Greetings. Welcome to the Kansas City Southern Fourth Quarter and Full Year 2014 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. This presentation includes statements concerning potential future events involving the company, which could materially differ from events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the company’s Form 10-K for the year ended December 31, 2013, filed with the SEC. The company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on KCS website, www.kcsouthern.com. It is now my pleasure to introduce your host, David Starling, President and Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

Thank you. Good morning. And welcome to the Kansas City Southern’s fourth quarter 2014 earnings call. Presenting here with me today will be Jeff Songer, our Chief Transportation Officer; Pat Ottensmeye, our EVP Sales and Marketing; Mike Upchurch, EVP and Chief Financial Officer; and joining by phone for the Q&A will be Jose Zozaya, our President and Executive Representative from KCSM. Start with our fourth quarter review. For the fourth quarter, KCS revenues were up 4% on volume growth of 5% and a few items played into our revenue growth rate for the quarter. First, as expected, we had very tough grain comps versus fourth quarter 2013. As you remember, it was during the fourth quarter of 2013, when we truly experience the surge in grain traffic, that surge provide a very tough comps for grain this past quarter. But our grain business was strong in the fourth quarter and it’s strong right now. There’s still a lot of corn to be shipped before the next harvest. We still feel very good about our grain franchise. After impacting fourth quarter revenues within the combined effects of lower fuel costs on our fuel charge revenues and the peso-dollar exchange rate. Together, these two items resulted in a 2% hit to revenues. Despite the impact from low fuel costs and a weaker peso, revenues from our key strategic growth areas still increased a healthy 15% for the fourth quarter a year ago, as was the case throughout 2014. Automotive led the way, we also experience progressively stronger revenues coming from Lázaro Cárdenas during the year and that business was especially good in the fourth quarter. Operational efficiencies, increased revenues and good cost controls helped us to achieve a 1.4 improvement in our operating ratio quarter-over-quarter. Let’s go to the full year for…

Thank you and good morning. Beginning with slide 9, productivity is measured by carloads per employee continues to improve as our operating team safely handled record fourth quarter volumes. [T&A] [ph] crews as well as maintenance of way in mechanical staffing levels are in good shape going into the year and we feel the hiring environment is stable. We will continue to focus our hiring efforts to align with our volume outlook and to keep pace with attrition. Turning to slide 10. Operating metrics for the quarter are stabilizing and overall I’m pleased with our performance relative to our increases in volume. For the quarter, velocity was up 7% versus the fourth quarter of 2013. However, in 2014, fourth quarter velocity was up 2% over Q3 and we should see this positive trend continue. It well remains below historical levels but its overall network health improves as terminal capacity projects come online in 2015. We should continue to see improvement in this metric. Slide 11 illustrates our continued commitment to invest in the business. In 2015, growth-related investment continues to be the largest segment of our overall capital program. With respect to equipment, all 85 locomotives ordered in 2014 have been delivered and additional 50 locomotives have been ordered for 2015. And we will begin taking delivery of these units in February through mid-year. Additionally, we have secured options for 2016 and 2017 locomotive orders. Capacity investment in our crude oil infrastructure includes both mainline and capacity improvements. Investment in our intermodal facilities continues with the opening of our new Wylie, Texas intermodal facility in mid 2015 and a continued expansion of our terminal in Jackson, Mississippi. Other significant projects such as the Sanchez Yard expansion and mainline siding additions will continue to support our network fluidity. Lastly, investment in the mainline infrastructure is having a positive impact on operations. Aside from the crude, health, and safety of the overall network, track maintenance programs between Shreveport and Baton Rouge will allow for speed increases over some time -- some of the segment from 40 to 49 miles per hour. Additionally, CTC implementation on the Laredo subdivision and in Mexico and continued mainline improvements between Monterrey and Nuevo Laredo will allow for increased maximum allowing for speed in those segments. I want to thank the operating teams for their hard work and contribution to a successful 2015 I will now turn the presentation over to our Executive Vice President of Sales and Marketing, Pat Ottensmeye.

Thanks Jeff. Good morning everyone. I will begin my comments on slide 13. As Dave Starling mentioned earlier, fourth quarter revenues grew by 4% from last year to $615.6 million which is a new record for the fourth quarter. Carloads grew by 5% to 543.6 thousand. RPU declined slightly during the quarter as a function of foreign exchange in fuel as you can see on the box on the upper right hand side of the slide. With the exception of ag and minerals and industrials and chemicals which I will speak to a little bit, it was really a pretty strong quarter across the rest of our entire portfolio and mix of business. For ag and minerals and particularly for grain, the fourth quarter of 2013 was an all-timer record for both volume and revenue because of the recovery from the drought of 2012. As we have been telling you for the past year, fourth quarter comps in 2014 were going to be tough and that finally happened pretty much as we expected. I would say that our grain business is back to normal and we should see steady single-digit growth for 2015 and beyond subject of course to weather-related volatility. For industrial and chemical business, revenues and volumes both increased by about 1% from last year. We saw strength in pulp and paper which was offset by weakness in metals and appliances. Metal shipments were negatively affected by lower demand for drilling pipe. Appliances were lower due to heavy shipments in the third quarter, driven by new Energy Star EPA requirements on refrigerators and freezers sold after September 15 of 2014. Appliance shipments sequentially fell by about 46% from the third quarter of 2014. Metal shipments were negatively -- I’m so sorry. I’ll make just another couple of additional…

