(Kansas City Southern issued the following news release on April 29.)
KANSAS CITY, Mo. — Kansas City Southern reported operating income of $17.4 million in the first quarter of 2004, a substantial gain over the $6.8 million reported in the first quarter of 2003. However, these gains were offset by lower equity earnings from Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM), debt retirement costs, and higher tax expense. KCS consolidated net income for first quarter of 2004 was $3.4 million, which after preferred stock dividends amounted to $0.02 per diluted common share, compared with net income of $13.6 million, which after preferred stock dividends amounted to $0.22 per diluted common share. First quarter of 2003 net income included a one-time benefit of $8.9 million ($0.14 per diluted share) related to the cumulative effect of a change in accounting method.
The $10.6 million increase in KCS domestic consolidated operating income resulted from a $7.6 million increase (5.4%) in consolidated revenues, and a $3.0 million (2.3%) reduction in costs and expenses quarter to quarter. The reduction in consolidated costs and expenses was due primarily to lower casualty and insurance expense, depreciation expense, and equipment costs.
During the first quarter of 2004, revenues from the Company’s principal operating subsidiary, The Kansas City Southern Railway (KCSR) increased $8.2 million, or 5.9%, compared to the first quarter of 2003. This increase was primarily driven by an 11% increase in freight revenues in the first quarter 2004 compared with first quarter 2003. Agriculture & minerals commodity group revenues increased by 22.3% quarter to quarter led by solid growth in both domestic and export grain traffic. Paper & forest products revenues grew by 8.4%, reflecting strong gains in pulp and paper, and lumber. Intermodal & automotive revenues increased by 8.2% based primarily on strong traffic growth on KCSR’s strategic Meridian Speedway. Chemical & petroleum products continued to rebound and posted a 2.6% increase in first quarter 2004 compared to first quarter of 2003. Coal was the only commodity group recording a decrease with revenues down 9.5% almost totally due to maintenance outages at two of the principal coal-burning electric utilities served by KCSR. In 2003, these outages occurred during the second quarter rather than the first. During April 2004, volume at those plants had returned to normal levels.
KCSR’s first quarter of 2004 total operating expenses decreased $3.7 million (3.9%) from the comparable period in 2003. Decreases in casualty and insurance ($3.0 million), material and supplies ($1.9 million), and equipment costs ($1.1 million) were the primary factors driving the improvements in operating expenses. Additionally, depreciation expense decreased $3.1 million in the first quarter of 2004, primarily as a result of changes in estimates related to a recently completed KCS depreciation study, which was approved by the Surface Transportation Board. Partially offsetting these positive results was a $2.0 million (15.9%) increase in fuel expenses caused by persistently high fuel prices. KCSR’s operating expenses, as well as its yields on its freight revenue, have benefited from sustained excellent operating metrics. KCSR continues to rank among the best in the industry in terms of the primary publicly reported performance standards of average train velocity, average terminal dwell time, and cars on-line. Higher revenues, lower expenses, and excellent service performance have combined to improve KCSR’s operating ratio to 84% for the first quarter of 2004 compared with 93.3% in the first quarter of 2003.
For KCS on a consolidated earnings basis, the impact of higher operating profit for first quarter 2004 over comparable 2003 was dampened by lower equity earnings from Grupo TFM, which decreased approximately $5.6 million quarter to quarter. Grupo TFM’s first quarter revenues were slightly lower ($1 million) than comparable 2003, though revenues and volumes strengthened during March 2004. The revenue impact of the continuing weak North American automobile market was offset by solid gains in chemical and petrochemical businesses. Grupo TFM’s operating expenses were relatively flat compared to first quarter 2003 despite a $2 million increase in fuel expense. The primary factor in reduced equity earnings for Grupo TFM this quarter was a $7.3 million deferred tax benefit (calculated under U.S. GAAP) compared to a $23 million benefit in the first quarter of 2003, a $15.7 million reduction.