Genesee & Wyoming, Inc. (NYSE:GWR) Q1 2019 Earnings Conference Call April 30, 2019 11:00 AM ET
Matthew Walsh - EVP, Global Corporate Development
John Hellmann - Chairman, CEO & President
Timothy Gallagher - CFO
Michael Miller - President, North America
Conference Call Participants
Allison Landry - Crédit Suisse
Bascome Majors - Susquehanna Financial Group
Jason Seidl - Cowen and Company
Christian Wetherbee - Citigroup
Kenneth Hoexter - Bank of America Merrill Lynch
Justin Long - Stephens Inc.
Ladies and gentlemen, thanks for standing by. Welcome to the First Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Matt Walsh. Please go ahead.
Thank you for joining us today on Genesee & Wyoming's Q1 2019 Earnings Call. Please note that we will be referring to a slide presentation during today's call. These slides are posted on the Investors page of our website, www.gwrr.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measure are likewise posted on the Investors page of our website.
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 that we will discuss later and the factors set forth in our filings with the Securities and Exchange Commission. Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risk and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We do not undertake and expressly disclaim any duty to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. And you should recognize that this information is only accurate as of today's date.
On the call today, we have 3 speakers: Our President and CEO, Jack Hellmann; our Chief Financial Officer, T.J. Gallagher; and our President of North America, Michael Miller. I will now turn the call over to our President -- sorry, to our Chairman and CEO, Jack Hellmann.
Thank you, Matt. And welcome to G&W's earnings call for the first quarter of 2019. As always, we'll our start this call this morning with safety. On Slide 3, you'll see that the winter was difficult from a safety perspective as our safety index was 1.2 injuries per 200,000 man-hours in the first quarter. While better than the Class I and short line averages, our safety results are short of our industry-leading standards, and we are focused on significant improvements for the remainder of 2019.
Turning to Slide 4 and highlights from the first quarter 2019. We reported diluted EPS of $0.68 in Q1 2019 compared with $1.19 last year. Our adjusted diluted EPS were $0.78, which was an 11% increase over the first quarter of 2018. Our first quarter results were impacted by severe winter weather and flooding in North America that impeded shipments from connecting Class I railroads and resulted in a $0.09 or 10% reduction in EPS compared with our guidance. The shortfall was concentrated primarily in our Midwest and Canada regions while the remainder of North America was modestly ahead of plan. We expect to recover a portion of the winter-affected traffic in the coming months, and our outlook for North American rail shipments remains positive in 2019. Meanwhile, the combined first quarter financial results in Australia and the U.K./Europe were consistent with our expectations. Australia was slightly weaker than expected due to lower export coal and drought-affected agricultural products, while our U.K./Europe region was slightly better than expected due to stronger performance in our U.K. intermodal business.
Now turning to Slide 5. In the first quarter of 2019, we implemented cost-reduction initiatives in each of our 3 geographic segments. In North America, we consolidated our Central regions into our Midwest and Southern regions and we also completed the consolidation of certain dispatch functions. We recorded a $600,000 restructuring charge in the first quarter and are expecting annualized savings of approximately $5 million. In Australia, we also engaged in operational restructuring associated with the termination of grain services on the Eyre Peninsula of South Australia and made a redundancy provision of $1.5 million in Q1. This narrow gauge business has been marginal for several years. And with its conclusion, our Australian grain shipments should decline by roughly 18,000 carloads per year and revenue should decline roughly $5 million. Meanwhile, our Australian free cash flow should be unchanged as the margin on the grain business was more than offset by track maintenance CapEx.
Finally, in the U.K./Europe, we continued our restructuring initiatives and recorded a $5.5 million charge in Q1. As you will see when T.J. discusses the detail of our U.K. performance, the benefits of restructuring are becoming increasingly visible as our adjusted same railroad operating income increased $5.8 million over Q1 2018, excluding currency.
