Genesee & Wyoming Reports Results for the Fourth Quarter of 2017

Genesee & Wyoming Inc. (G&W) GWR

Fourth Quarter Consolidated Highlights

• Operating revenues increased 10.7% to $571.6 million from $516.5 million.
• Reported operating income increased 101.9% to $108.2 million; Adjusted operating income increased 2.2% to $105.7 million.⁽¹⁾
• Reported diluted earnings per share (EPS) were $6.81 with 62.7 million weighted average shares outstanding, compared with reported diluted EPS in the fourth quarter of 2016 of $0.15 with 58.8 million weighted average shares outstanding; Adjusted diluted EPS decreased 8.3% to $0.77.⁽¹⁾
• Reported net income and diluted EPS included a $371.9 million, or $5.94 per share, income tax benefit associated with the United States Tax Cuts & Jobs Act signed into law in December 2017.
• Net cash provided by operating activities for the twelve months ended December 31, 2017 increased 17.7% to $479.2 million; Adjusted free cash flow attributable to G&W increased 3.6% to $250.2 million.⁽¹⁾

Fourth Quarter Segment Highlights

• North America: Operating revenues from G&W's North American Operations decreased 0.6% to $320.2 million from $322.2 million, primarily due to an $11.5 million decrease in freight-related revenues, partially offset by an increase of $9.3 million in freight revenues. 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 decreased 10.5% to $74.6 million; Adjusted operating income from G&W's North American Operations decreased 13.6% to $75.5 million.⁽¹⁾
• Australia: Operating revenues from G&W's Australian Operations increased 23.1% to $75.5 million from $61.4 million, primarily due to new operations. Reported operating income from G&W's Australian Operations increased from $2.8 million to $17.6 million. Adjusted operating income from G&W's Australian Operations increased 66.1% to $22.5 million.⁽¹⁾
• U.K./Europe: Operating revenues from G&W's U.K./European Operations increased 32.3% to $175.8 million from $133.0 million, primarily due to new operations. Fourth quarter revenues also included a $10.5 million favorable impact from foreign currency appreciation. Reported operating income from G&W's U.K./European Operations was $16.0 million, compared with an operating loss of $32.6 million in 2016; Adjusted operating income from G&W's U.K./European Operations increased from $2.4 million to $7.6 million.⁽¹⁾⁽²⁾

Comments on Fourth Quarter

Jack Hellmann, President and CEO of G&W, commented, "Our reported diluted EPS for the fourth quarter of 2017 were $6.81, of which a significant portion was a $372 million benefit from new tax legislation in the United States. Excluding the tax benefit and certain other items, our adjusted diluted EPS were $0.77 in the fourth quarter, as revenues in each of our geographic segments, North America, Australia and the U.K./Europe, finished the year in-line with our expectations.⁽¹⁾

"In 2017, we generated adjusted free cash flow attributable to G&W of $250 million, a 3.6% increase over 2016, as we effectively managed both expenses and capital expenditures to more than offset flat revenue. In 2018, with an improving business outlook in each of our operating regions, we expect double digit growth in both adjusted earnings per share and adjusted free cash flow attributable to G&W. At the same time, we continue to evaluate acquisition and investment opportunities across G&W's global footprint and have approximately $400 million of borrowing capacity under our revolving credit facility."⁽¹⁾

Financial Results

G&W's operating revenues increased $55.0 million, or 10.7%, to $571.6 million, in the fourth quarter of 2017, compared with $516.5 million in the fourth quarter of 2016. G&W's operating income in the fourth quarter of 2017 was $108.2 million, compared with $53.6 million in the fourth quarter of 2016. G&W's adjusted operating income in the fourth quarter of 2017 was $105.7 million, compared with $103.4 million in the fourth quarter of 2016.⁽¹⁾

Reported net income attributable to G&W in the fourth quarter of 2017 was $426.6 million, compared with $8.9 million in the fourth quarter of 2016. 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 2017 was $48.6 million, compared with $49.3 million in the fourth quarter of 2016.⁽¹⁾

