Kansas City Southern expects strong market for rail in second half of 2021

Kansas City Southern still anticipates double-digit revenue growth for 2021 amid favorable macroeconomic indicators, executives said during its second-quarter 2021 earnings call on Friday.

But KCS (NYSE: KSU) adjusted its 2021 target operating ratio to about 60% from earlier guidance of 57.5% amid uncertainty surrounding automotive production and disruptions of getting refined products into Mexico, among other issues. Operating ratio is a tool investors sometimes use to gauge the financial health of a company. A lower operating ratio can imply improved financial health.

Chip shortages have resulted in uncertainties about when automotive production will return to normal, according to KCS President and CEO Pat Ottensmeyer. He was informed earlier this week about three new planned auto production plant outages, he said.

The chip shortage “has been a bit of a moving target, and it’s difficult to predict how long it’s going to last,” Ottensmeyer said.

Meanwhile, KCS is facing other challenges unique to its network because of its operations in Mexico.

Regulatory scrutiny from the Mexican government has disrupted the flow of refined products into Mexico, resulting in some congestion and congestion-related costs, executives said.

Despite these headwinds, KCS still expects to boost revenue by improving service metrics, which slipped compared with a year ago because of more network traffic in the second quarter of 2021 compared with the second quarter of 2020, which experienced a pandemic-induced volume trough.

KCS has also been able to recall many of its furloughed employees, as well as add new hires to its network, so that there is adequate crew staffing to meet market demand, according to executives.

Low inventories, anticipated consumer demand and positive macroeconomic indicators signaling an improving U.S. economy are also factors that will drive rail volumes in the second half of 2021, executives said.

“It’s a bit of a show-me story but we’re from Missouri, the Show-Me State, and we have some credibility here from having delivered … and we’ll get this thing back on track,” said KCS CFO Mike Upchurch.

Executives also discussed KCS’ plans to merge with CN (NYSE: CNI), noting that the KCS shareholder vote to approve the merger with CN will occur in August.

Ottensmeyer said he expects the Surface Transportation Board to make a decision sometime in the second half of 2021 on CN’s request to use a voting trust to acquire KCS. Approval of the voting trust would move the merger process forward.

But STB should take whatever time it needs to make a decision, he said.

For KCS’ second-quarter 2021 financial results, go here.

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