Second Quarter 2021 Earnings Presentation - Kansas City ...
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Second Quarter 2021 Earnings Presentation
Safe Harbor Statement
This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward-looking statements orally or in other writing,
including, but not limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with the Securities and
Exchange Commission. Readers can usually identify these forward-looking statements by the use of such words as "may," "will," "should," "likely," "plans," "projects," "expects,"
"anticipates," "believes" or similar words. These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such
forward-looking statements as a result of a number of factors or combination of factors including, but not limited: the merger with Canadian National Railway Company ("CN") is
subject to various closing conditions and there can be no assurances as to whether and when it may be completed; failure to complete the Company’s merger with CN could
negatively impact the Company’s stock price and future business and financial results; Company’s stockholders cannot be sure of the value of the merger consideration they
will receive from CN in the merger; lawsuits may be filed against the Company and/or CN challenging the transactions contemplated by the merger between, among others,
the Company and CN; the shares of CN common stock to be received by the Company’s stockholders upon completion of the merger will have different rights from shares of
the Company’s common stock; after completion of the merger, CN may fail to realize the projected benefits and cost savings of the merger; public health threats or outbreaks
of communicable diseases, such as the ongoing COVID-19 pandemic and its impact on KCS’s business, suppliers, consumers, customers, employees and supply chains; rail
accidents or other incidents or accidents on KCS’s rail network or at KCS’s facilities or customer facilities involving the release of hazardous materials, including toxic inhalation
hazards; legislative and regulatory developments and disputes, including environmental regulations; loss of the rail concession of Kansas City Southern’s subsidiary, Kansas City
Southern de México, S.A. de C.V.; domestic and international economic, political and social conditions; disruptions to the Company’s technology infrastructure, including its
computer systems; increased demand and traffic congestion; the level of trade between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate;
natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; competition and consolidation
within the transportation industry; the business environment in industries that produce and use items shipped by rail; the termination of, or failure to renew, agreements with
customers, other railroads and third parties; fluctuation in prices or availability of key materials, in particular diesel fuel; access to capital; climate change and the market and
regulatory responses to climate change; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; unavailability of qualified
personnel; labor difficulties, including strikes and work stoppages; acts of terrorism or risk of terrorist activities, war or other acts of violence; and other factors affecting the
operation of the business; and other risks identified in this presentation, in KCS's Annual Report on Form 10-K for the year ended December 31, 2020, and in other reports filed by
KCS with the Securities and Exchange Commission.
Forward-looking statements reflect the information only as of the date on which they are made. KCS does not undertake any obligation to update any forward-looking
statements to reflect future events, developments, or other information.
Reconciliation to U.S. GAAP Financial Information
In addition to disclosing financial results in accordance with U.S. GAAP, the accompanying presentation contains non-GAAP financial measures. These non-GAAP measures
should be viewed as a supplement to and not a substitute for our U.S. GAAP measures of performance and liquidity, and the financial results calculated in accordance with U.S.
GAAP and reconciliations from these results should be carefully evaluated. All reconciliations to the most directly comparable financial measures calculated and presented in
accordance with U.S. GAAP can be found on the KCS's website in the Investors section.
This presentation contains forecasted financial measures including Adjusted Operating Ratio, Adjusted Diluted Earnings per Share, and Free Cash Flow, which are non-GAAP
financial measures. The Company did not reconcile these forecasted financial measures to the most comparable GAAP measure because certain information necessary to
© KANSAS CITY SOUTHERN
calculate such measures on a GAAP basis was unavailable or dependent on the timing of future events outside of the Company's control. For example, the GAAP numbers
included the strengthening or weakening of the Mexican Peso to U.S. Dollar and changes in fuel price, both of which could have a significant impact on the Company's
consolidated results. Therefore, the Company was unable to reconcile, without unreasonable efforts, the forecasted financial measures to the most comparable GAAP
measure.
