Kansas City Southern Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.24.14 | About: Kansas City (KSU)

Kansas City Southern (NYSE:KSU)

Q4 2013 Earnings Call

January 24, 2014 8:45 am ET

Executives

David L. Starling - Chief Executive Officer, President, Director, Chief Executive Officer of The Kansas City Southern Railway Company and President of The Kansas City Southern Railway Company

David R. Ebbrecht - Chief Operating Officer, Executive Vice President, Chief Operating Officer of The Kansas City Southern Railway Company and Executive Vice President of The Kansas City Southern Railway Company

Patrick J. Ottensmeyer - Executive Vice President of Sales & Marketing

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

Analysts

William J. Greene - Morgan Stanley, Research Division

Allison M. Landry - Crédit Suisse AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Jason H. Seidl - Cowen and Company, LLC, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Justin Long - Stephens Inc., Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Scott H. Group - Wolfe Research, LLC

Thomas Kim - Goldman Sachs Group Inc., Research Division

Operator

Greetings. Welcome to the Kansas City Southern Fourth Quarter and Full Year 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

This presentation includes statements concerning potential future events involving the company which could materially differ from the events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the company's Form 10-K for the year ending December 31, 2012, filed with the SEC. The company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.

It is now my pleasure to introduce your host, David Starling, President and Chief Executive Officer for Kansas City Southern. Mr. Starling, you may begin.

David L. Starling

Thank you. Good morning, and welcome to Kansas City Southern's fourth quarter 2013 earnings call. Joining me on this call this morning are Dave Ebbrecht, Executive Vice President, Chief Operating Officer; Pat Ottensmeyer, Executive Vice President of Sales and Marketing; Mike Upchurch, Executive VP and CFO; and joining us by phone is José Zozaya, our President and Executive Representative in Mexico.

Start with KCS's fourth quarter review. We're very pleased with our fourth quarter results. Revenues were up 8% in the quarter, which we feel was outstanding in light of being hit fairly hard by weaker-than-expected coal volumes, which I'll touch on again in a few minutes. Revenue growth in the quarter was especially driven by our grain business.

As we had forecasted would happen, KCS's grain traffic was quite strong throughout the quarter, causing grain revenues to increase 50% over the weak comps of a year ago. Export grain actually grew by 106% in the fourth quarter and cross-border Intermodal revenues by 64%. These 2 business segments were the principal drivers of KCS's overall fourth quarter cross-border revenue increases by 30% over last year. Both continued to perform well in the first weeks of the year.

KCS's fourth quarter operating ratio came in at 68.1%, which was a 1.4-point improvement over a year ago. Given the volumes in the quarter being lower than projected and some weather-related operating challenges in both Mexico and the U.S., we are very satisfied with our operating performance.

For the quarter, the company's adjusted earnings per share was $1.03, 13% higher than the fourth quarter.

The next page, the update for the full year 2013, our final scorecard in how we performed versus our guidance. In terms of volume, we had forecasted mid single-digit growth. With our reported 2% growth for the year, we obviously came in below that guidance. Coal was the main culprit with volumes of that commodity down 8%.

In addition, despite spectacular numbers in the fourth quarter, grain volumes were down 5% for the year caused by the impact of the drought on our grain business throughout the first 9 months of 2013.

While we ended the year quite happy with the pricing environment, I have to say that coal, again, had an impact on our total core pricing. As other rails have discussed, rail inflation calculations embedded in some coal contracts have impacted pricing in that commodity area. When this is added to the rest of our same-store pricing, it takes our total number below the mid single-digit guidance but still greater than inflation.

Pricing for KCS as well as for the other rails continues to be generally a good news story. We hit our mid single-digit revenue guidance, coming in for the year 6% higher than 2012, and solid double-digit revenue growth in Automotive and Intermodal helped drive hitting the revenue targets.

In addition, we did improve our operating ratio in 2013, coming in at 68.1%, 1.1 points better than the adjusted 2012 number.

And before leaving 2013, I'd like to remind everyone that this was the year that we attained the important financial objective of becoming investment grade. Immediately after achieving investment-grade status in the second quarter, we took advantage of historically low interest rates to undertake a major restructuring of our corporate debt. As a result, we doubled the company's weighted average maturity from 7 to 14 years, and we went from the Class 1 railroad with the highest weighted average coupon to having the lowest one in the industry.

In 2013 alone, we reduced our interest expense by $20 million, and since 2009, have taken out over $93 million of annual interest expense.

Becoming investment grade has made KCS a stronger company with a balance sheet that provides us with a lot of flexibility going forward.

On the next slide, 2013 is history. We've now turned our full attention to 2014. Before giving you a view of how we see the year developing for us, let me say we've taken long and hard looks at our forecast for the year ahead.

The first thing that becomes clear to me after working on our forecast is that there has been no loss of conviction among this management team that KCS has a superior long-term growth horizon. We're as confident in this as we were a year ago and as we were 2 years ago.

So with that, let me start with the volume growth, which we expect to follow in the mid single-digit range. We feel positive about our business growth coming from new and existing customers. That, coupled with not having to drag 3 quarters of wheat grain traffic and that utility coal, while still expected to be lower, won't be the same drag on our business as it was last year. This makes us feel very confident about our volume growth in 2014.

Given what I said earlier about low inflation, which we expect to remain low in 2014, the most accurate guidance we can give is that our overall core pricing will outpace inflation.

In terms of revenues, we are comfortable projecting high single-digit year-over-year revenue growth. Of course, KCS revenues can always be impacted either up or down by fluctuations in foreign exchange rates. Revenues can also be affected by the timing of the new auto and steel plants ramp up production and when new crude terminal facilities open.

Building these variables into our calculations, we believe our revenue projection is reasonable and very attainable. We certainly expect our operating ratio to improve. When you look at our performance over the last few years, you have pretty consistently seen improvement in our OR in the 1 to 1.5 point range. In fact, over the last 5 years, we have a 1.3 point average per year reduction in our OR. There is no reason you should not see something in that range again in 2014.

This year, we're adding a few new items to our list of guidance. First, total CapEx in 2014 will come in lower than 2013, but we'll still outpace the industry average of 17% to 18%.

KCS is still, first and foremost, a growth company. And we have to ensure that our resources are sufficient to take full advantage of our opportunities.

As such, our 2014 CapEx, as a percentage of revenues, will still be in the 20s, though considerably less than last year's 26%. Dave Ebbrecht will discuss our CapEx plan in a bit more detail during his presentation.

Finally, for the first time, we're providing some earnings per share guidance. For years, we've avoided doing so for a number of reasons. One of the reasons we backed away was due to a significant impact of fluctuations in the peso-dollar exchange rate add on our below-the-line financials. Now after a year of having an effective hedging mechanism in place, which has considerably mitigated the impacts of these swings on our earnings, we feel better about providing a degree of guidance.

Given the reasonably good economic conditions, we believe KCS is well positioned to record good annual EPS on a consistent annual basis. In 2014, we project that improvement to be in the mid teens. Embedded in the chart showing our EPS growth from 2010 to 2013 is the positive impact that restructuring our debt had on significantly reducing our interest expense.

Even though the opportunity to take up further interest expense is limited, we believe that given our abundant business growth opportunities and consistently strong operations KCS is positioned to continue to deliver double-digit EPS growth going forward.

With that, I will now turn over the presentation to Dave Ebbrecht and have a few comments at the end. Thank you.

David R. Ebbrecht

All right. Thanks, Dave. Okay, let's turn to Slide 10. We'll look at our ops leverage graph. We continue to emphasize our consistent ability to control costs here. Our ops costs have scaled well below the revenue growth over the past 4 years, and we'll continue to pursue 40% to 50% incremental margins.

The initiatives in network train management, our terminal efficiency, fuel optimization, capacity enhancements and our equipment utilizations continue to produce greater fluidity, headcount stabilization and a predictable cost pattern.

On Slide 11, our headcount controls continue to be very positive. Our headcount has been largely flat year-over-year with a small increase due to in-sourcing of work in Mexico.

As I've previously explained, we'll continue to see occasional dips in this efficiency metric due to seasonal variations in carloads shipped from quarter-to-quarter as we did in the fourth quarter, but the overall trend will remain positive.

We continue to hire in areas experiencing high growth rates, but most of our hiring is still for attrition purposes. We are also evaluating all contracted services in the U.S. and Mexico, and we'll experience stair-step increases in headcount as opportunities present themselves as financially accretive in the upcoming years.

