CSX Corp (CSX) — Q2 2015 Earnings Call Transcript

Thank you, Shirley, and good morning, everyone. And again, welcome to CSX Corporation’s second quarter 2015 earnings presentation. The presentation material we'll be reviewing this morning along with our quarterly financial report and our safety and service measurements are available on our website at csx.com under the Investor section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. This morning, our presentation will be led by Michael Ward, the company’s Chairman and Chief Executive Officer; and Fredrik Eliasson, our Chief Financial Officer. In addition, Oscar Munoz, our President and Chief Operating Officer; and Clarence Gooden, our Chief Marketing Officer will be available during the question-and-answer session. Now before I turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company’s disclosures in the accompanying presentation on slide two. The disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition, at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With approximately 30 analysts covering CSX today, and to respect everyone’s timing including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary a clarifying question on that same topic. And with that, let me turn the presentation over to CSX Corporation's Chairman and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning, everyone. I am pleased to report that yesterday CSX announced second quarter financial results for its shareholders that included all-time company records for operating income and operating ratio, as well as earnings per share, which were $0.56, up from $0.53 reported in 2014. Overall, significant operating efficiency helped offset year-over-year declines in revenue and volume. Starting with the topline, revenue in the quarter declined 6% to $3.1 billion. Pricing gains were more than offset by lower fuel recovery, a changing business mix, and a 1% volume decline as we cycled last year’s demand surge. At the same time, we have the resources in place to meet customer demand across the network, supporting improved service performance and operational efficiency. That efficiency coupled with lower fuel prices helped decrease expenses by 9% and delivered all-time records in operating income at $1 billion and an operating ratio of 66.8% for the quarter. We expect service momentum to continue as we progress toward the record service levels we saw in 2012 and 2013. That service is the foundation for driving long-term growth and value creation for our shareholders, as it also supports our ability to price to the value of rail transportation and produce ever more efficient operations. Now, I will turn the presentation over to Fredrik, who will take us through the top and bottom line results in more detail. Fredrik?

