Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Genesee & Wyoming, Inc. (NYSE:GWR)

Q4 2008 Earnings Call

February 11, 2009 11:00 AM ET

Executives

Michael E. Williams - Director of Corporate Communications

John C. Hellmann - President and Chief Executive Officer

Timothy J. Gallagher - Chief Financial Officer

Analysts

Edward Wolfe - Wolfe Research LLC

Christian Wetherbee - Merrill Lynch

Jason Seidl - Dahlman Rose & Co.

Neal Deaton - Stephens Inc.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Genesee & Wyoming Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Mike Williams. Please go ahead.

Michael E. Williams

Thank you for joining us today on Genesee & Wyoming's Q4 2008 earnings call. Please note that we will be referring to a slide presentation during today's call. These slides are posted under the investors tab of our website www.gwrr.com in the supporting materials for today's conference call webcast.

Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measure are likewise posted in supporting materials for today's call. We will start with the Safe Harbor statement, and then proceed with the call.

Some of the statements we will make during this call, which represent our expectations or beliefs, concerning future events are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a Safe Harbor for such statements. Our use of words such as estimate, anticipate, plan, believe, could, expect, targeting, budgeting or similar expressions are intended to identify these statements, and are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from our current expectations, including but not limited to factors we will discuss later, and the factors set forth in our filings with the Securities and Exchange Commission.

Please refer to our filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We do not undertake any obligation to update this information, and you should recognize that this information is only accurate as of today's date.

On the call today we have two speakers, our President and CEO, Jack Hellmann, and our CFO T.J. Gallagher. I will now turn the call over to our President and CEO, Jack Hellmann.

John C. Hellmann

Thank you, Mike, and good morning. Welcome to G&W's fourth quarter earnings call. Before I start, I'd just like to repeat that we have a slide presentation posted on our website under the investors tab, if you'd like to follow along. We'll speak to everything that is on those slides but you may wish to have the video presentation as well.

As always, I'd like to start our call this morning with safety. If you turn to slide number two you will see the G&W completed 2008 with an FRA reportable index of 1.3 and 200,000 man hours, a 20% improvement over 2007. This safety performance was a record in company history, and four of our nine regions completed the year without a reportable injury.

Our Oregon region has now completed three full years without reportable injury. As we enter 2009, we are lowering our annual safety target to 1.25, and we continue to pursue our ultimate goal of being injury free.

Now turning to financial results, our reported earnings for the fourth quarter increased 75% to $0.70 per share driven primarily, by the short line tax credit extension, and a gain on the sale of property in Australia. Excluding gains on asset sales and acquisition related expenses, our operating income increased 27% and our operating ratio was 80.9%. Despite this apparent strength, our results were below our guidance on November 3rd as revenue was approximately $6 million less than we expected and operating income was more than $3 million less than we expected. Most of this short-fall was due to the steep decline in same railroad shipments in the second half of the quarter, as a 9% carload decline in November and an 11% decline in December more than offset the benefit of the rapid drop in the price of diesel fuel. In addition the closure of our Oregon railroad due to icy whether in mid-December hurt us on the expense side.

Commodity groups were we saw the most significant declines in same railroad traffic were metals and steel, lumber and forest products and pulp and paper which were down 28%, 14% and 9% respectively in the fourth quarter. Since our exposure to intermodal and auto shipments is around 1% of revenues, we've been less directly affected by the downturn in these sectors.

Commodities that are holding up reasonably well include grain in Australia and Canada, utility coal in the U.S., garbage and salt in the U.S., as well as our contractually protected non-freight business, including iron ore shipments in Australia. Last quarter we estimated that 60% of our business is less economically sensitive, and 40% is more economically sensitive. A ratio that was consistent with our actual experience in the fourth quarter.

In response to the volume declines in late 2008 and early 2009, we moved rapidly to reduce our expenses, particularly in transportation. We have reduced service where possible, we have furload (ph) 90 employees, and we have parked 25 locomotives. These cuts are a direct response to what is obviously a troubled global environment for an industrial production.

We've had two customers file for Chapter 11, within the last month, one with debtor and possession financing, and one without debt financing. And we've had one steel customer in the Northeast announce the permanent closure of a mill.

Meanwhile, our five recent acquisitions the Ohio Central, Maryland Midland, Georgia Southwestern, KG and Rotterdam Rail Feeding, collectively performed in line with our expectations in the fourth quarter, and our overall budget for 2009 continues to track our acquisition models. This relative stability is for two main reasons. First, we have less economically sensitive traffic on these acquisitions, such as coal, garbage and certain highly fish (ph) and industrial plants.