On Slide 12, our velocity was at 27.8 miles per hour for the quarter [ph]. This was sequentially up over the third quarter.

Dwell was higher than last quarter by 2 hours at 21.9 hours, predominantly due to a mix shift of traffic through Shreveport and Jackson during peak season and holiday shutdowns as Thanksgiving, Christmas and New Year hurt the dwell metrics while we shut down in the terminals. Weather also played a role as we had to endure the ice storms after the Thanksgiving startup period.

While dwell and car efficiency experienced slight degradation during the fourth quarter, they are still indicative of a very solid performance and in the range necessary to execute our transportation service plan.

Flipping to Slide 13. I wanted to address the sizable decrease we have had in our maintenance away [ph] capital spend on a go-forward basis.

We're not deferring any maintenance spend. In fact, we have invested so heavily over the last 5 years to bring our mainline to a steady-state level of stability that we have achieved a more cyclical maintenance program. We'll continue to place the same importance on modeling growth, predicting capacity needs, executing a just-in-time approach towards our growth capital investments.

We see those capacity enhancements along the cross-border corridor, the Sanchez and the Nuevo León terminal complex, and the sidings needed for targeted growth opportunities.

Strategically, we'll continue to strengthen our Intermodal franchise on both sides of the border and invest in key corridor projects to handle the increased volumes of crude that we are projecting in the future. We also invested heavily in rolling stock equipment for auto and Intermodal growth while we continue to optimize the use of our existing fleet.

We are seeing very positive results from our capacity investments as indicated by the consistent performance of our train velocity at 27.8 miles per hour in the fourth quarter while achieving year-over-year record growth numbers.

We look to achieving greater fluidity in the upcoming years with our capacity improvements that will accommodate the significant growth opportunities ahead.

Now I'll turn it over to Pat.

Patrick J. Ottensmeyer

Okay, good morning, everyone. I will begin my comments on Slide 15. As you all saw in our press release this morning, revenues for the quarter were $615.6 million, up 8% from last year, and volumes increased by 2% to 543,600 units.

Both of these were record performance levels for the fourth quarter. And just for the record, our revenues and volumes for the full year of 2013 were also both all-time records. Mike Upchurch will review the full year results in a few minutes.

As Dave Starling mentioned earlier, we feel very good about the results for the fourth quarter, especially considering the impact that utility coal had on our overall revenues and volumes.

Our utility coal volumes were the lowest for any quarter since the beginning of 2006. Excluding the impact of utility coal, in other words, if it had just been flat from last year, our revenues and volumes would have grown by 12% and 4%, respectively, during the quarter.

So now, I'll get into a little more detail on the individual business units. First, revenues increased in our Chemical & Petroleum business by 2% on a 4% decline in carloads. The main driver in the volume reduction here was weakness in petroleum shipments in Mexico due to 2 large customers. In fact, these 2 shippers more than accounted for the entire volume decline in this business unit during the quarter.

The first case involved some residual impact of flooding in Southern Mexico earlier in the quarter in October as well as some terminal congestion on the part of our customer, which reduced the level of shipments. This was a temporary situation and, in fact, volumes for this customer are beginning to return to more normal levels in January.

The second case of the utility customer, again in Mexico, which shifted its power generation away from fuel oil to hydroelectric and natural gas, and we expect this weakness to continue for a good portion of 2014.

The only other business that merit comment here is agrochemicals, which was down by about 17% versus 2012, and the explanation is unfavorable comps due to the impact of strong shipments in the fourth quarter of 2012 as we were coming out of the drought. We are seeing this situation continue in the first quarter of 2014.

Moving onto Industrial & Consumer products. Revenues grew by 9% on a 1% increase in carloads. Areas of strength include metals and scrap, which was up 19%, driven by both volume and RPU growth, reflecting some new long-haul lanes for slab and pipe movements; appliances, up 38%, driven by volume growth due to strong housing-related markets and market share gains; lumber and plywood, up 10%, again, reflecting stronger housing and construction markets. These gains were partially offset by lower paper shipments, which were down slightly from last year primarily due to extended market-driven shutdowns at some of the plants we served during the quarter.

Our paper business continues to be a little soft so far in 2014, so we're watching this area pretty closely as we move into the new year as it feels like core demand may be slipping. I'll talk more about the outlook for this in a few minutes.

Moving onto Ag & Minerals, the phrase that comes to mind to describe the fourth quarter is easy comps. What a difference a crop makes in this business. A large portion of the growth in this business unit was long-haul cross-border grain, which you'll see in a minute, also is a primary driver behind the growth in our overall cross-border revenue that Dave mentioned earlier.

I think everyone remembers the drought of 2012 and the impact that it had an our Ag & Min business last year and into the first 9 months of 2013. The story has now run through the cycle, and we expect this business to be strong throughout 2014.

We also saw revenue growth in food products and ores and minerals, albeit to a lesser extent than grain.

Our Energy business unit wins the prize for underperformance this quarter, and that was primarily driven by lower utility coal volumes, but lower crude oil shipments also contributed to this weakness. As I mentioned earlier, utility coal volumes were at the lowest level we have seen for any quarter since the beginning of 2006. The explanation for this weakness includes the earlier than expected seasonal shutdown at one plant we serve in Texas, unplanned outages for 1 month at another plant we serve in Louisiana, and reduced shipments to a third plant that we serve due to derating in anticipation of permanently shutting down one generating unit there by the end of 2015.

Two of those factors are seasonal, and one is permanent, and I'll talk more about the impact on our outlook for utility coal in a few minutes.

Crude oil shipments declined by 8% during the quarter, which is the first time in a couple of years that we have seen decline in this business. Some of the factors driving this decline include shifting supply pattern among refiners, more light sweet crude coming into our service region by pipeline and water, and a shift in the destination for Bakken crude away from the Gulf and more toward the eastern refineries.

In addition, increased pipeline capacity and limited storage availability at one of the terminals we serve in the Port Arthur area contributed to the weakness. We still feel good about the long-term outlook for crude oil. As we have said in prior calls, our longer term opportunity is going to be driven more by the heavy crude coming from Canada, which did increase significantly during the quarter but not enough to offset the decline in Bakken and West Texas. Again, I'll talk more about the outlook for crude in a few minutes.

On the positive side, in our Energy business, pet coke and frac sand business both increased, by 14% and 9%, respectively.

Okay, moving on to more positive news. Revenues in our Intermodal business grew by 18% on volume growth of 3%. The bright spot here, once again, was our cross-border business, where we saw revenues grow by 64% and volume increase by 47%.

As was the case in the third quarter, volumes at Lázaro Cárdenas fell by about 4% in the fourth quarter. You may recall in our third quarter report, I mentioned that we would continue to have some headwinds in the fourth quarter due to an aluminum shipment for one particular customer that declined significantly over the course of last year. That was, in fact, the case. In removing the impact of this one shipper, our volumes would've been essentially flat to last year. We will be completely through that comp by the second quarter of 2014, but it really shouldn't be a material drag in the first quarter.

I will say that our outlook at Lázaro has improved as our volumes and revenue are both higher in January by 12% and 8%, respectively. A new call by 3 major ocean carriers and a vessel-sharing arrangement has contributed to this growth.

And finally, our Automotive business continues to show strong performance with revenues and volumes both increasing by 9% and 3%, respectively.

Negative foreign exchange movements caused a 1% reduction in revenues during the quarter.

The growth here was obviously driven by strong North American auto sales, new cross-border business, increased import and export activity at the Port of Lázaro Cárdenas. And we will just begin to see the impact of the new auto plants in Mexico in the spring of this year, and they will ramp up to full capacity, accelerating into 2015 and 2016.

Turning to Slide 16. You can see there our cross-border revenues increased significantly during the quarter, with grain being the primary driver of that increase. However, cross-border revenues increased in all of our business units versus last year. At $161 million and 26% of revenues, cross-border revenues were at an all-time high for any quarter.

Moving on to Slide 17. Here, we show full year growth rates for the 5 strategic growth areas, which at 22% combined, is significantly higher than our overall revenue growth rates.

Even with the weakness in the fourth quarter, our crude oil business grew by 51% versus the full year of 2012. These 5 businesses will continue to be the primary growth drivers for the years ahead.

