Oct 19, 2012
Executives
David Starling - President & CEO Dave Ebbrecht - EVP & Chief Operating Officer Pat Ottensmeyer - EVP, Sales & Marketing Mike Upchurch - EVP & Chief Financial Officer José Zozaya - President & Executive Representative, KCSM
Analysts
Chris Wetherbee - Citigroup Bill Greene - Morgan Stanley Tom Wadewitz - JPMorgan Jason Seidl - Dahlman Rose Allison Landry - Credit Suisse Matt Troy - Susquehanna Ken Hoexter - Bank of America Brad Delco - Stephens Keith Schoonmaker - Morningstar Sal Vitale - Sterne Agee Anthony Gallo - Wells Fargo Scott Group - Wolfe Trahan Tyler Brown - Raymond James
Operator
Greetings and welcome to the Kansas City Southern Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder, this conference is being recorded.
This presentation includes statements concerning potential and 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 ended December 31, 2011 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 could be found on the Kansas City Southern 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 Starling
Thank you. Good morning everyone.
Joining me this morning for Kansas City Southern’s third quarter 2012 earnings call are, EVP and Chief Operating Officer, Dave Ebbrecht; EVP, Sales and Marketing, Pat Ottensmeyer; EVP and Chief Financial Officer, Mike Upchurch and José Zozaya, KCSM President and Executive Representative is participating by telephone and will be available for questions later on. KCS’ overview; I am very pleased to be able to kick off this call by saying that KCS’ third quarter furloughs and revenues were both quarterly records for our company.
We were able to establish this despite somewhat anemic US economic growth and the fallout from one of the worst drought ravaged grain harvest in US history; speaks volumes about the overall strength of our business mix. In 2012, we’ve been spending considerable time talking to investors and analysts about five areas of growth that would appear to have exceptional upside.
For the first half of 2012, cross-border intermodal, automotive, Lázaro Cárdenas container traffic, frac sand and crude oil represented 15% of total KCS freight revenues and were growing at a rate of 35%. In the third quarter this pace increased; during the quarter, those five areas represented 18% of freight revenues and grew at a rate of 46%.
While this growth is in itself impressive, what is even more important from the long-term is that we're early in the development of each of these areas. There is a very long runway ahead for intermodal, automotive and energy franchises.
Speaking of growth, KCSM volumes grew 12% in the quarter. You heard us say this before, but it bears repeating.
The nearest-sourcing phenomenon in Mexico is real and the momentum seems to gain spinning every quarter. Not only the major automotive, electronics and appliance manufacturers building facilities in Mexico, they are bringing their suppliers with them.
To give you an example, over 20 Tier 1, Tier 2 and Tier 3 auto suppliers are following Asian auto-manufacturers to Mexico. We are seeing a similar phenomenon in other industries with the large main brand manufacturers are bringing their part suppliers with them as they locate in Mexico.
KCS’ business growth is reflective of three key components. First, Mexico’s GDP is growing 3.7% despite the sluggish performance of the US.
economy. While Mexico’s growth is still and always will be linked to the US, its economy is growing on its own merits and near-sourcing will only solidify its strength.
The second key component driving KCSM is that KCS operates the only single line rail service between the US and Mexico and trade between the two countries continues to expand at record levels. As rail is the most efficient mode for moving most of the commodity flowing between the two countries or three countries if you count Canada, KCSM and KCS will continue to benefit from the trade growth.
The crossing at Laredo, Texas is the primary surface transportation freight gateway between US and Mexico. The third component driving KCSM growth is its excellent rail service.
KCSM operates an efficient and secure system with good on-time performance. In short, it can stand alongside any of the North American Class I railroads in terms of service.
We have invested heavily in building up our Mexican infrastructure and our customers are reacting by providing us with more business. My final comment in the overview chart is on our solid revenues, cost controls and operating performance resulted in a third quarter operating ratio of 68.7%.
On a pure-performance basis this is the best quarterly operating ratio in the company’s history and represents a 2.6 point improvement over the 2011 third quarter adjusted number. Once again, accomplishing this without the benefit of some of our long-haul grain movements due to the drought and the dampening effect of the economy impact on certain commodities is a testament to the diversity of our overall commodity mix and to the efficiency of our operations.
Turn to the guidance page. Before turning over to my colleagues, I’ll briefly review our scorecard relative to our 2012 guidance.
During our second quarter earnings call, we pulled down our revenue guidance a bit for the year due to the headwinds caused by diminished coal volumes. But essentially our revised guidance was for mid-single digit volume and revenue growth as well as mid-single digit pricing.
As you can see, we remain on target with year-to-date growth at 6%, revenue growth at 7% and pricing still solidly in the mid-single digit range. For the first nine months of 2012, we have improved our operating ratio by 2.1 points over 2011 adjusted number which puts us on-track for another excellent year-over-year improvement.
With that, I will turn the presentation over to Dave Ebbrecht for an operations update.
Dave Ebbrecht
Hey thanks Dave. Turning to slide nine, I would like to continue to reemphasize our consistent ability to control costs.
As you can see, Ops cost which is the bottom red line on the chart has remained largely flat over the past four years as we have experienced a significant increase in the Line-Haul revenue. As an operating team we continue to focus on absorbing growth within our network.
We still have latent capacity on trains and the headcount to surge as necessary with the seasonality of the traffic. Our judicious expense management and cost control in these areas continues to be the major driver of overall improvement.
On slide 10, you can see our headcount controls are improving with growth. We still expect our efficiency to trend up throughout the year as our headcount will remain relatively flat; but we will see occasional dips as we initiate new service and expand our network.
On slide 11, you can see our operating metrics to continue to remain in a very good range for the third quarter. Velocity continues to be strong, averaging above 27 miles per hour and in the range necessary to maintain connection standards.
Dwell and Car Efficiency showed a very good trend of fluidity with the increased record volumes handled. The uptick in maintenance away Slow Order Miles is due to the heavy maintenance away activity that we had on the Shreveport and [Zacha Junction] subdivisions and the heat orders where the rail was above average new control temperature at the end of the summer.
But the bigger point is that the slower track speeds has had no material impact on the velocity and the dwell. Our main message from operations continues to be that costs will scale below the volume and revenue growth projections.
Now I’ll turn it over to Pat for Sales and Marketing.
Pat Ottensmeyer
Thanks Dave and good morning, everyone. I am going to start my comments on slide 13 where we show our normal summary of third quarter results by business units.
As you heard earlier, we had record quarterly revenue of $577.4 million and record carloads of 552,000. We had record revenues in four of our six business units.
You can also see that RPU was flat or higher in all of our business units. Foreign exchange cost is about 6% in RPU in the automotive business for the quarter and about 1% in total revenue growth overall.
You will also know that we are not showing consolidated RPU on slide this quarter. You can all do the math given the revenue and carload information, but the reason we are not highlighting consolidated RPU is because we thought it was causing some confusion that our yields were declining due to shift in mix and the very high growth in our intermodal shipments, which is absolutely not the case.
I’ll come back to that comments at the end of this slide. But first, I’ll make a few comments on some of the business units.
The chemical and petroleum business generated record revenue for the quarter, in spite of a 3% decline in volume. Lower volumes were due to some softness in our plastics business in the US, which was really due to extremely strong third quarter of last year.
RPU [industries] was very strong, which drove the overall increase in revenue. We also saw some weakness in our soda ash business, which is primarily a timing issue driven by vessel loading schedules at our Port Arthur export terminal.
