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spk18: Good morning and welcome to the Kansas City Southern Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. It is now my pleasure to introduce you to Ashley Thorne, Vice President of Investor Relations for Kansas City Southern. Please go ahead.
spk24: Thanks, Jason. Good morning, and thank you for joining Kansas City Southern's fourth quarter and full year 2020 earnings call. Before we begin, I want to remind you that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act as amended. Actual results could materially differ from those anticipated by such forward-looking statements, As a result of a number of factors or combination of factors, including but not limited to, the risk identified in our annual report on Form 10-K for the year ended December 31st, 2019, and in other reports filed by us with the SEC.
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spk24: Forward-looking statements reflect the information only as of the date on which they are made. KCS does not undertake any obligation to update any forward-looking statements to reflect future events, developments, or other information. And with that, it is now my pleasure to introduce Kansas City Southern's President and CEO, Pat Ottensmeyer.
spk13: Okay, thank you, Ashley, and good morning, everyone. Welcome to our fourth quarter earnings call. I'm going to go ahead and just move directly to slide five a summary of the quarter and a couple of comments here. As the headline indicates, we really had a strong quarter in the fourth quarter of 2020 with some significant challenges. And we'll talk about the challenges and the impact they had on our results a couple of times here. And you can see here, revenue declined 5% versus previous year. And that was impacted by the teachers' outage in southern Mexico, blocking our line from Lazaro Cardenas to Morelia in Mexico City. And we'll share some detail and the impact of that in the comments that follow. And obviously, fourth quarter results, particularly operating ratio and earnings per share and revenue, obviously, impacted by that event as well as some elevated casualty expense, which was really an unusual quarter. I think Mike Upshurst has told me that was the highest casualty-related expenses we've had in well over 10 years. If you look at the chart at the bottom of this slide, we've shown operating ratio and earnings per share in a way that tries to highlight comparable results to prior period as well as focusing on some of the core results. I will mention in the adjusted operating ratio column, the 62.4 last year to 60.2. That 60.2 does include the impact of some of these significant challenges and unusual level of impact. Mike Upchurch, again, will cover this in more detail later, but about one point on the operating ratio due to the Lazaro outages, and about 1.6 points, 160 basis points related to unusual level of casualties. So with that, we'll put 2020 in the books and move on to slide six, which I think is probably more interesting to all of you on the call, which is our outlook. We're reinstating multi-year outlook here. Obviously withdrew some of our guidance over the course of 2020 due to the circumstances that everyone's aware of. So we are expecting revenue growth for 2020 in the double-digit range, and Mike Nance will talk more about that in a few minutes. Operating ratio, we are targeting 57.5 in 2021 and 55 to 56 in 2022. EPS, $9 this year, increasing to $10.50 to $11 range in 2022. CapEx for the next couple of years, around 17% of revenues and free cash flow in excess of $700 million in both 2021 and 2022. So I think the punchline here is we feel very good about 2021 and beyond. We think we've got good visibility to our business pipeline and cost improvements, and we'll cover both of those over the course of the next several minutes. And we feel that we are set up very nicely for 2021 to have a terrific year, assuming, of course, that we have a little help from the economy, the pandemic recovery, and stability in some areas that were not so stable in 2020. So again, we'll get into a lot of details here, and I'll come back at the end for some summary comments. With that, I'll turn the presentation over to Sami Fahmy.
spk32: Yeah, thank you, Pat, and good morning, everyone, and thank you for being on this call. I would like to start on slide 8 by thanking the operation team for all the hard work and resiliency in the face of incredible adversity, and I think Pat touched on some of the items. I will repeat a bit here, but, you know, we are running trains and servicing customers in the middle of the worst pandemic, you know, that humanity has seen in the last hundred years. And like all the other railroads, I'm sure, you know, we had a lot of cases. We had 650 cases of COVID. And on any typical day, you have about 5% of crews marking off, you know, because of COVID. So we had to face that challenge. And simultaneously with it, we had this blockade for 59 days in the Lazaro area, you know, with the teachers' protest, which is unrelated to the railroad. Compounded with it, a hazmat rule that came in effect.
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spk32: in Mexico that reduced the maximum time on duty for crews and affected us by about 200 new crews per month in Mexico, which is significant and causes delays for trains. Now, thankfully, this hazmat rule has been reversed, at least for a couple of months, and that we are seeing already. an improvement in the velocity of the network in Mexico because of that change. People also forget that in October there were two hurricanes, you know, that came in the middle of all this. And, you know, the combination and then the derailment that Pat touched on, which was in the Houston area, which is the main artery between the U.S. and Mexico. traffic and it stopped the line for about two days. It was a very unfortunate one-of-a-kind type event. So that clearly had an impact on velocity and dwell, and you see it on the chart here. But simultaneously with all this, and while the volumes were essentially flat with Q4 2019, the GTMs, as you see, were only 1% lower. We manage actually to handle all this with a headcount which is significantly lower than the year before. You know, transportation headcount is 9% lower, mechanical 7% lower, engineering 6% lower. And you also have to keep in mind that, you know, in Mexico, we are not allowed, you know, to cut people. So we use attrition, and then a lot of the cuts actually have taken place in the U.S., And the trick we have used in 2020 since the pandemic started has been to reduce train starts, which reduces cruise starts and makes trains longer. So the trains are longer by 14% and the cruise starts came down by 14%. And a very beautiful side effect of that is fuel efficiency. So we gained 5% on fuel efficiency and the locomotives have come down by 5%. We managed to continue the PSR journey to service our customers the best way we can in the middle of the pandemic. And we had a significant surge in the Monterey area in particular from refined products, which served by like 81%, Q4 last year to Q4 2020. And it was all focused on the Monterey area, which created congestion in that yard. We had our people working on Christmas Day, Christmas Eve, New Year's Eve. You know, the intensity and the passion is definitely there, and we came out of it. So this is good news. If I go now to slide nine, the next slide, I just want to position where we are now on the journey and where we are going next in 2021, which is what has been driving our guidance. If you recall, you know, in 2019, our whole emphasis was on velocity. And the revenue was growing by 8%. And, you know, the whole, whole focus has been on trying to cycle the cars. Because every time you cycle the cars fast, like, you know, grain went down from 28 days to 18 days, cycled, you know, from Kansas City to Mexico and Mexico City and back. You know, you go back and you got more loads. So you got more revenue. So that has been the emphasis in phase one. In phase two, which is, you know, 2020, including the Q4 that we just finished that we are reporting the results on, the emphasis, like I said, has been on train starts and train lengths. And you see it here in the graph, a significant increase in train lengths. Now, at the end of 2020, we started actually converting into the phase three. And the phase three is trying to do the combination of both. We want to maintain the train lengths. We want to even increase it by probably another 5%. And at the same time, we want to regain the velocity, you know, that we have seen in phase one. And the way to do that is to remove the limitations that we have been facing in Q4 in particular, because we have been essentially testing the limits and hitting the constraints, which is helping us now focus our energy, you know, laser focused example, infrastructure. We know that when you run long trains, you need long sidings for train meets. Otherwise, you have to park a train a long way before the other train comes by because that's the only location where you have a 10,000-foot siding. Siding extensions, and Jeff, in a few minutes, will cover the infrastructure projects that we have. Siding lex is very important. Yard configurations are very important because the tracks, again, in yards and the switching lead is very important. When you have a long train, you have to double over on two tracks and all that. So we are going to invest money, but we know exactly where to invest it because we have been hitting these things. So it's not a theoretical exercise. It's based on what we have lived through in Q3 and Q4 of the last year. Labor agreements is another big area where where we are really sounding things now. And we are working very, very close with the union because we have labor agreements that limit us. When you have long trains, when you have more than 120 cars on a train, you have to add brakemen, as an example. When you have more set-ups and more pickups, you know, on line of road, you have to add more brakemen. So with the red light COVID that has been set as of Monday, pretty much over all of Mexico, we have to work with the union to find ways to run our trains with less crews because there is about 175 people now that qualify under a decree because of preconditioned health issues and stuff like that. So, and we have run very well since Monday. There is a charismatic union leader, you know, in Mexico, a very pragmatic man who is working with us and we are very close here and we are creating win-win situations that bode well for us, because once the red light is over, once the COVID is over, and it will be over one day, we are going to hopefully use the techniques and the agreements that are temporary right now.