Reported diluted EPS in the fourth quarter of 2017 were $6.81 with 62.7 million weighted average shares outstanding, compared with reported diluted EPS in the fourth quarter of 2016 of $0.15 with 58.8 million weighted average shares outstanding. Excluding the net impact of certain items affecting comparability discussed below, adjusted diluted EPS in the fourth quarter of 2017 were $0.77 with 62.7 million weighted average shares outstanding, compared with adjusted diluted EPS in the fourth quarter of 2016 of $0.84 with 58.8 million weighted average shares outstanding.⁽¹⁾

Impact of Glencore Rail (NSW) Pty Limited (GRail) Acquisition on G&W Financial Presentation

In conjunction with the December 1, 2016 acquisition of GRail, G&W 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). G&W retained a 51.1% interest in GWA and continues to consolidate 100% of GWA in its financial statements and reports a noncontrolling interest for MIRA's 48.9% equity ownership. As a result, G&W's 2017 operating income includes 100% of the Australian business, while net income attributable to G&W reflects its 51.1% ownership position in the Australian business.

Prior to the GRail acquisition, G&W's Australian Operations provided rail operator services to GRail, which were recorded as freight-related revenues. These freight-related services continued post acquisition, but are 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 2017 and 2016, 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 2017, G&W's results included an $8.9 million reduction to other expenses as a result of the buyout of the Freightliner acquisition deferred consideration agreements with certain former Freightliner management holders, Australia impairment and related charges of $4.9 million, which included $5.9 million related to the write down of track assets on idle branch lines in South Australia, partially offset by a $0.9 million recovery of prior year impairment and related costs associated with Arrium Limited's voluntary administration, $1.4 million of restructuring costs, $1.1 million of corporate development and related costs and a $1.1 million reduction to expense associated with a prior year accrual established for the restructuring of our U.K. coal business. The fourth quarter of 2017 also included a $371.9 million estimated income tax benefit primarily as a result of reducing the value of our net deferred tax liabilities from a 35% U.S. federal income tax rate to the newly enacted rate of 21% associated with the United States Tax Cuts & Jobs Act signed into law in December 2017.

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 Railways, B.V. (ERS) and $10.5 million of charges related to leases of idle coal railcars in the U.K. The fourth quarter of 2016 also included corporate development and related costs of $19.2 million, primarily related to the GRail, Providence and Worcester Railroad Company (P&W) and Pentalver Transportation Limited (Pentalver) transactions, write-off of debt issuance costs of $1.3 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, and restructuring costs of $1.9 million. The fourth quarter of 2016 also included an income tax benefit of $7.5 million associated with the United States Short Line Tax Credit, which expired on December 31, 2016.

Fourth Quarter Results by Segment

Operating revenues from G&W's North American Operations decreased $2.0 million, or 0.6%, to $320.2 million in the fourth quarter of 2017, compared with $322.2 million in the fourth quarter of 2016. Excluding $4.0 million of revenues from new operations, North American Operations same railroad revenues decreased by $7.2 million, or 2.2%, primarily due to a decrease in freight-related revenues. The decrease in freight-related revenues was primarily due to $10.0 million of revenue recognized in the fourth quarter of 2016 associated with a four-year take-or-pay volume commitment contract.

North American Operations traffic decreased 7,517 carloads, or 1.9%, to 395,422 carloads in the fourth quarter of 2017. Excluding 5,246 carloads from new operations, same railroad traffic decreased 12,763 carloads, or 3.2%, in the fourth quarter of 2017, compared with the fourth quarter of 2016. The same railroad traffic decrease was principally due to decreases of 9,444 carloads of coal and coke traffic (primarily in the Midwest, Western and Northeast regions) and 6,239 carloads of agricultural products traffic (primarily in the Midwest and Central regions), partially offset by increases of 3,481 carloads of minerals and stone traffic (primarily in the Central and Western regions). All remaining traffic decreased by a net 561 carloads.

