Q2 2019 Earnings Call
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Nice volume.
As our improved reliability is leading to customer customers trusting us with more of their freight.
This led to broad based growth across the merchandise segment as customers are recognizing the value of our best in class service offering.
This growth was offset by declines in coal.
Intermodal.
And other revenue, resulting in a 1% decline in total revenue to $3.1 billion.
I remain encouraged by the performance of our core merchandise franchise during a softer than expected freight environment.
We led class one volume growth again this quarter.
And grew volumes in all markets with the exception of metals and equipment and fertilizers.
Total merchandise revenue increased 2% as volume growth and pricing gains were partially offset by mix had mixed headwinds.
[noise] interim intermodal revenue declined 11% on 10% lower volumes, primarily due to the impact of line rationalizations implemented last fall and early this year.
We will begin to lap those rationalizations at the end of the third quarter.
Coal revenue declined 2% on 2% higher volumes as growth in domestic industrial markets.
It was more than offset by export and utility declines.
Finally, lower other revenues was primarily due to decreases in demurrage charges and intermodal facilities.
Let's move to slide seven.
Employee safety remains my top priority.
We were again the best in industry for Fr a personal injury rates and set a new company record for the lowest number of Fr Ray reportable train accidents this quarter.
We're also finding new ways to utilize technology to further enhance safety as one example use of automated track inspection cars helped reduce track caused mainline accidents by 85% year to date.
Well I'm pleased with this progress theres always opportunity to operate more safely and we will work diligently to make our railroad the savings that can be.
Let's turn to slide eight.
And take a quick look at our operating performance.
On the service side velocity and dwell improved by 14 and 6% respectively.
We also set another U.S. class one record this quarter by operating below one gallon of fuel per thousand gross ton miles as we continue to find new and incremental ways to improve efficiency and drive unproductive costs out of the system.
Most importantly, our improved operations are transferring to better outcomes for customers.
We dramatically improved our trip plan compliance over the last year and are seeing strong momentum exiting the quarter.
We continue to hit New records.
And it's gone so while tightening the schedules in the form of shorter trip planes.
We plan to roll out our trip plan compliance data to our customers later this year and look forward to the opportunities the increased transparency will provide us to engage more deeply with them.
With that I'll hand, it over to Kevin who will take you through the financials.
Thank you John and good afternoon, everyone turning to slide seven.
I'll walk you through the highlights and a summary income statement.
As Jim mentioned total revenue was down 1% in the second quarter.
The impact of lower volumes.
Particularly in intermodal.
More than offset pricing gains across most of our markets.
Moving to expenses.
Total operating expenses were 3% lower in the second quarter.
Reflecting continued strong efficiency gains.
Lower labor and fringe expense was 3% lower driven by a 5% reduction in headcount combined with favorable incentive compensation expense.
These savings were partially offset.
By inflation and other items.
The operating team continued to drive efficiencies in a number of areas highlighted by fewer crew starts down 5% and lower t. any overtime.
Recruits are also down 77%.
The significant improvement year over year.
Active locomotive count declined more than 300 locomotives down 11% year over year.
Smaller fleet.
Combined with fewer cars online and freight car repair efficiencies.
I will try to 6% year over year reduction in our mechanical workforce.
And I see no expense improved 3% versus the prior year.
Well, our active locomotive count drove savings and materials and contracted services.
Train accident cost were also favorable in the quarter.
As far a train accident rate fell over 50%.
Intermodal costs also saw a year over year improvement lower volumes combined with operating efficiencies.
Driving expense reductions.
Partially offsetting these items was an unfavorable impact from casualty reserve adjustment.
Unrelated to the improving trends and safety.
Real estate in line sale gains were flat in the second quarter versus the prior year.
We continue to see a strong pipeline of opportunities.
Looking at the other expense items.
Depreciation increased 2% due to the impact of a larger net asset base.
Record fuel efficiency, and a 6% decrease in deep and diesel prices.
Helped drive a 13% decline in fuel expense.
Our enhanced focus on distributed power utilization and energy management technology drove record second quarter fuel efficiency.
Equipment rent expense decreased 8% driven by improved cycle times, and lower volume related cost and intermodal.
Equity earnings.
Decreased $9 million in the quarter, primarily due to lower net earnings at our affiliates, including cycling in affiliates property sale in the prior year.
Looking below the line.
Interest expense decreased primarily due to higher debt balances.
Income tax expense increased 9 million, primarily due to the benefit and 2018 related to state legislative changes.
For the remainder of the year, we would expect an effective tax rate of approximately 24.5% absent unique items.
Closing out the piano.
As Jim highlighted in his opening remarks, CSX delivered operating income of 1.3 billion.
Record operating ratio of 57.4%.
Earnings per share of one dollar an eight cents, representing an improvement of 2% 120 basis points and 7% respectively.
We continue to see significant opportunities to drive efficiencies across every aspect of our business.
Just a few of the key initiatives into the back half of the year include.
Ongoing train consolidations through continued expansion of distributed power and additional longer pre runs.
This reduces the active locomotive fleet and associated maintenance and repair costs.
As well as crew labor and related travel and balancing expenses.
Hi reductions enabled by enabled by train consolidations and longer runs will reduce labor and overhead costs.
Overtime also remains a significant opportunity.
With a particular focus on its mechanical engineering.
There are multiple instances across our business functions were overtime as a percentage of straight time as well over 20%.
And in some cases exceeding 40%.
Well, we hit a record this quarter.
You will efficiency remains a big opportunity for us.
I expect the operating teams continue to deliver savings.
Train speed and dwell continue to be opportunities as well as well.
The related cost benefits remains significant.
Finally, we are finding new opportunities to become more efficient in our DNA costs recent initiatives should benefit us in the second half.
Turning to slide 11.
Year to date capital investment is down $54 million or 7% year over year.
At the same time, we have added 12% more rail and 25% more ties while doing it smarter.
Overall, our improved asset utilization from locomotives through rolling stock has enabled us to sustain lower levels of capital investment without compromising safety or reliability.
The level of PTC spending has also come down significantly in the last two years.
Growth and see effect its core operating cash flow, including improvements in working capital to a 22% increase in adjusted free cash flow to $1.6 billion for the second quarter.
Year to date, we have returned approximately 2 billion to shareholders, putting $1.6 billion in buybacks and 400 million in dividends.
