Kansas City Southern (KSU) Q4 2020 Earnings Call Transcript

Kansas City Southern  (NYSE: KSU) Q4 2020 earnings call dated Jan. 22, 2021.

Corporate Participants:

Ashley Thorne — Vice President, Investor Relations

Patrick J. Ottensmeyer — President and Chief Executive Officer

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

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

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

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

Analysts:

Thomas Richard Wadewitz — UBS Investment Bank — Analyst

Kenneth Scott Hoexter — Bank of America Merrill Lynch — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Jason H. Seidl — Cowen and Company — Analyst

Christian F. Wetherbee — Citigroup — Analyst

Amit Singh Mehrotra — Deutsche Bank — Analyst

Allison M. Landry — Credit Suisse — Analyst

Brian Patrick Ossenbeck — JPMorgan Chase & Co. — Analyst

Jordan Alliger — Goldman Sachs — Analyst

Justin Trennon Long — Stephens — Analyst

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Scott H. Group — Wolfe Research — Analyst

Bascome Majors — Susquehanna Financial — Analyst

Jonathan B. Chappell — Evercore ISI — Analyst

David Griffith Ross — Stifel, Nicolaus & Company — Analyst

Brandon Oglenski — Barclays — Analyst

Presentation:

Operator

Good morning and welcome to the Kansas City Southern Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]

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

Ashley Thorne — Vice President, Investor Relations

Thanks, Jason.

Good morning, and thank you for joining Kansas City Southern fourth quarter and full year 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. 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, 2019, and in other reports filed by us with the SEC. 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.

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. Welcome to our fourth quarter earnings call.

I’m going to go ahead and just move directly to slide 5 with a summary of the quarter and a couple of comments here. As the headline indicates, we really had a strong quarter in the fourth quarter of 2020, with some significant challenges. And we’ll talk about the challenges and the impact they had on our results a couple of times here. And you can see here, revenue declined 5% versus previous year, and that was impacted by the teachers’ outage in Southern Mexico, blocking our line from Lazaro Cardenas to Morelia and Mexico City, and we’ll share some detail and the impact of that in the comments that follow. And obviously, fourth quarter results, particularly operating ratio and earnings per share and revenue, obviously, impacted by that event as well as some elevated casualty expense, which was really an unusual quarter. I think Mike Upchurch has told me that was the highest casualty related expenses we’ve had in well over 10 years.

If you look at the chart at the bottom of this slide, we’ve shown operating ratio and earnings per share in a way that try to highlight comparable results to prior period as well as focusing on some of the core results. I will mention in the adjusted operating ratio column, the 62.4% last year to 60.2%. That 60.2% does include the impact of some of these significant challenges and unusual level of impact. Mike Upchurch will — again, will cover this in more detail later. But about 1 point on the operating ratio due to the Lazaro outages and about 1.6 points, 160 basis points, related to unusual level of casualties.

So with that, we’ll put 2020 in the books and move on to slide 6, which I think is probably more interesting to all of you on the call, which is our outlook. We’re reinstating multi-year outlook here. Obviously withdrew some of our guidance over the course of 2020 due to the circumstances that everyone’s aware of. So, we are expecting revenue growth for 2020 in the double-digit range, and Mike Naatz will talk more about that in a few minutes. Operating ratio, we are targeting 57.5% in 2021 and 55% to 56% in 2022. EPS, $9 this year, increasing to $10.50 to $11 range in 2022. Capex, for the next couple of years, around 17% of revenues and free cash flow in excess of $700 million in both ’21 and ’22.

So I think the punch line here is, we feel very good about 2021 and beyond. We think we’ve got good visibility to our business pipeline and cost improvements, and we’ll cover both of those over the course of the next several minutes, and we feel that we are set up very nicely for 2021 to have a terrific year, assuming of course that we have a little help from the economy, the pandemic recovery and stability in some areas that were not so stable in 2020.

So again, we’ll get into a lot of details here, and I’ll come back at the end for some summary comments.

With that, I’ll turn the presentation over to Sameh Fahmy.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Yeah, thank you, Pat, and good morning, everyone, and thank you for being on this call.

I would like to start on slide 8 by thanking the operation team for all the hard work and the resiliency in the face of incredible adversity. And I think Pat touched on some of the items I will repeat — I’ll repeat a bit here, but you know, we are running trains and servicing customers in the middle of the worst pandemic that humanity has seen in the last 100 years.

And like all the other railroads, I’m sure, we have — we had a lot of cases. We had 650 cases of COVID, and on any typical day you have about 5% of crews marking off because of COVID. So we had to face that challenge, and simultaneously with it, we had this blockade for 59 days in the Lazaro area with the teachers’ protest which is unrelated to the railroad. Compounded with it [Indecipherable] rule that came in effect in Mexico that reduced the maximum time on duty for crews and affected us by about 200 [Phonetic] crews in Mexico, which is significant and causes delays for trains.

Now, thankfully, [Indecipherable] rule has been reversed, at least for a couple of months, and that we are seeing already an improvement in the velocity of the network in Mexico because of that change. People also forget that in October, there were two hurricanes that came in the middle of all this. And the combination — and the derailment that Pat touched on, which was in the Houston area, which is the main artery between the US and the Mexico traffic, and it stopped the line for about two days. It was a very unfortunate, one-of-a-kind type event. So that clearly had an impact on velocity and dwell, and you see it on the chart here.

But simultaneously with all this, and while the volumes were essentially flat with Q4 2019, the GTMs, as you see, were only 1% lower. We managed actually to handle all this with a headcount which is significantly lower than the year before. Transportation headcount is 9% lower; mechanical 7% lower; engineering 6% lower. And you also have to keep in mind that in Mexico, we are not allowed to cut people. So we use attrition. And then a lot of the costs actually have taken place in the US. And the trick we have used in 2020 since the pandemic started has been to reduce train starts which reduces crew starts and makes trains longer. So the trains are longer by 14% and the crew starts came down by 14%. And a very beautiful side effect of that is fuel efficiency. So we gain 5% on fuel efficiency, and the locomotives have come down by 5%.

So we managed to continue the PSR journey to service our customers the best way we can in the middle of the pandemic, and we had a significant surge in the Monterrey area in particular from refined products, which surged by like 81% Q4 last year to Q4 2020, and it was all focused on the Monterrey area which created congestion in that yard. So we had our people working on Christmas Day, Christmas Eve, New Year’s Eve. The intensity and the passion is definitely there. And we came out of it. So this is good news.

If I go now to slide 9, the next slide, I just want to position where we are now in the journey and where we are going next in 2021, which is what has been driving our guidance. If you recall, in 2019 our whole emphasis was on velocity. And the revenue was growing by 8% and — the whole, whole focus has been on trying to cycle the cars because every time you cycle the cars fast, like grain went down from 28 days to 18 days cycle from Kansas City to Mexico and Mexico City and back. You go back and you got more routes, so you got more revenue. So that has been the emphasis in phase 1.

