CSX Corp (CSX) — Q2 2019 Earnings Call Transcript

Thank you, Shirley and good afternoon everyone. Joining me on today’s call is Jim Foote, President and Chief Executive Officer; Kevin Boone, Interim Chief Financial Officer; and Mark Wallace, Executive Vice President of Sales and Marketing. On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Good afternoon and thanks a lot Bill. Before we get started with the presentation, I'd like to first thank all CSX employees whose hard work once again drove the company to new record operating levels this quarter. These records include operating income, free cash flow, and operating efficiency in the form of an all-time low operating ratio for our U.S. Class I railroad. Not only did we achieve record financial results, but we continued our industry leadership in safety with the best performance in terms of lowest personal injury rate and meaningfully reduced train accidents. During this quarter, we successfully completed PTC installation and activation across our network. We now operate nearly 13,000 PTC-equipped track miles and are on pace to have the system fully tested and operational with our tenant railroads ahead of the required deadline. Let's move on now to Slide 5 of the presentation and our financial results. Second quarter results were straightforward with only a few small and unique items that Kevin will discuss. Second quarter EPS increased 7% to $1.08 versus last year's figure of $1.01. Our second quarter operating ratio improved by 120 basis points to a record 57.4%. Turning to Slide 6, we are delivering better service to our customers, which is reflected in our merchandise volume as our improved reliability is leading to 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 I volume growth again this quarter, and grew volumes at 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 mixed headwinds. Intermodal revenue declined 11% on 10% lower volumes, primarily due to the impact of line rationalizations implemented last fall and early this year. We'll 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 was more than offset by export and utility declines. Finally, lower other revenues was primarily due to decreases in demurrage markets at intermodal facilities. Let's move to slide 7. Employee safety remains my top priority. We were again the best in the industry for FRA personal injury rates and set a new company record for the lowest number of FRA reportable train accidents this quarter. We are also finding new ways to utilize technology to further enhance safety. As one example, the use of automated track inspection cars helped reduce track caused mainline accidents by 85% year-to-date. While I'm pleased with this progress, there's always opportunity to operate more safely and we will work diligently to make our railroad as safe as it can be. Let's turn to slide 8 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 I record this quarter by operating below one gallon of fuel per 1,000 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 have done so while tightening the schedule in the form of shortage trip plans. 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, Jim and good afternoon, everyone. Turning to slide 10. I'll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 1% in the second quarter, as the impact of lower volume, 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. 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 continues to drive efficiencies in a number of areas highlighted by fewer crew starts, down 5%; and lower T&E over time. Re-crews were also down 77%, a 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 helped drive a 6% year-over-year reduction in our mechanical workforce. MS&O expense improved 3% versus the prior year. Lower active locomotive count drove savings in materials and contracted services. Train accident costs were also favorable in the quarter as the FRA train accident rate fell over 50%. Intermodal costs also saw year-over-year improvement with lower volumes combined with operating efficiencies, driving expense reductions. Partially offsetting these items was an unfavorable impact from casualty reserve adjustments unrelated to the improving trends and safety. Real estate and 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 diesel prices helped drive a 30% 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 costs in intermodal. Equity earnings decreased $9 billion in the quarter, primarily due to lower net earnings at our affiliates, including cycling an affiliate's 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 in 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 P&L. As Jim highlighted in his opening remarks, CSX delivered operating income of $1.3 billion, record operating ratio of 57.4% and earnings per share of $1.08, representing improvements 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 other key initiatives into the back half of the year include; ongoing train consolidations through continued expansion of distributed power and additional longer crew runs. This reduces the active locomotive fleet and associated maintenance and repair cost, as well as crew labor and related travel and balancing expenses. Yard reductions 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 and engineering. There are multiple emphases across our business functions where overtime as a percentage of straight time is well over 20% and in some cases exceeding 40%. While we hit a record this quarter, fuel efficiency remains a big opportunity for us. I expect the operating teams continue to deliver savings. Train speed in dwell continues to be opportunities as well the related cost benefits remains significant. Finally, we are finding new opportunities to become more efficient in our G&A 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 times while doing it smarter. Overall, our improved asset utilization from locomotives to 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 in CSX's core operating cash flow, including improvements in working capital, drove a 22% increase in adjusted free cash flow to $1.6 billion through the second quarter. Year-to-date, we have returned approximately $2 billion to shareholders, including $1.6 billion in buybacks and $400 million in dividends. Dividend payments in the quarter reflect a 9% increase from $0.22 to $0.24 per share we announced in February of this year. Our ability to convert earnings into cash remains the key differentiator for CSX and a 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 had been unusual this year to say the least and have impacted our volumes. You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career. With natural gas prices expected to continue to impact both domestic and export coal, intermodal is showing little seasonal recovery and many of our industrial customers' volumes continuing to show weakness with no concrete signs of these trends changing; and adding in the impact on crude-by-rail shipment of last month’s Philadelphia refiner 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 these launches we need to adjust guidance, we're just stating the obvious. This outlook is based on current business levels and there is upside to this forecast as conditions improve in the second half. We are seeing a range of conflicting data points and economic indicators and regularly speak with customers who despite the recent slowdown, remain cautiously optimistic about the second half. Mark can add some color to this in the Q&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, decrease asset intensity, and improve efficiency by eliminating unnecessary touches that cause to slow us down. We are very proud of the progress to date and there is still much more left to do. With that, thank you, and I'll turn it back to Bill.

