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» Kansas City Southern Q2 2011 Results - Earnings Call Transcript
David StarlingThank you. Good morning and thank you for joining us for Kansas City Southern’s second quarter earnings presentation. Joining me today will be Dave Ebbrecht, EVP of Operations; Pat Ottensmeyer, EVP of Sales and Marketing; and Mike Upchurch, EVP and Chief Financial Officer. Also joining us by phone this morning is José Zozaya, President and Executive Representative of KCM from Mexico. If you go to Page 5 on the overview, I’m going to keep my opening remarks brief and let Dave and Pat and Mike get into the specifics of the second quarter. However, I would like to say our profit in the face of the lower than anticipated utility coal carloads, some foreign exchange headwinds, and an uncertain economy, KCS had a good quarter and in certain areas a very good quarter. That we set second quarter records for revenues, carloads and operating incomes speaks to the overall strength of the KCS Rail franchise and underlines the fact that our growth story is very much intact, and that our key growth areas gained significant momentum. For example, look at our cross-border intermodal business. In 2011, cross-border intermodal carloads increased by 56%. We were very impressed by that until the first quarter of 2012 when carloads increased by 78%. Again, we were impressed with this growth until the second quarter when the year-over-year volume growth hit 106%. It’s very exciting to see the percentage growth nearly double from 56 to 106% as the base actually gets larger. This growth is extremely important for us for a number of reasons. First, it validates what we have said for a while now – there’s a huge market for a premium intermodal product between the U.S. and Mexico, and that market will continue to grow. KCS is in the enviable position of being the only railroad that had single-line service on both sides of the border and controlled the primary gateway between the U.S. and Mexico. We’ve invested in our network to ensure we can provide the service necessary to successfully convert a large percentage of the business from truck to rail. Now that the infrastructure is in place and our truck and rail partners are fully engaged, we’re seeing the results. And what is especially exciting, we’re still at the very beginning of what promises to be many years of expansion growth.
The second aspect that makes cross-border intermodal important to us is that it represents some of the longest haul traffic on our network, which along with the high incremental margins we’re enjoying in this business segment makes this line of business quite profitable.I don’t want to steal all of Pat’s thunder, but by no means was cross-border intermodal the only bright, shiny object in the second quarter. Traffic on Lazaro Cardeñas remains strong and automotive continues to grow rapidly. We’re also experiencing the ripple effect of automotive growth on our other commodity areas. And as Dave Ebbrecht will illustrate in a few minutes, KCS’ operational performance continues to excel and our safety statistics just get better and better. The two really go hand-in-hand. As you have heard me say in the past, a safe railroad is inevitably a well-run railroad, and that KCS is both is having a very definite, positive impact on our profitability. While there are certain mixed signals regarding the direction of the economy, we do feel that some of the bright spots in the economy are having positive impacts on our business. Most notably the surge in automotive sales is certainly being felt in a number of our commodity groups. More over, the very solid manufacturing numbers we’re seeing related to Mexico are being reflected in our KCS volumes. I don’t by any means want to suggest that KCS is immune from the mood of uncertainty which is prevalent regarding the direction of the global economy. We are certainly impacted by it, but there are enough positives in the economy for KCS to maintain strong volume growth in the present business environment. We are also very satisfied with the outcome of the Mexican presidential election. José Zozaya has a good working relationship with President-Elect Peña Nieto. We believe his administration will be pro-business and we’re confident that the relationship between our company and the Mexican government will remain solid and positive.
If you’ll turn to the next page, second quarter results, I’m going to let Pat and Mike get into the nuts and bolts; but I would like to say we are certainly enjoying reporting the 62.6 second quarter operating ratio, but we understand the comparative adjusted second quarter operating ratio of 70.5, representing a 1.2 point improvement over last year, is the important number. Our second quarter adjusted diluted EPS was $0.85 compared to last year’s adjusted diluted EPS of $0.71.