2
Pat Ottensmeyer
© KANSAS CITY SOUTHERN
President & Chief Executive Officer
Today’s Presenters
Pat Ottensmeyer President & CEO
Mike Upchurch EVP & Chief Financial Officer
Available for Q&A
Adam Godderz SVP & Chief Legal Officer & Corp. Secertary
John Orr EVP Operations
Mike Naatz EVP & Chief Marketing Officer
Oscar Del Cueto President & Executive Representative of KCSM
Cuevas
Sameh Fahmy EVP Precision Scheduled Railroading
© KANSAS CITY SOUTHERN
4
CN and KCS Combination is Pro-Competitive
and Will Benefit All Stakeholders
▪ Pro-competitive deal will deliver more choices to customers through the
creation of new, single line service options, including direct and efficient rail
options for truck freight between the U.S., Canada and Mexico
▪ Keeping gateways open on commercially reasonable terms is a major
commitment that will ensure continued competition
▪ End-to-end merger seeks to create greater price transparency
▪ Proactive partnerships with passenger rail service in both Canada and the U.S.
▪ We are confident that voting trust meets STB insulation from control and public
interest requirements
▪ Combination creates compelling opportunity – targeting $1B EBITDA
synergies, primarily from growth
▪ There is widespread support for the merger, with over 1,750 letters of support
filed with the STB
© KANSAS CITY SOUTHERN
CN-KCS will create a more competitive marketplace, provide new options for
customers, and deliver compelling benefits for ports, employees and communities
5Path to Completion - Expected Second-Half 2022
2021 CN-KCS
2022
Response to KCS
CN-KCS CN-KCS Public Comments, Definitive
Enter into File Jointly for including 1750+ Proxy KCS Special Obtain common control approval
Definitive Voting Trust Letters of Support Statement Shareholder from STB and other applicable
Agreement Approval Filed with the STB Filing Meeting regulatory authorities
EXPECTED EXPECTED AFTER
AUGUST
MAY 21st MAY 26th JULY 6th JULY 7th SECOND SECOND FULL STB
19th
HALF 2021 HALF 2022 APPROVAL
PROGRESS TO DATE Following and subject to approval by KCS Voting trust
shareholders, satisfaction or waiver of other terminated; CN
customary closing conditions, Mexican acquires voting
regulatory approvals, and prior approval by the rights and
STB for the CN voting trust, CN will acquire KCS control of KCS
shares and place them into voting trust; KCS
shareholders receive consideration
With 1750+ statements of support received, customers across all industries will benefit from the end-to-
end CN-KCS combination that will expand North American trade and power economic prosperity.
Unprecedented pro-competitive commitments will enhance route choice and provide all market
© KANSAS CITY SOUTHERN
participants, railroads and shippers a fair chance to compete. For more information on the transaction
and the benefits it is expected to bring to the full range of stakeholders, visit
ConnectedContinent.com
6Concluding Thoughts
• The CN-KCS combination is pro-competitive and will yield significant public benefits
– We will increase customer options and keep all existing major gateways (existing options)
available
– We will enhance rail-to-rail competition with larger Class I’s
– We are a true “end-to-end” merger with our commitment to divest the sole overlapping line
resulting in zero overlap
– We benefit both the global environment and local communities by converting truck traffic
to rail
• The joint CN-KCS filing to the STB on July 6 demonstrates that our proposed voting trust
satisfies the STB’s test
1. It precludes premature control of KCS during the trust period; and
2. Approval of the proposed voting trust is in the public interest and causes no harms
• CN and KCS respectfully look forward to a positive response from the STB on our voting trust
and are fully committed to working towards a successful closing of our transaction
– Highly strategic combination that will create value for both CN and KCS shareholders
© KANSAS CITY SOUTHERN
CN-KCS clearly and significantly enhances competition – now await final ruling on voting trust
7KCS Second Quarter Overview
