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Edited Transcript of CSX earnings conference call or presentation 16-Jul-19 8:30pm GMT

Q2 2019 CSX Corp Earnings Call

Jacksonville Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of CSX Corp earnings conference call or presentation Tuesday, July 16, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Slater

CSX Corporation - Head of IR

* James M. Foote

CSX Corporation - President, CEO & Director

* Kevin S. Boone

CSX Corporation - Interim CFO

* Mark K. Wallace

CSX Corporation - EVP of Sales & Marketing

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Michael Zazula

Barclays Bank PLC, Research Division - Research Analyst

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation's Second Quarter 2019 Earnings Call. As a reminder, today's call is being recorded. (Operator Instructions)

For opening remarks and introduction, I'd like to turn the call over to Mr. Bill Slater, Chief Investor Relations Officer for CSX Corporation.

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Bill Slater, CSX Corporation - Head of IR [2]

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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's my pleasure to introduce President and Chief Executive Officer, Jim Foote.

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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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 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 volumes 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're 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 1 gallon of fuel per 1,000 gross ton miles as we continue to find new and incremental ways to improve efficiency and drive unproductive cost 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 whilst tightening the schedule in the form of shorter 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.

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Kevin S. Boone, CSX Corporation - Interim CFO [4]

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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. Lower -- labor and fringe expense was 3% lower, driven by a 5% reduction in head count 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 to overtime. Recrews are 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 cost also saw a 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 in 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, appreciation 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 13% decline in fuel expense. Our enhanced focus on distributed power utilization and energy management technology drove record second quarter fuel efficiency. Equipment rent expense decreased 8%, driven by improved cycle times and lower volume-related cost in intermodal.

Equity earnings decreased $9 million 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 of those 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 cost.

Overtime also remains a significant opportunity, with a particular focus on its mechanical and engineering. There are multiple emphasis 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 to continue to deliver savings.

Train speed and dwell continue to be opportunities as well. The related cost benefits remain 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 ties, 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 2 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 the 9% increase of $ 0.22 to $ 0.24 per share we announced in February of this year. Our ability to convert earnings into cash remains a key differentiator for CSX, and a significant driver of shareholder value.

With that, let met turn it back to Jim for his closing remarks.

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James M. Foote, CSX Corporation - President, CEO & Director [5]

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Thanks, Kevin. Turning to Slide 13, I want to wrap things up by discussing our guidance for the year. We started this year expecting revenue to be up approximately 1% to 2%. Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes. You see it every week 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 refinery explosion, we are now expecting revenues to be down 1% to 2% for the full year.

We are not necessarily being pessimistic about the second half of the year. But in as much as we need to adjust guidance, we're just setting out the obvious. This outlook is based on the current business levels and there is upside to this forecast if 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 downtime -- slowdown, remain cautiously optimistic about the second half. Mark is here and 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 the unnecessary touches that it cost and 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.

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Bill Slater, CSX Corporation - Head of IR [6]

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Thank you, Jim. (Operator Instructions) Shirley, we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ken Hoexter with Bank of America Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [2]

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Jim, maybe just talk a little bit about the performance rights. So a phenomenal operating ratio, yet when you show your data, the on-time arrivals continue to fall. Maybe just to understand how that's possible, given -- are you tightening the time frames to different levels? Or is that different than the improvements you're making on the performance?

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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Great. Well there's the difference between on-time originations and on-time arrivals versus trip plan compliance, which is measuring the blocks as it moves through the network. Our on-time departures, since we report to the STB, we're close to 100%, we're high 90s now. And arrivals is kind of in the high 80s -- mid- to high 80s just most recently here now.

The trip plan compliance, on the other hand, which is not measuring that train performance, it's measuring out the cargoes through the network from the time we pick it up to the customer and when we tell the customer we'll hand it to his customer in 114 hours. How often do we make that 114-hour trip plan? And every time -- and when we started measuring this, we were maybe in the 30 -- high 30% of the time we were making that trip plan, and now were in the high 7 -- we're close to 90% in intermodal and high 70s for the carload business. And yes, to your -- to answer your question, every time we start getting where we're producing really good results, Jamie and the operating team get in there and tighten up the schedule and make it more difficult for everyone, because ultimately, that results in a much better product for the customer.

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Kevin S. Boone, CSX Corporation - Interim CFO [4]

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Ken, to give you a little perspective. Last year, in second quarter of '18, we, on average, left -- we had early departures of about 16 -- 76 minutes early, whereas you look at this year, we're departing only 20 minutes early. So we gave ourselves a lot of cushion last year, which, obviously, would translate in a lot more cost. So we're tightening the windows, and you can see it in that differential, which helps us manage our outputs a lot better.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [5]

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Helpful review. And for my second one, or a follow-up, I guess, is maybe just moving over to Mark. And Jim, since you opened that up, maybe Mark, you can talk about, given the shift of the outlook, are you seeing an accelerating decline in kind of the some of the economic indicators you're looking at? It just looks like, carloads, you're right, have -- if we take out the intermodal, which stays around that down double-digit given your lane closures, it seems to -- are you seeing an underlying deceleration in some of the outlook? I don't know if you want to go by commodity or just overall.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [6]

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Thanks, Ken, for that good opportunity here. I think, exclusive of the PES refinery explosion that Jim just talked about in Philadelphia that just happened a couple of weeks ago, our change in our revenue guidance is largely evenly attributable between our 3 segments: so coal, merchandise and intermodal. On the coal, export coal has been below our expectations, mostly driven by thermal and lower API2 benchmarks, which we think will likely continue into the second half.

