Greetings, and welcome to the Kansas City Southern Second Quarter 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, 2014, 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, Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

Thank you and good morning, and welcome to Kansas City Sothern's second quarter earnings conference call. With me presenting this morning are Pat Ottensmeye, our President, who will review the performance of our business units and give some market commentary. Jeff Songer, will provide an update on our operations and Mike Upchurch will discuss some of our key financial metrics as well as talk a bit about our capital structure and capital priorities and Jose Zozaya will be answering questions from Mexico on any business climate or regulatory issues. Our second quarter overview, I'll begin by saying that while KCS reported revenues declined 10% year-over-year, the actual percentage declined due to decreased car loadings was 2%. In other words, foreign exchange and lower U.S. fuel prices were responsible for 8% of the total 10% decline. KCS' adjusted operating ratio came in at 68.1%, which was 1.1 point higher than last year's adjusted OR. Keeping their overall margins in the 32% range, while experiencing a 6% decrease in the car-loadings speaks of the strength of our franchise and our ability to take corrective actions. I’ll let Jeff, Pat and Mike provide some color on the past quarter, but I’d like to spend a few minutes focusing on the second half of 2015 and beyond. While there is still a great deal of uncertainty in many of the end markets we serve, we've seen our daily car-loading volumes increase each over the past two months. We’re seeing some tangible signs of life in our energy business and after a mild spring, it’s hot in the Midwest and South particularly Texas and hot is good for our coal franchise. While some of the coal fired utilities we serve will continue to be challenged by low nat gas prices, they’ve began to receive more…

Thank you, Dave and good morning. Beginning with Slide 7, operational highlights for the quarter focus on recent improving trends in Mexico, while full second quarter metrics lagged prior year numbers, trends over the past few weeks are showing improvement, particularly in dwell and Cars online. Dwell time in the major terminals in the North zone in border region has stabilized and we’re showing improvement in the South zone as hiring efforts are taking effect. Central Mexico metrics have not fully rebounded as hiring processes lag that of other areas. As I’ll detail below, we’re in position to fill our hiring needs through the third quarter. Mexico car zone line number has steadily decreased over the past few weeks and we’ve seen a 10% reduction through early July versus May. This signals the network is becoming less congested and in turn should drive improvements in velocity in dwell. Turning to Slide 8, I wanted to provide an update on the progress that has been made with Mexico T&E workforce. To-date we have 25% of the required 215 new employees hired and in service. Another 50% have been hired and are currently in training. These trainees will be in service in August. The remaining 25% are in the hiring process and will provide for extra Board capacity and maintain staffing levels going forward. Regarding Mexico Labor Organization, we have made positive strides over the past several weeks. In early July our Management Team was able to negotiate several longstanding items that will help drive productivity. Specifically we will expand the use of distributed power, which will support longer trains. We will increase our maximum allowable train length from 7,200 feet to 9,000 feet and our maximum number of locomotives per train from five to seven. Additionally, we will expand our yard…

Thanks Jeff and good morning, everyone. I will begin my comments on Slide 10. As Dave mentioned earlier second quarter revenues were $585.8 million or 10% lower than last year, volumes fell by 6% from last year. I want to highlight a few of the main drivers behind our revenue performance for the quarter. The 10% revenue decline equates to about $64 million lower revenue compared to last year. $31 million of that reduction is attributable to lower fuel surcharge revenue with the more majority of that due to declining U.S. diesel and WTI prices. About $18 million of the decline is attributable to the impact of a weaker Mexican Peso. There you can see the vast majority of our revenue decline is attributable to factors that do not accurately reflect the condition of our core business. All of this would then suggest that the revenue decline attributable to core business weakness was about 2% overall. As Slide 10 illustrates, more than all of that core revenue decline was due to weakness in our energy business unit specifically utility coal and frac sand where we saw line haul revenues fall by $31 million combined from last year. Other areas of the weakness include our industrial and consumer business, which was primarily driven by lower metals and scrap shipments due to reduced demand for drilling pipe and continued high levels of the import due to the strong U.S. dollar. In addition, our Ag and minerals business declined from last year due to a combination of factors including strong cons in 2014 and service related issues, which adversely impacted shipments during the quarter particularly in our cross-border grain business. On the positive side, chemicals and plastics revenue increased by 1% in spite of a 2% reduction in volume due primarily to pricing…

