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Kansas City Southern (NYSE:KSU)
Q2 2020 Earnings Call
Jul 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 Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce you to Ashley Thorne, Vice President, Investor Relations for Kansas City Southern.

Ashley Thorne -- Vice President of Investor Relations

Thank you, Andrew. Good morning and thank you for joining Kansas City Southern's second quarter 2020 earnings call.

Before we begin, I want to remind you that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act as amended. Readers can usually identify these forward-looking statements by the use of such words as may, will, should, likely, plans, projects, expects, anticipates, believes or similar words. Actual results could materially differ from those anticipated by such forward-looking statements as a number of factors or combination of factors, including but not limited to, the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2019, and in other reports filed by us with the SEC, including our quarterly report for the quarter ended June 30, 2020. Forward-looking statements reflect the information only as of the date on which they are made. KCS does not undertake any obligation to update any forward-looking statements to reflect future events, developments or other information.

In addition to disclosing financial results in according with US GAAP, the accompanying earnings release and presentation contains non-GAAP financial measures. These non-GAAP measures should be viewed as a supplement to and not a substitute for our US GAAP measures of performance and liquidity and the financial results calculated in accordance with US GAAP and reconciliations from these results should be carefully evaluated. All reconciliations to the most directly comparable financial measures calculated and presented in accordance with US GAAP can be found on our website.

And with that, it is now my pleasure to introduce Kansas City Southern's President and CEO, Pat Ottensmeyer.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay. Thank you, Ashley, and good morning, everyone.

I will make some brief comments here before I turn it over to my colleagues. On slide 4, the folks that we have on the call today are, for the most part, the usual crowd that you have come to see over the last several quarters, with the exception of Oscar Del Cueto. And Oscar -- we're introducing Oscar this quarter ahead of the transition of Jose Zozaya. I'll talk more about that at the end of the prepared comments. But Oscar has been working side-by-side with Jose for the last year and a half, and we feel that we are in a position for a very smooth transition in the leadership of our Mexico business. So happy to introduce Oscar, and again, I'll say a little bit more about that at the end.

Moving on to slide 5. Second quarter overview. We had a tough quarter. Revenue decreased 23%. 21% drop in volumes. Operating ratio -- really look at the adjusted operating ratio of 65.2%, 150 basis point worse than last year. Second quarter diluted earnings per share, again, adjusted, of $1.15 which is a 30% decrease from last year. So all of that sounds pretty horrible, but as you'll see, over the course of the next few minutes, there was quite a bit of good news and some very positive developments during the quarter, particularly on the cost side. So, certainly, reasons to be optimistic for the period ahead.

We also made organizational changes. July 1, you saw a press release that we announced with some organizational changes that were really intended to streamline some of the PSR activities and focus internally and really maintain our focus and sustain the significant savings and improvement that we have demonstrated over the last year and a half. And without stealing Mike Upchurch's thunder or some of the comments you'll hear from Sameh later on, you'll see later that we are significantly increasing our estimates for PSR related savings for 2020 and beyond. So a lot of good news, a lot of hard work.

We responded extremely well on the cost side to just -- I don't know what the right verb is to describe, but precipitous drop in volumes that we saw in April and early May. And then we also responded extremely well to an unprecedented 39% volume recovery that began in late May and throughout the month of June. I don't think anyone on this call has ever seen a 90-day period where business levels dropped so quickly, stayed at a stable level for a relatively short period of time and then recovered and responded so quickly thereafter. So I really feel like our team was on their toes, and we responded extremely well on the downside and on the recovery side as well.

Looking ahead, we're not going to change our attitude and practice here regarding guidance. So it's fairly thin in terms of the guidance that we're going to provide. We will stick to our 2020 capital expenditure guidance of $425 million and then still feel very confident in our ability to hit our cash flow target -- free cash flow target for the year of $500 million.

So with that, I will open the call for Jeff Songer to make some comments about our operating performance.

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

Okay. Thank you, Pat, and good morning.

I'll start my comments today on slide 7 with a quick update on our COVID-19 status. As mentioned last quarter, we have an extensive business continuity program in place and have been able to manage the pandemic today with relatively minor impacts to personnel and resources. Safety is our number one priority, and we continue to ensure the safety of our employees, aligning with CDC guidance and implementing controls around social distancing, use of protective equipment and quarantine protocols. Our workforce remain stable, and we continue to monitor and adjust as required.

Moving to key operating metrics for the quarter. Velocity of 17.1 miles per hour improved 37% year-over-year and 8% sequentially. Dwell of 20.3 hours improved 4% year-over-year and was 3% worse sequentially. Rapid changes in volume during the quarter have provided unique opportunities for us to continue our operating improvement initiatives. The first half of the quarter focused on rightsizing resources and modifying train starts to adjust for the decline in volume, while June and now July have focused on rapid sequential gains. We continue to work closely with customers to understand their business outlooks to ensure our service offering is aligned with the expected volumes, while at the same time formalizing some of the train start changes we have made to retain the service and cost benefits we have seen through the quarter.

Turning to slide 8. We saw across-the-board improvement in our PSR metrics over the prior year, and we've already exceeded our annual goals in some categories. Noting the current column on the right, I'll quickly discuss July performance as volumes have improved sequentially.

We have seen some impact to key metrics of velocity, dwell and car miles per day in July, while train length and fuel efficiency continue to show sequential improvement. Sequential velocity is a function of accelerated improvement during the quarter related in part to reduced volumes. While current July velocity trails our Q2 average, it is 22% better than Q2 2019, and we anticipate this to stabilize and continue a steady state improvement path.

Current month dwell is a function of adjusting train starts and optimizing our TSP. Of note, train length continues to outperform our initial 2020 goal, and we continue to see this as a great opportunity moving forward. Sameh will provide additional details on these initiatives. While Q2 presented many new challenges, we are very pleased that our operating model has allowed us to remain flexible and ensure strong service levels while maintaining solid cost control during a time of unprecedented shifts in volume.

I will now turn the presentation over to Sameh.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Thank you, Jeff. Good morning.

We did do a lot of work in Q2. We ran very, very fast and worked very hard, the whole team. And we adjusted to the volume decreases extremely fast and made significant progress on PSR that normally would have taken a year. I will give you the bottom line and then I will explain how we got there.

Essentially, we know now that we can meet the volumes pre COVID when they completely come back, and they are getting very close to coming back. Right now, we're only 6% below February levels, and we know that when we get to the full volumes, we'll be able to do it with 20% less train starts, 20% less crew starts, 20% less locomotives, 20% higher train lengths and 9% better fuel efficiency than we did in February. So this is the bottom line, and I'll explain how we got there.

As I said, we reacted fast, and Jeff also mentioned that. Beginning around mid-March, we started consolidating trains. So the strategy has been to take to mix the traffic, whether it's intermodal, automotive, manifest, grain trains, refined products, it doesn't matter. We mix them on trains and we take all the originations from South Mexico, as an example. So from Mexico City, from Queretaro, which are in the southeast; Toluca, which is in the south; Lazaro and Silao in the west. And you take all that, it goes through the Escobedo Yard, it goes through SLP, San Luis Potosi, goes through Vanegas.

