Genesee & Wyoming : Reports Results for the Fourth Quarter of 2016

Genesee & Wyoming Inc. (G&W) (NYSE:GWR)

Fourth Quarter Consolidated Highlights

• Completed the acquisition of Providence and Worcester Railroad Company (P&W), a Class III regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York, on November 1, 2016.
• Completed the acquisition of Glencore Rail (NSW) Pty Limited (GRail), the third largest coal haulage business in Australia, and concurrently issued a 48.9% equity stake in G&W’s Australian subsidiary, G&W Australia Holdings LP (GWA), the holding company for all of G&W's Australian businesses, to Macquarie Infrastructure and Real Assets (MIRA) on December 1, 2016.
• Announced agreement to purchase Pentalver Transport Limited (Pentalver), a U.K. based maritime container terminal and transportation business, on December 12, 2016.
• Completed 4,000,000 share offering of Class A Common Stock at $75.00 per share on December 13, 2016. The offering increased G&W's weighted average shares outstanding in the fourth quarter by approximately 522,000 shares, which reduced G&W's diluted earnings per common share (EPS) by approximately $0.01.
• Recorded impairment and related charges of $32.0 million in U.K./Europe in the fourth quarter of 2016 in conjunction with G&W’s annual assessment of goodwill combined with previously discussed efforts to address challenges with the U.K. coal and European intermodal businesses.
• Operating revenues increased 0.3% to $516.5 million from $514.9 million, including the recognition of $10.0 million of revenues from a multi-year take-or-pay volume shortfall under a crude-by-rail contract.
• Same railroad operating revenues, excluding a $19.4 million negative impact of foreign currency depreciation, increased 1.8%, including the revenue from the take-or-pay contract.⁽¹⁾
• Reported operating income decreased 43.4% to $53.6 million; Adjusted operating income increased 10.9% to $104.5 million.⁽²⁾
• Reported diluted EPS attributable to G&W decreased from $1.47 to $0.15; Adjusted diluted EPS attributable to G&W increased 1% to $0.99.⁽²⁾
  • The decrease in reported diluted EPS was primarily due to a $0.52 impact from U.K./Europe impairment and related charges in the fourth quarter of 2016 and $0.28 of corporate development and related costs in the fourth quarter of 2016, primarily associated with the GRail, P&W and Pentalver transactions, as well as a $0.34 impact from the full year 2015 Short Line Tax Credit being included in the fourth quarter of 2015 and a $0.17 impact from a reduction in U.K. tax rates in the fourth quarter of 2015, partially offset by a $0.10 benefit recognized in 2016 from a multi-year take-or-pay contract.

Fourth Quarter Segment Highlights

• North America: Operating revenues from G&W's North American Operations increased 7.9% to $322.2 million from $298.6 million, primarily due to a $17.6 million increase in freight-related revenues, as well as $5.2 million of revenues from new operations. Freight-related revenues in the fourth quarter of 2016 included the recognition of $10.0 million of revenues from a multi-year take-or-pay volume shortfall under a crude-by-rail contract. Reported operating income from G&W's North American Operations increased 13.9% to $83.4 million; Adjusted operating income from G&W's North American Operations increased 18.9% to $88.1 million.⁽²⁾
• Australia: Operating revenues from G&W's Australian Operations increased 11.2% to $61.4 million from $55.2 million, primarily due to new operations. Reported operating income from G&W's Australian Operations decreased from $10.5 million to $2.8 million, primarily due to the loss of the Southern Iron Ore fixed payment and corporate development and related costs associated with the GRail transaction; Adjusted operating income from G&W's Australian Operations increased 26.4% from $11.0 million to $13.9 million.⁽²⁾
• U.K./Europe: Operating revenues from G&W's U.K./European Operations decreased 17.4% to $133.0 million from $161.0 million, or 4.5% excluding a $21.7 million impact from foreign currency depreciation, primarily due to port congestion at certain U.K. ports, as well as lower Continental Europe intermodal volumes. Reported operating loss from G&W's U.K./European Operations was $32.6 million, compared with operating income of $10.9 million last year. The operating loss in the U.K./Europe primarily resulted from impairment and related charges of $32.0 million, including $21.5 million of charges related to ERS Railways (ERS) and $10.5 million of charges related to leases of idle excess U.K. coal railcars; Adjusted operating income from G&W's U.K./European Operations decreased from $9.1 million to $2.5 million.⁽¹⁾⁽²⁾

