Greetings, and welcome to the Kansas City Southern Fourth Quarter and Full-Year 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. This presentation includes statements concerning potential future events involving the company, which could materially differ from events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the company’s Form 10-K for the year ended December 31, 2015, filed with the SEC. The company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com. It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern. Mr. Ottensmeyer, you may begin.

Okay, thank you. Good morning, everyone, and welcome to Kansas City Southern’s fourth quarter 2016 earnings call. Slide 4 lists the presenters for today, and I think everyone is familiar with our teams, so I won’t read their names. I’ll begin my comments on Slide 5. As you saw in our press release from earlier this morning, our adjusted diluted EPS for the fourth quarter was $1.12, a decrease of 9% from last year. Revenues were $599 million, unchanged from last year. Excluding the impact of further weakening of the Mexican peso, our revenues for the quarter would have been about 3% higher than last year. Volumes for the fourth quarter were also unchanged from 2015. Our operating ratio for the quarter was 64.8%, which was 120 basis points higher than last year. There are some one-time items in the operating ratio for last year that made this a particularly tough comp for us, and Mike Upchurch will walk you through some of those factors in a few minutes. Our operating ratio for the full-year was 64.9%, which was a 190 basis points lower than last year. We’ll talk in bits and pieces about the 2017 outlook, but obviously, the political and economic uncertainty is probably first and foremost on most of our minds. And the irony of us reporting earnings on the inauguration day of the 45th president is not entirely lost on us, so we’ll move on. But and I just want to pick up the last point here. We still remain very positive longer-term about the growth opportunities that we’re facing. Brian Hancock will talk about many of those growth opportunities in a little while. Moving onto Slide 6, I wanted to provide a few – some commentary on a few of the more interesting topics that…

Thank you, Pat, and good morning. Beginning with Slide 9, velocity for the quarter of 28 miles per hour improved 3.6% over the prior year and 1% sequentially. While Dwell for the quarter of 24.6 hours increased 16% versus prior year and 2% sequentially. Dwell performance primarily in the border terminals at Monterrey, Sanchez and Nuevo Laredo fell short of expectation, as congestion in volume in this region created inefficiencies in our operation. While total Mexico volumes were up 4.3%, regional volume into the Monterrey metropolitan area grew by 19%, facilitated by growth in our total Mexico agriculture segment of 27%, automotive growth of 14%, and metals and other carloads up 13%. Overall system Dwell, excluding the three terminals was 22.4 hours. Expanding upon the system to Dwell performance in the North region, substantial growth with our largest soybean customer in the Monterrey area ahead of the planned track capacity improvements at the facility required us to hold these cars in our facilities for an extended periods of time. The cross-border grain traffic is also subject to additional customs inspection processes inside of our Sanchez facility, which is another factor of increased Dwell at this terminal. This customer is in process of expanding their tracks to provide multiple unit train capacity at their facility. We anticipate, this work will be complete in early Q2 and allow us to spot these trains directly into the facility without additional handling and Dwell in our terminal. Also note the new KIA business that started in mid-2016 has been handled inside of our main switching terminal in Monterrey, as we await the completion of the track construction at the KIA facility. We anticipate to move this work out of our terminal into the KIA facility in early Q2, which should provide some congestion relief…

Thank you, Jeff, and good morning, everyone. I’ll start my comments on Page 13, where you can see that both volumes and revenues were essentially flat in the fourth quarter compared with last year. Revenue in Q4 was impacted negatively by foreign exchange, which was offset by FX adjusted revenue growth of 14% in our Ag and Mineral business, 9% FX adjusted revenue growth in our Industrial Consumer segment, and 10% adjusted revenue increase in automotive. If you eliminate the impact of foreign exchange, our fourth quarter revenue would have been up 3%. Volume was also flat at 550,000 carloads for the quarter with 6% growth in our industrial consumer carloads, 10% carload increase in our Ag and Min business, and a 19% increase in automotive. The revenue per unit was slightly up for the quarter with gains in pricing and mix being offset by the impacts of foreign exchange and fuel. Core pricing for the quarter was approximately 3% based on same-store sales and renewals, and we expect 2017 to be at or above the levels we experienced in Q4. On Page 14, you see a total year analysis by line of business that provide some context for this year’s results. For the full-year 2016, our Ag and Min business unit saw growth of 7% in revenue and 5% in carloads, led by our grain and food business, which offset lower volume in the minerals group. The slowing in minerals was the result of several large construction projects being delayed or canceled due to the flooding in the southeast earlier in the year. Our Automotive business had a solid year considering the number of plant shutdowns we experienced. Total automotive carloads were up 5%, which is very, very encouraging when considering automotive volumes were down 12% at the end…

Thanks, Brian, and good morning, everyone. I’m going to start my comments on Slide 20. Fourth quarter volumes and revenues were essentially flat ending a string of seven successive quarter’s of revenue declines. Our revenue performance was impacted by the significant deterioration in the peso, which negatively impacted revenues by $17 million. For those of you who are trying to reconcile our reported volumes to the AAR volumes, we have included a reconciliation in the appendix on Slide 42, but the difference essentially relates to the AAR not using a calendar quarter. Operating ratio was 64.8% in the fourth quarter, higher than the 63.4% operating ratio in the fourth quarter of 2015. Now cover expense details in a few pages. Reported EPS was a $1.21 per share, down 5% from the fourth quarter, while adjusted EPS was $1.12, down 9% from the fourth quarter of 2015. Negatively impacting EPS was the higher OR, slightly increased interest expense and an increase in our income tax provision, primarily the result of a fourth quarter tax adjustment that increased our adjusted effective tax rate to 37.6%. I’ll cover those details in a few minutes. Offsetting those negative items was a pick-up as a result of the repurchasing of our stock and you can see further details on Slide 34 that reconciles EPS in the appendix. Moving to Slide 21, annual carloads and revenues declined 2% and 3%, respectively. Reported operating ratio improved to 190 basis points, while adjusted operating ratio improved to 150 basis points. Large expense decreases for 2016 included a $63 million fuel excise tax credit, foreign exchange benefits of $63 million, fuel price reductions of $22 million, and lower headcount and labor productivity of $15 million. The increases in expenses will largely attributable to incentive compensation, wage increases, and depreciation.…

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

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

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

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

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

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

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

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

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

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

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

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

Thank you, Jason.

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

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

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

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

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

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

Yes, thanks. Good morning.

Good morning, Chris.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hey, good morning. Thanks for taking my call.

Good morning.

Good morning.

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

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

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

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

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

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

It’s top secret.

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

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

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

No.

Okay. And then…

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

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

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

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

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

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

Okay.

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

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

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

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

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

Great. Good morning, guys.

Good morning.

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

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

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

Great. And…

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

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

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

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

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

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

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

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

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

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

Hey, good morning, guys.

Hi, Tyler.

Good morning, Tyler.

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

The delta in terms of dollars or…?

Yes.

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

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

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

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

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

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