Canadian Pacific Kansas City Ltd. (CP) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Kansas City Southern Fourth Quarter and Full-Year 2016 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, 2015, 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 the KCS website, www.kcsouthern.com. It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern. Mr. Ottensmeyer, you may begin.

Okay, thank you. Good morning, everyone, and welcome to Kansas City Southern’s fourth quarter 2016 earnings call. Slide 4 lists the presenters for today, and I think everyone is familiar with our teams, so I won’t read their names. I’ll begin my comments on Slide 5. As you saw in our press release from earlier this morning, our adjusted diluted EPS for the fourth quarter was $1.12, a decrease of 9% from last year. Revenues were $599 million, unchanged from last year. Excluding the impact of further weakening of the Mexican peso, our revenues for the quarter would have been about 3% higher than last year. Volumes for the fourth quarter were also unchanged from 2015. Our operating ratio for the quarter was 64.8%, which was 120 basis points higher than last year. There are some one-time items in the operating ratio for last year that made this a particularly tough comp for us, and Mike Upchurch will walk you through some of those factors in a few minutes. Our operating ratio for the full-year was 64.9%, which was a 190 basis points lower than last year. We’ll talk in bits and pieces about the 2017 outlook, but obviously, the political and economic uncertainty is probably first and foremost on most of our minds. And the irony of us reporting earnings on the inauguration day of the 45th president is not entirely lost on us, so we’ll move on. But and I just want to pick up the last point here. We still remain very positive longer-term about the growth opportunities that we’re facing. Brian Hancock will talk about many of those growth opportunities in a little while. Moving onto Slide 6, I wanted to provide a few – some commentary on a few of the more interesting topics that you’ll hear about in the presentation that follows, and that we know what is on all of your minds. And first, there is the U.S./Mexico trade issue. Obviously, there are still many questions about the future of NAFTA and the trade relationship between the U.S. and Mexico. While we’ve gotten some indication of the direction of the new administration through the nomination of most of the key trade policy makers, we still don’t have definitive answers to several of those questions. What we do know is that the president’s team has indicated that there will be a process for reshaping America’s trade policies, which could include updating NAFTA. The Mexican government has expressed its willingness to begin the process of modernizing the agreement as well. I’m extremely pleased to have been recently chosen by the U.S./Mexico CEO Dialogue to lead its Strategic Trade Working Group. The U.S./Mexico CEO Dialogue is an organization through which business leaders on both sides of the border seek to enhance trade and economic collaboration between the U.S. and Mexico, as a private sector complement to the government to government high level economic dialogue, which involves the Presidents and senior officials from both countries. Second, the Mexican peso continues to weaken against the U.S. dollar and now stands at levels that are almost 20% below last year. In prior quarters, we’ve talked about the impact the weak peso could have on our business, particularly in our international intermodal business. I’m happy to report that it looks as if we recovered some market share last earlier in the year in our business at Cárdenas. Furthermore, it does not appear that the currency value is having a negative impact on our overall portfolio pricing. Brian will discuss both of those topics in a few minutes. Most of you’ve noticed that Mexican increased fuel prices on January 1, in some zones by as much as 15% to 20%. Our average diesel fuel cost in Mexico now stands about 70% higher than in the U.S. The excise tax credit helps to offset the higher Mexican fuel cost, so we will need to aggressively manage our fuel procurement and locomotive management strategies to make certain we don’t experience any margin erosion, as Mexico continues to work through its energy deregulation timelines. On the positive side of that equation, the level of interest we’re seeing from U.S. refiners exporting fuel into Mexico continues to gain momentum, and we expect that to drive higher shipments of refined products beginning in 2017. Again, Brian will have more to say on that topic a little later. Finally, our operating performance during the quarter was admittedly not up to our expectations, and we saw a noticeable deterioration in terminal Dwell during the quarter. Drilling into this a little deeper, this is not an altogether negative story. One of the primary contributing factors to our Dwell performance was the opening of two new and very large customer facilities in our Northern region, which encompasses the Monterrey-Nuevo Laredo area. Both of these facilities were not fully prepared with adequate track infrastructure inside their facilities when they opened. This resulted in severe congestion in three of our terminals in that region, where we saw a 19% increase in volumes over the last year. The good news is that the needed track infrastructure is being built now, and we can see a clear path to improvement in the near-term. Jose Zozaya will get into that in more detail in a few minutes. Moving onto Slide 7, just one more comment or a couple more comments about trade in Mexico. This slide shows all of our cross-border traffic, including the business that we interchange with Union Pacific at Laredo by export and import. As you can see, 60% of our total cross-border carloads are southbound or export business. Most of you know that KCS’s largest cross-border commodity group is grain, specifically, yellow corn from the Midwest into Mexico. Furthermore, two of our large cross-border business opportunities for the future are also export-oriented from the U.S. to Mexico, namely refined products in plastics. There’s enormous amount of data available about NAFTA and I don’t intend to go through any of that today. However, I wanted to show this chart simply to convey that this is a complex issue, and there’s a lot of risk for both the U.S. and Mexican economies. If any future trade negotiations are not handled very thoughtfully, which I’m sure they will be. I believe that any modification in NAFTA can and will be done in a rational way that will likely strengthen North America’s economy and KCS future. Mexico is our neighbor and our third largest trading partner. Our economies in our societies are inextricably connected. I’m encouraged by some of the Cabinet nominations and comments that have been made since the election and in my role with the U.S./Mexico CEO Dialogue, I’m hopeful that I will have an opportunity to engage directly in the process, not only mindful of KCS interest in this topic, but that of most of our large customers as well. With that, I will turn the presentation over to Jeff Songer.

