Class I congestion hits G&W 1Q

First-quarter profit increased at the largest U.S. short line operator despite service issues with connecting Class I railroads.

Net income for Genesee & Wyoming Inc. was $75.1 million compared with $26.2 million in the first quarter of 2017. Excluding benefits of $15.9 million from federal tax reform and $31.6 million from the retroactive extension of the U.S. Short Line Tax Credit, adjusted net income was $43.8 million, up from $32.9 million.

“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,” said Jack Hellmann, Chairman, President and Chief Executive of Darien, Conn.-based G&W. “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.”

He added results from operations in Australia and the United Kingdom/Europe were consistent with G&W’s expectations.

“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.”

Operating revenues in the first quarter increased 10.7% to $574.7 million from $519.1 million. Operating income increased 14.5% to $86.9 million; adjusted operating income increased 2.7% to $87.4 million.

In North America, operating revenues increased 1.9% to $325.6 million from $319.5 million. Operating income was 8.1% higher at $73.2 million; adjusted operating income increased 0.6% to $73.4 million.

North American traffic rose by 2,997 carloads, or 0.7%, to 406,013 carloads in the first quarter. Excluding 1,570 carloads from new operations, same-railroad traffic increased 1,427 carloads, or 0.4%. The same-railroad traffic increase was principally due to increases of 2,583 carloads of pulp and paper mostly in the Southern and Central regions; 2,131 carloads of other commodity traffic (primarily Class I overhead traffic in the Central and Midwest regions), and 1,662 carloads of lumber and forest products traffic, primarily in the Western Region. Volumes were partially offset by decreases of 3,597 carloads of agricultural products traffic in the Midwest and Central regions, and 2,835 carloads of chemicals and plastics, mostly in the Western and Northeast regions. All remaining traffic decreased by a net 1,483 carloads.

The operating ratio in North America was 77.5%, down from 78.8% in the year-ago quarter.

The company repurchased 792,921 shares of its Class A Common Stock for $57.4 million during the first quarter of 2018.

The company projects $55 million in restructuring costs over the next 12 months “so as to unlock annualized savings of approximately $18 million, with the initial benefits recognized in the second half of 2018,” Hellmann said. “We believe the reorganization will not only meet strong customer demand for all of our supply chain services but also will enhance the quality and efficiency of our operations.”

Hellmann said G&W continues to evaluate acquisition and investment opportunities in all regions, and will consider further share repurchases in 2018.

In Australia, operating revenues from G&W’s 51.1%-owned business increased 1.3% to $74.8 million from $73.9 million. Operating income fell 6.9% to $16 million; adjusted operating income decreased 9.3% to $16.million.

Operating revenues from G&W’s U.K./European operations surged 38.6% to $174.2 million from $125.7 million, primarily due to new operations. The operating loss declined to $2.2 million from $8.9 million; adjusted operating loss settled at $2 million from $5.5 million.

In Australia, the company continues to see an uplift in business in the second half of 2018 as it takes delivery of new rail cars for spot coal movements in the Hunter Valley of New South Wales.

The operator is accelerating improvements to its rail, terminal and trucking business through an optimization plan to further rationalize rail equipment, streamline management, and to implement technology investments to enhance productivity.

G&W’s seven North American regions serve 41 U.S. states and four Canadian provinces and include 115 short line and regional railroads with more than 13,000 track-miles.

In total, G&W owns or leases 122 freight railroads organized in nine locally-managed operating regions with 8,000 employees serving 3,000 customers.