Operating income from G&W's North American Operations in the fourth quarter of 2017 was $74.6 million, compared with $83.4 million in the fourth quarter of 2016. The operating ratio for North American Operations was 76.7% in the fourth quarter of 2017, compared with an operating ratio of 74.1% in the fourth quarter of 2016. Adjusted operating income from G&W's North American Operations in the fourth quarter of 2017 was $75.5 million, compared with $87.4 million in the fourth quarter of 2016. The adjusted operating ratio for North American Operations was 76.4% in the fourth quarter of 2017, compared with 72.9% in the fourth quarter of 2016. Operating income and adjusted operating income in the fourth quarter of 2016 included $10.0 million of income associated with a four-year take-or-pay volume commitment contract.⁽¹⁾

Operating revenues from G&W's Australian Operations increased $14.2 million, or 23.1%, to $75.5 million in the fourth quarter of 2017, compared with $61.4 million in the fourth quarter of 2016. Excluding $11.6 million of revenues from new operations and a $1.7 million increase due to the impact of foreign currency appreciation, Australian Operations same railroad revenues increased by $0.8 million, or 1.3%.⁽²⁾

Australian Operations traffic increased 50,610 carloads, or 61.4%, to 132,999 carloads in the fourth quarter of 2017. Excluding 56,366 carloads from new operations, same railroad traffic decreased 5,756 carloads, or 7.0%, in the fourth quarter of 2017 compared with the fourth quarter of 2016. The carload decrease was principally due to decreases of 3,263 carloads of coal and coke traffic and 2,556 carloads of agricultural products traffic. All remaining traffic increased by a net 63 carloads.

Operating income from G&W's Australian Operations in the fourth quarter of 2017 was $17.6 million, compared with $2.8 million in the fourth quarter of 2016. The operating ratio for Australian Operations was 76.7% in the fourth quarter of 2017, compared with an operating ratio of 95.4% in the fourth quarter of 2016. Adjusted operating income from G&W's Australian Operations in the fourth quarter of 2017 was $22.5 million, compared with $13.5 million in the fourth quarter of 2016. The adjusted operating ratio for Australian Operations was 70.2% in the fourth quarter of 2017, compared with 77.9% in the fourth quarter of 2016.⁽¹⁾

Operating revenues from G&W's U.K./European Operations increased $42.9 million, or 32.3%, to $175.8 million in the fourth quarter of 2017, compared with $133.0 million in the fourth quarter of 2016. Excluding $37.8 million from new operations and a $10.5 million increase due to the impact of foreign currency appreciation, U.K./European Operations same railroad revenues decreased $5.4 million, or 3.8%, primarily due to a decrease in Continental Europe intermodal revenues following the discontinuation of certain intermodal train services as part of the restructuring of ERS, partially offset by stronger U.K. intermodal and aggregates in Poland and the U.K..⁽²⁾

U.K./European Operations traffic decreased 7,215 carloads, or 2.6%, to 274,007 carloads in the fourth quarter of 2017. The traffic decrease was principally due to decreases of 9,458 carloads of coal and coke traffic (primarily in the U.K. and Poland) and 4,209 carloads of intermodal traffic (primarily in Continental Europe), partially offset by an increase of 6,453 carloads of minerals and stone traffic (primarily in the U.K. and Poland).

Operating income from G&W's U.K./European Operations in the fourth quarter of 2017 was $16.0 million, compared with an operating loss of $32.6 million in the fourth quarter of 2016. The operating ratio for U.K./European Operations was 90.9% in the fourth quarter of 2017, compared with 124.5% in the fourth quarter of 2016. Adjusted operating income from G&W's U.K./European Operations in the fourth quarter of 2017 was $7.6 million, compared with $2.4 million in the fourth quarter of 2016. The increase was primarily due to the impact of the restructuring of ERS, improvements in the U.K. intermodal operations and the contribution from the Pentalver acquisition. The adjusted operating ratio for U.K./European Operations was 95.7% in the fourth quarter of 2017, compared with 98.2% in the fourth quarter of 2016.⁽¹⁾