The investor and consumer business in total was basically flat last year, carloads for metal and pulp paper were both down slightly, our US metals carload were down due to general slowdown in the market. However our metals and scrap volumes in Mexico were actually up about 4%, revenues in that business in Mexico were up 11% and that was driven primarily by strength in auto production in Mexico.
On the positive side, we are seeing a pick up, albeit in a small base in our lumbar and plywood and other construction related commodities as the housing market is finally showing some signs of life. Agricultural and minerals revenues and carloads were lower pretty much across the board.
Our crop order grain business was impacted by high corn prices in the United States, resulting from the drought conditions that Dave talked about earlier. The high prices are driving cross border grain shipments down as Mexico is purchasing more towards local harvest and imports from other region, primarily South America.
I'll spend more time talking about our grain franchise in a few minutes, which is very healthy on a long term basis. Food products revenues and volumes were lower due to the lost corn syrup business that we had talked about previously, and our ores and minerals businesses is lower due to the reduced rock shipments in the Haynesville Shale region, as new drilling activity in that area was down.
For the second consecutive quarter, our intermodal business set new records in revenue, carloads and RPU. Increased cross-border business continues to drive high revenue in volumes and strong RPU performance in that group.
I will touch more on that in a couple of minutes. Automotive also broke record across the board in spite of foreign exchange drag on revenue and rate per unit.
If the peso had remained flat year-over-year, RPU would have been 6% higher and revenue would have been 39% in the automotive business. The cross border growth is the fastest growing portion of this business unit, with high double-digit revenue and volume growth during the quarter.
Now let me go back to my earlier comments about RPU and yield. As I said earlier, RPU was flat or higher in each business units but down slightly overall.
The reason for that is primarily the intermodal volume growth, which as you all know, is a lower RPU business, is much higher than the other businesses. That does not mean that our yields or contribution are falling or being diluted.
Let me walk you through a quick comparison of a cross-border grain train and a cross border intermodal train. The grain shovel train will have 100 cars and will be loaded only one-way.
Our shovel trains are 100% empty return. The intermodal train could have 200 to 250 units, and their perfect world would be well balanced with loads in both directions.
So even though the intermodal RPU is much lower than grain, the revenue per train could be much higher for the intermodal train on any given route. The cost is essentially the same; so as we fill out our capacity and balance our network, the yield and contribution on the intermodal business will be very attractive.
In fact, it can even be higher than for higher ARPU businesses like train and coal. The next slide shows the major contributor to revenue growth.
In spite of lower volumes in the three of our six business units, the strong performance in intermodal and automotive drove pretty healthy volume related revenue increases. Fuel was a slight pickup, as we saw higher fuel surcharge revenue in Mexico.
(inaudible) mix, other was driven primarily by a combination of higher frac sand and crude oil movement, increased length of haul primarily due to growth in cross-border traffic and improved pricing. We’re still seeing pricing in the mid-single digit area.
Foreign exchange continues to be a drag in the quarter, and as I mentioned earlier cost us about 1% in total revenue growth. On slide 15 we show the pieces of our energy business unit.
At the end of the second quarter, we told you that utility coal volumes had bottomed in the spring and had recovered to what we saw were sustainable levels in June and July. So far that has proven to be the case.
And even though whole revenue was slightly lower than last year, it grew by more than 40% over the second quarter. There are a couple of wild cards out there that could cause November and December comps to be more challenging, including the fact that we began shipping to a new customer in November of 2011.
During the third quarter, strong growth and record revenues in crude oil, frac sand more than offsets the declines in utility coal and pet coke. If you look at this chart on a year-to-date basis, the decline in utility coal is almost completely offset by growth in frac sand and crude oil.
We saw a triple digit growth in crude oil revenue year-over-year and then near doubling over the last quarter and that growth could continue for the foreseeable future. Slide 16 details the volume and revenue growth in our frac sand business, which is quite impressive.
We currently have 12 frac sand destinations either on KCS or one of our short line partners, and we continue to see a lot of activity in the Eagle Ford and Permian regions, but we also expect to see growth in this business at high levels for the foreseeable future. The next slide shows our cross-border revenue which was flat for the second quarter, but 8% higher than the prior year.
What is noteworthy about this is that we are still showing year-over-year growth, in spite of sizeable reductions in our cross border Ag and minerals business, which today is our largest cross border commodity. Due to the drought conditions that Dave mentioned earlier and the losses from corn syrup business, our cross border Ag and minerals revenue in the third quarter was 35% below the record levels we saw in the second quarter, which explains the noticeable downward trend you see over the last three quarters on this chart.
Excluding Ag and minerals in our year-over-year comparisons, cross-border revenue in all other business units was up 15% from last year. Industrial and consumer was strong during the quarter, driven by metals and paper and intermodal and automotive growth continues at very high level.
As you can see on the next slide on cross-border intermodal revenue continues to set new records in the third quarter, with volumes increasing by almost 100%, revenues by 88% versus last year. Intermodal growth accounted for over 55% of our year-over-year cross-border revenue growth.
Based on our previous estimates that are addressable cross-border truck market is about 2.5 to 3 million units. You can see that we are still around only 2% market share on an annualized basis.
Moving on to slide 19 you will see the (inaudible) growth story remained strong as well, with revenue growth of 23% falling the 14, RPU of 9% which is a little bit higher than our overall intermodal results. Coupled with other comments about Lázaro and the outlook for the future; in August of this year, APM terminals finalized their concession agreement with the Mexican government to begin construction of a new container terminal at last Lázaro Cárdenas.
Over the next several years, APM will invest about $900 million to develop this terminal with capacity estimated to be about 3 million TEUs. Phase 1 construction began last months and is expected to be complete in early 2015.
The next slide shows you our market outlook for the full year of 2012. As Dave, mentioned earlier, we are still expecting mid-single digit revenue growth for the full year, with volumes also in the mid-single digit range.
If you look at this slide and compared it to what we showed you last quarter, there is only one change and that is in Ag and minerals, which has been change from a single digit positive to a single digit negative. Last quarter I said that we still felt, we would finish ahead of last year, and I quote weather could be a factor and it sure was.
Conditions just kept getting worst through the summer, and we ended up with the corn crop, which is our major commodity at the lowest production since 2006 and the lowest yields since 1995. It’s going to take a season to grow another crop, so this will have an affect on our business for the next few quarters.
We are not expecting on our Ag and minerals revenue to really rebound and show growth until the second half of next year. I will talk more about the longer term outlook for this business in a couple of slides.
Other then that our guidance was exactly the same that was in the second quarter, of course we are closely monitoring the health of the economy and we will watch products like steel and paper very closely as we finish the year. Our guidance for energy continues to be negative for the full year in spite of really exceptional growth in frac sand and crude oil, but still we are not off the weaknesses in the utility coal this year.
I want to emphasize this year because I do believe that long term the new energy markets will offset any risk we have in our utility coal business. The next slide is the one that we have included to highlight the five strategic growth areas that Dave mentioned earlier.
These targeted growth markets grew by 46% during the quarter and 39% year-to-date, and today these businesses represent about 18% of our total revenue. As you can see crude oil is the fastest growing but with smaller base.
We see it run with new opportunities in the business driven by our strategic position in the US Gulf Coast. As discussed earlier, both intermodal across the border and frac sands has grown at very high-double digit rates; Lázaro Cárdenas continues to reflect significant and steady growth.