Thanks, Pat. And good morning, everyone. I am going to start my comments on slide 22, our full year carloads increased 5%, while revenues increased -- I am sorry I am going to start on 21, fourth quarter carload volumes increased 5%, while revenues increased 4%. Lower fuel surcharge revenues and the deterioration of the Mexican peso negatively impacted our growth rate by 2 points. However, these negative impacts to revenue were offset by reductions in fuel expense and peso-denominated expenses. Our operating ratio improved to 140 basis points to 66.7% in the fourth quarter, our best ever fourth quarter operating ratio and incremental margins were solid 66%. Reported EPS of $1.28, grew 24% from quarter a year ago and adjusted EPS of $1.27 was up 23% from the quarter a year ago. Reported to adjusted EPS reconciliation can be found in the appendix to the presentation that largely reflects the offsetting nature of our FX hedge loss and the FX benefits in our income tax line item. Now moving to slide 22, full year 2014 carloads increased 5%, while revenues increased 9%. Lower fuel surcharge revenues and negative impacts, the deterioration of the Mexican peso had an approximate 90 basis point negative impact to revenues. However, again the negative impacts to revenue were offset by reductions in fuel expense and the favorable impact to peso-based expenses as a result of the currency deterioration. Full year adjusted operating ratio improved to 170 basis points to 67.1% and excludes the impact of lease termination costs that are included in our reported operating ratio. Again incremental margins were a strong 52% for the year. Adjusted EPS increased 21% primarily from increases in operating income and to a lesser degree lower tax rate and lower interest expense. Now cover the drivers of both…

Okay. Thank you, Mike. We will now open for questions.

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes. Good morning.

Good morning, Tom.

You gave some quite helpful perspective on the kind of the crude question. Pat, you gave us some good perspective on that. I’m wondering what’s -- and I apologize if I missed this, but what’s the framework for how we would think about, in terms of maybe trains per week? What you might ramp up to towards the end of the year? And I guess, also just considering, you said you guys use producers, refiners and pretty broad group together and got their input? What do you think the Canadian producers are assuming in terms of, if oil price to stay at the current level, is there going to be a big production cutback in 2016 or are they telling you, don’t worry, production will still grow in 2016, because it seems like, I guess, that seems a point of uncertainty?

Yeah. Tom, it’s -- we didn’t pickup any real indications that producers were looking to cut production. In fact, we have one of our customers. I am not going to get specific in names. But one of the customers and really one of the biggest drivers for our growth in 2015 which is a producer and refiner and they’re moving crude oil from Canada that they’re producing and transporting at the terminal down to a facility in Louisiana to a refinery that they own. So they more or less said, we’re going to refine crude oil and we want Canadian and it doesn’t matter to us whether the price is $70 or $50 or even lower. So we didn’t pickup any specific commentary about cutbacks in production. The timing of the trip was, obviously, very convenient because we knew this call was coming up and we’ve got to finalize our plan and forecast for 2015. So we came away with a pretty good feeling that the numbers we have in our forecast are achievable, based on feedback from our customers that is about as recent as it could possibly be. I guess, on that we’re basing all of our numbers on Canadian. Yeah, we don’t have any Bakken. A little bit of wax maybe from Colorado but it’s really, it’s almost all Canadian. As far as trains per week, we’re not going to give specifics about guidance, because as you see, there’s a lot of -- there has been a lot of volatility here. But the key point is that the facilities are built. We’re moving crude oil there to a couple of them already. One in Baton Rouge, we are finishing our connection too and we’ll be able to deliver crude we think by the end of the first quarter and the capacity is there for multiple trains a day. How quickly it ramps up and how -- what the pattern looks like is an unknown and I don’t think we’re going to give guidance on that. We may be able to provide a little more in the first quarter but right now, the connections are going to be build, that’s important thing for us to give that portion of adorn. But the steaming capability, everything we saw is there and its ready and they don’t need to build tanks because its going into a more surged tank and straight to the refineries, so that was most encouraging thing.

Okay. Yeah. I appreciate that. And I guess, I’d be careful the way I work there. It’s not the matter of production cost per se but a slower pace of production growth, perhaps is the way I was thinking about it. What about the terminal side of the one that feeds Baton Rouge. Are you optimistic about growth at other terminals like Beaumont or the Sunoco Logistics in Port Arthur, some of the others that are potentially growth drivers?

Well, I think it’s a same story. I mean, the Port Arthur market as we said for a long time, big market imports a lot of crude, 1.7 million to 2 million barrels a day, large concentration of heavy crude and the multiple refiners are looking to bring Canadian crude down. Back when we were there, they were actually receiving, one terminal was receiving their first heavy train because they just had the steaming capability working and that was kind of actually testing it on its first heavy crude train, so it’s just starting to gain the momentum.

Okay. So you’re optimistic on all of the terminals that you have talked about before. All right. I appreciate the time. Thank you.

Our next question is coming from the line of Allison Landry with Crédit Suisse. Please go ahead with your question.

Thanks good morning. So I can certainly appreciate you guys not wanting to provide EPS guidance. But given to your comments about revenues adjusting for the peso and fuel surcharges being at or above 2014, and considering that these items don’t actually have a material impact on the bottom line? Is it fair to sort of assume or think about the earnings growth similar to what was seen in 2014 or even the mid teens growth that you initially guided to last January?

