Jul 19, 2016
Executives
Patrick J. Ottensmeyer - President and CEO Jeffrey M.
Songer - EVP Engineering and COO Brian Hancock - EVP and Chief Marketing Officer Michael W. Upchurch - EVP and CFO Jose Zozaya - President and Executive Representative, Kansas City Southern de Mexico
Analysts
Chris Wetherbee - Citi Allison Landry - Credit Suisse Jason Seidl - Cowen and Company Tom Wadewitz - UBS Scott Group - Wolfe Research Ravi Shanker - Morgan Stanley Eric Morgan - Barclays Capital John Barnes - RBC Capital Markets Justin Long - Stephens Ken Hoexter - Bank of America Merrill Lynch Bascome Majors - Susquehanna International Group Brian Ossenbeck - JPMorgan Tyler Brown - Raymond James & Associates, Inc. Scott Schneeberger - Oppenheimer & Co.
Jeff Kauffman - Buckingham Research Group
Presentation
Operator
Greetings, and welcome to the Kansas City Southern Second Quarter 2016 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 future events involving the Company, which could materially differ from events that actually occur.
The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the Company’s Form 10-K of the year ended December 31, 2015, filed with the SEC. The Company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments.
All reconciliations to GAAP can be found on the KCS Web site, www.kcsouthern.com. It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern.
Mr. Ottensmeyer, you may begin.
Patrick J. Ottensmeyer
Thank you and good morning everyone, and welcome to the Kansas City Southern's second quarter 2016 earnings presentation. Again, I’m Pat Ottensmeyer, President and Chief Executive Officer of Kansas City Southern.
With me for today’s presentation are Jeff Songer, Executive Vice President and Chief Operating Officer; Brian Hancock, Chief Marketing Officer; Mike Upchurch, Chief Financial Officer; Jose Zozaya, is on the phone to help us with questions and Jose as you know is President and Executive Representative of Kansas City Southern de Mexico. Please move to Slide 4 for a quick overview of the second quarter results.
As you saw on our press release earlier this morning, our revenues for the quarter declined 3% versus last year, excluding foreign exchange and lower U.S fuel prices, we would have seen increase in revenue of approximately 2%.Volumes were unchanged compared to last year. Second quarter operating ratio was 61.3%, which includes the impact of a Mexican fuel excise tax credit of $34 million recognized in the second quarter, and this reflects the benefit for both the first and second quarter impact of the fuel excise tax credit.
Service continue to be impacted by flooding in Texas during the quarter or I shouldn’t say continued, but we did have flooding disruptions in the first quarter as you will recall and severe weather and flooding during the second quarter South of Houston affected our network and our cost as well. Jeff Songer will have more to say about that in his portion of the presentation.
I want to circle back and make a couple of quick comments about the operating ratio for the quarter and this Mexican fuel excise tax, which I realizes probably not well understood out in the analysts community. Mike will cover this in much greater detail in a few minutes.
But before anyone jumps to an incorrect conclusion about a new normal for operating ratio, I do want to emphasize that the $34 million credit is retroactive to January 1, 2016. So it covers both the first and second quarter.
While our reported operating ratio was 61.3, adjusting out the first quarter impact would have resulted in an operating ratio that would have been approximately 300 basis points higher than we reported, but still more than 350 basis point improvement from last year. We expect this benefit to continue through 2016.
Looking beyond 2016, the ongoing impact of this excise tax credit coupled with the longer term impact of Mexican energy market deregulation is difficult to quantify, because it will be influenced by many factors, most importantly the market price of diesel fuel and the level of the Mexican excise tax. Again, Mike will have much more detailed explanation in a few minutes and we will be happy to entertain questions on this point at the end of the presentation.
With that, I will turn the presentation over to Jeff Songer.
Jeffrey M. Songer
Thank you, Pat, and good morning. Beginning with Slide 7, velocity for the quarter of 28.4 miles-per-hour was a 7.6% improvement over prior year.
Dwell for the quarter of 21.8 hours was a 7.2% improvement over prior year. Solid operating performance in the quarter, despite continued weather-related interruptions which I will discuss, enabled improvements in our key operating metrics, and we’ve stabilized our operation well over the past three quarters.
Moving to the operations overview on Slide 8, we continue to aggressively manage resources. Currently 7% of the U.S.
T&E workforce is in furlough status and 15% of our locomotives across the system are in storage. Providing an update on other cost initiatives, our fuel management programs have provided approximately $3 million and reduced cost year-to-date through improved fuel efficiencies.
As presented in the first quarter, our fuel optimization program is well underway. We are approximately one-third complete with the planned installation for 2016, where we are installing on approximately 20% of the U.S road fleet.
Expanding upon this initiative in the second half of the year, we will begin similar work in Mexico related to fuel optimization technologies. We plan to deploy this technology across a similar number of our Mexico road fleet through 2017.
Automatic Engine Start/Stop or AESS technology is another area of focus in our fuel management efforts. While we employ this technology today, future work in this area including expanding use, in yard locomotives, upgrading to newer technologies and tightening up the work rules related to engine start-stop procedures will aid in our fuel efficiency management.
With respect to labor management, recrews are another key metric we have been focused on. In the second quarter, we achieved a 49% reduction in recrews and year-to-date we’ve reduced overall U.S and Mexico recrews by 42%.
Our capital project highlights for the quarter focus on our expansion of San Luis Potosi in support of the announcements you’ve seen regarding the new BMW and Ford automotive plants, as well as the WTC and Watco Fluids terminal. We are currently in the design phase for further capacity expansions in the San Luis Potosi area, including multiple new support tracks built at Interpuerto facility, as well as support track to directly serve the new auto plants.
This will ensure we had adequate capacity to 2018 and 2019 as these facilities come online. Other major projects at Lazaro and Sasol and mainline siding capacity projects continue on schedule.
Regarding equipment, our capital for 2016 is focused on multilevel auto equipment and by the end of Q3 we will have received 300 new auto tracks. We are also adding new Grain and Intermodal equipment to support those segments.
Turning to Slide 9, I will provide a quick overview of the weather-related service interruption in Rosenberg, Texas. Similar to the first quarter, we were impacted again this quarter by severe flooding in Texas, which resulted in the outage of a bridge on this trackage rights segment in early June.
This line was out of service for three weeks in June and was removed from service again on July 4, due to additional work required to ensure the safe operation of the bridge. We anticipate the bridge being return to service later this week.
Our cross-border and Grain segment have been impacted by this outage and we will see some residual impact in Q3 due to the additional work being performed on the bridge. I would like to recognize once again, the Union Pacific and BNSF for their cooperation as we again helped each other to maintain fluidity through the use of reroutes and detours.
I will now turn the presentation over to our Chief Marketing Officer, Brian Hancock.
Brian Hancock
Thanks, Jeff, and good morning, everyone. I'll start on Page 11, where you can see our year-over-year revenue was down 3% for the quarter, but up 2% excluding currency and fuel.