Lázaro Cárdenas was once again the fastest growing container port in the US in Mexico last year. And at 23% year-to-date growth in our automotive business, it is the second fastest growing business unit.
You’ll remember that in the second quarter presentation I gave you an update on the status of our automotive growth based on new plans that have been announced or under construction in Mexico, and we are looking at very strong growth in this business unit in the years ahead. Moving to slide 22, I want to spend a couple of minutes talking about our grain business which represents about 50% of our total Ag and mineral business unit and more than 20% of our cross border revenue.
The punch line of this story is that in any given period our grain business will be affected by weather, crop conditions and other factors. However, KCS has a very attractive and strategically well positioned grain franchise.
As you can see from this map, the KCS cross-border franchise is a highly efficient pipeline to move grains from the largest, most productive growing region in the world which is just north of Kansas City to some of the largest importing regions in the world which are in Mexico. Mexico is the second largest importer of corn in the world behind Japan.
In fact, in August our top grain customer recorded the largest export sale of grain by the United States in the last 23 years and the fourth largest ever. That product will move over the course of 2013 and we are handling some of that business today, so this is not all incremental.
Moving to slide 23, you can see that our franchise is going to get stronger on the origination end with two new grain elevators and several loading facilities coming under KCS network next year. Combined these two facilities will give us access to two new producing regions and will have storage capacity of 3.5 million to 4 million bushels.
We will see this business moving out of these facilities in the second half of next year and it will only strengthen our well positioned grain franchise. Moving on to slide 24, I will just cover these points quickly.
There is no change in our outlook for the economy or for the pricing environment. I think its really remarkable to produce the revenue and volume results that we just announced in the quarter were coal and grain which represents 20% of our business, were both weak.
I am sure we will get our fair share of coal questions, so I will just say that our visibility into the future is at best cloudy. We will give our 2013 nominations from our customers around December 1st so we should have a better feel for the outlook in a few weeks.
As I said at the end of the second quarter, our Utility Coal business bottomed in the spring and at this moment, we expect fourth quarter to be better than that, but the comps will be tougher because of new business that we took on in November of 2011. Long-term, we are still very excited about the new business pipeline and growth prospects for KCS.
As I mentioned earlier, our five strategic growth areas now represent almost 20% of our revenue and they’re growing at about 40% annual rate. Automotive production in Mexico is estimated to grow by about 35% over the next four years and our auto-related business is about 16% to 18% of our total revenues.
Finally, I would like to close with one of the fun facts about our recent trends moving to slide 25. In spite of the third quarter volume decline in three of our business units, we produced three consecutive monthly records for total revenue in July, August and September and based on the average daily carload through October 17th, we could easily see another record this month.
It really validates the strength and diverse nature of our franchise. Now I will turn it over to Mike Upchurch.
Mike Upchurch
Thanks Pat and good morning everyone. I would like to start with my comments on slide 27.
And while you see reported operating income did decline slightly, when you look at adjusted operating income excluding the $25.6 million insurance recovery gain that we recorded in the third quarter of 2011, operating income actually increased 16% to $181 million. Operating expenses continue to scale very well and increased only 2% on volume increase of 7% and revenue increase of 6%.
And as we’ve already indicated, our operating ratio of 68.7 represent the best ever normalized OR for KCS. Interest expense in the quarter declined 25% to $24.1 million, the result of refinancing activity completed during the first half of this year and the retirement of the 13% notes from December 2011.
And we now expect to report interest expense of about $100 million for fiscal year 2012, which represents $74 million reduction from our peak interest expense in 2009. Due to the strengthening Peso our FX gain was $3.7 million during the quarter, but that was more than offset by an increasing tax rate from the improving exchange rate.
Our effective tax rate for the quarter was 44.9% and is 38.4% for the first nine months of 2012. I’ll cover the tax rate in more detail on the few slides.
And finally, diluted earnings per share of $0.82, is 5% higher than the adjusted EPS from the third quarter of 2011. Turning to page 28, I would like to provide a little bit more insight into our reported EPS.
Quite unfavorable fuel comparisons year-over-year; our adjusted operating income increase contributed to the majority of the increase in EPS by driving earnings higher by $0.16 per share. Additionally, interest expense savings contributed another $0.05 per share to the bottomline.
And then the net impact of the foreign exchange gain and the impact of the higher tax rate combined reduced EPS by $0.15. So you can see it was a particularly challenging quarter from a foreign exchange perspective and I’ll discuss the tax impact on the next page.
Shifting to the tax rate on page 29; as a result of the improving exchange rate noted in the table on the right, our estimate for the full year 2012, our effective tax rate has increased from the 36 to 38% range we provided at the end of the second quarter to 39%. As you might recall, Mexican tax law requires us to revalue our U.S.
denominated debt when the currency rate changes. You might think (inaudible) the FX mark to market revaluation.
Specifically, the projected 12/31/2012 forward rate improved from 13.5% at the end of the second quarter to 13% at the end of the third quarter which creates taxable income as that now theoretically requires fewer pesos to extinguish our US dollar denominated debt. This does represented a non-cash expense for us; aren’t currently a cash tax payer in Mexico and we have been utilizing NOLs to offset any cash tax obligation.
Once we do transition to becoming a cash tax payer, we could pursue several strategies to hedge our economic cash risk and we will be evaluating that going forward. As you can see in the waterfall charts, we have reconciled the statutory rate and the top chart reconciles the third quarter rate from 35% to 44.9%.
Now I’ll comment on a couple of these reconciling items, first the bar labeled foreign exchange at 5.7% represents the period impact of the strengthening peso. The bar representing in the first half true-up at 5% and you might recall GAAP requires us to go back to periods and true-up our tax rate, so we already represents the impact of having the increase the tax rate from the first half of the year estimated 36.5% to the new full year estimated 39%.
And then finally, the lower foreign tax rate of 3.2% that you see, essentially represents the lower federal income tax rate in Mexico versus the US when applied in each countries’ pre-tax income levels. Turning to page 30 you can see the changes in the components of our operating expenses.
And we continue to scale extremely well during the quarter by managing expenses to a 2% increase, while volumes increased 7% and revenue increased 6%. In the table on the right, you can see our estimated volume growth and expenses increased $10 million, higher diesel prices in Mexico increased fuel expense by $3 million while FX reduced our expenses by 7%.
Our volume related expenses are primarily comprised of fuel consumption, variable compensation, equipment cost and intermodal charges. And it is important to note, that FX impacted operating income by less than $1 million during the quarter; as the benefit we saw in expenses was offset by $6 million decline in revenue that Pat addressed earlier.
I’ll turn now to compensation and fuel expenses on the next two slides. The purchased services increased $4 million largely due to reduced package right fees collected in Mexico.
Equipment costs were flat year-over-year, with lower locomotive expenses from the lease buyout in the third quarter of 2011, offset with higher volumes. Depreciation expense continues to increase due to our higher asset base and materials and others was flat with higher concession fee payments of $2 million being offset by lower casualty cost.
On slide 31, compensation and benefits expense continues to be a great story for KCS; it decreased $1 million to $108 million for the quarter; volume related expenses increased $2 million while headcount actually declined slightly. And as Dave mentioned earlier, we continue to scale headcount very, very effectively in our operations group.
Finally, foreign exchange contributed to $2 million reduction in comps and benefits. On slide 32, our fuel expense increased $3 million during the quarter.
