Kansas City Southern's (KSU) CEO Dave Starling on Q4 2015 Results - Earnings Call Transcript

Call Start: 08:45 January 1, 0000 10:00 AM ET

Kansas City Southern (KSU)

Q4 2015 Earnings Conference Call

January 22, 2016, 08:45 ET

Executives

Dave Starling - CEO

Pat Ottensmeyer - President

Jeff Songer - Chief Transportation Officer

Brian Hancock - Chief Marketing Officer

Michael Upchurch - CFO

Mike Upchurch - CFO

Jose Zozaya - President & Executive Representative, Kansas City Southern de Mexico

Analysts

Alex Vecchio - Morgan Stanley

Tom Wadewitz - UBS

Chris Wetherbee - Citigroup

Allison Landry - Credit Suisse

Matt Troy - Nomura Securities

Brandon Oglenski - Barclays Capital

John Barnes - RBC Capital Markets

Jason Seidl - Cowen and Company

Justin Long - Stephens

Ken Hoexter - Bank of America Merrill Lynch

Scott Group - Wolfe Research

Brian Ossenbeck - JPMorgan

John Larkin - Stifel Nicolaus

Operator

Welcome to the Kansas City Southern Fourth Quarter 2015 Earnings Release Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Dave Starling. Please go ahead, sir.

Dave Starling

Good morning and welcome to Kansas City Southern's fourth quarter 2015 earnings conference call. Presenting with me this morning are President, Pat Ottensmeye; Chief Transportation Officer, Jeff Songer; Chief Marketing Officer, Brian Hancock; Chief Financial Officer, MIke Upchurch; and on the phone from Mexico, will be Jose Zozaya, our President and executive representative for the answer session of the call.

Turning to our fourth quarter, the combination of a challenging economy and the dual impacts of a weak peso and lower than normal fuel surcharge revenues resulted in revenues declining 7% from fourth quarter 2014. The combination of foreign exchange and the lower U.S. fuel prices had a significant effect on our consolidated revenue. Excluding those factors, KCS's revenue for the fourth quarter 2014 were approximately flat with the prior year.

The Company responded very well to the difficult macro conditions which is illustrated by our posting a 63.3% operating ratio for the quarter, an improvement of 3.4 points compared to fourth quarter 2014. Prime contributors to KCS's strong operating ratio were a strict, steadily improving system velocity and system dwell metrics which have essentially returned to our 2013 levels.

Making our performance even more impressive is the fact that we had to contend with a hurricane that hit Mexico in late October and devastating floods in southern Missouri in late December. In both cases, we had to work around washouts and weather-related service delays. Despite the challenges, we operated at a high level of efficiency and recorded service metrics that put KCS in the top tier amongst Class I's.

Macroeconomic forces served to constrain levels of business growth in certain commodity segments which appears to be the case moving into 2016. We do not have a crystal ball to help project how the industrial economy will perform over the next 6 to 12 months. For that reason, we're unable to project definite growth and revenue numbers for the near future.

Pat and Jeff will discuss some of the areas in which we believe KCS can show measurable productivity improvements in 2016, as well as cover some of the capital projects necessary to handle the business growth opportunities that Brian Hancock and his team will be bringing online in the second half of 2016 and into 2017 and beyond. With that, I will turn it over to Pat.

Pat Ottensmeyer

Thanks, Dave and good morning, everyone. I will begin my comments on slide 7. Before I get into the data on this slide, let me just pick up on Dave's opening comments by saying that we're not going to talk a lot this morning about the factors which affected our performance, that -- and our outlook that we do not control, such as commodity prices, currency values, energy markets.

Those factors are pretty well understood, in the sense that they've created a lot of volatility in our business and uncertainty about general conditions going forward. We will spend more time this morning focusing on the things that we can and did manage to drive performance in an increasingly volatile and uncertain economic environment, things like service, cost control, asset utilization and capital structure and liquidity.

Now going back to slide 7, here we show you our velocity and dwell trends over the past three years and compare them to the average of all of the other Class I rails excluding KCS. Over the course of 2015, we showed noticeable improvement in both of these key metrics and we have returned to the strong performance levels that we were producing at the beginning of 2013.

The service recovery is even more impressive, when you consider that unlike most of our industry peers, we're handling more volume than we were at the beginning of this period in 2013. In addition, Dave mentioned the weather factors that we had to overcome last year as well.

Taking a closer look at velocity, this graph shows that we did see some deterioration during the second half of 2014 and first half of 2015. However, we were still performing at a level that was better than the overall industry average. This was not the case for dwell, but we have improved overall terminal dwell by 9% from the third quarter to the fourth quarter and feel that we're back where we need to be to run an efficient network and meet our customer's expectations.

In addition, our intermodal product has returned to a highly reliable and consistent service which is the key to regaining and securing some of the lost business that we talked about the last couple of quarters and eventually returning to the higher growth rates we believe are possible, given the size of the truck conversion opportunity here. In a few moments, Jeff Songer will talk about some of the specific things we did to manage to these outcomes and why we believe the service performance is sustainable going forward. I will just say that we now have an excellent operating leadership team in place, with substantial Class I rail experience at multiple layers through the organization. Jeff will elaborate in a few minutes.

Since becoming President last March, I have worked closely with Jeff and the entire operating team and can assure you that there is a very high sense of urgency in identifying and implementing key initiatives that are behind the improvements evidenced on these graphs. This process will continue. Jeff has better aligned functional responsibilities with the correct experiences and leadership skills and clear accountabilities to improve the way we manage the railroad and that is showing up in both our service and cost metrics.

Moving on to slide 8, you can also see the impact of this improved management focus on this chart. We're very pleased to show this trend has continued, quarter to quarter improvement in operating ratios over the course of a very difficult and volatile year and in the absence of volume growth and therefore no benefit from incremental margins. Obviously, there are many gives and takes from items like fuel and currency, but even excluding those items, we delivered real productivity gains over the course of a very difficult year. This is another example of managing things that we can control, like cost and asset utilization, in an environment where there are significant negative factors that we do not.

Finally, I will wrap up with slide 9. I will give you all a heads up, that other than CapEx which we will talk about in a couple minutes, this is the only guidance that we're going to provide at this time. Given the uncertainty that we see in the near-term economic and business environment, the only guidance that we can provide is that the long-term outlook continues to be positive, driven by growth in several key market areas, strong pricing trends which Brian will touch on in a few minutes and sustainable improvement in service, cost control and asset utilization. And as we state in the center of this slide, we expect to show long-term continued improvements in operating ratio, earnings per share and return on invested capital.