Dividend payments in the quarter reflect a 9% increase from 22 cents.
24 cents per share we announced in February of this year.
Our ability to convert earnings into cash remains a key differentiator for CSX.
And a significant significant driver of shareholder value.
With that let me turn it back to Jim for his closing remarks.
Thanks, Kevin.
Turning to slide 13, I want to wrap things up by discussing our guidance for the year.
We started this year expecting revenue to be up approximately 1% to 2%.
Both global and U.S. economic conditions have been unusual this year to say, the least and have impacted our volumes.
You see it every week and our reported Carlos.
The present economic backdrop is one of the most puzzling I've experienced in my career.
With natural gas price is expected to continue to embed both domestic and export coal.
Intermodal showings little seasonal recovery.
And many of our industrial customers volumes continuing to show weakness with milk concrete signs of these trends change.
And adding in the impact on crude by rail shipments of last month's Philadelphia refinery explosion.
We are now expecting revenues to be down 1% to 2% for the full year.
We are not necessarily being pessimistic about the second half of the year.
But in as much as we need to adjust guidance were just setting out the obvious. This outlook is based on the current business levels.
Then there is upside to this forecast if conditions improve in the second half.
We're seeing a range of conflicting data points in economic indicators and regularly speak with customers who despite the recent downtime.
Slowdown remain cautiously optimistic about the second half.
Marketshare and can add some color to this in the Q and a session.
We feel it is most prudent to actively manage expenses today to today's volumes rather than take a wait and see approach.
We still expect a sub 60 operating ratio for the year.
Our planned cost reduction initiatives will not impact safety.
Service and will ensure the business is positioned to handle any additional volumes when things pick up.
Lastly, we are maintaining our $1.6 billion to $1.7 billion capex outlook for the year.
Even though the year is off to a slower start than we had hoped we still see significant opportunities ahead.
We have a service product that is resonating with customers and a long list of opportunities to reduce expenses decreased asset intensity and improve efficiency by eliminating the unnecessary touches that cost is slow us down.
We are very proud of the progress to date.
And there is still much more or less to do with that thank you and I'll turn it back to bill.
Thank you Jim and the interest of time I would ask everyone to limit themselves to one question and one follow up only if necessary surely we'll now take questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one to withdraw your question Press Star two.
First question comes from Ken Hoexter with Bank of America Merrill Lynch you May ask your question.
Great. Good afternoon, and thanks for the discussion here can you maybe just talk a little bit about the performance right. So a phenomenal operating ratio yet when you show your your data the on time arrivals continue to fall, maybe just to understand how how that's possible given they are you tightening the timeframe is to different levels or is that is that different than than the improvements you're making on the performance.
Oh, great was different from the train on time originations are not talking arrivals versus plan compliance, which is measuring the blocks as it moves through the network or our on time departures, which we report to the STB you know were close to 100% high Ninetys now and arrivals.
It is.
Kind of in the high 80 mid to mid to high Eightys, just most recently hero.
Our plan compliance on the other end, which is not measuring that train performance has never how the car builds through the network from the time, we pick it up to the customer and when we tell the customer will have it to his customer at 114 hours, how often do we make debt hundred 14 hour trip plan.
And in every time.
And when we started measuring this we were maybe in the.
30, a high 30% of the time, we were making that trip plan and now were in the high Sevens.
Close to 90 in intermodal and I 70 is for the carload business and yes to your to the answer to your question every time, we start getting where were producing a really good results.
Jamie on the operating team did in there and tighten up the schedule and make it and make it more difficult for everyone. Because ultimately that results in a much better product for the customer.
And to give you a little perspective.
Last year in the second quarter of 18.
We on average less.
We had early departures about 16 76 minutes early whereas you look at this year were departing of only 20 minutes. Early so we gave ourselves a lot of cushion last year, which obviously.
Ah would translate in a lot more costs. So we are tightening the windows and you can see it in that differential.
Which effects help us manage our assets a lot better.
Helpful Review and for my second one if there are follow up I guess he is.
Maybe just moving over to Mark and Jim Since you opened that up maybe Mark you can talk about.
Given the shift of the outlook are you seeing an accelerating decline in kind of some of the economic.
Indicators, you're looking at it just looks like carload, you're right have you know if we take out the intermodal, which which stays around that down double digit given your lean closures it seems to.
Are you seeing an underlying deceleration in some of the outlook I don't know if you want to go by commodity or or.
Well, thanks, Thanks again for that or.
So the opportunity to think exclusive of the the PS refinery.
The explosion that Jim just talked about in Philadelphia.
So just trying to get a couple of weeks ago or change in our revenue guidance is largely evenly attributable between your three segments are cool merchandise and intermodal.
When they're cool.
Export coal has been.
Blue or expectations, mostly driven by thermal and lower EPA to benchmarks, which we think will likely continue into the second half.
On the domestic utility side, our volumes are down relative to our expectations.
Driven by continued lower natural gas prices.
Going into the year, we were we thought Henry hub is going to be somewhere around in our guidance was for Henry hub to be somewhere around 285.
Now we're hovering between 241 to 50, which is now reflected in our guidance.
On the merchandise.
Clearly.
As Jim mentioned, clearly there are signs of slowing economic conditions.
In both the R&D team GDP for Q3 in Q4.
Pointing to a less robust economy in the second half.
We've obviously seen evidence of this in our own business and.
And now see a softer industrial environment.
With signs in our automotive chemicals and metals segment.
What we're calling it as we see it and the run rates.
We're seeing are based on the trends that we saw in June .
And coming into Q3.
On the intermodal side.
Listen, we clearly hope for more of a recovery.
Particularly in the fourth quarter of the year.
But were not immune from some of the pressures that the entire.
US intermodal industry is recently now with the weak trucking merged into coming off an exceptionally strong 2018.
There is a lot of excess capacity in this market.
And as a result of what we saw in 2018 and a lot of trucks came into the came into the market.
Seems to be worked out.
But listen we're staying disciplined on serving our customers and providing everyone.
It was it was with is you mentioned great service no one would hope.
Obviously, we would hope in the back half would be.
Resolution or clarity on on treating terrorists.
Would obviously help but that is obviously beyond our control.
What is within our control is providing a high quality service product to our customers.
Uncovering new opportunities to use that service product for both new and existing customers and to make sure that we are extracting a fear.