And we do a lot of consolidations of these trains, and we consolidate also in our route to the Saltillo area, which is a very large manufacturing area in Mexico because all the traffic is heading north anyway. And then when we get to Sanchez, which is a large yard that we have, we split the traffic to go to various destinations in US. The opposite is true when we have traffic coming from the US. We consolidate a lot of trains in Shreveport, in Louisiana. It goes through Sanchez, and then in Sanchez, which again is our large yard in Mexico, we split it to the various destinations in Mexico, San Luis Potosi, Queretaro, in the opposite direction, OK?

Now, the interesting thing that we did in the last three months is that a lot of these consolidations that are happening in Mexico in small yards like Vanegas, San Luis Potosi, Escobedo which are not large yards, have been done with great precision. What we did is that we built tight windows for trains to arrive within that window, make the connections fast so that we don't affect the dwell time and then get out of the yard before the next trains come in. And that has been executed with a lot of discipline, and that's precision scheduling; I mean, that's PSR, and it has been very successful.

And we did that with the intensity every morning on the morning calls and without sacrificing velocity and without sacrificing dwell. So velocity has been up 37% year-over-year; dwell is up 4% in spite of the train consolidation and the extra waiting of guards to connect. So that has been achieved, and we have a very keen eye on customer service. So we started building trip plan compliance metrics for the first time a couple of months ago and they are coming in very handy now because we are monitoring them constantly and particularly for time-sensitive traffic. So we are at about 70% trip plan compliance which is equal or better than the pre COVID time. So, in spite of the train lengths, which has increased significantly and the train consolidations, and now I'll get to the numbers here on slide 10, the train starts have come down by about 40% during the trough. Now they are down 25%, and the traffic is only down by 6%.

And that's why I was saying earlier that we believe that will maintain a 20% reduction in train starts when that volume becomes equal to pre COVID levels, and the train lengths which you see on the right side of slide 10, is up 21%. When you're saying that in phase one our PSR were up only about 2% or 3%. This was an area that we did not attack very hard in 2019. We attacked velocity, we attacked service, we attacked growth. Now we're complementing all that with train lengths, which is significantly getting better.

When you reduce train starts -- now we go to slide 11 -- well, by definition, you reduce crew starts because you do a couple of crew starts, maybe three or four, along trip for a train that you started. So you see the same thing. We went down from like 300 crew starts a day, about 150 and 150 between US and Mexico, now we are at -- we went down to like 90 and 90 and now at about 110 and 110, and we believe that we will not grow higher than 240, which, again, is maintaining the 20% improvement even when the volumes come back. And we monitor that every morning, and we watch it and we don't allow that to get any closer than the 120.

The locomotives have come down significantly. The locomotives -- if you recall, when we started PSR, they were at 1,046. Before the COVID, we were at about 864; went down actually to 670 at the trough around April-May. Now we're up to about 745, which again is like more than 100 locomotives less than the pre COVID. It's 20% improvement in locomotives. And again, the carloads are down by only 6% at this point.

Fuel efficiency -- when you have long trains, heavy rains, the fuel efficiency is beautiful, OK? And we are getting 9% improvement. We are still a long way from where we can be. We are at 1.21, where I was before, and the two railroads that I have been associated with before, we're running at about 1.0, maybe even 0.98. So we still have room to grow there.

The cars online are important, and we always look at that and that's a function of the velocity of the network, and the foreign cars online have dropped by 12%, and that is really important because that affects the car hire expense that we pay to TTX and to other railroads. And we are keeping an eye on that. Plus, by the way, we've returned about 750 cars that were on lease. So that reduces the expense.

My last slide. All these things translate into money at the end of the day. And when you look at the transportation operating expense, it went down by about 27%. The crews, the active crew count in the US went down from 1,346 to 1,050. And again, we are only 6% below the volumes that we had in February. The mechanical costs went down by 29%. The mechanical staffing is down 14% from what it was June last year. Engineering also chipped in with about 9% improvement. A lot of work in optimizing the maintenance -- the maintenance gangs and using whatever time they had to displace contractors and that -- we are saving a lot of money there. So overall, the significant improvements, and Mike Upchurch is going to translate that into really bottom line money.

And my last point here is that we are going to build on this. So not only the savings that we did are sticking, and we know it's sticking because that 35% surge that we had in the last months is being absorbed without sacrificing the cost-cutting that we did, but over and above that, we are going to pursue that and build on it. Example, we're putting money in siding extensions because we know that these train lengths -- this train length strategy -- you have a lot less trains, so you have less congestion, but when they need, they need that specific locations where you have that train lengths.

So we are extending siding in spite of reducing the capital envelope of the Company. We're focused in the money we're spending and now we are not only extending to 10,000 feet, we're extending to 12,000 feet in prediction of more train length improvement because the other railroads are running at 10,000. So yes, we went from 5,800 to 7,200 we can be very proud of that, but we want to pursue that and get to where we want to be.

The Saltillo area is a very heavy area for KCS. We got about 12 trains in each direction every day in a difference of 50 kilometers in the mountains with grades and curves. It's a very slow area. This is an area where we are thinking about double-tracking in the future. So this is something that can really significantly improve things.

And my last point: the bridge, and we are very focused on the bridge -- the international bridge between the US and Mexico where all trains go except for some Matamoros but that's a majority of our trains, and we have static windows of six hours each. We want to get out of that, make it dynamic, and we found a solution, and we're working on it.

Bottom line: we want to be best-in-class. We are working very hard to do that, and we believe that we'll get there.

And on that note, I will turn it to Mike Naatz, Executive VP, Commercial. Mike?

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

Hey, thank you, Sameh. Good morning, everybody.

I'll begin my comments on page 14. Well, as you all know, it's a very interesting quarter. Beginning in the second half of March and accelerating through April, COVID-19 resulted in a pretty profound decrease in demand and production for many products. Volumes did finally level off in May as communities and businesses began to reopen. Since I believe most of you follow the AAR data and because we've already spent a good amount of time talking about business conditions and volumes throughout the quarter, I'll begin with a brief update on our Q2 performance.

As you heard Pat say, overall revenue was down 23% year-over-year on a 21% reduction in volume. Looking at the chart, you can see our quarter-to-date revenue declines generally outpaced volume declines in each of our business segments. To help explain that, look in the upper right-hand portion of the slide, and you'll see that lower fuel prices and FX impacts were the primary drivers behind this phenomenon. Of course, as you know, we pay less for fuel which helped to offset the decline in revenues.

And similarly, the FX impact on revenue was largely offset by lower peso-based operating costs. If we were to hold FX and fuel price constant, revenues would have been down about 19% instead of the 23%. Overall, our core pricing held up very well in a challenging environment. Our contract pricing improved, albeit at a bit of a slower pace given rate negotiation delays and special requests associated with the COVID-19 situation. We are maintaining good pricing discipline, and we continue to work with our customers to provide win-win solutions.

Looking at the business unit detail, the economic impacts to our business, our volumes and revenues were largely in line with Q1 assessment. As anticipated, our ag min business unit experienced the least amount of disruption with volumes and revenues being down approximately 7% each. Changes to food consumption patterns, i.e., more people eating at home versus restaurants resulted in some supply chain changes. Also some businesses including breweries in Mexico were considered nonessential which resulted in fewer grain shipments for those idled plants.