Thank you, Michael, and good morning, everyone. Let me begin by providing some more detail on our second quarter results. Revenue was down 6% versus the prior year, driven mainly by $183 million of lower fuel surcharge recoveries. At the same time, the impact of negative business mix and lower volume were essentially offset by core pricing gains. Volume decreased 1% from last year, with low commodity prices impacting coal and crude volumes and some of our merchandise markets, particularly metals being challenged by the strong U.S. dollar. Core pricing continues to improve sequentially and for the quarter was up 3.5% overall and 3.9% excluding coal. Other revenue increased $46 million versus the prior year. The primary driver was the cycling of about $20 million negative impact to the in-transit reserve last year, coupled with the positive impact this quarter from a similar amount as network performance improved significantly. Expenses decreased 9% versus the prior year driven mainly by the impact of lower fuel prices. Our ongoing focus on efficiency drove $45 million in productivity gains in the quarter, but lower volume resulted in $32 million of cost reduction versus last year. In addition, we recorded a $17 million gain in the quarter associated with the sale of an operating rail corridor. Operating income exceeded $1 billion for the quarter for the first time in CSX's history and was up 2% versus the prior year. Looking below the line, interest expense was similar to last year, while other income was favorable as we cycled environmental charges for non-operating activities from the prior year period. And finally, income taxes were $334 million in the quarter, reflecting higher pre-tax earnings. The effective tax rate was about 38%, which is consistent with our expectation going forward. Overall, net earnings were $553 million and EPS was $0.56 per share, up 5% and 6% respectively, versus the prior year period. Now, let me turn to the market outlook for the third quarter. Overall, we expect volume to decline slightly in the third quarter. Although, we expect a slight decline of the higher 2014 base, CSX’s portfolio remains balanced with several growth markets offset by challenging near-term market dynamics in others. We are projecting favorable conditions for 49% of our volume in the third quarter and stable to unfavorable conditions for the remaining 51%. Strong intermodal performance will continue as our strategic network investments support highway to rail conversions and growth with existing customers. Increased infrastructure development projects continue to drive a favorable outlook for minerals. Agricultural is neutral as strength in domestic grain shipments closing out the prior harvest is offset by a weaker ethanol market as a result of higher inventory levels. Automotive volume is expected to be similar to the strong level we saw in the third quarter last year reflecting North American light vehicle production. Chemicals is expected to be neutral due to lower drilling activity stemming from the continued low commodity price environment, which will put additional pressure on volumes in our crude and frac sand businesses. Both markets are expected to decline by about 15% in the third quarter. However, strength in plastics and LPG will keep the chemicals portfolio stable. In the unfavorable category, we sustained low natural gas prices under $3 and high stockpiles going into the heart of the summer season. Domestic coal volumes will decline close to 15% in the third quarter, and for the full year we expect volume to be down approximately 10%. Export coal volume is expected to be lower in the third quarter, reflecting global oversupply and the strong U.S. dollar. Although, we still expect about 30 million tons for the full year. Forest products will benefit from steady housing gains as inventories are worked off, but paper products remain challenged due to the secular trends in that market. The metals market is expected to be unfavorable as fuel production remains below prior year levels with the strong U.S. dollar encouraging higher imports. The phosphate markets will draw down on existing inventories and we expect volume behavior to be cautious going into the new harvest season. Overall, on a sequential basis, intermodal will experience a typical third-quarter increase going into the peak season while the merchandise segment will remain essentially flat and coal will be down. Turning to the next slide, let me talk about our expectation for expenses in the third quarter. Beginning with labor and fringe, we expect third-quarter average headcount to decline sequentially by approximately 1% as we align employees to the lower demand environment. We expect labor inflation to be around $25 million in the third quarter, which is a reduction from the level seen in the first half as union wage inflation becomes less of a headwind. In addition, we expect labor and fringe expense to benefit from further network fluidity improvement and efficiency as we remain focused on increasing train length and aligning crew starts. Looking at MS&O expense, we expect inflation to be offset by productivity gains. We also expect to incur remediation costs in the third quarter associated with the recent derailment in Maryville, Tennessee. Fuel expense in the third quarter will be driven mainly by lower cost per gallon, reflecting the current price environment and continued focus on fuel efficiency. We expect depreciation in the third quarter to increase $10 million to $15 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the third quarter is expected to stay relatively flat to last year, with higher freight car rates offset by improving car cycle times. Now let me wrap it up on the next slide. CSX delivered another strong financial performance this quarter and as Michael mentioned, we set new all-time records for operating income, operating ratio, and earnings per share. Looking ahead to the third quarter, while service excellence will continue to drive continued efficiency gains and strong pricing to support long-term investment in the business, we expect third-quarter EPS to be relatively flat to the prior year. Included in this outlook, we expect to incur at least a penny impact related to the Maryville, Tennessee derailment. In addition, we will be cycling a strong demand environment from last year, which coupled with the dynamic conditions we are facing is expected to impact our volume growth. Domestic coal continues to be a significant headwind and we now expect that market to be down close to 15% in the third quarter. Looking at the full year 2015 earnings, we are still targeting mid to high single-digit EPS growth. However, given the current energy environment, achieving the upper end of that range will clearly be challenging. That said, we still expect to make meaningful improvement to our full-year operating ratio and with improving service driving efficiency and strong core pricing that supports investment in the business, we are confident in the company's future and our progression towards the mid-60s full-year operating ratio. With that, let me turn the presentation back to Michael for his closing remarks.

Well, thank you, Fredrik. As you’ve seen today, CSX produced excellent results in the second quarter for its shareholders in a challenging market environment by driving operating efficiency with the committed efforts of our 32,000 dedicated employees. And we continued to focus on the actions that are foundational to our long-term success. Delivering excellent service supports growth and operational efficiency, which in turn creates customer value that enables strong pricing for the value of the service we provide and allows us to continue driving earnings growth and margin improvement. We are pursuing new opportunities across our diverse portfolio and further improving network performances to our consumers and producers throughout the global supply chain and to create value for you, our shareholders. Thank you for your interest in CSX and we are now glad to take your questions.

Good morning, Brian.

Hey, good morning and thanks for taking my call. So one thing that stood out is this is the first time in the quarter where you’ve put all-in numbers in core merchandise, intermodal same-store sales pricing results anywhere really close to one another including last quarter. So, I was wondering how much did the shift in the business mix impact those numbers, and could you have had even higher pricing trends if the commodity carloads didn’t drop off about 4% in the quarter. Is there any other color on that would be helpful? Thank you.

