Kansas City Southern First Quarter 2009 Volumes and Revenue Declines Mitigated by Comprehensive Expense Control Program

Kansas City Southern (KCS) (NYSE:KSU) reported first quarter 2009 revenues of $346.0 million compared with $450.6 million in the first quarter of 2008. Revenues were impacted by a 15% decline in volumes, the result of the weak United States, Mexico and overall global economies, as well as by a reduction of fuel surcharge revenues and a weakened Mexican peso. These three factors resulted in revenue declines in four out of five lines of business with only coal recording gains in volume and revenues.

Mitigating the negative impact of lower revenues on earnings was KCS’ comprehensive cost control program, which contributed to an overall 19.0% reduction in operating expenses. Leading the expense savings was fuel which benefited from lower diesel fuel prices, reduced consumption and greater fuel efficiency. Other expense areas also experienced substantial reductions, including casualties and insurance, 32.8% lower; compensation and benefits, 23.4% lower; purchased services, 13.1% lower; equipments costs, 11.9% lower; and, materials and other, 0.3% lower. Only depreciation and amortization expense increased 16.9% due to significant recent capital expenditures to expand capacity.

Operating income for the first quarter of 2009 was $48.5 million, compared with $83.4 million in 2008. The first quarter operating ratio was 86.0%, compared with 81.5% in the first quarter of 2008.

KCS recorded a net loss of $7.5 million, or ($0.08) per diluted share for the first quarter of 2009, compared with net income of $32.9 million, or $0.39 per share in the first quarter of 2008. The first quarter of 2009 includes the negative impact of $5.9 million, or ($0.04) per share, from debt retirement costs and $5.1 million, or ($0.04) per share, in foreign exchange loss associated with the weakened Mexican peso. Additionally, the diluted earnings per share calculation for the first quarter of 2009 does not assume the conversion of preferred stock or stock options into common shares, as those assumed conversions would be anti-dilutive. These assumed conversions were dilutive during 2008. This results in an incremental ($0.06) loss per diluted share, primarily due to preferred stock dividends being included in the diluted earnings per share calculation.

Comments from the Chairman

"With overall volume down 15%, KCS operating costs, excluding depreciation, were down 23%, yet operating performance metrics and customer service achieved all-time highs,” stated Michael R. Haverty, Chairman and CEO of Kansas City Southern.

"Four factors – foreign exchange losses, debt retirement costs, the impact of preferred stock dividends, and higher depreciation resulting from significant recent capital investment – had an adverse effect on KCS EPS for the quarter. However, these factors neither diminish our positioning for a strong rebound nor affect the long term strength of our franchise.

"KCS’ U.S. traffic volumes posted only a 7% decline; on the other hand, KCSM clearly felt the full impact of the widespread manufacturing downturn with a 26% decline in volumes. It is still too early to predict a timetable for renewed economic growth in North America, but we remain confident that KCS will benefit from and contribute to the eventual economic turnaround.

"This quarter, KCS completed an important refinancing of KCSM debt under difficult capital market conditions, and has strengthened its liquidity and financial position. We have also continued to invest in the Rosenberg to Victoria line in Texas, which improves our cross border competitiveness and immediately reduces our expenses by enough to finance the investment.

"For the near term, KCS will continue to make prudent operating expense and capital cost reductions, remaining focused on its central 2009 goal of ending the year free cash flow neutral or modestly positive. At the same time, we are conscious of positioning the Company to experience a significant rebound when the economy recovers momentum.”

This press release may include statements concerning potential future events involving KCS and its subsidiaries, which could materially differ from the events that actually occur. The differences could be caused by a number of factors including those factors identified in the "Risk Factors" and the "Cautionary Information" sections of KCS' Form 10-K for the most recently ended fiscal year, filed by KCS with the Securities and Exchange Commission (SEC) (Commission file no. 1-04717). KCS will not update any forward-looking statements in this press release to reflect future events or developments.