On the domestic utility side, our volumes are down relative to our expectations driven by continued lower natural gas prices. Going into the year, we were -- we thought Henry Hub was going to be somewhere around in our guidance, was for Henry Hub to be somewhere around $2.85. Now we're hovering between $2.40 and $2.50, which is now reflected in our guidance.

On the merchandise, clearly, as Jim mentioned, clearly, there are signs of slowing economic conditions in both IDP and GDP for Q3 and Q4, pointing to a less robust economy in the second half. We've obviously seen evidence of this in our own business and now see a softer industrial environment, with signs in our automotive, chemicals and metals segment. But we're calling it as we see it and the run rates we're seeing are based on the trends that we saw in June and coming into Q3.

On the intermodal side, listen, we clearly hoped for more of a recovery, particularly in the fourth quarter of the year. But we're not immune from some of the pressures that the entire U.S. intermodal industry is facing right now, with the weak trucking market coming off an exceptionally strong 2018. There's a lot of excess capacity in this market and as a result of what we saw in 2018, a lot of trucks came into the market. That needs to be worked out. But listen, we're staying disciplined on serving our customers and providing everyone with, as Jim mentioned, great service.

Now what would help? Obviously, what would help in the back half would be a resolution or clarity on trade and tariffs would obviously help, but that is obviously beyond our control. But what is within our control is providing a high-quality service product to our customers, uncovering new opportunities to use that service product for both new and existing customers, and to make sure that we are extracting a fair value for the service that we provide.

So hopefully, that covers the -- a little bit of the explanation on what we're seeing.

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Operator [7]

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And next question comes from Allison Landry with Credit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [8]

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So Jim, earlier, you outlined a number of concerns in the freight environment and what you're hearing from customers, but 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 a revenue decline can the business model withstand? And you still grow EBIT on a year-over-year basis in 2019?

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James M. Foote, CSX Corporation - President, CEO & Director [9]

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I don't know that we've ever modeled how much we can actually take out. I think we're doing -- this is not something we woke up yesterday and said, well, guess what, things are going a little bit softer than we had expected. We've been watching this throughout the first half hoping, as everyone did, that things would turn around and business levels would start to tick up instead of this just kind of slow, lazy, malaise-type drift down across, which as Mark said, kind of then accelerated as we got into June. And -- but we've been planning for this and watching it and taking steps for months now to, first of all, obviously, focus on that G&A because one of the things that we don't want to do in these situations is reduce cost in the transportation side of the business that could impact service. Then you impact service, and then your business can get softer. And then you get softer, so you cut more and then you impact service and you start this downward trend.

It would be much easier for us to respond if suddenly business just dropped 10% in a day because then we would know exactly how to rightsize the business for it, and we'd know exactly where we could and could not take out the expenses to be able to -- in order to handle the volumes. So we are doing the best we can and have done -- I think the team did an amazing job in the second quarter of getting a lot of things done, getting a lot of things rightsized based upon what we were anticipating and what we were seeing, and not really going into any kind of cost reductions on the transportation side of the businesses where the majority of our expenses are.

If we see or if we saw, and hopefully we don't, but if we saw a significant with the decline in our business levels, we would respond quickly and aggressively and do everything we could to try and maintain our cost structure and our advantage. At some point in time, I mean there's just no way that we can take out the order of magnitude of the amount of costs that are necessary if there were a significant decline in revenues, but we'll continue to do our best and monitor it.

So far, so good. I mean, things are not -- this is not doom and gloom. This is not end of days kind of thing. This has been a very slow drip from the beginning of the year. And as aggravating as it is, under the current rules of engagement with the investment community, once we put guidance out, when things start to look like we're not going to be able to achieve that guidance, we're obligated to give a new guidance. And so we've thought hard about it and said, based upon where we are today, if this is kind of the new run rate from today, then we'll probably be down 1% or 2%, especially when we just blew up an oil refinery, that was a big customer of ours. And which is by itself, on an annualized basis, 1% of our volumes.

So factored into the number that we've taken down is a onetime -- a 1% hit in volumes, half of which we'll recognize this year, associated with the refinery explosion. So -- but to get back to your question, we can do a lot if we know directly what it is we're trying to achieve. In this environment, it's just a lot more challenging.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [10]

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Okay. That's really helpful. And maybe just piggybacking on that a little bit. So yes, obviously the volume declines accelerated, and maybe in Q2, you tried to do a little bit of rightsizing. So should that, along with the comments that you guys made about having plenty of opportunity going forward for efficiency gains, is that -- should we read that as a signal that the year-over-year improvement in the OR could accelerate from the 130 bps in Q2? Not that, that wasn't a good number, just trying to understand the trajectory going forward and how you're thinking about that.

