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Kansas City Southern (NYSE:KSU)

February 20, 2013 1:20 pm ET

Executives

William H. Galligan - Vice President of Investor Relations

Analysts

Brandon R. Oglenski - Barclays Capital, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Well, good afternoon, everyone. Welcome to the afternoon sessions here at Barclay's ISC. I'm happy to introduce with us today, Bill Galligan, who's the Head of Investor Relations for Kansas City Southern. As some of you heard earlier, we haven't traditionally had railroads participate in this conference, so I'm excited that Bill -- have Bill be the second presentation at this long-running event. Also joining us is Ashley Thorne, with Bill's team. Bill's been with KSU now since, I believe, 1992, is that correct?

William H. Galligan

Correct.

Brandon R. Oglenski - Barclays Capital, Research Division

He's seen a lot of change and obviously a lot of expansions south of the border, which I'm sure a lot of the folks in this room are going to be focused on. I'm sure we'll get into the details there. But just to give some folks some context, I mean their stock has been a real home run since the recession. We were at about $12 in 2009. Today, we're close to $100. That's some pretty good equity performance by any measure. And EPS has been up 400% in that time frame. Operating earnings up 150%. And I can go on and on, on positive developments in that time period.

So, Bill, I just wanted to introduce you and the company and give you a couple minutes here. But obviously, you guys have done pretty well. I'd like to hear what the future holds for the company.

William H. Galligan

Okay. Well, thank you, Brandon. And thank you for the invitation to join you today. We're happy to be here. As probably a lot of you do know, even if you don't follow the company that closely, we've had a great run, mostly from 2005 on, excluding the recession, when we actually took 100% ownership of the Mexican franchise and really have been able to find the synergies between the 2 companies. It's been very, very successful. I almost -- you know, being Head of IR, actually any of us working at KCS who have to meet with investors and the media, and stuff like that, it's been kind of a dream scenario over the last few years because of all of the growth opportunities.

The funny thing is, we almost feel like used car salesmen when you, at this point, say, "But the best is ahead." We've had this outstanding growth, many times, double-digit revenue growth at various years. But when we look ahead at 2013, well we're there now, we've told people it's kind of a bridge year to 2014 and 2015. Well our bridge year we've kind of quantified in terms of forecasts like -- for mid single-digit volume growth, high single-digit revenue growth, mid single-digit pricing. And we're very comfortable with those numbers, by the way, and if the economy cooperates and nature cooperates, we have a good harvest this year in the Midwest, there's even some upside potential. But the real excitement is really of looking ahead to next year where we get the benefits for a number of auto plant openings in Mexico in 2014, and the continuing change of the dynamics of the energy market in North America which really has some very favorable attributes for us. So we're really happy about the growth opportunities. We're continuing to improve the -- our operations. There are people here, like I see, again [indiscernible] who knew the company many years ago when we were -- our operations were nowhere near as efficient and productive as they are today. Well we're still making improvements with that. So we have -- as we grow our revenues, we're also becoming more productive in terms of the way we run our business.

We've made tremendous strides a few years ago, we're a $2 billion -- we had $2 billion of debt. We're down to about $1.6 billion right now, we're pretty much where we want to be. We've taken about $175 million of interest rate -- interest expense off the books in the last few years. We expect to continually -- to do that over the next 12 to 24 months. And so overall, we see a very, very good next 5 to 7 years.

Take it away, Brandon.

Brandon R. Oglenski - Barclays Capital, Research Division

Well -- and with that I'd like to set the stage with this Audience Response System that we have. So if we can just queue up the first question here, I think it's good to get a sense for where ownership is in the room and obviously by itself. If we can quickly ask you to vote on this first question here, just -- do you currently own the stock? I think everyone knows the options here overweight, equalweight, underweight or not involved.

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

All right. So we have a lot of folks here that aren't involved in the Kansas City story. So I think, that's a pretty interesting way to discuss some of the opportunities ahead of -- for you guys. Well, can we also just queue up the second question, please? This is a -- without a lot of people involved here, I don't know if there's going to be a lot of response to this question. But what's your general bias towards KSU right now? Is it positive, negative, or neutral?

