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Kansas City Southern (NYSE:KSU)

Q4 2008 Earnings Call

February 03, 2009 11:00 AM ET

Executives

Michael R. Haverty - Chairman and Chief Executive Officer

David L. Starling - President & Chief Operating Officer

Patrick J. Ottensmeyer - Executive Vice President Sales & Marketing

Michael W. Upchurch - Executive Vice President and Chief Financial Officer

Analysts

Christian Wetherbee - Merrill Lynch

Edward Wolfe - Wolfe Research

Randy Cousins - BMO Capital Markets

David Feinberg - Goldman Sachs

Operator

Greetings, and welcome to the Kansas City Southern's Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (operator instructions). As 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 this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.

And it is now my pleasure to introduce your host, Mr. Michael Haverty, Chairman and CEO for Kansas City Southern. Mr. Haverty, you may now begin.

Michael R. Haverty

Thank you very much, and I want to welcome everyone to the fourth quarter 2008 year-end earnings presentation. Here from the Kansas City, joining me as presenters today are Dave Starling, President and Chief Operating Officer of the company; Pat Ottensmeyer, EVP Sales and Marketing; and Mike Upchurch EVP and CFO.

Also joining us on the telephone today from Mexico City is our President and Chief Executive... our Chief Executive Representative from Mexico, Jose Zozaya; and in the office here in Kansas City, we also have Scott Arvidson, who is the EVP and CIO and the EVP and COO of US operations, as well as Michael Borrows, our Chief Accounting Officer, Will Galligan and Ginger Adamiak, Investor Relations.

If you'll turn to slide number four, which if you are following on the website is entitled Financial Results, has 4Q '08-'07, fiscal year '08-'07. Bottom line is that we had what I consider a good year, but certainly a not-so-good final four months of the year including the fourth quarter.

For the year EPS was up 18.5%, but down 28.6% for the fourth quarter, and much of the fourth quarter was due to a foreign exchange... rate exchange from the Mexican peso. I think it's appropriate that I comment about the fiscal year 6.3% increase on revenues, because at the last analyst meeting there's a comment that I believe that we were going to finish with double-digit growth on our revenues. And at that time we were at 11.4% ahead for three quarters. We had just experienced the hurricanes of September.

We had a lot of belief that in October some of those chemical plants paper, lumber plants that we saw that had shut down in Louisiana and Texas in September, were going to come back in the fourth quarter. And since October is historically the best quarter of the year for Kansas City Southern and for the all the railroad industry, we really believed and saw that we were making comeback to the this nice blip and relatively the fans were going to be well toward the quarter and certainly not at the same level but remained at the double digit, at around 10%.

But obliviously that didn't happen and a lot of these plans that have anticipated that they were going to get back into full production in fact did not do that. They decided to cut back on shifts, they have decided to cut back on production. Some decided that they would overhaul their plants through the end of the quarter because of what they were seeing as a true economic downturn and really no demand for inventories.

Also in Mexico, what we saw is obviously the number of automobiles that were manufactured began to fall off and eventually all of the plants are shut down and automobile production in Mexico is obviously very important to us. We also saw steel drop off, we saw cement drop off. Two things that are very important in production and as the economy really took a dive in November, those commodities certainly took a hit in number of products as well we saw in the United States take off. So in fact was saw things kind of go off the end of the cliff at the end of October and we certainly did not make the double-digit revenue increase that I projected at the end of the third quarter.

Our annual operating ratio for 08 was 89...or, 78.9 compared to year ago 79.2. It would not run into the last four months of hurricane and then of the significant downturn we believe, probably we would have been on the target to hit 78 for the year.

If you'll turn to the next page that you're following webcast, I think it just kind of graphically shows the carload trend of what I just explained that place in September, of the down turn as a result of hurricanes. The encouragement that we got coming back in October and then we saw things began to fall off and go down in November and then fall of into the cliff in December. So this shows you kind of what happened in the year. The good news is if you look at the red line on here and you look at what's happening after the first of the year, you see the numbers going back up. So we find that quite encouraging.

As we look at the fourth quarter highlights, I think one of the things that we certainly did was control the expenses in the fourth quarter which decreased 5.6% for 2007. Certainly a lot of that was on the fuel side but compensation and health benefits decreased 14.3% in the fourth quarter, which meant that we were taking actions to reduce headcount and cut our expenses.

One other things that happened is when the volumes began the fall in September, we didn't sit back and wait and hoped things were going to come back. Our operating people actually took the type of actions that needed to be taken so that we in fact really did begin to cut our expenses back in December.

Despite of the down turn in the economy, down turn our business we're absolutely committed to safety and we had the best safety record in the history of the company this year. If you look at the category that we were in based on number of man hours, we're going to end up winning The Harriman Award with the best safety record, if you put us into all of the entire class ones. They have many, many more man hours than we have. We're still going to end up the second. So we're absolutely committed to safety.

Our refinancing got down in December. Certainly we were not too excited about the rates that we ended up paying. The fact is we've got it done and there were a lot of people that had doubt about whether or not they were in the high yield market. But we could actually go out there and get the financing done and we got it done, and even though it was painful the good news is we don't pay any more refinancing and have no debt maturities for two more years, until 2011.

From a pricing discipline standpoint, we sustain that at this point. We didn't panic. We didn't go in and start cutting shares, shareholder cutting prices to fund and get additional share. And so we've maintained that discipline and we intend to maintain that discipline and we are not out there cutting prices.

With that setting the stage, I'll turn it over to Dave Starling, our President and Chief Operating Officer.

David L. Starling

Thank you, Mike and good morning. I'd like to start off with the operating ratio. As Mike stated, we were really doing well until September and as the volume started to drop, our operating team very quickly has started to scale and bring our costs down. And we're not totally disappointed in our 78.5 operating ratio. We think, given the economic challenges we've had in fourth quarter, that that's a very acceptable operating ratio.

And the main driver was the economy and it's impact on our volumes and revenues, and all in all under the circumstances we felt like we did a good job coming under 79%, which allowed us to achieve some year-over-year improvement.

We go to page nine; obviously, the fourth quarter broke the trend and we just averaged over the last three years. There's a reflection of recession, as our fourth quarter operating expenses did improve and we hit new highs in operating performance, as you will see in the coming graphs.

Going to slide ten; if you follow the weekly AR data, you know that KCS now ranks among the elite railroads in terms of average train speed and terminal dwell times. These charts just cover the last nine months and that those of you who have followed us for years know, if you go further back our recent performance is even more notable. These efficiency improvements have allowed us to reduce total rolling stock while growing volume. Our rolling stock is down 11% from 2006 to 2008 and 5% from 2007 to 2008.

We'll go to slide 11; our focus on execution. Before looking at the next charts, I'd like to show you the truly impressive operating improvements and like to explain what we are trying to get at here.

First, as Mike stated on safety, we believe that safety is the foundation of a well-disciplined railroad. In fact in 2008, we had less than one injury per 200,000 man hours worked. And as Mike stated previously, this will be the third year in a row that KCS will be awarded The Gold Harriman Award for best-in-class of its group.