Now turning to Slide 6. In the first quarter, we had new business developments in North America that are worth highlighting. First, we announced the long-term lease of 2 short lines in Indiana that connect with existing GW railroads in the Midwest. With the transaction, we've created a 400-mile contiguous footprint that spans from Eastern Indiana to Western Illinois with connections to 6 Class I railroads. The transaction adds 5,000 annual carloads, of which we interchange 3,000 today, and opens up a number of new business development opportunities, particularly in the agricultural products sector.
Second, we recently announced the location of a new $172 million plastics distribution facility on our Georgia Central Railway. A packager of plastic pellets is developing a bulk-to-container transloading center in Savannah that will be taking advantage of excess container capacity and increasing vessel calls to the Port of Savannah. We expect initial shipments of approximately 5,000 annual carloads when business commences in late 2019 and see significant growth thereafter in partnership with two connecting Class I carriers.
Finally, we also landed three other business development projects in the first quarter. Projects include: A new contract to operate the Port of Caddo-Bossier on the Red River near Shreveport, Louisiana. We opened a new transload facility on the San Joaquin Valley railroad at California serving clay customers. And we also added a new third-party transload facility on the Chicago, Fort Wayne and Eastern Railroad to handle roofing granules. So overall, the industrial pipeline that we outlined in February is bearing fruit and our commercial development outlook is positive.
Now let's turn to Slide 7 and our outlook for 2019. The bottom line is that our guidance for 2019 adjusted diluted EPS is unchanged. We expect to recover over half of the income shortfall in North America from the winter weather as well as to benefit from our cost initiatives and the new business pipeline. In Australia, we expect a slightly weaker outlook due to lower coal shipments stemming from tension in the China-Australia diplomatic relationship, partially offset by higher expected shipments of metallic ores in South Australia. Finally, our outlook for the U.K. is unchanged as we continue to execute on multiple business improvement measures.
Now I'd like to turn the call over to our Chief Financial Officer, T.J. Gallagher, to discuss the details of the first quarter. T.J?
Thanks, Jack, and good morning, everyone. Starting with Slide 8. Our adjusted diluted EPS were $0.06 below our guidance with variance entirely due to North American winter and flooding, which had a $0.09 impact in the quarter, but was partially offset by strong results from other North American regions not impacted by the weather. Our international operations were net flat and slight variances from Australia and U.K./Europe offset. Now let's go to the details of the quarter, starting with North America on Slide 9. Same railroad traffic for the first quarter decreased 1.2% year-over-year primarily due to the impact of the winter weather and flooding on certain commodity groups. Focusing on the big changes. First, agricultural products were up around 1,800 carloads or 3% primarily due to higher soybean meal exports to Asia and higher DDGs partially offset by lower grain. Coal volumes decreased 7,900 carloads or 13% primarily due to the Class I service issues that Jack mentioned. Lumber and forest products declined 3,100 carloads or 9% from a combination of weather, customer plant outages and weaker export markets. Our metals traffic increased roughly 3,200 carloads or 9% with higher shipments of scrap and finished steel. Finally, petroleum products increased approximately 2,300 carloads or 9% primarily due to higher LPG volumes.
Now before I move on to North American pricing, I'll mention we have included a comparison of our U.S. carloads to U.S. Class I traffic on Slide 20. Excluding intermodal traffic, our U.S. carload change was 2.2 percentage points higher than the Class Is primarily due to relative performance in the agricultural products, coal, metals and minerals and stone.
Now let's turn to Slide 10. Our North American same railroad average revenues per carload increased 5.1% in the first quarter or around 4% excluding higher fuel surcharges. Adjusting for a favorable commodity mix, which in this case reflected a decrease in certain lower-weighted coal traffic, our core price increase was approximately 3%.
Now turning to Slide 11. North American same railroad revenues increased $12.3 million or 3.8% with broad growth across many commodity groups. In addition to petroleum products, metals, minerals and stone as well as pulp and paper, which all had carload growth, chemicals and plastics revenues increased due to favorable customer mix and higher average revenues per carload.