And phase 2, which is 2020, including the Q4 that we just finished, that we are reporting the results on, the emphasis, like I said, has been on train starts and train lengths, and you see it here in the graph, a significant increase in train lengths. Now, at the end of 2020, we started actually converting into the phase 3. And the phase 3 is trying to do the combination of both. We want to maintain the trains’ lengths. We want to even increase it by probably another 5%. And at the same time, we want to regain the velocity that we have seen in phase 1. And the way to do that is to remove the limitations that we have been facing in Q4, in particular, because we have been essentially testing the limits and hitting the constraints which is helping us now focus our energy, laser-focused.

Example, infrastructure. We know that when you are on long trains, you need long sidings for train meets. Otherwise, you have to park a train a long way before the other train comes by because that’s the only location where we have a 10,000-foot siding. So siding extensions — and Jeff in a few minutes will cover the infrastructure projects that we have — siding layouts [Phonetic] is very important, yard configurations are very important, because the tracks again and yards and the switching lead is very important. When you have a long train, you have to double over on two tracks and all that. So we are going to invest money, but we know exactly where to invest it because we — we have been hitting these things. So it’s not a theoretical exercise. It’s based on what we have lived through in Q3 and Q4 of the of the last year.

Labor agreements is another big area where — where we are really sounding things now, and we are working very, very close with the union because we have labor agreements that limit us. When you have long trains, when you have more than 120 cars on a train, you have to add brakemen, as an example. When you have more setups and more pickups on line of route, you have to add more brakemen. So, with the red light, COVID, that has been set as of Monday, pretty much over all of Mexico, we have to — we have to work with the union to find ways to run our trains with less crews because there is about 175 people now that qualify under the decree because of precondition health issues and stuff like that. So — and we have run very well since Monday.

There is a charismatic union leader in Mexico, a very pragmatic man who is working with us, and we are very close here and we are creating win-win situations that bode well for us because once the red light is over, once the COVID is over, and it will be over one day, we are going to hopefully use the techniques and the agreements that are temporary right now, hopefully, they can be perpetuated in which case we can — we can run hopefully with a fewer number of crews. Right now, we are on four men crews in many — under many circumstances. So that’s another area.

The train schedule, which we call the TSP, is very important and we have been doing a lot of experimentation with that to minimize the number of times that you switch a car and that you touch a car. And we just found cases here where we block the cars in Vanegas and block them again in Nuevo Laredo, Mexico, then block them again in Shreveport in US and Jackson again. Well, we are building things now to do this in Sanchez, which is a big yard. So — and we are working with our customers to do better local and industry distribution. And that’s — we used to call it on another railroad, the first mile, last mile. That is very important because that’s what the customer sees.

And we’re putting great, great intensity on working with the customers and monitoring, spotting percentages, as an example, are we giving them the number of cars that they ask for, are we giving them the right type of car, because we have customers that have multiple types of cars depending on frames for automobiles that will be manufactured, as an example. So, is it the right number of cars, is it the right type, do we get it in the right window. So we have a lot of intensity that is going to be significant, important. So on trip plan compliance or intermodal, as an example, and we’re beginning to see winning business because of that intensity. And the customer is going to be right at the center of our efforts. And we hope all this will add another $50 million of savings. And Mike Upchurch will get more into that.

So at this point, I will turn it to Jeff. He will — he will go more into the infrastructure. Jeff?

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

Okay. Thank you, Sameh. Good morning.

I’ll start my comments today on slide 11. And as Pat indicated, we are targeting capital expenditures of approximately 17% of revenue for ’21 and ’22. Expanding on those plans for ’21 capex, this map highlight some of the main focus areas related to those investments supporting our PSR phase 3 goals of service, volume growth, train length and productivity improvements. In the north zone of Mexico, we continue to have tremendous growth in cross-border volume, which was 18% for the quarter.

As Mike Naatz will discuss, refined products volumes led this growth story 82% higher for the quarter. One dynamic we’ve seen this quarter are significant manifest volumes moving to multiple new transloading terminals in both the Monterrey and San Luis Potosi areas. To support these new opportunities in the Monterrey area, we have redesigned some local train services and have developed new infrastructure projects separating Monterrey into separate different service zones, providing improved proximity to customers, faster local cycle times and improved service designs. We will continue with infrastructure work at our Sanchez terminal to allow for additional blocking and building of trains at that terminal to more efficiently serve the greater Monterrey area and to improve receiving and departing of all cross-border trains. Reconfiguration of yard leads in and out of our Salinas-Victoria intermodal terminal and the addition of intermodal cranes will provide significant productivity improvements in the terminal and support our intermodal growth.

Another characteristic of our infrastructure in Mexico is the density of customer facilities directly served off of our main line, which means the main line can be blocked for periods of time whilst finding and pulling cars from those industries. As more of these facilities are constructed in the Monterrey and San Luis Potosi areas, we will continue to modify our infrastructure with additional double main projects and new separated industry lead tracks. This will provide for more efficient switching for customers and allow more through trains to pass through the network unimpeded. Last year, we started multiple siding extensions to support our PSR train length initiative, and we will continue these into ’21 and beyond as we look to capture additional productivity benefits with train length and more efficient meet past capacity.

Turning to slide 12, I’ll provide some brief comments on ESG matters following our announcement this week that we have committed to a Science Based Targets initiative focused on greenhouse gas emissions reductions. Fuel efficiency is a major component to achieving this target. As illustrated in the slide, we continue to see consistent improvement in fuel efficiency and have accelerated these improvements recently under our PSR operating model, providing both cost and environmental benefits. While we are on track to achieve our current goal to reduce — to reduce CHG emissions intensity by at least 12% by 2025, our new science-based target will establish an even more aggressive longer-term goal.

As you can see, there are several positive ESG activities on this slide. One area I would like to highlight relating more to operations is our relationship with the Mexico labor union. As Sameh mentioned, we have talked in the past about some differences in our Mexican collective agreements and our goal to modernize these agreements to support a more efficient operation. Approximately 15% of our Mexico T&E workforce is currently on COVID related leave, with the majority out under the government mandated stay-at-home order. We have had several recent successes with the union related to our collective COVID response and have received tremendous support to minimize the overall impact to the operation. The union has allowed us to modify crew-conscious [Phonetic] requirements, relocate employees and modify some operating rules to provide for continuity of service during the pandemic. We believe these recent successes pave the way for additional positive negotiations and operational benefits in 2021.

With that, I’ll turn the presentation over to Mike.

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

Hey, thank you, Jeff, and good morning, everyone.

I’ll begin my comments on page 14 with a update on our fourth quarter performance. Overall, as you already heard from Pat, revenue was down 5% on a 3% decline in carloads. If we were to hold FX and fuel price constant, revenues would have been down only 1% year-over-year. And also, as you heard, we experienced a nearly two-month long teachers’ strike in the quarter, which affected the carloads moving in and out of Lazaro Cardenas. Adjusting for these protests, volume and revenue would each have been up approximately 2.5%, and sequentially, adjusting for the protest, fourth quarter volumes and revenues would have been up approximately 3% and 9% respectively.

All right. Looking at the business segments, Chemical & Petroleum volumes increased an impressive 18%, driven by strong growth in refined products, which was partially offset by lower LPG volumes, largely due to market conditions and shifts in sourcing. The Industrial & Consumer segment saw volumes decline 6% year-over-year, and this was driven by weakness in our metals business. We are continuing to see lower demand for drilling pipe due to the oil market conditions and for metal products used in infrastructure projects. The good news is that sequential volumes were up 2%, or 5% adjusting for the protests, and we are looking for continued improvement here. We do have some new steel plants coming online here in 2021, and the appliance business has been very strong on strong consumer demand.

