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Kansas City Southern (NYSE:KSU)

Q3 2008 Earnings Call

October 28, 2008 12 pm ET

Executives

Michael R. Haverty - Chairman and CEO

David L. Starling - President and COO

Scott E. Arvidson - EVP and CIO

Patrick J. Ottensmeyer - EVP and CFO

Mike Upchurch - EVP and CFO

Brian Bowers - Sr. VP, Intermodal and Automotive

Analysts

Christian Wetherbee - Merrill Lynch

Scott Nicholls - Gilford Securities

Edward Wolfe - Wolfe Research

David Feinberg - Goldman Sachs

Operator

Greetings, and welcome to the Kansas City Southern third quarter earnings call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press *0 on your telephone keypad 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, 2007 filed with the SEC. The company will not update any forward looking statements in the presentation to request future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.

It is now my please to turn the call over to your host, Michael Haverty, Chairman and CE) for Kansas City Southern. Mr. Haverty, you ma begin.

Michael Haverty

Thank you, and welcome to Kansas City Southern’s third quarter 2008 earnings presentation. Those that are following on the website, if you will turn to today’s presenters, you will see that accompanying me in this presentation are Dave Starling, President and Chief Operating Officer of the company, Pat Ottensmeyer in his new roll as EVP Sales and Marketing, and also Mike Upchurch in his new roll as EVP and CFO.

The next slide shows the chart of third quarter highlights earnings per share, $0.52 versus $0.48 a year ago, up $0.04, 7.7%., revenue growth 10.7%, operating ratio 77.4%.

Next slide continues with some comments on the third quarter highlights. We had a strong performance despite a pretty severe disruption during September with two hurricanes, and our loadings prior to shutting down in anticipation of Gustav, we were actually up, our loadings were up 1.5%, so we were having a very strong quarter until we began to shut down for Gustav.

As a result of Gustav, followed by Ike, even though they were not as bad as Katrina and Rita that we saw in August of 2005, it still affected our loadings, particularly chemicals and petroleum products, and also grain. We did not suffer significant infrastructure damage, but our major challenges were customers that lost service, and we lost some service our self from a standpoint of electrical power and therefore we had to shut down and our customers had to shut down.

The good news is that the business is coming back is not anything that is permanent. In fact, it did impact our EPS when you look at the revenue losses and expenses about $0.07 a share for the quarter.

We still continue to see business strength despite the troubled economy, revenue growth, has been double digit and we’ve said that from the very beginning of the year that it would be in the 10 to 14% range, and even though we haven’t had a real strong economy, we still, through three quarters, our revenues are up about 11.4%.

Our pricing has remained solid, and five of six commodity groups would have shown volume growth had it not been for the hurricane. We also continue to see operational efficiencies that is a result of tremendous improvements in our operating side, both in the United States and in Mexico, under Scott Arvidson in the US and Bill Noland in Mexico.

Even with the hurricanes in the US, for example, we’re seeing the best locomotive availability I’ve seen in the 13 years that I’ve been here. Our velocity is clearly improving, time is improving, foreign cars on line, all of the metrix that we ordinarily look at on the operating side have improved in spite of the hurricane.

Our foreign exchange loss reduced EPS by $0.05, so if you take the $0.07 from the hurricane impact and the $0.05 from the EPS loss that’s $0.12, so at 52 we would have been at 64.

If you go to the next slide, the management changes, we have made a couple of significant changes in our senior management staff. Pat Ottensmeyer, who was our EVP and CFO has now become EVP Sales and Marketing. We had a search out for this position for some time, and it was critical that we got a very strong leader, we had had an outside firm take a look at our marketing group, said that we had a strong group but we needed some to leadership. Pat actually came to Dave Starling and to me, and talked about assuming the position, something quite frankly we had not thought about, but as Dave and I talked about it, it made a lot of sense.

Pat is a strong leader; he is really the person that put the five year plan together. He knows all the pieces. He has been out selling our company, clearly with investors and so on, and in his previous life as a banker he spent a lot of time in sales, so as a leader we watched what he did in finance and accounting, and the entire financial group agreed in really strong leaders and we felt that he had the opportunity to do that as the EVP of Marketing Sales, and also from a successions planning standpoint, we leave him some diversity in management beyond just the financial side, just like we’ve used Scott Arvidson out of IT to come over and take over the operating side. He’s done a great job there, so we’re very pleased that Pat has moved into that position.

He has been succeeded by Mike Upchurch, Mike joined the company seven months ago as the Senior Vice President Financial Management and Purchasing, he has fit well into our organization, he is very well respected, made a lot of positive changes and so on. He spent 16 years at Sprint, and he was a divisional CFO reporting directly to the corporate CFO. He has spent time at Price Waterhouse, and in fact was on the team that used to audit Kansas City Southern many years ago. So he fits in well, we think that we have strengthened the management team by making these changes, and with bringing Dave Starling in, and making some of the other changes that we’ve made here recently we think that we are well positioned going forward.

With that, I would like to turn the program over to Dave Starling, President and Chief Operating Officer.

David Starling

Thank you Mike, we turn to page eight, talk about the operating ration.

The operating ratio continued to improve, came in at 77.4 for the third quarter, a half point improvement over last year. We expected to continue to deliver operating ratio reductions through our focused initiatives and productivity improvements going forward as well.

In the third quarter, we experienced, as Mike spoke, the two hurricanes in our service territory. They did impact our revenue to the extent of a little more than one full point on the operating ratio.

One additional thing to mention here is that fuel costs are still a factor, even with some recent improvements in price. If fuel had been held up to 2007 levels, the operating ratio was almost another half point lower.

Turning to page nine, operating ratio trend, we have another look at the continuing improvement of the operating ratio within the confines of the seasonality of the industry.

Year to date in 2008, our operating ratio is 79.1%, which compares to 80.2 reported for the first nine months of 2007. The key to these trends is to remind you that in the fourth quarter we expect to have a tough comparison.

Recalled in 2007, the company recorded a one time favorable compensation expense related to Mexican statutory profit sharing resulting from various tax initiatives, some of which were related to tax planning strategies and anticipation of the new tax legislation, which was enacted in the fourth quarter of 2007. That being said, we still expect to have solid operating performance for the rest of the year.

Third quarter operating expenses show compensation and benefit expenses decreased $12.5 million in the quarter, compared to last year. Lower incentive compensation accrual mitigated the impact of a new collective bargaining agreement, which too effect July 1 in the US.

