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Kansas City Southern (NYSE:KSU)
Q4 2019 Earnings Call
Jan 17, 2020, 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 Q4 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Pat Ottensmeyer, President and CEO. Please go ahead, sir.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay. Thank you and good morning, everyone. Welcome to our fourth quarter earnings review. I'll just point you to the Safe Harbor statement in the presentation that has been posted. And then also just a quick reference to the lineup for today, same as you have seen in the last several quarters. So I'll move to slide 5. Hopefully, everyone now has seen the press release.

We posted earlier today, revenue increase of 5% versus last year led by strength in Chemicals and Petroleum and Industrial & Consumer segments. And of course, Mike Naatz will get into much more detail in a few minutes on the revenue side of the business. Fourth quarter operating ratio as reported was 67.6%, but that includes a number of items, including $38 million of restructuring charges that Mike Upchurch will get into in more detail. So really when we look at the adjusted operating ratio of 62.4%, an improvement of 190 basis points versus last year, and that includes the negative impact of 90 basis points due to the loss of the Mexican Fuel Excise Tax Credit.

Fourth quarter earnings per share of $1.30, again adjusting for restructuring charge and other items, $1.82, which was an increase of 17% versus last year. I made a comment here at the bottom of this slide about our implementation of PSR that's clearly the headline story for 2019. Very, very pleased with the progress that we have made and believe that there is more to come. So I'll leave that for Jeff, Sameh and Mike to get into a little bit more and then come back to at the end for some additional color commentary on that.

If we look at the fourth quarter again on an adjusted basis, we did have a number of record performance levels in revenue, adjusted operating income, adjusted operating ratio and adjusted earnings per share. Moving to slide 6, probably one of the more meaningful data points in the conversation today, about our outlook. And you can see that volume -- volume growth, revenue growth up a bit better than what we had previously guided. I think the headline for 2020 -- for our outlook for 2020 is that we expect it to be better than 2019 in terms of volume and revenue. We are also accelerating our guidance on operating ratio. I think our previous guidance, as you know, had been the low end of the range of 60% to 61%. By 2021, we're now moving that up a year. We expect our operating ratio this year to be between 60% and 61% and then below 60% for 2021.

EPS outlook is mid-teen growth for the longer-term period out through three years. And then finally, capital expenditures, we are now guiding to about 17% of revenue this year and then on into the next couple of years. I'll just mention one other topic here that's not on the slide and that's our capital allocation announcement from November. We announced an increase in the dividend, a $2 billion share repurchase program over the next three years. Again, Mike Upchurch will have some more detail about that in a few minutes.

With that, I will turn the presentation over to Jeff Songer.

Jeffrey M. Songer -- Executive Vice President and Chief Operating Officer

Okay, thank you, Pat and good morning. Starting with the review of key operating metrics for the quarter on slide 8. Velocity of 15.2 miles per hour improved 36% year-over-year and 9% sequentially. Dwell of 19.9 hours improved 23% year-over-year and 2% sequentially. Operations in our border region remained strong with volume growth of 8% for the quarter in the segment. To date, we have operated over 3,000 trains with International Crews and we will expand our International Crew base in 2020 which should allow the majority of KCS trains to operate with International Crews over the Laredo gateway. Additional improvements with customs processing and joint US-Mexico customs efforts will continue into 2020.

Turning to slide 9, we are very pleased with the continued progress supported by our PSR initiatives. Significant gains in all key metrics were achieved in 2019, notably, a 22% improvement in velocity and a 16% improvement in dwell. We have provided 2020 targets on this slide. And as indicated, we have opportunities for continued strong improvement in our key metrics. Notably, we expect to see significant improvements again in velocity through our focus on TSP, reduction in equipment failures and resource management. Car miles per day will be an area of increased focus as we enter year 2 of PSR. This metric is reflective of both velocity and dwell and is a critical indicator for tracking the effectiveness of TSP changes and initiatives in our terminals to reduce dwell and car handlings. Sameh will provide additional detail on the specific PSR initiatives for 2020.

As highlighted last quarter, fuel efficiency was the largest single line item cost reduction through our 2019 PSR initiatives. For the year, we improved 4% and are planning an additional 5% improvement for 2020. Regarding the 2020 capex outlook on slide 10, capex as a percent of revenue will decrease from 20% in 2019 to approximately 17% in 2020. The largest year-over-year change is the elimination of new locomotive purchases as we have no locomotive or equipment purchases planned for 2020. This year, we will allocate some additional capex to expand our locomotive overhaul program in support of locomotive failure reduction initiatives. As we are operating now with about 16% fewer locomotives, our focus will increase on reliability of our remaining fleet.

IT spend in 2020 will provide for innovation initiatives with modernization of our operations management control and ERM systems. Additionally, we are installing our first automated railcar inspection portal in Mexico utilizing machine vision technology to analyze equipment health track speed. This technology will support improved inspection quality and increase productivity for mechanical forces, who will spend less time walking cars, performing visual inspection and more time making repairs. I would like to recognize the operating team for their efforts to make 2019 a success, and I'm confident that our operating improvements will continue into 2020.

I will now turn the presentation over to Sameh.

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Yeah. Thank you, Jeff and good morning. Like Jeff said, we are very proud of what the team has accomplished in 2019. And we are looking forward to a lot more to do in 2020. I have two slides. So I'm going to go over them fast and then we'll open it for questions later, if you want more details on any of the items. The first slide is what we have done in 2019, and how we laid the foundation going forward for PSR for the coming years. And then the second slide will be on the new initiatives that we are trying to complete in 2020.

So the way we approach PSR at KCS in 2019, we started by looking at the key things, velocity and dwell and as an example, velocity was running at about 11 miles per hour. In Mexico, it was like 8 miles per hour, 9 miles per hour; in US, maybe 12 miles per hour, which are considerably lower than where they can be. And the first task was to try to understand what's causing that. So, the typical thing is to look at delays, was our trains are held outside yards or whether we have locomotive failures, or any other reasons, congestion. And also, we looked at deviations from the plan. The plan itself had a lot of cushions off time, yet, it was not executed properly.

And we saw that when we visited SLP, San Luis Potosi. So, we looked at these things, we looked also at inefficiencies across the functions like mechanical shops as an example. And we sold at Monterrey shop, that had maybe two locomotives in it and a lot of staff. We also engaged with suppliers, with customers, because we found as an example, 600 cars in Monterrey, and the yard that are ready to go, but waiting for the customer to accept them. So, we did a lot of work in that area.