Value for the service that we provide so.
Hopefully hopefully that covers the year.
Little bit of the exploration.
From where we are what we are seeing.
No I truly appreciate thanks, Jim Mark Kevin Bill. Thank you for the time.
Thank you and next question comes Malson Landry with Credit Suisse. You May ask your question.
Okay. Thanks, So Jim early you outlined a number of concerns in the freight environment and what you heard from customers. It sounds like maybe the risk is to the downside and seven outside recovery.
But I guess my question is how much of a volume or revenue decline and the business model with stand and you know you still grow EBIT on a year over year basis in 2019.
Oh.
I don't know that we've ever modeled how much food.
We could easily take out a you know I think we're.
We're doing where do you know if this is not something we woke up yesterday and said well you know I guess, what the things are going to a little bit softer than we had expected.
We've been watching this throughout the first half.
I'm, hoping is everyone did that things would turn around in their business levels would start to pick up instead of this is just kind of slow blazier of bullies type drifted down across which as Mark said go to then accelerated as we got into a June .
And but we've been planning for this in in watching it and taken steps are for months now.
Or to a a first of all obviously focus on NGL <unk> Petchem, one things we don't want to do in these situations is is reduce.
<unk> costs in the transportation side of the business that could impact service.
In fixed services in your business can get softer and then it gets softer so you've got more and then you pick service and you start to downward trend.
Uh huh.
It would be much easier.
For us to respond if suddenly business just dropped 10% today. Because then we would know exactly how to rightsize the business for renewal exactly where we could put not take out the expenses to do in order to handle.
The volumes. So we are doing their best we can and have built a I think the team did an amazing job in the second quarter.
Of really getting a lot of things done and getting a lot of things Rightsized based upon what we were anticipating what we were seeing.
And not really going after any kind of cost reductions on the transportation side of the business is where the majority of our expenses are.
If we see.
Or if we saw it hopefully we though but if we saw a significant equip the decline in our business level, we would respond quickly and aggressively and do everything we could.
To try and maintain a or cost structure it or advantage.
At some point in time I mean, there's just no way that we can take out the order of magnitude or the amount of costs that are necessary. If there were a significant decline in revenues, but we'll we'll continue to do our best and monitor it. So far so good I mean things are not this is not doom and gloom. This is not in the days kind of thing. This has been a very slow drip from the beginning of the year and is aggravating as it is.
Under the current Oh rules of engagement with the investment community. Once we put guidance out when things start to look like we're not going to be able to achieve that guidance. We're obligated to give a new guidance and so we've thought hard about it and said you know based upon where we are today. If this is kind of the new run rate problem. Today, then, we'll probably be down one or 2%, especially when we just don't blow up an oil refinery there was a big customer of ours.
And.
ER, which is by itself on an annualized basis, 1% a a volume so factored into this the number that we've taken down is a is a one time a 1% hit the in volumes.
The <unk> App, which will that would recognize this year.
<unk> associated with the preferred refinery explosion.
So.
But to get back to your question.
We can do a lot.
If if we go directly what it is we're trying to achieve in this environment. It's just a lot more challenging.
Okay. That's that's really helpful and maybe just piggybacking on that a little bit. So yeah, I'd say that volume declines accelerated and maybe in Q2 I'm trying to do a little bit of a rightsizing. So <unk> should that along with the comments you guys made about having plenty of opportunity going forward for efficiency gains is that should we read that as a signal that the year over year improvement the alarm could accelerate from the 130 Bips in Q2 now that that wasn't a good number I'm just trying to understand that the trajectory going forward and how are you thinking about that thank you yeah Alyson, you're telling me I mean, we do a fantastic job annual Omar Khan.
You know I think we'll just we'll just stick with in this environment or going back to the original you know.
Got it you know that this this this revenue top line.
I do.
<unk> reflects a pretty significant.
The reduction in revenue and what we're seeing right now is working and we're going to achieve our goal of hitting an operating ratio below 60 and ER.
Despite what everybody else does out there maintaining our leadership position as the most efficient railroad in North America.
Thank you guys.
Thank you next question comes from Brian Ossenbeck with JP Morgan you May ask your question.
Hi, good afternoon, thanks for taking the question.
Mark one for you on.
Export coal.
Well when do you think that the you mentioned EPA to wanted to ask about met coal.
When do you think that that window will start to maybe a little bit tighter in seaborne prices you've come in a bit and are there any other changes that we've seen this cycle with maybe some longer term contracts or reservation systems at the ports that we were even restructuring of the coal producers in Appalachia.
Anything that you think can actually help extend this cycle for a little bit longer.
[laughter].
Yeah, Brent thanks.
I think.
Yeah on export coal, let me just start at a high level I think we're still expecting export cool roughly around 40 million tons for the year.
Oh thermal coal it is that as we talked about you're obviously some.
Tariff headwinds there given the EPA to.
Numbers, but you know we're you know there's there's some some tough things going on and in the Europe is Jim talked about with low natural gas prices, the mild weather and low natural gas prices in Europe . So that's.
Causing a little bit of a headwind I'm on the met side again.
Benchmarks remains strong there were about 190 box.
You know, we replaced reprice those contracts or quarterly.
You know we're working with.
We're working now with all our export to cool.
Producers to to look into next year.
I'm not going to give you any guidance, but we're having some success there and trying to walk up some volumes are not not anything.
Hugely significant but especially on the thermal side, which is encouraging but you know we work with are these guys every day.
Or customers and a new everyone's incented meister through water cooling Andrew heading into next year and hopefully as we get closer to the end of next year, we will.
Give you maybe a little bit more clarity on what your expectations are for 2020.
Alright. Thanks, Thanks, Mark appreciate that <unk>, maybe for you a follow up on that on a P.S. refinery Jim gave us the rough magnitude of that.
I was curious if we've seen some other headlines with U.S. steel.
Bringing down I guess, keeping down some some blast furnaces in the past you mentioned that the tariffs have actually cope.
Domestic steel production domestic met coal consumption.
So I was wondering if that was.
Three other distinct a events are reflected in the updated guidance.
Yes, certainly you know we had a we had a huge we had a big John .
Volume quarter in steel and industrial cool.
Now what's happening with some of those announcements and unfortunately some of those are producers.
Know worlds changing a little bit and we just talked about.