spk34: Hopefully they can be... How do you solve a monster-sized problem?
spk32: With Miro. Perpetuated, in which case, you know, we can run hopefully with fewer... number of crews. You know, right now we're on four-man crews under many circumstances. So that's another area. The train schedule, which we call the TSP, is very important, and we have been doing a lot of experimentation with that to minimize the number of times that you switch a car and that you touch a car. And, you know, We just found cases here where, you know, we'll block the cars in Venice and block them again in Nuevo Laredo, Mexico, and block them again in Shreveport in the U.S. and Jackson again. Well, we are doing things now to do this in Sanchez, which is a big yard. And we're working with our customers to do better, you know, local jobs. and industry distribution. We used to call it on another railroad, the first mile, last mile. That is very important because that's what the customer sees. And we are putting great, great intensity on working with the customers and monitoring spotting percentages, as an example. Are we giving them the number of cars that they ask for? Are we giving them the right type of car? Because we have customers that have multiple types of cars, depending on, you know, frames for automobiles that will be manufactured as an example. So is it the right number of cars? Is it the right type? Do we get it in the right window? So we have a lot of intensity that is going to be significant importance on trip plan compliance for intermodal as an example, and we're beginning to see winning business because of that intensity. And the customer is going to be right at the center of our efforts. And, you know, we hope with all this, we'll add another $50 million of savings And, you know, Mike will get more into that. So, at this point, I will turn it to Jeff. He will go more into the infrastructure. Jeff?
spk21: Okay. Thank you, Sammy, and good morning. I'll start my comments today on slide 11. And as Pat indicated, we are targeting capital expenditures of approximately 17 percent of revenue for 21 and 22. Expanding on those plans for 21 CapEx, this map highlights some of the main focus areas. Related to those investments, supporting our PSR phase three goals of service, volume growth, train length, and productivity improvements. In the north zone of Mexico, we continue to have tremendous growth in cross-border volume, which was 18% for the quarter. As Mike Natz will discuss, refined products volumes led this growth story at 82% higher for the quarter. One dynamic we've seen this quarter are significant manifest volumes moving to multiple new transloading terminals in both the Monterey and San Luis Potosi areas. To support these new opportunities in the Monterey area, we have redesigned some local train services and have developed new infrastructure projects separating Monterey into separate different service zones providing improved proximity to customers, faster local cycle times, and improved service designs. We will continue with infrastructure work at our Sanchez terminal to allow for additional blocking and building of trains at that terminal to more efficiently serve the greater Monterey area and to improve receiving and departing of all cross-border trains. Reconfiguration of yard leads in and out of our Salinas-Victoria intermodal terminal and the addition of intermodal cranes will provide significant productivity improvements in the terminal and support our intermodal growth. Another characteristic of our infrastructure in Mexico is the density of customer facilities directly served off of our mainline, which means the mainline can be blocked for periods of time while spotting and pulling cars from those industries. As more of these facilities are constructed in the Monterey and San Luis Potosi areas, we will continue to modify our infrastructure with additional double main projects and new separated industry lead tracks. This will provide for more efficient switching for customers and allow more through trains to pass through the network unimpeded. Last year, we started multiple siting extensions to support our PSR train length initiative, and we will continue these into 21 and beyond as we look to capture additional productivity benefits with train length and more efficient meet pass capacity. Turning to slide 12, I'll provide some brief comments on ESG matters following our announcement this week that we have committed to a science-based targets initiative focused on greenhouse gas emissions reductions. Fuel efficiency is a major component to achieving this target. As illustrated in the slide, we continue to see consistent improvement in fuel efficiency and have accelerated these improvements recently under our PSR operating model, providing both cost and environmental benefits. While we are on track to achieve our current goal to reduce CHG emissions intensity by at least 12% by 2025, our new science-based target will establish an even more aggressive, longer-term goal. As you can see, there are several positive ESG activities on this slide. One area I would like to highlight relating more to operations is our relationship with the Mexico Labor Union. As Sammy mentioned, we have talked in the past about some differences in our Mexican collective agreements and our goal to modernize these agreements to support a more efficient operation. Approximately 15% of our Mexico T&E workforce is currently on COVID-related leave, with the majority out under the government mandated stay-at-home order. We've had several recent successes with the union related to our collective COVID response and have received tremendous support to minimize the overall impact to the operation. The union has allowed us to modify group consist requirements, relocate employees and modify some operating rules to provide for continuity of service during the pandemic. We believe these recent successes paved the way for additional positive negotiations and operational benefits in 2021. With that, I'll turn the presentation over to Mike.
