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Kansas City Southern (KSU)
Q1Â 2019 Earnings Call
April 17, 2019, 8:45 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Kansas City Southern First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event 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 Factor section of the Company's Form 10-K for the year ended December 31st, 2018, filed with the SEC. The Company is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.
It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Good morning, everyone, and welcome to the KCS first quarter earnings call. On Slide 4, you can see our presenters most of the names here are familiar to you. We're introducing a new voice on the call this morning, Sameh Fahmy, our EVP of Precision Scheduled Railroading is going to make some comments about our progress on the PSR implementation and will be available for questions and Brian Hancock and Jose Zozaya are also on the call and will be available for questions later.
Moving to Slide 5, first quarter overview revenues increased 6% versus last year. Four of our six major business units were up. Mike Naatz will go through those in greater detail, but the leaders from our revenue side were Energy Reform related which is refined products moving from US Gulf Coast into Mexico and in Grain. Our volumes were down 1%, a big factor there in the quarter was the blockages that we experienced in the southern part of our network particularly on intermodal between Lazaro Cardenas and Mexico City. For operating ratio and earnings per share, we obviously have to report the reported figures, but I draw your attention more to the adjusted figures as they represent more of the sustainable performance metrics that we experienced in the quarter and that we see going forward, so adjusted operating ratio of 64.2% which was 160 basis points better than the first quarter of last year, and earnings per share of $1.54 which was 18% above first quarter of 2018.
Moving onto Slide 6, showing you the outlook. Pretty much the same as we showed you in the fourth quarter with the exception of volume growth which we have taken down by a percent from 3% to 4% which we showed you in January to 2% to 3%. At this moment, although revenue growth has been unchanged, and again, a big part of that story is the loss of intermodal volume in the first quarter which obviously has a bigger impact on volume than it does on revenue but operating ratio, EPS, and CapEx guidance is completely unchanged from what we reported in January.
On Slide 7, I want to show you our PSR ideology or strategy so to speak and I'm not going to read through this but the key points here for Kansas City Southern our PSR strategy is driven by service and growth. You heard us talk about in the fourth quarter January call, and really going back to the third quarter, how we didn't feel good about our performance. We didn't meet our own expectations. We didn't meet our customers or shareholders expectations and that was largely because of the fact that there was business available for us to move that we couldn't move because of service issues that we're experiencing particularly around the border between US and Mexico.
So for us PSR is all about improving the consistency, reliability, and resiliency of our network and it's really focused on service and growth. And I think you'll see as we go through the presentation here with my colleagues, our service has greatly improved, our growth profile has improved, our outlook is the same as it has been. We think there's tremendous opportunity for growth in several areas that we'll talk about, Mike Naatz will talk about it in a minute and if we can get the service issues resolved, improve the consistency, reliability, and resiliency of our network, we can get back on that rapid growth profile that we know is there for us.
Our mantra at the bottom of this slide Service Begets Growth. My team is tired of me saying that and I believe that's really what we're trying to accomplish here with the implementation of certain elements of PSR.
So with that, I will turn the presentation over to you Jeff Songer.
Jeffrey M. Songer -- Executive Vice President & Chief Operating Officer
Okay. Thank you, Pat, and good morning. Starting with a review of key operating metrics for the quarter on Slide 9, dwell of 21.8 hours improved 5% year-over-year and 16% sequentially, while gross velocity of 12.6 miles per hour improved 11% year-over-year and 13% sequentially. Numerous factors are contributing to the overall service improvement, PSR initiatives, reduced inventories, execution at our key terminals and improved asset utilization are all having positive impacts. Specific areas of improvement include our border terminals, Monterrey, Sanchez and Laredo all showing marked improvement both sequentially and year-over-year.
Monterrey Yard is one example where we have been able to work constructively with local customers to reduce excess equipment. We have been able to maintain inventory levels of around 1,500 cars this quarter, which is about 40% lower than peak levels we saw during last year's congestion. Another area that continues to improve is the efficiency of processing trains at the Laredo gateway. Cross-border traffic continues to show substantial growth with volumes up 13% versus Q1 2018 and up almost 25% versus Q1 2017. This illustrates that long-term initiatives including the Sanchez Yard expansion, international crews and customs process improvements are providing the intended benefit of adding additional capacity at the Laredo gateway. Today we cross an average of six to eight trains per day using international crews which can save up to 20 minutes per train.
One other item of note is the change in our reported velocity metric. We will begin reporting a gross velocity number, which is a more simplified and relative measure of train performance, as it is calculated as the sum of total miles traveled divided by total transit hours. This metric includes all delays including crew changes, terminal dwell and incidents. Similar to how other PSR railroads report velocity, we feel the focus on a metric that is inclusive of all delays will allow us to better identify and eliminate those sources of delays.
Expanding upon key metrics, we are now using to measure PSR performance on Slide 10. You will see, we have added a few metrics for 2019. Train length will be a renewed area of focus as we continue to modify our TSP and reduce train starts. Our stated goal of 6,000 feet for 2019 reflects a 3% growth in overall train length. However, we believe we have significant opportunity increasing the size of our manifest and intermodal trains and are targeting a 10% increase in the total combined length of these trains. As we identify additional opportunities for train consolidation, we will modify our targeted train length accordingly.
Car miles per day is another metric used extensively by PSR railroads and measures car velocity instead of total train speed. This measurement will help us establish targets for terminals and road operations to identify other sources of delays and to reduce handlings and work events at a car level. Fuel efficiency remains an area of focus and we plan to install fuel optimization technology on an additional 100 units this year. As discussed in prior quarters, our fleet renewal strategy is well under way and we have received 25 of the 15 new locomotives plan for this year. These units will contribute to fuel savings through improved fuel efficiency as well as improving our overall fleet reliability that in turn has allowed us to remove a greater number of units from service. Going forward, we will continue to provide updates on some of these new metrics to illustrate our progress in these areas.
I will now turn the presentation over to Sameh to provide more detail on our overall PSR efforts.
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Thank you, Jeff. Good morning. So, I will cover a bit what we have done so far on PSR, and what we see coming up. As Jeff mentioned, the velocity of the network has increased by 11% and that well decreased by 5%, which is good news for our customers and it frees up our assets. When people think of PSR, they typically think of train consolidations, scheduling was customers walking at origin. In other words, service design. But there is also an execution aspect and a discipline that comes with PSR, which is the intensity of watching the assets, checking every train delay and understanding what's going on at least a couple of times every day and that should proceed any service design changes as well as follow every service design change to make sure that it did what it was supposed to do. That intensity has definitely increased substantially in the last three months.
