Kansas City Southern reports record results but lowers volume outlook NEWSWIRE

KANSAS CITY, Mo. — Kansas City Southern reported record second quarter financial results today but reduced its volume outlook for the year and said it would trim capital spending as Precision Scheduled Railroading was freeing up capacity on its network.

The railroad’s adjusted operating income rose 5%, to $259 million, as revenue rose 5%, to $714 million. Earnings per share, adjusted for the impact of one-time items, grew 6% to $1.64.

KCS reported an adjusted operating ratio of 63.7%, a 0.3-point improvement over the second quarter a year ago.

KCS now expects traffic to be flat to down slightly this year, largely due to sluggish intermodal volumes in the U.S. and Mexico due to increased truck competition and the loss of a fuel tax credit in Mexico that truckers continue to enjoy.

Previously, KCS officials projected that overall traffic volumes would grow up to 3% this year.

“We certainly don’t see gloom and doom ahead of us,” CEO Patrick Ottensmeyer says, noting that the railroad has a favorable outlook for 60% of its business and a neutral outlook for 20% of its traffic.

In fact, Ottensmeyer says KCS still sees strong growth ahead this year from petroleum products exports to Mexico, automotive imports from Mexico, and plastics traffic. The railroad also expects cross-border intermodal traffic, which was up 10% in the second quarter, to continue to grow.

KCS stuck with its forecast of 5% to 7% revenue growth for the year as well as mid-teens growth in earnings per share from 2019 through 2021.

It was able to maintain its revenue outlook because the loss of lower-revenue intermodal volume will be more than offset by growth in high-revenue exports of gasoline and other refined products to Mexico. Intermodal represents about 45% of KCS volume but only 15% of its revenue due to its relatively short hauls in the U.S. and Mexico.

For the quarter, overall volume was flat. Chemical and petroleum traffic grew 18%, led by 125% growth in petroleum products exports to Mexico. Overall cross-border traffic was up 10%.

Automotive traffic was flat, while agriculture and metals volumes were down 1%, intermodal was down 3%, energy traffic was down 5%, and industrial and consumer volumes sank 7%.

The railroad’s shift to a Precision Scheduled Railroading operating model also will help reduce costs. KCS more than doubled its projected cost savings from PSR initiatives, to $40 million this year and $55 million annually.

“We are seeing better progress in every single expense category,” Chief Financial Officer Mike Upchurch says.

KCS is handling the same volumes with 12% fewer locomotives, 7% fewer cars, and 10% fewer crew starts since it began PSR. Employment levels have held steady, however.

KCS now expects to be at the low end of its operating ratio outlook of 60% to 61% range by 2021.

The railroad reduced its planned capital spending this year, to below $600 million, amid slowing growth and operational improvements tied to PSR.

“That said, we will continue to invest in cross-border capacity to stay ahead of the double-digit growth we’ve seen in the last 18 months,” Upchurch says.

But KCS will be able to delay or forego planned yard capacity projects due to more efficient operations, says Sameh Fahmy, the railroad’s executive vice president for PSR.

“An important part of PSR is to create capacity for free,” Fahmy says.

Reduced terminal dwell, improved train velocity, and moving traffic on fewer but longer trains has freed up space in yards and main lines, he notes.

KCS is redesigning its transportation plan from the ground up at local terminals. When that process is complete by the end of the year, KCS will take another look at the yard upgrades it has shelved for now.

Previously KCS said it would spend between $640 million and $660 million this year on capital improvements. KCS also expects to ratchet back capital spending in 2020 and 2021, reducing spending to 18% of revenue from 21%.