Thank you, Pat, and good morning. Beginning with Slide 9, velocity for the quarter of 28 miles per hour improved 3.6% over the prior year and 1% sequentially. While Dwell for the quarter of 24.6 hours increased 16% versus prior year and 2% sequentially. Dwell performance primarily in the border terminals at Monterrey, Sanchez and Nuevo Laredo fell short of expectation, as congestion in volume in this region created inefficiencies in our operation. While total Mexico volumes were up 4.3%, regional volume into the Monterrey metropolitan area grew by 19%, facilitated by growth in our total Mexico agriculture segment of 27%, automotive growth of 14%, and metals and other carloads up 13%. Overall system Dwell, excluding the three terminals was 22.4 hours. Expanding upon the system to Dwell performance in the North region, substantial growth with our largest soybean customer in the Monterrey area ahead of the planned track capacity improvements at the facility required us to hold these cars in our facilities for an extended periods of time. The cross-border grain traffic is also subject to additional customs inspection processes inside of our Sanchez facility, which is another factor of increased Dwell at this terminal. This customer is in process of expanding their tracks to provide multiple unit train capacity at their facility. We anticipate, this work will be complete in early Q2 and allow us to spot these trains directly into the facility without additional handling and Dwell in our terminal. Also note the new KIA business that started in mid-2016 has been handled inside of our main switching terminal in Monterrey, as we await the completion of the track construction at the KIA facility. We anticipate to move this work out of our terminal into the KIA facility in early Q2, which should provide some congestion relief to this terminal. Also of importance is the completion of additional classification tracks at our Sanchez terminal. While we incurred a few weeks of weather delay at the end of the year, these tracks will be complete in February. This project allows us to move some switching operations out of our congested Monterrey and Nuevo Laredo yards and will provide ongoing benefit to the region. We continue to work actively with other customers in the region to analyze our transportation service plan and identify additional opportunities to planning and capacity enhancements that will continue to support the growth in the region. Turning to Slide 10, we remain very positive on our overall operating outlook. We recently announced the addition of Mr. Kurt Jacobs as Vice President of Transportation in Mexico. Mr. Jacobs joins us from Brink’s Mexico, where he served as Chief Operating Officer. Kurt brings with them 25 years of operating and logistics experience and will focus on the day to day execution of operations and continuous improvement in our key performance areas. Entering 2017, our resources are well aligned. 5% of the U.S. workforce is in furlough status and 8% of locomotives are in storage. So we are prepared to handle additional volume as required. Another positive from 2016 that we will continue to build on is labor management and productivity. Excluding personnel associated with the car repair in-sourcing initiative, overall headcount was down 1% for the quarter. Significant full-year reductions in recrews and a $6 million reduction in overtime illustrate our operating team’s focus on cost and productivity controls. In Mexico, recent productivity improvements can be seen, as total volume increase 4.3% for the quarter, while T&E headcount remained essentially flat. Additional opportunities for expense reduction include our mechanical restructuring efforts. In 2016, we were able to restructure our car and locomotive maintenance activities, which will provide an ongoing annual reduction of about $10 million. Turning to Slide 11, 2017 capital spending will reduce by approximately $30 million from $584 million in 2016 to a range of $550 million, $560 million in 2017. General and maintenance spend will reduce in 2017, given the improvements in infrastructure we have made over the past several years, including the completion of the Monterrey to Nuevo Laredo track upgrade, which was completed in 2016. In addition, we do not currently have plans to purchase locomotives in 2017. While overall CapEx will reduce, we remain committed to capacity enhancements across the network, led by our continued investment in Sanchez yard and additional mainline siding capacity projects. Our Sanchez yard expansion will continue to allow for additional capacity and improve mechanical facilities in 2017. Continued investment in Sanchez supports those terminals, such as Monterrey and cross-border traffic that are experienced the largest growth in our network. Work at the Sasol support yard facility continues and is on schedule for our late 2017 completion. PTC is another area of significant investment in 2017, but we look for this to reduce substantially starting in 2018. I will now turn the presentation over to our Chief Marketing Officer, Brian Hancock.

Thank you, Jeff, and good morning, everyone. I’ll start my comments on Page 13, where you can see that both volumes and revenues were essentially flat in the fourth quarter compared with last year. Revenue in Q4 was impacted negatively by foreign exchange, which was offset by FX adjusted revenue growth of 14% in our Ag and Mineral business, 9% FX adjusted revenue growth in our Industrial Consumer segment, and 10% adjusted revenue increase in automotive. If you eliminate the impact of foreign exchange, our fourth quarter revenue would have been up 3%. Volume was also flat at 550,000 carloads for the quarter with 6% growth in our industrial consumer carloads, 10% carload increase in our Ag and Min business, and a 19% increase in automotive. The revenue per unit was slightly up for the quarter with gains in pricing and mix being offset by the impacts of foreign exchange and fuel. Core pricing for the quarter was approximately 3% based on same-store sales and renewals, and we expect 2017 to be at or above the levels we experienced in Q4. On Page 14, you see a total year analysis by line of business that provide some context for this year’s results. For the full-year 2016, our Ag and Min business unit saw growth of 7% in revenue and 5% in carloads, led by our grain and food business, which offset lower volume in the minerals group. The slowing in minerals was the result of several large construction projects being delayed or canceled due to the flooding in the southeast earlier in the year. Our Automotive business had a solid year considering the number of plant shutdowns we experienced. Total automotive carloads were up 5%, which is very, very encouraging when considering automotive volumes were down 12% at the end of Q1. Automotive revenues adjusted for foreign exchange were down 2% for the year. Besides currency, lower year-over-year revenue was due to a mix change, as well as some of the longer haul plants being down earlier in the year. At the end of the year, all of the KCS service plants were running at planned volumes and the new facility that opened in 2016 were all producing and shipping vehicles at the expected rate. Also, given the continued strength in the number of vehicles coming in at the Lázaro port, 2017 should be a very good year for our automotive business. Our Chemicals & Petroleum business unit had flat volumes year-over-year with adjusted revenue up 2%. Industrial and consumer volumes were down 1%, with adjusted revenue up 1%. Overall very solid results, given the tepid business environment in some of the base commodity segments. Our business with Pemex this year experienced some volatility as refinery and storage capacity fluctuated throughout the year. An early announcement of refined product importation opportunities combined with significant outages at many of the KCS serve refineries created an environment, where volumes were very difficult to predict. This was all in conjunction with the Mexico energy reform to begin rolling out across the country in 2016. I’ll discuss this in a – in more detail in a moment. Our intermodal business continued to see significant competition from inexpensive trucking and industry consolidation among major ocean shipping lines. It was also affected in the first-half of the year by flooding in the southeast and civil protest in Southern Mexico that impacted service. Our cross border business with UP continues strong and with the completion of the new APMT terminal in Lázaro and the new service with BNSF, we’re optimistic that our intermodal business will be positively impacted in 2017. For the total year, our energy business was down approximately 10% in carloads and 20% in revenue. This segment continue to be negatively impacted by lower coal and crude volumes, driven primarily by smaller spreads and the low price of natural gas. As you know, frac sand volumes have also been impacted by the significant changes in the energy markets. We continue to look for creative solutions in this important segment, but volumes will largely depend on the prices of natural gas and the prices and spreads associated with crude. We’re encouraged by what we’re seeing in January, which makes us cautiously optimistic that our energy business can improve as we move into 2017. On Slide 15, we provided year-over-year summary outlook for each industry segment. As you can see, we have a favorable or unchanged volume projection for every business unit. This includes the growth in both new and existing intermodal products, as well as the impact of the new container terminal at Lázaro. It also includes growth in the plastics business, as new plastics facility start to come online in late 2017. It also includes a full-year of volume from the automotive facilities we serve. We believe our Ag and Min business will grow at a more moderate rate than it did in 2016, but we still expect it to be a good year. We also expect steady volumes in paper and steel with upside in appliances, as home construction and home improvement activity escalates. We should also see stability in coal, crude, and frac sand, although we do not believe they will return to the levels experienced in 2015. On Slide 16, we wanted to provide an update on the Mexico energy reform and how KCS is supporting this critical initiative. Earlier this month, the government of Mexico announced that the plant transition to global market pricing for refined products, including unleaded fuel, premium fuel, diesel, and LPGs would move forward in 2017. The government also announced that the reforms will be rolled out by zones. These zones are listed on the slide, along with their expected changeover dates. As most of you know, KCS announced last week a major investment in the new fluids terminal in San Luis Potosi. We have joined Watco and WTC in the development of a facility, which will serve all of Central Mexico as a public fluids terminal. Obviously, there will be some volatility by zone as the new global pricing reforms are rolled out and there have already been protests in some regions, where prices have increased to reflect the non-subsidized cost of providing fuel to a given region. KCS has already moved its first unit train down to the Howard PMI terminal in San Jose Iturbide this month. Slide 17, highlights some of the details of the new SLP facility. Construction on the terminal is already begun, and we expect to complete Phase I in the second quarter of 2017. Phase I will allow terminal operations to unload product from railcars directly into trucks, which will allow us to serve the needs of the region as quickly as possible. Phase II of the project will include the construction of storage tanks on the property and will include both public and private storage capability. On Slide 18, we provide a snapshot of the other projects that already exist or being built on KCS. Many of these terminals have both storage and transload capabilities to serve their particular geographies. As you can see, seven of the facilities are already in operation and seven are under construction. It is expected that KCS will take a leadership role in helping Mexico move toward a market-driven energy model, which will ultimately help the country meet its increasing energy needs. Our investments in capacity and fluidity, as well as our newly announced investments in strategically located stores terminals will allow KCS to develop an efficient infrastructure to safely bring refined products into Mexico from the U.S. and ensure security and capacity for our customers. Overall, there’s much to do over the next 12 to 24 months. There will be normal temporary setbacks at times, but we’re totally engaged in and committed to the opportunities in front of us. As Jeff mentioned, we’re making strategic investments, which will help support our customerss growth strategy and we’ll see the benefits of these investments in the form of enhanced system capacity, better operational efficiency in fluidity, and ultimately increased bottom line profitability. With that, I’ll now turn the call over to our CFO, Mike Upchurch.

