Kansas City Southern First Quarter 2012 Earnings Presentation - - PowerPoint PPT Presentation

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Kansas City Southern First Quarter 2012 Earnings Presentation - - PowerPoint PPT Presentation

Update: On May 18, 2012, management presented at the Bank of America Merrill Lynch Global Transportation Conference. The materials presented at that conference update some of the information contained in these slides. Please review the


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Kansas City Southern

First Quarter 2012 Earnings Presentation

April 24, 2012

Update: On May 18, 2012, management presented at the Bank of America Merrill Lynch Global Transportation Conference. The materials presented at that conference update some of the information contained in these slides. Please review the updated presentation materials, which can be found by clicking on the following link: Bank of America Merrill Lynch Global Transportation Conference Presentation 5.18.12

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This presentation contains “forward-looking statements” within the meaning of the securities laws concerning potential future events involving KCS and its subsidiaries, which could materially differ from the events that actually occur. The words “projects,” “estimates,” “forecasts,” “believes,” “intends,” “expects,” “anticipates,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this presentation. Differences that actually occur could be caused by a number of external factors over which management has little or no control, including: competition and consolidation within the transportation industry; the business environment in industries that produce and consume rail freight; revocation of the rail concession of KCS’s subsidiary, Kansas City Southern de México, S.A. de C.V.; the termination, or failure to renew, agreements with customers, other railroads and third parties; interest rates; access to capital; disruptions to KCS’s technology infrastructure, including its computer systems; natural events such as severe weather, hurricanes and floods; market and regulatory responses to climate change; credit risk of customers and counterparties and their failure to meet their financial obligations; legislative and regulatory developments and disputes; rail accidents or other incidents or accidents along KCS’s rail network, facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; fluctuation in prices or availability of key materials, in particular diesel fuel; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; loss of key personnel; labor difficulties, including strikes and work stoppages; insufficiency of insurance to cover lost revenue, profits or other damages; acts of terrorism or risk of terrorist activities; war or risk of war; domestic and international economic conditions; political and economic conditions in Mexico and the level of trade between the United States and Mexico; the outcome of claims and litigation involving KCS or its subsidiaries; and other factors affecting the operation of the business. More detailed information about these factors may be found in filings by KCS with the Securities and Exchange Commission, including KCS’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-4717) and subsequent Quarterly Reports on Form 10-Q. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. KCS is not obligated to update any forward-looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, kcsouthern.com/investors.

Safe Harbor Statement

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Dave Starling

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Today’s Presenters

Dave Starling President & CEO Dave Ebbrecht EVP Operations Pat Ottensmeyer EVP Sales & Marketing Mike Upchurch EVP & CFO

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KCS Overview

  • All-time record quarterly revenues, record first

quarter carloads and operating income

  • Continued strengthening of capital structure and

balance sheet

  • Announcement of cash dividend to common

stockholders

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Record First Quarter Results

Q1 2012 Q1 2011 Variance Carloads/Units (in thousands) 508.1 474.1 7% Reported Revenues (in millions) $547.5 $488.6 12% Reported Operating Ratio 71.2% 73.8% 2.6 points Reported Diluted Earnings per Share $0.68 $0.58 17% Adjusted Diluted Earnings per Share * $0.75 $0.58 29%

* All reconciliations to GAAP can be found on the KCS website in the Investors section.

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No Change to 2012 Guidance Despite Coal Headwind

Original 2012 Guidance Update

  • Mid-single digit volume growth
  • Q1 volume growth of 7%
  • Mid-single digit pricing
  • Core pricing and revenue per unit in mid-

single digit range

  • Low-double digit revenue growth

(depending on fx impact)

  • Q1 revenue growth of 12%
  • Continued operating ratio improvement
  • n a year-to-year basis
  • Operating ratio improved 2.6 points over Q1

2011

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Dave Ebbrecht

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Investing in Growth Capacity

KCS has developed 3-5 year plans that drive timely investment in the following areas:

  • Infrastructure
  • Human Resources
  • Rolling Stock

30 30 20 20 20

1,600,000 2,000,000 2,400,000 2,800,000 400 450 500 550 600

2011 2012 2013 2014 2015 Carload Projections - Consensus Growth Rates Road Locomotives - End of Period

KCS Road Locomotive Projections

Locomotive Purchases 2011 - 2015 Road Locomotives Carload Projections with Consensus Growth Rates Linear (Carload Projections with Consensus Growth Rates)

(D)

(D) See definitions in the appendix to this presentation.