On Slide 18, you can see we are expecting revenue growth in all 6 of our major business units this year, with Intermodal and Automotive continuing to be the fastest growers, both in the double-digit range.

As Dave Starling mentioned earlier, our guidance for 2014 is for mid single-digit volume growth, pricing above inflation and high single-digit revenue growth.

Here are some of the factors that we considered in putting the current guidance together. The ramp-up in production at the new auto plants will occur over a bit longer period of time than we foresaw a year ago. And this will have a ripple effect on other products like steel and plastics.

The opportunities are significant. The plants are built. They're going to be opening soon, but the growth will be realized over an extended timeframe than what we believed a year ago.

We know a lot more about the crude oil business than we did last year and have adjusted our outlook to more accurately reflect permitting issues and capacity constraints, specifically the heating equipment required to handle heavy crude -- Canadian crude in the Gulf region. Again, the opportunity is there but will play out over an extended time frame.

Finally, as we have all been painfully reminded over the last 2 years, coal and grain will always be driven by factors outside of our control, so we've taken a slightly more conservative view in those business units to consider the likelihood of unexpected events.

Our core merchandise business will grow in the single-digit range as we see strength continuing in steel, plastics, petroleum and housing-related products like appliances and lumber. As I mentioned earlier, our paper business has been little soft recently, but our customers continue to tell us that they do not see a downturn over the course of the full year.

We do know that some of the mills we serve were running at very high utilization rates last year, so we may have a bit of an inventory bubble to work through. But taking all of that into consideration, we are expecting modest growth in the core merchandise business this year.

Our Ag & Minerals business is expected to show single-digit revenue growth for the full year. Our grain business will have very easy comps into the first half or 8 months of the year, but we expect it to flatten out as we finish.

In spite of another year of declines in our utility coal business, which will be in the mid single-digit range, we expect positive single-digit revenue growth in our Energy business unit overall as frac sand, pet coke and crude oil will more than offset the lower coal revenues.

As I mentioned earlier, we will see the impact of new auto plants in Mexico in our volumes beginning in the second quarter, and that business will ramp up over a 2- to 3-year period. Expectation for North American auto sales are for growth of about 4% to 4.5% in 2014, and we will grow faster based on the impact of these new plants.

Intermodal growth will be driven primarily by truck-to-rail conversion in our cross-border business, which we feel has a lot of runway to grow for a very long-term horizon. As fast as we've grown this business, we are still barely at 3% share of the available market, which we estimate to be nearly 3 million trucks crossing the U.S.-Mexico border in markets that we can serve.

Moving on to Slide 19, we want to spend a little more time reviewing our crude oil network and providing a bit more detailed update on our outlook for that business.

In the past, we've talked a lot about our plans for the development of a Port Arthur crude terminal, and we continue to work on that project. In fact, nothing has really changed regarding our view of that commercial opportunity, and we remain confident that we will proceed with that projected build out.

That said, we have no additional information to share with you at this time regarding our proposed partnership on that project. We continue to work through permitting and design and construction details.

The main purpose of Slide 19 is to show you that our crude oil opportunity is more than just Port Arthur. And, in fact, we are working in several new opportunities throughout the Gulf region. In addition, as I mentioned before, we believe that our longer term crude opportunity is going to be heavy Canadian crude moving into the Gulf Coast region.

One of the factors that has proven to be somewhat of a constraint on our growth has been the installation of heating equipment to unload the crude at the destination terminals. Over the course of 2014, we will see that equipment installed at some of the destinations shown on this slide, which will significantly improve the ability of these terminals to handle Canadian crude in much larger quantities.

On Slide 20, I just want to touch briefly on the energy reform legislation that has been passed in the Constitution of Mexico last month. As I'm sure you are all aware, the Mexican Constitution has been amended to open energy markets to foreign investment and competition. The key point I want to make is that while we believe this reform could create significant new opportunities over a long term for KCS, it is way too early to know what the specific laws and regulations will be and how that might impact our revenues and volumes in the near future.

The timing and magnitude of any new opportunities is very much an unknown at this point, and we have nothing in our 2014 plan or guidance related to Mexican energy reform. We will provide additional guidance as the legislature defines the rules and regulations of this reform over the course of the next several months.

Finally, I'll wrap up on Slide 21. We feel good about the economy in both the U.S. and Mexico, and we are confident that we will grow faster than the rate of GDP growth shown on this slide. I've already covered the business unit outlook pretty well. The pricing environment, as Dave Starling mentioned, is still positive, and we see core pricing increasing higher than the rate of inflation.

Our long-term growth outlook is still very positive. I've covered most of these points already, but I haven't touched on one, which is the longer term outlook for growth in plastics, specifically the ethane and propane base production increases that have been announced in our service region. We are working on several exciting new business opportunities in that space and hope to have more details as the year progresses.

With that, I'll turn the presentation over to Mike.

Michael W. Upchurch

Thanks, Pat, and good morning, everyone. I'll start my comments on Slide 23. And as Pat previously covered, our fourth quarter volumes grew 2%, and revenue grew 8%, the result of favorable mix of traffic, which comes primarily from our Ag business.

Our operating ratio improved 1.4 points to 68.1%, representing a best-ever fourth quarter for KCS.

And our incremental margins were a strong 48% in the quarter, consistent with some of our prior comments and guidance of 40% to 50% incremental margins.

Reported EPS for the fourth quarter was $1.03, 24% higher than a year ago. But on an adjusted basis, we had $1.03, which represents a 12% increase over a year ago and represents a combination of strong operating income performance and continued improvement in our interest expense resulting from our debt restructuring this year.

Operating income increases provided an approximate lift of $0.14 per share versus a year ago, while interest provided another $0.03 per share versus fourth quarter of 2012.

Offsetting those increases in EPS was a higher adjusted tax rate of 37% versus 33.6% in 2012. Several factors contributed to this higher tax rate, including the Mexican government's decision in December to eliminate planned 1% income tax rate reductions that were scheduled to be implemented in 2014 and again in 2015. And that required us to revalue our deferred taxes at higher rates than what we had previously recorded.

This increase in others contributed to an approximately $3.5 million increase in tax expense in the fourth quarter, and coupled with tax credits of $2.7 million a year ago, caused an approximate $0.06 per share negative impact versus a year ago.

And we've provided more details in the Appendix for those of you interested in additional information related to our income taxes.

Turning to the full year on Slide 24, our carloads grew 2% while revenues grew 6%.

Our reported operating ratio increased from 2012 due to the $43 million credit we recorded a year ago related to the elimination of the deferred liability in the second quarter.

So on an adjusted basis, our operating ratio improved 1.1 points to a record 68.8%, and that's a rate of improvement that's been consistent with our prior year trends.

When adjusting for the elimination in the deferred liability in 2012, our incremental margins were an extremely good 56%. Reported EPS was $3.18, down 7% from 2012 largely due to debt retirement charges recorded in 2013.

On an adjusted basis, EPS grew 12%; $0.40 of our growth came from operating income increases, $0.12 came from interest expense reductions that totaled $20 million year-over-year, and then offsetting those increases were higher adjusted income tax rates of roughly 1.5 points, which contributed to an $0.08 decline in EPS.

Again, for further information on our tax rate, please refer to the Appendix information. And just to give you a perspective going into 2014, we would continue to expect an ETR of approximately 35% that does exclude any kind of FX changes.

While the FX rate was relatively stable in 2013 and did not have a significant impact on our Mexican tax obligation, we are pleased with the effectiveness of our hedge strategy. We've included a summary of that for you in the Appendix materials.

Turning to Slide 25. We've provided details of our reported to adjusted earnings per share, just to help you understand the details of debt retirement costs and the FX gain that we recorded in the quarter.

Turning to Slide 26, our operating expenses increased 6% in the quarter, below our 8% revenue growth but above our volume growth of 2%, which is largely related to the length of haul increases, particularly in our cross-border grain business.

Key contributors of the expense increase are included in the table on the right side, and I'll provide more details on each of those expenses in the next few slides.

So on Slide 27, let me start with compensation. We saw compensation expense increase $6 million, about 6% year-over-year. The increase was driven by higher volumes and wage inflation.

Our headcount increased by 115, or less than 2%, and when excluding the impact of the in-sourced track maintenance contract that we've been discussing all year, which contributed to 57 FTE, our headcount increased about 1% year-over-year, continuing our trend of maintaining headcount growth below our volume growth.