On the other side of the equation, the automotive industry experienced an extraordinary reduction in volumes as plants were idled across North America. Year-over-year, automotive carloads were down about 73% in Q2. Of course, the auto plant shutdowns rippled into many other segments, including our intermodal, industrial and consumer and chemical and petroleum business units.

Turning to page 15. While we're not in a position to provide guidance, I did want to take a moment to demonstrate how our daily volumes are recovering. While it's fair to say that we have not completely recovered across all of our business units, we are absolutely moving in the right direction. Since hitting bottom in early May, our overall carload volumes have increased about 39%. Despite some continued consumer and economic weakness, we are seeing a very healthy recovery in a couple of our key growth areas. For example, our cross-border franchise business, which you see in the lower left-hand portion of the slide, is up about 55% from its trough and ended the month of June only 4% down on a year-over-year basis. Month-to-date, July were actually up 1% in that category.

Mexico energy reform. While still off early 2019 run rates, this business is up an impressive 210% from its low point in May and ended the month of June up 12% on a year-over-year basis. So far this month, we're seeing similar volume trends despite our LPG business falling about 60% year-over-year, given the loss of business associated with changes in origins. It's probably worth noting that our refined products make up about 80% of our Mexico energy reform carloads at this time.

Looking at the last chart on the page. Not surprisingly, given the opening of the auto plants, our automotive and intermodal business is recovering nicely, up 86% from its May lows. Admittedly, a couple of business segments continue to remain weak in the industrial and consumer business unit. Our metals business remains well below 2019 levels. However, we are encouraged by our customers' outlooks which indicate production and shipments will steadily pick up in the coming months as excess inventory is reduced.

On the energy side of the business, we are not expecting crude shipments to return in the near term. However, I am happy to report that the US Development Group's development of our Port Arthur property continues on schedule, and that facility is expected to be operational in the second half of 2021.

Well, it's very difficult to predict the future. And there are certainly risks associated with the COVID-19 resurgence. We are optimistic that the economy will continue with steady sequential recovery. The government has produced meaningful stimulus packages, and declining inventories in many sectors bodes well for continued improvement. The US trucking market is also improving. We're seeing tightening capacity and improved pricing. Given the continued trade tensions with China and supply chain learnings from the COVID-19 situation, we continue to believe nearshoring opportunities hold promise in the long run. And most importantly, our customers. We will continue to remain in close contact with them and be ready to efficiently handle their business as it returns.

And that concludes my comments. 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 17. The majority of the second quarter results summarized on this slide have already been addressed by Pat and Mike. But let me highlight that I think KCS acted quickly under challenging circumstances to drive down costs by consolidating trains, reducing crew starts and taking other actions to scale our costs against the backdrop of a 21% decline in volumes.

We were particularly pleased with the variable cost reductions that Sameh highlighted in his section, and I believe our 2Q results set us up extremely well for the remainder of the year as volumes continue to improve sequentially. Although second quarter revenue dropped 23%, these actions along with favorable impact of fuel and FX helped KCS post an adjusted operating ratio of 65.2%. We view this as an incredibly favorable result, given the challenges presented during the quarter and a credit to the hard work and intense focus across the entire organization.

But I'd like to give a special thanks to the men and women of KCS' operating team who have been delivering incredible results during this pandemic.

Reported EPS was $1.16, adjusted EPS $1.15. Our reported EPS includes a $10.5 million restructuring charge or $0.08 per share, primarily related to severance costs associated with the voluntary separation program implemented during the second quarter. This program will result in the reduction of approximately 6% of our management workforce, and we expect the reductions to result in annualized savings of $11 million.

Moving to our PSR savings. On slide 18, you'll see that we're continuing to drive significant and structural cost savings. As Sameh mentioned, we continue to make excellent progress on our PSR initiatives, and that progress accelerated during the second quarter as we quickly implemented changes in train starts in reaction to COVID-19 volume declines.

As Sameh indicated, volumes continue to rebound. Our goal is to achieve a permanent reduction in train starts that, coupled with running longer and heavier trains, should allow us to reduce our cost structure by approximately $35 million to $40 million a year. Accordingly, we are now expecting annualized PSR savings by 2021 to be in excess of $150 million, comprised of $58 million of realized savings in 2019 and an incremental $95 million of savings in 2020 which is a more than $30 million increase or better than 50% savings despite projecting year-over-year volume declines due to COVID-19. Not included in the PSR savings are approximately $11 million in anticipated comp and benefits savings related to our previously completed VSP program and $8 million in net lease savings from the purchase of 91 locomotives in January of this year.

Moving on to our detailed expenses on slide 19. Adjusted operating expense declined 22%. Our expense reductions were driven by strong cost management across the entire business, and all expense categories other than depreciation and amortization experienced year-over-year declines. I think the results clearly speak for themselves, with 19% decline in comp and benefits, 31% decline in equipment, 21% decline in purchase services and 10% decline in materials and other. One offset to these reductions, I'd like to note, is the $4 million of higher expense driven by COVID-19 impacts to our operations.

During the quarter, we incurred approximately $2 million in compensation expense, driven by Mexico stay at home decree, along with another $2 million in cleaning, sanitizing and other health-related expenses to keep our employees safe during this pandemic. And we would expect those costs to decline as we exit the year here.

Moving to slide 20. Comp and benefits declined 19%, driven primarily by a $19 million reduction from lower headcount and work hours. Our quarterly average headcount was down 5%, driven primarily by furlough actions taken in the US in response to declining volumes. And while we did not furlough employees in Mexico, we did experience a 23% decline in comp and benefits expense at KCSM from not calling employees to work as frequently from the declining volume environment. So we clearly have the ability to scale comp and ben at our KCSM operation.

As we previewed in Q1 earnings and in presentations throughout the quarter with investors, we have taken swift and decisive actions to address our variable costs, and this reduction to comp and benefits from lower headcount and work hours is an excellent example of how those actions have helped our cost structure flex with declining volumes.

Finally, moving to slide 21 in capital allocation. Our year-to-date free cash flow was up 35% year-over-year despite a $78 million locomotive lease buyout that we executed in January. Keeping us on track to achieve our outlook of at least $500 million of free cash flow in 2020. Our year-to-date capex was down 47%, driven primarily by a drop in the locomotive purchases that we had in the first half of 2019.

Finally, year-to-date return to shareholders is up 72%, driven by a 106% increase in share repurchases. As noted on the first quarter earnings call, we temporarily paused our share repurchase program in March to conserve cash during a period of extreme uncertainty. However, we resumed our share repurchases in the second quarter as we felt more comfortable the volumes were sustainably improving after bottoming out in April and early May.

Looking forward, while there is still a fair amount of uncertainty operating during this pandemic, we expect to continue to repurchase shares in a consistent pattern going forward but we'll retain our strong liquidity position of approximately $1.2 billion. Once we have better clarity around the demand outlook, we will reconsider increasing the cadence of our repurchase program.

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

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay. Thanks, Mike.

Before we open up the call, I'd just make a couple of comments; I'll go back to something I said at the very beginning. I want to recognize Jose Zozaya on the call today. This is his final earnings call. Jose hasn't always had a speaking role or has been visible on these calls, but some of you over the years have gotten to know Jose.

