Genesee & Wyoming Reports Results for the First Quarter of 2015

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

First Quarter Highlights

• Completed the acquisition of London-based Freightliner Group Limited (Freightliner) on March 25, 2015.
• Total operating revenues increased 5.5% to $397.0 million from $376.3 million, including $15.1 million of revenues from Freightliner for the last five days in March and $21.9 million of revenues from Rapid City, Pierre & Eastern Railroad, Inc. (RCP&E) and Pinsly Arkansas.
• Same railroad revenue, excluding the $13.4 million impact of foreign currency depreciation, declined 0.8%, primarily due to weakness in iron ore, utility coal and steel shipments.
• Adjusted income from operations increased 15.2% to $86.7 million; Reported income from operations decreased 3.0% to $72.6 million, primarily due to $12.6 million of expense related to the Freightliner acquisition. (1)
• Adjusted diluted earnings per common share (EPS) increased 18.6% to $0.83; Reported diluted EPS decreased 40.0% to $0.42, primarily due to $0.39 per common share of expense related to the Freightliner acquisition. (1)

Jack Hellmann, President and CEO of G&W, commented, "Our adjusted diluted earnings per common share increased 18.6% in the first quarter of 2015, or 23.9% excluding the impact of foreign currency. However, our results were weaker than our expectations for two principal reasons. First, severe winter weather, although not as challenging as last year, adversely impacted revenues and expense at several of our railroads, particularly in the Northeast United States. Second, we experienced a sharp decline in shipments of certain commodity groups in North America starting in mid-February, including coal (volume down 8% in the first quarter) and metals, primarily steel (volume down 18% in the first quarter). Meanwhile, our Australian operations performed well in a difficult business environment, as effective cost management helped mitigate revenue losses from the closure of customer iron ore mines.” (1)

"Looking ahead to the remainder of 2015, our business outlook varies by geography. In North America, overall economic activity is stable, although we expect continued weakness in utility coal, steel and scrap and certain shale-energy related shipments for the foreseeable future. In Australia, business conditions remain challenging, and, as previously disclosed, we expect our business to weaken due to the impact of customer mine closures. In the United Kingdom/Europe, we are focused on the successful integration of Freightliner and anticipate a strong financial contribution for the remainder of the year. Finally, with approximately $480 million of capacity currently available under our revolving credit facility, we continue to evaluate potential investment and acquisition opportunities worldwide.”

Financial Results

G&W reported net income in the first quarter of 2015 of $23.9 million, compared with net income of $40.0 million in the first quarter of 2014. Excluding the net impact of certain items affecting comparability between periods discussed below, G&W’s adjusted net income in the first quarter of 2015 was $47.3 million, compared with adjusted net income of $40.2 million in the first quarter of 2014. (1)

G&W’s reported diluted EPS in the first quarter of 2015 were $0.42 with 57.1 million weighted average shares outstanding, compared with reported diluted EPS in the first quarter of 2014 of $0.70 with 56.9 million weighted average shares outstanding. G&W’s adjusted diluted EPS in the first quarter of 2015 were $0.83 with 57.1 million weighted average shares outstanding, compared with adjusted diluted EPS in the first quarter of 2014 of $0.70 with 56.9 million weighted average shares outstanding. (1)

G&W’s effective income tax rate was 41.4% in the first quarter of 2015, compared with 36.4% in the first quarter of 2014. The higher effective income tax rate was driven primarily by limitations on the tax deductibility of a portion of the Freightliner acquisition costs.

Items Affecting Comparability

In the first quarter of 2015 and 2014, 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 first quarter of 2015, G&W’s results included Freightliner acquisition and related financing expenses of $33.3 million, including an $18.7 million loss on the settlement of foreign currency forward purchase contracts, $12.6 million of acquisition-related costs and a non-cash write-off of deferred financing fees of $2.0 million associated with the refinancing of G&W’s credit facility. G&W’s results also included Australian severance costs of $1.7 million and net gain on sale of assets of $0.3 million. G&W’s first quarter of 2014 results included business development and related costs of $1.2 million and net gain on sale of assets of $0.8 million.

First Quarter Results

In the first quarter of 2015, G&W’s total operating revenues increased $20.8 million, or 5.5%, to $397.0 million, compared with $376.3 million in the first quarter of 2014. The increase included $37.0 million in revenues from new operations, including Freightliner, RCP&E and Pinsly Arkansas. These revenue increases were partially offset by a $13.4 million decrease from the net depreciation of foreign currencies relative to the U.S. dollar. Excluding the net impact from foreign currency depreciation, G&W’s same railroad operating revenues, which exclude new operations, decreased $2.8 million, or 0.8%.

G&W’s same railroad freight revenues in the first quarter of 2015 were $270.4 million, compared with $287.7 million in the first quarter of 2014. Excluding a $9.5 million decrease from the net impact of foreign currency depreciation, G&W’s same railroad freight revenues decreased by $7.9 million, or 2.8%, primarily due to declines in iron ore, utility coal and steel shipments.