Price and volume both contributed about $3 million to the higher fuel expense and those increases were partially offset by $0.10 per gallon FX benefits that reduced overall fuel expense by $3 million. We do estimate our negative lag impact during the quarter was about $4 million as a result of higher fuel prices that would be recovered in future periods through our fuel surcharge and that compares to a $2 million favorable lag benefit we had in the third quarter of 2011, so the year-over-year comps were certainly not favorable.
Finally on slide 33, we generated $145 million of free cash flow through the first nine months of 2012 despite initiating and paying dividend this year. We did receive our first investment grade rating from Fitch during the quarter and despite having achieved investment grade credit metrics, macro economic conditions in fiscal cliff two issues we can't control continue to be an impediment to getting another investment grade rating which would allow us to refinance the balance sheet.
However, we are optimistic that in the near-term we can get at least one of the remaining agencies to upgrade us and that would allow us to access longer-term maturities at historically low rates. So the 12.5% KCSM notes which does represent our highest coupon debt are callable on April 1, 2013 and our current plans would be to either retire those with cash or potentially refinance the notes at that point.
While our top priority with excess cash continues to be the best in the business to support the exceptional growth opportunities we have; accordingly, we have invested 18% of our revenue in core capital projects and on top of that accelerated the purchase of new locomotives in to 2012 to take advantage of the bonus depreciation benefit which does represent an incremental 3% of revenue. Finally, we continue to explore our lease purchase options to convert our leased assets in to owned asset and have committed $23 million year-to-date to those efforts primarily purchasing equipment under lease.
Lastly, we declared our third quarter dividend on August 7, payable on October 3, which totaled 21.5 million and that dividend currently yield approximately 1%. With that, I would like to turn the call back over to Dave Starling.
David Starling
I'll conclude by saying that the third quarter results again underline the fact that the KCS growth story is still very much intact. Furthermore, we believe that the commodities that drove growth in the past quarter we continue to play prominent roles for many years in to the future.
And one final point I would like to add is, not only is KCS hitting the majority of the sales and operations target, but are ever strengthening corporate structure and balance sheet moving us closer to obtaining investment grade status. As Mike Upchurch just explained, this provided an investment grade ratings to KCS; another clear indication that we are moving along the right path to achieving the most important goal we’ve set for our company.
And with that, the team is happy to take your questions.
Operator
(Operator Instructions). Our first question comes from the line of Chris Wetherbee with Citigroup.
Please proceed with your question.
Chris Wetherbee - Citigroup
Maybe you could guys pick up on where you left off Dave and maybe for Mike, just when you think about the potential for getting upgraded to investment grade. Can you give us some of a sense of maybe, what the opportunity would be for you thus far, refinancing some of the material that you have out there?
I mean what really is possible as far as getting the (inaudible) or maybe it could be incremental savings from that?
Mike Upchurch
Yeah, Chris a great question; obviously in today’s environment with historical rates, the opportunity we think is pretty substantial. If we are investment grade today, we could probably refinance some of the stat at 3.5% on a 10-year note.
We clearly, we have substantial cash balance where we could chose to go ahead and retire with cash, the 12.5% notes, I mean that issue alone would be $12.5 million of interest savings, given that we have $100 million outstanding. And then really, if you look at our issues down in Mexico, most of those could be refinanced, the average rate there outside of the 12.5% is a little over 6% and reducing that potentially 3.5%.
The only thing that could present a little bit higher interest expense and offset some of those savings would be if we push maturities out to 30 years where there is still an overall savings but probably coupons closer to 5% on a 30 year note. So depending on the strategy it could be a bit challenging to give you a point estimate there, but I think it’s pretty material off of $100 million 2012 exit rate that we have.
Chris Wetherbee - Citigroup
And may be the follow-up just on the operational side for Dave Ebbrecht I guess, when you think about the headcount leverage that you still have in Mexico in particular, how should we think about that. I know you kind of have given us some guidance for keeping headcount flat, you’ve done a very good job with that, but as you see this continued growth and particularly in 2013 do you feel that you are reaching a point whether it is a step function to move up or you are still able to get some pretty good leverage out of that?
Dave Ebbrecht
We are still able to get good leverage. We are hiring, but most of our hiring has been for attrition purposes and we won’t hire in the areas where we have growth.
But overall, when you look at the total network, we are able to scale relatively flat as we still have a lot of latent capacity within our trains and within our corridors. So I see us maintaining the same leverage through the next year.
Operator
Thank you. Our next question is from the line of Bill Greene of Morgan Stanley.
Please proceed with your question.
Bill Greene - Morgan Stanley
Hey Pat, can we ask you a little bit about to expand on the coal side of the business. There has been some discussion about the potential for to have some plant closures on your lines.
I realize some of the stuff may not be finalized so we may not know, but any color you could offer there in terms of, how to think about guide post for ’13?
Pat Ottensmeyer
That's a really great question, I wish, I knew the answer to it. It’s been all over the math, when we talked to our customers, the range of forecast that we have gotten this year, as I mentioned, we don't yet have our nominations for next year is really very broad.
So it’s been difficult for us to forecast with any degree of accuracy. We only have nine plants on our network and we ought to be able to do a better job of forecasting that there are just so many factors that has changed the landscape.
You know Texas is going to be power, I don't think Texas can really operate with plant closures on a long term basis, but in any given quarter with natural gas prices being where they are, we could see shutdowns like we did in the spring of this year, where we saw a significant shutdowns of capacity. So it’s just a real hard thing for us to get visibility on.
As I said our crystal ball is very cloudy, there are couple of big events that are going to happen here in the next few weeks that will hopefully give us better clarity, including our customers giving us the nominations in 2013 around December 1st.
Bill Greene - Morgan Stanley
If we look at 2013 then and we think about the broader portfolio, can you give any sense for what percentage of your business is locked in already, so you have a view on pricing and you’ve had a very good pricing arguably among the best in the industry, can that continue or do you sort of converge toward the norm?
Pat Ottensmeyer
I think it can continue. Remember, half of our business is in Mexico, and if you just think about pricing being a function of inflation and CPI inflation in Mexico has consistently been a point or so higher than in the US.
So that's one of the reasons that we have a little bit better pricing than the rest of the rails. A lot of our business in Mexico prices on an annual basis, so we have less locked-in than you are hearing from the other Class Is, probably 50% locked-in next year versus I think the others have reported higher numbers, but again it’s inflation in Mexico.
The other factor and Dave Starling touched on this is, we've really got a superior product, service, security other things in Mexico and that has allowed us to be a little higher in terms of the value that we’re offering and coming through in rate negotiations on contract renewals.
Operator
Thank you. Our next question is from the line of Tom Wadewitz with JPMorgan.
Please proceed with your question.
Tom Wadewitz - JPMorgan
I wanted to ask Dave Starling, I think you made some comments, I believe it was the second quarter call where you said well, you know 2012 is kind of a slower growth year relative to the broad trend and then given some of the projects and market initiatives and so forth you might be a step up in the growth pace in 2013 and 2014. I want to ask if you still think that's the case and as you look to 2013 where the, what are the markets, the areas where you would expect to see a significant step up.
David Starling
Well Tom, I think in the context of the 2012 comment, I think we referred to it as a bridge year. It really wasn't going to be a slower year, but with the five auto plans coming on in the next two to three years, we think we will see the volume grow in 2013.
It should accelerate even more in 2014, and then with all five plants fully operational, we should hit some kind of peak around 2015. In the meantime, you are going to see the intermodal growth continue.
