Greetings and welcome to the Kansas City Southern First Quarter 2014 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. This presentation includes statements concerning potential future events involving the company, which could materially differ from events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the company's Form 10-K for the year ended December 31, 2013, filed with the SEC. The company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com. It is now my pleasure to introduce your host, David Starling, President and Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

Thank you and welcome to Kansas City Southern's first quarter call. We know it's late in the day and a busy time before the Easter holiday, so we intend to be very efficient today. Today's presenters here with me today is Dave Ebbrecht, our Executive Vice President and Chief Operating Officer; Pat Ottensmeyer, Executive VP, Sales and Marketing; Mike Upchurch, Executive VP and Chief Financial Officer. And on the call will be José Zozaya, our Executive Representative and President, KCSM. Turning to the first slide, our record first quarter consolidated revenue of $607 million were up 10% over the prior year. Ag and Min clearly led the way, growing 40% over 2013. Our grain revenues were up 69%, which much of that being long-haul traffic from the Midwest to Mexico. As we noted on the fourth quarter call, KCS is enjoying the dual benefits of strong grain carloadings and easy comps due to the 2012 [drought] [ph]. We expect the grain business to continue to show very good year-over-year growth throughout the second quarter. But during the second half of 2014, the growth trajectory in grain will plateau as we hit some tough comps in the fall. I should also mention that coal volumes were better than expected due to the higher natural gas prices, which allowed one of our coal customers to take more coal than they had previously planned. We expect coal volumes to remain solid in the second quarter, but it's a little too early for us to reject any certainty of what will happen in the third and fourth quarters. Clearly natural gas prices will be one element in what happens later in the year. A combination of our strong revenues, good mix and efficient operations were the primary drivers in KCS reporting an adjusted operating…

Okay. Thanks, Dave. Let's turn to Slide 8. As you can see, we continue to grow our volumes and our headcount controls are remaining solid; we increased 4% carloads during the quarter and only had an increase of 1.8% in headcount, while continuing to scale below the growth. And as we hit [stair step] [ph] growth milestones, we will see our efficiencies take dips from time to time in the chart provided, but the overall trend will continue to remain positive. On Slide 9, you can see our velocity was at 27.5 miles per hour for the quarter. This was 0.3 degradation sequentially over the fourth quarter, and dwell was better than last quarter by 2.5 hours at 19.4 hours. This was largely due to the higher amounts of grain and coal [inaudible] that traditionally carried or carried lower train speeds than intermodal or the automotive trains. The mix differential created the lower overall average train speeds. Weather did not play much of an expense role on operations compared to same periods in previous year and connectivity with our interchange carriers was relatively fluid, although it is worthy to mention that our rolling stock availability was extremely tight throughout the quarter due to congestion in Chicago and in the Northeast. That's all I have. I'll turn it over to Pat.

Okay. Thanks. Good afternoon, everyone. I will begin my comments on Slide 11. As Dave Starling reported earlier, revenues for the first quarter were $607.4 million, 10% higher than last year and a record for the first quarter. Volumes increased by 4% to 535,000 carloads. Adverse foreign exchange, foreign currency moves had the impact of reducing revenues by about 1%. So absent FX impact, we would have reported revenue increase of 11%. Turning to the business unit details, as you can see on this slide, revenues and RPU increased in all of our major business units, but volumes were a bit more of a mixed story, although as we drill into the details, we do not believe that we're seeing a downturn in any of our major business units. And as you'll see later, we are not changing our full year growth outlook. The short story for the quarter, as Dave mentioned, is that grain and utility coal were both strong and were both negatively impacted by weather, not so much on the KCS network itself, but on the North American rail network more generally. The primary negative areas for the quarter were crude oil, which we expect to turn positive over the remainder of the year, scrap paper, which I'll talk about more in a moment, and agrichemicals, due primarily to difficult comp last year. Now just a little bit more on each of the business units. In our Chemical & Petroleum business, revenues increased by 3% on a 3% reduction in volumes. RPU showed a strong increase of 6%, driven primarily by mix, specifically higher petroleum shipments in Mexico. As we look at the major contributors to the volume decline, there were three main factors that I would consider temporary or event driven such as planned outages, supply…