Head count at the end of the third quarter was basically flat, with last year at 6457 employees.

As mentioned earlier, fuel expense was up 23.5 million, a 35% increase. Price per gallon was up 45% over last year.

As you know, KCS benefits from an overall lower fuel price due to subsidized fuel costs in Mexico. However, Pimex is systematically increasing its fuel pricing each month to get greater alignment with the world market fuel costs.

Continued fuel efficiency, favorability due to both fuel saving initiatives and the more efficient locomotive fleet provides some relief. KCS consumes 6.5% less fuel during the quarter on a 1% increase in gross ton miles. Gross ton miles per gallon improved 8.1%.

Depreciation stepped up with the increased investment in our infrastructure over the last year. Casualties and insurance increased 7.9% in the quarter. A bit less than half of this difference was directly related to the hurricane cleanup along our lines.

Material and other expenses increased by 7.1 million due to increased material and supplies used for maintenance of freight cars and locomotives. We have a shop in Mexico that is managed by a contractor, that contract is up in May of next year. We have an opportunity to change that contract, and affect that number in a positive way.

Next page. In anticipation of Hurricane Gustav, which made landfall on September 1 in New Orleans, we began to shut down our operations in the area on August 27. This is moving trains out of the area, staging for recovery, relocation of crews, etc cetera.

Two weeks later, Hurricane Ike hit the Texas coast and basically caused KCS two problems. First, the refinery shut down in anticipation of a hurricane. Although they did not sustain appreciable damage, 15 refineries and chemical plants were out of service from September 4 through the end of September. Some in Baton Rouge area won’t be back until the first quarter 2009, due to elongated maintenance schedules, meaning in Texas had difficulties getting employees back to work.

Second, due to damage and flooding on our trackage routes through Texas, our cross border traffic stopped for a week, and then traffic moved at reduced levels for another week.

The expenses directly attributable to the hurricane cleanup as recorded in the quarter were approximately $3.5 million.

Attesting to the strength of our network, good planning efforts, and dedication of our employees, KCR service metrix were strong in September.

Next page. Here, the highlights of our consolidated service metrix, you can see the spike in terminal dwell time around the hurricane, as we held trains to wait for the storm to pass. Our average dwell time, as Mike spoke earlier, is at 12% improvement, and our average velocity was 25.5 miles per hour, also a 12% improvement. Re-crews were down over 50%, versus third quarter 2007.

Locomotive availability improved, from 82.5% to 96% year over year. Other items of which we are very proud, that the US had no reportable injuries during September, and we are currently leading our category in the US in overall safety performance. We are having similar success in Mexico as we continually work on incorporating rail industry best practices into our Mexico operation.

At KCSM, reportable injuries are down 30% and total train accidents down 23%.

Next page. Our key issues, we will continue our expansion plans in Mexico. We are adding and lengthening sightings based on future capacity requirements. [inaudible] and speedway improvements will continue, and our North-South line from Kansas City to Shreveport is being upgraded to handle more grain, coal, and intermodal. A Rosenberg intermodal facility will open in January of 2009, our Victoria Rosenberg line is still unscheduled for the second quarter 2009.

We will stay close to our customers to monitor the economic conditions and be prepared to take immediate actions to reduce costs. Our headcount is currently flat, ut we will freeze or reduce headcount as necessary. We will closely monitor our capital projects, which are non-maintenance related for adjustment or elimination. Store locomotives consolidate trains and all the other appropriate cost savings measures.

Having said that, I’d like to turn the presentation over to an old friend, the new Executive Vice President Sales and Marketing, Pat Ottensmeyer.

Patrick Ottensmeyer

Thank you Dave, and good afternoon everyone. I’m going to start my comments on slide 15, which shows some high level revenue summary.

As you know our quarterly revenues were 491.5 million, which was a record for any quarter. Year over year, our revenues were up 10.7%, and up a little over 1% from the second quarter of 2008 in spite of the hurricane disruption that you’ve heard about already.

Revenues increased in all segments except for automotive. Our pricing environment continues to be good, our RPU for the quarter was up 11.5, including fuel. I’ll get into more details on that in a minute. Except for automotive, our volume growth was positive in July and August, up until the time the hurricane disruption started.

The last bullet point here, fuel surcharge revenue was higher, however, our overall increase was less than the other North American Class I Rails.

I’d like to elaborate a bit on this point to illustrate the magnitude of Mexican fuel, and impact it has on our overall revenue growth.

In the US, our fuel surcharge revenue increased by about 124% year over year, in Mexico that increase was only 26%. If our fuel surcharge revenue had been at about the same level as a percentage of revenue in Mexico, as it was in the US, our total revenues would have been about $25 million higher for the quarter, and our revenue growth would have been closer to 16%, rather than the 10.7% that we recorded for the quarter.

Moving on to slide 16, it shows the factors contributing to our change in revenue for the quarter, and what this shows is that price and fuel were the primary factors driving our growth. Revenue lost due to declining volume was about six million, or 1.3% lower than last year. And then the final category, mix, is really mix and other, and it contributed about $2 million to the quarter.

Slide 17 shows a different breakdown of the change in revenue. As you saw from the headline, car loadings for the quarter fell by about 0.9% from last year. As Dave mentioned, a significant factor was the service interruptions caused by Hurricanes Ike and Gustav. Prior to that, the hurricane disruption we were actually up about 1.5%.

I want to point out that our total car loadings through the end of August were up about 1.5% for the quarter. As you’ll see in a few minutes, chemical and [inaudible] volume fell dramatically in September as a result of those outages.

Also, you saw from the previous slide that revenue lost from declining volumes was 1.3%, while car loadings only fell by 0.9%. The reason for the difference, again, and for the most part is the bulk of the business we lost due to the hurricane outage. In the ag and chemical business, RPU, as I mentioned, increased 11.5% driven by fuel and pricing.

Slide 18 shows the breakdown of our revenue base by business unit, again, as you can see with the exception of automotive, we had solid double digit growth in all of our major business units, even those that were impacted by the two hurricanes. Again, revenue grown was primarily driven by RPU increases, which is fuel and pricing, although we did have volume growth in chemicals and petroleum, intermodal, and coal.

I will now dive a little deeper into each of the business units. So moving on to slide 19, I’ll start with coal.

Our coal business was strong in the third quarter, revenue increased by 13.2% to $57.3 million. Carloads were up 0.7%, partly driven by shipments that were delayed into the third quarter from the flooding that occurred in the Upper Midwest in the second quarter of 2008.

