The company went public in 1996 and the following year switched its focus to taking over railways in Canada and Australia. The pace of expansion ramped up in 2000 with many acquisitions in North America, plus Rotterdam Rail Feeding in 2008, the 2249km Tarcoola - Alice Springs - Darwin line in Australia in 2009, Freightliner in Britain in 2015, and Glencore Rail in Australia last month. Today, G&W owns more than 24,000km of railway in five countries, employs around 7200 people and has more than 2800 freight customers.
But it has not been plain sailing recently as G&W’s freight business in North America suffered an 11% drop in carloads in 2015. “The business has been recovering over the course of 2016,” Hellmann says. “For example, in the first quarter of 2016, our volumes were roughly 9% below 2015 levels. However, in our most recent reported month of October, North American carloads were down 2%. Our traffic has been seeing modest improvements over the course of the year.
“North American utility coal aside, we think most commodities will recover, although the timing of recovery will depend on factors such as overall US industrial production, the relative strength of the US dollar, to the extent that it impacts imports and exports, diesel fuel prices, to the extent it impacts truck competition, commodity prices both mining and agriculture as well as the regulatory policies of the new US administration.
“We’ve long said that we expect North American utility coal to be a long-term fade given the macro forces of more stringent regulation and an abundance of competing alternative generation from natural gas, solar and wind. It appears that coal volumes have stabilised somewhat since the decline in 2015 and the first half of 2016. Coal has clearly moved from a baseload power generation source to a peaking source. “We expect long-term coal to slowly decline, noting that coal volumes ultimately will be dependent on changes in electricity demand, the price of competing electricity supply, and the weather. Looking ahead, our North American coal shipments will likely be more volatile than in the past.
“Our freight volumes generally reflect the growth and evolution of the broader economy and therefore changes in our traffic mix will be derived from changes in the economy. But, it is generally difficult to change our commodity mix unless we make a new acquisition that is concentrated in one area.”
G&W was forecasting a slight decline in North American operating income for 2016, but as it turned out the company has done better than expected, as Hellmann explains: “Year to date in North America, our reported operating income is up about 3%. Revenues are down roughly 3%, which was broadly consistent with our expectations, but we have nicely outperformed on the expense side which has put us ahead of plan.”
G&W set up in-house engineering and track-construction teams in North America in 2015, which Hellmann says has significantly reduced the need for G&W railways to use outside contractors for track capital projects. “We now have track gangs working on projects in the northern US during the summer and in the south during the winter, enhancing productivity by following the seasons,” Hellmann explains. “In addition to creating significant savings in track capital, the engineering team also provides the ability to react more quickly to emerging needs and to apply best practices across our regions - including our deep-rooted safety culture. Our in-house engineering team has been yielding world-class productivity levels and working injury-free since its start-up in April 2015. So performance has been outstanding.”
G&W purchased 94% of Freightliner, Britain’s second-largest rail freight operator, in March 2015 for £492m. Freightliner started life operating container trains, but has since diversified into bulk freight, and operates trains in Poland and Australia, as well as further afield in Europe through ERS Railways. But the British rail freight market is facing a tough time with the rapid demise of coal traffic, stiff competition, and the looming prospect of Brexit. So was it the right decision?
“Our timing could have been better,” Hellmann admits. “We are comfortable that we have the management team and an outstanding rail franchise to weather the current storm in Britain. When we purchase railroads, and we have added more than 100 rail operations since 2000, we are making a long-term investment in a macroeconomic environment, a customer base, and a management team.
“Our March 2015 acquisition timing could certainly have been better, as coal collapsed much faster than we expected, and we viewed Brexit as low probability at the time. However, we see a clear path to fulfil our original business expectations for Freightliner. We are well placed in the remaining growth markets of intermodal and infrastructure services that are more reliant on quality of service. This is something that has always underpinned the British service offering. In addition, at a macro level, we are confident that Britain will enact new trade agreements and other public policies that are consistent with the nation’s long-term economic interests.”
Nevertheless, G&W acted swiftly to restructure Freightliner’s coal business which was completed as planned in the first half of 2016. “While there is still an overhang of operating leases associated with coal equipment that is presently unused, those leases will roll off over the near and medium term,” Hellmann says. “The coal restructuring has significantly improved the financial performance of the business. However, in the third quarter of 2016, congestion in the Port of Felixstowe as well as unscheduled cuts in infrastructure services masked some of the benefit of the Freightliner team’s hard work in reducing UK costs.”
Despite the challenges, Hellmann does see several potential areas for growth. One of these is building on the strength of Freightliner’s current British intermodal service where new domestic routes are being added and investing in new maintenance facilities.
Metalic ore
G&W is also facing a challenging time in Australia. Rail revenues, excluding Freightliner Australia, fell by 34% in 2015 mainly due to a decline in metallic ore traffic. “The collapse in global commodity prices has made Australia a very tough place for rail shipments for nearly 2.5 years,” Hellmann says. “Prior to that, Australia was on a very steep income growth trajectory that included a period where it helped pull our North American operations through the global financial crisis.
“Today our picture in Australia is much improved for several reasons. First, we have seen improving commodity prices which are resulting in shipments or proposed new shipments from mines that previously were closed. Second, we just completed the $A 1.14bn ($US 854m) acquisition of Glencore Rail’s operations in the Hunter Valley of New South Wales which handles shipments of the most competitive steam coal in the world, destined for Japan, Korea, Taiwan and elsewhere in Asia. Third, in conjunction with the Glencore Rail acquisition, we issued a 49% equity interest in G&W Australia to the world’s largest infrastructure fund, Macquarie Infrastructure and Real Assets. We are pleased to have a strong partner down under and see promising growth opportunities from New South Wales to our footprint in South Australia and the Northern Territory.”
G&W has made a tentative step into providing technical assistance to other railways, and has a contract with Saudi Arabian Railway (SAR) to assist with the operation of phosphate and bauxite trains on the new North South Railway. “Although a small contract, the Saudi project has been a success,” Hellmann says. “In 2016, we expect to ship record tonnages of both phosphate and bauxite in a challenging operating environment. The contract with SAR has embedded our people into the operation of their network, so the model fits well with running our own railroads at a world-class level. For other projects of significant scale, I could envisage lending our expertise in other parts of the world. Many of those instances would be for existing global customers of G&W railroads with a need in a new geography.”
So will G&W continue to expand? As the very recent acquisition of Glencore Rail demonstrates, it has not been put off the Australia market or indeed expanding elsewhere, as Hellmann confirms: “We continue to evaluate acquisitions and investments across our global footprint.”