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James M. Foote, CSX Corporation - President, CEO & Director [11]

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Allison, you're killing me. I mean, we're doing a fantastic job, and then you want more. Come on. I think we'll just stick within this environment going back to the original. We've got to -- this revenue top line view reflects a pretty significant reduction in revenue. And what we're saying right now is we're going to achieve our goal of hitting an operating ratio of below 60%. And despite what everybody else does out there, maintaining our leadership position as the most efficient railroad in North America.

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Operator [12]

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Your next question comes from Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [13]

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Mark, one for you on export coal. When do you think that is a -- you mentioned API2, I wanted ask about met coal. When do you think that, that window will start to maybe get a little bit tighter as seaborne prices have come in a bit? And are there any other changes that we've seen this cycle with maybe some longer-term contracts or reservation systems at the ports that -- or even restructuring of the coal producers in Appalachia? Anything that you think can actually help extend this cycle for a little bit longer?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [14]

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Yes. Brian, thanks. I think on export coal, let me just start at a high level. I think we're still expecting export coal roughly around 40 million tons for the year. Thermal coal, as I talked about, obviously, some tough headwinds there given the API2 numbers, but we're -- there's some tough things going on in Europe, as Jim talked about, with some low natural gas prices, the mild weather and low natural gas prices in Europe, so that's causing a little bit of a headwind. On the met side, again, the benchmarks remain strong. They're about $190. We replaced -- we price those contracts quarterly.

We're working with -- we're working now with all our export coal producers to look into next year. I'm not going to give you any guidance, but we're having some success there and trying to lock up some volumes. Not anything hugely significant, but especially on the thermal side, which is encouraging. But we work with these guys every day, our customers, and everyone's incentivized to move a lot of coal heading into next year. And hopefully, as we get closer to the end of next year, we'll give you maybe a little bit more clarity on what our expectations are for 2020.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [15]

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All right. Mark, appreciate that. Maybe for you, a follow-up on the PES refinery. Jim gave us the rough magnitude of that. But I was curious, we've seen some other headlines with U. S. Steel, bringing down -- I guess, keeping down some blast furnaces. In the past, you mentioned that tariffs have actually helped domestic -- fuel production domestic met coal consumption. So I was wondering if that was or any other distinct events are reflected in the updated guidance.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [16]

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Yes. Certainly, we had a huge -- we had a big volume quarter in steel and industrial coal. Now what's happening with some of those announcements, unfortunately, some of those producers -- the world's changing a little bit, and we just talked about the declining or the softening industrial environment, which is obviously impacting them. Following the tariffs, they saw an increase in production. Unfortunately, now that -- with the markets there, so huge inventories went up, the markets' getting a little softer, prices are coming down. And so there's probably an excess in capacity there. And so yes, we expect that our metals and equipment volumes in the second half, just because of the softer industrial environment, will get a little bit softer unfortunately.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [17]

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

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [18]

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It is.

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Operator [19]

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Your next question comes from Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [20]

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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?

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James M. Foote, CSX Corporation - President, CEO & Director [21]

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Well, if you look at the -- again, let's focus on the -- there's 2 different business segments, there's intermodal and there's carload. Intermodal, our obligation there is to deliver a product that's as close as a 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 -- the time in transit is going to take longer.

So as there's a very soft truck market out there right now, and as Mark said, 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 talked a lot about, because it's 2/3 of our business and very profitable long-term business for us is the 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's actually saving money by putting -- taking the business off the highway and putting it in a railcar. So that's where we focus intently on, leveraging this service product. Mark, do you want to add to that?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [22]

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No. I think that's exactly right. And as we become more reliable and persistent, and as the markets soften and customers are holding on to 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 are -- our trip plan compliance is very good. And so they're willing to pay for that premium service.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [23]

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Well just as a quick follow up to that. And 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 would have thought with the improvements of the network on the carload side, 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 could 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.

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James M. Foote, CSX Corporation - President, CEO & Director [24]

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Well, again, as I'd like to point out, again, the carloads are pretty -- the carload -- we are the most transparent industry in the world in as much as we report our sales volume on a weekly basis. And our merchandise business segment, even though everybody says, oh my God, something's wrong with CSX, the volumes are down 10%, well it's all intermodal, and we already told everybody in the world why our intermodal business was going to be down, and nobody focused on the fact that our merchandise franchise was outperforming everybody else in the industry. This is what exactly what we're talking about.

So up until most recently, where we saw a couple of our industrial segments get much softer, we are very confident that the strategy of going -- having noncyclical growth in our merchandise segment is achievable based upon our service product. And unfortunately, as I said, half of this -- or a significant portion of this merchandise business that we've now taken that guidance down on was associated with this onetime customer event. And the rest of it is just kind of basically market-driven where, in certain segments, with our industrial customers, again, our grain business is doing really great. A lot of our segments of our business are doing really great.

