Genesee & Wyoming Inc.'s Earnings Decline on Slumping Shipments

By Markets Fool.com

Image source: Getty Images.

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A slowing global economy is sapping demand for commodities and industrial goods, and that is weighing on rail shipments. That slowdown had a noticeable impact on Genesee & Wyoming's (NYSE: GWR) second-quarter results, which were released before the market opened on Monday. That said, the company did exceed its muted expectations by successfully pushing down costs.

Genesee & Wyoming results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$501.4 million

$542.2 million

(7.5%)

Operating income

$87.2 million

$99.5 million

(12.4%)

Earnings per share

$0.83

$0.92

(9.8%)

YOY = year over year. Data source: Genesee & Wyoming.

What happened with Genesee & Wyoming this quarter?

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Slumping volumes weighed on Genesee & Wyoming results:

  • Revenue in North America slipped 2.1% to $304.6 million primarily due to declining coal, grain, and pulp and paper shipments. Foreign currency headwinds also weighed on revenue, cutting $5.2 million from the top line. That said, operating income actually rose 3.1% due to its cost management efforts.
  • Sales in the company's Australian segment dropped 17.3% to $55.2 million due to weaker metallic ore shipments. FX headwinds, likewise, added further weight by cutting revenue $8.8 million. Meanwhile, operating income slid 37.7% due to the overall weakness in Australian rail shipments.
  • Finally, sales in the company's U.K./Europe segment slumped 13.9% to $141.5 million due to declining coal, minerals, and stone shipments. Currencies, again, weighed on the top line and cut revenue by $7.1 million. Because of all this, the segment operated at a loss of $1.2 million, which was a sharp decline from the $7.7 million operating profit from the year-ago quarter.
  • Despite slumping shipments and weak profitability, Genesee & Wyoming generated strong free cash flow during the quarter of $85 million. That was actually up 4.6% from the second quarter of last year.

What management had to say

CEO Jack Hellmann,commenting on the company's results, said:

Our financial results for the second quarter of 2016 were well ahead of our outlook, primarily due to good performance from our North American Operations. Despite a 7% decline in North American carloads, favorable revenue mix and effective management of costs led to an improvement in our reported North American operating ratio of 1.3 percentage points to 74.1%, and a modest increase in our operating income. Meanwhile, our Australian and U.K./Europe Operations performed generally in-line with our expectations and we successfully completed the restructuring of our U.K. coal business. While we are pleased with our second quarter results, our reported diluted EPS declined 10% and our adjusted diluted EPS excluding the Short Line Tax Credit declined 13% compared to last year. As a result, we remain focused on improving the efficiency of our operations amid uneven business environments in each of our three segments worldwide.

The rail industry is under tremendous pressure right now, with the coal market, in particular, continuing to weigh heavily on results. Last quarter, for example, Genesee & Wyoming's freight revenue from coal plunged 40% over the prior year's second quarter while rival Norfolk Southern's (NYSE: NSC) coal revenue slumped 25%. That said, it is not just the coal segment that is proving problematic. Weak paper and forest product shipments, for example, drove a 5% decline in revenue from those product groups at both Genesee & Wyoming and Norfolk Southern.

Railroad companies are combating these weaker shipments by attacking their cost structure. Genesee & Wyoming, for example, managed its costs to drive an improvement in profitability in its North American segment. Meanwhile, Norfolk Southern is on pace to push $200 million in costs out of its business this year through productivity savings. These initiatives are critical to improving profitability amid the currently uncertain business environment.

Looking forward

Given the harsh operating conditions, Genesee & Wyoming will continue to focus on improving its costs during the second half of the year. As Hellmann also warned, "At the same time, this economic uncertainty continues to provide acquisition and investment opportunities that we are carefully evaluating in multiple geographies within our global footprint."

With robust free cash flow generation and a solid balance sheet, the company certainly has the financial capacity to take advantage of the current conditions to make investments in its future.

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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.