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July 2011
— by Pat Foran, Editor
For some time now, the folks at Ferrocarril Mexicano S.A. de C.V. (Ferromex) have been proud — eager, even — to talk about the progress the railroad has made since its 1998 inception. A mid-May visit with Chief Executive Officer Rogelio Vélez and Chief Operations Officer Lorenzo Reyes Retana at Ferromex headquarters in Mexico City proved to be no exception. In 2010, Ferromex recorded record revenue of $1.1 billion, a 15 percent increase vs. 2009's total. Currency appreciation had a little something to do with the boost, Vélez acknowledges, but the railroad also hauled a lot more freight last year. Ferromex originated 490,890 carloads, or 18.7 percent more than 2009's tally — the largest percentage origination increase among North America's nine Class Is, according to Association of American Railroads (AAR) data.
"We had excellent results in grain, which is by far our most important commodity," he says. "Automotive, metals, intermodal, we had very good results for all — between 14 percent and 27 percent increases. We had a fantastic year."
And it'll be a tough one to follow. But the railroad will post revenue growth — to $1.3 billion — this year, Ferromex number-crunchers were predicting at the end of June.
"To improve at all upon last year's numbers would be good," Vélez says.
Just how good they'll look at year's end will depend in part on how well Ferromex copes with a disastrous grain crop in northwest Mexico, which is just now beginning to show up in the carload counts. Another wild card: whatever aftershocks there might be in the automotive market following the March earthquakes in Japan. And Ferromex execs are hoping the Mexican government can provide some help with increasingly nettlesome problems with property and cargo security.
Improvement, though, isn't just about year-over-year revenue and traffic gains. It's about landing new business and meeting customer expectations. It's about improving efficiencies, and identifying and investing in growth opportunities. It's about getting better, period. And Ferromex — which has been gradually expanding its customer base, investing heavily in locomotive power and infrastructure, and preparing (likely) to merge at long last with Ferrosur S.A. de C.V. — is on the continuous improvement track, Messrs. Vélez and Reyes Retana say.
Hence their eagerness to talk.
"We like where we are," Vélez says.
Vélez and Reyes Retana have been helping Ferromex get there pretty much since the railroad's inception.
After spending 23 years in consumer-products marketing, Vélez joined Ferromex in 2000 as vice president of sales and marketing; he was named CEO in 2008. An attentive listener, Vélez has a keen interest in the world and how it works (or doesn't); the interconnectedness that is rail, then, appears to suit him. Reyes Retana, who's been with Ferromex and its government-owned predecessor since the late 1980s, commands respect because he gives it. Says a colleague: "Lorenzo is all about integrity."
Both Vélez and Reyes Retana are candid, at times brutally so, when describing the Ferromex journey. In conversation, a "We are still learning" sentiment surfaces earnestly and often.
Last year provided plenty of learning opportunities.
"It's true the commercial side of the story was impressive, but operationally, it was a very difficult year," Reyes Retana says. "The growth was more than we projected, and we ran into problems with customers. And then in July, we had the trouble with Alex."
That would be Hurricane Alex, which hit Ferromex and Kansas City Southern de México S.A. de C.V. (KCSM) hard, causing severe damage along Mexico's Gulf Coast and the Rio Grande Valley. To help keep rail traffic moving, KCSM worked with Ferromex and Union Pacific Railroad (which owns 26 percent of Ferromex) to reroute trains over the Brownsville/Matamoros and Eagle Pass crossings. Meanwhile, the business kept coming.
"We started having problems with line capacity. Line speed went down significantly, so the service deteriorated," Reyes Retana says. "Our customers were very angry at us — rightfully."
Breakfast meetings with customers helped, Reyes Retana says, but talking wasn't enough. Ferromex leaders leased additional locomotives from UP and BNSF Railway Co. Even more power, though, was needed, so Vélez asked parent Grupo México S.A.B. de C.V. for additional capital to acquire power and upgrade infrastructure. He got it: $100 million for locomotives and $70 million for infrastructure work, including new sidings.
"The board was very supportive," Vélez says. "This was the first time we received additional capex."
In January, Ferromex ordered 44 new SD70ACe locomotives from Electro-Motive Diesel Inc. — the railroad's first new power order since 2006. Deliveries began in April and will continue through early summer.
"For some of us, [2010] was a nightmare, but in the end, we were able to handle 15.5 percent more volume than the previous year," Reyes Retana says. "We had an explosion of growth, and we handled the volume. And that was very good. But going forward, the big challenge is to keep up with the growth that we know is coming."
Part of the plan is to continue investing in motive power and infrastructure. The railroad's 2011 capex budget, which includes the aforementioned 44 locomotives, is $330 million.
"That represents 24 percent of our sales," Vélez says. "That's very high."
Ferromex also has set aside $50.8 million for infrastructure maintenance, a 17.3 percent boost from 2010's budget.
Prepping for growth also has meant picking up the hiring pace. At 2010's end, Ferromex had 7,309 employees, up 6.2 percent compared with 6,881 on the payroll at the end of the previous year. As of mid-May, the railroad's employment was at 7,446 and rising.
"We've been hiring and training lots of people — 700 additional [workers] this year alone for transportation crews," Reyes Retana says.
They'll be needed, even if traffic ramps up at less than half of last year's pace, which it was about where it was clocking in as this issue went to press. For the first 24 weeks of the year, Ferromex originated 235,376 carloads, a 3.1 increase compared with the same 2010 period, according to AAR data. In all, Ferromex handled 343,587 carloads, up 3.7 percent.