Not all grain moves in unit train, a lot of grain moves in a boxcar -- individual boxcar that we're taking from a truck and put in a boxcar. So across the board in this merchandise segment, we're seeing gains, we're seeing traffic come to us. And if you're a customer right now that's kind of looking in the -- and saying like, wow, maybe things are a little soft, maybe I'd better see what I can do to rightsize my business, to take control of my cost structure, how can I save money in running my business, and so, I can reduce my transportation spend overnight by taking the traffic off the road and putting it in a boxcar. 10 years ago, I wouldn't have done that because, Jesus, if I would have, the product would have never got to where it was supposed to be. Nowadays, I'm willing to do that and I could save money.

So we're pretty confident on that, and I think -- and we think that the numbers are beginning to prove that -- prove us correct.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [25]

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If I could just ask one follow-up for Kevin, with respect to the cost opportunities you laid out. Kevin, do you expect to see a lot of 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.

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Kevin S. Boone, CSX Corporation - Interim CFO [26]

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Yes. I think Jim addressed this 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 top line.

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 onboard, 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 into nuance of second half versus first half.

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Operator [27]

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Your next question comes from Brandon Oglenski with Barclays.

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David Michael Zazula, Barclays Bank PLC, Research Division - Research Analyst [28]

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This is David Zazula on for Brandon. Just a little bit of drill-down into the prior question about pricing getting in terms of merchandise versus intermodal. Some of the service metrics you showed on intermodal in terms of trip plan compliance show really good trip plan compliance on the intermodal side. Could that make you, potentially, a victim of your own success, in that there's not as much room to go positive on the service side and try to drive conversion from the truck? Or are there more nuanced aspects of the service that you can still provide that would be beneficial to shippers currently using truck?

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James M. Foote, CSX Corporation - President, CEO & Director [29]

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Our metrics in intermodal versus carload business reflect the nature of 2 different kinds of businesses. The intermodal is terminal-to-terminal, point-to-point, and it's much easier to have those kind of 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 let Mark tell you about some of the great stuff we're doing on the technology side in intermodal that we think is going to differentiate ourselves as well.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [30]

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Yes. Well, I mean, again, across the board, I mean, we are -- lots of great things going on across the board with it, in terms of gate reservation systems, all kinds of things that the terminals are making it easier for customers to do business with us, whether it's on the website, lots of opportunities. But clearly, when we talk about converting a lot of business, merchandise is really where we see the greatest of opportunity. And driving that conversion from truck to our -- into our merchandise business, lots of opportunity there. We're seeing some great results. We're converting a lot of business as we speak. Because of our service that's improved so dramatically, our customers are responding to the reliability and the consistency that we're providing at a great price. And so I think there's a lot of opportunities left. But clearly, both on the intermodal side and on the merchandise side, there's opportunities for continued growth there.

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Operator [31]

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Your next question comes from Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [32]

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Wanted to ask about the guidance, and maybe specifically, can you help us sort of 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 because clearly, there's some company-specific initiatives on the intermodal side that are reducing volume. But just any help there to kind of think about that mix of what's yield and what's volume in the back half?

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James M. Foote, CSX Corporation - President, CEO & Director [33]

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Well, Chris, I mean, we're expecting that the volume in the second half is going to -- at this point in time, is probably -- we're going to have to work really hard to make the volume equal to or better than what we had in the first half and that's the challenge, as I said. Again, we came into the year expecting to be up 1% to 2%. The first quarter was, under the circumstances, with a lot of noise going on, it was still a pretty good quarter. But there's a lot of the segments, especially intermodal, just didn't bounce back with the way everybody expected it to be.

And so what we're saying right now is kind of take today as the run rate. And hopefully, we can do a little bit better than we did in the first half, even with a pretty strong quarter. But that's -- we don't have a big hockey stick anymore here anymore to work with. Relatively flat, we should get a tick up in the second -- in the fourth quarter of the year just simply because the intermodal starts over -- we start to get out of some of this de-marketing of certain lands. But on an absolute numbers basis, that's just pretty much a pretty good -- for planning purposes, for our guidance right now, and I'm pleased that I hope I'm proven wrong and we do see things turning stronger in the later part of the year, we're just assuming that this is kind of the new norm for guidance purposes.

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Kevin S. Boone, CSX Corporation - Interim CFO [34]

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Chris, with our first half of the year, revenue was up 2%. We're now guiding for the full year down 1% to 2%. We still expect pricing to remain positive, so I think the math is pretty simple there.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [35]

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Okay. That's helpful. I appreciate that. And then just on the pricing side, and maybe just thinking about yield in general, drilling down to the coal numbers. There's some puts and takes, and when export volumes move around a little bit, you tend to have fluctuation in the coal yields. When you think about the back half, should we be looking at 2Q as a reasonably good benchmark to use for the back half when we're modeling out, just trying to get a sense of is there other sort of movements between met and thermal that we should expect as we move into the back half of the year? It sounds like the guidance for 40 million tons still holds, just want to get a sense if there's any moving parts within that. Is 2Q a good number to use for coal yields?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [36]

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I think so. I think so, Chris. Listen, again, as you're looking at the RPUs in coal, as you know, in any given quarter, always lots of moving parts there. Q2, coal RPU was down, obviously, but that was really a reflection of some gains that we got in shorter haul business and in our utilities business to the north, which is generally lower RPU than the utility business to the south.