He has been with KCSM for 14 years, and there just aren't words to adequately describe what Jose has contributed over those 14 years to our success and our position in Mexico. There just has never been an executive that has served this Company as well with distinction that Jose has and contributed to our reputation in Mexico, our position, our relationship with the government officials at all levels, relationship with our employees, our unions. Again, just words are not adequate to describe what Jose has contributed. So I want to recognize him.

And then also to talk a little bit about Oscar. Oscar Del Cueto will a regular participant on these calls going forward. Oscar has been with the Company for 20 years, 30 years in the railroad industry in Mexico. This transition has been going on for a year and a half. So I'm confident that we will not miss a beat, and Oscar is extremely well suited and well positioned to move into this role and be effective that Oscar you have extremely hard, big shoes to fill, as I say. So, again, I just want to recognize Jose for his enormous contributions over the last 14 years.

And just a couple of comments about the quarter. Again, the headline is pretty horrible. But as you saw and heard over the last several minutes, we did a lot of really great things. And as Sameh said, we ran hard, we took out costs without compromising service.

Mike mentioned that we made swift and decisive actions, and all of this was with an eye toward making sure that these cost savings, these productivity improvements and efficiency gains that we were making in the face of rapidly declining volumes would be sustainable into the future and produce real savings when business recovered and we certainly saw that in June, with an unprecedented 39% recovery from the trough levels that we saw in May over a 30-day period. Again, I don't think any of us have seen this pattern of rapid decline and substantial recovery in such a short period of time.

I want to pick up on a comment that Mike Upchurch made as well, and I know a lot of our employees listen to these calls. And I just -- we couldn't be more pleased and proud of our employees for being on their toes for showing up and doing what we needed to do as a company to provide service for our customers, keep economies going and recovering just outstanding performance on the part of all 7,000 plus men and women of KCS. So thank you for your efforts, and we're very, very pleased and proud of the way you have represented the Company over this very difficult time.

With that, we'll open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Allison Landry of Credit Suisse. Please go ahead.

Allison Landry -- Credit Suisse -- Analyst

Good morning. Thanks. So, just given the significant progress that you're making with PSR and particularly the reduction in train starts and increased train length. So considering that, volumes are starting to show some decent second derivative improvement. Do you think that as you look to the second half of the year, do you think that you can improve the OR on a year-over-year basis in the second half? Thank you.

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

Allison. This is Mike. I mean, we're not giving guidance. So as much as I am very tempted to try to other answer that positively. I think our biggest concern sitting here right now is the volume environment, and what if any negative impact as a result of the second wave of infections could cause plants to shut down.

But what we do feel extremely confident in is the ability to continue to generate cost savings here. And I think we're going to be even better positioned as a company than we were in the first quarter where we delivered record results because of those cost actions that Sameh explained, and we do believe that those are permanent cost savings. This isn't taking credit for volume drops, but this is a permanent structural savings in our cost structure that we think will carry forward in the incremental margins as volumes return should be very, very strong. So I'll leave it at that.

Allison Landry -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

The next question comes from Jon Chappell of Evercore ISI. Please go ahead.

Jonathan Chappell -- Evercore ISI -- Analyst

Thank you. Good morning, everyone. My question, a bit of a scenario analysis for Sameh. I think it's really interesting that if the volumes get back to, call it, pre COVID levels, you can keep the train and the crew starts down at 20%. But what if you just dreamed a dream and carloads recover even quicker and they were up 5% to 10%, is there a catch-up in costs where the crew starts and the train starts would then need to increase by a greater pace to meet that increase in capacity or do you view that lagging even on the upside scenario?

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Well, whether we get to the volume that we had last year or we exceed it -- and we hope, we hope to exceed it, these cost reductions will stick. The field now has changed the way they run trains, the service design has been changed for the schedule of trains, the mechanical shops, as an example, have also been changed like we closed the Kansas City shop, as an example, that will stick whether we go to a 5% volume increase or a 10% volume increase. We have focused now our shops on Shreveport, in US and San Luis Potosi in Mexico. The effort that we have made in engineering to use our maintenance force's use of times that they were unproductive, to supplement and do more work for production and displays contractors is going to stick. So mixing manifest and intermodal and the others is something, again, that will stick.

So, you can just scale it. Like the 20% I gave at the beginning of my presentation, reduction in crew starts and train starts and locomotives applies to going to even level of volume versus what we had in January-February, but you can keep -- you can maintain that. I didn't do the calculation, but it will -- it may be -- instead of 20%, it may be 19% reduction or 18% reduction when the revenue goes up now by 5% above pre COVID levels. I didn't do the calculation, but my -- the message I'm getting is that the changes are sticking, and the culture, the mindset of people has changed, and the team is getting very, very strong and is getting stronger and stronger. This is something I didn't talk about, but it's a very, very important element in all this -- is that team is definitely not the same as it was a year and a half ago, but even more importantly, it's not the same as it was three months ago. We have guys that are getting sharper and sharper and sharper, and I think we have a solid team now that we need to move forward.

Jonathan Chappell -- Evercore ISI -- Analyst

That's very helpful. Thank you, Sameh.

Operator

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

Chris Wetherbee -- Citi Investment Research -- Analyst

Hey. Thanks. Good morning. Maybe sticking on the same theme. I kind of wanted to focus on the total annualized PSR opex savings. When you think about all of the potential benefits that you're accruing as you're going through the sort of big volatile period of time from a volume perspective and looking out into 2021, I guess, maybe, if you could help us sort of understand, Sameh, some of the comments you made about opportunities, whether it be on the fuel side, maybe it's more on the crew and train start side, what are the incremental buckets that you still see opportunities from as you move from 2020 then into 2021? Let's maybe forget about sort of the volume environment, but what are the key cost opportunities you still feel like you have?

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

That's an excellent question -- an excellent question, Chris. I didn't have time in the minutes I'm given to present these slides. Fuel in itself I can speak for the next half hour, about some of what we are doing on fuel. Example: we looked at what we call tonnage rating deals, like how much do we think a locomotive can pull tonnage-wise. And we just changed the tonnage table in Mexico, OK? It was kind of conservative understated. And we are getting a 5% fuel efficiency improvement just out of that. And that was -- that was very recent. Like we just measured it in June and we measured it before and after in the Tula District, which is between Mexico City and Acambaro, OK?

We look at the corridors like Benjamin Mendez to Leal where we have very steep grades. So you have to add locomotives when you're going up the grades, but when you are coming back, you still have to bring the locomotives back for the next cycle. And we noticed that the locomotives -- the excess locomotives are not being shut down, OK? So this is really simple stuff. And now we're going to shut down these locomotives. The guy who did the calculation, and it was on the PSR update that we did this past Wednesday, we do PSR updates every week to keep the progress going, and the gentleman who found that was a guy who we brought -- a retired guy who was on my team at CN, and that -- he quantified that to be $2 million. Just that. So here is another opportunity.

Now, you talk about crew starts. We have a significant amount of crew start. We would have had I think a reduction of 40-some percent. Had we -- if we are able to make a labor agreement to get rid of a crew base at a place called Leal, OK, our trains can go from Sanchez all the way to Benjamin Mendez without stopping at Leal. But the labor agreement forces us to change crews at Leal. So you waste time and a lot of money too. And that one alone, we just reviewed it yesterday on the transportation cost. We have a young gentleman who is awesome. His name is Nick Ryan [Phonetic] who we put in charge of crews and locomotives and he highlighted that to me that that can be a net saving of a couple of million dollars, OK, let's call it $4 million, maybe, a year. Things like that. So there is plenty still of opportunities.