The declining or the softening industrial environment.
Which is obviously impacting them.
You know following the year the tariffs.
So we saw an increase in production. Unfortunately, nowadays with the markets are so huge inventories went up the markets getting a little softer prices are coming down.
So there's probably in excess capacity, there and I'm. So yeah, we expect that.
Our our metals and equipment volumes.
In the second half just because of the softer industrial environment, we'll we'll get a little bit softer. Unfortunately.
Okay. So that sounds like it's considered in your in your current update.
It is.
Right.
Okay. Thanks for your time Mark appreciate it.
Sure.
Thank you next question comes from momentum in a tough way to meet your bank you May ask your question.
Thanks, operator, thanks, everybody and congrats on the good operating performance Jim can you I guess, maybe talk about the pricing environment is it harder to push pricing in the current volume.
And low inflation environment and can you just give us maybe a fleet a flavor of your ability to you know just just simply put just charge a higher price for the better service that you guys are delivering.
Well if you look at the.
Yes, again, it is let's focus as it there's two different business segments. There's you know intermodal and there's a carlo.
Intermodal overhead intermodal or obligation there is to deliver a game product, it's as close as and talk like.
ER and to do so at a price that's cheaper or is it a truck because of the service the differentiation between depicted.
The linked volatile time in France is going is going to take one.
ER, so there's a very soft truck markets out there right now to life as Mark said, a lot of excess capacity based upon some.
Recent historical or changes in the marketplace.
It's a little more difficult for us or any other area, where we're really focusing on it is we talked a lot about because its two thirds of our business and we are in very profitable long term business for us is the girls business.
From a high level perspective in their situation, we know that we're a a that the that our customers are paying a 15% to 20% premium.
To move their product in a truck because ER.
The surgery, because they want to buy service reliability.
As we become more reliable and supply chain, we should be able to get more and more of that business and we should be able to do so at a premium price because the customers actually saving money by putting it thinking that business off the highway and put it in a railcar. So that's where we focus so intently on leveraging the service worked what I have today, no I think that the comp you're right and as we become more reliable and consistent.
And as you know the markets soften in customers are holding on to chronic and just in time deliveries become more important.
You know we're service comes at a premium and I think customers recognize that we do a good job whether we get it there I wouldn't say, we're going to get it or deliveries or tripling complaints.
Very good and so Uh huh.
They're willing to pay for their premium service.
Well just said just as a quick follow up to that I mean, why wouldn't we see that then those market share gains show up in in the revenue I mean, the revenue revision is not surprising given all the headwinds you've discussed but would have thought with the improvements of the network on the carload side. The market. Your opportunity you just talked about the realignment of the sales organization those could translate to some market share gains and so maybe maybe just takes a little longer than than I. Appreciate.
If you could just talk about you know where you are in kind of the evolution of capturing that market share because it doesn't seem like it's showing up in the revenue numbers this year at least.
Well again, it again and jump off point out again, you know the carloads are pretty horrible weather was warmer than we are the most transparent industry in the world and as much as we report our sales volume on a weekly basis and our merchandise business segment, even though everybody symptom I got something rather see us that the volumes are down 10% well you know, it's all intermodal and we already told everybody in the world why our intermodal business was going to be down what we focused on the fact that our is that our merchandise franchise with outperforming everybody else in the industry and this is what exactly what we're talking about so up until most recently, where we saw a couple of our industrial segments. Given the softer. We were we are very confident that the strategy of growing it Uh huh.
Having non cyclical growth in our.
In our merchandise segment is achievable based upon our service product.
ER and unfortunately, as I said, you know a half of his or a significant portion of his merchandise business and we've now taken that guidance got on.
It was a short associated with this one time customer event.
And the rest of it is just kinda basically you know market, driven where in certain segments or with our industrial customers.
Again, you know our grain business is doing really great a lot of our segments of our business are doing really great.
Oh dray moves any other trained a lot of grain moves in a box car. Your individual box car that were taken from a truck and putting it in a box car.
So across the board in this merchandise segment, we're seeing we're seeing gains were seeing traffic come to us.
And if you're a customer if you're a customer right now and it's kinda looking and saying like why you know maybe things are a little soft hey, maybe I've understood. What I can do okay to rightsize Lightminer take control of the call my cost structure, how can I save money and one of my business I go and I you know I can reduce my transportation spend overnight.
Well by taking the traffic off the road and footwear in a box car.
10 years ago, I wouldn't have done that because she's my model.
The product would have never got to where it was supposed to be nowadays are willing to do that and I could say boy. So we're pretty confident a a bad and I think and we think that the numbers are beginning to prove it prove us color. If I could just ask one follow up on for Kevin.
With respect to the cost opportunities you laid out you know Kevin do you expect to see or improvement in the second half versus the the stellar results you guys put up in the second quarter Threeq, you typically looks a lot like to queue, but I'm not sure I'm not sure. If there's any further opportunity given the cost items that you laid out.
Yeah, I think Jim the dresses previously I don't think we're going to get into.
You know back half versus first half dynamics in terms of the war what I can tell you is there is a number of initiatives that we've been working on over the last.
Month.
That are new to our plan to react.
She was.
You know.
Downward guidance in our in our topline. So yes, we're reacting quickly not only across DNA it's across.
Oh, all aspects of our business.
Jamie and.
Brian are on board and.
You wouldn't do a ideas are coming to us every day and it's our job to identify those and go after them, but we're not going to get in the nuance of like an up versus first though okay I'll try to hit but I. Appreciate the response thanks everybody.
Yes.
Thank you next question comes from Brandon Oglenski with Barclays. Your line is open you may ask your question.
Hey, this is David Missoula on for Brandon.
Hi, Thanks for taking my question.
Just a little bit of drill down into the prior question about.
Pricing getting.
In terms of merchandise versus.
Intermodal.
Oh, yes, some of the service metrics you showed on intermodal in terms of plan compliance show really good preplanned compliance on the intermodal side.
Does that make you potentially a victim of your own success.
And that yeah, there's not as much room to go positive on the service side and try to to drive conversion from the trough.
Or are there more nuanced.
Aspects of the service that you can still provide that would be beneficial to kemper's card you currently using truck.
You know our metrics in intermodal versus carload business reflects the nature of two different kinds of businesses and on the intermodal is terminal to terminal what's the point.
