Q2 2020 Kansas City Southern Earnings Call
Cities.
Second quarter Twentytwenty earnings Conference call, all participants will be listen only mode should the need assistance leasing like conference specialist pressing the star keep followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask the question you make press Star then one honor telephone keypad withdraw your question. Please press Star then to.
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It's now my pleasure to introduce you to actually go on Vice President Investor Relations for Kansas City Southern.
Thank you Andrew Good morning, and thank you for join in Kansas City, Southern second quarter 2020 earnings call before we began I want to remind you that this presentation contains forward looking statements within the meaning of the Securities Exchange Act as an.
Readers can usually identify these forward looking statements by the use of that's worth it may will should likely plans projects.
Dissipate believes or similar words.
Actual results could materially differ from those anticipated by such forward looking statements as a number.
Dr. As a combination of factors, including but not limited to the rest identified our annual report on form 10-K for the year ended December 31st 2019, and then other reports filed by US with the FCC, including our quarterly report for the quarter ended June Thirtyth 20 forward looking statements reflect the information only as of the date on which they are made here, yes does not undertake any also.
Okay sure. They any forward looking statements to reflect what's your best developments or other information.
In addition, disclosing financial results and accordingly, U.S. GAAP the accompanying earnings release and presentation contains non-GAAP financial measures. These non-GAAP measures to be viewed as a supplement to another substitute for our U.S. GAAP measures of performance on liquidity in the financial results calculated in accordance with U.S. GAAP and reconciliations from these results should be carefully.
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Oh reconciliations to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP can be found on our website and with that it's now my pleasure to introduce Kansas City, Southern President and CEO [laughter]. Okay. Thank you Ashley and good morning, everyone I will make some brief comments here at before I turn it over to my colleague.
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Folks who we have on the call today are for the most part the usual a crowd that you have come to see over the last several quarters with the exception of Oscar don't quite though.
And Oscar we're introducing Oscar this quarter.
In a in ahead of the transition.
Jose Zozaya.
I'll talk more about that at the ended up after the prepared comments, but Oscar has been working side by side with Jose for the last year and a half then we feel that we are in a position for a very smooth transition and be leadership of our Mexico business. So.
Happy to introduce Oscar and again, I'll say, a little bit more about that at the end moving on to slide five second quarter overview.
What a tough quarter revenue decreased 23%, 21% drop in volumes operating ratio I really look at the adjusted operating ratio of 65 point 250 basis point worse than last year second quarter diluted earnings per share again adjusted of $1.15.
In which is a 30% decrease from last year, so all that sounds.
City horrible, but as you'll see over the course of the next few minutes there was quite a bit of good news in some very positive developments during the quarter, particularly on the cost side. So oh, certainly reasons to be optimistic for the out for that period ahead.
We also made organizational changes that July 1st we saw a press release that we announced a with some organizational changes that were really intended to streamline some of that P.S., our activities and focus internally and a in really mean.
Pain, our focus and sustain the see significant savings and an improvement a that we have demonstrated over the last year and a half and without stealing Mike Upchurch his thunder or some of the comment so you'll hear from Sami.
Later on you will see later that we're significantly increasing our estimates for P.S. our related savings.
For a 420 20 and beyond so a lot of good news a lot of hard work weeks. We responded extremely well on the cost side to just the <unk> I don't know what the right verb is to describe but a precipitous drop involved.
Games that we saw in April and early May and then we also responded extremely well to an unprecedented 39% volume recovery that began in late may and throughout the month of June I don't think anyone on this call has ever seen a 90 day period where business levels.
As drops so quickly stayed at a stable level for a relatively short period of time and then recovered and responded so quickly thereafter, so I I really feel like our team was on their toes and we responded extremely well on the downside.
Right and a on the on the recovery side as well looking ahead, we're not going to change our attitude and practice here regarding guidance. So it's a fairly Dan in terms of the guidance that we're going to provide we will stick to our 2020 capital expenditure guidance of 425.
Million and then I still feel very confident in our ability to get our cash flow target free cash flow target for the year of $500 million. So with that I will open the call for Jeff Songer to make some comments about our operating performance.
Okay. Thank you Pat and good morning.
I'll start my comments today on slide seven with a quick update on our Koby 19 status as mentioned last quarter. We have an extensive business continuity program in place and have been able to manage the pandemic today with relatively minor impacts to personnel and resources.
Safety is our number one priority and we continue to ensure the safety of our employees aligning with CDC guidance and implementing controls around social distancing.
Use of protective equipment and quarantine protocols.
Our workforce remained stable and we continue to monitor monitor and adjust as required.
Moving to key operating metrics for the quarter velocity of 17.1 miles per hour improved 37% year over year and 8% sequentially.
Dwell of 20.3 hours improved 4% year over year and was 3% worst sequentially.
Rapid changes in volume during the quarter have provided unique opportunities for us to continue our operating improvement initiatives.
First half of the quarter focused on Rightsizing resources and modifying train starts to adjust for the decline in volume by June and now July have focused on rapid sequential games.
We continue to work closely with customers to understand their business outlooks to ensure our service offering is aligned with expected volumes.
At the same time formalizing some of the train start changes we have made to retain the service and cost benefits, we have seen through the quarter.
Turning to slide eight we saw across the board improvement in our PSR metrics over prior year, and we've already exceeded our annual goals in some categories.
Noting the current column on the right I'll quickly discuss July performance as volumes have improved sequentially. We've seen some impact a key metrics of velocity dwell and car miles per day in July while train length and fuel efficiency continued to show sequential improvement.
Sequential velocity as a function of accelerated improvement during the quarter related in part to reduced volumes.
While current July velocity trails, our Q2 average it is 22% better than Q2, 2019, and we anticipate this to stabilize and continue a steady state improvement path.
Current Mark Dwelle as a function of adjusting train starts and optimizing Rts Pete.
Of note train link continues to outperform our initial 2020 goal and we continue to see this is a great opportunity moving forward Jamie will provide additional details on these initiatives.
While Q2 presented many new challenges, we're very pleased that our operating model has allowed us to remain flexible and ensure strong service levels, while maintaining solid cost control during a time of unprecedented shifts in volume.
I'll now turn the presentation over to Sammy.
Thank you Jeff good morning.
We did.
Do a lot of work in in Q2.
We ran very very fast on what it really hard the whole team and.
We are adjusted to the volume decreases extremely fast and made significant progress on PSR that normally would have taken a year.
I would probably be view.
Bottom line.
And then I'll explain how we got there.
Essentially.
We know now that we can meet.
The volume's up pretty equal and one that completely come back and they are getting very close to coming back right now well only 6% below.
Labrie levels.
And we know that when we get through the full volumes will be able to do it was 20% less train starts.
20% less crew starts 20% less locomotives.
20% higher train lengths.
A 9%.
Thats a fuel efficiency than we did in February. So this this is a bottom line and I'll explain how we got there.
We as I said reacted fast and Jeff also mentioned that.
Beginning around mid March we stopped the consolidating trains.
So the strategy has been to take don't mix the track whether its intermodal automotive many fast grain trains refined products. It doesn't matter, we make some on trains and we take all loan originations you know from Solace Mexico as an example, so from Mexico say defunct.
