Greetings and welcome to the Kansas City Southern Third Quarter 2012 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 and future events involving the company which could 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 31, 2011 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 could be found on the Kansas City Southern website, www.kcsouthern.com. It is now my pleasure to introduce your host, David Starling, President and Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

Thank you. Good morning everyone. Joining me this morning for Kansas City Southern’s third quarter 2012 earnings call are, EVP and Chief Operating Officer, Dave Ebbrecht; EVP, Sales and Marketing, Pat Ottensmeyer; EVP and Chief Financial Officer, Mike Upchurch and José Zozaya, KCSM President and Executive Representative is participating by telephone and will be available for questions later on. KCS’ overview; I am very pleased to be able to kick off this call by saying that KCS’ third quarter furloughs and revenues were both quarterly records for our company. We were able to establish this despite somewhat anemic US economic growth and the fallout from one of the worst drought ravaged grain harvest in US history; speaks volumes about the overall strength of our business mix. In 2012, we’ve been spending considerable time talking to investors and analysts about five areas of growth that would appear to have exceptional upside. For the first half of 2012, cross-border intermodal, automotive, Lázaro Cárdenas container traffic, frac sand and crude oil represented 15% of total KCS freight revenues and were growing at a rate of 35%. In the third quarter this pace increased; during the quarter, those five areas represented 18% of freight revenues and grew at a rate of 46%. While this growth is in itself impressive, what is even more important from the long-term is that we're early in the development of each of these areas. There is a very long runway ahead for intermodal, automotive and energy franchises. Speaking of growth, KCSM volumes grew 12% in the quarter. You heard us say this before, but it bears repeating. The nearest-sourcing phenomenon in Mexico is real and the momentum seems to gain spinning every quarter. Not only the major automotive, electronics and appliance manufacturers building facilities in Mexico, they are bringing…

Hey thanks Dave. Turning to slide nine, I would like to continue to reemphasize our consistent ability to control costs. As you can see, Ops cost which is the bottom red line on the chart has remained largely flat over the past four years as we have experienced a significant increase in the Line-Haul revenue. As an operating team we continue to focus on absorbing growth within our network. We still have latent capacity on trains and the headcount to surge as necessary with the seasonality of the traffic. Our judicious expense management and cost control in these areas continues to be the major driver of overall improvement. On slide 10, you can see our headcount controls are improving with growth. We still expect our efficiency to trend up throughout the year as our headcount will remain relatively flat; but we will see occasional dips as we initiate new service and expand our network. On slide 11, you can see our operating metrics to continue to remain in a very good range for the third quarter. Velocity continues to be strong, averaging above 27 miles per hour and in the range necessary to maintain connection standards. Dwell and Car Efficiency showed a very good trend of fluidity with the increased record volumes handled. The uptick in maintenance away Slow Order Miles is due to the heavy maintenance away activity that we had on the Shreveport and [Zacha Junction] subdivisions and the heat orders where the rail was above average new control temperature at the end of the summer. But the bigger point is that the slower track speeds has had no material impact on the velocity and the dwell. Our main message from operations continues to be that costs will scale below the volume and revenue growth projections. Now I’ll turn it over to Pat for Sales and Marketing.

Thanks Dave and good morning, everyone. I am going to start my comments on slide 13 where we show our normal summary of third quarter results by business units. As you heard earlier, we had record quarterly revenue of $577.4 million and record carloads of 552,000. We had record revenues in four of our six business units. You can also see that RPU was flat or higher in all of our business units. Foreign exchange cost is about 6% in RPU in the automotive business for the quarter and about 1% in total revenue growth overall. You will also know that we are not showing consolidated RPU on slide this quarter. You can all do the math given the revenue and carload information, but the reason we are not highlighting consolidated RPU is because we thought it was causing some confusion that our yields were declining due to shift in mix and the very high growth in our intermodal shipments, which is absolutely not the case. I’ll come back to that comments at the end of this slide. But first, I’ll make a few comments on some of the business units. The chemical and petroleum business generated record revenue for the quarter, in spite of a 3% decline in volume. Lower volumes were due to some softness in our plastics business in the US, which was really due to extremely strong third quarter of last year. RPU [industries] was very strong, which drove the overall increase in revenue. We also saw some weakness in our soda ash business, which is primarily a timing issue driven by vessel loading schedules at our Port Arthur export terminal. The investor and consumer business in total was basically flat last year, carloads for metal and pulp paper were both down slightly, our US metals…

