Kansas City Southern (KSU) Q2 2021 Earnings Call Transcript

Kansas City Southern (NYSE: KSU) Q2 2021 earnings call dated Jul. 16, 2021

Corporate Participants:

Ashley Thorne — Vice President, Investor Relations

Patrick J. Ottensmeyer — President and Chief Executive Officer

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

John Orr — Executive Vice President – Operations

Sameh Fahmy — Executive Vice President – Precision Scheduled Railroading

Analysts:

Jonathan Chappell — Evercore ISI — Analyst

Amit Mehrotra — Deutsche Bank — Analyst

Jason Seidl — Cowen and Company — Analyst

Justin Long — Stephens, Inc. — Analyst

Tom Wadewitz — UBS — Analyst

Chris Wetherbee — Citi Investment Research — Analyst

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Allison Landry — Credit Suisse — Analyst

Brian Ossenbeck — J.P. Morgan — Analyst

Scott Group — Wolfe Research — Analyst

David Zazula — Barclays Capital — Analyst

Presentation:

Operator

Good morning, and welcome to the Kansas City Southern’s Second Quarter 2021 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, Investor Relations

Thank you, Jason. Good morning, and thank you for joining Kansas City Southern’s second quarter 2021 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. Actual results could materially differ from those anticipated by such forward-looking statements as a result of 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, 2020 and in other reports filed by us with the SEC. Forward-looking statements reflect the information only as of the date they are made. KCS does not undertake any obligation to update any forward-looking statements to reflect future events, developments or other information.

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. Thank you for joining us for our second quarter 2021 earnings presentation.

I’ll start on Slide 4. We’re going to change this format a bit this morning. And Mike Upchurch and I will go through a brief presentation. I’m told that this is a record for us in terms of brevity of our formal remarks. But given the assumption that there will likely be a lot of questions related to matters other than our quarterly earnings, we’re going to change the format; go through the prepared material fairly quickly and expand the time for Q&A. The only other comment that I’ll make on this slide is, we have included Adam Godderz. Adam is our Chief Legal Officer, given the fact that we have a proxy statement out and shareholders’ meeting set for August 19 ask Adam to join us in the event if there are any technical or specific questions related to that.

Moving on to Slide 5. I’m going to start with three slides just to touch on and speak about the proposed merger with Canadian National. Obviously, most of you have heard this before, but given the timeline for events going forward, specifically, the KSU Special Stockholders’ meeting, which is now set for August 19. I wanted to spend just a few minutes and reiterate some of the more significant characteristics and benefits of this transaction.

So again, just looking at some of the highlighted comments here on this slide, we believe this is a pro-competitive deal and will deliver more choices, more single-line service options to shippers than exist currently. There has been a commitment to keep all gateways open on commercially reasonable terms and provide greater price transparency specifically through Rule 11 rates to those gateways to satisfy any potential competitive concerns that might arise.

This merger, this combination is driven by growth and the opportunity for growth across North America. It is not a combination that is focused on consolidation or eliminating options or facilities. It is all about growth. And as you see in some of the appendix material, we have been blessed with a very strong and widespread support for the merger over 1,700, close to 1,800 letters now supporting the transaction. We are confident that the voting trust that we are proposing to meet the STB requirement for installation from control and the public interest requirements and specifically the financial viability of both Canadian National and KCS during the voting trust period.

Moving on to Slide 6. This is a very brief timeline, path to completion. You can see the first items on the left are completed. The next milestone, as I mentioned a few minutes ago, is the August 19 Special Meeting of Kansas City Southern’s stockholders. And the proxy material has been circulated. We will fall back and refer to that proxy statement on a number of questions. And we’ll be happy to explain anything that’s in that proxy further.

As far as other milestones, these are really expectations. As you know, the Surface Transportation Board will take whatever time they need, and we respect that requirement. As far as the completion of their review and a determination regarding the voting trust, our expectation is that that will come in the second half of this year. And then beyond that, again, it is our expectation that a decision on the merger would be the second half of 2022, and Of course the voting trust would remain in place until we have full STB approval.

And then wrapping up the merger discussion on Slide 7, just reiterating again this combination is pro-competitive and we believe will yield significant public benefits. Some of those benefits are stated on this slide, I won’t read them. And then, importantly, the CN/KCS filings on July 6 in response to public comments and an opposition to the merger, we think are very strong and powerful and are available on our website as well as the website for our transaction, which is connectedcontinent.com. And the voting trust approval, which is the stage that we’re in now, we are very confident that the voting trust satisfies the requirements for independent and in public interest and the financial viability of both CN and KCS during the voting trust period is assured.

Moving on just — now to a few slides on the quarter. Second quarter revenue increased by 37% from the previous year. Gross ton miles up 30%, volumes up 21% — sorry, 31%. Obviously, the headline here is easy comps as a result of the COVID collapse in business that occurred in the second quarter of 2020. Our results were clouded by the accounting treatment of the $700 million termination fee for the Canadian Pacific transaction. Mike Upchurch will get into some of those details later.

I would like to draw your attention for purposes of our really representation of our underlying performance to the adjusted numbers shown on this slide. Second quarter adjusted operating ratio of 61.4%, which was a 380 basis point improvement versus last year and adjusted diluted earnings per share of $2.06, which was a 79% improvement from last year, again on an adjusted basis.

Moving on to Slide 9, our outlook. There are a couple of changes to this slide from what you saw in January and April. Revenue growth, we are confirming our guidance from previous quarters of double-digit revenue growth in 2021 for the full year. Operating ratio, we are changing our full year operating ratio guidance to about 60%, approximately 60% for the full year. That is revised from 57.5% guidance that we had provided earlier.

The headlines to that revision are a number of factors that you all are very aware of. In general, the chip shortages that have affected the auto industry and certainly our automotive business that has been affected by that as evidences recently as earlier this week, we have been informed of three new planned plant outages in Mexico. Mike Naatz is here to answer any questions about adding greater detail. But as you all know, that chip shortage that’s really plagued many industries across North America has been a bit of a moving target and difficult to predict how long that’s going to last.

In addition to that, in our case, there have been disruptions in the flow of refined products into Mexico due to some regulatory developments and other factors that are more unique to Kansas City Southern that have affected both our performance and our outlook for the full year. Those developments have created some additional congestion in addition to other factors. So there is a bit of an increase in congestion-related costs. And then in addition to those factors, the extended impact on the expense side of our business related to the polar vortex and other delayed plant openings, all contribute to our revised guidance here in operating ratio for the full year. And Mike Upchurch will provide more color regarding the path to our 2022 guidance in a few minutes.

