Title

Presentation

CSX Corporation beats earnings expectations. Reported EPS is $0.49, expectations were $0.4775.

Operator: Thank you for standing by. My name is JL. I’ll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. You may begin.

Matthew Korn: Thank you, JL. Hello, everyone, and good afternoon. Welcome to our second quarter earnings call. Joining me this afternoon are Joe Hinrichs, President and Chief Executive Officer; Mike Cory, Executive Vice President and Chief Operating Officer; Kevin Boone, Executive Vice President and Chief Commercial Officer; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In the presentation accompanying this call, you will find slides with our forward-looking disclosures and our non-GAAP disclosures for your review. Also, please note that our 10-Q has been filed and is available on our website. With that, it is now my pleasure to introduce Mr. Joe Hinrichs.

Joseph R. Hinrichs: Alright. Thank you, Matthew, and hello, everyone. Thank you for joining our second quarter call today. Before we start, I want to acknowledge and appreciate all our CSX employees who are out there working throughout the Southeast United States as we deal with the weather effects from Hurricane Debby. We are prioritizing the safety of our employees and our communities in everything we do. Now, this was a strong quarter for CSX. I am pleased that our results reflect the momentum that we are building as a one CSX team. And I’m proud to see how teams all across our railroad are working together in better and more effective ways than ever before. Operationally, we are developing initiatives to take an excellent scheduled railroading model and make it safer, leaner and more cost effective while providing the consistency and flexibility that our growing customer base demands.

And commercially, our sales and marketing organization is creating new, more targeted methods for us to go to market, create partnerships and use our leading value proposition to convert customers onto CSX rail. Now, there is much we have accomplished so far this year and we are eager to maintain and build on our momentum over the rest of the year. We keep reminding the entire ONE CSX team that when we are aligned with each other and work together as one team, there’s really nothing we cannot achieve. Our employees, our customers, and our shareholders are seeing how we are growing the business, controlling costs, leading in customer service, and leveraging our network capacity in ways we never could before. A successful culture we are building at CSX is delivering positive business outcomes.

Now, we can go over some of the highlights. Let’s go to Slide 1. On Slide 1, we show that some of the key results from our second quarter compared to revised results from past periods. Later on this call, Sean will provide more detail on the review of the accounting treatment for engineering scrap and certain engineering support labor as described in our financial report. Total volume grew by 2% with our intermodal franchise again leading the unit growth of 5% versus last year. And, we are proud to achieve this result even with the constraints at the Port of Baltimore that impacted our coal shipments. Our coal team did an excellent job finding creative ways to respond to the key bridge collapse and deliver for our customers. Our operating margin reached 39.1% which represents a 280 basis point sequential improvement.

Revenue adjusted over $3.7 billion was flat compared to the second quarter of 2023 and up modestly over last quarter as strong merchandise pricing and volume growth offset lower coal prices and decline in other revenue. Operating income was 1% lower than last year but up by 8% sequentially as our efficiency efforts helped reduce expense. Our earnings per share were flat versus last year and up by 9% sequentially. Overall, this was a good quarter that was right in-line with our expectations. Had we not faced the incident in Baltimore, our operating income would have been higher year-over-year. Our challenge now is to keep moving forward by focusing on our execution even as markets fluctuate and unexpected events occur as they always do. Now, I’ll turn the call over to Mike Cory to discuss our operational performance.

Mike Cory: Thank you, Joe, and thanks to all of you for joining us today. Here’s a rundown of our operating activities in the quarter. But before I do that, I’d just like to extend my sincere thanks to the ONE CSX operations team for their effort and their contribution day-in and day-out. We all here truly appreciate everyone’s teamwork and efforts. So, let’s go to Slide 3, the first slide on safety. We saw positive trends on train accidents for the quarter year-over-year. The reduction was driven mainly by fewer mechanical related derailments and a reduction in human failure accidents, although human failure remains our highest causation factor. On injuries, we saw both an increase in transportation and engineering employee incidents.

Slips, trips, and falls remain the highest related cause for injury. This is an area where increased attention to risk has tremendous potential to reduce personal injury. Much of our focus is on the development of heightened risk awareness for our less experienced employees who have the highest rate of accident and injury occurrence. By working with our union colleagues, we’re becoming better able to help our employees learn how to identify at risk situations and hazards. Though we have a long way to go, through this collaboration, we believe improvements and safety will take place. We’ve also embarked on an all-inclusive safe operations cultural transformation. This transformation starts with my leadership team and I will extend throughout to every leader at CSX.

This three-year initiative is the most extensive safety leadership program we have ever embarked on. We’ll support a culture of risk awareness and care where everyone knows they are valued, appreciated, respected, and included. ONE CSX was the first phase of this effort to align the organization to our values and cultural principles. This next initiative will be an extension of ONE CSX. We’ll have a strong focus on strengthening our safety leadership skills while building engagement with our employees. We’ll be aggressively identifying and eliminating unacceptable risks in our operations, which benefits all our stakeholders. So, going over to the next slide, overall, our fluidity metrics have remained pretty consistent. Our train speed has improved, but we have seen some variability in dwell.

Effectively, our dwell metric reflects a combination of our team focusing on keeping cost tightly in-line while maintaining the level of service our customers require. As we’ve deeply dug into train size and local service, we found some cases where we were spending money to switch a customer when the service was not necessarily required. This was reducing the dwell metric, but wasn’t positively impacting the customer experience, and it wasted precious train and engine resources as well as overall costs. We’re eliminating these unproductive handlings even though in some cases it will result in higher overall dwell. On the flip side, we’re spending a considerable amount of time evaluating our network infrastructure to identify opportunities that will increase the efficiency of certain yards and reduce the dwell going forward.