We're not suggesting you can achieve prosperity by operating the safest or most efficient railroad. Running efficient system certainly helps, but it can't make up for volumes falling at a rate we're currently seeing in our industry. What, I'd like to talk briefly about is our new approach of managing the business, how it's helping us now and how it will help even more with the economy, as it improves and volume starts to grow again.

We're looking at the business in a different way, refining our processes and using a new management approach. The new method concentrates on optimizing network, throughput and cost control. The key aspects of this methods are disciplined delivery of the service committed to the customer, management as key performance indicators, and accountability by field management for the drivers that affect the results and variable costs.

By using our common sale (ph) metrics and compliance monitoring, we will continue to realize substantial improvements overall execution. The new approach also provides a new level of attention to the cost of quality. Even the best operating plan can be affected by a number of factors, from human to mechanical to infrastructure. When a process encounters any level of failure, the team determines the root cause and an action plan to overcome the core issue follows the plan and measure the results.

The following charts are pretty self-explanatory. They show that over the last 12 to 18 months using this method, KCS has made enormous progress in its operations. Just a couple of years ago, we lagged behind the industry. Today, we are at or near the top of many of the key industry indicators.

Slide number 12; on-time origination, compliance to plan are primary drivers of being able to efficiently move our product from origin to destination. The transportation service plan determines the most cost effective method of moving freight on scheduled trains and optimize our network and meet or exceed our customers' expectations. These measurements support our assembly-line process. And as you can see, the improvements have been remarkable in the last 12 months.

Slide 13. Continuing metrics; our locomotive availability and reliability, continue to improve.

Slide 14. These charts just show you more of the same. Each one shows improvement, especially over the last six months. Locomotives in storage show that we are operating our system effectively. We've been able to scale down our locomotives and service as volumes have dropped. You can't do that if you are not operating efficiently. We will continue to scale back until we see a turn in business. At the end of 2008, 23% of our locomotive fleet was in storage. We continued to put locomotives in storage in the first quarter of 2009.

There is no question that softer volumes have some effect in improving some of these metrics; certainly recrews. So if you are not running an efficient system, your results are going to suffer even with a dip in the volumes.

This leads me to a final point on the overall subject of improved operations. If you look at these charts, imagine some of you might be thinking; okay, KCS has done a nice job improving its operations, that's good. But the bad news is that these numbers they have achieved, the opportunities for efficiency improvements and cost savings going forward must be pretty limited.

The fact is that we believe we are at best about half way through the transportation improvement process. Yes, our basic operating metrics have improved significantly and that's an essential part of the process. And the broader picture of this improvement will allow us now to turn a brighter light on our actual asset utilization and achieve the maximum efficiency out of each of our assets.

I also want to add a note on costs. We are reducing employee headcount by approximately 4%. In addition, we have reduced our contractor cost significantly. We will continue to adjust our cost to our level of business.

To return once more to the assembly line analogy, these charts you've just seen are basically telling you that KCS is getting its product produced faster than it ever has before. In fact, we've become one of the best in the industry. Now we can concentrate on refining every step of the process so that not only are we assembling our processes quickly, we're doing it in a most cost-efficient manner possible.

By no means do we think we have traveled out far down the road yet. There is still a great deal of efficiency that we can bring to our entire U.S. and Mexican network. So while we can't pave our way in the prosperity, as Mike said, we'll continue to take cost out of the system, which will help us weather the current economic storm.

More importantly, we believe that it will provide us the opportunity to improve our profitability when business level strengthens. I think we all hope that that is sooner rather than later. We intend to be a lean-mean machine when the economic recovers to respond quickly to the market demand.

With that, I'd like to introduce Mr. Pat Ottensmeyer, our EVP of Sales and Marketing.

Patrick J. Ottensmeyer

Thanks Dave. I will start my comments on slide 16, just with some highlights about the quarter and the year from a revenue perspective.

As you've seen, our quarterly revenue declined by 7.9% to 423.8, primarily due to the rapid volume reductions in the fourth quarter, specifically November and December. If you recall, Mike's slide earlier in the presentation, you can see that the dramatic drop off that we and most of the railroads experienced at the end of the year.

I don't want to lose sight of the fact and the second point here that the full year revenue increased by 6.3% to a record $1.852 billion. So we had a very strong year in spite of the fact the business just fell off at the end, particularly in Ag and minerals and chemicals and intermodals, were the growth leaders.

Mike mentioned core pricing environment continues to be strong in spite of the economy. So a couple of data points here that I'll get into more detail later on in my comments. So look at same linehaul move revenue; looking at moves year-over-year for the same costumers, the same commodities and the same O-D pairs and we saw a 5.6% increase in that metric year-over-year. And then, we also look at our linehaul rate per mile which I'll talk more about later and that is linehaul revenue, so it excludes fuel divided by total loaded car miles and year-over-year we saw an increase of 10.7% in that metric. So again we're seeing good discipline and good pricing increases year-over-year.

Revenue per unit was negatively impacted by mix and foreign exchange and again, I'll give you more detail on that but just as an example, some of the areas that held up the best were lower-rated businesses in our portfolio. Some of the areas that were more severely affected by the follow-up in business were among our higher-rated businesses. So that have the impact of bringing revenue per unit down in spite of good pricing trends.

Volumes... again going back to the slide that you saw, Mike talked about earlier; are beginning to improve from the very low-November and December levels, still running below last year but the trend line is improving and the there are some signs of life out there in the economy. And approximately 80% of our 2009 business has been repriced already and I'll have more details on that in a few minutes.

Slide 17, shows the breakdown of our revenue based by business unit, on the left for the quarter. Again total revenues were down 7.9%. We did have revenue growth in Ag and minerals and intermodal for the quarter while all others declined from a year ago. And again on the right, for the full year revenues of $1.852 billion of 6.3% from 2007 and we had growth in all business units except automotive. So again a pretty good year for the full year, in spite of a very weak finish in November and December.

Moving onto slide 18, this slide shows the factors contributing to the change in revenue for the quarter. And as you can you see only fuel had a positive impact in the quarter. Revenue loss associated with the decrease in carloads was 7.6%. So most of the decline was due to volume. Fuel surcharge revenue increased about 25% from the fourth quarter of last year and contributed to a increase in revenue.

As was the case with last quarter, our fuel surcharge revenue increased but it was lower than most of the other railroads because of lower fuel prices in Mexico. Revenue associated price and mix fell by 1.6% or contributed 1.6% to the decline and all of that is attributed to mix. As I said, pricing continues to be positive and I'll go into more detail on that in the next slide. Foreign exchange and other revenues accounted for small portion of the loss. Altogether, revenues fell by 7.9% over the last year to $423.8 million in the fourth quarter.

Moving onto slide 19 and back to the pricing theme. On the previous slide, you saw that price and mix contributed to a 1.3% decrease in revenue and I told you that, that was all mix. Earlier I mentioned that core pricing remains positive and referenced two data points to illustrate that. The first was revenue associated with same linehaul moves increased by 5.6% over last year and linehaul rate per mile increased by 10.7.