ER and it's much easier to have those kind of high can play in compliance builders are versus Carlo.
A lot of things we can do there.
On the terminal side, Oh in order to improve that.
The customer experience.
And I'll, let Mark tell you about some of the.
Great stuff, we're doing on the technology side in intermodal that we think is going to differentiate ourselves as well.
Yeah, well I mean.
Okay and across the board I mean.
We are.
Well, it's a great things going on across the board with it in terms of the gate reservation systems are all kinds of things that the terminals are making it easier for customers to do business with us or whether it's on the website and have lots of opportunities, but clearly when we talk about.
When we talk about converting a lot of business you know merchandise is really where we see the greatest of opportunity.
And driving that conversion from truck.
Two our Ah.
Moving to our merchandise business lots of opportunity there we're seeing some great results, we're converting a lot of business as we speak because of our service. It's improved so dramatically or customers are responding to the reliability and the consistency that we're we're we're providing.
It's a great or degree pricing so.
I think there's a lot of opportunities left but clearly are both on the on the intermodal side and on R&D. Your merchandise sorry, there's opportunities for continued growth there.
Thanks Mark.
Thank you. My next question comes from Chris Wetherbee with Citi. You May ask your question.
Hey, Thanks, Good afternoon wanted to ask about the guidance, maybe specifically can you help us sort of break out what you think the volume expectations are for the back half of the year and I don't know if you want to sort of handle that on on merchandise versus intermodal type of dynamic because clearly there's some company specific initiatives on the intermodal side, they are reducing volume, but just any help there, but kind of thinking about that mix of whats yield than what volume in the back half.
Oh, Chris I mean, you know we're.
[noise], we're expecting that the volume.
In the second half or is going to at this point in time is probably we're going to have to work really hard to make the volume the equal to a a or better than what we had in the first half.
And you know that's the challenge as I said, you know again, we came into the year expected to be up one to the first quarter first quarter was you know under the circumstances in a lot of noise going on it was still a pretty good quarter, but you know there's a lot of the segments, especially intermodal just didnt bounce back with the way everybody expected it to be.
And so.
What we're saying right now is you know kind of take today or as the as the run rate.
And.
Uh huh.
Hopefully, we hopefully we can do a little bit better than we did in the first half.
Even with a pretty strong quarter pretense.
We're not we don't have a big hockey stick anywhere anymore to work with you relatively at relatively flat and we should get a pickup in the second half.
Fourth quarter or the year, just simply because of intermodal start over you know.
We start to get out of some of this.
The more of it.
The marketing of certain lanes, but <unk> on an absolute numbers basis or this is pretty much a pretty good.
So where weve just for planning purposes for our guidance right now and and I'm pleased that I hope I've proven wrong, and we do see things didn't turning a stronger in the later part of the year.
So we're just assuming that this is kind of the new the new norm for for guidance purposes.
Chris.
With a you know our first half of the year revenue was up 2%. We're now guiding for the full year down one to two.
We still expect pricing to remain positive. So I think the math is pretty simple there.
Okay. That's helpful. I appreciate that and then just on the on the pricing side and maybe just thinking about yields in general drilling down to the coal numbers you know, there's some puts and takes in one export volumes move around a little bit you tend to have fluctuation in the in the coal yields when you think about the back half should we be looking at Twoq was a reasonably good benchmark to use for the back half when we're modeling out just trying to get a sense of you know.
If there are other sort of movements between met and thermal and that we should expect as we move into the back half of the year sounds like the guidance for 40 million tons are still still hold just want to get a sense. If there's any moving parts within that is too cute with good number to use for coal yields.
I think so I think so Chris listen again as it is you know it was.
If you're looking at your views and cool.
It was you know in any given quarter.
Always lots of.
Those are the moving parts there Q2 cool ARPU was down obviously, but but that was really a reflection of a some gains that we gotten shorter haul business and.
Utilities business, there to the north which is generally lower ARPU than the utility business to the South and then as I talked about earlier in an earlier question some of the steel and industrial growth that we saw.
So so saw some strong volumes, there which is against some lower ARPU than typically we see on the on the whole book or coal, but no I think going forward or sort of what you see is what you get for what you should probably think about as we if you plan to be a factor for the year.
Okay, great. Thanks for the time I appreciate it.
Thank you next question comes from Tom Wadewitz with TBS you May ask your question.
Yes. Good afternoon wanted to ask you first on the just kind of broader approach on price and volume Yeah, you know I'm I'm confident he'll show disciplined, but how do we think about.
You know how you want to Dow the you know that I havent approached the dialogue the levers I will you get more aggressive in terms of kind of.
You know competitive position to support the volumes as you see less volume out there or is it something where you're kind of let the volume flow with the market and.
You try to keep pricing reflects whats good service and discipline and all that.
So hey, Tom you know we should be there again, you know Jim mentioned, what we're going to do on the on the volume side and we're going to take it as it comes and we're going to be you know, we got a long pipeline of initiatives well things that I've talked about in the past whether it's on the marketing side with its certainly.
Or the business that we do with our short line burners, whether it's stuff that we're doing on the regional sales, whether it's a whole host of industrial projects and industrial development projects that we've got going on I mean, clearly a a long list of.
Some of the initiatives that we're working on it and so you know we're going to convert that that volume as it comes to us and we're working hard every day to bring more volume under the railroad, but let's be very clear, we're still achieving very strong value on the renewals in the month one of them that I spoke about in Q1.
Oh, I'm pretty sure that continued into Q2.
Every contract that.
We haven't still needs to come across my desk for approval.
And I can tell you that I'm extremely pleased with the discipline that our team is bringing and so.
You know, we're working hard to just to pull in both levers are and where we're taking a disciplined approach.
Okay, Great. That's a that's helpful. Thanks, Mark up.
One a one other question just step.
How should we think about the operating ratio in an environment and not necessarily second half of the year I know you've given us the kind of full year commentary, but you know, perhaps if we look to 2020 and you say well you're in an environment where revenue is flat.
Hi, do you have enough or you know kind of initiatives laughed I know Kevin identified some but do you have enough a efficiency gains left to improve the O. R. A if revenue was flat how might we think about that perhaps from a kind of a broader perspective or 2020, or however, you want to frame it.
Well I think what we just said is we're going to improve the operating ratio.