Daniel.
Shot in the South East.
The new Okay, which is in the sols lateral on say law will.
In the West and he did all that you go through the Escobedo Yodlee goes through S&P multiple see a gross over named US and we do a lot of consolidations of these strains and focus on it at all so in our route was the some steel area, which is a very large manufacturing area and in Mexico.
Because all the traffic is heading north anyway, and then when we got to Sanchez, which is a large yard that we have we split the traffic the water that is this the nations in U.S.
Yes. It is true wouldn't have traffic coming from the U.S., we consolidate a lot of trains and Trimboard in Louisiana. It goes the Sanchez and then in such as which again it all allows yard in Mexico, which led to the various destinations in Mexico and on San Luis Potosi can I don't have the opposite direction. Okay. Now the interesting thing that.
We did in the last three months is that a lot of these consolidations are happening in Mexico and small yards, you know like Vinay got San Luis Potosi, ASCO beta, which I'm not large yards have been done with with great precision.
What we did is that we then bite windows for chainsaw live within that window make the connections fast so that do not affect that one time and then get out of the odd before the next trans come in and that has been executed was a lot of discipline and that's you know thats precisions getting I mean, that's that's the.
SAR and it has been very successful.
And we did that when is that was the intensity every morning and on the morning call and without sacrificing velocity.
And it was off if I think one so velocity has been up 77%.
Yes, well is up 4% in spite of the tank consolidation and the abstract weighting of course the connect so that has been achieved and we had a very keen eye on customer service. So we started building took long compliance metrics for the first on a couple of months ago, and that's coming in very handy now.
As we are monitoring them constantly and taken to leave more time sensitive track. So we are at about 70% for planned compliance, which is equal or better than the pre quality time. So in spite of the train lengths, which has increased significantly and the taken some additional now I've got to the numbers here on slide.
Then.
The train starts have come down by about 40%, giving the trough now they are down 25%.
And the traffic is only down by 6% and that's why I was saying earlier that we believe that will maintain it 20% reduction in crude in train starts one that volume becomes equal to prequel did levels and the train lengths would you see on the right side on slide 10.
Is up 21%, let me, saying that in phase one of the Assad were up on the boat two or 3%. This was an area that we did not attack very hard in 2019, we attacked the last do you attacked service, we added will not allow complementing all bad with strain.
Lang switches significantly getting better when you reduce train starts now we've got to slide 11, while you are by definition any new school stocks because you do a couple of crew starts maybe three or four.
How long it's right for the time that you stopped so you see the same thing we went down from like 300 crew starts it day about 50 150 between us and Mexico now.
We went down to like.
Like 90, and Nike and now it's about 100, and then on 100, and then and we believe that we will not grow higher than 240, which again is maintaining that 20% improvement even when the volumes come back and we monitor that every morning, and we watch it and we don't.
Allow that does that any closer than the holiday and plenty.
Locomotives have come down significantly locomotives. If you recall what is thought to be I thought a lot of 2046, let me when before the call bid. It we want to talk about 864, well down actually to 670.
Trough you know around April may not off the about a 745.
Which again as like more than 100 locomotives less than the people would it's 20% improvement in locomotives and again that they the car loads are bound by almost 6% at this point.
Fuel efficiency when you have wrong when you have long chain heavy trains the fuel efficiency is beautiful, okay, and we are getting 9% improvement.
We are still along way from why do we can be.
We are up 1.21, you know the latter while I was before and then B.
The two what are all that had been associated with before well lining up about 1.0, maybe even 0.98. So we said have room to go there.
God what line are important and we always look at that and that's a function of the the velocity of the network and the caused the foreign cars online have dropped by 12% and that is really important because that affects the got highly expense that was a dts until all the railroads and and we are keeping on that.
By the way what are you talking about 750 cars. That's a lot on lease so that I do this is expense my last slide.
The.
All these things translate into money at the end of the day and why do you look at the transportation operating expense. It went down by about 27% you know the crew was the after school count in the U.S. went down from 17 46.
1050, and again, we are we are only 6% below the volumes that we had in February.
The the mechanical cost one down by 29% then mechanical staffing is down 14%.
From what it was what it was just one last year engineering also chip Dan It was about 9% improvement a lot of work in optimizing the maintenance the maintenance.
Gangs on and using what kind of time they have to this latest contractors and address giving a lot of money there.
So all in all the significant improvements on Mike Upchurch is going to say that into reading bottom line money and my last point here is that.
We are going to build on this so not the Ali the savings that we did our sticking and we know its sticking because that 75% service that you had in the last months is being absorbed without sacrificing the thoughts nothing that we did but over and above that we are going to pursue that had been.
An example, we're putting money in India in siding extensions as we know that these train length. This train length strategy.
You have a lot less strains. So you have left congestion, but when they need they need that's that's specific locations. What do you have that train lengths. So we are extending citing in spite of reducing the capital envelope of the company. We're focused in the money, we're spending and now we are not only extending to 10000 feet about extending to 12000 feet.
Prediction off this up more.
Hey lengths improvement because the other levels are running a 10000. So yes. We went from 5000 807200 and there can be very proud of that but we want to pursue that and get to wed want to be the steel area is is it very heavy area for four case, yes, we got about plans dream.
And each direction every day in a distance 50 kilometers in the mountains was grades and curves. It's a very slow area. This is an area what do I was thinking about bundled tracking in the future. So this is this is something that can mean, a significantly improves and my last point the bridge and we're very focused on the bridge the international bridge between New SM Mexico.
All trans goal, except for some sort of Matamoros, but that's a majority of our trains and west static end of six hours. Each we want to get out of that make a dynamic and you find the solution and we're working on it.
Bottom line, we want to me best in class, we are working very hard to do that and we believe that we get there and on that note I'll then turn it to Mike Mats.
Executive VP ecommerce Mike.
Hey, Thank you Sami good morning, everybody I'll begin my comments on page 14.
Well as.
As you all know is very interesting quarter beginning in the second half of March and accelerating through April Cobot 19 resulted in a pretty profound decrease in demand in production from any products.
Items did finally level off in may as communities and businesses began to reopen.
As I believe up most of you follow the our data and because we've already spent a good amount of time talking about business conditions and volumes throughout the quarter.
Again with a brief update on our Q2 performance.
As you heard Pat say.
Overall revenue was down 23% a year over year on a 21% reduction in volume.
Looking at that chart.
You can see our quarter to date revenue declines generally outpace volume declines in each of our business segments.
Hope explain that look in the upper right hand portion of the slide and you'll see that lower fuel prices and FX impacts were the primary drivers behind this phenomenon.
Of course, as you know, we pay less for fuel, which helped offset the decline in revenues and similarly, the FX impact on revenue was largely offset by lower peso based operating costs.
If we were to hold FX and fuel price constant revenues would have been down about 19% instead of the 23%.
Overall, our core pricing held up very well in a challenging environment, our contract pricing improved, albeit a bit of a slower pace given rate negotiation delays in special request associated with the cobot 19 situation.
We are maintaining good pricing discipline, and we continue to work with our customers to provide win win solutions.
Looking at the business unit detail, the economic impacts to our business.