Turning to Slide 28, purchase services increased year-over-year. Higher track repairs and maintenance reflected higher repairs -- slightly higher repairs and the impact of a fourth quarter 2012 reimbursement for crossing closures, which was about $1.5 million, contributing to some negative comps on a year-over-year basis. Higher trackage rights are primarily related to the significant increases in cross-border grain that Pat covered earlier. And other increases were primarily volume driven, including lift costs in our Intermodal business.

Turning to Slide 29. Equipment costs decreased $2 million year-over-year due to the $4 million decrease in lease expense as a result of a second quarter purchase of locomotives that were previously under lease. This purchase did drive an increase of $2 million in depreciation expense, which I'll discuss in a couple of slides.

That reduction was partially offset by higher rental expenses and some lease turn-in costs that we accrued during the fourth quarter of 2013.

Turning our focus to fuel on Slide 30. Fuel expense did increase $8 million; $5 million of that increase from volumes and $3 million from price. The increased consumption was due to a 5% growth in our GTMs, representing both our volume growth and length of haul increases, again from our cross-border grain trades.

Price increases of 3% also contributed to our fuel expense growth. On a consolidated basis, you can see on the bar charts our fourth quarter of 2013, price per gallon was $3.08 compared to $2.99 in the fourth quarter of 2012.

We did see price declines of approximately 4% in the U.S. However, that was offset with price increases of 11% in Mexico as the Mexican government continued to escalate fuel prices to get closer to world market prices.

On Slide 31, let's turn our attention to depreciation. We saw a $6 million increase due to the increased asset base resulting from our higher capital expenditures and our equipment purchases to support our new growth opportunities.

Additionally, the second quarter of 2013 acquisition of locomotives that had previously been under lease contributed $2 million to our [ph] increased depreciation. But as I noted a couple of slides ago, we saw the offsetting reduction in lease expense.

And finally, let me cover our capital structure priorities on Slide 32. First and foremost, we continue to be bullish on our future opportunities. And accordingly, we'll continue to invest our operating cash flow into network and equipment investments as Dave reviewed earlier.

We do expect to see a slight decline in the CapEx to revenue ratio into the low 20s this year. Secondly, while optimizing our balance sheet is largely complete at this point, we did during fourth quarter and we'll continue early this year taking some smaller steps to further optimize our capital structure. And we will certainly continue to purchase assets under lease that will help improve not only our operating ratios but also our EPS.

And just for a little color, since we started this program back in late 2011, we've achieved roughly 70 basis points of OR improvement in a little over 2 years. But I think it's also important to know that we've consistently said there is no silver bullet in buying these assets since our lessors have to be willing to sell the equipment to us and at prices that are economically attractive. Otherwise, there isn't a benefit to our shareholders.

We continue to believe this will be a 5- to 8-year journey as the optimal time to purchase that equipment typically is at a time that is close to lease termination where penalties are minimized.

But as with the refinancing of our debt, we'll continue to evaluate this and are certainly willing to absorb any kind of onetime early termination charges to the extent those transactions make sense.

We did complete the redemption of our 6.125% notes in the fourth quarter, and we'll redeem the remaining 8% notes next month.

Finally, we're also completing the restructuring of our credit facilities to support the launch of a commercial paper program that we are scheduled to do in February, and that will continue to allow us to access alternative funding on the most economical terms.

And finally, turning to our dividend. Our yield has certainly declined below the 1% level that we initiated the dividend at a couple of years ago. We are continuing to evaluate that. But those are board decisions, and we will keep you apprised accordingly of any decisions with respect to the dividend.

With that, I'll turn the call back over to Dave Starling.

David L. Starling

Okay, thank you, Mike. Before opening it up for your questions, let me say again that we feel good about our fourth quarter and the full year 2013. Revenues were solid. Our operating ratio continues to improve in the range we have achieved over the last 4 years.

In addition, for the fourth consecutive year, KCS delivered double-digit earnings growth in 2013, and we look forward to making it 5 years in a row in 2014.

Finally, revenues through the first few weeks of 2014 continue to be strong and are, again, being driven primarily by cross-border volumes.

These volumes should remain strong during the year since we now have a good grain crop. And as production ramps up at the new auto plants, the majority of that business we've been awarded for the new plants is long-haul cross-border.

Pat also discussed Mexican energy reform. While I echo what he said, there is certainly nothing in our forecast related to energy reform, nor have we as yet have a timeline for when we might see development. Still, there would appear to be a number of opportunities for KCS in the future.

Everything from transporting refined products cross border, moving frac sand from U.S. sources into Mexico and eventually moving crude and tank cars would seem to be an opportunity for us at some point.

And lastly, it appears that we may be nearing a point where there will be some more clarity around the much-discussed large-scale increase of ethylene and polyethylene production capacity in the Gulf area.

Again, any revenues for KCS are still a ways off, but we expect that during the year, we may get a better understanding of what the growth opportunity might be for us.

So please, stay tuned. It should be another interesting year. Now we'll be happy to take your questions. And as we stated earlier, we'd like to keep it to one question and one follow-up. So with that, I'll turn it over to the...

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of William Greene of Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Dave or Pat, can I ask you to comment a little bit more on this sort of 5-year view? Because we talked a lot about '13 as being a bridge year. You got 12% growth in earnings it seems like this year. So kind of mid teens isn't really sort of the ramp, I think, that folks were thinking was going to happen this year. So can you talk about how that growth rate should evolve? Does it accelerate? Or is mid teens and double digit about what we should expect kind of a longer term steady state?

David L. Starling

Well, I'll make a couple of comments and then turn it over to Pat. Some of the commodity groups like automotive, until the plants were actually completed and we could finally get a number from them on how long it was going to take for the ramp-up, there's just a little more lead time than we had thought. For instance, just one auto plant that will not start really producing any significant volume until March, but then when you look at '15, that production doubles. So we're finding this at several of the plants that there's just a longer startup, there's more testing, there's more product inspection, quality issues for them to finally get up to their full production. It's not the fact that the market's not there. That just takes longer. And certainly on the crude by rail, with everything that's going on today, [indiscernible] in the derailments that they've had and all of the press and potential regulation, people are a lot more nervous, and the permitting process seems to be taking longer. We certainly don't see the desire to move the crude by rail stopping. In fact, the meetings we've had in Washington have been we recognize that we, as a country, have an opportunity to become energy self-sufficient. And the Bakken crude and the Canadian crude are a big part of that. So we don't see that there's going to be any change in direction, but it's going to take a little more time. We're going to have to modify some tank cars. There's definitely going to be a little more regulation, but no one is saying we shouldn't move this in tank cars within the space that we're working in. So some of these things may take a little bit longer. Our Intermodal is still moving at the pace we expected it to. We're very, very pleased with the grain. But there's just been a few factors that are outside of what we control. Again, the long-term projection is there, but it may -- we may stairstep into it over the next 2 to 3 years. Pat?

Patrick J. Ottensmeyer

No, I think that's right. As we've talked in the past, the -- and I mentioned in my comments, the auto production and the auto business has a big ripple effect in terms of plastics and steel and those other commodities that we move that are connected to auto plants. So as the auto forecast ramps up slower than we might have expected a year ago, it has an impact on other commodity groups as well. And I agree with Dave, I think in terms of the crude oil, we still feel that, that opportunity is there and could be significant in the Port Arthur region and the Gulf region. It's just going to take a little longer than we had hoped and thought to develop.

William J. Greene - Morgan Stanley, Research Division

Okay, do you -- Pat, do you feel like you can increasingly use this low operating ratio as a way to stimulate demand, so use price a little bit? Does that matter at all? Or is this really just the underlying organic growth rate, and when it comes, it's going to come, and the pipeline looks good. But price isn't really a factor?

Patrick J. Ottensmeyer

No. We're not -- we don't see price as a factor to drive demand. It's really the pipeline is -- I mean, it's a very good pipeline. We've got a lot of new business opportunities to talk about the plastics. Dave mentioned the plastics capacity. Still unclear about the timing and magnitude, but there's just a lot of stuff taking place in our service region. So it really is more of a timing issue and a ramp-up, and this may be a little bit longer, steady ramp-up then the stairstep that we might have expected a year ago.

David L. Starling

And just a follow-up on your question, Bill. If we went to the auto plants today and dropped our rates, it wouldn't cause them to change their production in the auto plants. I mean, they've got a market today they want to ship to, but they've got to go through all their testing -- all the quality testing that they do, and then will -- they've already told us how many they'll produce, and they've already told us that they will double. That's their plan. But it is going to be a '14 and '15 issue.