Ag & Min revenue was up 3% on a 4% increase in carloads, and this increase was led by gains in our grain business, which posted a very robust 12% year-over-year volume increase. Looking at the Energy business, carloads and revenue were down 12% and 16% respectively. And I believe you’re all familiar with the story here. Frac sand, crude oil and coal were all down due to weak demand. And while it may be a while before the oil and gas industry has fully recovered from the pandemic, we have seen a very nice increase in crude shipments as the economics improve and after the Canadian government lifted their curtailments. We certainly expect this to continue in the near term.

Looking at the Intermodal information on the chart. We provided you a specific example of how the protest affected this business segment. As you can see, our year-over-year intermodal carloads and revenue were down 7% and 20% respectively. But removing the Lazaro business, you can see our Intermodal volume would have been up a very healthy 11%. Lazaro impacts aside, we saw very nice growth in our cross-border and domestic business. Similar to last quarter, we were seeing inventory replenishment, e-commerce demand and tight truck capacity as being helpful.

Lastly, our Automotive volumes were down 4%. We did see a nice sequential recovery as US vehicle demand was healthy and certain finished vehicle inventories remain low. In the latter portion of the quarter, we picked up some new business, specifically with the launch of a new electric vehicle that’s being produced in Mexico and shipping to Kansas City, which, incidentally, is a very nice length of haul for us.

Fourth quarter core and contract pricing held up well. We’re maintaining disciplined pricing strategy and targeting inflation or better pricing increases. We also continue to focus on yield optimization and win-win solutions with our customers.

Turning to page 15. I’d like to highlight the performance of our cross-border and refined products business. This strategic growth area has performed very well, with cross-border year-over-year revenues increasing by 17% and our refined products business growing an extraordinary 87%, which is very notable when you consider the COVID impacts on refined product demand. Returning to cross-border for just a moment. Our Ag/Min and Chemical & Petroleum business units both achieved cross-border volume and revenue records, and our Intermodal cross-border franchise business delivered another strong double-digit growth quarter. We continue to see excellent opportunities in both of these areas.

Turning to page 16, you will find our 2021 outlook. As Pat mentioned, we expect double-digit revenue growth in 2021. And looking at the slide we provided in FX and fuel constant bridge help explain our outlook. Working backward, favorable COVID comps, particularly in the second and third quarters, aided by favorable macroeconomic environment, will provide 6% to 8% lift year-over-year. Second, we believe our unique growth drivers, including the refined products and cross-border areas I just mentioned, will contribute another 4% to 5% to our overall growth. As a reminder, the Port Arthur DRUbit project we talked about in previous calls continues on schedule and is expected to be operational in the second half of 2021. And lastly, we expect favorable fourth quarter comps resulting from Lazaro protests to provide another 1% of growth.

In summary, while not without some challenges, we had a very solid quarter. Looking forward, while COVID resurgence is a risk, we’re very optimistic about 2021. The combination of our revenue opportunities, paired with the increased service focus as a part of PSR phase 3, will drive an impressive growth year here for Kansas City Southern.

And that concludes my comments. I’ll turn things over to our CFO, Mike Upchurch.

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

Thanks, Mike, and good morning, everyone.

I’m going to start my comments on slide 18. As Mike indicated, volumes declined 3% while revenues declined 5%. That was negatively impacted by fuel surcharge and FX. They, combined, reduced our revenues by 4 percentage points. We also experienced some negative impacts from the teachers’ protest on our Lazaro line that I’ll cover in more detail on the next slide.

Our reported operating ratio was 62.2%. That was negatively impacted by a one-time impairment of a $13.6 million software development cost impairment. And despite our challenges related to the Lazaro line protest and unusually high casualty cost this quarter, we managed to improve adjusted OR by 220 basis points. Our reported diluted earnings per share were $1.80. Adjusted for FX and the write-off of the software development costs, our adjusted diluted earnings per share were $1.89, up 4% over the prior year.

Turning to slide 19. I want to cover our fourth quarter results that were negatively impacted by the teachers’ protest and elevated casualties. Although we’re still feeling the lingering impact to these protests on our Lazaro business as shippers have understandably been a little bit slower to direct traffic back to Lazaro, we really view both items as largely discrete events that should not continue at those levels in 2021. To better put our quarter into perspective, you can see a bridge here of our adjusted operating ratio and adjusted EPS from fourth quarter 2019 to fourth quarter 2020. The shortfall to our forecast from the Lazaro impact was about $23 million in lost revenue, which we believe impacted our Q4 operating ratio by about 100 basis points and EPS by about $0.13 per share.

Additionally, unusually high casualty costs added an additional 160 basis point impact to our OR and a $0.10 impact on EPS. And while we’re disappointed in several high impact casualty events in the quarter, we do not believe the unusually high $26 million in casualties are reflective of our normal operating trends. And I actually went back 15 years, and I can tell you we never had a quarter like this we were kind of snake-bitten here. So really, as you look at the quarter, so aside those two events, we think our core earnings growth in the quarter was more around 480 basis points and $0.30 per share.

So turning to the next slide, let’s talk about operating expenses. Our adjusted operating expenses declined 8%, evidence of continued good cost management. Other than the previously mentioned $12 million increase in casualty expenses, we continue to benefit from strong cost management across the business, as evidenced by declines in comp and benefits, fuel, equipment and purchase services.

And let me just touch on comp and benefits and fuel. You will see more details on slide 29 in the appendix, but comp and benefits declined 11% driven by lower headcount and work hours, lower incentive comp and FX. Our quarterly average headcount was down 7%. Savings of $11 million from lower headcount and work hours is a result of lower volumes on our network, but more importantly, train consolidations driving fewer crew starts and reduced hours worked. Mechanical reductions due to fewer locomotives and freight cars and optimization of certain G&A functions that we executed midyear. For 2021, we expect our headcount growth to remain well below volume increases as we continue to lengthen trains, creating further operating leverage.

Fuel expense declined 34% in Q4, driven by reductions to fuel price, better efficiency and lower consumption. And for 2021, we continue to believe fuel efficiency will be a large opportunity for us as we continue improving our cost structure. And you can see more details, again, on slide 29.

Turning to capital allocation on slide 21. Free cash flow was up 29% despite the pandemic to $554 million, in line with our previous guidance of $550 million. I think this clearly illustrates the resiliency of our rail operations operating during the pandemic and is proof of our ability to continue to generate substantial amounts of cash flow. 2020 capex came in at $410 million, below the outlook of $425 million. And despite the significant pandemic challenges that KCS sustained in 2020, we actually increased shareholder returns by 23%, including a 26% increase in share repurchases. And during the fourth quarter, we repurchased approximately 2.7 million shares at an average price of $179.77.