This chart on slide 19 shows the year-over-year change in linehaul rate per mile. We removed the scale because we didn't want to reveal too much information here, but really highlight the trends year-over-year. This data point which is calculated as total linehaul revenue divided loaded online miles is a pretty pure indication of the impact of pricing. As you can see, linehaul per loaded mile increased in each business unit except automotive, which had a very small decrease and in total increased by 10.7% over the fourth quarter of last year.

Now, moving to slide 20, I'll start getting a little bit more detail into the business units. Slide 20 again is a consolidated different view of the revenue. Carloads fell by 8.4% from last year as a result of the rapid deterioration in the economy and as you'll see on the next slide, the decrease in volumes was pretty much across the board. All business units experienced decreases from last year.

Revenue per unit increased by 0.6% over last year and I want to point out that this RPU, on this slide includes; it really all-inclusive. It includes fuel price, mix and foreign exchange. So it is a little different than the break down you saw on the previous slide. We have to say that the pricing is environment continuously positive, but the changing mix is reducing our overall RPU.

Slide 21 shows the volume and RPU performance for all business units. I'll talk about each one of them separately in a minute, but there are couples of points I'd like make on this page. Volume and carloads were down as I mentioned across the board. All business units experienced decline over last year. In spite of very severe economic conditions and a near collapse in several of the major economic indicators in November and December, we were able to show revenue growth in Ag and minerals and intermodals in the quarter.

The graph also helps to illustrate the impact of mix, as I explained earlier on our overall RPU. You notice that two of the areas that have the weakest performance in terms of volume are industrial and consumer and chemicals and petroleum, and those are relatively high RPU business. So the gradual shift in our business mix with some of our higher RPU businesses declining more rapidly than the rest will have an impact on our overall revenue per unit.

Slide 22, I'll talk about Ag and minerals have had a strong quarter, in spite of the economic downturn. Revenues for the quarter increased by 4.9% to a 112.6. For the full year, revenues in this business increased by 12.7% to $455 million, which was a record for this business unit.

Coal pricing remained strong. October volume did rebound after the hurricane. October was the highest carload month for the year. And the economy and low vessel rates negatively affected November and December. This was particularly noticeable in our cross-border grain business. We saw increased activity to Gulf of Mexico for shipment by vessel into Southern Mexico. Most of the decline in volume was in our grain business with some offset in food products and minerals.

Our coal business was about flat; turning to page 23, fell by 1% to 51 million. For the full year, revenue was up 5.5% at 204 million. RPU growth was driven by increased fuel surcharge, offset slightly by unfavorable mix. Coal... utility coal remains in strong demand and actually our unit train volumes were up. The declining carloads was the mostly driven by petroleum coke and again heavily related to cement production which was down for the quarter.

Slide 21, as you can see our investor and consumer business was severely impacted by the economic down turn. Revenues fell to by 18.6% to $106 million for the quarter and for the full year still increased by 1.5% to $509 million. In spite of broad based weakness in this business, RPU actually increased by 2.3% which was driven by domestic steel, which was primarily a length of haul phenomenon and an increase in military shipments.

Slide 25 shows our chemical and petroleum business was also negatively affected by the economic downturn. Fourth quarter revenues fell by almost 10%, 75 million. For the full year, revenues were up about 8.6% to $348 million. All the plants we serve are in operation and this time and we're beginning to see lower car counts at some of our shipyards which is a sign that perhaps demanded is pulling inventories down and could be a positive indicator for the weeks and months ahead.

Page 26 shows our automotive business which is the weakest performer in terms of year-over-year decreases. Revenue fell by almost 31% to $21 million for the quarter and fell by 4.8% for the full year as well. Of the eight plants that we touched only one is currently in production, with the other scheduled to come back over the next few weeks. We could see some pick up on a weekly basis going forward. Year-over-year this business will... is expected to be below last year.

Turning to intermodal on page 27; revenues in this business unit increased by 4.6% in the quarter to $41 million. And the for full year, revenues were up about 12.2% to $161 million. We're seeing a selective rate increases in some business. Revenue from our Lazaro Cardenas service increased by 37.2% for the year, but we're offsetting that somewhat by drop in volume related to auto parts business, particularly in Mexico.

2009, we could see opportunities or possible growth in cross-border volume related to the Victoria Rosenberg line extension. It will be completed later this year in second quarter. Increase Meridian Speedway, highway traffic is also going to be a factor for 2009.

On page 28, we show the volume growth at the port of Lazaro Cardenas and this is not KCS volume. As you'll see these numbers show these are from the Mexican FCT and they show the total growth in containers through the port. And you can see for 2008, the growth was almost double, about 99% growth with the big pickup in August and in the last few months of the year, you can see a little drop-off as the economy started to hit the volume growth in the last four months was related to additional calls. Steamship companies calling at Lazaro shipping there. Mexican calls to this port from other Mexican ports.

Our volume, as I mentioned on the pervious page, was up about 38%. There... a couple of the new calls at Lazaro are trans-shipment, meaning that the ships come in, offload the cargo and it's loaded onto another ship instead of moving into the heart of Mexico. So, that has affected our growth rates to some extent.

Page 29 shows the portfolio repricing phenomenon. You can see about 43% of our business is on tariffs and rate growth... rate quote and non-signatory contracts, 57% is on contracts longer than a year of that. The total 36% is already locked in. With maturities, designed on the price chart on the right. You'll see most of that is in 2010 and then 21% of our business is yet to be repriced in 2009. So, we are substantially locked in as far as pricing and rates are concerned for this year.

Page 30 shows our familiar bubble map. I just wanted to make a couple of comments on this as we look back on 2008 and then look ahead at the growth opportunities. What you'll see on this map is the white bubbles are represented by all new business that came online in 2008, where we actually had revenue moves from all of these locations, there were 19 of them. Some of them, obviously produced lower volumes for the full year than we would have expected because of the economic downturn. But, the good news is, these facilities and this new business is coming online. And will help fuel our growth into the long-term ahead of us.

There are also several new opportunities that continue to be developed on our property. So, again long-term, we believe that our growth will be driven by new business opportunities. We are obviously in a recession and economic downturn, which we did not project in our original long-range plan. So, 2009 is going to be a rebuilding year at best. But, longer-term, we still see great opportunities ahead and new business that's materializing on our network.

And finally, just brief comments about outlook for ... on slide 31. 2009 volume outlook continues to be very uncertain. We are remaining very close to our customers and their production plans. But, it's still extremely hard to get a good feel for what 2009 is going to look like. Our best expectation is overall weakness continuing at least through the first half for the year where possible show some signs of strength in the second half. But again, it's too difficult to call at this point.

Intermodal and coal are the best possible growth opportunities for us this year. We believe that our coal business will be up because of commitments that we made at some of our utility customers. Coal pricing environment continues to be good and positive. Anecdotally, we just finished the contract extension with our U.S. customer. We serve multiple lanes and multiple plans and the rate increases that we're accomplishing at contract renewal were above our overall guidance of 4 to 6%. So, we are seeing contracts that are being renewed as we speak, that are still reflecting the positive value that rail serves and our customers view that rail is going to continue to be a critical part of their transportation.