Thanks Pat and good morning everyone. I would like to start with my comments on slide 27. And while you see reported operating income did decline slightly, when you look at adjusted operating income excluding the $25.6 million insurance recovery gain that we recorded in the third quarter of 2011, operating income actually increased 16% to $181 million. Operating expenses continue to scale very well and increased only 2% on volume increase of 7% and revenue increase of 6%. And as we’ve already indicated, our operating ratio of 68.7 represent the best ever normalized OR for KCS. Interest expense in the quarter declined 25% to $24.1 million, the result of refinancing activity completed during the first half of this year and the retirement of the 13% notes from December 2011. And we now expect to report interest expense of about $100 million for fiscal year 2012, which represents $74 million reduction from our peak interest expense in 2009. Due to the strengthening Peso our FX gain was $3.7 million during the quarter, but that was more than offset by an increasing tax rate from the improving exchange rate. Our effective tax rate for the quarter was 44.9% and is 38.4% for the first nine months of 2012. I’ll cover the tax rate in more detail on the few slides. And finally, diluted earnings per share of $0.82, is 5% higher than the adjusted EPS from the third quarter of 2011. Turning to page 28, I would like to provide a little bit more insight into our reported EPS. Quite unfavorable fuel comparisons year-over-year; our adjusted operating income increase contributed to the majority of the increase in EPS by driving earnings higher by $0.16 per share. Additionally, interest expense savings contributed another $0.05 per share to the bottomline. And then the…

I'll conclude by saying that the third quarter results again underline the fact that the KCS growth story is still very much intact. Furthermore, we believe that the commodities that drove growth in the past quarter we continue to play prominent roles for many years in to the future. And one final point I would like to add is, not only is KCS hitting the majority of the sales and operations target, but are ever strengthening corporate structure and balance sheet moving us closer to obtaining investment grade status. As Mike Upchurch just explained, this provided an investment grade ratings to KCS; another clear indication that we are moving along the right path to achieving the most important goal we’ve set for our company. And with that, the team is happy to take your questions.

(Operator Instructions). Our first question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Maybe you could guys pick up on where you left off Dave and maybe for Mike, just when you think about the potential for getting upgraded to investment grade. Can you give us some of a sense of maybe, what the opportunity would be for you thus far, refinancing some of the material that you have out there? I mean what really is possible as far as getting the (inaudible) or maybe it could be incremental savings from that?

Yeah, Chris a great question; obviously in today’s environment with historical rates, the opportunity we think is pretty substantial. If we are investment grade today, we could probably refinance some of the stat at 3.5% on a 10-year note. We clearly, we have substantial cash balance where we could chose to go ahead and retire with cash, the 12.5% notes, I mean that issue alone would be $12.5 million of interest savings, given that we have $100 million outstanding. And then really, if you look at our issues down in Mexico, most of those could be refinanced, the average rate there outside of the 12.5% is a little over 6% and reducing that potentially 3.5%. The only thing that could present a little bit higher interest expense and offset some of those savings would be if we push maturities out to 30 years where there is still an overall savings but probably coupons closer to 5% on a 30 year note. So depending on the strategy it could be a bit challenging to give you a point estimate there, but I think it’s pretty material off of $100 million 2012 exit rate that we have.

And may be the follow-up just on the operational side for Dave Ebbrecht I guess, when you think about the headcount leverage that you still have in Mexico in particular, how should we think about that. I know you kind of have given us some guidance for keeping headcount flat, you’ve done a very good job with that, but as you see this continued growth and particularly in 2013 do you feel that you are reaching a point whether it is a step function to move up or you are still able to get some pretty good leverage out of that?

We are still able to get good leverage. We are hiring, but most of our hiring has been for attrition purposes and we won’t hire in the areas where we have growth. But overall, when you look at the total network, we are able to scale relatively flat as we still have a lot of latent capacity within our trains and within our corridors. So I see us maintaining the same leverage through the next year.

Thank you. Our next question is from the line of Bill Greene of Morgan Stanley. Please proceed with your question.

Hey Pat, can we ask you a little bit about to expand on the coal side of the business. There has been some discussion about the potential for to have some plant closures on your lines. I realize some of the stuff may not be finalized so we may not know, but any color you could offer there in terms of, how to think about guide post for ’13?

That's a really great question, I wish, I knew the answer to it. It’s been all over the math, when we talked to our customers, the range of forecast that we have gotten this year, as I mentioned, we don't yet have our nominations for next year is really very broad. So it’s been difficult for us to forecast with any degree of accuracy. We only have nine plants on our network and we ought to be able to do a better job of forecasting that there are just so many factors that has changed the landscape. You know Texas is going to be power, I don't think Texas can really operate with plant closures on a long term basis, but in any given quarter with natural gas prices being where they are, we could see shutdowns like we did in the spring of this year, where we saw a significant shutdowns of capacity. So it’s just a real hard thing for us to get visibility on. As I said our crystal ball is very cloudy, there are couple of big events that are going to happen here in the next few weeks that will hopefully give us better clarity, including our customers giving us the nominations in 2013 around December 1st.

If we look at 2013 then and we think about the broader portfolio, can you give any sense for what percentage of your business is locked in already, so you have a view on pricing and you’ve had a very good pricing arguably among the best in the industry, can that continue or do you sort of converge toward the norm?