Earnings per share, we have made a slight revision to our guidance there for the full year at approximately $9 a share in 2021 versus in the prior two quarters. Our guidance was greater than $9 a share. So a slight revision to that guide. And then beyond that, our longer term EPS guidance as well as our capital expenditure and free cash flow guidance remains unchanged from the previous two quarters.

Moving on to Slide 10. Key operating metrics, which this chart had a little more green on it, but again, there is some explanations to go behind the numbers. Looking at train velocity and terminal dwell, those numbers are considerably below and worse than a year ago for the second quarter. But remember what had happened a year ago with the rapid downturn in business volumes during the second quarter of 2020. A good way to think of that is there weren’t many cars on the freeway at this time last year, so our speed and our dwell were at very high levels. This year, our volumes recovered. And we had other issues to deal with, including some of the weather-related issues and the regulatory developments in refined products that I mentioned a couple of minutes ago. So our network was much busier, and these statistics reflect a combination of those factors in the second quarter of 2020.

I’ll draw your attention to the four boxes in yellow at the bottom of this page that are highlighted, and these are some of the things that we have done intentionally to support the service recovery as well as the increase in volume and outlook that we have for the rest of the year. We have proactively brought additional power online, leading to a 39% increase in active locomotives. We have also proactively added crew starts and hired additional crews in the transportation and mechanical areas, leading to the year-over-year headcount increases that you see on this slide. Again, all of this is to support our service recovery and to be prepared for volume growth we see for the rest of the year and beyond.

And then finally on Slide 11, you can see the impact that some of those moves have resulted in, in terms of the additional resources and other initiatives and the impact they’re having on our most recent velocity and dwell trends, which are very encouraging. I called out a number of things on this slide, including the Monterrey team engagement effort and the Sanchez team engagement effort. I would encourage someone to ask a question of John Orr later about what’s behind that and some of the things that we are doing and John and his team are doing to really heighten the focus and accountability on our performance measures. A lot of those are built around infrastructure and aligning processes, org structures and resources for a more precise service delivery product.

So with that, I will turn the presentation over to Mike Upchurch.

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

Thanks, Pat, and good morning, everyone. I’m going to start my comments on the quarter here. I’ll cover revenue and volumes in a little bit more detail on the next slide, but you can see revenue grew 37% on 31% volume growth. Our reported operating ratio of 157.6% does include $721 million of merger cost we incurred during the second quarter, including the break fee of $700 million we paid when we officially terminated the merger agreement with Canadian Pacific on May 21.

As you might remember, CN paid us $700 million to reimburse us for this break fee. But because there are certain potential repayment obligations, we have recorded the CN reimbursement as a liability on the balance sheet. Once shareholders vote for the merger, the break fee received from CN will no longer be reimbursable. And accordingly, we would record to income the $700 million reimbursement effectively offsetting the break fee that we paid to CP in the second quarter. So you have the expense in the second quarter, the offsetting income we would expect to be recorded in the third quarter. And as Pat mentioned, our shareholder vote is currently August 19.

Excluding merger cost, adjusted OR was 61.4%, a 380 basis point improvement over prior year. We did incur several headwinds during the quarter, which I will discuss in more detail on the expense slide, but generally included an approximately 200 basis point headwind from network congestion, including higher overtime and re-crews, car hire increases from elongated cycle times and incremental costs from resources we put in place to improve our service and support our future growth.

We also recorded 120 basis point one-time non-recurring contract dispute during the quarter. Our reported diluted EPS was a loss of $4.17. However, adjusted for FX and the previously mentioned merger cost, our adjusted diluted earnings per share was $2.06, up 79% from a year ago. And then finally, we had about a 40 basis point headwind from fuel surcharge lag where price increases create a negative lag before we can recover those in our fuel surcharge.

So turning to the next slide, let me cover revenue. Revenue for the quarter was up 37% on a volume increase of 31%. Excluding fuel prices and foreign exchange, revenue was up 30%. All business segments saw a year-over-year volume and revenue growth. And let me address the negative mix you see in the revenue per unit table on the top right of this slide. We did see core pricing gains in the quarter. However, lower revenue per unit segments, like energy, saw growth rates creating — higher growth rates creating some negative mix in the quarter.

We’ve been very pleased with the revenue growth so far this year. And our results continue to be on track with our guidance established earlier this year despite what happened with the polar vortex in the first quarter, the auto chip shortage that has severely impacted auto production across the entire globe and increased regulations in Mexico related to the importation of refined products. Our franchise has shown remarkable resiliency despite some of these exogenous factors that have suppressed some of our growth potential, but again, we expect to lead the industry and volume growth during 2Q.

Cross-border volumes grew 42% and revenues 53%. Star performers for us in cross-border was intermodal growth revenue at 49% and Mexican Energy Reform grew 121%. Core pricing and contract renewals were essentially in line with the first quarter, but we are clearly seeing inflationary pressures that will need to be addressed going forward.

As we look into the back half of ’21, we would expect the auto chip shortage to continue to negatively impact our growth with a strong bounce back late in the year and into ’22 as auto demand continues to be extremely high and dealer inventories at all time lows. We also began shipping Western Canadian crude into the new Port Arthur Crude Terminal in the second half of July. And we would expect that terminal will gradually ramp up, whereby we will be moving approximately 15 to 20 trains per month by the end of the third quarter. So a fairly rapid acceleration of volumes.

Turning to expenses on the next slide. Adjusted operating expenses increased 29%. Some of that’s due to comps relating to the pandemic from a year ago as we saw significantly higher volumes, but we also saw higher fuel prices, foreign exchange impact and significant cost increases as a result of network congestion. As Pat mentioned, we’re clearly not operating as well as we expect, and saw productivity declined during the quarter as we in-service new locomotives and added headcount to stabilize our service and prepare for what we believe to be substantial increases in volume starting here in the third quarter.

Key expense drivers were fuel expense increased 19%, $13 million from volume and GTM increases. $16 million increase to expense from foreign exchange, which of course is largely offset in revenue. $10 million from higher overtime and higher re-crews as we deployed additional transportation resources to stabilize service. Headcount declined 1% year-over-year, but grew 2% sequentially, still well below the 5% sequential volume increase that we saw from 1Q to 2Q.

We also had a $9 million expense from one-time contract dispute. $6 million increase in materials and parts due to a larger locomotive fleet and the GTM growth that we saw year-over-year. $6 million in increased equipment rents, which is split roughly equally due to volume and car cycle times. $6 million from wage and benefit inflation. And $4 million from higher year-over-year incentive comp due to the fact that we greatly reduced our incentive comp expense during the pandemic in 2Q a year ago.