Now moving to Slide 12 and North American operating income. North American same railroad adjusted operating income decreased $3.2 million or 4.4% and our adjusted operating ratio worsened by 190 basis points. Incremental margins on the higher revenues were offset by higher expenses from the impact of winter weather and flooding, higher de-railing expense and higher deferred comp expense. Please note that the increase in deferred comp expense is offset below the line by gains on deferred comp-related assets and is therefore EPS-neutral.
Now turning to Slide 13 in Australia. Australia revenues were down $9.7 million or 13% primarily due to weak -- to the weaker Australian dollar. Excluding FX, revenues were down 4%, largely from lower agricultural products traffic resulting from drought in South Australia and New South Wales. Our coal revenues were roughly flat.
Now Slide 14. Excluding currency, Australia adjusted operating income was down $0.4 million with the impact of the drought partially offset by lower coal -- or by coal and lower expenses.
Now let's turn to U.K./Europe operations on Slide 15. U.K./Europe same railroad revenues increased $1.1 million or 0.7%. Excluding the currency impact however same railroad revenues increased $12.1 million or 8.1% primarily due to higher revenues across most of our U.K. franchise, including intermodal, road, bulk commodities and terminals with only infrastructure services being weaker. The new Network Rail 5-year control period started in the middle of the second quarter and we expect the full impact will be felt in the second half of the year for infrastructure services.
Now Slide 16. Excluding currency, U.K./Europe same railroad adjusted operating income increased $5.8 million due to stronger U.K. rail and road performance as well as $1.5 million in cost savings from restructuring initiatives.
Now let's turn to Slide 17 and second quarter guidance. 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 from our current expectations. These statements represent management's expectations regarding future results as of today, April 30, 2019, and we do not undertake any obligation to update this information. We expect second quarter revenues in the range of $570 million to $590 million and operating income in the range of $110 million to $120 million. Diluted EPS are expected in the range of $1 to $1.10 with 57.3 million shares outstanding. Same railroad growth in North America is expected to be 1% to 2% excluding the impact of a decrease in Class I empty car traffic resulting from more fluid Eastern Class I operations. Same railroad growth in Australia and U.K./Europe is each expected to be around 3%. Note that this guidance does not reflect an Australian employee bargaining agreement negotiation settlement that we expect to result in a onetime $3 million expense in Q2.
Let's finish up to with the balance sheet on Slide 19. We ended the quarter with net debt to capitalization of 39%, net adjusted debt to adjusted EBITDA of 2.8x and over $510 million of revolver capacity.
And now we'll turn the call over to questions.
[Operator Instructions]. Your first question comes from the line of Allison Landry from Credit Suisse.
In terms of the North American volume growth. So first, in terms of the delayed coal shipments, is that included in the 1% to 2% guidance that you gave? And/or should we expect that to roll in, in Q2 and Q3? And then for the full year, I think your previous expectation was for around 2% growth. So just wanted to see how you're thinking about that now, just given the tough start to the year.
Sure, the recovery in coal is included in our -- in Q2, but the timing of the inventory replenishment and recovery is really difficult to say if it's going to come in Q2, Q3 or Q4. Inventories are at critical levels in a number of the plants we serve and Michael can give you some more color on that. But it's going to flow as inventories are replenished. It's just difficult to judge the timing. With respect to the full year expectations, it was around 2%, was our guidance in February. With the -- we were down about 20,000 carloads versus our guidance. We'll recover some of that, but we're going to have a slow start in Q2 given April, where we had lingering effects from the flooding. So we expect to be up around 1% for the full year. That's really -- so the net change, really Q2 and then we'll go from there.
Michael, do you want to comment on the inventories and cycling of train sets out of the West and how that plays out?
Yes, Jack. Real quickly, I can just kind of give you the back of the envelope based upon our coal franchise. The plants we serve are averaging about 20% to 25% below their target inventory levels. So we know there's going to be a replenishment there. But as T.J. noted, the cycling of the coal sets have been somewhat slow coming out, just the lingering effects of the flooding. And I mean, we had snow this past weekend in the upper Midwest, so it's just kind of slowed the recovery down. But we certainly see the replenishment coming, it's a matter of when it gets here. And then what the winter -- what the summer weather looks like to drive additional demand for the firm.
