Kansas City Southern Fourth Quarter 2012 Earnings Presentation - - PDF document

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Kansas City Southern Fourth Quarter 2012 Earnings Presentation - - PDF document

Kansas City Southern Fourth Quarter 2012 Earnings Presentation January 22, 2013 January 23, 2013 Slides 39 and 40 added to Appendix Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the


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January 22, 2013

Kansas City Southern

Fourth Quarter 2012 Earnings Presentation

January 23, 2013 – Slides 39 and 40 added to Appendix

Safe Harbor Statement

2 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 reports. 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.
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Dave Starling

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Today’s Presenters

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

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KCS Overview

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

  • Strong performance despite coal and grain challenges
  • Record full-year adjusted operating ratio* of 69.9%
  • Stock price appreciation of 23% in 2012

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Fourth Quarter Results

Q4 2012 Q4 2011 Variance Carloads/Units (in thousands) 531.7 521.8 2% Reported Revenues (in millions) $568.4 $530.3 7% Reported Operating Ratio 69.5% 71.6% 2.1 points Reported Diluted Earnings per Share $0.83 $0.87 (5%) Adjusted Diluted Earnings per Share * $0.92 $0.77 19%

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

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FY 2012 FY 2011 Variance Carloads/Units (in thousands) 2,112.1 2,013.7 5% Reported Revenues (in millions) $2,238.6 $2,098.3 7% Reported Operating Ratio 68.0% 70.9% 2.9 points Adjusted Operating Ratio* 69.9% 72.1% 2.2 points Reported Diluted Earnings per Share $3.43 $3.00 14% Adjusted Diluted Earnings per Share * $3.56 $2.90 23%

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

Full Year 2012 Results

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Update for Full Year 2012

2012 Guidance Final 2012 Results

  • Mid-single digit volume growth
  • 2012 volume growth of 5%
  • Mid-single digit pricing
  • 2012 core pricing in mid-single digit

range

  • Mid-single digit revenue growth

(depending on F/X impact)

  • 2012 revenue growth of 7%
  • Continued operating ratio

improvement on a year-to-year basis

  • YTD adjusted operating ratio*

improved 2.2 points compared to 2011

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

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  • Mid-single digit volume growth
  • Mid-single digit core pricing
  • High-single digit revenue growth (depending on F/X impact)
  • Continued operating ratio improvement
  • Total capex – 21% of revenue

2013 Guidance

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Dave Ebbrecht

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

60 110 160 210 260 310 360 410 460 510

Millions $ Linehaul Revenue Ops Costs Linear (Linehaul Revenue) Linear (Ops Costs) 11

KCS ‘Ops’ Leverage Continues to Expand

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

(D)

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

Q412 ‘Ops’ Leverage of $278M – Ops Costs up 21% over past 4 yrs against Linehaul Revenue growth of 53% Q109 ‘Ops’ Leverage

  • f $147M

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Operations – Industry Leading Productivity

* Q3 2010 carloads per employee adjusted for Hurricane Alex.

70 72 72 68 60 61 69 71 73 77 79 80 78 82 85 85 83 86 90 87

50 55 60 65 70 75 80 85 90 95 6,000 6,200 6,400 6,600

Carloads per Employee Headcount Headcount Carloads per Employee

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KCS 2013 Capital Investments Providing Capacity for Growth

  • Capacity enhancements:

– Double track and additional/longer sidings - $47m – New origin/destination facilities - $27m – Intermodal terminal expansion - $29m – CTC and increased main line speeds - $20m – Rolling stock - $45m

  • Delivering measurable results on investments:

25 26 27 28 29 30 MPH

AAR Train Velocity

15 25 35 45 55 65 75

Miles

Operations Performance – Strong Operating Metrics Sustained in Q4

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

Slow Order Miles

(D)

Velocity Dwell

(D) (D)

Car Efficiency

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15

Pat Ottensmeyer

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Fourth Quarter Revenue Summary

Q4 2012 vs. Q4 2011

Q4 2012 Q4 2011 Variance Reported Revenues (in millions) $568.4 $530.3 7% Carloads (in thousands) 531.7 521.8 2%

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Q4 12 Q4 08

+$3 $530 $568 +$8 +$22 +$5

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$ in millions

Multiple Contributors to Revenue Growth in the Fourth Quarter

Q4 12 Q4 08

$86 $85 ($13) +$2 +$7 +$3

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Fourth Quarter Energy Business Unit Change Components

$ in millions

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Cross Border

(D) Revenue Increases 2%

Q4 2012 vs. Q4 2011

(D)

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

Excluding Agriculture & Minerals Business Unit, Cross Border(D) RevenueIncreases 22% in Q4 2012 vs. Q4 2011

Q4 11 Q4 12 Q4 11 Q4 12

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Cross Border Intermodal Revenue Growth Increases 70%