spk22: Hey, thank you, Jeff, and good morning, everyone. I'll begin my comments on page 14 with an update on our fourth quarter performance. Overall, as you already heard from Pat, revenue was down 5% on a 3% decline in car loads. If we were to hold FX and fuel price constant, revenues would have been down only 1% year over year. And also, as you heard, we experienced a nearly two-month-long teacher strike in the quarter, which affected the carloads moving in and out of Lazaro-Cardenas. Adjusting for these protests, volume and revenue would each have been up approximately 2.5%. And sequentially adjusting for the protests, fourth quarter volumes and revenues would have been up approximately 3% and 9% respectively. All right, looking at the business segments, chemical and petroleum volumes increased on an impressive 18%. driven by strong growth in refined product, which was partially offset by lower LPG volumes, largely due to market conditions and shifts in sourcing. The industrial and consumer segments saw volumes decline 6 percent year-over-year, and this was driven by weakness in our metals business. We are continuing to see lower demand for drilling pipe due to the oil market conditions and for metal products used in infrastructure projects. The good news is that sequential volumes were up 2% or 5% adjusting for the Protos, and we are looking for continued improvement here. We do have some new steel plants coming online here in 2021, and the appliance business has been very strong on strong consumer demand. Ag and min revenue was up 3% on a 4% increase in car loads, and this increase was led by gains in our grain business, which posted a very robust 12% year-over-year volume increase. Looking at the energy business, car loads and revenue were down 12% and 16% respectively. I believe you're all familiar with the story here. Fract sand, crude oil, and coal were all down due to weak demand. And while it may be a while before the oil and gas industries fully recover from the pandemic, we have seen a very nice increase in crude shipments as the economics improved and after the Canadian government lifted their curtailments. We certainly expect this to continue in the near term. Looking at the intermodal information on the chart, we provided you a specific example of how the protests affected this business segment. As you can see, our year-over-year intermodal car loads and revenue were down 7% and 20% respectively. But removing the Lazaro business, you can see our intermodal volume would have been up a very healthy 11%. Lazro impacts aside, we saw very nice growth on our cross-border and domestic business. Similar to last quarter, we were seeing inventory replenishment, e-commerce demand, and tight truck capacities being helpful. Lastly, our automotive items were down 4%. We did see a nice sequential recovery as U.S. vehicle demand was healthy and certain finished vehicle inventories remained low. In the latter portion of the quarter, we picked up some new business. specifically with the launch of a new electric vehicle that's being produced in Mexico and shipping to Kansas City which incidentally is a very nice length of haul for us fourth quarter core and contract pricing held up well we're maintaining discipline pricing strategy and targeting inflation or better pricing increases we also continue to focus on yield optimization and win-win solutions with our customers turn into page 15 I'd like to highlight the performance of our cross-border and refined products business. This strategic growth area has performed very well, with cross-border year-over-year revenues increasing by 17% and our refined products business growing an extraordinary 87%, which is very notable when you consider the COVID impacts on refined product demand. Returning to cross-border, for just a moment, our ag-min and chemical and petroleum business units both achieved cross-border volume and revenue records, and our intermodal cross-border franchise business delivered another strong double-digit growth quarter. We continue to see excellent opportunities in both of these areas. Turning to page 16, you'll find our 2021 outlook. As Pat mentioned, we expect double-digit revenue growth in 2021. And looking at the slide, we've provided an FX and fuel constant bridge to help explain our outlook. Working backward, favorable COVID comps, particularly in the second and third quarters, aided by favorable macroeconomic environments, will provide 6% to 8% lift year over year. Second, we believe our unique growth drivers, including the refined product and cross-border areas I just mentioned, will contribute another 4% to 5% to our overall growth. As a reminder, the Port Arthur Drubit project we talked about in previous calls continues on schedule and is expected to be operational in the second half of 2021. And lastly, we expect favorable fourth quarter comps resulting from Lazaro protests to provide another 1% of growth. In summary, while not without some challenges, we had a very solid quarter. Looking forward, while COVID resurgence is a risk, we're very optimistic about 2021. The combination of our revenue opportunities paired with increased service focus as a part of PSR Phase 3 will drive an impressive growth year-to-year for Kansas City Southern. And that concludes my comments. I'll turn things over to our CFO, Mike Upchurch.
spk11: Thanks, Mike, and good morning, everyone. I'm going to start my comments on slide 18. As Mike indicated, volumes declined 3% while revenues declined 5%, and that was negatively impacted by fuel surcharge and FX. that combined reduced our revenues by four percentage points. We also experienced some negative impacts from the teachers' protest on our Lazaro line that I'll cover in more detail on the next slide. Our reported operating ratio was 62.2. That was negatively impacted by a one-time impairment of a $13.6 million software development cost impairment. And despite our challenges related to the Lazaro line protest and unusually high casualty costs this quarter, we managed to improve adjusted OR by 220 basis points. Our reported diluted earnings per share were $1.80, adjusted for FX and the write-off of the software development costs. Our adjusted diluted earnings per share were $1.89, up 4% over the prior year. Turning to slide 19, I want to cover our fourth quarter results that were negatively impacted by the teachers' protest and elevated casualties. Although we're still feeling the lingering impact to these protests on our Lazaro business as shippers have understandably been a little bit slower to direct traffic back to Lazaro, we really view both items as largely discrete events that should not continue at those levels in 2021. To better put our quarter into perspective, you can see a bridge here of our adjusted operating ratio and adjusted EPS from fourth quarter 2019 to fourth quarter 2020. The shortfall to our forecast from the Lazaro impact was about $23 million in lost revenue, which we believe impacted our Q4 operating ratio by about 100 basis points and EPS by about 13 cents per share. Additionally, unusually high casualty costs added an additional 160 basis point impact to our OR and a 10 cent impact on EPS. And while we're disappointed in several high impact casualty events in the quarter, you know, we do not believe the unusually high 26 million in casualties are reflective of our normal operating trends. And I actually went back 15 years and I can tell you we never had a quarter like this. We were kind of snake bitten here. So really, as you look at the quarter, set aside those two events, we think our core earnings growth in the quarter was more around 480 basis points and 30 cents per share. So turning to the next slide, let's talk about operating expenses. Our adjusted operating expenses declined 8%, evidence of continued good cost management. Other than the previously mentioned $12 million increase in casualty expenses, we continue to benefit from strong cost management across the business, as evidenced by declines in comp and benefits, fuel, equipment, and purchase services. And let me just touch on comp and benefits and fuel. You will see more details on slide 29 in the appendix. But comp and benefits declined 11% driven by lower headcount and work hours, lower incentive comp and FX. Our quarterly average headcount was down 7%. Savings of $11 million from lower headcount and work hours as a result of lower volumes on our network, but more importantly, train consolidations, driving fewer crew starts and reduced hours worked. Mechanical reductions due to fewer locomotives and freight cars and optimization of certain G&A functions that we executed mid-year. For 2021, we expect our headcount growth to remain well below volume increases. as we continue to lengthen trains, creating further operating leverage. Fuel expense declined 34% in Q4, driven by reductions to fuel price, better efficiency, and lower consumption. And for 2021, we continue to believe fuel efficiency will be a large opportunity for us as we continue improving our cost structure. And you can see more details again on slide 29. Turning to capital allocation on slide 21, free cash flow was up 29% despite the pandemic to $554 million in line with our previous guidance of $550 million. I think this clearly illustrates the resiliency of our rail operations operating during a pandemic. and is proof of our ability to continue to generate substantial amounts of cash flow. 2020 CapEx came in at $410 million below the outlook of $425. And despite the significant pandemic challenges that KCS sustained in 2020, we actually increased shareholder returns by 23%, including a 26% increase in share repurchases. And during the fourth quarter, we repurchased approximately 2.7 million shares and an average price of $179.77. And before I turn the call back to Pat, let me give you a little bit of color, I think, on our guidance. You know, listen, we're really proud of the full year 2020 financial performance we delivered despite operating through what we hope to be a once-in-a-lifetime pandemic. Our team at KCS, I think from top to bottom, you know, really rallied against all odds and delivered terrific performance. And, you know, as Sammy indicated, I'd like to thank really all KCS associates, particularly those out in operations who don't have the luxury of work-at-home options like many of us do. So during the year, we improved our operating ratio 250 basis points. while volumes declined 6% and revenue declined 8%. And that improvement was the second best OR improvement in the past few decades, only bettered in 2010 as we emerged from the great financial recession when our revenues grew 23%. And as Mike mentioned, we feel really good about our 2021 growth prospects of double-digit revenue growth. We have some easy comps, obviously, not just pandemic, but with Lazaro. And when you look at it over a two-year basis, you have a two-year stack revenue growth of roughly 3% or 4%. Economic indicators around industrial production, low business inventory levels, high order levels, manufacturing PMIs of greater than 60%, and potential federal government stimulus and infrastructure spend give us some confidence that we can grow exceptionally well in 2021. Additionally, we do expect favorable mix impacts and continued strong growth in our cross-border business, particularly refined products and intermodal. You know, as it relates to our OR guidance of 57.5, the improvement of about 300 basis points is only nominally higher than what we delivered in 2020, and particularly in light of expectations we have for revenue growth in 21 versus experiencing revenue declines in 2020. Our incremental margin assumptions of 60-plus percent, I think they're very achievable as volumes return to our network. And we've demonstrated, you know, obviously a solid track record of delivering PSR savings We fully believe the $50 million target we have for 2021 is very achievable, and we have provided some additional details for you on slide 28 in the appendix. And with that, I'd like to turn it back over to Pat.