Our volumes and revenues were largely in line with Q1 assessment.
As anticipated our AG men business unit experienced the least amount at disruption with volumes and revenues being down approximately 7% each changes the food consumption patterns I eat more people eating at home versus restaurants resulted in some supply chain changes.
Also some businesses, including breweries in Mexico were considered non essential which resulted in fewer grain shipments to those idled plants.
On the other side equation.
The automotive industry experienced an extraordinary reduction in volume is plants were idled across North America.
Year over year automotive carloads were down about 73% in Q2.
Of course, the auto plant shutdowns Ripple, then to many other segments, including our intermodal industrial and consumer and chemical petroleum business units.
Turning to page 15.
Well, we're not in a position to provide guidance I did want to take a moment to demonstrate how our daily volumes are recovering.
Well, it's fair to say that we have not completely recovered across all of our business units were absolutely moving in the right direction.
It's a hitting bottom in early may our overall carload volumes have increased about 39%.
Despite some continued consumer and economic we weakness we are seeing a very healthy recovery and a couple of our key growth areas.
For example, our cross border franchise business, which you see in the lower left hand portion of the slide is up about 55% from its trough and ended the month of June only 4% down on a year over year basis.
Month to date July were actually up 1% in that category.
Mexico Energy reform was still off early 2019 run rate.
This business is up an impressive 210% from its low point in May and ended the month of June up 12% on a year over year basis.
So far this month, we're seeing similar volume trends, despite our LPG business falling about 60% year over year, given the loss of business associated with changes in origins.
It's probably worth noting that our refined products make up about 80% of our Mexico Energy reform Carlos at this time.
Looking at the last chart on the page not surprisingly given the opening of the auto plants, our automotive in intermodal business is recovering nicely up 86% from its may lows.
Admittedly a couple of business segments continue to remain weak in the industrial and consumer business unit, our metals business remains well below 2019 levels.
However, we are encouraged by our customers outlooks would you indicate production and shipments will steadily pick up in the coming months as excess inventories reduced.
On the energy side of the business, we're not expecting crude shipments to return in the near term. However, I am happy to report that the U.S. development groups development of our Port Arthur property continues on schedule and that facility is expected to be operational in the second half of 2021.
Well, it's very difficult to predict the future and there are certainly risks associated with the cobot.
19 resurgence we are optimistic that the economy will continue its steady sequential recovery. The government has produced meaningful stimulus packages and declining inventories in many sectors bodes well for continued improvement.
The U.S. trucking market is also improving we're seeing tightening capacity at improved pricing.
Given the continued trade tensions with China and supply chain learnings from the Cobot 19 situation. We continue to believe near shoring opportunities hold promise in the long run.
And most importantly.
Our customers, we will continue to remain close contact with them and be ready to efficiently handle their business as it returns.
And that concludes my comments with that I'll turn things over to our CFO Mike Upchurch.
Thanks, Mike and good morning, everyone I'm going to start my comments on slide 17, the majority of the second quarter results summarized on this slide have already been addressed by patent Mike, but let me highlight that I think tcs acted quickly under challenging circumstances to drive down costs by consolidate.
The trains reducing crew starts and taking other actions to scale our costs against the backdrop of a 21% decline in volumes.
We're particularly pleased with the variable cost reductions that Sammy highlighted in his section and I believe our Twoq results set us up extremely well for the remainder of the year as volumes continue to improve sequentially.
Although second quarter revenue dropped 23% these actions along with favorable impact of fuel and FX help Kfcs post an adjusted operating ratio of 65.2.
We view this as an incredibly favorable results given the challenges presented during the quarter and a credit to the hard work and intense focus across the entire organization, but I'd like to give a special thanks to the men and women of Tcs is operating team who have been delivering incredible results. During this pandemic.
Reported EPS was $1.16 adjusted EPS of $1.15.
Our reported EPS includes attended a half million dollar restructuring charge or eight cents per share primarily related to severance costs associated with the voluntary separation program implemented during the second quarter. This program will result in the reduction of approximately 6%.
Of our manager workforce, and we expect to reductions to result in annualized savings of $11 million.
Moving to our PSR savings on slide 18, you'll see that.
We're continuing to drive significant and structural cost savings.
As Sam you mentioned, we continue to make excellent progress on our PSR initiatives and that progress accelerated during the second quarter as we quickly implemented changes and train starts in reaction to covert 19 volume declines as Sammy indicated volumes continue to rebound.
Our goal is to achieve a permanent reduction in train starts the coupled with running longer and heavier trains should allow us to reduce our cost structure by approximately $35 million to $40 million a year.
Accordingly, we're now expecting annualized PSR savings by 2021 to be in excess of $150 million comprised of 58 million of realized savings in 2019, and an incremental 95 million of savings in 2020, which is a more than.
30 million dollar increase or better than 50%.
Savings despite projecting year over year volume declines due to cope with 19.
Not included in the PSR savings are approximately 11 million in anticipated comp and benefits savings related to our previously completed VSP program.
And 8 million in net lease savings from the purchase of 91 locomotives in January of this year.
Moving on to our detailed expenses on slide 19, adjusted operating expense declined 22%.
Our expense reductions were driven by strong cost management across the entire business and all expense categories other than depreciation and amortization experienced year over year declines I think the results clearly speak for themselves with 19% decline in comp and benefits.
31% decline in equipment, 21% decline in purchase services and 10% decline in materials and other.
One offset to these reductions I'd like to note is the $4 million of higher expense driven by Cobot 19 impact store operations during the quarter, we incurred approximately 2 million in compensation expense driven by Mexico stay at home decree.
Along with another $2 million in cleaning <unk> sanitizing and other health related expenses to keep our employees safe. During this pandemic and we would expect those cost to decline as we exit the year here.
Moving to slide 20 comp and benefits declined 19% driven primarily by a 19 million dollar reduction from lower headcount and worked hours.
Our quarterly average headcount was down 5% driven primarily by furlough actions taken in the us in response to declining volumes.
And while we did not furlough employees in Mexico, we did experience a 23% decline in comp and benefits expense at chase CSM from not calling employees to work as frequently from a declining volume environment.
So we clearly have the ability to scale comp and Ben and our K CSM operation.
As we previewed in Q1 earnings and in presentations throughout the quarter with investors, we've taken swift and decisive actions to address our variable costs and this reduction to comp and benefits from lower headcount and work hours is an excellent example of how those actions.
Have helped our cost structure flex with declining volumes.
Finally, moving to slide 21 in capital allocation.
Our year to date free cash flow was up 35% year over year. Despite a 78 million dollar locomotive lease buyout that we executed in January keeping us on track to achieve our allow outlook of at least 500 million of free cash flow in 2020, our year to date cap.
Our next was down 47% driven primarily by a drop in the locomotive purchases that we had in the first half of 29 team.
Finally, a year to date returned to shareholders is up 72% driven by 106% increase in share repurchases as noted on the first quarter earnings call, we temporarily paused our share repurchase program in March.
To conserve cash during a period of extreme uncertainty.
However, we resumed our share repurchases in the second quarter as we felt more comfortable that volumes were sustainably improving after bottoming out in April in early may.
