KSU
#Thank you, Jeff, and good morning, everyone
I’ll start my comments on Page 11, where you can see third quarter year-over-year revenue was up 9% and volumes were up 3%
As discussed by Pat, volume growth was negatively impacted by several weather events in Texas and Northern Mexico
Prior to these events, volumes were tracking at a growth rate of approximately 6%
For the quarter, same-store sales as well as in-quarter renewals pricing both came in at a solid 3%
The Chemical & Petroleum business growth of 10% was primarily driven by, excuse me, by solid performance in our longer length of haul southbound LPG business, as well as our lubes and oils
This business was hardest hit by Hurricane Harvey, with the heaviest impacts being seen in the petroleum business, where customer facilities and refineries were shutdown several weeks due to flooding in Southeast Texas
Our Industrial & Consumer business also showed improvement in the third quarter with revenue growth of 9% and an increase of volume of 4%
We continue to see strength in our military shipments and our metals business was also positive due to an increased need for pipe in the energy sector
Once again this quarter, our energy line of business saw over 100% revenue growth in both frac sand and crude oil, driving an overall year-over-year revenue increase of 19% for the total energy business
We also saw an improved length of haul and attractive mix this quarter due to a larger percentage of the business having final destination in Texas
The automotive business was up 19% over 2016, driven primarily by growth in the manufacturing capacity as new model launches began to take effect
Given the number of vehicles damaged in the hurricanes and the floods, lot of industry saw an increase in sales in September, but most of that demand were satisfied through existing dealer inventories
As a result of this surge in demand, we are seeing a tightness in the automotive equipment across several regions of the North American rail network
Even with this tightness, we still expect to see solid performance in Q4 to fill this demand
We do not expect any impact from the storms outside of the third and fourth quarter of 2017. Intermodal revenue and volume increases have improved to 4%, partly driven by new business and the new cross-border services
During the quarter, this business unit was definitely impacted by Hurricane Harvey, as well as the less publicized floods in Northern Mexico
We continue to see a very competitive market due to low trucking rates in ocean shipping consolidation, but we’re positioned very well to deal with the competition
There is also a tightening in the U.S
domestic intermodal business that has impacted some of our customers
We believe and are seeing we will continue to see solid in both – solid growth in both of our major cross-border service offerings, as well as freight coming into the Port of Lázaro Cárdenas as customers continue to look for alternative solutions for their supply chain
The Agriculture & Minerals line of business revenue growth of 2% was primarily driven by grain demand
Our operating team did a fantastic job in conjunction with our partner carriers to due to much of the export grain shipments that were impacted by the flooding
The harvest looks strong for the fourth quarter and we expect to see continued strength in ag and minerals to close out the remainder of the year
On Page 12, you can see an updated assessment of our fourth quarter 2017 volume outlook
As I mentioned, we expect to see our cross-border service offerings continue driving improvement in our intermodal business in the fourth quarter
We expect growth in our Chemical & Petroleum segment due to the additional refined product shipments and strengthening in the plastics market
I want to remind everyone that the final transition date for the remaining regions impacted by Mexico Energy Reform will be November 30. We also announced during the third quarter, our planned investment in another storage and distribution terminal near Monterey that I’ll discuss later in the presentation
As I mentioned, the strong grain harvest will drive year-over-year fourth quarter Ag business, but at a slightly lower rate in 2016. This strength could be slightly tempered by volumes in our Food Products business through the end of the year
In Industrial & Consumer, we expect to see moderate year-over-year growth in both metals and paper
Our outlook in military and cement moves remains uncertain, but if we continue to see the volumes similar to what we’re seeing currently, then it’s possible we’ll have quarterly growth in this part of the business as well
Due to year-over-year change in plant shutdown schedules, our automated – our Automotive business will be facing tough year-over-year comps, but we’re still expecting strong growth for the total year
The challenge of the end of year plant schedules may be mitigated to some extent due to the heavy demand for replacement cars and trucks in the area impacted by hurricanes and earthquakes
Crude oil and frac sand shipments will remain strong in the fourth quarter, but year-over-year volumes in the utility coal market will create a difficult comp when compared to the second-half of 2016. Moving to Slide 13, as I mentioned before, we announced the planned investment in refined products terminal in Salinas Victoria just north of Monterrey Mexico
