How Much Did Genesee & Wyoming’s 4Q17 Operating Margins Expand?
Genesee & Wyoming’s 4Q17 operating margins
In this part of the series, we’ll look at the combined and segmental operating margins for Genesee & Wyoming (GWR). While GWR’s revenues rose 10% in the fourth quarter 2017, its operating expenses rose just 0.1%. That could point to the extent of restructuring undertaken by the company in all three of its segments.
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Segment operating margins in 4Q17
GWR’s North America segment’s adjusted operating margin fell 3.5% to 23.6%, from 27.1% in 4Q16. Its operating income per share was $0.01 lower due to higher claims expenses. Recording of the take-or-pay shortfall as well as higher fuel costs led to the margin contraction for that segment.
In its UK-Europe operation, the adjusted operating margin was 4.3%, a 3.5% rise from 1.8% in the last quarter of 2016. The company’s operating margin per share declined $0.04 in 4Q17 due to an unfavorable mix of lower-rated contract revenue and spot revenue in the European intermodal operations. Higher frequency of service failure resulted in increased service costs, which acted in favor of its reduced operating margin.
In GWR’s Australian operation, the operating margin was 29.8% in 4Q17 compared to 22.1% in the corresponding quarter of 2016. The rise in operating margin was attributed to the Glencore Rail acquisition along with a solid increase in metallic ores and agricultural carloads.
Management’s outlook for 2018
Genesee & Wyoming expects an adjusted operating income of $335 million in 2018, representing a 7% growth in its North America operations. That translates to an expected operating margin of 25.4% for that segment. The company anticipates $25 million for adjusted operating income in its UK-Europe operation, which translates to a 3.3% operating margin in 2018.
For its Australia operation, GWR’s operating income guidance is $85 million and an expected operating margin of 25.8% for 2018. The railroad expects growth in spot volumes of coal to drive its operating income growth in Australia.
Peers’ operating margin initiatives
Freight volumes for major US railroads (FXR) are expected to increase in 2018 over last year’s levels. That could offer an opportunity for these railroads to grow their operating margins. Major Eastern US railroad Norfolk Southern (NSC) realigned its coal-related assets in 2017. Its arch rival CSX (CSX) shifted to Precision Scheduled Railroading. Major Western US carrier Union Pacific (UNP) has been aggressively pushing its G55 + 0 program to boost its operating margins. Overall, investors might expect an expansion in railroads’ operating margins in 2018.
In the next part, we’ll turn to analysts for their opinions on GWR and its peer group after the 4Q17 earnings.