Thank you, Jim. In the interest of time, I would ask everyone to limit themselves to one question and one follow-up only if necessary. Shirley, we’ll now take questions.

Great. Good afternoon and thank you for the discussion here. Jim, could you elaborate on the performance? You have an exceptional operating ratio, but your data shows that on-time arrivals are declining. Can you clarify how that's possible? Are you adjusting the timeframes to different levels, or is this unrelated to the improvements you're making in performance?

The distinction between on-time originations and arrivals versus trip plan compliance involves measuring the flow of boxes through the network. Our reported on-time departures are nearly 100%, in the high 90s at this point. Arrivals are currently in the mid-to-high 80s. On the other hand, trip plan compliance—which assesses how well cars progress through the network from the moment we pick them up until we notify the customer we'll have the shipment in 114 hours—has improved significantly. Initially, we were meeting that trip plan about 30% of the time, but now we're approaching 90% in intermodal and the high 70s in the carload sector. To address your question, whenever we achieve strong results, Jaime and the operating team make adjustments to the schedule to increase the challenge, as this ultimately enhances the service we provide to our customers.

To provide some perspective, last year in the second quarter, we had early departures averaging about 76 minutes, whereas this year we are departing only 20 minutes early. We allowed ourselves a lot of extra time last year, which obviously incurred more costs. Now, we're tightening the windows, and you can see that difference, which helps us manage our assets much more effectively.

Helpful review. For my follow-up, I’d like to ask Mark and Jim about the current economic outlook. Mark, can you discuss whether you are noticing an accelerating decline in some of the economic indicators you are monitoring? It appears that carloads, when excluding intermodal, exhibit a significant decline due to lane closures. Are you observing a fundamental deceleration in the outlook, perhaps categorized by commodity?

Thank you, Ken, for the opportunity. Excluding the recent explosion at the PES refinery in Philadelphia, the change in our revenue guidance is primarily related to our three segments: coal, merchandise, and intermodal. In coal, export volumes have fallen short of expectations, mainly due to thermal coal and lower API2 benchmarks, which we anticipate will persist into the second half. For domestic utility coal, our volumes are down compared to our forecasts, influenced by consistently lower natural gas prices. Initially, we expected Henry Hub to be around 285, but it's now fluctuating between 240 and 250, which is reflected in our updated guidance. Regarding merchandise, as Jim pointed out, we are observing signs of slowing economic conditions in both IDP and GDP for the third and fourth quarters, indicating a less vigorous economy in the latter half of the year. We've seen this trend in our own operations, particularly within the automotive, chemicals, and metals sectors, signaling a softer industrial landscape. We're reporting on these developments based on trends from June and into the third quarter. On the intermodal side, we had hoped for a stronger recovery, especially in the fourth quarter. However, we are facing challenges alongside the broader U.S. intermodal industry due to a weak trucking market following a very strong 2018, which resulted in excess capacity as many trucks entered the market. That situation needs to be addressed. Nevertheless, we remain focused on delivering quality service to our customers, as Jim mentioned. A resolution regarding trade tariffs would certainly aid us in the latter half of the year, though that's outside our control. What we can control is providing high-quality service to our customers, pursuing new opportunities, and ensuring we capture a fair value for the services we offer. I hope this provides some clarity on what we are currently observing.