You know more than a point with revenues down.
So we do a very good if we're faced with a similar circumstances. That's the hand, we're dealt.
ER will do everything in our power to manage the business accordingly.
And you think that could be the case beyond just second half.
Well thought out you know like I said this is not into that [laughter].
Yeah right right.
Yeah, there was a it again there was a certain amount and obviously, there's a certain amount.
The two variables that we wouldn't variables that were obviously need to work with our volume and inflation on the operating side and to the extent that there to the extent that we didn't get some cost reduction associated with volume reductions or increases.
If it goes the other way.
Our challenge each and every year is to offset whatever the input inflation number is.
And.
Hopefully if we're providing a high quality product is mark setting we're pricing appropriately.
So that should help us help us a lot.
To get us going into right direction for the full cost.
Which would help on the operating ratio side. In addition to keep finding ways to improve efficiency. We have a lot of ways would go a long list of initiatives.
ER work on we're far we're <unk>.
In all of these various categories, we're far from best in class or who we'd like to brag, but when we benchmark against it.
Just about everything that everybody else does not even it's not just in the railroad industry to try and figure out where we can improve we have a long ways to go in just about every segment of the way we do business.
Okay, great. Thanks for the perspective, Jim I appreciate it.
Your next question comes from Justin Long with Stephens you May ask your question.
Thanks, and good afternoon.
So last quarter, I think you talked about head count being down 6% to 7% this year, which would roughly be in line with attrition based on the volume weakness.
You've seen year to date and it sounds like you'll see in the second half whats your flexibility to reduce headcount further and do you have any updated thoughts around what that percentage looks like in 2019.
Yeah, we're still well on track to meet that forecast that we had in the six to eight.
I think I mentioned in my opening comments that really over time is a big focus of ours right now <unk> significant cost and everything.
Savings opportunity going forward.
Certainly we're going to continue to look at headcount on them, but we're going to use attrition where we can.
So we have a great.
A line of sight to what that number looks like and probably most of you know we need to go a little bit harder there any on how the volumes coming back after the year.
Okay, and secondly, I wanted to circle back to domestic intermodal and your expectations for growth on that front I know, it's a little bit noisy with some of the line rationalizations, but if you kind of take that out of the equation. What do you see as the underlying growth rate for domestic intermodal as we get into the back half of this year and longer term.
[noise] well.
You know tell me what the economy is going to do in the back half of the year I'll tell you what intermodal is gonna do listen I think there's a lot of.
You know as we talked about the excess.
Supply that's out there of truck supply.
Capacity.
You know we we.
Hopefully you're a flatter sure intermodal, we think the there's going to be.
You know.
Hi, good peak, but it's probably going to be somewhat muted first is extremely strong peak that we saw in 2018. So I think volume levels are going to pick up a little bit.
But probably not as a peakish as we saw that we as we have historically seen listen longer term domestic intermodal and my view is there's no reason why.
This this franchise should not be able to grow on an annualized basis, whatever GDP gives us plus two or three points.
Okay, and just to clarify your comment on flat markets is that flat domestic intermodal volumes, excluding rationalizations in the back half is that what you're saying.
No, including a rationalization so again.
You know, we we lap were officially lapped it will be the end of the rationalizations.
In January of next year are we took off again in January of this year, a 19.5%. So overall since since we began this journey in December of two day of about 2017, we've rationalized over 15% of the intermodal network.
Most of that a lot of that lapse in October and then the final bit lapse in a in December and in January .
Okay, Great. That's helpful. I appreciate the time.
Thank you next question comes from Scott Group with Wolfe Research you May ask your question.
Hey, Thanks afternoon guys.
Thanks, Kevin.
Kevin I don't know if I missed it but you guys usually give some guidance on the the other revenue expectations, maybe any color you can give us there.
Yeah, I think you should expect about around the current levels that we did in the second quarter continued for the back half of the year.
Okay helpful. And then so with a more cautious sort of volume revenue outlook does this change the way you guys think about target leverage ratios does it change the way you think about Capex I mean do you see some flexibility on on.
The billions sex and then I guess just follow up on that head count. These why not do more on head count into the volumes are coming in worse.
Well I certainly think if we continue to see downward pressure on volumes, which is not our expectation that you'll probably see some more opportunity there.
A younger and variable cost in our business and then we would take a look at some other things as well.
On the on the balance sheet right now we're sitting on 1.6 billion and cash we expect to generate a lot of cash in the second half of the year.
I can give us significant flexibility being proactive and opportunistic if the market gives us an opportunity.
Oh, we're well within our 2.5 to 2.75 times leverage targets, a hefty EBITDA I think we're comfortable living in that area. We're at the bottom end of that today.
So it gives us a lot of flexibility going forward, but again, you know with our cash balance one when you have today and what.
We expect to generate anywhere in the back half of the year and gives us a lot of opportunity on the opportunistic here.
Okay. Thank you for the time guys.
Thank you and next question comes from Ben Hartford with Baird You May ask your question.
Oh, then please check your mute feature.
Hi, guys, sorry about that so thanks for the time.
Mark I'm interested in your perspective on IMO 2020, and.
How customer conversations are shaping up in front of that did you expect it to have any sort of impact either in terms of.
International intermodal and a pull forward or anything along the crude or petroleum side of the equation.
How are you guys thinking about that impact in the back half of the year and the early part of 2020.
Yes, great question, we're obviously.
We're obviously working and talking to our customers I'll be visiting with a lot of the.
International Steamship guys here in the next month or so or were there I know that's going to be a huge topic of discussion were.
Clearly are early indications, we don't think it will have a material change for our business I know there.
You know, they're working on Oh I'm now on these issues are as we speak.
But.
You know, where we stand right now and again.
Maybe a little premature maybe.
Remind me that would bring their question back up and put them on the Q3 call well give you maybe a little bit more color, but oh, it's a topic of discussion coming up in Ah, but clearly I think right now yeah, we feel pretty comfortable that we're not going to see any material change.
Okay. That's helpful and then.