And before I turn the call back to Pat, let me give you a little bit of color I think on our guidance. Let’s say we’re really proud of the full year 2020 financial performance we delivered despite operating through what we hope to be a once in a lifetime pandemic. Our team at KCS I think from top to bottom really rallied against all odds and delivered terrific performance. And as Sameh indicated, I’d like to thank really all KCS associates, particularly those out in operations who don’t have the luxury of work-at-home options like many of us do. So, during the year, we improved our operating ratio 250 basis points while volumes declined 6% and revenue declined 8%. And that improvement was the second best OR improvement in the past few decades, only bettered in 2010 as we emerged from the Great Financial Recession when our revenues grew 23%.

And as Mike mentioned, we feel really good about our 2021 growth prospect of double-digit revenue growth. We had some easy comps, obviously, not just pandemic, but with Lazaro, and when you look at it over a two-year basis, you have a two-year stack revenue growth of roughly 3% or 4%. Economic indicators around industrial production, low business inventory levels, high order levels, manufacturing PMIs of greater than 60 and potential federal government stimulus and infrastructure spend give us some confidence that we can grow exceptionally well in 2021. Additionally, we do expect favorable mix impacts and continued strong growth in our cross-border business, particularly refined products in Intermodal.

As it relates to our OR guidance of 57.5%, the improvement of about 300 basis points is only nominally higher than what we delivered in 2020, and particularly in light of expectations we have for revenue growth in ’21 versus experiencing revenue declines in 2020. Our incremental margin assumptions of 60-plus-percent I think are very achievable as volumes return to our network. And we’ve demonstrated, obviously, a solid track record of delivering PSR savings. We fully believe the $50 million target we have for 2021 is very achievable, and we have provided some additional details for you on slide 28 in the appendix.

And with that, I’d like to turn it back over to Pat.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Thanks, Mike.

I think that was an outstanding summary and kind of a preview of how we see 2021. I will go back — I know there are typically a lot of employees on the call — pick up on some comments that my colleagues have made here and just thank you, congratulate you, for your amazing and outstanding agility and resilience through 2020. Very proud of the results and the way everyone responded. We thought we had things kind of dialed in in the first quarter. The second quarter, we went into full contraction mode. And then, before we even caught our breath there in the third quarter, we came into full expansion mode. And hopefully, we’re in a place here in the fourth quarter where we have a little bit more stability. We think we’ve got good transparency in our business pipeline and good transparency in our cost outlook as we move into 2021.

So again, as Sameh and Jeff mentioned, appreciate the flexibility that all of our employees showed and especially call out the Mexican cooperation we had with our Mexican unions as the protocols — the health guidelines and protocols that were in place from the federal level — federal government — had a real dramatic impact as the traffic light system changed over the course of the year from red to orange, and then back to red in many cases, required a lot of cooperation and effort on the part of our union colleagues to help us get through that and continue to be able to maintain our operation, serve our customers, and really thank them for the effort there.

So with that, we’ll open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Tom Wadewitz from UBS. Please go ahead.

Thomas Richard Wadewitz — UBS Investment Bank — Analyst

Yeah. Good morning, and thanks for the — all the detail on the guidance. It’s — it’s obviously a strong guide, and I think all the detail is really helpful. I wanted to see — the revenue growth is — is pretty strong and I wanted to see in the refined products momentum in fourth quarter is very strong as well. What do you think your risks are to that kind of I think you’re seeing like 11% to 14% revenue growth in 2021 and risk to 2022? Is it primarily risk to refined products? Is it just kind of macro industrial economy risk? Or how do you think about the — some of the key assumptions underlying that strong revenue outlook?

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

Thanks for the question. When we look at the risks, I think top of that list is just the COVID resurgence, what could be happening on that front. We are expecting, as Mike pointed out earlier, so — the macroeconomic environment to cooperate here — we’re expecting the administrations certainly in the US to provide economic stimulus. And what happens with those I think might be considered risks. With respect to refined products, we’ve grown even while the pandemic has curtailed demand for product, and we do think that that’s going to continue. We look across our business units and refined products, cross-border growth — I mentioned Port Arthur earlier. All of those things are expected to move forward. And while there may be some ups and downs, we believe that the outlook that we’ve provided is very reasonable.

Patrick J. Ottensmeyer — President and Chief Executive Officer

I might just add that auto is off to a little bit of a slow start with this worldwide chip shortage. And then of course Lazaro has started off a little bit slow here as well. But January — set aside Lazaro for a second and fuel and FX impacts. I mean, our volumes and revenue were up high single digits here in January. Now, realize January doesn’t make for the quarter of the year, but we’re off to a pretty solid start here and feel pretty good about the guide here.

Thomas Richard Wadewitz — UBS Investment Bank — Analyst

Okay. Great. Thank you.

Operator

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

Kenneth Scott Hoexter — Bank of America Merrill Lynch — Analyst

Hey. Great. Good morning. And Sameh, thanks for the great PSR rundown, and Pat, Mike and Mike for the great outlook. Jeff and Sameh, let me throw over to you, given that the robust outlook, Sameh, you made some comments about bumping up against capacity, yet you knew where to spend. Does that mean maybe constraints on Mike’s ability to hit that double-digit growth near-term? And then within that, is there a difference in growth rate you’re targeting between Mexico and the US obviously outside of the teachers strike rebound? Thanks.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Well, very good question, Ken. Some of the limitations we are hitting, we are already solving, and we are in January. Example I gave — I gave some of the constraints that we have with train lengths from a labor point of view. If there are more than 120 cars, you have to have a four-man crew. If one guy doesn’t show up, well, the whole train waits, that kind of thing. We manage to do things now with the union is helping us out tremendously. COVID is a catalyst in this case, ironically, but it is already happening, and we are in January.

When it comes to infrastructure, we have done some siding extensions that came live — we have two between Vanegas and Benjamin Mendez, which is an area of a lot of — a lot of train meets, and they come live in Q4. So this thing is in motion already. San Luis Potosi yard, we have been working on it for a couple of months. And I think this month, the main line is to go in the middle of the yard. Now, it’s not going to go — which is terrible, when you are doing switching operation in the yard, trains are held out of the yard waiting to get in. That is coming — is coming online I think at the end of this month. We — we have actually — one of my former colleagues running engineering, we brought him in from CN. He has — he was retired. And he is leading this effort and leading engineering, and he is really stepping foot on the pedal. Like, we are doing a lot of the satellite yard — satellite service areas in Monterrey that Jeff was talking about. We were trying to accelerate them as fast as possible to absorb a lot of — a lot of the volume.

And then the trick in the meantime, Ken, is the service design, which is how do you design your work to do things the smartest way possible. Like we’ve put some new cranes in the Intermodal terminal Victoria-Salinas in the Monterrey area. Well, now we are building blocks in that — in that terminal, and also, we lengthened the leads for the switching area. And we are doing that now, and we are taking work off of Nuevo Laredo, as an example, which is just before the bridge — and I have not talked about the bridge, but here is another infrastructure issue. We have one bridge. Now, Jeff has covered that in the past that we already have the permit to build a second bridge. Now, obviously that is not going to help 2021.

But in the meantime, the windows — I talked about that often. Hopefully next week, we’ll shorten the window from six hours to four hours, working very, very closely with customs on the US side and the Mexico side. These windows are northbound versus southbound. Many trains will miss the window, like I said before, by like half an hour. Now they have to wait for the next window. So the shorter the window, the better it is. But the nice thing is, with this implementation and the Mexican customs not having to cross the bridge to go to the south side, the Mexican side and US side, with four hour windows [Indecipherable] then we’ll go to zero windows. And that hopefully will happen in a very short time — short term, like it will happen in Q1.