These evaluation exercises start by analyzing the present level of production against demand, ensuring proper standards are in place and that those standards are being met. Then we aim to increase workload and reduce both handling at other locations and a reduction of route miles when possible. This can entail simple self-funded improvements in the infrastructure at some of our switching yards to eliminate car handlings and route miles. Effectively, we’re creating more mass where it makes sense, resulting in improved asset speed, service, and reliability. As we identify physical improvements to the infrastructure, we work with our supervisors to lead that process, so they understand how to extract the intended value and more. This experience teaches them to continue to strive for both productive work and opportunities for service or growth potential.

This initial exercise has been also been supported by a reduction in cost through better utilization of our major engineering gangs as well. Through all these exercises, supervisors are the largest area of a focus for us as we continue to develop the bench strength on CSX and position them to understand their overall operations better. And, we’re supporting them through a variety of methods, which include increasing visibility of leading indicators. We’re teaching them then how to utilize that data to identify areas improvement and the overall cost of their operations, and they get a lot of daily engagement with the senior leadership team. A great greater focus is to ensure they gain a far deeper understanding of the overall operational and customer activities within their charge.

We expect to continue improving these metrics as we go forward. Through the actions of our supervisors, we will always weigh customer need and the cost required to do so. Overall, I’m satisfied we’re on the right trajectory. We have opportunities and plans in sight for our network infrastructure and as well our operations leaders’ ability to improve. Turning over to the next slide, we continue to work with Kevin and the sales and marketing team to align our operations with the needs of our customers. Preferred service and cost discipline are always at the forefront. We strive to understand exactly how our customers work and what they need from us. Having this information in the hand of field level supervisors and stressing connectivity with their customers allows us to provide a very high-level of first and last mile service.

Our Trip Plan performance, like the dwell metric, reflects the same effect from a continuous focus on cost and customer need. We’ve identified areas of opportunity to improve or rely on more specific first mile and last mile metrics along with customer feedback and engagement to ensure we are delivering the needed service. You can see in our CSD numbers that our strong customer engagement and level of service are taking place. In closing, we have much work to do as we always will. With that said, I’m really excited now that our operations leadership team has been together for close to six months. I can see the improvement being made to clarify the importance of our tasks and to increase our information visibility. I can also see the deep thirst for learning from all our supervisors at all levels.

And this, to me, is probably the most important factor going forward. This team fully believes our approach to a safe, balanced, and efficient customer focused railroad as many opportunities for improvement ahead, and our plan is to deliver on every one of them. With that, over to you, Kevin.

Kevin Boone: Thank you, Mike. As Joe referenced, we are really seeing a lot of positive momentum, particularly around sales and marketing collaborating with operations. Highlighting these initiatives are the market reviews where our teams come together to discuss and evaluate opportunities to collaborate on operational efficiencies while delivering new solutions to target profitable business. Driving network efficiencies allows us to deliver a more competitive service product and expand the opportunity for growth. We are continuing to be very aggressive in pushing forward on our truck conversions, new industrial development projects, and creative solutions with the growing number of shippers who want to maximize their use of CSX rail.

As you’ve heard from a number of our peers and competitors across the transportation industry over these past weeks, the trucking market remains challenged and industrial markets are mixed as we move into the second half of the year. Accumulating effects of interest rates including a sluggish housing market and fluctuating commodity prices creates headwinds for some of the markets we serve. It’s a volatile environment, but we continue to drive initiatives to accelerate modal share and expand CSX’s addressable market. Let’s turn to Slide 7, and look at our merchandise performance. We had a great result with revenues up 5% on a 1% increase in volume. RPU was higher by 4% even with fuel surcharge lower year-over-year. As we continue to get pricing results that reflect the strong service that the team is delivering.

Throughout the second quarter, our chemicals franchise has performed very well as momentum has persisted in plastics, industrial chemicals, waste, and energy markets. Minerals revenues also saw positive results driven by industrial development wins and our unique network access into the southeast markets including Florida where we see a multi-year glide path for growth. Our Forest Products business began to accelerate driven by demand in pulp board and recent wins in the northeast portion of our network. We’ve been developing some very promising strategic partnerships in this market to take advantage of the capacity that our network has available, which puts us in a good position to gain more truck share as the housing market rebounds. Our Automotive business saw 4% revenue growth, leveraging our strong service product to deliver a competitive win with a key customer.

Less favorable this quarter was metals, where high inventories and expectations of weaker steel prices weighed on volumes. This is probably the market with the most near-term uncertainty as we watch trends in coil, plate, and scrap prices for a recovery. Fertilizer volumes continue to be hurt by phosphate production issues here in Florida. As in past quarters, lower volumes of this short haul of business, does have a favorable mix effect on the total fertilizer RPU. And Ag and Food remains soft on unfavorable regional crop supply dynamics. So, we are very encouraged by the fundamentals into the back half of the year where we see a weaker southeastern crop leading to incremental opportunities for growth. For the remainder of the year, despite a sluggish economy and persistently weak trucking market, we expect to capitalize on our best-in-class service to deliver growth.

Chemicals should remain strong supported by business wins, steady plastics and healthy waste moves. We also see opportunities in our Forest Product segment where we see operational focus differentiating us in the market. We’re also anticipating a much better second half for our Ag and Food business with demand supported by larger hog and chicken herds in the Southeast, which will need feed grain supplies from the Midwest. Turning to Slide 8 in the coal business. First, I want to reiterate Joe’s comments from the beginning of the call. Our team in Baltimore did a fantastic job of finding creative solutions to move coal after the Key Bridge collapse. Their efforts made a huge difference in reducing the negative impact that this incident had on CSX and the customers we serve.