There was no significant hurricane impact on our coal business in the third quarter, only a small petroleum coke move in the Gulf Coast, which is relatively low volume and RPU business. The fourth quarter outlook is probably flat the last year, volume should be slightly above 2007 levels, RPU could fall slightly in fuel prices continue to fall.

Moving on to slide 20, industrial and consumer business unit. This unit includes primarily paper enforced products, cement, metal and scrap, military movements, appliances, and others, in other words, a lot of the cargo in this business unit is sensitive to the economy, especially housing and industrial production.

Overall, revenue for the business unit increased 11.8% to 138.5 million for the quarter. Carloads fell by 5% and RPU improved by 12.3. The major area of strength in the quarter was metals, driven by energy related shipments, specifically steel pipes for the oil field business. Appliances, paper, and lumber all continue to be weak, and we don’t see that changing in the near future.

Looking ahead, the energy related business should remain positive, but possibly at a slower growth rate than we saw in this quarter. We should see a pickup of military shipments in the fourth quarter, which is generally good highly rated business. Steel movements in Mexico will be lower due to one of our plants reducing production due to the economy, and we are also seeing some slowdown in cement shipments in Mexico as well.

On the other hand, we are still seeing good yield improvement in pricing, particularly in the US.

Moving on to chemicals and petroleum on slide 21, the chemical and petroleum business unit show remarkable strength given the fact that it was one of the businesses that was pretty heavily impacted by the hurricanes.

Revenues were up 10.5% to 92.3 million. Carloads increased by 2.7%, in spite of the hurricane disruptions. As you will see on the following slide, our volumes for July and August were running almost 8% higher than last year. The good news is, for the most part, as Dave mentioned, our customers are back in business, and our volumes are returning to pre-hurricane levels and should be stronger in the fourth quarter.

Moving on to page 22, this illustrates the rapid decline in carloads that occurred in September as a result of the hurricane service disruption. As I mentioned a minute ago, our loadings were actually running about 8% above 2007 levels, and you can see how quickly they fell off in September.

Again, we’re seeing good October shipments and the fourth quarter should show a stronger year over year comparison.

Page 23, ag business also had a strong quarter, in spite of hurricane related interruptions, and delayed harvest in the US. Revenues increased by 12.3% to 115.8 million. Our carloads fell about 2% for the quarter.

Again, as you’ll see on the following slide, our loadings for July and August were running about 2% above last year, before the hurricane disruptions.

With the chemical business, the good news is we are seeing traffic levels rebound, particularly in export grain, and should see improvements in the fourth quarter.

Again, Slide 24, as I showed you with the chemicals, you can see that car loadings for July and August were running about 2% higher than 2007 levels and then fell dramatically in September.

We are seeing volume recover, particularly in export grain, and should be stronger in the fourth quarter.

Moving on to intermodal, slide 25 shows our intermodal business unit, which has increased in both RPU and volume, leading to a 15.8% increase in revenues to $43.3 million. Our Lazaro-Cardenas related volumes grew by 46% in the first of last year, which was a higher growth rate than we saw in the first half of this year.

This accelerated growth was due to three new carriers beginning to call at Lazaro in August, and we would expect this accelerated growth to continue in the fourth quarter and on into 2009. As I mentioned on the slide here that Lazaro related volume growth was partially offset by a 15% decline in auto parts shipments primarily in Mexico.

Revenue per unit was strong, again driven by Lazaro growth in collective price increases, particularly in Mexico. The outlook, we should be up year over year for the fourth quarter, but probably lower growth than we saw in the third quarter due to the absence of the US peak season this year. I’m sure a story you’ve heard from almost everyone else in the industry.

Finally, our automotive revenue, our automotive business unit continued to show weakness in line with the overall condition of the North American auto industry. Revenues fell by 13.4% to 25.1 million, as you can see on this slide, US auto sales fell below 1 million units in August for the first time in 15 years, and our business certainly reflected that weakness.

Volumes should improve a bit in the fourth quarter due to an increase in shipments of fuel efficient vehicles from Mexico.

While we continue to believe that we are extremely well positioned for long term growth in automotive business, we are not expecting much strength in this business for the foreseeable future.

Slide 27 talks a little bit about our market outlook. Our pricing trends remain positive, as you can see from what we’ve reported in the third quarter. I know the question has come up on a lot of the other rail calls about outlook for next year. At this point we have about 45 to 50% of our 2009 business locked in. It’s a little bit lower than you heard from some of the other rails, and reason for that is that in Mexico pricing and contracts tend to be shorter in duration and tend to renew in the early part of the year, so we have yet to lock in pricing on a lot of that Mexico business.

The pricing increases we’re seeing on new contract renewals is very consistent with our long term guidance in the 4 to 6% pricing range.

Our chemical and petroleum and export grain businesses have substantially recovered from the hurricane outages, so we should be good loading statistics in the fourth quarter for those businesses.

As I mentioned, also, we’re seeing intermodal growth because of the increased level of container shippers and steamship companies calling at Lazaro Cardenas.

Longer term, we continue to believe that new business opportunities will drive our revenue growth for 2009 and beyond, we’re seeing good momentum, and those new business opportunities, for those of you familiar with the bubble chart that we typically show, again those new business opportunities are moving forward and we continue to believe that new business volumes, new business growth on our network will be very strong over the long term.

For the short term, the global economy is clearly in transition, and we are waiting to see what I refer to as what new normal emerges. As with almost everyone else, our crystal ball is certainly a bit cloudy right now, we are keeping in very close contact with our customers, to see what they’re telling us and what they’re seeing, and as Dave mentioned, we’re very focused on being able to respond to business conditions as necessary, but I have to admit that right now we’re struggling to see what the new normal really means.

And finally, on page 28, I thought I would just reinforce, as you all know I’m new in my position here, and have a different role with the company as of October 15th.

Some of the sales and marketing priorities and objectives. Now many of these you've heard in the past, there is no difference. Clearly we're focused on maximizing cross border opportunities both international intermobile driven by the growth of Lazaro-Cardenas but also tractor rail conversion. We think that's a large market and an excellent opportunity particularly, moving on to the second bullet point, as we complete our intermobile network with the completion of projects like the Rosenberg Terminal. Victoria Rosenberg line, other terminal projects that we've talked about and focus on building density in key corridors.

