When adjusted for one-time items, KCS reported record first-quarter operating income of $242 million as revenue increased 6%, to $675 million. The railroad reported adjusted earnings per share of $1.54, up 18% from a year ago and easily topping Wall Street analyst expectations of $1.44 per share, according to I/B/E/S estimates.
KCS’s operating ratio, adjusted for the impact of one-time items, was 64.2%, a 1.6-point improvement compared to a year ago.
The teacher protests that blocked the KCS main to the Mexican port of Lázaro Cárdenas clobbered international intermodal volumes between the port and Mexico City. Lazaro volumes, which represent about a quarter of KCS’s total intermodal volume, declined 26% in the quarter.
The protests also affected automotive and industrial products volumes. Auto traffic was down 8% due to temporary shutdowns at Mexican assembly plants. Industrial products traffic declined 3%.
But the railroad’s other traffic segments saw robust growth: Chemicals & Petroleum was up 17%, Agriculture & Minerals was up 9%, and Energy was up 6%.
KCS’s key service metrics all improved as the railroad began implementing the principles of Precision Scheduled Railroading, which has reduced congestion in cross-border operations as well as in Mexico.
Congestion in the second half of 2018, particularly in Mexico and for cross-border traffic, limited the railroad’s growth prospects last year.
“PSR has cleared the path for exceptional growth going forward,” CEO Pat Ottensmeyer told analysts and investors on the railroad’s earnings call.
Grain volumes grew due to improved cycle times of unit trains linking the U.S. and Mexico.
“This supports the idea that service begets growth,” Chief Marketing Officer Mike Naatz says.
Cross-border volumes were up 13%, led by strong growth in the export of petroleum and other refined products to Mexico.
KCS executives maintained a positive outlook for 70% of the railroad’s volume, including Chemicals & Petroleum, Automotive, Industrial & Consumer, and Intermodal business segments. Agriculture & Minerals traffic is expected to be flat this year, while the outlook for Energy traffic, which includes coal, crude oil, and frac sand, is negative.
KCS ratcheted down its volume growth expectations for a year by a point, settling in at a 2% to 3% anticipated growth rate.
“A big part of that story is the loss of intermodal volume in the first quarter,” Ottensmeyer says.