▪ Revenue increased 37%, due to higher volumes,
higher fuel surcharge and FX
▪ $700 million CP termination fee included in reported
operating expense; offsetting CN reimbursement will
be recognized upon KCS shareholder vote
▪ Second quarter reported operating ratio of 157.6%
– Second quarter adjusted operating ratio* of 61.4%, a 3.8 point
improvement vs. prior year
▪ Second quarter reported diluted loss per share of $4.17
– Adjusted diluted earnings per share* of $2.06, an increase of
79% vs. prior year
© KANSAS CITY SOUTHERN
* Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section 8Revised Multi-Year Outlook
Current Outlook
Revenue Double-digit growth in 2021
Growth
Operating ~60% in 2021
Ratio Between 56% - 57% in 2022
Earnings ~$9.00 in 2021
per Share Between $10.50 - $11.00 in 2022
Capital ~17% of revenue in 2021 & 2022
Expenditures
Free Cash ~$700M in 2021 & 2022
Flow
© KANSAS CITY SOUTHERN
Revenue guidance assumes constant currency and fuel price; operating ratio, EPS and FCF are shown on
an adjusted basis 9Key Operating Metrics
Q2 2021 vs. Q2 2020
Gross Ton Train Terminal Train Fuel
Miles Velocity Dwell Length Efficiency
25.7 Billion 12.2 mph 26.1 hours 6,778 feet 1.22
30% Higher 29% Worse 29% Worse 2% Shorter 1% Worse
Active Line of Road Transportation Mechanical Engineering
Loco Fleet Crew Starts Headcount Headcount Headcount
1,009 24,826 3,386 793 1,364
39% Higher 39% Higher 8% Higher 3% Higher 4% Lower
© KANSAS CITY SOUTHERN
Increased Crew Starts, Locos & Headcount are
Supporting Higher Volumes and Service Recovery
10Network Performance Improving As Impacts
from Initiatives & Focused Efforts Take Hold
2021 Weekly Velocity and Dwell
14 36
Track Speed Increases &
Tonnage Rating Reviews
13 33
Grain Network
Focused Effort
Velocity (MPH)
Dwell (Hours)
12 30
4-Hour Border KCSR New Crews
Window in Place
Change
11 27
Sanchez Team
Polar Vortex Monterrey Team Engagement Effort
Engagement Effort
10 24
9 21
13
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© KANSAS CITY SOUTHERN
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Building Infrastructure and Aligning Processes
for a More Precise Service Delivery
11Mike Upchurch
© KANSAS CITY SOUTHERN
EVP & Chief Financial OfficerSecond Quarter Results
Q2 2021 Q2 2020 Variance
Carloads/Units (in thousands) 584.8 448.0 31%
Revenues (in millions) $749.5 $547.9 37%
Operating Ratio 157.6% 67.1% 90.5 points
Adjusted Operating Ratio * 61.4% 65.2% (3.8) points
Reported Diluted Earnings (Loss) ($4.17) $1.16 (459)%
per Share
Adjusted Diluted Earnings per $2.06 $1.15 79%
Share *
© KANSAS CITY SOUTHERN
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the
Investors section 13Second Quarter Revenue Summary
Q2 2021 vs. Q2 2020
Q2 2021 Q2 2020 Variance RPU Reconciliation
Q2 2020 RPU $1,143
Reported Revenues (in millions) $749.5 $547.9 37%
Fuel Price 46
Carloads (in thousands) 584.8 448.0 31% Foreign Exchange 34
Mix / Pricing / Other (5)
Excluding the impact of fuel price and F/X, Q2 2021 revenues increased 30% YoY *
Q2 2021 RPU $1,218
217%
139%
47% 43% 43%
37% 39%
31% 33%
20% 22%
9% 10% 14% 10%
7% 7%
© KANSAS CITY SOUTHERN
-3%
Chemical & Industrial & Agriculture & Energy Intermodal Automotive
Petroleum Consumer Minerals
Carloads RPU Revenue
* Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section 14Adjusted Operating Expenses* Increased 29%
$ in
$ in millions Total Adjusted Operating Expenses millions
$128.4 Q2 2020 Expense
†
$357
Comp & Benefits
$103.8 Fuel Price:
U.S. 13
$79.0 Mexico 6
Fuel
$39.5 Foreign Exchange 16
$24.1
Fuel Consumption 13
Equipment Overtime and recrews 10
$18.1
One-Time Contract Dispute 9
$91.2
D&A Locomotive Materials 6
$89.3
Car Hire 6
$55.8 Wage & Benefit Inflation 6
Purchased Svcs
$44.6 Incentive Compensation 4
Software and Programming 3
$81.9
Materials & Other Trackage Rights 3
$61.7
Employee Expenses 2
Q2 21 Q2 20 Other 6
††
Q2 2021 Expense $460
© KANSAS CITY SOUTHERN
†
Adjusted for restructuring charges
††
Adjusted for merger costs
* Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section 15Appendix
16
© KANSAS CITY SOUTHERNCN-KCS: Safer. Faster. Cleaner. Stronger.
