Canadian Pacific Kansas City

Good morning and welcome to the Kansas City Southern first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. It is now my pleasure to introduce you to Ashley Thorne, Vice President, Investor Relations for Kansas City Southern. Please go ahead.

Thank you, Rocco. Good morning, and thank you for joining Kansas City Southern's first quarter 2021 earnings call. Before we begin, I want to remind you that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act as amended. 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 to the risk identified in our annual report on Form 10-K for the year ended December 31, 2020, and in other reports filed by us 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. And with that, it is now my pleasure to introduce Kansas City Southern's President and CEO, Pat Ottensmeyer.

Thank you, Ashley, and good morning, everyone. Welcome to our first quarter earnings call. I'll start on slide four. You'll see this quarter we're going to shorten the prepared comments, at least that's our intention, and leave a bit more time for Q&A, given the situation that we're in right now. I would like to draw attention to the participants on the Q&A and specifically introduce John Orr. You may have seen a press release that we issued yesterday after the market closed announcing that John had joined our executive team as Executive Vice President of Operations. John, many of you probably know John, spent 20 plus years at Canadian National. Just a wealth of experience in transportation, terrific leadership positions in safety and environmental, and in other aspects of operations. John's been working with us for the past two months as an executive consultant, so he's had an opportunity to really see what we're all about, and we've had a chance to see how John operates, and I can tell you it's just been a tremendous fit. John has jumped in with both feet and really helped us in the two months he's been here and just delighted that he's here and available to move into this position and welcome John to the team and congratulate John on this appointment. Sammy will continue as you have seen Sammy for the past two plus years leading our PSR initiatives, particularly as we head into this important phase three, focusing on the customer touchpoints and service sustainability. And then Jeff Songer will continue on as an executive, a member of our executive team, and really dedicate his focus to strategic merger planning. As you know, we have been granted a protective order by the STB, which allows small group of individuals, executives from both companies to go into the zone of confidentiality and begin to share information to develop our merger case and our merger application, including network-wide operating plans, safety integration, environmental impact, and many other things. I can tell you it is a massive amount of work And we want to put someone in that position, as has Canadian Pacific, to really build the strongest case that we possibly can as quickly as we can. And Jeff is really ideally suited to fit into that role, given his experience and knowledge of the KCS, not only operations, but really all aspects of our company. So congratulations to Jeff on moving into this role, which is arguably the most challenging significant strategic project we've ever faced and welcome and congratulate John Orr to the executive team at KCS. With that, I'll move to, I believe, slide five. Before I get into the quarter, I'll just spend a few minutes talking about the merger process and updating you all on where things stand. And I will refer to this slide and these statements in the Q&A. There's really only so much we can say at this point about the process leading up to this point, as well as the process going forward. I'll give some additional disclaimers here in a second. Everyone knows on March 21st this year we announced an agreement to merge with Canadian Pacific in a stock and cash transaction representing an enterprise value of approximately $29 billion for KCS. We will close into, the plan is we will close into a voting trust where common shareholders of KCS will receive .489 shares of Canadian Pacific. and $90 in cash for each KCS common share they hold. Because this consideration includes both cash and stock, in addition to receiving an immediate cash payment, KSU shareholders will be able to continue to participate in the upside of this very exciting combination going forward with some powerful and compelling synergies and we think an opportunity for superior shareholder returns well into the future. As a result of the exchange ratio and the consideration that's part of this transaction, KSU, current KSU shareholders collectively will represent about 25% ownership in the new combined company. This is really a very exciting, historic, and transformative combination You've seen a lot of the material that we've made available publicly, but this will create the first rail network connecting the United States, Canada, and Mexico, and is expected to provide enhanced competitive alternatives to existing rail service, resulting in improved service options, expanded service options to all of our customers and potential customers as a result of this combination. We will remain the smallest of the six Class 1 railroads measured by revenue. The combined company will have a larger and more competitive network, service options that don't exist today, and operate approximately 20,000 miles of rail, employ close to 20,000 people, and generate combined revenues of nearly $9 billion. There has been tremendous shipper and customer support for this transaction, and this combination is evidenced by more than 375 letters of support from shippers, partners, ports, transload facilities, other business partners of both Kansas City Southern and Canadian Pacific. Finally, speaking for the KCS side, Very excited about this combination and what it provides for our employees and our presence here in Kansas City. As you have heard, our corporate headquarters is in Kansas City, Canadian Pacific, obviously, and Calgary. But as part of this announcement, we have also announced that the U.S. headquarters will remain in Kansas City for the combined company. We know there will be a lot of questions about process, which we really cannot answer because we don't have the answers to