Thanks, Pat, and good afternoon, everyone. I'll start on Slide 18. As Pat previously indicated, revenues were up a solid 10%, a 4% increase in carloads and a 6% increase in revenue per carload. FX did negatively impact revenues by approximately 1% on the growth rate, but operating expense was positively impacted by FX, resulting in an immaterial impact to operating income and the operating ratio. The adjusted operating ratio for the quarter was 68.7%, a 180 basis point improvement from the first quarter of 2013. The difference between our reported and adjusted operating ratio is due to a $29.9 million charge relating to the purchase of approximately $130 million of equipment that was under lease and the related lease termination. Those costs represent a one-time early extinguishment to make the lessor whole on the lease. And I'll provide further details in a few minutes, but these transactions benefit not only ongoing operating income and OR, but being able to finance the purchase of this equipment at historically low interest rates, particularly after achievement of our investment grade rating a year ago, creates substantial positive net present value. Despite our fourth quarter 2013 financing to acquire some of this equipment, interest expense actually declined 21% year-over-year due to the refinancing activity we completed almost a year ago and the launch of a commercial paper program early this year. Our average effective interest rate of 3.5% is more than 2 points lower than the first quarter of 2013, and we believe we continue to have the lowest effective interest rate in the rail industry. Assuming no further financing activity during the year, we would expect interest expense to be approximately $75 million for the full year. First quarter 2014 adjusted EPS increased 18% to $1.05. An increased adjusting operating income contributed…

Thanks, Mike. I'd like to end by again emphasizing that not only did we have a good first quarter, but we're optimistic that we can continue on this positive track throughout the course of 2014. And I hope this afternoon that we've dispelled any impression we might have left with you in January regarding KCS' long-term growth prospects. We at KCS are as enthusiastic as we've ever been in our growth story. While for a variety of reasons, some of our near-term growth opportunities are ramping up a little later than we had originally anticipated, they are ramping up and over the longer term, they will be substantial. And finally, as illustrated in the chart Pat discussed, we now see our business growth curve extending out further than we had projected a few years ago. The management team is very excited about the company's future and remains dedicated to turning the majority of our opportunities into tangible realities. And with that, we will be happy to entertain your questions.

(Operator Instructions) Our first question comes from the line of Allison Landry with Credit Suisse.

I wanted to ask about the first quarter performance relative to the expectations that you outlined in January. And as I think about the 18% earnings growth in Q1 what you did mention as typically the weakest quarter during the year, that relative to the mid-teens earnings guidance for '14, so should we expect the balance of the year to decelerate in terms of earnings growth or do you think that there is a potential for some upside but maybe you're erring on the side of conservatism at this point?

One thing to keep in mind is we did have about $0.03 benefit in the quarter from interest expense. And given the guidance that I provided of $75 million for the year, you won't see that in the remaining quarters. So there won't be any year-over-year benefit. I think consistent with what we talked about in January that was a big driver of our earnings growth over the last couple of years. So when you pull that out, mid-teens looks pretty solid to us.

And then as a follow-up question, it looks like there was a meaningful step-down in cross-border intermodal volume and revenue growth. And I realize that comps are difficult. The base is bigger, but is the 35%-ish growth range a good run rate to use going forward, or do you expect a reacceleration as you add some new services, specifically the ones that you mentioned during the fourth quarter call?

We can't feel too bad about 35% growth anywhere. But as we have said consistently that as the base gets bigger, these growth rates, we would expect them to moderate a little bit. But having said that, we definitely feel that the growth in the first quarter was affected by the weather and just the congestion and availability of cars and containers and everything else throughout North America. We can't quantify that, but that's what we're hearing from some of our large customers. So we're expecting for the rest of the year that the growth rates will move higher in cross-border intermodal. But over a longer period of time, we should expect them to come down as the base gets bigger.

We compete for the assets with our partners anyway, even in normal times. But when they get - the number of containers they did that are basically stuck in some of those weather-impacted areas and it is more difficult for them to prioritize to Mexico. So we were told by our partners that it definitely had an effect on the container supply for Mexico.

Our next question comes from the line of Chris Wetherbee with Citi.

What do you think about the second quarter specifically? Obviously, you're on to a really good start from a volume standpoint. How much do you think you'll sort of catch up and maybe how does that sort of progress as you go forward through the quarter here? And usually you're at a very nice run rate and would imply your revenues sort of run rate well above 10%, but just want to get a rough sense of how should we think about sort of the cadence within the second quarter.

Yeah, you're right, we feel like there was some sort of pent up momentum moving into the second quarter. Volumes are very strong. We're coming up on Easter week. That's always a bigger deal for us because of extended holiday in Mexico. So when we get through April, we'll have a better sense as to how much of this might have been a short-term blip versus a more sustainable. However we know that the grain comps are going to be strong and the coal comps, because of Luminant coming back early, should be strong as well. So I think wouldn't be surprised to see pretty good performance on the top line for second quarter, but then the third quarter is going to get tougher because of the comps and the fall off of the coal in the fourth quarter could be tougher yet.

