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KCS 2Q21: Strong Volume; Service 'Short of Expectations' - RailwayAge Magazine

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Written by Marybeth Luczak, Executive Editor
“KCS delivered strong second-quarter volume growth, as our franchise benefited from unique growth drivers and the economy recovered from the COVID-19 downturn,” KCS President and CEO Patrick J. Ottensmeyer said. “Although we are pleased with the strong volume growth, we fell short of our own expectations for customer service.”

“KCS delivered strong second-quarter volume growth, as our franchise benefited from unique growth drivers and the economy recovered from the COVID-19 downturn,” KCS President and CEO Patrick J. Ottensmeyer said. “Although we are pleased with the strong volume growth, we fell short of our own expectations for customer service.”

Kansas City Southern (KCS) on July 16 was the first Class I to report second-quarter 2021 earnings. For the possibly merger-bound railroad, revenue of $749.5 million grew 37% from the prior-year period ($547.9 million) based on higher carload volumes (up 31%), higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar. Service quality, however, was somewhat short of company expectations.

Second-quarter operating expenses were $1.18 billion, including a $700 million merger termination fee paid to Canadian Pacific (CP), following the KCS Board’s May 21 decision that CN’s offer to combine was a “Company Superior Proposal.” That fee is expected to be reimbursed by CN upon the August 19 KCS shareholder vote on the CN-KCS merger, according to KCS.

For second-quarter 2021, including the above-mentioned merger cost, KCS posted (under GAAP) an operating loss of $431.7 million, a net loss of $378.0 million, or $4.17 per diluted share, and an operating ratio of 157.6%. Adjusted (non-GAAP), the operating ratio was 61.4%, a 3.8 basis point improvement vs. the prior year, and diluted EPS came in at $2.06, an increase of 79% vs. the prior year.

As for operating metrics (see chart below), KCS reported that in second-quarter 2021, train velocity of 12.2 mph was down 29% from second-quarter 2020; terminal dwell time of 26.1 hours fell 29%; and train length of 6,778 feet was 2% shorter.

The railroad also provided a current outlook of:
• “Double-digit” revenue growth in 2021.
• An operating ratio of approximately 60% in 2021, and 56%-57% in 2022.
• Earnings per share of about $9.00 in 2021, and $10.50-$11.00 in 2022.
• Capital expenditures of approximately 17% of revenue in 2021 and 2022.
• Free cash flow of about $700 million in 2021 and 2022.

On the merger front, KCS reported that the joint CN-KCS filing to the Surface Transportation Board (STB) on July 6 “demonstrates that our proposed voting trust satisfies the STB’s test: 1) It precludes premature control of KCS during the trust period; and 2) Approval of the proposed voting trust is in the public interest and causes no harms … CN and KCS respectfully look forward to a positive response from the STB on our voting trust and are fully committed to working toward a successful closing of our transaction.” Common control approval from STB and other applicable regulatory authorities is expected by second-half 2022.

KCS President and CEO Patrick J. Ottensmeyer

“KCS delivered strong second-quarter volume growth, as our franchise benefited from unique growth drivers and the economy recovered from the COVID-19 downturn,” KCS President and CEO Patrick J. Ottensmeyer said. “Although we are pleased with the strong volume growth, we fell short of our own expectations for customer service.

“Our operating team is focused on implementing structural and sustainable changes that will improve operational performance and the resiliency of our network. To that end, we have deployed additional assets and crews in support of our service recovery, setting the company up to continue delivering robust volume growth while improving customer service in the second half of 2021.

“During the second quarter, KCS also announced a pro-competitive merger with CN, which will deliver more choices to customers through the creation of new, single-line service options between the U.S., Canada and Mexico. This combination represents an exciting opportunity for KCS and CN stakeholders, and we look forward to delivering a safer, faster, leaner and stronger railroad.”

The KCS Investor Relations site provides more details on second-quarter 2021.

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KCS 2Q21: Strong Volume; Service 'Short of Expectations' - RailwayAge Magazine
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