Thanks, Pat, and good morning everyone. I’m going to start my comments on Slide 16. A quick summary of the quarter -- second quarter volumes did decline 6% and revenue 10%. As Pat has already discussed declining fuel prices and the negative impact of the peso were the main drivers behind our declining revenue. Adjusted operating ratio increased 1.1 points to 68.1, while expenses declined 8%, it was not enough to offset the 10% decline in revenue and I’ll cover some specific expense details on the next slide. During the quarter, we again saw limited impact to operating income from foreign currency as our peso denominated revenues and expenses currently offset each other. We’ve included information on Slide 28, in the appendix for your information. We continue to hedge our foreign exchange risk in income taxes and it's illustrated on Slide 30 in the appendix, the net impact of the hedge and related tax benefits were positive $1 million for the quarter. Finally, reported EPS was $1.01 per share while EPS adjusted for FX impacts was $1.03 per share. Moving to Slide 17, operating expenses declined 8%, aided by an $18 million reduction due to foreign exchange and a $15 million U.S. fuel price reduction. Excluding those items, expense would have declined 1%. Other key drivers of expense decline include $10 million from fuel consumption and efficiency, lower incentive compensation expense of $6 million and $2 million in savings from contract restructuring actions. Offsetting those declines were $5 million in increase from wage inflation and $6 million in higher depreciation charges. Moving to a sequential view quickly; cost declined $16 million led by lower incentives, reduced casualties, lower fuel expense, lower headcount, reduced employees expenses and lower locomotive maintenance costs. Let me cover each of the major expense categories on…

Thanks Mike. So in closing just a couple of remarks a little about the past and where we are today. When I became the President in 2008 just in times we experienced first time one of the worst recessions in our history. Our operating ratio was 82 in 2009. So as we came out of the recession, we focused on rebuilding our physical network and controlling our cost. Our margins have steadily improved and from 2000 to 2014, we improved our operating ratio by an average of nearly 200 basis points per year. This team is very capable with continuing to control our cost and support our long-term growth plan over the coming years and we continue to maintain our low 60 operating ratio target by 2017. And we've had a few disappointing quarters, but with a little help from the economy, we believe the future is very bright for KCS and for the rail industry. And with that I’m going to open it up for questions. We’ve tried to make our deck smaller. We've listened to you. We get a lot of criticism for going too long. So we try to shorten our deck and we’re going to ask everyone to ask one question and we’ll try to wrap this call up within an hour if we can today, but with that we will take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Bill Greene with Morgan Stanley. Please proceed with your question.

Hi good morning.

Good morning, Bill.

Dave, we used to always ask and talk about what inning are we in on the labor productivity front and what not. And given some of the challenges that we've had now and when we look at the plans to hire particularly in Mexico, can you talk a little bit about what you think is left if anything there? Obviously we're hiring but volumes are down. So is this a pause and we will have a new level of productivity that will come in once we get some of the union stuff going and humming there, or how do you think about where you are in that? Because to get to a low 60s OR, it would seem you need the revenue growth for sure because unless that changes, the cost side is slowing I think. Just talk through your thoughts there would be helpful, thank you.

Well Bill, I’ll open it up and pass it to Jeff. What we've got in Mexico now is a bit of a breakthrough. We’ve been working on this for some time and we had very good dialogue with the Union. Jeff has a different relationship with the Union then his predecessor. It’s very positive. Jeff joined the key Manager in Mexico joined the Union and ahead of the Union is very powerful guy in Mexico. Actually stood up in front of the Union and said, this was our company and we're not meeting the service requirements and we’ve got to help the company. And that was a -- they’ve never done that before, it was a real breakthrough. We came out of that meeting with a 9,000 foot train length and the ability to add the seven locomotives. We’ve got some territories in Mexico that are very difficult coming out of Lazaro. And so to run a 9,000 foot train, it takes six to seven locomotives. So if you think about it that gives you about a 25% capacity gain without adding additional labor. So it’s a real breakthrough that is going to help us throughout the whole system. We’ve been building the longer sightings, but we've just had shorter trains than we wanted. So what we got queued up right now on the labor front is all of the training has been done and when we finish marking up people in August we're going to be over the hump. You've already seen the numbers. The last few weeks, we’ve seen big increases out of their simply because we’ve had the labor to run the cruse. We’re starting to pull the managers off the train, which is what we’ve been doing but anyway Jeff I’ll let you.

All right. I like to baseball analogy, I'll go ahead and say we’re probably in the seventh innings. As I’ve mentioned we’ve made very good progress here in the last couple of months and we got a lot of guys in training now. So getting that out of the union process, I think we've talked about in Q1 for the union has to provide the names to us that’s done; so most of this is now in our hands to get these guys push to training and running trains. The other very positive thing is again as I mentioned, we’ve had these so called restrictions in train length and the amount of locomotives we can put per train, which really restricts our length and our productivity. Now we're going to be able to figure those but we’re just looking at out of Lazaro today for example, we’re going to run a longer train, longer slab trains, we run 60 car trains. We're going to run 90s now today and crude trains will probably move from 90s to 120. So that’s going to create some productivity and some efficiencies with cost. The other thing keep in mind all these folks we're hiring, they're not, it’s not guaranteed paid situation. So to think about it is back to your baseball analogy, we're going to have a little -- a better bench strength here. So what will happen, not having anybody as we have call-ins for sick or missed call, there was just nobody to call on to bring to run the train. Some of this hiring as I mentioned was going to help support and get us a better bench strength to establish to handle attrition and to be able to work in through any rough times here as we go forward. So I’ m very positive with the last few weeks negotiations with the labor and how the hiring is going.