Our carloads for the quarter were unchanged for the last year. Our chemicals and petroleum business continues to show steady growth with an 8% volume and 6% revenue increase driven by strength in the petroleum and plastics business.
We continue to see this as an area of growth as the plastics manufacturers in the Gulf region continues to ship both domestically and globally. Industrial and consumer growth is slowing with year-over-year decreases of 4% volume and 6% revenue respectively, with the revenue decline primarily driven by softness in our metals and paper segment.
These segments continue to experience stiff competition, impacted by currency fluctuations in low truck pricing, which we believe to be unsustainable in the long-term. This weakness was somewhat offset by continued strength in our other carload segment.
During Q2, our Ag and Mineral business saw an increase of 9% in carloads and 10% in revenue driven by strength in grain and food products, particularly in the cross-border business. We're definitely seeing the benefit of the additional cars that Jeff spoke of, and we've been serving this important business unit all year with those additional cars.
Our overall cross-border business continues to show strong growth of 9% for the quarter being led by Ag and Mineral business as well as good growth in the chemical and petroleum business. More details on our cross-border franchise are included in appendix -- in the appendix on Pages 29 and 30.
Our energy business continues to be negatively impacted by local shipments and volatility in crew. We also continue to see declines in frac sand and petco segments as well.
Overall, carloads were down 5% and revenue down 16% versus prior year. Intermodal volumes were down 2% with revenue decreasing 7% in the quarter primarily driven by weakness in the overall market and continued competition from trucking and vessel operators.
We did see some signs this might be starting to abate as several key customers have begun returning portions of their intermodal shipments to KSC. As we’ve mentioned over the last few quarters, our automotive business has been impacted by retooling at several of the plants we service.
However, in Q2, we saw an increase in import and export volume in Mexico. This volume increase allowed us to hold shipment volume flat, while several facilities were offline for retooling.
Due to the mix, our adjusted revenue was up 7%, with these new import and export volumes are a good sign of the health of the automotive market in Mexico. As of June 30, all plants are back online with normal production and we’re very pleased with the ramp up volumes we’re seeing from new manufacturing sites.
KCS is well positioned to service our automotive customers as they grow their business in this important segment. From a pricing perspective, we continue to see renewals close at a positive rate with floor pricing coming in at mid single-digit level.
Intermodal continues to be the market segment most impacted by truck competition, but we're confident in the value we’re providing and this value is may affecting itself as volume returns to the railroad from some of our key constituents. As we’ve done in previous years, we’ve included Slide 12, which provide the sequential look for each industry segments.
As you can see we’ve a favorable or unchanged volume projection for about 86% of the business. This includes normal seasonal shipping in intermodal as well as return to some of our automotive parts business.
Given the warm temperatures in the Southwest and Texas, we're also seeing higher coal shipments being planned for the second half of the year. During Q2, we moved our first import shipments of LPG and refined products in the Mexico.
As we discussed previously, we expect to continue to ramp up with these shipments as a result of the Mexico energy reform. We are also seeing increased exports of fuel oil from Mexico, as well as increase in plastics and soda ash to support these two growing industrial segments.
The automotive business continues to grow in Mexico and our customers continue to ask us to do more in creating solutions to support their global manufacturing footprint. By 2020, Mexico will produce over 5.3 million vehicles and import another 900,000.
Over 60% of this production will have been added since 2010. We will continue to invest in the fluidity and capacity that will allow us to effectively service this important segment.
will ship according to its normal
And with that, I will now turn the call over to our CFO, Mike Upchurch.
Michael W. Upchurch
Thanks, Brian, and good morning, everyone. I’m going to start my commentary on Slide 14.
Second quarter carload volume was flat year-over-year and up 5% sequentially. While reported revenue declined 3%, excluding foreign exchange and fuel price impact from the depreciation of the peso, revenues actually increased 2% over the second quarter of 2015.
Operating ratio improved 680 basis points to 61.3%. Cost declined $50 million or 13% as a results of benefits from fuel excise tax credits of $34 million, the favorable impact of foreign exchange and lower fuel prices.
I'll cover expense declines and the fuel excise tax credit more fully on the next few slides. Reported diluted EPS of $1.11 was up 10% over second quarter of 2015, as we benefited from the improved operating ratio offset by higher interest expense, larger net FX losses from the peso depreciation, and lower equity and earnings from Panama Canal Railway.
Adjusted diluted EPS was $1.22, up 18% from second quarter of 2015. Moving to Slide 15, during the second quarter of 2016, we recorded a $34 million fuel excise tax credit for the first half of 2016, approximately half relating to the first quarter of 2016 and the other half the second quarter.
This credit relates the legislation passed in Mexico, which extends excise tax credits available to transportation companies beyond what has been available for the trucking industry to include the operation of locomotives and other work equipment. Our fuel prices in Mexico have been nearly double what we pay in the U.S., as a result of the excise tax being approximately 40% of the total price paid per gallon in Mexico.
While legislation enacted only includes credits for 2016, the government has publicly stated its intent to migrate to market pricing for fuel by 2018, and accordingly the Company believes it is likely that the government will continue to extend this credit to the railroad industry. For the full year 2016, we expect fuel excise tax credits to approximate 60 million plus, and 40 million plus after-tax, depending on fuel usage the level of excise tax per gallon imposed by the government and foreign exchange.
Finally, the credit is available against both withholding and income taxes and we currently expect to fully utilize the credit for 2016, but utilization is dependent on various factors that do influence our level of taxable income. There are no carryforward provisions to realize this excise tax credit in future years and thus it must be realized during the calendar year 2016.
Moving to the next slide, Slide 16 reflects estimates of the future foreign exchange and U.S fuel rates for the remainder of the year. As you can see we continue to expect significant downward pressure on revenues as a result of peso depreciation currently expected to be 14% and 11% respectively in the third and fourth quarters of 2016.
While third quarter of 2016 is expected to have some downward pressure on revenues as a result of lower year-over-year U.S fuel prices, based on EIA estimates, we'd expect a significant negative impact from lower fuel prices to begin easing in the fourth quarter. As you can see from our second quarter results, the negative impact on revenue of the peso and lower U.S fuel prices was $28 million and we'd expect that to continue in the third quarter.
Specifically for the third quarter 2016, we're now projecting mid single-digit sequential revenue growth. Moving to Slide 17, operating expenses declined 13% driven by the $34 million fuel excise tax credit previously mentioned, along with the declines from lower fuel prices and foreign exchange rates.
Incentive compensation was $6 million higher than second quarter of 2015, while depreciation excluding the lease conversions was $4 million higher. During the quarter, we also recorded a receivable for a probable insurance recovery of incremental flooding related expenses recognized in March and April, resulting in a $5 million net benefit in the quarter.
Recognition of remaining insurance recoveries would represent a contingent gain and will be recorded when the claim is finally settled likely during the second half of 2016. Offsetting that benefit were additional detour costs of $3 million recorded in the second order that Jeff discussed earlier, and we would expect those costs to continue in July as certain routes on a partner railroad are still out of service.