William J. Greene - Morgan Stanley, Research Division

Just the reverse make a difference if you raise the price? Is there no effect?

David L. Starling

We've already given them a price. I don't know if...

Operator

The next question is from the line of Allison Landry of Crédit Suisse.

Allison M. Landry - Crédit Suisse AG, Research Division

I was hoping you could help me bridge the revenue and OR guidance for '14. If I think about somewhere in the high single-digit revenue growth range and assume 150 basis points of OR improvement, it's implying contribution margins of roughly 50%. But given that your strongest growth is still expected to come from cross-border Intermodal and cross-border Automotive, I would think that more of the profit would fall through to the bottom line given the longer length of haul on this business. So I was wondering if you could walk me through this.

David L. Starling

This is Dave, Allison. I'll take the OR question. One thing is we're continuing to grow and ramp up our Intermodal business. We are creating new train starts. So we have more service offerings than we've had today. We've now got our route over Jackson to Chicago that we didn't have in the past. And in order to be truck competitive, we need to create some new train starts to have the service we need to be competitive. So there is going to be some stairstepping of train starts and a little bit more cost. And then we start to fill these trains out incrementally that falls to the bottom line. So it's a little bit of a chicken and an egg in the next 12 to 18 months.

Allison M. Landry - Crédit Suisse AG, Research Division

Okay. And I guess my follow-up question, do you think -- some of your peers are expecting similar revenue and earnings growth in '14, albeit some of that comes from share repurchases on the EPS side. But historically, you've really posted outsized growth relative to the industry. And given that we're, I guess, theoretically beyond the bridge year, I would think the growth gap would be widening and not narrowing? So as we think about 2014, is this sort of another bridge year? And are we -- is it a function of pushing out growth to '15 because of the timing of autos and crude? And can you return to something on the 20% EPS growth range in 2015?

David L. Starling

I'm not sure that we can return to 20%. We had a lot of interest taken out the last 4 years. So today, what we're doing is continuing to work the opportunity. I think what you're seeing is the same answer that I gave Bill earlier. The auto plants, when they first gave us their projections, they gave us what their plant could produce. So those are the plug-in numbers we use. Now the reality is when they sit down with us, they give us their ramp-up over 2 years. So we were somewhat disappointed that they weren't going to start out at a higher production, but it's something that we can't control. So that's been a little bit of the issue going from what we thought was going to be a little heavier '14 on autos, and that would be a true statement that, that will bridge out into '15. The crude by rail, a little bit different. You had -- we think we're going to be more of a heavy crude play because of being in the Gulf. That is just taking longer to get those origins in Canada, and it's taking longer to get the permitting done in the Port Arthur area. And if you saw in Pat's map, there's a couple of other areas there that don't require permitting because they're already in the chemical patch and they already have facilities. But it's going to take several months for us to get the connection built in and get them online. So they're there, but they're just taking a little longer than we thought they [ph] would.

Patrick J. Ottensmeyer

I guess, Allison, on the revenue side, if I think about the plans that we've prepared and then kind of the way we look at some of these opportunities, auto, crude, some of the other things we've talked about, I would say we haven't really changed our estimate or assessment of the ultimate size of those opportunities. It's really the timing and the rate of ramp-up that has changed. So I just don't feel like we feel that the size of the prize, so to speak, is any smaller. It's just going to be a different trajectory and, perhaps, a longer trajectory to get there.

David L. Starling

But it's still going to be double-digit EPS.

Operator

Our next question is from the line of Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I guess, I've probably a few around the same theme here. But when you -- Dave, when you think about the guidance, it does seem that -- so I understand you're not going to have as much interest expense reduction benefit to earnings. That makes sense. That's been a nice incremental driver. But what about on the OR improvement side? Is that also a bit slower? Because even as you've had slower volume growth in, let's say, the past 2 years, you've still done a great job in productivity and margin expansion. And, I guess, if Pat's comments are accurate about still seeing some acceleration in 2015, I guess, the 20% earnings growth number doesn't really seem that aggressive given your kind of your track record and history and also given the idea that the margin improvement could be better than 100 basis points a year. So I know it's kind of the same theme, but if you could give some more thoughts around that.

David L. Starling

Well, we're going to continue to work on the operating ratio. I mean, you know in the past, we've kind of given the standard guidance of 1 to 1.5. It's been a combination of some interest savings, but our -- lease savings, but also operating improvement. I think we will continue to improve. We've been very reluctant to put a number out there. We may very well do much better than 1.5, but right now, the guidance that we feel comfortable giving is the 1 to 1.5 points. I think that is going to be doable. Could we do better than that? Possibly. But that's the guidance that we feel comfortable with today.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

And is there -- I think you said that -- maybe you can clarify and make sure I understand right. Is there room for an acceleration from the mid teens when you look at 2015? It would seen that, I guess, if your -- there's a timing issue, and you could see acceleration in revenue that, that earnings could accelerate in 2015 as well. Or is that just, you got a bunch of moving parts, and that's just not realistic anymore?

David L. Starling

Well, I think it would depend. Intermodal, as we get the new train starts, Tom, could actually expand faster than we have in our plan. Usually when you start new services, you can have quicker conversions. The auto production in Mexico could be greater than we think it's going to be in '15. All we know is what they tell us today. The crude by rail could be the wildcard. There's, again, a lot of moving parts. The permits could come suddenly a lot faster. And if they do, our customer down there is very anxious to get started, so we could have some faster run-ups. We just -- we're somewhat concerned about our credibility because we've been coming to you and telling you what we were going to do, and did we decide to be a little more conservative and then make sure we hit these numbers? Probably so. Because these things we don't control. So we wanted to come in and be very, very realistic. We spent more time on this forecast than any forecast we've ever spent time on. So there are some unknowns out there that are all -- could turn very positive, but we just can't tell you that they're going to today. They look good. They're there. But we don't know what the schedule is.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

That's fair in setting a realistic bar, makes a lot of sense. But if you did see revenue accelerate in 2015, is there a reason to think that earnings wouldn't also follow that?

David L. Starling

Oh, Absolutely, it would.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

It would. Okay.

David L. Starling

We are, by no means, changing our story on our long-term growth. I think where we -- what we want to be realistic, we want to be credible. You know we're a company that's very concerned about giving you guidance and then hitting it. And we just wanted to be realistic this year, and there are some variables out there we don't control. We don't think we're going to lose any of these. We think they are definitely coming. It's one reason that we didn't jump out and try to give you some number on Mexican energy reform. We could have thrown some numbers in there and said, "We think we can do this and this." That will also be a surprise for all of us. We definitely know there will be cargo that will be moved, but we don't know what it is yet, so we're not going to tell you. We're not going to give you any numbers.

Operator

The next question is from the line of Jason Seidl with Cowen and Company.

Jason H. Seidl - Cowen and Company, LLC, Research Division

When looking at the numbers here for 2014, are we to assume that you don't have anything built in there for the crude stuff that you had talked to us about in couple of past quarters?

Patrick J. Ottensmeyer

We have crude growth in our plans, Jason. But as I said earlier, as we've gotten into some of the bigger projects, we have seen that they have taken -- they're going to take longer to materialize than we might have expected a year ago. But we do have crude growth, as I mentioned in my comments. Our energy sector is expected to grow, and energy business unit will show growth even though utility coal, with still the majority of our business there, is going to decline in the mid single-digit proportion.

Jason H. Seidl - Cowen and Company, LLC, Research Division

So you still have crude growth, but nothing coming on from the Navy's big projects?

Patrick J. Ottensmeyer

That's not -- if you looked at the map, the Port Arthur crude terminal is definitely going to take longer than we thought in the past. Again, as I said earlier, I don't think we feel that the size of the prize is necessarily any smaller. It's just going to be a different path to get there. In the meantime, we've actually had 2 or 3 other crude opportunities come up over the course of the last 2 or 3 quarters that we didn't anticipate. But some of these projects will begin to produce and are producing revenues today.

Jason H. Seidl - Cowen and Company, LLC, Research Division

So Port Arthur is out of your projections, but some of the other ones are in?

Patrick J. Ottensmeyer

No, I didn't say that. I mean, Port Arthur is going to take longer. We still will be -- we expect to deliver crude oil to Port Arthur this year. We will. It's a big project that we're working on. It's going to take longer.