All right. Thanks for the time.

Thank you the next question is coming from the line of Jason Seidl with Cowen & Company. Please proceed with you question.

Thank you very much. Gentlemen, good morning. Thank you for the time. Question is just on returning to the growth outlook that you guys executed so well for many, many years. Obviously sequentially it's looking a little bit better. Given what's on your plate, are you looking at 2016 in terms of returning to car loading growth? And in that vein, I guess, Mike can you talk a little bit about that CapEx number and break it down between maintenance and growth spending? Thank you.

I’ll talk Jason, this is Pat. I’ll cover the first part of that question and I think the answer is yes, depending on some of the energy sectors and crude oil prices and those kinds of things will obviously be a big factor in our outlook for 2016. We’re confident and have -- feel like we have pretty good transparence and visibility to what’s going to happen in the second half of the year. As it relates to some of the other markets like the cross-border grain intermodal, automotive, Jeff did a great job of talking about some of the things we’re doing to get our service back to where we expected and we think all of those things will put us in a solid position to grow -- to return to the growth in those markets that overall lot of it is going to depend on economy and the energy markets but we feel pretty good about that. Mike can you talk about the capital?

Jason, this is Mike. In an attempt to take slides out, we took that information out from last quarter but I'll go ahead and share that with you. Roughly 40% of our total capital dollars would be maintenance bucket. About 50% would be in what we would say growth equipment related needs capacity expansion, sightings and the other 10 would be split between G&A and PTC.

Okay. Fantastic. Gentlemen, thank you for the time.

Thank you. The next question is coming from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Good morning, Allison.

How are you? So looking at the cross-border intermodal second consecutive quarter of year-over-year declines, have you lost any market share there to maybe some of your western competitors? And based on the details that you've just talked in terms of the Mexico crude situation, what’s your best assessment of when we might start to see improvement in volumes on the cross-border side?

Answer to your first question is yes. And we’ve lost market share to both other rail alternatives as well as truck particularly in the highly service sensitive auto parts business. We’re confident though and again we’re basing this on our dialogue with customers and the three PLs that we do business with. As we improve our service and kind of get back to a level that we think will meet their expectations, we feel like we will get that back. And then as we've said for a long time the market is large and it’s growing and the opportunity is very significant. So we will get back on our feet and hopefully get back to the growth trajectory that you are used to seeing.

Okay.

Fundamentally we've changed, but there is no doubt that we’ve -- this business that we had available that we couldn’t handle and as a result we’ve lost market share for the last few months.

And is it fair to say it’s sort of -- that you think that you're confident you will get it back, because it naturally belongs on your network?

Yeah, I think the shippers and the intermediaries or we prefer rail, but when we are dealing with a customer that has service penalties built into their contracts and we’re not performing at the level that they require, they’re going t shift.

Okay. Thank you so much.

Thank you. Our next question is coming from the line of Tom Kim with Goldman Sachs. Please proceed with your question.

Great. Thanks. Pat, just a follow-on to the last question, can I ask you more specific to the cross-border intermodal, obviously it was weak again and I’m just trying to get a sense as to what extent it’s due to labor versus equipment. And then given the hiring and the additional equipment that you've brought on board when should we anticipate carloads, intermodal carloads and cross border to grow again?

Well it’s the same -- it's a combination of labor and equipment. It’s kind of the old chicken and the egg. When we can’t move trains and complete the cycles what happens is we flood the system with cars. Cars online increased and we just weren’t getting the equipment to the right spot at the right time. But all of that is getting better and again we’re showing intermodal and particularly cross border intermodal is favorable on the one slide in the presentation. So we think we will get back in the positive territory here pretty quickly.

Tom, this is Dave. I'll go out on a limb here and tell you that the last two weeks intermodal service is greatly improved. It’s been very stable and the whip is coming out to get on the marketing guys to get the train filled again.

Okay. That’s fair enough. And then I know that pricing was certainly strong again in the second quarter and this is specific to the cross border intermodal but I do wonder to what extent your gain from that lost share just as a measure of goodwill is there a little bit of risk around pricing?

No

Okay. Thanks a lot.

I can't talk that.

Thank you. The next question is coming from the line of Tom Wadewitz with UBS. Please proceed with your question.