Additionally, we incurred $2 million more in other casualty costs in the second quarter of 2016. For the year, we'd expect continued headwinds relative to depreciation, wage inflation, incentive comp, fuel and the detour costs that would be limited to the months of July.
Moving to Slide 18, compensation and benefits expense increased $1 million year-over-year. Incentive compensation increased $6 million and wage inflation contributed to a $3 million increase.
Offsetting those increases were benefits from the depreciating peso and lower U.S headcount. As you can see in the bar chart on the left side of the slide, headcount was flat year-over-year and declined 1% from the first quarter of 2016, despite a 5% sequential increase in our carload volumes.
On Slide 19, fuel expenses declined $60 million or 21% from second quarter 2015 due to lower fuel prices and the depreciating peso. Increases in tonnage contributed to a $2 million increase in fuel, while efficiency provided a $1 million benefit to fuel expense.
And finally on Slide 20, our capital structure priorities continue to focus on investing in the business to generate the best growth in the rail sector. In fact, despite the downturn in the industrial economy in the last 18 months, we've grown our volume 17% since 2007, while the rest of the Class 1 industry has declined 10% on an aggregate basis.
We will continue to focus on reinvesting our cash flow back into growing our business for the long run. Projected capital expenditures for the year continue to be in the range of $580 million to $590 million.
In May of 2015, our Board of Directors authorized a $500 million share repurchase program and about halfway through the life of the program we’ve repurchased 51% of our outstanding shares at an average of $88.46. We will continue to monitor economic and business conditions to determine future levels of share repurchases.
And finally during the quarter, we pre-funded our $250 million of floating rate note due in October of 2016 at 3.125% for a 10-year term. And with that, I will turn the call back over to Pat.
Patrick J. Ottensmeyer
Thanks, Mike. Before I open the call up for questions, I’d like to do two things in my closing comments.
First, I’d like to offer a quick overall assessment of the quarter and the current outlook. And second, I want to make a few comments about the management transition that has been underway here at KCS for the last year or so.
Regarding the second-quarter performance assessment, we feel very good about our performance for the quarter, and more importantly we feel good about the overall outlook for the rest of the year. As Brian discussed, our business volumes have shown sequential growth for the last three months and the short-term outlook for the vast majority of our business is either neutral or positive.
We are also very pleased to have demonstrated solid cost control, despite unusually high detour expenses and demonstrate operating ratio improvement even excluding the excise tax credit in the absence of volume growth. Regarding the management transition, I'm sure that you've all noticed that Dave Starling is not on the call with us today and you may also recall that I became President and CEO effective July 1, 2016.
Dave will continue on as an advisor to me until the end of this year, and then will continue on as a member of our Board of Directors until May of next year. It would be hard for me to overstate the remarkable accomplishments and the progress that KCS made under Dave's eight years as President and six years as CEO.
And I'm very grateful that Dave has agreed to continue on in this advisory capacity and I intend to use his counsel to assure that this transition continues to be as smooth as it possibly can. I'm very fortunate to have become CEO at a time when this Company has never been in better physical and financial condition than it is right now.
Over the last eight years, KCS operating ratio has improved by more than 12 full points. Since 2010, our earnings-per-share have more than doubled and our market value has almost doubled.
As a result of debt repayments and refinancings undertaken since becoming investment grade in 2013, our -- combined with the overall low level of interest rates, KCS today has the lowest average interest costs on our debt than any other Class 1 railroad. In spite of recent pressures on business volumes and weak outlook for the overall economy, we continue to focus on cost control and that has resulted in improvement in cash flow and profitability.
As for the future and longer-term trends, I am doubly fortunate to not only be CEO of a financially and physically strong Company, but one which I truly believe is that the threshold of exciting growth opportunities. There is a tremendous amount of new industrial development activity taking place on our network at this moment and these investments should drive our growth in the years ahead.
All across our network we’re seeing new investments in auto plants, intermodal terminals, ethylene refineries, grain elevators, just to name a few. Our relationship with the other railroads in North America are very strong.
This is an important factor because our ability to achieve our full growth depends on our ability to offer customer service options into the markets that we don’t serve directly. By virtue of our relationships and effective interchange with all of the other carriers, we’re in a position to do that.
As you’ve seen in the last two quarters as well the relationship we have with the other rail carriers is also very important, in our ability to provide continuous service options when we’re hit by weather and other factors on our online. And finally, we have a great team of talented and dedicated employees at all levels of the organization.
From a talent perspective, I feel we stacked up very well against our larger railroad counterparts and have great confidence in this team's ability to lead KCS to even higher performance levels in the years ahead. With that, we will be happy to take a few questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
[Operator Instructions] Thank you. Our first question comes from the line of Chris Wetherbee with Citi.
Please proceed with your question.
Chris Wetherbee
Hi, guys. Good morning.
I wanted to follow-up on the tax credit issue, because I think it is important. It sounds like you are saying for the full-year something in the neighborhood of $0.35 to $0.40 of this tax credit kind of rolls through.
But Mike, it also sounds like you are saying that you are kind of resetting the bar here to some extent, because I think you're expecting 2017 to also see some type of benefit from this. So, can you give us a sense of that’s sort of the right way to think about it, that we're kind of getting some credit for overpaying for an extended period of time as we move towards market rates in 2018 as this sort of way to bridge the gap, is that the right way to think about it?
Michael W. Upchurch
Yes, I think that’s a good question Chris and it is the right way to think about it. We’ve been essentially paying roughly double the price for a gallon of diesel in Mexico than we have been in the U.S.
And we're now on kind of a level playing field with the trucking industry in Mexico being eligible for this credit, this excised credit and after the credit it effectively gets you back to price per gallon that's roughly the same as what we're paying in the U.S. And while the legislation was only enacted for 2016, we believe sitting here today that this practice would continue as the country moves to its stated goal of getting to market pricing.
And so we can't say that for certain for 2017, but we believe that that will be the case and therefore kind of resets the bar in terms of what our costs per gallon is in Mexico.
Chris Wetherbee
Okay. That’s helpful.
So two sort of quick follow-up questions on that. In a scenario of rising fuel prices and assuming the tax credit sits around for 2017, you would see, I’m guessing, less of the credit roll through as -- sort of the gap narrows between world prices and Mexican prices.
And then, is there any impact on the fuel surcharge side, the collection side relative to this sort of neutral and just gets you back to where you need to be?
Michael W. Upchurch
Yes. Well, Chris, on the rising fuel price question, it's really difficult for us to know exactly what -- what’s the price, the excise price is going to be, because it changes month in and month out and there is actually a fixed component and a variable component.
So it’s a bit difficult to predict. And with respect to your fuel surcharge question, I mean, this program is really kind of put us on equal footing with the trucking industry and we're already pricing at market in Mexico.
So we will see how will that place out, but we don’t think there is going to be any significant impact. One last comment, this credit also applies to work equipment on our railroad, which really has nothing to do with the holding of freight for customers.