The service improvement that we've made that Dave Starling mentioned earlier; fuel efficiency, and all those factors are still very positive for the rail industry. In long-term, our revenue growth will be driven by new business opportunities, as I illustrated on the previous slide. So, with that, I'll turn it over to Mike Upchurch.

Michael W. Upchurch

Thank you, Pat. Let me walk you through our detailed financial results starting on page 33. First, 2008 full year revenues increased 6.3% to $1.852 billion. That revenue was generated through RPU increases of 9.3%, while volume declined 2.6%, largely as a result of the declining traffic in the last four months of the year. RPU without the impact of fuel recovery programs, increased a strong 5.4% for the year.

Operating expenses increased 5.9%, primarily due to the 20% in fuel costs. Without fuel, operating expenses increased 2.5% and I will provide a little bit more color in the coming pages.

Operating income increased 7.7%, despite the negative impact of high fuel costs. We recorded a $21 million currency loss for the year as a result of strengthening U.S. dollar against the peso. Equity and earnings increased nearly 60% year-over-year as the result of more than doubling of income from PCRC and strong increases in income from our tunnel operation in Mexico.

Interest expense declined 19 million year-over-year due to lower interest rates, higher capitalized interest from construction activities that increased year-over-year, and the reversal of interest accrual resulting from a favorable tax settlement that we reported earlier in the year. Other income declined year-over-year largely due to fewer property sales in 2008 versus 2007 and also lower interest income and a change in the valuation of short-term investments.

Income tax expense declined slightly, driven by a lower effective rate due largely from tax benefits of foreign currency losses in Mexico. And on the next slide, I'll talk a little bit more in detail about our affective tax-rate reconciliation on a year-over-year basis. So in total, for fiscal 2008, net income increased to solid 20%.

Moving to page 34. For the full year 2008 our effective tax-rate was 25.9%, lower than the 30.3% from fiscal 2007. The decline in our effective tax rate is really driven largely due to unfavorable economic conditions in Mexico related to the devaluation of the peso and its impact on our U.S. denominated long-term liability balances, primarily our U.S. denominated debt.

Offsetting this tax benefit is the valuation allowance we reported in the fourth quarter to reduce our deferred tax asset related to carryovers. Mexican tax law included an alternative tax system known as ISU (ph) that encourages reinvestment of profits in capital projects in Mexico.

As a result of our economic conditions that we're experiencing and the desire to manage free cash flow to a positive level during the course of 2009, the company did make a decision in connection with it's budget process to reduce capital expenditures in Mexico, that would trigger a cash back payment of approximately $12 million during 2009.

The company will obviously carefully monitor economic conditions and will adjust its capital spending to appropriately manage its cash flows and also plan appropriate levels of income tax. As a result of this impact, during the fourth quarter, we did report an income tax benefit in the income statement of $2.7 million. For your models going forward, I think its reasonable to assume a more normalized tax rate, effective tax rate in the range of 30 to 32%.

So, turning to slide 35, let me cover fourth quarter income statement. For the fourth quarter, revenues declined 7.9%, largely due to the volume decline of 8.7 and an ARPU decline of 0.9 that Pat covered in his presentation materials.

Operating expenses declined 19 million or 5.4% on the reduction predominantly in fuel and compensation expenses. While our fourth quarter costs decline, operating income did decline 17 million due to the revenue declines previously mentioned.

During the fourth quarter we also recorded a $21.7 million pretax loss as a result of the strengthening U.S. dollar against the Mexican peso, the U.S. dollar being our functional currency for our GAAP-based financial statements. The exchange rate for the peso at September 30th was 10.79, an increase to really unprecedented levels over the last five or six years, at the end of year to close at 13.53. Equity and earnings were flat quarter-over-quarter. We continued to see increases in PCRC income, while we had some slight declines in our thermal operation and Southern Capital Corporation.

Interest expense declined 2.2 million predominantly due to lower interest rates. Other income and expense declined as a result of fewer property sales, lower interest income and previously mentioned valuation adjustment that we reported for our short-term investment.

And as previously discussed on the prior slide, we did report an income-tax benefit in the fourth quarter of 2.7 million, again, largely due to foreign currency losses in Mexico and that was offset by the valuation adjustment of our deferred tax assets to our plant reduction in capital expenditures in Mexico.

Finally net income declined 39 to... 239.2 million, largely as a result of the revenue decline from foreign currency losses, other income reductions and an offset of the previously mentioned tax benefit. Let's spend a little bit of time on fourth quarter operating expenses, we did have a decline of 5.4%, largely as a result of compensation, fuel and casualty expense categories.

Compensation declined $13 million as a result of headcount savings related to our volume declines, and a reduction in impairment and stock-based compensations. Fuel declined largely as result of our volume decline, and strong efficiency gains that we're seeing as a result of the investments we made in the new locomotives.

Purchase services has increased due to higher locomotive repair expenses, really resulting from two items; first, contract price escalations and secondly, a contract that we have in Monroe (ph) that expires in May, 2009. We're committed to continue to pay for some locomotives, older locomotive that are currently held in storage. But that contract should give us an opportunity going into 2009 to see some reduction in locomotive maintenance expenses. And the company also saw slightly higher legal fees during this quarter.

Depreciation increased 3.2 million, largely as a result of higher capital expenditures in connection with our growth programs. And finally, casualty expenses declined 5.5 million, as our semi-annual actuarial PI study continues to show positive trends in our injury claims.

Moving to page 37; for the full year, our operating expenses increased 5.9%. Without the negative impact of rising fuel costs, operating expenses increased only 2%. Compensation and benefits declined almost $20 million, largely due to annual incentive compensation and stock-based compensation reductions. However, also a reduction in average of 40 years, that Dave mentioned; higher third party labor and some increased from capitalized labor as the result of higher construction activities in 2008 versus 2007.

Fuel accounted for $54 million of our expense increase; so the predominant part of our expense increase year-over-year and really, as a result of higher fuel prices in both Mexico and U.S. domestic fuel prices, obviously increased significantly, particularly in the second and third quarters.

We saw a year-over-year increase in our U.S. fuel prices of almost a dollar per gallon. Fuel prices in Mexico also began increasing, particularly in the second half of the year, although the devaluations of the peso mitigated the U.S. dollar impact of those increases. Offsetting the higher price of fuel, the benefit that we received from efficiency of our new locomotives and to a smaller degree from some lower volumes year-over-year.

Purchase services, again on year-over-year basis, increased for the same reasons we saw on the quarter, higher locomotive maintenance expenses predominantly in Mexico than higher legal expenses. Depreciation was up 10 million again due to higher capital expenditures. Casualties increased 3.7 million year-over-year. That was primarily attributable to the hurricane damages and then a slight improvement in the remaining casualty expenses that we incur.

