Greetings, and welcome to the Kansas City Southern second quarter 2011 earnings conference call. (Operator Instructions). This presentation includes statements concerning potential future events involving the company, which could actually materially differ from the 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 31st, 2010 filed with the SEC. The company will not update any forward looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found the KCS website at www.kcsouthern.com. It is now my pleasure to introduce your host, Michael Havety, Executive Chairman of Kansas City Southern. Thank you Mr. Havety, you may now begin.

Okay, thank you very much, and welcome to the second quarter earnings presentation. The management team that will be presenting today will be Dave Starling, the President and CEO, Pat Ottensmeyer, EVP Sales and Marketing, Mike Upchurch, EVP and CFO. Dave Starling will also introduce a couple of other key players that will be available for questions and answers following the presentations. If you’re following on the website, turn to slide number five. You see the second quarter results. I’m not going to go through those numbers. They’re all self-explanatory. Today, Starling will be talking about guidance here in a minute, and talk specifically about some departmental achievements that have taken place over the last year and a half. So what I’d like to do is maybe cover things from a big pictures standpoint. First of all, this is the best second quarter performance in the history of the company. And it is the best operating ratio performance in the history for any quarter. And that’s pretty significant because historically, our performance, as with most railroads, you start out the first quarter slower. Second quarter is better. Thirds improves, and fourth is usually the best. So to have best operating ratio ever for our company in the second quarter, I think is pretty significant. The second thing that I would like to comment about is that we have for the last year and a half talked quite frequently about becoming an investment grade security. And Dave and Mike Upchurch will go into a lot more detail talking about restructuring of the balance sheet and things that have taken place over the last year and a half. But again, from the big picture standpoint, we are significantly – have moved significantly down the field on moving towards being an investment grade security. If you looked over the last year and a half, you keep seeing our ratings are improving all the time. And certainly our liquidity cash flow is improving. And the rating agencies are taking note of that. The recent revolver in term loan that we did actually were investment grade. Obviously, they’re highly collaterized with the last revolver. The last term loan we had was not investment grade. So at least, we got started. We’ve got a ways to go. But I think we’re going to see significant improvement going forward. And I think this quarter is again a testament to what this management team has been able to accomplish through the execution of the plan. With that Dave, I’m going to turn it over to you.

Okay, thanks Mike. And as Mike referenced, we’ve got two other people that will be on the call today. Jose Zozaya, our President and Executive Representative is on the phone from Mexico City and available for questions. And also, Dave Ebbercht, our Vice President of Operations. With that, I’d like to refer to the first slide. As you can see by the update chart, KCS is tracking very well to the guidance we provided in January. Revenue growth for the first half was 14%, which was a bit above our low double digit guidance. Looking ahead to our second half book of business, we now feel confident that our 2011 will finish higher than the first half revenues. Our volumes are up 7%, which is at the upper end of our mid-[inaudible] guidance. Pricing has been and should continue to be stable in the mid-single digit range. Our operating ratio for first half improved within the range we projected despite some fuel cost headwinds. As you’re well aware, KCS recovers over 95% of fuel. However, the lack effective recovery can affect our OR at any specific point and time. Before moving forward in the presentation, I’ve got a few comments to make. The performance of our three main functional areas; marketing, operations, and finance, have driven our success in the first half. But just as importantly, they have set the stage for any future growth in many ways more robust than what you’ve seen from KCS over the last year and a half. Marketing has filled the pipeline with both new and expanded existing business opportunities. Some of these opportunities are occurring right now like Cross Border, Intra-US, and Intra-Mexico Intermodal. These business segments begin to take off in 2010. And will continue to grow for many years at a…

Thank you Dave, and good afternoon everyone. I will begin my comments on Slide 16, which is a recap of the revenues and volumes for the quarter. As you saw earlier, our revenues for the second quarter were $534.9 million, which was a 16% increase over last year. Our revenue growth was driven by a 7% increase in carloads and 9% increase in average revenue per unit to over $1,000 in the quarter. Mike mentioned that the second quarter operating ratio was the best in the history of the company. Total revenue and total carloads in this quarter were also records for any quarter in Kansas City Southern history. Moving to Slide 17, you can see the factors contributing to revenue growth quarter. And as you can see from this slide, all of the factors contributed positively to revenue growth. You’ll see that same store pricing contributed $14 million of the revenue increase over last year. The pool of revenue related to same store type movement was $270 million, or roughly 60% of our total linehaul revenue. So the increase during the quarter in so called core pricing was 5.4%. So moving to Slide 19 would be our familiar presentation of same store pricing. This slide shows you that linehaul revenue for loaded car mile, which excludes fuel, mix, and foreign exchange, on a same store basis increased by 5.4% over the second quarter of last year. And was higher in every business unit than last year’s levels. Just to point out a reference, the slide that Dave talked about earlier with the mid-year guidance, the 5.5% increase in same store pricing was for the first half. This slide references the second quarter. I want to comment about intermodal pricing. You can see intermodal showed the lowest increase in same…

