KCS sees opportunities for ‘productivity gains when volume recoveries occur’

Although refined products volumes to Mexico have been curtailed by a government crackdown on companies seeking to avoid paying taxes, Kansas City Southern still expects growth opportunities for shipping imported refined products into Mexico in the long term, KCS executives told investors Thursday while they were on a fourth-quarter 2021 earnings call earnings call with Canadian Pacific.

KCS executives were on CP’s (NYSE: CP) earnings call because of the agreement between both companies to merge. While the merger has been approved by shareholders, it still needs to undergo regulatory review by the Surface Transportation Board.

“This market had been a terrific opportunity for us, at least through midyear 2021,” said KCS CFO Mike Upchurch. “Then the government really stepped up regulations, inspecting cars because some shippers were illegally labeling the product to avoid excise tax. And the next step the government took was to inspect and shut down a number of refined product rail terminals that were receiving this product in Mexico.

“We’re beginning to see stabilization in that business, so that’s good news — hard to predict exactly where that’s going to take us here in 2022,” Upchurch continued.

Mexican refined products production can only meet a third of overall demand, and so the country still needs to rely on imports, according to Upchurch. However, imports have “clearly shifted” from rail to truck because of the rail terminal shutdown.

Companies are beginning to get approval to reopen and KCS hopes that will stabilize the market, according to Upchurch.

While refined products volumes are an unknown for 2022, KCS expects “nice growth” on the overall volume and revenue side, according to Upchurch.

“We believe that all of our segments with the exception of chemical and [that’s] really due to the refined product issue … should grow,” Upchurch said. He added that steel production facilities in the U.S. Gulf Coast as well as “a little bounce back” in automotive volumes could help support KCS’ traffic this year.

However, like its merger partner CP, KCS declined to provide any financial guidance for 2022, citing numerous uncertainties.

There are “just so many uncertainties about COVID and the impact on workforce and supply chain congestion and chip issues affecting auto and auto-related business and then the future trend in refined products,” said KCS President and CEO Pat Ottensmeyer. “We’re going to stay away from specific guidance at this point. But as Mike covered and I touched on with our service, I think we see opportunities for some pretty nice productivity gains when volume recoveries occur.”

KCS’ 4th-quarter 2021 financial results

KCS’ revenues rose 7.8% to $747.8 million in the fourth quarter amid flat volumes.

Net income was $595.1 million in the fourth quarter of 2021, compared with $166.3 million in the fourth quarter of 2020.

Fourth-quarter 2021 operating expenses were a negative $62.8 million because $512.6 million in net merger costs helped to offset other expenses for the quarter. In the fourth quarter of 2020, operating expenses were $431.1 million.

“The cross-border refined fuels continues to lag because of some regulatory changes in Mexico. But our service has improved just substantially since the middle of last year. So we are well positioned,” Ottensmeyer said while on CP’s fourth-quarter 2021 earnings call. “We think we’ve got good visibility to some of these opportunities coming back and our network is performing extremely well. And I think we’re in great shape to see and take advantage of those growth opportunities when they come back.”