We also looked at partner railroads, particularly Union Pacific was very close to us and we shared trackage rights with them in the Houston area. After we looked at all that, we started a disciplined execution with a great sense of urgency. We're going against the clock. And if you look at 2019, we really got going in earnest around July. It took time to get going and to build the momentum and to really understand the network and the yards and new opportunities and to see where we are going.

Hopefully in 2020, we're hitting the ground running like we were on operating calls on January 2 and we got going right away. So, in 2019, including Q4, we implemented waves of service design changes, four waves. To consolidate, manifest in Intermodal trains; we restructured supplier relationships. There were things that were outsourced like labor in shops, which should never be outsourced, so we insourced that. On the other hand, material was insourced; warehouses, we outsourced that as an example.

We also made changes to management in operation to put solid people in the key positions like running the operation in Mexico as an example. And then, we analyzed and we drilled down on every delay every day and that took us down quite a bit. And we improved delays from 139,000 hours on an annual basis to 86,000 hours. That's a reduction of 40%. It was all that scrutiny, every train and why did it go in the yard and set for 10 hours as an example. As a result of all this, we took out a lot of assets; we took out locomotives, 16%, we took out cars, 12%. Fuel efficiency improved 5% because of the longer, heavier trains and the tonnage on them. We reduced the cars online by 17%, particularly foreign cars and that affected things like car hire, which went down by $12 million in 2019.

We also improved the locomotive, -- the locomotive failures reduced by about 54%. I mean, when we reduced the fleet, we took out about 200 old locomotives. When you take 200 old locomotives, we took the worst ones. And by definition, we improved, in a disproportionate manner, the failures and reduced the workload on shops. The velocity, dwell on car miles improved. Jeff covered that.

We also put a lot of emphasis on crew efficiencies and reduced overtime recrews, deadheads, you have all the numbers on the slide. They are staggering, 24%, 43%, 16%. We also improved train length in Mexico, where we have put a lot of focus by 6% and the crewstarts went down by 7%; all this improved service. When you improve service, you got customer confidence. We are seeing it. Our revenue is growing. We're winning back customers. And Mike Naatz will be covering more on that on the commercial side.

So, what are we going to do now in 2020? While we will continue the momentum and actually will accelerate it, because like I said, we did not waste any time during the Christmas period, we then stopped trains two days before and start days after. We are watching the staff, and we started in January right away. And we had actually our first PSR update the first week of January to make sure that all the initiatives are going, so that we can get the savings as fast as, as we can.

So, the first thing, the white-boarding exercise, which was pretty much completed at the end of 2019, but there is a Phase III that will take place this month. We expect 15% reduction in crew events. Examples are Saltillo area and I give that before, so that three trains working in the Saltillo area, setting up cars and picking up cars. One train will have all the manifest and intermodal for that area, and the others will go through.

We are seeing already one mile per hour, actually we're seeing two mile-per-hour increase in velocity in Mexico. The velocity, like I said, used to be 8, 9 miles per hour. Well, yesterday we had 15 miles per hour in Mexico. And by the way, in the US, we had 18 miles per hour. So, we're really getting there, but we still are aiming for higher velocity. We are doing less classifications, less switching for a car, but also we're doing the switching in the large yards like Sanchez, where we have a very large yard and in Mexico City and set of these yards that you see on the map, Escobedo, San Luis Potosi, where the yards are really small and it's a lot tougher to classify. There is going to be more asset take-outs and more crew reductions.

We also started making an effort in the US, which we finally are getting there. And actually when you make efforts in US and you start taking out trains and crewstarts, the benefit is disproportionately higher, because of the -- the labor cost is much higher in US. So, we are doing one, where we had train from intermodal, you see that Wylie on the map, Dallas. Cars were coming from NS and Jackson from CM, going all the way to Wylie. So, going West, come back East to Freeport, that's what you call out-of-route. We are reducing that and we are taking out some trains.

There is going to be significant reduction in crew costs with that. We're putting a lot of focus on crew management in 2020, much higher than in 2019. And we're looking at the pool, a crew pool base in a place called Leon, which is north of Monterrey, where we are going to really stopping trains. We have about 24 trains that stop every day at Leon. We're not going to stop them anymore because when you think about that if train makes it in 14 hours now instead of 36 hours, because of the velocity of the network. But Leon need to change crews because we're allowed to run 16 hours in Mexico with the same crew. So, that's a pool of about 145 people, OK, that we're going to do something about.

We're putting again emphasis on fuel, we are at 1.31 gallons per KGTM. This is very, very high. We have improved it a lot, but we still have a lot of room to grow. Some other railroads I was associated with, they have 1.0. So, we have a lot of work there and the idea is to reduce the horsepower that you have on the train to be as low as possible compared to the tonnage. We are going also to put some effort on the engineering side, the Maintenance of Way, where we have a lot of contractors. We have about 300 FTE equivalents of contractors that are supporting the production gangs, while instead of that we're going to use our maintenance people, who are on the same sub-divisions.

When they have capital programs to do, we use them between repairs, instead of getting contractors. And last, the mechanical facilities, obviously with the reduction in the fleet, we have to start looking more at reducing shops and reducing line repair points for cars. The SLP shop, two days ago, the San Luis Potosi shop, which is one of our largest ones had one locomotive, two days ago, and had a staff of 50 in that shop. So, there is room here.

And the last point, streamlining the border operation. We can talk more about that maybe in the question-and-answer period. So, I'll turn it now to Mike Naatz.

Michael J. Naatz -- Executive Vice President and Chief Marketing Officer

Hey, thank you, Sameh, and good morning, everybody. I'd like to start my comments on page 15. Our fourth quarter revenue was up 5% year-over-year on a 1% decline in volume. And for the full year 2019, our 6% revenue growth and 1% volume decline fell within previously provided guidance of 5% to 7% revenue growth and flat to slightly declining volumes.

Our revenue per unit was 6% higher during the quarter with positive pricing, mix and fuel revenue favorably affecting our results. Fuel surcharge revenue increased about $9 million driven primarily by the rate increases associated with the loss of the Mexico fuel excise tax credit, which was partially offset by lower fuel prices. Our key themes remain consistent all year long. Very nice cross-border growth led by our Mexico Energy Reform volumes, favorable pricing and mix and outstanding service improvements resulted in strong revenue and margin gains.

We are pleased to report that our customers are seeing the benefits of the PSR initiatives. Both internal and external surveys highlight the same results. And those are customers like our version of PSR. They've experienced improvements in service and they want to move more freight on KCS. Our ability to handle growth efficiently without compromising service is a key goal of our PSR implementation. And these surveys provide valuable feedback that's important indicator that we are indeed heading in the right direction.