As we highlighted at a conference earlier this spring, operations at Curtis Bay were up and running at the end of May, several weeks ahead of our original projections. For the quarter, revenues were down 12%. We estimate that without the Key Bridge collapse, the year-over-year decline would have been more in the range of 5%. Volume was down only 3% with the decline driven by domestic shipments largely to utilities. Key here is that our team was able to grow export volume by 8% year-over-year which is an extraordinary result given the closure of the Port of Baltimore. Our PE was 9% lower year-over-year and 6% lower sequentially in-line with our expectations and driven by export benchmark prices and unfavorable utility mix. Looking ahead, the key benchmark for high-quality Australian coal remains above $200 per metric ton.

Given the lag in our export coal contracts, we expect a mid-to-high single-digit sequential decline for all in coal RPU in the third quarter. The temporary idling of a recently opened export mine on our network should have little impact on our export volumes as we see strong production offsets at other CSX served mines. Just as we did this last quarter, the team is already finding some creative ways to pivot towards other opportunities in the marketplace where we see strong demand for export capacity at our Curtis Bay terminal. On the domestic side, low natural gas prices continue to impact volumes, but we’ve seen some good signs from the hot summer with several utilities in our service region maximizing their coal units in response to very strong demand.

We’ve also seen inventory levels moderate from the highs seen earlier in the year. Finally turning to Intermodal on Slide 9, revenue increased 3% on 5% volume growth. RPU declined 2% as we felt the effects of lower fuel surcharge revenue and negative mix. Our International business drove our volume growth this quarter supported by higher East Coast import activity and favorable alignment with our steamship line partners. This has been the trend through the year and we’ve been pleased to see customer activity remain solid so far in the Q3. In contrast, momentum in our domestic intermodal business remains muted as weak trucking conditions persist. The weak trucking market has continued much longer than what was expected coming into the year, but in the meantime, we’ll keep pushing hard in a tough environment, leading with our best-in-class service.

All-in, the collective team has been capitalizing on opportunities throughout the year, working together to win business and gain share for CSX. With mixed conditions across end markets, we’ve been able to grow total volume by 3% year-to-date while setting ourselves up for more profitable growth over the longer-term by demonstrating to our customers that CSX stands apart for our service, creativity, efficiency, and capacity. Now, let me turn it over to, Sean.

Sean Pelkey: Thank you, Kevin, and good afternoon. As Mike and the operations team continue to drive efficiency with strong service, we’re challenging ourselves to hold support costs in-line and grow revenue through pricing gains and new business wins. As Joe noted, we’ve built momentum over the last several quarters and we’re looking ahead to strong year-over-year growth in the second half of the year, as we finally cycle some of the discrete items that helped our results in prior years. Revenue was flat in the Q2 while operating income was down 1% when compared to revised prior year results. Merchandise and Intermodal revenue ex fuel was up 5% and was partially offset by about a $100 million of unfavorable impacts related to lower export coal benchmark pricing and the Francis Scott Key Bridge collapse.

Declines in other revenue, fuel recovery, and trucking drove an additional revenue headwind of nearly $60 million. Expenses were 1% higher, and I will discuss the line items in more detail on the next slide. Interest and other expense was $11 million higher compared to the prior year, while income tax expense fell by $8 million. As a result, earnings per share was up 9% sequentially and stable year-over-year at $0.49. Let’s now turn to the next slide and take a closer look at expenses. As noted in the quarterly financial report, our review of the accounting treatment for engineering scrap and certain engineering support labor drove immaterial adjustments to previously reported financial statements. Second quarter 2023 expense was revised up by $16 million and going forward we expect a similar quarterly expense impact split between labor and PS&O.

The labor portion will result in lower capital expenditures, and the adjustments for engineering scrap and labor did not impact cash flow. Total second quarter expense increased by $20 million. Turning to the individual line items, labor and fringe was up $18 million as costs from increased headcount and inflation were partly offset by lower incentive compensation and other items. Headcount declined slightly from the first quarter and is expected to remain relatively stable through the remainder of the year. We expect to deliver labor efficiency gains in the second half while continuing to ensure the training pipeline is stable to offset attrition and support future growth. Also, as a reminder, our union employees are receiving a 4.5% wage increase effective on July 1st, and that will be reflected in a higher sequential cost per employee.

Purchase services and other expense increased $8 million as broad based efficiency savings and a favorable insurance recovery, mostly offset cost from inflation, a write-off of inventory in the quarter and other items. Depreciation was up $6 million due to a larger asset base. Fuel cost was down $11 million driven by a lower gallon price and improved efficiency, partly offset by costs related to higher volume. Through a combination of operating initiatives and effectively leveraging fuel saving technologies, we matched our best quarter of fuel efficiency over the last three calendar years. Finally, equipment and rents decreased by $5 million, while property gains were unfavorable by $4 million. Now, turning to cash flow and distributions on Slide 13, free cash flow year to-date is $1.15 billion.

This reflects lower net earnings and deferred tax payments made this year, partially offset by the prior year impact of back wage payouts. As expected, capital expenditures are also higher year-over-year as we continue to prioritize investments for the safety, reliability, and long-term growth of our railroad. After fully funding these investments, we distributed nearly $1.3 billion to shareholders year-to-date, and we remain committed to our balanced and opportunistic approach to returning excess cash. A long-term focus on economic profit further aligns our interest with our shareholders. While economic profit is lower year-to-date as we cycle prior year comparisons, the team is strategically focused on growing this measure over time. We expect second half economic profit to be up versus the prior year as profitable growth is paired with disciplined asset utilization and attractive returns on our capital investments.