Looking forward, while there is still a fair amount of uncertainty operating during this pandemic.
We expect to continue to repurchase shares in a consistent pattern going forward, but we'll retain our strong liquidity position of approximately $1.2 billion.
Once we have better clarity around the demand outlook, we will reconsider increasing the cadence of our repurchase program.
And with that I'll turn the call back over to Pat.
Okay. Thanks, Mike I before we open up the call Mike a couple of comments I'll go back to something at the end at the very beginning I want to I want to recognize jose's desire on the on the call today. This.
As his final earnings call.
Jose hasn't always had a speaking role or.
I have been been visible on these calls that some of you over the years have gotten to know Jose.
Been with Kfcs, Keith them for 14 years.
And there just aren't words to adequately describe what Jose has contributed over those 14 years to our success than our position in Mexico, there or just.
Has never been an executive that has served his company as well with the distinction that Jose has.
And contributed to our.
Our reputation in Mexico, our position our relationship with.
Government officials at all levels relationship with our employees are unions.
Again just words.
Our not adequate to describe what Jose has contributed so I want to recognize him.
And then also to talk a little bit about Oscar.
Ask her to Cueto will have the regular participant on these calls going forward Oscar has been with the company for 20 years.
30 years and the railroad industry in Mexico. This transition has been going on for a year and a half. So I'm confident that we will not miss a beat and Oscar is extremely well suited in and well positioned to move into this role and be effective but after you have extremely.
Hard to big shoes to fill as they say so.
I just want to recognize Jose for is.
Enormous contributions over the last 14 years.
And just a couple of comments about quarter again the headline.
Is it pretty horrible, but as you saw in heard over the last several minutes.
We did a lot of really great things and.
Sammy said, we ran hard we took out costs without compromising service.
Mike mentioned that we made swift and decisive actions and all of this was with an eye toward making sure that these cost savings. These these productivity improvements and efficiency gains that we were making in the face of rapidly declining volumes would be sustain.
Tenable into the future and produce real savings when business recovered and we certainly saw that in June with an unprecedented 39% recovery from the trough levels that we saw in may over a 30 day period again I don't think.
Any of us have seen this.
This pattern of rapid decline and substantial recovery in such a short period of time I want to pick up on a comment that Mike Upchurch made as well and I know a lot of our employees listen to these calls and I just we couldn't be more pleased and proud of our employees for being on.
Photos for.
Showing up and doing what we needed to do as a company to provide service for our customers keep economies going.
In recovering.
Just the outstanding performance on the part of.
All 7000, plus men and women of Kcbs. So.
You for your efforts and we're very very pleased and proud of the way you have represented the company over this very difficult time.
With that we'll open the call up for questions.
We will now begin the question answer session.
The question in the press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the key.
You withdraw your question. Please press Star then too.
Due to the number of participants on this morning's call.
Management will limit your question Q1.
At this time, we'll pause momentarily.
Well our roster.
First question comes from Allison Landry of Credit Suisse. Please go ahead.
Good morning. Thanks.
So just given the significant progress, you're making with TSR and particularly the production train size and increased trade like.
So considering that volume are starting to show some people second derivative improvement.
Do you think side as you left in the second half of the year do you think that you can improve the all are any of your basis.
And in the second half thank you.
Well Allison this is Mike I mean, we're not giving guidance so as much as I said.
I'm very tempted to touch.
The answer that positively yeah, I think our biggest concern sitting here right now is the volume environment and what if any negative impact.
As a result of the second wave.
Of infections could cause plants to shut down, but what we do feel extremely confident and.
The ability to continue to generate cost savings here and I think we're going to be even better positioned as a company than we were in the first quarter, where we delivered record results.
Because of those cost actions that Sammy explained and we do believe that those are permanent cost savings. This isn't taking credit for volume drops. This is a permanent structural savings and our cost structure that we think will carry forward in the incremental margins.
As volumes return should be very very strong so I'll leave it at that.
Hi, Thank you.
Your next question comes from Jon Chappell of Evercore ISI. Please go ahead.
Thank you good morning, everyone.
My question bit of a scenario analysis for Sami I think it's really interesting that at the volumes get back to call. It three coded levels.
And keep the training the crew starts down at 20%, but what did you just dream to dream and and carloads recover even quicker and say were up five to 10 per side is there a catch up in costs, where the crew starts the train starts and then need to increase.
I have greater pace to meet that increase in capacity or do you view that lagging even on the upside scenario.
Well.
No.
Whether whether we get to the volume that we had last year or we exceeded them. We hope we hope that exceeded.
You know these cost reductions will stick.
The seen now has changed the way they they are on trains.
Service design has been changed for the schedule of trends.
The mechanical shops as an example have also been change like we closed the Kansas City shop, as an example that one stake.
How do we go to at 5% volume increase or it 10% volume increased.
Focus now our shops on Freeport in us and San Luis Potosi, Mexico.
You know the effort that we have made in engineering to to use the.
Our maintenance forces use of times that they were on productive.
To to supplement and do more work for for production and.
And displays contract those is going to stick.
You know, so mixing manifest and put them all them and the others.
You know is something again that would stick. So so you can just get it like that 20% I gave at the beginning of my presentation reduction includes thoughts on trains thoughts on locomotives a block Stu willing to uneven level of volume was what we had in January February.
But you know you can keep you can maintain that I didn't do because liquidation, but ill. It when you know it maybe instead of 20% it may be 19% reduction or 18% reduction one that avenue rolls up down by 5% above pretty equal the level that I didn't do the calculation.
But Mike.
Domestic I'm, giving is that the changes are.
Stick and and culture.
The mindset of people has changed.
And the team is getting very very strong and is getting stronger on sound. There is something I didn't talk about this a very very important element in all this is.
That team is definitely not the same as it was not an apple, but even more important it's not the same as it were three months ago.
We have we have guys are getting sharper and sharper and sharper and I think we have we have a solid team now that we need to move forward.
That's very helpful. Thank you Simon.
The next question comes from Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, Good morning, maybe sticking on the same theme that kind of wanted to focus on the total annualized PSR.
Opex savings when you think it out.
All of the potential benefits that you're accruing as you're going through this or big.
Volatile period of time from a volume perspective, and looking out into 2021, I guess, maybe if you could help us or understand sandy kind of the comments you made about opportunities whether it be other fuels side.
Maybe it's more on the true in the crew and train starts side.
What are the incremental buckets that you still see opportunities from as you move from Twentytwenty that into 2021, what's maybe forget about through volume environment, but what are the key cost opportunities.
That's an excellent question asking the question Chris.
Phil and I I Didnt have time in the minutes on given in order to present these slides.
Fewer than it's sad if I can speak for the next half hour about some of what we're doing on Q.
Example, you know we looked at what the call tonnage rethink deals like how much do we think locomotive component.
Tonnage wise and we have seen the punished able to Mexico okay.
Let's kind of conservative understated and regarding a 5% fuel efficiency improvement just south of that and that was that was there anything like we just measured it in June.
And we measure the before and after in the two led district, which is between Mexico City on a combined okay.
We.
We look at that we look at the according to worse.
I'd like Benjamin Das duly out.