Okay. That's really helpful. And then in terms of the 400-mile contiguous rail footprint that you mentioned, how does that compare to other contiguous lines that you've formed in the past, in terms of the sort of length? And then are there other opportunities for short line leases or acquisitions where you could create something of this size? And anything you're seeing from, like, a Class I spin opportunity from UP or NS as they roll out PSR?
Sure. I'll start with that one. I mean, we've got several -- we're constantly looking at these kinds of things. There just happened to be one that happened in this quarter. And so the opportunities to either bolt on or make contiguous line acquisitions is something we spend a great deal of time on. So this is just illustrative of that. We've got -- if you look on a map, if you look in the southeast United States in parts of Georgia for example, we've got 400-plus mile contiguous rail systems that we've built out over time. In our Northeast -- the Northeast United States, the same. That's 7 contiguous acquisitions, and we're starting with the original G&W and consecutive acquisitions thereafter. So it's kind of -- it's the basic playbook from what we seek to do because the synergies of putting small assets together, getting the density on the rail lines; increasing asset utilization; and in this case, it'll open up some routes for connecting Class I carriers based on this acquisition, all makes it look pretty good. Michael, you have anything else you'd add?
Yes, I think the only other thing I would add, Jack, is there is a value here by creating these what we consider clusters of railroads where we can actually do more blocking for Class Is. So I do think there's some benefit, operating benefits, for the Class Is. As we look and build more density, we could do more blocking and take some of the first mile, last mile work that doesn't necessarily fit the PSR model, could fit better into this model as we get the cluster of railroads pulled together.
Okay. Excellent. And just anything else that you're seeing as potential opportunities emerging from UMP or NS on this front?
We comment on things like that when they happen, but our focus is on our bread and butter short line. There's plenty of short lines that are out there that are independent of the Class Is. And so our attention is always broadly focused.
Your next question comes from the line of Bascome Majors of Susquehanna
You own your Australian business in partnership with a global infrastructure investor. You've taken capital from private equity to fund acquisitions before. And I'm sure you've bid against both PE and infrastructure funds on deals dozens of times in the past. How does an infrastructure fund, in your experience, approach the short line business differently than a strategic acquirer or even differently than traditional private equity fund? And is there anything you think public equity investors don't get about how these longer-term capital allocators value your business?
Sure. How do they approach things differently? Typically, the focus -- the differential between infrastructure and private equity relates to cost of capital, which an infrastructure fund typically can have the lower cost of capital than a private equity fund. That is because they're focused on assets that they deem to have -- to be in effect less risky, with less downside to them. And therefore, they can -- it's having that lower return on the equity, because there's a cap on the downside, is viewed favorably. And they pure and simple look at valuations of free cash flow. So it's not conversations about book earnings, wouldn't happen there. It's a focus on free cash flow, pure and simple. I think that covers what -- T.J., you want to say something?
Yes, I mean, I think the other thing is infrastructure funds tend to have a longer investment horizon. Given the nature of their funding, could be longer term or permanent. And so their investment horizons could be much longer than a private equity.
Are you still seeing them active in deals in the space as you have over the last few years?
Yes. I mean, there's been significant inflows to those funds. As you said, I mean, we've had numerous relationships over the years. In 2006, we sold our Western Australia business to an infrastructure fund. In 2016, we sold 49% of Australia to Macquarie. And over the years, we've bid in partnership with infrastructure funds for major acquisitions. So we have plenty of experience there. I mean, the asset class sort of probably came into existence in 2005, 2006 or something like that. And it's been both a source of potential partnership as well as a source of competition when you're bidding on assets of a certain size. They typically have an appetite for larger asset. So smaller tuck-in acquisitions probably doesn't have the scale and the risk profile to be interesting to most of such funds. And bigger -- bigger assets, that's where we'll find that competition and that cost of capital competing.
Your next question comes from the line of Jason Seidl from Cowen.