The only thing we know for sure about Luminant that whatever number they've given us in the past, it's always, well, have to be careful. It's variable.

And then when you think about auto plants, Pat, now that we're moving into a little bit later on in 2014, how do you think about sort of the pace of that ramp-up. I know I think in the slide, you said over the next couple of years it will continue to ramp. Is it sort of progressing as you had expected? When you get into the summer months, should we be seeing sort of a little bit more of a progressive pace of outputs from those new plant online in Mexico?

Yes, I think based on what we're hearing, again automotive, the second quarter comps could be very strong, because we had an extended outage at a General Motors plant last year with a new model and a quality hold. So I think you could see our automotive growth actually get stronger as we move into the year based on production schedules. Obviously that all depends on the level of automotive sales in North America. Longer-term, so over the course of 2014, we could actually see the pace of growth kind of step up quarter-to-quarter between now and the end of the year. That's why we think we're going to get back to a double-digit for the full year. And there is really no change in the outlook for the three-year ramp-up that we talked about in January. This year, the new plants, we're expecting vehicle production of about 300,000. In 2015, that will ramp up to about 550,000. And in 2016, the final ramp will take us to about 660,000. That's unchanged since January.

Okay. So progressing as expected at this point?

Yeah.

Our next question comes from the line of Bill Greene with Morgan Stanley.

Can we start a little bit just on the Mexican business? I know there's still the debate on the legislation. So we'll see where that goes. But maybe you can offer us some commentary about the average length per contract in Mexico and maybe how much of productivity opportunity you still have left regardless of what happens down there. Maybe there are other levers you can pull to kind of keep improving and we'll see what the legislation looks like when it finally goes.

The average length of contract is shorter in Mexico than we typically see in the US. Much more of our business is priced annually in Mexico. Probably more than 70% of our business is priced annually. We are finding that customers are more willing to enter into longer-term contracts and spread. The other thing that causes us some administrative difficulties is very large percentage of our business in Mexico is priced in the first few months of the year. We're trying to kind of spread that out over the course of the year and we're trying to with some of our larger customers get into longer-term contracts and I think we've had some success there. But generally shorter, the vast majority are on annual contracts.

And on the operating side, we still have latent capacity to grow not only on [inaudible] side, but also on the train length and capacity side. As we have different growth in the automotive and intermodal sectors that will allow us to build solid trains and that will create the ability to also run faster with the unified mix of equipment. And then we'll push into growing the larger segments that manifest. But we see a dynamic stair-step environment over the next two, three years and plenty of opportunity to grow within our current footprint.

Can I just ask one detailed question to you, Mike, and that is the locomotive, the lease termination, is this the new base of which we kind of grow this, but just step down again as you maybe do more with the locomotives going forward? Can you just remind us exactly the kind of the timing and how this should work going forward?

Yeah, sure. We believe we still have other opportunities. We're currently working on some additional leases to purchase that equipment. There's no guarantee that we'll complete that or at what price. But still pretty optimistic we're going to have a little bit more benefit on that between now and the end of the year and maybe even into early 2015. And as we've always described, this is kind of a five to eight-year journey, trying to find the right time to really purchase these assets and make a good positive economic decision for the company.

Should is this the new level – should we take that as the new base where we are at now?

I think that'd be a good assumption until we communicate additional purchases of assets [inaudible].

Our next question comes from the line of Jason Seidl with Cowen & Company. Jason Seidl - Cowen & Company: Two quick questions, guys. I guess one we'll stick in the longer-term and then we'll bring it back to this year here. Longer term, obviously you put up the Mexican energy reform and pretty much everyone in the energy side that I talked to feels this is going to happen. Can you tell us how we can sort of track the progress? What's the best thing that we can look at? And where should we start to see that sort of show up in your carload (inaudible) does happen? Are we talking about sort of pipe and sand first before anything else happens?

José is on the line here. We'll let José take a little shot at the energy reform and tell us how he sees that falling out from a legal standpoint or political standpoint. José Zozaya: The energy reform, as you may know, has already been approved generally speaking of the lot, but (inaudible) laws about regulated are in the process of the discussion right now at the Senate. So we expect that to be finalized by the end of this session, so in September and will start being implemented after September. So that is on the political side of it. I don't know if you'll need more information on that one.