Jason H. Seidl - Cowen and Company, LLC, Research Division

Okay, that's fair enough. And you mentioned -- earlier in the presentation, you talked a little bit about pricing and some of the impacts of RCAF here for 2014. Could you remind us what percent of your business flows into RCAF?

Patrick J. Ottensmeyer

Almost all of our coal business does, and that's really the predominant portion of it. So our coal contracts are all locked in, and they all basically have some RCAF or AILFF [ph] type of adjustments.

Operator

Next question comes from the line of Chris Wetherbee of Citigroup.

Christian Wetherbee - Citigroup Inc, Research Division

Just a question, Dave, I think you highlighted maybe some of what the variances could be for '15 and the reacceleration of revenue growth. I guess I just wanted to think about the '14 outlook when you guys were putting that together. Were there any specific items -- or what were the specific items that maybe could give you variance to the downside or upside? What were the ones that were sort of the toughest ones to call for '14? I guess I just want to get a rough sense as to where the potential question marks may lie this year.

David L. Starling

Well, I think the -- as I stated earlier, the one surprise, and we don't think that it's going to cause a future downside because the market's good is we did think, and when we did our plan last year, that the auto production in Mexico would be coming up much quicker. So that one was a surprise to us. It was a surprise in 2 ways. Number one, they didn't even start the production in January, so it's going to take probably the second or third quarter before they're up to what they would consider to be full production this year. And then they're still half of what they're going to be for next year. So that was one. The crude and the fact that the incidents that we've had out there have created a little more delays in permitting. So some of the crude by rail into a greenfield site is starting to take longer than us or the customer anticipated. If you are going into a site that already is being used to move chemicals or like Tuscaloosa, and all you're doing is increasing your footprint or increasing your growth or building a new track in, that we don't have a problem. But even those are going to be probably not ramping up like we had thought they would until maybe the third quarter. So we've handicapped this, and we took our rose-colored [ph] glasses off and said, "You know, these guys say they're going to start in February. Let's plug them in the plan for 3 months later." Because nobody is exactly hitting exactly what they're telling us they were going to do because of permits. So that is probably been the best I can give you on how we've handicapped the plan this year. If everything goes right, '15 could look totally different.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that makes sense. That's helpful. And then just switching gears, just to talk very briefly about price. It sounds like the underlying sort of pricing dynamic has not changed for you. There's obviously some inflation adjustment potential for 2014. But when you think about sort of the new business wins and when you just kind of put the entire sort of yield book together for '14, can you just sort of give us a little bit of color on that benefits potentially for mix or headwinds for mix and sort of just what the pricing dynamic on that business looks like right now?

Patrick J. Ottensmeyer

There's a lot of questions in there, Chris. If you're talking about price or you're talking about revenue per unit, I don't -- mix -- I don't feel like there's a different pricing outlook. Obviously, the coal business is different because of the nature of those contracts and the price adjustments are built into the contracts. So until the contract renews, we obviously just take what the market gives us. But as far as the other businesses, I feel like we've got opportunities to see pricing gains kind of across the portfolio. As we said in the past and as you saw on the slide in the presentation here, Mexican inflation is running a little higher than U.S. So we price kind of based on market conditions and inflation expectations in both markets. So we feel like we might end up with a little bit better pricing view than some of our peers because of the impact of Mexico. I don't know if I'm giving you a satisfying answer, but I think we see -- and new contracts are coming up for renewal. We're seeing good opportunities to take rate increases.

Operator

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

Brandon R. Oglenski - Barclays Capital, Research Division

Pat or Dave, can you talk a little bit to the competition that you're seeing south of the border and even north of the border? I know in the past, you're saying as these new contracts come on board, you're looking to capture more of the length of haul that's moving in the U.S. Has that just gotten more competitive as well in the last few months? How's that changing?

David L. Starling

I'll start off and let Pat close. No, I mean, we're increasing our length of haul. We're still increasing our Intermodal business. Certainly, there are other service offerings into Mexico. It is a huge market. The El Paso gateway works very well for the West. We've got other gateways that work better for the West. So I think you're going to continue to see new services offered into Mexico other than ours. But we certainly don't have a problem with the position that we're in, the facilities that we have or the service that we offer. And we're -- haven't found ourselves needing to change rates or do anything to be competitive.

Patrick J. Ottensmeyer

I think what's happening is that it's actually somewhat encouraging to hear other people talking about the opportunity the same -- kind of in the same light that we are because, as you know, we've been talking about this cross-border Intermodal truck-to-rail conversion for quite a while. And as Dave said, it's a huge market. It's probably bigger than we could handle on our own long term. So there is -- it's not surprising us that we're seeing other people want to get into that. That's what we're hearing from our asset partners as well. And if you look at the cross-border revenue growth that we've -- we showed this quarter, all of our business units showed increases in cross-border trades. Some of that is growth in cross-border trade between U.S. and Mexico, and some of that has been market share gains.

Brandon R. Oglenski - Barclays Capital, Research Division

Well, and Pat, maybe if I can follow up on that, too. Specific to the Intermodal business, we see the growth rate on your transborder traffic, but can you talk about some of the moving pieces again on that lost contracts business, and how the growth is going to ramp up in that segment this year.

Patrick J. Ottensmeyer

On that -- how -- can you repeat the end of your question there?

Brandon R. Oglenski - Barclays Capital, Research Division

Yes. Well, there's a lot of moving pieces in the Intermodal business right now that are skewing some of those growth rates. I mean, obviously, your transborder business is growing at a very fast pace, but you do have that contract loss that you're lapping. Can you talk about how that growth rate is going to ramp through the year?

Patrick J. Ottensmeyer

What contract loss are we lapping?

Brandon R. Oglenski - Barclays Capital, Research Division

Or your customer loss, sorry, in the Intermodal business?

Patrick J. Ottensmeyer

Oh, that's Lázaro Cárdenas.

Brandon R. Oglenski - Barclays Capital, Research Division

Yes. Right.

Patrick J. Ottensmeyer

So you got to keep those separate, really, because our cross-border-business is the truck-to-rail conversion. The loss of the contract at Lázaro Cárdenas was an import shipment from Asia, and we will lap that. So that's why...

David L. Starling

That was not cross border.

Patrick J. Ottensmeyer

That was not cross border.

David L. Starling

Intra-Mexico.

Patrick J. Ottensmeyer

That was intra-Mexico, so -- and we are starting to see -- as I mentioned, that still had an impact in the fourth quarter. We won't lap it completely until February, but it really won't have a big impact in the first quarter. So we are seeing, as I mentioned in my comments, Lázaro, so far -- and realize it's only 22 days, but our Lázaro business is up pretty nicely so far in January. And we've got new service offerings that have certainly helped that performance. The other thing we've talked about, just before I move on, that -- and it's still under construction on the board for 2015. And again, we don't know how quickly this is going to ramp up or affect the business at Lázaro, but we have another terminal operator who's in the process of building out a second Intermodal terminal at Lázaro. And it's all -- we've talked about this several times in the past, APM Terminals. They've announced publicly their plans to spend $900 million developing that site. So we think, long-term, again, that bodes very well for the growth at Lázaro Cárdenas. On the cross-border side, big market. We have a very small share. We are growing rapidly. As Dave mentioned, we expect to add service this year in our cross-border product. We think that, that could actually, possibly accelerate our rate of growth as we move through the year and into 2015 because as our service becomes more truck-like, it will help drive growth because, right now, our service is not as close to truck transit times in some of the markets that we are targeting. But all of our -- we're pursuing a wholesale strategy as far as our cross-border Intermodal is concerned, so we're working with our asset partners. And we continue to see very high level of engagement with them in terms of adding equipment, adding sales resources and really going after this market. So we think we can keep those growth rates up very high. And as I've said, our market share is very low. And there's no reason we can't get to the same level of market share, ultimately, that you're seeing in some of the more mature Intermodal lanes in the U.S.

Operator

The next question is from the line of Matt Troy with Susquehanna.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

I just wanted to circle back on 2 specific comments earlier. One on the coal plant, specifically, you indicated you had a derating. I think we saw that in the press. I just want to understand, in terms of staging, since you only do have, what is it, 8 or 9 coal utilities, just give a sense of order magnitude, what does it mean to the total book? And per your comments that, that plant would be shut down in 2015, what -- is there a wind down? Or will we see the full effect of the shutdown in your volumes this year? I just want to get a sense of pacing.