Well, Allison, this is Mike. As Dave said, we are not going to give EPS guidance, but understand it’s difficult to predict what’s going to happen with fuel prices and what assumptions to use around for our currency. I mean I’d be happy to give you the assumptions we’ve used in our plans with respect to the peso at 14.11 average for the year, WTI around 54, Highway Diesel around 285, Gulf Coast prices at $1.74 and you guys can run some of your models there. You are obviously going to get a little bit of artificial lift in your OR. I would point to extremely good incremental margins in the fourth quarter of 66%. And we are not going to give you a specific number there. But historically, we’ve been around that 50%range. And I think it’s likely we could be much better in 2015, given the dynamics as we see them right now.

Okay. That was actually very helpful. Thinking about this is just my follow-up question. So think about Global Partners and Port Arthur crude terminal, correct me if I am wrong. But the plans to develop this I think were always for it to be a mixed-use facility. And based on some recent comments that you’ve made regarding strengthening demands for exports of refined products in Mexico, is there any talk or possibility of a full forward in that construction of the facility?

We are not planning on it, Allison. We are still looking at 2017 as kind of the best target date if we can get through some of the permitting issues quicker than this bigger known. They certainly will build it faster. But they are -- we are still -- the best guess at this point in still early 2017. And it is -- you are right, it is a multi product terminal that they have designed and envisioned so that will be refined products crude oil of the products.

Okay. Excellent. Thank you for the time.

Thank you.

Our next question is from the line of Chris Wetherbee with Citigroup. Please go ahead with your question.

Hey, Chris.

Chris, you are on mute.

Yeah. Sorry guys, thanks for taking the call. I was on mute there for a minute. When you think about sort of the energy outlook, particularly when it comes to Mexico? Can you give us just an update on sort of how we should be thinking about that. Obviously --prices you think that it would potentially be a little bit pushed out? But I guess, I just want to kind of understand it was ahead of schedule previously launched or get a sense of how you’re thinking about that now?

Really no change. Still not -- we don’t have a lot to build in. We don’t have anything built into our 2015 related Mexico energy. We could see some importation of refined products. We got a lot of interest. In fact, we posted a group of major potential partner and player in that market in Mexico this week. So we are seeing a lot of interest. We still feel that the first wave of opportunity for us is going to be refined products going in. But we are looking at that as a 2016 and 2017 opportunity. And then all of the normal activity related to fracking and drilling will take place probably after that. So I can’t say, we are obviously, we are watching it closely. The impact of lower energy prices and crude oil, the peso, how that affects Mexico in general. One thing, we have seen and is this reflected in our numbers that you are seeing now and will be an item of discussion in the first quarter, is the strength in our business with PEMEX. So we got better growth opportunities with PEMEX now kind ahead of the impact of the changes, so that’s a positive.

Okay. That’s helpful. And then just a follow-up. When you think about sort of the pricing dynamic in particular Mexico with foreign exchange fluctuation, we’ve seen in the past some potential pressure there. I am just curious as to how to think about the pricing outlook in Mexico? This piece of your business that is priced in U.S. dollars and I just want to kind of understand how we should be thinking about that in ‘15, given where we are we are with the peso?

Well, the impact will -- as you saw this quarter, as a significant portion of our revenues in Mexico are in dollars and for companies that are peso denominated that does cost them a little heartburn. We haven’t seen any impacts yet on pricing. We’ve had some discussions with primarily the ocean carriers, speaking of something like an adjustment factor, a currency adjustment factor. We haven’t done that yet. We did that a little bit in 2008 and 2009, for the purpose of protecting market share because we were hearing that there was some interest in moving to truck and we wanted to head that off. But so far, we haven’t had a groundswell of interest in that. But getting to your core question, I guess we haven’t seen any impact yet on pricing discussions in Mexico because of the peso.

And it’s safe to assume sort of the core outlook for pricing remains as constructive as it’s been?

Yes.

That’s helpful. Thanks very much for time, guys. I appreciate it.

Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead with your question.

Hey thanks. Good morning guys.

Good morning.

So if I take a look at the long-term OR, it implies about like 200 basis points of improvement a year. Do you think that because of that dynamic with fuel and the peso that we should be thinking more than that 200 in the first year, and then what is the fuel and peso assumption for 2017 in that guidance?

So, Scott, this is Dave. I’ll take the first part of it. When we put the three-year guidance together, we certainly look at the fuel tailwind we have today. But we don’t know how long that’s going to last. We don’t know what’s going to happen with fuel. And we don’t have that same headwind or tailwind in Mexico. So we are only going to be benefiting from a half of our system on the fuel. But our OR guidance is much more about the growth that we see and also the efficiencies that Jeff and Mike Naatz are continuing to seize out of the system. So that’s why instead of saying 63, we said low 60s. So we are giving ourselves a range around 260. So we were compensating for that on the fuel, when we looked at the low 60s guidance.

Okay. That’s helpful. And then just next question. As we think about the implications of lower fuel and then also of our peso, do you think that the near sourcing to Mexico story at all gets impacted because fuel product costs were lower and the cost of shipping from Asia aren’t as high? And then how does the lower peso may be help export for Mexico to U.S.? And just remind us how much of that cross-border is north-south versus the other way?

How much is -- our cross border is northbound…

North-south, it’s the other way, yeah.

