Kansas City Southern Posts Strong 3Q Gains Despite Hurricane Harvey

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Kansas City Southern reported profits rose 7.2% in the third  quarter on strength in automotive, energy, intermodal and petrochemical transportation, despite suffering a financial blow of up to $23 million in operating income from Hurricane Harvey.

The railroad freight carrier earned $129.2 million in profits or $1.23 per share for the three-month period ending Sept. 30, 4 cents better than the consensus Wall Street forecast. One year ago, the numbers were $120.5 million or $1.12.

Revenue grew 8.6% year-over-year to $656.6 million. Operating income was $234 million, 17% better than the third quarter of 2016.

“In spite of Mother Nature throwing almost everything she had, we really had a really terrific quarter,” CEO Patrick Ottensmeyer said in a conference call. “Hurricane Harvey hit Corpus Christi on a Friday. On Monday, I received a call from Lance Fritz, the CEO of Union Pacific, asking us how we were doing, telling me what the condition was of their network and offering to help in any way and encouraging us to stay in touch.”

Ottensmeyer also praised the performance of his operating team and their resiliency to quickly establish a detour to move grain trains to Laredo, Texas to serve the Mexican market, minimizing the potential financial fallout.

Prior to the hurricane, Kansas City Southern ran about 45,000 carloads, then dropped to about 37,000 during the week of Hurricane Harvey, but quickly recovered to pre-hurricane levels within two weeks. In the last two weeks of September, carloads surged beyond pre-storm levels to about 48,000.

“We were moving along at about a 6% or 7% growth rate from the previous year, before the hurricane hit, in carloads. We obviously reported a 3% increase in volume, so we didn’t get all of it back. The point is that we were moving along at a very nice growth rate until the hurricane hit and we’ve recovered some of it back,” Ottensmeyer said.

Hurricane Harvey cost Kansas City Southern about 12 to 14 cents per share, the company noted in a presentation. Aside from the operating income hit, there was an additional $7 million in incremental expenses related to the hurricane. The company told investors that it has filed an insurance claim to recoup those costs, but it won’t be able to record any of the reimbursement until a settlement date in 2018.

Despite Hurricane Harvey, full quarter freight revenue improved 9.1% to $633.6 million, carloads were up 2.6% to 576,400 and revenue per carload rose 6.3% to $1,099.

Cross-border revenue into Mexico improved 2% to nearly $180 million and volume 3% to 120,000 carloads.

Intermodal revenue went up 4.2% to $92.3 million, carload volume improved 3.7% to 249,500 and revenue per carload crept up 0.5% to $370. In a question-and-answer session, Ottensmeyer told industry analysts that despite low truck prices in Mexico, domestic intermodal should remain strong into 2018 given the recent surge in truckload pricing and the electronic logging mandate further exacerbating the capacity shortage in trucking.

Automotive revenue grew 19% to $61.4 million, carloads were up 7.1% to 39,100 and revenue per carload rose 12% to $1,570. The company told investors that new-year car models assisted in the numbers and also offered an optimistic outlook for the fourth quarter as automakers move quickly to replenish the inventory damaged by Harvey.

Energy revenue increased 19% to $74.5 million and although carloads slipped 2% to 76,700, revenue per carload jumped 20% to $971. Frac sand, crude oil and utility coal drove the results. The company told investors that crude shipments will likely remain strong in the fourth quarter, but utility coal could struggle and frac sand business will be relatively flat.

Petroleum powered solid returns in the petrochemical segment with a 33% jump in revenue to $47.6 million, a 21% surge in carloads to 23,400 and a 10% increase in revenue per carload to $2,034. Kansas City Southern’s overall operating ratio improved 250 basis points year-over-year in the third quarter to 64.4%.


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