be able to generate inflation Plus pricing which will certainly help us from the revenue perspective and then in terms of mix we expect our chemical in petroleum business unit to continue to be our fastest-growing segment, and that tend to have a higher Revenue per unit. So Thursday would also provide a benefit to us.

Okay, and then just trying to capex at 17% of the top line. I think you mentioned some spending on locomotive overhauls this year. But is there is there the potential wage scale that back further and what do you think is really the the longer-term sweet spots for capex without having to sacrifice growth is Jeff home? Yeah, you know, I think we're looking at this and as we mentioned, you know operating with significant significantly fewer locomotives, we are shifting a bit on reliability and so, you know some of that capex probably a little bit of an increased level of spend and focusing on on the reliability of our existing Fleet which supports the continued velocity and and service improvements will see so we're going to continue to do that. There is there is opportunity to bring that in probably a little bit lower than 17. Although we continue to look at some couple of business opportunities. I didn't mention, you know, all all the projects were looking at this year. Yep.

Then the long-term guidance is is Pat provided.

You know this Seventeen range of I'm from a longer-term at least from the outlet that we provided here. I think I think we feel pretty good with that, which is a pretty significant reduction from where we've been historically as you know,

Our next question today comes from Chris weather be a city, please. Go ahead.

Hey, thanks. Good morning, you know over the last year or so you guys have give it a sort of a nice walk to what we could potentially see in terms of operating ratio Improvement relative to the PSR progress or initiatives that gives you better take it. You've now had a few quarters to kind of really dig in and send me a very instrumental and it helped explain that quite well, I guess when you think about sort of the bigger picture, how would you react the company relative to maybe some of the piers? Is there the potential of the piece of competitive with mid-50s over the longer run outside of maybe the next year or two or should we just be thinking about this is sort of a what type of opportunity that that may be a little bit smaller in nature to get a sense. Maybe how you guys are thinking about the big picture opportunity to PSR over a multi-year.

Increase I'll take a stab at that. You know, let's let's let's take it a year or two at a time. I don't know.

We're in a position to declare Victory on a on an operating ratio based on the guidance that we have out for this year. And next year. We're just continue to look for every opportunity we can to get better and more efficient and and focus on cost and asset utilization and then as we've talked in the past the volume growth of the The Leverage in this business is phenomenal. So we get back into a situation where we we start to see some volume growth and we we're continuing to improve the way we run and and efficiency of of the operation of we certainly could see further Improvement beyond the guidance that we provided today.

Okay. All right, that's helpful. And then maybe just a detailed plan is we think about 20 20. Can you give us a sense of maybe how headcount and obviously it was down sequentially as we moved into the fourth quarter, you know sounds like some incremental initiatives happening particularly Mexico, but maybe beginning in the security maybe that reduced further just just any Cadence that we can think about for twenty twenty would be helpful.

Think we'll see opportunities some of the things that Sammy talked about particularly in Mexico is we we we get into phase two of the the tsp the white boarding exercise, we start to realize the the benefits that that that's going to produce and and it will really depend on our our volume performance in their life. So I know that when you look at some of the the the headcount totals for us compared to the other a particularly other recent PSR railroads, there's a there's a gap that you also look at the volumes. We we have not had the the drop-off in volumes that some of the other railroads have had and and so we are off on our toes and we will we will make adjustments based on the Outlook, but we don't want to short-sheet ourselves.

Yeah, the Sammy has go. Yeah, I mean if you know if I may had you know, like like that said, you know, the the revenue is growing volumes actually are are looking good to in which case in which case we're not in the same situation as as other PS our implementations, but also we we are not looking at we're looking at the money at the end of the day. I'm not necessarily headcounts and you know when you when you look at Cruise as an example, if you don't call them you don't pay them. Okay, so we have been doing a lot of that already in 2019 and we're going to do a lot more of that actually in 2020. Now if we make a breakthrough agreement, you know with labor then not only we don't call them then we can just get a net reduction like we I talked about some pools, you know crew pools crew basis where where we don't need people. Now dead.

We can reduce account.