I have some examples here. Yard inventories as an example. And Jeff touched on that, Monterrey Yard, which is one of the most critical yards on KCS. When I visited that yard, the first time in December, I could not see any tracks that's how full the yard was. Now, full could be an indication of good business, but it also means congestion. And it means that you cannot switch cars and the dwell increases. So a lot of actions have been taken on that. And Jeff mentioned that it has been reduced by about 40%, so we took out about 1,000 cars out of that yard.
The yard operations in general is also something that needs to be watched on a constant basis was PSR. As an example, we were watching one morning and a train was delayed by something like 54 hours, while 24 hours of that was waiting just outside the yard at San Luis Potosi because the crews ran out of time. Now, that should not happen like the change would have been pulled in-the-yard. But then after that we spend a couple of hours just setting off a block and picking up a block, and that's the kind of stuff that PSR looks at and eventually you can change into service design. But as a first step, it increase your intensity and make sure that the execution takes care of these things.
There is also very heavy switching in KCS, particularly in Mexico. And that's frankly because of the number of customers. Monterrey, again has like 600 customers around the yard, 150 of them are very active customers and therefore the switching part of PSR and the service design possibilities and potential are tremendous because one of the things PSR does is to try to block as much as possible at origin and try to also work with the customers to minimize the number of switches.Something else that we have been focused on, which is typical also PSR railroads is failures, particularly locomotive failures, which have decreased from about 7 per day to 4 per day. You know these failures cause a lot of train delays like about 35 hours per day, which is substantial for our size of railroad and that scenario that would continue to address.
The Houston area is another very important portion of KCS, and it's actually an area that is increasing in importance now with the refined products business which is a very good business for us. But also all the trains, grain trains as an example that manifest trains that come from the US and go to Mexico that goes through that area. I spent three days, it was a VP transportation, Steve through it in Houston and I talk there to our partners of other railroads to see how we can improve the fluidity of Houston. Houston is becoming a bit like Chicago and improvement in velocity in that area can significantly improve the velocity of our whole network and obviously the impact of that on our customers and our service as well as on our assets.
So far we have completed -- going way beyond the execution I'm going now to service design changes that are a way of implementing what we see in execution in a more permanent basis. We have implemented already three major service design changes. You know example combined we had trains that go for one railroad partner, the interchange traffic, another one for KCS, and they all started from St. Louis Porsche and they go up north. So why not combine them. As far north as you can go and then split the traffic but then mix it also with the manifest traffic, so you get intermodal and manifest. You know Some trains that are working maybe from Lazaro to Mexico City that will do a lot of work. Every one of them why get every one of them to do a lot of work when you can divide those that work between trains and get better and faster service point-to-point from Lazaro to Mexico City on the ones that will not do the work. We implemented yesterday southbound consolidations from the US to Mexico and now we have set new priorities for our service design team based on what we are seeing in execution particularly as an example the Houston area. So when you have pinch points where the grid is very tight and the capacity is limited, one of the things you want to do is to reduce the number of trains as much as possible. So you consolidate and you combine trains because the openings, the slots for every train are limited. So when you get one, you want to get the most out of it and essentially double the impact if you have two trains in one. The same philosophy obviously applies to the bridge between the US and Mexico.
Something also we have done which goes beyond the internal of KCS is also work with other railroads. People have rather a lot of documents saying, while KCS is an interchange railroad, the PSR model does not apply to it. While first of all, it applies big time in Mexico on its own, but also in the US, we are fortunate that other railroads are actually implementing PSR at the same time as we do and these railroads have been actually asking us, if we can combine automotive with manifest traffic for them coming from Mexico and we are asking for reciprocity from them on traffic coming from the US going to Mexico. But also we are beginning to do reciprocal blocking meaning, we blocked the traffic for less for destinations on that railroad and they blocked traffic coming from them to us for destinations in Mexico. So there is a lot of synergy and again we are very, very fortunate that we are both doing this at the same time.
We are also beginning to look at shorter routes around the Houston area, working to get out of the congestion and everybody wins in this case. As a result of this, we have a 100 crew starts per week that have been reduced 100 less locomotives to 1,000 less cars and a 4% improvement in fuel efficiency that comes with the network fluidity. When we took the assets out, we also took the assets in a way that it takes out the least reliable assets. And this is something by the way that all the PSR railroads did, but for some reason it's not talked about enough. It's -- you can take out 10% of the locomotives, which we did here, a 100 out of roughly a 1,000, but it does a disproportionate impact on your reliability because you take out locomotives at eight times, nine times a year that really you are better off not to even have them. So you improve the fluidity of the natural velocity, but also you reduce the work in the shops because you have a lot less repairs and we actually did close one of the locomotive shops. And we also decided to in-source another locomotive shop, because we want to be the beneficiaries of the improvements of PSR that we are doing. We don't want to be bound by contracts and that shop alone closing, it is going to save KCS $4 million a year.
So, overall, it's a very good chemistry. The team is a fantastic team. There is commitment; there is enthusiasm, but at a very high level of energy, it's very similar to the level of energy I've seen on two other railroads I have associated with that implemented PSR and that really bodes well and if we have all the signs of a winning team, I can name, I can go on that a long list. But we have people like Mike Vilsack, Olivia Daily, Cary Tippins, Steve Truitt, Brent Vander Ark, and Jon Meyers, who and that's only to name a few we have fantastic team.
So, now I'll turn it to Mike Naatz.
Michael J. Naatz -- Executive Vice President and Chief Marketing Officer
Okay. Thank you, Sameh, and good morning, everyone. I'd like to start my comments on Page 14, where you'll notice that revenues were up 6% year-over-year. I'm happy to say this was a record first quarter for KCS, despite the headwinds from the teacher protests in the State of Michoacan. If you look at the chart, please note that the service interruptions caused by those teacher protests impacted by and across several business units including our intermodal, automotive, and industrial consumer segment. For the quarter, our cross-border revenue was up 18% and a 13% increase in volume. We continue to see strong growth from our refined products and our cross-border intermodal business. And in addition, we saw an increase in our cross-border grain volumes. And this was doing a large part to the improved network fluidity in cycle times that were mentioned earlier. And I like this because this supports the idea that service does to get gross.