So this — this thing is already in motion, and we should not hinder the growth that is coming our way because the growth is actually — is very, very — is very steep. And this is why I was saying also that we are very focused on the customers, very, very focused on the customers. We are putting things in place so that we don’t have to wait for a customer to complain, okay? We want to know any issue with a customer before the customer even raises his hand because we want to get all the volume we can get. So, surely, we have a lot of work to do. Some of it takes time, construction, but there are a lot of things where we are turning the dials, okay, to be able to absorb the volumes with what we have. And I hope — I hope that answers the question, Ken. I don’t know, Jeff…

Kenneth Scott Hoexter — Bank of America Merrill Lynch — Analyst

It does.

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

The mix issue that you asked about, we do have an assumption of slightly higher revenue growth in Mexico than the US.

Kenneth Scott Hoexter — Bank of America Merrill Lynch — Analyst

Great. Thank you very much. I appreciate the time, guys.

Operator

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

Ravi Shanker — Morgan Stanley — Analyst

Thanks. Good morning, guys. So, slide 28 has some very good detail on the kind of PSR walk by bucket from ’19 to 2021. Can you also share what that could potentially look like for ’22, given the pretty healthy OR you’re guiding to for ’22?

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

Yeah, well, we’ve not made any assumptions around any incremental new initiatives in 2022, but the kind of carry-forward benefit of what we’re doing in ’21 has another $30-plus-million of savings in 2022 and that’s how we get to the roughly $250 million of structural permanent cost savings that will have generated out of our PSR efforts.

Ravi Shanker — Morgan Stanley — Analyst

Great. Thank you.

Operator

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

Jason H. Seidl — Cowen and Company — Analyst

Thank you, operator. Everyone, good morning. Hope everyone is healthy and safe. Can you — can you touch on mix a little bit more and pricing, how we should think about it? I know, Mike, you mentioned you have some new nice long-haul automotive business that will be coming from Mexico up to Kansas City. Wondering when that’s going to hit, how we should think about it and is there any other mix impacts that we should be modeling in as the quarters move on in 2021 and 2022.

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

I think there — there will certainly be some puts and takes. Revenue per unit on some of our faster growing segments like refined products will provide us with some lift. I think to the extent that we’ll have some intermodal comps related to Lazaro, those might swing a little bit the other way. But we believe in general that our revenue per unit should improve moving into next year.

Jason H. Seidl — Cowen and Company — Analyst

Okay. So positive for the — mix is going to be an overall positive with all the puts and takes, as you view it.

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

I mean, mix and the pricing increases, it should be positive, yes.

Jason H. Seidl — Cowen and Company — Analyst

Okay.

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

We’ll get a few points, Jason.

Jason H. Seidl — Cowen and Company — Analyst

Yeah. Okay. If I could squeeze one more in. Your thoughts on the Biden administration and the relationship it’s going to have with Mexico — love to hear that.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Yeah, Jason. It’s early to tell, but I think there are some positive signs. I was on a call yesterday that was arranged through the US-Mexico CEO dialog with the new Under Secretary of North America for Mexico and talking about sort of initial outreach and some — the way they are currently feeling about the relationship with the US. Too early to tell. And as the old phrase, actions speak louder than words, but I think there are some encouraging signs. The small things — not small things, I think fairly big things in terms of just the — taking some of the tension away from the relationship. I believe on the first day in office, President Biden signed two executive orders, one to support and work with Mexico in vaccine distribution, and the second to withdraw the — a lot of the program and funding for building a wall. So those are things that appear to be intended and the reaction in Mexico was positive to put the relationship on a good course.

Jason H. Seidl — Cowen and Company — Analyst

That’s good to hear. Gentlemen, I appreciate the time, as always. Be safe.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Thank you.

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

Thanks, Jason.

Operator

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

Christian F. Wetherbee — Citigroup — Analyst

Hey, thanks. Good morning. Maybe wanted to follow up on sort of the longer-term OR opportunity. Sameh, we’ve talked in the summertime about the potential to maybe get towards this mid 50s OR, and obviously you guys are — kind of put that into the targets as we move forward. We talked in the summer about different mixes, and where you can find that opportunity. You’ve given us this outlook through ’21 in terms of the buckets as you go out, sort of bigger picture. Should we still think that sort of labor productivity and maybe fuel efficiency are the biggest buckets? Is there anything that maybe you found that’s been a little bit different and unique as you think about the network going forward?

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Thank you, Chris, for the question, and I recall in the summer the analysis that you did that we felt is quite accurate. And I think you were saying that we can get to 55% which is what we are saying here in the guidance for next — for 2022. So yeah, the areas — I mean, the fundamental thing is, we are trying to keep the cost as flat as possible. Like we — and that showed in Q4. Like the headcount is very low and we’re trying to keep the cost as low as possible and then benefit from the fantastic revenue opportunity that we are uniquely positioned to have at KCS with the Mexico and cross-border traffic, and that is very unique to us. So, as long as we can hold that cost and manage to absorb the additional volume, with what we already have without adding too much to what we have, that operating ratio is just going to keep coming down, right?

I mean, that’s — so. So it’s really — it’s going to be a combination of cost takeout, but also revenue growth, and the revenue growth is going is — is phenomenal. I mean, when you talk about double digit now in 2021 because now we’re comparing to easy comparables for Q2 with the pandemic and all that. If we can get that, absorb that revenue, double-digit revenue growth and try to hold the line as much as possible on the cost — I’m talking here about crews and maintenance on locomotives and car and get more fuel efficiency, which is where that train lengths comes in, and keeping those train starts to where we are. We monitor them every morning, Chris. Like, we have targets we set that are below the pre-pandemic counts of train starts, and we’ll check them every morning and we check the train lengths every morning and the crew starts. We want to keep these to the gains that we made during the pandemic and at the same time absorb the revenue growth and then with more emphasis, with some help from infrastructure and with some help from labor, like I said, if we gain now velocity — I mean, velocity is an important piece, to answer your question.

Velocity is an important piece. We hope — we hope to increase the velocity by like one mile per hour, which is not very — that’s not very demanding. I mean, it’s not a very aggressive target. Nevertheless, it’s a big target, and there is a lot of money associated with that. Train lengths is another target and then fuel efficiency. So these are the three buckets. But again, for the OR, you have these buckets, but out of velocity, and it’s so obvious to us now more than ever before. You increase that velocity because the demand is there, the demand is there. And it’s not just refined products. Grain, as an example. There is so much demand in grain. We are focused on improving the cycle, like get that cycle down to fewer days, get more trips per months with the same car sets, and every time you go back, you collect more revenue. So, this is — this is the combination, keeping an eye on the cost but servicing the customers 100% because the revenue is there, the demand is there and we just have to go get it. So I hope I answered your question, Chris.

Christian F. Wetherbee — Citigroup — Analyst

Yeah, no. Very helpful. Appreciate the color. Thanks so much.