And now, I would like to move on to our Q4 business unit results, beginning with Chemical & Petroleum. The Chemical & Petroleum business unit experienced a 13% revenue increase and a 7% volume increase. Our Mexico Energy Reform related revenue was up 43% on a 37% increase in volume. We did note that this business remained relatively flat sequentially and found that this was largely due to the seasonality of our LPG volumes.

In fact looking at our refined products, we note that they grew year-over-year and sequentially as additional storage capacity came online. That being said, we are monitoring softer overall demand in this segment. On a full year basis, the business delivered 85% and 90% volume and revenue growth respectively, and this remains a great long-term growth opportunity for us.

Our Industrial & Consumer revenue grew by 11% on a 5% increase in volume. We saw strong military shipments and continued favorability in our metal business which resulted primarily from shifting sourcing patterns. Our Ag/Min volumes rose slightly in Q4. We saw lower revenue due to mix impacts and tougher 2018 caps. I would like to note however, that we continue to see healthy cross-border growth in this segment with service improvement supporting our key franchise customers.

Our energy volumes were up slightly on lower revenues. This segment is a mixed bag seeing strong utility coal performance being offset by lower frac sand and crude business. Looking forward, we are monitoring some upticks in crude volumes and changes to the overall crude market. Our intermodal segment volumes were down 5%, contributing to a 1% decline in revenue. Our cross-border intermodal volumes remain positive delivering a very nice 12% year-over-year growth. It's our US and domestic markets that remain challenged due to truck availability and pricing pressures.

As expected in our automotive segment, our automotive volumes were down, driven by lower plant production levels. This was more than offset by positive pricing, fuel and mix impacts, which actually resulted in a 4% year-over-year increase in revenue. Moving on to page 16, we are providing our 2020 revenue outlook. As Pat mentioned, we are expecting low-single-digit volume growth and mid-single-digit revenue growth. And as you can see we have a positive outlook for approximately 70% of our revenue portfolio with the remaining 30% of the portfolio expected to be neutral.

Our Chemical & Petroleum segment will continue to see strong growth led by refined product exports to Mexico. In addition, we do expect plastic volumes to benefit from new production out of Sasol Lake Charles facility and growth in plastic exports into Mexico. We are keeping an eye on trends in the broader petrochemical market, including potential saturation and shifts in global demand. We see steady demand and cycle time improvements contributing to a positive outlook in our Ag/Min business. Our Industrial & Consumer business unit will benefit from changes in metal sourcing patterns as well as easy 2019 comps in forest products.

Our intermodal revenue is expected to be neutral with continued growth in our cross-border franchise segment being somewhat offset by US and Mexico domestic volumes, again pricing and truck availability pressures persist, although we do believe that they've bottomed out. There are two key drivers of performance in our Energy segment, the first being utility coal which is expected to be flat year-over-year and we actually view this favorably considering the strong year-over-year growth we saw in 2019.

Secondly, as I mentioned earlier, we've seen a recent uptick in Canadian crude shipments and continuation of favorable spreads may provide an upside to our 2020 crude outlook. We expect our automotive revenue to be neutral, acknowledging some downward pressure on volumes. Our pricing mix and new plant volumes will have a favorable revenue impact. We are monitoring estimates indicating lower automotive exports to the US from our KCSM served [Phonetic] plants and lower auto imports into Lazaro Cardenas.

And finally, as you know, trade developments and economic conditions remain top of mind in 2020. It can be difficult to predict the developments in these areas. And our revenue estimates of course may be positively or negatively impacted by changes in this area. We are however optimistic. We just think that given continued mixed economic signals, we feel that an element of caution is prudent. I, for one, I'm happy to see that USMCA is almost behind us, and that should provide us some favorable benefits in the future.

And with that, I'll turn things over to our CFO, Mike Upchurch.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Thanks, Mike, and good morning, everyone. I'm going to start my comments on slide 18. The fourth quarter results highlighted on this slide, have been previously covered in this presentation, but I just simply want to highlight that once again, the combination of record fourth quarter revenues and strong cost controls led outstanding financial performance. 5% revenue growth and 11% growth in adjusted operating income grow 74% adjusted incremental margins.

Our adjusted operating ratio of 62.4% was 190 basis points improvement despite a negative impact to ROR of approximately 90 basis points resulting from the loss of the IEPS tax credit. Reported EPS was $1.30 while adjusted EPS of $1.82 grew 17%. I will also note that tax and other below operating income items are impacting our adjusted earnings per share this quarter. We've provided you a reconciliation on slide 25 in the appendix, but let me talk about a couple of the key components here. First equity in earnings from affiliates and other income and expense declined by $6 million or $0.04 per share primarily from a non-recurring loss that our affiliate FTVM recorded from the cancellation of the Mexico City Airport project.

Interest expense from the new notes that we issued in November drove a $0.03 year-over-year reduction to 4Q EPS. We also realized a $0.06 year-over-year benefit from a reduction to share count, as I will discuss in a moment, increasing shareholder returns is a key focus for the Company going forward.

And then finally a decrease in our fourth quarter adjusted effective tax rate to 24.9% resulted in an $0.08 benefit primarily from a $7 million tax benefit that we received as a result of the extension of the short line track maintenance credit, which was enacted in late December, was retroactively react enacted, so that we saw benefit of $3.5 million for $2018 and $3.5 million for 2019 for a total of $7 million. This credit will also be available to us in the future through 2022. Along with this credit and favorable changes to GILTI tax offset by the loss of the Mexican Fuel Excise Tax credit, we expect our adjusted effective tax rate to be approximately 28% over the next few years. And we've provided a few more details on taxes back in the appendix on Slide 32.

Turning to Slide 19, you will see that improvements we are making to our operations are driving significant and structural improvements to our P&L. As Sameh discussed, we continue to make excellent progress on our PSR initiatives and we are once again able to provide a positive update to our estimated PSR savings. In aggregate, we are now expecting annualized PSR savings by 2021 to be approximately $125 million, comprised of $58 million of realized savings in 2019, an incremental $61 million of savings in 2020 and a $6 million carry-forward impact into 2021. Covering each one of these line items briefly, comp and benefits, we expect $15 million of reductions in 2020, primarily from labor efficiencies, including changes to service design that we made during our white-boarding effort, fleet reductions and Mexican labor negotiations.