spk13: Thanks, Mike. I think that was an outstanding summary and kind of a preview of how we see 2021. I will Go back. I know there are typically a lot of employees on the call. Pick up on some comments that my colleagues have made here. And just thank you, congratulate you for your amazing and outstanding agility and resilience through 2020. Very proud of the results and the way everyone responded. We thought we had things kind of dialed in in the first quarter. The second quarter, we went into full contraction mode. And then before we even caught our breath there in the third quarter, we came into full expansion mode. And hopefully we're in a place here in the fourth quarter where we have a little bit more stability. We think we've got good transparency in our business pipeline and good transparency in our cost outlook as we move into 2021. So, yeah. Again, as Sammy and Jeff mentioned, appreciate the flexibility that all of our employees showed and especially call out the Mexican cooperation we had with our Mexican unions as the protocols, the health guidelines and protocols that were in place from the federal level, federal government, uh, had, uh, a real dramatic impact as the traffic light system changed over the course of the year from, uh, red to orange and then back to red in many cases, uh, required a lot of cooperation and, uh, an effort on the part of our, our union colleagues to, uh, to help us get through that and continue to be able to maintain our operations, serve our customers and, uh, really thank them for the effort there. So with that, we'll open the call up for questions.
spk18: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Due to the number of participants on this morning's call, management will limit your question to one. First question is from Tom Wiedewitz from UBS. Please go ahead.
spk07: Yeah, good morning, and thanks for all the detail and the guidance. It's obviously a strong guide, and I think all the detail is really helpful. I wanted to see the revenue growth is pretty strong, and I wanted to see in the refined products momentum in fourth quarter is very strong as well. What do you think the risks are to that kind of, I think you're saying like 11 to 14% revenue growth in 2021 and risk to 2022? You know, is it primarily risk to refine products? Is it, you know, just kind of macro industrial economy risk? Or how do you think about some of the key assumptions underlying that strong revenue outlook?
spk22: Thanks for the question. When we look at the risks, I think at the top of that list is just the COVID resurgence, what could be happening on that front. We are expecting, as Mike pointed out earlier, the macroeconomic environment to cooperate here. We're expecting the administrations, certainly in the US, to provide economic stimulus and What happens with those, I think, might be considered risks. With respect to refined products, we've grown even while the pandemic has curtailed demand for products, and we do think that that's going to continue. We look across our business units and refined products, cross-border growth. I mentioned Port Arthur earlier. All of those things are expected to move forward and And while there may be some ups and downs, we believe that the outlook that we've provided is very reasonable.
spk11: Yeah, I might just add, you know, Otto is off to a little bit of a slow start with this worldwide chip shortage. And then, of course, Lazaro's, you know, started off a little bit slow here as well. But, you know, January – You know, set aside Lazaro for a second and fuel and FX impacts. I mean, our volumes of revenue are up high single digits here in January. Now, realize January doesn't make for the quarter of the year, but, you know, we're off to a pretty solid start here and feel pretty good about the guide here.
spk07: Okay, great. Thank you.
spk18: The next question is from Ken Hoekstra from Bank of America. Merrill Lynch, please go ahead.
spk14: Hey, great. Good morning, Sammy. Thanks for the great PSR rundown and Pat, Mike, and Mike for the great outlook. Jeff and Sammy, let me throw over to you, given that the robust outlook, Sammy, you made some comments about bumping up against capacity, yet you knew where to spend. Does that mean maybe constraints on Mike's ability to hit that double-digit growth near term? And then within that, is there a difference in growth rate you're targeting between Mexico and the U.S., obviously outside of the teacher strike rebound? Thanks.
spk32: Well, very good question, Ken. You know, some of the limitations we are hitting, we are already solving, and we are in January. Example, I gave some of the constraints that we have with train lengths from a labor point of view. You know, if you run more than 120 cars, you have to have a four-man crew. If one guy doesn't show up, well, the whole train waits. You know, that kind of thing, we... We managed to do things now with the union. It's helping us out tremendously. COVID is the catalyst in this case, ironically, but it is already happening and we are in January. When it comes to infrastructure, we have done some siting extensions that came live. We have two between Venegas and Benjamin Mendez, which is an area of a lot of trade needs. And they come live in Q4. So this thing is in motion already. San Luis Potosi Yard, we have been working on it for a couple of months. And I think this month, the main line used to go in the middle of the yard. Now it's not going to go, which is terrible. When you are doing switching operation in the yard, trains are held out of the yard waiting to get in. That is coming online, I think, at the end of this month. We have actually, you know, one of my former colleagues running engineering. We brought him in from CN. He was retired, and he is leading this effort and leading engineering, and he is really stepping foot on the pedal. we are doing a lot of the satellite yard, satellite service areas, you know, in Monterey that Jeff is talking about, you know, we are trying to accelerate them as fast as possible to absorb a lot of the volume. And then the trick in the meantime can, is the service design, which is, you know, how do you design your work to do things the smartest way possible? Like, We put some new cranes in the intermodal terminal Victoria Salinas in the Monterey area. Well, now we're building blocks in that terminal and also we lengthened the leads for the switching area and we're doing that now and we're taking work off of Nuevo Laredo as an example, which is just before the bridge and I have not talked about the bridge, but Here is another infrastructure issue. You know, we have one bridge now, you know, Jeff has covered that in the past that we already have the permit to build the second bridge. Now, obviously that is not going to help 2021. But in the meantime, the windows, I talk about that often. Hopefully next week we'll shorten the window from six hours to four hours, working very, very closely with customs on the US side and the Mexico side. You know, these windows of northbound versus southbound, you know, many trains, you know, will miss the window, like I said before, by like half an hour. Now they have to wait for the next window. So the shorter the window, the better it is. But the nice thing is with this implementation and the Mexican customs not having to cross, you know, the bridge, you know, to go to the south side, the Mexican side and the U.S. side, you know, with four-hour windows, if this stabilizes, then we'll go to zero windows. And that hopefully will happen in a very short time, short term, like it would happen in Q1. So this thing is already in motion and we should not hinder the growth that is coming our way because the growth is actually, is very, very, is very steep. And this is why I was saying also that we are very focused on the customers, very, very focused on the customers. We are putting things in place so that we don't have to wait for a customer to complain, okay? We want to know any issue with the customer before the customer even raises his hand because we want to get all the volume we can get. So, you know, surely we have a lot of work, you know, to do. Some of it takes time, you know, construction. But there are a lot of things where we are turning the dials, okay, to be able to absorb the volumes with what we have. And I hope that answers the question, Ken. I don't know, Jeffrey. It does. Okay.