Operator

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

Amit Singh Mehrotra — Deutsche Bank — Analyst

Thanks — excuse me. Thanks, operator. Good morning, everybody. Mike, the unpacking of the ’21 guidance was — was really helpful. I was hoping you could do the same thing on ’22 in terms of — it looks like you’re just assuming high single-digit growth and maybe 70 percentish incremental margins and maybe some accelerated share repurchase. I was hoping you can kind of help us think about that. And then, I guess the recovery in Lazaro following the blockades, I think maybe shipper confidence in that route has been negatively impacted. There might be some re-routing to other ports and over the road options. I was hoping you could just talk about how the recovery has been as those blockades have cleared and what you’re seeing on that front. Thank you.

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

Mike, you want to cover Lazaro?

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

Yeah, I’ll go ahead and cover Lazaro. You’re absolutely right. It’s going to take a little while to restore the customer confidence in that lane. I will say that the customers want to be serviced out of that port, out of that area, and we do have customers that are coming back to us. We expect that that confidence will improve as we move through the first quarter and into the second quarter and those shipments will pick up. Certainly, that’s the case on the intermodal side of the house.

There are other businesses that will immediately go back to moving products in or out of Lazaro. And let me give you a couple examples of that. We move heavy fuel oil from Tula into Lazaro Cardenas. That is — that business comes back immediately. And then we moved steel slab out of Lazaro Cardenas into the Monterrey area, and it’s just not cost-effective to do that other ways. So that slab business will come back quickly as well.

So the intermodal piece will take a little while for that to be restored, but other business segments or business unit opportunities will snap back very quickly.

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

And on to 2022, I mean, I’m probably not going to go much beyond what we had on page 6. But yes, it certainly assumes a continuation of revenue growth, certainly not at the levels that we expect in ’21 given the easy comps. And then Sameh mentioned continued efficiency gains as a result of lengthening trains. That’s largely going to be around labor and fuel. We gave you a robust outlook on free cash flow. And keep in mind that our Board has authorized us to tick up our leverage ratio to the mid-2s, which is going to provide some additional dry powder for buybacks that contribute to the EPS growth that we’re assuming here in 2022. So, I think combined, all of that should get you reasonably comfortable with some of the numbers that we’ve guided to in 2022.

Amit Singh Mehrotra — Deutsche Bank — Analyst

Yeah. That makes sense. Okay. Thanks, everybody. Appreciate it.

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

Thank you.

Operator

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

Allison M. Landry — Credit Suisse — Analyst

Good morning. Thanks. So, obviously, there were some unusual challenges in the quarter but the service metrics have deteriorated quite a bit even in the last several weeks. So how quickly do you think you can start to reverse those trends and show improvement in speed and dwell? And then, if you can just share what the trip plan compliance was in Q4 — I think maybe it was around 60% in Q3, that would be great. Thank you.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Well, for the — good morning, Allison. For the service challenges and the numbers, they already started improving, Allison. And it is — we can see it. Like, it’s measured every day. An example: the inventory count in Monterrey, okay? It was up like 3,200 cars. Now it’s down to about 1,800, 1,700 cars, which is where it needs to be. This is a very, very nice number. When Monterrey gets filled, then we hold back traffic in Sanchez, and then you even can hold back traffic in the pipeline from the US going into Sanchez to go to Monterrey. So, we measure every morning and we’ll talk about it on the morning call, how many — how many cars they have in the pipeline in the US heading to Monterrey, how many cars in Sanchez are for Monterrey and how many cars I have in Monterrey and how many cars I service the industries in Monterrey every day. So now we are beginning to service the industries in the Monterrey area by about 550 cars a day.

We were — we were so congested in Monterrey because some of that surge in refined products came really as a surprise, as a shock. I mean, when you talk about 80 — 80-some percent, I can’t remember if it’s 81% or 87% in one surge, pretty much most of it heading to Monterrey. And then after that, when we saw it, it started actually moving to San Luis Potosi and start creating issues in San Luis Potosi, which is another yard in Mexico. So we reacted — and, like I said, I had the whole team working during Christmas and New Year and the time in between, to clean up the yard because at some point, and the people who are at road understand this. If you start congesting a yard, you spend all your time now cherry-picking, trying to find the cars and moving other — switching other cars. So we said, we’re going to take advantage of this lull and are going to clean up the yard, and we did.

And now the counts, like I said, from 3,000 down to 1,800, when you look at Sanchez, it was like 1,500 cars, even 2,000 cars heading to Monterrey that was stuck in Sanchez. Now it’s down to like 700. We still want to go down to about 300, 400. So this is clearly, clearly coming under control. And then you see it when you talk to customers. And we look at this customer issues every day and we talk about specific customers and how we can help them. And the customers are working with us. The same way as the laborers working with us, the customers are working with us. Now, many of them accepted to work night shift so that we can run the industry jobs that swap cars to them and pull cars at night so that we have jobs in daytime and jobs at night time, which actually gives us a better utilization of our assets and you don’t do everything all at the same time during the day shifts.

So we can see it, it’s palpable like the fluidity — the fluidity is back. We’ll see it when the numbers come out. You will see it in the velocity and you will see it in the dwell. So it is there, Allison, and it is happening. It’s already happening like we — we — we’re not as worried about what was it, about three weeks ago, four weeks ago, it was — we were working damn hard, okay, and — but now we feel a lot better.

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

Hey, Allison, to answer your question on trip plan compliance, we’re kind of low-70s in the US, and in Mexico, we kind of dipped below 50 late in the year but back above 50 and need to make a lot more progress there.

Allison M. Landry — Credit Suisse — Analyst

Okay. Thank you, guys.

Operator

The next question is from Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Patrick Ossenbeck — JPMorgan Chase & Co. — Analyst

Hey, good morning. Thank you. So maybe one follow-up on handling the growth and then just one on fuel economy. So Sameh, probably both for you. Can you give us a reminder, at least, where you are now maybe and where you exited the year in terms of fuel economy between the US and Mexico, and what assumptions you have baked into the guidance? So, do you believe there is at least some structural challenges in Mexico based on the grade? So the split between the two would help. And then just back on refined products. You’ve had tremendous demand even without really the overall market demand coming back. So it’s clearly creating some challenges that you’re working through. But how do you expect when the economy reopens, when the vaccines become more distributed, how do you expect you can handle an actual recovery in the broader market and not just the market share you’ve been enjoying so far? Thank you.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Mike, do you want to take the second one or do you want me to go first…

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

No, why don’t you go ahead? Yeah.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

Okay. I’m trying to remember my numbers on the — I can tell you that [Technical Issues] 1.24 gallons per KGTM in 2020. Okay? And we were at 1.31 gallons per KGTM in 2019, so improved by 5%. Our goal in 2021 is 1.16 gallons per KGTM, which is an improvement of 6%, an additional improvement of 6%. And again, this is a very, very far — very far cry from being perfect because, as you know, other railroads are at 0.98, less than 1% — less than 1 — I’m sorry, less than 1 gallon per KGTM. And actually, our operation in US is in that range. We’re at about 1.0 in the US. So the US portion is running very, very close to what the other Class 1s are doing in gallons per KGTM at 1.