It is subject to generating enough taxable income to get the offset. Its dependent on a variety of other factors that could move that credit up or down a little bit so, but that's generally where we'd net out on this, it's kind of a resetting of our price per gallon that we’re paying.
Chris Wetherbee
Okay. Got it.
That’s helpful. Thanks for the color.
I appreciate it.
Operator
Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Allison Landry
Good morning. Thanks.
I know that you talked about mid single-digit pricing, but I just wonder if you could clarify where that actually came in for the quarter versus the 38 that you talked about in Q1?
Brian Hancock
This is Brian. Thanks Allison.
What I would tell you is our pricing was strong across all of the different business segments. We saw great pricing and great renewals coming out of our core pricing efforts.
It's very close to exactly where you mentioned and we feel very comfortable that we will continue to be able to see that in the marketplace, but, yes we are right where we thought we would be.
Allison Landry
Okay. And then as a follow-up on the floods and the bridge repair, how should we think about what the revenue and OpEx impact was in Q2 and is that sort of a framework for how we should be thinking about the bridge repair that’s going on right now for the first three weeks of July and the impact on Q2?
Michael W. Upchurch
Well, Allison, on the Slide on the expenses we did try to give you that color on the incremental detour expenses that was $3 million in the month of June and we would expect some of that to continue here in July, given Jeff's comments that we still have a key bridge on our north-south route out of service. With respect to revenue, we think we lost a little bit of revenue and there was probably some revenue that was delayed into July, because of some of the operational issues, but I don't think it's a substantial amount.
Allison Landry
Okay. And then, outside of the detour expense that you talked about, was there any productivity impact that hit the labor line?
Brian Hancock
Yes, I would say, yes, although you are saying the net positive on the U.S side for the lower headcount, I would say there was some residual impact in addition to the detour, but probably be not significant.
Allison Landry
Okay. Thank you for the time.
Operator
Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.
Jason Seidl
Yes, thank you operator. I was wondering if you guys could give a little more of an outlook and some of the opportunities and the Mexican energy reform.
This year we saw that big project at Watco announced. Are there more projects like that on the horizon?
And how should we expect that flowing through the income statement in let's say 2017?
Brian Hancock
Yes, Jason. This is Brian.
I will take that one. What I would tell you is Mexico energy reform is really -- there's a number of different pieces where we can play.
There is obviously -- this from a base perspective, people are going to put pipelines into Mexico. So we will be hauling pipe.
There are other projects similar to the Watco WTC that we've mentioned before. The Rangeland announcement, some of the LPG work that’s being done.
I’d say there are probably right now about six or seven major projects primarily around storage and distribution. That’s kind of the key and making sure that you’re tied into the appropriate type of source from a refinery perspective.
And so when you think about what that will mean in the future will all depend on when those projects are able to be kicked off. Several of them, the Howard Energy project is already moving forward and so there are number of projects already moving forward, but I would say based on that timing it's probably the best way to look at and right now much of that is uncertain.
But again this last quarter we moved our first loads into Mexico for both refined products and LPG, and we think that will continue from a ramp up perspective through the end of 2016 into 2017, preparing for the open market pricing of 2018. And so as to when, what month, what quarter, that’s going to be very, very difficult to look at, but there are at least six to seven projects that are significant on our line.
Patrick J. Ottensmeyer
I would just add a little bit of cover to that and what we can't say is this market is real. There is a lot of interest, there is a lot of activity.
We are working with a number of partners that we’re going to be very, very cautious and kind of stick to our theme of being very light on specific revenue and volume and timing guidance until we have a better idea of when those projects are going to be permitted opened and start to be operating.
Jason Seidl
--
Patrick J. Ottensmeyer
Yes, let me cover that one, because I think Mike did a really good job of covering the details and Jason I would just say we think the intention of this credit was to put the -- all energy markets sort of on a glide path an equal footing to converge to deregulation and free market prices in 2018. So we feel pretty confident that what the behavior is going to be for this year and next year.
Again, once we get to 2018, then it's really the effect of Mexican energy market deregulation that that will continue on for, God knows how long in the future, so we think this is just the way to put everyone on equal footing and gain some of the benefits of the intention of deregulation on an accelerated basis.
Jason Seidl
Okay. Pat, team, appreciate the time as always.
Patrick J. Ottensmeyer
Thank you.
Operator
Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.
Tom Wadewitz
Yes, good morning. I understand you are not being real granular with the volume forecast and appreciate that, but wondered if you could get some kind of higher level of color on auto volumes in second half and what might be some of the drivers?
I think there is a sense that in addition to new facilities and restarting some of the facilities that you had, I guess, retooling work, there might be some share gain with some of the Japanese auto customers. But just wondered if you could run through some of the progress of auto in second half and how stronger ramp might be in volumes?
Brian Hancock
Sure, Tom. This is Brian.
Thanks for the question. What I would tell you is, I think we feel very, very comfortable that we come through the retooling in conjunction with our partners and everyone did exactly what they were suppose to do.
We feel, like I said in my prepared comments very comfortable that both the export and import volumes are going to be higher than what we thought they would be when we began the year. We are keeping a close watch on consumption, especially in North America, so U.S and Canada.
About 86% of the vehicles are exported, 14% of them are from Mexico consumption. So those exports can go both North America and then as I mentioned we’re seeing significant growth out of Lazaro and their crew.
So from a specific brand, specific customer, what I would tell is I think we continue to be asked to do more -- develop different types of solutions and we continue to believe that will go on probably into the next three or four years as some of these plants come on. As Jeff mentioned, we're building significant infrastructure from a capacity perspective for Ford and BMW.
Those dates have already been announced in 2018 and 2019. But we continue to believe that manufacturing of automobiles in Mexico is going to be strong simply because with the export market that they support.
And so we believe we have great models that our customers have put down into Mexico. The quality is good and so we don't see a significant downturn and that will continue as far as we can go forward.
Basically if you’re talking about specific brands, though we really can't provide that based on each one of their consumption and the way they think about their manufacturing footprint is what will drive that, but we’re very bullish on the way our automotive business looks right now.
Tom Wadewitz
Okay. Thank you.
And then for the second question, can you give us a sense of what the capacity is still available in the train network, maybe both the scheduled and the carload side and in an intermodal side, when we think of volumes improving, we think about well how much operating leverage, how much you need to add headcount back? And I guess, when we look at that is just how much latent capacity is there in the schedule.
I don’t know if you have any sense of is there 20% available or it's bigger than that in both carloads intermodal? Thank you.
Jeffrey M. Songer
Yes, this is Jeff. Thank you.
So with the investments, we’ve continue to focus on here, certainly Mexico has been a focus for capacity type construction, the Sanchez, I just hit on briefly this time we talked about that in the past, but other mainline capacity, the SLP, San Luis Potosi capacity I speak of today. I think from an infrastructure perspective, we definitely have capacity and I feel that we've done a good job to make sure we’re going to stay ahead of that.
And so the work we’re doing now in SLP for example that will set us in motion for the openings in 2018, 2019. So we’ve got a little bit of time to react.
