Apr 21, 2017
Executives
Patrick J. Ottensmeyer - President and CEO Jeffrey M.
Songer - EVP and COO Brian Hancock - EVP and Chief Marketing Officer Michael W. Upchurch - EVP and CFO
Analysts
Tyler Brown - Raymond James Ravi Shanker - Morgan Stanley Allison Landry - Credit Suisse Tom Wadewitz - UBS Brian Ossenbeck - J.P. Morgan Brandon Oglenski - Barclays Capital Bascome Majors - Susquehanna Financial Jason Seidl - Cowen and Company Brian Konigsberg - Vertical Research Chris Wetherbee - Citi Investment Research Justin Long - Stephens, Inc.
Ken Hoexter - Bank of America Merrill Lynch Scott Group - Wolfe Research Scott Schneeberger - Oppenheimer Jeffrey Kauffman - Aegis Capital
Operator
Greetings and welcome to the Kansas City Southern First Quarter 2017 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 for the year ended December 31, 2016, 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 very much and good morning everyone. Welcome to the Kansas City Southern first quarter earnings call.
We'll start with Slide 4. I don't think there is a big need for introduction.
It's the same familiar cast of characters that you've seen here for the last several quarters. So let's go right into the first quarter overview on Slide 5.
I think if I were in a position to write a headline for this quarter, it would be, 'Solid and Clean'. First quarter revenues, volumes, operating ratio and earnings per share, were all records.
So in addition to this being the first quarter that we have seen now in two years where we have seen year-over-year favorable comps in revenues and volume, it is also a record for the first quarter in those categories as well as operating ratio and EPS. So, while there may be some truth in the element that this is an easy comp from some flooding and other service disruptions that we had in the first quarter of 2016, it's also very important to recognize that this is a record for those four important categories, volume, carloads, operating ratio and earnings per share.
Brian will talk more about the major business units, but we saw solid growth in four of our six major business units during the quarter compared to last year. And the two business units where we saw declines, they were relatively modest, and again, I don't want to steal Brian's thunder.
He'll talk a little bit about the outlook that we see, favorable trends in 75% of our business, neutral in 25%, and we don't see any major business units where we are forecasting unfavorable or declining trends for the remainder of 2017. Moving on to Slide 6, probably most of you saw, I know some of you have written about a press release we issued after the market closed yesterday announcing that we had filed our response to the Mexican antitrust authority COFECE Preliminary Report, which was published in March of 2017.
We filed that press release separately from the earnings call because there is really very little that we are prepared to say about that at this point. The process is ongoing.
The responses will not be made public and the statement from yesterday is really all that we are in a position to say at this point. So just as a heads-up, for those of you who are thinking about how to use your precious time on the Q&A, you might want to stay away from this topic.
The press release kind of stands on itself, and again, because the process is still underway, there's just not much more we're going to say about it. So with that, I will turn the presentation over to Jeff Songer.
Jeffrey M. Songer
Thank you, Pat, and good morning. Beginning with Slide 8, velocity for the quarter of 27.8 miles per hour has remained relatively consistent over the past several quarters and is a leading indicator of stability in the overall network.
Dwell for the quarter of 23.3 hours lagged prior year's performance, but improved by 5% sequentially. Dwell in the north region of Mexico, in Monterrey, Sanchez and Nuevo Laredo, remains elevated versus historical levels, but all three terminals showed improvement over last quarter.
Total train volume in these three terminals remained strong with year-over-year and sequential growth of 10% and 5% respectively, and the team remains focused on reducing dwell in the region as we handle these additional volumes. The projects to add capacity at grain and auto terminals in this region, discussed last quarter, are on pace to complete this quarter.
Additionally, we completed construction of new classification tracks at our Sanchez Terminal during the quarter and are on schedule to construct additional tracks before the end of the year. Also of note, total train volume over the Laredo gateway increased 13% over prior year.
This includes franchise, non-franchise, loaded and empty carloads. Time to process trains across the bridge, which is another key measurement, improved 12% during this time in spite of the large increase in traffic.
Overall, I'm pleased with our operating performance during the quarter and remain positive that the ongoing capacity and process improvements will continue to support the growing operation. Turning to Slide 9, resources remained aligned.
4% of the U.S. workforce is in furlough status, 7% of locomotives are in storage and we remain well positioned to handle additional volume as required.
No locomotives are planned for purchase in 2017, but additional locomotives are readily available [indiscernible] market, should volume dictate. Productivity improvements during the quarter enabled us to handle 6% more volume with neutral headcount.
To support the automotive segment from Q1 2016 through Q2 2017, we will have increased our bi-level automotive fleet by approximately 40%. The additional equipment coupled with strong operating performance in this segment enabled us to handle 38% more automotive volume during the quarter versus a year ago.
Major curfews on the southern portion of U.S. network and significant curfew activity on the KCS/UP joint track in Texas had some negative impact to the operations during the quarter.
As Mike will show, this also added detour expense as we rerouted trains around these curfew areas. This work is now largely complete for the year and ongoing curfew related impacts and detour expense should reduce.
Other positive items include a mechanical in-sourcing and contract restructuring activities, we have discussed over the past few quarters. These actions are performing as planned, and as you will see in Mike's presentation, we are recognizing the cost benefits.
We anticipate these efforts will reduce operating costs by approximately $10 million for the full year. Also of note, we have restructured our short-term incentive program for the operating department by adding operating metric goals in addition to our standard operating ratio targets.
This plan will align individual performance with overall Company objectives and will reinforce our commitment to a strong operating environment. Turning to Slide 10, our 2017 outlook for capital remains unchanged at $550 million to $560 million.
This represents an approximate $30 million reduction from 2016. We remain focused on adding additional capacity in Mexico and supporting new business growth opportunities.