And then as I talked about in the earlier question, some of the steel industrial growth that we saw -- saw some strong volumes there, which is, again, some lower RPU than typically we see on the whole coal. But no, I think, going forward, sort of what you see is what you get for -- what you should probably think about as we -- as you plan out the back half of the year.

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Operator [37]

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Your next question comes from Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [38]

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Wanted to ask you first on the just kind of broader approach on price and volume. I'm confident you'll show discipline but how do we think about how you want to dial the -- how you want to approach the dial or the levers? Will you get more aggressive in terms of kind of competitive position to support the volumes as you see just less volume out there? Or is it something where you'll kind of let the volume flow with the market and you try to keep price that reflects what's good service and discipline and all that?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [39]

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So hey, Tom, we should be -- again, Jim mentioned what we're going to do on the volume side and we're going to take it as it comes and we're going to be -- we've got a long pipeline of initiatives, of things that I talked about in the past, whether it's on the marketing side, whether it's on the business that we do with our short line partners, whether it's stuff that we're doing on the regional sales, whether it's a whole host of industrial projects, industrial development projects that we've got going on. I mean clearly, a long list of initiatives that we're working on, and so we're going to convert that volume as it comes to us and we're working hard every day to bring more volume onto the railroad.

But let's be very clear, we're still achieving very strong value on the renewals and one of them I spoke about in Q1 on pricing, continued into Q2. Every contract that we have still needs to come across my desk for approval. And I can tell you that I'm extremely pleased with the discipline that our team is bringing. And so we're working hard to pull on both levers, and we're taking a disciplined approach.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [40]

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Okay. Yes, great. That's helpful, Mark. One other question, just how should we think about the operating ratio in an environment, not necessarily second half of the year, I know you've given us a kind of full year commentary, but perhaps if we look to 2020 and you say, well, you're in an environment where revenue is flat, do you have enough kind of initiatives left? I know Kevin identified some. But do you have enough efficiency gains left to improve the OR if revenue is flat? How might we think about that perhaps from a kind of a broader perspective or 2020 or however you want to frame it?

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James M. Foote, CSX Corporation - President, CEO & Director [41]

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Well, I think what we just said is we're going to improve the operating ratio more than 1 point when revenue is down. So we'll do our -- if we're faced with similar circumstances, that's the hand we're dealt, we'll do everything in our power to manage the business accordingly.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [42]

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And you think that could be the case beyond just second half?

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James M. Foote, CSX Corporation - President, CEO & Director [43]

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

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [44]

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Yes. Right. Right.

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James M. Foote, CSX Corporation - President, CEO & Director [45]

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Yes. There's a -- again, there's a certain amount -- obviously, there's a certain amount -- the 2 variables that we -- 2 variables that we obviously need to work with are volume and inflation on the operating side. And to the extent that we do get some cost reduction associated with volume, reductions or increases, if it goes the other way, our challenge each and every year is to offset whatever the inflection number is.

And hopefully, if we're providing a high-quality product, as Mark said, and we're pricing appropriately, that should help us a lot to get us going in the right direction from a cost -- which would help on the operating ratio side in addition to keep finding ways to improve efficiency.

We have a long ways to go and a long list of initiatives to work on. We're far -- in all of these various categories, we're far from best-in-class. We like to brag, but we benchmark against just about everything that everybody else does, not even -- not just in the railroad industry to try and figure out where we can improve. And we have a long ways to go in just about every segment of the way we do business.

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Operator [46]

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Your next question comes from Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [47]

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So last quarter, I think you talked about head count being down 6% to 7% this year, which would roughly be in line with attrition. Based on the volume weakness you've seen year-to-date and it sounds like you'll see in the second half, what's your flexibility to reduce head count further? And do you have any updated thoughts around what that percentage looks like in 2019?

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Kevin S. Boone, CSX Corporation - Interim CFO [48]

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Yes. We're still well on track to meet that forecast that we have, the 6% to 8%. I think I mentioned in my opening comments that really, overtime is a big focus of ours right now, it's significant cost and significant savings opportunity going forward. Certainly, we're going to continue to look at head count and -- but we're going to use attrition where we can. So we have a great line of sight to what that number looks like, and probably, we'll see if we get to go a little bit harder there, depending on how the volumes come in the back half of the year.

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Justin Trennon Long, Stephens Inc., Research Division - MD [49]

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Okay. And secondly, I wanted to circle back to domestic intermodal and your expectations for growth on that front. I know it's a little bit noisy with some of the lane rationalizations. But if you kind of take that out of the equation, what do you see is the underlying growth rate for domestic intermodal as we get into the back half of this year and longer term?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [50]

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Well, tell me what the economy is going to do in the back half of the year, I'll tell you what intermodal is going to do. Listen, I think there's a lot of -- as we talked about the excess supply that's out there, the truck supply capacity, we hopefully are flattish in intermodal. We think there's going to be a good peak, but it's probably going to be somewhat muted versus the extremely strong peak that we saw in 2018. So I think volume levels are going to pick up a little bit, but probably not as peak-ish as we saw, as we have historically seen.