Along those lines, how do you view your Australian business now versus when you sold the western assets? Do you think -- on a multiple basis, how you would look at it if you were an acquirer, is it more valuable, less valuable or about the same?
The business today versus what we sold in the west in terms of a valuation of the business?
I would say, that's an interesting question that requires me -- I'll launch back deep into my memory. Our business today is more valuable than what we had in Western Australia for a couple of reasons. One is that there was very high long-term CapEx need associated with that business that we sold. We sold it, I think, for about 12x EBITDA because the iron ore markets were starting to boom. The track infrastructure to handle tonnages going from 2 million tons to 10 million tons were such that the earnings trajectory would look good, but free cash flow generation would have been limited by those track capital needs over time.
Secondly, the other reason that business would have been of less value would be relating to the grain. It was -- remember, there's no irrigation in Western Australia. So you're either getting the cold front off the Indian Ocean or you're not. And so that means there's a lot of variability in that harvest. You don't have the diversification or the irrigation like we have in North America there. So it's either on or it's off. And so by definition, that type of a business has more volatility to it, has more risk to it, and therefore can -- its capital structure requires less debt implicitly, therefore, it wouldn't be worth as much.
If you contrast that with the business that we have today, it's a much more stable business, contractually protected for a huge proportion of it. And then the free cash flow attributes of it are very, very high for two reasons. One is the fact the north-south line, 50% of that is brand new because it was just built. And then in New South Wales, there is no track CapEx need, there's long-term contracts and there's only equipment investment needs. And therefore, its free cash flow attributes are extremely strong as well. So for both a mixture of the commodity mix as well as the contractual protections and the lower CapEx requirement, objectively, you could say that the current business is a more valuable one.
That's what I thought, Jack. That's a great response. I wanted to turn the second question back to sort of the macro. I mean, obviously, you had a lot of puts and takes in 1Q for North America. But it seems if you exclude the weather, you guys were slightly ahead of expectations. How are you viewing the macro picture in the backdrop, Jack?
Yes, no. It's interesting because you do, you look under -- and there was some other weather stuff in some other places like Southeast, there was some wet and it delayed some harvest of wood going into paper mills and stuff like that in the winter, but that's kind of normal winter stuff. Most of North America felt pretty good. And so it was -- what was unique about this period versus -- we've had some other severe winters over the years. What was unique about this one was that it was concentrated, very, very specifically in Canada, which you know how Canadian railroad, you've probably heard what they dealt with in Q1. And then in the Midwest because the transcontinental, Michael, the transcontinental line was out for how long? A couple of weeks?
Yes. I think UP, in their earnings call had 13 days, I believe.
Yes. So it was unique in that regard that it was so concentrated. In terms of the broader outlook, business is growing. It feels pretty good. What's unusual about today versus the past few years is the commercial development pipeline is as adaptive as we've seen for a long time. And you're starting -- I spoke to a few projects this quarter, but we've got a whole bunch of them that are going on right now. And so I'd' do expect -- we feel like we're comfortably ahead of plan for what we think we can land in 2019 in terms of new business development. And it's on a broad-based -- it's not in any single commodity group, it seems to be pretty broad-based across the economy, and that's pretty unusual as well. Normally, there will be the year where it's the new development opportunities are in energy. Or there'll be a single commodity focus. This one, if you look at kind of the wheel of opportunity, it's very broad-based across the economy and a lot of attaching right now. So obviously, people are investing in -- across our industrial customer base right now because we're merely a reflection of that deployment of capital that's going on in the broader economy.
Your next question comes from the line of Chris Wetherbee from Citigroup
I wanted to maybe ask a little bit about conceptually about sort of North America and what you're doing from a streamlining or a cost-cutting perspective. When you think about your business now in the context of what the Class Is are doing with PSR, is this the type of work that you need to be able to sort of keep pace and sort of maintain what was always known about a decent, sort of maybe 50% incremental margins on the growth of business? Or can it be accretive as you sort of come through this process, and maybe out the other end, post-PSR implementation from those Class Is, would maybe be a bit more profitable business. I just want to get a sense of sort of how that really structurally can change the North American business.