No. Truly appreciate it. Thanks Jim, Mark, Kevin, Bill, thank you for the time.

Thanks. So, Jim, earlier 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 instead of an upside recovery. But, I guess, my question is, how much of a volume or revenue decline can the business model withstand, and you’ve still grown EBIT on a year-over-year basis in 2019?

I’m not sure we've ever calculated how much we can actually cut. We have been observing this situation since the first half of the year, and while we hoped for an improvement, things have instead been drifting downwards, which accelerated in June. We’ve been proactive, planning for this and taking steps for several months, particularly focusing on general and administrative costs. We want to avoid reducing expenses in transportation, as that could negatively affect service. A decline in service would lead to a further decline in business, resulting in needing to cut costs again, creating a downward spiral. It would be simpler for us to adjust if our business dropped suddenly by 10%, as we would then know how to align our costs accordingly. The team performed exceptionally in the second quarter by making necessary adjustments based on what we were observing, without compromising on transportation costs, which represent most of our expenses. If we do encounter a significant drop in our business levels, we will respond swiftly and do all we can to maintain our cost structure and competitive edge. However, we cannot eliminate the substantial amount of costs that would be required with a significant revenue decline, but we will continue to do our best and keep monitoring the situation. So far, things are manageable. This is not a dire situation; it has been a gradual decline since the beginning of the year. Under the current circumstances with the investment community, when we publish guidance and find we might not meet it, we are required to provide revised guidance. We have carefully considered our position and believe that if this is the new normal, we might see a decline of 1% or 2%. This includes a one-time impact from the explosion of a major customer’s oil refinery, accounting for about 1% of our volumes annually. In summary, we can accomplish a lot if we are clear about our objectives, but the current environment makes that much more challenging.

Okay, that's really helpful. So, the volume declines have accelerated, and it seems like there was an effort to adjust things in Q2. Should we interpret your comments about having many opportunities for efficiency gains as an indication that year-over-year improvement in the operating ratio could increase from the 130 basis points in Q2? I'm trying to understand the direction moving forward and how you view that. Thank you.

Alison, you're challenging me. We do an excellent job, and yet you want more. I think we’ll stick to the original plan. This revenue outlook indicates a notable decrease in revenue. Currently, we are on track to reach our goal of achieving an operating ratio below 60%. Regardless of what others do, we aim to maintain our standing as the most efficient railroad in North America.

Good afternoon. Thank you for taking my question. Mark, I have one for you regarding export coal. You mentioned API2, and I'd like to ask about met coal. When do you think the window for that might start to tighten if seaborne prices come down a bit? Have there been any changes we've observed this cycle, such as longer-term contracts, reservation systems at the ports, or even restructuring among coal producers in Appalachia? Do you believe any of these factors could help prolong the cycle for a bit longer?

Thank you, Brian. Regarding export coal, we still anticipate around 40 million tons for the year. As I mentioned, thermal coal is facing some challenges due to the API2 numbers and current conditions in Europe, such as low natural gas prices and mild weather, which are presenting some obstacles. On the metallurgical coal side, benchmarks remain strong at about $190, and we adjust those contracts quarterly. We are currently engaging with all our export coal producers to plan for next year. While I won't provide specific guidance, we've had some success in securing volumes, especially on the thermal side, which is promising. We collaborate closely with our customers, and everyone is motivated to increase coal movement as we approach next year. Hopefully, by the end of next year, we can offer clearer expectations for 2020.

Thank you, Mark. I appreciate that. I have a follow-up regarding the PS refinery. Jim provided us with the rough estimate of that. I am curious if we have seen any other news related to U.S. Steel reducing some blast furnaces. Previously, you mentioned that tariffs have been beneficial for domestic steel production and domestic met coal consumption, so I was wondering if that or any other notable advancements are reflected in the updated guidance.