Depreciation is expected to benefit by $4 million, as a result of the reduced locomotive and railcar fleet. Fuel expense, as Sameh commented, lots of opportunity; we expect that to decline by $21 million from gains and efficiency as we focus on HPT assignment compliance, further investments in technology and cross-border fueling strategies.

In the equipment area, we expect to benefit by $17 million from improvement in car cycle times and we will continue to optimize our car portfolio to align with improved network performance. Finally, purchased services and materials and other is expected to benefit by $4 million. During the quarter, we did incur a $38.3 million impairment charge related to PSR, that is comprised of $27 million related to locomotives, $5 million related to freight cars, $5 million related to parts inventory and the remainder resulting from contract restructuring. And I might note that we would expect the fourth quarter of 2019 to be the end of our PSR impairments.

Turning to Slide 20, our adjusted operating expenses increased 2%. The largest driver of this increase was a loss of the Mexican fuel excise tax credit, which resulted in a $11 million year-over-year increase in OpEx. Without that increase, we would have seen our expenses down $2 million, despite higher FX and incentive comp. The remaining drivers in the year-over-year variance are primarily comprised of fuel and, comp and ben, which I'll cover on the next slide.

I'd also like to take this opportunity to provide just a couple of reference points on 2020 expenses. We do expect depreciation expense to increase mid-single digits, driven by a larger asset base, the full-year impact of new locomotives purchased in 2019 and the purchase of leased locomotives, which we just completed in early January, and that will be partially offset by savings from PSR impairments. And then with respect to interest expense, we did raise some money in the market in November and we would expect our interest expense to go up, approximately $20 million year-over-year.

Turning to Slide 21, comp and benefits expense increased 7%, driven by wage and benefit inflation, incentive comp, in-sourcing and FX. These increases were partially offset by a $6 million reduction, driven by lower headcount and work hours. Our lower headcount and work hours are the result of train consolidations, reducing crewstarts, hours worked, overtime recrews and deadheads, along with mechanical reductions due to a smaller fleet and some optimization of certain G&A functions. Our quarterly average headcount was down 2%, which excludes the in-sourcing of one FTE contractors.

Fuel expense declined 9%, as reductions to fuel price and improvements to fuel efficiency more than offset an increase in the consumption from higher gross ton miles and foreign exchange.

And finally, turning to Slide 22, I want to cover capital allocation highlights. Free cash flow was up 504% in 2019. We also increased our shareholder returns a 118%, driven primarily by higher share repurchases including the accelerated share repurchase program that we announced in November. KCS also announced in November a new capital allocation policy meant to help shareholders understand how the Company plans to allocate its cash generated from operations and our targeted leverage ratio going forward.

As Jeff discussed earlier in the presentation, we continue to believe that investing in our network, particularly our cross-border network is important as those investments drive returns well in excess of our cost of capital. Going forward, we expect to allocate approximately 40% to 50% of our available cash to capital projects and strategic investments that will help support that growth. We also expect to allocate 50% to 60% of our available cash to shareholder returns, primarily in the form of share repurchases and a modest dividend. We also expect to maintain our debt-to-EBITDA ratio in the low two range by prudently using our balance sheet capacity to execute our share repurchase program.

And with that, I'll turn the call back over to Pat.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay thanks. While hopefully we've shared some really good information in detail a little bit more forthcoming with guidance information than perhaps you've seen in the past, I guess my summary comment might be something like what a difference a year makes.

I looked back at our transcript from the fourth quarter call one year ago on January 18 of 2019 and we talked about, some of you will remember this, we talked about our performance for 2018, which on a number of levels wasn't horrible, but we talked in terms of a year that did not meet our own expectations, a year that certainly didn't meet our customers' and shareholders' expectations, and the need to do some things differently to get back into a position, where we could take advantage of the growth opportunities that we -- we had a high degree of confidence was there in front of us.

And I'll go back to one of the points I had on my initial slide, which is our implementation of PSR initiatives has exceeded our expectations at this point. And hopefully the message that you hear today is that there is more to come. Fahmy gave you some pretty good detail of the things we are doing, the level of detail, the level of intensity and focus that Sameh has brought to the entire organization. This is a cross-functional effort that I feel is being done in a way that involves a large number of people across functions throughout the Company, US and Mexico, and it's being done with a high level of intensity, a high level of learning that's going on, institutionalizing into the Company, and I feel is the recipe that's going to allow us to sustain this performance, further improve it in 2020 and sustain it well into the future.

Certainly, the resolution of USMCA, which Mike touched on, is a positive. We'll probably get questions about the magnitude of that and what to expect. And it's very difficult to quantify, but it's certainly is a positive. It removes a very significant cloud of uncertainty for us and there is fairly high expectations in Mexico that resolving USMCA is going to provide a boost to the economy in Mexico, which certainly would be a welcome occurrence for us.

As you know, our mantra with PSR was Service Begets Growth. We have seen a phenomenal, a very extraordinary improvement in service. And it is working out that we are winning customers back. As Sameh mentioned, a year ago, we said on a couple of earnings calls that there was more business for us to handle than we were able to handle, because our service was not up to standard. We have gotten a lot of that, maybe most of that back. We're gaining market share and we still have a high conviction in the new business opportunities that we see, particularly cross-border opportunities that we see in 2020 and beyond.

So, we feel very good about where we are, but by no means, do I want to convey that we feel like we're ready to say mission accomplished, there is more to come. And as you saw from Mike's slides, the PSR benefits will continue to grow and accelerate. And we feel that again, as for the reasons I had covered earlier, that these will be sustainable in the future beyond 2020.

With that, I will open the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Allison Landry of Credit Suisse. Please go ahead. Ms. Allison, your line is open.

Allison Landry -- Credit Suisse -- Analyst

Sorry. Thanks, good morning. Thanks. So I just wanted to start with the top line growth, mid-single digits, sounds like about half of volume, half come from yields. So is there a way to think about the yield assumption and what's underlying in terms of your expectations for core price versus mix. I guess sort of more focused on mix and you've had some positive benefit in 2019. So just curious to think through that cadence.

Michael J. Naatz -- Executive Vice President and Chief Marketing Officer

Good morning, Allison. This is Mike Naatz. I guess I'd look at it a couple of different ways. The first is, we continue to believe that we'll be able to generate inflation plus pricing, which will certainly help us from the revenue perspective. And then in terms of mix, we expect our Chemical & Petroleum business unit to continue to be our fastest growing segment. And that tends to have a higher revenue per unit. So that should also provide a benefit to us.