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40 90 140 190 240 290 340 390 440 490 540 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112

$ in millions Linehaul Revenue Ops Costs Linear (Linehaul Revenue)

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KCS “Ops” Leverage Continues to Expand

Q109 “Ops” Leverage of $147M Q112 “Ops” Leverage of $276M – Ops Costs up 15% over past 3 yrs against Linehaul Revenue growth of 49% (D) See definitions in the appendix to this presentation.

(D)

All reconciliations to GAAP can be found on the KCS website in the Investors section.

Operations costs contain transportation, mechanical, engineering, equipment costs, and other operations

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Operations – Industry Leading Productivity

* Q3 2010 carloads per employee adjusted for Hurricane Alex.

6,080 6,124 6,089 70 72 72 68 60 61 69 71 73 77 79 80 78 82 85 85 83

50 55 60 65 70 75 80 85 90 6,000 6,200 6,400 6,600

Carloads per Employee Headcount Headcount Carloads per Employee Seasonal Decline in Carloads Drives Q4 to Q1 Dip

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15 25 35 45 55 65 75

350,000 400,000 450,000 500,000 550,000 5 10 15 20 25 30

Carloads System Dwell

Avg System Dwell Carloads 350,000 400,000 450,000 500,000 550,000 15 20 25 30 35

Carloads System Velocity

Avg System Velocity Carloads

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Operations Performance

Dwell

* Q3 2010 adjusted for Hurricane Alex. (D) See definitions in the appendix to this presentation.

(D) (D)

Velocity Car Efficiency

320,000 370,000 420,000 470,000 520,000 35,000 40,000 45,000 50,000 55,000

Carloads Avg Cars On-Line per Day

Cars On-line Carloads

Slow Order Miles

Strong Operating Metrics Sustained in Q1 as KCS Experienced Record Volumes

(D)

Miles

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KCS Operations – Q1 2012 Highlights

  • Network remained fluid with record volumes
  • Productivity and efficiency improvements in fuel,

velocity, and capacity

  • PTC is on-track with deployment schedule
  • Best-in-class safety recognition - 6th straight

Harriman awarded

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Pat Ottensmeyer

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First Quarter Revenues Increased 12%

Q1 2012 Q1 2011 Variance Reported Revenues (in millions) $547.5 $488.6 12% Carloads (in thousands) 508.1 474.1 7% Average Revenue per Unit $1,041 $992 5%

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Q4 08

+$16 +$14 $489 $548 +$17 ($6) +$18 16

Multiple Contributors to Revenue Growth

$ in millions

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Q1 2012

$72 $71 +$1 17

New Energy Business Unit

  • New Energy business unit

replaces Coal

  • Historic low natural gas prices

drive Utility Coal decline

  • Strength in Frac Sand offsets

Coal decreases

  • New business opportunities

progressing

Minor Business Units as a Percentage of Q1 2012 Energy Revenue Q1 2011 to Q1 2012 – Revenue Change

Q1 2012 Energy Revenue - $71m

71% 11% 2% 16% Utility Coal Coal/Pet Coke Crude Oil Frac Sand

$ in millions

($6) ($1) +$5

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  • 2%

4% 3%

  • 6%

18% 14% 8% 13% 11% 5% 6% 5% 6% 17% 14%

  • 1%

26% 21%

Chemical & Petroleum Industrial & Consumer Agriculture & Minerals Energy Intermodal Automotive

Carloads RPU Revenue

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First Quarter Commodity Group Results

Q1 2012 vs. Q1 2011

Q1 2012 Q1 2011 Variance Reported Revenues (in millions) $547.5 $488.6 12% Carloads (in thousands) 508.1 474.1 7% Average RPU $1,041 $992 5%

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Cross Border

(D) Revenue Increases 28%

Q1 2012 vs. Q1 2011

(D)

(D) See definitions in the appendix to this presentation.