During the quarter, our revenue per unit grew at about 7% driven largely by a shift in business mix from the lower revenue per unit intermodal volumes over to the higher revenue per unit chemical and petroleum business. The latter grew 21% due to the continued benefits from Mexico energy reform. Our intermodal segment decreased in revenues and volumes by 12% and 9% respectively. The deterioration in volume was primarily the result of the teacher protests in the State of Michoacan, as well as the extended automotive plant shutdown that occurred earlier in the year.
On the plus side, our intermodal cross-border franchise volumes grew at 5%. This was driven by truck-to-rail conversions. This growth was partially offset by a slightly shorter length of haul. In the US, we are seeing some softness in the domestic intermodal market and this seems to be driven by increased truck availability. Year-over-year, revenue from our industrial and consumer business units was up 2% and 3% lower volumes. The volume declines were primarily attributable to the Michoacan service interruptions and the unplanned paper plant outages. These declines were partially offset by favorable pricing and mix. And finally, the utility coal business drove our energy business revenue growth of 5%, as we lapped plant closures that impacted us in 2018.
Moving on to Slide 15, we provided an update to our 2019 revenue outlook. As Pat mentioned, we are maintaining our year-over-year revenue guidance of 5% to 7%, and Mexico energy reform continues to be a significant focus for us and it's definitely unique opportunity that we remain very, very excited about. We are however, revising our volume guidance down 2% to 3% growth driven large part by the quarter teacher protests that we saw in early Q1. Unplanned plant shutdowns in the automotive and paper industries and available truck capacity US will have some downward pressure.
And with that, I'll turn things over to our CFO, Mike Upchurch.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Thanks, Mike, and good morning, everyone. I'm going to start my comments on Slide 17. Revenues increased 6% on volume decline of 1%, and revenue per unit growth of 7%. Reported operating ratio of 76.2% was worse than the 65.8% from the first quarter 2018, primarily reflecting the $67.5 million restructuring charge, which represents an impairment of locomotives and freight cars no longer required in our business, employee severance costs and contract restructuring costs. Additionally due to a change in Mexican tax law, the fuel tax credit has been moved from an offset in operating expense to a credit in income taxes. And I'll provide more details on the next slide.
Adjusted operating ratio of 64.2% was 150 basis points or 160 basis points better than the first quarter of 2018, due to revenue growth, initial benefits from PSR implementation and other expense reductions. I'll provide more colors on PSR in a few slides. Incremental margins in the quarter were strong 63%. Reported diluted EPS of $1.02 was down 27% from first quarter 2018. However, on our adjusted diluted earnings per share basis, we generated a $1.54, which is 18% higher than the adjusted diluted earnings per share of $1.30 from the first quarter 2018. The increase in earnings per share is primarily from higher adjusted operating ratio for operating income that increased 10%, along with a lower share count of 2.1 million common shares, resulting from stock repurchases.
Our adjusted effective tax rate for the first quarter was 28.9% in line with the 29% to 30% guidance we provided in January. And I'll provide more detail on our tax rates and we have some appendix materials in Slide 26.
Turning to Slide 18. Before I get started on the changes in IAPS, I want to -- maybe just set the tone that there is no difference in our eligibility of obtaining the IAPS credit. There is no difference in the economics of IAPS, it's still a pass-through of what we pay. And there is no difference in the full year GAAP net income or EPS. So in January of this year, Mexico changed the provisions of tax law that previously allowed for the realization of the IAPS credit as an offset to both withholding taxes and our income tax liability. The new provisions only allow for the realization of the IAPS credit as an offset to our income tax payments. So we can no longer offset against withholding taxes.
Despite the tax credit being a dollar-for-dollar credit against the excise taxes we pay on fuel expenditures included in our fuel expense, the strictest interpretation of accounting literature requires us to change the geography of the credit from an offset in operating expense to income tax expense. While this change creates undue complexity for investors to understand both the economics of the transaction and the GAAP financial statement impact, we are required to record the fuel credit in income taxes going forward due to the change in law. Pages 23, 24 and 26 in the Appendix provide more information to help investors gain a better understanding of the true economics of the fuel excise tax by providing a reported GAAP to adjusted schedule for various financial statement line items.
And to make this even more complicated, previously the tax impact of the IAPS benefit was subject to the 30% statutory tax rate in Mexico. However, recording the credit in income tax expense subjects us to income tax accounting principles that require an estimate of the full year effective tax rate of the IAPS credit and record that in your quarterly tax provision. This GAAP accounting requirement creates $2.9 million, or $0.03 benefit in adjusted EPS in 1Q 2019, but we expect that to reverse in quarters 2, 3 and 4. While this required change seems overly complex, it's again important to note that there is no difference in our eligibility of the IAPS credit; there is no difference in the economics of IAPS; and there is no difference in our full year net income or EPS.
Turning to Slide 19, adjusted operating expenses increased 3%, well under our revenue increase of 6%. Depreciation, wage and benefit inflation increased average headcount and higher repairs and maintenance costs led the year-over-year expense increases. Offsetting those expenses were lower equipment costs from better cycle time performance that lowered car hire expense by $3 million, better fuel efficiency of $2 million, and favorable impacts from foreign currency of $3 million. And just a quick note on our headcount in the quarter, that's an average headcount that's reported and after considering the in-sourcing of some contractors, our quarter-end FTE was down slightly year-over-year and down slightly from February, end of month February. And to give you a little bit of guidance for the rest of the year, what we expect to see in expenses, we're still working at comp in benefit up around 5% purchase services and materials and other give or take inflationary type increases, equipment expense, which we previously guided to flat for the year, we now expect to be down mid-single digit. And then depreciation expense, which we guided to being up 9% will now be up kind of mid-single digit.
Turning to the PSR Slide. During the first quarter of 2019, management took several actions implementing PSR principles that will generate approximately $16 million in OpEx savings in 2019 and $25 million on an annualized basis. Benefits include lower comp and benefit expense from reducing approximately 100 positions primarily from reduced maintenance activity commensurate with our reduced locomotive fleet and from fewer crew starts as we consolidate trains. We also expect depreciation expense from disposed assets to be lower. We also anticipate lower material costs from the disposal or return of approximately 100 locomotives and approximately 2,000 railcars deemed excess in our owned and leased fleet. Lastly, we expect benefits from restructuring of maintenance contracts. These actions represent a good start on our efforts to improve customer service, lower costs and improve asset efficiency. However, it is important to note that these cost reductions only partially help us achieve our own aggressive goals for 2019.