Allison Landry -- Credit Suisse -- Analyst

Okay. And then just turning to capex at 17% of the top line. I think you mentioned some spending on locomotive overhaul this year. Is there -- is that the potential to scale that back further? And what do you think is really the longer term sweet spots for capex without having to sacrifice growth.

Jeffrey M. Songer -- Executive Vice President and Chief Operating Officer

Hey, Allison, this is Jeff. Yeah, I think we're looking at this. And as we mentioned, operating with significant -- significantly fewer locomotives. We are shifting a bit on reliability. And some of that capex is probably a little bit of an increased level of spend and focusing on the reliability of our existing fleet, which supports a continued velocity and service improvements we'll see. So we're going to continue to do that.

There is opportunity to bring that in probably a little bit lower than 17, although we continue to look at some couple of business opportunities. I didn't mentioned all the projects we're looking at this year. And then the long-term guidance as Pat provided, the 17 range just from a longer-term, at least from our -- the outlook that we provided here I think -- I think we feel pretty good with that, which is a pretty significant reduction from where we've been historically as you know.

Operator

Our next question today comes from Chris Wetherbee of Citi. Please go ahead.

Chris Wetherbee -- Citigroup -- Analyst

Hey, thanks, good morning. Over the last year or so, you guys have given us sort of a nice walk to what we could potentially see in terms of operating ratio improvement relative to the PSR progress or initiatives that you've undertaken. You've now had a few quarters to kind of really dig in, and Sameh, you've been very instrumental and had helped to explain that quite well.

I guess when you think about sort of the bigger picture, how would you rank the Company relative to maybe some of the peers? Is there the potential to be more competitive with sort of mid-50s ORs over the longer run outside of maybe the next year or two? Or should we just be thinking about this is sort of a sub-60 type of opportunity that may be a little bit smaller in nature. Just want to get a sense of maybe how you guys are thinking about the big picture opportunity to PSR over a multi-year period?

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Yeah, Chris. I'll take a stab at that. Let's take it a year or two at a time. I don't know that we're in a position to declare victory on an operating ratio based on the guidance that we have for -- this year and next year. We just continue to look for every opportunity we can to get better and more efficient and focus on cost and asset utilization. And then as we've talked in the past, the volume growth, the leverage in this business is phenomenal. So we get back into a situation where we start to see some volume growth. And we -- we're continuing to improve the way we run and efficiency of the operation of -- we certainly could see further improvement beyond the guidance that we provided today.

Chris Wetherbee -- Citigroup -- Analyst

Okay. All right, that's helpful. And then maybe just a detailed point, as we think about 2020, can you give us a sense of maybe how headcount could trend? Obviously, it was down sequentially as we moved into the fourth quarter. It sounds like there is some incremental initiatives happening, particularly in Mexico, but maybe beginning in the US that could see maybe that reduced further. Just any cadence that we can think about for 2020 would be helpful.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

I think we'll see opportunities at some of the things that Sameh talked about, particularly in Mexico as we -- we get into phase 2 of the TSP, the whiteboarding exercise. We start to realize the benefits that, that that's going to produce. And then it will really depend on our volume performance. I mean that's -- I know that when you look at some of the headcount totals for us compared to the other, particularly other recent PSR railroads, there is a gap, but you also look at the volumes. We have not had the -- the drop-off in volumes that some of the other railroads have had. And so we are on our toes. And we will -- we will make adjustments based on the outlook, but we don't want to short heat ourselves. Sameh has some color.

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Yeah. I mean, if I may add, like Pat said, the revenue is growing. The volume is actually are looking good too, in which case -- in which case, while not in the same situation as other PSR implementations, but also we are not looking at -- we're looking at the money at the end of the day, not necessarily the headcounts. And you know when you look at crews as an example, if you don't call let me don't pay them. Okay. So we have been doing a lot of that already in 2019. And we're going to do a lot more of that actually in 2020. Now if we make a breakthrough agreement with labor, then not only we don't call them, then we can just get in net reduction, like, I talked about some pools, crew pools, crew basis where we don't need people, period.

Now we can reduce the headcount, but in the interim, we actually don't pay -- don't pay the money, except for some benefits. So that's -- that's something that to think about the brakeman issue that we talked about often. We have four men crews, we don't really need the extra two guys. Okay. So that one, if we do a labor agreement that would be significant, that would be hundreds of people. There are areas, like I mentioned in engineering and the maintenance of way where we are going to take out contractors.

Now when I take out contractors, it's not going to show as a staff reduction. At the same time, it actually will take out a lot of money, because I will be using the maintenance people in engineering in a far more productive and effective way to fill in the production gangs instead of the contractors. So we've also did some insourcing by the way, last year, significant insourcing, like I said labor in locomotive shops. Now that increases the headcount, but it -- it's really saved us like one move alone, saved us $4 million a year. So we -- at the end of the day, we are not hung up on headcounts, we are focused on the money. And as a rule, we don't want any area to increase in cost from 2019 to 2020.

When we reviewed the budgets, we are very strict on that. Everything has to be equal or lower. In this way, when the revenue goes up by whatever, 5% to whatever the number is, then it's all -- it all goes to the bottom line. So I hope I answered -- I gave a bit more color to this.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Hey, Chris. Mike Upchurch. I'm interested [Phonetic], any real quick comment about your operating ratio. If you look at 2018 we're 64.3%, finished at 63.2%, 110 basis point improvement. But when you consider the IEPS headwind that we had in the year, you're up 230 basis points improvement in operating ratio. And that's in a down 1% volume environment. Just think when we get volume back and revenue grows better than it did in the fourth quarter, there is a lot of leverage, and we had a incremental margin of almost 75%.

Operator

Our next question today comes from Tom Wadewitz of UBS. Please go ahead.

Tom Wadewitz -- UBS -- Analyst

Yes, good morning. Sameh or Jeff, I wanted to -- I think you talked a little bit about union impact and there is opportunity for headcount or costs reduction [Phonetic] in Mexico. Can you just give a little more perspective on how much of a constraint the current union agreement is or if you've made any changes that give you greater flexibility, I think all of you referred to that area, you're taking people out north of Monterrey. Is there any kind of union constraint there or are you pretty much free to make the changes as you're able to?

