Managing Change at G&W Jack Hellmann, President & CEO Midwest Association of Rail Shippers July 12, 2016 1
Agenda 1.G&W Overview 2.Managing Change 3.Current Trends 2
Overview NYSE: Listed as GWR with ~$3.5 billion market capitalization Railroads: 121 worldwide with ~16,000 track miles People: 7,500 worldwide Equipment: >1,300 locomotives Annual Carloads: ~3.0 million 3
Diversified by Geography G&W Operating Income by Segment U.K./ Europe ~10% Australia ~10% North America ~80% 4
Diversified by Commodity 2015 Freight Revenue* by Commodity Minerals & Stone 13% Waste 1% Pulp & Paper 8% Petroleum Products 5% Other 2% Agricultural Products 10% Autos & Auto Parts 1% Chemicals & Plastics 10% Coal & Coke 8% Metals 7% Metallic Ores 5% Lumber & Forest Products 6% Intermodal 21% Food & Kindred Products 3% *Freight revenue is 70% of total revenues 5
Customer Focus of a Short Line on a Global Scale 6
Managing Change 7
Changes by Year: 1899-2016 8
Geographic Footprint 2006 vs. 2016 21 U.S. States 41 5 Countries 10 1,000 Customers 2,800 9,300 Track Miles 16,000 430 Locomotives 1,300 9
G&W Railroads: 2006 41 logos 10
G&W Railroads: 2016 11
Carloads Interchanged in North America 170,000 90,000 405,000 310,000 48,900 405,000 300,000 2006: 940,000 2015: 1,700,000 12
G&W Revenue Growth $2,000 ($ millions) $451 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 13
Significant Changes Over Past Decade: External Shocks and Transformational Growth 2006: China-led Commodity Boom 2008: Global Financial Crisis 2012: Shale Oil & Gas Revolution 2015: U.S. Coal Collapse; Australian Iron Ore Collapse; Strong US$ 2010: Freightlink Acquisition in Australia ($320M) 2013: RailAmerica Acquisition in North America ($2B) 2015: Freightliner Acquisition in U.K./Europe ($740M) 14
External Shocks: Key Lessons 1. Short Lines Excel at Playing the Hand They are Dealt Operations can always be more efficient Opportunistic investments in downturns 15
External Shocks: Key Lessons 2. Boom Never as Good as You Think; Bust Never as Bad Linear extrapolation of trends is always wrong eventually 16
U.S. Steam Coal Power Generation EIA Annual Energy Outlook Forecast Coal Use (mm tons) 1,200 1,000 800 600 400 200 2011 2012 2013 2014 2015 2016 0 17
External Shocks: Key Lessons 3. Railroad Shipments Follow the Evolution of the Economy 18
External Shocks: Key Lessons 4. Politics Trump Economics 19
Transformational Growth: Key Lessons 1. Rigorous Upfront Analysis Railroads & Customers 20
Transformational Growth: Key Lessons 2. Outstanding People to Execute Integration 21
Transformational Growth: Key Lessons 3. Cultural Emphasis on Continuous Improvement 22
Transformational Growth: Key Lessons 4. Remain True to Core Values of the Organization 23
What Remains Constant Amidst Change? 24
Core Purpose To be the safest and most respected rail service provider in the world. 25
Safety Culture: 2006-2016 5 4 3 2 1 0 Injury Frequency Rate per 200,000 Hours Short Lines Class I 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 26
3 Safety Culture 2 2.0 Injuries per 200,000 hours 1.8 2.1 1 0.5 0.5 0.7 0 2006 2012 2012 2014 2015 2016YTD 27
Respected by Customers: Customer Satisfaction Rating 10 9 8 8.0 = Our Goal 7 6 5 2007 2009 2011 2013 2015 Trucking Other Railroads 28
Respected by Customers: Regions Designed for Customers Gary Long SVP, Midwest Region Operations Safety & Compliance Sales & Marketing Mechanical Engineering Human Resources Finance Strategic Planning Customers 29
Respected by Customers: Corporate Capabilities Support Local Focus 1. Outstanding Customer Service Intimate knowledge of our operations and customers needs 2. Industrial Development Driving new business to our 41-state footprint; 300+ meetings with local EDCs in last two years 3. Transload Enabling non-rail-served customers to tap freight-rail economics 4. National Accounts Relationships with customers served by multiple G&W railroads 5. Operating Excellence In-House Engineering, Mechanical, Purchasing 30
Respected by Customers: Strong Local Management 10 Regional Senior Vice Presidents 4 4 2 Promoted Internally Succession Planning Hired Externally Class I Railroad Chief Operating Officer Short Line Railroad President Mining Railroad President Joined via Acquisitions RailAmerica Regional Senior Vice President Freightliner Managing Director 31
Respected by Customers: Disciplined Allocation of Capital ($ millions) $331 $372 $232 $249 $179 $64 $96 $98 $89 $120 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 32
Current Trends 33
North American Carloads YTD May 2016 vs. YTD May 2015 Commodity Change % Comment Agricultural Products (6,300) (7%) Weak Commodity Prices, High Levels of Storage Autos & Auto Parts (400) (3%) Chemicals & Plastics (2,300) (3%) Coal & Coke (45,800) (37%) Steam Coal Food & Kindred Products (900) (4%) Lumber & Forest Products 2,200 4% Wood Pellets and Wood Chips Metallic Ores - 0% Metals 3,500 6% Steel inputs (scrap and pig iron) and pipe Minerals & Stone (6,400) (8%) Lower Frac Sand and Salt, Higher Aggregates and Cement Petroleum Products (300) (1%) Lower Crude By Rail, Higher LPGs/NGLs Pulp & Paper (4,500) (6%) Containerboard (Truck Competition) Waste 1,700 12% Other (1,700) (6%) Total Carloads (61,200) (9%) 34
Segment 1: North America 35
North America Update Expect Overall North American Volumes Down 5% in 2016 Coal continues to be weak given low natural gas prices and represents 80% of overall carload decline 36
North America Update Other Key Commodities Lumber and Forest Products: Stronger housing market (up 4%) Metals: Less import competition (up 2%) Minerals and Stone: Strong construction aggregates offset by lower salt and frac sand (down 6%) Agricultural Products: Two competing forces: large crops and high levels of storage vs. strong dollar and weak prices (+/-) 37
North America Update Cost Reduction Focus Reducing corporate and regional overhead expense Example: Internal benchmarking of operating regions 38
Segment 2: Australia Above and Below Rail Operations Above Rail Operations 39
Australia Update Global Commodity Weakness Largest Impact Three mines closed in 2015 (iron ore, manganese) 40
Australia Update Cost Reduction Focus Right-sizing operational and administrative overhead to new business landscape 41
Segment 3: U.K./Europe 42
U.K./Europe Update U.K. Intermodal & Infrastructure Services Performing Well Expect same railroad intermodal volumes up 5% - 10% U.K. Coal Restructuring Expected fade to 2022 has been faster New business wins reducing overall rolling stock surplus Continental Europe Intermodal Rationalization Continues Exiting unprofitable routes Cost Reduction Focus in Both U.K. and Europe 43
G&W Priorities for 2016 1. Safety - Freightliner integration to G&W safety culture 2. Expense-reduction efforts in all three segments 3. New commercial development (U.S., Canada, U.K., Australia, Europe) 4. U.S. Short Line Tax Credit extension 5. Active acquisitions and investment pipeline 44
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