Finally materials and other increased partly due to travel expenses. Rising travel costs, toll and taxing services particularly with our trainee employees. But we also had a negative comparison on a year-over-year basis, as 2007 had a significant excise tax refund thereby causing an unfavorable comparison to 2008.

Moving to page 38, from a free cash flow perspective cash provided by operating activities increased by $74 million; largely due to two items, first, an increase in net income and then secondly, a significant reduction in our DSO from 48 days to 36 days, due to the focused efforts by both our accounting organization and our marketing organization to improve our cash flows.

Cash CapEx increased $166 million in connection with our growth plans due to the significant increases in track, in capacity projects including the construction of about two-thirds of the Victoria Rosenberg line where we incurred about $110 million of capital expenditures during the course of the year.

Other investing activities utilized cash in 2008 while providing cash in 2007. But that's primarily due to the timing of the Meridian Speedway payments from our minority partner and when we actually incurred the cash expenditures to support that operation. Additionally, 2008 had a positive contribution of cash as the result of the repayment of the loan from one of our affiliates. Payment of preferred dividends declined in 2008 as a result of the industry preferred shares that we retired earlier in the year.

And finally, let me address some guidance going into 2009. Given the state of the economy and declining traffic volumes, we believe an adjustment to our capital spending programs is appropriate and prudent. As Mike previously indicated, our goals for 2009 include managing to positive free cash flow, and this will necessitate approximately 35 to 40% reduction in our capital programs, predominantly from growth capital and a reduction in equipment investments that we've made in the last two years.

Our growth plans for 2009 will generally be limited to completion of the Victoria Rosenberg line, which we previously discussed, will be about $60 million in 2009. And of course, we'll adjust our capital plans depending on the timing of any recovery we may see in the economy and we certainly plan to continually, prudently manage our operating expenses to adjust volumes that we see.

On page 39, let me briefly cover our liquidity situation. At year end 2008, we had unrestricted cash and unused credit facility capacity of $336 million, including proceeds from our refinancings that we completed in December, a major use of our liquidity. At the end of the year will obviously will retired the $200 million, 7.5% notes during the first quarter.

And then finally on page 40, are schedule of major debt maturities. As a result of tendering for the $200 million notes, we'll have no major scheduled maturities until 2011 when the KCS revolver expires, thus significantly improving our financial flexibility over the next three years.

Now, I'd like to turn the call back to Mike for some concluding comments.

Michael R. Haverty

Okay. Thank you, Mike. If you will turn to slide 42, the Panama Canal Railway, I'll just make some brief comments about our equity investment there. You've seen that we finished the year about 350,000 units we've been projecting around 360 to drop off a little bit at the end. But in spite of that we had a 56 % increase over the previous year, and the operating ratio was in the mid-50s.

And as we go forward, certainly Panama Canal which has slowed down somewhat in its expansion and our railroad are both feeling the impact of global recession. So we're not going to give projections for 2009, but even if we ended up flat through the mid-50s, our operating ratio is still in a very good case, so it's for us.

Final slide, page 43 summary and outlook. I am not going to give any guidance. Try to kind of do that in October with the best information we have of what was happening where we're heading and the bottom kind of settle up. That is giving I think a pretty good summary of market outlook. We just don't quite know what is going to happen. There are some positive things that we see, but who knows when the economy is really going to turnaround.

The one thing as Mike has emphasized and also Dave that we are going to do is manage our of company this year to positive free cash flow. And that means disciplined cost controlled both in capital and operating expenses, and we expect those to be significantly below what we've spent in 2007 and 2008, when we were really building capacity. We are comfortable that we have plenty of capacity in our railroad even if business should comeback, its not like we're going to get caught short, because we have good enough. And the one thing that we are going to continue to focus on because it is so strategically important to us, is the Victoria to Rosenberg line and we are getting ready to open that up this spring.

We are trying management compensation to free cash flow and one of the things that we are doing this is we are actually freezing the salaries of all management in our company. Tough time to do, but we certainly think that with the challenges that we have that that's something that we need to do and if things turn around, we will review that later on in the year. But right now we are in fact freezing the salaries. We continue to see operating improvements, and we believe that that is going to continue. We have no reason to believe that we just can just get better and manage closer and closer to our transportation service plan.

Finally, our franchises story remains good and we still likely to have a great growth story. If you go back to the global map that Pat showed and we've showed in several of our past presentations, we still have a tremendous number of growth opportunities that are coming onto our road.

And we make sure when that does comes back, when the automotive business comes back, steel business comes back, appliance business comes back, cement and paper and on and on, we're very, very well positioned. So, we have no reason to believe that long term we have any problems in long term accomplishing what we set to accomplish in our five-year plan; been delayed somewhat obviously by this year, but we're still on track to be where we want to be.

With that, we will open it up to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (operator instructions). Thank you. Our first question Chris Wetherbee of Merrill Lynch & Company.

Christian Wetherbee - Merrill Lynch

Great. Thanks very much, guys. I wonder if I can touch on yield first. Pat, I think, you mentioned that the FX impact in the quarter was... FX and yield together was down about one-sixth. Does that imply that the FX is kind of north of 7% headwind in the quarter, just want to kind of understand that a bit better?

Patrick Ottensmeyer

Chris, the 1.6 was price and mix. The exchange rate was actually about 1% decrease. But that is I think we said it before that. 70% of our Mexican revenues are... contract revenues are denominated in dollars and the other 30% is denominated in pesos. So, what this reflects the exchange rate impact on the water fall chart is the reduction in U.S. dollar revenues that occurred because of the devaluation of the peso on that portion of the revenue that is peso-denominated. This is the different than the foreign exchange rate that Mike Upchurch just talked about, which is more of an asset-based asset-driven variable. So, this is the revenue impact of the exchange rate devaluation.

Christian Wetherbee - Merrill Lynch

Okay. And is that net for expenses, I guess you've said in the past that your expense, exposure was close to the 45% down in Mexico as far as what's in pesos relative to U.S. dollars, is that right?

Michael Upchurch

Yeah, Chris, this is Mike Upchurch. That's about right. It's in the low 40s. And so, as we looked at the fourth quarter and looked at our peso denominated revenues and expenses and considering kind of a 75% OR there, we looked at that and it's almost a net loss in terms of the revenues and expenses within pesos.

Christian Wetherbee - Merrill Lynch

Okay, that's fair. And then just staying on yield for a second, Pat on the auto side. I kind of missed a bit of what you said there. It looks like the yield was particularly difficult there and it looked like your actually fuel pricing was a bit weaker there too. So, I if you could just kind of grow into that. I know you had a bunch of plans that were offline in the quarter but just from a pricing perspective. Are you getting push back there?

Patrick Ottensmeyer

No, we didn't have any repricings in the quarter as our decline in revenue per unit is really mostly driven by the losses in longer haul business that we had from one large manufacturer in Mexico. So again, it was a mix shift away from longer haul higher rated revenues.

Christian Wetherbee - Merrill Lynch

Okay. And I guess just on the volume side, just kind of the general outlook. I know guys aren't providing top line guidance. But I guess as far as the improvement that you've seen and I know what you can see in the next couple of weeks, is it that plan that have been kind of front load or on holiday over the course of the New Year time frame. Are those coming back online, or what's the business activity that's driving a bit of the firming in the volumes?

