Kansas City Southern Earnings Fall, Aims for Mexico's Auto Market

Researched by Industrial Info Resources (Sugar Land, Texas)--Freight rail operator Kansas City Southern (NYSE:KSU) (Kansas City, Missouri) reported third-quarter net income of $120.3 million on Tuesday, compared with $132.9 million for the same quarter of the previous year. Shipped volumes and revenues each declined 4% year over year. Nevertheless, company executives remained upbeat, particularly regarding the automotive market. Industrial Info is tracking $89.9 million in capital projects belonging to Kansas City Southern, as well as associated projects that require railyards and shipping facilities.

As with other rail operators, the company is suffering from lower crude oil prices and decreased drilling activity. In an earnings conference call, Chief Marketing Officer Brian Hancock said, "Our energy business continued to be negatively impacted by volatility in crude and frac sand. Our coal business had lapsed ... some of the lowest numbers from last year and was slightly higher in Q3. Overall energy carloads were down 7%, and revenue was down 15% versus prior year."

One of the areas where the company continues to see strength is the automotive sector, which saw volumes increase 14% year over year. The company has begun design work for the rail support facilities for Ford Motor Company's (NYSE:F) (Dearborn, Michigan) automotive assembly plant in San Luis Potosi, Mexico. Construction of the $1.6 billion plant is planned to kick off early next year and be completed in early 2018. The facility will produce 350,000 Ford Focus and C-Max hybrid vehicles per year.

Kansas City Southern is clearly taking aim at the lucrative Mexican automotive assembly market. "The automotive business is expected to grow as our customers continue to ask us to do more in creating solutions to support their global manufacturing footprint," Hancock said. "As we've mentioned before, by 2020 Mexico will produce over 5.3 million vehicles and import another 900,000. We're investing in those projects that will enhance the fluidity and capacity to effectively service this important segment."

The company is also spending heavily on safety as part of the Positive Train Control (PTC) implementation. These are a series of measures required to automatically stop a train if it exceeds certain operating parameters on all Class I railroad mainlines. The deadline to meet the implementation of these technologies is December 31, 2018. Jeff Songer, chief operating officer for Kansas City Southern, said of the PTC program, "2017 will be another heavy investment year and capital spend will begin to reduce thereafter."

Among other capital projects planned to kick off soon is the company's planned unit train crude oil terminal in Port Arthur, Texas. The $65 million project involves the construction of storage tanks and barge loading arms to ship Canadian heavy sour crudes to Gulf Coast refineries. The project is a joint venture with Global Partners LP (NYSE:GLP) (Waltham, Massachusetts). Construction on the project is planned to kick off by the end of this year and be completed in summer 2017.

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