A Fully End-to-End Merger
• Preserve all existing gateways
& create new single-line
routes
• Specific supply chain benefits
• Significant environmental
benefits
• Support across broad
stakeholder network
• We are committed to work
© KANSAS CITY SOUTHERN
with the STB to address any
demonstrated concerns
17Overwhelming Support from Our Customers
and Communities
Commentary from Dr. William Huneke on
Outpouring of Support from our Customers, CN’s open gateways commitment
Communities, and Industry Experts Former Director of the Office of Economics
and Chief Economist at STB
• At end of comment period, over 1,750 letters of • “This commitment ensures that shippers who today enjoy
support have been filed with the STB, including competitive joint line routings with either CN or KCS will continue
more than 1,000 specifically requesting approval to have those routings available to them in a post CN/KCS merger
of the proposed voting trust environment, even if a merged CN/KCS could handle the entire
movement via a single-line routing.”
• Support for voting trust and pro-competitive • “This means continued competition, and we know that
combination from more than 30 elected officials, competition encourages lower rates, better service and
including Congressmen Sam Graves and Bennie innovation.”
Thompson • “The commitment is not just about maintaining physical routings,
but also about ensuring that the routings are commercially
• Former STB Commissioner and Vice-Chairman reasonable to the shipper. What is meant by ‘open on
William Clyburn, Jr. wrote in a Railway Age op-ed commercially reasonable terms’? This means all market
dated June 10 that he believes the CN voting participants, railroads and shippers will benefit: They will get a fair
trust addresses “unlawful control” and the “public chance to compete. They will pay and receive remunerative
interest” standard under the new rules, and that rates and get efficient service. If a shipper is not happy with their
as such, the voting trust should be approved service, they can switch to another carrier because they will still
have a choice.”
• “A CN/KCS combination will create a strong new rail-to-rail
competitor that will provide new single-line rail movements in
competition with other rail carriers. In addition, with the gateway
© KANSAS CITY SOUTHERN
commitment, shippers will also have the option to use an existing
routing or other routings involving more than just the merged CN/
KCS.”