In in the interim. We actually don't pay don't pay the money except, you know for some some benefits. So that's that's that's something that the think about the the the the brakeman issue that we talked about often. You know, we have four men cruise. We don't really need the extra two guys. Okay, so that one if we do a labor agreement that would be significant that would be hundreds of people. There are areas like I mentioned in engineering, you know, and the Maintenance of Way where we are going to take out contractors. Now when I take our contractors, it's not going to show as a staff reduction at the exact same time. It it it actually will take out a lot of money because I will be using you know, the maintenance people in Engineering in a far more productive and effective way to fill in the production gangs instead of the contractors. So we also did some in sourcing by the way last year significant in sourcing like I said labor in locomotive shops birth

now that increases the headcount, but it it really it's

You saved us like one move alone saved us four million dollars a year. So so we are you know at the end of the day, we we are not hung up on on headcounts. We are focused on the money down and as a rule, we don't want any area to increase in cost from 2019 to 2021 review the budgets. We are very strict on that. Everything has to be equal or lower wage this way on the revenue goes up, you know by whatever, you know, five percent whatever the number is, you know, then it's all it all goes to the bottom line. So I hope I answered back a bit more color to this. Hey Chris my my capture. Is there any real quick comment about your operating ratio, you know, if you look at 2018, we're sixty four three finished at 6, 3 210 basis-point Improvement. But when when you consider the iapps Edwin that we had in in the year, you're up 230 basis points Improvement wage.

Operating ratio and that's in it down 1% volume environment. Just think when we get volume back and revenue grows better than it did in the fourth quarter or there's a lot of Leverage and we had a incremental margin of almost 75%

Our next question today comes from tell him what's of U UBS please go ahead.

Yes, good morning. Sammy or Jeff. Wanted to I think you talked a little bit about Union impact and kind of you know, there's opportunity costs in Mexico. Can you just give a little more perspective on you know, how much of a constraint the current unit agreement is or if you've made any changes that may be greater flexibility. I think also you referred to that area you're taking people out north of Monterrey, you know, is there any kind of Union constraint there or are you pretty much, you know free to to make the changes as eggs?

The others Jeff, you know with Sammy mentioned again. Our primary focus is cost and think we've done a good job with as we're as we reducing train starts and those things or you're seeing the cost to come out with some of the the the larger opportunities. We see with headcount are somewhat Union and labor dependent in Mexico. And most of this talk is is sent around Mexico. We continue to work on these things. We have not yet achieved the large-scale kind of war production that we continue to work on such as eliminating third and fourth grade men on a lot of these trains off. However, I would point we're not wholly dependent on the union or our our engineering forces in Mexico for 2019. We actually were able to reduce that by 5% off slowly through attrition. And so we're continuing to work on those things. You're continuing to look at attrition based reductions contractor based reductions is Sammy said and continuing to work with them.

Union on larger deals

But also I would I would classify, you know, small towns such as independent crew change locations if we can eliminate one you're going to you're going to reduce the amount of Crews needed to run for example between San Jose Benjamin Mendes by you know, almost 50% So we think we're going to continue to get some some quicker smaller wins with the Union while continuing to work on the larger War Perl that we have.

Okay, and it sounds like the right way to understand it also is that if you can't reduce the headcount you just pay less because you don't, you know, people have fewer trips. So it's not you know, you said you could get a digital savings, you know, three or four person Crews going lower but it doesn't sound like you're constrained in terms of some of the other things you're doing is that that fair way to understand it. You know, I I thought like Jeff said, you know, we a lot of what we are doing now is actually assuming that even if we don't make a breakthrough even even if we don't make one agreement, what can we do on our own? Okay and an example he gave, you know, a train would start, you know, instead of adding locomotives and layout and wasting time and changing cruise and all that, you know, which is just North of Monterrey to go all the way south to a place called Benjamin Mendes over the the grades while we are going to run these locomotives from Sanchez in North okay and DP, you know

hit power and and this way we're not going to stock and we're not going to add locomotives and we're not going to call cruise and we're not going to pay who's so there are things that we can do on our own and we started doing them and and and we are reducing more and

For you know our Reliance on that base now at the same time you spend three hours yesterday trying to structure an agreement, you know with the union and and with DTE, you know, like how can we move these people maybe to Benjamin Mendes and and you know, how we don't want to taxi them and stuff like that and you know, making arrangements win-win if you like and yep, that's the preferred way, obviously and and and we feel good about that like we feel that the union is really wanting also to work with us. So so hopefully we lost touch make agreements with you.