We're also focused, as Dave mentioned, we're seeing tremendous improvement in our service metrics and our performance metrics on the operating side. That's going to lead to improved cycle times and increase capacity and drive revenue growth per unit both automotive and export grain. We're going to heighten our focus on yield management optimizing capacity, getting more revenue with better asset utilization. We're working with the operations transportation and service design team to make organizational changes to improved the coordination between marketing operations so we can achieve our simultaneous goal of revenue growth and an operating ratio improvement. So with that I will complete my comments and I will turn it over to Mike.

Mike Upchurch - EVP and CFO

Thank you Pat. First of all, I would like to say I'm looking forward to getting to know the analysts and investors who call our KCS beginning next week on a trip I'm making to New York. And we're fortunate to work with a talented finance organization that will certainly help make the transition from Pat to me as seamlessly as possible and I'm eager to help KCS continue to deliver our five year strategic and operational goals.

Let's turn to page 30 and look at record operating income of $111 million dollars which was up 13% versus the prior year. Dave and Pat have already given you a good idea of the drivers behind our revenues, expenses and operation ratio of 77.4 in the quarter. That will reflect a little bit further on the remaining PNL. Reflecting the stronger dollar in relation to the Peso, we did record a currency loss of $7.5 million in the quarter or about five cents per diluted share. As of September 30, the balance sheet reflected net monitory assets of about 1.2 billion pesos.

On a year to day basis, the net currency loss is less than a million. However, continued weakness of the Peso could certainly have a greater unfavorable foreign exchange impact in the fourth quarter. Our equity and earnings continued to improve during the quarter. Our Panama Company PCRC more than doubled netting time over the last year and is certainly the most significant contributor to our equity and earnings.

Despite incurring higher debt levels than a year ago, interest expense has declined mainly due to lower rates from recent refinancing that we completed. And finally, income tax expense increased as a result of higher pretax income and higher effective tax rates for the quarter. Our effective rate increased to 32.7% for the third quarter '08 which is higher than the 27.2% reported in the third quarter of 2007 but is about the same as 2Q of '08. The higher tax rate is primarily as a result both of the shift in composition of pretax income between the US and Mexico and exchange rate fluctuations.

Turning to the next slide. Operating income grew 13%, record $111 million dollars. Again, despite of the impact of two hurricanes hitting our system in September. As Dave reviewed earlier, the storms had a negative impact not only to our revenues, but also increased our operating expenses, specifically casualty expense.

On the next slide, adjusted EDITA grew 9.6% year over year despite the hurricane impact. As you know this is an extremely important measure for us, particularly with respect to our credit statistics. Our strong performance here in EBITDA continues to provide plenty of coverage to comply with our various debt covenence and as a reminder our primary financial covenence our EBITDA interest coverage and total debt to EBITDA

Net income on the next slide prior to preferred dividends was up 10.5% from third quarter 2007 to $51.69 million for the quarter. We would have also improved sequential aid if not for the negative foreign exchange impact and the hurricane impact in the third quarter. On slide 34 you can see our improving diluted earnings per share trend. EPS was up 8.3% over last year with a reported 52 cents per share in the third quarter. In year to day diluted EPS is up more than 45%. The drop in EPS in the second quarter of this year reflects a one time interest expense benefit we booked in the second quarter of about 6 cents that can explain last quarter an was the result of some favorable tax settlements that we entered into. Also in the current quarter, its again worth noting the impact of the foreign exchange and the hurricane impact, and as Mike opened our comments in our adjusted basis you may think about EPS above the 60 cent range. Our diluted share count remains in the $99 million share range.

Turning to page 35 free cash flow through the first quarter 2008 is negative as we continue to invest in growth opportunities such as the Bill Laden and Victoria Rosenberg line and continue expansion of our intermobile network. Given the situation in the credit markets in the current economy, we're going to have to borrow our ability to delay or pull back on investments in our franchise.

First of all, as you are all well aware, KCS has just an exceptional growth opportunity. More than any other railroad in North America, we have a host of major business opportunities many of which involve cross-border traffic. However, these opportunities didn't necessitate infrastructure investment. The most important project right now for us is the Victoria to Rosenberg line. But we also have a number of intermobile terminals that must be built not only on Rosenberg but as well a few strategic terminals in Mexico. In delaying these projects this would really delay our growth and at this point in time we feel strongly about the return these investments will produce.

Having said that, we will obviously be monitoring economic conditions in the credit market and retain whatever flexibility that we need to have in managing our overall capital program. As you know our cap back spending was planned to revert to a more historical normal level in 2010 and as we had previously guided, we expect '09 capital spending in cash flow to look similar to 2008 levels as we complete various strategic projects across our network.

On slide 36 represents our quarterly requidity summary measured by unrestricted cash balances and available credit under our current credit facilities. As you can see, at the end of the quarter, we retained ample liquidity to fund our capital programs. And on slide 37 we've reflected our debt maturities that show the $200 million note that's due in the first half of 2009. Once we refinance this debt, we won't have any substantial maturities in 2011 - 2012 as the falling rate debt that were sure of 2009 automatically renews to later periods.

On slide 38 as discussed in supplementing the prior two slides, we do have a $200 million note that matures in June of 2009. Without a one-notch upgrade from SN Tierra our bank facility which we are still trying to pursue, we'll have to refinance this debt by mid-March. The credit markets are difficult and challenging right now, our banking group is confident that the high-yield bond market is available to us although the rate would certainly be higher than what we are accustomed to. As examples, two class one railroads recently accessed the credit market in the last few weeks and the deals were very well received despite the market turmoil.

Although these companies have different credit profiles thank KCS, I do think it points to the resiliency of the rail industry and the acceptance of royal paper in the market. Accordingly, we believe we'd be viewed as a safe name in the high yield market and are confident that we can pursue our goals.

On another note, we did close a locomotive financing in Mexico in September at a rate of 6.15. That was a great deal for us and is also the last of the newly purchased locomotives that we had to finance. And as discussed earlier, available equity at the end of September was just over $200 million. Higher capital expenditures we do expect the liquidity to decline some in the fourth quarter and we may pursue a small bank financing as a bridge to fund the Victoria Rosenberg project. We'll then work to refinance the entire project through the Red program later in 2009. I'd now like to turn the presentation back to Mike Haverty.