Second, although our acquisition revenue is behind plan for commodities such as steel in the US, and containers in Rotterdam, overall cost savings from acquisitions have been higher than expected.

Now, I'd like to review our general outlook for 2009 in the context of recent economic trends. There is no question that 2009 is a very difficult year to forecast due to the dramatic economic collapse, and unprecedented demand uncertainty. Having said that we strived to mange our business to a budget, based on best information that we have available. And philosophically, we believe that uncertainty requires us to provide our shareholders with more information rather than less, however and perfect.

For the first time ever at G&W, we opened up our 2009 budget in January, so as to review December results in detail, and incorporate additional feedback from our shippers. For some more regions, such as Australia, Rocky Mountain and Illinois, there are minimal changes to the 2009 budget, due to the stability of the commodity mix and/or contract structure.

For other regions such as Southern, Canada and Oregon, we reduce our shipment expectations by significant amounts for paper, lumber and steel. To give you some perspective, between our budget draft in mid-December 2008, and our final budget in the late January 2009, we reduced our operating income by approximately $14 million or roughly 10%.

Now, let's return to the slides. As you can see in slide 3, we finished 2008 with $602 million of revenue, which was a 17% increase over 2007. In 2009, we are expecting approximately 620 million of revenues. There are four essential elements to understand this 2009 revenue target, compared to 2008.

First, at current exchange rates, the weaker Canadian and Australian Dollars reduced revenue by approximately $20 million. Second, we expect revenues from third-party fuel sales in Australia to decline by approximately $10 million due to lower fuel prices. Third, we expect same railroad revenue to decline by approximately $25 million, which TJ will discuss in a moment. Fourth, we expect acquisitions to add approximately 75 million in revenues. So, when you add it all up, we're expecting about a $20 million net increase in revenue in 2009.

Now turning to operating income. As you can see on slide four, we finished 2008 with a $116 million in operating income which was a 20% increase over 2007. Excluding gains on asset sales and acquisition related expenses, our operating income was approximately $110 million in 2008. In 2009, we're expecting approximately $125 million in operating income, which should be an increase of around 14%. The simplest way to understand this $50 million increase in 2009 is that our acquisition operating income is more than offsetting a decline in our same railroad operating income.

Next I would like to discuss free cash flow. As one would expect in the current environment, we're intensely focused on managing all of our cash expenditures. Excluding the timing of working capital and government grant collections we're budgeting free cash flow between 80 and $90 million in 2009. This is approximately 20% higher than our 2009 outlook for net income and reflects effective management of capital expenditures as well as the favorable tax position due in part to the short line tax credit.

Now turning to a few thoughts on acquisitions. First as the evidenced by the significant expense related to acquisitions in the fourth quarter, we continue to be focused on select opportunities that are being very patient in an environment of significantly reduced competition and extreme economic uncertainty. Second, we have significant capacity under our revolver and plan to increase availability over the course of 2009 as we continue to generate strong free cash flow and pay down debt. While we are in a strong cash position today, we are also cognizant that our position relative to others may grow even stronger with the passage of time. So, we remain very patient.

Finally, I'd like to note that we ultimately look at 2009 as an opportunity to show the relative stability of G&W's business in the face of economic turmoil and to increase our free cash flow despite an extremely weak demand environment.

Thank you and with that I would like to turn the call over to our Chief Financial Officer, TJ Gallagher.

Timothy J. Gallagher

Thanks Jack, and good morning to everyone.

Let's start on slide 5. We reported $25.3 million in income from continuing operations in the fourth quarter, compared with $14.5 million in the fourth quarter of 2007. As you can see on this slide, we had four significant items in 2008.

First, due to the passage of an extension to the short line tax credit in October, G&W recorded a full year of the tax credit in fourth quarter. In order to compare the results with 2007, we've highlighted a nine month retroactive portion of the credit.

Second, other tax items provided a net tax benefit of 2.8 million. The components of this tax benefit include the impact of the 2008 acquisitions on our consolidated tax position, which provided a net tax benefit of $4.8 million, partially offset by $2 million in deferred tax valuation allowances in Australia and Canada.

Third, we had a gain on the sale of a property in Australia that provided an after-tax gain of 2.7 million. And fourth, due to a high level of DO (ph) activity, we had acquisition related expenses of 1.3 million after-tax. If you normalize for these items, we're about a nickel below our guidance.

Turning to slide 6. Fourth quarter revenues increased 14.7 million or 10.8% to 149.2 million. New operations provided revenues of 26.3 million, partially offset by a decrease in same railroad revenues of 11.7. Of the decrease in same railroad revenues, 7.2 million was due to the depreciation of the Canadian and Australian Dollars, versus the U.S. Dollar, and 3.5 million was due to lower third-party fuel sales in Australia. Other than these items, same railroad revenues declined by about a $1 million.