In addition to those cost reductions, we saw expense reductions in the quarter from lower car hire expense and improved fuel efficiency, partially the result of implementing PSR principles that have improved our velocity, dwell and asset efficiency. Our fuel efficiency is also benefiting from our prior investment in Trip Optimizer and other fuel saving technologies and initiatives. And it's important to note that we moved 2% more GTMs in the quarter and burned 2% fewer gallons. As we continue to firm up our PSR plans during the second quarter, you can expect us to target incremental savings as we further rationalize the equipment fleet, reduce train starts and implement other cost savings initiatives.
And with that, I'll turn the call back to Pat.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Okay. Thanks, Mike. I have a couple of quick comments before we open the call for Q&A. I want to go back again to draw your attention to Slide 7 and just reiterate that our focus and our strategy with respect to implementing PSR is really led by service and growth. This slide, as my team here knows, is -- we put a lot of thought into this message. This is one message for all audiences. So this is the approach that that we're taking with respect to PSR implementation that we will communicate to shareholders, analysts, customers, employees, regulators, one message for all audiences.
And I want to share an email exchange here from late yesterday. I was having an email conversation with our largest cross-border shipper and closed my last email with the comment that we are scheduled to have our first quarter earnings call tomorrow wish me luck. And I'm just going to read the text of his reply. Good luck tomorrow. My guess is you guys will be just fine. It's been impressive to see just how well your operations are performing lately. So, I think we're really off to a great start with the implementation that we have experienced so far clearing congestion from our network, from our yards, getting out of our own way, so that we can improve the consistency, reliability and resiliency of our network and put ourselves in a position where we can take advantage of the really powerful growth opportunities that we have in the years ahead.
So I know you all have really found my guidance on headlines for the quarter very helpful in the past. So I think, the way I think of this quarter strong beat, strong performance and more importantly, PSR has cleared the path for exceptional growth going forward.
With that, I will open the call for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Allison Landry of Credit Suisse. Please go ahead.
Allison Landry -- Credit Suisse -- Analyst
Good morning. Thank you. So if I think about the sort of sequence of events in prior PSR iterations, it seems like you're sort of changing the train design, service design and it goes with the yard rationalization and all of that. But just given the facts that that you guys have a lot of growth in front of you, is there any change in the way that PSR will get implemented such that you can continue to take on that volume growth? Maybe if you could explain that a little bit more and Sameh if you have any thoughts, just given your experience with past implementation.
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Yes, I mean the -- you mentioned yards as an example. Our approach is not going to be to close yards. Our approach -- unless something really is obvious, but I doubt it. When we free up space in yards and reduce switching and reduce dwell, it's actually more to be able to absorb more business and to service our customers in a more reliable manner. And we are working very, very close to many customers. Monterrey again comes as a very good example to coordinate between what we call local jobs, spotting cars and picking up cars from them and coordinating with the capacity that they have on their tracks and giving them the best possible service and most consistent service. So we are not going to look at this and we don't have humpy yards as an example, OK.
So this is -- hump yards are nothing but a huge sorting machine and because PSR principle is to reduce the number of times you touch a car, then eliminate some of the need for these sorting machines. But we don't have hump yards, OK. We have major yards that are flat switching. So we are using that principle of reducing the number of times we touch a car more to reduce the switching, but like I said, to free up space and grow our volumes. Something really distinct here and Pat mentioned it a couple of times is that the volumes here are growing. It's a nice potential, particularly in Mexico, in which case the capacity that is freed up will be used. I don't know if I answered the question correctly.
Allison Landry -- Credit Suisse -- Analyst
Yes. That was really good color. And then as my second question non-PSR related, but could you guys maybe split out from the yield perspective how much price versus mix versus fuel contributed?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yes. Allison this is Mike. I think from a pricing perspective , you know, we saw increases during the quarter along with renewal rates in the quarter that were similar to what we saw in 2018. The big impact obviously was the drop in the intermodal, which is about a third of our RPU when you compare it against the entire book of business, and then of course, we had great growth in refined products, which has a relatively high revenue per carload. So I think we'll leave it at that.
Operator
The next question will come from Jason Seidl of Cowen.
Jason Seidl -- Cowen and Company -- Analyst
Yes, thank you. Good morning, guys. Couple of quick questions. I think you said the adjustment in the volume outlook was an entirely due to the first quarter weakness on the intermodal side? Or is there anything else behind it?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
So weakness was associated with intermodal industrial consumer and the automotive business. All three of those business segments were impacted by the Teacher strike in the State of Michigan. So it's important (inaudible).
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Larger in the first quarter. I will pass to Jason.
Jason Seidl -- Cowen and Company -- Analyst
Yes, that was going to be my next question. And the other thing just clarify something, when I'm looking at your cross-border intermodal volumes versus revenue, I mean, your intermodal volumes are up 5%, but your revenues are down 6%. It seems to be some sort of a mix shift going on. Can you elaborate on that?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yes. We've had a reduction in our length of haul, which is largely driving the discrepancy that you're referring to.
Jason Seidl -- Cowen and Company -- Analyst
Would revenues have been up, if you exclude the length off?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Revenues would have improved, if we would have excluded the length of haul. The length of haul that's most significant to us is the East St. Louis moving South, that business went away as a result of activities on another railroad and as a result that significantly reduced our length of haul, and the domestic product.
Jason Seidl -- Cowen and Company -- Analyst
Perfect. Those are my two. Thank you again. I appreciate the time.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Okay. Thank you, Jason.
Operator
The next question will come from Justin Long of Stephens.
Justin Long -- Stephens Inc -- Analyst
Thanks and good morning.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Good morning, Justin.
Justin Long -- Stephens Inc -- Analyst
Sameh, maybe to start with that question for you on PSR; I wanted to see if I could get your thoughts on how you would compare the margin potential from PSR in the US versus Mexico. Just given the different dynamics of those networks and the different labor dynamics as well.
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
We have been looking at the whole network as whole. We -- and because it frankly affects each other. Like I talked extensively about the Houston area as an example. And that is for traffic going south from the US to Mexico and traffic going northbound from Mexico to the US. So we have not looked at segmenting our efforts on PSR between the US and Mexico. We have been looking at it as a whole.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Justin, this is Pat. I will chime in here just to add a little bit of additional color to this and I'll give an example of -- we get this question a lot, we really can't pay attention to Mexico versus US operating ratio. We look at the combined network. As you know, 40% of our traffic is cross-border and I will tell a story going back to the Dave Starling era. Shortly after Dave arrived at KCS, he was getting involved in making some operating changes, decisions and one of the decisions that he made was to shift some switching activity from Laredo, Texas to Nuevo Laredo in Mexico. And the senior operating guy who is no longer here -- wasn't here really long actually this conversation in fact, made a comment, who said, well, we can do that, that will increase our operating ratio.