Like I talked about the train lengths, Chris, we are very happy now to have gone from 5,800 to 7,200. Well, my colleagues in the other railroads who many of them all originated from CN, now they're beginning to shoot for 12,000 feet, 15,000 feet. So you can only imagine if I build now sidings that can accommodate a train meet of 12,000 feet or 15,000 feet, the sky is the limit. Then I can take these train starts that we are very proud to have reduced by 20%, maybe I can reduce them by another 20%.

Now, I have to make sure I have the sidings for these meets. I have to make sure that the yards have the configuration, and that's where we inject some money, so we have injected some money in San Luis Potosi yard. It's not big money; it's about $2.5 million this year and $2 million next year in spite of that capital envelope that I was talking about so that you can pull in a long train. You don't want to pull in a long train and then have to double it over two or three tracks because you cannot fit it on one track. So you start adjusting these things. So there is still a lot of opportunity.

I talked about the Saltillo area, double track. You can imagine if we do that. I mean, when you have trains running at about 15 kilometers, I'm not evening talking miles, that's 10 miles per hour, because of the very steep grades and curves, you can imagine how long it takes to make a train meet. I mean, you have to park one guy and wait for the other guy to come in at 10 miles per hour before we finally pull out of the siding. Well, if you double track, and it's only 50 kilometers, all these trains now come home.

So the bridge -- I talked about the bridge. When you have windows that are six northbound followed by six hour southbound, OK, and let's say you get your northbound train and you get there 15 minutes after your window has closed. And I give the example always like a ferry. You get there and the ferry just left 10 minutes ago. You know what happens. So if we eliminate that and make it dynamic, first in, first out, and we are working on that and we think we have a very simple solution for it, and we are working at all the customers on both sides of the border, that can give us an increase of a mile per hour, 2 mile per hour on the velocity. So lots of opportunities, Chris. And when we have our webcast with you, I think it's scheduled for August 4, I'm going to expand on that.

Chris Wetherbee -- Citi Investment Research -- Analyst

Sounds good. Looking forward to it. Thanks so much for it. I appreciate it.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Thank you.

Operator

Next question comes from Justin Long of Stephens. Please go ahead.

Justin Long -- Stephens -- Analyst

Thanks and good morning.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Good morning, Justin.

Justin Long -- Stephens -- Analyst

Good morning. Maybe a question for Mike. I know you guys are not providing detailed guidance. But last quarter, you talked about a scenario analysis. And when you talked about that, you referenced a 10% revenue decline in the third quarter and a 5% revenue decline in the fourth. I was wondering if you could provide any update around your thoughts on that forecast. I know it's just -- it's tricky now because volumes have gotten so much better sequentially, but COVID cases are rising. I just want to get a sense for, if your more or less optimistic about the recovery in the back half.

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

Yeah. I mean, what I would tell you, Justin, is the revenue side continues to be a bit challenging. But I think the two goalposts we put out there during the first quarter call, we still think for the year we're going to end up somewhere in between there. The volume environments, obviously, have been a bit challenging, particularly here in 2Q. But, all that said, we do have a more constructive view on overall expense reductions, and what our cash flows, EBITDA is going to look like, than we did back then.

So, still very difficult volume environment. I think those goalposts we put out there are still applicable today. And as you know, throughout the quarter we provided very detailed updates on where our revenues were tracking. We'll continue to do that here in the third quarter as have probably half a dozen investor updates scheduled.

Justin Long -- Stephens -- Analyst

Okay. Great. That's helpful. I appreciate the time.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Thank you.

Operator

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

Allison Poliniak -- Wells Fargo -- Analyst

Hi, guys. Good morning.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Good morning.

Allison Poliniak -- Wells Fargo -- Analyst

Just given sort of, obviously, the notable progress in PSR, combined with the dynamic volume environment, has anything come to light with the network, either an issue or opportunity, that could be addressed -- or an incremental opportunity on your PSR journey, either short or longer term here?

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

I'm sorry, I'm not clear on the question. Are you asking, if there are opportunities, infrastructure-wise or...

Allison Poliniak -- Wells Fargo -- Analyst

Well, anything. Just, you obviously had your PSR plan, a lot of those opportunities were accelerated as the volume environment was clearly dynamic in Q2. Did anything else come to light that maybe you weren't thinking of in your original expectations for this PSR journey that could be an incremental opportunity for you here?

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

I guess the biggest thing, frankly, is we -- because we were pushed, and there was a sense of urgency here. We were hesitant before about train lengths. And what we are finding is we can actually do it even with the yards that we have. That, in my mind, is the biggest finding -- is we never dream that we can get an improvement of 21% in train lengths in such a short time. And we did it, and we did it without comprising on velocity or dwell or customer service. I would say that that was our biggest finding.

Allison Poliniak -- Wells Fargo -- Analyst

Great. Thank you.

Operator

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

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning, guys. So, Mike, just a couple of things. With volumes up, I don't know, give or take, 15%, 20% sequentially, in the third quarter, any color on how to think about labor costs? And then any view on how to think about some of the components of yields, mix, fuel, FX in the third quarter relative to the second? Thank you.

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

Yeah. I think on the revenue side of the equation, obviously, we think fuel costs are going up. We've already seen some of those increases. Hard to predict what FX is going to end up doing. But as you think about mix, you may think about that similar to what we saw here in 2Q. I'm a firm believer that there isn't a strong correlation between what happens with our revenue per unit and operating ratio. And I think we saw tremendous leverage on the cost side here as we fill out trains. Sameh covered that at great length. So, even as we're adding intermodal at $350 a container relative to maybe $1,200 for the rest of the base, we'll take every one of those containers we can. It's great incremental profit for us.

In terms of labor costs, I think you get the clear message here that through train consolidation we're continuing to drive down labor costs. I made the point that while we furloughed crews in the US in light of the volume environment, didn't do that in Mexico, but we were -- had Mexican labor costs down 23% in the second quarter. I think we can continue as we build out train length to drive down our labor costs here. But some of that is obviously going to be dependent on how quickly the volumes bounce back here. There's always a bit of a stair-step involved in this business. As you have volume growth, you're going to have to put a few train starts back in place. But our goals are, as Sameh, said, absolutely to drive train length and that should give us some continued leverage on labor costs.

Scott Group -- Wolfe Research -- Analyst

Thank you, guys.

Operator

The next question comes from David Ross of Stifel. Please go ahead.

David Ross -- Stifel -- Analyst

Yes. Good morning, everyone. You talked about the increased consolidation that you're doing on the trains for better efficiency, mixing manifest, intermodal, etc. Do consolidations become more difficult in any way with more volume or easier? And another way to put that is, does growth in any one commodity type make it harder or easier to do those consolidations, while keeping dwell down and then keeping velocity high?