Listen, longer-term domestic intermodal, my view is there's no reason why this franchise should not be able to grow on an annualized basis whatever GDP gives us plus 2 or 3 points.

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Justin Trennon Long, Stephens Inc., Research Division - MD [51]

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Okay. And just to clarify your comment on flat markets, is that flat domestic intermodal volumes, excluding rationalizations in the back half? Is that what you were saying?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [52]

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No, including our rationalizations. So again, we lap -- we're officially lap the end of the rationalizations in January of next year. We took off again in January of this year of '19 a 5%. So overall, since we began this journey in December of 2017, we've rationalized over 15% of the intermodal network. Most of that, a lot of that lapse in October and then the final bit lapse in December -- or in January, excuse me.

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Operator [53]

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Your next question comes from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [54]

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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?

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Kevin S. Boone, CSX Corporation - Interim CFO [55]

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Yes. I think you should expect about -- around the current levels that we did in the second quarter to continue through the back half of the year.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [56]

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Okay. Helpful. And then so with the more cautious sort of volume revenue outlook, does this change the way you guys think about target leverage ratios? Does it change the way you think about CapEx? I mean do you see some flexibility on the $1.6 billion?

And then I guess just following up on that head count piece, why not do more on head count if the volumes are coming in worse?

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Kevin S. Boone, CSX Corporation - Interim CFO [57]

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I certainly think if we continue to see downward pressure on volumes, which is not our expectation, that you'd 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 given the significant flexibility to be proactive and opportunistic as the market gives us an opportunity. We're well within our 2.5 to 2.75x 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, what we even have today and what we expect to generate through the back half of the year, it gives us a lot of opportunity to be opportunistic here.

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Operator [58]

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Your next question comes from Ben Hartford with Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Mark, I'm interested in your perspective on IMO 2020 and how customer conversations are shaping up in front of that. Do you expect it to have any sort of impact either in terms of international intermodal and pull-forward, anything along the crude or petroleum side of the equation? How are you guys thinking about that impact in the back half of the year and in the earlier part of 2020?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [60]

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Yes, great question. We're obviously working and talking to our customers. I'll be visiting with a lot of the international steamship guys here in the next month or so. We're -- I know that's going to be a huge topic of discussion.

We're -- clearly early indications, we don't think it will have a material change for our business. I know they're working on these issues as we speak. But where we stand right now, and again, maybe a little premature, maybe remind me to bring that question back up on the Q3 call and I'll give you maybe a little bit more color. But it's a topic of discussion coming up and -- but clearly, I think right now, we feel pretty comfortable that we're not going to see any material change.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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Okay. That's helpful. And then the revenue -- excuse me, the outlook you gave on intermodal is helpful. I'm curious on the merchandise side as well. I mean, obviously, I want to talk about the macro and the softness. But as you guys embark upon expanding the addressable market, what's the probability in 2020 that you can make enough progress, either selling service that are helping some of the sales and marketing efforts, to be able to drive to whatever a U.S industrial production growth number might be, plus some sort of multiplier within the merchandise category in 2020? Or is that simply too soon? Is it too near of a time horizon to be thinking about an offset yet from some of these initiatives?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [62]

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Well, it's a great question. Listen, again, as Jim said earlier, we're outperforming the U.S. rail industry today on our merchandise volume growth. We're up, after the second quarter, over 2%. The others are down for the year on merchandise. So clearly, the initiatives that we're working on, the changes to our service plan and the service that we're delivering are clearly having a lot of -- a big impact.

Now we're facing reality and the industrial economy is kind of slowing down here. And we've got a few headwinds going into the second half, which we have to live with. And obviously, the PES explosion was a major factor to us revising this. But as I said earlier, we have a number of initiatives going on and the team that Kevin used to lead in the marketing department before he became the interim CFO here is doing some great work analysis. Those are the -- we've got a team of data analytic people downstairs that are doing some great research and exposing a lot of opportunities for this organization. We're excited by that.

There's some -- obviously, some big opportunities and we're going after everything methodically, and we're looking to grow this organization. We're not just taking what we can get. We're going out there. We're being proactive. And this is about growing CSX. It's not just taking what the customer gives us. We're going to find opportunities to grow and convert truck traffic, and we're doing just that.

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Operator [63]

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Your next question comes from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [64]

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You made a few changes in the C suite in the second quarter. I'm not sure if Farrukh's on the call, but if he is, I was hoping he could help us understand the responsibilities of this new role of Chief Strategy Officer and anything about the long-term or midterm vision that might entail, realizing he's 6 weeks into the job here. And Kevin, anything if you'd want to highlight your priorities for the financial organization under your leadership, that would be helpful.