Patrick J. Ottensmeyer

I think, again, we're -- I'm giving you my comments based on what we're hearing from customers. It's always -- it can be wrong. I think you'll see most of it, and again, maybe this is where -- going back to some of the commentary on the guidance, where we've assumed that it's going to be pretty rapid over the course of this year. And it's about -- in total, it's about mid single digits, call it 5% or 6% of our total coal business.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Okay. That's...

Patrick J. Ottensmeyer

That's kind of the explanation for the mid single-digit decline that we're seeing in the coal business for 2014.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Right, right. And it...

Patrick J. Ottensmeyer

Possible -- it's -- the agreement that they have struck is by closing that plant down by 2015, we're assuming it's going to happen sooner.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Got it. The follow-up question would be just your comments on the lower paper shipments. I know you said that there was a plant shutdown, but I was just interested more in your second comment about there was some sense that there was some slippage in core demand. And now paper's obviously a difficult business given digitization and substitution of media, but I was wondering if you were making a broader statement because paper, traditionally, has been viewed as a harbinger for the economy about that particular customer? Or did you see the paper business across your franchise as being somewhat more moderate than we would expect it? Just a little color, please.

Patrick J. Ottensmeyer

That's actually a good question, and it was more isolated to one large customer. We didn't see it kind of across the board, and it sort of depends on the product. But we also know that, as I mentioned, production levels were very high going into the end of the year. I would say higher than normal, so we're still kind of trying to sort out if this is an inventory issue that will work itself out over a few weeks, or whether there is some softening in demand, at least for some of these products. So what we've heard from the customer is that they don't see a downturn. What we've seen in our volumes is that they've been lower. So we're kind of trying to make sense out of it. And it's a little too soon to know for sure how that's going to play out, but we're keeping an a eye on it.

David L. Starling

But we're not looking at it right now as an indication that the economy's going down. I mean, we're looking at it more from our customers’ view that they are down.

Patrick J. Ottensmeyer

And if we think about the products and some of the markets that they serve, we're not seeing declines in those areas. But -- so it's one that we'll kind of stay tuned on, but, certainly, one that stands out.

Operator

The next question is from the line of Ken Hoexter of Bank of America.

Ken Hoexter - BofA Merrill Lynch, Research Division

On the -- I thought the -- on the rollout that the 2 auto plants were coming on in -- at the end of '13 and a couple were -- 2 more coming in, in early '14. Just want to understand, when did you get the revised ramp-up schedules? And to Dave, your point on the -- 2015, are they now talking about full production by 2015? Or is that level the doubling to full initial production levels?

Patrick J. Ottensmeyer

This has been an evolving process, Ken, as they have gotten closer to production and, really, kind of understood, I guess, it's one thing to say that they're going to start producing autos. But then, in one case, what we learned, as we get into the details, is it's very small production runs that really aren't going to impact our volumes to as great an extent for some period of time. So if you look at the 3 plants that have opened, one has actually opened in December, but again, producing at very small levels. The others were not -- the other 2 were originally expected to open in the first quarter, which they will. And by open, I mean, they will be producing vehicles. But as it turns out, the rate of production of those vehicles is going to be very small. They're going to -- in one case, it's a new product where they're literally going to produce a handful of vehicles for their dealers throughout North America. And then the real production ramp-up will occur kind of over the second quarter and into the back half of the year. And then, again, I'm speaking about one plant, just to give you an example, but their production is expected to double in 2015.

Michael W. Upchurch

Ken, this is Mike. You asked questions specifically when. And as you can imagine, this is a fairly fluid situation where you continually get updates from customers. But the total production of those new facilities is still slightly above 600,000. During the fourth quarter, we were out at a couple of conferences indicating this was going to be a little bit slower, and that we expected about half of that to be produced in 2014.

Ken Hoexter - BofA Merrill Lynch, Research Division

[indiscernible] You go ahead.

Patrick J. Ottensmeyer

Ken raises a good point that I'll go back to comments that Dave and I made earlier, is that the size of the price here is still the same. These plants will produce. The 3 of them that have opened will produce over 600,000 vehicles. It's just going to be a different trajectory to get there.

Ken Hoexter - BofA Merrill Lynch, Research Division

Yes, I get that. But I guess if you're talking about 3 different auto plants and that size of a difference, and as they got that close to production -- I mean, were they giving you that large of a difference in terms of number, even up until the end of, I guess, mid October in terms of their ramp schedule that had changed -- I imagine just in terms of discussions in terms of prepping equipment, locomotives and crews and everything on your side to change the production level in this quick of a timeframe just seems all 3 -- 3 different companies that are producing autos, just seems a sizable extreme to have that impact to their entire supply chain right as you launch those plants. It just seems a large impact from 3 different companies or 3 different customers to throw all at the same time.

Michael W. Upchurch

Well, Ken, I don't think it's really that significantly different. I think the production capacity has always been slightly above 600,000. And like I said, as they got closer to opening those plants, we got revised forecasts. And as I indicated, out at several conferences, indicated that we expected about half of that total production capacity to be produced in 2014 with the remainder of the ramp going into 2015.

Ken Hoexter - BofA Merrill Lynch, Research Division

I'm sorry. I must have missed that. So you were already indicating ahead of this that, that production will be half that level?

Michael W. Upchurch

About 300,000, right.

Patrick J. Ottensmeyer

Yes.

Ken Hoexter - BofA Merrill Lynch, Research Division

So the -- let me just jump over to crude. I guess, same thing in terms of the development, I guess. But this is more market based, I'm guessing, in the switch from Bakken moving east. And, I guess, can you describe -- is that a -- is that just a spread issue that's driving the Bakken east and the time on Canadian crude coming down? I guess, when do you expect that transition to move down south? And what kind of timeframe?

Patrick J. Ottensmeyer

We're moving crude -- and our Canadian crude actually grew quite a bit, even though it's a smaller base than the Bakken and West Texas. And I think you're exactly right. What we saw, sort of a double whammy, if you will, is the West Texas and Bakken -- and I think you've seen this in one of our peers, is really because of the pricing, the spreads, it was sort of diverted away from the Gulf Coast. So we were moving Bakken. We did not necessarily expect that it would move away from the Gulf Coast as quickly as it did. And on the Canadian crude, we are ramping up, and we will see heating equipment and storage equipment being added to the terminals that we serve this year. So we are forecasting and expecting pretty good growth in our crude oil year-over-year. But some of the bigger projects, like the one that we've been talking about at Port Arthur, are going to take longer than we expected largely because of some of the permitting issues that Dave mentioned. And so, again, I don't -- we don't feel differently about the ultimate size of the opportunity. It's just going to take a little longer to get there.

Ken Hoexter - BofA Merrill Lynch, Research Division

Pat, can you give the -- did you give the mix of what is West Texas versus -- or Bakken and West Texas versus Canadian crude in your, maybe, this quarter and last quarter?

Patrick J. Ottensmeyer

If you look at this quarter, it was almost all Canadian, very little Bakken and West Texas. And last quarter, I mean, it would have been predominantly Bakken and West Texas. So we saw a pretty rapid flip in terms of the origin that we are handling.

Michael W. Upchurch

Ken, this is Mike again. All the way back into September, we were providing some details on the 3 different origins and what was happening to Bakken and West Texas, which was clearly declining, partly because of the spread issue, and that Canadian crude was still rather strong. So that mix shift began taking place late summer, and we were indicating that in the September timeframe.

David L. Starling

And I think we would have actually seen that start to hit the Eastern rails, too, as they're crude by rail went up.

Operator

Our next question is from the line of John Larkin of Stifel.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

With the shift towards more of a long-term focus on heavy crude coming out of Canada and with the possibility of the northern half of the Keystone pipeline being approved in light of all the crude by rail incidents, often there's a knee-jerk reaction to that sort of thing. Does that give you any heartburn in terms of investing to position yourself to handle more heavy crude out of Canada going forward? Can the Keystone handle all that will be coming to the Gulf? Or is that just a small fraction of the total?