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

Pretty positive outlook here. And if we can ask to do the third question here because I think it will really help us with our conversation. But this is talking about through cycle EPS growth for KSU and for some of the donors at the end of the [ph] story maybe it's a little bit harder to have a view here. But for those that do, do you feel that KSU is going to grow above peers, in line with peers or below peers?

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

All right. Well we have a pretty bullish crowd here. I'm going to try to keep this open at the right time. Definitely, let's get some audience participation with questions for Bill. But I'm going to jump right into it.

Question-and-Answer Session

Brandon R. Oglenski - Barclays Capital, Research Division

My guess is a lot of the favorable view here is going to be driven by your Mexico opportunity. Can you talk a little bit about how that story has developed in the last 5 years, the amount of volume growth you're getting out of it and the efficiency potential that you're seeing there as well?

William H. Galligan

Absolutely, Brandon. First of all, we have been involved in Mexico since 1997. I was actually in Mexico at the time when we had the opportunity to bid on, with a Mexican partner on the concession. There was -- Mexico decided to privatize their rail system. And they essentially created 3 railroads. And we bid, with our partner, on kind of the crown jewel. And that went from Laredo, Texas, which is the main freight gateway between the U.S. and Mexico, went down through the manufacturing spine of Mexico, San Luis Potosi, Monterrey, Saltillo to Mexico City area. And then there was a branch line that went out to the Port of Lázaro Cárdenas. At the time, a U.S. company could not be a majority owner. So we had 49% ownership and our partner had 51%. It was an immediate financial success for us. However, operationally, it became clear that to really hit at full potential, it had to have one railroad, one owner, and the best owner would be the railroad company, KCS in this case. So in 2005, we bought out our partner and became 100% owner of the railroad. Since then, what has happened is that we've been able to create which is the only single-line railroad service between the U.S. and Mexico. Now Union Pacific still has a huge amount of business that they do. Mexico is very important to them. But they -- most of the business that they do with Mexico is related to us. If it's going northbound, we bring it hands off to them at Laredo and then they take it to other destinations. If it's going southbound, same thing. They hand it off to us at Laredo. And so that's still a big part of the business. However, what we have too, is anything going to the East Coast of the United States, or really to the central core, can stay on our railroad, but I tell you, it's going northbound, from Central Mexico, we can take it to destinations in the east, hand it off to another railroad to take it to New York City, Atlanta, Columbus, Ohio, Chicago. And really, there's -- no other railroad can do it with just either nonstop, we can -- if hit that market like Houston, we can do it alone, or with just one other railroad. So we can touch every location in North America from Mexico with one interchange. And there's no one else who can do that. And so, what's very significant about this is the near-sourcing phenomena that has been occurring over the last few years. We see -- the first amount of business is really when we start seeing appliance manufacturers. Companies like Samsung would close their North Korean -- or South Korean, sorry, South Korean manufacturing for large, like washing machines and dryers and stuff like that, move to Mexico build them there, put them on our line. We saw the same thing with LG and even GE moved back from Asia. You even have -- like Maytag, who bought Maytag, I forgot. It was one of the big -- whatever. Maytag really moving most of their business back into the United States and Mexico and putting it on our line over the last few years.

So that was the first wave. The second wave has been Automotive. Most of the Japanese or the Asian manufacturers are realizing, are pretty open about it, that they can no longer can sell their smaller-version cars in the United States and make any money. So they are moving, as fast as they can to build facilities in Mexico. In 2014, what we're going to see is Mazda, Honda, and Nissan open up major facilities. We've started -- they've started to place the orders with us and give us corridors and stuff like that. And it's clear that we're going to have the majority of the production we'll be moving on our lines to various locations, both in the United States and to other -- to port facilities to get to Canada and the western part of the United States. So that's growing. They're bringing 21 of their top-tier manufacturing facilities with them like tires, transmissions, glass for windows and everything. Everything we're moving. So what's happening is you have this tremendous growth of the Automotive industry. We grew at 25% last year. We're growing currently at 20%. We see an uptick to this in 2014 when these plants go online. This is all good business for us. But one of the most exciting things to talk about Mexico, and then we can go on to something else, is cross-border Intermodal. In the transportation industry, nothing is a more exciting growth opportunity than Intermodal movement. And we offer the only cross-border Intermodal product that there is. We started offering this in 2010. Last year, our volumes grew at 88%, and we only feel that we are now touching about 2% of the addressable market. So to try to give you an idea of what that size could be, UP and BN own about 40% of the market, of moving containers from L.A. to Chicago. The cross-border Intermodal market is about the same distance and we feel that there's nothing in the way for us to grow the business to 35% or 40%. Now it will take many, many years to get to that number but you're going to see very, very high double-digit growth in that business for certainly the next decade and probably beyond that. So that's just a few of the things going on in Mexico that is very attractive.