Brian, this is Fredrik Eliasson. The big driver here is that we’re cycling the actions we took last year in the export coal markets. And as a result, we’re seeing those two numbers harmonize more now and we expect that going forward as well.

Okay. So you expect them to be harmonized in the near future at the same level on that 3.5% to 4%.

No. What I am saying is that the gap between the two numbers, between our all-in pricing and the non-coal pricing has been exacerbated because of the actions we’ve taken over the last year or two in our export coal markets. We are now as we move into the third quarter moving past those actions from last year. I think, over time, we continue to expect strong pricing in all our markets as we continue to price to market and ensure reinvestment in the business. So, I think that gap will be much, much more narrow going forward.

Thank you, Brian.

Good morning, Chris.

Good morning, guys. Thanks. I wanted to talk about sort of the productivity gains that you’re getting. You’ve seen sort of the cost from efficiencies pickup 2Q to 3Q. Presumably, if service continues to improve, those numbers should get a bit better in the back half, but just wanted to get sort of an update on how you think about sort of the back half in terms of productivity and efficiency gains from the cost perspective?

Yes, this is Fredrik again. We’ve gone up to a good start here this year, obviously $45 million here in the second quarter, but $41 million in the first quarter. We have said that we still think we can approach $200 million for the full year, but probably not as close as we originally have thought because of what we saw in the first quarter, because of weather and also because of the fact that the volume environment is not as strong as we had originally anticipated. However, we’re very much focused on driving efficiency gains, but just implied by the first half performance and our guidance for the full year, we are going to have a strong second half as well.

Okay. Great. Thanks, guys.

Good morning, Tom.

Yes, good morning, Michael. I wanted to ask you a question about coal. I appreciate your comments on the third quarter and how to interpret them. Looking beyond the third quarter, when do you think coal volumes might reach their lowest point for both the utility and export sectors? Do you anticipate a 15% decrease in the fourth quarter followed by stability next year? It seems like there are significant pressures on both the utility and export sides. It's challenging to predict how coal volumes will evolve over the next few quarters. Thank you.

Well, Tom, this is Clarence. It looks like the fourth quarter could potentially mirror the third quarter if gas prices remain stable. It might be too early to predict next year's export outlook, but it isn't likely to be as robust as it has been this year, especially if the Australian benchmark remains stable, the Australian dollar stays around $0.74, and the API 2 stays in the high 50s. Next year is not expected to be a strong year for exports.

So if you said the current conditions persist, do you think coal will down next year further or do you say well it’s already been down enough this year so it’s flat?

Well, there is certainly more upside than downside for next year, but it could be down.

So a lot depends I guess on the weather and where gas prices are.

Weather and where gas prices are, right. Weather and gas prices.

I think just to clarify what Clarence said, I think there is probably more downside to the coal volume next year than there is upside.

Right.

If gas prices remain high and the export markets continue to be challenging.

Yes. Based on seeing right now both between domestic and exports, probably more downside to our volumes for 2016 than there is upside in those two markets.

Okay. I know it’s a tough market to figure out, so I appreciate the color.

Good morning, Allison.

Good morning. Thanks for taking my question. I was wondering in terms of the fourth quarter, do you think that you could grow earnings year-over-year even if the volume environment remains soft, just given the acceleration in productivity gains, sort of getting the network back in balance and then continuing to see acceleration in the core pricing gains?

Well, I think this is Fredrik again. We have two quarters behind us and have provided guidance for the third quarter and the full year. The range of that guidance depends on what we’ll see in the fourth quarter. We have strong momentum on the productivity side and a solid pricing environment. However, it really hinges on the impact of the coal headwind in the second half. The interaction between the positives and negatives will determine our ultimate production levels. We are aiming for earnings growth, but until we get through more of the summer and see where stockpiles sit as we approach the shoulder season, it’s difficult to pinpoint our exact outcome.

Okay. So it seems like coal is really the wildcard or question mark for 4Q.

Yeah. I think coal is the wildcard and I also think as we have indicated in the prepared remarks that we also expect a sequential decline in our crude volumes based on what we see in the spread due. And I think we’re going to have to follow that as well to see what the impact from that will be on our volumes there.