As you've heard from all of the other rails that have reported so far, the short-term outlook is very uncertain. And as a result, we're just not in a position to provide more definitive guidance regarding volume, revenue or operating ratio. Many of you on the call this morning have as much or better information regarding the economic outlook, commodity and currency markets than we do.

I was at a rail industry conference last week and I thought when railroad executive characterized the current landscape quite well when he said and I am paraphrasing here, we're in an energy market depression, an industrial and manufacturing recession, but somehow the consumer is doing okay. We do know that the long-term outlook is strong. And for the near-term, we will focus again, on those things over which we have more control, to drive long-term continued improvement in all of our key metrics.

Mike Upchurch will talk to you in a few moments about a recently completed debt restructuring which we believe improves our overall liquidity profile and strengthens our financial flexibility. Growth will return. The investments in chemical plants, auto production, port terminals and other facilities that is taking place in our service area is quite remarkable.

In 2016, we're forecasting a reduction in overall capital spending. Jeff will touch -- give you more detail on that in a minute. But we will continue to spend on those key projects that support the industrial development activity and new business opportunities taking place on our network. When these new plants and terminals open, we will be ready to capitalize immediately on the opportunities that we know are coming over the longer-term horizon.

In closing, I will restate once more that our near-term focus will be on those things over which we have more control, such as service, cost control, asset utilization and capital structure. With that, I will turn the presentation over to Jeff Songer.

Jeff Songer

Thank you, Pat and good morning. 2015 was a challenging year for the operating team. As outlined on past calls, wide fluctuations in volume while aligning appropriate resources had a negative impact on service levels. However, the team has worked through these challenges and has ended the year with a positive trend.

Organizationally, we continue to make changes necessary to ensure our continued performance improvements. When I stepped into the job over a year ago, one of our first organizational moves was to appoint a new vice president of transportation in the U.S.. This individual brings over 30 years of railroad experience from the Union Pacific and CSX and positions the operating team well into the future.

Likewise in Mexico, we promoted a new head of transportation who has led the efforts in restoring our workforce and is now focused on regaining service levels. About that time, we announced a new vice president of our mechanical organization. This individual brings 30 years of experience, notably with Amtrak and CSX. Last August, we added a director of intermodal and operations -- and automotive operations in Mexico. This former CSX employee brings eight years of experience, leading large intermodal terminals in Chicago and New York.

Finally in November, we promoted a new lead for our network operations center and crew management function. This individual came to KCS in 2013 from the BNSF, where he had successfully worked in the operating departments since 1997. Additional realignment of our network operating center and field operating teams, as well as restructuring our crew management team should lead to greater synergy and coordination of the network.

Touching on the workforce, the 2015 Mexico hiring initiative is complete and crews in Mexico are stable. In the U.S., we're currently at 6% of the TD workforce and furlough status and we will continue to manage our resources to meet volume demands.

Moving into 2016, where we continue -- we will continue our focus on service and increasing productivity to reduce costs. Specific actions already in process include the implementation of inter-divisional trains which allow for the reduction in crew starts across the segment due to improved velocity. This operation started in January between Shreveport and Meridian and we will implement a similar approach in Mexico between the Nuevo Laredo and Monterrey, where our capital improvements have allowed us to increase track speed to 70 miles an hour in this segment.

Working in coordination with the UP, we have relocated a dispatch console from Kansas City to Spring, Texas to dispatch this joint KCS, UP, BNSF territory. All railroads are now working together in the same facility to ensure the most efficient operation. Sanchez Yard Phase 1 is complete as scheduled and Phase 2 is underway. The additional capacity will enable us to process trains at the border more fluidly and in 2016 will allow for transition of some work from Laredo to Sanchez to reduce overall labor costs in this segment.

Opportunities to streamline the departure process from the Port of Lazaro will allow us to reduce car handling and improve cycle times by an average of six hours per train. Additionally, we have allocated capital in 2016 to install locomotive fuel optimization technology for 20% of our road fleet which will help improve fuel efficiency and velocity of our trains.

Regarding operating metrics for the quarter, system velocity improved 1% to 27 miles per hour, while dwell time in terminals improved 9% versus Q4 2014. Velocity and dwell metrics continue to be a focus, as we regain our consistent service levels and will also allow for improved asset utilization driving down equipment costs.

Moving on to slide 12, capital spending for 2016 is projected at $580 million to $590 million which represents a 10% reduction from 2015. Reductions in overall maintenance spend and no planned locomotive purchases in 2016 will more than offset our continued investment in growth-related industries. We remain steadfast in our commitment to invest in projects such as Sasol, Sanchez Yard, the Port of Lazaro, as well as adding additional automotive and intermodal equipment to meet the future projected growth in these areas.

I will now turn the presentation over to Chief Marketing Officer, Brian Hancock.

Brian Hancock

Thanks, Jeff and good morning. 2015 was a year in which the organization faced continued volatility in commodity prices and general business conditions. Overall, we're pleased with the creativity and perseverance the team has shown in working through these issues. To begin, as noted earlier, car loadings for the quarter were down 2% year-over-year and revenue was flat after taking out the impact of currency and fuel, while we continue to see solid pricing of 4.1% all-in for the quarter.

Let me provide a little more detail by line of business, using page 14 as a reference. In our chemicals and petroleum business, we saw an increase of 8% in carloads, with a 4% increase in revenue, driven by increased volume in our petroleum and plastics shipments. Our industrial and consumer business unit was down 14% versus 2014 which continues the trend we've seen for most of 2015. The year-over-year decrease for the quarter was driven by continued weakness in our metals business, being slightly offset by an increase in our other carloads area.

Our ag and minerals business delivered a 2% increase in carloads in the fourth quarter, driven by strength in the food products and ores and minerals segments, offset by slightly lighter grain volumes. Revenue for ag and mineral was up 4%, when you remove the effects of fuel and foreign exchange. Our energy segment continued to be impacted by mix and continued volatility in the commodity prices. Overall, carloads in the quarter were up 11%, while adjusted revenue was off 4%.