Where is the growth coming from? Automotive and related business is one driver. Ferromex moved 101,858 carloads of motor vehicles and related equipment in 2010, a 29 percent leap over 2009's total, according to AAR data. And so far this year, auto traffic is up, albeit modestly, Vélez says. That growth could rise higher than the "modest" mark: Two Japanese automakers might build plants in Mexico "in the very near future," Vélez says, declining to identify the automakers.
"I will say that there are good opportunities for growth," he adds.
Ditto for intermodal. In early June, Pacer International Inc. expanded its Mexico Direct double-stack intermodal service by adding a new service between Guadalajara, Mexico, and key U.S. and Canadian markets. Ferromex and UP provide intermodal rail service for the new offering, which operates five days per week. Meanwhile, Ferromex marketing execs have high hopes for an InterPacífico container service between Mexico City and Mexicali, which operates five or six times a week, Reyes Retana says. And then there's the traffic coming to and from the Port of Manzanillo.
"Intermodal has been and will be a big growth area for us," Vélez says.
Industrial products is another revenue driver. The segment includes beer: "A lot of Corona goes to the U.S," Vélez says. Last year, Heineken N.V. bought the beer business of Mexico's FEMSA, which produces Dos Equis, Tecate and Sol — "another opportunity," Vélez adds.
Business also has picked up in a few niche areas, including rail cars as North American lessors and railroads last year began nudging up the order needle.
"Trinity and Greenbrier [plants] are now working at full speed," Vélez says. "We're moving 1,000 rail cars a month."
Ferromex marketers also have mined successfully for new business during the past couple years. ArcelorMittal, Mexico's largest steel producer, now moves 2,000 carloads per month via Ferromex. And petroleum company Petroleos Mexicanos (Pemex) is moving about 1,000 cars of fuel oil per month.
"We have several other plans for Pemex, which is important because Pemex has not been using railroads much," Vélez says.
One railroad Pemex has used is Ferrosur, which in 2010 posted a record $265 million in revenue, an 18.6 percent increase compared with 2009's total. And Ferrosur is on track to post 2011 revenue of $313 million, Ferromex execs say.
"One of the keys for Ferrosur's success has been the shipping of diesel fuel for Pemex from Coatzacoalcos to Puebla — it's about 900 cars a month," Vélez says. "That's been going on since early 2010. That was really the first traffic we had with Pemex."
Technically, Ferromex and Ferrosur don't constitute a formal "we" — or, at least, they didn't as of late June. In 2005, the 4,407-mile Ferromex announced plans to acquire the 917-mile Ferrosur, which Mexico's Comisión Federal de Compentencia rejected on grounds that the transaction was anti-competitive. The deal then languished in the courts. But earlier this spring, the Mexican government consented to the marriage.
"Finally, they told us, 'You can merge if you want to,'" Vélez says.
Now, it's a matter of officials from Grupo México actually deciding to seal the deal. As this issue went to press, no decision had been announced.
"If we decide to merge, there will be a lot of operating efficiencies," Vélez says.
Of course, officials from both roads have been working closely together for the past several years, sharing technical expertise, among other things.
"Car availability is a big thing," Vélez says. "Ferromex acquired 775 grain hoppers from Trinity, and Ferrosur pays car hire — we interchange, if needed. This is the good thing about having the ability to merge."
Incremental traffic and revenue growth on top of 2010's record numbers, along with merger-related operating efficiencies, provide Ferromex execs with reasons to feel good about the rest of 2011. But the year isn't issue-less by any stretch. In the words of Vélez: "There are some things that have affected us."
For example, an early February freeze destroyed about 90 percent of the grain crop (corn, mostly) in northwest Mexico. Considering grain is far and away the railroad's leading revenue generator, that's a problem.
In the 2010-11 crop season, Ferromex moved 46,000 carloads. In the 2011-12 season, the railroad will move 32,000, Ferromex officials project.
"We're starting to see the effects of that," says Vélez.
Also, the impact of Japan's March earthquake and nuclear crisis will affect automotive business to at least some degree during 2011's second half, although Ferromex execs weren't sure last month just how much. Meanwhile, line speed still isn't where it needs to be.
"We have committed to faster service, which is important for the automotive companies. To compete and get this traffic, we need to provide service," Reyes Retana says. "We want to be running at 28-29 kilometers per hour — we're at 23. So there is room for improvement."
Nowhere is the need for improvement more urgent than in the security realm. As Reyes Retana puts it: "Events [i.e., thefts] against the railroad have proliferated." And thefts have proliferated "in geometric numbers," Vélez adds.
"We've seen maybe twice what we had last year, and the kind of events we are seeing are new," Vélez says. "They are stealing [telecommunications] towers, they are stealing fuel from the locomotives. When they steal fuel, traffic stops."
Meanwhile, local authorities haven't been of much help on the security front, Ferromex officials say. And under current law, railroads in Mexico cannot use security forces that carry guns.
"That makes it even more difficult to prevent crime," Reyes Retana says.
Help could be on the way in the form of tougher laws. One proposal calls for making crimes against a railroad a federal crime.
"Federal authorities have been very supportive on this, so we are hopeful," Vélez says.
Optimism always has been an undercurrent in the halls of Ferromex's headquarters, located in Mexico City's colorful Santa Fe business district, and it was certainly part of the furniture in mid-May. Challenges, Ferromex execs say, come with the rail privatization territory. They're used to attempting to meet them one challenge at a time.
In the meantime, Vélez and Reyes Retana vow to keep on pushing to identify growth opportunities, drive efficiencies and improve service. The Ferromex team, they say, will continue to get better at railroading. The path to continuous improvement is the only path they've been on, and the only one they know.
In a way, continuous improvement has become Ferromex's calling card. And that suits Ferromex execs just fine. It's always been about the journey, as Reyes Retana has told Progressive Railroading in interviews over the years.
"There is room for improvement," he says. "And we will improve."
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