Brandon R. Oglenski - Barclays Capital, Research Division

Well I just want to reach out to the audience because I'm sure there's going to be some questions on the Mexico business. We'll see if there's any here. We'll get the mic upfront. But while we're waiting here, I mean what are some of the initiatives that you're putting in place to really build out the Intermodal network? It's my understanding that you didn't even really broadly offered this product until about 1 year or 2 years ago, enrolling the early stages of cross-border Intermodal.

William H. Galligan

And that's a frequently asked question saying, "Okay. You've owned this, you've been in Mexico since 1997. You've owned it since 2005. What were you doing before then?" The fact is that we didn't have, either in the U.S. or Mexico, the kind of infrastructure necessary to really convert from truck to rail. And that mean we needed modern Intermodal facilities. So we built -- we purchased and upgraded 3 in Mexico, we built one outside of Houston. And that's really -- and those were not done until the end of 2009. And that's really, the number one thing that we did to spur growth. The number two thing, there are 2 models in the Intermodal world. Roughly speaking, there's the Union Pacific model and the other one is the BNSF model. Union Pacific -- and they're both good, they're just different. Union Pacific owns the assets, they -- they have most of the containers themselves. BN works with the asset players like J.B. Hunt, Swift, Schneider. They'll put other trucking companies on their railroad. We've adopted the BNSF model for a number of reasons. So we have those 3 very good partners, Swift, Schneider and Hunt, all of which say they want to double their business in 2013 and beyond on our Intermodal corridor. And so those are the kind of the 2 things that we have done. They really bring the customers to us. They bring the business to us. We're kind of the wholesaler of the business. We provide the transportation services. It seems to be working very well and our partnership with those 3 are very good. Oh, and the third thing we're coming to is closer partnerships with the other railroads. Because I mentioned, for instance, Columbus, Ohio use that as an example. Well, we may go to a company like Swift and said -- who might come to us and say, "Look, we need a hot service from Central Mexico to Columbus, Ohio." Well then we'll go to other railroads and say, "Hey, we have to make this work in 6 days transit." And so, we design it with an NS or a CSX that we can do that. And so, the third part of the whole thing is working with other railroads. And that's an ongoing process but we've really made great strides in that in the last few years.

Brandon R. Oglenski - Barclays Capital, Research Division

I think, we have a question over here.

Unknown Analyst

Do you have a sense for what percentage of cross-border freight is Intermodal compatible and what percentage of cross-border freight is currently going Intermodal?

William H. Galligan

Yes. Well right now the great majority of our movement of freight across border is not Intermodal. About -- normally, about 25% of our total revenues, about 20% to 22% of our volumes, we classified as cross-border. By the way, cross border for us, I got to remind you that cross border for us is that we handle it on both sides of the border. We do not count anything that we hand off to, let's say UP as cross border. It is obviously in your eyes. But in our eyes it's what we handle on both sides. Really, Intermodal at this point is well under -- probably under 5% of that 25%. The biggest single commodity we move cross border is grain. We can get to that in a bit because it's a great opportunity in 2013 after the drought and everything. But that is the biggest. Then chemicals, steel are also major. Over time though, there's no question that Intermodal will represent the largest production. I would say that we probably target, and this is over a long -- probably over the next 10 years, they'll probably will be closing in on 40%, 45% of our total revenues, will be on both sides of the border and the majority probably will be Intermodal at some point, some point.