Thanks Pat, and I’ll start my comments with the condensed income statement on Slide 25. As Pat has already mentioned, revenues increased 16% to a record quarterly level of $535 million consisting a volume growth of 7% and revenue unit growth of 9%. We believe our volume growth will be 60% to 70% better this quarter than the rest of the industry, which we estimate to be around 4%. And is reflective of the tremendous growth driven franchise KCS has built over the years. Operating expenses increased 15% primarily due to a 33% increase in fuel price. As Dave has already mentioned, our second quarter OR is the best ever, $71.7. Our year-over-year incremental margins is a bit lower in second quarter at 33%. Please note, we did have approximately a $2.5 million negative fuel lag along with about $7 million in higher casualty expenses primarily due to a lower personal injury actuarial credit than we booked a year ago. Sequentially, our incremental margins were slightly above 50%. And for the year, we continue to believe incremental margin will be 40% plus. Interest expense declined 23% to $32 million as a result of our debt reduction and refinancing activities over the last year and a half. Since the start of our debt restructuring, we have reduced interest expense by $13 million per quarter or more than $50 million annually from 2009 peak quarterly levels. During the quarter, we did incur $10 million in debt retirement costs. Those are the result of our refinancing that we completed in May for KCSM. Moving to our tax rate, our effective rate was 37% consistent with the guidance we’ve been providing this year. And for the full year, we’ll continue to believe we’ll be in that 35% to 37% range. Finally, adjusted earnings per…

Okay Mike, thanks. In summary, KCS has a very good second quarter. We’re well positioned for a strong third quarter and second half. Operating efficiency remains excellent. Pricing is solid. Expenses are firmly under control. And as Mike I’m sure has pointed out, we expect our incremental margins to improve in the third and fourth quarters. And end the year somewhere in the 40% to 50% range. And finally as I noted up front, we expect our full year revenues will come in with a percent increase greater than the 14% we achieved in the first half. Our confidence comes from the anticipation of solid revenue growth in all our business groups, the continued expansion of our cross border business, and the fact the Mexican economy is currently growing at a rate roughly twice that of the U.S. Put it all together, and there’s no question we’re looking forward to the rest of 2011. With that, we will open it up for questions.

(Operator Instructions). Our first question comes from Bill Green from morgan Stanley Smith Barney. Bill Green – Morgan Stanley Smith Barney: Yeah. Hi. Good afternoon. Just for a point of clarification, Dave, on your last comments. Obviously, given the improvement in the [inaudible] margins, is it safe to say that operating ratio improved [inaudible] 150 – I’m sorry, 100 to 150 so far this year. You should be much better than this 110 basis points that we’ve gotten even in the first half given the revenue outlook and the improvement in incremental from here. Is that safe to say?

You know, we hope we’re going to do better, Bill, but we’re still sticking with our guidance of the 1 to 1 ½ points. We’re certainly, this quarter, the third quarter is going to be a little harder to compare to the [inaudible]. But we certainly are going to continue to improve. Bill Green – Morgan Stanley Smith Barney: Okay. So when we look at headcount and you guys have kept it really sort of flat for quite some time now, some of the other rails have started adding. If I look through sort of the headcount [inaudible] if you will, [inaudible] start hiring given these growth rates. How should we be thinking about kind of where we are in the productivity story? Are we sort of seventh inning or how do we think about where we are?

I’ll let Dave answer that.

Okay. Our headcount continued to remain relatively flat as we continue on the current growth trend and we leverage our latent capacity that we have in Mexico. In the U.S., we continue to scale below the growth and will continue to do that. We figure we still have about 8% capacity left to grow on the Mexican side. So we’ll continue the current productivity trends and we’ll scale lower.

And you know, one other comment, Bill, there’s more than T&E headcount. So we’re continually looking at our administrative costs in all the other department as well. Bill Green – Morgan Stanley Smith Barney: Okay. Just one last question on autos. Longer term, how – I don’t know how to think about what the real sort of opportunities that are there. Is there a way to sort of say, well, look, this is the addressable market that we think we can have access to if we can win some of it? Because there growth rates are just huge and off the charts, and I’m not sure how think about [inaudible] to slow them down?

Bill, I think that, you know, as the industry has kind of really ramped up, we still see opportunities for market share at some of the plants that we serve. There’s still plants that we could serve in Mexico that we can’t, or that we don’t currently. And then there’s the impact of the longer-term new plants that are coming online. I think, you know, this growth rate level for the next few quarters is likely to flatten because of the fact that the industry has bounced back so much. But we will still see exceptional growth in Mexico and in longer term, the outlook is very good. Bill Green – Morgan Stanley Smith Barney: Okay. Thanks for the time.

Thank you. Our next question comes from Allison Landry from Credit Suisse. Allison Landry – Credit Suisse: Thanks. Good afternoon. I was wondering if you could provide a little bit of color on the current average length of haul is and maybe how that compares to historical trends?

This is Dave. You know, currently we’re trying to build our Intermodal product. So as we have added the new training starts out of Mexico, it is definitely pulled down the length of the train of debt. But that’s an opportunity for us to fill those trains out, so it’s not as critical as measurement to us today. Are you talking length of haul, or length of train? Allison Landry – Credit Suisse: Length of haul.

Oh, okay. Well, the length of haul will still be a factor of the Cross Border traffic. And that number is improving in this quarter. And we also are getting the longer haul coal traffic as Pat referred to. So we will continue to increase the length of haul. Allison Landry – Credit Suisse: Okay. And then as a follow up on the Cross Border Intermodal capacity, how should we think about durability to handle the additional volume growth you’re expecting over the next few years in terms of how much capacity you think that you have there, and should we expect any incremental of CapEx for infrastructure or rolling stock?