My question today comes from Justin long. It's Stevens, please go ahead and good morning know last year you provided the PS are saving since you began implementation and the estimates just kept moving higher throughout the year as you were working through the financial impact at the same time. You were making these operational changes. Are we to the point now where you're far enough along in the process that you feel pretty good that this hundred and twenty five million dollar run rate is an accurate reflection of the the total PSR opportunity or are there still incremental initiatives operationally that are going in and twenty twenty and twenty Twenty-One that aren't getting fact of that estimate that could drive upside just in this this is my good question and you're right. We we just continued throughout last year to to find more and more Opera.

Cities and you know, I would expect.

That will continue to be able to find new opportunities as we continue down this path. We feel very good about the hundred and twenty five million dollars and you know at this point in time that that that's where we think we're going to end up, but certainly there's not going to be a lack of trying here to to do a lot better than that.

Okay, that might just say, you know, it's it's a it's a snapshot of where we feel we're at at this point in time. But you know, one of the things that and you picked up some of this just with with some of the examples of Sammy gave we're just focused on everything we do and I I don't think I ever say you know that we're we're finished with this will just kind of keep as Sammy likes to say peeling the onion and and when we when we knock some of these things down and and put the money in the bank will continue to look at them and just make this over the longer period of time sort of a continuous Improvement exercise.

Okay makes sense. And secondly I wanted to ask about the volume Outlook. So you gave the guidance for Mid single-digit growth this year. But is there any color you can provide them on the quarterly Cadence of that growth? Are you expecting it's excuse me low single-digit growth and kind of each quarter this year and you know, you answered that would love to get off your take on how truckload conversions are progressing and if that's something that's factored into that guidance as well. I think that we're likely to see some continued softness here certainly in here.

Things with my expectation and things would be more favorable in the second portion of the year with respect to your truck load question. We do see plenty of capacity out there still we do see that rates continued to be depressed or suppress on that front. And so that makes it a little more challenging for us to do with conversions. However, I did mention earlier that I think that that pricing is hit bottom and has that recovers then we expect to see things moving back to the rail or being able to tap move share to the railroad.

Our next question today comes from Scott group of wolf research, please go ahead. Hey, thanks morning guys. So I just want to First clarify just a couple of things on the guidance office in your opening comments. You say that you thought Revenue growth was better going to be better in 2020 than than 2019 and then Mike. I know you said there was some one time things and then another Equity maybe if you can just give us some guidance and how you expect those to be in 2020.

Okay, I can take the guidance one, you know, the below-the-line items that that we incurred in the fourth quarter. I went through each one of those but equity and Thursday. We took a $0.04 hit in the quarter that was predominantly the loss associated with the Mexico airport project cancellation of one of our Affiliates Thursday. We believe that we are done with that and we should have favorable comps going forward. So we're not going to provide a specific number for you there because we have three or four or entities that roll into that line item. So it gets a little bit complex, but I don't think you should see the pressure in that line item that that you did in in 2019. We also had three cents higher interest expense in the fourth quarter as a result of the borrowing that we did to buy back shares that wage.

Netta creative transaction

Action for us. So you have to consider the share share count reduction that we're getting there. But I did also comment that we would expect to see a 20 million dollar increase in interest expense in twenty-twenty. I think those cover the two primary below the line items.

Scott I guess. I maybe I misspoke a little bit but just when I look at revenue and volume outlook for 2020 in general we feel that life is going to be stronger than 2019, but it wasn't intending to give specific guidance relative to what you see on that chart for Thursday our previous guidance provided in 2019. So I'll thank you for allowing me to clear that up.

And the next question today with your bank, please. Go ahead.

