Kansas City Southern posts record first-quarter results

Customers continue with Mexican expansion plans, executives say
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KANSAS CITY, Mo. — Kansas City Southern reported record first-quarter results today as the smallest Class I set new marks for freight volume, revenue, earnings per share, and operating ratio.

“The revenue growth and volume growth that we saw was pretty solid across the board,” CEO Pat Ottensmeyer said on the railroad’s earnings call this Friday morning.

Traffic surged 6 percent in the quarter. The railroad’s operating profit was up 12 percent to $211 million on revenue of $610 million, an 8-percent increase versus a year ago. Earnings per share was $1.38, up 39 percent over the first quarter of 2016.

KCS posted an operating ratio of 65.4 percent, an improvement of 1.2 points.

The key drivers of the railroad’s revenue improvement were gains in energy, automotive, and chemicals and petroleum traffic. Automotive traffic, fueled by increased production in Mexico, grew 38 percent in the quarter. KCS was able to handle the growth because it expanded its multilevel fleet by 40 percent over the past year.

Intermodal was weak during the quarter, but KCS said it expected overall intermodal growth this year thanks to new service with BNSF Railway and the expanded APM terminal at the Port of Lazaro Cardenas, which opened in February.

Looking ahead, the railroad has a favorable outlook for 75 percent of its traffic volume this year and a neutral outlook for 25 percent of its volume, including agriculture and minerals and industrial and consumer segments.

KCS yesterday responded to the Mexican government’s preliminary report on rail competition, which last month claimed that the country’s railroads face a lack of competition that raises prices for shippers. The government said it could impose various regulatory remedies.

In its response, KCS cited studies that show Mexican railroads face more competition from trucking than their U.S. and Canadian counterparts. It also said that since the industry was privatized in the 1990s, rail traffic has grown by more than 50 percent and rates have fallen by more than 20 percent.

Ottensmeyer declined to take questions regarding the report, noting that the review process is underway.

“Mexico is an incredibly competitive market,” he says.

Executives addressed other big political uncertainty facing KCS: Free trade with Mexico. Election rhetoric seems to be dying down, Ottensmeyer said, and trade discussions seem to be going in the right direction. American farmers, in particular, want Mexican markets to remain open to their products.

KCS customers are moving ahead with expansion projects in Mexico and have urged the railroad to continue adding capacity to support their growth, Ottensmeyer says.

Among them: a Kia assembly plant that will ramp up production to 600,000 vehicles this year, a new soybean processing plant that will be the largest in North America, the new APM terminal, and new and planned terminals for energy and refined products.

KCS also has begun moving test loads of plastic pellets from the Gulf Coast to port at Lazaro Cardenas for export to South America and Asia. The loads are moving in hopper cars to the port, where they are transferred to 40-foot containers for export. The expansion of Gulf Coast plastics production will mean significant new export volumes in the next two to three years.

“The long-term outlook continues to be extremely positive,” Ottensmeyer says.

The railroad expects to spend between $550 million and $560 million on capital projects this year, which is about $30 million less than last year.

“We really have to stay the course,” Ottensmeyer says.

The railroad’s key operating metrics – including train velocity and terminal dwell – remained consistent with prior quarters, Chief Operating Officer Jeff Songer says. But terminal dwell remains high in northern Mexico, he says, as cross-border traffic at the Laredo gateway increased 13 percent during the quarter.

KCS put 10 new classification tracks in service at Sanchez Yard outside Nuevo Laredo. Another 10 tracks will enter service in the third quarter, while new mechanical facilities will open in early 2018. The work is part of a $60-million, three-year expansion project that aims to smooth the flow of cross-border traffic.

On the U.S. side of the border, joint KCS/Union Pacific track capacity improvements in Texas will come online mid-year and should improve cross-border fluidity, Songer says.

About 4 percent of the railroad’s U.S. crews are furloughed, down from 5 percent in the fourth quarter. Seven percent of KCS’s locomotives were stored, down from 8 percent in the fourth quarter. The railroad won’t be taking delivery of new locomotives this year, but will be able to lease power should traffic demand additional power, Songer says.

NEWSWIRETrains News Wire

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