Well, let me take the terminal question first, and then I’ll turn it over to Dave for the train operation. You know in the last three years, we have spent close to $300 million in the Victoria Rosenburg line, a facility that we built at CIT Houston in [inaudible]. We have doubled the size of our Intermodal facility at Monterey. We are in the process of purchasing the facility in San Louis [inaudible]. And in the month of June, we completed tripling the size of the facility in Port of Mexico. So from an Intermodal capacity standpoint, we are in good shape for three to five years on Intermodal growth. In fact, I’d like to be challenged to say we didn’t have enough capacity and had to build more. But we certainly are ready for this Intermodal conversion.

And I’ll also add there that we’ve got a line capacity of infrastructure of about 200,000 cars per month right now. And we’re well below that, running at about 166,000 for the quarter. We continued with the investment through the line that Dave talked about, and we do not see any capacity constraints in any of the near future. Allison Landry – Credit Suisse: Great. Thank you very much.

Thank you. Our next question comes from Jason Seidl from Dahlman, Rose and Company. Jason Seidl – Dahlman Rose and Company: Hey, guys. Good evening. How’s everything?

Hi, Jason. Jason Seidl – Dahlman Rose and Company: A couple quick questions. One on the pricing side. I know you gave guidance in sort of mid-single digit range, but with, you know, 5.5 in the recent quarter and 6 in your factual goals and having such a decent amount renewed, shouldn’t we expect to see probably a little bit better than 5.5 in 3Q or am I looking at that wrong?

Yeah. I think – if you remember, the first quarter, Jason, we – on contract renewals, we were actually up a little over 7. So you know, we’re going to begin – now, that’s not – that’s not necessarily on all same store basis. So when I say, you know, 6% for contract renewals, that’s not necessarily going to equate exactly to 6% same store because in some cases when we renew these large contracts with multiple lanes, the pricing is different lane by lane based on competition, based on equipment issues, and other things. So when we – it’s not necessarily the case that that 6% is going to feed a same-store sales. It’s certainly going to help. You know, I think the environment we’re in feels like it’s going to be pretty strong, and you know, shippers are interested in locking in capacity, base capacity to make sure that they have the capacity when, you know, to prevent against equipment tightness if that were to happen. And we’re still seeing not just in the Intermodal, and the Cross Border, but we’re still seeing opportunities to gain market share versus truck at paper plants and steel plants, appliance plants. And you know, I think that’s going to equate to some pretty good pricing moves. Jason Seidl – Dahlman Rose and Company: It doesn’t sound like you guys are have much trouble getting business off the road there? Can I look out a few years now, we talked a little bit about the Phase 2 of Lazaro Cardenas being awarded before the end of the year. Let’s say it is awarded. How long before we see that capacity builds and, you know, containers flowing through it on your lines?

It’s really hard to tell because we don’t know the rules of the bid. If you look back on what happened historically, you know, I think before any material volume comes through a new terminal it’s going to be at least a year. And we would expect that the bid and the award would contain some commitments and deadlines. That’s what happened in the case of the first terminal where as a condition of the award, they have to complete certain activities and generate traffic within a certain timeframe. We don’t know what those rules are until we know – and actually, Dave was down there a few weeks ago, in Lazaro meeting with the Port Authority. So you might have…

Yeah. That closed in – the bids actually closed the day I was there, and they said they had solid bids. They were moving forward. It’s either 12 or 24 months that they have to have a port completed, [inaudible] in place, and open for business after the award. So it’s within a one to two-year timeframe. I’m not exactly sure, but there is definitely a timeframe involved with the awarding of the bid. Hutchinson has started their second phase. We actually went down and kicked the tires and they should have that opened by the end of this year. So the capacity is definitely going to be there. Jason Seidl – Dahlman Rose and Company: So we’re looking, at best, sometime in 2013 [inaudible] or 2014 for the new phase?

For the second… Jason Seidl – Dahlman Rose and Company: For the second phase.

Yeah, but we’re not restricted right now. I mean, the Hutchinson facility will open at the end of this year, so that definitely gives us the opportunity for new business and to add more carriers to Lazaro. The thing we think the second port concession will do is offer the carriers more competitive rates and could accelerate because of the movement of ships, carriers calling [inaudible] over the Lazaro Cardenas. Jason Seidl – Dahlman Rose and Company: Interesting. Guys, I appreciate the good color.

Thank you. Our next question comes from Scott Group from Wolfe, Trahan and Company. Scott Group – Wolfe, Trahan & Company: Thanks. Good afternoon, guys.

Hi, Scott. Scott Group – Wolfe, Trahan & Company: Just a couple quick things to clarify. The revenue growth accelerating better than 14% in the second half, is that excluding these easy comps with Alex? That’s one part of it. And then the second part, can you just – I’m having trouble understanding – on Slide 16 you talk about a $14 million increase in revenue from same store pricing. And then the next slide you talk about a 5.4% increase in same store pricing. Those don’t seem to match up. If you can just give a little color there.

Fourteen, okay. Yeah, the $14 million in same store pricing, that applies to 270 – roughly 270. You’ve got to get into the real numbers and get out of the rounding. You know, if you take 14 over 270, you’ll get something like 5.3. But when you actually use the real numbers, it doesn’t work out to 5.4.