Good morning. Wanted to see, Pat or Dave if you could translate some of the volume comments that seem to be a lot more feed in second half versus second quarter of first half? What do you think about total volume growth in the third quarter, fourth quarter? ARE we transitioning to kind of less of a year-over-year decline in third quarter and a growth in forth or might you actually see growth in volume year-over-year in third quarter or how would you think about that? And then I know it’s tough visibility, but what about 2016? Is there are you kind of returning to normal volume growth that’s 5%, 6% or just kind of broad thoughts on that as well? Thank you.

Tom I think I will limit my answer to the second half just because we've got better visibility there and I guess as I tried to characterize in my comments clearly what we've seen in the first half of the year is just a very rapid reduction in certain markets, energy related -- our coal business really couldn’t be any worse than it was in the second quarter and really the entire first half And then we definitely felt the impact of the service issue. So for the rest of the year third quarter, fourth quarter and as we continue to recover our service in Mexico and on the cross-border products we think we will see growth in the fourth quarter as well. 2016, I would like to withhold commentary on that until we get a little bit further into the year.

But in terms of year-over-year, I guess what seems like you’re presenting it sequentially in terms of year-over-year would you expect volumes to be up in the third quarter or kind of less down less in second?

Less down in the second. Yes.

And then maybe growth in fourth.

Yes. Based on our kind of assessment of the current landscape yes.

Keep this spreads where they are on the crude and will be in better shape as well.

Hot weather and wide spreads will help. Okay. All right, thank you for the time.

Thanks Tom.

Thank you. Our next question is coming from the line of Christian Wetherbee with Citigroup. Please proceed with your question.

Hi Chris.

Good morning guys. Maybe just piggybacking on to the last question there a little bit, taking a step further. In terms of the mix of volume versus resources, you're adding back again, trying to get service back to where it needs to be, should we feel confident that 2Q is probably the trough from an earnings perspective and any commentary you can give about the second-half outlook. I know you don't have full-year guidance at this point, but how do you think about that? Seems like we're maybe past the worst, but want to get a rough sense of maybe we can start seeing flat to slightly positive earnings growth as we move through the back half of this year.

Yes Chris. This is Mike. I think certainly on a sequential basis I think that’s the case, but subject to the comments that Pat just made and Dave made around spreads and so forth, weather we're not going to make any commitments, we’re not giving guidance, but I think sequentially it would appear to us sitting here today that we've hit bottom.

The other thing Chris is the service is stable out of Mexico on the intermodal side. We got a new facility that opened in Wylie. That facility was constrained. It is no longer constrained. So we should certainly do as well as the intermodal growth that’s out in the market. So we're going to be pushing hard to grow Wylie because it is the fastest route to the Southeast and we now have a state-of-the-art terminal unlike the old clunky five-track, stub-in two hours to switch the train on the inbound, two hours to switch it on the outbound and not enough parking for customers. So we’re really going to push that facility hard and push that market hard and we think there are some players out there they want to be on that train.

So it sounds like keeping an eye on the weekly volumes and how those trend over the course of this quarter and next quarter is the indicator we should be keeping an eye on.

Thant’s exactly what we're doing and that's how we're trying to size right now we’re being careful. We’re being cautious as we bring cruise back and bring locomotives out, but we have been thrilled by the crude before. So we bought locomotives last year thinking the crude was going to be a great grow story in the first half of the year and it just wasn’t. And so now we’re seeing the growth and we hope this is sustainable. The comment I made about the pipeline being we’re being told as full from Canada down to Pad 3, but that’s an indication and rails being used as they overflow and we think that’s a good indication. Anyway that’s the way we’re reading it.

Okay. That’s very helpful. Thanks for the time guys. I appreciate it.

Thank you. The next question is coming from the line of Matt Troy with Nomura Securities. Please proceed with your question.

Yes, thanks and good morning. I just wanted to ask about coal. There had been an uptick in your outlook there. I know there was an outage in the first half, but what gives you confidence in this customer which has given your coal business a greater level of volatility than other railroads in the past that you can count on them in the back half of the year? I'm just trying to get a little bit more comfortable because the swings have been so volatile. Are there steps you can take to get better compensated for this volume? So one, what gives you the confidence, and two, are there steps you can take in the relationship that might mitigate some of the volatility?

The first one I guess the best answer I can give you at this moment is that they're running trains and they've pulled train sets out of storage and so we’re actually seeing the volumes tick up. You've seen the carloads volumes daily report that our utility coal business is up almost a 100% from last quarter. So again we've got more confidence and more visibility to the second half of the year than we do beyond that. But you’re other points are valid that I think for the next several months as Dave mentioned its hot in Texas and this is their season and where we feel confident in what they've told us that beyond that its we've kind of got to the point where we've adjusted the way we think about planning and forecasting to take into consideration our experience and the volatility that we've experienced with their customers.