Jeffrey M. Songer -- Executive Vice President and Chief Operating Officer

Yeah, this is Jeff. As Sameh mentioned, again our primary focus is cost and I think we've done a good job with. As we're reducing train starts and those things, you're seeing the cost come out. Some of the larger opportunities we see with headcount are somewhat union and labor dependent in Mexico, and most of this talk is centered around Mexico. We continue to work on these things. We have not yet achieved the large scale work rule reduction that we continue to work on, such as eliminating third and fourth brakeman on a lot of these trains. However, I would point we're not wholly dependent on the union. Our engineering forces in Mexico for 2019, we actually were able to reduce that by 5%, solely through attrition. And so, we're continuing to work on those things. We're continuing to look at attrition-based reductions, contractor-based reductions as Sameh said and continuing to work with the union on larger deals. But also, I would classify [Indecipherable] such as independent crew change locations, if we can eliminate one, you're going to reduce the amount of crews needed to run. For example, between Sanchez and Benjamin Mendez by almost 50%.

So, we think we're going to continue to get some quicker or smaller wins with the union, while continuing to work on the larger work rule opportunities that we have.

Tom Wadewitz -- UBS -- Analyst

Okay. So, it sounds like the right way to understand it also is that if you can't reduce the headcount, you just pay less, because you don't -- people have fewer trips. So, it's not you could get additional savings, a three- or four-person crew is going lower, but it doesn't sound like you're constrained in terms of some of the other things you're doing. Is that a fair way to understand it?

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Like Jeff said, a lot of what we are doing now is actually assuming that even if we don't make a breakthrough, even if we don't make one agreement, what can we do on our own, OK. And the example he gave, a train with start. Instead of adding locomotives in Leon and wasting time and changing crews, and all that, which is just north of Monterrey, to go all the way South to a place called Benjamin Mendez to over the grades. While we're going to run these locomotives from Sanchez in North, OK and DP, those distributed power, and this way, we are not going to stop. And we're not going to add locomotives, and we're not going to call crews and we're not going to pay crews. So, there are things that we can do on our own and we started doing them. And we are reducing more and more our reliance on that base.

Now at the same time, we spent three hours yesterday trying to structure an agreement with the union and with detail, like how can we move these people maybe to Benjamin Mendez and how -- we don't want to taxi them and stuff like that, making arrangements win-win, if you like, because that's the preferred way obviously. And we feel good about that, like we feel that the union is really wanting also to work with us. So, hopefully we'll also make agreements with the union.

Operator

And our next question today comes from Justin Long at Stephens. Please go ahead.

Justin Long -- Stephens -- Analyst

Thanks, and good morning.

So, last year, you provided the PSR savings as you began implementation. And the estimates just kept moving higher throughout the year as you were working through the financial impact. At the same time, you were making these operational changes. Are we -- to the point now where, you're far enough along in the process that you feel pretty good that this $125 million run rate is an accurate reflection of the total PSR opportunity? Or are there still incremental initiatives operationally that are going in 2020 and 2021 that aren't getting factored into that estimate, that could drive upside?

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Yeah, Justin, this is Mike. Good question and you're right. We just continued throughout last year to find more and more opportunities. And I would expect that we'll continue to be able to find new opportunities, as we continue down this path. We feel very good about the $125 million. And at this point in time, that's where we think we're going to end up. But certainly, there is not going to be a lack of trying here to do a lot better than that.

Justin Long -- Stephens -- Analyst

Okay.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

I might just say, it's a snapshot of where we feel we're at, at this point in time. But one of the things that -- and you picked up some of this just with some of the examples that Sameh gave, we're just focused on everything we do. And I don't think we'll ever say that we're finished with this. We we'll just kind of keep, as Sameh likes to say, peeling the onion, and when we knock some of these things down and put the money in the bank, we'll continue to look at them and just make this over the longer period of time, sort of a continuous improvement exercise.

Justin Long -- Stephens -- Analyst

Okay, that makes sense. And secondly, I wanted to ask about the volume outlook. So you gave the guidance for mid-single-digit growth this year, but is there any color you can provide on the quarterly cadence of that growth? Are you expecting mid-single -- excuse me, low-single-digit growth and kind of each quarter this year. And as you answer that, would love to get your take on how truckload conversions are progressing? And if that's -- something that's factored into that guidance as well.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Well, I think that we're likely to see some continued softness here certainly -- things with the -- my expectation is, things would be more favorable in the second portion of the year. With respect to your truckload question, we do see plenty of capacity out there still. We do see that rates continue to be depressed or suppressed on that front. And so that makes it a little more challenging for us to do conversions. However, I did mention earlier that I think that pricing has hit bottom, and as that recovers, then we expect to see things moving back to the rail or being able to move share to the railroad.

Operator

Our next question today comes from Scott Group of Wolfe Research. Please go ahead.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning, guys. So I just want to first clarify just a couple of things on the guidance. Pat, in your opening comments, you said that, you thought revenue growth was better, going to be better in 2020 than 2019. And then Mike, I know you said there were some one-time things in other income, other equity. Maybe if you can just give us some guidance on how you expect those to be in 2020?

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay. I can take the guidance one. You know, the -- below the line items that we incurred in the fourth quarter I went through each one of those, but equity in earnings, we took a $0.04 hit in the quarter that was predominantly the loss associated with the Mexico Airport project cancellation of one of our affiliates. We believe that we are done with that. And we should have favorable comps going forward. So we're not going to provide a specific number for you there, because we have three or four entities that roll into that line item. So it gets a little bit complex, but I don't think you should see the pressure in that line item that you did in 2019.

We also had $0.03 higher interest expense in the fourth quarter as a result of the borrowing that we did to buyback shares. That's a net accretive transaction for us. So you have to consider the share count reduction that we're getting there. But I did also comment that we would expect to see a $20 million increase in interest expense in 2020. I think those cover the two primary below the line items.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Scott, I guess -- maybe I misspoke a little bit, but just, when I look at revenue and volume outlook for 2020, in general, we feel that 2020 is going to be stronger than 2019, but I wasn't intending to give specific guidance relative to what you see on that chart for our previous guidance provided in 2019. So I'll thank you for allowing me to clear that up.

Operator

And our next question today comes from Amit Malhotra of Deutsche Bank. Please go ahead.

Amit Malhotra -- Deutsche Bank -- Analyst

Thanks. Congrats on all the success in 2019. Mike, I just wanted to follow up on the commentary around incremental margins that you mentioned earlier. The implied, if I just look at the revenue and OR expectations for 2020, the implied incremental margin is closer to 100%. That's obviously impressive. It makes sense. But if we back out the $61 million of productivity that you called out, the organic incremental, if I can -- if I can say it that way is around, it's pretty much exactly 50%.

So, is that the right way to think about the structural kind of structural leverage opportunity at the Company, once you guys are kind of at this 125% run rate or even greater. I'm just trying to understand, like what's the right run rate beyond all the changes that you're making?