I think it can continue. Remember, half of our business is in Mexico, and if you just think about pricing being a function of inflation and CPI inflation in Mexico has consistently been a point or so higher than in the US. So that's one of the reasons that we have a little bit better pricing than the rest of the rails. A lot of our business in Mexico prices on an annual basis, so we have less locked-in than you are hearing from the other Class Is, probably 50% locked-in next year versus I think the others have reported higher numbers, but again it’s inflation in Mexico. The other factor and Dave Starling touched on this is, we've really got a superior product, service, security other things in Mexico and that has allowed us to be a little higher in terms of the value that we’re offering and coming through in rate negotiations on contract renewals.

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

I wanted to ask Dave Starling, I think you made some comments, I believe it was the second quarter call where you said well, you know 2012 is kind of a slower growth year relative to the broad trend and then given some of the projects and market initiatives and so forth you might be a step up in the growth pace in 2013 and 2014. I want to ask if you still think that's the case and as you look to 2013 where the, what are the markets, the areas where you would expect to see a significant step up.

Well Tom, I think in the context of the 2012 comment, I think we referred to it as a bridge year. It really wasn't going to be a slower year, but with the five auto plans coming on in the next two to three years, we think we will see the volume grow in 2013. It should accelerate even more in 2014, and then with all five plants fully operational, we should hit some kind of peak around 2015. In the meantime, you are going to see the intermodal growth continue. You are going to see Lázaro Cárdenas continue and possibly accelerate even beyond where it is when the APM facility opens in 2014 or 2015. You are still going to see crude and frac sand growth. So we don't see a downturn at anytime that you may see we could very easily slip back in to double-digit in the out years. Any question?

Yeah, it does. Yeah I recall you said bridge there, not necessarily (inaudible), but when we think about auto, is there a timing, where the impact of the timing coming on would be more material, is that kind of second half of 2013, where you might see that step up? And then I guess in terms of drilling down on the crude oil, that’s accelerated, but how do you think about, I guess the factors that would cause a step out here, there are some refinery investments in receiving facilities or are there factors and kind of timing of when they would give you potentially a step up in 2013 in crude oil?

Well, I’ll let Pat talk to you about the automotive side, but I think one thing we don’t want to lose sight of is we're still the largest supplier of grain for Mexico and we've just come out of a drought year. So we certainly expect the back half of 2013 to be a very good year for grain and given the contract, the deal that was done with one of our customers with a major user in Mexico, we don’t expect the first half of the year to be that weak. They’ve got orders to fill down there and they’re going to fill those orders; in fact they bought out in the futures to secure this corn. So they’ve got a contract. They’ve got to fulfill for the full-year 2013, so we're certainly going to help them do that. But the grain has been a significant hit for this year. It's something that we generally are, good margins, gives us a nice long haul. So we should have that grain back next year and with the two new elevators, we should have even growth in grain more than we have ever had in the past.

On the auto and crude oil Tom, the auto plants that are under construction Mazda, Honda and Nissan, those will begin producing finished vehicles in the first quarter of 2014. So we won’t see much from those plants, but if you look at, we keep saying that this is a bridge here for automotive and adjusting for currency we’re up 30% plus. So we like that bridge, we’ll take that bridge; we’re leading market share and so, we’ll see the big pop from the new plants beginning in 2014. Crude oil is just really hard for us to predict, I mean we’re liberally getting, our team is working hard, they’re doing a great job, but we’re getting new requests, we’re getting new movements and new business literally coming in almost every week. We’re looking at a number of options to invest and use our footprint in Port Arthur, Texas to maximize our opportunities in that business; we are very well positioned at the receiving end, obviously like our coal business, we don’t originate any crude oil, the thing that gives us the seat at the table is our footprint and our position in Port Arthur which is one of the biggest refining markets in the world. So we’re looking at making some investments; I don’t think there is anything huge or there is no real kind of step function; capital that has to take place, it’s just a big market, it imports a lot of crude oil and it wants to draw crude oil from Canada and from Bakken. And we through our rail connections we can deliver both. And it’s probably not a satisfying answer, but it’s just very hard for us to forecast the future there, because literally we’re getting new business almost every week.

I want to leave you with 2012, with the statement I made is that, we were not excited about 2012, we were going to be more excited about 2013; we’re extremely excited about 2012; we think it’s been a great year and at a time when we have had grain drought, drought affecting our grain and also the coal being down. We are very pleased with the growth of those other five major commodities; we don’t see that slowing down, we see grain coming back.

Our next question is from the line of Jason Seidl with Dahlman Rose. Please proceed with your question.

First let me once again congratulate Chairman Haverty on winning the Salzburg Award yesterday. Pat, when you look at the coal business, if we exclude the potential closures of plants which may or may not happen and that’s a little cloudy now, how could rest of the business look with natural gas having move up forward recently?