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James M. Foote, CSX Corporation - President, CEO & Director [65]

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Sure. I've known Farrukh for many, many years. We go way, way back, all the way back to the privatization of the Canadian National where we worked together on that initiative. At that time, and I've kept up with his career as I've moved around the industry as well. So I just felt that we're embarking on a significant transformation of CSX and a lot of things that we want to do differently, a lot of them in the area that Mark spoke of in terms of expanding on our reach and our interface with our customers. And Farrukh instantly came to mind because I felt that he had had great experience in working in that area.

So it's all about what it is we can do to make our service offering, our whole rail product offering better to our customers. And to me that involves a significant amount of new thought, new direction, new vision from what has historically been done in the railroad industry, and that's what Farrukh's going to work with me on and make it happen.

And Kevin, Kevin is phenomenal. He's doing a great job. We all appreciate that he was here and his skill set and his ability to step right in and pick up where Frank left off. Frank did an amazing job for CSX, and we're all happy that Kevin was here to help as we work through the transition. And we are -- I am in the process, as Kevin well knows. He's looking at me kind of sheepishly. As you all know, we're doing an external search to see if we can find the right person to fill this role. And as part of that process, Kevin is going to be considered.

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Operator [66]

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Your next question comes from Jordan Alliger with Goldman Sachs.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [67]

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Just a little pushing on the intermodal, the trip plan compliance looks really strong. And I'm just sort of wondering, the demarketing 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 or 2%, 2.5% as we move into 2020. Do you feel comfortable that at that point, you'll be able to start more aggressively remarketing the intermodal and do that GDP plus 2 to 3 points? Or is it premature?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [68]

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No, I said longer term, I think that would be our goal. Clearly, I'm not going to sit here in July of 2019 and provide you 2020 guidance. But longer term, as we think about the intermodal business, yes, that would be my hope and expectation given our franchise, the strength of our franchise and the service that we provide to the customers, which we're pretty proud of, that we would be able to do whatever the economy gives us plus 2 to 3 points above that.

So that's my wish. That's my goal. That's what we're going to work on. We're settling in on our footprint. We're doing really well on the lanes that we -- that we're in now. We're showing our customers what we're made of. And when the growth comes, we're ready to handle it and got excess capacity. And we're ready for the growth when it comes.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [69]

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Okay. And then sort of next question, fully understand the need to be prudent in the guidance with all the various cross currents going on. I think though you might have mentioned in the very opening remarks, Jim, that customers remain cautiously optimistic. So I'm just sort of wondering, which areas might be where that optimism is. And if their optimism plays out and you sort of run that through your system, could we get back to that 1% type of revenue growth if the cautious optimism plays out?

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James M. Foote, CSX Corporation - President, CEO & Director [70]

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Well, I think yesterday, Jamie at lunch had said they were pretty excited about the second half of the year. I think it was about 2 weeks ago on the front page of the newspaper, General Motors was talking about how great things were and on and on and on. Not necessarily our customers per se, but I think Jamie Dimon said it this morning, "Stop being so pessimistic, things aren't that bad."

All we're doing is saying that there's been -- as I said, this slow drip since the beginning of the year where everyone has expressed concern. I think all of our customers, Mark interfaces with them more than I do on a daily basis, and maybe he wants to comment as well, but I think all of them have said from the very beginning, yes, this -- 2019 is expected to be -- was expected to be a slower year than last year. And as we went into the year, with all of the confusion and chaos more driven by governmental issues than anything, but if we didn't -- as you know, with government shutdowns, you name it and on and on and on, tariffs this, tariff that, if we didn't bring its calmness and noise down in the marketplace, we could begin to do things to damage the economy. So -- and nothing really has changed to make everyone feel different over the first 6 months.

And so we're looking at it, is this the new norm for the rest of the year? And now we're talking about another government shutdown, maybe as early as September or October. And so as I said, unfortunately, in this day and age, I'm obligated, we're obligated to update guidance when it changed. And we were trying to figure out where to put the peg in. And so we said, let's pretty much take -- well, let's assume that what we have today continues for the rest of the year, and let's hope that we're wrong and that things pick up, as opposed to saying, well we don't really know, let's not take a realistic view. We can always -- we can always just take our guidance down again next quarter. And you don't want to get into that situation.

So we think this is a realistic look at the state of the economy and where we fit in. And we're confident with that. Plus, it gives us the ability internally to say, "Hey guys, this is the new norm. Let's tighten our shoes. Let's get to work." And we're going to achieve our targets.

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Operator [71]

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Your next question comes from David Vernon with Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [72]

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So the down 1 to 2 for the full year, I'm just trying to get a sense for what that should -- what we should be expecting for sort of operating income dollars, not necessarily the operating ratio. The Street's right now got you up 3 inclusive of land sales, up 6 ex land sales. What kind of EBIT growth on a down 1 -- on a down sort of 3 to 4-ish back half of the year should we be expecting?

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Kevin S. Boone, CSX Corporation - Interim CFO [73]

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David, as you know the math, if I give you the EBIT growth you would not know the OR. So by default, we're not giving you the OR ratio into the back half but we're probably on kind of...