We had a significant volume quarter in steel and industrial coal. However, there have been changes affecting some of those producers. We previously discussed the declining industrial environment, which is having an impact on them. After the tariffs were implemented, there was a rise in production. Unfortunately, as markets faced large inventories and softened demand, prices have started to fall. This has likely led to excess capacity. Therefore, we anticipate that our metals and equipment volumes in the second half may also decline due to the weaker industrial environment.

Okay. So it sounds like it's considered in your current update?

It is.

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 flavor of your ability to, just simply put, just charge a higher price for the better service that you guys are delivering?

Well, if you look at the – again, let's focus on there, there's two different business segments, there's intermodal and there's carload. Intermodal, our obligation there is to deliver a product that's as close as truck-like and to do so at a price that's cheaper than a truck, because of the service differentiation between the fact that the lift or the time in transit is going to take long. So as there's a very soft truck market out there right now and really marks a lot of excess capacity based upon some recent historical changes in the marketplace. It's a little more difficult for us. On the other hand, what we're really focusing on and as we talk a lot about, because it's two-thirds of our business and we – and very profitable long-term business for us is carload business. From a high-level perspective, in that situation we know that we're – that our customers are paying a 15% to 20% premium to move their product in a truck, because they want to buy service reliability. As we become more reliable in that 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 customer is actually saving money by putting – taking the business off to highway and put it in a railcar. So that's where we focus intently on, leveraging the service product. Mark, do you want to add to that?

No. I think that's exactly right and as we become more reliable and persistent and as the market soften and customers are holding onto product and just in time deliveries become more important. Our service comes at a premium and I think customers recognize that. We do a good job for them, we get it there when we say we're going to get it. Our deliveries – our trip plan compliance is very good, and so they're willing to pay for their premium service.

Well, just as a quick follow-up to that. Why wouldn't we see that then those market share gains show up in the revenue? I mean, the revenue revision is not surprising, given all the headwinds you've discussed. But what if that would be improvements to the network on the carload side is the market share opportunity you just talked about. The realignment of the sales organization, those could translate to some market share gains. And so, maybe, it just takes a little longer than I appreciate, if you can just talk about 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?

I'd like to highlight that we are the most transparent industry globally, as we report our sales volume weekly. Although some might say there's an issue with CSX due to a 10% decline in volumes, it's primarily related to intermodal. We've already informed everyone about the anticipated decline in our intermodal business. However, it's important to note that our merchandise segment is outperforming others in the industry. Recently, we observed a softening in some of our industrial segments, yet we remain confident that our strategy of achieving non-cyclical growth in our merchandise segment is feasible based on our service product. A significant portion of the reduction in our merchandise guidance is linked to a one-time customer event, while the rest is largely market-driven. Many of our industrial customers are seeing strong performance, particularly in our grain business. It's important to note that not all grain is moved by train; lots of it is transported in individual boxcars, which were previously taken by truck. Across our merchandise segment, we're observing gains and an increase in traffic. Customers may be reevaluating their operations to reduce costs and find ways to save money. By shifting transport from road to boxcar, they can significantly cut transportation expenses. Ten years ago, such a move would have seemed impossible, but today it's a viable option, and it leads to savings. We are confident in this approach, and we believe the numbers are starting to validate our position.

If I can just ask one follow-up for Kevin with respect to the cost opportunities you laid out. Kevin, do you expect to see OR improvement in the second half versus the stellar results you guys put up in the second quarter? 3Q typically looks a lot like 2Q, but I'm not sure, if there's any further opportunity given the cost items that you laid out?

Yes, I think Jim addressed that previously. I don't think we're going to get into back half versus first half dynamics in terms of OR. What I can tell you is there's a number of initiatives that we've been working on over the last month that are new to our plan to react to this downward guidance in our topline. So, yes, we're reacting quickly not only across G&A, it's across all aspects of our business. Jamie, Ed, Bob, and Brian are on Board and new 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 the nuance of second half versus first half.

Hey, this is David Zazula on for Brandon. Thanks for taking my question. I would like to discuss the earlier question about pricing, particularly regarding merchandise compared to intermodal. The service metrics you presented for intermodal indicate excellent trip plan compliance. Could this success mean there is limited room for growth on the service side, making it harder to convert truck users? Are there still more detailed service aspects that you can offer that would help shippers currently relying on trucks?