And I think we’ve done a good job with that. On the crew side in Mexico, again getting back to the 2015 hiring we did, we believe that puts us in good shape and continues, that’s probably why you haven't seen the year-over-year numbers decreased to fully recognize what we’ve done on the U.S side with reductions.
But you are in place and we’ve done a good job of staying in front of the hiring this year in Mexico to provide that additional capacity. So right now no concerns, right now I think we’re committed to making the investments on a timely basis that are going to allow that capacity with -- without constraint here in the future.
Tom Wadewitz
Can you just say like, what that added -- with the existing schedule, how much volume you could add carload and intermodal? Do you have a rough sense of that?
Patrick J. Ottensmeyer
I will [indiscernible]. I think we have a pretty rigorous planning process on the revenue volume side, our top 200 customers represent 75% to 80% of our business and we do planning and forecasting on sort of a rolling basis to look at where the volume growth is going to occur by origin destination card type, etcetera.
And then models make sure that we clear the path and don’t run into any obstacles for the growth that we see 12 to 18 months at least out in front of us. So, the answer to the question about how much excess capacity or capacity for growth we have is very dependent on what stretch, what particular part of our network you’re talking about.
But the overall answer to your question is we don't see bottlenecks occurring that would impede our growth anywhere in our network for at least 12 to 18 months.
Tom Wadewitz
Great. Thank you.
Operator
Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group
Hey, thanks. Good morning guys.
So wanted to just follow-up, Mike, on your comment about mid single-digit sequential revenue growth from 2Q to 3Q. Can you help bridge us there?
Just -- I'm having a tough time getting there. I presume that fuel surcharge revenues up something sequentially as your fuel surcharges come back in the money, so it seems to imply something like a 3% or 4% sequential volume increase which is worse than we typically see.
So, maybe I'm just missing something with your comments. So if you can give a little bit more color there?
Michael W. Upchurch
Well, I think we’re going to stick with what we said, which was we expect mid single-digit sequential revenue growth from 2Q to 3Q. Understand Scott, there are significant headwinds here that continue with respect to currency and there are some obviously year-over-year issues with respect to fuel.
But Brian gave pretty good color I think of some of the segments and what we expect to see in the back half of the year and that we’re looking at kind of the mid single-digit sequential revenue growth.
Scott Group
Okay. And then, just wanted to go back to the tax credit issue just one more time, because so many questions, I’m not sure it's entirely clear.
Is the idea that we know we have the tax credits in '16. We think we will have then in '17.
It's likely we will have in '17 and then when we go to deregulated, we’re going to lose the tax credits in '18, but we will just have lower fuel costs in '18, is that the way to think about it?
Michael W. Upchurch
It's really hard to gauge what they will do. I mean, we’ve excise taxes on fuel in the United States and what level they ultimately settle out at is anybody's guess, Scott.
But I think the stated goal is quite clear, they want to get to world pricing, market pricing and we believe that's what they will do. There is no certainty around this credit in 2017, but you almost have to believe that they lowered in '16, they’re going to go back up in '17 and then lower again in '18 for us not to get this credit and we just don’t believe that that's the intend behind what they’ve tried to do and I think Pat, kind of very clearly indicated what our assessment is and what the government is trying to accomplish, getting to market pricing.
And then just obviously your comment about lower prices in 2018, the market will determine what the prices are. The situation that exists today is that Mexico fuel prices are artificially high, compared to world market prices.
And so this is the way to actually essentially accelerate getting to that world market price and put us all on a level playing field. But as that converges toward complete market deregulation in 2018, the market will dictate what the prices are.
Scott Group
Okay. And then just your point about the fuel surcharges earlier, if presuming that Mexico fuel costs come down from here, do your fuel surcharges just naturally come down as well or you think that won't happen?
Michael W. Upchurch
We price based on market. So, that again will depend on the market level of fuel.
Scott Group
But meaning, if fuel prices come down in Mexico, do fuel surcharges naturally come down too?
Michael W. Upchurch
Sure. That’s just like from the U.S.
Scott Group
Great. Okay.
Okay, perfect. Thank you, guys.
Operator
Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Ravi Shanker
Thanks. Good morning, everyone.
You said on slide 12 that you’re seeing several segments facing strong competition from truck, but also in auto and it seems like some parts are moving back to rail. Can you just kind of explain the truck competition, the dynamics there?
Is it getting better or is it getting worse? And does the fuel change for you guys kind of help with the shift back to rail at all and if there is any potential pass through?
Brian Hancock
Hi, Ravi. This is Brian.
Thanks for the question. What I would tell you is we’re seeing significant competition from a truck perspective in two segments, primarily it is the intermodal segment that everybody has talked about for the last two years.
We continue to believe that that capacity at some point we will start to wane. Based on pricing what typically happens is if price gets too low for those smaller pieces of capacity to stay in the market and then people return back, also there's a service component that a lot of people prefer that sometimes they don't get in that cheaper capacity.
So we believe that’s going to continue to be a market, we’ve to stay very close to intermodal. It’s a critical part of our business, but it's still going to see a significant competition.
The second piece would be our industrial consumer business which is primarily that paper and steel. Now when you have a currency fluctuation, paper from Mexico becomes cheaper than paper in the U.S., those facilities down there will use that local paper.
It would be hauled potentially by a trucking company versus rail, because of a shorter haul. So, that’s the competition you see.
It's not only the cheaper paper, but then the cheaper capacity. We don't think that’s sustainable.
In the past you’ve seen companies go through this cyclicality, if you will, on this type of market. But again, we’re going to continue to see it in those two things.
Otherwise we feel very comfortable that we're more than competitive and creating value for our customers where again I think in the auto parts and some other where that volume is returning whereas less last year and we spoke about that in our comments then. We see that now coming back to the rail because of the consistency of the service that Jeff talked about.
Ravi Shanker
Got it. A couple of quick ones on the topic de jour [ph], the fuel tax credit.
First, I want to clarify that the amount of the tax credit you’re getting right now is about the same as you would get in potentially '18, when you do go to market pricing? And also can you just talk a little bit about the genesis of this move?
I mean, whether you guys pushing the government for it or was it a populous move? I’m just trying to get a sense of -- I mean, to the extent it's possible to understand the Mexican government's thinking, kind of sitting here, what they might be thinking in 2017, will they consider renewing this?
Patrick J. Ottensmeyer
I will take a shot at the second part of your question about the Genesee and then I might ask Jose Zozaya to provide some commentary here as well. But as you know going back to 2014 or maybe even before that the then new Pena Nieto [ph] administration embarked on a very broad-based energy market reform agenda and that included production, generation, consumption, it was pretty much across all sectors of the energy market.
And prior to that and prior to this a clarification on the prior to this clarification on the excise tax, the price of diesel fuel gasoline and other consumer products in Mexico was set by the government and by Pemex. It wasn’t a world market price.
So we are migrating toward and it was a very clear path, a detailed kind of longer term, three to four year path to get to full market energy reform. So this is a bit of attack on if you would, it's probably not the best rates to use that energy market deregulation that has been in motion for a couple of years now.