On slide 7, you'll see that freight revenues increased 13.1 million or 15.9%. Excluding currency and acquisitions, same railroad freight revenues declined 2.8 million. The decline was primarily due to lower carloads, which declined 8.8% in the fourth quarter, compared to the prior year. Average revenues per carload decreased 1.1% in the fourth quarter, largely due to currency, and the impact of acquisitions, which collectively had lower average revenues per carload than the rest of G&W. Excluding currency, same railroad average revenues per carload increased 5.9%.

Non-freight revenues in the fourth quarter increased 1.6 million or 3%, compared with the fourth quarter of 2007. Excluding currency and declines in third-party fuel sales, same railroad non-freight revenues increased 1.8 million primarily, due to higher levels of industrial switching, as well as new crewing services in Australia.

Turning to slide 8. During the fourth quarter, operating income increased 35.2% to $30.4 million, normalizing for gains on asset sales and acquisition expenses, operating income increased 27.2% from 22.4 million in the fourth quarter of 2007, to 28.5 million in the fourth quarter of 2008. Our operating ratio adjusted for these items, improved to 80.9%.

Moving to free cash flow. At the beginning of the year, we estimated 2008 free cash flow from continuing operations of approximately $60 million, including the net impact of delayed receipt of government grants for projects completed in 2008. We finished the year with $67.9 of free cash flow, about $8 million ahead of guidance. Higher net income, including acquisitions was partially offset by higher business development capital spending, in Australia and the Netherlands.

You'll note that our networking capital improved by approximately 13 million, primarily due to improved collections, and that deferred taxes were much lower. The primary driver of the difference in deferred taxes was the passage of the short line tax credit, which had the effect of reducing our book tax rate well below our original guidance of 37%.

Moving to slide 9, and guidance for 2009. 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 expectations regarding future results as of today, February 11, 2009, and we do not undertake any obligation to update this information.

First, let me say that we don't have any better insight into the economy, than any of the other railroads, or anyone else for that matter. However, we have worked very hard to come up with a budget from the ground up, that reflects our current... reflects the current economic realities, and we have established internal targets to which we hold ourselves accountable.

With that said, we are expecting diluted earnings per share between $1.80 and $2 in 2009. The underlying assumptions are as follows.

We expect revenues to be approximately $620 million with an operating ratio around 80%. Net interest expense is estimated at $26 million and our tax rate should be approximately 30%. Depreciation and amortization is expected to be around $52 million and diluted shares are $36.2 million.

The short line tax credit extension passed last October is effective for the 2008 and 2009 tax years. If the tax credit is not renewed again this year, we expect our book tax rate will increase in 2010 to around 37 to 38%. However, given our overall tax position our cash tax rate should not increase and therefore free cash flow would not be impacted.

You'll note that the upper end of our 2009 EPS guidance is roughly equal to our actual 2008 results. Recall that we had about $0.15 per share in gains on the sale of assets in 2008 and we typically don't budget for these items. In addition, we had other tax items in 2008 that provided another $0.05 per share. Considering these items, our guidance represents an increase in EPS between zero and 10%.

Turning to slide 10. Jack has already discussed the big picture but let me outline the detail. Core same railroad revenue decline is split between, roughly 60, 40 between freight and non-freight consistent with the makeup of our overall revenue base. With respect to freight revenues, we anticipate same railroad volume declining, somewhat between 4 and 7% and rate increases around 5%, excluding the impact of fuel, mix and currency. Metal, forest products and paper carloads are expected to be the weakest.

For non-freight revenues the decline is due to exiting a U.S industrial switching contract, lower grain volumes at our U.S. port railroads and reduced equipment lease income in Australia.

Turn to slide 11 for CapEx. Capital expenditures in 2009 are expected to be around 58 million. This total is composed of the following, 51 million of core recurring track and equipment CapEx plus $7 million in CapEx related to new business development, primarily additional locomotives at Rotterdam Rail Feeding.

With the 2008 acquisitions our annual maintenance capital expenditures are roughly equal to our depreciation and amortization of 52 million. Thus in 2009 we are spending about this level and in addition we expect to receive approximately 38 million in government funding, so the overall quality of our infrastructure will continue to improve.

Let's turn to slide 12 for free cash flow guidance. If you start with the range of our... of expecting net income, add back D&A, non-cash compensation expenses in deferred taxes, we expect operating cash flow between 140 to $148 million for 2009. Subtracting capital expenditures of 58 million, yields a range of 80 to 90 million in free cash flow which would be a record for the company and approximately 20% increase year-over-year.

