KCS Reports Record Revenues for 1Q20

Kansas City Southern (KCS) reported record revenues of $731.7 million, an increase of 8% from first quarter 2019. Overall, carload volumes were up 4% compared to prior year.

First-quarter revenues were primarily led by an 18% increase in Chemicals and Petroleum due primarily to increased refined fuel products and liquid petroleum gas shipments to Mexico. Intermodal revenues grew 11%, driven primarily by strong cross-border shipments. Agriculture and Minerals and Industrial and Consumer Products revenues also increased by 9% and 6%, respectively. These increases were partially offset by revenue declines in the remaining two commodity groups. Energy revenues declined by 13%, as increased Crude Oil shipments were more than offset by declines in Utility Coal and Frac Sand; Automotive revenues declined by 6%.

First-quarter operating expenses were $442.9 million, including $6 million of restructuring charges related to PSR initiatives. Operating income was $288.8 million and the reported operating ratio was 60.5%; on an adjusted basis, operating ratio was 59.7%. First quarter net income was $152.3 million, or $1.58 per diluted share. Adjusted first quarter operating income, operating ratio, net income and diluted earnings per share were as follows:

Due to the general economic uncertainty created by the global COVID-19 pandemic, KCS is withdrawing previously provided revenue, volume, operating ratio and earnings per share guidance. Previously provided capital expenditure guidance is revised from about 17% of revenue to about $450 million. Guidance for 2021 and 2022 capital expenditures remains at about 17% of revenue. KCS is targeting $500 million or more of free cash flow in 2020. See the following pages for a reconciliation of historical free cash flow.

“KCS posted a record first quarter, driven by 8% revenue growth and judicious expense management,” stated President and CEO Patrick J. Ottensmeyer. “This outstanding performance resulted in a record adjusted operating ratio of 59.7%, which reflects the positive impact of PSR-related efficiencies and cost controls.

“As pleased as we are with this exceptional performance, we have now turned our full attention to the rapidly changing operating and economic environment. The COVID-19 pandemic presents KCS and companies across the globe with unprecedented challenges and uncertainty. We are responding by prioritizing the safety of our employees and ensuring business continuity. At the same time, we are focusing intently on rightsizing our resources in the face of declining volumes, while remaining prepared for a return to volume growth.

“KCS is well-prepared to handle this period of challenge and uncertainty. Our employees are dedicated, vigilant and focused. Moreover, our financial profile has never been stronger with ample liquidity and a favorable debt maturity schedule. I am confident that the actions we are taking to accelerate our already successful PSR implementation during this downturn will further strengthen the Company and leave us well-positioned to handle future volume growth.”

Cowen Insight: KCS in “An Enviable Position”

Kansas City Southern’s (KSU’S) 1Q20 results strongly outpaced expectations and new guidance of $500 million of free cash flow in 2020 is encouraging, given the uncertain macro environment,” comments Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “KSU has no upcoming debt maturities, an untapped revolver, and its PSR implementation should aid in scaling costs lower as volumes fall. We lower our PT to $154 but reiterate KSU as our top rail pick.

“KSU reported adjusted EPS of $1.96, well above our $1.73 forecast and consensus’ $1.78 expectation. Revenue of $731.7 million was up 8% y/y and was above our $712.2 million and consensus’ $716.2 million estimate. KSU’s adjusted operating income of $294.8 million was above our and consensus’ $266.2 million and $271.8 million estimates, respectively. Adjusted operating ratio (OR) of 59.7% was a company record, ~650bps improved y/y, ~300bps better than our estimate, and ~235bps better than the Street’s expectation.

“Unsurprisingly, management removed revenue, volume, OR and EPS guidance, in light of macro uncertainty stemming from COVID-19. Management also reduced 2020 capex guidance from ~17% of revenue to ~$450.0 million, while maintaining capex guidance for 2021 and 2022 of ~17% of revenue. Nonetheless, management is targeting at least $500 million in 2020 free cash flow. KSU is in an enviable financial position, with no debt maturities until 2023, an untapped $600 million revolving credit line, and the ability to lower capex by another $50 million if needed (a move that will likely only be taken in the most dire economic scenarios, in our opinion).

“Results for the remainder of 2020 will balance a few competing factors. Precision Scheduled Railroading (PSR) implementation continues to progress nicely, with the active locomotive fleet down 20%, total cars on line down 10%, and fuel efficiency improving 6%, among the notable achievements. In just the past month (in the rough time frame since the onset of COVID-19 in the U.S.), KSU has consolidated 179 trains, saved 416 crews and stored 50 locomotives and 2,500 cars. The impressive PSR implementation should allow KSU to scale costs down with the expected significant decline in traffic in KSU’s energy, intermodal and automotive business units, roughly 32% of total revenue. We note that KSU’s ~16% decline in traffic through two weeks of 2Q includes a difficult Easter comparison (particularly in Mexico, where the holiday is celebrated for a more extended period of time), but that the declines, particularly for the Class I’s U.S. operations, may worsen slightly in coming weeks.”