You are going to see Lázaro Cárdenas continue and possibly accelerate even beyond where it is when the APM facility opens in 2014 or 2015. You are still going to see crude and frac sand growth.
So we don't see a downturn at anytime that you may see we could very easily slip back in to double-digit in the out years. Any question?
Tom Wadewitz - JPMorgan
Yeah, it does. Yeah I recall you said bridge there, not necessarily (inaudible), but when we think about auto, is there a timing, where the impact of the timing coming on would be more material, is that kind of second half of 2013, where you might see that step up?
And then I guess in terms of drilling down on the crude oil, that’s accelerated, but how do you think about, I guess the factors that would cause a step out here, there are some refinery investments in receiving facilities or are there factors and kind of timing of when they would give you potentially a step up in 2013 in crude oil?
David Starling
Well, I’ll let Pat talk to you about the automotive side, but I think one thing we don’t want to lose sight of is we're still the largest supplier of grain for Mexico and we've just come out of a drought year. So we certainly expect the back half of 2013 to be a very good year for grain and given the contract, the deal that was done with one of our customers with a major user in Mexico, we don’t expect the first half of the year to be that weak.
They’ve got orders to fill down there and they’re going to fill those orders; in fact they bought out in the futures to secure this corn. So they’ve got a contract.
They’ve got to fulfill for the full-year 2013, so we're certainly going to help them do that. But the grain has been a significant hit for this year.
It's something that we generally are, good margins, gives us a nice long haul. So we should have that grain back next year and with the two new elevators, we should have even growth in grain more than we have ever had in the past.
Pat Ottensmeyer
On the auto and crude oil Tom, the auto plants that are under construction Mazda, Honda and Nissan, those will begin producing finished vehicles in the first quarter of 2014. So we won’t see much from those plants, but if you look at, we keep saying that this is a bridge here for automotive and adjusting for currency we’re up 30% plus.
So we like that bridge, we’ll take that bridge; we’re leading market share and so, we’ll see the big pop from the new plants beginning in 2014. Crude oil is just really hard for us to predict, I mean we’re liberally getting, our team is working hard, they’re doing a great job, but we’re getting new requests, we’re getting new movements and new business literally coming in almost every week.
We’re looking at a number of options to invest and use our footprint in Port Arthur, Texas to maximize our opportunities in that business; we are very well positioned at the receiving end, obviously like our coal business, we don’t originate any crude oil, the thing that gives us the seat at the table is our footprint and our position in Port Arthur which is one of the biggest refining markets in the world. So we’re looking at making some investments; I don’t think there is anything huge or there is no real kind of step function; capital that has to take place, it’s just a big market, it imports a lot of crude oil and it wants to draw crude oil from Canada and from Bakken.
And we through our rail connections we can deliver both. And it’s probably not a satisfying answer, but it’s just very hard for us to forecast the future there, because literally we’re getting new business almost every week.
David Starling
I want to leave you with 2012, with the statement I made is that, we were not excited about 2012, we were going to be more excited about 2013; we’re extremely excited about 2012; we think it’s been a great year and at a time when we have had grain drought, drought affecting our grain and also the coal being down. We are very pleased with the growth of those other five major commodities; we don’t see that slowing down, we see grain coming back.
Operator
Our next question is from the line of Jason Seidl with Dahlman Rose. Please proceed with your question.
Jason Seidl - Dahlman Rose
First let me once again congratulate Chairman Haverty on winning the Salzburg Award yesterday. Pat, when you look at the coal business, if we exclude the potential closures of plants which may or may not happen and that’s a little cloudy now, how could rest of the business look with natural gas having move up forward recently?
Pat Ottensmeyer
It looks a whole lot better than it did 90 days ago, so I think we said as we look at our coal plants, our business is pretty simple, we serve nine plants and we have the opportunity to serve a 10th in 2015. We have put a red flag on those plants that were either natural gas prices or for EPA regulations are questionable and that could be as much as to the quarter 30% of our coal business.
Do we think that we are going to lose 25% to 30% of our coal business, absolutely not? There is a lot of politics involved in this; some of the customers are digging in and saying, we are not going to invest in the scrubbers, we are going to close the plants and that means that we are going to loose jobs and the markets that we serve particularly Texas just are going to need the power and so those plants are going to produce at some level.
With gas prices kind of where they are now in the mid $3 range, most of our plants tell us that they can compete and they can operate profitability at this level, but some of them are not in that position. So it’s like a fire-hose; the analogy I use here internally is like a fire-hose with the water flow blast and no one holding onto it, in terms of the forecast that we are hearing and the possible range of outcomes going forward.
And again as I realize it’s not a very satisfying answer for you guys, it’s not a very satisfying position for us, it’s just very hard for us to forecast.
David Starling
One other statement Jason, if you look at the one of these plants in Texas, they burn today a lot of lignite and that lignite is not as clean as the Powder River Basin coal. One of the outcomes out of this could be restricted from burning lignite and they got to switch to Powder River Basin coal.
In that instance, we would actually gain coal share and the market would go up from what we previously had. So I mean, at this by and lot, so this could go a lot of different directions.
I think, what the theme is down though, if coal is what it is, whatever the outcome is, that's what we are going to deal with, but we’ve got growth in all of these other commodities; that's what we are focused on; if the coal plants don't close, does not, let them close the plants which this another possibility and we are just going to benefit from that. But we’ve got all the growth and every commodity grew, so that's what we are spending our time worrying about; we’ll deal with what happens with coal.
Mike Upchurch
Jason, this is Mike Upchurch, remember it’s a highly variable cost structure as well, so we don't own this equipment and don't have a fixed cost; (inaudible).
Jason Seidl - Dahlman Rose
Thanks for the addition Mike. Well, let’s talk some of the other business lines, let’s talk for a minute about the cross-border intermodal; obviously you know still growing at a very good clip.
Talk about converting new customers and what do you have in the pipeline and getting more people to put those products on the trains and what's the outlook here and in 2013?
Pat Ottensmeyer
The outlook is good as I said in the past, the market is very large. Our share is very low; it’s growing very rapidly so the outlook continues to be bright.
We are working with our asset partners who are working with our rail partners to continually look at new markets, look at new service and we will probably get a question later on from someone about adding train starts and are we going to have to add costs to train starts that keep this going and growing at this rate; I sure hope so. And the more we do that, and the more we build into the balance, the more we will be able to support new service, direct service at some of these markets which will make our service look more truck light and will actually allow us to grow faster.
So in the past if you look at some of the market share for rail versus truck in the well established mature intermodal lanes in the United States, they are in the 40s or approaching 50% we’re at 2%. There is no structural impediment that says we can't get to those market share levels overtime, but if you look at the US railroad or Western railroad particularly Chicago LA is probably the best example, its taken them a lot of years to get to those market share levels.
It will take us a lot of years to do that as well, but the growth opportunity is very large.
David Starling
And I might add this. We are still spending CapEx in the intermodal facilities.
We will spend another $7 million in monorail next year; we will spend $4 million in St. Louis [OTC] next year as well, so we continue to expand those intermodal facilities to accommodate even more and more volume.
Operator
Thank you. Our next question is from the line of Allison Landry of Credit Suisse.
Please proceed with your question.
Allison Landry - Credit Suisse
So in terms of automotive opportunity in Mexico, how should we think about the potential market share that we might be able to gain from the incremental production as new OEMs and specifically as this relates to the cross-border finished vehicle market. So I was wondering maybe what some of it's dynamic or advantages that KSU has that might be able to allow you to move the vehicles cross-border on your network as opposed to having them off to Union Pacific?