Unknown Analyst

[indiscernible] compatible?

William H. Galligan

Yes. It's a very good question. We have sized the market at 2.9 million truck loads a year go across the border at Laredo. That's our target. Realistically, of that 2.9 million, probably about 2.5 million really what is a possible number. So when I say that we have -- when I say we have 2% of the market, we have 2 point percent of that 2.9 million and we really feel that we could get up to 25% to 35% of that over probably in the next 10, 15 years.

Brandon R. Oglenski - Barclays Capital, Research Division

Anything else from the audience at this point? I wanted to come back to the Automotive story. There's a lot of plants there forecast to come online. And you're growing auto volumes at a very fast pace today. Should we be thinking that there's even more upside from that growth rate?

William H. Galligan

There is. There's a few other things happening. Number one, the way Mexico set up the concession operations is that we've got our line but we can't build in to anybody else's line, by law. To some extent that's regional monopolies. There is some cross -- there is some trackage rights like there is in the United States. But they're kind of regional monopolies. We are not allowed to build in to, let's say, a port facility that we weren't granted access to by the concession. However, the concession did not say that the port can't build out to us. And we have good service, our loss and damage in Mexico is 0.02% of everything we move which is similar to what it is in the United States. Our on-time performance is quite good and the auto manufacturers have taken note of that. We also have the best cars. We've invested heavily in kind of the most popular car for moving small autos. It's called the AutoMax. I'll give you an idea, you can move things on a Bi-level and get above 10 cars. A Tri-level, you can get about 15 cars. On the AutoMax, you can get 26 to 28 cars. And so the smaller -- especially Honda, just loves these and so does Mazda, of -- the AutoMax. So we've invested heavily in those cars. That's helping us get a disproportionate amount of the market share. Well, also the port of Veracruz, which is an east -- Eastern Mexico port, has taken note of that. And presently, about 750,000 cars are exported out of Veracruz every year. We move a small handful. I mean, a de minimis amount of cars because, Veracruz, we don't have access to that port right now but they are building out to us because they want KCS to be able to have access to the port. They say that they'll be done in 2013. They're very close to being done with that build out. That'll give us access we haven't exactly gotten into, bids of what we can get in terms of market share there. But that's a whole new auto opportunity right now that's been closed to us. That's already there. That is kind of ripe for the picking to a certain extent. On top of that, our -- we're meeting next week in Germany with BMW. They will be building in Mexico. And the word on the street in Tokyo that there'll be some other announcements of Asian manufacturing going there really soon. So this kind of movement of autos has long legs of growth. This will go on for many, many years.

Brandon R. Oglenski - Barclays Capital, Research Division

Okay. I want to touch on the grain business as well that you mentioned a little bit earlier. You have some pretty interesting customers that you've just signed up. And you do move a lot of transborder grain traffic. Can you talk a little bit more about that opportunity for the company?

William H. Galligan

Right. One of the interesting things, and this is just by the luck of geography, one of the greatest origin points of corn is really the upper Midwest and just north of Kansas City, in that region, Illinois, Minneapolis, Iowa, all that stuff. That's where -- those are the origin points for corn that we do -- we move. We have 2 distinct services for grain. We service 30 poultry producers in the southern part of the United States. And those chickens eat everyday and they don't retire and move to the sunshine states. I mean, they're there for their 6 week[indiscernible] [ph]. And so it's a good core business we have there. But the real exciting part of the business is that Mexico cannot supply the corn themselves to their huge population. And so a tremendous and growing business to move corn from Kansas City down to Central Mexico. To the point, one of the businesses, a matter of fact, our largest customer is a grain customer, our partner that we do business with. Last year, they signed the fourth largest export grain deal in the history of the United States. And it's all moving corn on Kansas City Southern from Kansas City to Central Mexico. And that's on top of an already flourishing business to various facilities there. The problem for us this year is the U.S. suffered one of the worst droughts in its history. So essentially, we have the customers, we don't have the product right now. So our grain numbers, if you look, and it's published every week, our grain numbers for the first quarter are down about 35%. The good news, hopefully, is that we have a good spring and a good summer and they are -- the plants -- our USDA said there's going to be a record planting to make up for this huge shortfall we have right now in inventories. And if we have any kind of harvest at all, we will have -- you'll see record numbers of grain movements. So kind of what that means for us, we're being told to be prepared to move -- what we do is run shuttle trains continuously on our network that will run up to 50 or more shuttle trains in the fourth quarter between Kansas City and Mexico. Hopefully that will happen. There -- again, it's somewhat out of our control what the weather does, but I think there is a pretty good likelihood that we'll have a record crop -- or a good crop and a record movement of grain this year. And so that's very good business for us.