Working capital is assumed to be neutral and I am assuming that we'll have roughly the same impact of delayed receipt of government grants as we've had in prior years that is 8 to 10 million per year of slippage as indicated on this slide.

The big picture is that even during the severe economic downturn, we expect our business to generate significant free cash flow.

Now turning to the specifics for the first quarter of 2009. We expect the first quarter to be roughly similar to fourth quarter of 2008 with revenues in the range of 145 to 150 million and an operating ratio around 81%. We're assuming same railroad carloads decline in the range of 6 to 7% and an increase in same railroad average revenues per carload of approximately 5% excluding fuel, mix and currency.

Net interest expense should be approximately 7 million and D&A in the area 12 to 13 million. Our effective tax rate is expected to be around 30%, diluted shares are estimated at $36.2 million. So, the bottom-line is that we are expecting Q1 EPS around $0.40, although January results are tracking slightly below that.

With that I'll open up the call for questions.

Question-and-Answer Session

Operator: (Operator Instructions). And our first question comes from the line of Edward Wolfe with Wolfe Research. Please go ahead.

Edward Wolfe - Wolfe Research LLC

Hey, good morning Jack, good morning TJ.

John Hellmann

Good morning.

Timothy Gallagher

Good morning Ed.

Edward Wolfe - Wolfe Research LLC

Hey Jack, when you said, kind of you did your budget a little later and you're seeing here between December and January and reducing EBIT by 10%.

John Hellmann

Yes.

Edward Wolfe - Wolfe Research LLC

But what's gone through your mind when you're doing that? Is it... this is, obviously we're in this, nothing is moving in December, January period. Are you looking and saying just because of the volumes, this is where the cost and the run rate as right now or are you're looking forward and saying this is where we see things bottoming. What kind of call are you making here about where the bottom is and what the economy is going to look like, I guess?

John Hellmann

Yeah it's a little, no it's a good question, because it kind of gets the psychology. It's a little of both. I mean, the benefit of doing it at a time when things are literally not shipping at all, which is what happened in late December, early January is that hopefully from the ground up including at the shipper level, you've got the best sense of reality that you possibly can. But of course, the shippers themselves have a difficult time, knowing precisely what their outlook is. And so, conversations for... with those shippers say in a cyclical commodity like, pick lumber, would be what we told you last December, let's take that down... take that volume down 20%. And so, it's a ground up process that has the imperfection of the human beings feeding the information into that process. But it's for the 40% of our business, which is the most economically sensitive, so you sort of reduce the exposure in that regard.

And then, we test it from above to make sure that it makes intuitive sense. Implicit in TJ's annual guidance is continued strong deterioration in the first quarter. Seeing these volumes continuing to be weak. And then also implicit and that is continued weakness in the second and the third quarters, and maybe a bit of an uptick in the fourth quarter relative to the economy just shutting down. But it's... the short answer is that it's the best information we have at this point in time.

Edward Wolfe - Wolfe Research LLC

That's helpful.

John Hellmann

Yeah.

A: And where we sit here on February 11, is there any sign I mean, there is couple of signs if you really search for them, that maybe at least the rate of decline has bottomed in the last couple of months whether you look at the Baltic indexes or some plants over there?

John Hellmann

Right.

Edward Wolfe - Wolfe Research LLC

Are you seeing any signs of that, are you seeing any customers who, you talked about a couple that have gone out of business or shut a plant. Is anyone opening anything, or opening up a little bit?

John Hellmann

I would... it would be premature for me to reply. I can tell you that, one thing that surprised me and it's consistent with the Baltic index is, with our own iron ore business in Australia, as well as I've talked to the CEO of another Australian railroad recently, and we've both been amazed at how the iron ore shipments have held up from... for those specific customers. That's all going to mid-size steel mills in China, and tonnages are shipping at expected levels and there is visibility on orders until May. So, that's surprised me. Having said that, every other piece of information you get on a daily basis, goes in the negative category. So, it's hard to take too much comfort in that information.

Edward Wolfe - Wolfe Research LLC

On the 5% pricing that you talked about, net of currency in mix and fuel. How much of that is locked in already for '09 as you look out?

Timothy Gallagher

Rd, this is TJ. The bulk of that is already locked in. Like the class ones, most of our contracts are renewed, are either long-term or are renewed annually. And if you assume that on average, half the contracts were renewed in the back half of '08 then the first half of '09 is locked in, plus the longer-term contracts, they don't change. So, the bulk of that has already built in.

Edward Wolfe - Wolfe Research LLC

Can you be a little more specific TJ, is the bulk 70%, 80%?

Timothy Gallagher

In that range.