Yeah. Obviously, finished vehicles appliances, electronics, all of that, that’s kind of the -- those are the industries that have sort of been the poster child for the near shoring phenomenon. Certainly don’t see it slowing down, as I mentioned. We probably saw, if you haven’t, General Motors made the press release in announcement of the $5 billion, a capital investment program in Mexico multi-year investment. We talked a lot of about the auto plants appliances. We know that there are more auto manufacturers looking at sites in Mexico. So we don’t think that’s finished yet. So, I think the answer to your basic question is the peso and energy cost is all of that positive to the re-shoring and near shoring thesis and we think it is. We’ve always thought -- we talked a lot about the advantages of near-shoring and then particularly Mexico in terms of wages and currency and the transportation and labor. And one of the headwinds, if you want to use that phrase, kind of against that thesis is Mexico has -- historically has high energy cost. So with oil coming down and with energy reform and all of the things that are going on, we expect energy cost in Mexico to become more attractive. And we think that we’ll just add to the case. Our -- the North-South, it’s our balance of northbound, southbound, our largest cross-border commodity is corn and that’s southbound. Mexico imports a lot of corn and we move about 35% or 40% of all of the corn that Mexico imports and then it’s autos, appliances, electronics and another products coming north. In total, it’s actually fairly balanced.

Okay. Great. Thank you, guys.

The next question comes from the line of Matt Troy with Nomura. Please go ahead with your question.

Yes. Thank you. Just wanted an update on your initiatives to increase length of haul, when you look at the cross-border business historically in some of the categories like automotive. You had to hand off a lot of that business and you talked either retaining on your own line partnerships, more of that business deeper into the U.S., if you could maybe just give us an update there and how some of your partnerships with some of the U.S. providers are evolving that would be helpful?

Well, I will start off. We have a natural interchange with the union specific at Laredo. We actually cross more trains for the [indiscernible] than we do KCS trains. So together, those franchises are extremely powerful. And as we grow -- add more and more auto plans in Mexico, then that relationship I think will improve. But at the same time, UP knows that we are going to grow into those kind of service and we’ve done that. So we’re continuing to grow into some of the other lanes. Particularly one of our targets is the Southeast. We think that’s our sweet spot, our strong spot. So as these companies come online, that’s a lot of the business we will be fighting for over the Kansas City gateway over that and over the Southeast. So again, I think you’re finding the railroads today. We compete with each other, but we almost have to look at us as a network. And a lot of times the best route for certain destinations will win, but we are winning our fair share of the finished autos. You remember five or six years ago we handled zero. So it’s been a great growth story for us and we continue to build density. We have expanded out DDC in Houston to contain to handle more finished autos in the Houston for distribution in that market. So I think the story continues.

Yeah. Matt, this is Mike. I’d just tell you we don’t report the length of haul, but I can tell you we are seeing nice increases in both length of haul in Mexico and in the U.S.

I guess at the heart of that question was just the fact that you’ve given us this longer-term OR guidance. I was just curious if that was predicated on material shift in your ability competitively to handle more of that, it doesn’t sound like you’re making any huge assumptions there, kind of more of the same. Is that fair?

Yeah. Continual growth, continual improvement on the cost side.

Okay. Thank you. And my follow-up would be just the Port of Lázaro, obviously you’ve got the West Coast favored issues. What’s your sense? And I know it might be hard to just aggregate, but how much of the double-digit growth you’re seeing more recently? Would you characterize potentially just to spill capacity coming from -- resulting from the labor issues up North, versus something that may be more sticky or contractual based where we can kind of bank on that more reliably in our models? Just trying to get a sense if you can see that yet and what that might be. Thanks

Very little of it is related to the issues in LA Long Beach in the past. So almost say all of the growth that we’re seeing in Lázaro is the function of Mexico shipments, and the amount it might be cross-border. We did do some test loads into the Houston market in the fourth quarter, but really no significant revenue contribution. So most of the interest that I spoke about in cross-border is prospective and we think it will be sticky. We think it will be market that makes sense and we think it will be a business that we can retain on some sort of a contract basis. But I think too soon to get more specific and there are ongoing discussions, but we can’t take any notices.

Okay. Thanks for the time today.

The next question is coming from the line of Tom Kim with Goldman Sachs. Please go ahead with your question.

Good morning. Thanks for your time. Just with regard to the CapEx and the headcount, can you give us a sense of what percentage of both are coming, are for the U.S. versus Mexico?

Tom, this is Mike. As you know, we’ve always tried to keep consolidated reporting on any of those types of metrics, so we don’t typically split that out. The only thing, I can say you on CapEx is we pretty much look at it as a network. So there is really not a dividing line of what we would do in Mexico or the U.S. So if you’re buying 85 locomotives and then another 50, those are for the network. So it would be one way to look at it. And if you went to our list of siding extensions and projects we have, I’d say that they are pretty equal. There is really again one year we may build more sidings in Mexico than we do in the U.S. The next year we may build more in Mexico. So it’s a one network look.

Okay. That’s very helpful. And then just with regard to the near sourcing opportunity, and obviously it’s certainly a key feature of your business and then all is have clearly done well. I’m just wondering if you are starting to see maybe a pickup in non-auto, non-auto-parts sort of industries for example and whether it’s light goods or electronics and tech. Can you give us a sense on FDI and sort of growth opportunities outside of the auto industry?