18Compensation & Benefits Expense Increased 23%;
Fuel Expense Increased 98%
$ in
Compensation & Benefits
Quarterly Average millions
Q2 2020 Expense $104
Employee Headcount
Overtime and recrews 10
Decreased 1% Wage & Benefit Inflation 6
Foreign Exchange 5
Incentive Compensation 4
COVID-19 (2)
6,685 6,617 Other 1
Q2 2021 Expense $128
Q2 20 Q2 21
Locomotive Fuel Price
($ per gallon)
$ in
$2.51 Fuel Expense millions
Q2 2020 Expense $40
$1.65
US $1.99 Fuel Price:
U.S. 13
US $1.14 MX $2.99 Mexico 6
MX $2.17 MX $2.58* Consumption 13
© KANSAS CITY SOUTHERN
Foreign Exchange 7
Q2 20 Q2 21 Q2 2021 Expense $79
* Assumes constant F/X. 19Capital Allocation Highlights
($ in millions)
Free Cash Flow* Capital Expenditures Return to Shareholders
Share Repurchases Dividends
$370
$226 $228 $294
$249 $173
$187 $75
$76 $98
YTD 20 YTD 21 YTD 20 YTD 21 YTD 20 YTD 21
▪ YTD free cash flow* up 1% YoY; excluding $78M of locomotive lease buyouts in 2020
YTD adjusted free cash flow* is down 25%
▪ YTD CapEx up 33% YoY, primarily due to higher capacity investments
▪ YTD return to shareholders down 53%, as the share repurchase program has been
terminated; dividends will remain at $0.54 per common share going forward
– As final settlement of the 2020 Accelerated Share Repurchase Program, 233K shares were
© KANSAS CITY SOUTHERN
received during Q121, bringing the final ASR average price to $191.75 per share
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section 20Condensed Income Statement – Q2
($ in millions, except EPS Diluted) Q2 2021 Q2 2020
Revenues $749.5 $547.9
Operating Expenses 1,181.2 367.5
Adjusted Operating Expenses* 460.4 357.0
Operating Income (Loss) (431.7) 180.4
Equity Earnings 3.4 0.2
Interest Expense (39.1) (38.1)
Foreign Exchange Gain 6.8 7.8
Other Income, Net 1.0 0.8
Income (Loss) Before Income Taxes (459.6) 151.1
Income Tax Benefit (Expense) 81.6 (40.8)
Net Income (Loss) $(378.0) $110.3
Reported Earnings (Loss) per Share Diluted $(4.17) $1.16
Adjusted Earnings per Share Diluted* $2.06 $1.15
© KANSAS CITY SOUTHERN
Average Diluted Share Count (in thousands) 90,767 94,893
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section
21Q2 Adjusted Diluted Earnings per Share*
Q2 2021 Q2 2020
Reported $(4.17) $1.16
Merger Costs 6.26 —
Restructuring Charges — 0.08
F/X Gain (0.05) (0.06)
F/X Component of Income Taxes 0.02 (0.03)
Adjusted $2.06 $1.15
© KANSAS CITY SOUTHERN
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section
22Effective Tax Rate Reconciliation
Hedge and F/X Tax Impact
Q2 2021 Effective Tax Rate
Projected
$ in millions Q2 21 Y/E 2021
5.7% 0.1% 1.3% 0.9%
F/X Benefit in Income Tax
(1.8)% $— $2
Expense
26.3% (9.4)%
21.0% 17.8% F/X Gain (Loss) on MX
8 (3)
Peso Exposure
U.S. Higher Global State Other Adjusted Foreign Impact of Reported
Statutory Foreign Intangible Taxes ETR Exchange Termination ETR Unhedged F/X Income
Rate Tax Rate Low-taxed 8 (1)
Fee Statement Impact
Income
F/X Hedge Loss (1) (3)
Net F/X Income $7 $(4)
Statement Impact
Q2 2020 Effective Tax Rate
Note: Above amounts are net of tax at the 30% statutory Mexico tax rate
1.3% 1.5% 0.1%
4.9%
Tax Outlook Through 2023
(1.8)%
28.8% 27.0%
21.0% 2021 Adjusted ETR ~27%
2022 - 2023 Adjusted ETR ~28%
© KANSAS CITY SOUTHERN
U.S. Higher Global State Other Foreign Reported
Taxes Adjusted ETR
Statutory Foreign Intangible Exchange
ETR
Rate Tax Rate Low-taxed
Income 2021 Cash Tax Rate High Teens
†
2022 - 2023 Cash Tax Rate High-20%
†
Cash tax rate impacted by fluctuations in 2021 FX 23Estimated F/X Impacts on Adjusted Operating
Income*
KCSM MXN-Based Q2 2021 F/X F/X Adjusted
$ in millions Q2 2021 Revenues & Expenses Impact B/(W) Q2 2021
Revenues $749.5 $126.1 $16.2 $733.3
Adjusted Operating Expenses* 460.4 117.0 (16.5) 443.9
Adjusted Operating Income* $289.1 $(0.3) $289.4
© KANSAS CITY SOUTHERN
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section.