It looks a whole lot better than it did 90 days ago, so I think we said as we look at our coal plants, our business is pretty simple, we serve nine plants and we have the opportunity to serve a 10th in 2015. We have put a red flag on those plants that were either natural gas prices or for EPA regulations are questionable and that could be as much as to the quarter 30% of our coal business. Do we think that we are going to lose 25% to 30% of our coal business, absolutely not? There is a lot of politics involved in this; some of the customers are digging in and saying, we are not going to invest in the scrubbers, we are going to close the plants and that means that we are going to loose jobs and the markets that we serve particularly Texas just are going to need the power and so those plants are going to produce at some level. With gas prices kind of where they are now in the mid $3 range, most of our plants tell us that they can compete and they can operate profitability at this level, but some of them are not in that position. So it’s like a fire-hose; the analogy I use here internally is like a fire-hose with the water flow blast and no one holding onto it, in terms of the forecast that we are hearing and the possible range of outcomes going forward. And again as I realize it’s not a very satisfying answer for you guys, it’s not a very satisfying position for us, it’s just very hard for us to forecast.

One other statement Jason, if you look at the one of these plants in Texas, they burn today a lot of lignite and that lignite is not as clean as the Powder River Basin coal. One of the outcomes out of this could be restricted from burning lignite and they got to switch to Powder River Basin coal. In that instance, we would actually gain coal share and the market would go up from what we previously had. So I mean, at this by and lot, so this could go a lot of different directions. I think, what the theme is down though, if coal is what it is, whatever the outcome is, that's what we are going to deal with, but we’ve got growth in all of these other commodities; that's what we are focused on; if the coal plants don't close, does not, let them close the plants which this another possibility and we are just going to benefit from that. But we’ve got all the growth and every commodity grew, so that's what we are spending our time worrying about; we’ll deal with what happens with coal.

Jason, this is Mike Upchurch, remember it’s a highly variable cost structure as well, so we don't own this equipment and don't have a fixed cost; (inaudible).

Thanks for the addition Mike. Well, let’s talk some of the other business lines, let’s talk for a minute about the cross-border intermodal; obviously you know still growing at a very good clip. Talk about converting new customers and what do you have in the pipeline and getting more people to put those products on the trains and what's the outlook here and in 2013?

The outlook is good as I said in the past, the market is very large. Our share is very low; it’s growing very rapidly so the outlook continues to be bright. We are working with our asset partners who are working with our rail partners to continually look at new markets, look at new service and we will probably get a question later on from someone about adding train starts and are we going to have to add costs to train starts that keep this going and growing at this rate; I sure hope so. And the more we do that, and the more we build into the balance, the more we will be able to support new service, direct service at some of these markets which will make our service look more truck light and will actually allow us to grow faster. So in the past if you look at some of the market share for rail versus truck in the well established mature intermodal lanes in the United States, they are in the 40s or approaching 50% we’re at 2%. There is no structural impediment that says we can't get to those market share levels overtime, but if you look at the US railroad or Western railroad particularly Chicago LA is probably the best example, its taken them a lot of years to get to those market share levels. It will take us a lot of years to do that as well, but the growth opportunity is very large.

And I might add this. We are still spending CapEx in the intermodal facilities. We will spend another $7 million in monorail next year; we will spend $4 million in St. Louis [OTC] next year as well, so we continue to expand those intermodal facilities to accommodate even more and more volume.

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

So in terms of automotive opportunity in Mexico, how should we think about the potential market share that we might be able to gain from the incremental production as new OEMs and specifically as this relates to the cross-border finished vehicle market. So I was wondering maybe what some of it's dynamic or advantages that KSU has that might be able to allow you to move the vehicles cross-border on your network as opposed to having them off to Union Pacific?

As far as the market share, we're in discussions with the auto companies now to really better understand where they see the markets and the flows of these plants going; again these plants are not go to open until early 2014. But to your second question, you know, if you are looking at, look at our services and our security advantage in Mexico, this is a real significant factor and you look at the way we can connect those plants over the Laredo gateway to the population centers in the Eastern half or two thirds of the United States, basically, Dallas, Houston, Kansas City, Chicago in East and we can connect with all of the other Eastern railroads and the Canadian railroads. I think we have a pretty good service offering to get those vehicles to gateways where we can connect with multiple other carriers and I think that’s a real significant advantage. There will be competition, no doubt about it and it’ll be stiff, but the combination of our cross-border service, our security and our ability to connect with multiple carriers at other gateways and Laredo are something that factors, that are very interesting to the auto companies.

And then, I’ve a follow up question in terms of the partnership that you do have with the other Class Is. Maybe if you could talk a little bit about the Class Is that you’ve currently been working with more over the last couple of years. And I guess my question is, which ones are you currently working the least with right now, and have you been in any discussions with these Class Is to potentially increase business with them or form new partnerships or agreements?