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

If you got sufficient volume that you don't need to consolidate between two trains, that's fine. I mean, the best example is coal trains. Coal trains are not consolidated with other trains because they are beautiful, they are nice, they are point to point, from the mine to the utility; no need to fool around with them. I mean, that's your most efficient train that you can get. There is no switching, there is nothing. So, if you get enough volume, example, intermodal, if it grows enough that you can go from Interpuerto to the US, Interpuerto is at San Luis Potosi, as an example, or Victoria Salinas, that's fine. I mean, then you can have a full train. It's exactly as if between two cities for airlines you have enough traffic that you can have like Chicago to Los Angeles and you have enough traffic and you have planes that don't have -- you don't have to switch passengers in the intermediate airports. I mean, that's fine.

So if the volumes come back, that's OK. You can have trains and reduce actually your switching in this case, which is another principle of PSR, and you will not be losing anything. You're not actually -- I mean, you would not be consolidating, but the consolidation fundamentally is to make up for situations, but you don't have enough volume to have a full train of manifest or a full volume for a train of intermodal. So one does not negate the other. If you have the volumes and it's all intermodal and it's between an origin and a destination, great. We can build a train without having to worry about consolidation.

David Griffith Ross -- Stifel, Nicolaus & Company -- Analyst

But there is no commodity types or car types that are more difficult to mix into a consolidation than others.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Well, that's a very good question. I mean that's why the train handling is a very important part of thinking about train consolidation and we have operating rules, where you position cars on a train, you know, if you mix, you know, like for one thing loads and empties, you have very strict rules on that. I mean, you don't want empty cars stuck behind the locomotive -- between the locomotives and loads in the back at the tail end of the train because if you do shoving action, it can derail. So there are rules on that. You know, automotive cars, you have to be very careful with them, obviously, with cushion units we call them. So, yes, there are rules for that, but none of them is insurmountable, like you just have to apply the rules and be disciplined about it.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

I'll make a comment here just kind of picking up on Sameh's response to that question in a comment that Mike Upchurch made on the previous question and go back to look at Slide 15 in Mike Naatz's part of the presentation and just look at the dramatic V-shape recovery that we saw in intermodal and intermodal and automotive and that's an area where adding train starts is an important part of getting the business and getting back to pre-COVID levels, but also getting back on a growth track. So we've talked a lot about consolidating and furloughing and other things that we've done to improve our cost profile and respond very quickly to a rapidly changing business environment, business landscape.

So my catchphrase of service begets growth kind of went on the shelf for a few weeks or a couple of months that we're now starting to see that again and we're very focused as you hopefully heard throughout this presentation to make sure that the efficiencies that we have produced over the last two or three months as business volumes have changed dramatically, first to the downside and now back on the upside, but very focused on making sure that we keep our service at a level that allows us to get back on the growth track that we believe we can achieve. And in the case of intermodal and automotive, that probably is going to result in additional trains because that business just fell so dramatically.

Our auto business in April and May fell by almost 100%, over 90% in less than two months and now it is roaring back. So we're going to have to add trains. The key is not to get back to the same level of cost and resource allocation that we had pre-COVID. So we've learned a lot. We've done some things differently. As Sameh mentioned, we've done some things that maybe we didn't think we could do or weren't prepared to do under the stress of growing volumes that we saw in 2019 and those changes are going to stick, but we are very focused on making sure that our customer service doesn't deteriorate and that we can get back on the growth track that we know is out there, if we can provide and sustain the level of customer service that's required.

Operator

The next question comes from Brandon Oglenski of Barclays. Please go ahead.

David Zazula -- Barclays -- Analyst

Hey, this is David Zazula on for Brandon. Good morning and thanks for taking the question.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

You're welcome.

David Zazula -- Barclays -- Analyst

The free cash flow guidance, I mean our kind of rough math says net income would be down about 20% from last year based on that. We understand that's a floor, but given how you're saying you haven't changed much in your revenue outlook and you do have more certainty around cost, maybe you could talk about why you're leaving that floor in place and speak generally. I'm not asking for guidance, but what an upside scenario might look like?

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

Yeah, this is Mike. We're going to stick with our $500 million plus. Obviously, there's lots of levers here around revenue, around cost, around capex, around working capital, taxes is always a dark horse and we're going to stick with $500 million for the time being.

David Zazula -- Barclays -- Analyst

Thanks.

Operator

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

Brian Ossenbeck -- JPMorgan -- Analyst

Hey, good morning. Thanks for taking the question. Just with all the moving parts into and within Mexico. I just wanted to get your latest update on that. How you see any potential slowdown in the automotive recovery if COVID cases continue to increase. Obviously, that's not nearly as big of a Mexico-only problem as it was maybe couple of months ago, unfortunately. And then just maybe a broader update in the refined products in terms of what's going on with the Pemex situation and especially any congestion you're seeing on the border. It seems like it might actually have been a benefit in the quarter as some of the volumes went over rail instead of getting stuck at the ports or the border crossings. Thank you.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Mike Naatz, do you want to address the auto and Pemex question?

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

Sure, happy to. Let me start with the auto. As you know and we've talked about the automotive business has bounced back. I think our outlook for automotive is that global demand for vehicles is going to continue to be low for a while. It may take 18 months or so for that to completely recover. Certainly, there has been changes in Mexico auto production in terms of where those cars are going and what's being made. So we'll probably perform at or a little bit below what those forecasts look like.

On the refining side of the house, it's interesting, we look at Pemex. Pemex is producing more of what they're selling, but they're selling less. Their market share continues to decline and their overall production of gas and diesel is flat to down. So what we're seeing is we're continuing to see imports from others -- from those other than Pemex continue to increase and we should absolutely be a beneficiary of that. I believe non-Pemex imports according to data we're looking at have increased about 57% on a year-over-year basis through May.

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

Hey, Brian, it's Mike Upchurch. Let me just offer up a couple of thoughts for you. I know you've been less than constructive on Mexico, which is understandable. Typically during downturns, we get hit a little bit harder there, but it's hard for us to sit here and say that we've had worse experience in Mexico. If we just look at our own COVID cases, we've had more in the US. than Mexico in an aggregate, yet, it's hard to say that the US has been better in containing the virus than Mexico. I think the data is pretty staggering there in the US. Our volume decline was down at trough a little bit more in Mexico than the US, but it's bounced back a heck of a lot stronger too. So you may want to think through those issues. Refined product grew in the month of June. It's growing again in July. So we're back on a growth trajectory after people went back to work. Plastics has played out to be relatively strong for us and we got tremendous operating leverage in Mexico. So, we think Mexico is a great place for us to do business and will continue to be a great place for us to do business.

Brian Ossenbeck -- JPMorgan -- Analyst

All right, thank you.

Operator

The next question comes from Jason Seidl of Cowen. Please go ahead.

Jason Seidl -- Cowen -- Analyst

Thank you. Hey, good morning everyone. Wanted to chat a little bit about the outlook for near-shoring. You guys touched on it a bit, but wondering how much COVID has maybe put a pause on some of those plans for some people and how do you view it going out 2021 and beyond and maybe you could also throw in your relationship with the Mexican government. I know there has been a little bit of chatter of late about the 2027 reexamination of your agreement with them.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

I will maybe take a first shot at that and then ask Jose to make some comments, but our relationship with the Mexican government is very, very strong, very positive and as I mentioned, the transition that we have had in place for a year and a half now was really very intentional kind of knowing that Jose was thinking about moving on. We moved Oscar into this position a year and a half ago at exactly the point that the new AMLO administration went into power so that Oscar could be side-by-side with Jose from the very beginning of this new administration getting to know the people, the decision makers, and not avoiding that situation where we had a transition in the middle of the administration. So I think our relationship with all levels of government is extremely strong. I mean we are, I hate to say it this way, but we're a big deal in Mexico. Sometimes, we have to bite our lip a little bit because we're not the biggest, we're not the headliner in the US or in North America in general, but we are a big deal in Mexico and we have just terrific relationships long -- going to your question about near-shoring and the opportunity there.

