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Genesee & Wyoming Inc. Is Off to a Solid Start in 2018

By Matthew DiLallo – May 1, 2018 at 12:00PM

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The regional rail operator expects its results to be even better in the second half of the year.

Genesee & Wyoming (GWR) delivered double-digit revenue and earnings-per-share growth in the first quarter thanks to the positive impact of acquisitions and changes to the U.S. tax law. Those factors enabled the company to more than offset hitting a speed bump in its North American rail operations, which caused those results to fall short of its expectations. However, the company did note that its North American business started gaining steam toward the end of the quarter, which when combined with other positives on the horizon, positions the company to deliver even better financial results in the second half of 2018.

Genesee & Wyoming results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$574.7 million

$519.1 million

10.7%

Adjusted operating income

$87.4 million

$85.1 million

2.7%

Adjusted EPS

$0.70

$0.53

32.1%

Data source: Genesee & Wyoming.

A freight train with the sun setting in the background.

Image source: Getty Images.

What happened with Genesee & Wyoming this quarter? 

Acquisitions and taxes drove results, as you can see below.

  • Revenue in North America rose 1.9% versus the year-ago period to $325.6 million thanks to a 0.7% improvement in traffic, which increased by 2,997 carloads. Roughly half of that came from new operations the company acquired, while the balance came from improving carloads of pulp and paper, lumber and forest products, and other commodities, which offset weakness in agricultural products as well as chemicals and plastics. However, the company's overall results in North America fell short of expectations due to the adverse effect of congestion on several Class I railroads that limited car supply.
  • Revenue from the Australia segment edged up 1.3% to $74.8 million, primarily caused by a positive impact from foreign exchange rates, which added $2.7 million to the top line. Traffic in the country declined because of lower carloads of agricultural products and metallic ores. Results, however, met the company's expectations.
  • The U.K./Europe segment's revenue jumped 38.6% to $174.2 million as a result of the acquisition of Pentalver and foreign currency fluctuations. Same-railroad revenue, on the other hand, slipped 2.2% on lower intermodal revenue from the restructuring of its operations in continental Europe and a decrease in U.K. infrastructure revenue. However, these results matched expectations.
  • While operating income only rose about 3%, earnings per share surged more than 30% because of the impact of lower taxes from the U.S. tax law signed in December.
  • Another factor driving up the per-share result was the impact of share repurchases after the company bought back nearly 800,000 shares for $57.4 million. That's part of its $300 million buyback program, which will help offset the dilution from the $300 million of new shares it issued at the end of 2016 to pay for the Pentalver Transport transaction in Europe and to retire debt.

What management had to say 

According to CEO Jack Hellmann:

G&W reported diluted earnings per share of $1.19 in the first quarter of 2018, or $0.70 per diluted share excluding the retroactive benefit from the U.S. Short Line Tax Credit for 2017. Although our adjusted diluted EPS increased 32%, our financial results in North America were adversely impacted by congestion at several connecting Class I railroads that limited car supply as well as by lower utility coal shipments in the Midwest. Meanwhile, our results in Australia and the U.K./Europe were consistent with our expectations.

As Hellmann notes, while the company's earnings jumped during the quarter, it did face an unexpected headwind in the form of congestion on some large railroads, which caused its results in North America to fall short of expectations. However, the CEO went on to say that "our North American business strengthened in March and we see a favorable outlook for rates and volume for the remainder of 2018, despite ongoing pockets of rail system congestion." Furthermore, he said that the company continues to anticipate an improvement in its Australia business in the second half when it also expects to benefit from the restructuring of its U.K operations.

Looking forward 

In addition to the anticipated second-half improvement in its financial results, Genesee & Wyoming expects to put its financial strength to use this year. Hellmann stated that "given G&W's strong free cash flow generation and modest leverage... we are actively evaluating acquisition and investment opportunities in all geographies in which we operate. We expect to continue to pursue both traditional M&A opportunities as well as opportunistic share repurchases in 2018."

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Genesee & Wyoming. The Motley Fool has a disclosure policy.

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