0% 5% 10% 15% 20% 25% 30% $60 $80 $100 $120 $140

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

% of Revenue

Revenue (in millions)

Cross Border Revenue Hurricane Adjustment % Total Revenue

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+87% +78% 5,274 9,369 Q1 11 Q1 12

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Cross Border Intermodal Revenue Growth Increases 87%

(D) See definitions in the appendix to this presentation.

Cross Border

(D) Intermodal

Volumes

$4,600 $8,610 Q1 11 Q1 12

Cross Border

(D) Intermodal

Revenues ($ in thousands)

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Lázaro Cárdenas Revenue Growth Increases 26%

34,012 43,463 Q1 2011 Q1 2012

Lázaro Cárdenas Volumes

+28% $12,276 $15,515 Q1 2011 Q1 2012

Lázaro Cárdenas Revenues

($ in thousands)

+26%

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Market Outlook – Linehaul Revenue

Excludes FX Impact

Q2 2012 FY 2012

Chemical & Petroleum Industrial & Consumer Agriculture & Minerals Energy Intermodal Automotive

+ Single digit revenue growth expected during period. = Flat revenue growth expected during period. ++ Double digit revenue growth expected during period.

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82% 84% 86% 88% 90% 92% 94% 96% 98% 100% Service meets my needs Easy to do business with A value to my company I would recommend

KCS Results

2011 Total Spring Fall Winter

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Customer Satisfaction Continues at High Level

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Market Developments

  • Economic outlook continues to be positive in both U.S. and Mexico

– Key indices continue to signal growth in U.S. carloads – Mexico’s GDP expected to be 3% - 4% for 2012

  • Core pricing outlook in line with prior mid-single digit guidance
  • Cross border traffic outlook very strong

– Intermodal truck to rail conversion – Positive ripple effect related to Mexican automotive production

  • Long term new business pipeline continues to grow

– Mexico near sourcing – Port Arthur Crude shipments – Lázaro Cárdenas port expansion – Export coal

  • North American shale gas discoveries will have positive long term impact

– Negative impact on Utility Coal – Positive impact on other Energy business and ethane based production

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Mike Upchurch

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Condensed Income Statement

* All reconciliations to GAAP can be found on the KCS website in the Investors section.

($ in millions, except EPS Diluted)

Q1 2012 Q1 2011

Revenues $547.5 $488.6 Operating Expenses 389.7 360.8 Operating Income 157.8 127.8 Equity Earnings 5.8 3.6 Interest Expense (27.2) (33.1) Foreign Exchange Gain (Loss) 3.9 (0.1) Debt Retirement Costs & Other (12.8) 1.7 Pre-tax Income 127.5 99.9 Income Tax Expense (52.2) (35.8) Net Income $75.3 $64.1 Reported EPS Diluted $0.68 $0.58 Adjusted EPS Diluted* $0.75 $0.58 Average Diluted Share Count (in thousands) 109,996 109,751

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Operating Expense Increases

$109.3 $54.4 $88.3 $38.3 $48.4 $51.0 $100.4 $48.1 $79.5 $41.4 $45.7 $45.7 Comp & Benefits Purchased Services Fuel Equipment D&A Materials & Other

Q1 12 Q1 11

$ in millions

Total Operating Expenses $ in millions Q1 2011 Expense $361 Volume Sensitive 17 Fuel Price Increases 10 Inflation 9 FX (7) Q1 2012 Expense $390

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Compensation & Benefits Expense Increases

6,080 6,089 Q1 11 Q1 12 Quarterly Average Employee Headcount

Compensation & Benefits $ in millions

Q1 2011 Expense $100 Wage Inflation / Volume Sensitive 5 Other 4 Q1 2012 Expense $109

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PTU Agreement Provides Savings and Consistent PTU Expense

  • Mexican law provides profit sharing to employees based on statutory income
  • US GAAP requires we record expense based on US GAAP income

– Cash component has been paid to employees every year and will continue to be paid – Depreciation, amortization, FX, etc. created timing differences (similar to income taxes) that have accumulated to approximately $40m as of 12/31/2011