Thanks, Brian, and good morning, everyone. I’m going to start my comments on Slide 20. Fourth quarter volumes and revenues were essentially flat ending a string of seven successive quarter’s of revenue declines. Our revenue performance was impacted by the significant deterioration in the peso, which negatively impacted revenues by $17 million. For those of you who are trying to reconcile our reported volumes to the AAR volumes, we have included a reconciliation in the appendix on Slide 42, but the difference essentially relates to the AAR not using a calendar quarter. Operating ratio was 64.8% in the fourth quarter, higher than the 63.4% operating ratio in the fourth quarter of 2015. Now cover expense details in a few pages. Reported EPS was a $1.21 per share, down 5% from the fourth quarter, while adjusted EPS was $1.12, down 9% from the fourth quarter of 2015. Negatively impacting EPS was the higher OR, slightly increased interest expense and an increase in our income tax provision, primarily the result of a fourth quarter tax adjustment that increased our adjusted effective tax rate to 37.6%. I’ll cover those details in a few minutes. Offsetting those negative items was a pick-up as a result of the repurchasing of our stock and you can see further details on Slide 34 that reconciles EPS in the appendix. Moving to Slide 21, annual carloads and revenues declined 2% and 3%, respectively. Reported operating ratio improved to 190 basis points, while adjusted operating ratio improved to 150 basis points. Large expense decreases for 2016 included a $63 million fuel excise tax credit, foreign exchange benefits of $63 million, fuel price reductions of $22 million, and lower headcount and labor productivity of $15 million. The increases in expenses will largely attributable to incentive compensation, wage increases, and depreciation. Reported EPS increased 1%, while adjusted EPS was essentially flat. Year-over-year, changes include improvements in operating income and a lower share count, offset with higher interest expense and a slight increase in the adjusted effective tax rate and further details are in the appendix on Page 34. Moving to Slide 22, let me briefly cover our effective tax rate. As you see in the waterfall charts on the left, our FX adjusted effective tax rate was 37.6% in the fourth quarter and 34.4% for the full-year. We also have provided the reconciliation from ETR to reported ETR with the difference being the income tax benefit we received from a deteriorating peso as the currency continued to devalue throughout 2016. During the fourth quarter, you can see an increase of 4 percentage points within other in our ETR, primarily the result of a one-time non-cash tax reserve we booked as a result of an uncertain tax position that developed late in the year relating to some prior year tax returns. While we believe we have good facts and circumstances that should make a compelling argument for our position under GAAP, we’re obligated to record a $5.8 million tax liability in the fourth quarter. While it is difficult to predict the final outcome of the matter, we do not believe it will have any material negative future impact to our taxes or earnings per share. The table in the right side of the slide shows the income tax benefit of the deterioration in the peso offset by our hedge loss. Our hedging strategy, which we employed four years ago continues to be an effective strategy to mitigate any substantial EPS impact in our P&L due to foreign currency. Moving to Slide 23, expenses increased 2%. We experienced a $16 million decline due to foreign exchange, while the Mexican fuel tax credit contributed $13 million to lowering our net fuel costs. Offsetting those reductions were increases in incentive comp, $5 million in increased equipment costs, which is a combination of the mix shift to more automotive and grain carloads that increased 19% and 10%, respectively, in the fourth quarter, $1 million in early termination and lease termination charges, and $1 million from higher cycle times in Mexico. We also experienced $5 million in fuel cost increases and $4 million in depreciation. During the quarter, we also had an approximately $5 million net negative comparison to last year related to some labor and benefit claim true-ups, a legal settlement, and a personal injury actuarial true-up that benefited 4Q 2015. I wanted to make a few comments with respect to the maintenance expense savings, which Jeff indicated, was approximately $10 million annually. To help account for the changing geography of these expenses, during the fourth quarter, we saw a reduction in purchase services of $8 million, which represents vendor savings from in-sourcing a contract, offset by a $1 million increase in compensation expense as a result of hiring the vendors and employees, along with a $5 million increase in materials and other to purchase parts for our facility. Turning to Slide 24, compensation and benefits were up $11 million, primarily due to higher short-term incentive compensation expense of $7 million, which represents an increase payout assumption for 2016 versus 2015, and a $3 million year-over-year increase in our long-term incentive expense mainly as a result of a $3 million credit booked in 4Q 2015 to reduce the payout levels. Foreign exchange benefited comp expense by $5 million. And while we experienced wage inflation of $4 million, we largely offset that with a $3 million improvement from lower U.S. headcount and U.S. productivity improvements. In the bar chart, excluding the mechanical in-sourcing, headcount actually went down 1.4% year-over-year. The addition of 260 mechanical FTE is lower than what our vendor was employing another indication that in-sourcing this work makes economic sense for KCS. Moving to Slide 25, our fuel expense declined $2 million, foreign exchange benefited fuel by $7 million, offset by $3 million of increases in combined fuel prices in both the U.S. and Mexico. Consumption, as measured by increased GTMs added $2 million in fuel expense, and on a year-over-year basis, our negative lag was $3.3 million. Let me provide you with a little more information on fuel expense and what we anticipate for 2017. As we expected, the Mexican government has extended the fuel tax credit for 2017, and we currently expect to receive a credit of approximately $60 million similar to 2016 levels. As Brian mentioned a few minutes ago, the Mexican government is beginning a transition to market price fuel that will be implemented throughout 2017 on a zone by zone basis to achieve true market pricing by 2018. Effective in January 2017, fuel prices did increase in the range of 15% to 20%. While we expect to have some negative lag impact during the first quarter, some of the higher fuel prices can be mitigated by KCS, so we pass those costs on through our existing fuel surcharge programs and by purchasing fuel in the most cost-efficient manner taking an advantage of inter-region pricing in Mexico, cost effective cross-border purchases of fuel, and our position as a transporter of fuel for our customers, whereby we may be able to purchase fuel directly from them on cross-border refined product trains we’re moving into Mexico. And finally, on Slide 26, we’ve outlined our capital structure priorities. Again, first and foremost, we will continue to invest in capacity needs to support our growth opportunities. Despite the downturn in the industrial economy over the past two years, we are still moving 15% more freight than in 2007, while the rest of the class one rails combined are moving a 11% less freight. And this has required us to continue to invest in capacity projects and rolling stock. In 2016, we generated $169 million in free cash flow, the highest annual level of free cash flow generation by KCS, along with a strong balance sheet positions us well to continue to find ways to grow our business, while also providing shareholders a return. 2016 capital expenditures were $584 million within our prior guidance, and for 2017, we do expect a slight decline in capital to the $550 million to $560 million range, despite continuing to incur peak spend levels for the Sasol Lake Charles development and PTC, which combined will be about $115 million next year. We continue to execute the share repurchase program during the fourth quarter, and on a cumulative basis, we have now repurchased 4.3 million shares for approximately $380 million. We continue to expect to conclude that program by June 30 this year. We continue to make further progress in our lease conversion program and now own 67% of our locomotives and freight cars, up from 18% in 2011. We continue to evaluate new purchases of leased equipment and we’ll take advantage of those opportunities when it makes economic sense to do so. Finally, we retired our $250 million floating rate notes in October, with proceeds we obtained from our May debt issue, which was a ten-year note at 3.18%. We do not have any significant maturities until 2020, giving us ample financial flexibility. And with that, I’ll turn the call back over to Pat.

