Canadian Pacific Kansas City

Good morning and welcome to the Kansas City Southern second 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.

Thank you, Jason. Good morning, and thank you for joining Kansas City Southern's second 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 SEC. Forward-looking statements reflect the information only as of the date 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 Oddensmeyer.

Okay, thank you, Ashley, and good morning, everyone. Thank you for joining us for our second quarter 2021 earnings presentation. I'll start on slide 4. We're going to change the format a bit this morning, and Mike Upchurch and I will go through a brief presentation. I'm told that this is a record for us in terms of brevity of our formal remarks, but given the assumption that there will likely be a lot of questions related to matters other than our quarterly earnings, we're going to change the format go through the prepared material fairly quickly and expand the time for Q&A. The only other comment that I'll make on this slide is we have included Adam Godders. Adam is our chief legal officer. Given the fact that we have a proxy statement out and shareholders meeting set for August 19th, ask Adam to join us in the event there are any technical or specific questions related to that. Moving on to slide five, I am going to start with three slides just to touch on and speak about the proposed merger with Canadian National. Obviously, most of you have heard this before, but given the timeline for events going forward, specifically the KSU Special Stockholders Meeting, which is now set for August 19th, I wanted to spend just a few minutes and reiterate some of the more significant characteristics and benefits of this transaction. So again, just looking at some of the highlighted comments here on this slide, we believe this is a pro-competitive deal and will deliver more choices, more single line service options to shippers than exist currently. There has been a commitment to keep all gateways open on commercially reasonable terms and provide greater price transparency, specifically through Rule 11 rates to those gateways to satisfy any potential competitive concerns that might arise. This merger, this combination is driven by growth and the opportunity for growth across North America. It is not a combination that is focused on consolidation or eliminating options or facilities. It is all about growth. And as you see in some of the appendix material, we have been blessed with a very strong and widespread support for the merger. over 1700, close to 1800 letters now supporting the transaction. We are confident that the voting trust that we are proposing meets the STB requirements for insulation from control and the public interest requirements and specifically the financial viability of both Canadian National and KCS during the voting trust period. Moving on to slide six, this is a very brief timeline past the completion. You can see the first items on the left are completed. The next milestone, as I mentioned a few minutes ago, is the August 19th special meeting of Kansas City Southern stockholders. And the proxy material has been circulated. We will fall back and refer to that proxy statement on a number of questions, and we'll be happy to explain anything that's in that proxy further. As far as other milestones, these are really expectations. As you know, the Surface Transportation Board will take whatever time they need, and we respect that requirement. As far as the completion of their review and a determination regarding the voting trust, our expectation is that that will come in the second half of this year. And then beyond that, again, is our expectation that a decision on the merger would be the second half of 2022. And of course, the voting trust would remain in place until we have full SBB approval. And then wrapping up the merger discussion on slide seven, just reiterating again, this combination is pro-competitive and we believe will yield significant public benefits. Some of those benefits are stated on this slide. I won't read them. And then importantly, the CNKCS filings on July 6th in response to public comments and opposition to the merger, we think are very strong and powerful and are available on our website as well as the website for our transaction, which is connectedcontinent.com. And the voting trust approval, which is the stage that we're in now, we are very confident that the voting trust satisfies the requirements for independence and public interest and the financial viability of both CN and KCS during the voting trust period is assured. Moving on just now to a few slides on the quarter. Second quarter revenue increased by 37%. From the previous year, gross ton miles up 30%, volumes up 21%, I'm sorry, 31%. Obviously, the headline here is easy comps as a result of the COVID collapse in business that occurred in the second quarter of 2020. Our results were clouded by the accounting treatment of the $700 million termination fee for the Canadian Pacific transaction. Mike Upchurch will get into some of those details later. I would like to draw your attention for purposes of our really representation of our underlying performance to the adjusted numbers shown on this slide. Second quarter adjusted operating ratio of 61.4, which was a 380 basis point improvement versus last year. And adjusted diluted earnings per share of $2.06, which was a 79% improvement from last year, again, on an adjusted basis. Moving on to slide nine, our outlook. There are a couple of changes. to this slide from what you saw in January and April. Revenue growth, we're confirming our guidance from previous quarters of double digit revenue growth in 2021 for the full year. Operating ratio, we are changing our full year operating ratio guidance to about 60%, approximately 60% for the full year. That is revised from 57.5 guidance that we had provided earlier. The headlines to that revision are a number of factors that you all are very aware of in general. The chip shortages that have affected the auto industry and certainly our automotive business has been affected by that. As evidence is recently, as earlier this week, we have been informed of three new plant outages in Mexico. Mike Nass is here to answer any questions about that in greater detail. But as you all know, that ship shortage that's really plagued many industries across North America has been a bit of a moving target and difficult to predict how long that's going to last. In addition to that, in our case, there have been disruptions in the flow of refined products into Mexico due to some regulatory developments and other factors that are more unique to Kansas City Southern that have affected both our performance and our outlook for the full year. Those developments have created some additional congestion in addition to other factors So there is a bit of an increase in congestion-related costs. And then in addition to those factors, the extended impact on the expense side of our business related to the polar vortex and other delayed plant openings all contribute to our revised guidance here in operating ratio for the full year. And Mike Upchurch will provide more color regarding the path to our 2022 guidance in a few minutes. Earnings per share, we have made a slight revision to our guidance there for the full year at approximately $9 a share in 2021 versus in the prior two quarters, our guidance was greater than $9 a share. So a slight revision to that guidance. And then beyond that, our longer-term EPS guidance as well as our capital expenditure and free cash flow guidance remains unchanged from the previous two quarters. Moving on to slide 10, key operating metrics. Wish this chart had a little more green on it, but again, there's some explanations that go behind the numbers. Looking at train velocity and terminal dwell, those numbers are considerably below and worse than a year ago for the second quarter, but remember what had happened a year ago with the rapid downturn in business volumes during the second quarter of 2020. A good way to think of that is There weren't many cars on the freeway at this time last year, so our speed and our dwell were at very high levels. This year, our volumes recovered, and we had other issues to deal with, including some of the weather-related issues and the regulatory developments in refined products that I mentioned a couple of minutes ago. So our network was much busier. And these statistics reflect a combination of those factors in the second quarter of 2020. I'll draw your attention to the four boxes in yellow at the bottom of this page that are highlighted. And these are some of the things that we have done intentionally to support the service recovery as well as the increase in volume and outlook that we have for the rest of the year. We have proactively brought additional power online leading to a 39% increase in active locomotives. We have also proactively added crew starts and hired additional crews in the transportation and mechanical areas leading to the year-over-year headcount increases that you see on this slide. Again, all of this is to support our service recovery. and to be prepared for volume growth we see for the rest of the year and beyond. And then finally on slide 11, you can see the impact that some of those moves have resulted in, in terms of the additional resources and other initiatives and the impact they're having on our most recent velocity and dwell trends, which are very encouraging. I called out a number of things on this slide, including the Monterey team engagement effort and the Sanchez team engagement effort. I would encourage someone to ask a question of John Orr later about what's behind that and some of the things that we are doing and John and his team are doing to really heighten the focus and accountability on our performance measures. A lot of those are built around infrastructure and aligning processes, org structures, and resources for a more precise service delivery product. So with that, I will turn the presentation over to Mike Upchurch.