Yes? The question -- I think you're on.

Unknown Analyst

I was wondering if you could comment briefly on shale-related business as well, please.

William H. Galligan

Absolutely. This is a really exciting time for us right now. With the new frac-ing deposit and the new interest to become energy sufficient in the United States has opened up a whole new huge line of business. Now the reason that Kansas City Southern can play and be a fairly substantial player in this market is one of our key operation areas is into Port Arthur, Texas, the Gulf region of Texas. In this area, 6 of the largest 50 refiners in the world are located on our line there. And there's a -- right now, there's a demand for over 1 million barrels of crude oil a day in Port Arthur alone. And that's largely heavy crude. They're demand is for the heavy crude. They also take the Bakken light crude to mix with the heavy. But -- so over the last couple of years, our crude business has grown. Today our revenues grew off a small base in the fourth quarter at 785%. So you're in this silly number kind of period because we're building off a small base. Of the 100% of the crude that we move, 40% is from the Bakken, 40% basically is from Western Canada, 20% is from West Texas. This is significant because if we were here 6 months ago, those percentages would have been vastly different. It would have been much more from the Bakken. Our belief is, and I think a lot of research is suggesting, that the Bakken to the Gulf, over the next few years, will stabilize and start to decrease because of pipelines. And that's kind of our view, especially for our business. However, the -- also the belief is that it's going to see tremendous crude by rail growth out of Western Canada with Canadian Pacific and Canadian National. And we're seeing that right now. We're seeing it -- again, our volumes are growing in multiple hundreds in the first quarter and should be continued to be strong throughout the year. But another thing that is going to ramp up probably, we're in very serious negotiations with a third-party that is interested to build a crude facility on our property in Port Arthur, Texas. And this will be a mixed use facility. It could take heavy crude from Western Canada, it can take Bakken or a lighter crude, it can take refined products, can even take ethanol products. But this is a company that already has a network in the United States, both in the East Coast and the West Coast, and they wanted a Gulf facility too. We're-- we kind of fit perfectly into the plans because our facility, our land, is right on the Gulf of Mexico. Probably the largest plot of land still undeveloped on the port of -- in the middle of all these refineries, they're pipelines already running through it. There's rail access into it. It's a perfect facility. If this facility is built, and I would say there's a pretty good likelihood that's going to happen, and probably sooner rather than later, that would take multiple unit trains a day of product. And that would be kind of a game changer again for Kansas City Southern in terms of its whole business profile. And it's theoretically possible, you'd start seeing that kind of huge growth in unit trains in 2014, it all depends on when we can finalize the deal. So one way or another, it's going to grow substantially. We think there's a good chance that there is going to be a lot of growth in this facility. And then looking -- talking about the whole frac-ing, the whole drilling, what's going on, we also -- I mean we moved frac sand not only to the wet wells, the oil but also the natural gas. And we and -- are going to benefit from all the natural gas growth in the United States. So right now, there have been 7 cracker plants, ethylene, polyethylene plants cited in this Port Arthur region -- Gulf region. All these plants want to be dual serve in this region, it's largely Kansas City Southern and Union Pacific, and they like to be near water too, which we are. So even when the crude business starts to level off when most of the growth -- the curve starts to level off, then you'll see the growth through this natural gas feedstock to other chemical products coming up. That's where we're going to be for Kansas City Southern, looking out 2016, 2017. But what's nicer than everyone is it kind of gives a long upward projection for our growth in that whole business, so we're very excited about that. And one final thing that people often say, "Won't even the pipe lines cut into your western crude business?" Well from what I'm reading, first of all, the earliest possible time the Keystone, which would be the one that would affect the western part, is 2015 and that's the most optimistic projection. But even the pipeline companies have grudgingly said, "Rail is kind of here to stay." Reason is that we have the luxury of having the infrastructure there. So Kansas City Southern really doesn't have to put a lot of infrastructure, a lot of money, a lot of capital into this. Obviously, we'd have to buy more locomotives but then, I've been going over the growth of Automotive, Intermodal, everything else, we need locomotives anyway, so they're pretty fungible. The track structure is, by and large, there. So we don't need a 15- to 20-year commitment, as what the pipeline ask for when they're building the pipeline. And so, a lot of the refiners are liking the idea that they can either do a spot deal with rail or 3 years, maximum 5 years, so they have a little bit -- they wanted to hedge their bet somewhere -- somewhat. So I think that you're going to see crude by rail for quite a long time.