Sanchez Yard construction continues as planned and the new fluids terminal project in San Luis Potosi is on target to open later this quarter. Additional capacity projects on the KCS/UP joint track in Texas are estimated to be complete mid-year and should provide for additional fluidity in this region as well as benefit cross-border traffic flows.
Finally, the Sasol Terminal project is progressing well and is on schedule for completion late in 2017. I've included a photo showing the Sasol project and our adjoining Mossville, Louisiana terminal.
Once complete, this will roughly double the footprint of our existing terminal and will provide 1,400 additional carload capacity for Sasol. With that, I will now turn the presentation over to our Chief Marketing Officer, Brian Hancock.
Brian Hancock
Thank you, Jeff, and good morning everyone. I'll start my comments on Page 12 where you can see first quarter year-over-year revenue was up 8% on 6% volume growth.
The negative impact of foreign exchange to revenue was more than offset by strength in our energy, automotive and chemical and petroleum business. If you eliminate the impact of foreign exchange, our first quarter revenue would have come in at a strong 11% increase.
Volume increases of 30% in energy and 38% in automotive were the primary drivers of growth in the quarter. But we also saw strong revenue per unit increases in spite of the foreign exchange, driven by improved core pricing, fuel price increases and impact of positive mix.
Our energy line of business saw revenue up 64%, led by utility, coal and frac sand, offset by weakness in our crude business. Automotive revenue was up 25% over 2016, driven by higher year-over-year volume, but this includes comping the plant shutdowns we saw in Q1 of 2016.
We also saw 8% growth in our chemical and petroleum business unit, with solid performance in our southbound LPG business as well as lubes and oil product movements. The industrial and consumer segment was generally flat in the quarter.
We continue to see competition with truck and barge for the metals business but we have seen some encouraging signs over the last few weeks. We also experienced temporary plant shutdowns at several of the paper facilities in the first quarter.
We see continued solid performance in agriculture and minerals business, with 6% year-over-year revenue growth in the quarter, driven primarily by increased demand in food products and grain. Our intermodal business continues to see stiff competition from low trucking rates and ocean shipping consolidation.
Intermodal saw volume decrease of 1% and revenue decrease of 2% for the quarter. I'll speak more in depth about intermodal here in a few minutes.
On Page 13, you can see an updated assessment of our 2017 volume outlook. Our outlook for energy is improved, driven by higher natural gas prices and low inventories, driving an increase in demand for coal.
Additionally, a resurgence in drilling is driving demand for frac sand. Our automotive business should continue to see strong growth in volume and revenue.
This is partially due to the temporary plant shutdowns we saw in the first quarter of 2016, but we continue to see growth in this business segment driven by additional manufacturing capacity and improvements in our service. Chemical and petroleum should also continue to show growth due to the refined product shipments as well as some of the new plastics facilities coming online over the next 24 months.
The ag business remains neutral, grain and food product demand remain strong, but we are comping a very strong 2016. Industrial and consumer will continue to be quite variable in the short-term as both steel and paper markets continue to see significant pricing pressure against other modes of transportation.
We have a positive outlook on our intermodal business, but it continues to see significant competitive pressure. I'd like to take the next few minutes to describe our plans in this important area.
If you turn to Slide 14, you can see our intermodal business is broken into four segments, each making up approximately 25% of the intermodal portfolio. First let's discuss our cross-border franchise business.
This business segment has a positive outlook for the remainder of 2017 and these are the shipments that run on the KCS-KCSM across the border and provide a direct KCS solution for our customers. This service connects to most of the other Class I railroads to provide service to every part of North America.
This service has been the focus of our new intermodal product announced with BNSF last year. Next you can see the cross-border interchange business that provides service through our interchange partner, Union Pacific, with an exchange at Laredo, Texas.
This segment has historically consisted of auto parts moving north and south in support of the growth in manufacturing on both sides of the border. As we said in the past, the UP is an excellent partner and the relationship is one of the most important that we have in our network.
The KCS and Union Pacific are working together to expand this service and make it easier and faster to move products on this route. Next is our domestic U.S.
business that primarily uses the Meridian Speedway to service customers in the Southeast United States. This service has a dedicated train five days a week and is the fastest service seen in Dallas and Atlanta, using our interchange partner, [indiscernible].
This is the business that would experience the most benefit from any tightening that we would see in the U.S. truck capacity over the next few years.
Our final segment is that of the Lazaro and intra-Mexico segment. This business continues to be strong but faces daily competition from inexpensive trucking from the Port of Lazaro in the Mexico City.
Our service provides a very secure and timeless solution for our Mexican customers. And with the opening of a new APM Terminal, we expect this portion of the network to be used as an alternate route for shipments bound for the Southeast U.S.
from the West Coast ports. We also expect to provide additional services for shipments going southbound through Lazaro Cardenas, bound for Asia and the western side of South America.
On Page 15, you can see a picture of the new terminal which was dedicated two weeks ago by the President of Mexico and was attended by many of the KCS management team. Consistent reliable service in and out of Lazaro will continue to be a source of growth and investment over the next few years,.
We believe this service will continue to provide our north bound customers with a shorter, more secure alternative to reach the North American consumers and it will also provide an excellent route for southbound products going to other regions of the world. On Slide 16, I wanted to provide an update of our refined products business.
As you know, the 2013 Mexico Energy Reform is being implemented this year. KCS has a growing number of terminals, either already built or in some phase of construction on our line.
Our new refined products terminal in San Luis Potosi will move its first shipments in Q2, but KCS has already participated in over 1,500 cross-border carloads of refined products including diesel, unleaded and LPGs. We continue to believe that the number of shipments could vary month-to-month during the startup phase of the new law, but we are encouraged by the current volumes in the agreements we're putting in place.
Overall, this shift towards an open fuel market will be a positive for the country of Mexico, for energy exporters from the U.S. and for KCS.
