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Kansas City Southern Grapples With Macroeconomic Uncertainty

Kansas City Southern (NYSE: KSU) might update its operating ratio targets and its anticipated revenue margin for 2020 next month, but any modifications will largely depend on how the U.S.

Benzinga · 03/18/2020 14:21

Kansas City Southern (NYSE: KSU) might update its operating ratio targets and its anticipated revenue margin for 2020 next month, but any modifications will largely depend on how the U.S. responds to the coronavirus pandemic, executives said Tuesday at an investor conference.

"We're going to need the next 30 days to see what's going to happen to our end markets," said Kansas City Southern (KCS) Chief Financial Officer Mike Upchurch during an investor conference sponsored by Bank of America. KCS typically reports its first-quarter earnings in mid-April. That is when the company may update its guidance for 2020.

The railroad has conducted internal analyses and modeled various scenarios on the North American post-pandemic landscape. Those scenarios include a recession.

But KCS' implementation of precision scheduled railroading, an operating model that seeks to streamline operations, will enable KCS to be more responsive to capital allocations and volume changes, including areas where it might need to trim costs, executives said. 

In the near term, KCS is unaware of any shutdowns or changes in U.S. or Mexican policy that would impact the flow of cross-border freight.

Although the coronavirus may have upended public life in the U.S., rail operations continue normally at KCS, with the company making some modifications, such as dispatching U.S. and Mexico trains in multiple locations, according to Upchurch.

The railroad also has business continuity plans in place, and it has taken safety and cleaning measures to ensure employees' health.

"There is nothing that we have done in the last week or two weeks in response to the coronavirus pandemic that should slow down or interfere with our ability to continue the momentum we have shown on PSR-related savings," said KCS CEO Pat Ottensmeyer.

KCS also hasn't seen any impact so far on the supply chain. While the railroad hasn't seen any closures of customers' facilities or any scale backs in production, that could change depending on how the pandemic plays out in North America, Upchurch acknowledged. Should the coronavirus pandemic affect freight transportation, the most critical need for KCS would be ensuring good access to fuel, he said.

Nevertheless, KCS is starting to see effects of the coronavirus outbreak on its intermodal segment at the Port of Lazaro in Mexico, as volumes from China and South Korea have fallen 41% and 19%, respectively, in recent days because of drops in those countries' manufacturing output as a result of the outbreak.

"It's hard to determine exactly how long that will last, but at this point we're seeing manufacturing ramp up again in China, [and] so the 30 to 45 days will give us a good idea of whether we'll return to normal traffic patterns," Upchurch said.

Other effects of the coronavirus outbreak are anecdotal, Upchurch said. In the past three to four days, KCS has seen demand grow to move chemicals to facilities that produce disinfectants, as well as increased requests to move paper products for toilet paper.

"We're going to make equipment available to the best of our ability to help those shippers," Upchurch said.

Should the U.S. enter a recession, Upchurch expects the railroad's automotive segment to soften later this year since consumers tend to spend less in the automotive end market in moments of crisis, he said. But for now, the financial results for KCS' automotive segment are "neutral," Upchurch said.

However, the passage of the trade agreement among the U.S., Mexico and Canada (USMCA) should encourage U.S. companies over the next several months and years to invest in operations in Mexico as a means to diversify the supply chain away from China and take advantage of Mexico's lower wages and transportation costs, executives said.

The railroad industry has also been communicating with the White House and other government agencies about the need to keep supply chains open and support critical transportation infrastructure as the next several months play out, executives said.

Image Sourced from Pixabay