We think -- that’s why we're confident that while it's unclear if this excise tax credit will be available in 2017 when we put it in the overall context of the broader market deregulation -- energy market deregulation, it would be a bit illogical to think that they would repeal this or remove this in 2018 or 2017. And then once we get to 2018, the energy market, the price that we paid for diesel, the fuel surcharge, all of that is basically going to be essentially identical to what we’ve in the United States.
Zozaya, I don’t know if you want to provide any more color commentary about the government -- government's agenda here.
Jose Zozaya
Thank you, Pat. I just wanted to clarify that these are measurement that the government took.
Generally speaking to that applies to all the railroad companies not only to us. And that as also Mike mentioned, this is a decision that is being in the annual laws that are published by the government regarding the tax rate.
So that’s why they mentioned about 2016 and essentially 2017, but we will have to see at the end of the year when they publish these new regulations.
Michael W. Upchurch
[Indiscernible] this is Mike. I’m just going to add one more thing when the law became effective in 2014, they did have the stated goal of getting to market pricing by January of '18 and in the interim they’ve kind of had this excise tax credit in the or excise tax that you’re paying now they’ve implemented this credit.
And effectively with the credit available to us now for 2016, our prices are about the same as what we’re paying at the Gulf Coast in the U.S. And that’s another reason why we believe the credit will still be available to us next year that they won't reverse course.
But again, we can't be certain of that similar to what we’ve seen in the U.S., when bonus appreciation [ph] doesn't get enacted until December and gets retroactively applied, so you’re a little bit at the mercy of those actions to take place sometimes later this year.
Patrick J. Ottensmeyer
And just to really be clear, this is a good thing. This is a good thing.
And as you see for the past year or so as oil prices and diesel prices have fallen, we have not gained the full benefit of the rest of the Class 1 railroads because of the pricing in Mexico. This gets us to that point where we should start to see -- we are starting to see the benefits of lower effective prices through this excise tax credit and really put us on level footing with our other North American railroad brethren and the truckers in Mexico.
Ravi Shanker
Very helpful. Thank you all.
Operator
Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Eric Morgan
the excise tax credit, try with apples
Patrick J. Ottensmeyer
Well, we haven't given any guidance for 3Q OR, so I will probably shy away from that. But certainly we’ve had some incremental expenses in the second quarter relative to incentive comps that we highlighted and certainly continuation of flooding related events that added some cost pressures there.
Eric Morgan
Okay. And if I could start to follow-up on some of your intermodal comments.
I think over the last few quarters you talked about winning back customers, I know you lost the trucking due to service issues specifically. Is the market so bad where you has no longer an opportunity or is that you still expect that volume to come back?
Patrick J. Ottensmeyer
No, Brandon, I will tell you that we feel very comfortable with our intermodal, one would say it’s a situation where you're competing against a number of different factors. First off, the trucking that we’ve already discussed.
Second, is vessel operators. There has been some changes in the way that -- some of the vessel operators are looking at their fixed costs, many of them announcing pricing efforts that we're going to compete with.
But again we feel very comfortable inside of our network where we're providing the service, people are seeing the value. There is a significant value and consistent service in the intermodal space and we feel comfortable that we’re -- last year there were service concerns, those are no longer with us and it's much easier for many of these companies to do their intermodal business with the rail companies versus putting it on truck.
So, again feel very comfortable where we’re at and we said in the past we will not chase the lowest-priced trucker out there. That we're just not going to do.
We valued our service. We feel its market based and we’re going to continue to go out at in that way.
Eric Morgan
Thanks for the color.
Operator
Our next question comes from the line of John Barnes with RBC. Please proceed with your question.
John Barnes
Hey, good morning. I have two questions.
First of all, I know that it just opened, but given that you own the Panama Railway, can you talk a little bit about the expanded canal opening, and the fact that the slots are full? Have you yet seen any impact, whether it be to the actual Panama Railway or maybe have you seen any impact yet to any of the Mexican ports as a result of this?
Patrick J. Ottensmeyer
John, [indiscernible] we haven't seen yet and really don’t anticipate much of an effect on our business. We just -- again most of our international intermodal business is Mexico origins and destinations.
We have cracked into the Houston market that is still very, very small in terms of our cross-border mix at this point. We just don't feel like traffic going into or out of Mexico particularly to South America and Asia is going to transit the canal.
So we don’t think that’s going to be a big impact. Secondly, as far as Panama Canal Railway is concerned, where is Dave Starling when we needed.
I don’t think it's -- we haven't seen the impact there necessarily to the opening of the Canal, but just the overall sort of environment for Transpacific in international cargo has probably been the most noticeable effect there.
John Barnes
Okay. All right.
Very good. And my second question is, and Mike, this goes back to your comments around the mid -- I guess, the 3Q revenue sequential outlook.
Can you talk a little bit about just how the carload outlook looks to you as the second half progresses, I mean, you by far got more of your commodity type in the neutral to favorable category, than say CSX, that has all but two in the unfavorable category. I mean, it looks to us like your carload comparisons, number one, get easier as the quarter -- as the year progresses.
Two, you guide this new business development coming online. So I think, can you just marry that together with maybe only being in that 3%?
Is that suggesting that, those headwinds you pointed out in terms of fuel and currency are -- have they worsened or? I'm just trying to get that balance and understand that.
Thank you.
Patrick J. Ottensmeyer
Yes, yes. I will give it a quick shout here and then let Brian talk a little bit about the community outlook and we did have that slide.
But if you look at the foreign currency estimates it is expected to continue to be at a pretty tough level here in the third quarter. We had a combined $28 million negative top line impact in the second quarter as a result of currency and fuel and we would expect to continue to see some of that impact occur during the third quarter here or so.
I think we feel reasonably good about some of the carload volumes. And I will let Brian comment on that, but you’ve just got some of that pressure related particularly FX going on in the third quarter here.
Brian Hancock
Yes, I think the key for us is when you think about the growth, you have the plastics industry that is continuing to grow and we continue to see more and more shipments as those crackers come online and we're able to participate in that volume. The automotive plants were down in Q1 and so they're going to be up in -- or in the first half.
So in the second half obviously they’re going to be moving the number of vehicles that we thought they would, so that will be growth as well. Ag and mineral, I mean there are a number of different projects that we participate on online as Pat said and so we will continue to see that, normal seasonality in the ag business.
Intermodal, obviously in the retail and carload business, the appliance business they are very heavily weighted sometimes towards the back end of the year as consumers start to spend money for the holidays and things like that. And in the energy space, coal shipments are typically higher in the second half because of the heat, the air-conditioning and things that are needed down in the Texas and in Southwest area.
So, yes, there is pressure from a commodity perspective, but we see each one of the commodities that we primarily work with moving forward in the way that we think it's going to. So is there going to be pressure in paper and steel?
Absolutely. Is there going to be pressure in intermodal?
Absolutely. But overall we are very comfortable that we’re going to grow similarly to what we do each year.
John Barnes
Okay. Very good.