Well, we’re really working with everybody. We connect with every railroad in the industry, and to some extent, well let me say this, everyone has a strong interest in working with us, because of what they see going on in Mexico and what they see us doing in terms of investing in our franchise and really building a first class network in Mexico. To some extent there are factors like, just the physical connection points and the gateways that we have with the other carriers and how that orients us into their flows that dictates kind of the highest and best of it, if that makes sense. So, the fact is we’re working with everyone, we’re engaged with the marketing teams at all the other carriers to look for opportunities, and again, because of our unique position in Mexico and what we’ve done to build out the network, everyone kind of wants a piece of that.

Okay, it’s fair to say that there could be some potential opportunities to work more risk with some other carriers?

There are opportunities with all of them. What we are trying to do is find the highest and best fit with each one, and that’s going to be driven by the physical connection points that we have, the gateways and how of those gateways orient us into their [freight] clause.

Our next question is from Matt Troy of Susquehanna. Please proceed with your question.

Thanks. Do we still have Jose on the line? José Zozaya: Yes I am here.

I wanted to ask you, since we have got you here today; well given the administrative changes in the Mexican government, just wondering if you could talk about how you are relating with ,them how the relationship is progressing? Talk about may be some of the client [pulse] of the things you are focused on and the next [call] it one, two, three years with the new regime gave concession on your tax rates are just how you are working with the government? José Zozaya: Well I should start by giving you some brief history of our relationship with that team. We started working with (inaudible) Mexico where we run trains and we have a intermodal facility for Mexico there. We started an initiative, a very close working relationship with them. We continue that relationship, we are doing their campaign also. I was invited to the most important event on the campaign, and at this moment I will continue having (inaudible) with some of the numbers of this things that are in the transitional team with their (inaudible) administration. So we feel that we have a closer and very good relationship with the whole team, not only with the elected president. We foresee very optimistic the next years in the Mexican economy and that the experience we got the, we’ve seen this team work in on the State of Mexico use for business, [people] more sense a course for an investment and he also is very, very committed to the rule of law. So taking into considerations those facts, we feel very confident and very optimistic about the future of Mexican development and the Mexican economy.

I guess, the second question in terms of the near-term house keeping, I understand the situation in coal is fluid and we will find in the coming weeks based on weather and certain gains which we have done in Texas. But we are just curious in the US if I just look at your total consolidated coal power earnings falling 22% in the last quarter four weeks basis, is that just comp noise or one and two of your customers [throughout] essentially slow plant and currently. Just trying to get a sense, before we bump into the harder comps in November, what might be causing that little blip down in coal near-term?

It’s a little bit of timing and little bit of comp. We had a little bit of surge in the third quarter, just kind of slow down a little bit here and then there is some unfavorable comps (inaudible) the last year, okay.

With the noise that's in Texas, we are still moving a surprising amount of coals still forward as planned.

Our next question is from the line of Ken Hoexter of Bank of America. Please proceed with your question.

Just a quick, and I want to take up a follow-up here. On the (inaudible) target mid-single digit volumes and mid-digit pricing and the estimate single digit revenues. Is that offsetting because of the evaluation of peso. I just want to kind of grab that new forecast on that?

No it’s a pretty tight band. I don't think there's any peso impact in that guidance.

Can you talk about crude growth noted, you've now going to seat at the table, is this just kind of an incremental cars without additional investment, just want to understand the incremental margin opportunity, and I guess Pat if you want to delve into maybe the size of that opportunity over the next year or two obviously, you know you've accelerated significantly through the years, should we look at this pace being maintained or can you talk about new customers coming out here. Could you just give us some insight on it.

Again Kenneth it’s really hard for us to predict. I think we can sustain this growth, a very high growth even though the base is getting larger for the next few quarters based on business that we are hearing about and business that we've kind of secured and is in the pipeline for this quarter and next year. We are looking at a number of options and talking to a number of potential partners for investments in the Port Arthur area and the facilities or properties that we own that could secure our position even further. You know we talked a little while back about this idea of crude terminal working with Savage. That hasn't happened, but what has happened is that some of the customers that we were targeting to be users of that crude oil terminals have actually invested their own capital in their own facilities to take crude by rail, and so we haven't lost the business and we haven't lost the momentum. It just didn't happen the way we thought it would happen. But having said that; we are still talking to people who are interested - potential partners and potential customers, who are interested in looking at facilities that we own and investing in crude oil terminals. I listened to one of the railroads earlier this week. I agree that crude oil by rail its something that's going to be around for a long time. I don't think it’s going to end and some of these pipeline investments and reversals are made lot of flexibility, a lot of advantages to crude by rail. The thing that we are very excited about is that Port Arthur has a pretty good mix and a pretty good balance of light and heavy, and again with our rail partners we can deliver both, out of Canada, out of Bakken, we can deliver light and heavy and so you know it just really feels good to me that we are in a pretty good position on the origination side. Port Arthur is a very large market, it imports a lot of crude oil and we are seeing tremendous amount of activity there.