For the quarter, our intermodal volume was down 6%, with adjusted revenues off 5% and our cross-border volume was off 8% and down 3% in revenue. As Jeff mentioned, given the improved service levels in the latter half of the year, our intermodal offering continues to compete well for the increased volume in this segment. For the fourth quarter, our automotive business increased year-over-year 1%, with an adjusted revenue increase of 6%. Our automotive group was able to take advantage of the improved fluidity in the network and provided additional capacity and speed on our finished vehicle shipments, providing a strong finish to the quarter.

On slide 15, we've provided visual updates to some of our largest investments which will continue to increase capacity and fluidity across the network. On the top left-hand side, you can see a picture of the new super Panamax cranes being deliver to the APM terminal in Lazaro Cardenas As stated previously, this terminal will double the port capacity when it opens in the second half of 2016.

In the bottom left-hand corner, you can see a picture taken this last week of the construction at the new BMW manufacturing plant. This facility is another tangible example of the growing automotive manufacturing footprint in Mexico.

On the top right-hand side is an updated view of the Sasol plant on the Gulf which will provide an anchor for our growth in the plastics industry. And then, in the bottom right, we show a long-term illustration of the Sanchez Yard in Nuevo Laredo which will provide better capacity and fluidity on all of our cross-border moves. This capability provides our customers with better and more reliable solutions they can count on, as they expand their cross-border supply chain. As was mentioned earlier, we continue to stay focused on preparing for the opportunities in front of us and we plan to take advantage of our enhanced capacity and fluidity as we execute our critical customer deliverables in 2016.

With that, I'll now turn the presentation over to our CFO, Mike Upchurch.

Michael Upchurch

Thanks, Brian and good morning, everyone. I am going to start my comments on slide 17. The fourth quarter volumes declined 2%, while revenue declined 7%. The peso depreciation had a $20 million negative impact on revenue growth during the quarter, while declining U.S. fuel prices had a $27 million unfavorable impact on revenue growth. Combined, this $47 million impact contributed to a 7 point -- 7 percentage point negative impact on revenues.

Operating ratio improved 330 basis points to 63.4%, a new record for fourth quarter. A 12% reduction in expenses helped offset the negative impacts from lower volumes and revenues and I'll cover more expense details in a couple of slides. Our adjusted effective income tax rate for the quarter was 32.4% and further details are included in the appendix on slide 35. I might offer one comment, that the Congress enacted legislation in December providing us an extension of the Short Line tax credit, not only for 2015, but also 2016. And the 2015 benefit in the fourth quarter was about $2.5 million, while we expect about a $3.5 million benefit in 2016.

Reported fourth quarter 2015 EPS was $1.28 a share, flat year-over-year and adjusting for debt exchange costs and foreign exchange impact, adjusted EPS was $1.23, a 3% decline from the fourth quarter of 2014. We have provided a reconciliation of our reported to adjusted EPS in the appendix on slide 31 and have also included full-year results in the appendix and in our consolidated investor report on our website.

Turning to slide 18, while the peso did experience significant depreciation quarter over quarter, you can see the impact was minimal on operating income at an estimated $200,000, due to our peso-based revenues and expenses essentially offsetting each other.

Moving to slide 19, as I mentioned on my first slide, we did experience a $47 million negative impact to revenues from foreign exchange and lower U.S. fuel prices. That is a trend that we expect to continue in 2016 as the peso is expected to continue to decline, particularly in the first and second quarters as projected exchange rates are 16% and 12% respectively lower than what we saw in 2015. Likewise, we're projected to experience significant declines in revenues from lower U.S. fuel surcharges, more pronounced in first, second and third quarters at 26%, 20% and 12% declines.

These factors are based on readily available estimates, but I might note that the current exchange rate is significantly worse than the estimates and we're currently at 18.50, while highway diesel prices are $2.11 per gallon. Again the takeaway here, we will have significant pressure in first quarter and second quarter at a minimum from foreign exchange and lower U.S. fuel prices.

Moving to slide 20, fourth quarter operating expenses declined $50 million year-over-year, most notably from peso depreciation, lower U.S. fuel prices and continued lower incentive compensation expense. Beyond those items, we managed expenses lower by $11 million through various cost reduction and expense control efforts, while depreciation increased $7 million. And I will cover more expense details in the next few slides.

On slide 21, compensation and benefits expense declined $19 million for the quarter, mainly from lower incentive compensation, impacts from the peso depreciation and year-over-year benefits primarily from unfavorable actuarial true-ups in our fourth quarter of 2014 that relate to post-employment benefits. Offsetting those declines were $4 million in wage inflation. And while overall average FTEs increased 3% to support improving service levels in Mexico that Jeff previously covered, we experienced lower headcount in the U.S., resulting in no net expense increases as a result of wage differentials.

Moving to slide 22, fuel expense declined $25 million largely due to declining U.S. fuel prices and the impact of the peso depreciation. Our average U.S. fuel price was $1.54 per gallon during fourth quarter 2015, a 37% decline from the previous year. On a constant currency basis, we saw Mexican fuel prices stay flat year-over-year, as a result of government price actions.

Moving to slide 23, during the fourth quarter equipment costs declined $1 million, while depreciation increased $7 million. We continued to experience lower equipment costs, as a result of our strategy dividing these assets and accordingly saw a $2 million decline in equipment costs. Partially offsetting that $2 million in lower equipment costs due to lease conversions was higher depreciation of $1 million.

Other increases in equipment costs were primarily incremental car hire expenses, as we continue to experience hire cars online. Depreciation also increased by $6 million from a larger asset base, as a result of our capital expenditure program.

On slide 24, during the fourth quarter, we saw purchased services decline $11 million, due to a maintenance contract restructuring, lower repair costs, foreign exchange benefits, reduced joint facility costs and lower legal fees. Materials and other expense was flat year-over-year benefiting from the peso depreciation which was offset by higher materials and supplies expense, resulting from the insourcing of previously mentioned maintenance contracts.

Moving to slide 25, I'd like to provide an update on our capital structure priorities and we continue to be focused on investing in our business to maximize our growth opportunities. For 2015, we incurred $649 million in capital, slightly below our guidance of $650 million to $670 million. And for 2016 as Jeff already mentioned, acknowledging the uncertain volume environment we're operating under, we expect to further reduce our capital to somewhere between $580 million and $590 million.