And I might add this we try not to talk about customer specific, but its more than one customer that's adding coal sets in.

Yes that’s a good point.

Understood, and my follow-up would be simply if I look at your mix of traffic now, coal is somewhere in the mid single digits, 5% to 7%. If I look out a few years, your long-term guidance and goal of a low 60s OR, I think it's a great story. If you can do that with that little coal given the volatility and structural uncertainty on a secular basis around the prospects for that commodity. Just to be clear, if we stay at 5%, 6% coal in terms of your mix, that low 60s OR is attainable. It basically contemplates coal not rebounding.

That is correct. We are not looking at a lot of life out of coal beyond where we are today.

Keep in mind if you look at the broader energy sector, crude oil plastics the Sassaw project is a ripple effect of the same set of circumstances that is causing our outlook for coal to be weak. That’s also very attractive business and will help us get to that OR target as the upside that we see in some of those other markets is more powerful than the downside we see in coal.

And don’t forget the automotive market out of Mexico and also intermodal where we think intermodal is still a bit growth engine for us.

Good spot to be in, thank you guys.

Thank you. The next question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Great, good morning. I guess just a clarification. You mentioned before the seventh inning -- in the seventh inning, is that on the recovery or is that of total productivity gains? But that's just a clarification. My real question for Jeff is just wanted to dig into Mexico a bit more. Velocity has just been -- you mentioned in your charts dwell time and cars online, but velocity has been really volatile lately and really seemed to take a step down. So really amazed at the ability to get the expenses so low. Can you talk about what's going on, on the velocity side and improving on the network? Is that related to everything in Mexico, or is there more going on in the U.S. that's impacting that?

Yeah, our velocity as you hear for the last couple of three weeks is just technically in the U.S. has taking a bit of downturn. Nothing systemic there. We’ve had our production gains just out of the Kansas City that’s probably our most cumbersome area to work those guys that’s planned and that’s something we do every year. So we’ve got I think 10 more working days with those gangs here on the north, south route. And then they all pay up and go to less impactful territory. So nothing systemic, we thought is a normal some weather issues in the Southwest here. The cross border initiatives we talked about, so really nothing systemic yet. We’ve seen some of our velocity here in the last couple of weeks, but I look for that to rebound here pretty quickly. Regarding your first question, I think my reference to seventh is kind of on a recovery. As I mentioned our total growth productivity gains I’m very excited about, but we haven’t really kicked the fires on a lot of that where there’s new agreement on exactly how much that’s going to benefit us with the length of train, but I’m looking for good things I’ll add to that.

I appreciate the insight. Thank you.

Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Good morning Scott.

Thanks, good morning guys. So I get that you don't have guidance for the year, but just given the optimism that you're seeing on the volume front and the improvement, is it fair to think that you think we will see like a better than normal ramp in earnings from second quarter to the back half of the year? Because that's what the Street has modeled. Just want to make sure you're comfortable with that directionally, that framework.

Yeah, Scott this is Mike. I tried to address that on one of the earlier questions that from a earnings perspective I do think we’ve hit bottom in the second quarter and given where we’re at right now, what we’re seeing in the business for the back half of the year, we would expect some improvement on a quarterly EPS perspective from 2Q in the back half of the year for those are sequential.

And you think it could be better than that normal sequential that we typically see given the recovery in volumes?

I’m not going to quite go there, but let’s just say we believe we hit bottom in the second quarter on EPS and believe we’ll see some sequential increases going through the back half of the year.

Okay, and then can you just help -- the comp per employee was down 9% year over year and just help us understand the drivers of that and how sustainable that is.

The -- I’m sorry the compensation.

The compensation per employee.

I think we’ll try to give you a little bit of guidance in the index around some of the declines there, but yet a $6 million benefit in foreign exchange and a $6 million benefit in lower incentives those will be the big drivers. Thanks Scott.

Thank you, guys.

Thank you.

Thank you. Our next question is coming from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hey, good morning. Thanks for taking my call. Just had a quick question on Lazaro, if you can give us an update there on APM expansion. And sequentially the volumes haven't improved since the first quarter. I imagine a lot has to do with the service issues. But is the expansion something that -- is that what you really need to get that growth back into the low to mid teens or can you start to improve on that with better service and this new ability to run fairly longer trains out of that port?

I want to say yes is that okay. We did if you look at the appendix we did see Lazaro recover to pretty attractive growth rates and in spite of challenges in our operating team kind of really doing pulling around that's sort of hat to keep up with it. So Lazaro is back on a good growth trajectory. The APM terminal longer term we think is going to be a very positive for just the overall attractiveness of the port. They expect the first vessel to arrive in the spring of next year. And we’re getting ready for that in terms of cruise and equipment and then track infrastructure around the port. So long-term I think that’s going to be a very positive development for us. So we feel very good about the intermodal opportunity for Lazaro and then all the things that Jeff mentioned in terms of the crew based the longer trains, the additional locomotives will help us better service.