Dave pretty much cut him off and said, what do you mean our operating ratio, and I mean, I was talking about the Mexico operating ratio. So we actually had that mentality in the Company, you know 8 years or 10 years ago, and as Sameh said, we are -- as we're implementing PSR, we're looking at just making decisions what's the right way to handle the traffic. Where should we -- where do we have capacity, where do we have resources and that's going to drive costs in decisions about where we handle things that may affect the operating ratio in Mexico versus the US. And the way we run the network, whether it's on the cost side, the revenue side, it's very much just ignoring the details of what the impact is going to be on operating ratio in Mexico versus US and doing what's right for the network, what's right for the customer. It's almost like if you would ask Union Pacific or BN, what is your operating ratio in Illinois versus Iowa, it's just not a factor.
Justin Long -- Stephens Inc -- Analyst
Makes sense. And secondly, I guess this one is for Mike. So it sounds like your outlook for headcount has improved year-to-date, but you mentioned that the guidance for comp and benefits to be up 5% was unchanged from what you've told us in January. Can you give us some more color on why that's the case and why that's not moving lower and then also on the change in the accounting for the fuel excise tax credit, is that going to impact incentive comp at all?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yes. Justin on comp and benefits, we had guided up around 5% back on our January call we did in our plans assume a gradual decline in headcount throughout the course of the year and we continue to expect that. We talked this morning about 100 reduction in positions. There is some mix issues there between the two countries that maybe don't give you quite the dollar impact. So we're going to stick for right now with up about 5%. With respect to the fuel tax credit, really nothing has changed on the fuel tax credit from either a net income EPS perspective or the fact that we are eligible to get the credit. So there's really no anticipated change. All that happened here was because of the law change we were no longer able to offset this against withholding taxes and we can only offset against income taxes, so that drove us down into income taxes. So no change there.
Operator
Next question will come from Ari Rosa of Bank of America Merrill Lynch.
Ken Hoexter -- Bank of America Merrill Lynch. -- Analyst
Hey, it's Ken Hoexter from Bank of America Merrill Lynch. Hey, guys. I really used to think in the depth you've engaged in precision railroading. So thanks for that. But, Sameh, your thoughts on interlining Wichita rails. How important is your performance become and your ability to improve on PSR and keeping to your schedule given the amount of interline traffic you have?
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Well, you know like I explained earlier, we are definitely in this game together with major Class 1s. I can think particularly a few people who is our largest partner and BNSF. And when they do have impacts, you know example, recently the floods, it did have some impact on us, but you know the resiliency aspect that Pat mentioned really comes out in this case is that situations like this that ended up not only affecting us at the North end of our network, but they started rippling into the Southwest of US like Texas. If we had not had PSR, we would have had some serious congestion issues and some disruptions like it happened last October. It was -- it's very similar. The circumstances were very similar, but because of all the implementations of PSR, we actually absorbed the blow and maintained a very decent velocity and a very decent service was to our customers. Not only the PSR changes that we made internally, but also the very, very close, tight work that we have been doing with these other partners, who in the case of one of them is also migrating to PSR. So, yes, the interline is very important, but the synchronization between the railroads is important and working together in a very synergetic manner as well as implementing within KCS, the PSR principles to create that resiliency that I talked about.
Operator
The next question will come from Chris Wetherbee of Citigroup.
Chris Wetherbee -- Citigroup -- Analyst
Okay. Thanks. Good morning, guys. Sameh, maybe another question for you. Just when you think about the network relative to the other two rails that you've been at you obviously have really strong strides forward particularly from the Houston guide now, wanted to get a sense of maybe how you sort of compare this at least potential from an operating ratio perspective to those businesses? And then just maybe a little bit of a follow-up on what your expectations are for timing of the roll-out and is your contracts around a two-year deal. You think this can all be achieved in a relatively short timeframe or how should we actually be thinking about that?
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
We gave a guidance on the operating ratio. Mike talked about it, and Pat of 61% to 62% by 2021. You know, clearly, if 60% to 61%, I'm sorry, 60% to 61% by 2021. Now we have clearly made very good progress, very fast in Q1. How is that going to impact the timeline? I guess, we'll find out as the months go by. But now, if I compare this to other railroads, which was at the front end of your question, all I can say is that I look at the active trains twice a day and we have a report that comes out that shows all the delays and event-by-event and where the delays are enduring. And all I can say is that we have a lot of room to go. Okay, like we have -- we clearly have a lot of potential. If I look at the train delays, we know what the pinch points are. We know what's causing these delays. We know what needs to be done. It's a question now of converting, but there is still a lot of -- that is frankly is still a lot of fruits hanging. And I guess that's...
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Hey, Chris, I just go back to the comment that you remember what we said at the end of the fourth quarter and full year 2018 performance. None of us felt good about the way we performed in 2018, and we knew that we left a lot of business behind because our service was not at the level that allowed us to handle all the business that we knew was available. So our focus here -- there is going to be operating ratio improvement as a result of changing the way we manage and operate the network. But again, it's really about primarily focused on service and growth. We can get our service improved. We can improve the resiliency of our network. We know there's business for us to handle and that ultimately is going to be a powerful driver of improvement in operating ratio, improvement in EPS, and ultimately improvement in shareholder returns.
Chris Wetherbee -- Citigroup -- Analyst
Okay. That's helpful. And one quick follow-up to sneak it in for Mike here. In terms of charges, anything else we should be expecting this year progresses that you guys continue looking toward PSR?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Well, I mean, we're still developing our plans and that certainly could be the case here in the second or third quarter. We will kind of monitor that and provide some timely updates at various points throughout the conference season. Then you should certainly expect an update from us on our progress and our targets during the second quarter and we'll probably do that on the second quarter earnings call.
Chris Wetherbee -- Citigroup -- Analyst
Okay. Thank you.
Operator
The next question comes from Amit Mehrotra of Deutsche Bank.