Thanks for taking the question. I appreciate it.
Operator
Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Justin Long
Thanks and good morning. Maybe follow-up on the auto question first from earlier.
It sounds like you’re fairly bullish on the back half of the year. Is there full-year expectation still for auto volumes to be relatively flat or is there potential we could see year-over-year growth in 2016?
Patrick J. Ottensmeyer
Justin, I will take that one. I think as the -- its really going to depend on the output that the new plants coming online have.
So obviously the Kia [ph] plant has started up this year. We got an additional facility coming up later in the [indiscernible] area.
So there is some fairly large start ups. We feel very comfortable that we're going to be a little bit higher than we were, but I mean we’re still watching the SAR and all the other metrics very closely, working with our partners, but we’re bullish on our automotive business.
We feel like it continues to bend in primarily because of its global nature. They’re shipping these cart all over the place and that’s a great thing for our railroad as we're able support them in the global footprint not just the North American footprint.
So, yes, we're still very, very bullish on our automotive business.
Justin Long
Okay, great. And as my second question, I wanted to ask about coal.
Last year you jump in your utility coal volumes in the back half of the year when you made some temporary adjustments through a contract. Now that we’re going to start whacking those comps in the third and fourth quarter, how should we be thinking about the year-over-year change in that utility coal business in the back half of this year?
Patrick J. Ottensmeyer
Well, I think coal is definitely one of those commodities that is extremely volatile for us. Our assumption is that we will continue to see some shipments.
Our shipments have picked up a little bit here over the last few weeks and months as you see much more heat in the Texas and Southwest area. So we’re going to continue to see that.
But again it's a very volatile market, but we continue to believe that the second half will be better than the first half as it is most years and -- but I don't -- I mean, I wouldn’t say it's going to be exceptional. I think it's going to be exactly what we thought it would be and we're happy to have that volume into support those coal customers in the energy generation sector.
So, right now we believe it's going to be right where we thought it would be.
Justin Long
Okay. But any guess on in terms of the year-over-year change in the back half?
Patrick J. Ottensmeyer
Probably not going to give any guidance around that piece, simply because it's just -- its extremely volatile and we’re going to hold back on getting guidance on that.
Justin Long
Okay. Fair enough.
I appreciate the time today.
Operator
Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Ken Hoexter
Great. Good morning.
I know we’re running a bit long, I will just go real quick. On -- how long have the trucks had the benefit over the rail on the tax credit?
Is it a long time that they’re likely to extend the credit?
Patrick J. Ottensmeyer
Ken, I’m not entirely clear. Brian thinks it might be couple of years.
The legislation came in 2013, so probably we would've experience -- They would have experienced that benefit in 2014 is my assumption. We would have to go back and check on that for you.
Jose do you know?
Jose Zozaya
That’s exactly what we said that these benefits have been received by the trucking companies for, I guess more than two, three years now.
Ken Hoexter
So this just came into being two, three years ago, that the gap between trucks and rail in terms of the excise tax?
Patrick J. Ottensmeyer
Yes. I think we will definitely validate that Ken, but yes I think that's correct.
Ken Hoexter
Okay. And then as a follow-up, Pat you talked about being at the 64% run rate I guess if you normalize for the tax credit, I guess any thoughts Jeff or Mike, if it's kind of level of volume growth you talked -- Jeff talked a couple of programs are going to continue on the cost reduction side.
Is there a dollar level operating ratio on the programs or thoughts on the ongoing benefits here asides from what you’ve been on the tax -- the fuel tax side?
Jeffrey M. Songer
Ken, this is Jeff. I won't put any specific OR numbers around it.
Fuel and labor are the things we're continuing to focus on. The fuel benefit we’ve seen, we did quantify a little bit of that that we’ve seen throughout this year, although that's I want to say that’s more of a slow and steady program on the fuel installations will be through the end of this year, getting -- just simply installing all that technology in the U.S., we still have a training component for engineers and doctors to utilize that.
As I mentioned, we’ve installed about a third of that already, so you're starting to see some benefit. I think you continue to see more benefit out of that as the year goes on and then through '17 as we expand that technology to Mexico.
So without putting any hard numbers around it, I think one of the things we're marching towards on both the fuel and labor side is kind of some consistent regular steady improvement in both of those areas and I think we still have room to go.
Ken Hoexter
And did I understand from Mike, that there's going to be an increasing incentive comp impact going forward?
Jeffrey M. Songer
Well, you saw the impact in second quarter, Ken where we’re accrued at levels higher than we were in 2015 and so you should expect some continued pressures in third and fourth quarter on higher projected incentive payouts.
Ken Hoexter
All right. Appreciate the insights.
Thanks, guys.
Operator
Our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.
Bascome Majors
Hey, thanks for the time, guys. Just want to clarify a couple things on the tax credit in Mexico and the fuel surcharge.
So, is this a benefit where you're seeing cost benefits today, and just because of the typical lag, you will see the fuel surcharge fall a similar amount sometime in the third quarter?
Patrick J. Ottensmeyer
I don’t think so, because we set the fuel surcharge based on the market and I'm not sure we would expect that to be the effect.
Bascome Majors
Okay. So kind of piggybacking on that, so there is no obligation or need for you guys to go back and share the first half rebate from a surcharge basis with customers that pay the surcharge over that time?
Patrick J. Ottensmeyer
No. And remember this is a little bit broader than just fuel on freight transportation.
It includes fuel that we burn on what equipment. There are other factors that will ultimately determine the utilization of that credit such as having sufficient tax liabilities to be able to fully utilize the credit.
So there is a lot of moving pieces to this, but we believe not.
Bascome Majors
Okay. Thank you for that.
And just taking it one step further, clearly this has improved your cost structure in the Mexican business, and certainly relative to truck which is already receiving it, which we talked about a lot already. I mean, is there an opportunity, or are you already changing your marketing strategy?
I mean, can you price more effectively to gain share versus truck in Mexico, than you have been over the last two years? Just maybe some thought on how that plays out, from a marketing, sales, and volume growth standpoint?
Brian Hancock
Hi, this is Brian. I’d say that mark -- from a marketing perspective, the market that’s the price, and we’ve to compete in that market, and we’ve talked about that on calls in the past.
It doesn’t -- we have to take everything into account and so I would say we are already, as we mentioned in the past experiencing pretty significant pressure from trucking industry, from the vessel industry and we have done the things necessary to compete in the markets that we support, but also we’ve a value proposition that significantly different than a truck or a vessel and so we take that into account. But I would say we’ve been going after this thing for the last couple of years facing the type of pressure that you’re -- than you’re seeing today.
This is just a number of years of work that have come to fruition for us from a fuel perspective and I think the team has done a great job, but in the pricing and marketing world we compete every day in the market as it is against that competition that’s already there. So I don't see any major changes in the future.
Bascome Majors
Thank you. And lastly are there any operational benefits, where you don’t necessarily have to stop and fill up at the border like you were before to take advantage of fuel price differentials?