Thanks congrats on on all the success in 2019 Mike. I just wanted to follow up on the the commentary around incremental margins that you mentioned earlier, you know, the the implied if I just look at the the revenue and our expectations of the twenty-twenty the implied incremental margin is close to a hundred percent that's obviously impressive and makes sense. But if we back out the 61,000 of productivity that you called out, you know, the organic incremental if I can't if I can say it that way is around it's pretty much exactly 50% So is that the right way to think about you know, the structural kind of you know structural leverage opportunity at the company. Once you guys are kind of at this 125 run rate or even greater, you know, I'm just trying to understand like what's the long run rate beyond all the the changes that you're making? No good question and you know incremental margins obviously are dependent not only on cost reductions but Revenue growth were.

Where we get, you know a 74.

Santoor, so pull through on on incremental volume and and and then pricing so we kind of stayed away from getting any kind of specific incremental margin going forward. But off my my comment earlier that we saw pretty nice or Improvement set aside the the apps for a second 230 basis points and a 1% down volume year off, you know, if you start seeing low single-digit growth, we we should be able to certainly achieve that and and perhaps a bit better.

Next question today comes from Allison of Wells Fargo, please go ahead. Hi guys. Good morning. So, you know obviously well down the path of these opportunities. I mean, I kind of look over sort of the past year and going forward as he peeled back the onion as you as you spoke to before where do you see sort of the greatest benefit opportunity or surprised recently?

Hello, I would say that the the largest opportunity is in in Cruz, you know crew management and it's not just you know, the the crew pool and uh, but you know, everything else it to the screws like taxis something we call our batteries in in Mexico, you know, like all these bonuses that would pay for extra hours and and over time and and and length of training and stuff like that. So crew is is a big opportunity fuel is a big opportunity, you know, we spend three hundred million dollars on fuel and and like I said, you know, we are at 1.31 in 2019 were aiming at one point two for a gallons per kis etm in 2020. But that is still that is still a lot of opportunity and we are watching that now daily, you know trained by 3 a.m.

The same way as we were watching delays.

We are watching the H BT another horse power on trains and we're also when I said we assigned we made some management changes. We have put one of our best most promising young young people neckline. We put him in charge of locomotive management and cruise and he is delivering big time already and he is watching that horse power port on quite a bit. We also move fuel under operation, which is another movie made. So we we did some management and structure changes. So fuel is is important crews are important and Congress are still we're still heavy on cars. I mean and you look at our car miles per day still a high number, especially I mean Hello number especially in Mexico. We went from 7 miles per day to a hundred miles per day, which is a significant Improvement hundred miles per day is is very very inadequate and there is room to improve we have some car leases that birth

We're going to return.

Some significant ones in in 2020 and that was part of the savings at my talked about so to summarize to answer your question Cruise fuel and cars would say these These are still big opportunities. We still have opportunities in locomotives. We have big opportunities in engineering because we have not touched that last last year that's offensive way big big opportunities in engineering and actually brought one of one of the guys who are on my team retired gentleman who achieved track at one of the railroads our associated with for a long time. He was on my team for ten years and he is now helping us here. And actually this week is on a on a gang, you know watching, you know, the work equipment and the productivity of our engineering gang and there is a huge potential there too. So

Our next question today comes from Ken extra of Bank of America, please. Go ahead. Hey Greg. Good morning, Mike or Pat. Maybe just some more thoughts on on Mexico growth. You mentioned some strong industrial economy out there, I guess in contrast to the low single-digit volume growth and and MSD Revenue growth. Can you talk about energy reform and and the decelerating cross-border revenue growth and then on the trade agreement page or anything negative on auto production, we should expect out of usmca.

So I guess looking at the second part of your question from the automotive perspective know we're not necessarily seeing anything negative coming out of that would affect the automotive segment with respect to Thursday the first portion of your question, we've been saying that that refined products growth will slow over time just because those times get tougher year-over-year, but the Mexico economy has been a bit soft to the extent that that has implications on fuel consumption. That's really what we're monitoring.

Next question today comes from Brian Austin Beckham JPMorgan, please go ahead.

Hey, good morning. Thanks for taking the question Sammi one more for you on fuel you. Look at that being the biggest expense Improvement bucket here this year. And next do you think that could be the same thing when you look back to the subject d o r and twenty Twenty-One. I just wanted to hear some more of your thoughts versus the peers and the benchmarking you doing there. What is what is structural versus what you think is just getting more focused for the management side that you mentioned or maybe even moving some of the the equipment and efficiency there.