Edward Wolfe - Wolfe Research LLC

That's helpful. Any sense now that we're getting a little bit more meat on the bones of what the stimulus is going to look like. Are there any customers who've said specifically, we have an opportunity for this or that. Or at one point there was a 100 million that was going to go towards short lines in the house version anyway, is there anything that you're going to sense that might help later in the year from the stimulus?

John Hellmann

Steel and aggregate would be the two places principally. And that would touch us in Oregon, and that would touch us in Oregon and in our rail linked region principally. Yeah, with respect to the 100 million did not make it into the senate version, there is other elements of the bill where there could be an opportunity for freight railroads, above a certain threshold. I think the number is about $20 million. And so, if there was some major projects that maybe accessed to government funds for those. But there hasn't... it hasn't been a heavily real focused stimulus packages as of now. Although there is going to be appropriations down at the state level where there maybe a shot at us benefiting, because we are shovel ready, given the nature of our business. We have the permits, and for large projects, we hire outside contractors. So, we truly do stimulate the local economy, because we don't carry the manpower necessary to do some of those larger projects. So, we are still acutely focused on that as an opportunity. But it's a handicapper right now. It's a little tough.

The important legislative event of '09 will be focusing on highway bill, and the extent of the short line tax credit, and getting that to a much... and hopefully extending that for a longer period of time, three year renewals and two year renewals.

Edward Wolfe - Wolfe Research LLC

You don't think the two are related, do you, the highway reauthorization and the extension?

John Hellmann

They maybe. We'll see. It could be embedded in it.

Edward Wolfe - Wolfe Research LLC

Can you take us through a little bit, you said you have two customers who filed different ways bankruptcy, and then a plant closing. When did these three events occur when we look at them in terms of revenue that might not be coming back versus what's still going on, how do I think about that going forward?

John Hellmann

Yeah, no, anecdotally, I mean it will just give you... they are all captured in the guidance we gave. But there was a Arcelor Mittal galvanizing facility up on the South Buffalo, 2, $3 million of revenue a year which will shut forever. There was a... the ethanol plant out in Oregon, Cascade Grain that we've began shipping to, is the one that filed for Chapter 11, its currently shut. And they say that they're going to open up and will see, we've assumed that they won't to be conservative, but... and then a large paper customer filed for Chapter 11 with debt financing and then often times filing for Chapter 11 from a railroad perspective is not of particular concern because we're critical to the supply chain in the first months into bankruptcy are the long-term survivors and we're their service provider. So, that in itself isn't... the Chapter 11 isn't itself is particular cost of concern, expect it's a reflection of the broader weakness in the industrial economy of course.

Edward Wolfe - Wolfe Research LLC

Last one, and I'll let some have it. The non-freight revenue, I don't know if you gave specific guidance for that for '09, but how should we think of that versus the 232 million in '08?

Timothy Gallagher

We had a $25 million for same railroad decline in revenue with roughly 60, 40 between freight and non-freight. So, 40% of that $25 million excluding currency would be the non-freight.

Edward Wolfe - Wolfe Research LLC

Okay. So take that out and that's kind of the number give or take?

Timothy Gallagher

Yes, yeah.

Edward Wolfe - Wolfe Research LLC

Okay.

John Hellmann

And as TJ said that, remember because I know it can be confusing between freight and non-freight, that's capturing a combination of things. One is you know that grain shipments in the U.S. are weaker and that's where our show up, so our exports of grain in that category, go through that non-freight category through the ports down south. It's also exiting U.S. industrial switching contracts that we're doing that on purpose. And then some reduced leasing that come in in Australia because the economy is down there and we have some excess equipment that we lease out there. So just to give you color on what's in that.

Edward Wolfe - Wolfe Research LLC

That's perfect thanks. It sounds that you got that cold everyone has got, feel better.

John Hellmann

Yeah, thanks.

Operator: And our next question comes from line of Chris Wetherbee with our Merrill Lynch. Please go ahead.

Christian Wetherbee - Merrill Lynch

Great, thanks very much. Speaking about the OpEx side, I know you mentioned, I think in 80% or what (ph) is the target for '09, if could just give us a sense of what you think, what proportion of your expenses seems to be directly variables, so tied to kind of that decline that you guys are looking for in volumes on a same railroad basis and who much might be, maybe longer term variable to the extent that we have a little bit, this really weak patch that we're in right now, last a little bit longer and pushes through a good part of the year?