Michael R. Haverty - Chairman and CEO

Ok. Thank you Mike and if you look at slide number 40 is the Panama Canal the way Mike talked about that a little bit in his presentation this is just a graph here that shows how were doing, our projection of the number of units to be handled in Panama was 362 thousand this year through 9 months [inaudible]. The run rates around 33 to 35 thousand so we're going to be pretty close to that. I think the important thing here is to look this operating ratio at 43.2%. That is probably going to go down to the 30's here as we put more cars on our trains and we become more efficient down there. I showed this slide, not that this is a big part of our company necessarily, but it is an important part of our equity earnings and it also is a company that is run by someone that's now president and chief operating officer of our company. A lot of people questioned how would the company do and it's done very, very well and we expect them to do a lot of the same things here that he was able to do in Panama.

Slide 41, the summary and the outlook despite a challenging economy even in this quarter here we expect that we will still have double digit revenues throughout the fourth quarter. As I said, through three quarters we're at 11.4% so we expect to be double digits. That for the year and that is what we had said we would do under our five year plan. In fact this is the second year that we have executed on our five year plan and not particularly strong economy. But again because of some of our growth opportunities we've been able to do well and to stay on that plan, or near that plan in each of our various categories.

We are a flexible company both Dave and Mike talked about what we would do on the capital side and at this point in time we're not making capital cuts. We are long term players and we don't want to panic at this point in time, we've got a lot of things on the drawing board that we think are important for the growth of this company. However, if we see things begin to deteriorate rapidly, we will react. And Dave and Mike and Pat and the senior management team are meeting now to look at things that we may have to do going forward on both the capital and the operating side if we need to do that.

There's still a lot of uncertainty with all of the economic turbulence at this point in time and while we feel good about the fourth quarter and we just finished it with our marketing people yesterday and we've got enough data on how they project things for the remainder of the quarter, we think we're going to do fine for this year. But as Pat said, it's pretty uncertain now what's going on with the economy that we are still in somewhat of a panic situation and we'll see what happens going forward so we're not in a position right now to talk about 2009. So with that, we will conclude and open it up to questions.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation sound will indicate your line is in question queue.

If you would like to remove your question from the queue, or if you are on speaker phone, it may be necessary to pick up the handset before pressing the star key. One moment please while we poll for questions. As a reminder it is star one to ask a question.

The first question is coming from the line of Jason Paddle of Salmon Rose. Please proceed with your question.

Jason Paddle - Salmon Rose

A couple of quick questions on the intermobile side. You've picked up a couple callings that are from Lazarow. Are these still intra-Mexico moves, or are we seeing cross-border business?

Patrick J. Ottensmeyer - EVP and CFO

Hi Jason this is Pat. These are still intra Mexico moves.

Jason Paddle - Salmon Rose

Now do you think that the cross border business might be pushed back or pushed out a little bit further given the economic softness and as people maybe people don't exactly need another option port because there's ample capacity on the current, on the Long Beach corridor?

Patrick J. Ottensmeyer - EVP and CFO

It's a little bit too early to tell Jason. I mean we go back to our projections, even some time ago we did not expect the cross border growth to occur initially. I think what we said fairly consistently is that the initial growth that led to our Lazslo-Cardinence was expected to be largely if not almost exclusively intra Mexico. So we didn't really plan on it this year or even to a large extent next year certainly as we said a couple of times we're keeping our fingers on the pulse on the economy trying to understand what the new normal is all about. But as we build the facilities, as we build our network, we still think that in the out years that those cross border opportunities will be there.

The other thing that I mentioned in my market update slide where we do see more immediate opportunity is in the truck market, the cross border market unrelated to the international business. When we get the Rosenberg facility and make some of the completes on the capital investments that are currently underway, we are obviously going to go after that business very aggressively.

Jason Paddle - Salmon Rose

Thanks for you answer Pat. Can you talk a little bit about how we started off the quarter here at intermobile? It seems a little bit of weakness. Is there anything surrounding that?

Patrick J. Ottensmeyer - EVP and CFO

The weakness is primarily the automotive and we do a lot of parts intermobile in Mexico and so you've got a little bit of a blend coming there. If you look at our overall intermobile business in Mexico, you've got strong growth related to international in Lasarow, you've got weakness in the auto sector and then domestically we've also had a little bit of weakness in the early part of the fourth quarter off the meridian speedways and traffic that was rerouted there because of the mid-west flooding which subsequently then moved off.

Jason Paddle - Salmon Rose

Also if I can jump the question real quick and we can hand it off to somebody else. I think you said 45 to 50% of on-line business is booked now. When we enter '09 what is that percentage going to be up to? Is it going to be closer to 60-75, or are we going to still be close to about 50.

Patrick J. Ottensmeyer - EVP and CFO

I think it's going to be close to 50. The bulk of the Mexico business reprices in the first quarter typically. And we feel pretty good about some pricing opportunities there so the fact that that isn't locked in doesn't really change our overall view for pricing levels for 2009.

Jason Paddle - Salmon Rose

Ok, fair enough. Thanks for the time as always guys.

Operator

Thank you. Our next question will be coming from the line of Chris Weatherview of Maryland. Please go ahead with your question.

Chris Weatherview

Great, good afternoon guys. I guess I could just stay on pricing for a minute. The share pricing you talked about in the slide about five two in quarter was a little bit light relative to where it was last quarter. I was just wondering if you could walk us through kind of what the takes where on that line?

Patrick J. Ottensmeyer - EVP and CFO

I think year over year Chris was in Cole where we had in the prior year we had some fuel, some contractors did not have full fuel. I'm struggling to think of more specific answers as to where that came from quarter to quarter.

Chris Weatherview

OK. So that was more of a comp issue than anything else?

Patrick J. Ottensmeyer - EVP and CFO

We did have some shorter haul revenue too on the chemical side.

Michael R. Haverty - Chairman and CEO

The chemical business included the Exxon business that we have talked about in the past which lower RPU, very profitable business but that affected the pricing level.

Chris Weatherview

OK. Well you did say the mix was positive in the quarter right? The mix was about 40… of tailwind there?

Patrick J. Ottensmeyer - EVP and CFO

The reality is most of that increase is actually other revenue, not necessarily mix.

And I’m thinking the other factor here, Chris, is that the mention of the Hurricane losses. We lost some of the higher rated business because of the Hurricane service destruction. Also, Intermobile Traffic was repriced later in the 2Q this year in Mexico - or 3Q, I’m sorry.

Chris Weatherview

Ok. So you might see some of that benefit as we move into the next Quarter, or the 4th Quarter.

