The global economy has been noticeably weaker than expected this year, which is affecting companies involved in global trade. Genesee & Wyoming (GWR) was no exception, with the regional railroad reporting declining earnings before the market opened on Friday. The company's results were affected by a variety of issues, including foreign currency weakness and weak demand for many of the commodities that it ships. Nevertheless, its results were still stronger than it had expected.
Genesee & Wyoming results: The raw numbers
| Metric |
Q3 2015 Actuals |
Q3 2014 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$546.3 million |
$432.5 million |
26.3% |
|
Income from Operations |
$117.6 million |
$123.1 million |
-4.5% |
|
EPS |
$1.10 |
$1.27 |
-13.4% |
Data source: Genesee & Wyoming.
What happened with Genesee & Wyoming this quarter?
Genesee & Wyoming results were under pressure on a lot of fronts:
- Revenue growth was robust, but that strength was solely due to revenue gained from recent acquisitions. On a same-railroad basis, and excluding a $23.6 million negative impact from foreign currency fluctuations, revenue declined 10.8% due to weakness in iron ore, coal, and metal shipments.
- The company's North American railroads experienced a 9% decline in revenue and a 10% decline in operating income because of weakness in 12 out of the 14 commodity groups it ships.
- Its Australian segment was even weaker, with its operating income dropping 33% because of the impact of iron ore mine closures and a weak Australian dollar.
- Helping to partially offset this weakness was the UK/Europe segment, where operating income surged 50% from just last quarter because of the recently acquired Freightliner Group.
What management had to say
CEO Jack Hellmann, commenting on the company's results, said: "Our adjusted diluted earnings per share declined 10% in the third quarter of 2015, with approximately half of the decline caused by a weak economic environment for industrial and commodity shipments and the other half due to the negative impact of foreign currency depreciation. Nevertheless, our third-quarter adjusted diluted earnings per share were 17% higher than the second quarter of 2015, with stronger-than-expected performance from each of our three business segments."
Hellmann notes a key point. While the company's results appeared weaker than last year's results, the quarter was much stronger when compared with the prior quarter. In other words, while conditions have weakened over the past year, the company has improved the operations of its three segments.
Genesee & Wyoming wasn't the only railroad going up against unfavorable year-over-year comparables. CSX (CSX 0.67%) saw its third-quarter revenue decline 9% while its earnings were relatively flat, after gains in prices were more than offset by weaker volumes. To compensate for weaker volumes, especially among coal shipments, CSX reduced its costs by 11%. Cost reductions also helped Genesee & Wyoming to report stronger sequential earnings after the company delivered "good cost management by each of our operating regions" so that it could "maintain an operating ratio of 71.2%," which for perspective was a higher operating ratio than the 68.3% at CSX.
Looking forward
In discussing what lies ahead, Hellman noted:
Our outlook for the second half of 2015 remains unchanged from August, with third-quarter results stronger than planned and fourth-quarter outlook expected to be weaker than planned. As we finish the year and look ahead to 2016, our management team is concentrated on optimizing the strong free cash flow that underpins the value of our 120 railroads. In addition, we continue to evaluate potential acquisitions and investments worldwide.
One of the company's calling cards is its ability to acquire railroads to drive growth. Given the weakness in the global economy, it appears to be opening up the opportunity for the company to take advantage of the situation to acquire, or at least invest in, railroads that might not have been available if conditions were better.