With that, let me turn it back to Joe, for his closing remarks.

Joseph R. Hinrichs: Alright. Thank you, Sean. Now, we will wind up our prepared remarks by reviewing our guidance for the full year 2024. If you look at Slide 16, we expect total volume and total revenue growth in the low to mid-single digit range for the second half of the year. Total first half revenue was slightly below our original expectations, largely due to lower fuel prices. The macroeconomic environment does appear a little more uncertain than it did a few months ago. That said, as Kevin described, in merchandise, we see promise across chemicals, forest products, ag and food, and minerals markets supported by increasing customer activity, the ramp up of new projects, and a growing portfolio of business wins. On the other hand, metals and fertilizers have both lagged and appear likely to remain softer through the end of the year.

We expect momentum to gradually build in Intermodal supported by strong port activity and the strength of our service performance, which is facilitating new ways of working together with our channel partners. This is allowing us to drive small but meaningful modal conversions even while the truck market still remains soft. The reopening of the Port of Baltimore, return to full operations at Curtis Bay and consistent domestic demand should lead to a modest pickup in coal shipments in the second half of the year. We continue to price according to our leading service, work better together as a ONE CSX team and push forward on our efficiency initiatives. As a result, we expect to deliver a meaningful operating margin expansion on a year-over-year basis in the second half, supported by a very strong incremental margin on our revenues.

Our CapEx forecast of approximately $2.5 billion is unchanged as is our balanced opportunistic approach to capital returns. We are encouraged by our accomplishments over the first half of the year. Now, we are very focused on executing our plan over the rest of 2024 as we position ourselves for sustained, profitable growth over the long-term. We have the capacity, the operating model, leadership team and the culture we need to ensure that we are the best run railroad in North America. We look forward to sharing more details about our strategy at our upcoming Investor Day in November. Thanks for your interest in our company. Matthew, we’re ready to take questions.

Matthew Korn: Thank you, Joe. We will now move to our question-and-answer session. In the interest of time and to make sure that everyone on this call has the opportunity to take part, we ask you to please limit yourselves to one and only one question. JL, we’re ready to start the process.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Brian Ossenbeck of J.P. Morgan. Your line is open.

Brian Ossenbeck: Hey, good afternoon. Thanks for taking the questions. So, maybe with Kevin, just wanted to see if you’re feeling any impact or seeing any impact from the potential, East and Gulf Coast labor disruption? Doesn’t sound like that’s the case, but wanted to see if there’s anything in particular that you’re hearing from customers. And, maybe to that point, we’ve seen a lot of international volume. You gave the reasons for that, but when do you think some of that would start to spill over into the domestic side?

Kevin Boone: Yes. I guess that’s a magic question, right? When does the domestic market recover, given what we’ve seen on the export or the import side of the business. I think, I don’t we’re still not hearing from customers a major shift, in their activity from the east to the west. If that were to occur, I think it probably presents maybe more opportunities than risk for our business, especially if some things want to move further into the eastern part of our network where today that’s truck. So, it’s a watch item for us. We’ll be close with Mike and his team and able to capitalize on that if we see a shift, which this team is well prepared to capitalize on. Yes, we all listen to the earnings calls from our customers on the domestic side, and I think, we all came into the year a little bit more optimistic on the recovery.

It will come, but it’s been pushed to the right. That’s for sure. And, I think, hopefully, the import business will be a precursor to, some better days ahead on the domestic side, but we’re not yet seeing that uplift necessarily as you’ve heard from a lot of our customers, on their earnings calls.

Operator: Your next question comes from the line of Scott Group of Wolfe Research. Your line is open.

Scott Group: Hey, thanks. Good afternoon, guys. So, Sean, the comments about meaningful margin improvement in the back half, any just directional color what that means? And, I know every quarter you give us some thoughts on sort of the sequential puts and takes for margins and earnings, two good quarters in a row with cost ex fuel coming down? Do you think that continues, stuff like that? Thank you.

Sean Pelkey: Sure, Scott. Yes. I mean, I we’re not going to give a pinpoint estimate on meaningful improvement in margins or we would have done that, obviously. But, we feel good about the setup for the second half of the year, and I think what’s exciting is some of the sort of dust that’s been in the year in terms of year-over-year comparison starts to clear in the second half of the year, and you’ll see the core momentum that we continue to build both on the cost side, but also, the pricing action, supportive of the service reflective of the service that we’re delivering as well as the growth that we’re seeing in the business. That’ll drop through at very attractive incremental margins. Sequentially, second to the third quarter, you got a couple things going on that are probably worth remembering.

One is Kevin’s guidance on the coal RPU, which will be down mid to high-single digits. That’ll be a big impact. We got the wage step up. For us, that’ll be about 20 million. Fuel, we have positive lag in the second quarter. So, depending on where prices go, that could be a headwind as well. That said, we’re holding the line on expenses. The things that we can control, obviously, we can’t control the wage increase or fuel prices. But outside of that, we feel good about, the run rate that we’re at in terms of second quarter for core expenses. And, our focus is on, growing year-over-year and delivering that growth at strong incrementals.

Operator: Your next question comes from the line of Jonathan Chappell of Evercore ISI. Your line is open.