Certainly as all of the ones you mentioned, I mean Mexico right now I think is the largest manufacturer of household appliances. We’ve seen all of the major appliance companies come there. And we are really seeing it kind of across the board. If you think about the factors that our attracting companies to Mexico, really applicable to almost any industrial product. But the ones where we’re seeing the best growth and the best example are clearly auto appliances, electronics. Starting to see some interest in other household items, like furniture which is still I think the largest import coming through LA Long Beach. But the thesis really would apply to most manufacturing.

Okay. Thanks. Can I just ask one last question, just with regard to [St. Teresa] [ph], are you seeing any diversion of cargo, with the ramp in [St. Teresa] [ph]?

Well, not it’s related to that, but we have seen some diversion of shorter haul intermodal, I think, we have talked more about that last quarter, particularly to moderate Laredo has some diversion over Eagle path. I don’t -- I can’t speak to how high that is to [St. Teresa] [ph] specifically, but we have seen some diversion. And quite frankly, some of that was intentional that, as you know, that the very short haul move for us, 150 mile and we were filling up our terminals in Mexico, particularly, filling Victoria outside of Monterey, spending a lot’s of capital and really the economics of the short haul move just didn’t support the capital investment.

Make sense. Thanks a lot.

Your next question is coming from the line of Bill Greene with Morgan Stanley. Please proceed with your question.

Yeah. Hi. Good morning.

Hi, Bill.

Mike, I kind of want to follow up a little bit on the cost side? I have the impression given the new OR longer term target and given the kind of the revenue outlook that, as the revenue growth ends up being perhaps a bit lower and I realize some of that currency related? But is the revenue growth kind of normalized as down overtime, perhaps there is an opportunity to focus a lot more on the cost? Is that sort of kind of what you’re trying to convey here with some of this longer term OR, if revenue supplies to the upside I think you’ve got to add a lot more cost, but maybe is not there you can tighten those screws a little bit, is that the way to think about that?

Well, remember, Bill, the FX and fuel impact, I mean, I think, Pat, said it well are core fundamentals here are at or above what we delivered in 2014 and we look at our volume guidance of mid-single digits, you ought to be able to include it, at least what we had in ‘14 and could certainly be better. But to address specifically your cost question. We do expect to continue to be able to re-benefits on our least equipment purchase strategy and we’ve got a number of maintenance contracts that we’re mining costs out of. We had some that concluded here at the end of ‘14 that we’re able to successfully renegotiate and take costs out. We’ve had headcount a little bit higher in the last two quarters than what we’ve typically seen, but there’s a bit of a stair step there, so as you progress into 2015, maybe that levels off a little bit. So we still have cost opportunities here and don’t forget the pricing environment being better than what we’ve seen in 2014. So I think all of those contribute to pretty positive outlook we have going forward that helps us get down into low 60s.

This is Dave. Some of the maintenance contracts we have, we actually will get more benefit in the out years than we do in near years. So we got some conversion costs to take over some of these facilities. So your best years, your greatest savings are going to be out in year three and four. So as far as we are concern, the cost reduction game never stops and we still got more opportunities, but it certainly not being driven by anticipated lower revenue.

Okay. Fair enough. Pat, I just wanted to ask you one question on coal. The last time we saw that gas prices at these levels coal became -- even beyond Eastern Rails that started to become an issue for even some of the Western Rails and some of the plant to serve, I know, have sort of struggled economically from time to time can you put some parameters around what this natural gas price could mean for coal volumes or carloads?

We think overall it’s going to -- our utility coal business will decline kind of in a mid single-digit range for the year from last year.

Given inventory, is that a back half issue more than a first half?

No. I think it’s going to start to show up in the -- even in the first quarter.

Okay.

Our inventory, we had a pretty strong fourth quarter in coal. I think our stock piles at the plants we serve are pretty healthy back to normal. So our coal comps have been positive so far. But I am expecting that to flip on us here pretty quickly.

Okay. Thank you for the time.

Your next question comes from the line of Ken Hoexter, Bank of America. Please proceed with your question.

Good morning. Can we just talk about the outlook on the 200 basis points of OR improvement, what -- is there, I just want to follow up on your question before that you had on. Is there a breakdown in there of what is fuel and what is peso in that? Just trying to understand what is the underlying improvement? And similarly when you talk about your Mexico fuel surcharge being behind the curve? Is there a move to get that ahead of the curve and make that a positive or can you adjust those surcharges quick enough?

Well, the surcharges, Ken, in Mexico, really functions same way they do in the U.S. It just a government policy that causes our fuel costs to go up in Mexico and right now they are certainly faced with situation where fuel prices are significantly above world market. I don’t know if any effort to begin the lowering fuel prices there and given that 30% of their government revenues are tied to oil. I wouldn’t expect that. So, hopefully, we could see maybe a leveling out in Mexico. As far as what the impact is going forward in ‘15, ‘16 or ‘17 on fuel or I wish I could predict the prices and if anybody saw this drop coming six months ago, nobody was talking about it. And so we have tried to make some assumptions around futures curves that are available to everyone. I gave you a few of those numbers earlier on the call, but glad to follow-up afterwards and I give you those again. But, obviously, you get a little bit of a benefit in OR when you take that fuel out of the numerator and denominator. So there is a little bit left in OR, but that’s not really core business strength, the…

No. I understand. I was just trying to …

Yeah. So drop in fuel was not the driver to go to the three-year guidance. The driver to go to the three-year guidance was more on how we look at our business and being comfortable with its consistent as we have been into 1 to 1.5 range would be other initiative that my math and Jeff have on the table that they are working on and the growth that we have on the automotive side and also on the Canadian crude, I mean, just, it came to the point of, why aren’t we doing this. So we went ahead and laid it out there, knowing that fuel maybe back at its old level in 12 months or 18 months, we just don’t know. But the guidance was not driven by a lower fuel prices.