As we look into the second half, we do expect better productivity. And we will be extremely focused on better execution of the PSR principles Sameh has installed at KCS over the past two years. As a reminder, we have successfully reduced expenses by an annual run rate of approximately $150 million going into 2022 as a result of these PSR initiatives and continue to target $250 million run rate now by 2023.

One cost increase to inform you about in the second half of 2021, and we’ve discussed this at length in prior quarters, but we do not expect an approximate $8 million of incremental compensation expense related to the profit sharing from the passage of labor reform in Mexico. However, going into 2022, we would expect any expense increases associated with the new labor law to be negligible.

So let me wrap up with a little perspective on our outlook for the rest of the year and 2022. We expect the demand environment to hold up quite well as key macroeconomic factors, feedback from our customers and new business opportunities continue to give us confidence in delivering superior growth. And that’s despite all the challenges around the vortex and chip issues, etc. that we’ve mentioned.

During the first half of the year, we had a couple of challenges, but essentially are on plan on guidance with what we’ve provided early in the year. And we think that that revenue outlook is certainly supportive of some of the supply chain challenges we’re seeing across the board and pent-up demand that’s being built for vehicles, appliances, household goods and a variety of raw materials. As we look at a variety of economic factors going into the rest of the year and into 2022, we really believe we’re going to see tremendous top-line growth that we think going into ’22 will allow us to deliver somewhere in the range of 150 to 200 basis point improvement to the operating ratio.

And then turning to the cost side, we can clearly execute better than we have and consistent with our PSR success in 2019 and 2020. We recently deployed some incremental resources, namely locomotives and transportation FTE to improve our network fluidity and prepare for continued growth in our business. This improvement in congestion plus favorable expense comparisons relative to the unplanned cost around the Mexican labor reform and the one-time contract dispute that I mentioned should allow us to achieve another 150 to 200 basis points of OR improvement. So collectively, you’ll see our guide continues to believe we’ve got some substantial opportunities to improve operating ratio.

So with that, I will turn the call back to Pat for final remarks.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Okay. Just a couple of comments before we open the line up for questions. We’ve got the, as I mentioned, the entire executive team here, happy to answer any questions about our performance, our outlook for business, our outlook for operating efficiencies and those types of questions. Ashley advises me that we get a lot of questions about additional details, background and other things that we will not be able to answer.

The proxy statement is available. And while we are happy to provide any clarification on certain things in the proxy leading us to the shareholder vote, but a lot of questions that I know are out there, we’re just going to rely on the proxy disclosures that’s out there. So you might want to steer away from those kinds of questions if you only have limited time.

And then in that vein as well, I know there’s a lot of question about the likelihood of various outcomes and responses from the STB. We will also not be in a position to answer those questions. As I said, our expectations are that the STB will reach a decision in the second half of this year. But as I also mentioned, the STB will take whatever time they deem is necessary to make a full evaluation before making that decision, and we’re just not going to speculate on timing or outcomes beyond that.

So with those sort of warnings, I suppose we’ll happy to answer — open the line up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jon Chappell from Evercore ISI. Please go ahead.

Jonathan Chappell — Evercore ISI — Analyst

Thank you. Good morning, everybody.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Good morning.

Jonathan Chappell — Evercore ISI — Analyst

Maybe this doesn’t matter in a month based on what the STB says, but if I can focus on the fundamentals in the operations a little bit here, and maybe at Pat’s encouragement, I’ll go to John Orr first. There is a lot of optimism about the back half of the year in the guidance. I mean, to get to the OR number for the full year, you need about 300 basis points improvement. To get to the EPS number, you need $5 after $4 in the first half of the year, yet there is a lot of challenges still out there whether it’s the planned outages of the auto plants in Mexico, the reduction of flows in the Mexico, the refined products. Maybe speak to us a little bit about the exit rate of some of your KPIs and your service metrics that gives you the confidence that you’ll have that fluidity and that service to be able to meet these kinds of lofty financial expectations for the second half of the year?

John Orr — Executive Vice President – Operations

Yeah. Thank you. You’re absolutely right. We have a lot of momentum and we have a lot of challenges, but this team is certainly up to those challenges. I guess, there is a couple of fronts; first and foremost is the field activity and the engagement in the field. And second is the network structure that — and the organizational structure that’s better aligned for process improvement and asset management and accountability, and that’s what supports the effectiveness of our service, the use of our plant and the plan itself.

And so as part of that, we have gone through a network reorganization with our Network Vice President, both accountable for the plan development and the plan execution. And we’ve — in that, we’ve improved our service visibility and awareness at all levels, including the new delivery of asset levers that we can now see in order to create more resiliency and more precise fit for both our capacity and our resources.

So it’s sort of the — it’s the architecture that we’ve developed underneath our service plan to support it and create a balance of strategic and tactical deployment of assets. The velocity is one of the key drivers that everyone on the team, whether it’s Mike Naatz, Sameh Fahmy or myself, really focusing on a daily basis. And that willingness to get into the weeds and drive performance with the team is showing the results. And if you look at where we see network performance improving and the impacts of the initiatives that are taking hold, our velocity is improving. In fact, our velocity today is in line with the three to four year average, taking the outlier of the comp of COVID — the COVID year out of the equation.

U.S. is recovering at a quicker pace. We are very comfortable with where the pace is and the path we’re on. And I see that returning to close to the challenging number of a COVID target through Q3. Mexico velocity is showing the right trends. We still have some headwinds with COVID recovery not being as complete as it is in the U.S. So we still deal with those realities today. But with the initiatives that we focused in Monterrey and Sanchez where we brought our team engagement to bear where it wasn’t — we take an integrated multi-functional team to decongest significant yards like Monterrey, which is primarily service yard, so that we can implement our view — implement better customer service and the effectiveness.

And not only do we roll up our sleeves and work 24 hours a day, seven days a week to create a better plan and create better visibility, but we’re also addressing the skills development of the local teams and the network support to build the organizational structure and create that better asset alignment and service visibility. And it comes down to the accountability that we’re driving across all of our departments. In the case of Monterrey and Sanchez, the heightened focus created more fluidity. It created more search resilience. And these are again key service areas that really drive how Mexico goes and drives our ability to cross-border.

One of the key indices that I really looked at was our grain performance because it is really an end-to-end market for us. So a market segment that has hand-offs with other railways. It spans most of the length of our network. And it has a really good sense of what our end-to-end supply chain capability looks like. And those numbers for grain in the last two months have picked up tremendously. And we’re closing in on some record performance and even benchmarking against some of the best times from a capacity and fluidity perspective.