Okay, great, and then just one quick follow-up. You mentioned competition at the port as being a favorable impact for the second-half outlook versus the first. I know at one point you mentioned that some of the carriers were asking for currency adjustments. Is that still an active discussion since the peso has gotten even weaker first half this year, or is that something that the competition for the space can in the improving service can really negate and you aren't really seeing that type of pushback? Thanks.

We’re not actually seeing pushback. We’re still in dialogue. We’re still hearing kind of fairly high level of interest in that but, I don’t believe we’ve seen a lot of pushback and obviously it hasn’t affected our growth coming out of Lazaro.

Thanks.

Thank you. Our next question is coming from the line of Justin Long with Stephens. Please proceed with your questions.

How are you Justin?

Hi, good morning and thanks. Just based on your conversations with customers lately, I was wondering if you could share your bigger picture take on the Mexican economy and the freight environment there. Does the outlook feel better in Mexico versus the US? Are there concerns with the move we've seen in oil prices? What's your opinion on where we're generally headed from here?

This is Mike, I think generally that their growth has been little bit less than projected over the last year or so, but I think fundamentally that economy is turning down. We’re seeing record levels of foreign direct investment being made particularly in the auto sector. We thought that length of that all the new plans that are coming online there some of the biggest manufactures in the world are being facilities in Mexico. That longer term while the initial auction results may be have been great we certainly think that’s going to be a big opportunity for us moving forward. So generally speaking I think their economy is fairly solid and we would hope to see a little bit of an uptick. With two thirds of what's manufactured in Mexico moving into the U.S., they’re very closely tied to our economy and certainly we’ve been lackluster here in the first half of the year. Jose, do you have anything that you would like to add?

Well, I just would like to complete what Mike just said and reinforce the idea of foreign investment that keeps coming very fluently to Mexico. I’ve been present at several announcements of President, Pena Nieto doing because of increase on the foreign investment coming into the concrete. So that shows a lot of interest and a lot of confidence in the country.

Just picking up on your comment or question about the customer perspective, if you look at the key drivers in our business automotive that’s going to grow because the new plans intermodal trade between U.S. and Mexico continues to grow and then we’ve got a huge opportunity with market share gains from truck to rail. The whole energy market is still much -- to much degree -- to a large degree unknown, but we are seeing a lot of interest right now in the movement of refined products from the U.S. Gulf to Mexico and I think I have said in the past several quarters that we actually feel that’s going to be -- our first opportunity is moving refined products into Mexico and then eventually we will see production movement of frac sand, crude by rail and other markets as well so. So putting all that together, I think we still feel very, very good about the prospectus for growth in Mexico.

Okay. Great. That’s helpful color. I appreciate the time.

Thanks Justin.

Thank you. The next question is coming from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hi, good morning everyone. Thanks for getting us on here. Dave or Jeff, I just want to come back to this Mexico service issue because it looks like if you go back maybe a year and a half, two years in the network, you've been moving over 12 million RTMs each quarter for quite some time. So can you just walk us through again what precisely happened out of Mexico that lead to this disruption and inability to take more volume on to the network?

We didn’t hire enough crews.

But you had enough crews in the past so your hiring plans went down. Is that the problem here?

We did not hire enough crews and for attrition as you start to get behind then you have dig out and when you start trying to dig out, it takes even more crews as we had explained in the past when you get behind and then you have to start re-crewing the same train three times then it just speeds on itself so that’s exactly what happened.

All right, well thank you for the clarification, and Pat, if I can just get one in here. It's normal I think to see sequential acceleration in the back half of the year for your Company and broadly for the industry. Are you calling for better than normal seasonal activity on your volume, and that feeds into the whole issue that you will be having the right crews in place?

No, I wouldn’t say that, again I think we feel we have pretty good visibility in the back half. Is it going to be normal? I don’t know. A lot of it depends on how quickly we get some of the business that we feel has moved away from us as we demonstrate our service improvements on the cross border as well as continued strength in the energy markets. Thanks Brandon.

Appreciate it.

Thank you. The next question is coming from the line of Tyler Franz with Raymond James. Please proceed with your questions.

Hi, good morning, guys.

Tyler, how are you?

Dave, so one thing I've noticed is that your Sanchez blocking yard dwell has really improved over the last few weeks. So first, is that the key metric we should be looking at regarding northern Mexico fluidity? And secondly, can you talk about the implications of the Sanchez expansion and what that might have on your Mexican main line even bridge capacity and just service overall in Mexico?