Finally on Page 17, we wanted to provide an update on the petrochemical facilities being built along the Gulf Coast. Currently there are $169 billion worth of facilities under construction that will provide plastic resins for regions all over the world.
These facilities are taking advantage of the low-cost natural gas found in the Gulf region. In Q1, KCS sponsored a Plastic Symposium attended by more than 70 customers and service providers.
At the meeting, KCS provided detailed plans on the infrastructure we've put in place to support this important and growing business segment. KCS is spending significant capital in the Mossville area, as Jeff noted, to support our agreement with Sasol.
But we expect to ship products from many other customers as well. Obviously, much of this product will be shipped to the major ports on the Atlantic and Pacific coasts, but many of our customers are looking at shipping through Mexico and out of the port of Lazaro Cardenas as a way to create additional capacity and protection of supply for their global consumers.
We believe this opportunity will benefit KCS and many of the other railroads because shipping by rail is the most efficient way to move these products. Overall, we believe these and other opportunities provide a robust environment for KCS to continue its growth in the markets that we serve.
I'll now turn the call over to our CFO, Mike Upchurch.
Michael W. Upchurch
Thanks, Brian, and good morning. I'm going to start my comments on Slide 19.
First quarter volumes increased 6% and reported revenues increased 8%. Our operating ratio declined 120 basis points to 65.4% despite some significant fuel challenges.
As [indiscernible] mentioned, it is $8 million year-over-year lag headwind. Additionally, we saw some mix changes in our peso denominated revenues and expenses which created a $3 million net negative impact to operating income, and you can find more details on Slide 27 in the appendix.
Reported first quarter 2017 EPS was $1.38 a share. On an adjusted basis, first quarter of 2017 EPS was $1.17 this year, a 14% increase in earnings per share.
You can refer to Slide 28 in the appendix for more complete income statement details that reflects a $46.8 million foreign exchange gain, representing both a gain on our currency hedge contract and the impact of the remeasurement and settlement of our peso-denominated net monetary assets. Our adjusted effective tax rate for the quarter was 34% and our average basic outstanding shares declined 1.95 million shares, reflecting 2.1 million shares we repurchased over the last 12 months.
Turning to expenses on Slide 20, operating expenses increased $24 million or 6% in the quarter. Foreign exchange benefited our expenses by $11 million.
Increasing fuel prices contributed to $18 million in expense increases, but the $12 million fuel excise tax credit mitigated some of those negative fuel price impacts. Fuel consumption increased expense by an additional $6 million as we experienced carload growth of 6% and GTM growth of 12%.
Car hire was up $5 million year-over-year, $2 million due to carload growth and another $2 million due to the mix of equipment, with higher cost to automotive equipment to support the 38% carload growth Brian mentioned. Depreciation added another $5 million due to a higher capital base.
And in the compensation expense line item, we saw wage inflation of $4 million and benefits inflation of another $4 million, and I'll talk a little bit more about compensation on the next slide. And finally, as Jeff mentioned, maintenance on the trackage rights with a partner railroad caused us to detour more trains, increasing expense by $4 million in the quarter, and we would expect to see that decline in the second quarter, and already have during the first part of April.
Turning to Slide 21, compensation expense increased $7 million or 7% year-over-year. Wage inflation drove $4 million of the increase, while benefits expense was up another $4 million, largely due to funding of our U.S.
union benefits obligations which continue to rise. Foreign exchange contributed to a $3 million decline in wages.
And finally, I would note that our mechanical in-sourcing drove compensation expense higher by another $1 million, but we saw corresponding declines in purchase services. Overall headcount levels excluding the mechanical in-sourcing were flat year-over-year despite the fact that we generated 6% carload growth, hence driving nice labor productivity during the quarter.
Turning to Slide 22, fuel expense increased $18 million or 33%, driven by fuel price increases of more than 20% year-over-year. Foreign exchange helped expense by $6 million while fuel consumption, again driven by carload and GTM growth of 6% and 12% respectively, caused a $6 million increase.
Finally, during the fourth quarter earnings call, we provided some guidance that we would expect the IEPS fuel excise tax credit to be approximately $60 million for 2017. Since then, fuel prices have increased in Mexico approximately 20% to 25% depending on region.
However, in response to a variety of protests that took place in Mexico due to higher fuel prices, the Mexican government did decrease the IEPS component of fuel price to moderate the overall negative impact. While we don't have great visibility in the specific plan for fuel prices in Mexico for the rest of the year, we do currently expect the reduced IEPS tax to stay stable throughout the remainder of the year.
Clearly much has happened in last 90 days but we now believe our credit will be in the range of $45 million to $50 million, $10 million to $15 million below our original guidance. And we'll continue to closely monitor fuel prices in Mexico and make changes in fuel surcharges and purchasing practices to minimize any potential negative impact.
And finally on Slide 23, let me address our capital priorities. We continue to focus on reinvesting our cash flows into growing our business for the long run.
And accordingly, we continue to estimate 2017 capital spend between $550 million and $560 million. However, we will continue to pursue investments in ventures, such as our refined products fluids terminal in San Luis Potosi to take advantage of the incremental growth opportunities that Brian discussed around the energy sector.
For 2017, we currently anticipate incurring at least $20 million to fund our share of the terminal buildout. In acknowledging the need to balance our capital spend with shareholder distributions, our Board of Directors approved a cash dividend of $0.33 per common share.
We also have now completed almost 90% of our share repurchase program by repurchasing 4.9 million shares at an average price of $88.82. And finally, with the balance sheet that is comparable or better than most of the rail companies rated two notches higher than us, we continue to make gains in converting leased equipment into owned assets and now own approximately 68% of our equipment.
The end result of this program has been an improvement in our operating ratio by approximately 230 basis points. And with that, I'll turn the call back over to Pat.