spk11: The mixed issue that you asked about, we do have an assumption of slightly higher revenue growth in Mexico than the U.S.
spk18: Great. Thank you very much. Appreciate the time and thoughts. The next question is from Ravi Shankar from Morgan Stanley. Please go ahead.
spk27: Thanks. Morning, guys. So slide 28 has a very good detail on the kind of PSR walk by bucket from 19 to 2021. Can you also share what that could potentially look like for 22, given the pretty healthy OR you're getting to for 22?
spk11: Yeah, we've not made any assumptions around any incremental new initiatives in 2022, but the kind of carry forward benefit of what we're doing in 21, has another 30 plus million of savings in 2022. And that's how we get to the roughly $250 million of structural permanent cost savings that we'll have generated out of our PSR efforts.
spk27: Great, thank you.
spk18: The next question is from Jason Seidel from Cowan. Please go ahead.
spk20: Thank you, operator. Everyone, good morning. Hope everyone is healthy and safe. Can you touch on mix a little bit more in pricing and how we should think about it? I know, Mike, you mentioned you have some new, nice, long-haul automotive business that will be coming from Mexico up to Kansas City. Wondering when that's going to hit, how we should think about it, and is there any other mixed impacts that we should be modeling in as the quarters move on in 2021 and 2022?
spk22: I think there will certainly be some puts and takes. Revenue per unit on some of our faster-growing segments like refined products will provide us with some lift. I think to the extent that we'll have some intermodal comps related to Lazro, those might swing a little bit the other way. But we believe in general that that revenue per unit should improve moving into next year.
spk20: So positive for the – mix is going to be an overall positive with all the puts and takes as you view it?
spk22: Between mix and the pricing increases, it should be positive, yes.
spk11: We'll get a few points, Jason. Yep.
spk20: Okay. If I could squeeze one more in. Thoughts on the Biden administration and the relationship it's going to have with Mexico? Love to hear that.
spk13: Yeah, Jason, it's early to tell, but I think there are some positive signs. I was on a call yesterday that was arranged through the U.S.-Mexico CEO dialogue with the new Undersecretary of North America for Mexico and talking about sort of initial outreach and some, you know, the way they're currently feeling about the relationship with the U.S. And, you know, Too early to tell and is the old phrase actions speak louder than words, but I think there's some encouraging signs that. You know, small things that not small things, I think fairly big things in terms of just the. Taking some of the attention away from the relationship, I believe on the 1st day in office, President Biden signed 2 executive orders. 1 to support and work with Mexico and vaccine distribution. And the 2nd to to withdraw the. a lot of the program and funding for building the wall. So those are things that would appear to be intended, and the reaction in Mexico was positive to put the relationship on a good course. Now, that's good to hear. Gentlemen, I appreciate the time, as always.
spk20: Be safe. Thank you.
spk18: Thanks, Jason. The next question is from Chris Weatherby from Citigroup. Please go ahead.
spk15: Hey, thanks. Good morning. You know, maybe we wanted to follow up on sort of the longer-term OR opportunity. You know, Sammy, we talked in the summertime about the potential to maybe get towards this mid-50s OR, and obviously you guys are kind of putting that into the targets as we move forward. You know, we talked in the summer about different mixes and where you can find that opportunity. You know, you've given us this outlook through 21 in terms of the buckets. As you go out sort of bigger picture, you know, issue, we still think that sort of labor productivity and maybe fuel efficiency are the biggest buckets. Is there anything that maybe you found that's been a little bit different or unique as you think about the network going forward?
spk32: Thank you, Chris, for the question. And I recall in the summer the analysis that you did that we felt is quite accurate. And I think you are saying that we can get to 55%, which is you know, what we are saying here in the guidance, you know, for next, for 2022. So, yeah, the areas, I mean, the fundamental thing is we are trying to keep the cost as flat as possible. Like we, and that showed in Q4, like the headcount is very low and we're trying to keep the cost as low as possible and then benefit from the fantastic revenue opportunity that we are uniquely positioned to have at KCS, you know, with the Mexico and cross-border traffic. And that is very unique to us. So, you know, as long as we can hold that cost and manage to absorb the additional volume with what we already have without adding too much to what we have, that operating ratio is just going to keep coming down, right? You know, so it's really, it's going to be a combination of cost takeout, but also revenue growth. And the revenue growth is going, is phenomenal. I mean, when you talk about double digit now in 2021, you know, because now we are comparing to easy comparables, you know, for Q2 with the pandemic and all that. If we can get that, you know, absorb that revenue, double digit revenue growth and try to hold the line as much as possible on the cost, you know, I'm talking here about crews and maintenance on locomotives and car, and get more fuel efficiency, which is where that train length comes in, and keeping those train starts to where we are. We monitor them every morning, Chris, like we have targets, we said, that are below the pre-pandemic counts of train starts and you check them every morning and check the train lengths every morning and the crew starts. We want to keep these to the gains that we made during the pandemic and at the same time absorb the revenue growth and then, you know, with more emphasis, with some help from infrastructure and with some help from labor, like I said, if we gain now velocity, You know, I mean, velocity is an important piece to answer your question. Velocity is an important piece. You know, we hope to increase the velocity by like one mile per hour, you know, which is not very, that's not very demanding, you know. I mean, it's not a very aggressive target. Nevertheless, it's a big target and there is a lot of money associated with that. Train lengths is another target. And then fuel efficiency. So these are the three buckets. But again, for the OR, you have these buckets, but out of velocity. And it's so obvious to us now more than ever before. You increase that velocity because the demand is there. The demand is there. And it's not just refined products. It's grain as an example. You know, there's so much demand, you know, in grain. We are focused on improving the cycle, like get that cycle down to fewer days, get more trips per month with the same car sets. And every time you go back, you collect more revenue. So this is the combination, keeping an eye on the cost, but servicing the customers 100% because the revenue is there, the demand is there, and we just have to go get it. So I hope I answered your question, Chris.