Sure. Michael, you want to get started and then I'll chip in?
Sure. I mean, we think long term, it certainly can be accretive. Obviously, as Class Is are implementing PSR, there's changes to the service product, there's changes to the blocking, changes to the train side, things that impact us at interchange that we have to adjust to. And one of the initiatives that we talked about is Roots Reset, which is really a railroad-by-railroad analysis of our service plan, our asset allocation, what we are doing to serve our customers. And as we go through the PSR changes with Class Is, we revisit our railroads and really try to make them as optimal as possible based upon the Class I service or interchange plan.
So I think in the short term, there's obviously a little bit of friction that those changes have with our business and it may take our costs up a bit. But longer term, we optimize based upon the service product that we'll interchange with our Class Is. And that actually creates more -- a more optimal operation. And certainly, consistency from a Class I allows us to plan our assets and our people better which makes it a lower-cost operation for us. So short term, there is some friction, there is some additional cost. But as they implement and we optimize around their implementation, we see long-term benefits. And we're seeing some of that today with CSX, who's kind of pretty much do most of their PSR initiatives. And when you look at how our business is with them, it's certainly been positive in Q1. And we look to see it being even more positive throughout the year.
Yes, the way I -- to add to Michael's thoughts, the way I think about what Michael just said is in kind of three buckets. One is when you see us consolidating regions like we did, that's something we're always thinking about thinking doing, is how do we more efficiently run the business. And that reduction in G&A is just an outcome of that ongoing process. It's the third time you've seen us consolidate a region over time. And that's just doing more with less from an oversight standpoint.
Then there's at the railroad level, all of our Roots Reset initiatives which are -- we're either doing for purposes of continuous improvement regardless and/or we're seeking to implement in conjunction with any PSR changes that are happening at the Class Is in order to match their new service plans with our existing operation. So that's kind of point two.
And then the third element of it is the long-term fluidity of the systems. To the extent that we get to that new status quo where there's more network capacity, the focus then turns to growth. And where that growth comes from is going to be one of the logical places which with the merchandise traffic which is where short lines are strong, and that is what we do. In fact, it could be coming from coal. Long term, Intermodal is what it is, but that long-term growth will come from a more fluid PSR network through that merchandise traffic, and that's our bread and butter. And so those are the -- I just group them in my head in those 3 buckets.
Yes, got it. That's extremely helpful. I appreciate that, that's good color. And then there's been some discussion over the course of the quarter on the M&A front. I just want to get, maybe Jack, a big picture sort of sense from you, what your thoughts are in terms of whether you think this is a buyer or a seller's market when it comes to sort of -- whether it be short line assets or just sort of core infrastructure assets. What does this market really feel like?
As always, it's an asset-by-asset analysis. There certainly is competition out there from infrastructure buyers. There's no question that's the case. Equally, it's also the case that where there are contiguous opportunities to our lines, we will always be the logical acquirer, assuming a rational economic world because the magnitude of the synergies that we can typically bring to those situations. And so there may be things where, to your point -- so the answer is both. There have certainly been situations where we have not been competitive bidding recently based on more aggressive views of businesses, perhaps more aggressive cost of capital. There remain other situations that we're looking at where you could see us being in a very good position to be an acquirer, if the price was right.
Your next question comes from the line of Ken Hoexter from Bank of America
Jack, if I could just follow up on that one for a second. So obviously, just given all the articles about potential investment, did you comment on if you were seeking infrastructure funds or a desire for capital? And then if they were sizable projects or more tuck-ins that you were looking at?
No. What you're talking to, Ken, there was an article in Bloomberg that came out in March. And no, we didn't comment. The simple answer is we don't comment on market speculation or rumors. And so as I said before, we had various relationships with infrastructure funds that we've bid on, we bid with them, we've bid against them. We obviously have various dialogues that are -- that have been active over time. And but with respect to that specific article, we don't comment on speculation.