I just want to make sure I understand. You touched on the coal, You said the coal yield could be down in the 4th quarter, is that correct?

Patrick J. Ottensmeyer - EVP and CFO

Because of fuel.

Chris Weatherview

Ok. Ok. So all in yield could decline year over year?

Patrick J. Ottensmeyer - EVP and CFO

For the 4th Quarter.

It all depends on fuel prices obviously. Say they continue to fall; we’re going to pay lower fuel surcharge revenue.

Chris Weatherview

Ok. I guess just on Lazrow, I know you mentioned it and it looked very good in the quarter. How were Lazrow specific volumes looking in October? I know you mentioned that continued, I am curious to see if that will continue at such a robust rate. Are you seeing any impact of the flow of the economy at Lazarow specifically?

Patrick J. Ottensmeyer - EVP and CFO

No we are not. In fact as I mentioned in my comments, we are seeing accelerated growth into the 4th Quarter and beyond because of the additional activity.

Chris Weatherview

Ok. Do you think that’s more share gains, or is it probably not so much organic growth, right? Can you tell where that’s coming from?

Patrick J. Ottensmeyer - EVP and CFO

Well, some of it is the shipping companies, it’s the new calls that occur to Lazrow in August, they were share gains. They were coming from other ports in Mexico. It’s also just a function of import growth in Mexico.

Chris Weatherview

Just two more quick ones. I guess on the expense side, I think you mentioned on the casualties line that about 3.5 million was the increase from the Hurricane. I guess that’s still about a million or so step up sequentially, it seems like we are running at $19 or 20 million dollar run rate. Is that a fair assumption, thoughgoing forward, it seems that is a good run rate to use.

Patrick J. Ottensmeyer - EVP and CFO

We also had some derailments, particularly in Mexico that were the higher cost than the our historical average that costs the increase in casualties.

Chris Weatherview

Ok. Just on the debt side, you guys weighted out pretty clearly that they billed as we think out and assuming you can get past this maturity that’s coming up, it may be a little bit more expensive but probably can do it, when you think about 2011, 2012, it seems that then have a pretty sizeable maturities coming out of those two years. Once you get past this big CapEx, are you guys aggressively attacking that or what are your thoughts about that?

Patrick J. Ottensmeyer - EVP and CFO

Clearly, our long range plan would suggest significant increases in cash flow that was lost to begin paying some of that debt down and we’re still very committed to that plan as of right now.

Chris Weatherview

Ok. Great. Well, thanks very much for the time. I appreciate it.

Operator

Thank you. Our next question is coming from David Feinberg from Goldman Sachs. Please ask your question.

David Feinberg

Good morning. Some questions on Lazrow to start. Any update from your end on the concession for the second quarter operator there? I think we were originally expecting someone to be announced by the end of September.

Patrick J. Ottensmeyer - EVP and CFO

We still expect the bid packages to go out before the end of the year. And we would expect the whole process in terms of the bids coming back and the selection of the concession winner in the first half of next year.

David Feinberg

And when would be as soon as you might see the benefit of increased capabilities before assuming a mid '09 winner?

Patrick J. Ottensmeyer - EVP and CFO

Probably

PART ELEVEN

Question-and-Answer Session

Patrick J. Ottensmeyer - EVP and CFO

The end of 2010 and certainly the beginning of 2011. The other thing that prompted my memory here is there is another concession that is in the process of being bid at Lazwow which relates to an automobile import transload facility that probably will be going out sooner and can may be awarded more quickly than the containers from concession. We are expecting that any day there could potentially being producing revenues sooner than the containers from home.

So things are still happening and that is the good news. What is happening is that the economy from what we’re seeing, there really isn’t any change of course in terms of the development or growth that is occurring at Lazrow-Cardinence.

David Feinberg

The second question relates to Mexico. Any thoughts or comments on the concession or update on the potential for a new port on the west coast to Mexico?

Patrick J. Ottensmeyer - EVP and CFO

The port has been delayed until the first quarter of 2009. That’s the latest information we have.

David Feinberg

And is that something that you would at all be interested in?

Michael R. Haverty - Chairman and CEO

We are not interested in that it doesn't fit with our system. we have a great opportunity… that we are going to develop and we are going to continue to develop the route between Lazrow and the US and we would not go off there.

David Feinberg

Just one question on foreign exchange for financials. I understand that the translation impact that’s going through your income statement as you are adjusting the balances on the balance sheet. But my understanding is that you actually in terms of peso denominated expenses versus revenue you have a higher percentage of your expenses denominated in Pesos compared to revenue. The thought process is that a strength in US dollar would actually be a benefit property margin or operating ratio. Am I thinking about it the right way?

Patrick J. Ottensmeyer - EVP and CFO

I think it’s actually closer to 50-50 which creates the a natural hedge for us.from a true cash perspective.

David Feinberg

OK. So net-net effects has no impact in terms of cash flow but it does have an impact on the…

Patrick J. Ottensmeyer - EVP and CFO

Yes. It’s minimal. It has a minimal cash impact but a balance sheet Impact.

David Feinberg

Last question. Any early indication in terms of the interest rate you might get on the notes that come due in first half of '09?

Michael R. Haverty - Chairman and CEO

No. We are not going to try to predict the credit market. We would like to think that between now and the time that we actually have to refinance that things will return to a little bit more normal levels.

David Feinberg

It’s worth a shot. Hang in there.

Operator

Thank you. Our next question is coming from the line of Edward Wolfe from Wolfe Research. Please state your question.

Edward Wolfe

Thanks. Just a follow-up on the currency question. The 5.2-

Operator

Hello?

Edward Wolfe

Can you hear me now?

Patrick J. Ottensmeyer - EVP and CFO

Yes. We can hear you.

Edward Wolfe

Good morning or good afternoon. On the currency question that you just asked. Just a little bit of a follow-up; the 5.2 % of pure pricing, was there any fx impact on that or benefit in that?

Patrick J. Ottensmeyer - EVP and CFO

I’m sorry. Would you repeat that question?

Edward Wolfe

Sure. The 5.2 % of pricing that you discussed in the quarter year-over-year, realizing the fx impact was more balance sheet than income statement, is there any impact that's depressing or helping that 5.2%? I’m guessing it’s depressing it a little bit.

Patrick J. Ottensmeyer - EVP and CFO

I don’t think it’s having a significant impact.

Edward Wolfe

So they only impact on that that you saw then is the ramp up of the Exxon contract?