Patrick J. Ottensmeyer
All right, thanks. I think the team has done a good job of kind of explaining the quarter and the outlook, but let me just touch on a couple of points to draw your attention or highlight certain things.
The revenue growth and the volume growth that we saw was really pretty solid across the board. If you look back to Slide 12 that Brian covered, I think the strength of some of our business gets muted by the scale on this slide.
So ag and min, and chemical and petroleum, look kind of small but we saw a revenue growth in those business units of 8% and 6% respectively. Feel very good about the cost performance.
As Mike highlighted, our volume growth was 6% but our GTM growth was 12%. So I think Jeff and the team have done an outstanding job of managing the cost and improving the operating performance.
Intermodal, we wanted to go a little bit deeper into the intermodal segment because that is one area where we might be a bit of an outlier. We're not happy with the performance for the first quarter, but we clearly feel like we can see a path to grow through the remainder of 2017.
I think Brian got into some of the reasons that we are confident about that in his presentation. And then again, I just want to reiterate the long-term outlook.
Many of us have had a chance to be in Mexico, particularly a few times so far this year. We have seen a brand-new Kia plant, a $3 billion plant that opened last year that's still ramping up toward a production level of about 600,000 vehicles a year.
We toured a soybean processing plant that's in the process of being expanded, that once completed will represent the largest soybean processing plant in North America and most of their raw materials will be sourced from the United States. Brian talked about the APM Terminal.
For those of you that haven't been to Lazaro, it is just an incredible place. And once the APM Terminal ramps up to full capacity and they complete Phase 2 and Phase 3, this very well could be the second largest international container terminal in the West Coast of North America.
The Plastic Symposium, we are starting to become more active in our business development efforts with our customers and shippers and intermediaries who are interested in moving those millions of tons of products out of the United States, as many of those products will be exported as a result of the U.S. being a low cost producer and we think there are some very interesting solutions to move those into Mexico as well as through Mexico for South American and Asian markets.
And then finally, the energy and refined products, that is happening today. We are active in terms of investing to support that growth and we've seen many other destination terminals being built and more in the pipeline to be able to handle those products over the coming years.
So the long-term outlook continues to be extremely positive, and I'll close where I started. I think the way I look at this quarter is solid and clean.
So with that, we'll open up the line for Q&A.
Operator
[Operator Instructions] Our first question is coming from the line of Tyler Brown with Raymond James. Please proceed with your question.
Tyler Brown
Mike, quick question about the proxy, so in the proxy you give the OR the fee incentive comp is tied to. I think this year you made the 100% payout based on a range as opposed to a set number.
I'm just curious if you could comment on why you changed that to a range. And then I know it's not guidance, but should we assume that that 100% payout threshold is kind of effectively what you're budgeting internally?
Michael W. Upchurch
The second part of your question, 100% is roughly on the AIP, about $18 million a year. And then have some PTU obligations in Mexico and some long-term incentives that target gets you to about 25%.
With respect to the ranges, that's really a reporting of last year's range. And so I'm not sure I completely understand your question.
We haven't actually disclosed anything for 2017. That would be in next year's proxy.
Tyler Brown
Okay. Let we ask this.
I think last year, 2016, you accrued maybe 200% on the AIP. But assuming this year if you hit just say 100%, can you talk about what the accrual differential would be in dollars?
Michael W. Upchurch
Yes, I mean in essence I tried to just give you that. It is about $18 million, Tyler.
So if you were at 100%, it's about $18 million. If you're at 200%, it would be double that.
Operator
Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Ravi Shanker
Pat, as you said, a clean quarter this time around, and it looks like you have a couple of overhangs to get past, that may not be in your control with policy out of D.C. and the antitrust stuff.
But once you get past that, and let's say we have clarity on that the next months or so, how could you know your number is going to be from that point on? In terms of your view on macro, some of the noise you've gone through the last several months, the startup costs you've had, do you think you're past that now, and the stuff that's in your control is coming along pretty well?
Patrick J. Ottensmeyer
Yes, I feel very good about the things that are within our control. And as far as the impact of some of these other things that are not in our control and the impact that that would have on our numbers, I just don't know how to answer that question, it's just too hard to know exactly where some of these things are going to land.
But it feels good. It certainly feels better to me and to us at this point on both of the obvious fronts, the NAFTA and COFECE.
I think you're seeing some of the campaign rhetoric die down, and as the new administration is becoming populated with cabinet members and staff members and getting focused on doing work, it certainly feels to us like it's going in a good direction.
Ravi Shanker
Got it. And can you give us an update on that in terms of what you're hearing from customers and are your customers feeling the same way about that and are they sounding more constructive about ramping up investments in Mexico or do they still think, are they like sitting on the sidelines until we have a little more clarity there?
Patrick J. Ottensmeyer
Yes, I think customers are still forging ahead, and again, many of the projects that we talked about, the new projects in Mexico in particular, were well underway before the election results were known. But we really have – I'll frame it this way, we only know what we know based on customer activity that was in process and customer activity that was planned, investment activity, we haven't seen any significant pullback, which is one of the reasons that we are not pulling back from our capital investment plans because we have to be ready for that growth once it occurs.
And until we see evidence that our customer investment activity and growth actively is changing, we really have to stay the course. But again, we're spending a lot of time on this topic.
We have talked to a lot of congressional leaders, policy makers, people who we believe are going to be very influential in the process, as well as quite frankly one of the areas where we are really taking the lead, in fact in the last two days we've had few conferences here in the Midwest with U.S. ag interests.
This is a very important topic to U.S. agriculture and all of those farmers and all of those Midwestern Red states who voted for President Trump are very interested in making sure that international markets, and particularly Mexican markets, remain open for their products.