Michael Upchurch

Are you talking about overall or just...

Christian Wetherbee - Merrill Lynch

Overall, yeah. That's right.

Michael Upchurch

It's plans that are coming back online. I think it's a function also, if you go back to the chart that Mike started the presentation with, I think is a very powerful chart, and I'm sure the same for almost everybody. That is just a function of how bad things got in December. We saw things that, plans and activity to shutdown like they've never shutdown before. And so, the good news is and the point of that chart is to say that some of that is coming back from those levels. We're still clearly below last year. So, we're not sitting here saying that the recession is over, and we're back to good times. It's just that there is some signs of life. We've seen some paper plants coming back online; auto plants, we think they are going to come back over the next few weeks. So, there is a pulse out there.

Christian Wetherbee - Merrill Lynch

Okay. And then just one ...

Michael Upchurch

I don't know if you can say it, it certainly gives you the impression that we think it's going to be a quick rebound or recovery; it's alive, that's about it.

Christian Wetherbee - Merrill Lynch

Okay, that's fair enough, and just one more question, on the yield side again, Pat again I think you mentioned 21% still open for repricing in 2009, 21% of your business. If you just let us know how much of that in Mexico, and if you are feeling any weakness based on that FX impact obviously, with the combination of increased pricing and devaluing currency, it seems like a pretty big number that some of your customers may have to deal with coming up?

Patrick Ottensmeyer

Yes, it's pretty well balanced. There is some Mexico contracts in there, but we're well into the Mexican repricing cycle and we've... it's growing reasonably well. The inflation rate in Mexico last year which is usually what we used to peg pricing changes was over 6%. But we've got some of our large customers and industries that are really affected by the downturn that were trying to work with to help find a way to offset the environment that we're in that... so obviously no one is excited about pricing increases, but we are able to hang in there and so far it's looking like we are going to get pretty close to inflation in terms of our increases in Mexico.

Christian Wetherbee - Merrill Lynch

Okay, great. Thank you very much for the time. I appreciate it.

Operator

Thank you. Our next question is coming from Edward Wolfe of Wolfe Research.

Edward Wolfe - Wolfe Research

Thanks. Good afternoon. I just wanted to make sure that I am looking at this the way you're looking at in the quarter. If you take the $22 million currency loss and the $21 million tax gain below the line, tax rate in line let's call 31% the 30 to 32 that you gave us. I get about $0.41 ongoing earnings if I do those three things. Is that kind of how you're thinking about this quarter in going forward?

Michael Upchurch

Ed the 21... you referenced the $21 million tax gain?

Edward Wolfe - Wolfe Research

Well if I normalize the tax rate to 31%, that gives me tax as you would have paid at $18 million. 0.7 that you got again?

Michael Upchurch

Our pre-tax income was 36.5, right? So, we're using kind of an effective rate of 30%, would have been income tax expense of about 11.

Edward Wolfe - Wolfe Research

Right. But again what I'm doing is I am taking the currency below line. $22 million to $217 million. Changed my pre-tax to 58 and then I'm normalizing a tax rate of 31, which gives me $18 million in taxes that I m taking below the line. That 18 away pass the 2.7 that you got as the benefit and when I do all the math, I get around $0.41 that are 31% tax rate. And by doing these things that you think is incorrect or what do you think?

Michael Upchurch

No I think on a go forward basis that's exactly where we will try to guide you in terms of your effective tax rate.

Edward Wolfe - Wolfe Research

But that you did already in terms of currency going forward do you view these kind of large swings, that are non-cash; is that an appropriate way that you look at internally?

Michael Upchurch

It is. I can tell you it's pretty difficult for us to predict what's going to happen with this currency. I don't think anybody would have predicted the decline we saw in fourth quarter. It's similar to trying to predict fuel prices the way we are seeing the fluctuation $4 down to a $1.50 during the course of the year. So for our planning purposes, we have kind of assumed really a stable currency. I realize that the exchange rate right now is a bit higher than it was at the end of the year and would like to see how that plays out. But assuming kind of consistent currency rates I think our guidance is 30 to 32% is right inline.

Edward Wolfe - Wolfe Research

One of the volume charts that I think Mike Haverty showed. You talked about volumes coming back a bit in January, but every January seasonally they come back. You then said in the Q&A that you're seeing a couple of plans to reopen and so forth. Hence year-over-year if you take the seasonality out of it, what's your sense then that volumes right now are tracking give or take in the US and in Mexico?

Patrick Ottensmeyer

Tracking from, compared to last year.

Edward Wolfe - Wolfe Research

Past year-over-year?

Patrick Ottensmeyer

Lower.

Edward Wolfe - Wolfe Research

I mean that are we lower 8% still or is it much worse than that? Where are we?

Patrick Ottensmeyer

Sorry, could you repeat that?

Edward Wolfe - Wolfe Research

I am just looking at your.

Patrick Ottensmeyer

Hello?

Edward Wolfe - Wolfe Research

Can you hear me?

Patrick Ottensmeyer

Yeah.

Edward Wolfe - Wolfe Research

I m looking at the chart five where you showed this big decline in December and then this big uptick in January and I'm looking at the beginning of the chart that shows the same thing a year ago in January. And I'm just assuming seasonally after you come off of the break back. So I m trying to understand year-over-year, getting your sense that plans are reopening right now, taking seasonality out of it, how should we think about volumes? Currently as you see it, I know you can read the future in the economy is terrible, so kind of where are we relative to November and December year-over-year right now?

Michael Haverty

Year-over-year, we're still down at this point. But and again the point of this slide ... I see your point on week one. Last year we had another phenomenon that affected volumes around year-end which goes back to this ISU tax that Mike mentioned. And I don't know if you remember this from last year but we had grain shipments with probably the biggest impact where this new tax was rolled out and it became effective in January 1st of 2008.

And the heavy impact of delaying a lot of shipments for inventory purposes in Mexico that really popped up in January as Mexico introduced this new tax law, Mexican tax law. People are able to take a credit for investment including inventory investment. So that had a kind of a big impact and provided some static around the end of last year. It was really an inventory management issue as opposed to a seasonal issue or any kind of a cyclical issue.

But the point is, the chart five, I think is to show that things are improving from the dismal levels at the end of last year. But the fact is we're still running lower year-over-year, a little bit closer in the U.S. if you just look at the AER carloads statistics. Our U.S. business is actually hanging in there a little bit better than Mexico. Mexico is driven by fuel, autos and cement which we expect to be down for the foreseeable future.

Edward Wolfe - Wolfe Research

Visibility. There is a slide where you showed that basically 81% has been repriced by tariff or contract for 09. Can you give us a sense on both of those sides, the tariff side and the contract side? What have you seen kind of as the average increase those have come up both sides of the house?

Patrick Ottensmeyer

Well again, I gave a very recent example of a long-term contract that we renewed in a range that was with the high end of the 5 to 6% range that we've been talking about. So I'd say, generally, we still are seeing pricing increases on contract renewals in that mid-single digit range call it 4 to 5%.