Scott, this is Mike Upchruch. With respect to your other question, obviously the third quarter’s relatively easy comp for us given the impact that we reported a year ago for Hurricaine Alex. But I think you’ll see that even pulling that out, we would expect revenue growth to accelerate. Scott Group – Wolfe, Trahan & Company: Okay, and that’s great. And just the other question, again, outside of third quarter easy comp, why is it that incremental margins are going to get better going forward from here? Is something changing on the cost side? Is it just you’ve got a visibility of the revenue growth accelerating? What’s driving the confident that incremental margins get better from there?

Yeah, Scott, Mike again. I think probably two things. As I indicated in my comments, second quarter is typically when we see some credit for personal injury for our actuarial study, and year over year we had a lower credit that we booked in the second quarter of about $5 million. And then, you know, certainly the fuel comps have been much more difficult in the first half of the year. And I'm not going to try to predict what is going to happen with fuel prices. But you know, even if we were flat or, you know, picked some of that up along with the PI, you know, we believe that we should have better incremental margins than what we reported in the second quarter. Scott Group – Wolfe, Trahan & Company: Okay, that’s helpful. Thanks for the time.

Thank you. Our next question comes from Matt Troy from Cisco Hanna International Group. Matt Troy – Cisco Hanna International Group: Yeah, thanks. I have a question on export coal. I think we’ve seen recently three proposals. One at [inaudible], Port of Corpus Christi, and Port of Houston. I was just wondering have you been in conversations, or have you been approached about servicing or coordinating with any of the players out of the three ports? I know you access Corpus Christi directly, but [inaudible] accesses directly as well. You’ve gotten the Burnside, which is kind of the TDB. I was just wondering if you’ve been having conversations about export coal opportunities growing to the golf as the infrastructure grows?

The one export coal opportunity that we have been pursuing is actually at Lazaro Cardenas. That’s the TPP facility at Lazaro, which is going to come online I think in the second quarter of next year. And it’s hard to tell. That’s obviously a fairly long haul from say Central Illinois. I think the draw of Lazaro is going to be Illinois Basin, you know, Illinois, Indiana, Kentucky coal, which wants to move to Asia, and has a lot of challenges getting there because it’s tough to get to the West Coast. And going to the East Coast, you have an awfully long voyage to get to North China. So there is interest on the part of the terminal operator. There’s interest in part of the coal producers. And there’s enough interest that we are spending a fair amount of time trying to drive that to an outcome, which would lead to coal being exported out of Lazaro Cardenas. But at this point, it’s still too early to tell when, and how much, and what that might amount to.

This is Dave. I might add we certainly don’t have it built in our plans, but it’s a nice long haul. And we’d love to have it. Matt Troy – Cisco Hanna International Group: Okay, so the three potentially new facilities though, you are not in discussions. You’re staying the course with your original bet and focus.

No, we have talked to Corpus, the port of Corpus Christie about their plans. But again, it’s too early to know what they’re actually going to do. And as you mentioned, we conserve that port, so it’s to get to North Asia from Corpus is obviously a very long sales. When you put the – and it’s just a matter of putting the total package together and what makes the most economic sense. And capacity, as you know for export coal, is constrained off the west coast anywhere. And there’s enough coal that wants to move there and China seems to want to buy it all, there might be enough for everybody. And then Lazaro Cardenas, you’re on the right side of the canal. Matt Troy – Cisco Hanna International Group: Second question, would this be a metric and intermodal volumes if I look at the AR reported data? You’ve kind of buffed the trend that you’ve seen that the U.S. railroads specifically if I look at your first and second quarter volume growth in intermodal in the 22%, 25% range over the last four weeks, it looks like you’re up at almost twice that level on a going-forward basis. I was just wondering if that Victoria line, what’s going on there that you’re seeing the recent strength? Is it just going to be a year-over-year comp easier for the last year? Any color on that would be helpful. Thank you.

It’s really a combination of all those things, but it is also a big factor is the easier comps because July of last year, we were out of service between Laredo and Monterey. And that affected our intermodal business pretty strongly. Matt Troy – Cisco Hanna International Group: Right, okay, thank you very much.

That’s certainly not all of it. We’re seeing growth in Lazaro, growth in cross border, growth in the other intermodal business within Mexico.

Thank you, our next question comes from Scott [Notts] from Goldman Sachs. Scott [Notts] – Goldman Sachs: Hi, thanks. First on the intermodal, the same store sales, I understand you want to build density. One thing, if you can help us think this through a little bit more that with fuel prices high and truck load prices rising, you seem to be trying to make even a sharper of a price difference between rail and truckload competitors. Can you talk about what the average range of how much lower you are versus your truckload competitors on pricing for intermodal. And kind of why you really need to push price this much.

There’s some of it is a function of, as I said in my comment, getting the traffic, getting the business on the train and keeping it there. And certainly in terms of some of the recent conversions, we feel that holding some price for some period of time, and focusing on building density, and improving contribution and profitability by increasing the length of those trains has a very powerful bottom line impact for us. And will help us secure that business for a longer period of time. Scott [Notts] – Goldman Sachs: So what is the relative price? Is there any way you can give like some kind of average relative price difference for a customer on a cross border move or just your intermodal business versus the truck?