Okay, thanks. I just have a couple of comments before we open it up here. I just want to go back. First of all, I misspoke in my opening comments about the operating ratio change for the quarter. I stated, it was 120 basis points, obviously, when you saw Mike’s slide, it’s a 140 basis points. But just kind of putting a little bit of a wrap on the quarter and the outlook, I think, again, while it’s hard to get it too excited about revenues being flat. As Mike mentioned, this ended a string of seven successive quarters of revenues – revenue declines. The outlook obviously, Brian, went through by commodity on Slide 15, we think it looks pretty strong and we’re enthusiastic about 2017. And as Jeff mentioned in his comments on the performance, the operating performance when you consider that some of the deterioration that we saw was related to a surge in growth, particularly in the Northern part of our network. And the capital investment that’s being made to deal with that, we’re very confident that we’ll see a return to more solid performance numbers very soon. So with that, I will open the line up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Brian Konigsberg with Vertical Research Partners. Please proceed with your question.

Yes, hi, good morning. Thanks for taking my question. Just I’d like to start off just on the pricing dynamics. So fairly strong in Q4, you’re expecting that or better in 2017. Maybe can you talk about your expectation for the cadence of price, and how does that compare for your expectations on inflation?

Brian, this is Brian, thanks for the question. Obviously, we feel very good in the quarter about the way that pricing came in from a core perspective. When you look out as we look at the business that we’re repricing here in the first and second quarters, we feel very comfortable that we’re going to continue that that pace. When you think about above inflation, that’s really the way we’re looking at it. Obviously, there are a number of uncertainties that we have to take into account with fuel, with FX, and some other things, and so we feel very comfortable with that. We continue to see pressure on our intermodal business and you have to compete in the markets that you’re in. And so there’s a lot of interesting things going on from a trucking perspective, both in Mexico and the U.S. And obviously, the ocean carriers continue to make changes as that that industry consolidates. And so we feel comfortable that we’re going to be able to maintain and potentially improve on what we’re doing in a number of our segments. But again, if you look on Page 15, you can see kind of the segments that we really see positives in, and we’ll continue to work towards those early in the year.

Great. And just secondly, maybe if you could comment a bit just on the customer base, obviously, we’ve heard a couple of the auto OEMs talk about moving production, or redirecting their capital out of Mexico back to the U.S. Just curious with your conversations with other customers, and I’m sure these things are fluid and you probably are hesitant to give specifics. But are you coming across other customers that are sharing incremental concerns, and maybe if you could give your current view on how that could play out over the next 12 to 18 months?

Sure. That’s a great question. This is Brian again. Last – it’s interesting. Last week, I spent the week with an entire every single day with a new set of customers. And the overwhelming message that we received from our customers was, we realized the environment is a little tenuous and there’s a lot of things being said. But please make sure, you continue to invest in Mexico because, we’re continuing to invest. We see continued strength in many of the commodity markets that may have been a little weaker. There’s a significant amount of product moving, as Pat said, South. The export volumes continue to be strong. And so we feel very comfortable that we’re in a very good space. Our customers are continuing to invest. There’s a lot of confidence that the issues that are out in the public right now will be resolved in a way that is better for both countries and for the companies that do business in them. So right now, it was overwhelmingly positive. And this is, I would say, probably over 20 to 25 different customers that we met with last week. So we feel very good about 2017 and into the future.

Thank you. Our next question comes from line of Jason Seidl with Cowen and Company. Please proceed with your question.

If you just exclude sort of the import business from Mexico, how does the growth of the rest of your base business look? I was wondering if you could sort of separate that out for investors, just sort of talk about some of the opportunities there going forward?

Jason, again, this is Brian. Thanks for the question. As Pat mentioned, about 60% of our business is southbound, so it’s export from the U.S. into Mexico. That includes four of our big product lines. When you think about grain, it’s obviously our largest. But intermodal and automotive parts going into Mexico, plastics, fuel, all of those industries will continue to ship into Mexico and grow. It’s important to remember, Mexico has over 20, already trade agreements with other countries. And so, Mexico, as it produces, it ships all over the world. And as they think about importing into the U.S., obviously, that’s a key trading partner for them, and we continue to see investment in a number of different areas, when plastics go out of the U.S., then they come back in for other parts other things that we see. But I would tell you, overall, we continue to see our export business from the U.S. probably growing faster than our import business back into the U.S. And then once they’re in Mexico, there’s a number of opportunities given to port structures that we’re able to export into the rest of the world and we’re able to touch some of that freight as well. So cross-border is a big space. We were up on our cross-border business 8% for the quarter. And so we feel very comfortable that that’s going to continue to grow, both north and southbound.