Edward Wolfe - Wolfe Research

I am sorry, single digits 4 or 5 was, what's that?

Patrick Ottensmeyer

Contract renewals.

Edward Wolfe - Wolfe Research

And what are you seeing on the tariff side?

Patrick Ottensmeyer

About the same.

Edward Wolfe - Wolfe Research

And is there a big difference between Mexico and the U.S.? Is Mexico still higher?

Patrick Ottensmeyer

Overall, I'd say no, maybe there is maybe a little bit inflation rate in Mexico is a little bit higher, but I would say not materially different.

Edward Wolfe - Wolfe Research

It I were to just changing gears now at your expense line items? Comp was down about 13.5%?

David Starling

Looking at quarter-over-quarter?

Edward Wolfe - Wolfe Research

Yeah, I am looking at fourth quarter of 08 or the fourth quarter of 07 salary and benefits?

David Starling

Right. Yeah, we talked about that being somewhere related to reductions in headcount as volume ramped down and a reduction in incentive and stock-based compensation on a year-over-year basis.

Edward Wolfe - Wolfe Research

Was there some reversals of accrued comp here?

David Starling

Yeah, minor. About $1million in the fourth quarter from balances that we had at the end of Q3.

Edward Wolfe - Wolfe Research

Talk a little about Mexican fuel prices and the direction year-over-year, where we are right now and where you see that going because this credits are definitely than fuel.

Michael Upchurch

Yeah, I think we continue to see increases on a year-over-year basis in fuel down in Mexico. However, the impact of the currency has actually caused our prices to be relatively stable. For 2007, our fuel prices was $1.72 in Mexico when converted to the U.S. dollars; and in 2008, $1.84.

So obviously, there was a higher increase in fuel in Mexico percentage wise from a peso standpoint. But, we saw the favorable impact of the currency bring that down from U.S. dollar standpoint. There is some momentum in Mexico right now, to put a cap on fuel prices. We have already done that for the citizens buying the gas. And there is some real optimism here that they may implement that as well on diesel prices for businesses.

Edward Wolfe - Wolfe Research

How do we think about, I understand that makes sense for the cost side. How do we think about the surcharge side and the lagging benefit that you might or not be getting in Mexico relative to the U.S.?

David Starling

Well, we had a favorable impact in the fourth quarter, when you look year-over-year. And certainly, going into 2009, it's going to be a little bit difficult for us to predict given what the government may end up doing with fuel prices.

Edward Wolfe - Wolfe Research

But in fourth quarter, you had a benefit of if you look at where your costs went up in fuel year-over-year versus where your surcharge went up?

David Starling

Correct

Edward Wolfe - Wolfe Research

And I'm guessing that benefit wasn't as close to as large that that was in the U.S. though?

David Starling

It was not as large, but it was certainly a benefit, noticeable benefit.

Edward Wolfe - Wolfe Research

Just on and then I'll let some other. Can you give just an update on the RRIF loan status for Victoria Rosenberg?

David Starling

Yeah, obviously with change in administration, we're unclear exactly what all the impacts are going to be. We have had continuing conversations with the government about our RRIF loan. I think that that program will still at the end of the day be a viable option for us to try to fund capital expenditure programs. There maybe different mechanisms in place to access that funding with Victoria Rosenberg, as we've previously indicated. We chose to move forward with that project prior to the environmental reviews. And, whether that at the end of day with the new administration will still allow us to go in and replace the potential bridge financing with the RRIF loan, it is certainly something we're going to work with the administration on.

But, they were looking at a variety of different programs, whether it'd be RRIF loans, which they have tended to indicate they would favorably inclined to continue methodically (ph) for Victoria Rosenberg or future capital projects, but also a lot of discussion around investment tax credits and accelerated depreciation. So we just have to wait and see what happens with the stimulus plan.

Edward Wolfe - Wolfe Research

When does Victoria Rosenberg project end?

David Starling

Well, I'm sorry, when did that end?

Edward Wolfe - Wolfe Research

What I'm saying is, if you're done with financing Victoria Rosenberg, which you're going to be at some point this year. Is it too late at that point to seek the RRIF or can the RRIF cover what you already laid out?

David Starling

No, we would actually be able to still file our application. And I think as we previously discussed, timing is the big question and it would likely take nine to 12 months to get through that approval process.

Edward Wolfe - Wolfe Research

Okay. Thanks for all the time. I appreciate it.

David Starling

Sure.

Operator

Thank you. Our next question is coming from Randy Cousins of BMO Capital Markets.

Randy Cousins - BMO Capital Markets

Good afternoon. Just a couple of housekeeping; you mentioned that you cut the CapEx back. I wondered if you guys could actually tell us for the dollar CapEx you are budgeting for, for 2009 and are you planning to use any lease financing at all?

David Starling

The last one is easy. We're not planning on any kind of significant lease financing that's typically been associated with equipment and you'll see a pretty sizable reduction in our plan on year-over-year basis.

Michael Upchurch

Randy I would just tell you, we're trying to retain from flexibility and our capital program. But if you look at the slide on page 38, 2008 CapEx was 577. I kind of indicated the 35to 40% reduction. So you might look at something in the 350 to 375 range.

Randy Cousins - BMO Capital Markets

Okay, and just on the cash flow, you've taken your receivable, down to $167 million from 243. Can you sustain them at that level or do you see some... is that kind of more of the year-end phenomenon?

Michael Upchurch

No. It's absolutely not a year-end phenomenon and I would tell you, really the accounting department took the leadership role in this initiative. They worked very, very closely with the marketing organizations to identify, how we can really reduce payments terms and accelerate cash generation. Clearly we're dealing with difficult economic environment right now. But we have internal goals that we will continue to improve that. It may be not be at the cliff of reducing 12 days the way we did in 2008. But I can tell you, we absolutely believe we can continue to reduce that. If you look at some of our competitors while we have caught up significantly with most of them, there are a couple that are still significantly better than we are and that have might be a multiyear effort to try to get contract terms and conditions changed to mirror what, a couple of other railroads may have in place today. But we continue to believe we can move this down and we will see improvement in 2009.

Randy Cousins - BMO Capital Markets

And again with reference with cost benefit, I think you might just the add that the million dollars was kind of like the prior accrual. I think you also talked about the stock-based compensation. So if we look to that 78 and we're just sort of thinking about some sort of normalized number excluding the sort of the variance items that came through in the fourth quarter, what would have been the fourth quarter run rate?

Michael Upchurch

Run rate for stock base compensation?

Randy Cousins - BMO Capital Markets

Just compensation in benefit overall. Like you took out... looks like there was a stock-based reversal. I'm assuming there was a bonus accrual in the fourth quarter which didn't take place because of the reduced results. And then there was a reversal for prior quarters, right? Yeah. What just I am coming at is what would be the sort of run rate that we should use for the comp and benefits if we use fourth quarter as the benchmark?