David Starling
As far as the market share, we're in discussions with the auto companies now to really better understand where they see the markets and the flows of these plants going; again these plants are not go to open until early 2014. But to your second question, you know, if you are looking at, look at our services and our security advantage in Mexico, this is a real significant factor and you look at the way we can connect those plants over the Laredo gateway to the population centers in the Eastern half or two thirds of the United States, basically, Dallas, Houston, Kansas City, Chicago in East and we can connect with all of the other Eastern railroads and the Canadian railroads.
I think we have a pretty good service offering to get those vehicles to gateways where we can connect with multiple other carriers and I think that’s a real significant advantage. There will be competition, no doubt about it and it’ll be stiff, but the combination of our cross-border service, our security and our ability to connect with multiple carriers at other gateways and Laredo are something that factors, that are very interesting to the auto companies.
Allison Landry - Credit Suisse
And then, I’ve a follow up question in terms of the partnership that you do have with the other Class Is. Maybe if you could talk a little bit about the Class Is that you’ve currently been working with more over the last couple of years.
And I guess my question is, which ones are you currently working the least with right now, and have you been in any discussions with these Class Is to potentially increase business with them or form new partnerships or agreements?
David Starling
Well, we’re really working with everybody. We connect with every railroad in the industry, and to some extent, well let me say this, everyone has a strong interest in working with us, because of what they see going on in Mexico and what they see us doing in terms of investing in our franchise and really building a first class network in Mexico.
To some extent there are factors like, just the physical connection points and the gateways that we have with the other carriers and how that orients us into their flows that dictates kind of the highest and best of it, if that makes sense. So, the fact is we’re working with everyone, we’re engaged with the marketing teams at all the other carriers to look for opportunities, and again, because of our unique position in Mexico and what we’ve done to build out the network, everyone kind of wants a piece of that.
Allison Landry - Credit Suisse
Okay, it’s fair to say that there could be some potential opportunities to work more risk with some other carriers?
David Starling
There are opportunities with all of them. What we are trying to do is find the highest and best fit with each one, and that’s going to be driven by the physical connection points that we have, the gateways and how of those gateways orient us into their [freight] clause.
Operator
Our next question is from Matt Troy of Susquehanna. Please proceed with your question.
Matt Troy - Susquehanna
Thanks. Do we still have Jose on the line?
José Zozaya
Yes I am here.
Matt Troy - Susquehanna
I wanted to ask you, since we have got you here today; well given the administrative changes in the Mexican government, just wondering if you could talk about how you are relating with ,them how the relationship is progressing? Talk about may be some of the client [pulse] of the things you are focused on and the next [call] it one, two, three years with the new regime gave concession on your tax rates are just how you are working with the government?
José Zozaya
Well I should start by giving you some brief history of our relationship with that team. We started working with (inaudible) Mexico where we run trains and we have a intermodal facility for Mexico there.
We started an initiative, a very close working relationship with them. We continue that relationship, we are doing their campaign also.
I was invited to the most important event on the campaign, and at this moment I will continue having (inaudible) with some of the numbers of this things that are in the transitional team with their (inaudible) administration. So we feel that we have a closer and very good relationship with the whole team, not only with the elected president.
We foresee very optimistic the next years in the Mexican economy and that the experience we got the, we’ve seen this team work in on the State of Mexico use for business, [people] more sense a course for an investment and he also is very, very committed to the rule of law. So taking into considerations those facts, we feel very confident and very optimistic about the future of Mexican development and the Mexican economy.
Matt Troy - Susquehanna
I guess, the second question in terms of the near-term house keeping, I understand the situation in coal is fluid and we will find in the coming weeks based on weather and certain gains which we have done in Texas. But we are just curious in the US if I just look at your total consolidated coal power earnings falling 22% in the last quarter four weeks basis, is that just comp noise or one and two of your customers [throughout] essentially slow plant and currently.
Just trying to get a sense, before we bump into the harder comps in November, what might be causing that little blip down in coal near-term?
Mike Upchurch
It’s a little bit of timing and little bit of comp. We had a little bit of surge in the third quarter, just kind of slow down a little bit here and then there is some unfavorable comps (inaudible) the last year, okay.
David Starling
With the noise that's in Texas, we are still moving a surprising amount of coals still forward as planned.
Operator
Our next question is from the line of Ken Hoexter of Bank of America. Please proceed with your question.
Ken Hoexter - Bank of America
Just a quick, and I want to take up a follow-up here. On the (inaudible) target mid-single digit volumes and mid-digit pricing and the estimate single digit revenues.
Is that offsetting because of the evaluation of peso. I just want to kind of grab that new forecast on that?
David Starling
No it’s a pretty tight band. I don't think there's any peso impact in that guidance.
Ken Hoexter - Bank of America
Can you talk about crude growth noted, you've now going to seat at the table, is this just kind of an incremental cars without additional investment, just want to understand the incremental margin opportunity, and I guess Pat if you want to delve into maybe the size of that opportunity over the next year or two obviously, you know you've accelerated significantly through the years, should we look at this pace being maintained or can you talk about new customers coming out here. Could you just give us some insight on it.
David Starling
Again Kenneth it’s really hard for us to predict. I think we can sustain this growth, a very high growth even though the base is getting larger for the next few quarters based on business that we are hearing about and business that we've kind of secured and is in the pipeline for this quarter and next year.
We are looking at a number of options and talking to a number of potential partners for investments in the Port Arthur area and the facilities or properties that we own that could secure our position even further. You know we talked a little while back about this idea of crude terminal working with Savage.
That hasn't happened, but what has happened is that some of the customers that we were targeting to be users of that crude oil terminals have actually invested their own capital in their own facilities to take crude by rail, and so we haven't lost the business and we haven't lost the momentum. It just didn't happen the way we thought it would happen.
But having said that; we are still talking to people who are interested - potential partners and potential customers, who are interested in looking at facilities that we own and investing in crude oil terminals. I listened to one of the railroads earlier this week.
I agree that crude oil by rail its something that's going to be around for a long time. I don't think it’s going to end and some of these pipeline investments and reversals are made lot of flexibility, a lot of advantages to crude by rail.
The thing that we are very excited about is that Port Arthur has a pretty good mix and a pretty good balance of light and heavy, and again with our rail partners we can deliver both, out of Canada, out of Bakken, we can deliver light and heavy and so you know it just really feels good to me that we are in a pretty good position on the origination side. Port Arthur is a very large market, it imports a lot of crude oil and we are seeing tremendous amount of activity there.
Ken Hoexter - Bank of America
Can I just review that first answer for a second, I guess its still mathematically doesn't make sense, are you giving yourself conservative room on the volume side given what's going on the coal and Ag side? There is no way I would just, because a mid-single digit plus mid-single digit can't equal mid single digit.
David Starling
Well, it’s a matter of how you define the range this close.
Mike Upchurch
This is guidance is for full year 2012, we haven't seen anything specific in the fourth quarter. I don't know if that helps you.
David Starling
Yeah, and given the impact of the second quarter, the guidance is for the full year.
Operator
Our next question is from the line of Brad Delco with Stephens. Please proceed with your question.
Brad Delco - Stephens
I guess somewhat of a follow-up to the last question on the guidance and I think that’s a question given the pretty outlook you guys had longer term. When I think about the guidance, I kind of think of there being a bridge probably in the next few quarters or so, because of [good] coal on the side, but you also have some great challenges that you will be dealing with [probably] on mix.