Brandon R. Oglenski - Barclays Capital, Research Division

We'll probably take another question from the audience in just a minute, but I want to move the conversation along. I think a big part of the upside to the story has been the incremental margins that you've driven with the growth over the last couple of years. Now obviously, you called last year and this year a bridge year, but last year's results looked pretty good. And now if that classifies as a bridge year, I can't wait to see what you guys have for 2014. But what -- a few challenges this year, what type of incremental margins can we be expecting in this? If there are more efficiency to be gained in the Mexico franchise?

William H. Galligan

There are. Right now, just on our overall margins in the rail business, for those who don't follow rails. We called operating ratio which is really inverse of margins, so we're at about a 30% margin. I think we ended at 69.9% operating ratio, above 30%. While we don't give exact targets, we have been saying that we can easily take 1 point, 1.5 points off a year and we've been kind of doing better than that. But as you go get better, of course it gets tougher. We believe that ultimately we can be one of the top 2 or 3 in the industry in terms of operating ratio. The main driver for that is basically Mexico. Our operating costs in Mexico are considerably less than they are in the United States. When you blend together the 2 we can be one of the best in terms of margin. Beyond that, we've been enjoying incremental margins of basically over 60%, almost 70% a lot in 2012. And without wanting to guide that high, in 2013 they should be pretty substantial because, okay, we had 88% volume growth in our Intermodal trains in 2012. Right now, probably, growth will be anywhere from 65% to 90%, in that range, roughly for the year. Those trains are only about half full which means that every car we put on has about 95% incremental margin to it and it's really helping our business in terms of margin. And I think we're in -- you're going to see a very healthy incremental margin scenario in 2013. Now, at various times, and this is a good thing, we'll have to add trains, we'll have to add new trains, probably more in terms of Intermodal in 2014 rather than 2013. But when you start up enough new trains, that cuts into your margin somewhat, but then you start building again. Again in the fourth quarter, we're going to have to add upwards the 35, 40 new trains for the grain business, and the crude business is growing. And so incrementals, it could kind of eat into that. But overall, our margin should continue to improve over the next few years fairly substantially.

Brandon R. Oglenski - Barclays Capital, Research Division

Well and I think with that, maybe if we can go to the fourth question here in the ARS system. And as you've improved your profitability, obviously cash flows become a lot more abundant than it has in the past. You've obviously de-levered quite a bit. And maybe if we can think longer-term about this question before the audience, but for everyone here, in everyone's opinion, what should Kansas City Southern really focus on with the excess cash. I'm not sure, the first 2 responses here are about bolt on M&A or a larger M&A make a lot of sense. But as your cash profile continues to improve, with this audience, is it share repurchases, dividends, debt pay-down, or continued investment in the network? If we can go ahead and poll the audience now.

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

So it looks like a pretty resounding statement here about dividends. We've heard this from other companies as well. What is Kansas City Southern's priorities on free cash flow going forward, between the...