There is no doubt that there is a huge opportunity as a function of USMCA being resolved, in place. The dark cloud of uncertainty that has existed for two or three years over NAFTA and what would happen with the trade agreement has been removed. We have certainty for another 16 years. It's an improved deal and you couple that with the relationship between the US and all of North America and China being strained and I don't think there's any doubt, you guys see this in your coverage of other companies that supply chain leaders are disfavoring extended global supply chains and particularly China. That's going to take a while to play out. So I can't tell you that we've got a long list of shovel-ready projects and investments. I think the COVID pandemic has slowed things down. We've got to get through this and we have some issues to resolve in Mexico as well in terms of the investment climate there, but we'll get through those and longer-term, all of that points to a very positive profile in Mexico.

As far as the concession and the exclusivity, you put out a nice piece the other day, Jason and I think you really characterized it correctly. This doesn't result in just an open access environment in 2027 or 2047. There is a process that someone would have to go through in order to make the case that there is a lack of effective competition and then determine what the remedy to that is. So we're not afraid of that situation and I think you all -- most people on this call understand how trackage rights work as a remedy to lack of competition and how trackage rights don't work. I think the regulatory agency, particularly the head of the regulatory agency in Mexico understands that.

So I think he's got kind of clear eyes in terms of knowing how trackage rights work and in theory, if the regulatory framework develops in a manner that is somewhat consistent with the US and even the Canadian model, it's very difficult for the guest railroad in a trackage right situation to have an advantage over the host. So we'll do everything we can to make sure that we're providing the service, the value, all of those things to our customers to limit that exposure, but at the end of the day, if that's the way the regulatory framework develops, we don't see that as a significant game changer or risk to our franchise and the value of our franchise longer-term. And I might ask Jose -- Jose and Oscar have been very close to the regulatory agencies and the COFECE, the antitrust agency just to comment on some of the more recent conversations we've had with those agencies. Jose?

Jose Guillermo Zozaya Delano -- President, General Manager and Executive Representative

Yeah, just, this is Jose. And just to add to your comments, one important thing to consider on the granting of trackage rights. Those trackage rights in the event those are granted, has to be granted to concessionaries, so not to everyone that wants to pass through our tracks. That's -- I think that's an important point also to consider. And the exclusivity, it's a figure that has been already implemented and added to the original term to another concessionary. So it's something that the authorities are now considering also to maybe happen with Kansas City Southern in Mexico. I don't know, you want me to explain more on that?

Patrick J. Ottensmeyer -- President and Chief Executive Officer

No, I think that's good, Jose, thank you.

Jason Seidl -- Cowen -- Analyst

Thanks for the color, guys.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay.

Operator

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

Tom Wadewitz -- UBS -- Analyst

Yes, good morning. You provided some charts which pretty clearly show the large rebound in volume that you've seen and you talked about the magnitude of that. I'm wondering if you could offer some thoughts on what might cause further -- what could be a catalyst for further growth off this level that you're now at as you look to second half. And then also if you could just offer a brief thought on how you think about the risk related to the sharp rise in COVID infections in the South, if you've kind of seen any impact directly or just how you would think about the risk to freight from that increase in infections? Thank you.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

I'll take the second one. Just, as you know, Tom, it's just very difficult to predict. So we are continuing to be on our toes and I think we've learned a lot through the April, May downturn what to do, how to respond. I think Sameh mentioned it in his comments, the team is getting stronger. We've learned a lot. We have the culture, the mindset, the ability for the team to know what to do and respond accordingly in the event that we see another downturn, have a lot of confidence that we'll perform at least as well, maybe better if that happens, but we don't know.

As far as just doing the things that we need to do to continue to keep our employees safe and protect our core operations and business continuity, we haven't stopped. I mean we haven't insisted, we haven't brought people back to the office that are working from home. We've continued to use the same practices and procedures in terms of sanitary guidelines that we did from the very beginning. So we're not -- we're kind of assuming that that's going to happen and the practices that we've had in place that have resulted in really good outcomes for us, we're just going to continue to do those things.

As far as the first part of your question, there is no doubt that intermodal, we continue to see good growth there, refined products. I think the oversized growth areas that we've talked about for the last couple of years before the COVID downturn, we still feel very confident that those opportunities are there and we're kind of getting back into that mindset of service begets growth and if we continue to provide the kind of service and value that we think we can provide to customers consistency, reliability, and then the cost profile and asset utilization, all of that, that we can realize those growth opportunities longer-term. And then, tack on to that the comment I made on the previous question about the longer-term outlook for Mexico given resolution of the trade agreement and the attitude toward China and Asia. We still feel very good about the long-term growth profile here.

Tom Wadewitz -- UBS -- Analyst

Great. Thank you.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Welcome.

Operator

The next question comes from Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.

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

Great, thanks. Good morning, Sameh, I got to say, I still can't tell if you're enthusiastic about this PSR stuff or not, but Mike, just a lot of concern about the return of the industrial demand in Mexico. So Mike, thanks for your thoughts there, but can you give maybe some more thoughts on intermodal. How things are progressing at Lazaro, the cross-border, thoughts on the peso impact and any shifts you're seeing post USMCA, if any. Thanks.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

[Speech Overlap] Go ahead, Mike Naatz.

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

Okay. So I think we are watching the industrial and consumer piece fairly well. As I mentioned earlier, the primary area of weakness there looks like it's on the metal side of the business for us. We are getting positive feedback from metal producers that indicate that that's going to begin turning around here as they work down those inventories. With respect to intermodal, I think the cross-border business has been returning nicely for us in part because of growth on retail moving in and out of Mexico, but then you also have the automotive parts.

So intermodal should continue to grow. I think the -- or the cross-border intermodal should continue to grow. I think the Lazaro and the intra-Mexico is going to continue to be a bit of a difficult position because truck capacity remains readily available and obviously with the value of the peso, that's a more attractive option. So we'll continue to evaluate that situation, but that's currently how we're looking at it.

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

Thanks, Mike.

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

Sure. Thank you.

Operator

The next question comes from Bascome Majors of Susquehanna. Please go ahead.

Bascome Majors -- Susquehanna -- Analyst

Yeah, thanks for taking my question. With the surge in traffic maybe taking a step back beyond just the KCS network, have you seen any particular pinch points emerge either with your interchange partners at your interchanges or at other key nodes in the North American network. Just trying to see where there might be pockets where capacity could be constrained whether or not resources needed to be added to fix that. Thank you.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

You must have been listening to some of our -- some of our earning calls. The interchange partners are seeing the same. I believe they are seeing the same surge as we are seeing and as a result, in Kansas City, we have a yard called Knoche and we did see a flood of cars coming from interchange partners, I'm not going to name them and we have to adjust to that and we did adjust to it. Like it took a two or three-day blip. It was actually in the past couple of days and we were very focused, we had like double the number of cars to be switched on a typical day all coming in at the same time.