spk15: Yeah, very helpful. Appreciate the call. Thanks so much.
spk18: The next question is from Amit Athorta from Deutsche Bank. Please go ahead.
spk04: Thanks, operator. Good morning, everybody. Mike, the unpacking of the 21 guidance was really helpful. I was hoping you could do the same thing on 22 in terms of it looks like you're just assuming high single-digit growth and maybe 70%-ish incremental margins and maybe some accelerated share repurchase. I was hoping you could kind of help us think about that. And then I guess the recovery in Lazaro following the blockades, I think maybe shipper confidence in that route has been negatively impacted. There might be some rerouting to other ports and over-the-road options. I was hoping you could just talk about, you know, how the recovery has been as those blockades have cleared and what you're seeing on that front. Thank you.
spk22: Mike, you want to cover Lazaro? Yeah, I'll go ahead and cover Lazaro. You're absolutely right. It's going to take a little while to restore the customer confidence in that lane. I will say that customers want to be serviced out of that port, out of that area, and we do have customers that are coming back to us. We expect that the confidence will improve as we move through the first quarter and into the second quarter. and those shipments will pick up. Certainly that's the case on the intermodal side of the house. There are other businesses that will immediately go back to moving products in or out of Lazaro, and let me give you a couple examples of that. We move heavy fuel oil from Tula into Lazaro Cardenas. That business comes back immediately. And then we moved steel slab out of Lazaro Cardenas into the Monterey area. And it's just not cost effective to do that other ways. So that slab business will come back quickly as well. So the intermodal piece will take a little while for that to be restored, but other business segment or business unit opportunities will snap back very quickly.
spk11: And Amit, to 2022, I mean, I'm probably not going to go much beyond what we had on page six. But yes, it certainly assumes a continuation of revenue growth, certainly not at the levels that we expect in 21, given the easy comps. And as Sammy mentioned, continued efficiency gains as a result of lengthening trains, that's largely going to be around labor and fuel. We gave you, you know, a robust outlook on free cash flow. And keep in mind that our board has authorized us to tick up our leverage ratio to the mid-2s, which is going to provide, you know, some additional dry powder for buybacks that contribute to the EPS growth that we're assuming here in 2022. So I think combined, all of that should get you reasonably comfortable with some of the numbers that we've got it to in 2022. Yep.
spk04: That makes sense. Okay. Thanks, everybody. Appreciate it.
spk18: Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.
spk26: Good morning. Thanks. So obviously, there are some unusual challenges in the quarter. The service metrics have deteriorated quite a bit, even in the last several weeks. How quickly do you think you can start to reverse those trends and show improvement and speed as well? And then if you could just share what the trip plan compliance was in Q4. I think maybe it was around 60% in Q3. That would be great. Thank you.
spk32: Well, good morning, Alison. For the survey challenges and the numbers, they already started improving significantly. Allison, and it is, we can see it, like it's measured every day. And example, the inventory count in Monterey, okay, it was up to like 3,200 cars. Now it's down to about 1,800, 1,700 cars, which is where it needs to be. This is a very, very nice number. When Monterey gets filled, then we hold back traffic in Sanchez. And then you even can hold back traffic in the pipeline from the U.S. going into Sanchez to go to Monterey. So we measure every morning and we talk about it on the morning call. How many cars do I have in the pipeline in the U.S. heading to Monterey? How many cars in Sanchez are for Monterey? And how many cars I have in Monterey? And how many cars I service the industries in? in Monterey every day. So now we are beginning to serve as the industries in the Monterey area for about 550 cars a day. We were so congested in Monterey because some of that surge in refined products came really as a surprise, as a shock. I mean, when you talk about 80-some percent, I can't remember if it's 81% or 87%, you know, in one surge. pretty much most of it heading to Monterrey. And then after that, when we saw it, it started actually moving to San Luis Potosi and started creating issues in San Luis Potosi, which is another yard in Mexico. So we reacted. And like I said, I had the whole team working, you know, during Christmas and New Year and the time in between to clean up the yard. Because at some point, and the people who are on the road understand this, if you start congesting a yard, you spend all your time now cherry picking, trying to find the cars and moving other, switching other cars. So we said, we're going to take advantage of this lull and we're going to clean up the yard. And we did. And now the counts, like I said, you know, from 3,000 down to 1,800. When you look at Sanchez, you know, it was like 1,500 cars, even 2,000 cars heading to Monterey that were stuck in Sanchez. Now it's down to like 700, we still want to go down to about 300, 400. So this is clearly, clearly coming under control. And you see it when you talk to customers. And, you know, we look at this, at customer issues every day, and we talk about specific customers and how we can help them. And the customers are working with us, the same way as the labor is working with us. The customers are working with us. Now, many of them accepted to work night shift, you know, so that we can run the industry jobs that spot cars to them and pull cars at night so that we have jobs in daytime and jobs at nighttime, which actually gives us a better utilization of our assets. And you don't do everything, you know, all at the same time during the day shift. We can see it. It's palpable. Like the fluidity is back. We see it when the numbers come out. You know, you see it in the velocity and you see it in the dwell. So it is there, Alison, and it is happening. It's already happening. Like we were not as worried, you know, what was it, you know, about three weeks ago, four weeks ago. It was, we were working damn hard, okay? And... But now we feel a lot better.
spk11: Hey, Allison, to answer your question on trip plan compliance, we're kind of low 70s in the U.S. And in Mexico, we kind of dip below 50 late in the year, but back above 50 and need to make a lot more progress there.
spk26: Okay. Thank you, guys.
spk18: The next question is from Brian Austin Beck from J.P. Morgan. Please go ahead.
spk10: Hey, good morning. Thank you. So maybe one follow-up on handling the growth, and then just one on fuel economy. So, Sammy, probably both for you. Can you give us a reminder, at least where you are now and maybe where you exited this year, in terms of fuel economy between the U.S. and Mexico and what assumptions you have baked into the guidance? Because I do believe there's at least some structural challenges in Mexico based on the grades, so the split between the two would help. And then just back on refined products, you've had tremendous demand, even without really the overall market demand coming back. So it's clearly creating some challenges that you're working through. But how do you expect, you know, when the economy reopens, when the vaccines become more distributed, how do you expect you can handle an actual recovery in the broader market and not just the market share you've been enjoying so far? Thank you.