William H. Galligan

Yes. Well it really is 2 things and kind of in line with what the audience has said. We instituted a dividend last year, we upped it a little this year and it all depends on how successfully we are from year-to-year, but the plan is to continually increase it to some extent, every year, if we can. But we want to be known as a growth company. We are a growth company. We -- I mean there's no reason why we shouldn't have double-digit revenue growth in 2014 and beyond, for some time. But to do that, we have to invest in our system. This year, we'll be spending 21% of our revenues on capital spending and I think you can see that kind of number going forward. So it's reinvest in our growth and dividends are probably our top 2 things.

Brandon R. Oglenski - Barclays Capital, Research Division

Just want to go to the audience real quick if there's any questions. Along those lines then, the returns have obviously gotten better too. How far do you think this industry can go in terms of increasing returns before we really start to invite the regulators for a larger discussion?

William H. Galligan

I actually think we have quite a long ways that we can go. I think the rail industry -- when it comes down to it, and I've seen this throughout my career a few times, at various times there's some saber rattling. You're not seeing very much right now, there's something going on with the STB, but it's not really that big a thing right now. But you've got to remember this, in the United States, we have a crumbling highway infrastructure, bridge infrastructure. Really for the -- probably the first part time -- definitely the first time in our history, there are more environmental concerns, the carbon footprint has become a really major thing. And so, ultimately, while some people say, "Rails, they keep on getting 4%, 5% pricing year after year after year, when it comes down to it, they also realize that the rails pay their own freight, to coin a term. That we get no subsidies. We fund ourselves, our own advancement. So when it comes down, policy makers suddenly realize do we really want to penalize the one transportation mode that is really thriving and paying for itself and is not a drag on government spending. So I really think that the rails, as long as we don't gouge, and I don't think that's really happening too often, I think, we're pretty clear for a long time. And by the way, people ask in Mexico, we have probably have a better regulatory atmosphere, better pro-business atmosphere in Mexico than in the United States.

Brandon R. Oglenski - Barclays Capital, Research Division

Well I think we only have a couple minutes here and I definitely wanted to get to the last 2 questions in our response system. And number five here, if we can queue that up, this is obviously considering valuation. Now KSU is one of the more expensive stocks depending upon how you look at it within the railroad universe, but obviously with a pretty bright outlook. So in everyone's opinion here, right now KSU is trading in the higher band. But long-term, where do we see the stock trading? I doubt we're going to get many responses, less than 10, I hope. I believe we have 10 to 12, 13 to 15, which is traditionally where a lot of rails have traded in the past, about 16 to 18, and 19 to 21 times. I know it's a question about 2013 but I think in terms of KSU the question is over the long run when some of this growth normalizes, where is this company going to trade? So I think, if we can poll the audience now.

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

16 to 18. That's pretty encouraging I think, over a long-term.

William H. Galligan

Over the long term, yes.

Brandon R. Oglenski - Barclays Capital, Research Division

And probably talking about some of the continuing drivers of that Mexico trade story.

William H. Galligan

Yes, that's great.

Brandon R. Oglenski - Barclays Capital, Research Division

Lastly, I just wanted to ask our sixth question here which is the most significant investment issue for Kansas City Southern. Is it core growth, is it margin performance, capital deployment or execution of strategy? If we can go ahead and...

[Voting]

Brandon R. Oglenski - Barclays Capital, Research Division

Pretty evenly divided here between core growth and capital deployment and the execution of strategy and on the opportunities here.

William H. Galligan

Right. That makes sense.

Brandon R. Oglenski - Barclays Capital, Research Division

Well, Bill, I'm going to leave it to you to close but again I appreciate you coming to the ISC here. It sounds like a continuation of the story. I can't wait to see what you guys have in 2014.

William H. Galligan

Thanks. Again, thanks for having us. I -- just continue to follow us. It's always an interesting story. People always enjoy following our story because it changes, and it changes for the better every few months actually. We get new opportunities and look forward to the future. So thank you, everybody.

Brandon R. Oglenski - Barclays Capital, Research Division

All right. Thank you.

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Source: Kansas City Southern Presents at Barclays Industrial Select Conference, Feb-20-2013 01:20 PM
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