Kansas City Southern reports record results for quarter and full year

Petroleum exports to Mexico surge
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Patrick Ottensmeyer, Kansas City Southern CEO
TRAINS: David Lassen
KANSAS CITY, Mo. — Kansas City Southern reported record financial results for the fourth quarter and full year on Friday amid revenue growth across all six of its business groups.

For the year, KCS set new marks for revenue, operating income, operating ratio, and earnings per share. Operating income was up 13 percent, to $922 million, on revenue of $2.6 billion, an 11-percent increase. Traffic volume rose 5 percent. Adjusted earnings per share was $5.25, up 17 percent.

KCS’s operating ratio declined to 64.3 percent, down 0.6 points from a year ago.

For the fourth quarter, operating income was up 13 percent, to a record $238 million, on record revenue of $660 million. The 10-percent increase in revenue was driven by a 5-percent increase in volume, with energy, automotive, and chemical, and petroleum traffic leading the way. Quarterly earnings per share rose to $1.38 on an adjusted basis, up 23 percent.

The fourth-quarter operating ratio was 64 percent, an improvement of 0.8 points, despite an 18 percent spike in fuel prices.

“Looking ahead to 2018, we believe KCS is positioned to maintain its growth momentum driven by unique franchise opportunities, a strengthening economy and a focus on cost control,” CEO Patrick Ottensmeyer says. “We expect to continue leveraging the investments made in our network to grow our business, ensure good customer service, and maximize shareholder returns.”

KCS has a favorable outlook on 90 percent of its traffic volume this year.
Petroleum and plastic exports to Mexico are expected to be particularly strong. Petroleum exports grew 12 percent in the fourth quarter as new terminals for gasoline and liquefied petroleum gas opened in Mexico. Shipments are expected to rise later this year as storage facilities, being built in Mexico, are completed. This year, Sasol will begin ethylene production at its $8.9-billion plant on KCS in Lake Charles, La.

Executives also see strength in cross-border intermodal traffic, international traffic from the Port of Lazaro Cardenas in Mexico, and rising automotive production in Mexico.

The only area facing pressure is energy, due to closure of a coal-fired power plant in Texas and uncertainty over the strength of frac sand shipments as new mines open close to drilling locations in West Texas.

With the completion of two major projects — including the yard for Sasol and Sanchez Yard in Nuevo Laredo, Mexico — KCS will reduce its capital spending budget this year. The railroad expects to spend between $530 million and $550 million, down from $560 million last year.

A third of the capital budget will fund growth-related projects, including capacity improvements, locomotive overhauls, new auto racks, finishing touches on Sanchez Yard, and an improved connection between KCS de Mexico and Ferromex at Celaya, Mexico.

KCS does not plan to order or lease new locomotives in 2018. But executives left the door open to expanding the fleet if traffic grows faster than expected.

To a certain extent, the fate of KCS hangs on North American Free Trade Agreement negotiations, which resume this week in Montreal.

“[This] week could be a headline week for Kansas City Southern,” Ottensmeyer says, because the thorniest trade issues will be on the table for negotiators from the U.S., Canada, and Mexico.

Those include a five-year sunset provision for the trade agreement, origin-of-content rules covering automobiles, government procurement rules, and foreign investment protection.

About 60 percent of trade between the U.S. and Mexico does not depend on NAFTA, Ottensmeyer says. But nearly a third of KCS’s revenue flows from cross-border traffic, a figure that rises to 40 percent when volume interchanged with Union Pacific at the border is included.

“It is a significant part of our portfolio but not the majority,” Ottensmeyer says.

KCS is confident that North American free trade will continue due to its economic importance and the fact that industries have built their supply chains around free flow of goods across borders.

“That investment is not going to go idle,” Ottensmeyer says.

If the U.S. does pull out of NAFTA, trade with Mexico would be covered under World Trade Organization rules.

“Those are not horrible,” Ottensmeyer says.

President Donald Trump has called NAFTA the “worst trade agreement ever.” Ironically, the WTO tariffs — along with likely fluctuations in the Mexican peso — would make it more expensive to export U.S. products to Mexico and cheaper to import Mexican products to the U.S., Ottensmeyer says.

The U.S. may pursue a bilateral trade agreement with Mexico to replace NAFTA, Ottensmeyer says. It’s unclear what such a deal may look like.
KCS is prepared for a range of trade scenarios.

“We could scale very quickly and appropriately to preserve profitability and cash flow under a wide range of scenarios,” Ottensmeyer says.

KCS declined to provide details on how trade issues could affect various business segments.

“There are just too many unknowns to know how we would be affected,” he says.

NEWSWIRETrains News Wire

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