Yeah, we'll talk a little more about the growth side, what we think we'll see first. I'll take a little shot at it. Well, first of all, we're seeing Pemex be a lot more aggressive. I mean we've got one particular facility where they're starting to build a pipeline out of their facility over to a transload, so they can be more efficient to rail. We've got a transload facility in Lázaro Cárdenas, which is going to be converted from transload into a direct delivery into the port facility, so they can transfer direct to vessel. So even now you're seeing Pemex being run a lot more as a business than a government entity. So those are the first subtle changes we're going to see. And then it's the traditional stuff you're going to see in the US. It's going to be pipelines, pipetrains, frac sand, drilling. You're just going to see more of everything. And then as they can start to export, we think you'll see some petroleum actually going into the US.

Yeah, I think I agree on all that. The one thing that you could see, that we could see depending on how the rules are written more quickly and it wouldn't require the kind of infrastructure investment that some of the drilling and other activities would is the importation of refined products into Mexico. So that potentially could happen this year or next year, wouldn't require any infrastructure investment, but that might not be as big a deal as some of the frac sand and crude oil movement. Also remember that the change in the laws isn't just related to oil and gas exploration and production. It also covers refineries and power production. So potentially we could see companies building power plants to compete with federal government in Mexico, or we could see companies building refineries to do their own refining in Mexico. So more questions than answers at this point as to how all of that is going to unfold and the timing. We think it will be significant for us. The timing is going to be obviously extended, and we hopefully will know more about the secondary laws in the next few months. Jason Seidl - Cowen & Company: I guess my follow-up question has to do with the comment you made about Lázaro. You said basically no business growth or not much growth until the second half of '15 when APM opens up the terminal. Can you talk a little bit about why, I guess and that was a little bit surprising that you still see some growth in Lázaro, I mean, just based on Mexico growing? Could you just explain that?

Well, what I said is that we won't see sustainable double-digit growth until back half of 2014. So we're expecting Lázaro to grow. I believe we could see occasional blips of double-digit on any given quarter. There seems to be a lot of jockeying back and forth between Manzanillo and Lázaro and price for market share and ocean carriers making changes to their rotation lineup on an interim basis. So it's going to be a little bit choppier for the next year-and-a-half. When APM opens their terminal, I think we will get back to more steady, sustainable double-digit growth.

I guess another way to put it is for the first time, there would be competition in Lázaro Cárdenas.

The other think I think has happened is that Lázaro has grown, if you think back over to the last three of four years, some of the growth rates we saw there were kind of gravity-defying. It's now gotten larger. And so it goes back to my comment about the intermodal. It's a larger base. So getting those high double-digit growth rates is a little harder to achieve and sustain.

Our next question comes from the line of Scott Group with Wolfe Research.

So I wanted to ask about the Mexican legislation and maybe you can bring us up to date on what you guys know and the things curious about your sense on timing now and I think you tried to talk about, hey, we think there's ways to take the original legislation and make it a little less to bear and maybe get some color on what a less severe or draconian bill might look like. And then how should we think about kind of applying this to the model, if at all? My sense is it allows competition, does enforce competition, so maybe it takes years for this to actually have an impact on any of the business. But would love some comments from you guys as an update.

I agree with your interpretation on the second half of the question. Whatever we come up with, it's going to take quite a bit of time to implement. But again, we think we will come to a reasonable conclusion. Certainly the landscape has dramatically changed since the time when you're supposed to pass this build very quickly. José and his team have done an excellent job of educating not only the Senate and the Congress, but the other government officials and government officers and the shipper base on how much capital we actually have invested in Mexico and what kind of railroad they have down there and the importance we're to the economy in Mexico. So we've seen a dramatic shift in the attitude towards the railroad, and that's what we needed to do, and that's changed the landscape of how the negotiations are going. And I'll let José kind of give you his view from south of the border and what I just said. José Zozaya: You correctly mentioned. This law has been approved by the House of Deputies and (inaudible) to the Senator. The Senator House has reviewed it and then called for an operating forum where we and other actors were called to give our presentations. And due to the more information we brought in, the President of the Transportation Commission of the Senate has declared that this reform has to be modified before sending back to the House of Deputies. But we are expecting that that will happen in September as the President of the Transportation Commission of the Senate has mentioned. And that will be (inaudible) to the House of Deputies with modifications to the original document on what's approved by the House of Deputies.

I think there is something else, Scott, not to forget, we paid $1.4 billion for the concession. It wasn't given to us. So we're in a very strong position where we're with the government investments we have made. We think we'll come to a good outcome. But if not, we have some other courses that we would take if the outcome is not so good. But right now, we're feeling pretty good about it that we've had a lot of meetings with the SET. They support our position. They understand the importance of the railroad. So we think the worst of this is behind us.

