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Commodities Crash Weighs on Genesee & Wyoming Inc's Earnings

By Matthew DiLallo - Feb 9, 2016 at 11:15AM

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The regional rail operator doesn’t see conditions improving in 2016.

The global crash of commodity prices is having a noticeable impact on volumes at Genesee & Wyoming's (GWR) railroads. That's putting pressure on its earnings, which dropped pretty significantly during the fourth quarter. That pressure is unlikely to abate anytime soon, which is forcing the company to restructure its business in order to boost cash flow.

Genesee & Wyoming results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$514.9 million

$415.6 million

23.9%

Income From Operations

$94.6 million

$113.5 million

(16.6%)

EPS

$1.47

$1.53

(3.9%)

Data source: Genesee & Wyoming.

What happened with Genesee & Wyoming this quarter? 
Genesee & Wyoming results were actually worse than the raw numbers indicated:

  • While revenue growth appeared to be strong, that growth was primarily due to revenue gained from the acquisition of Freightliner. On a same-railroad basis, and excluding a $16.6 million negative impact from foreign currency fluctuations, revenue declined 13.8% year over year due to weakness in iron ore, coal, and metal, and agricultural products shipments.
  • Operating revenue at the company's North American railroads declined 11.7% to $298.6 million, with income from operations slumping 18.9% to $73.2 million. A big driver of the decline was carloads, which decreased 14.8%.
  • Its Australian segment was also weak, with its revenue declining 23.8% to $55.2 million while income from operations plunged 55.9% to $10.5 million. This segment's performance would have been even worse if it wasn't for the contributions of the newly acquired Freightliner Australia, which boosted revenue by $11.8 million, helping to overcome a $11.5 million impact from foreign currency fluctuations.
  • The big driver of revenue growth was the company's UkK./European operations, which saw its revenue skyrocket from $5 million to $161 million due to the acquisition of Freightliner's U.K./European operations.
  • Genesee & Wyoming's underlying earnings were actually much weaker than the reported numbers because the company benefited from a $0.47-per-share Short Line Tax Credit and a $0.17-per-share reduction in U.K. tax rates. After adjusting for these items, earnings would have only been $0.85 per share. That's down 24% year over year, but consistent with the company's most recent guidance.

What management had to say 
CEO Jack Hellmann, commenting on the company's results, said:

The weakness in our rail shipments has been largely driven by three overarching trends: i) the collapse in the prices of global commodities such as iron ore, copper, manganese and crude oil, ii) the rapid shift of U.S. and U.K. power generation away from coal to cheaper natural gas, and iii) a strong U.S. dollar, which has been making our industrial customers, such as steel manufacturers, as well as our agricultural customers less competitive in global markets.

The global commodity price crunch, which can be attributed to a slowing economy in China as well as a strengthening U.S. dollar, is having a big impact on rail shipments. It's not just impacting the regional rail lines operated by Genesee & Wyoming, but also bigger Class I railroads like Union Pacific (UNP -0.74%). Last quarter, for example, Union Pacific saw its freight revenue for industrial products slump 23%, while agricultural products fell 13%, and coal plunged 31% after its customers pulled back on volumes, which were down 9% year over year. That led to a 19% year-over-year decline in Union Pacific's earnings. Suffice it to say, operating conditions are pretty tough for the rails right now.  

Looking forward 
Unfortunately, neither company sees these weak conditions improving in 2016. Hellman warned:

The trends that made 2015 difficult show few signs of abating in 2016. In North America, we anticipate our operating income to be down slightly as sustained weakness in coal and steel shipments is expected to offset positive trends such as core pricing. In Australia, we expect a decline in operating income due to the recent closure of a manganese mine and continued pressure on our remaining iron ore business. In the U.K./Europe, we expect operating income to be flat, but to improve in the second half of 2016 after we complete the restructuring of the U.K. coal business. The net impact of these trends and weaker foreign currencies is that we expect our adjusted diluted EPS to be down approximately 10% in 2016.

Despite that weaker earnings outlook, the company is planning to focus on reducing its costs so that it can improve its cash flow. It expects that the measures it takes will actually increase cash flow by 10% year over year. With that cash flow the company intends to continue to pursue acquisitions and investments, however, it plans to weigh those opportunities with share buybacks.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Genesee & Wyoming. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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