Michael Haverty

Yeah, Randy. I did mentioned a roughly a million dollar reversal to give a little bit more guidance on a year-over-year basis in the fourth quarter. I mean we did see a sizeable reduction in incentive and stock-based compensation. It was to the tune of about $8 million and that represents a combination of a couple of factors. One, corporate shares under our stock program of individuals to who have left the company, but also in annual reduction in the percentage of payout on our stock-based program.

Now going forward if you are familiar with our stock-based program, the war becomes more difficult in the third and final year which is 2009. So I wouldn't necessarily you know think about significant increases in the stock-based comp. There may be some ability for us to make that up, but again it's largely going to dependant on the recovery in the economy and whether we can get back to some of our numbers that we established three years ago relative to that plan.

Randy Cousins - BMO Capital Markets

And then on casualty and insurance, you mentioned the favorable actuarial results. What was that worth and given the positive momentum that you've built up in terms of safety performance, do you structure that as cost item that will be coming down in 2009.

Michael Haverty

Yes we do see that as an item that will come down in 2009. Quarter-over-quarter, we look at that as a $5 million improvement

Randy Cousins - BMO Capital Markets

Okay. And then my last question is for Pat; just with reference to the intermodal; you talked about this as an area for opportunity. There seems to be a lot of moving parts there and I wondered, if you could give us some sense, Pat, just in terms of sort of how you are sensing the mix? What that's going to do to RPU in the intermodal category?

Patrick Ottensmeyer

Well, obviously the wildcard is still the economy, but it gets I think about the intermodal business, we expect Lazaro to grow. You should remember the chart in the presentation. We had a big surge in growth activity in the last four months of the year, if the traffic through the port continues at that level, we should still see very solid 30-40% growth through port. So that's going to drive our growth. That should be good RPU at least as good as our overall portfolio.

We are going to see growth over the Meridian speedway on our haulage trains. The RPU there is lower and then the other big thing we've got going on is the opening of the Victoria-Rosenburg line, the opening of the Rosenburg Terminal and the intense focus on cross border traffic from Houston into Mexico and really offering a service in that lane and the RPU ought to be again very good.

Randy Cousins - BMO Capital Markets

So in general, would you have a positive effect on RPU if everything just continues to play the way you're looking at it right now?

Patrick Ottensmeyer

I think that's a fair statement. The other moving piece there that's had big impact is the automotive-related business which is just been dead for the last several months. So, if the auto plant start producing and we get some that parts business moving, it shows up in our intermodal numbers we could get... that could help us well.

Randy Cousins - BMO Capital Markets

And you've been working really hard to drive up the length of haul. What's happening with the length of haul in that intermodal business?

Patrick Ottensmeyer

It's been staying about flat. So we haven't really seen the kind of improvements that we want because of the economy in the fourth quarter that I think the real opportunity for us is when we open that Rosenberg Terminal and that Victoria Rosenberg line be able to serve Houston to Central Mexico.

Randy Cousins - BMO Capital Markets

Okay, great. Thank you.

Patrick Ottensmeyer

Okay.

Operator

Thank you. Our next question coming from Jason Seidl of Dahlman Rose & Co. Mr. Seidl. You may now ask your question. We will go to our last question coming from David Feinberg of the Goldman Sachs Group.

David Feinberg - Goldman Sachs

Good morning or good afternoon. First question is about a quarter ago when you were talking about refinancing, you were discussing the possibility to repay trading cash. I am assuming this point that's off the table?

Michael Haverty

No, that's not off the table.

David Feinberg - Goldman Sachs

And what would determine the timing or the amount of any of those issues in terms of repay trading cash from Mexico to the U.S.?

Michael Haverty

We've completed that initial tranche in the first quarter.

David Feinberg - Goldman Sachs

How much was that?

Michael Haverty

About $65 million.

David Feinberg - Goldman Sachs

Thank you. And then, Pat, you were quoting what I felt Houston statistic is really the same linehaul and the linehaul move the increases in the fourth quarter. Can you give us similar more statistics for the other quarters looking 2008 for 1Q, 2Q, 3Q?

Patrick Ottensmeyer

I don't have those in front of me. I think though if we look it year-over-year, the order of magnitude will decrease somewhat the high double or high single digits, low double-digits.

David Feinberg - Goldman Sachs

Okay. And then as we look at your book of business, in the 2010, the 50% of your contract that you'll touch of the ... excuse me, the 50% of the 36% of the roughly 18% that you are going to touch in 2010. When do you start talking to customers about those 2010 contracts. Is it the back half of year, did you start now?

Patrick Ottensmeyer

It will really heat up in the back half for the year. And a lot of that is in Mexico. A lot of the contracts that we have in Mexico are one year renewable annually and they are typically in the first few months of the year. So, a big chunk of that 56% relates to our Mexican business.

David Feinberg - Goldman Sachs

And, is it safe to assume based on some of your earlier comments, you tend to peg those to a trailing Mexican inflation rate?

Patrick Ottensmeyer

That has typically been the pattern.

David Feinberg - Goldman Sachs

And then my last question is a follow-up to your comments on intermodal and the potential for cross motor traffic moving from Central Mexico into Houston. Are those... is there hope there that it will be international moves. In other words, using Lazaro as an alternative to some of the other West Coast ports or is that ... are those products coming from industry within Mexico into the U.S.?

Patrick Ottensmeyer

It's primarily the latter. It's the truckload market from the industrial part of Mexico across border. We have been talking about across the international opportunity at Lazaro for some time now. So it's really going to be both that the opportunity that I mentioned with the opening of Rosenberg Terminal is going to be truck inversion market that moves across in the Lazaro gateway. It's a big market and dominated by truck and we think the new service and the improved service that we'll have from Rosenberg into the heart of Mexico is going to make it possible for us to get a much bigger share of that.

David Feinberg - Goldman Sachs

And then the last question specifically on that international intermodal move from Lazaro into the U.S. Have shippers pushed out any plans or thoughts given the weakness in U.S. volumes in terms of some of the data points we've picked up is that, some of the bottlenecks within international shipping lanes have eased up such that they not as aggressively looking for alternative ports in alternative lands, has that been the case?

Patrick Ottensmeyer

I'd say that's been the case as far as people looking for alternatives. What we're seeing though is people who aren't calling in LA Long Beach, who are interested in using Lazaro as gateway to get into the Southern and Southeastern U.S. So, it's not shift in calling patterns. It's really an example would be the South American carriers, who seldom seem to call on Los Angeles. They are interested in using Lazaro as the gateway into the Southern U.S.

David Feinberg - Goldman Sachs

Alright. Thank you very much.

Patrick Ottensmeyer

Okay.

Operator

Thank you. Ladies and gentlemen, we are out of time for further questions today. I would like to hand the floor back over to management for any closing comments.

Michael Haverty

Okay, thank you very much and I want to thank all of you for joining us today. And I hope times gets better here and news is a little better as we go forward. But we are committed to sticking with our plan, keeping our cost under control, remaining positive cash flow and we've been through these times before and we will survive this time.

So, thank you very much again for joining us.

Operator

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

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