Okay. All right. Thank you for the time.

Good morning, Rob.

Good morning. Following up on the productivity discussions, could you discuss how, looking back a couple of years, productivity was a couple of miles an hour faster? What operational changes need to be made across the network to return to those levels? Also, from a financial standpoint, what would be the bottom line benefit if CSX improves its velocity by those two miles an hour?

Rob, this is Oscar Munoz, nice to meet you. Listen, with regards to the recovery aspect of that, I think what we’ve said for sometime is the initial point of recovery was this quarter, second quarter and then the acceleration and continued performance and getting back to those record levels. I think the timing of that is related to a lot of the other activities that we've been talking about. But I think that’s the progression we’re making.

We have seen significant improvements in the second quarter, making progress throughout the quarter, but we still believe that our levels will come down over time. There is potential for better crew levels and equipment cycle times, which is why we see a strong opportunity not only in the second half of 2015 but also moving into 2016. This will be critical for us, as the volume environment, based on what we’re observing now, may not be as strong as we would prefer. However, we are gaining momentum in productivity, which should positively affect our bottom line.

Note. And just as a clarification with the productivity, should we be expecting another elevated productivity gains looking out into 2016, given those expected, continued improvements?

I like to think that we should be able to exceed our historical average, which has been somewhere around the 130, 140 as we move into 2016.

Perfect. Thank so much.

Yeah.

Good morning, Thomas.

Good morning. Thanks for your time. Last quarter, you disposed as an operating asset. And I’m curious if you could sort of frame out for us the opportunity set to monetize what management seem to be non-core or perhaps maybe less strategic going forward?

Yeah. This is Fredrik again. Yeah. So, we did have an operating property that we monetized here this quarter, was a deal that we worked on through an extended period of time frankly. And we do have some more, both operating and non-operating properties going forward and when they occur, we would be transparent with those. And of course, you will see them as I said when they’ll occur. I don't think that the opportunity set is big enough where it’s going to make a huge difference over time for us because we've done a lot of this over the last couple of decades frankly. But there is something that we constantly look at, to see if there are opportunities to rationalize some of the infrastructure we have, whether is operating or non-operating.

Could you provide insight into how the recent asset sale impacts your operating expenses?

One more time?

Regarding the most recent asset sale, to what extent is the sale beneficial in reducing operating expenses? Is there some...

This sale specifically I don’t think is going to improve our operating expense because it essentially a line segment that we weren’t really operating much on it at all and so it really won’t have an impact. There could be instances in the future really would but this one specifically didn’t.

Okay. Thanks very much.

Good morning, Bill.

Hi. Good morning, Michael. Clarence, I have a question for you on pricing, because I get asked this a fair amount and that is, when we look at sort of what CSX chose to do in export coal as things got weaker there, why would you not take a similar approach in the domestic market? Could you or is it your view that you can or cannot sort of preserve some volume, save some utility plants given the low natural gas price? How do you think about the pricing in the coal market, because that's something, given what you've done in export that folks look to and say, how sustainable is the pricing dynamic there?

Bill, we have taken a look at it and frankly, the gas prices are so low, we just cannot materially impact it enough to make a difference.

Okay. Regarding the export side, we have completed what we set out to do. Is there any risk that market conditions might make you reconsider your position, or have you done everything possible, so the volumes will take care of themselves from this point forward?

We have done what we can do in the volumes, so we just have to take care in the sales.

Yeah. Fair enough. Thanks for your time. Appreciate it.

Thank you.

Good morning, Ken.

Great. Good morning, Michael and team. And just on the labor cost here, you have dug into cost per employee was flat this quarter versus up 5% last quarter. Just your thoughts, I guess, on a couple things around that and further employee cuts, I think, you noticed down 1%, but if volumes continued to fall, how do you think about that, Oscar, maybe in advance? And then, cost per employee, what happens to that as we go forward here on your productivity?

Yeah. And this is Fredrik, let me take that one. So, yeah, cost per employee did fall here versus what we saw in the first quarter and that’s, obviously, part of that is, in fact that we now have close to 600 people on furlough and that reduced it. But also reduction in overtime, a little bit of reduction in training costs as well. So that helped. And as we move forward now, as we continue to run better, we probably have an opportunity, perhaps, that even greater number of furloughs and reduce overtime that reduce the crew, the recruits as well. I think there are opportunities to see efficiency gains that was obviously those have biggest expense component and therefore, the one that we focused relentlessly around, how do we reduce the number of people, how do we become more efficient, how do we become more efficient over the cost employee and so that, you should see continued improvement there. Thank you again.