With respect to shareholder returns, we continued to repurchase our shares during the fourth quarter and repurchased approximately 675,000 shares for $58 million or an average price of $85.69. Through the first six months of the program, we've repurchased approximately $194 million in stock which represents a reduction in our shares outstanding by 2.1 million shares. We front-loaded the program by buying about 40% of the authorized $500 million two year repurchase program during the first six months.

And finally, we continue to optimize our capital structure. As Pat mention, in December we completed a debt consolidation program by exchanging approximately $2 billion of our KCSR and KCSM subsidiary debt into parent company debt which provides us more financial flexibility, lower future borrowing costs, less administrative costs of maintaining two capital structures and enhanced cash flow flexibility. Additionally, we established a corporate level revolving credit facility and commercial paper program, increasing our overall liquidity to $800 million.

And with that, I will turn the call back over to Dave.

Dave Starling

Thanks, Mike. Before opening up the call for questions, I would like to end with just a few glass half-full comments. What we're going through right now, reminds me a lot of what we were going through back in 2009.

KCS, like the other rails reacted to the recession, with a host of service and productivity initiatives that partially mitigated the impact of the business downturn. We at KCS, at the same time knew that we had an abundance of business growth opportunities on the near horizon. Sure enough, KCS came out of the recession, hitting on all cylinders with a new business growth and efficient operations, fueling strong earnings from 2010 to 2014. Now fast-forward to 2016.

Reacting to the challenging economy, KCS has implemented and continues to implement service and productivity initiatives, the impact of which have already been shown to be positive. And just like 2009, we're looking at expansive near-term business growth opportunities. To name but a few on the horizon, two new auto plants in Mexico will open in the second half of 2016, while at the same time, we will also begin to see the benefits from the plant expansions at the three of the auto facilities we serve in Mexico. I might also add that in the near future, you will likely hear of an additional auto growth on our line, but that's a story for another day.

Also during the second half, the APM Maersk terminal at Lazaro Cardenas is presently scheduled to open. 2017, the Mexican energy reform goes into effect and will provide us the opportunity to remove refined products into Mexico which promises to be a very good sized business opportunity. And over the next couple years, KCS expects to begin to gain the benefit of growth of the plastics production that will be centered in the Gulf region.

But let me be clear, KCS like everybody else, is confronted with some challenging economic issues impacting some of our commodities. These issues will be with us for a while. With the growth opportunities we see coming online, coupled with stronger than ever operations, makes us confident and excited about our future.

So with that, I will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Alex Vecchio with Morgan Stanley.

Alex Vecchio

My question is with respect to the service and your statements with respect to hoping to regain some of the lost share, I think referring to the intermodal, the cross-border intermodal. I guess, what gives you the confidence that you will be able to regain as much share as you think you will, considering where the peso has gone and with lower fuel and the increasing competitiveness of the alternative truck option there?

How do we think about the offsets there, between better service and then the economics between rail and truck, given the factors I've just mentioned?

Brian Hancock

Basically, what I would tell you is, yes, the currency continues to slide, but we don't have any evidence that, that has impacted us from a market share perspective. And we continue to see a strong demand from our customers, who put much of this volume, especially the cross-border volume on rail and in our intermodal product. And so, even though we do see it in the truck rates, we have not seen a decrease in our market share in the intermodal space.

Jeff Songer

I would just chime in and say, the two additional points that -- just picking up on what Brian said, if we look at market share trends in our Lazaro Cardenas intermodal businesses where we probably would see the biggest impact or the impact of the weak peso taking market share, we just haven't seen a deterioration in market share over the past year. So we watch it closely. But the ocean carriers want to use rail. They like the service, they like the security aspect of it.

So and the fact is, we just haven't seen it in the numbers. Back on the cross-border, the strongest indicator that we have for regaining market share is dialogue with customers. They have seen and they have been pleased with the improvement that we demonstrated in the reliability and consistency of our product. And they have told us that they are going to move some of that business back to rail.

Dave Starling

Yes, this is Dave Starling. Something to add here too, that you have got to be careful of in Lazaro, we've had a couple of folks talk to us about market share in Lazaro. You've got to take the transhipment out. So the transhipment moves around. So if you leave the -- if transhipment drops 20%, that is not a market share loss to rail. So what we measure ourselves against is truck. So again, be careful when you are looking at Lazaro with that transhipment number. It really doesn't affect us.

Alex Vecchio

And then, just if I may, a follow up, more of a housekeeping. I know you guys aren't providing explicit guidance, but maybe you can just help us think about at least the tax rate. Should we kind of assume a normalized 32%, 33%-ish in 2016, given the Short Line tax credit?

Mike Upchurch

Yes, Alex this is Mike. I would just stick with something in the neighborhood of 34%. The $3.5 million credit on the Short Line extension that we're going to get in 2016, when you apply that over a full-year, it doesn't have as big of an impact. So I'd probably would stick with 34%, it could be 33%, sure, somewhere in that ballpark.

Operator

Our next question today is from Tom Wadewitz from UBS. Please proceed with your question.

Tom Wadewitz

I wanted to see if you could talk about the -- I mean, you did talk about the cost structure and areas where you are making adjustments. I think one of the concerns that I've heard from investors recently is just that, you may have constraints in Mexico, in terms of how quickly you can adjust versus what the U.S. rails do.

If you could just maybe address that? And if there are constraints, if you could discuss them and how you deal with them? Or if you would say, look, it's not really a constraint, because we can do one thing, while we can't do another. If you could just give us some commentary around that, that would be helpful? Thanks.

Jeff Songer

I wouldn't say we necessarily have constraints. I mean, we have been working through 2015 to -- again add and make sure we have adequate resources. To me, that has been our bigger hurdle to overcome here and we've have done that. So I think we're at a good level as far as headcount right now and with the volume projections, remain at this level. If we need to adjust, we can certainly do that. We have the ability in work rules to continue to add benefit there, to right-size that workforce. We're going to have some retirements here in Q1 and there is some normal annualized attrition that we always have. So I don't view that as a concern.

Dave Starling

Tom, let me add a little bit to that. What we do have, a list of things in Mexico that we're working on, that we want from the union. And so, we're going through that list very methodically. Jeff meets with them on a regular basis and there are certain work rule changes, that we think don't hurt the union and certainly benefit us.

And in Mexico, it's a little bit different. You don't do the contract over five years. You can literally go in and talk about changes anytime you want. So any time you can go in with the union and come up with an idea that benefits both, if it's run through at Leout [ph]. That's something we've had for some time. We just haven't used it. And so, we're initiating that now, the longer train length.