You know that the revenue or those who knew the the outlook you gave on intermodal was helpful. I'm curious on the merchandise side as well I mean, obviously I want to talk about the macro in the softness but as you guys embark upon expanding the addressable market. What's the probability in 2020 that that you can make enough progress either selling service developing some of the sales and marketing efforts to be able to drive to you know whatever the U.S. industrial production growth number might be plus some some sort of multiplier within the merchandise category in in 2020 or is that simply too soon as a tool to near of a a time horizon to be thinking about and also up from from some of these initiatives well. It's a great question listen again as Jim said earlier, you know, we're outperforming the U.S. rail industry today on our merchandise volume growth or we're up there you know after the second quarter over 2%.
The others are down for the year on merchandise. So clearly the initiatives that were that we were working on the changes to our service plan and the service that we're delivering are clearly having a lot of the big impact now yeah, we're facing reality and you know the industrial economy, it's kinda slowing down here and we've got a few headwinds going into the second half, which we have to live with and obviously the p. yes.
Explosion was that it was a major factor to us revising this but you know as I said earlier, you know we have a number of initiatives going on and and the team that Kevin I used to lead in the marketing Department before he became the injured in terms. He CFO here is doing some great work analysis those are the.
We've got a team of a.
Data analytics that people downstairs that are that are doing some there's some great research and exposing a lot of opportunities for this organization. We're excited by that there's a there's some some obviously some are some big opportunities and we're going after everything methodically and you know we're looking to grow. This organization. We're not just taking them. What we can get were going out there we're being proactive and this is about growing CSX, it's not just taking what the.
You know what the customer it gives us we're going to find opportunities to grow and convert truck truck traffic than them and we're doing just that.
I appreciate it.
Thank you and next question comes from Bascome majors.
You May ask your question.
Yeah. Thanks for taking my question here you made a few changes in the C suite in the second quarter I'm not sure if for rigs on the call but.
[laughter]. If he is I was hoping you could help us understand the responsibilities of this new role of Chief strategy Officer, and anything about the long term or mid term vision.
That might entail realize any six weeks into the job here and and cabin anything if you'd want to highlight your priorities for the finance organization. Your leadership that would be helpful. Thank you.
Sure.
And not enough room for many many years thing he goes moving from way way back and I'll leave it to the privatization of the Canadian National already worked together.
On that initiative.
At that time and it kept up with his career.
[noise] ER.
As I moved around the industry as well. So I just felt that are you know, we're we're embarking on it.
You know.
Significant a transformation of the stuff of Csxs ER and a lot of things that we want to do that differently a lot of them in the area that mark spoke of.
In terms of you know in expanding a armed our reach and our interface with with our customers.
And and Ah for room, a instantly canton line, because I felt that it hit him and great experience and in working in that area.
Ah So it's all about what it is we can do to.
[noise] double what it is we can do to make our service offering our core rail product offering to our customers.
ER and ER.
To me that's a.
So then in office and the Cana now than you thought and new direction.
New vision.
ER from what it has historically been at Dawn and the railroad industry and that's what groups going to work with me out and they can handle.
And Kevin or.
Kevin It's phenomenal is doing a great job are we all appreciate it.
Then he was here and his skill set and his ability to step right now.
And.
And ER and ER pickup.
Or Frank left off Frank did an amazing job for US you know sex ER and ER. We're all happy then Kevin will share in a health as we work through the transition and we are.
I am in the process is Kevin well knows.
He is looking at me Count Sheepishly asked you about those were doing an external search or to see if we can find the right person to fill this role and as part of that process, Kevin is going to be consider.
Thank you.
Thank you. Our next question comes from Jordan Alger Goldman Sachs. You May ask your question.
Yeah, Hi, guys. Thanks, I'm, just a little pushing on the a and the intermodal the chip playing compliance looks really strong.
And I'm just sort of wondering the de marketing is going to lap by the end of the third quarter.
So, let's just say the economy sort of gets back to a 2.5% GDP type number two two and half percent as we move into 2020 do you feel comfortable that at that point, you'll be able to start more aggressively remarketing, the intermodal and do that GDP plus two to three points or is it premature.
Oh, they said longer term I think that would be our goal clearly I'm not going to.
Sit here in July of 2019, and provide you 2020 guidance, but.
You know longer term as we think about the intermodal business, yeah that would be my hope and expectation given our franchise the strength of our franchise.
And the service that we provide to the customers, which were pretty proud of that we were able to do or whatever the economy gives us less so.
Oh, so two to three points above that so.
Oh, that's my wish that's my goal that's we're going to work on we were settling in on our on our footprint, we're doing really well in the wanes a that we than where they were in now Oh, we're showing our customers. What we yeah. What we're made up in ER and ER and when the growth comes we are ready to handle it we got excess capacity.
And we're ready for the group when it comes.
Okay, and then certainly next question.
Fully understand the need to be prudent in the guidance with all the various cross currents going on I think you know you might have mentioned in the very opening remarks, Sam Jim that that customers remain cautiously optimistic so I'm, just sort of wondering which areas might be where that optimism is and and if their optimism plays out and you sort of run that through.
Your system could we get back.
Two yeah that 1% type of revenue growth if the cautious optimism plays out.
Well I think yesterday, Jimmy onset and we're pretty excited about the second Anthony here I think it was about two weeks ago on the front page news.
For General Motors was talking about right things work.
And ER and on and on and on ER.
You know well not necessarily our customers per se per se, but I think you know Jamie Diamond said this morning shouldn't stop and so pessimistic things aren't that bad.
Oh, all were new way of saying that.
<unk>.
You know there's Vince this is as I said, the slow drip or since the beginning of the year, where everyone has expressed concern I think yeah.
All of our customers Mark interfaces that went down more than I do on a daily basis.
And maybe he wants to comment as well, but I think.
All of them as set forth therein and yes. That's the 2019 is expected to be it was expected to be a slower year than last year and as we went into the year with all of the confusion and chaos more driven by a you know governmental issues than anything.
But if we Didnt you know once government shutdowns you name it Oh, yeah on tariffs this tariff at ER and you know if we didnt bring it is calmness and noise down in the marketplace and we can begin to do things to damage the economy.
So <unk> and nothing really has changed or to make everyone feel different though over the first six months.
ER and so we're you know we're looking at it is it's just going to his this unusual or for the rest of the year are now we're talking about another government shutdown, maybe as early as September or October and Ah. So a as I said you know Unfortunately in this day and age I'm obligated, we're obligated to update guidance when it changed and we were trying to figure out where to put the package and so we said let's.
Pretty much take care. So what we have today. It continues for the rest of the year and lunch home, let's hope.