This joint venture with Bulkmatic will continue to demonstrate our commitment to creating quality facilities in critical markets that allow us to provide rail service and growing refined products markets in Mexico
This slide provides an update on our shipments in this important segment
Adjusted for the hurricane impact, we saw a 17% increase in volumes and refined fluids as well as LPG
LPGs continue to make up more than half the carload shift year-to-date
It’s important to remember that growth in this business will come in stair steps
The first portion coming after all the facilities are open, and the second, a larger step will come after construction of the storage tanks is complete in the second-half of 2018. On Slide 14, we have included a diagram that provides a visual of the KCS network, the important new terminals on our line and the existing pipeline systems for both refined products as well as LPG
As you can see, our investments are strategically located in to serve major population centers and growth areas that are not close to existing pipeline
The diagram also shows that almost the entire pipeline system is already running near capacity levels
Given the difficulty of acquiring land as well as topographical and security challenges of building new pipelines, we believe the strategic investments give us a significant foothold in this new and developing infrastructure
With that, I’ll now turn the call over to our CFO, Mike <UNK>
Yes, absolutely, Ken, thanks for the question
Definitely, I was talking about Mexico
The truck rates in Mexico continue to stay low, continued relatively cheap equipment and fuel, very competitive specifically into the Mexico City market, but we’re positioned well
We’re seeing great volumes off of the Lázaro terminal, also inter-Mexico, like I said, the cross-border is working very, very well
As you mentioned, we are seeing significant price increases in the domestic space, which allows – there’s a lot of things that happen there specifically for our market basically between Dallas and Atlanta, that’s a fairly competitive market
And so as those truck rates go up and as intermodal rates go up, obviously it’s positive for us, because we’re able to get more freight on the railroad
So we think intermodal is positioned well
We think it’s maybe coming out of that pricing funk that it’s been in for the last few years
And so we continue to believe, intermodal is going to be a great benefit going forward
No, I would say, it’s a mix issue exactly, <UNK>
There’s no repricing happened in the quarter
<UNK>, I would say that the pricing environment right now is relatively positive and strong
We continue to believe it will be inflation plus on both sides of the border
There’s really no change in that
We are seeing some change in some of the markets in the U.S
I would tell you, I think that the pricing in the refined products market has kind of stabilized
And I think everybody kind of is seeing how that’s going to play out
So we feel very comfortable that it’s a good solid pricing environment and we’ll continue to expect inflation plus
Thanks, <UNK>
Again, this is <UNK>
That’s a great question
And what I would tell you is, from a market share perspective, we still have very little market share there as the number of containers coming across the border is around 3% to 4%
And so you think about upside, there’s significant upside in converting that freight from the road to the rail
What I would tell you is, we are extremely pleased with the business
We just had a review this week with our partners BNSF and both groups are very pleased with what’s happened
We feel very comfortable that it’s going to grow
There’s a lot of interest
We also see the exact same thing with the UP, our partner in the automotive business and some of our other intermodal
So the IMCs are focused
They understand the opportunity
It doesn’t take much to understand it, just go stand at the border and look at the 16,000 trucks trying to cross every day, it’s a great opportunity for us
And I think, as Jeff mentioned, he mentioned the kind of quietly in his comments, he mentioned the joint facility between Mexican and U.S
If we’re able to get that time at the bridge down like he’s really working hard on, that’s going to be a great benefit to the intermodal as well as the carload customer
So we think it’s going to be a good space
Yes, great question, <UNK>
What I would say is the LPGs have been surprising to us how quickly it picked up
And bringing those LPGs into Mexico obviously it’s used in almost every home in Mexico
And so the storage facilities are being created in most of the major population centers
But what I would tell you is, we’re going to continue to see that business grow as well
I think refined products will probably grow a little bit faster now, because LPG has really got a quick start out of the gate
But it’s going to continue to grow significantly as again that’s one where they do not have enough from a national supply perspective and you’re seeing already facility is being constructed in the San Luis Potosí area, obviously in Salinas, Monterey
So it’s going to continue to grow as well
Yes, Chris, I think that’s the million-dollar question obviously is how fast is this going to ramp up? I think the keys for is we watch are going to be primarily a couple of things