Thank you.

Good morning, Brandon.

Good morning, Michael. Good morning, team. Fredrik or Michael, I think in the past you have talked about how, you really need core to establish and I really want to hone in on the idea of that there is more downside risk for 2016 closing that is probably is upside, where we have plenty of shale gas in those countries, so I think we are resetting into this new reality that gas is just a lot cheaper than it used to be? But you are getting positive price, you are getting productivity, you are getting growth, especially in corridors like intermodal? So, in the longer term is it possible to get sustainable earnings growth and margin expansion to hit that a lot of target even if we are facing continued sequential core declines or is that still going to be too much headwind on the business? And maybe we don't understand how difficult it is to get the cost out of the core system, maybe that’s where we have been underestimated?

Well, obviously, coal is a very profitable business of ours in our portfolio. But I do think that the fact that we will be able to produce the 66.8% operating ratio here in the second quarter with coal being down more than $100 million year-over-year is a great testament to what our core strategy of service excellence to our customers is providing. Now, clearly, as we look forward, the impact of the coal declines is going to also impact the path of progression. We are going to make meaningful improvement here in 2015 and we feel very confident that overtime we can get to that mid 60s operating ratio. And I think this quarter as I said earlier is a great testament to that, but if coal is cooperating, we can get there faster and if coal is going to not cooperate is going to take us longer, which is why at this point I don't think we have enough clear around the coal picture to really put a flag down in the ground on when we actually get to that mid 60s operating ratio.

Thanks.

Good morning, Jason.

Thank you. Good morning, guys. How is everything?

Great.

Quick question here, obviously, you mentioned a little bit on furloughs and you have some very good productivity numbers in the quarter? Is the network right-sized for the current volumes or is there a little bit more work to do as you move throughout the third quarter?

Jason, it’s Oscar. We are always, always reflecting on where our volume loaded and the capacity is. So it’s never perfectly right-sized but we are working towards that. We have a lot of capacity. Importantly, I think, our train size initiatives have been really creating even more capacity and more productivity. So, we'll continue to work on that, teams done a great job of it. But I think there is still opportunity to right-size.

Okay. Appreciate it, guys.

Good morning, Matt.

Hey. Good morning. My question was on intermodal. Specifically, just if you could give us a sense in terms of the competitive environment you referenced in your press release some competitive share loss and I was wondering if you could just put that into context and then more specifically just looking at the rate trends whether you are looking at revenue per carload, a revenue per ton-mile, certainly we’ve seen a step down in those metrics over the last two quarters. Obviously, fuel is a big component of that traffic category. I just want to make it clear as to what’s going on with rates, if you could just answer those two. That’s all I got. Thank you.

On the competitive loss as you are aware, we don’t make particular comments for individual customers. On the revenue-ton mile as you summarized, it is all in fuel. On the rates of sales in the trucking market, we still find that these truckers are keeping their rate structures up this year into 3% to 5% range on the trucking renewal rates. Our particular spot markets in our trucking part of our door-to-door product has been very strong this year. Our transcon product has been down a little bit because we are still rebuilding our owner operator base in the L.A. Basin from the strike. But the core part of the intermodal business and the pricing this year has remained fairly strong as we've been able to price for the value of the service that we are offering into competitive markets for our reinvestments we've been very pleased with that. Clarence, you want to comment on the domestic volumes?

Yes. As you’ve seen the domestic intermodal volume themselves have been up around 9% in our intermodal business, so the highway to rail conversion programs that we’ve had in place have been quite successful this year.

Absolutely. That’s what I was pointing out. Thank you.

Good morning, Ben.

Good morning. Clarence, to continue that point, there has been significant discussion about the pace of conversions moving forward, especially as truckload capacity has somewhat normalized in 2015 compared to 2014, fuel prices are lower, and rail services have not yet fully recovered. Can you provide a three-year outlook on the pace of domestic intermodal conversions and the associated opportunities? What are shippers indicating considering the mixed trends with lower diesel fuel prices and potential capacity constraints? Has the outlook changed significantly over the past few quarters?

