“We did not meet the expectations of our customers or shareowners, particularly in the areas of customer service and growth,” CEO Patrick Ottensmeyer said on the railroad’s earnings call on Friday.
“KCS has entered 2019 with a renewed and heightened focus on operational excellence,” Ottensmeyer says. “Throughout the year, we will implement principles of the Precision Scheduled Railroading methodology that are most applicable to our network. We expect this focus on operational excellence and PSR principles to help drive improvement in asset utilization, cost and capital efficiency, and customer satisfaction.”
KCS also released a 2021 operating ratio target of between 60 and 61 percent, down from the adjusted operating ratio of 64.3 percent reported for 2018.
For the quarter, KCS operating income was up 8 percent, to $256 million, on revenue of $694 million, a 5-percent increase. Earnings per share, adjusted for the impact of currency exchange, tax reform, and hurricane-related insurance payments, was up 13 percent to $1.56, matching Wall Street expectations. The quarterly adjusted operating ratio was 64.3 percent, up 0.3 points from a year ago.
For the year, KCS operating income was up 7 percent, to $986 million, on revenue of $2.7 billion, a 5-percent increase. Adjusted earnings per share was $5.97, an increase of 14 percent versus 2017.
Traffic volumes were flat in the fourth quarter overall and up 2 percent for the year, driven by increases in refined products shipments to Mexico, crude oil, and cross-border intermodal. Overall cross-border volumes surged 16 percent in the fourth quarter led by 22-percent growth in intermodal traffic.
For 2019, KCS expects volume growth of 3 to 4 percent and revenue growth of 5 to 7 percent.
Executives have a favorable outlook for 65 percent of the railroad’s traffic, including chemical and petroleum products, automotive, and intermodal. They expect flat volume for 35 percent of traffic, including industrial and consumer, agriculture and minerals, and energy shipments.
Some Wall Street analysts on the KCS earnings call were skeptical of the railroad’s volume projections because of recent lackluster growth.
KCS executives say the collapse of energy markets in 2015 and 2016, which was not foreseen by customers or economists, affected their previous long-term outlook. And service problems in 2018, tied partly to congestion on Union Pacific trackage-rights routes in South Texas, also muffled volume growth in 2018.
Service is back to normal, KCS executives say, and the current outlook is based on the best information from the railway’s customers.
Capital spending will range between $640 million and $660 million this year, up from $512 million in 2018. The increase is attributable to the $140 million allocated to the railroad’s order for 50 new locomotives from General Electric.
The first units will be delivered later this month.
Forget customer service!!! Just keep that money rolling into the hedge funds.