KCS reports record financial results despite impact of south Texas congestion

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KANSAS CITY, Mo. — Kansas City Southern reported record first-quarter earnings today amid robust growth in automotive, intermodal, and petroleum traffic.

The results were muted by industry-wide congestion, which increased KCS’s expenses and likely held back some volume growth, executives say.

Operating income rose 4 percent, to a record $219 million, on record revenue of $639 million, a 5-percent increase. Net income was down 1 percent, to $145 million. KCS reported record first-quarter earnings per share of $1.40, a 1-percent increase that easily beat Wall Street analyst expectations of $1.33, according to an I/B/E/S survey.

KCS’s operating ratio was 65.8 percent, up 0.4 points from a year ago, as congestion-related costs increased expenses by $2.5 million.

Overall volume was up 1 percent for the quarter as the railroad saw traffic grow in all commodity groups except Energy and Agriculture-and-Minerals. KCS continues to expect mid-single digit volume growth this year.

KCS executives said the congestion in south Texas, particularly in the Houston area, is easing and should gradually improve during the next two months. On its key route to Mexico, KCS relies on Union Pacific trackage rights in south Texas between Beaumont and Rosenberg, on the western outskirts of Houston, and Victoria and Robstown.

In March, KCS’s recrew rate was up nearly 60 percent between Beaumont and Kendleton, near Rosenberg.

But now recrew rates are falling, some KCS traffic is being rerouted around bottlenecks in Houston, and the supply of empty multilevel railcars has improved, allowing KCS to clean up a backlog of autos awaiting shipment from Mexican assembly plants.

“Things are feeling a little better,” Chief Operating Officer Jeff Songer says. But he adds: “I don’t think we’re out of this quite yet.”

For the first quarter, key operating metrics reflected that the majority of the KCS network in the U.S. and Mexico was fluid. Average train speed of 27.6 mph was consistent with prior quarters, and terminal dwell of 23.1 hours was a 1-percent improvement compared to a year ago.

The KCS yards on either side of the Rio Grande — at Laredo, Texas, and Nuevo Laredo, Mexico — were congested, however, due to the impact of the Houston-area bottleneck.

Traffic gains were led by petroleum shipments, which were up 14 percent overall. The growth was tied to exports of refined products to Mexico, which surged to 6,486 carloads from 1,675 a year ago as new terminals opened and storage facilities came online.

“We continue to expect steady growth as this infrastructure is built out,” Chief Marketing Officer Brian Hancock says.

Last year was the first year Mexico, under energy reform, permitted the import of gasoline and other refined products. Construction is under way on a half dozen new terminals and storage facilities in Mexico that will open in the second half of the year. They all are geared toward unit train deliveries.

Intermodal volume grew 8 percent, led by cross-border growth of 17 percent, which was due partly to KCS’s intermodal alliance with BNSF Railway, which began in late 2016.

Automotive volume was up 6 percent as production increased at Mexican assembly plants.

KCS has a favorable outlook for the year on 80 percent of its volume. It has a neutral outlook on agriculture and minerals, which represents 10 percent of its volume. And the railroad has an unfavorable outlook for its energy segment, largely due to the January closure of a coal-fired power plant in Texas. Frac sand may challenged by the opening of local sand mines in west Texas.

Chief Financial Officer Mike Upchurch says KCS is optimistic that North American Free Trade Agreement negotiations will produce a modernized trade deal covering the U.S., Mexico, and Canada.

KCS also put behind it the threat of regulatory action in Mexico after the government closed an investigation into rail competition.

CEO Pat Ottensmeyer, whose mother died on Thursday, did not participate in this morning’s earnings call so that he could spend time with family.

NEWSWIRETrains News Wire

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