We recovered from it and we are back to normal now and the key thing here, when I talk about the team being resilient and strong, is that you know with that ramp-up of 39%, you are bound to have pockets of noise, OK. I mean this is -- the example I give all the time is like a car with a manual transmission, an old car and you go from one to two, two to three, you feel the shift and then after that, you go at a steady state. So it moves, the pockets move from the Meridian line to Knoche and Kansas City. Before that, we had an issue with the bridge. A few days before that, actually, or a week before that, we had Sanchez where we felt tightness of locomotives.

And the key saying that the team is doing different now is that we diagnose the cause of the noise because in railroads, you get the noise from one place and it triples. So you have to make sure you don't look at the symptoms, you look at the root, you find the root and you address it and you fix it and you resist the temptation of falling back and going back to an old TSP, an old schedule of trains and throwing in, adding more train starts or adding more locomotives. So that is the trick and the team is getting better and better at it, but to answer your point, yes, it is true. You see it was interchange partners like us and they are having the same thing as us and it's going to subside as things settle down.

Bascome Majors -- Susquehanna -- Analyst

Thank you, Sameh.

Sameh Fahmy -- Executive Vice President Precision Scheduled Railroading

Thank you.

Operator

The next question comes from Ravi Shanker of Morgan Stanley. Please go ahead.

Ravi Shanker -- Morgan Stanley -- Analyst

Great, thanks very much. If I can just follow-up on the OR and kind of operating leverage discussion earlier in the call. So if you guys saw your carloads down 6% and your crew starts down 29% exiting 2Q, you should have seen a pretty significant increase in the operating leverage in the back half of the second quarter. So just wanted to confirm if you saw that or not and if that's in the 2Q print.

And also I know you don't want to give forward guidance and who knows what volumes might do, but if that same gap between the starts and crews were the hold like you think it will into 3Q, do you think you might be able to do like a 60 [Phonetic] or sub-60 [Phonetic] OR in 3Q?

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

Yeah. Ravi, I'm probably going to stop from giving you a specific number, but we absolutely saw better operating ratio performance April to May, May to June for the exact reasons that you indicated and in fact, we were late in the quarter providing a little bit of guidance around where our expense line items might net out for the quarter and you'll see that we actually ended up with some favorability on the labor side. Some of that was operating leverage and some of that was also favorability in incentives, but we definitely saw what you're referring to.

Ravi Shanker -- Morgan Stanley -- Analyst

If that continues in 3Q, that should leave you kind of in a much better OR position than what you predicted for the second quarter.

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

I would suggest that we will have a better operating ratio in the second quarter or third quarter than second quarter given some of that operating leverage, yes.

Ravi Shanker -- Morgan Stanley -- Analyst

Okay, great, thanks.

Operator

The next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

Amit Mehrotra -- Deutsche Bank -- Analyst

Thanks, Mike, we definitely got to the answer of that quarterly OR question. I have a few -- I dialed in late, so forgive me if these have been asked before, but I have a few rapid-fire questions. First one, Pat, a few weeks ago, you did a media interview where you talked about the rise in COVID cases and I think you were referring to within your own employee ranks unfortunately and how that may impact your ability to execute on higher demand and obviously in the context of higher growth, I wanted you, if you could, to just expand on that a little bit and just talk about the risk -- the real risks around that.

The other question quickly is there were some acquisition, there were some media reports about you guys receiving inbounds from either strategic or private equity-like companies for an acquisition. I obviously understand how sensitive those matters are, but can you either deny or maybe not comment on those, just address that.

And the last quick rapid-fire questions for me, I understand the work hours in Mexico have declined, but if the workers in Mexico aren't getting the hours that they need to make enough money, does that drive a lot of attrition in your Mexican workforce and what are the opportunities and risks around that in the context of higher volumes, if you can address that as well? Thank you very much.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

I'll take the second question because that's the easiest one and then Jeff Songer, be prepared for the other questions about the COVID profile of our employee base and then the attrition, but yeah, we saw a lot of noise a few weeks ago, a lot of media seem to be coming out of Europe or London about KSU and a possibility that someone was preparing for a deal and obviously, you know, the standard answer is no comment on things like that, but the story behind that is we've got a terrific plan, we've got outstanding opportunities, we have a lot of runway to have a successful run as a independent stand-alone publicly traded company and that's our focus and that's what we're going to do.

We're executing very well, we've got growth. There is no doubt in my mind having been in the commercial job for a number of years before moving into this job, our customers like us because we give them options. We have great relationships with the other railroads and we've just got a lot of runway again for a successful run creating terrific shareholder value as a public independent company and that's our focus and as long as we do that, I think we will be in great shape. Jeff, do you want to comment on kind of our adequacy of our staffing. I think this is what you're getting at given the COVID impact and then the attrition impact in Mexico.

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

Yeah, Pat, sure. COVID, we have seen a slight tick up in our COVID cases really both sides of the border, but as we've talked about earlier, I think Sameh mentioned kind of sticking on the US, the headcount, we've got roughly 20%, 25% under furlough still. So we have adequate resources to return as needed, if needed, but I think we've done a great job. We've talked about that for two quarters, I think we were very aggressive attacking this upfront and I think again our numbers have been very manageable thus far.

Very good observation on Mexico. We're thinking about that the same way as train starts reduce. The potential for earnings for some employees has reduced. Our attrition rate, we just reviewed this in a financial review yesterday, I think we're 4% to 5% here on the T&E workforce for normal attrition. So we're letting that play out and I think that could potentially accelerate as you see some additional train start consolidations and things that would drive that. In addition, we continue as always working hard with our labor group down there to recognize these things and to capitalize on them. So I think again our workforce is stable. We've managed it appropriately with some additional opportunities for attrition as we change our TSP models.

Amit Mehrotra -- Deutsche Bank -- Analyst

Okay, all right, thank you. Have a good weekend everybody, appreciate it.

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Thank you.

Operator

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

Patrick J. Ottensmeyer -- President and Chief Executive Officer

Okay, terrific. Thank you all. I think we got all of our questions in and just under incredible circumstances. Feel very good about the way we performed through this wild swing of volumes and feel very good about where we are positioned for the future. These cost savings will stick as Sameh mentioned. The culture, the mindset, the team is performing extremely well. We are confident that we're going to begin to see growth return assuming that we don't have another big setback with COVID second wave and look forward to getting together in 90 days. Thank you all and have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 93 minutes

Call participants:

Ashley Thorne -- Vice President of Investor Relations

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 & Chief Marketing Officer

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

Jose Guillermo Zozaya Delano -- President, General Manager and Executive Representative

Allison Landry -- Credit Suisse -- Analyst

Jonathan Chappell -- Evercore ISI -- Analyst

Chris Wetherbee -- Citi Investment Research -- Analyst

Justin Long -- Stephens -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Scott Group -- Wolfe Research -- Analyst

David Ross -- Stifel -- Analyst

David Griffith Ross -- Stifel, Nicolaus & Company -- Analyst

David Zazula -- Barclays -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

Jason Seidl -- Cowen -- Analyst

Tom Wadewitz -- UBS -- Analyst

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

Bascome Majors -- Susquehanna -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Amit Mehrotra -- Deutsche Bank -- Analyst

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