Just one quick follow-up on that, just because it's not Mexico regulatory, it's not an area where a lot of us are very close with. When you talk about some sort of moderated bill or legislation, do you think ultimately we end up with a regulatory backdrop that's similar (inaudible) is still better than kind of what we have in the US that seems to be certainly an environment where the rails can do well?

We think it's going to be workable, but we're really not in a position to talk about the different parts of the bill right now while we're in negotiation.

I think we're hearing grain is going to slow in the back half of the year, but some maybe some strategic growth is going to accelerate. Net-net, is that a good or bad thing for margin?

I think it's a good thing. I mean as we look at the mixed issues and I think grain and coal could drop out, as I mentioned, in the fourth quarter and we expect to see some crude oil pick up with some of the terminals that we're serving, adding seaming equipment and just based on some projects that we're working on. And when you add it all up and kind of mix it all up, I think it will be good for margins.

Our next question comes from the line of Justin Long with Stephens.

You mentioned the additional locomotive you're ordering, but I was curious if these were for lease conversions or growth. And just in general, you also talked about the rolling stock environment tightening in the first quarter. Are you comfortable with your access to equipment right now, or could this potentially be a limiting factor to volume growth as we progress throughout the next few quarters?

There is certainly more grain that could be moved. Unfortunately a lot of it is stuck up in other railroad systems right now that we can't get our hands on. But yes, if we had more railcars right now, we could move more grain, but that's not an issue of purchasing cars. That's an issue of them being available. And I think it's pretty much utilized right now with the whole grain (inaudible) setup, and it's a little bit sluggish right now. As far as the locomotives, this is that year we've been talking about, next year's Tier 4. So I think the conversations we've been having the past couple of months with our suppliers is we think the order books are already full. So everybody is scrambling to get locomotives, while we're still under Tier 3 for about $400,000 cheaper this year compared to what they're going to be in 2015 and beyond. And we've always and our team has been extremely frugal. They always run very, very tight on power. So this is a good time for us to make an acquisition and load up with a Tier 3. So we will again be receiving power through the remainder for the year. As far as lease conversion on equipment, there is no change to the way Mike explained earlier. We're opportunistic. We've got equipment in our budget every year for the next five years to the growth. And a lot of that could be small hoppers to jumbos. We like to improve the grain fleet with more jumbos. And we've got some old equipment that we probably need to replace. Everything we've learned in the lease conversion is you do get a benefit on the (inaudible) side as well, because you have more owned cars out in the fleet and there is a pop in (inaudible) as well as the savings in the lease versus owned.'

Justin, those locomotives are incremental. They don't have anything to do with the lease conversion.

Yeah, correct. That was your question. Now these will be new locomotives. They will not be leased locomotives and they're incremental.

I guess as my second question, I wanted to ask about coal. The recent pickup we've seen is encouraging. But I was wondering if you could talk the longer-term outlook for your coal business beyond this year? Do you anticipate any major shutdowns from your customers due to regulation in 2015 or beyond that?

We have one unit that will go down at the end of 2015, and I think we've talked about that on prior calls. So yeah, the long-term outlook for coal is not great for us. I mean we've had 10 power plants on our network and we're serving nine of them. And so there's not a lot of growth opportunities there. And we see some downside because of new regulations. So it's not going to be a significant decline, but it's going to be a decline in business for us.

There's still talk about export coal, so how that's going to work, but there's still few companies that contact us about exporting coal.

Port Arthur would be a good place to export coal, but right now, we don't have anything really in the works to develop that business.

Our next question comes from the line of Brandon Oglenski with Barclays.

I wanted to come back to the CapEx outlook in the new locomotives, because of buy and sell. I realize that's going to be 28% of revenue. But how does that factor into the budget looking forward beyond this year? Should we view that as the opportunity to take CapEx down a little bit in the next couple of years?

Well, I think we've talked about CapEx. We've talked about our maintenance CapEx in the past, I think about 10% of revenue. We are getting to the point that over the coming years, you could see that drop from maybe 10% to 9% to 8% just because of the amount of money we've spent in our infrastructure and the condition that it's in. The rest of the capital we would spend would be on normal things to run our business. And then beyond that, it's going to be growth. So if you do see accelerations in capital, it'll be because of growth, but I would say this year is going to turn out to be an exceptional year because of the locomotives and that same kind of range again and we would have a darn good reason on why we're doing it that there would be revenue tied to it.