Hey, they were wrong and if things pick up.
Yeah as opposed to say well, we don't really know, let's not let's not take a realistic view or we can almost that we can always just take our guidance down again next quarter and you know you don't want to get into that situation. So we think this is a realistic look at that.
Yeah, the state of the economy, and where we fit in.
And we're confident with debt plus it gives us the ability internally to say hey, guys. Hey, This is the new norm, let's tighten or shoes and to get the work and we're going to achieve our targets.
Okay. Thank you.
Your next question comes from David Vernon with Bernstein, You May ask your question.
Hey, guys. So they're down one to two for the full year I'm, just trying to get a sense for what that should what we should be expecting for first sort of operating income dollars I missed some of the operating ratio. The street right. Now got you up three inclusive of land sales up six ex land sales, what kind of EBIT growth on a down one and it down sort of three to four its back half of the year should we be expecting.
David as you know the math if I gave you the EBIT growth you would not know they are so by default or not getting it all ratios in the back half, but probably on kind of is it reasonable to expect up a little down a little flat can you give us some directional guidance on where the EBIT number will be.
Look I think we gave the revenue guidance that we gave in all our target and I think we're going to stick with that.
No for now well, obviously update as we get further through the year, Alright, and maybe just as a follow up if you look at the sequential downturn in the other revenue.
You was that just like changing the rules on when you're charging demurrage because the volume was sequentially flat in intermodal and that was it was called out in the report I'm just trying to get a sense for what drove that sort of sequential move lower in the other revenue.
Well your intermodal volumes were down 10%, there's lot less boxes sitting sitting in a in terminals in we're charging a lot less and well certainly look for those reasons. We told everybody before you know this is a real charges or something that.
You know, we're not looking to.
That makes a lot of money there. It's just it's it's really changing customer behaviors and getting boxes to flow in and and and assets to move through hoping your network and so you know some of that is working and we're working with our customers and we're seeing some good.
Dwell numbers and so we're happy with where that's running as well, but obviously a lot of that was driven by just a lower intermodal volumes.
The volume from one to two key were flat.
Pardon me. The one did you give the sequential volume was kind of flattish and you went from like 168 to 124 I was trying to understand did you see a really big pick up in the yard to put yard performance or was this just to you we sell to and you know again. It is most of this is international intermodal and this is where you know these guys and the guys and say they can't pay offsite storage.
They must store their box in our terminal well guess, what when you start charging them suddenly a day, they find ways and they and they move a their boxes to a container storage facilities located near our intermodal terminals.
The nature of the Beast, So, yes volume by the Oh volume a yeah international sites well was Uh huh.
Overall volume was down in intermodal volume on it on the international side was relatively flat, but to be in customer behavior that Mark just alluded to are these are the first guys to take advantage of that and get them out of it.
All right. Thank you.
Thank you. My next question comes from Jason Seidl with Cowen You May ask your question.
Thank you operator, Jim and team. Thanks for squeezing me in here I just have one question.
Looking out at intermodal, obviously, you guys do you market. It some of the business because there wasn't enough in some of the lives and the profitability just wasn't there.
It's clearly important to raise the profitability of intermodal you know how much of that is improving service and how much of that is going to be you guys going after higher prices.
Oh yeah.
You know a lot of the work that well that we're working on right now is changing the footprint and are working on taking out all the unnecessary.
Touches in switching where we used to do with intermodal that was crazy changing this.
Hoping spoke system that Oh, we inherited when we joined the railroad, which caused a lot of inefficiencies in the in our intermodal product and in our service and drove up our intermodal or cost significantly. So we have changed that model. We have gotten out of a lot of the lanes that were clearly very unprofitable for us we're focusing on what we do well in billings that we do well you know in our in our contracts we have a longer term contracts. So it's not we're not susceptible susceptible to the.
Ah you know very well.
[noise] sort of mid to high single digit or or exposure to the spot market. So it doesn't really affect us too much but most where most of our pricing is under a long term contracts with.
With the rate escalators, so annual raise wages for yourself.
But were working there in we're doing a good job and we're going to see the profitability.
That business segment to improve overtime.
Okay. Thank you for the time as always.
Right.
Thank you and next question comes from Walter Spracklin with RBC capital markets. You May ask your question. Thanks, very much good afternoon, everyone I'll keep it to one as well just a.
Again on the intermodal side and and your effort I think Mark you were saying are you targeting trucking.
You are you one of your peers, obviously in Canada is taking a little bit different approach to that they're they're not only targeting the trucking market, but investing in and buying intermodal assets within that market to kind of jump started to accelerate that conversion that truck to rail conversion is that something you would consider is that something you've looked at what's your overall view on that strategy.
[noise] I think they are smart people, Jim and I know them really well, obviously I spent a lot of my career at the railroad I admire what they're doing a we have a little bit of a different model here in the United States than a than up north, but you know we are.
We look at what they're doing and.
But you know I'm not going to share with you on the call today or strategies for the future, but listen we I think as Jim alluded to we're looking for growth opportunities everywhere, whether it's I've got some merchandise whether that's in intermodal and.
Right you never say never to any opportunity that comes across your desk.
Okay, Jay and Keith and looking at it we're watching what they're doing yep.
Okay fair enough, maybe if I could sneak one in there as well an extra one a R&D Mark again, you mentioned that technology I think the real industries right for it or can we see or do you expect to see.
Brett This is better for Jim perhaps.
More of your Capex dollars going toward potential investment in.
Accelerating the R&D applicability to rail to get some of those extra efficiencies from from that trend just curious your your thoughts on that.
Hey, This is Kevin first of all Tech dollars are up this year. So we aren't spending more on Capex, a technology, but I'll, let you answer the rest of my question.
Well again, you know it says.
Something we're always there we're always looking at ways to <unk>, we're here to grow the business so plus.
This is not you know despite what a a lot of people, saying that you guys had a lot of people say you know we're here to you know shrink the business to profitability, we're going to make the business run better. So that we can grow it and and well look at every opportunity where we can make a buck.
ER and making the process made to shareholders very rich and famous ER and ER. That's what it's all about so we're always studying every opportunity that we have in person.
Okay. That's it thank you very much.
Right. Thank you very much for calling.
Thank you at this time I turn the call back over to the speakers.
Thank you again for joining today I think that concludes our call.
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