Jonathan Chappell: Thank you. Kevin and maybe looping Mike in here as well. Back on the opportunities, I think there’s a lot of uncertainty around what could happen with the port. There’s probably a perception that the East Coast rails are hit more directly. But as you mentioned, there’s probably more kind of long haul as it relates to intermodal, etcetera. Can you just tell us how you think about the opportunities and risks of this as it gets closer and what it does to the network as far as keeping balance and resources that are required if there were to be a stoppage and you did have to kind of shift more to a Chicago focus as opposed to, some of the East Coast ports?

Kevin Boone: Yeah. I’ll let Mike, follow-up. But from a capacity standpoint, we’re working really close, with our team. I think we’re well-positioned to adjust as we have in the past, when these events happen, temporarily. But, like you mentioned, there’s opportunities probably for some longer haul, business should, we see a disruption on the East Coast and some more volumes that would traditionally move east local. Think about the New York markets and maybe some of the southeastern markets that are locally trucked, that would have to move through the West Coast. That that’s an opportunity for all of us to participate, and we’ll be more than ready to do that. But I’ll hand it over to, Mike to talk about capacity.

Mike Cory: Sure. Thanks, Kevin. Hi, Jon. What’s the capacity, Jon? We have the odd train, train pair, let’s say, that’s, at a higher rate of using capacity. But for the most part, our network can withstand whatever Kevin brings us in terms of intermodal. We’ve done a lot of work at our terminals. Our intermodal team is really dug in deep here over the last six, eight months to provide that great first and the last mile for the customer. But in terms of the capacity over the network, it’s there for us to get, get the business.

Operator: Your next question comes from the line of Chris Wetherbee of Wells Fargo. Your line is open.

Chris Wetherbee: Yes. Hey, thanks. Good afternoon, guys. I guess real quick, I don’t know if you gave it. I apologize if I missed it. Could you give us the number of the accounting change for the quarter, the impact on 2Q? And, then I guess I was curious about, how you think about pricing sort of going forward? As you see, service product continue to be very solid. There’s some opportunities on the volume side. I know you do most of the re-pricing probably towards year-end. Are you seeing any of that acceleration in terms of the year-over-year growth that you’re able to capture on new contracts as they be as they are being signed to through 2Q and into 3Q?

Sean Pelkey: Chris, it’s Sean. I’ll take the restatement first. So, what I mentioned was a $16 million impact in the prior year split between labor and PS&O. Even though there was no restatement for Q2, obviously, because we’re reporting Q2 results of this year for the first time, that impact was similar in the second quarter, and that’s pretty similar to what we expect on a go-forward basis as well. I’ll turn it over to Kevin for pricing.

Kevin Boone: Yes. On the second question, clearly, facing a truck market when you’re trying to convert truck is not the most ideal backdrop to do that, but we’ve had a lot of success. And, you’re going to see that success really build momentum as that market comes back. So, and on the intermodal side, not as strong of a pricing environment, which we’ve been pretty transparent about. On the merchandise side, given our service, given the value we’re providing to customers, given the efficiency we’re driving for them, we’re having really good discussions around there. And, you’re right. A lot of that re-pricing every year comes out at the end of the year in the first part of next year. But, with inflation coming down, those things, those will be factors as well, but we still nothing’s really changed from our strategy there.

We want to go after volume and price, and deliver the value to our customers so they are, see the value in, giving us more business along with, obviously covering the cost and the inflation that we will have to absorb every year.

Operator: Your next question comes from the line of Tom Wadewitz of UBS. Your line is open.

Tom Wadewitz: Yes. Good afternoon. Wanted to see, Mike, if you could offer some thoughts on how you think the network is running? I think some of the metrics show a little bit of deterioration in terms of, like, on time arrivals or carload trip plan compliance. I wonder if you think, why you think that would be the case and whether you would expect those metrics to rebound as you look into 3Q and 4Q?

Mike Cory: Sure. Thanks for the question, Tom. Look, we have really made a lot of changes here the last six months, most focused on two things. Well, safety first, as though you can’t tell by our metrics on that. But service, whatever we do in terms of whether it’s we make changes to the operating plan, which in some cases has caused trains not to run on time right down to making sure that the assets that we have out there are being pushed. So, locomotives being stored. We’re doing things right now just to test the railway. And, yes, there’s been some drop in some of the metrics, and, yes, they will improve, as we go forward. But, we have opportunities here, first of all, with a very young group of people to learn how to do this properly, and second, for them to partake in it.

So, the changes we’re making, yes, they’re having some effect, nothing material, but some effect on some of our lagging indicators. But, what we’re able to do from a cost perspective and still maintain that service is powerful. And, really by focusing on the connectivity between our fields people and their customers, we’re starting to see the more benefits come out. So, yes, we’ll get our metrics back, but at the same time, we’re not running for a metric. We’re running for service. We’re running for a return, and that’s very important. And so, Tom, for me just learning as I go. I’ve been here 10 months now. I’m not overly concerned. Trust me. It’s a focus, as we go through to improve those metrics. And, prior to this storm we had going, we had a pretty good, pretty good July, on those regards.

So, metrics will improve, but focus is on cost and service and safety. And, we’ll figure out the right metrics from there.

Operator: Your next question comes from the line of Ben Nolan of Stifel. Your line is open.

Ben Nolan: Yes. I appreciate it. Thank you, guys. I was going to ask a little bit on the chemical side. That has been working pretty well for you guys. It was curious how you would, do you think it’s just fundamentally there’s just a lot more chemicals to be moved, or is this share gains maybe relative to the trucking side of the business or maybe competitors? And, any framing that you can, talk to on the chemical side would be helpful.