G&W’s same railroad non-freight revenues in the first quarter of 2015 were $89.7 million, compared with $88.5 million in the first quarter of 2014. Excluding a $3.9 million decrease from the net impact of foreign currency depreciation, G&W’s same railroad non-freight revenues increased by $5.1 million, or 6.0%, primarily due to an increase in railcar switching revenues.

G&W’s traffic in the first quarter of 2015 increased 9,358 carloads, or 2.0%, to 476,737 carloads. Excluding 24,569 carloads from new operations, same railroad traffic in the first quarter of 2015 decreased 15,211 carloads, or 3.3%. The same railroad traffic decrease was principally due to decreases of 7,324 carloads of metals traffic (primarily in the Southern and Northeast regions), 6,691 carloads of coal and coke (primarily in the Central Region), 2,180 carloads of waste traffic (primarily in the Ohio Valley and Pacific regions), 1,874 carloads of agricultural products traffic (primarily in the Australia Region), partially offset by a 4,414 carload increase in minerals and stone traffic. All remaining traffic decreased by a net 1,556 carloads.

G&W’s income from operations in the first quarter of 2015 was $72.6 million, compared with $74.9 million in the first quarter of 2014. G&W’s operating ratio in the first quarter of 2015 was 81.7%, compared with an operating ratio of 80.1% in the first quarter of 2014. Income from operations in the first quarter of 2015 included Freightliner acquisition-related costs of $12.6 million and Australian severance costs of $1.7 million, partially offset by net gain on sale of assets of $0.3 million. Income from operations in the first quarter of 2014 included business development and related costs of $1.2 million, partially offset by net gain on sale of assets of $0.8 million. Excluding these items, G&W’s adjusted income from operations increased $11.4 million, or 15.2%, to $86.7 million in the first quarter of 2015, and G&W’s adjusted operating ratio improved 1.8 percentage points to 78.2% in the first quarter of 2015, compared with 80.0% in the first quarter of 2014. (1)

Free Cash Flow (1)

G&W’s free cash flow for the three months ended March 31, 2015 and 2014 was as follows (in millions):

(a) The 2015 period consisted of net cash used for the acquisition of Freightliner and Pinsly Arkansas.

Overview of Freightliner

Headquartered in London, England, Freightliner is an international freight rail operator with operations in the United Kingdom (U.K.), Poland, Germany, the Netherlands and Australia. Freightliner's principal business is located in the U.K. where it is the second largest freight rail operator, providing intermodal and heavy haul service throughout England, Scotland and Wales. Freightliner operates in open access rail freight markets and therefore has limited ownership of track assets. Its fleet of primarily leased equipment includes approximately 250 standard gauge locomotives (mostly diesel-electric) as well as 5,500 wagons. Freightliner employs over 2,500 people worldwide.

Conference Call and Webcast Details

As previously announced, G&W’s conference call to discuss financial results for the first quarter of 2015 will be held on Friday, May 1, 2015, at 11 a.m. EDT. The dial-in number for the teleconference in the U.S. is (800) 230-1096; outside the U.S. is (612) 332-0802, 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. EDT on May 1, 2015, by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 345264.

About G&W

Inclusive of Freightliner, G&W owns or leases 120 freight railroads worldwide that are organized in 11 operating regions with 7,700 employees and more than 2,500 customers.

• G&W’s nine North American regions serve 41 U.S. states and four Canadian provinces and include 113 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, the Northern Territory and South Australia and operates the 1,400-mile Tarcoola-to-Darwin rail line.
• G&W’s U.K./Europe 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 European 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.

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 2014 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. Adjusted income from operations, adjusted operating ratio, adjusted net income, adjusted diluted earnings per common share (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.

* Represents intermodal units

** Includes carload and intermodal units

Non-GAAP Financial Measures

This earnings release contains references to adjusted income from operations, adjusted operating ratio, adjusted net income, adjusted diluted earnings per common share (EPS) and free cash flow, which are "non-GAAP financial measures” as this term is defined in 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. In accordance with these rules, G&W has reconciled these non-GAAP financial measures to their most directly comparable U.S. GAAP measures.

Management views these non-GAAP financial measures as important measures of G&W’s operating performance or, in the case of free cash flow, an important financial measure of how well G&W is managing its assets and a useful indicator of cash flow that may be available for discretionary use by G&W. Management also views these non-GAAP financial measures as a way to assess comparability between periods. Key limitations of the free cash flow measure include the assumptions that G&W will be able to refinance its existing debt when it matures and meet other cash flow obligations from financing activities, such as principal payments on debt.

These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly-titled non-GAAP financial measures used by other companies.

The following tables set forth reconciliations of each of these non-GAAP financial measures to their most directly comparable GAAP measure (in millions, except percentages and per share amounts).

Reconciliations of Non-GAAP Financial Measures

Adjusted Income from Operations and Adjusted Operating Ratio

(a) Income from operations is calculated as operating revenues less operating expenses.

(b) Operating ratio is calculated as operating expenses divided by operating revenues.

Adjusted Net Income and Adjusted Diluted Earnings Per Common Share

Free Cash Flow