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [74]

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Is it reasonable to expect up a little, down a little, flat? Can you give us some directional guidance on where the EBIT number will be?

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Kevin S. Boone, CSX Corporation - Interim CFO [75]

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Look, I think we gave the revenue guidance and we gave an OR target. And I think we're going to stick with that for now. We'll obviously update as we get further through the year.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [76]

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All right. And maybe just as a follow-up, if you look at the sequential downturn in other revenue, the -- was that just like changing the rules on when you're charging demurrage? Because the volume was sequentially flat in intermodal and that was what was called out in the report. I'm just trying to get a sense for what drove that sort of sequential move lower in the other revenue.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [77]

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Well, when your intermodal volumes are down 10%, there's a lot less boxes sitting in terminals and we're charging a lot less. And certainly, as we've told everybody before, accessorial charges are something that we're not looking to make a lot of money there. It's really changing customer behaviors and getting boxes to flow and assets to move throughout the network. And so some of that is working. And we're working with our customers and we're seeing some good dwell numbers. And so we're happy with where that's trending. It was -- but obviously, a lot of that was driven by just lower intermodal volumes.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [78]

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But the volume from 1 to 2Q were flat.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [79]

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Pardon me?

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [80]

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The 1 to 2Q, the sequential volume was kind of flattish and yet you went from like 168 to 124. I was trying to understand, did you see a really big pickup in the yard performance? Or was this just that you had built in adjacent...

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James M. Foote, CSX Corporation - President, CEO & Director [81]

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No, this is -- most of this is international intermodal, and this is where these guys are the guys that say they can't have offsite storage. They must store their box in our terminal. Well, guess what? When you start charging them, suddenly they find ways and they move their boxes to container storage facilities located near our intermodal terminals. That's just the nature of the beast. So yes, volume on the international side was -- overall volume was down in intermodal. Volume on the international side was relatively flat. But the customer behavior that Mark just alluded to, these are the first guys that take advantage of that and get them out of there.

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Operator [82]

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Your next question comes from Jason Seidl with Cowen.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [83]

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I just got -- I have one question. Looking out in intermodal, obviously you guys demarketed some of the business because there wasn't enough from some of the lines and the profitability just wasn't there. It's clearly important to raise the profitability of intermodal. How much of that is improving service? And how much of that is going to be you guys going after higher prices?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [84]

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Yes. A lot of the work that we're working on right now is changing the footprint and working on taking out all the unnecessary touches and switching that we used to do with intermodal that was crazy, changing this hub-and-spoke system that we inherited when we joined the railroad, which caused a lot of inefficiencies in the -- in our intermodal product and in our service and drove up our intermodal cost significantly. And so we have changed that model. We have gotten out of a lot of the lanes that were clearly very unprofitable for us. We're focusing on what we do well and the lanes that we do well.

In our contracts, we have longer-term contracts, so it's not -- we're not susceptible to the very sort of mid- to high single-digit exposure to the spot market. So it doesn't really affect us too much, but most of our pricing is under long-term contracts with rate escalators, so annual rate escalators so -- but we're working there. And we're doing a good job. And we're going to see the profitability of that business segment improve over time.

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Operator [85]

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Our next question comes from Walter Spracklin with RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [86]

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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?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [87]

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I think they are smart people. Jim and I know them really well. Obviously, I spent a lot of my career at that railroad, I admire what they're doing. We have a little bit of a different model here in the United States than up north. But we look at what they're doing and -- but I'm not going to share with you on the call today strategies for the future. But listen, we -- as Jim alluded to, we're looking for growth opportunities everywhere, whether that's in merchandise, whether that's in intermodal. And you never say never to any opportunity that comes across your desk.

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James M. Foote, CSX Corporation - President, CEO & Director [88]

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They're changing the key and looking at it, we're watching what they're doing.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [89]

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Yes.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [90]

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Fair enough. So maybe if I could sneak one in there as well, an extra one, R&D. Mark, again you mentioned it. Technology, I think the rail industry is right for it. Can we see or do you expect to see -- this is better for Jim perhaps, more of your CapEx dollars going toward potential investment in accelerating the R&D applicability to rail to get some of those extra efficiencies from that trend? Just curious your thoughts on that.

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Kevin S. Boone, CSX Corporation - Interim CFO [91]

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This is Kevin. First of all, tech dollars are up this year. So we are spending more on CapEx technology but I'll let Jim answer the rest of the question.

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James M. Foote, CSX Corporation - President, CEO & Director [92]

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Well, again, it's something we're always looking at ways to -- we're here to grow the business, simple as that. It's not -- despite what a lot of people say, but not you guys, a lot of people say, we're here to shrink the business to profitability. We're here to make the business run better so that we can grow it. And we'll look at every opportunity where we can make a buck and make -- in the process, make the shareholders rich and famous. And that's what it's all about. So we're always studying every opportunity that we can pursue.

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Operator [93]

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At this time, I'll turn the call back over to the speakers.

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Bill Slater, CSX Corporation - Head of IR [94]

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Thank you, everyone, for joining today. I think that concludes our call.

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Operator [95]

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This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your lines.