Comments on Fourth Quarter

Jack Hellmann, President and CEO of G&W, commented, “The fourth quarter of 2016 was extraordinarily active at G&W as we closed on the acquisition of GRail in Australia, we closed on the acquisition of the P&W in the United States, we signed an agreement to acquire Pentalver in the U.K., and we raised $287 million of equity to position ourselves for additional acquisition and investment opportunities. Our reported diluted EPS for the fourth quarter of 2016 were $0.15 which included expenses related to the above transactions as well as impairment and related charges in the U.K./Europe. At the same time, our adjusted diluted EPS of $0.99 included a $0.10 diluted EPS benefit from a multi-year take-or-pay contract. Excluding this benefit, our fourth quarter results were consistent with our outlook as our business performed as expected.” ⁽²⁾

“In North America, a modest increase in same railroad traffic of 2% and good expense management at each of our eight operating regions resulted in 14% growth in operating income in the fourth quarter of 2016, or 5% excluding the take-or-pay contract and corporate development costs. We held the shares of the newly-acquired P&W in a voting trust for November and December and, upon receipt of Surface Transportation Board approval, the P&W came out of trust on December 31^st and our integration team has completed a series of initiatives that are consistent with our acquisition plan.”⁽²⁾

“In Australia, the fourth quarter of 2016 was a transition period that included two months of 100% G&W ownership and one month of 51% G&W ownership following the December 1st formation of our partnership with MIRA and the concurrent acquisition of GRail. The transition has been smooth and our Australian operations performed as expected throughout the fourth quarter. With improving commodity prices, a record harvest in South Australia and our expanded presence in the Hunter Valley coal supply chain, our outlook for Australia is promising as we enter 2017.”

“In the U.K./Europe, our financial results continued to underperform in the fourth quarter of 2016, although we expect significant improvement as 2017 unfolds, led by the U.K. and Poland. In the fourth quarter, the efficiency of our U.K. intermodal operations suffered due to congestion and irregular shipping patterns in the ports which masked positive changes to the cost structure of our U.K. heavy haul business. Also in the fourth quarter, we recorded impairment and related charges of US$32 million, which included US$10.5 million of charges related to leases of idle U.K. coal railcars and US$21.5 million of charges related to our ERS operations in Continental Europe. For context, at the time of acquisition, ERS net assets represented approximately 1% of the Freightliner acquisition price. By discontinuing most ERS routes and dramatically shrinking the operations, we expect to bring our remaining business on the continent (port switching and maritime intermodal) back to profitability by mid-2017.”

“Meanwhile we continue to evaluate multiple acquisition and investment opportunities across G&W’s global footprint and have over $500 million of borrowing capacity under our revolving credit facility.”

Financial Results

G&W's operating revenues increased $1.7 million, or 0.3%, to $516.5 million, in the fourth quarter of 2016, compared with $514.9 million in the fourth quarter of 2015. G&W's operating income in the fourth quarter of 2016 was $53.6 million, compared with $94.6 million in the fourth quarter of 2015. G&W's adjusted operating income in the fourth quarter of 2016 was $104.5 million, compared with $94.2 million in the fourth quarter of 2015.⁽²⁾

Reported net income attributable to G&W in the fourth quarter of 2016 was $8.9 million, compared with $84.9 million in the fourth quarter of 2015. Excluding the net impact of certain items affecting comparability between periods as discussed below, adjusted net income attributable to G&W in the fourth quarter of 2016 was $58.3 million, compared with $56.8 million in the fourth quarter of 2015.⁽²⁾

Reported diluted EPS attributable to G&W in the fourth quarter of 2016 were $0.15 with 58.8 million weighted average shares outstanding, compared with reported diluted EPS in the fourth quarter of 2015 of $1.47 with 57.9 million weighted average shares outstanding. Excluding the net impact of certain items affecting comparability discussed below, adjusted diluted EPS attributable to G&W in the fourth quarter of 2016 were $0.99 with 58.8 million weighted average shares outstanding, compared with adjusted diluted EPS in the fourth quarter of 2015 of $0.98 with 57.9 million weighted average shares outstanding.⁽²⁾

Impact of GRail Acquisition on G&W Financial Presentation

In conjunction with the GRail transaction that closed on December 1, 2016, G&W issued a 48.9% equity stake in GWA to MIRA and retained a 51.1% interest. G&W continues to consolidate 100% of GWA in its financial statements and now reports a noncontrolling interest for MIRA’s 48.9% equity ownership.