Can I just review that first answer for a second, I guess its still mathematically doesn't make sense, are you giving yourself conservative room on the volume side given what's going on the coal and Ag side? There is no way I would just, because a mid-single digit plus mid-single digit can't equal mid single digit.

Well, it’s a matter of how you define the range this close.

This is guidance is for full year 2012, we haven't seen anything specific in the fourth quarter. I don't know if that helps you.

Yeah, and given the impact of the second quarter, the guidance is for the full year.

Our next question is from the line of Brad Delco with Stephens. Please proceed with your question.

I guess somewhat of a follow-up to the last question on the guidance and I think that’s a question given the pretty outlook you guys had longer term. When I think about the guidance, I kind of think of there being a bridge probably in the next few quarters or so, because of [good] coal on the side, but you also have some great challenges that you will be dealing with [probably] on mix. How should we think about with other rail sands, fourth quarter expectations or volumes down that we should be thinking about may the next two quarters in volume growth and how are you guys are going to able to offset any potential headwinds there on the cost side or what you’ve been doing here for last several quarters.

I think I lost track of your question. You know, if you just look at some of the areas where we're growing, and we’ll continue to grow kind of little difference in the rest of the rails, obviously cross-border intermodal is a market share plate. You know, it's not out of the question in my mind that we could grow, continually grow cross-border intermodal even if the economy was down. You look at crude oil, frac sand. So those areas are kind of unique to our network and our position. On the cost side, I do believe that we will grow faster in our outlook for the fourth quarter is better than what you heard from some of the other rails. Our coal impact is not as large. You know, as [deposit] I can sit here and say, thank god we don’t have CSX coal business. It's not as large as an impact on us, as it is on some of the other carriers that are looking at 30% plus of their business being coal. On the cost side, and Dave talked about this that where we’re seeing the weakness, if you think about it, its coal and grain. And we’ve talked about this in the past, those are two areas where you have, because of the nature of the business you have an immediate cost of avoidance when you lose that business. Unit trains, shuttle train, when we lose business or our business is down, we park those trains, we don’t run the locomotives, we don’t burn the fuel, we don’t have the crews and so it’s actually, to lose any business, but it’s actually better to see weakness on the cost side in coal and grain than it is in something like steel and paper, where you’re running in a manifest service, if you lose 25 cars off of a 90 car train, you’re still running the train, when you lose coal business and grain business, you’re parking the train.

Hey Brad, this is Dave let me take another, a little shot at this. Yes, one indicator is we do not have any locomotive storage, so even though the coal business has been down and the grain business is down. We have plenty of business growth that has still made us the fastest growing railroad out there and we don’t expect that to change. So even though it could have been much better, it could have been in double digits, if we’d had all the grain and coal, we’re still in a pretty damn good place and we just don’t see that changing.

I guess what I think most people are trying to get at is, with that guidance for fiscal year ’12, how much of that is based on the momentum you have Q3 to-date versus what your expectations are for maybe fourth and first quarter. I’ll kind of move on maybe to my follow-up, not much has been mentioned about potentially serving in the port in Mexico at Veracruz; is there any color you can add to that and may be some timing around that?

Uncertain, the Port of Veracruz has a lot of big plants; we were down there a few months ago. They are building a rail connection that will significantly improve our ability to serve it and that will happen in the first half of next year. So we will be able to improve the way we get in and out of the port and our service will improve. But the port is pretty congested and the main -- I would say the highest and best use today of the Port of Veracruz is automotive. All of the auto companies are interested in using Veracruz for exports either to the East Coast or to other markets and it’s already pretty full. So the timing of those expansions are uncertain at this point. The Port Authority is counting on and their business model is based on private capital, so they are going to be going out over the next hopefully the next few quarters or next year or so looking for concession operators. But at this point in time, the exact details of where that money is going to come from and the timing of the expansion is unknown.

But I will add this that some point the story we will be telling will be the continued growth of Lázaro Cárdenas and the build out of Veracruz, it is going to happen. They have spent so much money down there; it’s just a huge footprint and the fact that they have made the investment to build the railroad connection all the way from the port over to our line is a significant commitment. It will be finished sometime in 2013, so we will then be connected directly into the port and we know in past, I just made a trip to Japan and met with the auto companies and they were all talking about Veracruz as one of the auto loading and unloading points. So Veracruz is coming, it just may not be on the radar screen for the next year or two as far as being built out, but the footprint is there, but you need some concessions in [LatAm] and they haven't done that yet.

