Kansas City Southern wows with earnings report

Despite hurricane, smallest of Class I railroads hits several financial statement records
RELATED TOPICS: KANSAS CITY SOUTHERN | SOUTH | FINANCIALS
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KANSAS CITY, Mo. – Kansas City Southern reported record-setting third quarter financial results today despite the impact of Hurricane Harvey, which flooded sections of the railroad and shut down shipper operations on the Gulf Coast of Texas and Louisiana.

“In spite of Mother Nature throwing us almost everything she had, we had a really terrific quarter,” CEO Patrick Ottensmeyer said on the railroad’s earnings call, noting records were set for operating income, operating ratio, and earnings per share.

KCS was able to recover quickly from the hurricane and later, unrelated flooding in northern Mexico in September.

But a lingering cloud still hangs over the railroad as efforts to renegotiate the North American Free Trade Agreement stalled in Washington, D.C., this week. Officials in the U.S., Mexico, and Canada – who had hoped to wrap up a deal by the end of this year – said negotiations now would be extended into 2018.

Ottensmeyer spent three days in Washington this week as talks were going on and said the negotiations bogged down over detailed proposals that will take time to digest.

“All parties are still at the table, which is good,” Ottensmeyer says.

The Trump administration has threatened to withdraw from NAFTA. KCS is dependent on cross-border traffic moving between the U.S. and Mexico. KCS-hauled commodities – including grain, petroleum products, and plastics – all represent opportunities to cut the U.S. trade deficit with Mexico, Ottensmeyer says.

For the third quarter, KCS operating income rose 17 percent, to $234 million, as revenue rose 9 percent, to $657 million. Net profit was up 7 percent, to $129.9 million. Adjusted earnings per share was $1.35, a 21-percent increase that topped analyst expectations of $1.31.

The railroad’s operating ratio was a third-quarter record 64.4 percent, down from 66.9 a year ago.

Ottensmeyer praised coordination efforts of KCS, BNSF Railway, and Union Pacific during and after the historic and widespread flooding wrought by Harvey.

“The level of communication and cooperation was just outstanding,” he says.

KCS’s traffic was growing at a 5- to 6-percent clip during the quarter until Harvey hit and lingered in the region for a week, putting growth at 3 percent for the quarter. Growth has since bounced back, executives say.

Leading the rising traffic: automotive, energy, and chemicals and petroleum business segments.

Petroleum shipments to Mexico jumped 21 percent; frac sand loads were up 87 percent; crude oil was up 48 percent as Canadian oil moved to the Gulf Coast; and automotive traffic grew 7 percent on increased manufacturing capacity in Mexico.

Despite the hurricane and Mexico flooding, Chief Operating Officer Jeff Songer says KCS’s average train speed held steady versus a year ago. Terminal dwell improved 10 percent – partly due to increased operations at the expanded Sanchez Yard in Nuevo Laredo, Mexico.

KCS has begun positive train control revenue service demonstrations on two subdivisions in Louisiana, Songer says.

For the fourth quarter, KCS has a positive outlook on 57 percent of its traffic volume, including intermodal and chemical and petroleum traffic. It has a neutral outlook on 25 percent of its volume, including agriculture and minerals; industrial and consumer; and automotive. Only energy, which represents 18 percent of traffic, has a negative outlook, primarily due to anticipated declines in frac sand and utility coal shipments.
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