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Mr. Starling, you may begin.Dave Starling Good morning and thank you for joining us on Kansas City Southern’s First Quarter 2012 Earnings Call. Presenting with me today are Dave Ebbrecht, our EVP of Operations; Pat Ottensmeyer, our EVP of Sales and Marketing; and Mike Upchurch, our EVP and Chief Financial Officer. To start out, obviously we’re very pleased with the results KC has posted. First quarter revenues, carloads and operating income are record. A few things that stand out as important contributors to these results, first, our Cross Border revenues increased 28% in the first quarter over a year ago. A 26% increase in Cross Border grain revenues and an 87% increase in Cross Border Intermodal were key contributors. What’s also nice about our Cross Border traffic, it represents some of the longest lengths of the haul on the KCS network and that drives not only our revenue, but profitability as well. Automotive was also strong in the first quarter with revenues up 21%. We view 2012 as kind of a bridge year in our automotive business as we look ahead to the impact of planned expansions and new plants coming online in 2013, ’14 and ’15. But as it’s turning out, we’re seeing good growth in 2012 due to increased auto production. The latest forecast calls for 2012 North American auto production to be around 14.8 million vehicles, which would be up 13% from 2011. Still below the 16.3 million in 2006, but definitely moving in the right direction. As we’ve noted in other meetings, auto manufacturing in Mexico is projected to increase by over 40% by 2015 and KCS stands to significantly benefit from the growth. Pat will provide more color on the recent decisions made by Honda, Mazda and Nissan to build or add to their plants in Mexico. We also are being told a major European manufacturer is looking at plant sites in Mexico as well.
Auto production has a ripple effect as new plants provide an opportunity for KCS to move raw material and auto parts into Mexico and then finished vehicles for the local market, US and Canada, as well as exports to Lázaro Cárdenas for the central and South American markets.It’s also becoming increasingly clear to us that KCS is beginning to experience the tangible benefits of the near sourcing phenomenon taking place in Mexico. We talked about it for the last few years and now it’s really starting to take hold. We’re basically just on the front end of this production migration from Asia to Mexico. The perfect wave of competitive wage rates, favorable currency environment and significantly lower transportation rates to US markets are all in play and we’ll see it rippling through our various business units. During the first quarter, we continued to strengthen the company’s capital structure and balance sheet. In March, we took advantage of a favorable interest rate environment to enter into a $275 million bank term loan arrangement at a very attractive rate. KCS then used the bank term loan to redeem KCSR’s 8% senior notes. We took out approximately $175 million of the notes in the first quarter and we’ll redeem the remaining $100 million in this quarter. When we complete this refinancing on a go-forward basis, our annual interest expense will be just over $100 million. In 2009, we paid $173.7 million in annual interest expense. The turnaround has been pretty spectacular. We will continue to look at other opportunities to reduce or refinance debt. On the horizon are the 12.5% notes at KCSM, which are callable in 2013. We will continue to do what makes the most sense with our free cash to reduce debt and cost and I can assure you we’ll have adequate resource to fund our growth opportunities in whatever form they may take.
Once again, the steady improvement of our financial strength was noted by a rating agency. In March, S&P upgraded its rating of KCS to be B+, only one notch below investment grade. KCS remains fully committed to achieving investment grade status. In addition, as you all know, KCS declared a quarterly cash dividend to its common stockholders. While KCS is still very much a growth company with outstanding short- and long-term business opportunities, our cash profile is such that it made sense to initiate the dividend at this time.The underlying message we hope this sends out is that KCS is both a dynamic growth company with a one-of-a-kind rail franchise and is also a stable, well-managed and financially strong company. My final overview observation is in regards to the recent announced labor agreement signed with the Mexican railroad union. Mike Upchurch will provide a little color on the agreement in his remarks. This is a good agreement for all involved. The benefit to KCS is apparent, but it also benefits KCS union employees as it provides a framework for more stable and predictable annual cash payout. If you go to the next chart, you can see KCS’s first quarter volumes and their revenues came in a bit better than the guidance we gave in 2012 back in January. The growth in volumes and revenues are especially noteworthy given the headwind we faced in our utility coal business. Our 71.2% operating ratio was also a record for a first quarter for KCS. It marked a 2.6 point improvement from a year ago and was also sequentially improved from the fourth quarter. Despite a higher corporate tax rate resulting from the impact of the strengthening peso on our Mexican tax rate, KCS adjusted diluted EPS came in at $0.75, a 29% improvement over first quarter 2011.
Turning to the next slide, you can see our first quarter compared favorably with our 2012 guidance of mid-single digit volume growth, mid-single digit pricing and low double digit revenue growth.But knowing the audience I’m speaking to today, I’m sure the primary question is how does the rest of the year look? I say there’s absolutely nothing we see in our business at this time that would lead us to back off of earlier guidance. It looks like our utility coal business will pick up in the second quarter. We have all of our coal plants receiving coal at this time. Just remember, coal was only 14% of our revenue in 2011. We are beginning to see movement of crude oil to the Bakken region and our participation in the movement of frac sand is expanding rapidly. Pat will provide more color on the entire energy sector. US economy is definitely stronger than it was a year ago and seems to be slowly gaining momentum. As I mentioned before, near sourcing is beginning to have more of an impact on an already faster growing Mexican economy. The bottom line is that KCS has started the year on a strong note. We’re optimistic that we’ll be able to sustain solid growth throughout this year. Read the rest of this transcript for free on seekingalpha.com