Joseph R. Hinrichs: Yes. I mean, I think you first got to start with last year. Obviously, that was a difficult backdrop for our chemical market, but we have seen some wins on the industrial, development side, that are really starting to, help us there. So, that’s been positive in the plastics market, so we’ve really capitalized on those opportunities. And, I think it’s all of the above that you mentioned. We obviously have quality carriers and, that alignment with them, that understanding of the market has helped us in our conversations with customers. In fact, there’s a recent customer where we’re kind of bundling that opportunity together and allows us for us to work together in a white boarding session to really look at their total network and how we can make that real more rail centric over time.

So, those are exciting things. Some of the things that we’ve been working on for a long time that are really, picking up momentum, but it’s really all of the above. It starts with the leading service in the in the east, and we’re really, delivering on that, and that allows us to have a really different conversation with our customers than we were able to a year or two ago.

Operator: Your next question comes from the line of Eric Morgan of Barclays. Your line is open.

Eric Morgan: Hey, good afternoon. Thanks for taking my question. I wanted to ask on Industrial Development. Just wondering if you could offer any update on some of those projects. I don’t think the merchandise slide called out the, that 1% contribution to merchandise volumes you called out last quarter. So, just wondering if that’s still the target. And then, curious just any other progress you’ve made since last quarter, anything incremental that might have you tracking closer to the low or high-end of that 1% to 2% range you’ve talked about for, I think ‘25 or ’26?

Kevin Boone: Yes. I mean, Joe mentioned at Investor Day in November, and we’re certainly going to put probably more of a bow on the story and, kind of open up, a lot more of the details and share with all of you. But, we are seeing that acceleration, this year, year-over-year, in that range that I mentioned. And, when you look at full run rate and some of these projects can take a year or two to really get up to full run rate volume, But, the pickup in terms of things that we’re seeing put in place this year has certainly accelerated this year, and we anticipate that’ll accelerate next year and then the following year. So, that means, several years of growth as those projects really come up to full rate production. On average, a lot of these projects are $2 million.

So, it’s a lot of small things that add up to a fairly large number. We do have the larger projects in there as well, but it’s a very diverse, set of projects, opportunities that are that are coming online across a number of our merchandise network segments. So it’s exciting. We still see the momentum out there. I think, it’s going to be fun to talk about it in November and, and share more of those details with you.

Operator: Your next question comes from the line of Ken Hoexter of Bank of America. Your line is open.

Ken Hoexter: Hey, great. Good afternoon. Sean, can you just, I guess, can you clarify when you say, meaningful improvement, in answering Scott’s question, but you didn’t say if you were going to see sequential improvement or decline. I just want to clarify if you were suggesting you’re going to see improvement sequentially. And then when you mentioned labor flattish, do you still see opportunities to cut costs there, or can we see progress on that, or is this kind of the refined level you expect to run at? Thanks.

Sean Pelkey: Yes. Ken, I’ll take the sequential part first. We’re not going to guide specifically to sequential. I did lay out a couple of the factors there that are be somewhat, challenging from 2Q to 3Q, comes with a wage step up, the net fuel, and the coal RPU. That being said, core expenses, we should trend pretty similarly to Q2. And, we’ll see what happens in terms of the demand side of the equation. But, again, feel good about low to mid-single digit volume and revenue growth year-over-year in the second half. And then, in terms of the labor opportunities, I think there’s always, continued opportunities to drive efficiencies on labor. Mike’s clearly focused on overtime reductions out there. We’re seeing momentum across many of the crafts.

He’s also got a team looking very closely at how do we increase retention across the craft workforce T&E in particular. There’s significant cost in training those employees, and retention is extraordinarily important, not just from an operating, standpoint, but also from a cost and efficiency standpoint. So, definitely opportunities going forward on the labor side even if it’s not headcount. I think headcount will be pretty stable, and we will drive year-over-year improvements in headcount efficiencies where we do expect volume to grow more than headcount in the second half.

Operator: Your next question comes from the line of Daniel Imbro of Stephens. Your line is open.

Brady Lierz: Okay, great. Thanks. This is Brady on for Daniel. I wanted to ask, as we’ve gone through earnings season, we’ve heard some anecdotes about the truck market maybe moving a little closer to balance than it has been over the last couple of years and maybe even showing some signs of seasonality again. I wanted to ask, have you seen or heard any anecdotes from customers to suggest truck to rail conversions are picking up sequentially or could pick up in the back half? Thanks.

Sean Pelkey: Yes. I listened to the same call as you did. I think they’re obviously a lot closer to it, on a day to day basis, than we are. I think the environment’s persisted a lot longer, than what we expected than everyone expected, quite frankly, and we’re just, setting ourselves up for the recovery, and I think we’re well positioned there. But I don’t have any additional anecdotes to add to what we’ve all heard. I’m hopeful that, we’re further along in this cycle than not. And I think we’re set up, with what Mike mentioned on our intermodal ops side from a capacity standpoint, we’re better positioned than we ever have to bring on the volume.

Operator: Your next question comes from the line of Jason Seidl of TD Cowen. Your line is open.

Jason Seidl: Thank you, operator. Joe, Kevin, Mike, Sean, good afternoon, gentlemen. Wanted to dig a little bit deeper, Joe, into a comment you made. You talked about it now. There appears to be, I guess, a little bit more uncertainty a quarter ago. Was that comment more related to what we’ve seen sort of over the past two weeks with, PMI being negative again and the job number that we saw last week? Or was this from what your customers might be telling you? And if it is from the customers, maybe you could elaborate or just give us more color on that.