I mentioned intermodal versus carload business reflects the major of two different kinds of businesses. The intermodal is terminal-to-terminal, point-to-point and it's much easier to have those high trip plan compliance numbers versus carload. A lot of things we can do there on the terminal side in order to improve that customer experience and I'll have Mark tell you about some of the great stuff we're doing on the technology side on intermodal that we think is going to differentiate ourselves as well.

Yes, there are many positive developments happening, especially regarding our reservation systems and terminals, which are making it easier for customers to engage with us through our website and other channels. A significant area of focus for us is converting business through merchandise, where we see substantial potential. We are successfully converting a lot of business currently because our services have improved significantly, and customers appreciate the reliability and consistency we offer at competitive prices. There are still many opportunities ahead. We are seeing growth potential on both the intermodal and merchandise sides.

Hey, thanks, good afternoon. Wanted to ask about the guidance and maybe specifically, can you help us break out what you think the volume expectations are for the back half of the year. I don't know if you want to sort of handle that on a merchandise versus intermodal type of dynamic is clearly there's some company specific initiatives on the intermodal side that are reducing volume, but just any help there to think about that mix of what's yields and what's volume in the back half?

Chris, we expect that achieving the same volume in the second half as in the first half will require significant effort. That's our current challenge. Initially, we anticipated a 1% to 2% increase in the first quarter. Despite the surrounding circumstances, we did end up with a solid quarter. However, certain segments, particularly intermodal, did not recover as expected. As of now, we consider today’s performance as the baseline. We're hopeful that we can surpass our first-half results, even with a strong quarter behind us. However, we no longer have a substantial upward trend to rely on. We anticipate a slight increase in the fourth quarter due to improvements in intermodal as we move away from certain demarketing strategies. For our guidance and planning purposes, we view our current figures as quite favorable. I remain hopeful that circumstances will improve in the latter part of the year, but we are treating this performance as our new baseline for guidance.

Hey, Chris, our revenue for the first half of the year increased by 2%. We're now projecting a decrease of 1% to 2% for the full year. We still anticipate positive pricing, so the calculations seem straightforward.

Hey, everyone. I'm trying to understand what to expect for operating income dollars in light of the forecasted decline of 1% to 2% for the full year. Currently, the market is projecting a 3% increase including land sales and a 6% increase excluding land sales. What kind of EBIT growth should we anticipate with a decline of about 3% to 4% in the latter half of the year?

David, as you know the math, if I give you EBIT growth, you would know the OR. So by default, we're going to give the OR ratio into the back half, but probably kind of…

Hey, thanks. Good afternoon guys. Kevin, I don't know if I missed it, but you guys usually give some guidance on the other revenue expectations. Any color you can give us there?

You should expect to maintain the current levels we achieved in the second quarter throughout the second half of the year.

Okay, helpful. And then so with a more cautious 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 some flexibility on the $1.6 billion? And then, I guess just following up on that headcount piece, why not do more on headcount if the volumes are coming in worse?

I certainly think if we continue to see downward pressure on volumes, which is not our expectation that you probably see some more opportunity there. There is variable cost in our business and then we would take a look at some other things as well. On the balance sheet right now, we're sitting on $1.6 billion in cash. We expect to generate a lot of cash in the second half of the year, kind of, give us significant flexibility to be proactive and opportunistic if the market gives us an opportunity. We're well within our 2.5, 2.75 times leverage targets, debt to 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, with our cash balance, just we even have today and what we expect to generate through the back half of the year gives a lot of opportunity to be opportunistic here.

Yes. Thanks very much. Good afternoon, everyone I'll keep it to one as well just again on the intermodal side and your effort. I think Mark you were saying targeting trucking your one of your peers obviously in Canada is taking a little different approach to that. They're not only targeting the trucking market, but investing in and buying intermodal assets within that market to kind of jump start and 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?

I believe they are knowledgeable individuals. Jim and I are quite familiar with them. My career at the railroad has a significant connection to what they're accomplishing, which I greatly respect. We have a somewhat different approach in the United States compared to Canada. We observe their efforts, but I'm also here to discuss our strategies for the future. As Jim mentioned, we are actively seeking growth opportunities in various areas, whether it’s in merchandise or intermodal, and we remain open to any potential opportunities that arise.