Also, prior to the GRail acquisition, G&W’s Australian Operations provided freight-related services to GRail which were recorded as freight-related revenues. These freight-related services continued post acquisition, but are now eliminated in consolidation. Revenues from the GRail acquisition are now included in G&W’s consolidated freight revenues from new operations.

Items Affecting Comparability

In the fourth quarter of 2016 and 2015, G&W’s results included certain items affecting comparability between the periods that are set forth in the following table (in millions, except per share amounts).

In the fourth quarter of 2016, G&W’s results included U.K./Europe impairment and related charges of $32.0 million, which included $21.5 million of charges related to ERS and $10.5 million of charges related to leases of idle excess U.K. coal railcars. The fourth quarter of 2016 also included corporate development and related costs of $19.2 million, primarily related to the GRail, P&W and Pentalver transactions, write-off of debt issuance costs of $2.2 million related to the termination of Australia's term loan as a result of the entry into a new Australian credit facility in conjunction with the GRail acquisition, restructuring costs of $1.9 million and net loss on the sale and impairment of assets of $1.1 million.

In the fourth quarter of 2015, G&W finalized its allocation of fair values to assets and liabilities associated with the acquisition of Freightliner in March of 2015, which resulted in a decrease in operating expenses of $3.9 million and an increase in interest expense of $1.0 million. Of the $3.9 million decrease in operating expenses and the $1.0 million increase in interest expense recorded in the fourth quarter of 2015, $2.6 million and $0.7 million, respectively, did not relate to that period, but were included as adjustments to G&W's fourth quarter 2015 results. In the fourth quarter of 2015, G&W’s results also included corporate development and related costs of $1.3 million, Freightliner acquisition/integration costs of $1.2 million and net gain on the sale of assets of $0.3 million.

In December 2015, the U.S. Short Line Tax Credit (which had previously expired on December 31, 2014), was extended for fiscal years 2015 and 2016. In the fourth quarter of 2015, G&W recorded a full year tax benefit of $27.4 million associated with the extension of the Short Line Tax Credit, of which $19.7 million related to the first three quarters of 2015, as well as an income tax benefit of $9.7 million associated with a prospective change in U.K. tax rates enacted during the fourth quarter of 2015. In addition, net income for the fourth quarter of 2015 was reduced by $1.3 million due to the application of the full year effective income tax rate to the results of the first three quarters of 2015.

Fourth Quarter Results by Segment

Operating revenues from G&W's North American Operations increased $23.6 million, or 7.9%, to $322.2 million in the fourth quarter of 2016, compared with $298.6 million in the fourth quarter of 2015. Excluding $5.2 million of revenues from new operations, North American Operations same railroad revenues increased by $18.3 million, or 6.1%, primarily due to an increase in freight-related revenues. The increase in freight-related revenues included $10.0 million of revenue recognized in the fourth quarter of 2016 associated with a 4-year take-or-pay volume commitment contract.

North American Operations traffic increased 14,711 carloads, or 3.8%, to 402,939 carloads in the fourth quarter of 2016. Excluding 6,389 carloads from new operations, same railroad traffic increased 8,322 carloads, or 2.1%, in the fourth quarter of 2016 compared with the fourth quarter of 2015. The same railroad traffic increase was principally due to increases of 10,054 carloads of coal and coke traffic (primarily in the Midwest and Central regions), 4,146 carloads of metals traffic (primarily in the Northeast and Midwest regions), 4,000 carloads of agricultural products traffic (primarily in the Central, Mountain West and Pacific regions), partially offset by decreases of 3,843 carloads of pulp and paper traffic (primarily in the Southern, Northeast and Canada regions), 3,020 carloads of minerals and stone traffic (primarily in the Northeast and Coastal regions) and 2,918 carloads of other traffic (primarily in the Canada, Central and Southern regions). All remaining traffic decreased by a net 97 carloads.

Operating income from G&W's North American Operations in the fourth quarter of 2016 was $83.4 million, compared with $73.2 million in the fourth quarter of 2015. The operating ratio for North American Operations was 74.1% in the fourth quarter of 2016, compared with an operating ratio of 75.5% in the fourth quarter of 2015.