Mexico is more like 1.54, which has a lot of room to go and we are continuing that. And we all know that there are some very steep grades in Mexico. But the thing we are very focused on now is the horsepower per ton, the HPT. This is the secret. You get it with train lengths. The more train lengths, typically the tonnage is heavier and you try to do it with the same number of locomotives. So your ratio of tonnage of — or the opposite, horsepower to tonnage goes down. And the less HPT, the better your fuel efficiency. One thing we are really keeping a very eye on and created a very little tiny fuel desk of four people, okay, it’s one per shift, essentially. We are monitoring to make sure that locomotives are shut down when they’re not needed because when you come back with trains that have empties on them like grain trains, I mean, we take loads from the US to Mexico, we come back with empties.

But you have to reposition the locomotives to balance the power. Well, that — these locomotives are excess, so you want to shut them down, so that fuel desk is picking up every day some people who are not compliant with this. So we shut down the locomotives, and that is more relevant in Mexico. That happens a lot more in Mexico. Also, when you take grades, the grades are, let’s say, Lazaro to Morelia. Well, after that, if you don’t have grades, we shut down the locomotive, we don’t need it for the rest of the trip. So, you keep an eye on this staff, you keep an eye on the HPT, and sometimes it’s a fraction of locomotive, in which case you say, okay, don’t go higher than [Indecipherable] 7, don’t go to [Indecipherable] 8, which is effectively a reduction of the horsepower of that locomotive because in this case it’s fractional, you cannot shut down the whole locomotive.

So we are taking a lot of measures. We are very focused on Mexico to get the gains in fuel efficiency. We are getting gains in the US too because we added a lot of train lengths in US. We run at 8,000 now in US, fleet, which is very respectable. In Mexico, we are running at about 6,800, but we are trying to get those HPTs and the compliance, and we even are working with the union to add a bonus for added compliance with the trip optimizer, which actually is like cruise control that avoids breaking and acceleration and burning fuel. And I believe we got that deal done. It’s a win-win. It’s a bonus for the crews and it’s very good for increasing the compliance and getting more trip optimizer deployed.

So we are working on a lot of fronts. Mexico is the focus. And again, we’re just aiming for 1.16 consolidate for US and Mexico. And that is a far cry from the others. And when people ask about the operating ratio, that’s why we still have a lot of room in the operating ratio. We have a room on fuel. Even after we do the 1.16, we have room on velocity. I mean, velocity target for next year, average for the year is 16 miles per hour between Mexico and the US, 18 miles per hour in the US and about 15 miles per hour in Mexico, 16 miles per hour. What it was before, it was 20,21. So, we have room there too. So I keep saying we still have a lot of room on the cost and we still have a lot of room on their revenue. So it’s a nice place to be.

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

Okay, operator, could we go to the next? We have eight more in queue here.

Operator

Jordan Alliger from Goldman Sachs. Please go ahead.

Jordan Alliger — Goldman Sachs — Analyst

Yeah. Hi. Good morning. Just a quick question on the auto thing. I know you mentioned the chip issue. We’ve seen some of that as well. I mean, is this just too small a global basis to have much of an impact on the recovery given the shutdown in the second quarter of 2020? But just curious, your thoughts on that front. Thank you.

Patrick J. Ottensmeyer — President and Chief Executive Officer

I can only speak to what we’re seeing here. We are seeing impacts ranging from nominal or nonexistent at some of our automobile manufacturers. But in other cases, we have OEMs that have not reopened their plants and may not reopen facilities here until early-to-mid-February. So I think the semiconductor shift is hitting different people different ways, but it is definitely impacting us here in the first quarter.

Jordan Alliger — Goldman Sachs — Analyst

Thank you.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Sure.

Operator

The next question is from Justin Long from Stephens. Please go ahead.

Justin Trennon Long — Stephens — Analyst

Thanks, and good morning. Mike, maybe just a quick question for you on the guidance. Any way you could help us with the buyback assumption that’s getting baked into the EPS guidance this year and next year in terms of the dollar amount you’re buying back or the share count? And then maybe on technology, any color you can provide on spending for technology opex and capex the next couple of years versus what you’ve done historically? Just curious how much of a role technology will play in this growth that you’ve outlined?

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

Yeah. I think on the buyback question, Justin, we’re probably going to stay away from exact number of shares I aim and a lot of that obviously depends on what happens with the price per share throughout the course of the year. But you ought to think about us continuing to apply 50% to 60% of our available cash to shareholder distributions, with the vast majority of that going to buybacks. And also keep in mind the leverage ratio that I mentioned. Trying to keep that in the mid-2s range should give us some additional dry powder in the back half of the year. So I’ll probably leave it at that.

On the technology spend, I would tell you, we’ve got a chart in the back. I think it’s in the appendix, that we talked about that maybe gives you a little bit of insight into technology spend. It’s roughly 7% I think of our total capex. So we continue to invest in technology. Obviously, with PTC fully implemented now, we’re going to continue to move forward with various automation and certainly have capital dollars in our budget to accomplish that.

Operator

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

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Hi, good morning. Could you talk to any guardrails that you may have in place in the growth side? You’re willing to accept that, obviously, a lot of network improvements have been made, so you want to protect that, but obviously you want to leverage growth there. So how are you balancing to? Any color there?

Patrick J. Ottensmeyer — President and Chief Executive Officer

Not sure I understand the question. Guardrails…

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Well, guardrails in terms of, like, are you focused on profit? Like how are you working with your customers? Obviously, you want to take the growth and it seems like there’s a lot of growth out there, but you want to protect certainly the improvements that you made on the network. So how are you balancing sort of that incremental low that you’re willing to take on with the customers there? What kind of guardrails do you have in place that you sort of don’t outpace that network availability?

Patrick J. Ottensmeyer — President and Chief Executive Officer

So, earlier on, I mentioned that we’re working with our customers to develop win-win solutions. These would be opportunities where we can work together to improve our efficiencies. It could be how we spot and pull pieces of equipment or it could be on things like train length. So, for example, if we have a customer who is running, as an example, 80 cars on a train — on a unit train, but it would be more efficient for us to run 90 cars on that train, we are working to incent them to get us to that 90 train car length or train length, in this example, and then we’re basically sort of sharing in the benefits. So that’s something that we’re actively working on with our operations team and customers. And so far it’s been received well.

Allison Poliniak-Cusic — Wells Fargo Securities — Analyst

Perfect. Thanks.

Operator

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

Scott H. Group — Wolfe Research — Analyst

Hey, thanks, good morning. Can you just say relative to the revenue guidance, what’s in the plan for train starts and headcount this year? And then, Mike, just want to understand the free cash flow, $700 million both years. Is there a reason if earnings are up 20% or so in ’22 that you wouldn’t see free cash flow grow?

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

Yeah. We have — you’re talking about 2022. We have some incremental tax payments that will happen in Mexico. You’re kind of operating on a lag basis where 2021 cash payments — cash tax payments in Mexico are based on 2020, which has depressed income levels because of COVID. So then your ’22 payments will be based on ’21, which will have good growth in our income. So that’s why your free cash flow maybe looks a little bit low. But then we would expect that accelerate again going into 2023. And, I’m sorry, Scott, I forgot your second…

Scott H. Group — Wolfe Research — Analyst

It was just train starts and headcount in the plan for this year. How much do you think that will be?