Hey, Brad. This is Mike Upchurch, let me make one more attempt to what I think your question is. Our guidance for the year is mid single digit volume growth and core pricing of mid-single digit. But to get to the mid-single digit revenue, you have to look at your revenue per unit, which has generally been flat year-to-date, right. So that's how you get back mid-single digit volume roughly flat revenue per unit, each in the mid-single digit revenue. And our core pricing continues to be positive which allowed us to generate bottomline savings, increase on margins; Pat tried to cover that with respect to the intermodal AND I think the economics there are rather simple, when you add a box in existing train the incremental margins are extremely high.

Thank you. Our next question is from the line of Keith Schoonmaker of Morningstar. Please proceed with your question.

Let’s switch to free cash generation and as per (inaudible) when you expect to be a cash tax payer, I think you mentioned in the first quarter you will be cash tax payer in US this year, but (inaudible) 2013, so given your reference to having some tax deductions to have this maybe available, when do you anticipate being cash tax payer in US and Mexico please?

Yeah, this is Mike, our goal was obviously to push that date out as far as we possibly can with tax planning strategies. This upcoming election may afford us some additional opportunities, but as of today not knowing what the future tax policies might be, we will be paying cash taxes in both Mexico and the US in 2013. But a simple policy adoption of bonus depreciation as an example would allow us to push out our cash taxes in the US for another year into 2014. So it’s a very fluid situation, but we will begin paying some cash taxes in 2013 that’s our current assumption.

Okay, thanks. That's my first one on cash tax payment strategy as well. Growth in Mexico is really impressive and given the importance and really an impressive growth here, I guess just the curiosity, do you expect the continued growth in your sourcing Tier 1 suppliers will lead to primarily container and box car growth that are capable of productive round trips or is this a significant part of this or it’s going to be something like the railcars that return empty?

It’s really going to be both, its going to be, you look at appliance companies where we are seeing more interest in appliances moving in box cars. We’ve had a really good kind of yield management success looking at our box car flows, loading paper into Mexico and reloading appliances out and its finished vehicle and that also there is some southbound finished vehicle going into Mexico but mostly it’s a northbound flow. And in intermodal obviously our strategy on intermodal and our asset partners is to achieve balance, so that will be pretty balanced. And if you look at the truckloads, the 2.5 million to 3 million trucks that I have talked about, it's really pretty balanced.

Just in this quarter, we had shutdowns on the auto companies and we were then told that none of the auto companies were going to shut down for first quarter, but they will all be in full production. So just a good sign for where the economy is in the car orders and how the current automotive production in Mexico is remaining very robust.

Thank you. Our next question is from the line of Jeff Kauffman with Sterne, Agee. Please proceed with your question.

Sal Vitale on for Jeff. Just a quick question on the cost side of things. Look at your unit cost, specifically if I am looking at labor cost for a car load, it was down about 7% year-over-year; was there anything particular for the quarter, maybe a comp against an easier number against the harder number rather a year ago and how do we expect that to turn going forward?

I can take that. It's relatively keeping the headcount flat while we're increasing the car load numbers on the train. When you look at our train starts and what we're doing, we're absorbing the growth within our network and so when you have that, it's not necessarily a comp issue; it's just continued growth and we put it over the flat headcount, you are going to see continued productivity increases.

Okay, and has there been any immediate recovery in coal and grain volume, do you expect your headcount to pretty much trend or pretty much to remain flat over the next call it six quarters or the next year and a half?

We expect to continue to maintain leverage and scale well below our growth the headcount. The only comment I would like to add is we still have contracts in Mexico that we’re working on and some of those are performed by outside contractors. It does makes economic sense for us to take over that work and add headcount to do it and take that cost out of purchase materials and you might see that and that might cause a movement in the headcount. But when we do that, it’ll be a net saving.

Okay. And then, just a follow-up, earlier, pretty much just a clarification on a comment you made earlier, you mentioned that you will see some tough comps in 4Q because of some business you took on, and I think it was December of last year. Was that specific to coal or does that affects other groups as well?

My comment was specific to coal. We took on a new contract staring in November and really picked up in December. So, that’s going to provide some noticeable challenges on the comps in coal.

Can you give a sense of who [had] the contract for the 3Q for example how may car loads that comprised?

I don’t have that off the top of my head, I don’t know their specific shipments in the third quarter. I can tell you that it was 12 or 14 trains in December of 2011 that we picked up when we pick up their contract.

Can you pick it up in early December?

It’s already moving in November.

November.

And it really got to full strength in December.

Our next question is from the line of Anthony Gallo with Wells Fargo. Please proceed with your question.

Just one housekeeping and then one big picture of housekeeping. Mike, did you say what you thought the fourth quarter’s tax rate would be?

I did not say what the fourth quarter tax rate would be. But yeah, I’ll take the mystery out off that, since you asked a great question there. We guided the 39% for the full year. If you look at our tax rate through the first three quarters, we are at 38.4, and if you do the math on that you are probably going to come up with the fourth quarter tax rate of 41%.