And if I'm not mistaken, it sounded like the 2015 outlook is pretty favorable. Is that's what's providing the support here? I mean how do we think about the volume expectations looking beyond 2014 as the acceleration in the business?

Well, as you've seen Pat's chart, it is a long-term story. I mean we've got acceleration in '15 and '16. And then when you get to '17, you got some new drivers. But the other thing you got to remember, some of this is being driven by the fact that you got a new type of locomotive coming out in 2015. That's why GE and (inaudible) going to be full this year. Everybody is buying a locomotive. And we'll always run extremely tight. And this is the year for us to improve the locomotive fleet, because again, some of these opportunities come up like grain this year. We had cars and a little more power (inaudible) grain. So we don't want to find ourselves in that position. Locomotives are your life blood. You can't pull a train without them. So you never want to be in a situation where you don't have enough power. The other railroads are in the same situation. It's hard to borrow power. I think to the end probably at least everything that was out here this year. So you never apologize for buying locomotives.

Our next question comes from the line of John Barnes with RBC Capital Markets.

Given some of the service issues experienced by a couple of the other railroads, did you by chance experience any kind of uptick in carloads that would have resulted from that that may not be sustainable given some of that market share ebbs away due to the service issues?

I didn't see any increases, maybe slight increase, minimal that was negligible. It seems like most of the congestion stayed up in the Chicago area during the quarter and in the Northeast with the weather issues and there didn't seem to be diversion that ran over KCS at all that was subsequently declined in the second quarter.

And then secondly, on the ag business, is it possible to give us a little bit of color around kind of the same-store ag business versus maybe the new facility you begin serving in the second half of the year? And just as you look at the quarter's volume, how much of that came out of the new business versus the existing?

Well, a lot of it came out of the new facility, but I'm sure we've kind of concluded that that's new business. I think it's probably more correct to say that they sourced it out of Western Illinois rather than Council Bluffs in Omaha and Lincoln. So it wasn't really true incremental growth for us, but that Jacksonville facility in Western Illinois was a very significant producer for us and for our customer.

Our next question comes from the line of (inaudible) with Macquarie Group.

My first question relates to pricing trends in automotive and also in ag. We saw automotive flattish this quarter, whereas ag was really strong. Can you help us understand what you're expecting for the rest of the year and anything unusual that we should be aware of this quarter?

I think you're referring to revenue per unit, which is not necessarily tied to pricing. When we take the revenue per unit in ag, it was really driven by length of haul, and that is the cross-border business came back strong and that is a very long haul for us. So you need to kind of separate pricing from revenue per unit. And some of the same situation going on in automotive. We had some disruption in our automotive cross-border business because of constraints on equipment. So that had some downward pressure on revenue per unit, because the length of haul was shorter. In both businesses, we had a negative impact on foreign exchange, because the lot of our automotive businesses is denominated in pesos and foreign exchange was a headwind in the quarter and it would have affected our revenue per unit.

Did you quantify that foreign exchange impact?

Overall, it was about 1% of consolidated in terms of the impact on the automotive business and I don't know that number off the top of my head.

And then my follow-up is with regards to the outlook for the operating ratio. Could you describe in detail what we should expect on the underlying operating side versus the financing help from the leasing transactions? For the next year, how should we think about this improvement of 100 basis points to 150 basis points (inaudible) management maybe sort of similarly spend next year as contributed by the underlying business side versus financing?

We gave you enough information here to see the impact from the lease conversion. It's roughly $3 million in the quarter. So you can do the math on what that benefit was. So we're still staying with our 100 basis point to 150 basis point guidance and improvement. We think that's pretty solid coming out of the business.

But we've not guided into next year. So when we gave that guidance, we factored in the lease conversions. So we knew that was going to be a part of the guidance.

I seem to remember that maybe on some other occasion towards year-end, you said that you see no reason why this [ph] pace of information continue for a few years out. Can you comment on that at all?

It will depend each year as we put our budget. Our plan is to lot of this cargo mix. So I mean that's something that we will look at towards the end of the year as we (inaudible) can't comment right now on the out years.

Our next question comes from the line of Ken Hoexter with Bank of America.

Going back to when you set your year-ahead targets, you had noted growth in the mid-teens instead of in the 20%. Yet if I look at your pace of investments and the things you're scaling up both on locomotive and even from the asset side, are you looking at growing back to that 20%? I guess how do we think about what you're indicating here with this level of investment? And that's a great short-term in terms of your long-term growth opportunities. So does that get you back toward your long-term sustainable growth of 20%?

