Kansas City Southern (NYSE:KSU) Q2 2016 Earnings Conference Call - Final Transcript

Jul 19, 2016 • 08:45 am ET


Kansas City Southern (NYSE:KSU) Q2 2016 Earnings Conference Call - Final Transcript


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Greetings, and welcome to the Kansas City Southern Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

(Forward-Looking Cautionary Statements)

It is now my pleasure to introduce your host, Pat Ottensmeyer, President and Chief Executive Officer for Kansas City Southern. Mr. Ottensmeyer, you may begin.

Pat Ottensmeyer

Thank you and good morning everyone, and welcome to the Kansas City Southern's second quarter 2016 earnings presentation. Again, I'm Pat Ottensmeyer, President and Chief Executive Officer of Kansas City Southern, with me for today's presentation are Jeff Songer, Executive Vice President and Chief Operating Officer; Brian Hancock, Chief Marketing Officer; Mike Upchurch, Chief Financial Officer; Jose Zozaya, is on the phone to help us with questions and Jose as you know is President and Executive Representative of Kansas City Southern de Mexico.

Please move to slide 4 for a quick overview of the second quarter results. As you saw on our press release earlier this morning, our revenues for the quarter declined 3% versus last year, excluding foreign exchange and lower US fuel prices, we would have seen an increase in revenue of approximately 2%. Volumes were unchanged compared to last year. Second quarter operating ratio was 61.3%, which includes the impact of a Mexican fuel excise tax credit of $34 million recognized in the second quarter, and this reflects the benefit for both the first and second quarter impact of the fuel excise tax credit.

Service continue to be impacted by flooding in Texas during the quarter or I shouldn't say continued, but we did have flooding disruptions in the first quarter as you will recall and severe weather and flooding during the second quarter South of Houston affected our network and our cost as well. Jeff Songer will have more to say about that in his portion of the presentation.

I want to circle back and make a couple of quick comments about the operating ratio for the quarter and this Mexican fuel excise tax, which I realize as probably not well understood out in the analysts community. Mike will cover this in much greater detail in a few minutes, but before anyone jumps to an incorrect conclusion about a new normal for operating ratio, I do want to emphasize that the $34 million credit is retroactive to January 1 of 2016, so it covers both the first and second quarter.

While our reported operating ratio was 61.3, adjusting out the first quarter impact would have resulted in an operating ratio that would have been approximately 300 basis points higher than we reported, but still more than 350 basis point improvement from last year. We expect this benefit to continue through 2016.

Looking beyond 2016, the ongoing impact of this excise tax credits, coupled with the longer term impact of Mexican energy market deregulation is difficult to quantify, because it will be influenced by many factors, most importantly