Amit Mehrotra -- Deutsche Bank -- Analyst
Thanks, operator. Hi, everybody. Thanks for taking the question. Mike, just quickly on the tax credit reclassification. I just want to confirm that the way you report the adjusted cost base in the adjusted OR has not changed in the quarter. And how will you report the cost base going forward? And I think the 60% to 61% OR, included the tax credit above the line. So I'm just trying to compare the performance you achieved in the quarter in terms of how you're going to report numbers and the target make sure all of those are an apples-to-apples basis from an EBIT perspective?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yeah. So, good question. And we did actually include a slide in the Appendix that I think gives you the various amounts and the geography of where they're reported and where we adjusted them. So hopefully that will help and I'd be happy to have a call with you after the official earnings call is over here to provide you any more guidance on that.
Amit Mehrotra -- Deutsche Bank -- Analyst
Okay. But I mean, is the 60% to 61% OR is including this credit above the line or excluding the credit above the line?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yeah. That's -- you should view that as an adjusted OR for us going forward.
Amit Mehrotra -- Deutsche Bank -- Analyst
Right. Okay. Got it. And then one other question, if I could. There's obviously been a lot of headlines in recent weeks about the Mexican government engaging the Antitrust Commission to discuss competitiveness of the rail network. I know you provided a statement inter-quarter, which is very, very helpful. But any other color that you can help with in terms of what's going on on the ground, because there's just been a resurgence of headlines and activity around that topic from 12 months ago. And obviously it has fundamental implications for the outlook for the company. So any color on -- what's actually going on in the ground would be helpful.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Sure. First thing I'd mention is, this wasn't entirely unexpected. We knew this investigation was going on. I think we made some comments about that. And the specific impact, the commodities, the routes, the business that is the target of the most recent COFECE ruling is less than 1% or 2% of our total business. And we actually think this is a good thing and I'll explain that. I mean, if you remember a couple years ago, COFECE and there was a push in the Mexican Congress to more broadly reregulate open competition on the railroad networks by suggesting or imposing track rights on a much broader basis. And we argued and we opposed that point of view by saying, really if you think about making a determination that there is a lack of effective competition, this really has to be commodity and route specific. This most recent ruling is commodity and route specific. I think there are 31 or 32 specific routes, all of them -- all of them are routes that are originated by another railroad other than KCS. This is primarily focused on the shipment of chemicals from quarts of cocoas, which we do not have direct access to into other markets in Mexico.
So we are responding to the ruling, we expect the COFECE final ruling to be public in the fall -- late summer or fall and then the process will -- the way the process works. That ruling, once it's final and determined will be passed to the ATRF, which is the, call it the Mexican STB as the regulatory agency in Mexico that has responsibility for remedies and enforcement. And then, we're in a new world; there is no case history; there is no President for how the ATRF is going to rule once they get the final COFECE ruling. We will be very engaged in that process. We have a ATRF commissioner who is new with the current -- with the new Lopez Obrador's administration. I met with them last week in Mexico City. We will be very engaged. I think they are very reasonable. They understand the importance of creating an atmosphere in the rail industry that allows the railroad, operators and concessionaires to earn an acceptable return on their investment, and keep the rail network in Mexico, particularly as it relates to connecting to the rest of North America, very efficient and attracting capital. So we think we've got a good regulator in Mexico that will reach reasonable conclusion, but it's probably going to be several quarters or years before we have a final determination.
Amit Mehrotra -- Deutsche Bank -- Analyst
Got it. Okay, I appreciate the confidence. Thanks so much.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
More than anybody wanted, but that's where we are.
Amit Mehrotra -- Deutsche Bank -- Analyst
I guess I'll just say Gracias. Appreciate it guys.
Operator
The next question comes from Brandon Oglenski of Barclays.
Ben Hartford -- Barclays -- Analyst
Hi, this is Ben Hartford on for Brandon. I just had a quick question for Sameh. So you touched a low in the inter-liner question earlier about how some of -- what you're doing has allowed you to respond to events. You've had some one-time events in the past. Can you just touch a little bit more in detail on the specific service, design initiatives that you've implemented and how they'll help you respond to one-time events and make them less cascading moving forward?
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Actually, in this case, some of the service design changes helped a little because we have fewer trains running in Mexico due to service design changes, but it goes back to my point earlier when I was presenting my slide about the execution portion of PSR. PSR is a philosophy of running the railroad in scheduled manner, but the keyword also is precision and that precision is the execution side. And you can get a lot of fruits out of the execution before you even implement any service design changes. Just the intensity of watching trains constantly and looking at like these reports -- we have reports that come out twice a day, they come out of like five in the morning and 5:00 PM. I read them actually at 5:00 AM. And then you react immediately. You don't wait till the situation builds up and you have that huge backlog that is coming from -- a simple example, you know, we had a bad, bad storm, OK, on the weekend. It affected in this case Shreveport to Meridian and there was a big recovery happening; the trees that came down on the line and all that. There was a lot of intensity over the weekend some work that was supposed to maybe take place on Monday, it took place on Saturday, and the guys worked and they reopened the line faster and really cover a lot faster.
The saying I talked about on the Houston for Texas, we did not wait like we could see that a lot of trains were in holding status and after cascade them up all the way to the North because we don't have -- we don't have huge yards. So you don't wait until we you out of hand on and out of control. You start attacking up straight away. We went to Houston, sat in the dispatch center and worked with people and worked toward the other railroad and we helped each other and we found solutions, like shorter routes outside of the area that not only had bus they helped the other railroads because they take us out of that grid and reduced the congestion.
So -- and then the coordination between the US side on the Mexican side, which was not very -- was not at 100% in October and this time that coordination was superb, like the guys at Sanchez making sure that the way they released trains going northbound they are going to release not in a way that congested trains that are coming southbound. So that's what I'm referring to is and I call it focus and intensity and being engaged and -- so that allowed us to do these things and work with them the interline partners and absorb also any blips that are happening on any site.
Ben Hartford -- Barclays -- Analyst
Awesome. Thanks.
Operator
The next question comes from Tom Wadewitz with UBS.
Tom Wadewitz -- UBS -- Analyst
Yes, morning.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Good morning, Tom.
Tom Wadewitz -- UBS -- Analyst
Yes, good morning. Let's see -- a lot of interesting things to talk about on the call and I appreciate all the perspective you are providing. Let's see either for I guess Sameh or Patrick , I wanted to get your thought on where you're at in the reset of the train schedules? Are you 90% there or are you 50% there, but if you look across the whole network and you think about changing the train schedule, how far along are you?
Patrick J. Ottensmeyer -- President and Chief Executive Officer
I'm going to ask Jeff Songer to address that question.