How should we think about with other rail sands, fourth quarter expectations or volumes down that we should be thinking about may the next two quarters in volume growth and how are you guys are going to able to offset any potential headwinds there on the cost side or what you’ve been doing here for last several quarters.
David Starling
I think I lost track of your question. You know, if you just look at some of the areas where we're growing, and we’ll continue to grow kind of little difference in the rest of the rails, obviously cross-border intermodal is a market share plate.
You know, it's not out of the question in my mind that we could grow, continually grow cross-border intermodal even if the economy was down. You look at crude oil, frac sand.
So those areas are kind of unique to our network and our position. On the cost side, I do believe that we will grow faster in our outlook for the fourth quarter is better than what you heard from some of the other rails.
Our coal impact is not as large. You know, as [deposit] I can sit here and say, thank god we don’t have CSX coal business.
It's not as large as an impact on us, as it is on some of the other carriers that are looking at 30% plus of their business being coal. On the cost side, and Dave talked about this that where we’re seeing the weakness, if you think about it, its coal and grain.
And we’ve talked about this in the past, those are two areas where you have, because of the nature of the business you have an immediate cost of avoidance when you lose that business. Unit trains, shuttle train, when we lose business or our business is down, we park those trains, we don’t run the locomotives, we don’t burn the fuel, we don’t have the crews and so it’s actually, to lose any business, but it’s actually better to see weakness on the cost side in coal and grain than it is in something like steel and paper, where you’re running in a manifest service, if you lose 25 cars off of a 90 car train, you’re still running the train, when you lose coal business and grain business, you’re parking the train.
Dave Ebbrecht
Hey Brad, this is Dave let me take another, a little shot at this. Yes, one indicator is we do not have any locomotive storage, so even though the coal business has been down and the grain business is down.
We have plenty of business growth that has still made us the fastest growing railroad out there and we don’t expect that to change. So even though it could have been much better, it could have been in double digits, if we’d had all the grain and coal, we’re still in a pretty damn good place and we just don’t see that changing.
Brad Delco - Stephens
I guess what I think most people are trying to get at is, with that guidance for fiscal year ’12, how much of that is based on the momentum you have Q3 to-date versus what your expectations are for maybe fourth and first quarter. I’ll kind of move on maybe to my follow-up, not much has been mentioned about potentially serving in the port in Mexico at Veracruz; is there any color you can add to that and may be some timing around that?
Dave Ebbrecht
Uncertain, the Port of Veracruz has a lot of big plants; we were down there a few months ago. They are building a rail connection that will significantly improve our ability to serve it and that will happen in the first half of next year.
So we will be able to improve the way we get in and out of the port and our service will improve. But the port is pretty congested and the main -- I would say the highest and best use today of the Port of Veracruz is automotive.
All of the auto companies are interested in using Veracruz for exports either to the East Coast or to other markets and it’s already pretty full. So the timing of those expansions are uncertain at this point.
The Port Authority is counting on and their business model is based on private capital, so they are going to be going out over the next hopefully the next few quarters or next year or so looking for concession operators. But at this point in time, the exact details of where that money is going to come from and the timing of the expansion is unknown.
David Starling
But I will add this that some point the story we will be telling will be the continued growth of Lázaro Cárdenas and the build out of Veracruz, it is going to happen. They have spent so much money down there; it’s just a huge footprint and the fact that they have made the investment to build the railroad connection all the way from the port over to our line is a significant commitment.
It will be finished sometime in 2013, so we will then be connected directly into the port and we know in past, I just made a trip to Japan and met with the auto companies and they were all talking about Veracruz as one of the auto loading and unloading points. So Veracruz is coming, it just may not be on the radar screen for the next year or two as far as being built out, but the footprint is there, but you need some concessions in [LatAm] and they haven't done that yet.
Mike Upchurch
Hey, Brad. This is Mike Upchurch, let me make one more attempt to what I think your question is.
Our guidance for the year is mid single digit volume growth and core pricing of mid-single digit. But to get to the mid-single digit revenue, you have to look at your revenue per unit, which has generally been flat year-to-date, right.
So that's how you get back mid-single digit volume roughly flat revenue per unit, each in the mid-single digit revenue. And our core pricing continues to be positive which allowed us to generate bottomline savings, increase on margins; Pat tried to cover that with respect to the intermodal AND I think the economics there are rather simple, when you add a box in existing train the incremental margins are extremely high.
Operator
Thank you. Our next question is from the line of Keith Schoonmaker of Morningstar.
Please proceed with your question.
Keith Schoonmaker - Morningstar
Let’s switch to free cash generation and as per (inaudible) when you expect to be a cash tax payer, I think you mentioned in the first quarter you will be cash tax payer in US this year, but (inaudible) 2013, so given your reference to having some tax deductions to have this maybe available, when do you anticipate being cash tax payer in US and Mexico please?
Mike Upchurch
Yeah, this is Mike, our goal was obviously to push that date out as far as we possibly can with tax planning strategies. This upcoming election may afford us some additional opportunities, but as of today not knowing what the future tax policies might be, we will be paying cash taxes in both Mexico and the US in 2013.
But a simple policy adoption of bonus depreciation as an example would allow us to push out our cash taxes in the US for another year into 2014. So it’s a very fluid situation, but we will begin paying some cash taxes in 2013 that’s our current assumption.
Keith Schoonmaker - Morningstar
Okay, thanks. That's my first one on cash tax payment strategy as well.
Growth in Mexico is really impressive and given the importance and really an impressive growth here, I guess just the curiosity, do you expect the continued growth in your sourcing Tier 1 suppliers will lead to primarily container and box car growth that are capable of productive round trips or is this a significant part of this or it’s going to be something like the railcars that return empty?
Dave Ebbrecht
It’s really going to be both, its going to be, you look at appliance companies where we are seeing more interest in appliances moving in box cars. We’ve had a really good kind of yield management success looking at our box car flows, loading paper into Mexico and reloading appliances out and its finished vehicle and that also there is some southbound finished vehicle going into Mexico but mostly it’s a northbound flow.
And in intermodal obviously our strategy on intermodal and our asset partners is to achieve balance, so that will be pretty balanced. And if you look at the truckloads, the 2.5 million to 3 million trucks that I have talked about, it's really pretty balanced.
David Starling
Just in this quarter, we had shutdowns on the auto companies and we were then told that none of the auto companies were going to shut down for first quarter, but they will all be in full production. So just a good sign for where the economy is in the car orders and how the current automotive production in Mexico is remaining very robust.
Operator
Thank you. Our next question is from the line of Jeff Kauffman with Sterne, Agee.
Please proceed with your question.
Sal Vitale - Sterne Agee
Sal Vitale on for Jeff. Just a quick question on the cost side of things.
Look at your unit cost, specifically if I am looking at labor cost for a car load, it was down about 7% year-over-year; was there anything particular for the quarter, maybe a comp against an easier number against the harder number rather a year ago and how do we expect that to turn going forward?
Mike Upchurch
I can take that. It's relatively keeping the headcount flat while we're increasing the car load numbers on the train.
When you look at our train starts and what we're doing, we're absorbing the growth within our network and so when you have that, it's not necessarily a comp issue; it's just continued growth and we put it over the flat headcount, you are going to see continued productivity increases.
Sal Vitale - Sterne Agee
Okay, and has there been any immediate recovery in coal and grain volume, do you expect your headcount to pretty much trend or pretty much to remain flat over the next call it six quarters or the next year and a half?