Wonderful. And Dave, can you talk about the status of the Mexican legislation, obviously, a lot of movement in this quarter and your thoughts and takeaways on the impact and what it might mean, whether its on the CapEx side, whether any other impacts to the business?

We have talked about this in the past. We can’t get into a lot of detail, because it has gone through the Senate, has gone through the Congress and it is on the President’s desk. We expect that to be signed in the next two to three weeks, depending on the President schedule. They kind of do things when they want, but we do not think there is going to be any changes to it and is workable, and that’s what we can kind of say at this point. I certainly don’t see any CapEx impact on that new bill. But again, we need to get it signed and then we will all know that it’s done. But right now we are feeling very, very good about it. We worked very well with the government. I think the government understands today too how important the railroad is for the growth of the Mexican economy. I think the auto plans have been a real eye opener for them. They understand these auto plans wouldn’t be locating in Mexico if they were not for the railroads and their efficiency.

So is there anything -- I guess, I’m sort of -- I know you don’t want to comment too much but in terms of mandating access to your network or sharing infrastructure that was in the original legislation?

I think we have stated in the past that those concerns have been taken care of.

Okay. Appreciate. Thanks.

Next question is from the line of Justin Long of Stephens. Please go ahead with your question.

Thanks and good morning.

Hey, Justin.

Hey, wanted to follow up on the OR in the long-term target there. When you think about the progression to a low 60s OR. Is that primarily based on just the strong operating leverage in the business given a mid-single digit volume growth environment or could you kind of parse out how much of it is that versus cost and productivity initiatives that you are pointing?

I don’t know that we can break it down. I gave you the percentages but as we stated lower --rather than saying we’re going to go to 63, we really felt like lower 60s given ourselves more room to go down was appropriate. Because if we -- this crude could surprise us, we hope it does. We are going to have the locomotives for it. We could certainly have a surprise to the upside. We’ve already got the network in place to handle the crude. We’ll have the locomotives. So that could be a very pleasant surprise. It certainly would help drive the OR. We kind of push the fuel aside and said it, let’s just -- the fuel is going to be whatever it’s going to be. But some of these maintenance contracts that again the operating and as a team we’ve been working on, really we are not going to start to get the benefit until this year. But then the benefit grows and that will be better in ‘16, I believe it will be better in ‘17. So there is still long-term things we’re doing that are going to continue to help us maintain those margins that we’ve enjoyed. And the network has become more robust. I mean, we’re able now to start to take some of the CapEx away from the infrastructure and spend it on more opportunities like lease conversions, improving the network from more volumes. So it’s just a positive time for us. We got to remember it wasn’t that many years ago that we had a very, very high operating ratio. So this has been a very steady march for us down at this level. And we see ourselves now very, very good infrastructure. We are very pleased with our -- the development costs has gone down significantly every year. So it’s time for us to join the pack and start getting a little more aggressive in giving you longer term OR guidance. And that’s what we intended to do.

Justin, this is Mike. Just to remember, in that low 60s, FX and fuel are generally pass-throughs and so this is all business related. The revenue pipeline is strong and as Dave said there is lots of cost opportunities there. So we feel very good about the business going forward.

Great. That’s helpful guys. And my second question, I wanted to ask about headcount and apologize if I missed it. What are your expectations for headcount in 2015 and going forward as you progress that OR target? What are your expectations for headcount growth and you call it mid-single digit volume growth environment?

This is Jeff. I’ll speak to that. So we’re -- as Mike stated on the headcount, we’re keeping pace with our volume. We’re keeping on pace ahead of attrition. There are certain things we’re doing on the mechanical side in sourcing some of that work which should be both operationally beneficial for us, financially beneficial for us in the long run. That may spike headcounts to slight above what we saw this year. But I would assume similar type growth year-over-year if not slightly elevated but for those reasons.

Okay. Great. That’s helpful. I appreciate your time today.

Your next question comes from the line of John Larkin with Stifel. Please go ahead with your question.

Good morning, gentlemen. Thanks for taking my question. The intermodal really started to grow very nicely in the fourth quarter, up almost 9% volume wise year-over-year. Are you getting to the volume now where you can begin to consider running a different schedule that would make your service more truck like and therefore accelerate the rate at which we’re able to pull in highly conversions?

John, this is Dave. We are there on few of the trains. We are actually pulling a little more up to Laredo and classifying some of those trains so that we can run them through. But we still got our ways to go on the critical mass of trying to run solid trains out of our big load centers. We have so many destinations in to the U.S. especially since MS has opened up more destinations for us on their network as they continue to open new ramps and add the Crescent and the Heartland. So a lot of it is just blocking and trying to get the critical mass. But the answer to your question is we’re still moving forward with it. We’re not quite there yet.

