2016 Kansas City Southern KANSAS CITY SOUTHERN. Bank of America Merrill Lynch Transportation Conference

Transcription

1 KANSAS CITY SOUTHERN Bank of America Merrill Lynch Transportation Conference May 17, 2016

2 Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the securities laws concerning potential future events involving KCS and its subsidiaries, which could materially differ from the events that actually occur. Words such as projects, estimates, forecasts, believes, intends, expects, anticipates, and similar expressions are intended to identify many of these forward-looking statements. Such forward-looking statements are based upon information currently available to management and management s perception thereof as of the date hereof. Differences that actually occur could be caused by a number of external factors over which management has little or no control, including: competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; loss of the rail concession of KCS subsidiary, Kansas City Southern de México, S.A. de C.V.; the termination of, or failure to renew, agreements with customers, other railroads and third parties; interest rates; access to capital; disruptions to KCS technology infrastructure, including its computer systems; natural events such as severe weather, hurricanes and floods; market and regulatory responses to climate change; credit risk of customers and counterparties and their failure to meet their financial obligations; legislative and regulatory developments and disputes; rail accidents or other incidents or accidents on KCS rail network or at KCS facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; fluctuation in prices or availability of key materials, in particular diesel fuel; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; availability of qualified personnel; labor difficulties, including strikes and work stoppages; insufficiency of insurance to cover lost revenue, profits or other damages; acts of terrorism or risk of terrorist activities; war or risk of war; domestic and international economic conditions; political and economic conditions in Mexico and the level of trade between the United States and Mexico; increased demand and traffic congestion; the outcome of claims and litigation involving KCS or its subsidiaries; and other factors affecting the operation of the business. More detailed information about factors that could affect future events may be found in filings by KCS with the Securities and Exchange Commission, including KCS Annual Report on Form 10-K for the year ended December 31, 2015 (File No ) and subsequent reports. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. KCS is not obligated to update any forward-looking statements to reflect future events or developments. All reconciliations to GAAP can be found on the KCS website, kcsouthern.com/investors. 2

3 KCS Rail Network Founded in 1887 More than 6,500 track miles Seamless cross-border network Service to 12 Gulf ports and 1 Pacific Ocean port Service to more than 140 transload centers and 11 intermodal ramps 181 interchange points with other railroads, including all U.S. and Mexico Class I railroads 3

4 Revenue and Volume Update 2016 Kansas City Southern

5 Second Quarter Revenue and Volume Trends KCS Revenue and Carload Growth Agriculture & Minerals volume up 13% - Grain volumes up 18% mainly due to increased railcar fleet and improved cycle times 3% Chemical & Petroleum volumes up 9% - Strong Petroleum volume growth of 33% and Plastics volume growth of 15% partially offset by declines in Chemicals volume Impacts of F/X -3% -2% Automotive volumes down 13% due to planned plant re-toolings in Mexico - Chrysler and GM plants are now re-opened Impacts of U.S. Fuel Price -2% Energy volumes down 21% - Utility Coal volume down 36% - Frac Sand volume down 20% - Crude Oil volume down 18% -2% Revenue Carloads Pricing continues to track above inflation - Fuel surcharge and F/X expected to have negative impacts to revenue Q2 Revenue and Carload as of May 15,

6 F/X and U.S. Fuel Price Are Expected to Impact 2016 Revenues F/X Estimates Q1 Actual Q2 Q3 Q4 Actual / 2016 Consensus MXN/USD Exchange Rate Average Quarterly MXN/USD Exchange Rate Variance (21%) (14%) (5%) (4%) U.S. Fuel Price Estimates Q1 Actual Q2 Q3 Q4 Actual / 2016 Estimated Average On-Highway Diesel Price/Gallon 3 $2.08 $2.24 $2.33 $ Average On-Highway Diesel Price/Gallon 3 $2.92 $2.85 $2.63 $2.43 Variance (29%) (21%) (11%) (1%) 1 Source: Bloomberg Consensus as of 5/16/16 2 Source: Banco de México 3 Source: EIA as of 5/10/16 6

7 Long Term Growth Drivers 2016 Kansas City Southern

8 Key Growth Drivers KCS links the heart of Mexico s manufacturing region with all Class I rails, offering a single connection from Mexico to all major markets in the U.S. and Canada Well-positioned to participate in Mexico s growing economy and near-sourcing phenomenon Strategic access to growing auto manufacturing industry in Mexico and well-positioned to move finished vehicles into the United States Single-line intermodal service between U.S. and Mexico offers opportunity for long-term truck to rail conversion Sole rail provider to the port of Lázaro Cárdenas Access to Port Arthur, TX., Eagle Ford and Permian Basin offers leverage to energy markets Access to the Gulf Coast petrochemical build-out due to abundant low-cost natural gas Well-positioned to participate in Mexico s energy reform, moving refined products, LPGs as well as steel pipe, frac sand, and crude oil longer-term 8

9 KCS is well-positioned to benefit from growth in Mexico automotive plants Aguascalienties Salamanca City Saltillo Silao Ramos Arizpe San Luis Potosi Celaya Mariscala Cuautitlan KCS currently has access to twelve automotive plants in Mexico: Chrysler Fiat (Toluca), (Encantada) Ford (Cuautitlán), (San Luis Potosi 2018) (1) GM (San Luis Potosí), (Rojas), (Silao) Nissan (Aguascalientes 2 plants), (Cuernavaca) VW (Puebla) Honda (Celaya) Mazda (Salamanca) Audi (San Jose Chiapa 2016) (2) Mercedes/Infiniti (Aguascalientes 2017) (2) BMW (San Luis Potosi 2019) (2) Kia (Monterrey 2016) (2) Toyota (Mariscala 2019) (2) Toluca San Jose Chiapa Cuernavaca Puebla Source: (1) Reuters (2) Manufacturer s Press Releases 9