So those are things we will constantly be working on. I don't look at them as big impediments. I look at them more as just a continued laundry list Jeff is going to have. But candidly, two years ago, we didn't have the relationship with the union to do this and we do today.

Tom Wadewitz

So with those things in mind, do you think sequentially headcount is likely to come down somewhat, if we look at the next couple of quarters, versus what the level was in the fourth quarter?

Jeff Songer

So again, I -- think about our hiring process through 2015, so we were adding throughout 2015. So as we get further into the quarter, that should stabilize from year-over-year. And I would view our current level to be kind of the status quo for this year, given volume. Now in the U.S., we're actually down a little bit here year-over-year. So those two items will continue to offset, I think you will see the year-over-year numbers stabilize, given our hiring efforts through 2015.

Dave Starling

But I will pick up on one thing Jeff said there and that is, volume considerations will drive that over the course of the year.

Pat Ottensmeyer

Yes, in Mexico because of the back half of 2016 and what we've seen in 2017, we have a chance to add more volume without adding the headcount, similar to what we had done in the past. So we have got some opportunities there. And then, we have a fairly high attrition rate in Mexico as well. But you had to get enough people, before you could start to do the trimming and looking at some of the work rules. But we're there now and we will start to work through those. But yes, it's -- as in always, we want to do less -- we want to do more with less.

Operator

Our next question today is coming from Chris Wetherbee from Citigroup. Please proceed with your question.

Chris Wetherbee

I wanted to ask a little bit. I know you are not providing outlook on the volume side, but when you think about some of the things that are going on in the network -- you talked about the second half, getting some auto plants opening there. You have the retooling efforts ending.

You have Lazaro, sort of the second concession opening up there. If you think about sort of a stable economy like we had in the fourth quarter -- for stable to what we had in the fourth quarter. I mean, it doesn't seem with easier comps, there would be some market share gains coming up, that you could see some positive volume growth in the second half? I just want to get a sense of maybe what are the other puts and takes that I should be thinking about?

Pat Ottensmeyer

We're going to remain stubborn and steadfast in our position, because there are just so many uncertainties. The auto sales figures are not starting off strong for the year. We're coming off a couple years of very strong levels. So there's just a lot of questions and uncertainties.

But if you framed it the way you did, in a stable economy, given the -- what we do know about auto production and what we do know about new plants and things coming on stream like the APM terminal. But keep in mind, the APM terminal is going to add -- is going to double capacity at Lazaro Cardenas, but it's -- that doesn't mean that there's going to be a huge surge of new volume. It's -- we would expect it to --

Dave Starling

Yes, the market's not going to double.

Pat Ottensmeyer

Yes, the market is not going to double. It's going to take years for that capacity to be used. But just knowing what we know about production, new facilities and framing it in your context of stable economy -- which none of us feel too solid about right now -- you could expect the second half to be stronger than the first half but we're not saying that--

Chris Wetherbee

Yes, fair enough. No absolutely, I just wanted to make sure I understand how you guys are thinking about that in that context and who knows where the economy goes from here. In terms of pricing, wanted to switch gears really quickly. I think you mentioned, Pat, 4.1% I think was the all-in number. Can you give us some sense of how the pricing environment trended in Mexico over the course of the quarter?

Brian Hancock

What I would tell you, is from a pricing perspective, we continue to see the strength that we have seen historically. Our customers are -- have continued to be pleased with the service and the product that we're offering to them. And so, we continue to see pricing as stable from a historical perspective and we will continue to see that I think into the next years.

Jeff Songer

Looking at it a little bit differently, I don't think we saw any material difference in the trends between U.S.A and Mexico during the quarter.

Operator

Our next question is coming from Allison Landry from Credit Suisse. Please proceed with your question.

Allison Landry

I was wondering if we could talk a little bit about incentive comp in 2016 and maybe how you are thinking about that, given some of the tailwinds that you saw in 2015?

Mike Upchurch

Well, Allison, I mean, again, we can't really predict what's going to happen in 2016. You go into a budgeting cycle, assuming you're going to hit your targets and have payouts at a 100% level. Obviously, 2014 was far from that and it remains to be seen exactly what happens with 2016. But if all the targets are hit, you would have some expectation of some increases in incentive comp, maybe to the tune of $10 million.

Allison Landry

And then, as a follow-up question, thinking about the Sasol Project, can you provide us with any update in terms of the timing and the initial volume expectations? And then, in terms of the CapEx, it seems a little elevated relative to what you guys had talked about previously which was I think 2% to 3% of sales for this project? So any color on that would be helpful. Thanks.

Pat Ottensmeyer

I don't think there's anything too much more we can offer on the specifics of Sasol, Allison. It is still under construction. There's a lot of activity. You can see from the illustration in the photo in the slides, they are forging ahead. They are certainly not holding back. In fact, this is kind of an example of the bright side of low energy prices and natural gas prices that's driving the demand for these products and the investment here.

But no more specific guidance about timing and magnitude of revenue, still looking at a 2018 impact for us. So we're still a couple years away, from knowing exactly how that is going to play out. On the capital side, I don't think we have changed anything, other than maybe the percentage of revenue, just because of our -- maybe the situation we're in and the outlook for growth.

Dave Starling

I think you've still got the Sanchez Yard. You still got the automotive and intermodal equipment. And maybe the one thing that Jeff didn't throw in there, we're going to have to build more support tracks for all this auto and intermodal equipment that's going to go into Mexico. You can't put it in your pocket, when it goes down there. So we will be building some infrastructure, very happy to support these new auto plants.

Operator

Our next question today is coming from Matt Troy from Nomura Security. Please proceed with your question.

Matt Troy

I just wanted to ask -- we've talked about Lazaro doubling in capacity, but so to, are we at the point or imminently at the point where the Panama canal expansion should be complete, capacity doubling there as well. We've talked about it in the past. I just wanted an update on your thoughts, now that we will have a more expansive all-water gateway which allows shippers to bypass a land bridge from the West coast ports. How does that net out for KSU, in terms of either threat of loss of business through somewhere like Lazaro? Or the ability to pick up the business in Gulf ports? Just trying to put it into context, how you view it? And whether it is a net positive or negative, in terms of the long-term implications for the franchise?