Ben, I don’t think it has. In 2014, we lost some intermodal business back to the highway due to service issues. However, we are actually seeing some of that volume return in 2015 as services improve. As I mentioned regarding the highway to rail conversions, our estimates this year will exceed 40,000 new loads on CSX organically, in addition to what our trucking partners are bringing back to rail. The electronic reporting that we require next year and the upcoming legislation should put more stress on smaller truckload carriers, making intermodal more appealing. The congestion issues on highways in America have changed, and we still face driver shortages that trucking companies must contend with moving forward. Considering what is happening in Congress, we anticipate that a highway transportation bill will likely pass, but without new funding for rebuilding highways and infrastructure in this country, all the challenges we’ve discussed over the past few years remain. Therefore, intermodal appears to be very promising for the next two or three years.

Great. Thank you.

Hi Cherilyn.

Thanks very much and good morning. You saw good sequential improvement in both on-time originations and arrivals. But there was much more improvement in originations than arrivals, which I think is the normal order of things as network velocity increases. Maybe you can just talk about that. And when we should expect to see the gap between those two metrics narrow?

Hey, Cherilyn. Thanks. It’s Oscar. Historically, as you probably know, there has always been a small gap between the arrivals and the originations, and we have seen both measures improve as we want to restore a service level. We would expect the improvement in arrivals to slightly lag that of originations, again as that continuity of service improves. The key thing for us is to focus on how late the average train is. That is a metric we’ve seen substantial improvement over the last several months, so in effect spend. So while you will still see the optic on arrivals a little lagging, we actually look at it still more internally the number of hours that our late is improving. So I think over the next quarter and two and then certainly into next year, I think you will see that gap narrow to its historical average.

Thank you. That’s my one.

Good morning, David.

Good morning. Thank you for the question. Fredrik, looking at the bigger picture, we’re noticing that volume growth is slowing and gross profit margins have decreased slightly. Do you see any chances to invest in the capital expenditure budget? Additionally, in the long run, how should we view the effect of decreased utilization of the coal network on future depreciation?

Yes. In terms of capital, I think we have the $2.5 billion number out there. We are looking at that to see if it makes sense. But in general, a lot of those products have already been started. So I am not sure if there is many opportunities short term. We have a sales kind of corrective mechanism and then we tied it to revenue and I think that will be correcting it. Ultimately, that’s a proxy for gross ton miles because 80% of that we spend is a reflection of how much we run over the network. So if that comes down, then our capital will come down. So we will look at that as we get into the planning for 2016. And then in terms of the coal network, I can assure you we had a very concerted effort in 2012 to see what we could do to drive our cost there. We’re excellent at taking out train starts and crew base to more than reflect the kind we saw in volume. And here now in 2015 and 2016, there is a renewed focus again because of the step function change that we’ve seen to further look not just train starts and look at the crew base and the locomotive assets we have deployed, but also the fixed infrastructure that is up there and to see what we can do. It is not as black and white as you would like because we do have growth up there as well and we run other traffic around there. We have seen a lot of growth in LPG and fraction in those same areas, but there should be more than we can do and our team is very much focused on those efforts.

Appreciate it. Thanks.

Good morning, John.

Good morning, gentlemen. Clarence was very adamant on the first quarter call about how pricing was accelerating from the later stages of the first quarter into the second quarter. Is that going to continue into the third and fourth quarter? Or are we going to plateau at this relative high level where merchandising intermodal same store pricing is up say 3.9% year-over-year?

Well, John, as you can see in the past several quarters, we’ve improved the pricing sequentially. And here in the second quarter you can see that we had 3.5 all-in and 3.9% in the merchandising and in intermodal. As I look forward we remain focused on the strong pricing reflecting the value of the service we provide across all these competitive market which just defines the reinvestment in our business that drives a long-term value of our shareholders. So that’s what you will see.

Got it. Any pushback from customers given that service levels have been fully recovered, are they willing to absorb those even higher price increases given where service currently stands?

I think they see that the service that we’re providing right now has just defined that price levels for the reinvestment that they see that we’re doing.

Got it. Thank you.

Hi, Bascome.