10 Mexico s auto production continues to rise 60% Increase A 2014A 2015A 2016P 2017P 2018P 2019P 2020P (units in millions) Source: Autocast, April

11 Mexico s auto production expected to increase in the second half of 2016 (units in thousands) KCS Served Automotive Growth by Plant Plants closed during 1H 16 for re-tooling Nissan - VW - Puebla GM - Silao Nissan - Aguascalientes Cuernavaca Fiat/Chrysler - Saltillo Fiat/Chrysler - Toluca Mazda - Salamanca GM - San Luis Potosi Honda - Celaya GM - Ramos Ford - Cuautitlan Kia - Monterrey Audi - San Jose Chiapa 1H H 2016 Source: Autocast, April

12 APM Terminals is developing a second container concession at Lázaro Cárdenas APM will invest $900m in a second container concession at Lázaro Cárdenas The first phase is targeted to open in 2016 with 1.2 million TEU capacity The full build out is expected to have 4.1 million TEU of capacity Phase I equipment will include 7 Super-Post Panamax ship to shore gantry cranes Construction of APM container terminal Source: APM Terminals press release 12

13 KCS Plastics Volume Growth 2016 Kansas City Southern KCS has seen strong plastics growth ahead of major project openings in the coming years Plastic industry is the 3rd largest manufacturing industry in U.S. behind petroleum and auto Mexico, Canada, and China receive approximately 50% of U.S. plastics exports Houston is the most utilized port for exports but is congested and has limited capacity Plastics production is expected to double by 2018 and triple by 2030 $50 billion invested in new facilities since 2010 with additional growth in the future 16% 14% 12% 10% 8% 6% 4% 2% 0% Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Source: Corporate Public Announcements, Trade Press, ICIS 13

14 Export Plastics Pipeline 1,635 rail miles Plastics move in covered hoppers from Gulf Coast producers to México. Plastics are packaged and/or transloaded into 40 containers. To Asia 1,342 rail miles 40 containers are exported through Lázaro Cárdenas to international markets. To South America 14

15 Mexico energy reform is a reality, creating business opportunities Near-Term Importation of LPG Importation of refined products (gasoline, diesel & biofuels) Free importation timeline accelerated from January 2017 to April 2016 Volumes subject to facility builds and Mexican price controls (IEPS) Longer-Term Steel pipe for oil fields and natural gas transmission Shale oil (CBR) shipments from Mexican basins Importation of frac sand Increased fuel oil moves 15

16 Capital Structure and Capital Allocation Priorities 2016 Kansas City Southern

17 Balanced Approach to Investing in Business and Returning Capital to Shareholders Invest in Business Committed to superior growth profile 2016 Capex - $580 to $590 million range Target returns of upper teens are being achieved Shareholder Returns Board of Directors approved $500 million share repurchase program During Q1 16 KCS repurchased 645,612 shares for $51.0 million with an average price of $78.94 Q1 cash dividend declared on Jan. 28, 2016; paid Apr. 6, 2016 Quarterly payout of $0.33 per share or $35.6 million Annualized payout of $1.32 per share or $142.4 million Optimize Capital Structure Continue opportunistic lease conversions Percentage of owned equipment increased from 51% at 12/31/14 to 65% at 3/31/16 KCS issued $250 million in 3.125% senior notes due 2026 Proceeds used for repayment at maturity (October 2016) of the KCS and KCSM Floating Rate Senior Notes and general corporate purposes, including the repayment of outstanding commercial paper 17

18 Higher Capital Spend at KCS Supports Industry Leading Revenue Growth/KCS ROIC Improvement Exceeds Peer Group * *KSU, CN & CP adjusted to constant currency basis in

19 ROIC Returns on capital projects grow throughout the life of the investment 60% 2009 Victoria Rosenberg Investment 25 Year ROIC Analysis = 17% ROIC (avg) Year 1 = % 58% 50% 45% 40% 40% 36% 30% 20% 2016 ROIC below WACC ROIC > WACC after 10 years 25% 22% 20% 9% 11% 12% 14% 16% 18% 28% 32% 10% 0% 7% 8% 7% 7% 4% 6% 3% 1% Year Return on Invested Capital Returns on capital investments are long-term, matching the useful life of the assets Returns grow throughout the life of the investment creating a drag on ROIC in the first onethird of the life while generating significant returns over the remaining life Investment generated $25M of pre-tax operating expense savings in

20 KCS is well-positioned for medium to long-term growth Volumes Macroeconomic & energy challenges Strong growth outlook over next 5 years Automotive facilities in Mexico Intermodal - Port of Lázaro, Wylie, cross-border Petro chemical market Gulf crude destinations Mexican energy reform Pricing Inflation + pricing expected to continue Rail continues to provide good value Improved service levels Investments driven by shipper capacity needs Cost Control Continued operations productivity improvement Maintenance agreement renegotiation Lease conversions continue Fuel / energy management investments G&A cost containment Asset Utilization Improved velocity, dwell, and equipment cycle time Return to growth drives strong incremental margins Improved asset availability Capacity expansion improves network fluidity 20

21 KSU Investment Highlights Well-positioned growth story in the industry with unique U.S.-Mexico cross-border network Track record of strong financial and operating performance Well-diversified customer base and commodity mix Excellent strategic positioning with multiple growth drivers Solid balance sheet with a commitment to maintaining investment grade credit rating 21

22 Kansas City Southern