Although Kansas City Southern (NYSE: KSU) executives were tight-lipped about how operations might look should it succeed in merging with Canadian Pacific (NYSE: CP), the railroad was upbeat Friday about its volume expectations for 2021.
Kansas City Southern (KCS) and CP announced plans last month to merge and are in the preliminary stages of a multimonth regulatory review before the Surface Transportation Board (STB).
KCS also reported Friday that its first-quarter net income was $153.4 million, or $1.68 per diluted share, up 0.7% from $152.3 million, or $1.58 per diluted share, from the first quarter of 2020. On an adjusted basis, net income for the first quarter of 2021 was $174.2 million, or $1.91 per diluted share, and operating income was $272.3 million. The adjusted figures account for $19.3 million in merger costs.
Despite declining to comment on the proposed merger beyond what has been said in regulatory filings and public statements, KCS executives pointed out that one area where they see opportunities is with cross-border intermodal, particularly between Mexico and points in the Upper Midwest, such as Chicago and Minneapolis.
“This is a huge freight corridor, a huge truck market, and we know that there are opportunities to convert” traffic from trucking to rail, KCS President and CEO Pat Ottensmeyer said.
Ottensmeyer also affirmed KCS and CP’s decision to form a voting trust as part of the merger process. The two have said previously that a voting trust will insulate KCS from control by CP until STB reviews the merger. The trust will also enable KCS to pursue its independent business and growth plans, CP has said.
“We and CP have done everything possible to create a plain vanilla, squeaky-clean trust structure” in which former KCS CEO Dave Starling serves as the trustee, Ottensmeyer said.
KCS’ outlook for 2021
KCS is maintaining its financial targets for 2021 and 2022 despite taking a volume hit in February because of severe winter weather. These targets include full-year operating ratio (OR) of around 57.5% in 2021 and between 55% and 56% in 2022. OR is a tool investors sometimes use to gauge the financial health of a company, with a lower OR implying improved health.
KCS also expects capital expenditures in 2021 and 2022 to represent around 17% of revenue.
These targets come amid expectations of a good volume outlook for the second half of 2021, as well as an economic recovery that appears to be in full swing, according to Ottensmeyer. Refined products carloads and exports to Mexico should also provide growth opportunities for KCS, he said.
Other factors that could influence volumes in 2021 are an anticipated volume return in the automotive sectors as OEMs resume production levels and a crude product facility coming online in Texas in the third quarter. The facility will handle a type of Canadian crude product and KCS is working with CP to transport the crude.
KCS hopes to deploy the third phase of its precision scheduled railroading (PSR) program, which will entail regaining the service improvements made during phase one and maintaining the train length gains of phase two, according to Sameh Fahmy, executive vice president for PSR.
The third phase will serve as a period of fine-tuning operations, particularly at the U.S.-Mexico border, according to Fahmy. This will include structural changes such as improving switching operations in Monterrey, Mexico, and improving yard switching and car spotting at Shreveport, Louisiana, he said.
“It’s structural improvements to the way our yards are running,” Fahmy said.
KCS will also be looking at increasing the utilization of its locomotives and improving fuel efficiency, he said.
KCS acknowledged the capacity and service issues that it and companies representing other transportation modes — ocean and trucking — have been experiencing in recent months. Significant disruptions back to back, such as Gulf Coast hurricanes in the fourth quarter of 2020, staffing restrictions in Mexico because of COVID-19 and the polar vortex in February, were “shocks to the system,” Ottensmeyer said.
But KCS is seeing congestion improve at its yards and is focusing on improving its customer-touching and customer-facing metrics.
“We’re bringing back resources to get the network performing the way we want it to and [the way it] needs to” so we can pursue growth opportunities, Ottensmeyer said.
KCS appoints executives to new roles
Late Thursday, KCS said it has named Jeff Songer as executive vice president of strategic merger planning and John F. Orr as executive vice president of operations.
Songer most recently served as KCS’ chief operating officer. In his new role, Songer will focus on managing the merger application process, which KCS says will include developing a joint networkwide operating plan, a safety integration plan, an environmental impact statement and environmental assessment, and a labor plan.
“Jeff is uniquely qualified to fill this critical role in what is arguably the most strategically significant project in our company’s 134-year history,” Ottensmeyer said in a release. “His 16-year track record of outstanding performance at KCS, and his familiarity with all aspects of our network, business and customer base, make him very well suited for this important role.”
Orr served mostly recently as chief transportation officer at Canadian railway CN (NYSE: CNI), where he was responsible for CN’s transportation and network assets across the U.S. and Canada, a network of about 20,000 miles, KCS said. Orr also has more than 20 years of experience with PSR.
“Among the wide variety of positions he has held over his distinguished career, John also served as senior vice president-operations for CN’s U.S. (Southern) Region, CN’s vice president-transportation for their network in Eastern Canada, and vice president-chief safety and sustainability officer for CN’s North American network,” Ottensmeyer said. “John has been with us as an executive consultant since February and has gained a solid understanding of our network operations and opportunities for further improvement. John has integrated extremely well with Sameh Fahmy and the entire PSR implementation team at KCS, and I am confident he will contribute positively to our service focused ‘phase three’ PSR initiatives.”