Note: Revenue and expense impacts are based on KCS’ actual peso-based transactions.
The average MXN/USD exchange rates as published by Banco de México were 20.1 and 23.4 for the quarters ended June
30, 2021 and 2020, respectively.
24Estimated F/X Impact – Q2
Estimated
FX
Reported Reported Reported Adjusted
($ in millions) Q2 2021 Q2 2020 Change Change
Chemicals & Petroleum $232.5 $158.5 47% 45%
Industrial & Consumer Products 144.6 120.6 20% 17%
Agriculture & Minerals 139.9 114.4 22% 22%
Energy 54.5 39.3 39% 36%
Intermodal 91.1 63.5 43% 41%
Automotive 49.4 15.6 217% 188%
Other revenue 37.5 36.0 4% 1%
Total revenues $749.5 $547.9 37% 34%
Compensation and benefits $128.4 $103.8 24% 18%
Purchased services 55.8 44.6 25% 21%
Fuel 79.0 39.5 100% 83%
Equipment costs 24.1 18.1 33% 33%
Depreciation and amortization 91.2 89.3 2% 2%
© KANSAS CITY SOUTHERN
Materials and other 81.9 61.7 33% 29%
†
Total adjusted operating expenses * $460.4 $357.0 29% 24%
†
Adjusted for merger costs in 2021 and restructuring charges in 2020
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section
25Second Quarter EPS Reconciliation
Reported Adjusted*
Q2 2020 Diluted Earnings Per Share $1.16 $1.15
Increase in Operating Income 0.74 0.74
Increase in Merger Costs (6.26) —
Decrease in Restructuring Charges 0.08 —
Increase in Equity Earnings and Other Income 0.02 0.02
Increase in Interest Expense (0.01) (0.01)
Decrease in Tax Rate 0.03 0.08
Decrease in Share Count 0.08 0.08
Foreign Exchange Impact (0.01) —
© KANSAS CITY SOUTHERN
Q2 2021 Diluted Earnings (Loss) Per Share $(4.17) $2.06
*Non-GAAP financial measure; all reconciliations to GAAP can be found on the KCS website in the Investors section
26Total Cross-Border† Volumes and Revenues
† †
Total Cross-Border Volumes Total Cross-Border Revenues
($ in millions)
42% 53%
187,500 $283.4
131,800 $184.7
Q2 20 Q2 21 Q2 20 Q2 21
Mexico Energy Reform Volumes and Revenues
††
†† Energy Reform Revenues
Energy Reform Volumes
($ in millions)
107% 121%
39,700 $88.2
© KANSAS CITY SOUTHERN
19,200 $40.0
Q2 20 Q2 21 Q2 20 Q2 21
†
Cross border is defined as traffic that moves on Kansas City Southern both north and south of the U.S. / Mexico
border. Traffic interchanged with a competing railroad at the border is not considered cross border.
††
Cross-Border Franchise and Non-Franchise movements related to Mexico Energy Reform,
as reported within Petroleum minor business unit. 27†
Cross-Border Intermodal and Lázaro Cárdenas
Intermodal Volumes and Revenues †
† Cross-Border
Cross-Border
Intermodal Revenues
Intermodal Volumes
($ in millions)
37% 49%
$28.0
40,400
29,500
$18.8
Q2 20 Q2 21 Q2 20 Q2 21
Lázaro Cárdenas
Lázaro Cárdenas
Intermodal Revenues
Intermodal Volumes
($ in millions)
(14)% (12)%
29,600 $14.3
25,500 $12.6
© KANSAS CITY SOUTHERN
Q2 20 Q2 21
Q2 20 Q2 21
†
Cross-border is defined as traffic that moves on Kansas City Southern both north and south of the U.S. / Mexico
border. Traffic interchanged with a competing railroad at the border is not considered cross border. 2829
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