When we have very steep grades. So you have to add locomotives. When you are going up the grades, but Tony I'll cutting back you still have to bring the locomotives back for the next cycle.
And we noticed.
That locomotives.
Access locomotives I'm not being shutdown. Okay. So you know this this is really simple stuff and and and now are going to shut that.
Down these locomotives that the guy we did the calculation I thought on the BS out our bid that we did you know this past Wednesday, we do PSR updates every week to keep the progress going and the fundamental found that was it I would we brought let me dive in wasn't my team at CN and that key quantified that to be $2 million.
Yes that up so here's another opportunity now you talk a little cool crew starts.
We have a significant amount of crude stock we would have had I think a reduction of.
40 some percent.
Had had me if you are able to make the labor agreement to get rid off it crew base at the please call me out okay. Our fans to enroll from Sanchez, all the way to Benjamin Bas without stopping at Leann.
But then either I think on forces us to change crews at least so you will find and then and a lot of money too and that one alone. We just are you ended yesterday on the transportation costs, we have a young gentleman, who is awesome and then as Nick line, we put in charge of crews and locomotives and he highlighted that don't.
Me that can be in net saving of.
A couple of million dollars, Okay, let's call. It four maybe you know India, you know things like that so that is plenty sten opportunities like I talked about the train lengths Chris.
We're very happy now top down from 5800 7200.
Well you know my colleagues on the other railroads, who many of them all originated from CN now that are beginning to feel for 1000 feet 15000 feet. So you get on the imagine if if I had been now sidings that's that can accommodate it they need of 12000 feet or 15000 feet.
You know this guy is the limit then I can dig these train starts with our that's where I'm very proud to have reduced by 20% maybe I can reduce on by another 20%.
Ill.
Now I have to make sure I have the findings for these meat I have to make sure that the yards.
Have the configuration and that's why to inject some money. So let me injecting some money in San Luis Potosi odd.
Money, it's about 1.5 million to see it on 2 million next year in spite of that capital envelope that I was talking about so that you can put an end along train you don't want to blend along train and then have to double it in all of our two or three tax because it does not fit it.
On the contract. So you start adjusting these things. So so that it's 10 that is still a lot of opportunity.
I don't want we I I talked about the something area double track you can imagine if we do that.
You have trains running at about 15 kilometers I'm not even talking Mize, that's 10 months one dollar.
Because of that very steep grades on curves you can imagine how long it takes to make it turn meat I mean have you have to bought one guy and wait for the other guys will come in a deadlines for dollar before you finally pulled out of deciding what if you double track and it's only 50 kilometers in all these trends now come home so the bridge.
Which I thought that all the bridge when you have windows that our six dollar northbound followed by six hour southbound okay, and let's say you get you out of North bound train and you get that 15 minutes. After the window has closed and I get the example, always like to fill rate you got that into fairly just left 10 minutes level you know what happened so.
So you know if we eliminated that make it dynamic first enforce out and we're working on that and we think we had a very simple solution for it and we're looking in owns the customs on both sides of the more than that it can give us an increase of.
A modest dollar per month, but on the velocity okay. So.
Lots lots of opportunity discuss and ill, let me have auto up guest.
Always you I think is scheduled for August four.
The expand on that.
Sounds good looking forward to it thanks, so much hurt.
Thank you.
Next question comes from Justin Long of Stephens. Please go ahead.
Thanks, and good morning.
Hi, good morning.
Morning, maybe a question for Mike I know you guys are not providing detailed guidance, but last quarter you talked about.
Scenario analysis, and when you talked about that.
You referenced.
10% revenue decline in in the third quarter in a 5% revenue decline in the fourth I'm. Just wondering if you could provide any update around your your thoughts on on that forecast I know, it's just it's tricky now because volumes have gotten so much better sequentially, but koby cases.
There are rising I, just want to get a sense for if you're more or less optimistic about the recovery in the back half.
Yeah, I mean, what I would tell you Justin is the revenue side continues to be a bit challenging, but it but I think the two goalpost, we put out there during the first quarter call. We still think through the year, we're going to end up somewhere in between there.
The volume environments, obviously been a bit challenging, particularly here in Twoq Q.
But all that said, we do have a more constructive view arm on overall expense reductions and you know what our cash flows EBITDA is going to look like.
The than we did back then.
So you know still very difficult volume environment, I think those goalpost, we put out there are still a pluggable today and as you know throughout the quarter Weve provided very detailed updates on on where our revenues were tracking will continue to do that here in the third.
Orders we have.
Probably to half a dozen investor update scheduled.
Okay, Great. That's helpful. I appreciate the time.
Thank you.
The next question comes from Allison Poliniak Wells Fargo.
Go ahead.
Hi, guys good morning.
Good morning.
Just given sort of obviously that notable progress in PSR combined with the dynamic volume environment has anything come to light list with the network either an issue opportunity that could be addressed or and I increments opportunity on your PSR journey, either shorter or longer term here.
Okay.
I'm, sorry, I'm not clear on the question are you are you asking about opportunities.
Infrastructure wise or.
Well anything just you know you obviously had your PSR plan a lot of there's opportunities to accelerate Ed you know as they then volume environment was clearly dynamic in Q2 did anything else come to light that maybe you weren't thinking of thing your original expectations for this PSR journey that could be an increment incremental opportunity for you here.
Yes, I guess the biggest thing frankly is.
We because were pushed and there was a sense of urgency here.
We want it hasn't done before about about train lengths and and what about finding as we can actually do it even was the odds that we have.
That I in my mind is the biggest finding is.
We never dreamed that pick and yet the an improvement of 1% to 1% and train lengths in such a short time and and we did it and within that those are compromising on velocity or blood or customer customer serves.
I would say that that was our biggest.
I think is fine.
Great. Thank you.
The next question comes from Scott.
Wolfe Research. Please go ahead.
Hey, Thanks morning, guys. So Mike just a couple of things with volumes up I don't give or take 15, 20% sequentially.
In the third quarter.
Any color on how to think about labor costs and then.
Any any view on how to think about some of them the components of yields mix fuel FX in the third quarter results for the second thank you.
Yeah, I think on the.
Revenue side of the equation I, obviously, we think fuel costs are going up.
We've already seen some of those increases hard to predict what FX is going to end up doing but as you think about mix.
You may think about that similar to what we saw here into Q.
I'm a firm believer that there isn't a strong correlation between what happens with our revenue per unit and operating ratio.
And yeah, I think we saw tremendous leverage on the cost side here as we fill out trains.
Sammy covered that'd be great lengths, so even as we're adding intermodal at 350 Bucks a container relative to maybe 1200 for the rest of the base will take every one of those containers we can.
It's great incremental profit for us.
Terms a labor costs.
I think you get the quarter message here that through train consolidation, we're continuing to.
Drive down labor costs I made the point that while we furloughed crews in the us in line or the volume environment.
Didn't do that in Mexico, but we were you know had had Mexican labor costs down 23%.
In the second quarter I think we can continue as we build out train lengths to drive down our labor costs here, but some of that is obviously going to be dependent on how quickly the volumes bounce back here, there's always a bit of a stair step.
Involved in this business as you have volume growth you're gonna have to put a few train starts back in place, but our goals or Sammy said, absolutely the drive train length and that should give us some continued leverage on labor costs.