John Hellmann

I mean I would think as a rough rule of thumb, when you lose revenue, you lose at least 50% of the margin on it. And depending on a how much volume you lose, it totally depends on the specific railroad and the specific services to how much of the... of what had been long-term cost you can turn into variable cost in effect. So, for example in the instance of a permanent plant closer, I can assure you we will have to do reconfiguration of yards, and other customer service in that area. And we will be able to offset a large portion of the expenses, so we'll get more than 50% back in that instance. In the case, we're just learning... losing an incremental car of the back of a train, that's a 100% margin that you lose. But as a rule of thumb, I think if you start from that 50% premise and then work backwards into the specific instances, where some maybe worse and some maybe better, that's probably the simplest way to think about it. I would imagine that's relatively consistent with, for the class one, will tell you as well.

We've got some additional things that we can do to help us, such as storage, when we've got a track that's not being utilized or sightings (ph) that aren't being utilized, you see us going into the storage business and parking all the excess equipment that's in U.S. rail system right now, right on our network and that's a good, it's basically becoming a parking garage, it's a good way to earn income in a time of this deep downturn.

Christian Wetherbee - Merrill Lynch

And then within the commodity mix, I mean certain commodity is little bit more variable and than others based on unit moves as opposed to single carload type of business.

John Hellmann

Absolutely, that's right.

Christian Wetherbee - Merrill Lynch

Okay. And then I guess just, I jumped on a little late, so I apologies if you've covered this already, if you could just walk through the yield impact a little bit. I know there was currency in there, and some I guess mix issues as well, I know you mentioned your core pricing in the five plus percent range, but I just wanted to understand a little bit about how the rest of those two broke down?

Timothy Gallagher

So, reported numbers were 1.1% decline in average revenues per carload, if you exclude the impact currency and acquisitions, we were about 5.9%, up, so same railroad 5.9% up.

Christian Wetherbee - Merrill Lynch

Okay. And I'm sorry, it's all currency, is the difference there or was there...

Timothy Gallagher

Currency and acquisitions.

Christian Wetherbee - Merrill Lynch

Okay.

Timothy Gallagher

And lower yields on acquisitions, it's on slide seven in the presentation.

Christian Wetherbee - Merrill Lynch

Okay. And I guess just on the acquisition market, I know you guys, it sounds like you were active in the quarter, I guess, I am assuming that there is going to be the potential for opportunities given how weak everything is right now, and potentially, I don't know if there is distress situations, I mean, what's your raw sense, it sounds like you guys are staying active?

John Hellmann

We are staying active. We are looking. But, we are being extremely patient. I mean, the real issue is we're in a strong cash position. And we continue generate strong free cash flow and will we be in a stronger position relative to others tomorrow than we are today, and that ultimately translates into valuation and everything else.

So, we take think, probably relative to our last call, I would say we are being a little more patient and cautious, as we continue to watch the economic environment. But we are looking carefully, and you are right, they are very likely are distressed assets out there.

Christian Wetherbee - Merrill Lynch

And what do you think your dry powder is, I mean, from a revolver perspective. I know you've talked about your free cash flow, what do you think you have as far as what you had....

John Hellmann

I mean, it depends on the price you pay, right. I mean, the face value of the revolver is 210 million. And we say, we think we're going to generate between 80 and 90 over the course of this year. Would we want to take all that leverage down, no. You'd want to have a nice big cushion, especially in an economic environment with a degree of uncertainty that's in this one. And so, I mean, the answer depends, right if you paid, if you were paying three times EBITDA for an asset, we might have a lot of capacity. If you're paying a little more than that, you'd have a little less. So, I wouldn't... especially in a distressed environment, I wouldn't want to opine as to a specific number just to say, we're looking.

Christian Wetherbee - Merrill Lynch

Okay. Alright. Well, thanks very much for your time. I appreciate it.

John Hellmann

Thanks.

Timothy Gallagher

Thanks.

Operator

Thank you. And our next question comes from the line of Jason Seidl with Dahlman Rose. Please go ahead.

Jason Seidl - Dahlman Rose & Co.

Hey guys.

John Hellmann

Hey Jason.

Jason Seidl - Dahlman Rose & Co.

Quick question here. You mentioned 5% pricing for 2009. That's below what you got in '08, but still pretty good. Do you think some more of your business is more protected from some of this truck competitive freight, because we're seeing a lot of pressure especially on the domestic intermodal pricing side here recently. How much of your freight do you think is protected from truck competition?

John Hellmann

Well I'll answer that with what is exposed. I mean historically, the portion of our business that's been exposed has been the merchandised traffic, and specifically the paper side of things. And then to some degree, when you've had the fall off in the coal market that have been so active, there could be a portion of some short haul coal moves. In Pennsylvania for example, where trucking could be competitive.

But it's not a huge segment that would be exposed, and we don't handle... besides of intermodal we handle is first of all, very little, except for that which is beginning to ramp up for a very long haul out of Portsmouth, Virginia. So I wouldn't say we've got a huge degree of exposure there.