Dave Starling

Matt, since I am the old Panama Canal railway guy of nine years, I will take that one. Everybody is opining on what the Canal is going to do and whether it's going to increase the all-water -- some of us think that the DCs and everything that was going to get done, has already been done. And that the effect of the West Coast port strikes has already caused a movement of cargo. People want a lot of options now.

The shippers we've talk to, are not going to be satisfied with just the West Coast. They want the West Coast, they want the East Coast, they want the Gulf and they want Lazaro. Right now, Lazaro is primarily the Mexican market.

So we don't see any shift there. Although APM terminals has been very open, about looking at their port facility as being something that they definitely want to promote, the cross-border into the U.S. traffic. And that is what we're talking a lot to them about and we're talking to customers about.

So we still think we're going to become that next option, that overall as the volume grows, that the canal is not going to have a negative effect on Lazaro Cardenas cross-border into the U.S..

Matt Troy

My second question, given who is on the phone, I guess, there is a couple people that could answer. But just trying to put some parameters around the energy markets opening in Mexico in 2017. I'm not talking about dollar amounts -- impossible to know -- but being less familiar with that market, I'm just curious, broad side of the barn type thinking, what is the logical business opportunity, the logical OD pairs that you might be looking at?

And what are the price economics for the energy you might be pulling out of the ground down there? Obviously, we've seen, with the compression of energy prices in the U.S. and Canada, the crude by rail and other growth opportunities slow somewhat, I am just wondering what the economics of the energy down there are and the threshold where rail continues to make sense. Just trying to understand that market broadly? Thank you.

Pat Ottensmeyer

Okay. I will tee it up here and then Brian can talk maybe a little bit about some of the color we've got going on, with opportunities. But the initial opportunity that we see is not going to be related to oil production in Mexico. It's going to be related to refined products from the U.S. Gulf coast moving into Mexico.

So that is where we're seeing a lot of interest. OD pairs, we have got a great network between the U.S. Gulf coast and the heart of Mexico. So a place like San Luis Potosi, where we could visualize moving refined products to serve market, as the PEMEX monopoly on pricing and distribution of refined products opens up over the next couple years.

Brian Hancock

The only thing I would add is that the amount of interest and the number of parties is significant. And it's just important that we make sure that we take a look at all of the different options. Especially in -- as Pat said, the refined products, the specialty chemicals, some of the other things that are easily opened up, especially with some of the volume coming from the Gulf. But again, a very opportunistic place for us to play over the next two to three years as we see how this plays out.

Dave Starling

Now I think the other opportunity, there is a lot of tank cars out there now looking for oil -- [Technical Difficulty]. There is a lot of tanks moved to destinations that they -- you don't have a couple years ago.

Matt Troy

All right. Again, I'm sorry, just that's very helpful. The economic question, does the business opportunity play out where, with commodity and energy prices where they are today or do we need some sort of recovery?

Pat Ottensmeyer

On refined products, the economics work today.

Operator

Our next question today is coming from Brandon Oglenski from Barclays. Please proceed with your question.

Brandon Oglenski

So Dave, I want to come back to your comments, because you did say that this feels similar to 2009. And obviously, we're seeing some pretty bad outcomes on the data across the industry. But you guys have actually outperformed a little bit from a volume perspective. I know that in the past, you've talked maybe being little bit more aggressive on your coal business, reducing yields for certain customers.

But how do you manage through an environment like this, where you have a big capital budget, a lot of growth plans in the future and obviously resources that you want to keep productive? Is there incentive here to take this lower -- or better margin that you have today and maybe keep a little bit more growth on the network in the next few months? I mean, what is the priority for you as you run the organization?

Dave Starling

I will start with the answer and I'll then turn it over to Pat. We're a long-term Company. We been here 127 years. We certainly look at everything from a long-term horizon. We have taken some heat in the past over our capital spend, but when we -- the growth numbers that we see over the next few years, again, we've got to support that growth. And overall, just the rail growth in our industry for the next years -- I am pleased that all of the railroads are continuing to spend on capital, because we're a network. And if one railroad has service problems, it reflects -- it affects all of us.

So I think we're all continuing to do the right thing. We're franchises, they can't be duplicated. You're not going to build another railroad. So we've got to be aware or we've got to be committed to our business and I think we're. So when shareholders come to our office and ask me, how we're going to spend their money, the first thing is for growth. I think that is what they want to hear.

Then it's dividend, then it's a stock buyback. But growth tops everything and that is that we're continuing to do. So what I talk more about, on feeling the 2009, the 2016, is more of that feeling that we were working through cost issues. We were taking a lot of low hanging fruit off, that Jeff now is going to -- he's taking it to a different level.

He is going after things that we never had an opportunity to. He's got a great team. So we're focusing on what we can control in today's environment. So when we come out of this recession in the back half of 2016 hopefully, 2017, 2018, we're going to be poised to get back to those margins, those outsized margins we had back in that four-year period. That is our goal. That is what we're working on.

Brandon Oglenski

Can you just address the -- how you balance that in the interim though? Do you take a more aggressive push on pricing and say, we really have to maintain those margins? Or do you look at the growth opportunities with your customers in a deflationary environment say, look, this requires give-and-take on both sides?

Pat Ottensmeyer

Well, it's really been the commodity pricing that has been under the greatest pressure. The customers that we have today, they want to make sure that we're spending enough capital so they can grow their business. So when we go in on a customer call, we lead with a capital plan and how we're going to be able to help them grow their business.

So I don't really see the pressure point there. Where we're getting the pressure point is more on those businesses that are really suffering, like coal. And that one, it is still a wild card. I mean, we're at the new normal on coal. Are we? I don't know. It may be a -- it depends a lot on whether it's going to be Republicans or Democrats running the show for the next four years. But right now, that's really the only rifle shot approach or flexibility if you will that we've done in the past, that and some of the commodities.

But it's been based on the short-term capacity, availability, no new locomotives and did it makes sense to put it in our network. And was it a very positive contribution? Absolutely. So those will still -- but we're not going to get into the discount business. That is not what railroads do. So if that's your question, are we going to become a commodity-based pricing and we're going to get into the discount business, I don't think we need to do that. The challenge is still going to be for the coming years is having the capacity to handle the demand.

Operator

Our next question today is coming from John Barnes from RBC Capital. Please proceed with your question.