Not really. What I will say is that generally, the paradigm for thinking about truck versus rail or rail versus truck is in Mexico, is not too dissimilar from in the U.S. The one added piece that we have to offer is the cross border cost in transit time savings. So I’ll just step back and say all the ingredients are there for us to go after this market. And I think the cross border thesis is very similar to the long haul in a rail versus truck advantage in the United States. Scott [Notts] – Goldman Sachs: Okay, thanks. The other thing I have is just on, you talked a bit about developing the Port Arthur terminal. Can you just talk about the opportunity in crude oil? How much are you moving right now and what’s the opportunity there?

We’re moving zero right now because the terminal doesn’t exist, but I think the opportunity is substantial. We’re working with Savage, a private company. We announced a partnership with them a few weeks ago, maybe a month ago now. And Savage is building – they’re a company we know, they’re in the rail services business. They operate a terminal for us at Port Arthur, which is an export loading facility for petroleum coke coming out of the refineries around Port Arthur. So they know the market and they’re a partner that we trust and believe that they can make this happen. But what we’re doing now is out trying to secure indications of interest and commitments for volumes. And we have some thresholds that we have in mind, and once we get those thresholds, the Savage will build the terminal at Port Arthur. They are under construction and building a terminal up in North Dakota in the Baken Region. So they’re looking at a total logistics package, which would include origin terminal facility in North Dakota, destination terminal facility in Port Arthur, and then we would work with other carriers to provide the rail transportation. It’s a big market. Port Arthur imports over a million barrels of crude oil a day, and – so it’s a market that’s looking for new sources, and we think this could be a significant opportunity for us. And our Port Arthur facility is in the middle of the refining companies that are in Port Arthur. A lot of these would literally be a pipeline away. The property is even continuous in some cases. It’s 500 acres, and it has a good waterfront access as well. So it’s a very attractive piece of property for this type of a project. Scott [Notts] – Goldman Sachs: Thanks, very helpful.

Thank you. Our next question comes from Tom [Waveless] from [Inaudible]. Tom [Waveless]: Yeah, good afternoon. I wanted to ask you a little bit on Intermodal. I typically don’t think of your intermodal business, or your Mexico business as having that much competition. There’s just so much difference in your out structure versus [inaudible]. But I think Pacer announced something during the quarter, a service with [inaudible], and I believe it was auto-related traffic. That appeared like it might be moving over to Theromax from you. I wondered if you had any kind of comment on that specific weight in, just kind of the broader thought of, you know, is Theromax a material competitor when you think about cross border intermodal, or are they really, you know, they just don’t have the right route structure in general?

That’s a tough one, Tom. Yes, yes, and yes. You know, I think that, you know, all we’ll say is that we have an outstanding intermodal network cross border. As Dave mentioned, we’ve invested close to $300 million in line capacity terminal capacity. We have a state-of-the-art world-class, and Dave Starling knows that that means. He’s probably built and operated more intermodal terminals than anyone in the business in his career. So we, you know, the network is in place, and we feel in our partnerships, our channel partners are very engaged. So – and it’s a big market. So we – we think everything is in place for us to have some just outstanding performance there. I think the business that you’re referring to, and we’ve heard mixed signals on this, is actually to a location in Guadalajara, which is not where we have a national advantage for cross border traffic. So if it goes that way, you know, I think we can look at it and kind of say that it’s difficult for us to serve Guadalajara because we don’t have direct access for cross border intermodal. And that’s one market that we might have some, you know, might not have the strongest position regarding the other railroad. But I might add that we have no problem at all in competing in Mexico on transit service. Tom [Waveless]: Right. Well, okay, that was my assumption that, you know, the franchise matters a lot and you invested a tremendous amount it. So okay, so that’s kind of small noise and it’s more related to that specific geography in Mexico. Let’s see, in terms of the – let’s see, the weather impact, I suppose – no, I guess there’s enough noise in the volumes here. Was there much of a, you know, a coal impact, enough to kind of [inaudible] for us and how much that might boost your coal volumes in second half related to your connecting business with BN and UP? Obviously BN’s coal volumes are down pretty sharp over the last several weeks, and I think UPs were a little weak. Any thoughts on that?

This is Dave. I’ll take that one. I mean, everybody knows we connect with BN and UP in Kansas City and that’s where the coal comes from the plants. And they definitely had problems. We had worked with them and tried to mitigate them, but it has slowed down cycle times. So fortunately coal plants generally have about a 60-day coal burn on the ground, so they’re burning through that and once we get the weather corrected and we get everything back on cycle, we’ll have the opportunity to refill those stockpiles. And at the same time, I don’t want to take – cause anyone to be fretful about the heat, but it’s a good thing for us. They burn a lot of coal. So we, along with our friends to the north, think that there’s going to be a surge. We don’t know how much of it there will be, but there will be a lot of coal burned and reasons to replenish those stockpiles. Tom [Waveless]: Do you think that’s kind of a quick thing, or that’s more into fourth quarter when you see [inaudible]?

Oh, I think it’s going to be throughout the second half of the year. And I think we’ve really covered that in our guidance on the double-digit growth for coal in second half. Tom [Waveless]: Right, right, okay. Thank you for the time. I appreciate it.

