KCS: Record 3Q19 Revenue

Written by Andrew Corselli, Managing Editor
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Kansas City Southern (KCS) reported record revenues of $747.7 million, an increase of 7% from third quarter 2018. Overall, carload volumes were flat compared to prior year.

Revenue growth for 3Q19 was led by a 21% increase in Chemicals and Petroleum due primarily to increased refined fuel products and liquid petroleum gas shipments to Mexico, KCS noted. Agriculture and Minerals revenues grew 15%, driven primarily by improved cycle times. Industrial and Consumer Products and Intermodal revenues also increased by 2% and 1%, respectively; these increases were partially offset by revenue declines in the remaining two commodity groups. Energy revenues declined by 11%, as increased Utility Coal shipments were more than offset by declines in Frac Sand and Crude Oil. Automotive revenues declined by 2%.

In 3Q19, KCS’s reported operating expenses were $465.7 million. Excluding restructuring charges related to PSR initiatives and a gain on insurance recoveries related to hurricane damage a year ago, adjusted operating expenses were $453.7 million, 2% higher than 2018. Adjusted operating income was $294 million, 15% higher than a year ago. KCS reported an adjusted 3Q operating ratio of 60.7%, a 2.70 point improvement over 3Q18.

Reported net income in 3Q19 was $180.6 million, or $1.81 per diluted share, compared with $174 million, or $1.70 per diluted share in 3Q18. Adjusted diluted earnings per share was $1.94, 24% higher than a year ago.

PSR Results

In KCS’s 3Q16 earnings call, Executive Vice President Precision Scheduled Railroading Sameh Fahmy gave the following details about KCS’s PSR roll-out:

“We took out 14% of our locomotives. So now we have an active fleet of 903. When we started the PSR exercise it was 1,046. We also took out a lot of cars. When you look at the active car count, we now run at about 58,000 cars. We were at 64,000 cars online, this time last year. Car-miles went from 70 miles per day to 100 miles per day. We know that we can get to 150 and even higher than that. When you take out the least reliable assets, you improve reliability. So failures have reduced by 31%. When you have fewer foreign cars on the railroad, you end up with significant savings in equipment cost. We’re down by 24% in Q3. Crew costs have come down 9% in this quarter compared to the same quarter last year. We look at every train that has a high horsepower/trailing ton. We ask, for example, why do we have five locomotives for 800 tons? In Mexico, we replaced two intermodal and one manifest train with one train that would combine the intermodal and manifest going to that area, and will set out the blocks that will be combined. So if it’s Santa Maria, intermodal and manifest, it will all go together. Rojas the same way. So you drop three or four, actually, because you have four locations, so four setouts today of blocks instead nine setouts. Thus, we’ve seen significant progress in reducing the work events, reducing train delays, improving velocity and reducing car dwell. That’s one example.

“We have about 68% trip plan compliance. We should be at 85% or 90%. Already, 77% of our customers are seeing a significant or moderate improvement in our transit time and our service. Grain unit trains went from 1.20 to 1.42 trips/month. That means, instead of doing a complete round-trip in 28 days, we do it in 21 days. Every day means a $9 million increase annually in our revenue.”

Commented Railway Age Contributing Editor Roy Blanchard, “This is exactly what Hunter Harrison did on the Illinois Central 20 years ago.”

Cowen Insight

From Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, and analysts Matt Elkott and Adam Kramer comes the following analysis:

“KCS’s reported adjusted EPS of $1.94 is above our $1.73 forecast and the Wall Street consensus $1.79. Revenue of $747.7 million is up 7% y/y, above our and the consensus $727.4 million and $734.9 million estimates, respectively. The adjusted operating income of $294 million was above our $273.1 million estimate and the Street’s $276.3 million. The adjusted OR) 60.7% was 270bps improved y/y, 180bps better than our estimate, and 170bps better than the Street’s estimate.

“We note that the adjusted EPS, operating income and OR reflect adjustments primarily for one-time restructuring charges related to PSR implementation. These figures no longer include the favorable effects of the Mexican fuel excise tax though, as KCS is no longer the beneficiary of this credit following an adverse ruling by the Mexican government announced in an April 30th 8-K. Management continues to believe that it is unlikely that the credit will be re-instituted. Instead, they would like to see the government’s new stance applied more judiciously to competing modes of transportation such as trucking, which still benefits from the fuel excise tax.

“Management left both their 2019 volume guidance of ‘flat to slightly down’ and their long-term OR guide of ‘low end of 60% – 61% range by 2021’ unchanged. However, while they wouldn’t increase their 4Q volume guide or make their OR guide more aggressive, we expect management to do so at a future date. We continue to believe that their current OR guide is achievable, and we are modeling for an OR of 61% in 2020 (we do not have a published 2021 estimate at this time).

“Revenue expectations by market type were relatively consistent with 2Q19, with the lone change a swap of Industrial & Consumer and Automotive, with the former moving to the ‘Positive’ category and the latter moving to the ‘Neutral’ category. As a result of this shift, the “Positive’ category now encompasses 70% of KCS revenue, up from 60% last quarter. We note that the shift of Automotive to ‘Neutral’ from ‘Positive’ was in part due to the GM strike; should this get resolved it would be a positive. Finally, within KCS’s intermodal business—which continues to be listed as a ‘Negative’ revenue market—cross-border intermodal has been a bright spot, and we expect that further PSR initiatives will help make this offering even more competitive with truck.

“KCS appears poised to actually benefit from U.S. trade actions. Indeed, the ongoing trade war with China has pushed and is still pushing companies to lessen their supply chain exposure to China. Some companies have ‘near-shored’ more of their supply chain, while others are contemplating a change. The USMCA (United States–Mexico–Canada Agreement) has yet to pass Congress, but seems to have widespread support and could lead to increased trade between the U.S. and Mexico once completed.”

Commented KCS President and CEO Patrick J. Ottensmeyer, “These results are a testament to our employees’ hard work, and dedication to improving operational performance and customer service. We are very pleased with our progress toward implementing PSR principles. Notwithstanding this exceptional performance, we expect to continue optimizing our cost profile while delivering superior customer service and shareholder value.”

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