Jeffrey M. Songer -- Executive Vice President & Chief Operating Officer
Yes. I'll comment -- I made a comment about our train length initiative, and again, the 3% initial target is maybe little underwhelming when you look at the total. But our intermodal manifest product and primarily as we're starting to look at this in Mexico, there is a substantial amount of opportunity with resetting train starts and we're doing that. I think Sameh mentioned we've taken a look at our northbound product that was done earlier in the quarter; our southdown products are just now. I mean, just this month, we've started to make and implement some changes. So I think I wouldn't put it is a 50%, I would say is part of the intermodal manifest product itself, we're certainly working down that path. We have not yet focused on maybe some of the US products with maybe bulk commodities. I don't think there's as much opportunity there, but there certainly is opportunity; we will be looking at here as this quarter progresses and all through the year. So I would say we're early in this and early from seeing the benefits here in Q1 that a lot of these changes we've already made just came into play here, mid-Q1 and some are just starting right now.
Tom Wadewitz -- UBS -- Analyst
What was the 3% number again, Jeff? That was...
Jeffrey M. Songer -- Executive Vice President & Chief Operating Officer
Yes. In my slide in the presentation, there we're regaining focus here on train length and so. And so if you look at the numbers, we provided the overall train length there, I think for -- the target for this year with what we've identified thus far is about 3%. But I made a color comment around manifest intermodal our biggest opportunities out of the gate here. We're looking for 10 -- probably 10 plus percent growth on those trends.
Tom Wadewitz -- UBS -- Analyst
Okay. That's great. And then just a quick follow-up. A lot of this seems predominantly process-driven that PSR, right. But are there any infrastructure constraints that you know, I think if we look at like what TREE did -- they did some targeted training -- excuse me, siding expansions or siding additions. Is there -- is that a component of the opportunity as well to kind of strategically add pieces that of infrastructure that make the network flow better?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Yeah, I'll give my comments, and I'll let Sameh add some color here. Like I mentioned also the cross-border for us that continues to be the catalyst and the main -- and the main driver of this cross-border volume we're seeing both from an infrastructure perspective as we've been doing over the past few years adding the physical capacity of international crews. Those initiatives are not necessarily physical capacity. International crews is proving to have a lot of benefit, continuing work with customs. On the capacity side because of the refined products opportunity Mike mentioned, we are investing somewhat last year and then heavily this year in our corridor between Houston and Laredo. And so that's going to pick up Houston originated traffic Corpus originated traffic. So we've seen this coming. We've reacted, we constructed one new siding last year, we've got a couple of new sidings, we're constructing right now to stay ahead of that. So I think strategically in the quarters that are really growing for us, we are looking to add capacity in some segments.
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Tom, I'll provide a little cover here to your question and that is, I have -- we talked a lot here as we make these changes, as we implement these things, as we take locomotives, cars, service design, the changes that we're making kind of we're -- if we're going to air, we're going to air on the side of probably moving a little slower than quickly. One thing we've talked about here, we never want to be in the position that we were in last year, where we said to our investors, shareholders, employees, Board, there was more business that we can handle than we were able to handle because of congestion and service issues on the network. I never want to have to come back on an earnings call and say there was more business that we could handle than we were able to handle because of congestion and service issues on the network. I never want to have to come back on an earnings call and say there was more business than we could handle but we couldn't take any and we couldn't move it because of a lack of power or crews or other assets. So we're going to be very careful and thoughtful as we make these changes with an eye toward making sure that we have capacity to handle the business that we believe we know is available to us particularly in the four oversized growth areas that we see ahead of us refined products, plastics, automotive, and intermodal.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
And if I may add to what Jeff said about some of the improvements in infrastructure. As we keep looking at yards every day and we have a small team that has been going through yards. There are some small money investments that pay huge dividends. Example, we have a yard at Vanegas (ph) in Mexico. And the main line goes right in the middle of the yard. So, whenever you do switching you'd lock the main line. But we can do some bypasses here for $1 million, $2 million and in fluidity, we have a situation at a place called Leon which is north of Monterrey which is a true change point. And every train whether it's southbound or northbound goes through that location and spends about 4, 4.5 hours not only to change crews but to add locomotive because when it goes out that are great. When we are doing that, we are also blocking the main line. So if you built the track to do this work then you can -- you can save a lot of time. So there are a lot of small infrastructure savings that can be done that can greatly improve the fluidity particularly of yards but also on the main line I just described especially that Beaumont all the way to Laredo section.
Tom Wadewitz -- UBS -- Analyst
Great. Thanks for all the time and the insight.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Okay, thank you.
Operator
The next question comes from Scott Group of Wolfe Research.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Good morning, Scott.
Scott Group -- Wolfe Research -- Analyst
Hey, thanks. Good morning, guys. So 100 locos, 2,000 cars so far. I guess how much more in the pipeline in the next couple of years? And then Mike, big picture, I think last quarter you said the OR improvement in the next three years is maybe a little bit more back-end loaded with lower DNA and equipment cost this year. Does that change now? Is 2019 now better than you thought from an OR standpoint? Are there any offsets we need to think about?
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Scott, I'll take the first part of that question and then ask Mike to answer the second part. And again, I don't -- I hate to say, I don't know how much more and go back to what I said a minute ago. We're going to be very thoughtful about how we take assets, locomotives, crews, cars, out of the picture here, because we want to do this in a way that is long-term sustainable and we want to do this in a way that prevents us from ever having to say there was more business than we -- that we had available that we could handle because of a shortage of resources. I think there is more to come. But -- and will every day we're finding opportunities to reduce congestion, reduce assets, do more with less. And the quarter-end is an opportunity for us to take a still shot of where we are and report to analysts and shareholders and we'll continue to update quarterly. If we have information during the -- between the quarter reports at conferences and other venues, we'll update the market. But we're just going to go about this everyday finding opportunities to get better and improve our performance.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Scott, I will address your other question. You're right, the 60% to 61%, we did guide us is a bit more back loaded. Remember that was primarily because of a big step-up in PTC costs from 2018 to 2019, approximately $17 million. The other factor just to keep in mind what -- while we are seeing a nice downward reduction in our expenses, we have one quarter that doesn't make for the full year. And finally on the slide that I reviewed where we showed $16 million of 2019 operating expense savings don't forget the comment I made that that only partly gets us to the goals that we established for 2019. So we're really pleased with our results in the first quarter, but we've got a lot of work ahead of us.