spk32: Mike, you want to take the second one or do you want me to go first? Why don't you go ahead? Okay, I'm trying to remember my numbers. I can tell you that consolidated, we are at 1.24 gallons per kgtm in 2020, okay? And we were at 1.31 gallons per kgtm in 2019, so we improved by 5%. Our goal in 2021 is 1.16 gallons per kgtm, which is an improvement of 6%, an additional improvement of 6%. And again, this is a very, very far, you know, very far cry from being perfect, because as you know, you know, other railroads are at 0.98, less than 1%. less than one, I'm sorry, less than one gallon per kgtm. And actually our operation in the US is in that range. We are at about 1.0 in the US. So the US portion is running very, very close to what the other class ones are doing in gallons per kgtm at one. Mexico is more like 1.54, which has a lot of room to go. And we are continuing that. And we all know that there are some very steep grades in Mexico. But the thing we are very focused on now is the horsepower per ton, which is the HPT. This is the secret. You get it with train lengths. The more train lengths, typically the tonnage is heavier. and you try to do it with the same number of locomotives, so your ratio of tonnage, or the opposite, horsepower to tonnage, you know, goes down. And the less HPT, the better your fuel efficiency. One thing we are really keeping a very eye on, and we created a very little tiny fuel desk, you know, of four people, okay, so it's one per shift, essentially. we are monitoring to make sure that locomotives are shut down when they are not needed. Because when you come back with trains that have empties on them, like grain trains, when we take loads from the U.S. to Mexico, we come back with empties. But you have to reposition the locomotives to balance the power. Well, these locomotives are excess, so you want to shut them down. So that fuel desk is picking up every day, Some people are not compliant with this, so we shut down the locomotives. And that is more relevant in Mexico. That happens a lot more in Mexico. Also, when you take grades, the grades are, let's say, . Well, after that, you know, if you don't have grades, we shut down the locomotive. You don't need it for the rest of the trip. So you keep an eye on this stuff. You keep an eye on the HPT. And sometimes it's a fraction of locomotive, in which case, You say, okay, don't go higher than throttle seven. Don't go to throttle eight, which is effectively a reduction of the horsepower of that locomotive because in this case it's fractional. You cannot shut down the whole locomotive. So we are taking a lot of measures. We are very focused on Mexico to get the gains in fuel efficiency. We are getting gains in the U.S. too because, you know, we added a lot of train lengths in the U.S. We run at 8,000 now in U.S. feet, you know, which is very respectable. In Mexico, we're running at about 6,800, but we are trying to get those HPTs and the compliance. And we even are working with the union to add a bonus, you know, for added compliance with the trip optimizer, which actually is like cruise control that avoids braking and acceleration and burning fuel. And I believe we got that deal done. You know, it's a win-win. You know, it's a bonus for for the crews and it's very good for increasing the compliance and getting more trip optimizer deployed. So we're working on a lot of fronts. Mexico is the focus. And again, we're just aiming for 1.16 to consolidate for US and Mexico. And that is a far cry from the others. And when people ask about the operating ratio, that's why we still have a lot of room in the operating ratio. We have room on fuel, Even after we do the 1.16, we have room on velocity. I mean, velocity target for next year, average for the year is 16 miles per hour between Mexico and the U.S. 18 in the U.S. and about 15 in Mexico. 16 miles per hour, well, you know, what I was before, it was 2021. So we have room there, too. So, you know, I keep saying we still have a lot of room on the cost, and we still have a lot of room on the revenue. So it's a nice place to be.
spk11: Okay, operator, could we go to the next? We have eight more in queue here.
spk18: Jordan Alliger from Goldman Sachs. Please go ahead.
spk19: Yeah, hi. Morning. Just a quick question on the auto thing. I know you mentioned the chip issue. We've seen some of that as well. I mean, is this too small on a global basis to have much of an impact on the recovery given the shutdown in the second quarter of 2020? But just curious your thoughts on that front. Thank you.
spk22: Well, I can only speak to what we're seeing here. We are seeing impacts ranging from nominal or nonexistent at some of our automobile manufacturers. But in other cases, we have OEMs that have not reopened their plants and may not reopen facilities here until early to mid-February. So I think the semiconductor CHIP is hitting different people different ways, but it is definitely impacting us here in the first quarter. Thank you.
spk18: Sure. The next question is from Justin Long from Stevens. Please go ahead.
spk06: Thanks, and good morning. Mike, maybe just a quick question for you on the guidance. Any way you could help us with the buyback assumption that's getting baked into the EPS guidance this year and next year? in terms of the dollar amount you're buying back or the share count. And then maybe on technology, any color you can provide on spending for technology, OpEx and CapEx, the next couple of years versus what you've done historically. Just curious how much of a role technology will play in this growth that you've outlined.
spk11: Yeah, I think on the buyback question, Justin, we're probably going to stay away from exact number of shares. I mean, a lot of that obviously depends on what happens with the price per share throughout the course of the year. But you ought to think about us continuing to apply, you know, 50% to 60% of our available cash to shareholder distributions with the vast majority of that going to buybacks. And also keep in mind the leverage ratio that I mentioned, trying to keep that in the mid twos range should give us some additional dry powder in the back half of the year. So I'll probably leave it at that. On the technology spend, you know, I would tell you we've got a chart in the back. I think it's in the appendix. that we talked about that maybe gives you a little bit of insight into technology spend. It's roughly 7%, I think, of our total CapEx. So we continue to invest in technology. Obviously, with PTC fully implemented now, we're going to continue to move forward with various automation and certainly have capital dollars in our budget to accomplish that.
spk18: The next question is from Allison Poliniak from Wells Fargo. Please go ahead.
spk25: Hi, good morning. Would you talk to any guardrails that you may have in place on the growth side you're willing to accept that, you know, obviously a lot of network improvements have been made, so you want to protect that, but obviously you want to leverage growth there. So how are you balancing to any color there?
spk13: Not sure I understand the question. The guardrails?
spk25: Guardrails in terms of, like, are you focused on profit? Like, how are you working with your customers? You know, obviously you want to take the growth, and it seems like there's a lot of growth out there, but you want to protect certainly the improvements you made on the network. So how are you balancing sort of that incremental load that you're willing to take on with the customers there? What kind of guardrails do you have in place that you sort of don't outpace that network availability?
spk22: So earlier on I mentioned that, you know, we're working with our customers to develop win-win solutions. these would be opportunities where we can work together to improve our efficiencies. It could be how we spot and pull pieces of equipment, or it could be on things like train lanes. So for example, if we have a customer who's running, as an example, 80 cars on a train, on a unit train, but it would be more efficient for us to run 90 cars on that train, we are working to incent them to get us to that 90 train car length or train length in this example. And then we're basically sort of sharing in the benefits. So that's something that we're actively working on with our operations team and customers. And so far it's been received well. Perfect. Thanks.
spk18: The next question is from Scott Croup from Wolf Research. Please go ahead.
spk16: Hey, thanks. Morning. Can you just say, relative to the revenue guidance, what's in the plan for train starts and headcount this year? And then, Mike, just want to understand the free cash flow, $700 million both years, is there a reason if earnings are up 20% or so in 2022 that you wouldn't see free cash flow grow?
spk11: Yeah, we have, you're talking about 2022. We have some incremental tax payments that will happen in Mexico. You're kind of operating on a lag basis where, you know, 2021 cash payments, cash tax payments in Mexico are based on 2020, which has depressed income levels because of COVID. So then your 22 payments will be based on 21. which will have good growth in our income. So that's why your free cash flow maybe looks a little bit low, but then we would expect that to accelerate again going into 2023. And I'm sorry, Scott, I forgot your second question.