Thank you guys.
The next question comes from the loss of Stifel. Please go ahead.
Yes, good morning, everyone.
You talked about the increase consolidation that you're doing on the trains for added efficiency mixing manifests intermodal et cetera.
Do consolidations become more difficult in any way with more volume or easier in another way to put that is.
This growth in any one commodity type make it.
Harder or easier to do those consolidations, while keeping dwell down and keeping velocity high.
If if you got sufficient volume.
But you don't need to consolidate between two trains.
That's fine I mean that you know the Best example is called trains.
Quotations are not consolidated was other things because they are beautiful they are nice.
That point to point in all from from the mine to the utility.
Oh, no need to fool around listen I mean, thats. Your most efficient train that you can get you know there's no switching that there was nothing so if you if you got the not volume.
Example, intermodal if it grows enough.
That that you can goal.
You know from Antelope wells, so to US. It went up were pleased that San Luis Potosi, as an example, or you know victorious Alina Hello.
That's fine I mean that then then you can you can have a full train as exactly as if.
Between two cities for Airlines you know you have you have enough traffic. That's you can have like Chicago, Los Angeles any have you have enough traffic any any have paints. The bump that you don't have to switch passengers and intermediate airports and all I mean, that's that's fine so if the volumes come back.
That's okay. You know you can have you can have trains and they do is actually or switching in this case, which is another principal off of PSR.
And you will not be losing anything you are not actually I mean, you would not be consolidating but the consolidation fundamentally is still make up for situations. What do you don't have enough volume.
You have to have a full train of Medifast on a full volume for the train up intermodal. So so one does not negated. The other if you if you had the volumes in oil and it's all the intermodal and is between on origin and destination, great you know with embedded ituran without without having to worry about consultative.
There is no commodity types or car types that are more difficult to mix into a consolidation than others.
No.
Well, if that's a very good question and I mean, that's why.
The chain handling is a very important part of thinking about 10 consolidation and we have operating rooms.
Do you position cars on a train.
If you mix on a cliff for one thing.
All of the NMTC half do you have very strict rules on that I mean, you don't want to empty cars spot behind the locomotive between the locomotives and loads in the back at the tail end of the trend because if you do shopping action. We can debate so that our rules on that automotive caused you have to be you have to be very careful was them. Obviously you know for was was cushion units we call them.
So yes, not all roads for that but none of them is insurmountable like you. Just you just have to apply the roads and be disciplined default.
Yeah, I'll make a comment here just kind of picking up on Sami's response to that question in a comment that Mike Upchurch made on the previous question and go back to look at Slide 15 in my math is part of the presentation.
And just look at the the dramatic V shaped recovery that we saw in intermodal and intermodal and automotive and that's that's an area where.
Yeah, we're adding train starts is an important part of getting the business and getting back to.
Pre covert levels, but also getting back on a growth track. So we've talked a lot about consolidating in furloughing and other things that we've done to improve our cross profile and respond very quickly to a rapidly changing business environment busy.
This landscape.
So my catchphrase of service begets growth kind of.
Went on the shelf for a for a few weeks or a couple of months, but we're now starting to see that again and we're very focused as you hopefully heard throughout this presentation to make sure that the efficiencies that we have produced over the last two or three months.
As business volumes have changed dramatically first of the downside and now back on the upside, but very focused on making sure that we keep our service at a level that allows us to get back on the growth track that we we believe we can achieve.
And in the case of intermodal and automotive that probably is going to result in additional trains because that business just fell so dramatically our auto business in April and May fell by.
Almost 100% over 90% in less than two months and now it is roaring back. So we're going to have to add trains. The key is not to get back to the same level of costs and in resource allocation that we had pre coated.
So we've learned a lot we've done some things differently as the Sammy mentioned, we've done some things that maybe we didnt think we could do or did weren't prepared to do under this stress of growing volumes that we saw in 2019.
And the and those those those changes are going to stick, but we're very focused on making sure that our customer service doesn't deteriorate and that we can get back on the growth track that we know is out there if we can provide and sustain the level of customer service.
Thats required.
The next question comes from Brandon.
Please please go ahead.
This is david visible on for Brandon.
Good morning, and thanks for taking my question.
You're welcome.
Free cash flow guidance, I mean are kind of rough math says net income would be down about 20% from last year.
Based on that now we understand that a floor but.
Given how your sand you havent changed much in your revenue outlook can you do have more certainty around cost.
Maybe you could talk about why you're leaving that.
Floor in place and speak generally not asking for guidance about what an upside scenario might look like.
Yeah. This is Mike we were going to stick with our 500 million plus I, obviously, there's lots of levers here around revenue around cost around capex around working capital.
Taxes is always a dollar course, and we're going to stick with 500 for the time being.
Thanks.
The next question comes from Brian Ossenbeck JP Morgan. Please go ahead.
Okay.
Hey, good morning, Thanks for taking the question.
Just with all the moving parts into and within Mexico.
Just wanted to get your latest update on that how you see.
Any potential.
Slow down in the automotive recovery, if Cobra cases continue to increase obviously, that's not nearly as big of a Mexico only problem as it was maybe a couple of months ago. Unfortunately.
And then just maybe broader update and refine products in terms of what's going on with the Pemex situation and especially in your congestion youre seeing on the border seems like it might actually been a benefit in the quarter as some of the volumes went over rail instead of getting stuck at the ports for the border crossings. Thank you.
Mike Dance do you want to address the auto and Pemex question sure happy to I'll, Let me start with the auto.
As you know and we've talked about the automotive businesses is bounced back I think our outlook for automotive is that.
Global demand for vehicles is going to continue to be.
Low for a while it may take a.
18 months or so for that to completely recover.
Certainly there has been changes in Mexico auto production.
In terms of where those cars are going and what's being made so we'll probably perform.
At oral a little bit below what those forecasts look like.
On the refining side of the house.
It's interesting.
Look at it Pemex.
Pemex is producing more of what they are selling.
But they are selling less there their market share continues to decline.
And their overall production of gas and diesel is flat to down so what we're seeing is we're continuing to see imports from others.
From those other than Pemex continued to increase and we should absolutely be a beneficiary of that.
I believe non Pemex imports according to data we're looking at.
It is increased about 57%.
On a year over year basis through May.
Hey, Brian It's Mike Upchurch, Let me just offer up a couple of thoughts for you.
I know you've been less than constructive on on Mexico, which is understandable typically during downturns, we get hit a little bit harder there, but you know it's hard for us to sit here and say that we've had worst experience in Mexico. If we just look at our own cobot cases, we've had more in the U.S. than men.
It's a go in an aggregate it's hard to say that.
The U.S. has been better in containing the virus in Mexico, I think the data is pretty staggering or in the US you know our volume decline were was down at trough a little bit more in Mexico than the U.S., but it's bounced back a heck of a lot stronger too.
So you may want to think through those issues.
Refined product is grew in the month of June it's growing again in July so we're back on a growth trajectory. After people went back to work.
Plastics is played out to be relatively strong for us and we got tremendous operating leverage in Mexico. So.
We we think Mexico's are great place for us to do business and will continue to be a great place for us to do business.
