Kansas City Southern (

KSU

)

Q4 2011 Earnings Call

January 23, 2011 5:00 p.m. EST

Executives

Michael Haverty – Executive Chairman

Dave Starling – President and CEO

Dave Ebbrecht – EVP, Operations

Pat Ottensmeyer – EVP, Sales and Marketing

Mike Upchurch – EVP and CFO

Analysts

Bill Greene – Morgan Stanley-Smith Barney

Chris Ceraso – Credit Suisse

Chris Wetherby – Citigroup

Tom Wadewitz – JPMorgan Chase & Co.

Matt Troy – Susquehanna Financial

Ken Hoexter – Bank of America

Art Hatfield – Morgan Keegan

Scott Group – Wolfe Trahan & Co.

John Barnes – RBC Capital Markets

Keith Schoonmaker – Morningstar

Anthony Gallo – Wells Fargo

Sal Vitale – Sterne Agee

Brad Delco – Stephens Inc.

Neal Deaton – BB&T Capital Markets

Scott Nichols – Bishop Rosen

Presentation

Operator

Greetings, and welcome to the Kansas City Southern Fourth Quarter and Full Year 2011 Earnings Call.

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At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

This presentation includes statements concerning potential future events involving the company which could materially differ from events that actually occur. The differences could be caused by a number of factors, including those factors identified in the Risk Factors section of the company’s Form 10-K for the year ended December 31, 2010 filed with the SEC. The company will not update any forward-looking statements in its presentations to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, www.kcsouthern.com.

It is now my pleasure to introduce your host, Michael Haverty, Executive Chairman for Kansas City Southern.

Mr. Haverty, you may begin.

Michael Haverty

Thank you for joining Kansas City Southern’s fourth quarter and yearend 2011 earnings call. I have here with me today presenting, Dave Starling, President and CEO; Dave Ebbrecht, our EVP, Operations; Pat Ottensmeyer, EVP, Sales and Marketing; Mike Upchurch, EVP and CFO. Also with us today in here Kansas City is Jose Zozaya who is President and Executive Representative of Kansas City Southern to Mexico. Jose will be available for questions.

If you’ll turn to the slide that says KCS Overview, let me make a few remarks about the 125th anniversary of Kansas City Southern. That took place on January 8. And I will say that, over the last 20 years, that there are probably some folks that wondered whether we would make it to the 125th anniversary. The railroad was for sale in 1993 and ’94, Western Rail mergers took place in the mid-‘90s, and a lot of people were writing the obituary of Kansas City Southern.

Then in 2000 when the company spun off the financial assets of the company and we had to do a very painful reverse one-for-two split, we went out on the market. We did that because we were trying to maintain double-digit numbers. We went out on the market on July 13 of 2000 at $5.75, and our market cap at that time was just over -- or just under $350 million. The market cap at close today was just under $8 billion. So, I think (inaudible) in Mexico, as you’re going to hear from the team here today, was certainly a great thing that got us to this 125th anniversary.

Second bullet point on my comments, dramatic turnaround from 2008 to 2011. The meltdown took place in the fall of 2008, and just things got fell off the end of the table there and our loadings just went down significantly. But we have come back not only from a standpoint of loading, the car loads in the model units, but also with a total enhancement of the capital structure of Kansas City Southern. That’s down and spread out. The cash flow and cash on hand has dramatically improved. Debt ratings have been upgraded. And the company has not been stronger during its 125 years.

Final comment, 42% stock price appreciation in 2011. Some folks might say that’s over the top. I think there certainly has been a recognition and an understanding of the value of this franchise as it serves the growing manufacturing area of Mexico and connects with the rail carriers serving the US, Canada and Mexico. We also have heard from time to time that KCS multiples are higher than the rest of the industry. But if you look at our PE and our enterprise value over EBITDA ratios over the last decade, they have historically been above industry averages.

With that, I'm going to turn it over to Dave Starling, CEO, to continue with the presentation.

Dave Starling

Okay, Mike. Thanks.

We’ll turn to page seven, Fourth Quarter Results. I’d like to point out some of the highlights and then guide up to full-year 2011, how we matched up with the guidance we gave during the past year.

Fourth quarter volumes came in at about 7% higher than the previous year. Automotive, intermodal and coal were all strong drivers of growth. I don’t want to steal any of Pat Ottenmeyer’s thunder, but I’ll take the 22% volume increase in automotive, 18% in intermodal, and 8% in coal (inaudible).

Chemicals and petroleum were a bit off in the quarter, but it does not appear that the slight decline had anything to do with either a slowing economy or KCS losing market share. Our customers we spoke with in the chemical industry are pointing towards a destocking of inventories by end-users in the fourth quarter, particularly in plastics, which is a significant commodity for us. While it’s an industry-wide phenomenon, more specific to KCS was that one of the refineries we serve was down for maintenance during the quarter. And another customer had to allocate some of its shipments to another rail carrier to meet its annual contractual obligation.

The good news is while chemicals and petroleum were down in the quarter, they bounced back in the first quarter. Pat will have more to say about that later.

Revenue in the fourth quarter, up 11%. Another solid quarter. The revenue would have been greater if not for the weakening of the (inaudible) the dollar which alone reduced our quarter-over-quarter revenue growth by about 2%.

That being said, let me re-emphasize something we’ve said many times before. Swings in the currency exchange rate (inaudible) revenues on a quarterly basis have a very muted impact on our operating income. The reason for this, [above the line], we have a good natural hedge against swings in the peso/dollar exchange ratio, somewhere between 65% to 70% of our Mexico-generated revenues are dollar-denominated, while our Mexico costs were about 50/50 dollar/peso.

So, when our revenues are somewhat negatively impacted by a weaker peso, our expenses come in a little lower in the bottom line. The overall effect on operating income is pretty insignificant. Now, below the line, the story can be a bit different at times, and Mike Upchurch will take you through those numbers during his presentation.

Our fourth quarter operating ratio was 71.6 compared to 71.8 we recorded in the fourth quarter of 2010. Mike Upchurch will also provide more colors to what went into our OR calculation in the fourth quarter, which kept it from being even lower.

Reported diluted EPS for the quarter was $0.87 compared with $0.50 a year ago, 74% increase. If you adjust that debt retirement cost in both fourth quarter 2010 and 2011, diluted EPS was $1.01 and $0.62 respective, a 63% gain.

Next page, the full-year results. KCS hits some significant milestones. For the first time in our history, volumes hit the 2 million mark and revenues went above $2 billion. It’s especially gratifying to hit these historic numbers in light of the fact that a little over two years ago we were just beginning to struggle out of the worst economic environment since the Depression. In 2009 we reported annual revenues of $1.5 billion, which were down 20% the year before. Now two years later, we report 2011 revenues of $2.1 billion, 42% higher than 2009.

On a reported basis, our volumes were up 8% for the year, revenues were up about 16%. Also on a reported basis, KCS 2011 operating ratio was 70.9. You should note that this number includes insurance settlement we recorded in the third quarter for Hurricane Alex which struck Mexico in the third quarter of 2010.

Our reported diluted EPS for 2011 was $3, compared to $1.67 in 2010, an increase of 80%. Adjusting out debt retirement for 2011, diluted EPS was $3.23 compared with $2.11 in 2010, a 53% increase.

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