+74% +70%

8,041 13,974 $7,233 $12,290

Cross Border

(D) Intermodal

Volumes Cross Border

(D) Intermodal

Revenues ($ in thousands)

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

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Q4 11 Q4 12 Q4 11 Q4 12

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Lázaro Cárdenas Revenue Growth Increases 12%

Lázaro Cárdenas Volumes Lázaro Cárdenas Revenues ($ in thousands)

(5%) +12%

57,198 54,600 $19,079 $21,386

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Lázaro Cárdenas Development Plans

  • APM Terminals signed second container concession contract in August 2012 and will

invest $900m in the project

  • In October 2012, SSA Marine won a concession to develop, operate and maintain a

Specialized Auto Terminal capable of handling up to 750,000 autos annually

  • Hutchinson Port Holdings plans to have five new vessel cranes installed in Q2 2013

Source: APM Terminals Press Release dated November 12, 2012; sct.gob.mx

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Market Outlook – Linehaul Revenue

Assumes constant F/X

FY 2013

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

+ Single digit revenue growth expected during period. ++ Double digit revenue growth expected during period. 24

Strategic Growth Areas up 39% in Q4 2012

Q4 2012 vs. Q4 2011

Collectively these 5 growth markets grew 39% YoY and represent 19% of total KCS Freight Revenue in Q4 2012

Frac Sand Cross-Border Intermodal Automotive Lázaro Cárdenas Crude Oil 0.0% 100.0% 200.0% 300.0% 400.0% 500.0% 600.0% 700.0% 800.0% 900.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% YoY Revenue Growth - Crude Oil YoY Revenue Growth - Automotive, Frac Sand, Cross-Border Intermodal & Lázaro Cárdenas % of Freight Revenue +780% +70% +35% +12% +33%

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Market Developments

  • Record revenue and volumes in 2012 particularly remarkable given

weakness in coal and grain

  • Economic outlook for 2013 is positive in both U.S. and Mexico
  • Core pricing outlook continues to be in the mid-single digit range
  • 2013 still a ‘bridge year’ to new auto plants and energy opportunities

anticipated for 2014

– New grain elevators will open in mid-2013

  • Long term new business pipeline continues to grow
  • Strategic growth areas continue significant contribution to growth

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Mike Upchurch

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Condensed Income Statement – Q4

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

($ in millions, except EPS Diluted)

Q4 2012 Q4 2011

Revenues $568.4 $530.3 Operating Expenses 394.8 379.9 Operating Income 173.6 150.4 Equity Earnings 4.2 4.6 Interest Expense (23.8) (31.4) Foreign Exchange Loss (1.4) (2.3) Debt Retirement Costs & Other (2.3) (24.6) Pre-tax Income 150.3 96.7 Income Tax Expense (57.8) (0.7) Net Income $92.5 $96.0 Reported EPS Diluted $0.83 $0.87 Adjusted EPS Diluted* $0.92 $0.77 Average Diluted Share Count (in thousands) 110,137 109,912 28

Condensed Income Statement – Full Year

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

($ in millions, except EPS Diluted)

FY 2012 FY 2011

Revenues $2,238.6 $2,098.3 Operating Expenses 1,522.7 1,486.7 Operating Income 715.9 611.6 Equity Earnings 19.3 18.2 Interest Expense (100.4) (129.1) Foreign Exchange Gain (Loss) 2.7 (9.2) Debt Retirement Costs & Other (21.1) (36.5) Pre-tax Income 616.4 455.0 Income Tax Expense (237.0) (123.1) Net Income $379.4 $331.9 Reported EPS Diluted $3.43 $3.00 Adjusted EPS Diluted* $3.56 $2.90 Average Diluted Share Count (in thousands) 110,080 109,830

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Earnings per Share – Q4 2012 vs. Q4 2011

Q4 2011 Adjusted EPS Diluted* $0.77 Q4 2012 Increase in Operating Income 0.13 Q4 2012 Decrease in Interest Expense 0.04 Other, net (0.02) Q4 2012 Adjusted EPS Diluted* $0.92

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

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Fourth Quarter Effective Tax Rate Driven by F/X Fluctuation

38.5% 1.4% (0.1%) (2.7%) 4.9% 35.0%

Statutory Rate State Taxes (Net) Other Lower Foreign Tax Rate Foreign Exchange Q4 12 ETR

Q4 2012 ETR

2.8% (5.9%) (2.6%) (28.6%) 35.0%

Statutory Rate State Taxes (Net) Other Lower Foreign Tax Rate Foreign Exchange Q4 11 ETR

Q4 2011 ETR

0.7%

FX Rates

MXP/USD

Y/E 2010

12.4

Y/E 2011

14.0

Y/E 2012

13.0

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Full Year Effective Tax Rate Driven by F/X Fluctuation