Thank you. Our next question comes from the line of Ken Hoexter form Vilanch. Ken Hoexter – Vilanch: Great. Good afternoon. If I could just stick on the coal for a second. Pat talked about some of the coal lanes were extended and that’s going to impact yields in the next quarter. Can you delve into that a little bit? What is shifting there that’s going to impact the yields in the quarter?

It’s really just a timing thing, Ken. It just so happens because of maintenance schedules and other things that were going on in the quarter, a higher percentage of our movements in the second quarter were going to our longer haul utilities. And so I don’t expect that you’ll see the same sort of RPU growth. But you know, with the flooding and the service disruptions, and people scrambling around to make sure that they keep their stockpiles at adequate levels, we’re not certain how that’s all going to play out in terms of the destination. Because, you know, we serve several plants and some that are multiple utilities. And they make choices from time to time whether to send it to Plant A or Plant B. And depending on whether they give us the long haul moves or the short haul moves, it’s going to affect our revenue per unit. Ken Hoexter – Vilanch: All right. But I mean overall as you work through the year it’s kind of neutralized?

It is. It will. It will work itself out over the course of the next few months. Ken Hoexter – Vilanch: I’m sorry. I’m a little confused by that. So you’re not consistently sending to each one of the utilities? You’re actually switching which plants – so it’s not a constant cycle to each one of the utilities?

On any given quarter, that is true. Ken Hoexter – Vilanch: Okay.

However, over the course of the full year, it’s going to level out. Ken Hoexter – Vilanch: Yeah. Okay.

So the plants themselves are actually making that diversion. That’s one of the advantages they have with KCS. Once it gets on our system, if they want to switch it to another plant because they’ve got maintenance or they need to build a stockpile in that plant, they can actually switch it, even in transit. Ken Hoexter – Vilanch: Okay.

But again, at the end of the day, this is not a seismic shift. This will all level out and we think the coal numbers will be as originally advertised. And then you may see a plus because of the heat and just the coal burn in the plants. And that’s why give them the double digit guidance in the second half. Ken Hoexter – Vilanch: Great. Thanks for that. And then if you think about your incremental margin commentary, which you’ve hit up a lot. If we think a little bit longer term, I think Dave talked earlier about keeping the personal cost and having that capacity particularly down in Mexico. Can you maybe talk a little bit about some other leverage points that you have? I don’t know whether it’s the equipment availability or purchase services, where else you have [inaudible] leverage to I guess move the operating ratio into the – like you have right now, so the upper 60s as you’re somewhat near term [inaudible]. Can you talk about what other options you have out there?

Sure, Ken. As we continue to grow, you know, we’ll continue to see operating expenses scale lower than the revenue growth. And you know, again, they’ll be the occasional [inaudible] if we put on new train starts, but that will be for a short duration. The largest cost savings efforts will center around leveraging our basic existing headcount and maximizing optimization of it for productivity. It will also be rationalized in our rolling stock equipment leases. We’ll be renewing maintenance contracts, especially in Mexico, and looking to rationalize those. And then a lot around our fuel conservation efforts, as those prices continue to increase, we’ll pay more and more dividends. And I might add what we’ve talked about in the past. We still have latent headcount capacity in Mexico that we still have a lot of trains we can add before we have to start hiring down there. So that’s probably our biggest opportunity right now is to continue to add volume. Ken Hoexter – Vilanch: Is there a timeframe on some of those leases or the maintenances contracts? Is there a timeframe coming up, you know, in the second half of ’11 or early ’12 for some of those?

Right now, it will be the second half of ’11 that we’ll be renegotiating two of our maintenance contracts. Ken Hoexter – Vilanch: Thanks for the time. I appreciate it.

Thank you. Our next question comes from Anthony Gallo from Wells Fargo. Anthony Gallo – Wells Fargo: Thank you. Cross border intermodal question. Does the network have [inaudible] off balance right now, or how is that playing out right now?

It does. On our cross border network – are you talking about intermodal? Anthony Gallo – Wells Fargo: Yes.

It’s very close to 50/50, a little bit more northbound. But it’s well balanced. And if you look at the total market data that we’ve – I think we shared in the June 29th presentation on the market, the truck market, it’s actually pretty well balanced as well. Anthony Gallo – Wells Fargo: The growth and near sourcing that you talked about [inaudible] was very helpful. Is that containerized good as well? Does that facilitate more [inaudible] or are they two separate items really?

I think it will be both. I mean, we’re seeing more and more interest on the part of companies that have traditionally or, you know, for the last several years, maybe decades have not used rail as in boxcar. You know, I won’t name any of the companies, but we’re seeing more interest in companies that adding rail, as in boxcar rail to their mix, and their kind of base logistics planning in addition to intermodal and over the road. So I think this general near-sourcing phenomenon, the growth and industrial activity in Mexico will possibly feed multiple business unit. Intermodal will probably be the fastest. But we see opportunities working with customers now doing test loads, companies in Mexico that are 100% rail – or intermodal or over the road, that are more and more interested in introducing boxcars. Anthony Gallo – Wells Fargo: And then a separate question, unrelated. [Inaudible] I’m not clear on what might be happen in Mexico, but what’s the outlook over the next year or so for wage and benefit growth?

Just specifically Mexico, or both? Anthony Gallo – Wells Fargo: Both if you can.

