Weather Dampened Genesee & Wyoming's Q1 Results

Severe winter weather and flooding hit much of the U.S. Midwest and Canada during the first quarter, which impacted rail shipments, and caused Genesee & Wyoming's (GWR) results for the period to come in below its expectations. The railroad operator, however, expects to recover some of those lost volumes in the coming months, which will put it back on track to achieve its full-year forecast.

Genesee & Wyoming results: The raw numbers

Data source: Genesee & Wyoming.

What happened this quarter? 

Multiple headwinds impacted the multinational railroad operator in Q1:

• Revenue from Genesee & Wyoming's North American operations increased 2.1% from last year's first quarter to $332.4 million due to higher freight and freight-related revenues. Sales growth would have been an even better 4.2% if it wasn't for foreign exchange fluctuations relative to the Canadian dollar, and the expiration of some rail leases in that country at the end of last year.
• Adjusted North American operating income, however, slumped 4.2% due to the negative impact of severe winter weather in the U.S. and Canada, including flooding in the Midwest.
• The company's joint venture in Australia hauled in $65.1 million of revenue, down 13% year over year, due to foreign exchange fluctuations and a drought in the country that diminished agricultural product shipments. Those factors caused adjusted operating income to decline by 11.9%.
• Revenue from the U.K./Europe segment decreased 7.8% to $160.4 million, due to foreign exchange fluctuations and the sale of ERS Railways last June. Factoring out those two items,  the region's revenue would have been up 8.1% year over year due to increases in U.K. intermodal freight-related and freight revenues. The segment posted $3.4 million of adjusted operating income, which was an improvement from the year-ago adjusted loss of $200,000.
• Earnings soared on a per-share basis due to Genesee & Wyoming's stock repurchase program, which reduced shares outstanding by 9.2% year over year. Earnings would have been even higher if it wasn't for the negative impact from the weather in North America, which shaved $0.09 per share off the total.

Image source: Getty Images.

What management had to say 

In the first quarter of 2019, our adjusted diluted EPS increased over 11%, despite severe winter weather and flooding in North America that impeded shipments from connecting Class I railroads to our Midwest and Canada regions. These weather impacts resulted in a $0.09, or 10%, reduction in diluted EPS compared with our first quarter guidance. -- CEO Jack Hellmann

Not only did Genesee & Wyoming battle the weather in North America, it also experienced drought-related issues in Australia. On top of that, foreign exchange shifts negatively impacted its results in Canada, the U.K./Europe, and Australia. Finally, the company went up against tougher comparable results in Canada (where some leases expired during the fourth quarter) and in U.K./Europe (where it sold a business last year). It was largely able to overcome these issues thanks to the overall strength of the rail market, and by initiating expense-reduction programs in all of its regions during the quarter.

Looking forward 

"We expect to recover a portion of the winter-affected traffic in the coming months," said Hellman. Because of that, he continued, the company's "outlook for North American rail shipments remains positive, and our 2019 annual guidance remains unchanged" meaning that it still "expects double-digit adjusted diluted EPS growth in 2019."

Genesee & Wyoming is also reportedly exploring a sale of either the entire company or minority stake. It's working with a financial advisor and has held early stage talks with several potential investors, including Brookfield Asset Management. Brookfield's infrastructure arm, Brookfield Infrastructure Partners, currently operates railways in Australia and Brazil, making it a logical bidder. It's unclear what Genesee & Wyoming might do since it has a range of potential outcomes, including continuing its current strategy.