I’m going to led Jeff take that one but I'll tell you, I’m going to say the same thing I told my CFO, be real careful when you look at one yard and say looks like we’re behind here, It look like the network is in trouble because what happens a place like Sanchez which is the lunched to the border crossing, we can be easily be holding four or five trains there to cross the border for the window and at 7’o clock in the morning, it can look like it’s too high and 3’o clock in the afternoon it looks like it’s low. The same thing happens on Laredo. The same thing even happened when people started looking at Dwell and Shreveport in the U.S. The Shreveport count went up because we were doing blocking in Shreveport to help Mexico. So Jeff very astutely moved some of his work around on our network in the U.S. to help Mexico and it pushed our Dwell up. So it is a network and we do run it as one network. So you’ll see those numbers move around but to just be careful about I think what you got to look at over time is just the total Dwell numbers.

Yes, I agree completely there, Dave and Sanchez and Monterey and Laredo, all the yards on the North in Mexico have shown kind of some pretty consistent improvement here as of late. The Sanchez expansion kind of touching on that for a minute, I think I highlighted in Q1 the benefit of that project it really removes us from Laredo and similar to the Zacha versus Wylie facility, the current switching operation that we do to shove trains across-the-Board is just very inefficient because of the track layout in Laredo. So we’ve got to drag out trains and double our train on to the main line which blocks the main line. So it’s just inefficient. Sanchez is going to allow us to build trains, to build multiple trains in Sanchez ready to stage at the border. So we currently operate North window for six hours and then switch to Southbound window for six hours that lets us build trains during the opposite flow and as soon as that gate opens up cross the border we will be able to shove more efficiently trains do there. So we’re very excited about Sanchez project and as I said, we’re going to have some of those tracks on here at the end of August, which is a little ahead of schedule. So we’ll start seeing some benefit while we finish up the entire project and then just roll right into the 2016 project with additional class tracks and be able to block some more trains.

And I would like to add, the yard at Sanchez, the classification yard for next year, our biggest interchange partner is Union Pacific at the Laredo Border and this was allow us to do some blocking for the UP at Sanchez that will help their network, but it also allows the UP to do some blocking for us which helps our network. So we’re going to be able to work with each other on the benefits of Sanchez to improve the whole velocity between those two railroads and that’s something we’re very excited about it.

Okay. That's great color, and then just following up, so we've heard a lot about network balance that's being a big issue for cross-border intermodal. It seems that the IMCs are just simply reluctant to send equipment into Mexico. And I get that Wylie is really good for call it domestic intermodal and Dallas putting traffic over the speedway, but does it have any big again implications to the ability to build empty trains back into Mexico to help rebalance that network?

You’ve been reading our playbook, that's exactly what we do as the empties build in Dallas and we do have some loaded traffic that's actually moving to Mexico over Dallas, but that’s how we get one of our major ways of getting the empties back into Mexico and remember we don’t have the IMC. So we’re really with the asset players like Hunt Swift and Schneider. And so we will reposition because we have to reposition the cars in the Mexico anyway. So we will reposition those empties down from Wiley down into Mexico and then become a North end load. So that’s exactly what we are doing.

Okay. Perfect. Thank you for the time.

Thank you. The next question is coming from the line of Bascome Majors with Susquehanna Financial Group. Please proceed with your question.

Yes, good morning. It's encouraging to hear about the improving labor relations and operational flexibilities in Mexico, and certainly your optimism towards sequential volume increases in the second half. Can you talk a little bit about how much ability you now have to adjust crew resources in Mexico lower if demand does down shift down the road and you end up with excess crew capacity after you reach your headcount targets in late 2015 here?

Yes it’s good observation and we kind of talked about climbing out of service issues probably require more heads than we would probably run rate normally, but the attrition rate again, that’s something that I’ve always found correct, it's very quickly with attrition. The other thing we’re going to see is I touched on is these efficiencies with longer trains and additional locomotives that’s going to help and that's going to help drive down that things requirement. So we’re viewing this as we're getting staffed up. We're building extra boards. We're building extra capacity with those crews, but then we will continue to right size as we start to see the benefits, the new labor agreements and the length of train. So that’s another metric we'll be looking at here going forward.

So the thing we're concerned about though is you got to remember the auto plants that we will be opening in Mexico. We just got to be very cautious that we don’t get ourselves in a position we were in before. So you will see us with ample labor in Mexico and just to remember the cost is a lot different down there as well.

Thanks, can you size up the attrition rate in Mexico just to give us a bogey for how quickly you can take that down if it's needed?

Well don't forget we can still furlough crews in Mexico if we need to. So there is no rule that says we can't furlough if we need to.

Yes, it’s about a 5% to 6% a year that number on average.

All right. Thanks a lot for that guys.

Thanks.

Thank you. The next question is coming from the line of Jeff Kauffman with Buckingham Research. Please proceed with your question.

