KCS: 2019 “Exceeded Expectations”

Written by William C. Vantuono, Editor-in-Chief
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Kansas City Southern President and CEO Pat Ottensmeyer, Railway Age 2020 Railroader of the Year.

Implementation of its own version of PSR (Precision Scheduled Railroading) helped Kansas City Southern post solid financials for fourth-quarter and full-year 2019.

Fourth-Quarter 2019

Fourth-quarter revenues were $729.5 million, an increase of 5% primarily led by a 13% increase in Chemicals and Petroleum and an 11% increase in Industrial & Consumer Products as compared to 4Q2018. Carloads were down 1%, as declines in Automotive and Intermodal offset carload growth in all other business units.

Fourth-quarter operating expenses were $493.5 million, including $38.3 million of restructuring charges related to PSR initiatives. Operating income was $236 million, and the reported operating ratio was 67.6%. Fourth-quarter net income was $127.9 million, or $1.30 per diluted share. Adjusted fourth-quarter operating income, OR, net income and diluted EPS were as follows:

“Kansas City Southern’s implementation of PSR principles has sustained momentum in the fourth quarter, driving strong results in the form of more-consistent and reliable operations, improved customer service, improved cost structure and growth in shareholder returns,” stated President and Chief Executive Officer (and Railway Age 2020 Railroader of the Year) Patrick J. Ottensmeyer. “Thanks to the hard work and dedication of KCS’s employees, we exited 2019 with network-wide velocity performing at record levels.”

Full-Year 2019

Full-year 2019 revenues were $2.9 billion, an increase of 6% on a 1% decline in carloads. Operating income was $886.3 million, and the reported OR was 69.1%. Full year 2019 net income was $540.8 million, or $5.40 per diluted share.

During 2019, KCS “significantly improved” its operating performance, as demonstrated by an increase in gross velocity of 22%, a decline in terminal dwell of 16%, and an improvement in car-miles per day of 19% as compared to 2018. PSR initiatives also contributed directly to operating expense savings of $58.0 million in 2019, and are projected to deliver incremental savings of $61.0 million in 2020.

“Year one of KCS’s PSR implementation has exceeded our own expectations for service, operational and financial improvement,” stated Ottensmeyer. “As we turn our focus to 2020, we look forward to growing our business while implementing our second year of PSR initiatives.

“These strong results have allowed us to improve guidance, and we now expect to deliver a 60% to 61% operating ratio in 2020, and below 60% in 2021. Additionally, we have improved our outlook for earnings per share growth to a mid-teens CAGR (compounded annual growth rate) from 2019 through 2021. Finally, with improved asset utilization, we have reduced our outlook for capital expenditures to ~17% of revenue through 2022.”

DOWNLOAD A PDF OF KCS CONSOLIDATED STATEMENTS OF INCOME:

Cowen Perspective

“KCS’s 4Q19 results beat our estimates but fell just short of consensus,” noted Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “However, 2020 guidance was strong, aided by PSR gains and a volume outlook that is impressive, given broader freight weakness. The U.S.-Mexico railroad is well-positioned to capture supply chain shifts from China to Mexico and the new USMCA agreement. We raise our price target to $181 and reiterate Outperform.

“KCS reported adjusted EPS of $1.82, above our $1.78 forecast but below the consensus $1.85. Revenue of $729.5 million was up 5% y/y and was above our $727.6 million, but slightly below the consensus $730.2 million estimate. Adjusted operating income of $274.3 million was above our $272.8 million estimate but below the Street’s $280.5 million. Adjusted OR was 62.4%, 190bps improved y/y, 10bps better than our estimate, but 80bps worse than the Street’s expectation.

“Management updated its existing OR, EPS, and Capex guides and also provided initial 2020 guidance for volumes and revenue, raising 2019-2021 OR targets and EPS CAGR forecast, both positive indications regarding the company’s cost-cutting and PSR implementation. With overall rail industry volumes challenged throughout the last year and expectations for the volume weakness to persist in 2020, KCS’s outlook is a notable exception. Initial volume guidance of low-single-digit growth in 2020 compares to our expectation at the time of the release of 2.3% growth. Similarly, initial revenue guidance of mid-single-digit growth compares to our 4.8% at the time of the release and the Street’s 5.8% expectation. While this is essentially in line on its face, one could argue it was better than anticipated, given there was a fear among investors of downward adjustments across the rail space prior to earnings.

“In our view, one of the sources of the more positive volume outlooks for KCS is the supply chain shift out of China to North America. Our recent 4Q19 Rail Shipper Survey showed that among those who moved their supply chain, 41% moved it to somewhere in North America, 27% to Southern Asia, 21% to Europe, and 11% to South America. With cheaper labor than the U.S. and Canada, locations in Mexico and Central America are well-positioned to be on the other end of this supply chain shift. As the sole U.S.-Mexico railroad, KCS is well-positioned to be the primary beneficiary of this shift, able to capture incremental business from existing customers and new business from customers who recently moved operations to Mexico.”

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