Very good question from a structural point of view. The grades in Mexico are extremely steep very very Steep and and that obviously is not good for fuel efficiency so long, so even though you know, I use one point zero as kind of, you know a benchmark there is a limit as to how how far we can go because of that, you know, the whole program fee if you like of Mexico, so that is is a structure on limitation if you like, I never counted exactly how low we can go, you know in that gallons per kg TM. All I can say is that there is there is definitely room to go beyond the 1.2 for which is a target for 2020. Some of some of the stuff will do is like I I talked a lot about you know, the horsepower per ton, but there are also Technologies. Okay. Thank you.

that are partially

On on KCs they were deployed extensively on the railroad. I was associated with before coming here on my secondary road if you like a new age and and you know, we have we have those that software and Hardware, you know deployed on on many of our locomotives will continue deploying it, you know, like three Optimizer which does cruise control and and avoids, you know, the acceleration and braking which is really bad for for fuel, but there is also something really important on top of trip Optimizer, which is called hppt which we used a lot in what I was in deployed it aggressively actually week-by-week on locomotives what I was and we are were attempting the same thing here that not only will calibrate how many locomotives are on a train and you know, if you shut down one of the three locomotives because you have empties heading back as an example.

But actually it will it will actually allow you to even plucked with the horsepower based on the traffic you pick up.

So the punish increases for reset out traffic the you know, the punish decreases so during a trip it will actually allow you to go up and down and and I you know that that that kind of Technology also is going to to help us a lot. So so there are a lot of things happening obviously the service design helps a lot, you know, these long trains mix with manifest and Intermodal and Automotive making a very very efficient for for fuel efficiency. So I can't answer your your question with precision as to exactly what is my theoretical best. You know, is it is it one point one? Is it 1 .07? I I don't know the exact number but all I can say is that it should be it should be better than the 1.2 for which were aiming for for this Thursday, which is which is quite an improvement compared to the one point three one.

And our next question today comes from Brandon glinski Barclays, please go ahead.

Hey, good morning, everyone. So can you guys expand a little bit more on the new capital allocation policy? Cuz I feel that could be pretty significant looking forward and maybe just in the context of historical, you know, you guys will call out maybe incremental volume opportunities that the industry didn't see so you guys would spend a little bit more does that mean that you know, maybe growth could be a little bit less or is this just more money more efficient with what you have still leveraging those opportunities looking forward.

What brand?

This is Mike. I I don't know that there's much more that we would expand on on the capital allocation policy. I I know there might be a desire for us to give you exactly what the 3-year cash flow numbers look like but you know, I I assume your models allow you to do some projections. They're given the guidance that we've given around Revenue this year and month term o r n e p s guidance but I think the point that you should take away is that our Focus has shifted from Mork at Beck's cognitive to shareholder distributions to more shareholder distribution than than cat backs and that should be viewed as favorable in light of the the kind of increase solid free cash flow here. So we'll we'll probably just stick with the guidance that we've given here and the other question if I understand the other question the other part of your question,

and I wouldn't I wouldn't read anything into a

For Capital allocation targets or strategy that would suggest would be emphasizing core capex that will drive growth. We think the the efficiency that we are realizing and will continue to improve with PSR in terms of asset track capacity yard capacity. We factored that into our capex farg, but if we have extraordinary growth opportunities in the future that require investment, we are perfectly happy and willing to make those Investments.

And the next question today custom Jordan of Goldman Sachs, please. Go ahead. Yeah. Hi. Good morning. Just a quick question. Your PSR initiative is they're obviously going very well. I'm sort of curious. Are there any areas of the PSR rollout that may be more of a challenge than you thought and then Are All Phases not the dollar amount, but the actual facepalm the rollout generally on track from a timing standpoint. I think if I remember reading he might be up to phase three or something in January . But anyway, just curious your thoughts. Thanks.