Okay. I didn't know if that was something you were following up and putting out there, which I doubted. Just on the growth, T.J., when you look at the, I guess, the cadence of your earnings, just to get to that $4.30, $4.50, it seemed like you had -- you kind of gave details for second quarter. And then it sounded like you were maybe expecting a slower growth in the third quarter and a pickup in the fourth quarter. Is that timing of some contract? Maybe you can delve into that full year outlook a little bit more on the $4.30, $4.50.
In terms of the -- we included a slide, it's the very last slide, sort of an updated seasonality of our earnings slide. And if you compare this to what we showed in February, you'll see that Q1 is a little lower and then Q3 and Q4 are a little higher. And so what that reflects is recovery of coal, for example; benefit of the costs initiatives that we've talked about; and also the new business. So yes, and so we've sort of shifted some of the earnings back a little bit, but it's, in terms of the distribution of revenues and operating income, it's not that different.
Okay. In terms of the -- okay. So there is still, I guess, a deceleration in that third quarter then before the acceleration...
No, it's really -- Ken, it's really -- if you look at the slide, it's really low mid-single digits, 5% to 10% growth in Q3, a little stronger in Q4.
Yes. That perceived deceleration is because Q3 was really strong last year. And so that's mostly timing related rather than any structural factor. And so that's why it appears that way, the growth doesn't appear to be as great.
Fair. So against the 15% growth in...
See there proportional contribution of each of those quarters, it's basically the same as it was in February.
Okay. Yes. No. Again, against the 15% earnings growth in the third quarter, but not like that 20% diluted EPS growth in the fourth quarter is expecting an acceleration because of new contracts or anything else.
No, it's more relative of what we did last year.
Your next question comes from the line of Justin Long from Stephens.
So to start, truckload rates, spot rates have moderated. Capacity is becoming a little bit more fluid on that front. Just curious if you're seeing that translate into any rail-to-truck conversions in your network year-to-date. And is that something that you're baking into the volume guidance in North America that you talked about earlier?
Michael, you want to talk a little bit about trucking market right now?
Yes, Justin. We certainly have seen spot rates drop a little bit, contract rates not as much. With the weather in Q1, we certainly saw some of our paper shipments move to truck, but those have moved back to rail in Q2. So from our standpoint, we don't see any big structural shifts. We think contract rates won't move down any material amount. And quite honestly, when we look out to 2020, with IMO 2020 coming on, diesel price is likely going up, I think everybody is just trying to build as much capacity in their supply chains, and rail is a big component of that for most of our industrial shippers. So we don't really see a big impact on it. If there was a substantial drop or the economy really, really slowed down, it would be a bigger concern. But right now, our view is steady as she goes. We see kind of pretty much volumes and rates staying as we projected the end of last year and what we've got in our slides.
Okay. That's helpful. So I think you talked about 3% core pricing in North America last quarter. That assumption has not changed?
Okay. And then secondly maybe to follow up on some of the commentary around acquisition and investment opportunities. Jack, could you just talk from a high level about the activity level in the pipeline? I'm just curious if you've seen an acceleration year to date. And any color on the geography where you're seeing the most potential for something to materialize, when you just look at the opportunities out there and look at the bidding activity and kind of valuations?
Sure. I mean, I wouldn't say there's an acceleration. I would just say there's a steady -- there's always a steady flow. And if you look at us historically, you'll find years in which we've done nothing. Doesn't mean we weren't looking at a whole bunch of stuff. It's just there was nothing that was at the right value and risk profile. And so right now in North America, there's probably a skew towards North America in terms of our opportunity set right now in terms of what's out there. And having said that, we are looking at some continued equipment investments in Australia which we view as akin to M&A. It's a deployment of capital under a long-term contract, so it's not dissimilar. So -- but I would say there's a skew towards North America.
In terms of Europe, we're not looking at -- the biggest value creation and best use our time is continuing to extract value from the rapidly improving U.K. business. So the idea that we'd be looking at -- it would have to be a slam dunk piece of M&A tuck-in for us to be active there. There's just too much value creation from -- and management doesn't need the distraction of M&A on a business that's rapidly improving now.
And at this time, there are no further questions.
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