John Barnes

So two things, I wanted to ask you about. Number one, you've mentioned -- you can add volume without headcount. And you talked about headcount. You kind of pointed headcount being up 3% year-over-year. How much more volume can you add, given the existing headcount? And how do you think about it -- I guess, if Mexico was up -- I would imagine Mexico was up and is a good portion of that 3%. You said the 6% of the U.S. is furloughed.

Is that the right number to use, in terms of trying to figure out how much Mexico is really up and how much the U.S. is down on headcount? I am just trying to figure out that balance.

Jeff Songer

Yes. Again, I'm going to have to push back to the volume component of that, because I feel we're in a good position in Mexico. As we said a little last year, I think we said, climbing out of service issues, we had to hire and now we're focused on service and productivity to drive those numbers down through the year, if volume -- as volume dictates.

In the U.S., same story, we went through fluctuation of increases in the significant furloughs last year. I think, we're just coming out of the year in a better place. So to me, though more -- the better story this year is that some of the productivity initiatives we have seen and I have outlined, those are actually leading toward the furloughs in the U.S., versus just the total volume component.

Pat Ottensmeyer

I think that's a key component. Some of the changes that Jeff talked about in his comments are allowing us to do, as Dave said, more with less, to use crews and assets more efficiently. And so, it's not just a function of looking at headcount, it is really the efficiency of the network.

But the other thing that's -- and ties in with the previous question, is we still as we've said, we still feel confident based on all of the things that we're seeing being built on our network, that growth will return. And given the lead time in this business on things like crews and training -- hiring and training crews and other assets that are needed to handle that growth, you kind have got to look a little bit further down the line so to speak, in order to fine-tune exactly what that balance is, between what do I need to handle business volumes today, versus what do I know is coming in the relatively near future?

And then, as circumstances change and our outlook changes, then we have to move in and manage that. So there is no doubt that the environment we're in, is causing us to be much more nimble and I think we've responded pretty well. Jeff's team has done an outstanding job of being on their toes and really looking at ways that we can respond.

If you just look at 2015 as an example, I think we showed a slide like this in a previous earnings call, started out strong. We were hiring and training in January and in the early part of the first quarter a year ago, then everything energy-related collapsed and we were literally furloughing crews as they were coming out of training.

And then, volume kind of recovered in the third quarter and we were scrambling to get them back. So we were kind of chasing our tail. So we really -- one of the things we focused on is looking a little bit longer term, but being nimble and quick to respond as we get better information about the outlook to manage the resources appropriately.

John Barnes

Yes, I recognize that and then, your commentary around pricing in your deck. I mean, again, just kind of pointing to inflation-plus. But given that you operate in two distinct geographic areas between the U.S.A and Mexico. Can you give some color as to -- especially in Mexico, what is your inflation expectations are, just so we have some trend line on, how to think about pricing, if it's an inflation-plus environment?

Mike Upchurch

Yes, John, this is Mike. In Mexico, most of the projections would suggest about 3% inflation for 2016. So hopefully, that gives you a pretty good benchmark. I mean, they've seen the same thing we've seen in the U.S., declining trends of inflation. A few years ago, you might have seen 5% or 6%, but they are down to 3%.

Operator

Our next question is coming from Jason Seidl from Cowen & Company. Please proceed with your question.

Jason Seidl

Looking at pricing going forward, at least in the U.S., do you foresee at least in the near-term, any pressure on your truck competitive business, given that there is fairly ample capacity in the TL marketplace and we're starting to see even the contract market come in a bit?

Brian Hancock

We really see pricing, not only strong in the fourth quarter, but maintaining that at historical levels. And so, we don't -- we're not going to give you guidance as to how we see it into the entire year, but we continue to see pricing being strong at historical levels that we've had in the past. So we don't see it right now, that we would go into -- as Dave said, we're not going to go into a discounting type environment.

Dave Starling

We don't think it has hurt us just yet.

Jason Seidl

And I don't think anyone has asked about the potential M&A activity in the rail space, but I'd love to get your thoughts on it, here on the call.

Dave Starling

I will take that one. That's the easiest one. There has been so much said about M&A, I think by this point, we're not going to comment on M&A.

Operator

Our next question today is coming from Justin Long from Stephens. Please proceed with your question.

Justin Long

If we assume that your volumes remain weak and are down low single-digits again this year, is that an environment where you think you can still see margin improvement from pricing and productivity? I know you aren't giving guidance, but just conceptually, do you need to see volume growth this year in order to improve the OR?

Dave Starling

I will take that one. We're going to work as hard as we can on the things that we control, to try to continue to improve our efficiency and to improve our OR. Are we going to be able to do that going into this year? I don't know, a lot of it is going to depend on the volume and where we get it in our network.

But we still have opportunities on cost control. Jeff has got a long list of things he will be working on. So is the opportunity still there? Yes. But we have been noted in the past as a cost control railroad and we're back on that hard, fast and furious. We know how to do that and we're going to continue to do it.

Justin Long

And as my second question, it seems like the relationship with UP at the border has improved and I was wondering if you could provide some more color on that front? Could you discuss any new initiatives or infrastructure improvements that you feel could meaningfully impact your business over course of the year?

Dave Starling

I will take that one. UP is our biggest interchange partner at the border. 65% of the traffic that comes across the border at Laredo, it goes to the UP. So if you look at all of the auto plants that are being added and you look at all of the opportunities, intermodal, then energy, you rapidly come to the conclusion that, that number is going to increase, because they serve a lot of U.S., that we don't serve. They are and have by far the best route into Chicago. So are we working well with the Union Pacific to help develop Mexico?

Yes, to our mutual benefit. So initiatives will continue. We have a great relationship with them at the operating level. Again, we just moved our dispatchers down to the center in Spring. We have a great relationship and a lot of respect for Lance and his whole team. We're no longer the railroad that doesn't want to work with other railroads.

We want to work with all the railroads. We view this as a network in the U.S. and we want to work with all of the carriers. We think it is to the benefit of our shippers and not to do so, is being irresponsible.

Operator

Our next question today is coming from Ken Hoexter from Bank of America Merrill Lynch. Please proceed with your question.

Ken Hoexter

Maybe a little bit on CapEx. You talked about a lot of continuation of some long-term projects. But you also pulled back CapEx. Can you talk about what got culled, just given you still have a lot in the expansion growth phase that are still under construction, you are still building out. So maybe talk a little bit about where, where you have can cut and what you have taken out?

Dave Starling

Yes, Jeff, will handle that one.

