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|Subject: GWR: Gennessee & Wyoming Q4 CC||Date: 2/14/2008 11:06 AM|
|Author: FreethinkerKW||Number: 10 of 25|
Looking at our fourth quarter revenue, you will see that’s freight revenue which is 61% of our total increase 9%. The significant dynamic to note is at a 6% decline in volume was more than offset by 16% increase in price per carload.
In this regard, I would note that despite the weak housing and paper markets, we’ve continued to maintain our forest products, pulp and paper revenues due to strong pricing. This in turn implies that we have growing leverage to any volume upturned in these markets.
One other item of note in our fourth quarter freight revenue with car are Illinois Co-shipments from the Powder River Basin were strong in the fourth quarter and more than offset weak haul traffic in Utah due to the closure of two mines, following the tragic mine collapsed last year.
Now, turning to the fourth quarter non-freight revenue which is 39% of our total, you will see an increase of 23%. Particularly important, were strong shipments at our port railroad and Galveston Texas, Corpus Christi Texas, Savannah Georgia, as well as strong iron ore exports to Whyalla, South Australia. Meanwhile our diluted earnings per share from continuing operations increased 8% to $0.40 per share in the fourth quarter 2007. As T. J will explain in further detail, after normalizing for certain tax effects and gains from that sale of assets our core EPS growth was over 23%.
Now, the trends of the fourth quarter combined with new business coming on line in 2008 make us optimistic for the coming year despite the US economic landscape. So I would now like to take a step back and look at the big picture for the G&W and discuss our outlook for 2008. With Mexico now a discontinued operation and Australia fully consolidated, we are finally able to give a clear presentation of our core business
If you turn to slide 1, you will see our core revenue has grown at a compound annual growth rate of 24.7% over the past five years. In 2008, which TJ will discuss in detail. We’re budgeting revenue of approximately $560 million, an increase of around 8%. About 80% of this expected revenue growth is same railroad, driven by an anticipated 1% increase in carloads and a 7% increase in rate per carload or revenue per carload.
In slide 2, you will see that our operating income has grown at a compound annual growth rate of 31.6% over the past five years. In 2008, we are expecting operating income growth of around 14% to around $110 million dollars. Excluding the impact of asset sales in 2007, which is shown as the green cap on the bottom of the slide, we expect our core operating income to grow more than 20% in 2008.
Overall, our target operating ratio for 2008 is approximately 80%, which should be 2 percentage points better than 2007 excluding the impact of asset sales. This margin improvement is largely driven by our mix of new business. In 2008, several of the projects that we have been investing in over the past 12 months are coming online including a new ethanol plant in Oregon and new wooden pellet plant on the Bay line, increasing ores and mineral shipments in South Australia and a ramp up of intermodal traffic on Commonwealth Railway from Maesrk new terminal in Portsmouth, Virginia
Turning to areas of weakness, which are captured in this 2008 outlooks, we are primarily concerned with paper enforced product volumes in our Oregon and Canada region. In particular, Canada regions has been adversely affected by combination of the weak US housing market, a weak paper market, and a strong Canadian dollar, which makes Canadian exports less competitive. Meanwhile, we are facing another Australian drought with revenues in 2008 expected to be similar to last year due to the structure of our contract.
Now turning to our earnings per share outlook. Because the short line tax credit has not yet been extended. We expect our growth and operating income to be largely offset by book tax rate that increases from 24% in 2007 to 37% in 2008. Consequently, we expect 2008 earnings per share to increase in low single digits instead of the much stronger growth employed by our core business. Please note that the short line tax credit extension has strong bipartisan support with 199 co-sponsors in a house and 39 co-sponsors in the Senate, and we are waiting for to find its way into the appropriate legislation.
Now turning to the acquisition market. On December 31st we completed the acquisition of an 87% stake in Maryland Midland. The railroad has been fully integrated. January results were good and we look forward to its contribution for many years to come. Meanwhile, we remain focussed on select international markets as well as natural resource development projects in the United States and Australia. The acquisition market remains active for us right now as illustrated by the fact that we spent more than a million dollars on acquisition related expense in the fourth quarter 2007, which caused our operating at 70 basis points. On one hand, we seemed to be in advantage of the corporate acquirer with a strong balance sheet, while other acquirers may be more dependent on the debt market, which are currently in disarray. On the other hand, we are still determining the precise degree of competition from the other bidders. And with that, I would like to turn the call over to our Chief Financial Officer, T.J. Gallagher.
Timothy J. Gallagher – Chief Financial Officer
Thanks Jack and good morning to everyone. Turning to the next slide, fourth quarters revenue increased $16.9 million or 14.3% to a $134.5 million. Trade revenues increased $7 million or 9.3%, as an increase in average revenue per carload of 15.8% was partially offset by a 5.6% decline in carloads. Note that, approximately 3.7% of the increase in the average revenue per car was due to the appreciation of the Canadian dollar, an Australian dollar versus the US dollar. However, even adjusting for the foreign currency benefit, average revenue per carload increased 12.1%
Non-freight revenues increased 9.8 million or 23.2%, of this increase 4 million was related to increased iron-ore services and accruing contracts in South Australia, 3.4 million was due to higher third-party fuel sales, and as Jack mentioned, the reminder of the increase in non-freight revenues was due to broadly higher revenues at our US ports and industrial switching locations.
Let me offer a few other observations on fourth quarter carload results. First, the 2006 drought impact on the South Australia Green harvest produced farm and food product carloads in 2007. The fourth quarter impacted, which was approximately 4800 carloads.
