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Steady growth. Brisk growth. Vibrant growth. Growth stays strong. These are the phrases used by Thursday's Wall Street Journal to describe economic conditions in the Federal Reserve regions west of the Mississippi. Among the indicators are expanding mining and construction, improving commodity prices, good retail sales volumes and falling energy costs. All of which could benefit rail carriers in the region. That includes UP and BNSF of course but also Wisconsin Central, RailAmerica and Genesee & Wyoming. Forward earnings estimates for 2Q00 and FY2000:
Chemicals are among the most lucrative commodities for the railroads. Average revenue per carload among the major class 1 hovers around $1,700 vs. the average of $1,200 per merchandise carload. Moreover, it tends to move in equipment the railroad doesn't own and that means no equipment ownership cost and no car hire, just a very modest mileage fee paid to the car owner. But safety counts in a big way and small railroads are not always perceived as being as safe as the class 1s.
That shoe unfortunately does fit some. Enter the American Shortline and Regional Railroad Assn (ASLRRA) Safety program. Starting now, the ASLRRA will use the FRA's monthly safety reports to determine the safety status of its member railroads. The Association will also prepare charts comparing safety performance going back to 1998 and will update them monthly. Perhaps this worthy effort will improve the chemical industry's perception of shortline safety so small railroads can increase their share of carloads in this key commodity group. (Reportedly the comparison charts will be posted at www.fra.dot.gov. The specific URL will be posted here when we find out what it is.)
Interestingly, we find a strong correlation between safety performance and fiscal responsibility. More shortline readers could well join their peers and other professionals from class 1s and shippers requesting copies of the Rule Maker spreadsheets Week in Review uses to compare quarterly results. The same models are used to compare shortline performance in our own consulting work. Thus shortline readers are invited to compare their own profitability and productivity measures against the averages for their peers and then see how they stack up in the ASLRRA safety ratings.
Wisconsin Central did as advertised and missed 1Q00 estimates, but not by much. Net income came in at $12.6 million ($0.25 per diluted common share) vs. $13.7 million ($0.27 per diluted common share) a year ago. The consensus was 28 cents. Increases in fuel expense negatively impacted earnings by a nickel per diluted common share this year versus last so absent that unexpected tidbit the picture would have been better. That's important. WIR always tries to ferret what the railroad is really doing absent the odd hit.
During the conference call CEO Tom Power's remarks dwelt quite a bit on EWS. The press release says, "The contribution from EWS was $US2.6 mm for the quarter versus $3.4 mm a year ago. Operating revenues increased 6% while operating expenses increased 8% due to higher lease expense for new equipment as well as higher fuel and service-related expenses." That's the bad news. The good news is it'll get lots better. Newly tapped (Jan 2000) EWS Chief Executive Philip Mengel will be changing half his top ten staff assignments, has vastly improved RailTrack relations, and sees better revenue yields as money now left on the table due to performance missteps can be picked up as price increases as service improves.
For what it's worth, The EWS quarterly magazine, EWS Focus, notes that the "Enterprise" less-than-trainload service now handles 7 mm US tons of freight annually and schedules will go up on the website (www.ews-railway.co.uk/) shortly. Also, Two leaflets have been produced by the Freight on Rail campaign. E-mail email@example.com.
In New Zealand, the earnings contribution from Tranz Rail Holdings (TRZ) was $1.9 mm for the quarter vs. $1.6 mm last year. Revenues were up 4% on just 3% more expense. Not much was said about the 550 miles operated as ATN, except that equity income went to a negative $21,000 from a positive $221,000 last year. Responding to a question from Mike Lloyd of Merrill Lynch, Power said that there remain good opportunities in agriculture and coal as well as the impending privatization of the Western Australian lines.
Getting back to the good ole USA and Canada, WCTC revenue went up 3.8% while operating expense rose 4.6%. Power sees the payoff coming in terms of normalized ore traffic and expanded paper revenues. If the BNSF-CN merger fails, WCTC still has 18 years to run on the haulage agreement. If it goes through, so much the better. An intriguing picture, to say the least. I can hardly wait to visit in two weeks.
Genesee & Wyoming reported 1Q00 earnings and the results are encouraging, to say the least: sales up 62%, operating expense up 47%, operating ratio down nine points, EBITDA more than doubled, share count down 10% and share price up 45%, all since 1Q99. North American railroad revenues rose 112% driven by 40% more sales in Canada, 38% more in Mexico, and 23% in the US. Australia, alas, was off 4%, though happily AUS accounts for less than a fifth of total sales.
CFO John Hellman says, "We are pleased to be reaching a critical mass of operations in the U.S. and abroad. Our international properties present certain challenges such as operating in new business environments and managing foreign currency fluctuations. For example, the strength of the Mexican peso in the first quarter created a non-cash gain related to FCCM's U.S. dollar denominated debt, but if the peso depreciates in subsequent quarters, a non-cash expense would result.
"In Australia, the first quarter contribution by our new contract to ship iron ore for Broken Hill Proprietary Co. Ltd. (BHP) was offset by a 25% decline in our higher margin grain shipments. Carloads of grain declined 24.7% in the first quarter, primarily due to the weaker 1999-2000 grain harvest. We expect that mainland grain that is currently being stored will contribute to our Australian operations as it is shipped during the remainder of the year."
Picking up on last week's thread on holding trains for tonnage, a DC reader writes, "I'm fascinated by the second paragraph of the 4/29 WIR. More and more emphasis is on velocity and everyone (except perhaps some railroad management) is calling on the railroads to provide better, more reliable service. [Who can afford] to hold cars for maximum tonnage or maximum cars per crew start?
"Sounds incredible, except perhaps for hauling coal to meet scheduled ocean vessels or something similar. Where do the other majors stand on schedule vs. holding for tonnage? An old question, but one that seemingly should be settled now that we finally consider equipment utilization and costs and should be aware of customer needs." Couldn't have said it better myself.
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