Hi, Thank you.
The next question comes from Jason Seidl on.
Please go ahead.
Thank you Hey, good morning, everyone.
Wanted to chat a little bit about the outlook.
For near Shoring, you guys touched on it a bit.
But wondering how much cobot as maybe put a pause on some of those plans for some people and how do you view it going out 2021 and beyond and maybe you could also.
Throw in your relationship with the Mexico Mexican government I know there's been.
Little bit of chatter of late.
About the 2027 reexamination.
As of year agreement with them.
I will maybe take a first shot at that and then and then ask as data to make some comments but.
You know our relationship with the Mexican government is is very very strong very positive.
And as I mentioned the transition that we have.
I've had in place for a year and a half now was really very intentional.
Kind of knowing that.
That Jose was thinking about moving on.
Moved Oscar into this position a year and a half ago.
At exactly the point that the new and low administration.
Went into into power, so that Oscar could be side by side with Jose from the very beginning of this new administration getting to know the people the decision makers and and.
Not avoiding that situation, where we had a transition in the middle of the administration. So I think our relationship with all levels of government is extremely strong I mean, we are we are.
I would say it this way, but we're a big deal in Mexico, sometimes.
We we have to fight our lip a little bit because we're not the biggest we're not the we're not the headline or in the U.S. or in North America in general, but we are a big deal in Mexico, and and we have just terrific relationships.
Long going but to your question about near shoring.
And the opportunity there I know theres no doubt that there is a huge opportunity as a function of U.S.M.C.A. being resolved in place.
The dark cloud of uncertainty that has existed for two or three years over NAFTA and what would happen with the trade agreement has been removed we have certainty for another 16 years is have you seen improved deal and you couple that with the.
The relationship between the U.S. and all of North America in China, being strained and I don't think Theres any doubt you guys.
See this in your coverage of other companies that supply chain leaders are just favoring extended global supply chains, and particularly China, that's going to take a while play out.
So I can't tell you that we've got a long list of shovel ready projects and investments.
Think to covert endemic has slowed things down we've got to get through this and we have some issues to resolve in Mexico as well in terms of the investment climate there but.
We'll get through those and longer term.
All of that is is points to a very positive profile in Mexico.
As far as the.
The concession and the exclusivity you put out a nice piece the other day, Jason and I think you really characterize it correctly.
You know this this doesn't.
Result in and just a an open access environment in 2027 or 2047, there. There's a process that someone would have to go through in order to make the case.
But there is a lack of effective competition and then determine what the remedy to that is.
So we're not to we're not.
Afraid of that situation I think you all most people in this call I understand how trackage rights work.
As a remedy to lack of competition and how trackage rights don't work I think the regulatory agency, particularly the head of the regulatory agency in Mexico, I understand that so I think you've got kind of clear eyes in terms of knowing how trackage rights were.
And.
In theory.
The there if the regulatory framework develops in in a manner that is.
Somewhat consistent with the U.S. and even the Canadian model.
It's very difficult for the guest railroad in a trackage rights situation to have an advantage over the host.
So we'll do everything we can to make sure that we're providing the service the value all of those things to our customers to to limit that exposure, but at the end of the day if that if thats the way the regulatory framework develops we don't see that as a significant game changer.
Our or risk to our franchise in the value of our franchise longer term.
Ask Jose Jose an Oscar had been very close to the regulatory agencies and the and the co for say the antitrust agency just to comment on some of the more recent conversations we've had with the with those agencies.
As a.
This is hosting yes, but this is jose and just to add to your comments.
Importantly to consider.
The on demand.
Slides both struck with rising demand boats are granted has to be granted to quote central marys.
So not much to everyone to wants to ask why would track that's I think thats on put them on both with the country the and the.
Thats completed yet.
It's figured that has been already implemented and added to that you do not from one another on mother on schedule Maui. So it's something that they both these are now considering also the maybe it happened we gensets you discovered in Mexico.
Don't really want me to explain more on that.
No I think I think thats good Jose Thank you.
Thanks for the color guys.
Okay.
The next question comes from Saul Ludwig.
Please go ahead.
Yes, good morning.
Yeah, you provided some charts, which pretty clearly showed a large rebound in volume that you've seen.
When you talked about the magnitude of that I'm wondering if you could offer some thoughts on what might cause a further increase what could be a catalyst for further growth off this level that that you're now at as you look to second half and then also if you could just offer a brief thoughts on.
How you think about the risk related to the sharp rise in cobot infections in the South if you kind of.
Seen any impact directly or you know just how you would think about the risks to freight.
From that increase in infections. Thank you.
I'll I'll take the second one yeah, just as you know Thomas just very difficult to predict so we are continuing to be on our toes and I think we've learned a lot.
Through the the April made downturn.
What to do how to respond to think.
Sammy mentioned in his comments.
The team is getting stronger we've learned a lot we have the culture. The mindset the the ability for the team to know what to do and respond accordingly in the event that we see another downturn and a lot of confidence that the that with it will will perform at least.
As well, maybe better if that happens, but we don't know.
As far as just doing the things that we need to do to continue to keep our employees safe and protect our core.
Operations and business continuity, we haven't stopped I mean, we haven't we haven't insisted we haven't brought people back to the office that are working from home. We've continued to use the same practices and procedures in terms of.
Sanitary guidelines that that we did from the very beginning so we're not the we're kind of assuming that that's going to happen in the practices that we've had in place that have resulted in really good outcomes for us we're just going to continue.
To do those things as far as.
The first part of your question Theres no doubt that.
Intermodal.
We continue to see good growth there refine products I think the oversized growth areas that we've talked about the for the last couple of years before the covert downturn, we still feel very confident that those opportunities are there.
And.
You know, we're kind of getting back into that mindset of service begets growth than if we continue to provide the kind of service and value that.
We think we can provide the customers consistency reliability.
And and then the cost profile and asset utilization all of that that that weekend realize those growth opportunities longer term and then.
Cap onto that the comment I made in the previous question about the longer term outlook for Mexico, given resolution of the trade agreements and.
And the attitude toward to China and Asia.
We still feel very good about the long term growth profile here.
Great. Thank you.
Welcome.
The next question comes from and Huckster.
America Merrill Lynch. Please go ahead.
Great. Thanks, Good morning, Sammy I got to say I still can't tell if your enthusiastic about this PSR stuff or not.
But but.
Just a lot of concerned about the return of the industrial demand in Mexico. So Mike. Thanks for your thoughts there, but can you give maybe some more thoughts on intermodal how things are progressing at lies or other cross border.
Thoughts on the peso impact and any shifts you're seeing post u_s_m_c I if any thanks.
Sure I guess.
I'd like now yes go ahead, Mike NAV.
Okay. So I think.
We are watching the industrial and consumer piece up fairly well as I mentioned earlier the primary area of weakness there looks like it's on the metal side of the business for US we are getting positive feedback from metal producers that indicate that that's going to begin turning around here as they work down those those inventories.
With respect to.
Intermodal.
I think the cross border business.
He has been returning nicely for us.
In part because of growth on retail of moving into moving in and out of Mexico, But then you also have the.