Sean Pelkey: Yeah. Thanks, Jason. I think Kevin has highlighted a number of the areas. One area we didn’t talk about was automotive. And while we had strong performance in the first half of the year, I think you’ve seen the shipments over the last few weeks have been down a little bit coming out of their shutdown period. So, that’s one we watch very carefully from the consumer side of things, interest rate sensitivity. You think about it, housing market, auto market are two big areas in our business that are very rate sensitive, so we’re watching it very carefully. But my comment was, you know so that’s in addition to all the stuff that Kevin talked about earlier. But my comment was more in general, I think. I mean we were thinking about this call.

This is even before today’s events, when the marketplace, I think there’s just a little more uncertainty about where the economy really is. We see a number of areas that we’re excited about for the second half of the year. But clearly, we’re watching what happens with the Fed. We’re watching what happens in the general economy. And, and so I think if you could say where we are today versus two months ago, the economy seems to be a little bit more fragile. And we’re optimistic that, you know, it can pick itself up, but we’re watching it very carefully.

Operator: Your next question comes from the line of Stephanie Moore of Jefferies. Your line is open.

Stephanie Moore: Hi. Good afternoon. Thank you. Maybe continuing on the same thing, would love to hear maybe some color that you’re seeing from maybe some picked up infrastructure or general industrial investments that we’ve seen across the southeast. Any commentary that would suggest maybe a slowdown in that activity or acceleration or the likes there, or any kind of thoughts as we kind of look forward? Thank you.

Joseph R. Hinrichs: Not really any, slowdown. And I think we presented a slide last time that we do have a very, very diverse portfolio and there was a lot of focus on the EV market and certainly we’ve seen some of that be pushed to the right, but our portfolio is much, much larger than, just the EV segment. So other areas, continue to stay on trend, on pace, and we’ll, obviously have a ramp up period over time. But we have we have pretty clear line of sight. A lot of construction is already underway. So, a lot of some capital out there with these projects needing to be finished. So, we feel pretty good that despite maybe, even if the macro scene is a little bit weaker in the back half that these projects, in large part will continue on and be a positive factor for us in the back half and into the next year and the following year.

Operator: Your next question comes from the line of Walter Spracklin of RBC Capital. Your line is open.

Walter Spracklin: Yes, thanks very much. Good afternoon, everyone. I was wondering, I don’t know if this is a question more for Mike or for Sean with regard to long-term OR where your OR could go. I know that you and a number of your peers were able to achieve a 55 OR at least on a quarterly basis, in the past. But now with cost inflation, new work rules and I’m talking really just your rail operation if we would exclude your trucking from this conversation. If we look at the cost inflation, new work rules and the other factors that have come to play here in the current environment, do you still see your efforts and Mike you mentioned you’re making great efforts on cost efficiency, on service and on safety. Can they translate into 55 again? Or is 60 the new 55 or something else? And maybe if you talk a little bit conceptually about not so much the target itself, but if these are real impediments to you achieving the run rates you’ve had in the past.

Mike Cory: Well, I’ll start it off, Walter, and nice to hear you. Good that you’re on the call. Look, no different than any other time. The margin is not what we’re aiming for. We do see a pipeline in terms of efficiencies, and that’s again, this is going to take time, but it’s happening as we speak that we’re developing supervisors to see these things, giving them the tools to be able to relate to them better. And I see a lot of the things I saw in my previous career. There’s just opportunity here to connect people and activities where we get rid of waste. And that’s our focus, and I’ll turn it over to my financial friend here.

Sean Pelkey: No. Thanks, Mike. I agree. I mean, margin obviously is an indicator of financial health and in our industry, it helps us to understand how efficient we’re running the railroad. Clearly, as we’re able to grow the business as well and do that at strong incrementals that’s going to help the margin, but the margin really isn’t the destination. The goal is to grow earnings, to grow economic profit, be disciplined around the way that we spend capital and look for opportunities to invest in things that have a high return, whether those are growth oriented projects or projects that help us to drive further efficiency gains, technology investments, capacity investments across the railroad. That’s our primary focus.

We think that’s the quickest, surest way, to grow the value of the company. And in terms of things changing versus previously, I think you make a good point in terms of the impact of inflation on the rail operating ratio, operating margin equation. That being said, I don’t see any reason why we can’t continue to see improvement in that metric as we expect across many other metrics, in our financial performance over time if the formula, the equation that we have going for us right now is able to continue, and we’ve got confidence that we’ll be able to do that.

Joseph R. Hinrichs: Yes. This is Joe. Last comment to add to that. I appreciate you recognizing, quality carriers as part of our equation when it comes to margins. If you look at our second quarter performance, even with now accounting for scrap and the related labor according to our policies, even looking at fuel being down, we had over 39% margin in our corporate results. But if you look at the as we’ve said in the past, effective quality carriers is about a 250 basis point effect on our total margin. So, our rail operations, then if you just do that simple math, had over a 41% margin in the second quarter. In a clean quarter with not a lot of exceptional things going on or, like, a lot of those quarters that you’re referencing in the past had high fuel surcharge or had a lot of demurrage or storage charges or even had record export coal prices and other things like that.

We had a pretty stable quarter even with the Baltimore bridge collapse. And with our rail operations, even with the inflation that we’ve had over the last couple of years, capable of delivering that kind of performance. And as we’ve noted optimistic about how we continue to run this as forward, we’re very excited about the margin potential of this business, and recognizing that service and our operating efficiency go hand in hand. Having said all of that, if the pursuit is just only to optimize the margin number, this industry or even this company has the potential to turn away good business. And I think it has in the past. If we had a 41% plus operating margin for our rail business last quarter and a 35% margin opportunity present itself, do we turn it down?