The white boarding has gone has gone very very well. You know, there is always adjustments. Obviously, you know, like, you know, we had a train which which town hall for us, you know from Lazaro in Mexico on the Pacific all the way to Laredo in the US, you know, and and it had a lot of traffic on it making a lot of stars in many yards and initially were a bit concerned about it, but that's part of the watching that we do every morning and and we notice what the delay is our and there have been some human being some adjustments or some stuff from the look at the same people to see and so so, you know, it's it's it it's it never it never really finishes exercise. I mean you do you do the big portion of it and then you keep doing it and tuning it off. The white boarding has been going extremely well and we see it. We see it in the velocity of the network in Mexico. We would have never dreamed in February or you know, Marsh last year dead.

That we can get to fifty miles per hour.

Our in Mexico and I mean, like I said, you know, the network was running it nine ten miles per hour. So the results are good. So the white boarding is going well. The mechanical is going well the Car hire and and reducing the car Fleet is going is going well. The fuel efficiency is okay the the the service and revenue at always mentions at and keep keep that always in mind that our model is adjusted for the reality of PCS. And that means Mexico. It means took some tight yards beans potential for good Revenue that has been going very well to the area that is challenging very frankly is is is the labor agreements on cruise and like I said, we have we have our way of getting the most of the savings even if we don't get labor agreements, we we are just going to

you know to to adjust to the current rules if we have to and

and maximize

and today's Final question comes from Baskin Majors. That's go ahead and Financial Group, please go ahead. Thanks and good morning guys you Mike. If you look back five to ten years ago, You were dropping eight to ten per-cent of revenues to free cash flow. If I look at your guidance today. It looks like that's probably going to be closer to 20% going forward based on your expectations. So just you know dramatic Improvement there. I know it's kind of been addressed but I was hoping you could expand on this a little more. I mean part of that Improvement in the coming years is the the Rolling Stock holiday both life motives and rail cars. Can you talk about where you are, you know based on your growth Brands looking out to three years perhaps further. And and where do you think you might start to get tight out for Speed on real cars or locomotives text?

Well, that's a great question. You know, we don't have any plans right now for incremental locomotive purchases, you know, I'd love to see us get out of this industrial recession that that I think we've seen here in the US and start growing volumes again that then we'll begin to to think about that. We've parked net I think a hundred and sixty nine a locomotives all of that sold technology, you know, I don't know that there would be a lot of retirements that would be immediate in our next couple of years, but I probably say, you know locomotives maybe the place that we would look to before Freight cars, but you know, it's hard to predict what's going to happen over the next three years.

Thank you. This includes the question answer session. I'd like to turn the conference back over to patents matter for any closing remarks. Okay. Thank you. Thanks everyone for joining us just a couple of things that actually me pick up on on that final question and and something that Sammy said just a couple of minutes ago about the the way we are approaching this and I would say that we have been intentionally going about some of these changes whether it's asset impairments locomotives Freight cars and I think any of you have probably heard the example of our grain flash where we saw significant it just extraordinary Improvement in cycle times freed up a lot of cars and we made a decision to hold on to those cars rather than scrapping wage as quickly as as might have been otherwise possible because we felt that there was an opportunity for us to grow that business and to gain market share and lo and behold that that wage.

Did happen and it takes a while for those.

Particularly customers that are under contracts for some period of time to come back but we're very very conscious very careful as we go about these changes to make sure that it doesn't have the effect of limiting or growth down the road. And as I said a few minutes ago you yes, our our our capex targets and capex numbers incoming down, but please don't read that as as in any way being unwilling or unable to to ramp up and make Capital Investments core capex Investments. If there are growth opportunities that we think are really attractive to us. So I again I just reiterate where we started we feel very very good about where we are and and and believe that there is more to come. We also continue to be confident and optimistic about some of the growth opportunities particular wage.

Cross-border growth opportunities are in front of us the removal of the Dark Cloud of uncertainty with usmca. I think will be helpful over over the long-term certainly changed the way. We are going about our PS are transformation with Sammy working broadly cross-functional cross-border with a very large number of people within a company. There's a lot of excitement a lot of enthusiasm as we go about this, and and I think there are are very very high expectations that they're more good results ahead. So thanks for your time and attention here final comment. Go Chiefs is a new America's team at 2:00 on Sunday, and we'll talk to you guys about 3 months. Thank you everyone. Thank you, sir. Today's conference has not concluded and we thank you all for attending today's presentation. You may not have connect your lines and have a wonderful day.