David Starling
We expect to continue to maintain leverage and scale well below our growth the headcount. The only comment I would like to add is we still have contracts in Mexico that we’re working on and some of those are performed by outside contractors.
It does makes economic sense for us to take over that work and add headcount to do it and take that cost out of purchase materials and you might see that and that might cause a movement in the headcount. But when we do that, it’ll be a net saving.
Sal Vitale - Sterne Agee
Okay. And then, just a follow-up, earlier, pretty much just a clarification on a comment you made earlier, you mentioned that you will see some tough comps in 4Q because of some business you took on, and I think it was December of last year.
Was that specific to coal or does that affects other groups as well?
Mike Upchurch
My comment was specific to coal. We took on a new contract staring in November and really picked up in December.
So, that’s going to provide some noticeable challenges on the comps in coal.
Sal Vitale - Sterne Agee
Can you give a sense of who [had] the contract for the 3Q for example how may car loads that comprised?
David Starling
I don’t have that off the top of my head, I don’t know their specific shipments in the third quarter. I can tell you that it was 12 or 14 trains in December of 2011 that we picked up when we pick up their contract.
Sal Vitale - Sterne Agee
Can you pick it up in early December?
David Starling
It’s already moving in November.
Sal Vitale - Sterne Agee
November.
David Starling
And it really got to full strength in December.
Operator
Our next question is from the line of Anthony Gallo with Wells Fargo. Please proceed with your question.
Anthony Gallo - Wells Fargo
Just one housekeeping and then one big picture of housekeeping. Mike, did you say what you thought the fourth quarter’s tax rate would be?
Mike Upchurch
I did not say what the fourth quarter tax rate would be. But yeah, I’ll take the mystery out off that, since you asked a great question there.
We guided the 39% for the full year. If you look at our tax rate through the first three quarters, we are at 38.4, and if you do the math on that you are probably going to come up with the fourth quarter tax rate of 41%.
Anthony Gallo - Wells Fargo
Just wanted to make sure cause that’s these numbers move around a bit too much. You mentioned that grains are expected to be stronger in the second half of the 2013, can you just elaborate on that.
Is that because stocks are going to be rebuild, there is an easy comparison or just an outlook probably that there is one customer that’s made it big. Just a little bit more color on why range should be the way you are expecting the second half of 2013?
Mike Upchurch
The main reason is that it takes a while to grow crop, and so it’s going to take planting season for things to hopefully get back to normal. I don’t think that we will be as bad as may be some of the other because of the nature of our business, where a lot of our shipments are locked in by contract.
Our business is really driven by human food consumption and poultry production for [peers], corn syrup, corn starch; those products which are pretty stable. And as Dave mentioned, we’ve got contractual commitments and obligations.
So we may have to draw a corn from a larger origination of region, but the main reason for my comment was really just everybody knows this was a weak crop and it takes a while to grow another one.
David Starling
I might add that the two elevators that will be located on our systems, they are not adding those elevators to take care of their current business, that is for growth. So we certainly expect the production from those elevators to be, an increase in the grain that we would normally handle from those customers.
Operator
Our next question is from Scott Group of Wolfe Trahan. Please proceed with your question.
Scott Group - Wolfe Trahan
It’s been a long call; I will go for two quick ones. The first Mike with the full forward cap of the locos this year, can you give us some color on CapEx for next year.
Does that come down? The second question for Pat, on the coal side; I understand there is uncertainty, but it will be helpful if you can help us frame maybe the risk.
There obviously has been some talk about some clients that may get shut down. What percent of your coal volume are associated with those couple client center been talked about shutting down for a few months starting in December?
Mike Upchurch
I think, I’ve said earlier 25% to 30% of our coal plans we have a red flag by. Do I think that we will loose 25% to 30% of our coal business?
No.
Scott Group - Wolfe Trahan
So just 25 are a third of the clients or a third of the business that you saw and it maybe a difference?
David Starling
It’s really a pretty much both. Tell me who is going to be win the election, tell me what the EPA’s attitude is going to be, tell me what natural gas prices are going to be, it’s just very hard to predict.
Scott Group - Wolfe Trahan
No, no, I understand and I am just trying to get a sense of what the potential risk could be from the clients that already been announced that may shut down for the six months or so, okay.
Mike Upchurch
Scott, this is Mike, on the CapEx question that you had, we have not given guidance yet on 2013, but I would tell you, we are going to make whatever investments are required in this business to capture this growth. You look at the automotive opportunity we have, I mean the growth are already over 30%.
We feel very, very bullish about that business segment, and we are going to have to invest in additional equipments to handle that business and we’ll do whatever it takes to do that and we’ll update you on CapEx on our fourth quarter call as we typically do.
Scott Group - Wolfe Trahan
That might be (inaudible). The [CapEx] for autos, is that just power or do you need the facilities.
Mike Upchurch
No it’s mainly equipment. Auto-Max and other equipment carry those vehicles, and we are just taking delivery of an incremental 30 locomotives by the end of the year.
So that's where the bulk of the investment would be. But it remains to be seen over the next few years, how much track infrastructure we’ll invest to get into those facilities.
But when those plants are going to be there for many, many years; that's certainly a pretty easy decision for us to make.
Operator
Our final question today is from the line of Tyler Brown with Raymond James.
Tyler Brown - Raymond James
Mike if I could quickly come back to the balance sheet. I know you all have been very focused on deleveraging over the last couple of years.
But as we look forward, how should we think about your leverage. Are you guys looking at kind of the target numbers ratio or maybe looking at just $1.5 billion and keeping it steady or how should we think about that in the future.
Mike Upchurch
Yeah, I think we are going to probably try to keep our leverage ratios close to where they are at today. As I mentioned we've already accomplished the objectives that have been established by the agencies, and today it’s more of an issue of macroeconomic conditions in the fiscal [clause] that I think has held their decision the upgrade decision.
I still think in the next three to six months, you are going to see some positive traction there. But we don't believe we need to have any significant delevering here.
We feel very comfortable with our debt levels. As I mentioned, we may chose to use cash to take out the 12.5 that was some of the equipment that we're going to invest in.
You could potentially replace that with some low cost financing that we could push out, 20, 30 years if we chose. So I’d probably assume fairly flat levels.
David Starling
Okay, I might add too Tyler that we are still going to work on the 20-80 ratio we have on lease versus owned on equipment. So our goal over the longer-term is to be at least 50-50 on the equipment ownership.
We think that’s a prudent number. So that’s another way that we're using our cash on a go forward basis and then like Mike said earlier, we're such a growth company, that I don’t want to be - the worst criticism we could take as a team is not having the capacity that handle the volume.
So we're going to make sure that we are very cautious, and are ahead and always were, so we can enjoy this revenue.
Tyler Brown - Raymond James
Okay, perfect. And Pat you made some interesting comments related to the pickup and housing.
But have you guys ever tried to bracket maybe what your total exposure is to housing plus construction, and then I don't know if you frame it kind of like how you frame it with the ripple exposure to autos?
Mike Upchurch
It's a little bit hardened to be terribly specific about that. We think it's pretty small right now, obviously that maybe 5% or less.
Operator
Thank you. There are no further questions at this time.
Mr. Starling, I would like to turn the call back over to you for closing comments.
David Starling
Okay, thank you very much. We will see you next quarter and everyone have a great weekend.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time.
Thank you for your participation.