spk16: It was just train starts and headcount in the plan for this year. How much do you think they'll be up?
spk11: Yeah, you know, I made a comment around headcount. We believe the growth there will be far less than our overall volume. I would tell you, you know, sitting here today, depending on exactly where all the growth comes from, Think about headcount growth just being up a couple of points, and we're going to try to, through train length, continue to get operating leverage. I know you track the numbers every month when they get reported, and we've shown some pretty nice operating leverage there from the standpoint of growth versus headcount, and we would expect to continue to see that kind of leverage.
spk18: The next question is from Vasco Majors from Susquehanna. Please go ahead.
spk09: Yeah, good morning, and thanks for taking my questions. I just wanted to clarify a couple of things on the 2022 outlook. Does the OR target assume any breakthrough in the four-man crew negotiations in Mexico. And on the CapEx, does that include any anticipated spend on the Laborato Bridge? And maybe just an update on where that stands and what that could mean for your capital envelope if you go forward. Thank you. Jeff, you want to cover Laborato Bridge?
spk21: Let me take the capital question first. I think largely that project is underway. We're in design phase right now. We're targeting completion of that probably early 2023. So We'll start to see some spend this year, bulk of that spend will be 2022. We believe we can handle most of that within kind of obviously within this current guidance. As those design estimates are done and cost estimates are done, that may tweak one way or the other, but largely absorbing that Laredo bridge as part of our normal run rate is the plan.
spk18: The next question is from John.
spk11: Ask him on the labor. No, we don't have any specific assumption that we're going to get that breakthrough. We're just going to continue to manage this through train consolidations. I think we may have mentioned headcount was down 7% in Mexico. So we've been able to accomplish some of that savings just through train consolidations. But we're not giving up on that. As Sammy mentioned, we've made a lot of individual progress and individual asks that we've had, but no, we have not assumed a major breakthrough in any of our guidance numbers.
spk18: Thank you both. The next question is from John Chappelle from Evercore ISI. Please go ahead.
spk05: Thank you. Good morning, everyone. Jeff, you laid out the investment plans in the near term on Mexico for all the obvious reasons of the growth opportunities there, and we know about the bridge. What are some of the investments in this side of the border regarding to trying to take customers, enter new markets? Where are you targeting your investment dollars in the U.S. growth initiatives?
spk21: Yeah, that's a good question. Again, the focus has been largely on Mexico for structural reasons. You know, the U.S. network has been built out over the years with kind of some of these longer sidings. And so, you know, right now we don't see a lot of restrictions, don't see a lot of need on that. Although as we move into the future, I think certainly we'll continue to look at train length opportunities. We look at our core routes, certainly between Kansas City all the way to the border. and continue to look at even further expansion of maybe sightings to continue to expand upon, as Sammy mentioned, the current 8,000-foot train length in the U.S., which is respectable as we go beyond that. We are looking at some of the areas really on the Laredo as you get closer to the border. We are doing some work in the Laredo yard itself this year, which really complements cross-border on the U.S. side. So those are your focus areas. We feel pretty good about the infrastructure in the U.S. being where it needs to be, but we'll obviously keep our eye on things.
spk32: And we are doing, Jeff, we are doing some investment in Candleton. Candleton is in the Houston area, and that is strategic because of the growth in refined products. You know, like a lot of a lot of demand from Corpus Christi and these areas. And, you know, that requires, you know, some manifest strains that, you know, need some consolidation, some switching. So we are investing in – it's not a big yard. It's a small yard in Kendleton. But that strategy is aligned to the refined product strategy.
spk17: Yep.
spk18: Great. Thanks, Sammy. Thanks, Jeff. The next question is from David Ross from Stiefel. Please go ahead.
spk17: Yes, thank you, and good morning. Just a quick question on the cross-border process. Wondering if in the past year has it gotten any easier with U.S. and Mexico customs, if there's anything changing with, say, paperwork versus electronic documentation in the process that might improve velocity and turns?
spk21: Yeah, this is Jeff. I can talk on that. Yeah, we continue to work very closely with customs, more process-related items. Sammy mentioned kind of the shifting of windows. We currently operate on kind of six-hour windows north, six-hour windows south. Again, we've had some success recently. We'll shift those to four hours here, which we believe creates a little more capacity, a little more fluidity, continuing to work towards kind of a windowless operation there. But, you know, a lot of that is is in sync with customs and those processes. So we feel very good about those initiatives, where we're at, the international crew initiative that, again, it's kind of normal course of business now that continues to operate very well. And we have opportunities to continue to expand that. So I guess from an overall process at the border, we feel good. We feel confident in the relationships with those entities on helping us continue to modify that to continue to manage this growth we continue to talk about.
spk17: Is there any talk of a seamless border crossing, kind of how some packages that move internationally clear customs in the air before they even get here? Would it be possible to clear a train before it hits?
spk21: Yes, we absolutely talk. And again, those are items that we have coordinated efforts ongoing to try to get some of that here pushed through. We are clearing at destination. In Mexico, you've got a lot of that grain that does have to sit at the border and go through some clearing processes there. So, yeah, those are absolutely other components of what we'd like to do and see a truly seamless border crossing here in the future.
spk18: Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.
spk08: Hey, good morning, everyone, and I appreciate you getting all the questions in. Mike, I think you said in your prepared remarks here that, you know, there's about 4 to 5% upside here on growth, unique things to your network. You know, should we think about those as really kind of baked into the plan here? I mean, I know the economy needs to contribute, but would you be these almost as agnostic to GDP? And I know it's been asked earlier, but any view on, you know, where we should be thinking volume and revenue for 2022?
spk22: Well, I think we danced around the 2022 question a little bit earlier, so I'll do that again here. With respect to that 4% to 5% that are related to our sort of unique growth opportunities here, yeah, these are things that are very much related to cross-border business, right? So it could be refined products, it could be metals business, certainly intermodal business. It's really a wide variety of things, and we think that we haven't talked about nearshoring at all here today, but we do think with USMTA being racked up behind us, there's more certainty for people to make decisions. Certainly, the pandemic has made people question their supply chains and the length of time it takes to get things to the United States. The fact that we operate in the U.S. and across the border and into Mexico and vice versa, that is something that is unique to us and it will serve us well moving into the future.
spk18: This concludes our question and answer session. I would like to turn the conference back over to Mr. Ottensmeyer for any closing remarks.
spk13: Okay, thank you. I appreciate all of your time and attention and good questions. I feel like we finished 2020 on a very strong note, set up well for 2021. Good visibility on both the demand and revenue growth perspective and cost side. I think the only other comment that would be appropriate to make, given most of you are probably in the Eastern time zone and in New York, is we're looking forward to a really exciting ASD championship game on Sunday night and a return to the Super Bowl for the Kansas City Chiefs. So... Thank you all, and we'll see you on the conference circuit and back here in 90 days. Thank you.
spk18: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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