First off, the instance of new retailers into the market, how quickly that happens, how quickly the infrastructure from a retail perspective occurs
Second is going to be the distributors that are currently in place, how do they play from a storage perspective, as well as distribution into these new retailers
And then third, what is the infrastructure off of the ports, off of other facilities coming out of Texas, right now it appears that the big Texas facilities are going to be around Beaumont area, around Corpus Christi and then into the center of the country across a number of different items
So we expect it to ramp up significantly from a retail perspective
Starting in 2018, a number of firms have already announced their plans and how big that will be
How quickly that actually plays itself out? I don’t know
If you look at the expectations from a storage perspective, you have about 10 years for the country to gain that that significant storage capacity they were looking at of adding 10, 15 days of supply
But we think here in 2018, you’re going to see some pretty significant volumes, not only in off of the ports, but also out of the rail line
Again, I think the pipelines are pretty full, they’re almost at capacity
So I don’t think they’ll be significant movement on that space
So we’re very positive about how it will impact this in 2018 forward, but the ramp up is going to be really tied to the retail – the new retailers
Yes, <UNK>, I would tell you that, we don’t have really any idea where it will end up
We know that what the proposals have been from a part and content perspective, deal content
What I would tell you is, there are – there is a little bit of a change in the downtime scheduling around Christmas that impacts us and 2017 and that might be some of the changes, just a calendaring space and how the calendar work for those particular plants
But overall, we’re very positive in our automotive business
And we continue to believe that no matter what happens
Mexico is going to be a great place to build vehicles for the world, and that’s going to have content from all over the world and we’re going to be a part of it
So we’re – we continue to be very positive on our automotive business
Yes, <UNK>, this is <UNK>
Our core pricing was 3% that’s both in renewals and in the what’s…
The same-store, I’m sorry, I was thinking about the second part of your question
When you think about the intermodal space, obviously those bids go out for the large customers, they go out sometime in the first quarter
And so it takes a while to see that
What you’re talking about is the spot market of intermodal that impacts both truck pricing and intermodal pricing in probably that spot market, let’s say, the top 20% or that piece that’s flexible during the search periods of the year
That’s not going to impact us as much as it would our intermodal carriers
And so, we’re primarily into that bid season in the fourth quarter, first part of first quarter, and then that’s when we would see the pricing improvements
But obviously, it’s going to be a benefit to us as truck pricing continues to go up and gives us some pricing power, as well as intermodal becomes a better option for some of those people who had products on the road
So it usually takes a full cycle of bids from an intermodal perspective on that
Yes
First off, we are seeing a little bit more movement
As I mentioned, we saw over 100% increase, but that’s from a pretty low number, basically hardly anything in the third quarter last year
Our capacity to move the Canadian crude or crew coming from anywhere is, we have plenty of capacity
There’s plenty of equipment, and Jeff is ready to move it when people are ready to move it
Obviously, the spreads create an environment where the market can change overnight
But we’re seeing some positive signs in crude by rail and we’re going to continue to take advantage of it when possible
And but we’re not going to say, boy, this is going to come on like gangbusters, but if it does, nobody would be happier than Jeff <UNK>, because he’s ready to move with when they bring it to him
Yes, Tom, I – I’ll take
This is <UNK>
Here’s what I would tell you, we are very, very focused on doing this in a rational, competent way in building out infrastructure and building out the Sasol Yard, the Sanchez Yard, these two terminals, that’s all infrastructure which allows us to take advantage of markets that are coming that we can see
That volume is going to come on in a ramp environment
We’re going to continue to see it grow again as retail markets change, as NAFTA is renegotiated, that will have a big impact on steel
We are focused on creating fluidity and capacity in Mexico across the border and in the U.S
, both in intermodal terminals, track, everything else
And so we’re going out in a very rational way in a way that allows us to take advantage of markets
We’re not making big jumps into anything that might be a swing in the marketplace
But we do – we see great growth in Mexico, great growth in Southeast Texas and along the Gulf Coast with the crackers and others
So it’s going to take time
It’s going to ramp up in a way that we think we can take advantage of it
But we are spending our infrastructure dollars to make sure we’re fluid and we have the capacity to get it when it comes