Hey, good morning. So coal miner’s financial situation has continued to deteriorate here. And we’ve seen recent reports that one of your smaller customers is going to file for bankruptcy this week and other larger miners that were still working on restructurings here. Can you just talk a little bit about how you manage your risk in this business given financial situation on that side, maybe a little bit on the business side such as pricing pressure which you addressed a little bit already but counterparty risk as well?

Yes. This is Fredrik. So obviously from a credit perspective, we do monitor it very closely. Many times it’s actually utilities that pay the bill. But we do have some exposure to some of these producers that are going through a very difficult time. So we’ve already seen some of those go through restructuring. Generally, we are well protected through a variety of means through that process. And one of the most important things is that if you do want to restructure out of it, you’re going to need the rail service that we provide in order to be successful in transforming the company. And overall, from a broader perspective, clearly we're also looking at the capital deployment. And you heard in other previous question, we're really trying to make sure that as we look at reinvestment in coal-related assets that we’re really taking a long and hard look at whatever capital we put in there to make sure that we’re not leaving capital stranded for 40 years, which is essentially the life of assets that we’re putting in. So we work very, very hard across our system to make sure that we’re making prudent decisions around that. So, great question. Thank you.

Yes. Do you have an idea of the percentage of your business that is spent on miners compared to utilities, or is it a more complex situation?

Well, I think on the domestic side, I think the majority is clearly paid by the utilities and on the export side, I think there is a little bit of a more mix and more perhaps the producer.

All right. Thank you.

Good morning, Jeff.

Thank you. Good morning, everyone. Thanks for taking my question. With the revenue, well, I shouldn't say revenue, but the volume outlook taking another step down, have you rethought the capital program at all and can you talk a little bit about where the capital is going to help in terms of the productivity recovery and to get the system back to fluidity?

Sure. Our capital plan for 2015 is set at $2.5 billion. We are evaluating whether to move some projects out of this year, but as we have progressed, it’s challenging to make changes since many initiatives are already in progress. Looking ahead to next year, we have a self-adjusting mechanism linked to a percentage of revenue that we discuss publicly, but internally, we tend to analyze it from a gross ton mile standpoint. Approximately 80% of our spending is for maintenance, while 20% goes towards productivity. This year, our primary focus has been on acquiring new locomotives; we plan to acquire about 200 new units and rebuild around 150. This has been our top priority since this time last year, as it is crucial for us to improve our service excellence levels. Additionally, we have several productivity initiatives, including technology products and automation for back-office functions, that enhance efficiency and require capital investment.

Thank you.

Good morning, Scott.

Hey, thanks. Good morning, guys. So I wanted to follow up Oscar, your comment about more to go in terms of right-sizing the network. Just given the volumes and now the service levels improving, is it possible ahead to start seeing some more material headcount reduction? I don’t know, 3%, 5%, 10%, I don’t know, is that possible?

Scott, I think I’d answer by the fact that we always make those adjustments commensurate with where we see the volume forecast. And so it's hard to detect specifically a number, but we’ll as you've seen us do before take the appropriate measures.

And to add to Oscar’s answer that we do expect and I said that in prepared remarks about a 1% decline sequentially in headcount and we already have 600 people in furlough and it is our largest expense base. So we’re going to be very, very prudent and very, very thoughtful about what we’re doing there, because we do need to reduce our labor expense in order to create the sort of productivity savings that we’ve outlined.

Yes. So just with that maybe Fredrik, so the volume environment changed most notably in the second quarter. How much of the cost response from you guys did we see in the second quarter versus how much are we going to see ahead? If there is a way to kind of bucket it out?

I guess, this is a pretty hard question to answer. I do say that from the overall productivity knowing our guidance for the full year and the fact that we’ve been done here about $86 million for the first half. Clearly, we have at least as much in the second half or somewhere around there and so there is a lot of opportunity still. We have done a lot of structural things that we have worked on for a period of times in terms of train length and of course some of the other ongoing initiatives as well. And well we have made some inroads in terms of driving the fluid into the network back. It was only kind of partly through the second quarter we really got traction around that. So as we move into the second half, we should expect more of that. And so we’re once again, we feel very strong and we feel very bullish about the opportunity set going forward on the productivity side. Thank you, Scott.

Thank you, guys.

Good morning, Donald.