Patrick J. Ottensmeyer - EVP and CFO

On the reduced pricing?

Edward Wolfe

Yes, on the 5.0

Patrick J. Ottensmeyer - EVP and CFO

No, it was a combination of factors. It was pricing, it was the slow-down in the higher rated commodities. Like the ag and chemicals that occurred in the 4th Quarter, or the end of the 3rd Quarter.

Edward Wolfe

Again, the 5.2 % was outside of mix No?

Patrick J. Ottensmeyer - EVP and CFO

It’s not a pure mix that the fact that those shipments that were delayed had an impact on our pricing improvement in the Quarter.

Edward Wolfe

Ok. The senior notes that come next June, as I understand it, there are $415 million or so of floating rate term loan revolver that’s due in March.

Patrick J. Ottensmeyer - EVP and CFO

That is correct.

Edward Wolfe

How do we think about that timing-wise? Do you try to pay down the $200 million before March?

Patrick J. Ottensmeyer - EVP and CFO

Our current plan is to try and to get that down before mid-March. Again, it’s subject to whether or not we can get an upgrade with S&P. Obviously, in the environment we are operating today that may not happen but we are certainly optimistic but we will try to refinance that $200 million and then the floating rate would automatically reduce by 2011 and 2013.

Edward Wolfe

If you can’t do that, then how do you renew the floating rates?

Patrick J. Ottensmeyer - EVP and CFO

Well, we are pretty confident that we are going to be able to renew that.

Edward Wolfe

The bridge that you talked about that Rosenberg inquired to the size of that, can you talk about the timing of that?

Patrick J. Ottensmeyer - EVP and CFO

I probably don’t want to talk about the size of it because we really want to reevaluate the market conditions but it’s reasonable to think that we’ll try and do something before the end of the year.

Edward Wolfe

Before the end of 2008?

Patrick J. Ottensmeyer - EVP and CFO

Correct.

Edward Wolfe

Ok. And when does the…come through?

Patrick J. Ottensmeyer - EVP and CFO

Really, it’s a completion of the project. Probably closer to the end of 2009. We would actually put the application in at the conclusion of the project but financing wouldn't be made available because of the government process we have to go through until the end of 2009.

Edward Wolfe

Sure. Ok. Earlier you spoke about half of the Mexican business of pricing of 2009. The 4-6% pricing that you talked about that you expect to be in that realm for the 4th Quarter of 2008, and that’s kind of a long-term goal. Did you expect the Mexican side of that to be within that range? The low end? The high end? Relative to the US business, how do you expect Mexican pricing?

Patrick J. Ottensmeyer - EVP and CFO

I think it’s going to be low within the range.

Edward Wolfe

So in the average?

Patrick J. Ottensmeyer - EVP and CFO

I think in the middle of the range, based on what we believe right now.

Edward Wolfe

Why not cut some heads now? The sense I got Mike from your words now were that you were going to see where we are in 2009 but yet volumes were down in third quarter and since the Hurricane you’re down and that it feels like directionally the world is not getting any better. Why not be more proactive with your whole process?

Patrick J. Ottensmeyer - EVP and CFO

We're still a growth company. We had Ike and Gustav that set us back about a month but the volumes still look good in October and November. So coming up, we still have our metrics in place. We’re continuing to lower the cost and as you saw, our head-count is already flat. We’re going to be very cautious on our capital going into the next 30-60 days as Mike said, we’ll have a Plan A and a Plan B and a Plan C if we need it. We know that there are some full costs but we don’t want to send a message out to our customers, to you and to our employees that we’re not still in a growth cycle.

Edward Wolfe

If you wanted to reduce say 2% of that hedge, how many quarters does that make?

Patrick J. Ottensmeyer - EVP and CFO

I don't want to speculate on that, but it could be down very quick. As I said, the team has been meeting and they are looking at things like, do we have to lay locomotives up, put them into storage, take them out, which ones we are going to take out. So they are really doing this planning. Don't get the impression that everyone is sitting around and waiting for things to go bad and we’re going to react but they are already meeting and planning and we’re ready to do something as quickly as needed to be done.

Edward Wolfe

Last one. What’s your confidence level at this point in making up chemical and Ag volumes that were lost in the Hurricane and besides for make-up, what percentage are you back to where you were in terms of are there any customers that aren't even up and running at this point

Michael R. Haverty - Chairman and CEO

I think there are, based on the conversations from yesterday - there are two, one in Beaumont, one in Baton Rouge, and its not that they are not coming back up, they're coming back more slowly and January was the branch because of the economy but Pat will talk about that.

Patrick J. Ottensmeyer - EVP and CFO

We’ve seen good recovery in terms of businesses getting back and in terms of export grains, the volumes we’re recovering - if we look throughout October, we’re very encouraged that a lot of that business will be made up and obviously we still have November and December and the economy is still a question mark so it’s harder to really be specific about exactly how much of that we’re going to get back but based on what we’ve seen so far, particularly in those two areas, plastics and chemicals and export grains, it’s very encouraging what we’re seeing now in October.

Edward Wolfe

So you would think that total chemical and ag volumes both will be better in 4th Quarter than in 3rd Quarter?

Yes.

Edward Wolfe

Ok. Thanks so much for your time today.

Operator

Thank you. Our next question is coming from the line of Randy Cousins from….Capital Markets. Please state your question.

Randy Cousins

Good afternoon. I was wondering if you could comment on some of the networks -obviously you’ve got the new locomotives. Have you gotten the entire fuel benefit into the numbers yet? I guess the other thing I would ask about is the new power - you’ve talked in the past about increasing… and reducing trains’ cars. Can you tell us what’s in front of us in terms of …. That new locomotive……

Patrick J. Ottensmeyer - EVP and CFO

Thanks Randy. We have not retired all of the older locomotives yet. We are now going through that process. As we retire disposed of, sell scrap, whatever, we do see some more opportunities on the fuel savings, even on the maintenance cost side. We are already consolidating more trains than we had previously - due to having better horsepower. The other thing we’re doing is in Mexico, we’re continuing to lengthen the sidings, we've always had an issue south of Moralio to Lazlow-Cardinence. We put in three new sidings this year - I’m sorry, two sidings this year - there are three more on the budget for next year that allows us to run longer trains that out of Lazrow. So we are continuing to stick with our five year capacity plan. Scott with his team is continuing to focus on the metrics very process-oriented, so we still see improvement there. We’ve got a couple of projects down in New Orleans where we think we can pull quite a bit of cost out of the system by moving some cargo around. So we got a lot of these initiatives still on the table and we see the operating ratio continuing to improve.