Operator
Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Allison Landry
With respect to the opening of the San Luis Potosi facility, should we expect any sequential uptick in refined products in the second quarter or will the ramp be weighted more towards the second half of the year?
Brian Hancock
This is Brian, I'll take that one. We will probably see our first shipments later in the second quarter.
So you'll see obviously the ramp up happen more towards the back end of the year. But certainly what will be open will be tracks where we'll be able to take product directly from the trains into trucks.
And so as that business starts to grow, you'll see those definitely in the second quarter and on throughout the year, and then as the terminal fills itself out, you'll see the higher volumes later on in the year.
Allison Landry
Okay. And I guess just more broadly thinking about growth in cross-border volume and the various capacity projects that you have going on in Mexico, is there anything on the horizon from a capital standpoint to expand or upgrade the Laredo bridge?
Jeffrey M. Songer
This is Jeff. We're focused on process improvement at the bridge right now.
Some day into the future that's something we will probably need to address. I don't see that for several years.
I think we've got a lot of opportunity to continue to streamline customs processes, working on some international crew activity that should allow us to increase our throughput before we need to move forward and build a new or second bridge or additional crossing. Keep in mind, we also have the crossing at [indiscernible] gateway that we interchange to UP.
That's a relatively unused [indiscernible] versus, comparatively to Laredo. So, there's a lot of additional capacity on that gateway as well that we could utilize into the future.
Patrick J. Ottensmeyer
And also, Allison, I think much of the expansion that we are doing and planning for the future at Sanchez is going to improve the efficiency of the way we cross the border. And then as Jeff mentioned, I think there are some process and technology initiatives that are well underway and showing good progress that we think will also be helpful to improve capacity and efficiency at crossing the border.
Operator
Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.
Tom Wadewitz
Wanted to ask you about two of the I think longer-term drivers of growth that you mentioned and that you have talked about for a while, and just really ask about kind of visibility with customers. So the first is on the plastic side.
Have you got any customer commitment to use Lazaro to actually ship the plastic pellet, whether it would be container, I assume via container, through Lazaro to access markets in South America, or is that something that still is kind of remaining to be developed? And then also on the, I think you commented on the APM Terminal, saying, we think shipments to the U.S.
will come back. Is that based on visibility of Maersk or someone else saying they are going to do that or is the comment more like, well, we think longer-term it can happen again?
Brian Hancock
This is Brian. I'll take your question.
From a plastics perspective, we have been running test shipments for a myriad of companies across a number of different options that they are all going through. The important piece to understand is, the amount of product that's going to be coming out of the Gulf region is significant, and most of the companies are looking for one, two, maybe even three ways to get their product into the global market.
So you think about shipping to the West Coast of the U.S., shipping to the East Coast of the U.S., and then having some type of an outlet for protection of supply, Mexico is a perfect opportunity in that space. And so that's really the place that we play.
And we believe through our test shipments that people are excited about the opportunity. I would tell you, it's primarily Hopper car down into Mexico, transloaded into a 40-foot container, and then off to the port.
You could also see containers, maybe 53 is down, transload, 40 is out. So there is a big opportunity there, but we're going through all of those test shipments right now.
And really the high volumes come on over the next 24 months. So people are still waiting to make those commitments.
We certainly have a commitment with Sasol that has been announced for several years. So I think it's important that we continue to go down all of these different paths because people are looking for multiple ways to move their product.
From the APMT perspective, we have obviously been very close with Maersk for many years and we stay close to their plans, as they have made the infrastructure investments, as we have made the infrastructure investments. Typically these are seasonal.
They are also going through an industry consolidation that has had a pretty significant impact on the way that containers move throughout the globe. And so, we're participating with them in that.
But Lazaro as a port, not only for containers but also for finished vehicles and others has become kind of a standard, and now if you go down and you look at the technology that's been implemented in APMT, the productivity they are going to be able to have, and then our renewed service and consistency of our service, the investments that Jeff has talked about, when all those things are in place, that's going to be a very viable port and way to bring products in and out of North America.
Patrick J. Ottensmeyer
I'll provide another little color commentary. When we were at the ribbon-cutting ceremony a couple of weeks ago in Mexico, we were told that there were seven containers on a vessel that was parked at the APM Terminal that were U.S.
plastic products that were shipped to Lazaro for export to Asia. So as Brian mentioned, we're in the test phase.
The direct answer to your question, do we have commitments at this point, customer commitments for that business? No, but we met with a few weeks ago or maybe months now one of the companies that's building one of the largest cracker plants in the Gulf Coast, and I will tell you that one of their biggest concerns and issues that they talked about as their plant begins to produce and ramps up was infrastructure and how these plants and the investments that's being made in the Gulf Coast, the capacity that's being added will exceed the demand in North America.
So these products are going to need to move to other markets around the world. And their concern is infrastructure, port capacity, highway capacity, they are looking for every available option that makes sense, and we think we have a very good option for those products to move through Mexico, particularly to South America and Asia.
And one other point, and you're already starting to see this with ExxonMobil's announcement just a few days ago about a new ethylene cracker plant that they're going to build in Texas. This capacity that's coming online in the next two to three years, this will be fully utilized and sold out within a six or seven year period according to the customers that we're talking to, and they all are beginning to plan new plants in the 2022, 2025 timeframe to add the next wave of capacity that will be needed to satisfy global demand.
Michael W. Upchurch
Tom, this is Mike. Not to over-answer that question, but I think plastics going out of the port, remember containers is less than half of our revenue that we generate at Lazaro, and a good bit of the rest of it is in fact chemicals, plastics going out, auto, and some grain.
Tom Wadewitz
Thank you for the very thorough answer. I just had a real short follow-up.
Can you give any update on the BNSF service and kind of how well that's – how that's ramping up?
Brian Hancock
Sure, Tom, I'll take that. We are very happy with the service.