Consolidated Annual Results

2017 Segment Highlights

• North America: Operating revenues from G&W's North American Operations increased 3.0% to $1,274.3 million from $1,236.8 million. Reported operating income from G&W's North American Operations decreased 4.9% to $303.9 million from $319.6 million; Adjusted operating income from G&W's North American Operations decreased 4.6% to $312.6 million from $327.6 million.⁽¹⁾
• Australia: Operating revenues from G&W's Australian Operations increased 38.2% to $307.5 million from $222.6 million. Reported operating income from G&W's Australian Operations increased to $77.3 million from $4.8 million; Adjusted operating income from G&W's Australian Operations increased to $82.2 million from $41.4 million, primarily due to new operations from the GRail acquisition.⁽¹⁾
• U.K./Europe: Operating revenues from G&W's U.K./European Operations increased 15.5% to $626.2 million from $542.2 million, primarily due to new operations from the Pentalver acquisition. Operating revenues included a $13.4 million benefit from foreign currency appreciation. Reported operating income from G&W's U.K./European Operations increased to $17.3 million from an operating loss of $34.7 million; Adjusted operating income from G&W's U.K./European Operations increased to $20.7 million from $5.2 million, primarily due to the impact of the restructuring of ERS and the contribution of the Pentalver acquisition.⁽¹⁾⁽²⁾

Reported net income attributable to G&W for the year ended December 31, 2017 was $549.1 million, compared with $141.1 million for the year ended December 31, 2016. Excluding the impact of certain items affecting comparability listed below, adjusted net income attributable to G&W for the year ended December 31, 2017 was $182.0 million, compared with $182.4 million for the year ended December 31, 2016.⁽¹⁾

G&W's diluted EPS for the year ended December 31, 2017 were $8.79 with 62.5 million weighted average shares outstanding, compared with diluted EPS of $2.42 with 58.3 million weighted average shares outstanding for the year ended December 31, 2016. Excluding certain items affecting comparability listed below, G&W's adjusted diluted EPS for the year ended December 31, 2017 were $2.91 with 62.5 million weighted average shares outstanding, compared with adjusted diluted EPS of $3.13 with 58.3 million weighted average shares outstanding for the year ended December 31, 2016.⁽¹⁾

G&W's 2017 and 2016 annual results included certain items affecting comparability between the periods that are set forth in the following table (in millions, except per share amounts).

Adjusted Free Cash Flow Measures ⁽¹⁾

Adjusted free cash flow measures for the twelve months ended December 31, 2017 and 2016 were 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 2017 will be held on Thursday, February 8, 2018, at 11 a.m. EST. The dial-in number for the teleconference in the U.S. is (800) 288-9626; outside the U.S. is (612) 332-0345, 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, 2018 by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 439193.

About G&W

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

• G&W's seven 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 serves New South Wales, the Northern Territory and South Australia and operates the 1,400-mile Tarcoola-to-Darwin rail line. The Australia Region is 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./Europe Region includes the U.K.'s largest rail maritime intermodal operator and second-largest freight rail provider, as well as regional services in Continental Europe.

G&W subsidiaries and joint ventures also provide rail service at more than 40 major ports, rail-ferry service between the U.S. Southeast and Mexico, transload services, contract coal loading, and industrial railcar switching and repair.

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 United States Security and Exchange Commission.

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 2016 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.

Non-GAAP Financial Measures

This earnings release contains references to adjusted operating income, adjusted net income attributable to G&W, adjusted diluted earnings per common share (EPS) and the adjusted free cash flow measures of adjusted net cash provided by operating activities attributable to G&W, adjusted free cash flow attributable to G&W and adjusted free cash flow attributable to G&W before new business investments and grant funded projects, 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 the adjusted free cash flow measures, 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 adjusted free cash flow measures 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 Operating Income