Thank you for that. And then maybe as a follow-on, with fuel prices really dropping fairly dramatically. Is there a point at which you would consider entering into any kind of hedge agreements to perhaps to put yourself on a stronger position once fuel prices revamp?

I don’t think so, John. I mean, we have the fuel surcharge mechanism in place and that really provides a natural hedge. So I don’t believe that this point we’re considering that. There are a lot of discussions we’ve -- we recognized over and over time. But right now, we just think that we could get that much of a benefit.

Got it. Thanks very much for your time.

Your next question is coming from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your question.

Thank you very much. Hey guys. Many of my questions have been answered. I want to focus with Mike on some of the free cash use and just some details here. You mentioned that little less capital to CapEx, little bit more to lease buyouts, can you talk a little bit about other uses of free cash because it will be growing over the next few years?

Well, we annually have those discussions with our board. And we’ll be having those discussions actually next week when we have had a little bit of history of increasing your dividend, not suggesting we’re going to do that because that really is the board’s decision. But we constantly take a look at that. One thing, I would point out is that we’re still not a cash tax payer in the U.S. and that will be at some point in time something that we’ll have to use in free cash flow for. We don’t anticipate that in 2015 because of the bonus depreciation that was enacted in December that retro-ed for full year 2014. We don’t really expect that in ‘15. But I think absent any additional bonus depreciation, we would expect in ‘16 or beyond to be cash tax payers in the U.S. and we are cash tax payers in Mexico. So that’s the other element that you need to think about. And we go through that process every year with our board and look what the available cash opportunities are. I wouldn’t expect us to delever the balance sheet through paying loss debt. I think we’re pretty comfortable with the leverage and talking to the agencies here in the next few weeks about where we’re at with our metrics and hopefully seeing you here in 2015, is that we would continue to get an upgrade in our credit rating.

Okay, Mike. And just one follow-up detail. I didn’t see in the release with the lease buyout cost for this quarter even though you did provide them on the year. Could you give the breakdown of the lease buyout costs in the quarter, as well as the amounts for the tax audit reversal and the short line credit for the tax rate?

Well, the buyout was zero in the fourth quarter. We will have some in the first quarter. So we didn’t execute any of those transactions and let me leave it at this. There are fairly small numbers in the fourth quarter relative to those reversals and tax credits, but they certainly helped in that 4.5% reduction I referred to in the chart. It was a good part of that number.

I see. So that $10 million between the two is the 4.5%.

That would be a little high when you look at the 4.5% applied to pre-tax income.

All right. guys. Well, congratulations and thank you.

Thank you.

Thank you.

Our next question is from the line of Keith Schoonmaker of Morningstar. Please go ahead with your question.

Yeah. Thanks. Could you pull a lot of attention unless you facts, I think will still more than double the revenue in volume and I understood one of the crude volumes has little blocking or U.S. facing exposure because frac seems one of the five strategic growth areas that you’ve identified. I’m interested if you’ve seen shifts in shipment patterns away from the legacy Texas, Louisiana destinations and what you expect in sand shipments if gas and oil remain at current rates?

We would expect it to fall but it hasn’t. Our frac sand business so far in January was pretty strong and it was pretty strong in the fourth quarter. Our market in Texas or the Eagle Ford, we don’t touch any frac sand, it goes north. And one thing that has happened is I think I mentioned this in one of the prior calls. We seem to have had a little bit of a disadvantage because some of the facilities that we serve aren’t capable of taking unit trains and particularly when the service issues were the worst. There was a noticeable shift to unit train loading and unloading and that hurt us at a couple of sites. We’ve had some improvement in the infrastructure in our network and I think that’s been one of the reasons that we’ve seen a little bit of a surge here. But that business is decent and fairly strong right now. But if the gas prices or oil prices stay low or go lower, we would expect that to have an impact and probably see some weakness later on this year.

Okay. Thanks. And as my second, wonder if you could just maybe qualitatively discuss how important driver shortage is to your intermodal franchise across the border and especially in the Mexican market given the dynamics we are seeing, maybe greater commission to some Mexican operators in the U.S.? Just in general, we hear a lot about the driver shortage in U.S. and I’m interested in your color on driver shortage as a critical factor for your business in Mexico?

We think it’s the real factor and it’s going to drive larger, higher intermodal growth. It’s a different situation in Mexico. But for the cross border product, which is our key focus and I guess I should also say and I think I highlighted just a little bit in the third quarter call. Our domestic intermodal business, which is primarily the Dallas, to and from the Southeast to mid-Atlantic has been growing very nicely. And I think the driver issues that are very well publicized and understood is definitely a factor there, as it is on the cross border. So we see fuel prices are coming down, that takes a little bit of your advantage away. But all of the drivers for truck to rail conversion, I think are still very much intact and we see the intermodal thesis as a very strong growth area for us going forward.

I think the other dynamic for the trucker too is all that’s happening, the price of trucks are going up. The trucking companies are having to pay their drivers more to retain them. So it doesn’t seem to have the effect that some thought it might on the conversion back to truck. So, I think rail is still going to continue to grow and all of the factors that are causing the truckers to convert to intermodal. There is just many, many of them from HOS to CSA regulations of the both dynamics to consider.

Thank you.

The next question comes from the line of Cleo Zagrean with Macquarie. Please go ahead with your question.