Thank you very much. Hi guys. Just looking at the cross-border grain volumes, how much of what you're not doing right now year to year do you think is more of a operating issue and how much of it do you believe are factors such as currency or things that may be changing that market just in terms of say the next 6 to 12 months?

I would say it’s all related to servicing congestion.

Okay, so you would expect cross-border grain volume when you get service back to go back to what you were doing second half of last year?

Second half is pretty strong last year, although last year we have the impact of the congestion across the rails in North America. So I would say yes to your question. The only thing we got to be careful with is remember some of our grain actually comes to us in connection at Kansas City. It doesn’t all originate on us. So there has been some congestion North of us that has caused some problems with the water. So it’s not all ours, but our system in the U.S. is flowing very nicely today but again we had some congestion North of us that's created problems on origins.

Okay guys, that’s what I want. Thank you.

Thank you.

Thank you. The next question is coming from the line of Cleo Zagrean with Macquarie. Please proceed with your question.

Good morning and thank you for taking my question. My first question relates to pricing in the energy line. Is that 9% decline excluding foreign exchange and fuel mostly mix? Can you comment at all on same-store price especially for your utility coal business and how we can expect that to trend now that we've reached some bottom there? Thank you.

Most of our utility coal business is priced off of indexes RCAF or AILF. So the rate increases have been reflective of what’s happened with those and they’ve been very low and that’s usually the way the contracts work and so we would not expect pricing in the coal business to be as strong as our overall portfolio.

Okay, and then in the chemicals segment, very nice performance there, price up 10%, right, excluding foreign exchange and fuel. Can you comment a little bit on the drivers there? Chemicals, petroleum plastics, Mexico versus U.S., appreciate any insights, thank you.

It’s certainly been strong on both sides that as I mentioned it’s the one area of business unit for the quarter where we’ve seen some strength that particularly in plastics and petroleum in Mexico. I think we’ve actually cited some of the changes over the last few quarters that we have instated with Pamex moving refined products from Central Mexico to the Port of Lázaro Cárdenas. We’ve changed the way we support that business moving more to a unit train type of service and that has created both yield and efficiency gains.

Okay, and then to people who are concerned as to whether such strong performance means tough for next year, what would you say? Thank you.

I’m sorry I didn’t hear.

In terms of pricing ex-energy doing so well this year, what do you think we can expect for next?

No change, yes.

Very nice.

Thank you. Last but not least.

Our final question is coming from the line of John Barnes of RBC Capital Markets. Please proceed with your question.

Thanks guys. I appreciate.

For last John.

I do what I can. Hi, just on the Mexican labor situation, given what you outlined in your slide in terms of train length and number of locomotives and that type of thing, how does that impact the level of employment that you need in Mexico on a going forward basis, and does it necessarily -- is it a buffer to prevent this labor shortage from cropping up again?

If I understand the question, let me see if I get that, so the current hiring as I mentioned allows for kind of future attrition and extra board activity. So the current hiring path provides for some of that cushion if you will. The productivity gain that we should see with the length of train should decrease the overall requirement, but as Pat mentioned there’s some volume that did move, because of service. So for me right size give us cushion on the extra boards for unforeseen or outages and then continue to scale appropriately with the volume knowing that we’re going to have some efficiency gains on length of train.

I think the key driver John is the reduction in train starts to move the same volume. So you’re going to get some incremental revenue on that basis when you can add 25% of the same train that’s pretty good swing.

Yeah and that's what I was getting at is you pick it up on train size, and so does it mean that a normal year that may need 500 hires now becomes 300 hires? That's what I'm getting at. Does it reduce the necessary labor force?

I would look more that it’s going to enable us to handle the growing volume and so again Dave mentioned running a 25% more trains that’s four trains for about the price of three so -- and that’s also going to help congestion and just help the overall capacity of that line to be able to handle more volume. Lazaro had some good volume this year.

Very, good, very good and then just one clarification on that. Did you give up anything, negotiations are always give and take, what did you give up in order to realize this productivity gain? Was there a wage increase, was there anything you had to give to the union?

Sure our negotiations are both ways, but things for example on the longer train the 3,000 meter trains we will add additional brakeman, which is something we would probably want to do anyways for the overall safety of the operations and the flow of those. So now in addition to those numbers the efficiencies you've added a kind of additional wavier and small additional waiver on some of the trains should be more than offset with the productivity gains on the length of train.

And the other thing too John there’s some of the lengths we got because of the locomotive usage that you actually upsize the train and you don’t get into the third of the third crewman. So there’s kind of -- you got to get out almost for the max to get out to their third group. So these first trains we're adding out of Lazaro don’t even get to the -- through the third crew number.

Very good. Very good. Thanks for the time guys.

All right. Thank you. That concludes our call for today. So thank you and we’ll see you next quarter.

Ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. And we thank you for your participation.