Jeff Songer

Yes, it's on my comments, we've talked a little bit about the maintenance infrastructure in the past. So again, our core maintenance, core infrastructure is stable. And so, you've seen a little bit of reductions there. The locomotive purchases we've had over the last two years, again given the fluidity, given that they're recent purchases, we're at a good position on power. So there is no locomotive purchases planned for this year. So those are the key drivers.

But again, I think my comments stated, we're steadfast in the other investments. And so, the Sasols and the Sanchez and all the capacity and line of road capacity which I won't itemize, we're moving hard and fast to do --

Mike Upchurch

There are lots of moving pieces, but it's essentially, no locomotives in 2016, offset by increased Sasol expenditures.

Jeff Songer

PTC, again from a raw percentage, I think we were 6% in 2015. That is going up to 9%. So that's a little bit of that as well.

Ken Hoexter

And a follow-up, Mike, while I have you on there at the end. You talked a bit about the locomotive and equipment lease renegotiations. Can you talk about what's left, because it sounds like you might still have some runway. And is that a future, I guess, operating ratio help in 2016 or is that continuing to slow down as you move forward?

Mike Upchurch

Yes. No, it's definitely a help in 2016 and beyond. We have been pretty aggressive trying to restructure some of these old legacy deals, that we inherited predominantly from the FTM days. We saw some nice savings this year. We will see incremental savings in 2016.

And then, there are a variety of other maintenance agreements that are coming up for renegotiation. And we're in -- actively engaged in discussions with those vendors, to try to get a little more market-based pricing on those. I'm not going to give you any kind of the specific number, but just suffice it to say we're ultra-focused on reducing those costs.

Ken Hoexter

Is there any way to quantify -- I know you said not a specific number, but for at least maybe near-term, kind of 2016 targets? Or is that dated is it too fluid?

Dave Starling

Let me close this out. Look, one thing we're doing here, we're getting a little bit long here. So we're going to have to -- although we love the dialogue and love all the good questions. Let's just say that, we have gone through the lion's share of them. We had some that were out there on leases, we could convert them. They are a little more difficult and are going to take a little more time now.

So we're going to be opportunistic. We're not going to buy out of the lease, unless it is the right thing for us to do. So we're not sure what the number might finally be on ownership. We're still looking at that. But we're going to be opportunistic and keep pushing out. The number might be 75% or 80%, we don't know.

Right now, we have set a target for 65% or 70% and we were looking at that on ownership. But it's -- we don't have as many deals in front of us, as quickly as we had in the past. So it's going to take a little bit more time.

Operator

Our next question is coming from Scott Group from Wolfe Research. Please proceed with your question.

Scott Group

So I just want to follow up on the OR comment. I know, Dave, you just said that you are not sure about OR improvement this year. But Pat, you had a slide that said you expect continued improvement in OR, operating ratio and earnings. Does that not apply to 2016? Is that more of just long-term comment?

Pat Ottensmeyer

Yes, we're talking really about longer-term continued improvement and volume is a key. But we do think that longer-term, we can drive improvements in all of those key metrics. And keep in mind, that when we talked about our guidance before, it was based on assumptions about the economy, commodity prices, volume growth which at the time we made them were substantially different than what we're seeing today.

Scott Group

So just with that like -- I'm not sure that any models have it anymore, but do you still think a low 60%s OR is achievable for 2017?

Dave Starling

We think that a low 60%s OR is achievable, but the time frame is going to depend on the volume outlook.

Operator

Our next question is coming from Brian Ossenbeck from JPMorgan. Please proceed with your question.

Brian Ossenbeck

Maybe just a really quick one on the regulation roll out in Mexico. It has been a while since we've heard an update on that and it seems like it's getting consistently delayed. So maybe if Dave or Jose, could give us a little bit of an update there, we'd appreciate it. Thanks.

Dave Starling

Jose, you want to take that one?

Jose Zozaya

Yes, I will take that one. Thank you and thank you, Brian. And the regulation as we all know was published last year and it's in the process of being -- starting its effects. We're just ready for the last review of the federal government. And we're expecting the public -- the last publication within the month of -- the end of January or the month of February. So not more than 50 to 30 days, we will have the new regulations now in effect.

Brian Ossenbeck

Okay. So it would be in effect and then, the implementation would follow some period of time afterwards. Is that clear, is that clear when that would happen?

Jose Zozaya

That is exactly right. It's now in the process. As you may know, it was initially published -- approved and published. And then it was in the process to be reviewed and to hear from different parties. It's now, that process is now ending. Now it will come to final communication. And they are starting on the -- effect or implementation will start day one of the communication.

Operator

Our final question today is coming from John Larkin from Stifel. Please proceed with your question.

John Larkin

Just wanted to talk a little more broadly about the domestic intermodal opportunity, the highway conversions if you will, especially with Union Pacific having opened a large facility at Santa Teresa. And they've got one at Laredo under construction as I understand it.

Do you worry at all about the fact, that perhaps some shippers and carriers are going to be bringing the freight across the border, via to hand-off at the border from one trucking company to the next. And then, handing it off to the UP north of the border, where the intermodal service is in theory more truck-like? Or am I reading too much into those big investments that the UP is making along on the border? Thanks again for taking the question.

Dave Starling

Well, John, this is Dave. I can't comment on Santa Teresa. It's quite a ways west and not really -- it's off our service territory. But Port Laredo has been there for years, so this is not anything new. I know UP is going through a big expansion and there's still a lot of business that comes into Laredo, a lot of business gets transloaded. If you look at the size of the truck market. We've talked about it being over 3 million.

So that is always part of our target market, is to go after that truck that stops in Laredo for some reason. But we still see the market growing to the point -- I don't blame the UP for doing what they did. They want to make sure they've got capacity.

But I do look at Port Laredo being more of that traffic, that is coming from the northern end of Mexico. When you get deeper into Mexico, down into our service territory, the cross-border is still by far the best cost-savings security and the way to keep your cargo together for border crossings. But Laredo is always challenge for us, even because of brokers.

So but anyway -- we don't -- but that does not keep us awake at night. It is just part of the overall growth.

Operator

Thank you. That concludes our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Dave Starling

Okay. I know it's been a long call, but we had a lot of great questions. We really appreciate those and we appreciate the interest in our Company. So if you are out in the East, be careful. Go home and have a good weekend and close the shutters and stay in. So we will see you next quarter. Thanks.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.