There’s a tentative agreement being negotiated right now in the U.S. and that currently projects it at 17% over five years. But that hasn’t been ratified yet. That will go out for an August 5th vote, and we should know back whether it’s ratified by September 6th. And in Mexico, we are looking at negotiations ongoing right now and those negotiations of the rate will keep up with inflation.

Generally, Mexico is an annual basis. A little bit of inflation plus, and in the U.S. , we’re in the same agreement process that the other railroads are in. Anthony Gallo – Wells Fargo: Those 3 to 4% annual numbers, they’re pretty consistent with what you’ve been accruing and what the other the railroads are talking about. Is that fair?

In the U.S., definitely. And in Mexico, that’s close range. Anthony Gallo – Wells Fargo: Thank you, gentlemen.

Thank you. Our next question comes from Scott Nichols from Joseph, Rosen and Company. Scott Nichols – Joseph, Rosen and Co. : Congratulations on a great quarter. David, I’d like to ask you, in your opening remarks, you said essentially that you don’t have any debt repayments due until 2015. Is that because of this recent pack agreement?

I’m going to like Mike answer that one. He can give you more details.

This is Mike Upchurch. We do have a 13% note in the U.S. that’s due 2013. But as I described in my talking points, we do have plans to call that before the end of the year. And we showed you the pro forma maturity schedule, assuming we call that, retire it with cash, we would not have any maturities due until 2015. Scott Nichols – Joseph, Rosen and Co. : In your 10-K, it showed that for 2013 you’ve got debt due of 458 million.

And that included the term loans that we just announced two weeks ago that we had pushed out to 2017. So that’s done. Scott Nichols – Joseph, Rosen and Co. : That’s done. So you won’t have any debt coming due until 2015?

Correct. After the ‘13s are retired. Scott Nichols – Joseph, Rosen and Co. : After the ‘13s are retired. Now, the ‘13s are going to cost you how much? Is there a penalty?

At par plus coupon. Scott Nichols – Joseph, Rosen and Co. : So what will that come to, 139 million?

You’re pretty darn close. Scott Nichols – Joseph, Rosen and Co. : Close. And you expect to do that in December?

Yes. That’s our plan today. Scott Nichols – Joseph, Rosen and Co. : Okay. Thank you very much. That’s all we have.

Thank you.

Thank you. Our next question comes from Keith Shoemaker from Morningstar. Keith Shoemaker – Morningstar: Thanks. I’ll ask about use of cash. [Inaudible] a history of consistent positive free cash flows pretty short. Could we get an update on the CapEx budget? Is it still north of 20% of sales for 2011?

Yeah. This is Mike Upchurch. I think on our last quarterly call, we talked about roughly 22%. We’re still in that range today. That was a step up from what we had provided at the beginning of the year, but that’s primarily because of two issue. One, acceleration of locomotives that we had in our plans for 2012. We accelerated that to take advantage of the tax benefits. And then we are contemplating the completion of a couple of lease buy-outs here in the third quarter that would represented some incremental cash CapEx. It will take us in that 22-ish range. Keith Shoemaker – Morningstar: Still 22 then? And in light of the reduction of preferred dividend obligations, completion of several major capital projects lately, could you please comment on your [inaudible] towards your use of cash? Is there a certain threshold at which you would consider.

Well, you know, our priority is always going to be around investing in our business and making sure we, you know, continue to grow to trajectory that you’ve seen us deliver over the last couple years. But even if you play that out over the next few years with the cash production, you know, debt payments being very minimal, it does create a situation that, you know, we have discussed publically before, of potentially evaluating a return to shareholders. But we’ve made no firm decisions on that, and I think as we’ve discussed previously, that’s a 2012 decision for us. Keith Shoemaker – Morningstar: Thank you.

Thank you. Our next question comes from Christian Wetherbee from Citigroup

Hi. This is Seth Lowery in for Chris. I just have a quick one on the cross border intermodal. If we were to just conceptionally think about freezing pricing at the current level, could you give us a sense, just in general, how much freight would still inevitably come onto your network?

No, I can’t – I can’t really – we haven’t specifically given guidance and growth targets for just the cross border But I’d just go back to something, we’re not freezing prices. We’re not freezing rates. When we bring a new customer on, we do it in a way that, you know, may involve some commitment or some period for pricing to be constant. But you know, our focus is to – is to grow the market share and improve the utilization of the trains that we’re running and improve profitability, and keep the business that we’ve had, that we’ve gotten. So you know, we’ve talked about how big the market is. We’ve talked about where we are in terms of market share. The facilities being in place, and the fact that the intermodal truck to rail conversion thesis is very strong, particularly given the time and the cost of dealing with the border crossing on an over-the-road move. So we think we can get to a very good level of – get very good market share over the next few years, and you’ll continue to see very rapid growth.

Okay. And you know, I – I guess in reference to your previous target, I think, you know, you put out the [inaudible] prior presentations the million truck load market and the 1% penetration of that market. Is that fair to say that we’re a little ahead of that, or can you give us an update on that?

At this moment in time, that’s really about where we are.

Okay.

That’s still a very current testament. We’re just getting started.

Okay. Thank you.

Thank you. Our next question comes from Brad Belco from Stephens, Inc. [Brad Belco] – Stephens, Inc. : Good afternoon, gentlemen. How are you?