  • Transfer of employees to service company terminates KCSM’s PTU obligation
  • KCSM will contract for and pay market-based compensation to Service Company
  • Agreement with union provides employees a more stable and predictable annual cash payout

– 2012 expected cash payment is 37% higher than 2011 cash payment – Annual cash PTU payments have ranged from $4k MXP to $16k MXP – Reduces variability due to economic conditions and one-time items such as debt retirement costs

  • Q2 results will include a one-time, non-cash reversal of the approximate $40m deferred liability

recorded as a contra expense in operating expenses

  • Q2 results will also reflect a reversal of $7m non-cash first quarter 2012 PTU compensation expense
  • Expect to realize an annual expense reduction equal to approximately 4% of annual 2011

Compensation & Benefits expense

  • Provides KCS a more stable and consistent PTU expense in the future
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Fuel Expense Increases; Primarily Due to Price

Fuel Expense $ in millions

Q1 2011 Expense $80 Price 10 Volume 4 FX & Efficiency (6) Q1 2012 Expense $88

Q1 2010 Q1 2011 Q1 2012

Locomotive Fuel Price Dollars per Gallon

$2.15 $2.63 $2.84

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Equipment Costs Decrease 7%; Primarily Due to Locomotive Lease Buyouts

Equipment Costs

$ in millions

Q1 2011 Expense $41 Car Hire/Volume 3 Locomotive Lease Buyouts (4) Other (2) Q1 2012 Expense $38

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Effective Tax Rate Driven by FX Fluctuation

FX Rates

MXP/USD

Y/E 2011 14.0

3/31/12 Actual & Y/E 2012 Estimate

12.8

Estimated Full Year Tax Rate

40-42%

40.9% 1.7% 0.5% (2.6%) 6.3% 35.0%

Statutory Rate State Taxes (Net) Other Lower Foreign Tax Rate Foreign Exchange 1Q12 ETR

Q1 2012 Effective Tax Rate Reconciliation

27.1% 1.5% (0.5%) (3.2%) (5.7%) 35.0%

Statutory Rate State Taxes (Net) Other Lower Foreign Tax Rate Foreign Exchange 2011 ETR

2011 ETR

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Generated $38 million Free Cash Flow in Q1; Announced Cash Dividend on Common Stock

All reconciliations to GAAP can be found on the KCS website in the Investors section.

  • De-levering strategy largely complete
  • Call & refinance KCSR 8% notes on 6/1/12
  • Target investment grade rating
  • 2012 LTM Funds from Operations-to-Debt: 35%*
  • 2012 LTM Debt-to-EBITDA: 2.5*

De-lever

  • Core capital expenditures – 17-18% of revenue
  • Committed to superior growth profile
  • Pull forward locomotive purchase in 2012 to take

advantage of accelerated depreciation (~3% of revenue)

Invest in Business

  • Cash dividend declared on March 30, 2012
  • Quarterly payout of $0.195 per share or $21.4 million
  • Annualized payout of $0.78 per share or $85.6 million
  • Represents a 1.1% yield

Shareholder Returns

*Calculations of FFO-to-Debt and Debt-to-EBITDA are based on S&P’s and Moody’s methodologies respectively

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Dave Starling

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Panama Canal Railway Company*

Q1 2012 Q1 2011

Volumes 111,426

85,438

Total Revenues (in millions) $15.7

$12.1

Operating Ratio 46.1%

56.6%

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000

Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11 Q1 12

Quarterly Container Volume

* PCRC is a 50% equity investment.

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Closing Comments

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Appendix

  • Road locomotives are considered to be locomotives with greater than 4000 horsepower
  • Linehaul revenue is revenue provided by transportation services, excluding fuel surcharge and other revenue
  • System dwell is defined as the average time a car resides at the specified terminal location.
  • Slow order miles are defined as speed restrictions on a rail line, which are set below the track's normal speed

limit and tend to disrupt timetables and time-sensitive shipments.

  • Car efficiency is defined as a measure of productivity that compares total units of shipped goods (carloads) to

total cars online.

  • Cross border is defined as traffic that moves on Kansas City Southern both north and south of the U.S. / Mexico
  • border. Traffic interchanged with a competing railroad at the border is not considered cross border.
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