Patrick J. Ottensmeyer

John, yes, we think the Keystone can handle about 50% of the volume that -- the import volume that the Port Arthur requires. And for some of the same reasons that we've talked about and others have talked about in the past, even if the pipeline capacity gets built, we believe that there are -- there is a role for crude by rail in terms of capital investment, lower capital investment, flexibility, you know the reasons. So we're still seeing and hearing that those factors will prevail in making the crude by rail sustainable. As far as the investment, a lot of the investment has taken place, and our service region is not on us. The shippers typically own the cars. So our investment's going to be track capacity to handle the trains, which we will make as the business occurs in locomotives, so -- and the arrangement that we've been talking about at Port Arthur in terms of the large crude terminal. Again, we're working with a partner, and the capital investment for the facility will largely be theirs.

David L. Starling

And if I could add to that, too. The rail's secret sauce is the fact that we can take the condensate and move that back to the origin. That's a real problem with a pipeline. So our crude-by-rail customers -- and some of these customers are pipeline customers, tell us that our secret sauce is not only are we a mobile pipeline, but they will make arrangements to take that condensate and move it back up to Canada. So that is -- we're being told a big advantage.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

And then maybe just as a follow-on on the Intermodal side. Clearly, your cross-border business is growing at a very rapid clip off a small base. But given the compelling economics and how much easier it is to sort of clear customs, et cetera, going by rail, you would've thought maybe that transition from highway to rail would've even been faster. Are there any capacity utilization issues on your system? Or are there service improvements that need to be made to really convince the truckers that Intermodal is a very capable substitute for the over-the-road alternative?

David L. Starling

Well, density gives you more direct trains. I've spoke about this in the past. When you don't have solid trains out of origins, then you end up doing kind of a milk run and picking up 3 different terminals in Mexico rather than coming out of one. So we're getting to those points where we're starting to build the density. And then when we do that, we create the train start. That's how I answered the question earlier about the cost side of it. There will be a little bit of a chicken and an egg where we have to create a new train start with more of a -- 2 origin, 2 destination, rather than 4 or 5 origins and multiple destinations. So we make a lot of blocks right now to service a lot of markets. So that will start to get cleaned up as we get more business. So it's really a density issue, and that will improve the service. So yes, you get to levels where you're more truck-like and you get more business, then it helps you get to the next level to get even faster than truck. But we do have that advantage at the border crossing. But we're continuing to grow. And the partners that we're growing with have not lost their conviction. And there's a lot of issues coming up on the truck side this year, next year. They've got their own regulatory issues. They've still got HOSS [ph] to deal with. They've got CAS [ph] to deal with. They're going to have to pay their drivers more. So they still see -- the truckers do that Intermodal is going to be one of their major tools for a long time.

Operator

The next question is from the line of Justin Long with Stephens.

Justin Long - Stephens Inc., Research Division

On the cost side of the equation, you've talked about the lease-to-own strategy for locomotives. But I was curious if you could provide some other areas from a productivity or a cost-initiative standpoint where you feel like you can drive additional margin expansion going forward.

David R. Ebbrecht

Sure, this is Dave Ebbrecht. We have multiple areas where we continue to look at how we can drive costs down. The first thing that we wanted to invest in is our yards and look at our critical production yards as we grow and invest just ahead of the growth and grow smartly in our yards building out, our receiving yards and our capability to receive and handle trains. The next is we want to look at our secure corridor and the efficiencies at the international bridge and to continue to build the capacity for the future to handle all the increased growth that will be coming out of Mexico. Then we're doing a lot of things around the infusion of technology within our rail operations, everything from the use of inward-facing cameras that we believe is just going to have great value to how we operate and really mitigate a lot of our failure cost, to asset help and wayside indicators that will help to prevent any type of catastrophic failures on the rail side. We also are doing things like installing CTC, centralized traffic control, on Laredo sub. It's going to greatly improve the fluidity between Laredo up to the Robstown area. And there's all sorts of things that we're looking at as far as automated clearance systems in Mexico to look in camera technology at the border for security purposes and going to one crew, handling in between our yard in Mexico, all the way into the U.S. But we really have a lot of good efforts that's going to streamline our efficiency. And the key tagline is that we're going to grow smartly and just ahead of our growth.

Justin Long - Stephens Inc., Research Division

Great. That's helpful detail. I appreciate it. Quick follow-up. I know it's been a long call, but I did want to ask about CapEx. It was helpful to get the detail for 2014. But as you look beyond this year, do you think CapEx, as a percent of total revenues, stays around this 20% level the next few years? Or is there a chance we could see some moderation?

David L. Starling

Well, I think what you saw in Dave's presentation was that our mainline CapEx, we've got the system robust and up now. We're very confident of the quality that, that number will start to drop. So the main group of CapEx that will run that 10% -- 10% to 11%, should start to come down maybe 1% a year. So it'll be the other part of the capacity growth that we will be making decisions on where we need to grow. There's lanes today that we can grow in that don't require any capacity expansion. There are some lanes that would require capital. So a lot of it is going to depend just where the growth is coming. But yes, I don't see us back up in the 26s, and I do see us over time starting to come back down into the range of the rest of the industry.

Operator

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

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

My question is on the resource side. As your expectations and your customer expectations about volumes have shifted, is there anything you're doing specific on the network resource side? Are you carrying more than you normally would, recognizing volume is around the corner? Or how should we think about resources?

David R. Ebbrecht

Yes, this is Dave Ebbrecht again. I'll address the fact that as we grow and we have the resources in place just ahead of the growth, what we do is stairstep the growth into it so that we'll run extra train starts and materialize the gross in a phased-in period. There is nothing that we have on a resource right now that will be considered extra resources or anything that we won't be utilizing or optimizing utilization of going into 2014. But what we will create is latent capacity that we can continue to grow on until we hit different stairstep function. So I'm comfortable that resources are appropriately sized for all the business growth opportunities that we're seeing on the horizon. And as new opportunities present themselves, we'll do what takes to make sure the appropriate resources are in place.

David L. Starling

Let me add to this just a little different statement. We did not back down off of what we were putting in the capital budget when we got a little more conservative. We know that this volume is coming, so we are preparing for it. The fact that it's going to take us a little bit longer than we first anticipated, we did not step back and say, "Okay, let's pull back on capacity." We are building the network out to handle the volume that we have predicted would be coming for several years. So there is no lack of conviction on our side on what we need to do to handle the growth that's coming.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

That's helpful. And then as a follow-up, so this idea of creating latent capacity, all else being equal then, '15 should see resources grow at a pace slower than volume, all else being equal? Does that sound right?

David L. Starling

Not necessarily. That'll all depends on where it's going to grow, as I said earlier, in what corridor. If we're going deeper into Mexico -- if it's a move that goes from Kansas City to Lázaro Cárdenas, you've got a very long network to look at to see what you need to add. If it's going from Kansas City to Baton Rouge, I don't have to do a lot on capacity. I've got capacity. So kind of a tough question to answer unless you know exactly where the growth is on that traffic so...

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

But in theory, the longer length of haul would also create better RPU, and it comes out in the wash that way.

David L. Starling

Certainly. Absolutely.

Operator

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

Scott H. Group - Wolfe Research, LLC

It's been a long call. I just have one question for you, Dave. So the stock's obviously down a lot today, and CapEx is coming in a little bit, and you guys are still expecting pretty nice earnings growth. Do you anticipate going to the board anytime soon and asking for a buyback authorization?

David L. Starling

First of all, we didn't anticipate the stock going down today. So no, the answer to that is no. We are still a growth company. We would have a lot of dividend work to do before we started going in and asking for a stock buyback. You'd see dividend improvement first.

Operator

At this time, we have reached the end of our allotted time for questions and have time for one final question today coming from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Can you just provide us a little bit more details on your FX hedging strategy and the percent you've covered for 2014 and '15?

Michael W. Upchurch

Sure, Tom. That can be a fairly lengthy explanation, but I think we did a pretty solid job hedging that risk this year and have taken a very similar approach to hedging that risk for next year. In fact, we've executed pretty much all of the forward contracts that need to be in place. So our expectation sitting here today would -- you would see the same dynamic at the end of 2014 where we've properly hedged that risk, particularly that income tax risk of the changing peso. So basically, same strategy we executed, and we do have a slide in the Appendix that shows you how that hedge functioned during the course of 2013.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Just a follow-on, are you protected from swings of 10% or more?

Michael W. Upchurch

Yes.

Operator

Thank you. Mr. Starling, I'd like to turn the floor back over to you for closing comments.

David L. Starling

Okay. I want to thank everyone for joining us on the call. Great questions, and we will see you next quarter. Thank you.

Operator

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

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