So I would say it’s the reorganization and the architecture that supports growth. It is the heightened accountability and visibility and leading indicators. It is support and education of our frontline and entire management staff. And at the same time, we are underpinning everything with our safety values and our customer service values. So that’s what gives me a lot of confidence that we’re on the right path. And the leading indicators that we look at every day are pointing in that direction.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Hey, Jon. Just real quickly. I mean, clearly, we have an assumption here, we’re going to work our way out of some of the congestion and lower our operating costs. But don’t forget that first half of the year was pretty challenging with polar vortex and GIP issues. And we’re still sticking with our guidance for the full year on the top-line, implying that we’re going to have a really terrific back half of the year from a revenue perspective, including new business from this Port Arthur Crude Terminal. So that top-line is certainly going to help significantly here.

Jonathan Chappell — Evercore ISI — Analyst

Right super helpful answer, John. I almost feel bad asking a follow-up, but I know anyone else on this call would ask one. So Mike, since I have you, you guys have been talking about the refined product opportunity to Mexico and the huge numbers you put around it for quarter upon quarter, but now we have this new regulatory issue and some of the congestion it’s causing. Is there any way to frame either the lost revenue or the cost impact of this of these regulatory issues in New Mexico and also kind of the duration of following you take this loss?

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

I think it’s a temporary situation, Jon. Let me kind of back up to the macro environment here. The bottom line is, two-thirds of Mexico’s demand has to be imported, and most of that’s coming from the U.S. and there is nobody better positioned than KCS to bring that from the U.S. Gulf Coast into Mexico. So that gives us a lot of confidence that this is still a great business for us. In fact, when we look at the share data, third-party’s share of importation of total demand has actually increased from high-teens to 25% this year. So there is more product being shipped by companies like KCS.

And I think what’s happening here, we’ve got kind of half of our business in unit trains, half of it in manifest, it’s the manifest side of this that the government is doing a little more sampling to make sure that products are getting labeled properly and it’s created a little bit of a backlog. But just here recently, we cleared up a lot of that backlog working with the regulators down in Mexico. And the demand dynamics are such that we think this is going to continue to be a really good business for us. So maybe just a short-term dislocation versus any kind of permanent impact to that business for us.

Jonathan Chappell — Evercore ISI — Analyst

Got it. Thank you, Mike. Thanks, John.

Operator

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

Amit Mehrotra — Deutsche Bank — Analyst

Hey, thanks operator. Hi, everybody. Pat, I just — there’s obviously a lot of headlines in the rail sector last couple of weeks around regulatory and the Biden executive order. Wondering what you can talk about that? I mean, they obviously mentioned consolidation, not specifically at least, but then also the idea of reciprocal switching. You’ve obviously had a time to think about it and what the impact is to your business and the industry as a whole. Wondering if you can comment at all in terms of what you think the implications are, if any?

Patrick J. Ottensmeyer — President and Chief Executive Officer

I’ll do my best, but it’s really sort of unclear. And if you think back last week, we had a headline based upon a rumor that came out a day before the executive order, which was pretty shocking to everyone. And then when we saw the details in the executive order, I think people will calmed down quite a bit. One thing to remember, and I’m actually looking at the executive order here as I’m answering your question, and I’ve highlighted a few things here. This is literally a guidance to the STB. The executive order includes language like the Chair of the Surface Transportation Board is encouraged to work with the rest of the board to do the following. Consider rule-making on reciprocal switching. Consider rule-making on other relevant matters of competitive access. And then jumping ahead specifically to mergers in the process of determining whether a merger, acquisition or other transaction involving rail carriers is consistent with the public interest. And to consider fulfillment of other rules that are already existing.

I think if you look at the path that has been laid out by the Canadian National using the current rules of the STB for mergers, and the language that’s in this executive order, one could conclude they are one and the same. So I don’t think there is any different standard for evaluating a merger in the executive order that’s inconsistent with what the current rules, the so-called, new rules of the STB already involved. But as is always the case in situations like this, we really won’t know the full impact on some of these things until time plays out. But we also know that the STB has a very full backlog and docket of activities including rules on reciprocal switching that I think are going to be priorities of the STB in the near future in addition to the merger activity that they have on their plate including ours.

Amit Mehrotra — Deutsche Bank — Analyst

Okay. I appreciate you answering that question. The follow-up for me, I guess, for Mike. I think you guys have done a phenomenal job over the last couple of years. I mean, you’ve knocked the cover off the ball operationally quarter-after-quarter. So I don’t want to extrapolate too much from a one quarter blip, if you will, especially in the backdrop of the congestion that we’re in. But Mike, the incremental margin assumed by your guidance next year is like north of 80%, which is a huge number. I understand some of the cost items in the first half, particularly in the first quarter. But a lot of these things that you’re expecting to revert is a little bit difficult to have a lot of visibility on. And so why is 85% incrementals next year the right number given all that’s going on today and especially all the resources you’re throwing at trying to fix a lot of the issues? If you can just help us get some comfort and confidence around how you’re thinking about the framework for next year as implied by the guidance? Thank you.

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

Sure, sure. I’ll take a stab. And as I said in my prepared comments, we think we can get roughly half of this from the revenue line and roughly half of it from the cost side. But if you think about just really incredibly strong demand environment and all the macroeconomic indicators whether it’s GDP or PMI or corporate investment, industrial production, inventories being at all time lows, give us a lot of confidence around the top-line. And at two-thirds, the 70% kind of incremental margins, you get a couple of hundred basis points out of that.

So I think we feel pretty good about where we’re at with demand and being able to deliver that. And then clearly, we need to improve in the operating side of the house. That’s costing us combined with fuel and congestion and a couple of these one-time costs, couple of hundred basis points. And you get rid of that and you see your way I think some really nice improvement in operating ratio year-over-year. So yeah, I realize we — it’s bit of a show-me story, how we’re Missouri, the show-me state and we’ve got some credibility here from having delivered, as you acknowledged, over last few years and we’ll give the swing back on track.

Amit Mehrotra — Deutsche Bank — Analyst

Got it. Okay, very good. Thank you very much. Have a great weekend, everybody. I appreciate it.

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

You too.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Thank you.

Operator

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

Jason Seidl — Cowen and Company — Analyst

Thank you, operator. Pat, Mike, team, good morning, everybody. Two quick questions here. One, in terms of pricing, it sounds like there were some — clearly some pressures on the cost side that are going to cause you to be more aggressive in the back half of the year. Should we expect higher contract renewals? And how should we think about the spread of those contract renewals in relationship to the rail cost inflation that you’re going to see?

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

Well, I think, generally, it’s no surprise inflation is ticking up. And as contracts come up for renewal, we’re going to have to take that into consideration as we reprice that business. The good news is, we’ve seen an environment where over the last few quarters price increases have roughly been the same. We’ve now got to step-up in inflation. So we need to kind of deal with that going forward because our long-term strategy has always been to price above the cost of inflation. But an interesting dynamic and even the Fed looking at their long-term projections around inflation would suggest inflation is going to come back down in 2022. So there are interesting discussions with customers to have. And we’re going to do our best to continue to make sure we cover cost increases in our business there.