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

Yeah. I made a comment around headcount. We believe the growth there will be far less than our overall volume. I would tell you, sitting here today, depending on exactly where all the growth comes from, think about headcount growth just being up a couple of points and we’re going to try to, through train length, continue to get operating leverage. I know you track the numbers every month when they hit reported and we’ve shown some pretty nice operating leverage there from the standpoint of growth versus headcount. And we would expect to continue to see that kind of leverage.

Operator

The next question is from Bascome Majors from Susquehanna. Please go ahead.

Bascome Majors — Susquehanna Financial — Analyst

Yeah. Good morning, and thanks for taking my questions. I just wanted to clarify a couple of things on the 2022 outlook. Does the OR target assume any breakthrough in the four-man crew negotiations in Mexico? And on the capex, does that include any anticipated spend in the Laredo Bridge and maybe just an update on where that stands and what that could mean for your capital envelope if you go forward? Thank you.

Patrick J. Ottensmeyer — President and Chief Executive Officer

Jeff, you want to cover Laredo?

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

I will take the capital question first. I think, largely, that project is underway. We’re in design phase right now. We’re targeting completion of that probably early 2023. So we’ll start to see some spend this year. Bulk of that spend will be 2022. We believe we can handle most of that within kind of — obviously, within this current guidance. As those design estimates are done and cost estimates are done, that may tweak one way or the other, but largely, absorbing that Laredo Bridge as part of our normal run rate is the plan.

Operator

The next question is from…

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

Bascome, on the labor, no, we don’t have any specific assumption that we’re going to get that breakthrough. We’re just going to continue to manage us through train consolidations. I think we may have mentioned headcount was down 7% in Mexico. So we’ve been able to accomplish some of that savings just through train consolidations. But we’re not giving up on that. As Sameh mentioned, we’ve made a lot of individual progress in individual asks that we’ve had, but no, we have not assumed a major breakthrough in any of our guidance numbers.

Bascome Majors — Susquehanna Financial — Analyst

Thank you, both.

Operator

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

Jonathan B. Chappell — Evercore ISI — Analyst

Thank you. Good morning, everyone. Jeff, you laid out the investment plans in the near term on Mexico for all the obvious reasons of the growth opportunities there, and we know about the bridge. What are some of the investments in this side of the border regarding to trying to take customers enter new markets, where are you targeting your investment dollars in the US growth initiatives?

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

Yeah. I think it’s a good question. Again, the focus has been largely on Mexico for structural reasons. The US network has been built out over the years with kind of some of these longer sidings. And so, right now we don’t see a lot of restrictions, don’t see a lot of need on that, although, as we move into the future, I think certainly we’ll continue to look at train length opportunities, we look at our core routes, certainly between Kansas City, all the way to the border, and continue to look at even — even further expansion of maybe sidings to continue to expand upon, as Sameh mentioned, the current 8,000-foot train length in US, which is respectable, as we go beyond that. We are looking at some of the areas really on the Laredo as you get closer to the border. We are doing some work in the Laredo yard itself this year, which really complements the cross-border on the US side. So those are your focus areas. We feel pretty good about the infrastructure in the US being where it needs to be but we’ll obviously keep our eye on things.

Sameh Fahmy — Executive Vice President Precision Scheduled Railroading

And we’re doing — Jeff, we are doing some investment in Kendleton. Kendleton is in the Houston area. And that is strategic because of the growth in refined products like a lot of demand from Corpus Christi and these areas and that requires some manifest trains that need some consolidation, some switching. So we’re investing in — it’s not a big yard, it’s a small yard in Kendleton but that strategy is aligned to the refined product strategy.

Jonathan B. Chappell — Evercore ISI — Analyst

Yeah. Great. Thanks, Sameh. Thanks, Jeff.

Operator

The next question is from David Ross from Stifel. Please go ahead.

David Griffith Ross — Stifel, Nicolaus & Company — Analyst

Yes. Thank you, and good morning. Just a quick question on the cross-border process. I’m wondering if in the past year has it gotten any easier with US and Mexico customs, if there is anything changing paperwork versus electronic documentation in the process that might improve velocity and turns?

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

Yeah. This is Jeff. I can talk on that. We have — we continue to work very closely with customs, more process-related items. Sameh mentioned kind of the shifting of windows. We currently operate on kind of six-hour windows north, six-hour windows south. We — again, we’ve had some success recently. Those — it’ll shift those to four hours here, which we believe creates a little more capacity, a little more fluidity, continuing to work towards kind of a window-less operation there. But a lot of that is in sync with customs and those processes. So we feel very good about those initiatives where we were at, the international crew initiative that, again, we’ve — it’s kind of normal course of business. Now that continues to operate very well. And we have opportunities to continue to expand that. So I guess from an overall process at the border, we feel good, we feel confident in the relationships with those entities on helping us continue to modify that, to continue to manage this growth, we continue to talk about.

David Griffith Ross — Stifel, Nicolaus & Company — Analyst

And, is there any talk of a seamless border crossing, kind of how some packages that move internationally clear customs in the air before they even get here. Would it be possible to clear the train year before it hits?

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

Yes. We absolutely talk. And again, those are items that we have coordinated efforts ongoing to try to get some of that here push through. We had a clearing at destination in Mexico. You’ve got a lot of that grain that does have to sit at the border and go through some clearing processes there. So yeah, those are absolutely other components of what we like to do and see a truly seamless border crossing here in the future.

David Griffith Ross — Stifel, Nicolaus & Company — Analyst

Thank you.

Operator

The next question is from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski — Barclays — Analyst

Hey, good morning, everyone. And I appreciate you getting all the questions. And Mike, I think you said in your prepared remarks here that it was about 4% to 5% upside here on growth, unique things to your network. Should we think about those as really kind of baked into the plan here? I mean, I know the economy needs to contribute, but would you — it’s almost agnostic to GDP. And I know it’s been asked earlier, but any view on where we should be thinking volume and revenue for ’22?

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

Well, I think we danced around the 2022 question a little bit earlier. So I’ll do that again here. With respect to that 4% to 5% that are related to our sort of unique growth opportunities here, yeah, these are things that are very much related to cross-border business, right? So it could be refined products, it could be metals business. Certainly, intermodal business. It’s really a wide variety of things. And we think that — we haven’t talked about nearshoring at all here today, but we do think with USMCA being racked up behind us, there is more certainty for people to make decisions. Certainly, the pandemic has made people question their supply chains and the length of time it takes to get things to the United States. So the fact that we operate in the US and across the border and into Mexico and vice versa, that is something that is unique to us, and it will serve us well moving into the future.

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. I appreciate all of your time and attention and good questions. I feel like we finished 2020 on a very strong note, set up well for 2021, good visibility on both the demand and revenue growth perspective and cost side. I think the only other comment that would be appropriate to make given most of you are probably in the Eastern Time Zone and in New York is, we’re looking forward to a really exciting AFC Championship game on Sunday night and a return to the Super Bowl for the Kansas City Chiefs. So thank you, all, and we’ll see you on the conference circuit and back here in 90 days. Thank you.

Operator

[Operator Closing Remarks]