27.1% 1.5% (0.1%) (3.2%) (5.7%) (0.4%) 35.0%

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

2011 ETR

FX Rates

MXP/USD

Y/E 2010

12.4

Y/E 2011

14.0

Y/E 2012

13.0

38.4% 1.4% 1.3% (3.0%) 5.5% (1.8%) 35.0%

Statutory Rate State Taxes (Net) Other Lower Foreign Tax Rate Foreign Exchange State Tax Valuation Allowance 2012 ETR

2012 ETR

$40.5 $47.1 $42.8 $88.5 $51.3 $47.7 $51.9 $42.8 $94.9 $50.5 Materials & Other D&A Equipment Costs Fuel Purchased Services Comp & Benefits

Q412 Q411

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Operating Expenses Increase 4%

$ in millions $107.0 $109.7

Total Operating Expenses

$ in millions

Q4 2011 Expense $380 Fuel Price Increase 6 F/X 5 Depreciation 5 Other (1) Q4 2012 Expense $395

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Compensation & Benefits Down Despite Volume Growth

Compensation & Benefits $ in millions

Q4 2011 Expense $110 Inflation 3 F/X 2 Incentives (7) Other (1) Q4 2012 Expense $107

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Fuel Expense Increase Primarily Due to Price

$2.75 $2.99 Q4 2011 Q4 2012

Locomotive Fuel Price Dollars per Gallon

Fuel Expense $ in millions

Q4 2011 Expense $89 Price 6 F/X 2 Other (2) Q4 2012 Expense $95

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Q4 11 Q4 12

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Materials & Other Increase Primarily Due to Concession Fees and Casualties

Materials & Other $ in millions

Q4 2011 Expense $41 Concession Fees 3 Casualties 3 Other 1 Q4 2012 Expense $48 $41 $48

Materials & Other

$ in millions

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Generated $35 million Free Cash Flow* in 2012

  • Committed to superior growth profile
  • Core capital expenditures* - 18% of revenue
  • Pull forward cash purchase of equipment to take advantage of accelerated

depreciation - 4% of revenue

  • Equipment lease buyouts $23m - 1% of revenue
  • Total capex to revenue – 23%
  • Committed to superior growth profile
  • Core capital expenditures* - 18% of revenue
  • Pull forward cash purchase of equipment to take advantage of accelerated

depreciation - 4% of revenue

  • Equipment lease buyouts $23m - 1% of revenue
  • Total capex to revenue – 23%

Invest in Business

  • 2012 interest expense $100m; down 22% from 2011
  • Refinanced term loan and amended credit facilities in 2012
  • Received corporate investment grade rating from Fitch and US investment

grade rating from Moody’s in 2012

  • Target corporate investment grade ratings from S&P and Moody’s in 2013
  • Call KCSM 12.5% notes in April
  • 2012 interest expense $100m; down 22% from 2011
  • Refinanced term loan and amended credit facilities in 2012
  • Received corporate investment grade rating from Fitch and US investment

grade rating from Moody’s in 2012

  • Target corporate investment grade ratings from S&P and Moody’s in 2013
  • Call KCSM 12.5% notes in April

De-lever

  • Q4 cash dividend declared on November 15, 2012; paid December 28,

2012

  • Quarterly payout of $0.195 per share or $21.5 million
  • Annualized payout of $0.78 per share or $86.0 million
  • Represents a ~1% yield
  • Q4 cash dividend declared on November 15, 2012; paid December 28,

2012

  • Quarterly payout of $0.195 per share or $21.5 million
  • Annualized payout of $0.78 per share or $86.0 million
  • Represents a ~1% yield

Shareholder Returns

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

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Closing Comments – Dave Starling

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Appendix

  • 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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Appendix - Adjusted Earnings per Share

Q4 2012 Q4 2011 FY 2012 FY 2011

Reported EPS Diluted

$0.83 $0.87 $3.43 $3.00

Adjustment for elimination of net deferred liability

  • (0.27)
  • Adjustment for gain on insurance recoveries
  • (0.15)

Adjustment for debt retirement costs

0.01 0.14 0.11 0.23

Adjustment for foreign exchange (gain) loss

0.01 0.01 (0.02) 0.06

Adjustment for foreign exchange component of income taxes

0.07 (0.25) 0.31 (0.24)

Adjusted EPS Diluted*

$0.92 $0.77 $3.56 $2.90

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

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Appendix - Adjusted Earnings per Share - 2012

Q4 2012 Q3 2012 Q2 2012 Q1 2012 FY 2012

Reported EPS Diluted

$0.83 $0.82 $1.09 $0.68 $3.43

Adjustment for elimination of net deferred liability

  • (0.27)
  • (0.27)

Adjustment for debt retirement costs

0.01

  • 0.03

0.07 0.11

Adjustment for foreign exchange (gain) loss

0.01 (0.02) 0.02 (0.02) (0.02)

Adjustment for foreign exchange component of income taxes

0.07 0.15 0.01 0.07 0.31

Adjusted EPS Diluted*

$0.92 $0.95 $0.88 $0.80 $3.56

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

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