Operating revenues from G&W's Australian Operations increased $6.2 million, or 11.2%, to $61.4 million in the fourth quarter of 2016, compared with $55.2 million in the fourth quarter of 2015. When comparing our non-freight revenues from existing operations in the fourth quarter of 2016 to our non-freight revenues in the fourth quarter of 2015, note that the 2016 existing operations included $4.1 million of revenue for services provided to GRail for the month of December 2016, which were eliminated in G&W's consolidated freight-related revenues. Excluding a net increase of $7.0 million of revenues from new operations and a $2.3 million increase due to the impact of foreign currency appreciation, Australian Operations same railroad revenues decreased by $3.1 million, or 5.3%, primarily due to a decrease in freight-related revenues resulting from the loss of the Southern Iron fixed fee payment.⁽¹⁾

Australian Operations traffic increased 36,144 carloads, or 78.2%, to 82,389 carloads in the fourth quarter of 2016. Excluding 35,203 carloads from new operations, same railroad traffic increased 941 carloads, or 2.0%, in the fourth quarter of 2016 compared with the fourth quarter of 2015.

Operating income from G&W's Australian Operations in the fourth quarter of 2016 was $2.8 million, compared with $10.5 million in the fourth quarter of 2015. The decrease in the Australian Operations operating income was primarily due to $10.7 million of corporate development and related costs in the fourth quarter of 2016 related to the GRail acquisition. The operating ratio for Australian Operations was 95.4% in the fourth quarter of 2016, compared with an operating ratio of 81.0% in the fourth quarter of 2015.

Operating revenues from G&W's U.K./European Operations decreased $28.1 million, or 17.4% to $133.0 million in the fourth quarter of 2016, compared with $161.0 million in the fourth quarter of 2015. Excluding a $21.7 million decrease due to the impact of foreign currency depreciation, operating revenues decreased $6.3 million, or 4.5%, primarily due to a decrease in Continental Europe intermodal revenues and U.K. coal revenues.⁽¹⁾

U.K./European Operations traffic increased 5,562 carloads, or 2.0%, to 281,222 carloads in the fourth quarter of 2016. The traffic increase was principally due to an increase of 9,446 carloads of intermodal traffic (primarily in the U.K.), partially offset by a decrease of 4,183 carloads of coal and coke traffic (primarily in the U.K.).

Operating loss from G&W's U.K./European Operations in the fourth quarter of 2016 was $32.6 million, compared with operating income of $10.9 million in the fourth quarter of 2015. The operating loss in the U.K./Europe primarily resulted from impairment and related charges of $32.0 million, including $21.5 million of charges related to our ERS business and $10.5 million of charges related to leases of idle excess U.K. coal railcars, as well as $1.8 million of restructuring expenses and $1.3 million of corporate development expenses, primarily related to the previously announced Pentalver acquisition.

Consolidated Annual Results

2016 Segment Highlights

• North America: Operating revenues from G&W's North American Operations decreased 0.4% to $1,236.8 million from $1,241.8 million. Reported operating income from G&W's North American Operations increased 7.4% to $319.6 million; Adjusted operating income from G&W's North American Operations increased 5.2% to $327.4 million .⁽²⁾
• Australia: Operating revenues from G&W's Australian Operations decreased 8.4% to $222.6 million from $243.0 million. Reported operating income from G&W's Australian Operations decreased 91.2% to $4.8 million, primarily due to the loss of the Southern Iron Ore fixed payment and corporate development and related costs associated with the GRail transaction; Adjusted operating income from G&W's Australian Operations decreased 27.4% to $41.8 million.⁽²⁾
• U.K./Europe: Operating revenues from G&W's U.K./European Operations increased 5.1% to $542.2 million from $515.6 million, or increased 15.8% excluding a $47.3 million impact from foreign currency depreciation, primarily due to the full year of operation of Freightliner in 2016 versus nine months in 2015. Reported operating income from G&W's U.K./European Operations decreased from operating income of $31.9 million to an operating loss of $34.7 million; Adjusted operating income from G&W's U.K./European Operations decreased 84.3% to $5.1 million.⁽¹⁾⁽²⁾

Reported net income attributable to G&W for the year ended December 31, 2016 was $141.1 million ($215.5 million pre-tax), compared with $225.0 million ($300.9 million pre-tax) for the year ended December 31, 2015. Excluding the impact of certain items affecting comparability listed below, adjusted net income attributable to G&W for the year ended December 31, 2016 was $212.4 million ($305.7 million adjusted pre-tax), compared with $240.7 million ($339.0 million adjusted pre-tax) for the year ended December 31, 2015.⁽²⁾