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Yeah, no, good question. Incremental margins, obviously were dependent, not only on cost reductions, but revenue growth where we get a 70% or so pull-through on the incremental volume and then pricing. So we kind of stayed away from giving any kind of specific incremental margin going forward. But my comment earlier that we saw a pretty nice OR improvement, set aside the IEPS for a second, 230 basis points and a 1% down volume here. If you start seeing low-single-digit growth, we should be able to certainly achieve that and perhaps a bit better.

Operator

Our next question today comes from Allison Poliniak of Wells Fargo. Please go ahead.

Allison Poliniak -- Wells Fargo -- Analyst

Hi, guys. Good morning. So obviously, well down the path of these PSR opportunities, I mean as you kind of look over sort of the past year, and going forward as you peel back the onion as you spoke to before. Where do you see sort of the greatest benefit opportunity or surprised recently?

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Well, I would say that the -- the largest opportunity is in crews, crew management. And it's not just the crew pools and, but everything I see it, it was crews, like taxis, something we call arbitraries in Mexico, like all these bonuses that we pay for extra hours and over time and length of train and stuff like that. So crew is a big opportunity, fuel is a big opportunity. We spent $300 million on fuel. And like I said, you know, we are at 1.31, in 2019, we are aiming at 1.24 gallons per KGTM in 2020. But that is still -- that is still a lot of opportunity.

And we are watching that now daily, train by train, the same way as we were watching delays, we're watching the HPT, the horsepower on trains. And we also, when I said we have signed [Phonetic] -- we made some management changes, we have put one of our best most promising young people, Nick Klein [Phonetic], we put him in-charge of locomotive management and crews. And he is delivering big time already. And he is watching that horsepower or ton quite a bit. We also move fuel under operation, which is another move we made. So we did some management and structure changes. So fuel is important. Crews are important. And cars are still -- we are still heavy on cars.

And you look at our car miles per day, still a high number, especially, I mean a low number, especially in Mexico. We went from 70 miles day to 100 miles per day, which is a significant improvement. 100 miles per day is very, very inadequate and there is room to improve. We have some car leases that we're going to return, some significant ones in 2020 and that was part of the PSR savings that Mike talked about.

So to summarize the answer your question, crews, fuel and cars, I would say, these are still big opportunities. We still have opportunities in locomotives. We have big opportunities in engineering, because we have not touched that last year that's the maintenance of way; big, big opportunities in engineering. And actually brought one of the guys who are on my team, a retired gentlemen, who was chief track at one of the railroads, I was associated with for a long time. He was on my team for 10 years. And he is now helping us here. And actually this week is on a gang, watching -- the work equipment on the productivity of the gang, the engineering gang. And there is huge potential there too.

Operator

So our next question today comes from Ken Hoexter of Bank of America. Please go ahead.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Good morning. Mike or Pat, maybe just some more thoughts on Mexico growth. You mentioned some slowing industrial economy out there, I guess, in contrast to the low-single-digit volume growth and MST revenue growth. Can you talk about energy reform and the decelerating cross-border revenue growth. And then on the trade agreement, is there anything negative on auto production, we should expect out of USMCA?

Patrick J. Ottensmeyer -- President and Chief Executive Officer

So I guess looking at the second part of your question from the automotive perspective, no, we're not necessarily seeing anything negative coming out of USMCA that would affect the automotive segment. With respect to the first portion of your question, we've been saying that refined products growth will slow over time, just because of the comps get tougher year-over-year. But the Mexico economy has been a little bit soft, to the extent that, that has implications on fuel consumption. That's really what we're monitoring.

Operator

Our next question today comes from Brian Ossenbeck of JPMorgan. Please go ahead.

Brian Ossenbeck -- JPMorgan -- Analyst

Hey, good morning. Thanks for taking the question. Sameh, one more for you on fuel. You look at that being the biggest expense improvement bucket here, this year and next. Do you think that could be the same thing when you look at getting to the sub-60 OR in 2021. I just wanted to hear some of your thoughts versus the peers and the benchmarking you're doing there. What is structural versus what do you think is just getting more focus from the management side that you mentioned or maybe even improving some of the equipment and efficiency there.

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Very good question. From a structural point of view, the grades in Mexico are extremely steep, very, very steep. And that obviously is not good for fuel efficiency. So, even though I use 1.0 as kind of a benchmark, there is a limit as to how far we can go because of that, the topography if you like, of Mexico. So that is a structural limitation if you like.

I never accounted exactly how low we can go in that gallons per KGTM. All I can say is that there is definitely room to go beyond the 1.24, which is a target for 2020. Some of the stuff we'll do is, like that -- I talked a lot about HPT, the horsepower per ton. But there are also technologies, OK, that are partially deployed on KCS. They were deployed extensively on the railroad. I was associated with, before coming here, and my second railroad, if you like. And we have -- we have those, that software and hardware deployed on many of our locomotives will continue deploying, you know like Trip Optimizer, which does cruise control and avoids you know the acceleration and braking, which is really bad for fuel. But there is also something really important on top of Trip Optimizer which is called Smart HPT, which we used a lot in what I wasn't deployed it aggressively, actually week by week on locomotives, what I was. And we are attempting the same thing here, that not only will calibrate how many locomotives are on a train. And you know if you shut down one of the three locomotives, because you have empties heading back as an example.

But actually it will -- it will actually allow you to even fluctuate the horsepower based on the traffic you pick up, so the tonnage increases or we set out traffic -- the tonnage decreases. So during a trip, it will actually allow you to go up and down. And I -- that kind of technology, also is going to help us a lot. So there are lot of things happening. Obviously, the service design helps a lot. These long trains mix with manifest and intermodal and automotive, make it also very, very efficient for fuel efficiency. So I can't answer your question with precision as to exactly what is my theoretical best is it -- is it 1.1? Is it 1.07? I don't know the exact number, but all I can say is that, it should be better than the 1.24 which we are aiming for this year, which is quite an improvement compared to the 1.31.

Operator

And our next question today comes from Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski -- Barclays -- Analyst

Okay. Good morning, everyone. So can you guys expand a little bit more in the new capital allocation policy, because I feel that could be pretty significant looking forward. And maybe just in the context of historically, you guys have call out maybe incremental volume opportunity that the industry didn't see, so you guys would spend a little bit more. Does that mean that maybe growth could be able to bit less or is this just more of being more efficient with what you have still leveraging those opportunities looking forward?

