Kansas City Southern Earnings Call Nuggets: Grain Side Dynamics and Crude-By-Rail Timeframe

Kansas City Southern (NYSE:KSU) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Grain Side Dynamics

Christian Wetherbee – Citigroup: Maybe first question just on the grain side. I see the comps and I do get a little bit easier. I guess as you get into the back half of the year, but Pat maybe if you could give us a little bit of guidance on how we should be thinking about kind of the severity of the declines, at least in the shorter term, call it second quarter or so. Is there anything that changes the dynamic now that you have a new contract I think that started earlier this year, does anything change the dynamic in the near-term or we’re just going to have to wait for September before we see these volumes moving?

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Patrick J. Ottensmeyer – EVP, Sales & Marketing: We’re going to have to wait till September, Chris, maybe August with some of the new facilities that’s openings further south, where the harvest might be a little earlier, but I think you’re going to see a little bit. If you look at the first quarter revenues, second quarter should be a little bit better, just seasonally. Third quarter will probably be very close to the first quarter. Then we’re expecting the fourth quarter to kind of return to historical normals. So the next two quarters are going to be weak.

Christian Wetherbee – Citigroup: Then my second question will just be kind of on the run rate of kind of operating expenses that you have as it stands right now. I think Dave, you mentioned that you were unable to cut back crudes as much as you would have liked because you’re anticipating better harvest in the back half of the year. Can you give us a sense of how that impacted, I guess the first quarter or so, and maybe how that plays out over the next quarter or two? I don’t know if you have kind of a sense or granular on the number there, but just trying to get a rough sense what it might have done to the OR in the quarter…

David R. Ebbrecht – EVP and COO: We’re confident that we’re going to be able to continue to control the expenses at the rates we have and keep them relatively flat. We’re just choosing to hold on to employees to make sure we do training like putting them in engineered training and cut them back, different ways that we can keep them engaged, preparing for the third and fourth quarter volumes surges. But it takes us about three months to hire employees and then another four months to train them and we think it would be fruitless to go ahead and furlough these employees (indiscernible) have to rehire others.

David L. Starling – President and CEO: Chris, with the new millennia, if you lay somebody off 30 days after they come out of training and then you call them back in three months they may not come back. That wasn’t the kind of the industry I thought it was going to be, I’m going to move on. So, Dave and I talked about it. We think it’s a prudent decision. And then when the harvest does come and volumes are there, we will have ample crews to move them through this. This could be a great fourth quarter on grain if the weather cooperates.

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Crude-By-Rail Timeframe

Thomas Wadewitz – JPMorgan: So, Pat, I’m going to ask you something. I’m not sure if you can you give any directional color on it and you probably get through where it’s going. The crude-by-rail is there a timeframe where you say you’ve got this discussion with one kind of unidentified party, is there a timeframe that you put on that and if it doesn’t come to fruition, then you move onto the next or is there any kind of timeframe you have in mind that’s reasonable for getting an agreement? Is this kind of a one year process and that shouldn’t be longer than that just any kind of comments you can provide on how we should think about the timing for a potential agreement?

Patrick J. Ottensmeyer – EVP, Sales & Marketing: I think it’s a matter of few weeks. Let me say it this way. Again, we are in good negotiations, it’s been very high level participation Dave and CEO on the other side. And we really don’t expect that there are any major differences in terms of wrapping this up. But I think we’ll know with this party in a matter of a few weeks.

Thomas Wadewitz – JPMorgan: So, it could work or it could be the case you have to move on but at least that resolution with the current party will be just a couple of weeks?

Patrick J. Ottensmeyer – EVP, Sales & Marketing: Correct.

Thomas Wadewitz – JPMorgan: Second question you gave us some pictures on auto plant which is very helpful it looks like there is a lot of work that’s been done on three of those. How would you view that, I guess, there is some noise recently in terms of the yen weakening and how that might affect the outsourcing strategy for some of the Japanese manufacturers, (indiscernible), we changed Japanese manufacturer. Do you think there is any risk at all related to yen weakness or on those three plants or do you think in the future that would affect at all the opportunity in Mexico?

Patrick J. Ottensmeyer – EVP, Sales & Marketing: I don’t see it, Tom. I was in Mexico visiting with a couple of our automotive customers including, visiting the Nissan site at Argos, Calientes did not hear any reversal, any indications that they are weakening their view of Mexico. There are lots of other reasons why the auto companies are choosing Mexico just other than currency. Labor costs which is impacted by currency, the fact that Mexico has more free trade agreements than any other country in the world. So, they are looking at Mexico, primarily to serve the U.S. market, but they are looking at Mexico more and more to serve other markets in South America, the markets in the world, transit cost et cetera. So, there are more factors than just currency, but the direct answer to your question are we seeing or hearing anything that would suggest a weakening of the enthusiasm or interest in putting plants in Mexico? No. Now, I mentioned this in the past as well, but in addition to the big auto plants, there are a large number of tier 1, tier 2 suppliers going into support these plants. I drove several weeks ago, Dave and I were in Mexico, we drove past an industrial park in the Salvia area, which is near the Hondo and Mazda facility. There were eight or nine buildings going up in that facility simultaneously and eventually Honda told us there will be 19 Tier 1 and Tier 2 suppliers locating in that facility. So, the ripple effect is pretty big with finished vehicles and we just aren’t seeing any indications that the enthusiasm for Mexico is waning.

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David L. Starling – President and CEO: Tom, this is Dave. One thing I might add, the other thing we’re learning about the plants is they have additional capacity, additional expansion property, so they’re already — when they built this, it’s almost like it’s in phases. So, they all have bigger footprints to expand into at a later time, so very encouraging for us.

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