Yeah. Hi, guys. Thanks. Just a little pushing on the intermodal, the trip plan compliance looks really strong. And I'm just 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 2%, 2.5% as we move into 2020. Do you feel comfortable that at that point you’ll be able to start more aggressively re-marketing the intermodal and do that GDP plus two to three points or is it premature?

As I mentioned, our long-term goal is to enhance our intermodal business. While I can't provide guidance for 2020 at this time, I hope that our strong franchise and the quality service we deliver will enable us to achieve growth that exceeds economic trends by two to three percentage points. That is my aspiration and what we are focused on. We are solidifying our operational footprint and performing well in our current lanes. We’re demonstrating our capabilities to our customers, and when growth opportunities arise, we are prepared to meet demand with additional capacity.

Well, you never say never. I mean, we've been clear about the last few years about our environmental stewardship challenges. That's not the main thing we do but we got to continue to exercise caution and prudence. And this isn't a well built situation; that's not something we're trying to chase down and it's worth it just for that one-time pickup. I think we're being cautious on that front, it's part of making sure we continue to focus on our execution and solidifying and ensuring that we invest while improving the bottom line.

Thank you, Mark. I have another question regarding the operating ratio in a scenario where revenue remains flat. Based on your insights about the full year, if we consider 2020, do you believe there are still enough initiatives in place to improve the operating ratio despite stagnant revenue? How should we approach this from a broader perspective or in relation to 2020, or however you prefer to frame it?

I believe what we mentioned is that we plan to enhance the operating ratio by more than a point even with a decline in revenues. If we encounter similar conditions again, we will do everything possible to manage the business effectively.

Thanks and good afternoon. So, last quarter, I think you talked about headcount 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, what's your flexibility to reduce headcount further? And do you have any updated thoughts around what that percentage looks like in 2019?

Yes, we are still on track to meet our forecast of 6% to 8%. As I mentioned earlier, overtime management is currently a major focus for us, presenting both significant costs and opportunities for savings moving forward. We will continue to monitor headcount and will rely on attrition where possible. We have a clear understanding of what that number should be, and we may be more aggressive in that area depending on the volume trends in the second half of the year.

To understand the economy's performance in the latter half of the year, I'll refer to intermodal activity. I believe there is a considerable amount of excess truck supply and capacity, and we expect intermodal to remain relatively stable. We anticipate a solid peak, although it is likely to be more subdued compared to the exceptionally strong peak experienced in 2018. Therefore, while we expect volume levels to rise somewhat, it probably won't reach the peaks we have historically observed. Looking ahead, I believe there is no reason our domestic intermodal business should not grow annually by whatever GDP growth we experience, plus an additional two to three percentage points.

Hey, thanks. Good afternoon guys. Kevin, I don't know if I missed it, but you guys usually give some guidance on the other revenue expectations. Any color you can give us there?

Yeah, I think you should expect about the same levels that we achieved in the second quarter to continue through the latter half of the year.

Good afternoon. I wanted to ask about your overall strategy regarding pricing and volume. I have confidence that you will maintain discipline, but how should we understand your approach to managing these factors? Will you adopt a more aggressive stance to enhance your competitive position and support volumes in light of the reduced market volume? Or will you let volume fluctuate naturally with the market while trying to maintain pricing that reflects good service and discipline?

We should be prepared, as Jim mentioned, for the volume ahead and will adapt as it comes. We have a comprehensive pipeline of initiatives I’ve discussed previously, including marketing efforts, our collaborations with short-line partners, regional sales activities, and various industrial development projects. We have a significant number of initiatives underway, and our goal is to convert the incoming volume while working diligently to increase what we carry on the railroad. Importantly, we are still obtaining strong value during renewals, and the pricing momentum I referenced in Q1 has continued into Q2. Each contract must receive my approval, and I am very pleased with the discipline our team is exhibiting. Therefore, we are focused on both aspects and maintaining a disciplined approach.

Well, that I hoped. Like I said this is not end of days.

Thank you. That’s it. Thank you very much.