Okay, thanks for that. And on my follow-up, I wanted to touch a little bit more on energy reform. I realize it’s early on and it sounds like it could be lumpy as they roll out the zones. But could you talk about, from a modeling perspective, what we should be expecting, at least, from this initial facility, as it ramps up? I know you guys just sent the unit train. And how should we look at it, as we go out to 2018? Should we expect, at least, maybe another facility to potentially roll on them, or should we, at least, just sort of take the wait-and-see approach?

Yes, Jason, let me just address it in this way, because it’s going to be very difficult for me to predict, or give you any type of guidance on, how fast will it roll out, how will each zone participate, and what would be the impacts. Basically, if you look at Slide 18, it gives you the 14 facilities that are on our line. Seven of those are already in operation. Several of them are primarily storage facilities that feed the distributors in particular geographic areas. We do feel very comfortable that the pipeline system coming out of Veracruz is going to continue to be the primary source into Mexico City. And so when you think of rail, everything else that you see on this page is an opportunity for us. How it will roll out? How each individual region will go forward from a volume perspective? I really can’t – I can’t give you any prediction on that simply because it’s going to be an interesting year. But we do feel very, very comfortable that the politicians, the people inside the communities, they’re very focused on making sure that they have enough refined products. Just to give you one point, you have to remember, the U.S. has about a 90- day supply of refined products. Mexico has a two-day supply of that. And so it’s important to realize the export from U.S. into Mexico is going to continue to be a very, very important part of the overall Mexico energy strategy. And you’ll see, this will give you 14 facilities. I really can’t tell you anything besides that.

Okay. I appreciate the color, guys, and thanks for the time.

Thank you, Jason.

Thank you. Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Hi good morning. This is Danny Schuster on for Allison. Thank you for taking our question. So thank you very much for showing the mix of cross-border business on Slide 7. We found that extremely helpful. And we were just wondering, so if you’re a net exporter to Mexico, how would a border adjustable tax system impact you?

Well, this is Mike Upchurch. Obviously, that’s just a concept at this point that we don’t know exactly how that might play out and if it, we’ll play out. But our view of that is, it would certainly make customers of ours produce less if they’re importing into the U.S. And in general that concept is to tax imports and have a tax-free environment for export. So, it would clearly be a negative if that were to occur. I think the challenge with that concept becomes, take the auto industry, as an example. How many parts go southbound? How many materials like chemicals and steel and plastics and get assembled and then back North? And certainly, the President-Elect made some comments about that being too complicated. But that would be our initial sense of the border tax.

Okay, great. That’s a helpful clarification and certainly understand that it’s still very uncertain at this point. And then just back to Slide 7, how – so of your overall revenue base, how much of that is represented by the cross-border traffic that you’re showing on this slide? Does that question make sense there?

Yes. And this slide represents a little bit different view of cross-border. When we talk about cross-border, historically, we have talked about the business that is handled by Kansas City Southern on both sides of the border. And so that did not include other cross-border traffic that was interchanged with primarily with the Union Pacific at Laredo. So the KCS cross-border only is about 20% – 28%, 29% of our revenues. And when you add the other piece of it, it’s in the low 40s.

Thank you. Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Yes, thanks. Good morning.

Good morning, Chris.

I wanted to talk a little more about the volume outlook for 2017. So you gave a helpful slide and kind of everything in the neutral to positive dynamic. But wondered if maybe we could put a slightly finer point on that, when you think about the auto growth and we’ve talked about what production looks like in Mexico in 2017. You have refined products. You have some intermodal opportunities, it seems. But when you start to think about that, do we think maybe mid single-digit? Is there a way to kind of get a little bit more granular in terms of what we should be expecting for total volume growth for the business in 2017?

Chris, I’ll take that one. We’re going to remain steadfast in our position that we’re not going to give specific guidance. But clearly, when you look at the – just that one slide, it would certainly indicate that we expect 2017 to be better than 2018., sorry, 2017 to 2016. But until we get more in clarity on some of the environmental and other factors that are on the landscape, we’re just going to kind of stay where we are.

Okay, got it. That’s helpful. When you think about the – this is a follow-up. When you think about sort of some of this volume growth, and you talked a little bit about it in the fourth quarter. So it sounds like maybe there was a mix of maybe some customer facilities that weren’t quite ready, but it ultimately ended up impacting the network negatively sort of the story here has been about the ramp up of volume, particularly in Mexico. As we think about 2017, how is the network sort of prepared for that volume? You’d love to see the ability to sort of really leverage that opportunity, as we move through the year. I don’t know if this is just initial growing pains we saw in the fourth quarter, or do we think that maybe some of this spills into 2017? Just want to get a sense of how that kind of plays out, and obviously, that has an impact on the operating ratio in 2017?

Yes, I’ll take that. This is Jeff. So as I try to give a little color around more regional impact here, which is really what we’re seeing. If you look at some of the other terminals in Mexico, San Luis Potosi in the kind of the heart of the country for us actually saw some improvement. Velocity, cars are getting over the line relatively well. And so I – it’s not for me. It’s not a system issue. It’s not a symptom that won’t be corrected here after some of this capacity comes on, on this kind of specific to that North region. And as I mentioned, the volume in that territory, if I have one terminal, for example, Monterrey is the primary terminal that was impacted with the volume growth. That backs up towards the border that starts to impact Sanchez and Nuevo Laredo. So unfortunately, we lost a little bit of time. On the Sanchez yard, we’ve got additional classification space here ready to open next month. I was hoping to have that in December, but we lost a little time due to the weather. So certainly, we’re looking at how we’re strategically deploying a capital. Sanchez is first and foremost and will continue to be, in addition to the initial tracks opening here in February, we’ll have another cut of tracks opening up probably early fall. So, we’re trying to not do one large project and wait until it’s all ready and opening up. We’re trying to cut over tracks and get that capacity service as quickly as we can, which is really what we’re going to see here starting next month.

Chris, this is Mike. One other thing I might just comment. Our volumes in Mexico were up a little over 4%. And Jeff kept his T&E labor flat during the quarter. So, I think that that was a nice little productivity bump in the fourth quarter from a labor perspective.