Good morning, gentlemen. Help me better understand your guidance of expecting meaningful full-year OR improvement, because to the first half, the gross cost of diesel is down about $325 million. So you had a run rate, let’s call $650 million. If I just assume that the cost of diesel is down by $650 million for the full year, and the fuel surcharge is down by $650 million and all of your other operating costs remain constant on a year-over-year basis. That alone would create 150 basis points of OR improvement. So is meaningful full-year OR improvement less than or greater than 150 basis points?

Well, that remains to be seen. It's a good question. In the first half, if you look at our quarterly flash, we’ve gone from about 72.3 last year in the first quarter to 69.5 this year. That shows a significant improvement in just one year. As we consider this quarter specifically, most of our gain was actually not related to fuel because even though fuel costs decreased this quarter, we experienced a negative impact year-over-year due to the lag and spread differential we observed. I can't specify exactly where we’ll end up, but we do expect meaningful improvement despite the fact that the volume environment is not ideal. Thank you.

Hey, Cleo.

Good morning. I would like a little bit of help with fending the utility coal volume downside for the next year. Where do you see that coming from? We’re potentially hoping for some reversal of gas switching and inventories having normalized? So is that retirement driven? What are you hearing from your customers that drive your cautiousness on domestic utility? Thank you.

The stockpiles in both the north and south are higher than usual, resulting in some inventory overhang. We still anticipate that gas prices will remain relatively low. Additionally, there is research suggesting an increase in gas acres being installed in the regions we serve. Considering these factors, we believe there is a possibility that utilities' coal consumption in our area may be slightly lower than this year.

Okay. And then just as a quick clarifying follow-up, when you give guidance for domestic coal, do you include the domestic math or that refers to utility?

Includes both, everything.

Thank you very much. Thank you.

Good morning, Rick.

Good morning, guys. Hi. Oscar, you put out a service update in May that listed your T&E trainees at 1,235. What's that number today?

The people, it's nice to hear you, welcome back.

Thank you.

Good morning, Tyler.

Hey good morning. Hey, I was just curious, if we could get a lot more detail on the acceleration of the non-coal pricing. And I appreciate this might be a bit of semantics but Clarence, was the sequential acceleration fairly broad based or was it more in thousand say intermodal than the other merchandise, just maybe some broad comments there?

No, it was very broad based across almost all of our commodity lines.

Perfect. Thank you.

Good morning, John.

Thank you, and good morning. Regarding the CapEx question, I want to ask how quickly you can prioritize the project list and reallocate the capital. If volumes remain low, how aggressive will you be with maintenance CapEx? Is there any flexibility in that approach?

I believe that while there are short-term maintenance strategies that could save money, they may be detrimental in the long run. For instance, temporarily halting our teams that are currently replacing rail may seem like an option, but in the long run, the costs of mobilizing and demobilizing are higher than continuing with the current work. It's essential to make thoughtful decisions. That's why I don't think making significant changes to our capital budget is the best approach for long-term economic stability. As we look ahead to next year, we will consider factors like gross ton miles and the specific line segments that require capital allocation. The coal example illustrates our commitment to ensuring that any investments we make are sensible without compromising safety. We will continuously evaluate our capital budget for next year in light of how gross ton miles are shaping up.

Thank you.

Thank you, John.

Good morning Justin.

Good morning. Thank you. I was wondering if you could comment on me final tank car regulations that we got during the second quarter. Assuming everything in this regulation which stands legal pushback, how should we think about the impact these changes could have on your business going forward?

Justin, I think we are by and large very pleased with the new tank car standards they come out with, we think it’s a much safer vehicle. We were a little bit surprised that the thermal blanket was not included and we will continue to push for that as an industry because we think it gives some extra layer or safety at not a great expense. As far as the long-term impact on the business, obviously as you know, we don’t own the tank cars, the customers or leasing companies do. Our early read is that most plants retrofit their cars or buy new cars that meet those standards. Obviously, it impacts the economics of the movement somewhat and as Clarence alluded to earlier, there is already a little bit of pressure on the crude movement just because of the current spreads between Bakken and Brent. But we think longer term that this car is a better car or safer car and I think we’ll continue to see the movements of the crude as we go forward.

Okay. Great. Thanks for the time.

Thank you. Thank you everybody. We will see next quarter.