Jason Seidl — Cowen and Company — Analyst

But in terms of the spread, Mike, do you think that that’s going to change that much between your price increases and your cost?

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

Well, we’ve kind of moved away over the last year from giving specific numbers there. But clearly in the quarter, you would have seen a negative spread, but that doesn’t mean over the course of the year as you go through contract renewals that we can’t keep that at a positive level.

Jason Seidl — Cowen and Company — Analyst

Okay. Fair enough. My follow-up question is going to be, looking at sort of the margins on some of the types of business that sort of may have been deferred or may be coming online in the back half of the year because you guys are obviously looking for a strong rebound going forward. How should we think about the margins and some of those businesses that have been delayed from either chip shortages or on plants coming online in relationship to your overall business?

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

Jason, you’ve been doing this for 25 years, right? We never talk about segment profitability.

Jason Seidl — Cowen and Company — Analyst

I keep trying though. You can’t blame a girl.

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

But no, I would tell you this. It probably wouldn’t be surprising to see us miss our auto plan by $50 million because of this chip issue solved out. We’re going to deliver [Technical Issue]

Jason Seidl — Cowen and Company — Analyst

Guys?

Operator

Pardon me, ladies and gentlemen. It appears the speaker line has dropped. Please standby while we reconnect. Thank you for your patience. Ladies and gentlemen, we have reconnected with the speakers. Please go ahead.

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

All right. Jason, I think your question was around segment profitability. And I’m not exactly sure, we got dropped there. But I was just commenting, as we look into the back half of the year and going into 2022, segments like auto where we’re probably going to be $50 million short of our original plans because of this chip issue, you’re going to have the opportunity to make that up. And we’re not going to go through segment by segment giving you the profitability there and whether that’s accretive or not to our overall business, but I think you should generally just assume continued strong demand that generates great incremental margins, and that’s really our focus is to continue to deliver that top-line growth.

Jason Seidl — Cowen and Company — Analyst

And so, Mike, that assumption is that that $50 million that was lost, that’s just being pushed out that you’re going to make up most of that in ’22?

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

Yeah, listen, I don’t think anybody knows exactly when this chip shortage is going to be fully resolved. It’s kind of an amazing issue. I read an article the other day that the total value of the chips for these cars are less than $1, but we can’t get any. So you can’t complete the production process of putting a vehicle together. You’d like to think this gets resolved fairly soon. And we’re being told by the OEMs despite some incremental shutdowns here in the third quarter that that issue will begin to subside in the fourth quarter, and going into 2022, we’re going to see really strong auto production, second, third shift. Demand is incredibly high right now driven by a dealer lot lately, but you’ll see more bear asphalt than you will cars. It’s pretty tough to order a car these days, long, long wait times. And so the demand environment is pretty strong. We think this is going to begin to really deliver some outsized growth for us late in the year and into 2022.

Jason Seidl — Cowen and Company — Analyst

I appreciate the updates. And I’m knocking on wood that the supply chains get fixed there. Appreciate the time guys.

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

You bet.

Operator

Our next question comes from Justin Long from Stephens. Please go ahead.

Justin Long — Stephens, Inc. — Analyst

Thanks, and good morning. Just circling back to the service challenges that were faced in the quarter, how much of this would you say is related to issues that are specific to your network? So refined products and some of the regulation there, the plant outages, Lazaro versus a kind of broader rail network issue with some of your interchange traffic?

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

I — yeah, go ahead, John.

John Orr — Executive Vice President – Operations

Yeah. Well, some of the descriptions you had in your question, Justin, I think answer that question where a number of issues that are on our network particularly. But the conditions that exist outside of that I think are more global issues where we have been very successful in, for example, finding new employees and hiring new employees. We’ve been very successful in recalling our furloughed employees that were furloughed in 2020 and 2021.

Where we see difficulty in some of the execution that creep into some of our performance like re-crews and other things like that are problematic across the entire employment base in the United States. Taxis and fuel trucks and other services that are happening across a lot of industries. But the performance issues that we’re finding that are isolated on to our own network, we’re addressing very well. Oscar and the team, for example, on refined fuel products combined with Mike and the rest of the operating team worked tirelessly for 40-plus days to work with the officials in Mexico to resolve that.

And as Mike said earlier in the call, we’re breaking through that. We’re doing as much as we can to support the customers in the auto business to be ready to service them as soon as those chips come or as they’re moving equipment around in order to be prepared for that. So I would say there are a number of issues that are localized on our network that are condition of the broader global issues on supply chain. And for those that are really isolated to us, we’re working as a team to resolve them as efficiently as possible. And in fact, some of our recoveries are disproportionately quicker than others.

If you look at even some of the improvements we’re making on our intermodal velocity, in our intermodal supply chains in the U.S., we are order of magnitude, some of our chip plants are in the plus six hours and the 95% range over the last two weeks trending very well in recovery. So I think where we have network performance challenges that are isolated to our network, we’re addressing them very aggressively. And based on service and how the customer sees our service capacity and capability.

Where it’s an upside influence, we’re doing our best to mitigate those things. And in some cases, as we’ve said, we’ve gone a little long on our locomotives, pre-purchasing them in anticipation of problems in that supply chain for locomotive availability as we see the growth across the whole of transportation systems. And pre-positioning employees in our critical areas so that we know that the employment basis are going to be tough and going as aggressively as we can to hire a little bit long on that so that we’re ready for that growth that’s coming. I would say that’s my take on how we have kind of both a macro and a micro challenge, and we’re addressing both.

Justin Long — Stephens, Inc. — Analyst

Okay, that’s helpful. Thanks. And as my follow-up, I wanted to ask about the guidance. So despite the change to the OR outlook, the EPS outlook was only tweaked this year. The outlook for 2022 wasn’t changed. So is the right read here that your revenue guidance has actually gotten a little bit better and that’s offsetting a weaker margin outlook or is there anything out, Mike, below the line that’s influencing this?

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

You got it exactly right. We’re looking at revenues at the high-end of our guide that we’ve provided back in January. So that’s certainly helping the flow through the net income and EPS. And just as a reminder for everyone, we’ve talked about this before, we have stopped our share repurchases, which was in our original guidance, but has kind of a limited impact on 2021. And so as we kind of reset things at the end of the year for 2022 going forward that could potentially be a changing variable depending on where we’re at with the merger. But you’re spot on. It’s better revenue.

Justin Long — Stephens, Inc. — Analyst

Helpful. Thanks for the time.

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

You bet.