Thank you. Our next question comes from line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Great. Good morning. Pat, thanks for the detailed thoughts on Mexico, and your regulatory outlook. It was a great overview. But Brian, sticking with that for a minute on the auto side, you mentioned the big news on Ford withdrawal from San Luis Potosi and BMW, seems like they’ve suffered from some tweets lately. But I don’t think they’ve made any changes to their production. Is that right? And then any updates on the timing or planned builds at Toyota, Mercedes, Infiniti? Just want to make sure we understand kind of the revised – any revised outlook if there is any. And are any other auto companies just because that’s the biggest scale, is there anything else we’re waiting to hear from?

Yes, absolutely, Ken, thanks for the question. Obviously, the Ford announcement was disappointing. It’s – it was a very large facility. But when you look at it and understand the way the market is working and the small cars that were going to be built there, it makes sense. I think, Ford has said, it was a business decision, and I believe that it was. All of our other customers, I think that they are well attuned to what’s being said. What’s coming out on a daily basis. But again, we met with a number of our automotive customers and very much in detail customer by customer specific conversation saying, hey, please make sure that you continue to invest in the infrastructure we needed. We continue to have plans. And so we have not seen any of the other facilities move. Certainly, the companies that you’ve mentioned, there has been no announcement and we have not seen them hesitate. In fact, we’ve actually received calls saying, hey don’t. We understand what’s being said. But we want to continue marching down the path that we have. So we feel comfortable that we’re well connected with our customers. They’re helping us understand exactly how they’re being impacted. We’re doing the same for them. And I think, as was said in the opening comments, Pat being responsible as a Chair on the CEO Dialogue, our President Jose Zozaya down in Mexico very much staying attuned to what’s going on politically. We’re as close as we can be, and we continue to feel very comfortable in our support of the automotive industry and the intermodal industry that also supports those big plants. So that’s where I would say.

I just chime in and add a couple of comments here. And that is, we are trying to stay very, very close to some of these major customers and projects, obviously. So that we are adjusting if necessary or appropriate our capital thought for the next two or three years and beyond. And as Brian said, we’re not getting any indication from some of these other opportunities in the pipeline that their plans have changed. So we need to be prepared for that business when it comes. Then on Ford, if – just another kind of color commentary. If you look at what they said when they made their announcement, it’s all about the investment environment in the United States, is looking better to them. That plant was just begun construction. And so they made a decision based on the outlook for the environment, the tax environment, the regulatory environment, that’s all very positive. And I think if companies start to do that, it’s going to result in the trade deficit eventually improving from the U.S. perspective. And we look at the opportunities that we’re talking about and the opportunities for additional exports, we think that that’s all going to be taken into consideration, as the policymakers began to work this issue through and come to what we think and what we hope is a reasonable outcome.

Great. And if I can follow-up, it sounded like, Jeff, you were giving an answer to Chris on on kind of some of the updates in – on the network. But how – when you think about, how long does it take to get the network ready, when you’re thinking about KIA, you’ve talked about some of the KIA issues, I guess, Audi was launched after that. Is there, I mean, you’ve had plenty of lead time on the opening a plant. I guess, I want to try to understand what was the surprise in Mexico? Did you get a larger share than you expected? Why was the network so I guess disjointed when you had all this influx of volume?

Yes. So I kind of – I try to provide some color around the – I would say very, very solid growth in the region of Monterrey, 20% growth, 27% on the Mexico ag side. So I want to say, a little bit of a storm with the auto plants. If you recall, early in the year, we had shutdown activity with autos, those all came online here, half to later in the year. The KIA is something we’ve just kind of been, as I mentioned, been waiting pool for the facility to complete how that works. They actually have their facility. They truck those automobiles into our Monterrey, downtown Monterrey terminal. We’re handling them there, which is not ideal by any means. So it’s creating some pressures there that, again, we look for some relief, as we look to move that operation back out to the KIA facility here in Q2. So really just a little bit of a storm with, I want to say, the volume in the regions in the Monterrey area.

Thank you. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. Wanted to get a little sense of some of the cost side items. I assume from you Mike, how do you look at per worker cost in 2017? I mean, you had a lot of noise from incentive comp moving up a lot this year. I think generally a weaker peso being helpful in terms of lower cost per worker. But I just that – there has been a lot of noise. How would you think about bottling the change in per worker comp benefit, broadly speaking in 2017?

Yes, Tom, the challenge obviously in the comp and benefits line item when you look at the expenses is the incentive. If you exclude that and we did include a page, I guess, it’s Slide 29, back in the appendix. You look at annually, we had about $14 million of wage inflation and combination of productivity improvements and labor reductions in the U.S. more than offset that actually $15 million of benefit. So I think from a labor productivity perspective, we’re certainly seeing that productivity, particularly on the U.S. side. I think on the Mexico side, with the influx of the volumes we saw here in the fourth quarter, we want to manage that correctly, given some of the issues we had late 2014, 2015. But I think, overall pretty decent performance when you look at the cost increases and the productivity improvements that we’ve been able to generate out of Jeff’s organization.

So if you look at where the peso is today, and if you look at it, you ran at a pretty high incentive comp level in 2016. Would you say it’s reasonable that comp per worker could actually be down year-over-year in 2017?

Well, a lot of that’s going to be dependent on volumes. I mean, we would expect right now comp and benefits to be up probably low single digits. In 2017, we do have some health and welfare costs going up, medical benefits that are going to hit us there. Obviously, you get the benefit of the incentive going back to 100, and the wage inflation, we have a pretty good handle on that. But I think you probably ought to assume just slight increases in comp and benefits going into 2017.

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

Hey, good morning. Thanks for taking my call.

Good morning.

Good morning.

So when you look at the some of these new volumes, refined products, and plastics, I think you called out like a 4% of CapEx has gone to rolling stock. Are there any bottlenecks or limitations when it comes to what appears to be the immediate need to move refined product into Mexico? Is that – does the government have the tank cars? Is that something that refiners are supplying?

Yes, Brian, this is Brian. Thanks for the question. I think the only bottleneck is really the capacity to unload and store refined products at the rate necessary, as the government starts to role things out. And so that’s where you see all of the investment. That’s why we wanted to provide the chart on Page 18. It’s literally from a rolling stock perspective. Obviously, there’s a lot of tank cars in the environment right now. So I don’t think that’s the issue. But I would tell you, everyone is focused on making sure that you’re able to transload specifically off of rail into truck and into the district distribution system. So I think that’s the bottleneck, and that’s why again, I think our investment in the Watco, WTC, KCS terminal is so important, because it allows us to create a destination, where we can really offload and get that moving as quickly as possible.

Okay. And then just a follow-up on just the energy reform, in general. I know there’s commentary about how – there’s a lot of moving parts. But how does Pemex in their new form factor to enter into this equation? I know they have some regional stores, the cars that might be an opportunity. We’ve got the first open season ending in mid-February could actually be a competitor in some of these areas? Just kind of the early thoughts on them kind of and then your shape in form would be helpful, as we look at this evolve in the next 12 to 24 months? Thanks.