Just wanted to make sure cause that’s these numbers move around a bit too much. You mentioned that grains are expected to be stronger in the second half of the 2013, can you just elaborate on that. Is that because stocks are going to be rebuild, there is an easy comparison or just an outlook probably that there is one customer that’s made it big. Just a little bit more color on why range should be the way you are expecting the second half of 2013?

The main reason is that it takes a while to grow crop, and so it’s going to take planting season for things to hopefully get back to normal. I don’t think that we will be as bad as may be some of the other because of the nature of our business, where a lot of our shipments are locked in by contract. Our business is really driven by human food consumption and poultry production for [peers], corn syrup, corn starch; those products which are pretty stable. And as Dave mentioned, we’ve got contractual commitments and obligations. So we may have to draw a corn from a larger origination of region, but the main reason for my comment was really just everybody knows this was a weak crop and it takes a while to grow another one.

I might add that the two elevators that will be located on our systems, they are not adding those elevators to take care of their current business, that is for growth. So we certainly expect the production from those elevators to be, an increase in the grain that we would normally handle from those customers.

Our next question is from Scott Group of Wolfe Trahan. Please proceed with your question.

It’s been a long call; I will go for two quick ones. The first Mike with the full forward cap of the locos this year, can you give us some color on CapEx for next year. Does that come down? The second question for Pat, on the coal side; I understand there is uncertainty, but it will be helpful if you can help us frame maybe the risk. There obviously has been some talk about some clients that may get shut down. What percent of your coal volume are associated with those couple client center been talked about shutting down for a few months starting in December?

I think, I’ve said earlier 25% to 30% of our coal plans we have a red flag by. Do I think that we will loose 25% to 30% of our coal business? No.

So just 25 are a third of the clients or a third of the business that you saw and it maybe a difference?

It’s really a pretty much both. Tell me who is going to be win the election, tell me what the EPA’s attitude is going to be, tell me what natural gas prices are going to be, it’s just very hard to predict.

No, no, I understand and I am just trying to get a sense of what the potential risk could be from the clients that already been announced that may shut down for the six months or so, okay.

Scott, this is Mike, on the CapEx question that you had, we have not given guidance yet on 2013, but I would tell you, we are going to make whatever investments are required in this business to capture this growth. You look at the automotive opportunity we have, I mean the growth are already over 30%. We feel very, very bullish about that business segment, and we are going to have to invest in additional equipments to handle that business and we’ll do whatever it takes to do that and we’ll update you on CapEx on our fourth quarter call as we typically do.

That might be (inaudible). The [CapEx] for autos, is that just power or do you need the facilities.

No it’s mainly equipment. Auto-Max and other equipment carry those vehicles, and we are just taking delivery of an incremental 30 locomotives by the end of the year. So that's where the bulk of the investment would be. But it remains to be seen over the next few years, how much track infrastructure we’ll invest to get into those facilities. But when those plants are going to be there for many, many years; that's certainly a pretty easy decision for us to make.

Our final question today is from the line of Tyler Brown with Raymond James.

Mike if I could quickly come back to the balance sheet. I know you all have been very focused on deleveraging over the last couple of years. But as we look forward, how should we think about your leverage. Are you guys looking at kind of the target numbers ratio or maybe looking at just $1.5 billion and keeping it steady or how should we think about that in the future.

Yeah, I think we are going to probably try to keep our leverage ratios close to where they are at today. As I mentioned we've already accomplished the objectives that have been established by the agencies, and today it’s more of an issue of macroeconomic conditions in the fiscal [clause] that I think has held their decision the upgrade decision. I still think in the next three to six months, you are going to see some positive traction there. But we don't believe we need to have any significant delevering here. We feel very comfortable with our debt levels. As I mentioned, we may chose to use cash to take out the 12.5 that was some of the equipment that we're going to invest in. You could potentially replace that with some low cost financing that we could push out, 20, 30 years if we chose. So I’d probably assume fairly flat levels.

Okay, I might add too Tyler that we are still going to work on the 20-80 ratio we have on lease versus owned on equipment. So our goal over the longer-term is to be at least 50-50 on the equipment ownership. We think that’s a prudent number. So that’s another way that we're using our cash on a go forward basis and then like Mike said earlier, we're such a growth company, that I don’t want to be - the worst criticism we could take as a team is not having the capacity that handle the volume. So we're going to make sure that we are very cautious, and are ahead and always were, so we can enjoy this revenue.

Okay, perfect. And Pat you made some interesting comments related to the pickup and housing. But have you guys ever tried to bracket maybe what your total exposure is to housing plus construction, and then I don't know if you frame it kind of like how you frame it with the ripple exposure to autos?

It's a little bit hardened to be terribly specific about that. We think it's pretty small right now, obviously that maybe 5% or less.

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

Okay, thank you very much. We will see you next quarter and everyone have a great weekend.