those questions. As for the process that led us to this point, we will simply refer those to the proxy statement that we expect to have available within a matter of a couple of weeks. And so just be warned that if there are questions in the Q&A section about how we got here, I will refer to the proxy statement that will be available in two to three weeks. As for the STB process, again, the next step in this process is up to the board to decide the path, the old rules versus new rules, and take a position on the KCS waiver. You've seen a lot of testimony and statements and objections and responses that have been provided publicly, and that's really all we will have to say about this. I will refer you to a couple of, I think, very powerful statements that I'm sure most of you have seen, many of you have reported on, and those statements from William Clyburn, former vice chair of the STB, at the time of the new merger rules and the KCS exemption. And then former Senator and Congressman Byron Dorgan also provided a very powerful statement in support of the process that we have laid out and the transaction. Shown on this slide also is a website that we have created that has a massive amount of information. I'm sure many of you have spent time there, but You probably refer some questions to the website where we have a lot of detail, including access to all of the shipper support letters and the two letters that I mentioned from former STB Vice Chair William Clyburn and former Senator Byron Dorgan. So with that, I will move on to the subject of the call here, which is our first quarter results. We'll get into more detail here over the next few minutes, but you can see revenues fell by 4% during the quarter due to lower volumes, volumes down about 1%. Fuel and foreign exchange adjustments account for three percentage points of the decline in revenue. So adjusting for fuel and foreign exchange, our revenues would have been down 1%. and volumes down 1% as well. The first quarter operating ratio, I'll focus on the adjusted operating ratio of 61.4, was 170 basis points higher than last year for reasons that many of you well know, including some service disruptions caused by severe winter weather, polar vortex weather, in much of our service territory during the first quarter, as well as COVID-related labor shortages, particularly in Mexico as a result of the Mexican government health decree and the impact that had on the availability of crew labor during the quarter. Our first quarter adjusted earnings per share of $1.91 is about 3% lower than last year. In the case of operating ratio and earnings per share, the major adjustment is for the transaction-related expenses of about $19 million, and Mike Upchurch will cover that in greater detail in a few minutes. I will take a minute to talk about our commitment to ESG, specifically fuel safety and service on this slide. Through PSR and investment in fuel-saving technology, we continue to focus on improving fuel efficiency and partnering with our customers to limit supply chain emissions. As an update, we are well ahead of our target to reduce greenhouse gas emission intensity of at least 12% by the year 2025. Additionally, we've committed to a more challenging science-based target in support of the goal of limiting global warming and to well below two degrees centigrade above pre-industrial levels. We realize ESG is much broader than emission reduction and take pride in our holistic approach at KCS. We hope that you take the opportunity to review our latest sustainability report when it is published later this spring, as it will showcase many of the actions that we've taken over the last year and expect to take going forward. Additionally, in 2021, We are adding safety and service, specifically trip plan compliance measures, to our annual incentive plan for management employees, and specifically safety and trip plan compliance for the executive management team and operations management to further drive safety and customer service accountability throughout the organization. Moving on to slide seven, I won't spend a lot of time here, but despite the first quarter challenges, we are confidently reiterating our multi-year outlook, including the guidance that we provided for the full year of 2021 back in January. This obviously implies some upside throughout the rest of the year. We feel very good about our volume outlook, and the economic recovery appears to be in full swing. And our network remains the beneficiary of several unique growth opportunities driven largely by refined products exports from the U.S. Gulf Coast into Mexico. Mike Nance will talk about that, both the historic growth levels and our outlook for that business in a few minutes. Finally, we don't show it here on this slide, but we are committed to improving customer service As I mentioned, we are including customer service metrics in our annual incentive plan targets for 2021 for executive and operations and other employees throughout the company. So we'll talk more about that in the coming minutes. I'll close with slide eight, key operating metrics, just as you can see from the chart here, it's a bit of a mixed bag. For the quarter, dwell and velocity were both materially worse year over year as lingering network congestion exacerbated by the polar vortex and COVID-related crew issues, especially in Mexico, impacted our train operations during the quarter. You can see active locomotives are now up slightly year over year. as we have consistently been removing locomotives from storage to assist with our service recovery effort and get back to a network performance that we are comfortable with. And despite weather impacts, you can see we are still maintaining the increased train lengths that we gained during PSR Phase 2 last year. This has allowed us to move roughly the same amount of GTMs with 12% fewer crew starts than the previous year. As we continue our PSR Phase 3 efforts in 2021, our primary focus will be regaining the service improvements made during PSR Phase 1 while maintaining the train link gains that we made during PSR Phase 2 last year. The end result will be more fluid and more cost-effective network that we can use to drive revenue growth as we continue to focus our industry-leading volume and revenue growth. With that, I will turn the presentation over to Mike Nance.