Second, the discontinuance of the M&B haulage traffic reduced fourth quarter carloads by 11,500. Excluding these items carloads increased by about 5000 carloads or 2.6%, primarily due to stronger coal shipments in our Illinois region and stronger salt shipments in our New York, Pennsylvania region. These increases offset an 1800 carload decrease in pulp and paper traffic, which continues to be negatively impacted by a weak Newsprint market.
During the fourth quarter of 2007, we had operating income of 22.5 million compared with operating income of 18.7 million in 2006. Normalizing for gains on asset sales totaling 0.8 million in the fourth quarter of 2007, and 2.8 million in the fourth quarter of 2006, operating income increased 36.5% from 15.9 million in 2006 to 21.7 million in 2007. Our operating ratio adjusted for these items improved from 86.5% in the fourth quarter of 2006 to 83.9% in the fourth quarter of 2007, an improvement of about 250 basis points.
Now turning to slide 5. Normalizing for the gains on the asset sales and the net tax benefits in the fourth quarters of 2007 and 2006, earnings per share increased 23.3% from $0.30 per share in the fourth quarter of 2006 to $0.37 per share in the fourth quarter of 2007. Also, when comparing earnings per share in the fourth quarter of 2007 versus the fourth quarter of 2006, please note that in the fourth quarter of 2006 we had approximately 95 million in cash on our balance sheet associated with the Australian taxes due on the ARG sales that were paid in June of 2007. Fourth quarter 2006 result include roughly $1 million aftertax and interest income from that cash balance
Moving to discontinued operations. We reported a net loss of 0.6 million or $0.02 per share in the fourth quarter of 2007 primarily associated with the cost of liquidation. Moving forward, we expect the cost of liquidation to be around 400,000 in the first quarter as we completed statutory audits, and then the minimis expense there after.
Moving to free cash flow. At the beginning of the year, we estimated 2007 free cash flow from continuing operations of approximately 66 to 67 million. We finished the year with 79.5 million or about $13 million better than guidance. You will note that our networking capital improved by approximately $24 million. The big picture is that 13 million of this increase was due to an increase in our interlined freight payable associated with higher freight revenue. The remaining $8 million increases timing related, the benefit of which was offset by the delayed receipt of $11 million in government grants for capital projects completed in 2007.
Note also that if you look at our cash flow statement you will see that deferred taxes were about $8 million lower than our expectations a year ago. The difference here is split about 50-50 between effects of the Mexico liquidation and a tax payment on the ARG sale on our consolidated US tax provisions. You will note in our guidance for 2008 that the impact of deferred taxes on our free cash flow is at a more normalized level of 17 million.
Moving to slide 6 and the guidance for 2008 let me refer you to our earlier Safe Harbor statement that noted that these statements are subject to a variety of factors that could cause actual results to differ materially from our current expectations. These statements represent our views regarding future results as of today, February 13, 2008, and we do not under take any obligation to update this information. We are expecting diluted earnings per share of approximately $1.65 to a $1.75. Please note that this guidance does not assume a renewal of the short line tax credit.
Our underlying assumptions are as follows. We expect revenues to be around 560 million with an operating ratio of around 80%. Net interest expense is around 12 million and our tax rate increase is to 37%. G&A will be around 37 million and diluted shares are 36 million. Please note that we would expect an extension of the short line tax credit, should that occur to increase earnings by about $0.20 to $0.22 per share. With respect to discontinued operations we area expecting the ongoing cause and liquidation to be about a penny per share in the first quarter, and then diminimis thereafter.
Turning to slide 7 for CapEx. Capital expenditures in 2008 are expected to be around $60 million. This total is composite of the following; 42 million of core maintenance capital, plus $1 million for our locomotive lease buyout, $12 million in capital expenditures associated with new business development and $6 million of long-term infrastructure projects with matching governments spend. These projects are typically infrastructure upgrade projects, and in 2008 these projects include upgrades on the Eyre Peninsula in South Australia and upgrade to bridges in Oregon and Canada.
You’ll note that our core maintenance capital spending has increased from 36 million in 2007 to 42 million in 2008. This increase is primarily a function of currency movement in Australia and Canada $2 million, the MMID acquisition $1 million and increases in track and bridge spending in the US which has been impacted by higher material cost. While there is an absolute increase in dollar terms, the level of maintenance spending remans relatively constant at 28% of EBITDA.
Now let’s turn to slide 8 for free cash flow guidance. We’ll start with our net income, add back DNA non-cash compensation expenses and deferred taxes. We expect operating cash flows are around a $119 million to $124 million in 2008. Subtracting our quarter maintenance capital spending yields core free cash flow from the business between $77 million and $82 million. This is the amount of cash flow the business would generate in a steady state.
In terms of what we report in 2008, we need to add $19 million of non-maintenance Capex, adjust for the out of period $11 million in third party funds for 2007 projects and assume that our 2008 grand funding will be received in 2008. While it is difficult to predict the timing of the recede of government grant funding, if we are neutral, 2008 free cash flow would be around $69 million to $74 million as shown on the chart.
Turning to the specifics for the first quarter of 2008 we expect revenues around a 138 million and an operating ratio around 81%. Net interest expense should be approximately 3.4 million and our effective tax rate should be around 37%, diluted shares are 36 million shares. Our bottom line is that we are expecting Q1 EPS around $0.40. And with that, I will open up the call for questions.
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