And where our cost of capital is a lot lower than that, and most businesses don’t have that kind of margin. It would deteriorate the average margin on the business, but still incrementally could be good business. And so that’s where Sean’s point, is very valid. We want to grow earnings, grow cash so we can return that to shareholders and reinvest in the business for profitable growth. And that’s the kind of way we look at it. Efficiency matters. There’s no question about it. So does safety, so does service. But the big opportunity at these margins is to create profitable growth, which has strong incremental more incremental margins. That’s what we’re excited about.

Operator: Your next question comes from the line of David Vernon of Sanford Bernstein. Your line is open.

David Vernon: Hey, guys. Thanks for taking the question. Sean, I wanted to ask the incremental sort of operating leverage question a little bit differently. If you look at the first half of the year, volumes are up 2%, operating profit is down 4%. I know the bridge is in there, but if you think about what’s been missing in the equation for operating leverage to drop down to the bottom line on that volume, what what’s going to change in the second half of the year?

Sean Pelkey: Yes. No. Good question, David. If you look at the first half, I mean, I get to about $300 million of kind of unique year-over-year challenges between the Baltimore collapse, the lower export coal pricing, decline in other revenue, net fuel, that’s $300 million. Second half is not going to be anywhere near that significant. We will have coal pricing headwinds, but the rest is pretty clean. And then the other thing that’s different, in the first half of the year, we were still cycling, some of the labor additions that that came on over the course of last year. So, our labor productivity was negative in the first half of the year. That’s going to turn positive in the second half of the year, on our volume growth and, keeping headcount essentially flat from where we are right now. So, those are the two big factors there.

Operator: Your next question comes from the line of Ravi Shanker of Morgan Stanley. Your line is open.

Ravi Shanker: Thanks, everyone. So maybe also piggybacking on that operating leverage question. I mean, just to kind of summarize the call a little bit, and it seems like a little bit of a mixed message from you guys on cycle sentiment. On the one hand, you did say that the it appears the kind of inflection is kind of pushed out a little bit and the economy is a little more fragile. On the other hand, you are guiding to some pretty strong operating leverage in the back half of the year. Just trying to get a sense of how much visibility you have on that operating leverage because general, in comments you indicated that’s driven a lot by volume and price. And in a fragile market that maybe a little hard to come by, especially given some of the puts and takes in the end market there. Just trying to get a sense of how much confidence and visibility you have on that operating leverage in the back half.

Sean Pelkey: There’s been a lot of puts and takes, this is Sean, on a year-to-date basis, but, we’re pretty much right on our plan in terms of both total volume and revenue, which is which is great. We had a stretch plan in place, across the teams, and we’ve done a good job when there have been challenges of figuring out ways to offset them. Kevin did a good job of describing that with the key bridge outage in in Baltimore and what we did to adjust there. And we think we’ll be able to continue to do that as the year goes forward. And I think I think we also talked about a number of the opportunities. There are some markets that are setting up quite well for us in the second half of the year. It’s not guaranteed until we actually move the freight, but we’ve got a couple areas of strength between ag and food and minerals and chemicals continuing to show nice year-over-year growth.

There’s some headwinds and some uncertainties out there as well. So, nothing’s ever a given, but we’re not only focused on growing the volumes. We’re also focused on getting the price that we need to get in the marketplace. A lot of that price for this year has already been locked in, and then driving efficiency in the cost base. And we’ve already seen pretty significant improvements from where we entered the year to where we’re exiting the first half of the year that give us confidence we’ll be able to hold the line there into the second half. So, if the macro is not as supportive and maybe we don’t see as much growth as we expect, Will we still be able to deliver margin improvement? Yes. I think we will.

Operator: And your last question comes from the line of Jeff Kauffman of Vertical Research. Your line is open.

Jeff Kauffman: Thank you very much for squeezing me in. Mike, just a quick question. You talked about excess capacity. Actually, it might have been Kevin mentioned that. We have plenty of capacity on the line. And I noticed that, dwell was up a little bit. So, I guess my question is, are there opportunities you said you’re testing the railroad, here and there, seeing what it can do, to run with fewer locomotives or fewer cars or maybe technology can help you drive efficiency on the asset side. I’m not talking so much about the people side here because you mentioned that earlier. But I was just kind of wondering, because cars online were up about 3,000 cars sequentially. I don’t know if that was seasonal or not. But what kinds of opportunities do you see for improved asset utilization on the rail?

Mike Cory: Thanks, Jeff. Just to clarify, what I what we’re speaking about before was an intermodal shift. So, I was speaking specifically about our intermodal trains and the capacity that we have in that network. But everything you talked about, the answer is, yes. Do we want to run with fewer locomotives? Will there be technology that enhances what it is we’re doing? Absolutely. The biggest thing we’re focused on right now is outside of the day to day sweeping the corners, making sure people understand what the standards are and how to go about, achieving them. We’re looking at infrastructure that we have. And so there there’s some opportunities to reduce out of route miles, reduce a lot of handlings, essentially create mass where we don’t have it today.

This railroad has customers everywhere versus it being linear where you can accumulate all your traffic, you can switch it out, and it runs. So, we’re going to try. We are looking at our network to see areas where we can bring and create mass in certain places and eliminate all those touches that we do. We do a lot of work online and road with trains block swapping because we just don’t have the mass at the origin terminal. So, there’s opportunities there and at our in our Investor Day or when we get together, we’ll lay out far more than just me talking about it. We’ll show you what we’re talking about there.

Operator: Thank you. With no further questions, this concludes our Q&A session and the conference call. You may now disconnect.