Good morning and thank you. With fuel and foreign exchange having a lately benign impact on operating income and please correct me if my understanding is wrong? Can we please focus on the fundamental for the core business and specifically pricing? Is there any reason why you should lag, or maybe you could outperform the industry on this metric given your specific exposure to Mexico and your growth areas? Please help us understand how we should think about pricing going forward? Thank you.

About the first question, our core business is, as I mentioned a couple of times in my comments, core business is strong. With the exception of maybe one or two areas, we have seen some weakness as I mentioned in the movement of steel pipe for drilling. We expect that to continue maybe for the first half. But obviously that will depend on the crude oil prices and the pace of drilling activity. But other than that, our core business is strong and I think we have kind of typically been a little bit on a high end, as the rest of the rails in terms of pricing outlook and some of that is related to Mexico and the inflation in Mexico. But I still feel that we will be at the high end of the range regarding pricing. Mexico inflation is coming down but if you kind of look at the headline there, I think it’s heavily influenced by things like tourism and things that don’t necessarily relate to rail shipments and industrial products. But we think the pricing environment is going to continue to be good and probably better than the recent performance, better than last year.

Thank you very much. And my follow-up relates to your capital spending plan for the longer-term. Can you please refresh us on how we should think about spending and maybe how your plans relate to your strategic growth areas? What projects are you excited to come to plan to support growth? Thank you very much.

Well, we are going to continue to spend about 9% to 10% of our revenue on infrastructure. We’ll certainly have an IT spend every year. We will have PTC. But as you saw in the presentation by Jeff that portion of growth capital, be it for locomotives or siding extensions or for yards that will be based on our volume growth. So if you see an outsized growth in crude-by-rail down into the Gulf region, it might be a point where we would have to add more locomotives because of numbers of trains. But, again, it’s going to be driven by the revenue line. So it’s hard to give you a number without understanding exactly what the growth of some of this commodity groups are going to bring, the automotive when those plans are build. We don’t know exactly what those volumes are going to be and what our portion will be. So that is really going to be what drives the spend, so hard to give you a number or percentage.

Thank you. And just as a quick follow-up. On a fundamental basis, do you expect foreign exchange, or fuel to modify the opportunity available in automotive and cross boarder as the top areas in strategic growth?

No. I mean, it will -- automotive, obviously, a lot of those contracts are peso denominated. So as you saw this quarter, it will have an impact on the results, the dollars, but we don’t see it having an impact on the core business.

Thank you very much.

Thank you. Our next question is from Tyler Franz with Raymond James. Please go ahead with your question.

Hi. Good morning, guys.

Hi.

Good morning. Hey, I’ve got a question for maybe all of you. I’m hoping you guys can kind of follow me here. But, I know, you’ve got a lot of business in Mexico with U.S. companies? So we’re in this very unique situation. We got Mexican diesel falling, U.S., I’m sorry, Mexican diesel rising, U.S. is falling? So my question is how the surcharge mechanism works? So is it because the contract that housed is the U.S. is tie to U.S. and you maybe paying Mexican price? So you could be in situation where you get pinched or is that really not an issue?

Well, it’s really not an issue. I mean, we -- it’s not a perfect correlation. It’s a fairly complicated question to answer because you further add to that the way the interchange rules work in the U.S., if we take a load that’s originated by another carrier, we can have a different fuel mechanism. It’s not a perfect hedge, but it’s pretty effective. And I guess, if your question is, does it driving behavior or is it driving decisions for people to think to use our network, we don’t think it is.

Okay. No. That’s a great color. And then, Dave, I got a question about the cadence of next year. So it seems to me you got, why we coming on in the spring, crude terminals come online, I guess, through the whole course of the year, APM terminal probably comes along in the back half, there are crude maybe in the back half and you probably have some building of auto volume? So is the idea that volume growth will probably improve as the year goes on and you have a really spring board in ‘16?

We don’t have a crystal ball, but that -- again we don’t drive the crude. You’ve got the origins and the destinations. Our customers are telling us, they are going to grow throughout the year, so certainly, that is one piece of it that we’re encouraged by. The automotive, how quickly those plants get started and the issue we’ve had with the automotive, Tyler is even though plant opens, there is testing to be done, there is quality issue, it doesn’t just open and go to full capacity. So there is a bit of a startup. You are right about APM. We’re very encouraged by that. There are some discussions about possible diversions because of what’s going on in the West Coast. So there are a lot of factors. Veracruz is one as well and even further development in Lázaro on the auto side. So there is a lot going on. It looks very, very encouraging to us. We do feel like on the locomotive side that we went ahead and bought a little bit into’16 this year. And we went ahead and committed to ‘16 and ‘17 to make sure we have the slots, because locomotive production can be an issue. So that is our vision. We have not call that in our plan but that’s our vision and we’re hoping that’s the way the story works out through the remainder of the year.

All right. Perfect. Thanks, guys.

Thank you. There are no further questions at this time. Mr. Starling, I’d like to turn the floor back over to you for closing comments.

Okay. Thank you very much for joining us. I know the call was going long. I know it’s been a very interesting call with all of the FX and fuel revenue impacts that as we see offset by declines in expenses. We kind of look them as a pass through. So we had a very strong 2014. We met our guidance and we feel like 2015 is going to be similar year as full and we have a lot of opportunities on the cost control side. So the story is intact. We feel very good about it. We thank you for joining the call. See you next quarter.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.