Yes, Brian, that’s a great question. Thank you. Pemex is an environment. It’s difficult for them to really understand how they want to move forward in particular markets. What I would tell you is, they’ve been more than helpful for us and for others in helping open up the market to the global pricing and the way that the gold works from a crude perspective, from a refined products perspective. And I would continue to see them as a large store of facilities. I know that their refineries many people have discussed in the press about the shape of those refineries. But I would tell you, they’re focused on making sure that Mexico has all of the refined products necessary whether it’s to import into storage facilities that already exist for them, or by reworking their refineries. We see that on a number of the refiners that we support. But right now, I think, we’re working well with Pemex and most of the other companies are as well. But will there be significant change in the retail space? All signs are pointing to, there will be significant change from a midstream distribution perspective. I think that there are a lot of companies trying to understand who have received their product from Pemex that may not be able to get in the future, where they’re going to get that product. And so I think that’s a key. But again, I think the parties are working well together. And over the next year, it’s certainly going to be an interesting time. There will certainly be things that we didn’t foresee coming. But overall, I think it’s going to be very positive for the country. I think it’s certainly going to be positive for KCS. And I think Pemex is going to come out of it as well as a better stronger company, focused on what they do best the Mexican population. So that’s where I would say with Pemex.

Thank you. Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hey, good morning, everyone. And Pat, very important question for you Do you mind sharing your Twitter handle with everyone on this call, because I think we’re going to get quite a bit views out there.

It’s top secret.

Look, with all the back and forth on NAFTA, I mean, has this shaped the strategic direction inside Kansas City Southern? I mean, are you guys now looking at the export energy market as potentially being a bigger opportunity than maybe say autos was for this company two or three years ago, I mean, or has nothing really changed that drastically the way you look at the future of your company?

It’s – I’d say, it’s more along the the latter, where as I said earlier, we’re trying to stay very close to our customers. So that we understand, if they’re making any changes. Do we need to consider that in our capital planning, resource planning? And as Brian mentioned so far, we’ve really other than a couple of announcements that are pretty highly publicized, we haven’t seen that. We’re also trying to stay as active and involved with policymakers, our friends in the Senate and Congress. There’s just going to be a lot of interest, as this moves forward as we begin to engage with those policy members, both individually and through organizations like the CEO Dialogue. This is an important topic for the AAR. According to the AAR, 30% of all class one carloads are connected to international trade. So we know that this is one of their top agenda items for 2017, as well. So and until we kind of know exactly what we’re faced with, our strategy is pretty much the same. We’re going to continue to invest in those facilities that are going to drive our growth. And again until we have better facts to make any changes, we’ll do that when we feel it’s appropriate.

Okay. But in terms of the capital outlook and where you’re going to allocate your incremental dollars, that that hasn’t changed in the last six months?

No.

Okay. And then…

Obviously, with Ford making their decision, we’ve taken a look at the capital that we were planning to support that facility, but that really wasn’t a 2017 capital item. So but there has been no changes in the last six months that that will affect our capital outlook solely related to the NAFTA discussion.

Okay. And Mike, if I can just ask one on fuel real quick. Look, I’m just a simple transport analyst, but we’re having a hard time here understanding what’s going on with the fuel price situation in Mexico. So I understand the caps are going up. You’re going to get the excise tax credit this year. But how does everything change into 2018 if we go into an open market? Does your fuel spent then conceptually come down and you lose the tax credit, how do we think about this from a modeling perspective?

Yes. Well, you’re not the only one that’s unsure about that environment, believe me. We spent a lot of time on this internally trying to understand that. But clearly, their stated plan is to eliminate any kind of price controls effective January 1, 2018, and they’re beginning to migrate, as Brian and I both indicated throughout the course of 2017. We honestly don’t know what the eye ups will be as a percent of the price of fuel. In the U.S., we pay excise taxes today on a gallon, and will the federal government kind of bring that number down to a comparable level, we don’t know for sure what the answer is. So, for 2017, again, just summarizing we believe that that we’re going to get the credit again that that’s been decided. We think it’s going to be about $60 million. Prices are going up. We have a lot of flexibility in terms of our business model and where we buy that fuel. So we can take advantage of the inter-region and even cross-border strategies. We’re moving a lot of refined product or hope to be moving a lot of refined product on behalf of our customers, where we could potentially work with them to procure that fuel. We obviously have a fuel surcharge program in place in Mexico that helps cover some of those cost increases, and we’re going to be managing this very, very diligently. But I can’t give you the answer to the crystal ball what happens January 1, because I don’t think anybody really has communicated that from the Mexican government.

Thank you. Our next question comes from the line of Justin Long with Stephens, Inc. Please proceed with your question.

Thanks and good morning. So first, maybe to follow-up on an earlier question on auto. Last quarter you talked about your expectation for growth in this business in 2017 to be pretty similar to the 20% increase in Mexican auto production. Is that still the case? And should we see growth above that in the first quarter just given the shutdowns you experienced last year?

Justin, this is Brian. Certainly, we have not changed our outlook for 2017 on the automotive grow. We still feel very comfortable. And obviously, last year in Q1 and Q2, we were experiencing a number of outages and plant shutdown. As you can see by the numbers, our volumes continue to be good. Even in the fourth quarter, we saw strong volume and we think we will continue to see that in into 2017. Beyond that, obviously, we’re not giving any guidance on that. But we feel like we’re in line with 2017, yes.

Okay.

And we’re off to a great start in January. So, obviously, three weeks doesn’t make a quarter, but we’re seeing tremendous growth in the auto sector. We’re right where we thought we would be.

Great. That’s helpful. And then secondly, I wanted to ask about the peso. You mentioned the peso remains weak, and I know there’s not a direct impact to operating income. But could you just provide an update on the percentage of your volumes or revenue. It could face an increase competitive dynamic from a weaker peso and how much of that is factored into the 2017 volume outlook that you provided?

Well, let me take a stab at this. This is Mike, and let Brian chime in. I think generally speaking, the peso from a competitive perspective has been most challenging in our intermodal business South of the border. And the truckers bill in pesos, we bill in U.S. dollars to our big shippers, and that obviously creates a dynamic, where trucking is more advantageous from a cost perspective. But that’s not the only factor in a customer’s decision. There’s certainly security and service that we believe we have done a good job selling to, I give the intermodal marketing team a lot of credit for trying to hold the line on pricing. Once you reduce pricing, it’s difficult, I think, to come back. And so while we’ve experienced a little bit of share loss there, you can look at the results at the port at Lázaro, while our share has dropped a little bit. We recovered in the back-half of the year. We’re back above 50%, slightly above 50% of the inland containers. And so I think that’s an indication that we are weathering the storm to the best of our ability. And the only thing I would add in is that, you have to remember, as you look at the intermodal market overall, one of the biggest costs when competing against trucking is fuel. And in Mexico those truckers just took a pretty significant fuel increase, where when you think about rail, we’ve got locomotives that are already going up that hill. We know where they’re going and we’d love to put more on there. So I think we become more competitive as they have to face that particular issue. So we feel very comfortable in our intermodal space. We’ve got some great new products across the border and the new terminal. So we feel good about where we’re at in competing against that peso deterioration that you see.

