10/19/2012

Kansas City Southern Article
Kansas City Southern set all-time revenue, volume records in 3Q

Despite "anemic" economic growth and the fall out from dismal U.S. grain production because of a prolonged drought — including the lowest corn output since 2006 — Kansas City Southern set all-time volume and revenue records in the third quarter, senior executives said during an earnings conference held this morning.

Volume rose 7 percent to 552,400 units and revenue climbed 6 percent to $577.4 million compared with third-quarter 2011 results.

In addition, on an adjusted basis (excluding hurricane-related impacts in third-quarter 2011), diluted earnings per share increased 5 percent to 82 cents, operating income rose 16 percent to $181 million and the operating ratio improved 2.6 points to a record 68.7.

The financial results were driven by solid top-line growth, disciplined operating performance, a diverse traffic mix and cost controls, said KCS President and Chief Executive Officer David Starling.

Revenue primarily was propelled by the railroad's five fastest-growing traffic categories: automotive, cross-border intermodal, container traffic through Lázaro Cárdenas, Mexico, crude oil and frac sand. Cross-border intermodal revenue soared 88 percent and frac sand revenue leaped 82 percent year over year, helping to offset weak coal and grain revenue, which account for 20 percent of KCS' business.

"Collectively, these five categories, which represent approximately 18 percent of total KCS freight revenues for the third quarter, grew by 46 percent when compared to the third quarter of 2011," said Starling. "We believe that there is significant long-term growth potential in each of these areas."

Overall, KCS set revenue records in four of its six business units despite lower volume in three of the units. Automotive revenue jumped 31 percent; intermodal revenue climbed 25 percent; energy revenue increased 8 percent; chemical/petroleum revenue rose 4 percent; industrial and consumer revenue inched up 1 percent; and agricultural and mineral revenue fell 10 percent.

Adjusted operating expenses increased only 2 percent to $397 million even though volume climbed 7 percent, said Executive Vice President and Chief Financial Officer Mike Upchurch. Compensation and benefits costs inched down from $109 million in the year-ago period to $108 million as the quarterly average headcount dipped from 6,112 in the year-ago period to 6,106. Fuel costs rose slightly from $87 million in three-quarter 2011 to $90 million.

Because of the promise inherent in the five growing traffic sectors, KCS' growth story "is very much intact," said Starling. Grain business will receive a big boost next year, as well, due to new origination points on the railroad's network.

Bartlett Grain Co. L.P. plans to open a facility in Jacksonville, Ill., in July 2013 and Ray-Carroll County Grain Growers expects to open a facility in Corder, Mo., in September 2013. The facilities will provide KCS access to two new grain producing regions and strengthen the Class I's grain franchise, said EVP of Sales and Marketing Pat Ottensmeyer.

— Jeff Stagl