G&W’s diluted EPS for the year ended December 31, 2016 were $2.42 with 58.3 million weighted average shares outstanding, compared with diluted EPS of $3.89 with 57.8 million weighted average shares outstanding for the year ended December 31, 2015. Excluding certain items affecting comparability listed below, G&W’s adjusted diluted EPS for the year ended December 31, 2016 were $3.65 with 58.3 million weighted average shares outstanding, compared with adjusted diluted EPS of $4.16 with 57.8 million weighted average shares outstanding for the year ended December 31, 2015.⁽²⁾

G&W’s 2016 and 2015 annual results included certain items affecting comparability between the periods that are set forth in the following table (in millions, except per share amounts).

Free Cash Flow ⁽²⁾

G&W’s free cash flow for the twelve months ended December 31, 2016 and 2015 was as follows (in millions):

Conference Call and Webcast Details

As previously announced, G&W’s conference call to discuss financial results for the fourth quarter of 2016 will be held on Wednesday, February 8, 2017, at 11 a.m. EST. The dial-in number for the teleconference in the U.S. is (800) 230-1059; outside the U.S. is (612) 234-9959, or the call may be accessed live over the Internet (listen only) at www.gwrr.com/investors. Management will be referring to a slide presentation that will also be available at gwrr.com/investors. The webcast will be archived at www.gwrr.com/investors until the following quarter’s earnings press release. Telephone replay is available for 30 days beginning at 1 p.m. EST on February 8, 2017 by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 405456.

About G&W

G&W owns or leases 122 freight railroads worldwide that are organized in 10 operating regions with approximately 7,300 employees and 3,000 customers.

• G&W's eight North American regions serve 41 U.S. states and four Canadian provinces and include 115 short line and regional freight railroads, with more than 13,000 track-miles.
• G&W's Australia Region provides rail freight services in New South Wales, including in the Hunter Valley coal supply chain, and in the Northern Territory and South Australia, including operating the 1,400-mile Tarcoola-to-Darwin rail line. As of December 1, 2016, G&W's Australia Region was 51.1% owned by G&W and 48.9% owned by a consortium of funds and clients managed by Macquarie Infrastructure and Real Assets.
• G&W's U.K./European Region is led by Freightliner, the U.K.'s largest rail maritime intermodal operator and second-largest rail freight company. Operations also include heavy-haul in Poland and Germany and cross-border intermodal services connecting Northern Europe seaports with key industrial regions throughout the continent.

G&W subsidiaries provide rail service at more than 40 major ports in North America, Australia and Europe and perform contract coal loading and railcar switching for industrial customers.

From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding G&W is routinely posted on and accessible at www.gwrr.com/investors. In addition, you may automatically receive email alerts and other information about us by enrolling your email address in the "Email Alerts" section of www.gwrr.com/investors. The information contained on or connected to our Internet website is not deemed to be incorporated by reference in this press release or filed with the SEC.

Cautionary Statement Concerning Forward-Looking Statements

This press release contains forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “could,” “should,” “seeks,” “expects,” “will,” “estimates,” “trends,” “outlook,” variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following: risks related to the operation of our railroads; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments, railroad network congestion or other substantial disruption of operations; customer demand and changes in our operations; exposure to the credit risk of customers and counterparties; changes in commodity prices; consummation and integration of acquisitions; economic, political and industry conditions (including employee strikes or work stoppages); retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with, expenses related to estimated claims, self-insured retention amounts, and insurance coverage limits; consummation of new business opportunities; decrease in revenues and/or increase in costs and expenses; susceptibility to the risks of doing business in foreign countries; our ability to realize the expected synergies associated with acquisitions; and others including, but not limited to, those noted in our 2015 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q under “Risk Factors.” Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this press release or as of the date they were made. G&W does not undertake, and expressly disclaims, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

1. Foreign exchange impact is calculated by comparing the prior year period results translated from local currency to U.S. dollars using current period exchange rates to the prior period results in U.S. dollars as reported.

2. Adjusted operating income, adjusted net income attributable to G&W, adjusted diluted earnings per common share attributable to G&W (EPS) and free cash flow are non-GAAP financial measures and are not intended to replace financial measures calculated in accordance with GAAP. The information required by Item 10(e) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and Regulation G under the Securities Exchange Act of 1934, including a reconciliation to their most directly comparable financial measures calculated in accordance with GAAP, is included in the tables attached to this press release.