If you go back to Mike’s comment about security, the cost differential of moving a truck versus a container might be measured in tens of dollars, where the value particularly we’re talking about how high value cargo like electronics or apparel, the value of a single container if it experiences some sort of theft or damages could overwhelm the cost advantage on hundreds of containers.

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

Great. Good morning, guys.

Good morning.

Could you please give us a breakdown of – good morning. Could you please give us a breakdown of your CapEx between the U.S. and Mexico? We’re just wondering why you haven’t lowered your CapEx guidance a little bit more, given the excess equipment and particularly the political uncertainty?

Well, we don’t report separately the segments between the U.S. and Mexico. But Jeff, if you want to add some color?

We provided a little color on the specific numbers. The Sasol project in the U.S. is another very big hitter for 2017, that really goes away in 2017. PTC, as I’ve said, is another, I’ll frame up around $16 million, I think we’ve kind of talked about that. Again for 2017, that should roughly cut in half or a little better even into 2018. So you’ve still got a couple of big drivers in those two categories. The Sanchez, as I’ve mentioned, we’ve talked about the capacity and we’re going to continue to look and invest where we need to. We’re still have pretty good expenditures here into 2017. So a couple of big drivers of that being offset, as I mentioned, no locomotive purchases, reduced infrastructure.

Great. And…

And our volumes in Mexico were growing, as we mentioned earlier, in the Northern part of the region, the three terminals that we used to serve the Northern region volumes in those terminals were up – was up 19% in the fourth quarter. So there’s still a lot of growth going on. Refined products, plastics, we see opportunities for export growth there. And you’re right about the political uncertainty, but it is that, it is uncertainty. So until we have better clarity and certainty on what is actually going to happen, we need to make the investments to support our customers.

Great, thank you. And for a follow-up, can you talk a bit more about your coal business and specifically your expectations for Luminant this year and beyond? Thank you.

This is Brian. Our coal business, as I said, was down significantly this year. We don’t see it returning to the level that we saw in 2014 and 2015. We’re continuing to work with our carrier partners with the other customers to provide some creative solutions. But we still very – feel very comfortable that we’ll be able to make sure this business moves when it’s available and that that’s a tough market. It’s moving around a lot and but we’re going to play, where we think that we can play correctly at the right pricing levels. And right now we feel like we’re in a good spot with that.

Thank you. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Good morning, everyone. Thanks for putting me here. So just a couple of follow-ups. I think in response to one of, I think, it was Ken’s question earlier on autos, I agree with you, guys. I think the Ford announcement was more about the cycle and what’s happening with auto demand rather than anything to do with the new administration’s policies. But what’s the risk that that becomes an even bigger risk, in that, as per our numbers, at least, I think a majority of the new volumes coming out of Mexico in the next three, four years are all in that same BC segment, that Ford kind of targeted. Is there a risk that kind of where the auto cycle is going and with gas prices, that some of your volumes don’t materialize, having nothing to do with the new administration’s policies?

Ravi, I’ll go back to – that’s a great question, but I’ll go back to the conversations we had last week. We just do not get that sense from our customers. They’re extremely focused on providing to the markets that they sell to and that they focus on. Some of the new plants are more in the luxury space. And so we don’t feel like they’re going to be impacted at the same rate that you might have seen the cars that were planned to be in the Ford facility. We have a lot of larger vehicles, SUVs, in the plants that we serve. So right now, we feel very comfortable in the markets that we serve with the facilities that we serve. And overall, our automotive business should grow at the rate that we discussed earlier.

Got it. And a couple of quick housekeeping ones, if I may. I think you said earlier in the call that your pricing was up 3% in the quarter. Is that excluding the large industrial customer that you are kind of, that’s kind of going through difficulty that you’re helping right now? And also, just to clarify on the excise fuel tax credit, how are you still going to get the same amount of excise fuel tax credit in 2017 as 2016, when we are kind of going through market pricing in 2017 by region?

Yes, Ravi, I’ll handle the pricing question, and then I’ll let Mike take the other – the last part of your question. From a pricing perspective, as we said, we felt very comfortable with our core pricing at 3%. We believe that we will do better than that next year and that’s across all of our customer base. So overall, we’re not going to give anymore guidance than that. But we feel very comfortable that we understand the markets, where we play and where we need to be priced to continue to move the product in an efficient way for our customers. So I think the guidance that we gave of, yes, third quarter – our fourth quarter was 3%, and we will either be at that or exceed that for next year, I feel comfortable with that.

Ravi, this is Mike. On the IEPS, our assumptions here, we do have a fixed price per gallon on the IEPS that’s been communicated to us. So then you’ve got a combination of volume growth that would take that number up and for an exchange that would take that number back down. So we’ve tried to give you the best estimate that we have on what that IEPS credit would be and it’s about $60 million.

Thank you. Ladies and gentlemen, we have time for one more question. Our final question will come from the line of Tyler Brown with Raymond James Financial. Please proceed with your question.

Hey, good morning, guys.

Hi, Tyler.

Good morning, Tyler.

Hey, Mike, I just wanted some clarification on incentive comp. So it looks like it was up, say, $35 million or so for the year. But it also sounded like your accrual was greater than 100%. Can you just give us the delta on incentive comp if you accrued kind of normal if you hit budget next year?

The delta in terms of dollars or…?

Yes.

Yes, approximately $25 million would be a 100% in our income statement. And of course, on the 2016, that’s still subject to our Board of Directors approval. And we’ll communicate what that percentage is in the proxy.

Okay. Okay, good. And then Mike, just a big picture question on CapEx. And I appreciate that you are just now giving 2017 CapEx. But it sounds like Sasol, Sanchez, PTC, all of these kind of largely conclude in 2017. I mean, in 2018, should we – assuming nothing new comes online, I mean, should we be expecting a big material drop in CapEx in 2018?

Well, I think it’s safe to say that we’re going to be done with the Sasol Lake Charles project, and we still have some PTC spend, but not at the levels that we’re anticipating in 2017. So you could take that capital number down roughly $115 million. But certainly, we hope to be growing this business again, as we are here in January that is going to continue to require freight cars equipment, potentially locomotives, we still have a number of those parts. But be a nice problem to have if we’re buying locomotives in 2018.

Thank you. Ladies and gentlemen, we’ve come to the end of our time for questions. Mr. Ottensmeyer, I’d like to turn the floor back to you for any final remarks.

Okay, thank you, and thank you, everyone, for your time and attention. I realize there are a couple of people that will circle back with offline. But we will obviously be out on the conference circuit, and stay tuned if thing develop in Washington and we’ll talk to you again in April. Thank you.

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