Timothy Gallagher

Yeah Jason, Even the plants that we serve, the metals plant or paper mill, or a lumber facility that's still served, usually, the origin or destination drive logistics, not so much price competition. So, on the margin there is competition, but it's not... it's not like (inaudible) like intermodal.

Jason Seidl - Dahlman Rose & Co.

Yeah. No, that's a fair comment. And Jack you mentioned Portsmouth, that contract is basically structured like a switching contract, correct?

John Hellmann

Yeah, I mean in effect. We receive a rate per car.

Jason Seidl - Dahlman Rose & Co.

Yeah. So it's like you're (inaudible) business?

John Hellmann

Actually I would say, it is not structured like a switching contract?

Jason Seidl - Dahlman Rose & Co.

Okay.

John Hellmann

It's got a little more variability to it.

Jason Seidl - Dahlman Rose & Co.

Okay. And could you give us a little bit more color. You mentioned you lost a contract for switching. Could you give us some more color on that one?

John Hellmann

In U.S. switching contract, that was not profitable.

Jason Seidl - Dahlman Rose & Co.

There was not... was that coal?

John Hellmann

No, in industrial facility.

Jason Seidl - Dahlman Rose & Co.

Okay. TJ, on the cash flow number, obviously that's a really strong number for 2009, there is a lot of things you can do with the money, obviously, you could do your test on the acquisition funds, but as sort of first order to pay down debt here?

Timothy Gallagher

Yes, absolutely.

Jason Seidl - Dahlman Rose & Co.

Okay, fair enough. Well guys thank you for the time as always.

Timothy Gallagher

Thanks Jason.

John Hellmann

Thanks Jason.

Operator: (Operator Instructions). And we'll go to the next line of Neal Deaton with Stephens Incorporated. Please go ahead.

Neal Deaton - Stephens Inc.

Hey Jack and TJ, good morning.

John Hellmann

Good morning, Neal

Timothy Gallagher

Good morning, Neal.

Neal Deaton - Stephens Inc.

Just a couple of quick maintenance question, real quick. Did you say diluted shares for '09 was 36.2 million?

Timothy Gallagher

Yes.

Neal Deaton - Stephens Inc.

Okay. And then going back to Ed's question, I think I got this, but $25 million decline in same railroad EBIT?

Timothy Gallagher

No, on revenues.

Neal Deaton - Stephens Inc.

I'm sorry, on revenues.

John Hellmann

It was about, Neal it's about 14 million in EBIT or about 10% from where the budget already was.

Neal Deaton - Stephens Inc.

Okay. As you can apply there, the $25 million decline in that revenue kind of the 60, 40 split to it, as far as the standing, how much of it is freight and non-freight, is that right?

John Hellmann

Around numbers.

Neal Deaton - Stephens Inc.

Okay, roughly. And I know you've lost that or you're moving away from that one industrial switching contract. Do you have any opportunities out there to win some new business and I know that you don't have... clearly have to be the...

John Hellmann

Yeah, we do.

TJ: The thing about industrial switching is that you are not limited to your physical infrastructure, you go to the customer site and we compete all over the country.

John Hellmann

We sell our services not as a low cost provider but based on our safety track record and our service performance.

Neal Deaton - Stephens Inc.

Right, yeah, I remember that number four. But you... I guess, do you see some opportunities out there and I mean just the profit look okay, I mean obviously industrial works...

John Hellmann

We are normally adding a couple of those per year. And then down economic environment when people are trying to ring efficiencies out of their facilities there maybe some additional opportunities.

Neal Deaton - Stephens Inc.

Alright. And I guess just give... could you give us a little bit of an update on your internal initiatives, I guess that mostly kicked off in '08, middle part of '08, Portsmouth, I know you touched on a minute ago, but what's going on down there in Cottondale, Florida with the (inaudible) and then ethanol plant in Oregon, give me updates for those and I guess how is that back into the '09 guidance?

John Hellmann

Yeah, there is a mild ramp up, it's at Portsmouth in there, there is continued improvement down at Cottondale because we are shipping more there. And then the ethanol and the grain trains is out, we're assuming that... they have, when they filed for Chapter 11 at the end of the last month, there is... I won't be too specific, but there is a legal dispute between two parties there with respect to the construction. And they think they can get up and running shortly, but we'll see. And then there is a judge in the middle man and we'll just have to see how it plays out. So, we've put those carloads on hold and any capital expenditures related to the track to handle those 10,000 carloads of grain, we have curtailed until there is clarity in the situation.

Neal Deaton - Stephens Inc.

Okay. So, those (inaudible) grain are not factored into '09 guidance?