Operator
The next question comes from Bascome Majors of Susquehanna.
Bascome Majors -- Susquehanna -- Analyst
Yeah. Thanks for taking my question here. Just want to follow up on Justin's much earlier question for Sameh and Pat. And I know from that response in what you said before, you don't manage the business to independently maximize margins on either side of border. But even with all the challenges you had south the border last year, it still looks like the Mexico business operated that let's call it a high 50s OR versus -- for the full year versus the US business in the high 60s. So as you think about implementing the PSR principles that work for your network, is there anything structurally keeping KCS' US business from getting into let's call it somewhere in the 50s much longer term and given the corollary that we saw the Illinois Central reached the low 60s more than 20 years ago with the North South US railroad? Thanks
Patrick J. Ottensmeyer -- President and Chief Executive Officer
I'm going to take that one and I'm going to be really stubborn about my answer. It just really is unimportant to us. We look at the combined results and we will make decisions about cost, activity, other things that are in a particularly given the 40% of our business that is cross-border. That is in the interest of driving consolidated profitability and improvement and performance and really very little regard to US versus Mexico operating ratio. So I know that's probably not a satisfying answer, but I'm going to be really stubborn about that.
Bascome Majors -- Susquehanna -- Analyst
Fair enough.
Operator
The next question will come from Brian Ossenbeck of JPMorgan.
Brian Ossenbeck -- JPMorgan -- Analyst
Hey, good morning, everyone.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Good morning, Brian.
Brian Ossenbeck -- JPMorgan -- Analyst
Two quick questions here. One if Mike or Mike if you can give us an update on just what's going on at the border there's obviously been some disruption with some order personnel being reassigned. I know that's been a near-term disruption to the business if it's not opportunity if truck's could have (ph) us longer. So maybe can just cover that? And then third for Sameh if you can just -- it's not though a lot of success the opportunities with PSR at KCS? Can you just give us a sense of some of the challenges and difficulties you are encountering, what's the easier or tougher than you've expected so far this year earlier in the process? Thank you.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
I'll take the first piece, I believe that you're referring to the long lines of trucks at the borders that are waiting to cross as a result of some personnel movement with the CBP, is that correct?
Brian Ossenbeck -- JPMorgan -- Analyst
Yes, that's correct, Mike.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Okay. So, yes, we absolutely do see that. And we're not experiencing any challenges like that on the railroad side of the house. I believe it's much more efficient and effective to cross similar amounts of volume via train versus via truck. And I'd like to see this turn into an opportunity for us, absolutely.
Brian Ossenbeck -- JPMorgan -- Analyst
Is it too early for that opportunity to to rise?
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
We have had customers approach us looking for alternatives of moving freight across the border, trying to move away from truck and move to trains. So those discussions are happening, but there a fair amount of work that will need to be done in order to make the actual change occur.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Now, as far as the second part of your question about challenges, I guess the biggest challenge is the Houston area, like when it comes to Mexico and all that, it's all great potential. The rest of the US is also great potential. The one challenge is the Houston area. But it's a nice challenge to have, because it is something that has been hindering KCS for a long, long time. So fixing that is going to be a step function, improvement to the whole network. So I think that the same way as it's a challenge, it's a golden opportunity and we're working very, very hard to find solutions for it. Some of the solutions are short term, some of the solutions are more medium term, like infrastructure, improvements, joint efforts was with other railroads.
As far as another thing that obviously is always something that you don't know until you start size of PSR when you joined the new team is you don't know what kind of receptivity, what kind of engagement and that was a fantastic surprise, like that was extremely positive that the team here is definitely, definitely very committed. And you see it when you saw somebody in north on a Saturday morning and they reply within 5 minutes. So that tells you that people are watching, they are all engaged in this process and they all want, it's a winning team. And it's a very positive spirit, you feel it, and the chemistry is awesome. You don't find anybody questioning or has it second-guessing or saying, OK, well, now this is because of PSR or something like -- it's, you don't see any of that and that's -- so that is on the very positive surprise side. And like I said, on the challenge, Houston is it and, and we are confident that we will fix it.
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Unrelated to this, Pat, if I can just clarify something I mentioned earlier, there was a question on about intermodal revenue per unit decreases and I correctly referred to the fact that was the result of the change of length of haul. And the example that I provided with a East St. Louis was correct or I mistakenly referred to that as a US domestic business and it's actually US cross-border business. I just wanted to make sure I clarify that.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Okay. I think we're finished. Operator, no further questions?
Operator
No, Pat. That's all at this time.
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Okay. Well, I'll pick up on the closing comments from Sameh. I know there are a lot of KCS' employees -- if you'll indulge me for just a few seconds here, lot of KCS employees listen to this call, both in US and Mexico. And I just want to pick up on what Sameh closed with and that is, just the level of engagement and commitment and enthusiasm that I've seen, I think the whole team has seen and go back to the end of the year, when we talked about the performance in 2018 not being up to our own expectations. I really feel like everybody in the Company felt that way and the way this team has engaged is just have been very very gratifying; everybody in this Company wants to get better. We know we didn't meet our customers' expectations, our shareholders' expectations, our own expectations in 2018. So I just want to make that comment for the people on the call from KCS, I'm very pleased, very proud of the effort, the engagement, the commitments at this team is shown. So I think there are many good things ahead of us and I'll close with that and we'll catch up conferences and in about three months with our second quarter report. Thank you all very much.
Operator
Thank you. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.
Duration: 83 minutes
Call participants:
Patrick J. Ottensmeyer -- President and Chief Executive Officer
Jeffrey M. Songer -- Executive Vice President & Chief Operating Officer
Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading
Michael J. Naatz -- Executive Vice President and Chief Marketing Officer
Michael W. Upchurch -- Executive Vice President and Chief Financial Officer
Allison Landry -- Credit Suisse -- Analyst
Jason Seidl -- Cowen and Company -- Analyst
Justin Long -- Stephens Inc -- Analyst
Ken Hoexter -- Bank of America Merrill Lynch. -- Analyst
Chris Wetherbee -- Citigroup -- Analyst
Amit Mehrotra -- Deutsche Bank -- Analyst
Ben Hartford -- Barclays -- Analyst
Tom Wadewitz -- UBS -- Analyst
Scott Group -- Wolfe Research -- Analyst
Bascome Majors -- Susquehanna -- Analyst
Brian Ossenbeck -- JPMorgan -- Analyst
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