Operator

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

Tom Wadewitz — UBS — Analyst

Yeah. Good morning. Pat, I know you gave us some kind of parameters about not asking certain things. I’m not sure if it fits into it or not, but I think it’s more factual. Can you explain to us what happens if STB says no to the voting trust and the merger deal doesn’t expire till February? So what’s your obligation if they say no? And what happens if they say no and your shareholders still vote in favor of the deal?

Patrick J. Ottensmeyer — President and Chief Executive Officer

What happens if they say no and the shareholders [Indecipherable] the shareholder vote is going to whether it occurs before or after the STB decision is going to be conditioned on and a closing into a voting trust. So the shareholder vote will assume that there will be a closing into the voting trust.

And then your other question really is, it’s hard to answer because it will really — it will be a decision on our part, our board’s part on CN’s part and including and taking into consideration all of the information that will be available at that time, including any color or explanation from the STB as to what’s behind their decision, including the possibility that there would be technical reasons. So remember that the CN, original CN voting trust application was turned down and/or sent back on a technical matter because of the fact that there wasn’t a merger application associated with the voting trust application.

I remind everyone of that just to make sure you remember there are any number of reasons and factors that we cannot begin to anticipate at this point as to what might be included in a vote — in an STB decision. And all of that would have to be taken into consideration by our board and certainly by CN [Technical Issue] that forward.

Tom Wadewitz — UBS — Analyst

Okay. What about with respect to break fees and other obligations? Do you get out of some of the break fees if your shareholders approve the deal? I’m just trying to think about that obviously there is a chance you can end up going down a different path and break fees would be a consideration. So I just want to make sure I fully understand your obligations. If you continue — the deal doesn’t expire till February, but it’s possible STB could say no. So could you give a thought on that? Just how break fees would change in your obligations during that period?

Patrick J. Ottensmeyer — President and Chief Executive Officer

Well, again, I’m not going to speculate on the conditions and circumstances around STB decision. I think the break fees, the mechanics of the break fees are pretty thoroughly detailed in the merger agreement, which is part of the proxy. So I will fall back on my statement that I’ll just refer to those documents.

Tom Wadewitz — UBS — Analyst

Okay. So it sounds like it’s just pretty unclear what happens in that if that voting trust is rejected. Okay. Thanks for entertaining the questions.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Okay.

Operator

The next question comes from Chris Wetherbee from Citigroup. Please go ahead.

Chris Wetherbee — Citi Investment Research — Analyst

Yeah. Hey, thanks. Good morning, guys. Maybe just following along a little bit on that last line of questions. I don’t know if the board or you Pat had contemplated the prospects of potentially pursuing a merger without a voting trust. Is that simply just a no-go as it stands right now? Is that something that would — there could be circumstances that could lead to that being a potential option for you?

Patrick J. Ottensmeyer — President and Chief Executive Officer

Chris, I’m going to probably disappoint you with my answer that we are totally focused on getting voting trust approval, and I think that we have a very strong case and application. And then beyond that, it really is not — it wouldn’t be appropriate for me to comment on what the STB is going to say and what our board’s response would be.

Chris Wetherbee — Citi Investment Research — Analyst

Okay. That’s fair. And then when you think about the executive order, one of the things that we’ve been getting questions on is, maybe how some of this potential scrutiny relates to the relative service that the industry at large is sort of providing to customers, and obviously, you guys had some struggles in some service here in the short-term, as you’ve acknowledged. How much of a remedy is service improvement you seem to the potential for the regulatory scrutiny or maybe if there is any incremental regulatory scrutiny coming from the executive order, I guess, is there something that is a little bit more controllable from your perspective in terms of improving service in a shorter term, has the potential to put you on a stronger footing in terms of this regulatory dynamic?

Patrick J. Ottensmeyer — President and Chief Executive Officer

I don’t necessarily see them as being tied together. I know the STB before the executive order has been very focused on service. They hold hearings. There is an advisory group of the STB that’s called RSTAC. We have an employee of KCS who is on that committee. Over time, they have gone from probably monthly meetings to quarterly meetings when service levels were improved to weekly meeting. And I think just recently they have scaled that back a little bit I believe from weekly to monthly. But that is an organization that is intended to be sort of a clearinghouse of information and feedback from shippers and railroads and STB.

So there is a very high level of interest in scrutiny from the STB on service levels. We have all received, I know you’ve seen this, all of the CEOs, all of the railroads have received requests from the STB for comment, some detail about what we are doing to prepare for service recovery. Normally these things — these letters come to us just prior to the seasonal peak, but this time they came to us a little bit early. So I see the STB’s interest in service level and recovery and resource commitment as certainly predating the executive order. And I know from just interactions that we’ve had with the STB, including comments that Chairman Oberman has made publicly that that will continue to be a very heightened focus.

So we are taking those requests and that interest level very seriously. As you can see from the materials that we presented, we have proactively brought back resources. We’ve brought back crews. We’ve got crews in training. We think we are on a good path to make sure that we have adequate resources to complete our service recovery and handle our growth, both in the U.S. and Mexico. So I would say, we’re taking those inquiries and the concern that the STB has over service very seriously and responding in ways that we think are necessary and appropriate and don’t see the executive order is necessarily changing any of that.

Chris Wetherbee — Citi Investment Research — Analyst

Okay. Okay, that’s helpful color. Thanks for the time. Appreciate it.

Operator

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

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Hey, great. Good morning. So Pat or maybe a question for Sameh. But Union Pacific suspended international intermodal traffic for a week last night. I guess, we’ve seen this before in El Paso, Phoenix, maybe the West Coast ports in the early to mid-2000 after the mega mergers of the late 90s. What’s your thought on the ability for contagion on some of these supply chain shortages? Is there any impact to your network given the interaction with UP from Mexico? And then just my follow-on question, I’ll throw them both at you. But maybe can you provide any details on that contract dispute?

Patrick J. Ottensmeyer — President and Chief Executive Officer

Well, I’ll take the first one and I’ll — and just to comment on the first part, obviously, we can’t comment on what’s going on specifically at UP. But there is no doubt — you’ve used the word contagion, and there is — the North American rail network is a network. And particularly, given our interdependence with other carriers, and obviously, elevated in cross-border traffic, when other railroads have difficulty on their network, we feel it and in a lot of cases we help them. If there are detour options and other things that we can do to serve our joint customers, and that’s very much the way we think of it is, particularly given the fact that we interchange so much traffic at the border with other carriers.

These are joint customers. We’re not — we have no — nothing to gain from fully cooperating with the other carriers to make sure that our customers sees an adequate level of service. But yes, it is a interconnected network. I think the level of coordination and communication with the other carriers is very high. So on a very daily basis, we try to find ways to help each other to relieve congestion, to improve the utilization efficiency of assets and different gateways and different routes. But particularly being among the smallest, it’s hard for when the rest of the industry is tight and struggling with service and capacity issues, we are definitely going to notice this.