Patrick J. Ottensmeyer
No, I think we’re continuing to manage the operation, I want to say somewhat indifferently but we’ve got flexibility with the fixed fueling stations and truck type fueling scenarios that we can react pretty quickly to again get the benefit on either side of the board, but I don’t think there is really an operational impact here.
Bascome Majors
Thank you very much, guys.
Operator
[Operator Instructions] Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Brian Ossenbeck
Thanks. Good morning.
I appreciate you squeezing me here at the end. So, just a quick question on intermodal.
Brian, you mentioned you typically have second half weighted from retail. Seasonality is a bit stronger historically, call it mid single digits sequentially.
Auto growth is ramping. Clearly, you’ve got some truck competition there.
So I was wondering if you could give us a little bit more detail on the neutral outlook for the second half of the year, and if the recent, I guess, loss of the 2M Alliance going away from Lazaro into Houston directly, if that had anything to do with that? Thanks.
Brian Hancock
Yes, I would say I think from a neutral outlook means that we believe what we thought was going to happen is going to happen and so we feel very comfortable in that space from an intermodal perspective. The change that was made at Lazaro and into -- from a vessel perspective, I think was more driven by a change in the way that particular organization is thinking about their cost structure and the recuperation of their fixed costs.
I think it's -- you can see that it's a market where variable pricing has come into account. And so it's a great piece of business that is moving, but we also believe based on the factors that we're seeing at least in the market is not going to have an impact on us to the point where it's a very significant space.
And if we're correct in the way they're looking at pricing then we’re pretty sure that volume will return as economic changes occur and the customers need that freight where it's been coming for over the last few years. So we feel like there is absolutely a significant change going on in the vessel environment.
There is also a significant change in the trucking environment. But we’re starting to get through that and see well how this thing is going to play out over time and we’re comfortable that we’re positioned well and like I said we’re not going to chase the lowest cost methodology of the day, because there is a lot of people trying to make up with things and we’re just not going to chase that volume.
We have a very specific value set.
Brian Ossenbeck
Okay. I will leave it there.
Thanks, Brian.
Brian Hancock
Okay.
Operator
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Tyler Brown
Hey, good morning, guys.
Brian Hancock
Hi, Tyler.
Tyler Brown
Hey, Brian, just real quick on grain. I think it is was the only commodity that saw positive year-over-year change in ARPU.
I surmise that was driven by export grain. But I’m curious about what your go-forward expectations are there, just particularly in light of the peso?
And then, I thought I heard you mention new elevator investments on the network. Is that a '17 benefit and are those to serve the export market?
Brian Hancock
There are -- thanks Tyler for the question. There are a number of elevator investments that have been made.
The grain industry continues to evolve and the food industry, so our position in grain and food together, they continue to evolve and we feel like we’re positioned very well. There was great growth on the line for the first half of the year.
But I will tell you much of that was driven by our additional equipment as Jeff had talked about. And we continue to see this as an area where we can spend the capital, get the equipment and participate in much of that cross-border business.
So, yes, we were very pleased with the growth that we saw not only in grain overall, but grain on the cross-border business and we do believe that that's going to continue and we believe we’re positioned well for those elevators that have been put up and also some of the other plans that are occurring. But other than that we think it's -- the grain market is going to kind of stay where it's at and we feel comfortable that we are positioned well.
Tyler Brown
All right. Thank you.
Operator
Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Scott Schneeberger
Thanks for squeezing me in. Just to follow-up on flooding, it sounds like you've answered pretty much to the extent of what you were looking to third quarter, but I’m just curious you mentioned a partner route out of service, if you could elaborate?
And then also, has the flooding in the first quarter and second quarter, made you rethink perhaps your infrastructure in South Texas, and any thoughts or changes that you may make going forward? Thanks.
Brian Hancock
Yes, so to clarify I believe we’ve got a map here in the slide deck that shows you exactly where this was at, that the bridge was on the UP line which is our trackage right just outside of Rosenberg, so our connection cross-border. This is our main rail, basically north-south rail.
So, I wouldn’t jump to conclusions that because we’ve seen such -- I want to say partnership, but good cohesiveness on the detours between BN and UP are multiple routes around the Texas areas that as we work well together that we're able to utilize and I think that’s what you’ve seen certainly in the first quarter, the flooding event which is more expensive because that impacted multiple lines. This was the single route while very critical single route.
I think the railroads kind of proved out that we can work around these temporary issue. So right now no long standing, no long-standing issues.
We are set. We are assuming we’re going to get this bridge back in service here this week and so we ought to be back to normal.
Patrick J. Ottensmeyer
I think it's just not practical to think of how -- infrastructure investments to avoid floods. You just never know where they’re going to occur.
So the solution and we’ve seen it really work extremely well both this quarter and the first quarter is it that have healthy active partner type relationships with our interline carriers to make sure we give the market, our customer solutions to keep them in business and keep the freight moving than one or more of us are out of service.
Scott Schneeberger
Thanks.
Patrick J. Ottensmeyer
Okay.
Operator
Our next question comes from the line of Jeff Kauffman with Buckingham Research. Please proceed with your question.
Jeff Kauffman
Thank you very much and thanks for squeezing me in, guys. Just a quick one for Brian.
Brian, I want to go back to the coal commentary. It clearly has been hot, but I think there is a perception that there is a large inventory overhang nationwide in coal.
Can you speak a little more specifically, as to what gives you optimism about the increased shipments? So do you know where the inventory levels are relative to normal at your coal customers?
And to clarify, you said they are going to pick up, but you had a pretty big third quarter last year. So we are not talking about up year-on-year.
We are talking about up sequentially, and versus first half, correct?
Brian Hancock
Yes, I’d tell you from a coal perspective on the inventories they’re extremely high and have been all year long. Our customers continue to work with us in where they want to be from an inventory perspective, but we’re definitely talking a sequential first half versus second half.
We will have more coal shipments, we had hardly any coal shipments in the first half. So from a sequential perspective we feel comfortable that we will continue to support them in their efforts, but also as some of those inventories get burn here in the third quarter as you go through the end of summer, they will want to replenish that, which is a normal state for the industry.
So nothing out of the ordinary, nothing -- like I said, breakthrough this is exactly what we expect to happen in the second half of the year and we will support them as we need to.
Jeff Kauffman
Okay. Thank you.
Operator
There are no further questions at this time. Mr.
Ottensmeyer, I would now like to turn the floor back over to you for closing comments.
Patrick J. Ottensmeyer
Okay. Thank you.
I’m sure we’re all suffering from conference call fatigue at this point, but again I will disclose by saying we feel good about the quarter. Obviously, in the absence of volume growth, the fact that we were able to focus on cost over time service disruptions because with flood, feel very good about the performance that we are able to deliver for the quarter.
We feel the outlook for the rest of the year is pretty positive and we will continue to focus on cost control and continued improvement in operating ratio. And then beyond that, again, the long-term outlook I feel very confident, very excited about and I look forward to all of these new capital investments in plants being built that will drive our growth in the years ahead.
So with that, I will close and look forward to getting with you all again in October. Thank you.