I would tell you that both operating teams have done a great job in creating stability for the expectations of the customer. We're continuing to see the volume increase and we have – we are very pleased, we're probably a little bit ahead of where we're at when we think about commitments that we've had together, the bids that we've won together, and we feel very comfortable that we're going to be able to meet our expectations and probably exceed our expectations on that service.
So we're very pleased with the way it's going right now.
Operator
Our next question comes from the line of Brian Ossenbeck with J.P. Morgan.
Please proceed with your question.
Brian Ossenbeck
I had a quick one on refined products. Brian, if you could just give us an update on the full liberalization of prices in [indiscernible] Sonora, an ongoing open season with Pemex I guess across the country, and then just more broadly, how the daily market adjustments really worked across the other regions and has that really triggered any pressure on peso denominated trucking competition so far?
Brian Hancock
Greta question. Obviously we're watching it very closely as is everyone else.
I think the key is the March 30th date went by and there were no major, major disruptions in that Sonora region. June 30th is obviously the big day.
That's when you actually hit a population center that will have a significant impact. And we believe that it's going to go very well.
Actually there is the supply which was the concern. We think we've got that taken care of.
There's a number of investments that have occurred and also people have been very – there are a lot of people working together, which I think has been beneficial. We haven't seen really the fluctuations.
Mike talked a little bit about how the government has really I want to say taken the hit for the initial increase. We saw that in January.
They backed up a little bit of that in February. But right now everybody is stable and we believe that it's going to go up very well.
Obviously June 30th is a key date. You start moving, that last six months you're moving 95% of the population of Mexico into the market.
And so we feel like it's going to be – that's why I said in my comments that we'll see some fluctuations, but we think it's all going to be positive. And right now it appears that we're going to be able to meet all the demand.
I think the people are very focused on working together. So hopefully that gives you a good answer.
Brian Ossenbeck
Yes, thanks Brian. So just a quick follow-up on sentiment and investment in the country in Mexico, Pat or Jose, you mentioned there wasn't really any significant pullback as you're talking to customers across the spectrum.
But we have seen some reports in the press about China's Great Wall motor considering [indiscernible] plant in [indiscernible] the latter would be of interest to KCSM. So just curious, since the high-profile step-back of Ford earlier in the year, has anybody stepped in to fill that gap?
Brian Hancock
I'll go ahead and take that. Pat is kind of pointing at me.
We have not seen anyone pull back except for that initial Ford announcement. Many of the producers, you talk about Great Wall, you talk about others – I know that there is a couple of other automotive companies that are looking to moving into the production space that's been opened up there.
Toyota will have their facility open here in another year and a half. The Mercedes Infiniti opens up this year.
Kia, as Pat mentioned, we went through that plant and just the enormity of their plans on a global production basis. So we have not seen anyone pull back and they have asked us very specifically, please do not stop your investment, please do not stop your investment in capacity, in fluidity.
So we feel very comfortable that there's going to continue to be a great flow of auto parts in from the other North American countries, assembly manufacturing in Mexico and then those vehicles being shipped all over the world. The ports, we're seeing a lot of product go out through Lazaro, Veracruz.
There's just a number of things that are happening. So we feel pretty good about the foreign direct investment that's happening in Mexico.
Patrick J. Ottensmeyer
And I'll go back to, I didn't really finish my comment I made earlier about we only know what we know. Obviously what we don't know is plans that may have been underway but not made public or that we weren't aware of that have been put on hold.
No way of us really assessing or commenting on that. But for those projects that we were aware of, obviously those that were already underway, with the exception of Ford, and I think we can say that we know that site is one that Great Wall is interested in.
And you mentioned San Luis Potosi. Ford had made some progress on that facility, about $400 million in the facility when they changed their course and made the decision to move back to the U.S.
But based on plans that we are aware of and projects that were underway, with the exception of that, we just haven't seen any evidence that customers, that our customers are pulling back.
Operator
Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Brandon Oglenski
Congrats on a clean result here. We definitely like to see the improvement.
Pat, I'm going to address the [indiscernible], I'm not talking about the competition, commission, but if we go back a few years, your stock definitely had a big valuation in the group with the idea that Mexico could be big growth. Now we're concerned about what's going on south of the border.
So can we just address from a U.S. investor perspective, we understand regulation and the U.S.
pretty well, but you do have a couple of things that are unique down in Mexico apart from the concession agreement. You do have an exclusivity period that ends in 2027.
So I was wondering if you could address that. And then secondly, just at a high level, if I'm a captive shipper in Mexico, what are my options today and how does it differ from regulations in the U.S.?
Patrick J. Ottensmeyer
Let me answer I guess the first part of your question first. Our position is, we want to compete on the basis of running the best railroad in Mexico, and I think we do, from a service, from the way we face with customers, from a security standpoint.
So we think we have a superior product in Mexico and we run the business to maintain that competitive edge, which then we believe regardless of what happens, whether there is something that comes out of the current investigation or just sort of running the normal course of the original concession, we will be able to protect and defend and grow our existing market as well as compete and grow in any potential new markets, whether that's after 2027 or prior to, and have success there as well. So I don't know if that's an entirely satisfactory answer but I think if we continue to focus on running the best railroad in those markets and providing the best interconnection to the rest of North America through our own network and through our very good relationships with all of the other Class Is in North America, we'll be fine.
And now I've rambled on so long that I've forgotten your second part of your question.
Brandon Oglenski
What other modes of transportation [in that do you compete] [ph]?
Patrick J. Ottensmeyer
Mexico is an incredibly competitive market, and if you look at the press release from yesterday, you will see links to three OECD reports that have been issued and prepared over the last couple of years, going back to 2014 when we were looking at the threat of possible reregulation of the rail markets legislatively in Mexico, which I'm sure all of you remember. I'll just draw your attention to those reports and you can take a look at the research and conclusion that the OECD has reached about the competitiveness of the transportation markets in Mexico.