Sameh Fahmy — Executive Vice President – Precision Scheduled Railroading

And Ken, this is Sameh. A lot of the supply chain issues have been across the rail industry, the trucking industry, a lot of industries, and a lot of it is bringing people back. And like we have been talking about congestion and all the rest here, the roller coaster of volume drops and increases. You go down about 30%, 40% this time last year. Then you go up about 30%, 40% after and you have to bring people back. It’s not a trivial exercise, trying to bring back also the assets like a lot of locomotives were stored, we have to activate them.

And when you look at the numbers, the GTMs as an example in Q2 compared to Q2 last year, they went up by 30%. The headcount in transportation went up by 8%. So 8% against 30% volume increase. The mechanical headcount went up by 3%. So bringing people back is not a trivial exercise, and it did contribute for sure to some of this congestion. But at the same time, it does provide a nice productivity thing, because if you recall, when we said in PSR Phase 2, which was last year, we’re very much oriented obviously towards making up for the lost revenue. And we said that in Phase 3, which is 2021, we don’t want to lose all the gains that we made. So we did conserve a lot of the gains because the headcounts are not going up at the same level as the volume increases. And the train lengths did not go down very much, it went down by about 2%, which means that the train starts and all the rest. We have conserved a lot of what we did last year.

So the game really is, how can you absorb the volumes. How can you improve the service, which was the thrust of Phase 1 of 2019, and we have done a lot of work in that area. We have really pushed the envelope on the local service and the industry jobs and the spotting and pulling percentages, which went up from like 70% to 87%. So the game is, how can you improve the service, absorb the volumes and still maintain some of the efficiency gains that we have done.

We’re talking about locomotives. Actually 69 locomotives are going to leave our network in the next three weeks. Leave the network, not go in storage. They are leaving the network. There’s a lot of other locomotives that are actually demo locomotives that were working on with a vendor. So the efficiency is still there, but at the same time, the service is primordial, and this is really the balancing act that we are trying to do. And this is a challenge to the supply chain, to your question.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Sameh, just to wrap up on that. Is it hard to get the employees in terms of the labor market right now for the rail network? For your network?

Sameh Fahmy — Executive Vice President – Precision Scheduled Railroading

I would say that initially it was, Ken, a couple of months ago when we started the training classes. It was tough to get people back and actually approach even people that we had that we wanted to bring back. And they said, they are no longer interested. Obviously, a lot of the payments they have been receiving became hindrance, why come back when they were getting checks at home. So initially it was.

Now recently, we have had much more success. And we have — I think we have about 140 people in classes. 40 of them now have marked up, meaning we can actually use them. So there is still 100 that are in the pipeline. And when you talk about productivity and cost, well, you have 100 people here that have not gone into productive service yet, but they are counted in the headcount. So we say that the headcount is 8% higher, but it includes people who are still in training.

One measure we use, I look at a lot is compared to pre-pandemic. Not compared to Q2 last year, because Q2 last year everything was not really where it is, where it needs to be. But the crews right now are still 5% lower than pre-pandemic and the volumes are 3% higher, the carloads are 3% higher. So there is productivity happening and we are facing the challenges, but we are finding people now. And we expect that in two to three months, it will be a completely back on track. And you know what, John talked about the velocity and the dwell, we have very, very clear plans now. And we expect our velocity to go back up to 16, 17 miles per hour in the next, I would say, months or two.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Wonderful. Thanks. Appreciate, Sameh, Pat and team. Thanks.

Operator

The next question comes from Allison Landry from Credit Suisse. Please go ahead.

Allison Landry — Credit Suisse — Analyst

Thanks. Good morning. Appreciate squeezing me in. I’ll just ask one. But I just wanted to go back to the topic of reciprocal switching, but sort of asking the question in a different way. Obviously, it’s difficult to estimate the potential impact for the industry, never mind what actions the STB might take down the path, if any. But Pat, I just — is there an argument to be made that KCS would be less impacted on a relative basis versus some of your peers? I’m just sort of thinking about the fact that you probably have lessened the way of captive traffic, more interchanges, etc. So just do you think that this is a fair way to think about it?

Patrick J. Ottensmeyer — President and Chief Executive Officer

A fair way to think that KCS would be less impacted?

Allison Landry — Credit Suisse — Analyst

Yeah, right.

Patrick J. Ottensmeyer — President and Chief Executive Officer

It just really depends on what the rules are and without knowing kind of specifically how, because there are many different proposals, many different options for how reciprocal switching would be actually implemented. It’s just impossible to know how it would impact us.

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

Allison, this is Mike. Obviously, half of our business is in Mexico which wouldn’t be impacted. So I think it’s safe for you to conclude that. But what the impact is in the U.S. relative to the others, would be difficult to answer. And so we really understood what specific proposal is.

Allison Landry — Credit Suisse — Analyst

Okay, understood. I’ll leave with that one. Thank you.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Okay. Thanks, Allison.

Operator

The next question comes from Brian Ossenbeck from J.P. Morgan. Please go ahead.

Brian Ossenbeck — J.P. Morgan — Analyst

Hey, good morning. Thanks for getting me on the call here at the end. I appreciate it. Two quick ones. One on the network performance. John, if you could just give us an update on the four hour border window change going from six to four? How does that work? Any — was there any benefit improvement when you made that switch? And what’s the visibility to going to maybe two or no more fluid border crossings?

And then again back on the executive order, if you can just comment briefly on, I think Sameh just mentioned it on spotting and pulling. If we do get more data on first mile, last mile, how do you think we should interpret that? Is it going to be sort of hard to put in the context because every network is different? Are customers are really asking for this level of disclosure? So maybe since I think we can hear more about that potentially in the future, Pat or someone can give us some thoughts on first and final mile that would be helpful. Thanks a lot.

Sameh Fahmy — Executive Vice President – Precision Scheduled Railroading

As far as the first mile, last mile, I don’t see any issue in giving numbers, like I just gave some numbers. But the numbers went from the 74% to 87%. John and the team have been unbelievably focused. That exercise in Monterrey that John talked about was very intense, and we have a lot of customers around the Monterrey area. And you can have the trip as fast as you can from origin to destination. But if you don’t get it to the industry when they need it then it doesn’t make any difference.

So now we provide about 550 cars on a regular basis, reliable basis every single day in the Monterrey area. We spot 550 cars. And the other thing is supplying the MTs also, which is another thing that is important. When a customer orders 50 MTs and you give them the right type of car. So that aspect has really, really improved, and it’s not mentioned in any of the slides here. So to your point, we should make that more public.

