KSU - Good Quarter/Uncertain Macro -But Still Hard to Headline
July 23, 2018
“Solid Volume and revenue growth in most strategic growth areas particularly cross border growth, (sic) weakness in volume, we feel is really isolated to energy some of which is crude oil timing….(and there’s a lot more)”
/Kansas City Southern CEO Pat Ottensmeyer’s suggested “headline” for KSU’s Q2/18 results, proving that Cubs fans might make excellent CEOs, and even decent writers (Will, Royko, et al) but should leave headlines to the professionals….But it does make me pine for the return of the SGA charts (not to mention the bubbles….).
“KSU makes slow but steady progress reducing uncertainties (trade/politics/FX) while continuing to show reasons for 2019+ optimisim”
KSU reported a 16% YOY EPS increase, slightly beating expectations (that’s 4 for 4 for those of you scoring at home). Unlike the other rails, so far, KSU also took the opportunity to move their FY volume outlook down a point or two (to +3-4%) on issues involving intermodal out of Lazaro (subject of a third of the Q&A; below). It must be noted here that H2/17 and Hurricane Harvey make for rather easy comps, so….Volume was up 1% for Q2 (and H1); price was up ~3% (+5% or so on renewals, suggesting pricing is accelerating). Interestingly, in in sharp contrast to the reception afforded UP, the only straight pricing question they received rather bizarrely asked if perehaps they werent pricing too high (in lieu of volumes)! Still coming will be Canadian CBR into the Gulf (the timing issue mentioned above); in fact 90% of the KSU commodity base was listed as “favorable” for H2/18, with plastics and autos joining the SGAs, below, as areas of real, prolonged strength. Still, the OR did increase 50bps (to 64%). Operations were solid – velocity was up YOY) but down sequentially; dwell was modestly worse – but the problems in east Texas and the UP connections are improving.
Mexico – with one (temporary?) exception Mexico’s present for KSU is positive; its future still bright. My trip to Monterrey in May seemed to confirm the secular nature of the relationship, with economics and culture rising above politics. NAFTA is the big elephant in the room, of course – but it seems POTUS’ wrath has moved on to other longtime competitors of the USA (China of course, as well as the UK, the EU, & Canada). Discussions with the incoming AMLO government have been fruitful. FDI is way up in 2018 (although the stats are Q1 – that was when the headlines were even worse than now).
There has been no discernable impact on FDI, customer capex, or business levels from the tariffs, NAFTA talks, or aggressive headlines; of course KSU cannot model “what might have been” but that’s pretty good news in contrast to the coverage….
Cross border revenues increased 19% on a 13% increase in volume. XB is now a quarter of the volumes (more than that in revenues) and the key to the “NAFTA Railway” (as they used to call KCS – and will again). Recent steady accomplishments at the border crossing at Laredo will only help – as they said, they want to make freight crossing with Mexico/US like that of Canada/US….XB-Intermodal volume growth of only 5% was a bit concerning, if I am to be honest.
Mexico Energy Reform business is still growing at a supercharged pace. The inbound refined products carload growth was 84% (+57% in revenues), held back only by the pace of terminal construction, which is ongoing (some of which I saw).
Lazaro Cardenas inbound intermodal - a quarter of that category, is troubled. With KCSM pricing in US$ and competitors in pesos (one fallout from the trade wars), in effect adding 50% to KCS pricing. Consequently trains are running at ~3/4 to 2/3 capacity and volumes are down 16% (revenues -15%). KSU, claiming (and reclaiming!) a “thoughtful strategic approach, hasn’t chased volume with price (leading to that afore-mentioned question from deep left field). It’s a “complex issue; multi-modal and multi-port”. (I should interject here that my transcript of the webcast called that last bit “multi-pork”, which given the endemic corruption in Mexico – that helped drive the big AMLO election – maybe that was a Freudian slip?). The key here is KSU’s discipline, which should be rewarded rather than questioned, as well as their operating and security capability versus the competition; let’s see how the next rounds of bidding plays out....
KSU is setting up for a big year next year, and beyond, and we should see clear signs of that over the course of H2….Refined products, plastics, intermodal,. Automotive, grain – all have above-market growth potential. So, slowly but steadily they, or events, seem to be chipping away at the myriad of uncertainties out there. Some remain, somewhat in (Lazaro) or beyond (NAFTA) their control. But in the end, good sense almost always wins out….
So, if I deny Pat the headline, I will let him write the postscript:
“It really feels to me and I think to us that the business is stronger than the results would indicate”!
Anthony B. Hatch