I think if you look at the chart that Pat showed, we're never saying never. But when we changed our guidance, we were looking at the next year to what we were seeing, and that's why we changed our guidance. From a long-term standpoint for the company to get back to 20% or above, yes, but we'll have to look at those opportunities and look at the timing of them. And as we look at the timing of those opportunities, if we need to tweak that up, we'll certainly do that. So that's what we're seeing today.

Just to clarify, the beginning of the sentence there, it sounded like you were saying what we're seeing next year wouldn't be at that 20%, did I hear you right, you said it wouldn't be at the 20%?

I said we will need to look at the timing of those opportunities. One thing that we're doing again on the locomotives is a $400,000 less than if you try to buy them in '15. We're understanding that one of the manufacturers may not produce a locomotive in 2015, a Tier 4. It may go more into the rebuild cycle. So we have to be cautious that we can buy locomotives in 2015. So this was a little more of a strategy as well as to make sure that if there is any kind of restriction on locomotives in '15 that we don't find ourselves competing with the buy guys trying to buy power in '15 and can't give an order in, because there's perhaps only manufacturer that's producing a Tier 4.

And longer-term, still back to that, sounded like you said back to the 20%.

No. We said we'll look at those opportunities going forward. And could we get back into 20%s, yes, we could, but we got to look at those opportunities, because if you look at them on the chart, they all have their own start dates, their own start time periods. And we don't want to get out ahead of ourselves and tell you that energy reform is going to start in '17 and for some reason it gets caught up, political process, and (inaudible) '19. So the ethylene plants. I mean to build one of those is a $2 billion decision. So we've got to wait and make sure they're going to be built, when they're going to open. And then we will certainly look at the guidance and if we need to tweak it, we will.

Pat, I appreciate the ramp-up on timing that you gave. But I thought you also slipped in there the shortage of equipment. I know you were talking before about intermodal, but it sounded like you said the same thing on auto. Does that mean you go in and you buy more auto cars and is there investment maybe overall on the car side as well? If there is nothing to buy in '15 on locomotives, do you go and make a much larger car investment, or do you still push that to the customer in order to get around some of the (inaudible) I thought you mentioned that if you have more cars, you could be moving more right now.

We purchase (inaudible) and we will continually be purchasing to put into that pool, but we were in a pretty good equity position with the TTX pool throughout the quarter and we met all of our demands, even though some of it may have been slightly delayed. On the plant side in Mexico, there's nothing getting across the border. But let me get it straight that the loading on the fleet was up in the 60% range in that all-time highs and it was a very strange fleet across United States.

And my reference, Ken, to the equipment supply was really more first quarter phenomenon because of the general weather-related congestion, because our auto business is for the most part originates and terminates in the Northeast and the Midwest. So that is one area where when Chicago gets fouled up, we will eventually feel it in terms of extended cycle times and constraints on equipment availability. It's not a real long-term situation and I think we worked through it for the most part. But going back to your other part of your question, if we see growth opportunities and we've expressed to our auto customers, if we see growth opportunities for cross-border movements that require us to go out and buy more cars, we said we would be prepared to do that.

But again, most of your expense would be overall that we're delivering to. So generally speaking it's CTX buying the cars and then each of us will buy racks for the cars and then we share them. So (inaudible) decision to buy those cars. Same way with the double-stacked cars. You're 53 and you're 40, that's much more of an industry decision. I'm on the trailer term board and we look at replacement, we look at two to three years out. We want to have car orders in. So again, it's much more of an industry decision.

Our next question comes from the line of Keith Schoonmaker with Morningstar.

(inaudible) Could you see us getting near the state now or could you take additional actions to continue this trajectory?

I think there are opportunities to continue to improve. I just don't think it'll be at a rate initially seen. I think we'll start to level out more and just hit little stair step improvements, but we still have labor agreements and issues that we can approach in Mexico to realize more latent capacity.

And really kudos to the finance group for a rapid progress after the (inaudible) rating a year ago, you were trying to (inaudible) leased locomotive. Is there any other such restructuring still remaining in additional locomotive?

Well, the lease program includes not just locomotives, but freight cars as well. And so we've executed transactions on both fronts and will continue to look at those leases that generally are more attractive as they get closer to exploration. And that's why it extends over five to eight-year period, which we started back in 2011, I think, was the first transaction we did.