Okay, Brad. [Brad Belco] – Stephens, Inc. : Well, most of the questions have been asked, but I’ll give it a shot. Dave, I think last quarter you talked about the opportunity on some of these leases, and I heard it mentioned the last several times. And I think you said it was an opportunity to improve the OR by about a ½ of basis point. And it seems like that continues to be the plan towards the back half of the year. Would you say that your OR guidance of, you know, 100 to 150 includes taking advantage of some of those opportunities, or would that be viewed as something incremental?

In that case, it would. But we are also, you know just back to the question of Mike Upchurch about the uses of free cash flow going forward, we are certainly going to be evaluating all of our leases. As we have fixed our balance sheet, it may make sense to own instead of lease. So we will be going through that process over the next 12 to 18 months and we may be able to continue improving our OR on that conversion as well. But that has not been factored into our longer range guidance of 1 to 1 ½ points.

Brad, just to be clear, that guidance that we gave last quarter was 40 basis points annualized. [Brad Belco] – Stephens, Inc. : And I guess last, you know, several of the people we’ve talked to seem to be pretty excited about the Mexican intermodal opportunity. Do you care to comment in terms of, you know, maybe what particular carriers that seem to be expressing more interest, or what any of the pushback would be?

You know, it’s kind of funny. We started with the container guys, the truckload carriers that have their own assets. And now we actually have the TOFC truckers that understand that if they don’t start the rail conversion, the guys with containers are going to steal their business. So we’ve got everyone talking to us now, anyone that’s doing business in Mexico and sees the opportunity. The near sourcing phenomenon, there’s so much press on it that people are coming to us to talk about it now. And we really see a combination of containers, truckload carriers, the siders, the hops. We also see a combination of truckload carriers that use intermodal and even potential of container boxes, container fleet that we would be able to bring even more of the INCs on board. So I don’t think that any of the [inaudible] channels are fully closed. [Brad Belco] – Stephens, Inc. : I appreciate it, guys. That’s all I had. Congrats on a good quarter.

Thanks, Brad.

And our next question comes from Art Hatfield from Morgan Keegan. Art Hatfield – Morgan Keegan : Good afternoon, guys. I wanted to come out of the intermodal opportunity from a different perspective. I think last year about this time you guys noted intermodal potentially going to over 20% of your overall revenue base for the next three-plus years. So you know, just kind of as you look at the business a year later, you know, have things kind of progressed as quickly as you’d like on that front? And really, is that 20% plus as a portion of your overall revenue base, is that kind of seal the goal – the target goal for the next three to four years?

Yeah. I think we can, you know, with the growth rates we’re showing and the opportunity that’s there, I think we still feel that we’ve got the ability to get into that range. I think you’ve got to understand too, we’re growing intra Mexico, we’re growing on the Radian Speed Way. We’re growing on the Cross Border Domestic coming out of Mexico. And we also still have the opportunity for the international coming through Lazaro for the Houston market. So it’s not just one market we’re looking at. Art Hatfield – Morgan Keegan : Yeah, absolutely. And then on the CapEx, I’m not sure if you guys mentioned it, but are you guys still targeting 475 million for this year?

It will be a little bit higher than that, but still in that 22% of revenue range. Art Hatfield – Morgan Keegan : Okay. Are you guys pulling any additional purchases for it this year other than your locomotives, or is that just kind of your normal increase to CapEx?

There’s nothing significant that we’re pulling forward. There could be some containers that we may purchase by the end of the year, but nothing significant.

And I might add, you know. we pull this forward for a tax reason. Art Hatfield – Morgan Keegan : Yes, absolutely. Thanks a lot for the help, guys.

Okay. Thank you.

Thank you. We have time for one last question. And our last question comes from Tyler Brown from Raymond James. Tyler Brown – Raymond James: Thanks. Just a couple of modeling questions for Mike. Does your concession, duties step up in ’12 and would you view that as material cost?

It does step up. I believe it’s effective June 30 next year. And that goes up from 75 basis points, so ¾ of a percent to 1.25%. Tyler Brown – Raymond James: Okay. Is that the only step up, at least over the term of the remaining concession?

Yes. And that is disclosed in our K, so you can just verify that. But I believe that’s accurate, 0.75 to 1.25. Tyler Brown – Raymond James: Okay. And then on the cash flow, can you update us on where you are kind of as a cash tax payer? I thought maybe in 2011 you’d be a U.S. payer and then ’12 maybe a Mexican payer. Is that still the case, or is that extended out?

With the incremental benefits on pulling some of the capital forward in the U.S. it looks like we’ll be able to probably push out being a cash tax payer until 2013. But in Mexico, in all likelihood we would be a cash tax payer in 2012. Tyler Brown – Raymond James: Okay. And then, Pat, I just had one final question. Just, you know, UP, [inaudible] interesting comment that you and UP had won a recent coal fired power plant. I don’t know if there was any – if you can make any public comments about that or anything around that?

No, we’re not in a position to give any more detail on that. We’re still in negotiation for that contract. Tyler Brown – Raymond James: All right. Fair enough. Thank you.

Hey, Tyler, Mike Upchurch. Just – I looked at the Q, it is 25% of revenue today going to 1.25 in June of 2012. Tyler Brown – Raymond James: Okay. Thank you.

Thank you. I’ll know turn the call back over to Mr. Haverty for closing comments.

Thank you very much. I think that concludes the presentation and I think things went well. And we’ll see you next quarter. Thank you.

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