Automotive parts. So intermodal should continue to grow I think the or the cross border intermodal should continue to grow I think the last ROE and the interim Mexico is going to continue to be a bit if a difficult position because truck capacity remains readily available and obviously with the.
Value of the peso, that's a more attractive option. So we'll continue to evaluate that situation, but thats currently how we're looking at it.
Great. Thanks, Mike.
Thank you.
Next question comes from Bascome majors Susquehanna. Please go ahead.
Yeah. Thanks for taking my question.
With the surgeon traffic, maybe taking a step back yard and.
Just the case, yes network have you seen any particular pinch points emerge either with your interchange partners at your interchanges are at other key nodes in the North American network, just trying to see whether there might be pockets, where capacity could be constrained whether or not resource needs to be added.
Fix that thank you.
You might you must have been listening to some of our learning some of our.
Running calls.
The interchange partners are seeing the same IBT, they're saying the same surge as we are seeing.
And as a result in Kansas City.
Have a golf can oaky and and we did see you know a flub off of cars coming.
From interchange partners I'm, not going to name them and.
And we have to adjust to that and we did adjust to it like it took a tool are saying they live it was actually in the past couple of days and we were very focused.
We had like.
Double the number of cars to be switched on the typical day all coming in at the same time.
We had any color from it and we are back to normal now and and the key thing here when I talk about the team being resilient and strong.
Is that.
No Thats and Bob I'll start to 9%.
Our bound to have.
Cuts off noise. Okay. I mean this is an example, I get all the time, there's like a cod was a manual transmission.
Okay and you go from one to two two to three you know you've seen the shift and then after that to go out to steady state. So it moves the pockets move from the median line to Kentucky in Kansas City before that we had an issue was the bridge the few days before that actually where the week before that.
We had such as where we felt tightness locomotives and the key saying that the team is doing different now is that we bad notes because of the noise because in railroads you've got the noise from one place and triples. So you have to make sure you don't look at the symptoms you look at Bill would you.
Find a road any address it and you fix it any resist the temptation a falling back.
And going back to an old TSV and all schedule of trains and swelling in adding more train starts or adding more locomotives. So that is is that trick and the team is getting better and better added but the answer to your point, yes. It is true.
You see it was interchange partners like us.
And at that they are having the same thing has us and it's going to subside.
As as things settle down.
Thank you sorry.
Thank you.
The next question comes from Ravi Shanker of Morgan Stanley. Please go ahead.
Oh, great. Thanks very much.
If I can just follow up on the or and kind of operating leverage discussion will you on the call.
So if you if you guys saw your Youre carloads down 6% of new crew starts down 29% exiting through Q, you should have seen a pretty significant increase and the operating leverage in the back half of the second quarter. So just wanted to confirm if you.
I saw that are not enough that's into Twoq trend and also I know you want to give forward guidance and who knows what volumes might do but if that same.
Gap between the starts and crews were to hold you like you think it will into Threeq. You do you think you might be able to do like 60 or subsidy or and thank you.
Yeah Robby.
Probably going to stop from giving you a specific number but we we absolutely saw better operating ratio performance April the May may to June for the exact reasons that you indicated and.
In fact, we were late in the quarter, providing a little bit of guidance around where our expense line items might net out for the quarter and you'll see that we actually ended up with some favorability on the labor side.
Some of that was operating leverage and some of that was also favorability in incentives, but we definitely saw with what you're referring to.
And so that continues in Threeq you that should leave you kind of in a much better or position than what do you printed with second quarter.
I would suggest that we will have a better operating ratio in the second quarter or third quarter than second quarter, given some of that operating leverage yes.
Okay alright. Thanks.
The next question comes from I mean, we're also.
Please go ahead.
Thanks.
Mike We definitely got to answer that quarterly our question [laughter] Oh I.
I have a few.
So forgive me if these have been asked before but.
I have a few.
First one.
A few weeks ago, you immediately review, where you talked about the rising koby cases, and I think you were referring to within your own employee ranks. Unfortunately, and how that may impact your ability to execute on on higher demand and obviously in the context of higher growth I will.
I wanted you if you could you just expand on that a little bit and just talk about the risk.
The real risk.
The other question quickly is there were there were some acquisition there were some media reports about you guys receiving inbounds from either strategic war.
Private equity Mike accompanies for an acquisition I, obviously understand how sensitive those matters are but can you either deny or maybe not comment on those just addressed that and the last the last quick rapid fire questions for me as I understand the worked hours in Mexico.
Hi.
If the workers in Mexico on getting the hours that they need to.
Make enough money does that drives a lot of attrition in your Mexican workforce.
And what are the opportunities and risks around that.
If you could address that as well. Thank you very much all right I'll take the second question because as the easiest one.
And then Jeff songer be prepared for the that the other questions about the.
Kobin profile of our employee base and then.
The attrition, but yeah, we saw a lot of noise a few weeks ago lot of media seem to be coming out of Europe or London about issue in the possibility that someone was a.
Preparing for a deal and obviously you know the standard answer is no comment.
On things like that but you know the the story behind that is we've got a terrific plan. We've got outstanding opportunities, we have a lot of runway.
To have a successful run as a independent Standalone publicly traded company and that's our focus and that's what we're going to do we're executing very well we've got growth. There is no doubt in my mind.
Having been in the commercial job for a number of years before moving into this job.
Customers.
Like us because we give them options, we have great relationships with the other railroads and we've just got a lot of runway again for a successful.
On creating terrific shareholder value.
As a public independent company and that's our focus and.
As long as we do that.
We will we will be in great shape.
Jeff do you want to comment on kind of our.
Adequacy of our staffing I think this is what you're getting at given the Covance impact and then the attrition impacting in Mexico.
Yes, yes pitcher.
Yes covered we have seen a slight tick up in our coded cases really both sides of the border.
But as we've talked about earlier I think Sammy mentioned kind of sticking on the U.S. the headcount.
We've got roughly 20, 25% on or for low sales. So we have adequate resources.
To return as needed if needed now, but I think we've done a great job me, we've talked about that for two quarters like we were very aggressive attacking this upfront and I think again, our numbers have been very manageable thus far.
Very good observation on Mexico, we're thinking about that the same way as train starts reduce.
You know the potential for earnings for some employees is as reduced our attrition rate. We just reviewed this in a financial yesterday I think were 45% here on the teeny workforce for normal attrition. So we're letting that play out and I think that could potentially accelerate as you see some additional.
Transtar consolidations and things.
That would drive that you know in addition, we continue as always working hard with our with our Labor group down there to recognize these things and capitalize on them. So I think again, our workforce is stable we've managed it appropriately with some additional opportunities.
For attrition as we change our TSB models.
Hi, Thank you have a good weekend everybody appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Ottensmeyer for any closing remarks.
Okay terrific.
Thank you all I think we got all of our questions in and can just a under incredible circumstances fuel.
Very good about the way we performed through this wild swing of volumes and.
I feel very good about where we're positioned for for the future. These cost savings will stick as Sam you mentioned the culture. The mindset. The team is performing extremely well we are confident that we're going to begin to see growth return.
Looming that we don't have a another big setback with the co. The second wave and look forward to getting together in 90 days. Thank you all and have a great weekend.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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