In the past, because of our financial condition, we always leased. So now that decision as it comes up is basically you got to replace the equipment under the lease is expiring. We always want to own, but if it's something like (inaudible) or woodchip cars or something that is season car or something that could be a surplus car in a depression, then we're very cautious with that as the other railroads are. But for standard, the average on the system is about 66% ownership. And I think coming out of this conversion this year, it would be about 52%. So as Mike said earlier, we're going to be opportunistic. And as these leases come up, it makes sense to convert them to ownership. We definitely, if we're buying something, we're purchase it in leases or if we need equipment, so we'll keep turning that dial and summing up with more savings. This year was the big year for lease conversion when we went out and made a substantial leap forward.

In addition to lease conversions and refinance, are there any sort of major engineering covets (inaudible) is there any other sort of financial engineering that you have in mind?

I think those have been the two primary objectives over the last four or five years. And I think from a debt restructuring perspective, we're pretty much at the end of that opportunity. And hence the comments I made earlier about the incremental improvement, which seems in EPS from refinancing activities, we're just not going to see that going forward. And then lease conversion, we're working closely with the operations group to identify when those leases come up and what are the equipments we want to own and if we do, (inaudible) equipment. But outside of that, there's probably nothing significant.

And the two important factors for us is we're investment grade. We want to stay investment grade, but yet we still have a lot of room, so that if we needed to go out and make purchases for growth, we certainly have the room to do that and still maintain our financial structure. And we have liquidity. I mean we got caught in 2009 with liquidity. We're never going to let that happen again.

Our next question comes from the line of Tyler Franz with Raymond James.

Mike, just a quick modeling question on the fuel side. How much was your fuel price up in Mexico this quarter, and are you guys still feeling that pressure from the state-imposed price increases there?

We are, Tyler. In fact, our fuel price for the first time in Mexico that I can recall was higher than in the US. So we were up 8% on the price per gallon in Mexico and actually down 2% in the US. The official policy is to continue to implement in Mexico small increases each month. But now that we're at a point where actually the (inaudible) price is greater than (inaudible) price remains to be seen. But we'll continue that policy. But this was kind of a first quarter where we saw higher prices in Mexico.

Is there a fuel surcharge mechanism down there to somewhat inoculate that?

Yes.

And then, Pat, if I'm not mistaken, late last year, your competitor down in Mexico kind of launched a cross-border intermodal service, I guess, over Eagle Pass out of Monterrey. And I totally get your traffic was very good and I get (inaudible). I'm just curious upon the margin that impacted you at all, or if there is any change in dynamics down there.

We did lose some business because of that service, but we got some back. And the good news is when we get it back, it gives us an opportunity to move it cross-border. So it's actually a bigger win than a loss. So we did expect that that competing service was announced that we were to lose some business in 2014. We factored that into our guidance and our projections. But ultimately, we think that Loretta was a better gateway and our asset partners are very interested in working with those customers. So the loss that we experienced was not significant.

The other thing you got to think of is we were spending a lot of capital in Monterrey to expand Monterrey. It was a 150-mile line haul out of it. So it sure makes a lot of sense for us to have a big foray lined up for the cross-border train that goes up in our network.

Our next question comes from the line of John Mims with FBR Capital Markets.

So I just had one follow-up on the auto business. So you have the (inaudible)?

We're having a little trouble hearing you. I think what you're asking is how is the balance work of the auto equipment. We looked for every opportunity we can to get a back haul in the Mexico. And there are auto manufacturers in the US that sell in Mexico. In fact, we will use some of our outbound facility (inaudible) as an inbound RDC, so we can bring cars in and then finish the others and to look for the Mexico city market and load those back with outbound cars. But it's clearly in balance and everyone tries to price that in to their roundtrip economics.

But it's similar if you think about the grain business. It's heavy empty back haul, the coal business, and you just price it into the business.

We have some (inaudible) load both ways, but that's very rare.

But I understand that (inaudible) works now. But as the Mexican business really ramps up, is that still the case or do you mean to deploy a lot more time and a lot more empty back haul back down into Mexico just to satisfy the new (inaudible) going on down there?

We'll have to add capacity. But again, the pricing and the contribution on that business is quite high. So we'll add capacity, locomotives and cars and it will be a slower ramp up, so it's not going to be a big capital commitment right upfront. But we factored that into our growth plans and our capital plans.

I mean we have a lot of times that the CTX purchase for the auto cars.

Ladies and gentlemen, I would now like to turn the conference back to management for any closing comments.

Okay. The only closing comment I have is everyone have a Happy Easter and if you're trying to get home, travel safe. Nice long holiday and we'll talk to you next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.