As far as the window, four hour window, that has been a great success and we worked actually hand in hand with Union Pacific on that because our trains that go to UP from the bridge. And now a train instead of waiting six hours, if you miss the window, you have to wait six hours for the next one, now you wait only four hours if you miss. Now obviously, we don’t want to miss at all if we can help it. But there has been a nice improvement, but that improvement is all chained with the rest because it’s a network.

So John and the team did a lot of work in the Laredo yard, which has to receive the trains, to plan ahead when the train arrives so everything is ready. But the fact that now you send four hours’ worth of trains to Laredo coming from Mexico northbound is much better than sending to Laredo in one shot six hours’ worth of trains, you don’t flood the yard. So these are benefits and they are all coordinated with the rest of the yards on the other side of the border, on the south side, Nuevo Laredo, Sanchez and Monterrey. And it all goes hand in hand and there is a wide boarding exercise that we don’t even talk about here that just took place. John was the new structure that he talked about, the new organizational structure. And there is a lot of good things that are going to happen. A lot of work was being done in yards that are not the best yards like Nuevo Laredo is a very small yard, it was doing work for Sanchez, which is a very big yard. But Sanchez was affected by the refined products, which grew by 100% from Q2 last year to Q2 this year.

So all these things are connected. But to answer your main question, the bridge, now the windows went from six hours to four hours. And then the intention eventually is to go down to zero, our windows, and to build the second bridge, in which case, there are no windows at all and you go directional. Northbound goals and southbound goes at the same time without having any sequencing between trains, and that will do magic to the velocity of the KCS network, which is our cross-border is what’s growing the most. Our cross-border grew by 50% from Q2 last year to Q2 this year. And I think refined product across that is 100% increase, right Mike?

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

Yes, over that.

Brian Ossenbeck — J.P. Morgan — Analyst

All right. Thank you, Sameh.

Operator

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

Scott Group — Wolfe Research — Analyst

Hey, thanks. Good morning, guys. So quickly, can I just clarify if for whatever reason the voting trust is blocked before August 19, does the shareholder vote still happen? And then the executive order focused a bunch on passenger service and Amtrak, can you just talk about like how much passenger service exposure do you guys have and what you guys are planning there?

Patrick J. Ottensmeyer — President and Chief Executive Officer

First answer first question, yes. Shareholder vote will take place on August 19. If there is a decision prior to.

Scott Group — Wolfe Research — Analyst

Regardless of the decision?

Patrick J. Ottensmeyer — President and Chief Executive Officer

We — KCS does not actually host any Amtrak. We have I think a couple of one location around St. Louis. Technically, Amtrak runs over our tracks, but we don’t control it, we don’t dispatch it. So we really have no relationship with Amtrak. There has been talk obviously from time to time with Amtrak and with other passenger and commuter metro-type organizations to bring passenger service on to our network, but that’s really the extent of our relationship with Amtrak. So we don’t have a history with Amtrak. And if you are familiar with the Amtrak response, I think they talked about the Baton Rouge to New Orleans route that has been identified as a divestiture candidate, but there is no passenger service on that route today.

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

And by the way, Scott, there hasn’t been passenger service on that in over 50 years.

Scott Group — Wolfe Research — Analyst

Okay. So Amtrak shouldn’t be a big issue there. Just real quick follow-up. If for whatever reason we don’t get a voting trust decision by August 19, does the shareholder vote get delayed until there is a decision?

Patrick J. Ottensmeyer — President and Chief Executive Officer

No. Again, as I mentioned earlier, the intention is that the shareholder vote would be subject to — shareholder approval will be subject to STB approval for a voting trust. So if there is no decision, it would be our intention to proceed with the shareholder vote.

Scott Group — Wolfe Research — Analyst

Okay. Thank you, guys. Appreciate the time.

Operator

The next question comes from David Zazula from Barclays. Please go ahead.

David Zazula — Barclays Capital — Analyst

Thanks for taking my question. Just maybe for Mike. As you’ve had the opportunity to review some additional data with respect to potential additional traffic that you can convert that’s along CN line, KSU line, has that changed your opinion on the potential benefits of converted traffic due to the merger?

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

Is that a question specific to the synergies?

David Zazula — Barclays Capital — Analyst

I guess, I’m thinking more broadly on how much long-term do you think is convertible just as you…

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

Yeah. Well, I think CN has done a really good job of evaluating the various market opportunities that present themselves to combined company here. And we’ve done a terrific job growing our business over the years. I often use the cross-border intermodal business at Laredo, depending on how you measure that, we think we have somewhere around 5% to 6% share. That’s interesting, but that’s far short of the possibilities. And the challenge that we’ve always had is we don’t go to any interesting places in single-line service. Not to say, Kansas City is an interesting place, it is, but it’s not a market like Chicago or Detroit or Toronto, which is the attraction of combining with CN.

And we think we can dramatically increase the share of that cross-border business that has been moved by truck and move that business off the highway systems, more environmentally-friendly, we can establish premium intermodal service that we think will compete very effectively with other modes of opportunities that are out there for shippers and provide a new services that bottom line doesn’t exist in the market today. So I think that’s a great example. And beyond that, we’ve looked at it segment by segment and think there are tremendous opportunities for the two companies to provide new single-line service that’s pro-competitive and offer shippers more options.

David Zazula — Barclays Capital — Analyst

Noting your capital plan, at least, the level has not changed. I guess, have you changed any composition of the capital plan in response to kind of preparing for the potential merger and maybe some additional growth or terminal facilities that you might want to put in place or is that kind of planning not kind of in plan yet?

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

No, not really. I’d say, we’re executing against our plan. I mean, you always have some pluses and minuses, and John was recently out on the railroad with his team and a few projects here and there. So you add a few, you take a few away. But generally, we’re still on plan. We don’t see any reason why we would scale that back. We’ve got to continue to operate as a independent company obviously both before voting trust closing and after voting trust closing. And CN’s offered us the opportunity in the merger agreement to spend more than what we’ve guided externally in the event that there are additional growth opportunities or projects that John’s team needs to execute on. So yeah, our plans have really not changed and we’ve got lots of flexibility going forward under the merger agreement.

David Zazula — Barclays Capital — Analyst

Thanks a lot.

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

You bet.

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. Thank you, all. Thank you for your questions. Obviously, a challenging environment for us as well as for supply chains across North America and beyond. Hopefully, one of the things that you heard today is that we are very focused on improving our service and operational performance. We feel very confident about the growth opportunities that are in front of us, and working very hard to realize those opportunities. So thanks again for your attention and look forward to seeing you all again soon.

Operator

[Operator Closing Remarks]