Brandon Oglenski
I appreciate that, Pat, but I guess if I could decipher then, am I hearing you correctly that I guess beyond 2027 then there could be potential competition for parts of the concession that you have today, is that correct?
Patrick J. Ottensmeyer
Certain provisions of the exclusivity are relaxed, but there is still a need for the regulatory agency to determine that there is a lack of effective competition in certain markets. So again, I'll fall back to my earlier statement, we expect and we plan to run a competitive efficient railroad and attractive service to our customers, and that kind of at the end of the day is going to be the most important consideration.
Brian Hancock
Brandon, if you read those OECD reports, about 13% of traffic in Mexico is rail traffic. The rest of it are other modes of transportation.
So that gives you a sense of the level of competition.
Patrick J. Ottensmeyer
And I'll just say one other thing, and not going to great depth, but I think you all, most of you are familiar with the case for and against trackage rights really representing effective competition. And again, if we stay focused on running the most efficient, safest, customer-focused railroad in our markets, we will be just fine.
Brandon Oglenski
All right, thanks guys. Appreciate it.
Operator
Our next question is from the line of Bascome Majors with Susquehanna. Please proceed with your question.
Bascome Majors
So you made some changes this year to the [indiscernible] incentive targets. I believe you added a free cash flow component and that was at least last year based entirely on margin.
I was hoping, Pat or Mike, could you address kind of what the Board's thought process was in making this change, and looking forward, do you see any further evolution in the way that the senior management team is incentivised at KSU?
Patrick J. Ottensmeyer
I'll take a first shot at that. I think the evolution is that distributing, and by the way, this is something that's happened across the entire industry, moving away from operating ratio as the sole financial metric for purposes of annual incentive payouts.
I believe we were actually the last railroad to do that. And the way I would say it is, when your operating ratio is in the high 80s and you're spending 20%-plus of your revenue on capital expenditures, you can do that math in your head, there is a very high degree of urgency and need to improve your operating ratio to support the investment in the business.
We are not declaring victory on operating ratio. We are not suggesting that we can't further improve operating ratio, and I believe we will.
But when your operating ratio is in the mid to lower 60s, the need for further improvement isn't as great. We are clearly – at this level of profitability we are earning returns to support reinvestment in the business and we believe that our shareowners are more interested in seeing growth in return on invested capital, in cash flow and in earnings per share, and not solely focused on improvement in margin.
Bascome Majors
Thanks for the comprehensive answer. That's all I've got.
Operator
Our next question will be from the line of Jason Seidl with Cowen and Company. Please proceed with your question.
Jason Seidl
Want to circle back to some of the energy destination terminals that you guys remarked a couple being announced, some being planned. Could you talk a little bit about the timing of the construction of these projects and how many will fall on or near your lines?
Brian Hancock
This is Brian. All of the facilities that I mentioned are on our line.
And so we have right now about somewhere between 14 and 16 that are either completed, under construction or in the permitting process. So we feel very comfortable.
Now many of those are I would say to the north. So you think about Monterrey, Salinas, San Luis Potosi, San Jose [indiscernible], those types of locations.
Many of them small, they start with the transload, the ability to take a railcar, go into a truck, but many of those now have tank-in. So we've already shipped to two of the Pemex facilities, as was mentioned in the script.
So when you think about where we're at, we're looking at large facilities, small facilities and all of the regions where we serve primarily. So we feel very comfortable that it's going to continue to grow.
The market is now just starting to understand where the need is, and so we'll continue to keep you updated as we know more.
Operator
Our next question is from the line of Brian Konigsberg with Vertical Research. Please proceed with your question.
Brian Konigsberg
I just had more of a broad question. So the volume performance obviously fairly good in the quarter, just curious when you take a look at the portfolio, what's changed as far as your expectations by market, what you see now versus coming into the year what has improved and what may be a little bit more challenging?
Jeffrey M. Songer
Here's what I would tell you. I think chemical and petroleum is performing as we had hoped, even better than we had hoped, and so we feel very comfortable.
Now those are complex deals. They are very important that you have security and all those things in place.
So we're going to continue to see it grow. Industrial consumer, primarily driven by the paper and steel markets, and so they fluctuate as to which mode they use, but we feel like we're competing well and we feel like the market is coming back in a couple of places that we serve specifically.
So I think we're going to be flat to up there. Ag and min continues to be strong.
Pat mentioned the new facility down in Monterrey. It's an enormous soybean crusher and we feel it's right on our line.
We feel very good about that. The foods business continues to grow.
Energy, I think coal has returned, but for us the more important piece of that is that we're able to move it where it works within our network. We have great product diversity across a number of different product lines.
And so it allows us to the days that we have to get very, very discounted to move a lot of or even minimal coal is no longer there. So we feel very comfortable that we're in a good place in our energy business, frac sand.
There's a lot of fracking going on, a lot of people need natural gas in Texas. So that's a good space.
The crude business has still not performed but we feel very comfortable in our energy business. Intermodal, we talked a lot about.
I don't have anything else to say on that. And automotive, it's going to continue to grow.
We said in our last call, in the next two, three years, there is a lot of production coming on, there's a lot of products, especially parts that move back and forth. So they are going to continue to grow at the pace that we've already laid out.
So I would say we're upbeat. Since 75% of your product line are green, you feel pretty good about what's going on.
Operator
Our next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Chris Wetherbee
I had a question about the peso improvement. So we have seen the peso sort of bottom in January and improve pretty decently from those levels.
Just want to get a sense if you're seeing that flow through any pieces of the business, is it too early to see that sort of benefit and should we think about it as it goes through 2Q and maybe beyond if we can sustain these levels, how should we think about sort of this dynamic change within currency?