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Well, Brandon, this is Mike. I don't know that there's much more that we would expand on, on the capital allocation policy. I know there might be a desire for us to give you exactly what the three-year cash flow numbers look like, but I assume your models allow you to do some projections there given the guidance that we've given around revenue this year and longer term OR and EPS guidance. But I think the point that you should take away is that our focus has shifted from more capex relative to shareholder distributions to more shareholder distributions than capex and that should be viewed as favorable in light of the kind of increase that you saw in free cash flow here. We'll probably just stick with the guidance that we've given here. And the other question, if I understand the other question -- the other part of your question, I wouldn't read anything into our capital allocation targets or strategy that would suggest we're de-emphasizing core capex that will drive growth.

We think the efficiencies that we are realizing and we'll continue to improve with PSR in terms of asset, track capacity, yard capacity, we factored that into our capex targets, but if we have extraordinary growth opportunities in the future that require investment, we are perfectly happy and willing to make those invest.

Operator

And our next question today comes from Jordan Alliger of Goldman Sachs. Please go ahead.

Jordan Alliger -- Goldman Sachs -- Analyst

Yeah, hi, good morning. Just a quick question, your PSR initiatives, they're obviously going very well. I'm just -- sort of curious, are there any areas of the PSR rollout that may be more of a challenge than you thought? And then are all phases, not the dollar amount, but the actual phases of the rollout generally on track from a timing standpoint. I think if I remember reading, you might be up to phase 3 or something in January. But anyway, just curious, your thoughts. Thanks.

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Alli [Phonetic], the whiteboarding has gone very, very well. You know there is always adjustments obviously, like we had a train, which is a long haul for us from Lazaro in Mexico on the Pacific all the way to Laredo in US, and it had a lot of traffic on it. We're making a lot of stops in many yards and initially were a bit concerned about it, but that's part of watching that we do every morning. And we noticed where the delays are and there have been some tuning some adjustments, some stuff from the look at San Luis Potosi. And so, it's -- it never really finishes the exercise.

I mean you do the big portion of it and then you keep tuning it and tuning it, but the whiteboarding has been going extremely well and we see it. We see it in the velocity of the network in Mexico, we would have drinked in February or January, 15 miles per hour have never dreamed in February or March, like I said, the network was running at 59 mph. So, the results are good, so the whitebording is going well, the car hire and reducing the car fleet is going well. The fuel efficiency is OK. The service and revenue, and Pat always mentioned that, and keep that always in mind that our model is adjusted for the reality of KCS. And that means Mexico, it means some tight yards means potential for good revenue that has been going very well. To the area that is challenging very frankly is the labor agreements on crews and like I said, we have -- we have our way of getting the most of the savings, even if we don't get labor agreements, we are just going to adjust. So the current rules, if we have to and maximize.

Operator

And today's final question comes from Bascome Majors of Susquehanna Financial Group. Please go ahead.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Thanks and good morning, guys. You, Mike, if you look back 5 to 10 years ago, you were dropping 8% to 10% of revenues to free cash flow. If I look at your guidance today, it looks like that's probably going to be closer to 20% going forward based on your expectations. So just dramatic improvement there. I know it's kind of been addressed, but I was hoping you could expand on this a little more. I mean part of that improvement in the coming years is that the rolling stock holiday, both locomotives and railcars. Can you talk about where you are based on your growth trends looking at up to three years, perhaps further and where do you think you might start to get tight for speed on railcars or locomotives. Thanks.

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

That's a great question. We don't have any plans right now for incremental locomotive purchases. I'd love to see us get out of this industrial recession that I think we've seen here in the US and start growing volumes again, then we'll begin to think about that. We've part -- net, I think 169 locomotives all of that's old technology. I don't know that there would be a lot of retirements that would be immediate, in our next couple of years, but I'd probably say locomotives may be the place that we would look to before freight cars. But it's hard to predict what's going to happen over the next three years.

Operator

Thank you. This concludes the question-and-answer session. I would like to turn the conference back over to Pat Ottensmeyer for any closing remarks.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay, thank you. Thanks everyone for joining us. Just a couple of things that, as you may pick up on -- on that final question, and something that Sameh said, just a couple of minutes ago about, the way we are approaching this. And I would say that we have been intentionally going about some of these changes, whether it's asset impairments, locomotives, freight cars, and I think many of you have probably heard the example of our green fleet where we saw significant, just extraordinary improvement in cycle times, freed up a lot of cars, and we made a decision to hold on to those cars rather than scrap them as quickly as might have been otherwise possible. Because we felt that there was an opportunity for us to grow that business and to gain market share. And lo and behold, that did happen.

And it takes a while for those customers, particularly customers that are under contracts for some period of time to come back. But we're very -- very conscious, very careful as we go about these changes to make sure that it doesn't have the effect of limiting our growth down the road. And as I said a few minutes ago, yes, our capex targets and capex numbers are coming down. But please don't read that as, in anyway being unwilling or unable to ramp up and make capital investments, core capex investments, if there are growth opportunities that we think are really attractive to us.

So I -- again I just reiterate where we started. We feel very, very good about where we are, and believe that there is more to come. We also continue to be confident and optimistic about some of the growth opportunities, particularly cross-border growth opportunities are in front of us. The removal of the dark cloud of uncertainty with USMCA, I think will be helpful over the long term certainly. The way we are going about our PSR transformation with Sameh working broadly, cross-functional, cross-border with a very large number of people within the company. There's a lot of excitement, lot of enthusiasm as we go about this. And I think there are very, very high expectations that there are more good results ahead of us. So thanks for your time and attention here. Final comment, Go Chiefs, the new Americas team, 2 o'clock on Sunday, and we'll talk to you in about three months. Thank you, everyone.

Operator

[Operator Closing Remarks]

Duration: 77 minutes

Call participants:

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Jeffrey M. Songer -- Executive Vice President and Chief Operating Officer

Sameh Fahmy -- Executive Vice President of Precision Scheduled Railroading

Michael J. Naatz -- Executive Vice President and Chief Marketing Officer

Michael W. Upchurch -- Executive Vice President & Chief Financial Officer

Allison Landry -- Credit Suisse -- Analyst

Chris Wetherbee -- Citigroup -- Analyst

Tom Wadewitz -- UBS -- Analyst

Justin Long -- Stephens -- Analyst

Scott Group -- Wolfe Research -- Analyst

Amit Malhotra -- Deutsche Bank -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

Brandon Oglenski -- Barclays -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Bascome Majors -- Susquehanna Financial Group -- Analyst

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