Randy Cousins

If we’re thinking about cost per GTM could you disclose your GTM numbers and x out fuel because that's something you can’t control. Should we see cost per GTM come down over the next 12 months or as move forward, or is it a case of stabilization, or how should we think about unit of cost?

Patrick J. Ottensmeyer - EVP and CFO

Well I think you’re going to see the unit cost continue to come down. I don’t think, as I said earlier, that all of the initiatives that Scott has teed up today some, of them are require a little bit of capital here and there for yards. We want to change some double tracks down in Mexico that will improve our velocity. We’re getting some of our slow orders up as have in the past that will again always increase velocity. We hit an all time record on recruise this last month, in fact this month we’re down to 25 which is something we have never done. In the same time frame last year we were over three hundred, so there’s more to come, we certainly had the group focused as Pat stated earlier. With Pat coming into the group we have a more brisk yield management. We have an opportunity on our trains with cargo and we’re trying to push more revenue into our existing system.

Randy Cousins

But you are also consolidating the trains right now.

Patrick J. Ottensmeyer - EVP and CFO

Right…..

The gross ton miles per gallon. I think Dave mentioned earlier that it was an 8.1% improvement, but it’s the best that I’ve ever seen since I’ve been here, so we are getting better locomotive utilization and I think in fact that at one time here, not that long ago, within the last year and a half or so, we were in the low eighties and now we’re in the mid nineties on locomotive utilization.

Patrick J. Ottensmeyer - EVP and CFO

We’re 96% on this quarter, new territory for us.

Randy Cousins

Congratulations. Pat, I wondered if you can speak to the sensitivity of your Mexican customer base at a US GDP industrial production so, just to keep it simple, let’s assume we have a 3% drop in US industrial production, how do you see that impacting your Mexican business? Is Mexico decoupled from the US or is it hyper-sensitive to what happens to the US economy?

Patrick J. Ottensmeyer - EVP and CFO

I don’t think its either one of those extremes. What we have seen up until very recently is that the Mexican economy and things in Mexico were behaving differently; I wouldn’t go so far as to say that they are decoupled, but it was behaving differently than what we were seeing in the US. For example, when the economy was growing faster than in the US, import traffic into the ports, albeit the coal import traffic coming into Mexico is much lower than it is coming into the west coast of the US, but unlike what we were seeing at LA/Longbeach, where import traffic was down 9 or 10%, Mexican import traffic was actually up.

Clearly with our present CapEx that’s going to maybe cause us to look and behave differently. We’re already seeing it, we look and behave differently than some of the US railroads. So, again, its still falls into the category of waiting to see what the new “normal” looks like, but we, up until very recently have seen strengths in certain segments of the business in Mexico that was different than what the railroads were seeing in the US.

Now, I mentioned in my comments, and you didn’t see this in the third quarter results, but we are starting to see one of our large steel customers in Mexico has curtailed production, and so our volumes in the early part of October were down, and we are seeing some slowness in cement, which is clearly related to construction and some of that was cement that was being exported into the US.

Randy Cousins

So, it works, it would be safe to state that your Mexican customer base is not hypersensitive to the US. In other words, if the US goes down, the Mexican customers are not going to go down hard, can we say that?

Patrick J. Ottensmeyer - EVP and CFO

I think for us that’s true, but then the other thing you need to understand and be reminded of is just that all of the new business that we’ve talked about, the bubble map, all of the new business, the new industrial growth that is scheduled to take place in our line and so far we have not seen any significant delays or plans to cancel or do anything different. You asked the question about the connection and the correlation of the two economies in general, and I guess I would also want to remind you that in our case, given the specifics of where our network goes, some of the industrial markets that we serve and some of the growth plans that our customers have for those areas, we still see good growth opportunities.

Randy Cousins

Final question. You know, obviously you need to access capital emergence, who knows what they’re going to look like six months from now, or actually, next week. I wonder, when you talk about your CapEx, I wonder if you could carve it up for us into layers and say, “this is the stuff that we absolutely have to do, this is the stuff we sure would like to do, and this is the stuff that if we have to push it another year, so be it, we’ll push it another year.” How should we think about the layers within your CapEx budget?

David L. Starling - President and COO

Well, we start this today, Victoria Rosenburg is going to be finished, and so we’ve got to get that line ready, we're looking for that in the second quarter. However, if you look Mexico, Capital Budget, somewhere around $335 million of the US will be $200 billion plus, we already identified these large piece of both of those that we could carve out that are part of our 5 year plan for expansion. Again, we don’t want to do that but that’s what we have to do to keep companies fluid and keep our profitability up, so we're going to do that. We’re not going to have maintenance, that's a false economy, but we certainly have a lot of projects to add to our expansion.

Randy Cousins

What is sustenance CapEx for KSU?

David L. Starling - President and COO

What is what?

Randy Cousins

Sustenance, CapEx, baseline maintenance that you have to spend every year?

David L. Starling - President and COO

It will be about 120 this year.

Randy Cousins

ok. Thank you.

Operator

Thank you. Our final question is coming from the line of Brad Kern Please proceed with your question.

David L. Starling - President and COO

I want to clarify a statement there, the 120 that I quoted was just the US.

Patrick J. Ottensmeyer - EVP and CFO

I think just a comment the last couple of years we’ve obviously been investing in our CapEx its been maybe closer to 30% levels. As I indicated earlier in 2010 we expect that it will come down to more normalized industry levels in the high teens. That may give you a little bit of guidance going forward.

I think the question was what of that was for maintenance. Usually its about half, in the case of us now acquiring more locomotives and so on that same range.

Operator

Mr. Kern you’re on the line for questions.

Brad Kern

Can you hear me now? Hello?

Brad Kern

My question is, are all the locomotives secured or are they still [inaudible]

Yes, we’re complete with that program.

Brad Kern

Ok. Thank you.

Operator

Thank you. There are no further questions at this time. Mr. Haverty, we’ll go back over to you for closing comments.

Mike Haverty

Ok. I just want to thank everyone for phoning in and participating in this and we still think we’re on track. We’re going to watch what happens with the economy, we'll be ready to react. We think things would have been much better in the 3rd quarter without the hurricanes, but we have no control over that, but that business will come back and we look forward to a strong 4th quarter and we will see what happens in 2009. Thank you very much for joining us.

Operator

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

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