Michael W. Upchurch
I would tell you that currency is going to help us as it gets stronger. With the peso coming back to a normal level, it allows the cheap trucking that we compete against, that's a key, when we're in a space where we're in U.S.
rates or we have rates that are being impacted by the cheap trucking, that's a big deal for us. So as the peso strengthens, trucking comes back to a normal level.
We're more competitive and we believe the security and the service we provide, we are a better deal. So we feel comfortable that that's going to be a good [guess] [ph] as the peso returns to a normal trading range.
Operator
Our next question is from the line of Justin Long with Stephens. Please proceed with your question.
Justin Long
I wanted to ask about pricing. First, would you be willing to share the core price number for the quarter?
And secondly, we've seen the continuation of a pretty competitive environment in the truckload sector year-to-date. So I was wondering if you still have confidence in achieving above inflation pricing this year.
Brian Hancock
This is Brian. Our core pricing came in at that mid low single-digits.
We feel very comfortable that we'll be above inflation and we feel very comfortable that the trucking market is going to continue to be very competitive. We're going to have to be of good value and we feel like we are, but our core pricing, we feel very comfortable that we're going to move into the – to continue to be above inflation where we're at.
Patrick J. Ottensmeyer
Justin, just to be specific, it's 3%-plus in the quarter. So it's ahead of where we ended 2016.
Operator
Our next question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Ken Hoexter
You had talked about some of the heavy volumes you had gotten from one of the auto plants that had just recently opened but you had some service issues on the line and the region. It sounds like I think that line opened up and you're up and running now.
Can you talk about the volumes, maybe the progression of volumes? Is the plant fully up and running and giving you those volumes now, is it still accelerating?
Brian Hancock
This is Brian. I would tell you I don't think we said anything like that.
Jeffrey M. Songer
This is Jeff. I think as I mentioned on Q4, Kia was the one that we talked about from an infrastructure that Kia continues to expand their footprint.
If you recall, they opened without really their track infrastructure in place. And so we are handling that, still handling that in our Monterrey yard, which I think I went into some detail in Q4.
But that construction is moving well. We took the tour.
We saw that. So here, kind of toward the latter part of Q2, we expect that track work to be done in their facility and move that out of our Monterrey Terminal.
So that should help the fluidity and help our product. Brian may talk about the Kia overall volume.
Brian Hancock
I was just going to add that the overall volume in Kia, they are producing at the levels that they thought they would, maybe even a little bit higher. So the operational work that Jeff is doing, literally they put him in a truck, haul him downtown to Monterrey and put him on a railcar, that's a tough move.
So we're going to get a lot of benefit once that track is in place, but they continue to grow at the pace that they thought they would.
Operator
Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group
Quickly, can you just clarify if the incentive comp this year assumes 60 million of the fuel tax credits or 45 million to 50 million? And then just the bigger picture question, just coal yields were up 34%, is that interchange rates like tied to higher natural gas prices, is that mix?
I guess I'm just not sure how we should think about coal yields and maybe overall mix going forward rest of the year.
Michael W. Upchurch
On the first part of the question, Scott, we did budget for the guidance that we gave at the beginning of the year. So we're going to need to manage to that number.
Brian Hancock
And on the coal side, Scott, we not only picked up an increase linked to haul on some of our facilities, but some of the temporary pricing that was put in place two or three years ago is no longer in place. So we feel very comfortable that where we're at is kind of where you're going to see us for the next few years from a pricing perspective.
Operator
Our next question is coming from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Scott Schneeberger
Just to kind of round up, speaking to network fluidity in Mexico, some issues at the end of last year and some staffing changes, a little bit of impact on dwell time, could you just give us a status update and maybe impact on operational ratio right now and going forward, the potential impact there?
Jeffrey M. Songer
This is Jeff. So I think I kind of covered where we were for the quarter.
The volumes still remain very heavy on the north and the dwell still a little overweighted. I kind of pointed out that velocity number really stabilizing, which is what I'm glad to see.
So it signals we're providing the consistency for our customers. I've been in the chair now for about a year, so getting the resources aligned with headcount, getting the equipment in line, I think we're there.
And so, the capacity that will come online with Sanchez, that will continue to help the fluidity. As we've said, we haven't backed off any of our investments to help with other mainline.
I don't talk about those smaller project citing extensions and capacity improvements. We're making around the entire network.
But we're so very committed to say increasing our capacity and infrastructure to help the overall fluidity of the network.
Operator
Our next question is from the line of Jeff Kauffman with Aegis Capital. Please proceed with your question.
Jeffrey Kauffman
A quick question on cash flow and modeling, I realize the share repurchase is like about 90% complete, but there is still a couple of hundred million of free cash you're generating this year. Can you talk a little bit about priority uses for free cash?
Michael W. Upchurch
This is Mike Upchurch. I tried to in the presentation indicate that our priority was going to continue to be investing in the business.
We obviously have a dividend in place, our share repurchase program expires June 30 and we'll be having those conversations with the Board prior to expiration, and we'll have some additional communication once we're through those discussions.
Patrick J. Ottensmeyer
I think the one change, I'll draw your attention to the final slide that Mike covered in the presentation, is in the 'invest in the business' category we've added this concept of growth accelerators. Projects like the San Luis Potosi fluids terminal, we've had those discussions internally and with our Board, and I think you should probably expect to see us do similar types of activity where we see opportunities to invest in facilities that are very complementary to our core business and drive revenue and volume growth on the railroad.
Operator
There are no further questions at this time. Mr.
Ottensmeyer, I'd like to turn the floor back over to you for closing comments.
Patrick J. Ottensmeyer
Okay, I think we have covered about everything that is certainly on our minds and thank you for your participation and we'll see you in 90 days. Goodbye.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.