John Hellmann

That's right. And you'll see that going forward and when you are watching our carloads, you'll continue to see good shipments in Australia because our carloads, we're still shipping nicely into February out of Australia. And then as we get a little deeper into the year, about April, April, May, you'll see that those carloads that have been for that ethanol facility taper-off unless they come back online by then.

Neal Deaton - Stephens Inc.

Right.

John Hellmann

We'll talk about that more when we know.

Neal Deaton - Stephens Inc.

Okay. And we have one other question. I know you guys guided to 30% tax rate in '09 and I know the previous guidance was at the end of the third quarter call, you were still maybe 27 to 28, what's the, I guess explanation for the variance there?

Timothy Gallagher

It's really a function of the change in mix of our overall income more in United States which is high-tax jurisdiction versus international, so it's really, it's a mix of income geographically.

Neal Deaton - Stephens Inc.

Okay. That makes sense. Okay, I appreciate your time. Thank you.

John Hellmann

Thanks Neal.

Operator

And our next question comes from the line Art Hatfield with Morgan Keegan. Please go ahead.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Thank you. Good morning guys.

John Hellmann

Good morning Art.

Timothy Gallagher

Hey Art.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Jack, going back to your comments about the customers going into Chapter 11.

John Hellmann

Yes sir.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Can you recall or remember the last time that you guys had to take an accounts receivable hit for an uncollectible of magnitude, you probably have small ones every so often, but, do you remember kind of how far back that was?

John Hellmann

Boy, well you typically, and why don't I... let... the answer is yes, and it relates to the steel industry, and it would have been back in the 2001, '02 range. But you tend to be... they tend to be small hit.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Well my curiosity...

John Hellmann

Well they are small hits because you are the first one paid or service can be interrupted. Why don't TJ, do you want to talk about our allowances for just a little.

Timothy Gallagher

Yeah. When you look, if you looked at our third quarter Q, and then, when you'll see our K, which we'll file in a few weeks, you will notice about a $1.5 million increase in allowance for bad debts. Of that 1.5 million third quarter to fourth quarter, roughly a million of it, 900,000, was due to the bringing on the balance sheet of the Ohio Central and about 600,000 was additional expense in the fourth quarter. So, even though our collections improved this year, which helped out our free cash flow, in the fourth quarter we actually did bring up our allowances just given the weakening environment.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Okay. Great. That's very helpful.

Timothy Gallagher

But that was a bunch of small customers, not one big customer.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Right. And the big customers, unless you get a liquidation, you're probably okay if they work through a Chapter 11 and need service.

John Hellmann

Yes.

Timothy Gallagher

Yeah, public companies filing Chapter 11 are generally financial restructuring, which means they continue to operate, all companies are effectively Chapter 7 liquidations and (inaudible).

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Do you have...

John Hellmann

And Art, you go to a cash pay a few cents if sense that there is going to be trouble.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Right. Did you... have you had a large customer Chapter 7 that you recall?

John Hellmann

Large customer Chapter 7. Well, I mean that's the equivalent of effectively what's happening in Buffalo right now where the...

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Okay.

John Hellmann

The parent is still there. But, well, that's actually, no, that's not accurate showdown (ph). The receivables would be fine in that instance and you're just going with the plant. I think the answer is, no, I can't recall one.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Okay, thank you. The other thing, so you talked a little bit about acquisitions. And if we go back a few years, there was a lot of activity where some people, without getting specific on the private equity side were very aggressive. Have you seen any of those properties come back to market recently?

John Hellmann

No. We... I wouldn't want us to comment on a specific set of properties, except to say that, we keep an eye on everything that's out there.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Okay. And then finally, I guess this will be for TJ. When we look up at your guidance for the year, do you... and you may have said this and if I missed it, I apologize, but what your kind of assumptions are for currency exchange rates for Australian Dollar and Canadian Dollar in '09?

Timothy Gallagher

We had roughly 80, $0.82 on the C dollar, and high 60s for the Australian Dollar.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

For '09?

Timothy Gallagher

Yep.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Thank you. Thank you. That's all I got.

John Hellmann

Thank you, Art.

Operator

Thank you. And there are no further questions. I'll turn the call back over to you Mr. Gallagher.

Timothy Gallagher

Again, thanks very much for joining us on our earnings call. And this concludes.

John Hellmann

Thank you.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 1:00 PM today, through March 11th at midnight. You may access the AT&T Teleconference Replay System at anytime by dialing 1800-475-6701, and entering the access code 974244. International participants dial 320-365-3844. Those numbers again are 1800-475-6701, and 320-365-3844, access code 974244.

This does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Genesee & Wyoming Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts