afternoon, ladies and gentlemen, and welcome to the CSX Corporation Second Quarter 2018 Earnings Call. As a reminder, today's call is being recorded. For opening remarks and introduction, I would like to turn the call over to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation.
Thank you, Amber, and good afternoon, everyone. With me on today's call is Jim Foote, Chief Executive Officer and Frank Lanaygrove, Chief Financial Officer. On Slide 2 is our forward looking disclosure, followed by our non GAAP disclosure on Slide 3. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote. Thank you, Kevin.
Well, it's great to be with you this afternoon. Thank you all for joining our call. In order to get started, I guess, the first way to kick it off is the press release that we put out says it all, record financial results. These results are due to the hard work of all CSX employees, who I can tell you, are really excited about what has been accomplished. We will all celebrate a little bit tonight, and then expect to work tomorrow to continue to drive change to fully realize the potential of this company.
Before I turn to the slides, let me comment on a couple of key initiatives. 1st, safety. We intend to be the safest railroad. In May, our new Chief Safety Officer, Jim Switchenberg, joined the company. Switchen comes to us with 20 years of railroad experience, including almost 10 years with the FRA.
I'm confident that he can bring new approaches that will drive improvement in our safety performance. Also in May, we engaged DECRA, a highly regarded expert in helping companies improve their safety performance. A comprehensive safety assessment is underway, and I expect positive changes to materialize as a result. The entire organization is committed to being the best in safety. 2nd, we recently announced the appointment of Mark Wallace as Executive Vice President, Sales and Marketing.
I've known Mark for a long time, and his ability to lead, combined with more than 20 years of scheduled railroading experience, will allow our sales and marketing team to work more effectively with our customers and drive profitable growth. Deanna's store fleet will take over most of Mark's former portfolio assuming increased responsibility as Executive Vice President and Chief Administrative Officer. Diana in her role as CSX's Chief Human Resources Officer, has built a big has been a big part of our transformation by driving a more productive and engaged workforce. Renew responsibilities, which will now include technology and labor relations, provide a significant opportunity to drive a more focused organization. Now to get to the slide, let's turn to Slide 5 and start with our results.
Two words, I think, sum up everything. Great performance. Just like the Q1, there's nothing unusual in these numbers. They're very straightforward. EPS increased 58% to $1.01 versus last year's adjusted EPS of $0.64 The new lower tax rate and lower share count down 6% contributed to the significant year over year increase.
Our operating ratio improved 4.90 basis points to a record 58.6 compared to last year's adjusted OR of 63.5, clearly the lowest ever for CSX and I believe the lowest ever by a U. S. Railroad. The significant year over year improvement in our results was driven by 6% top line growth combined with price and lower costs pretty much across the board with the exception of fuel. Revenue increased 6% as price, fuel surcharge, supplemental revenues and a 2% increase in volume all contributed to positive growth this quarter.
Similar to recent trends, we did see slight improvement in pricing this quarter, excluding coal. Quick look at the on the next slide on the business segments, each were which were positively impacted by higher fuel and price. In Chemicals, strength in industrial products, plastics and crude by rail was partially offset by our fly ash losses, which we discussed last quarter. Auto saw strength is based on North American U. S.
Light truck production, which was up 5%. In forest products, lumber, panels, wallboard and paper products all increased in the quarter. In metals, shipments of sheet steel and construction related steel products drove increases. Fertilizers revenues, as I have mentioned previously, were mainly lower due to the Plant City facility closure last year. And in the coal markets, export coal remained very good during the quarter and showed healthy gains.
Utility coal continued to weaken. On the intermodal side of the business, growth continued to come from the international markets with domestic relatively flat on a year over year basis because of the line rationalizations that we went through in the fall of 2017. Other revenue declined $58,000,000 declined due to a $58,000,000 liquidated damages, which was in last year's results, which did not repeat this year. Excluding that item, we saw gains in supplemental revenue, including demurrage. We continue to work with customers to create a more fluid network, especially as we approach the fall peak season.
On Slide 7, let's take a quick look at some of the key operating metrics that this team is focused on. Train velocity increased year over year and on a sequential basis. Terminal dwell saw an 11% year over year and 7% sequential improvement. While we drove improved velocity in dwell, train length increased on both a year over year basis 13% and sequentially 5%. Let me tell you, improving all three of these metrics at the same time is no easy task.
Finally, car miles per day showed low double digit improvement on both a year over year and sequential basis. This is a good measure of asset efficiency and our ability to effectively turn our assets. The improvements we saw in these metrics clearly translated into our financial results. Now let me hand it off to Frank, who will go through the financials in more detail as well as the benefits of these operating improvements.
Thank you, Jim, and good afternoon, everyone. Turning to Slide 9, I'll walk you through the summary income statement. Reported revenue was up 6% in the 2nd quarter, driven by 2% more volume, higher fuel recoveries and solid core pricing gains across all major markets. Same store sales pricing, which reflects year over year increases for stable traffic, improved sequentially in the second quarter. Pricing for merchandise and intermodal contracts that renewed in the quarter was strong, exceeding same store sales pricing
growth.
Other revenue was down year over year, though the benefit of higher demurrage and storage charges mostly offset the cycling of $58,000,000 in liquidated damages from the prior year. Note that we now expect other revenue to remain in the $130,000,000 to $140,000,000 per quarter range for the remainder of the year. Moving to expenses. Total operating expenses were 8% lower in the 2nd quarter or 2% lower after normalizing for last year's restructuring charge. Overall, labor and fringe savings of $82,000,000 or 11% year over year were driven by an 11% reduction in average headcount.
This smaller labor footprint spans both the operating and G and A departments. On the operating side, year over year improvements of 7% in velocity and 13% in train length drove more efficient use of our train crews and rolling stock. Even with 2% volume growth, train and engine employee road starts were down 9%, while yard and local starts also fell 9%. And the level of recruits, a signal of network fluidity, dropped by 15%. Shifting to mechanical.
The active locomotive count was down 13%, reflecting our ability to keep over 600 locomotives in storage despite higher volumes. The smaller fleet, along freight car repair efficiencies, helped drive an 18% decrease in our mechanical craft workforce. We recently aligned the engineering function to the regional structure we have for mechanical and transportation, which will also yield headcount and other efficiencies moving forward. Our G and A headcount continues to decline as we look for every opportunity to absorb attrition. Over the past year, we have eliminated unnecessary layers of management, dealing a structure that is cost effective and enables rapid communication and decision making across our network.
MS and O expense was down 5% against the prior year. As you look at the year over year comparisons in MS and O, recall that we are cycling a $55,000,000 gain from a favorable legal judgment in the Q2 of 2017. This year, results benefited from $37,000,000 of real estate gains as we continue to make headway in monetizing our surplus real estate portfolio. These gains are consistent with our guidance to achieve $300,000,000 of cumulative real estate sales through 2020. From an operational perspective, many of the key drivers of labor expense favorability also yielded savings in MS and O in the quarter as lower asset and resource levels helped drive down MS and O expense.
Material savings attributed to the smaller locomotive fleet are complemented by our decision to store units that are less reliable. The decisions we've made around storage, combined with additional fleet reliability efforts, drove a 33% year over year improvement in our locomotive out of service measure and further reduced costs related to materials and contracted services. Looking at non labor costs associated with our training crews, the reduction in road crew starts, combined with better network fluidity, yielded lower hotel and taxi costs. Additionally, MS and O continues to benefit from our efforts to streamline contractors and consultants, particularly in our technology department. Consistent with our prior guidance, we remain on track to reduce our total workforce by 2,000 resources by the end of 2018.
Looking at the other expense items. Depreciation increased slightly as the benefit of asset sales mostly offset the impact of capital investments. Fuel expense was up primarily due to a 36% increase in the per gallon price, but we were pleased to achieve record fuel efficiency in the quarter. We will continue to drive further fuel savings through continued improvement in network fluidity, train length increases and the use of fuel optimization technologies. Higher equipment rents expense is mainly attributed to volume growth.
These volume related increases were partially offset by improving car cycle times across most markets. Equity earnings were favorable due to improved performance at our Affiliates in addition to a nonrecurring benefit from an Affiliates property sale in the quarter. Given the recent strong performance, we now expect core equity earnings of Affiliates of $20,000,000 to $25,000,000 in Q3 and Q4. Lastly, just as a reminder, we are cycling 20 seventeen's restructuring charges. Looking below the line, interest expense increased primarily due to the additional debt we issued earlier this year, partially offset by a lower weighted average coupon rate.
Tax expense was lower year over year even with higher pretax earnings given the benefits of the new lower corporate tax rate. Our effective tax rate was 23.3% in the quarter, slightly lower than our prior guidance, mainly due to a onetime benefit from state legislative changes. Going forward, absent onetime events, we expect our effective rate to be around 24.5% for the back half of the year. Closing out the P and L, as Jim highlighted in his opening remarks, CSX delivered record operating income of nearly $1,300,000,000 a record operating ratio of 58.6%. Turning to the cash side of the equation on Slide 10.
Year to date capital investments are lower by 14% and keep us on track for our 3 year $4,800,000,000 capital target. The reduced capital intensity of the scheduled railroading model, the substantial core earnings progress detailed on the prior slide and the benefits of tax reform helped drive a nearly $600,000,000 increase in year to date adjusted free cash flow. Significant improvements in free cash flow generation, combined with higher leverage, enabled us to nearly double our shareholder returns compared to the first half of twenty seventeen. We have now completed approximately $2,000,000,000 of the current $5,000,000,000 buyback authority and remain on pace to complete the program by the end of Q1 2019. As we stated at our investor conference, CSX will continue to evaluate cash deployment and shareholder returns on an annual basis.
In closing, I will reiterate the 3 key priorities that drive this management team on a daily basis: ensuring the safety of our employees and communities, delivering great service for our customers and appropriately rewarding our shareholders. With that, let me turn it back to Jim for his closing remarks.
Great. Thanks a lot, Frank. Turning to the last Slide, number 12. While we've achieved a lot in a very short period of time, we are far from where I believe we can go. As many of you know, we just rolled out our trip plan compliance a few months ago.
We're in the early stages of driving improvement in this metric, and there is significant opportunity there to get better. Trip plans are so important as we think about delivering even better customer service and asset efficiency. It allows us to track every car and container on our network and identify at a very discrete level where we may have a problem. This allows us to know why something happened so we can react and more importantly, fix any problem so it does not repeat. I mentioned velocity and dwell earlier.
Clearly, to be the best, we have more room to improve. Our train speeds specifically, we have significant opportunity to improve as we remain below the industry leaders. Our dwell is better than the industry average, but again, there is significant runway for opportunity before we can call ourselves the best. Cars online continue to be a focus of this team. We are in the business of moving cars, and the more efficient we get, the less cars we need to move with the same to move the same volume.
But turning towards faster, it also frees up capacity for us to take on additional business. Finally, fuel efficiency. Diesel prices are up, so this becomes even more important. There are many ways to drive improvement in this area. Fuel alone this quarter was 2 $70,000,000 in costs.
So we are in the $1,000,000,000 run rate range for the full year. These are big dollars. From trip optimizer to distributed power, we will use all of these to drive improvement and lower cost. Now on revenue. We are raising our full year guidance from up slightly to up mid single digits.
At some investor conferences, I said we were trending to be a little better than where we thought we would be at that time of the year. This slightly higher outlook is a reflection of a number of factors, including our belief that export coal strength will continue, higher fuel prices will remain and a healthy economic backdrop. Obviously, there are factors we cannot control, mainly the economy. That can provide some variability as we get into the back half and fourth quarter specifically. But this is how we see it today.
In closing, we have shown a relentless focus on executing our business model. But let me assure you, we have an eye on the horizon to develop long term sustainable growth. Our business practices are new to CSX employees, but are becoming part of our DNA as we work hard every day with the goal of becoming the best run railroad in North America. Thank you, and I'll turn it back to Kevin. All right.
Thank you, Jim. In the interest of everyone's time today, I would ask that everybody limit themselves to one question and one short follow-up if needed. Operator, we'll take our take your questions.
Thank
you. Our first question comes from Amit Mehrotra. Your line is open.
Hey, thanks a lot. Congrats on the great results. Jim, the OR obviously in the second quarter is below the target that you set for 2020. Fully understand the nuances of seasonality and the risks around the macro. But would it be fair to characterize the 2020 target as conservative based on what the teams achieved so far?
And if so, what do you feel maybe is the structural limits of where you can take that OR over that time period? Thanks.
Well, over the time period is what we laid out just 3 months ago when I stood up there and said we had a target of 60 in 3 years, and I think everybody in that room kind of thought it was crazy that we'd never be able to get there. So and it's only we're only 2 quarters in. So we're not clearly not changing our guidance here and what we think is achievable. And as I said, we have a lot, a lot of work to do. And we got a lot of help this quarter from coal.
So if things continue to align, I continue to say I have confidence that we can hit a number 60, which everybody, I think, is thinks is extremely, extremely impressive. So there's no change in this short period of time from what we laid out just a quarter ago.
Right. Okay. And just kind of related to that as my follow-up. Your comments at the end there with respect to where you are in implementing PSR and just a lot more room to go in terms of low hanging fruit on the cost side in particular, I would imagine. Can you just talk about where PSR is not represented in the network today?
I guess some of the new initiatives that you're taking on specifically on the intermodal franchise in terms of implementing scheduled railroading that strategy on that particular business. If you can talk about some of the places where it's not represented in the opportunity there more concretely in terms of reductions in dwell time or things
like that, that would be great.
One answer, intermodal. Our intermodal network needs a ton of work in order to become to be efficient part of our system that it needs to be. And we are just really beginning to get in there and start to figure out how to rationalize that big part of our business so we can become much more efficient and have a much better product for our customers.
And is that should we be watching Origin 12 time yields in that business? I mean how should we monitor looking outside in terms of your progress there?
I mean all of our yes, it will be reflected in all of our metrics. Again, our terminal dwells are pretty good. But we have a network franchise here that to a large degree is dysfunctional. And it is the product of, for many, many, many, many years, CSX having a standalone intermodal entity. So we need to kind of go forward and reconfigure the franchise and make sure that it is properly and appropriately integrated into I've talked, we have a very, very early stages, a lot of work, So as I've talked, we have a very, very early stages, a lot of work to do in that area and in every other area.
As I said, yes, we had some great results, and we did that. We're not the we don't have the highest velocity. We don't have the lowest dwells. So we have a lot of opportunity ahead of us to get even better.
Yes. It makes it seem
just that 6UR is so conservative. But I will those are my 2, so I'll leave it there. Congrats again. Appreciate it.
Our next question comes from Ken Hoexter with Merrill Lynch. Your line is open.
Hey, great. Good afternoon. And again, congrats. That's a phenomenal job on the operating ratio so quickly. But Jim, I guess on the on time originations and arrivals, both are down year over year, but you noted the calculation has changed in the details, but the results were restated to conform.
Why are they down given the network improvement how everything's accelerated on the network?
We're pretty comfortable. Obviously, we'd like to be better on the originations. We deploy our trains pretty close to on schedule. We don't give them across the network as effectively as we should. We depart if you give ourselves, which we don't, but if you did from accounting standpoint, give yourself a couple of hours of flexibility on either end.
We depart in the high 90% are trains to schedule, and we get to destination again with that 2 hour cushion over a 3 day operating period in the 80% range. That's unacceptable. And a lot that always comes up with for a number of different reasons. And so we need to just continue to be able to work to eliminate the causes of failures. And that's why our trip plan compliance is in the kind of 60% range.
We need to get that up to 100%. And when the trains fail to arrive on time, they miss their connections. And therefore, we're off the trip plan. So all of those things need to improve. And a lot of it has to do with culture, where people recognize that there's going to be a failure, and they go above and beyond the call of duty to make sure that we get the box to make the connection on the next train.
As I said many times, what does a UPS employee do when he sees that a box is not going to get in the truck? He runs behind the truck down the road and makes sure that he gets the box on the truck. Our guys are going to wait to the train, see you later, and the car runs a later. So it's culture, and it's all kinds of changes that we need to take place in order to get better.
Wonderful. And if I can get the follow-up on pricing. Frank, you mentioned that pricing accelerated on a pure pricing basis. Are there levels you can talk to, especially given how tight the truck market is? Can you be any more specific in terms of are you seeing it growing at going 100 basis, 200 basis points up on a sequential or year over year basis from where you were?
Yes.
Ken, I think you probably know the answer to that question. I think what we're trying to help you understand is the environment is a strong environment and that's why we're seeing the contract renewals come in higher than the same store sales pricing. I think the last public number we have out there is in the Q3 of 2017 at 2.2% for merchandise and intermodal. What we can say is that we have seen sequential improvement every quarter since then than in same store sales and that the discretionary renewals in Q1 were better than that and the discretionary renewals in Q2 were better than that.
Wonderful. Thanks for the time and great job.
Our next question comes from Brandon Oglenski with Barclays Capital. Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions. I don't know if Mark is on the call, but I guess for Jim or Mark, it seems the improvement here is coming maybe a bit faster as the first two questions kind of alluded to. I mean, does this in any way change your philosophy on the revenue outlook? I think at the Analyst Day, you were saying, look, maybe we'll get a little bit of growth in 2018, but obviously, you're seeing a bit more now.
So is that because of the changes you made in the network? Is the market that much stronger? And now with the lower cost base, does that change the dynamic on focusing between price and volume at all?
As I said at the Investor Day and as I said, basically, ever since I've been here, number 1, I don't differentiate in the implementation of scheduled railroading that you ignore your customer and don't focus on growing the top line as you implement your operational changes. You do that at the same time. So and we have been working to improve the quality of our service and work with our customers to grow our business throughout the last 6 months. And with, I would say, pretty favorable results and responses from our customers, They went from when I showed up here to hating me now on occasion buying me a drink. So we've made great improvements in our customer relationships.
And so but I don't see a differentiation here. I also don't look at this as, oh, you're a price leader or a price taker. We're focused on volume, we're focused on price. We're focused on growing our business with long term sustainable profitable business that people recognize that we have differentiated ourselves in the marketplace. We have a better product to sell to our customers, and our customers recognize that by working with us and paying us more because we're a better quality product, they can save money in their business.
That's our strategy. That's our strategy to grow the business, and that has been our strategy since day 1 and will continue into the future.
Appreciate it, Jim.
And next we'll go to Tom Wadewitz with UBS. Your line is open.
Yes. Good afternoon and great results. I'm sure everybody is going to refer to that, but they're obviously very impressive. Let's see, what do you think about OR in second half? I mean, you're sub-sixty percent in second quarter probably implies numbers ought to go up in second half.
Is it pretty reasonable to think you'd be sub-sixty percent in second half as well? Or is there anything in terms of maybe incentive comp? Is it tailwind? There would be a headwind or anything else we ought to consider when we think about second half OR relative to the really strong results in Q2?
Sure, Tom. From a seasonality standpoint, the Q2 for CSX is always the best. So one would assume that, that's going to always be the best this year, too. Going forward into the second half of the year, number 1, the way we account for our vacations, we have a disproportionate a disproportionate amount of labor expense associated with vacations in the second half of the year. We have a 3% wage increase around 3% wage increase in the second half of the year.
So those are headwinds that we have planned for and have expected all along. And then the most reliable variable is the weather here in the Q4, which is a new phenomenon for EMEA Mark where you've got a hurricane in Florida and the Gulf, while you're worrying about freezing rain in Atlanta, snow in Chicago and along Lake Erie. So we always seem to have weather that makes it more difficult for us to operate in the Q3 and 4th I mean, it's Q4. So those are the kind of things that we look at and say it is totally rational and what we believe to be the case that our expenses in the 3rd Q4 will be higher than the second. I can tell you that they'll be lower than they were last year.
How about that?
Okay. Sure. That's fair. I appreciate the color on that. Let me ask you also, you made a comment on the intermodal network.
It seems to imply you might simplify it further. I don't know if that's accurate or not. But how do you think about the potential changes to get the intermodal network right? Is that simplifying the flow, fewer touches? And what might be the timing for that?
Is that something that you can do pretty quickly? Or is that something you need to kind of plan and execute over multiple quarters and maybe you see that result in 2019?
I think as I said earlier, Tom, we're just starting to really peel this back and understand what changes we need to make. Obviously, last year, I mean, it was well talked about when Hunter closed that, changed the philosophy and got rid of the hub and spoke. There was about 7% of the volume that was taken off the revenue taken off the railroad. And at that point in time, it was my belief that a large part of that rationalization of Intermodal has been accomplished. Well, that's not the case.
So but we're going to take it very methodically. We are going to have very good and open communication with our customers about what it is we're trying to accomplish. And it involves train design changes. It involves terminals and terminal potential terminal consolidations. And we will do this very methodically and logically and appropriately and do it being fully aware of the fact that we are looking at a peak season this year, which everybody is indicating us is going to be very strong.
So we're not going to do anything that's going to screw up the railroad. So if it takes a little longer than a quarter or 2, I'm fine with that.
Okay, great. Thanks for the time. Appreciate it.
Our next question comes from Chris Wetherbee of Citigroup. Your line is open.
Hey, thanks for good afternoon. Thanks for taking the question. Wanted to touch
a little bit on sort
of the revenue and volume outlooks. You're taking the revenue numbers up. I think some of that is driven by what you're saying on the other line. But how
do you think about the
sort of volume outlook and maybe sort of queuing up the competitive environment? You brought the OR down arguably a lot faster than most of us had expected. Does that open up new opportunities? Do you see some of that in the second half? How you kind of think about those opportunities going forward?
I believe that the operating ratio is a reflection of the efficiency of our service, which in my mind means that we continually improve the product that we offer to our customers. We are not working diligently to drive down the operating ratio so that we can be the price leader in the marketplace. So I think as I said last time, we don't get stickers and bonus points for volume. And therefore, to the extent that we can sell our product as a superior product in the marketplace, we fully intend to do that. Clearly, we have as much flexibility as we want to if there are unique opportunities in the marketplace where a customer to us is not interested in quality of service but is only interested in price.
And it makes sense for us to be being the low cost provider to pursue that business. We can do that, too. So we have all the flexibility in the world to pursue whatever business segments we want. Our principal objective here is to be a better run network that has a differentiated service product in the marketplace that demands a higher price for that, then we can grow business at the extent of truck, which we already know the customer is paying 15% to 20% more ore. So why discount your better quality product when you know you can go save the customer money by having a service that's more truck like.
Okay. I guess it sounds like there might be opportunity there on the volume side. That's helpful. And then getting a little bit more specific, when you think about export coal, as we look out into the back half of the year, I know this is a tough commodity to predict. But I think you've given us some help in the past and you know what you expect.
Any changes to sort of that high 30,000,000 ton number that we've talked about for 2018 as we look out into the second half?
Yes. On the second half, I mean, clearly, one of the reasons that we have talked now about higher volumes is because export coal has been better in the first half of the year and appears that it will be better in the second half slightly better in the second half of the year than what we originally expected. Frank, maybe you have further comment on that.
Yes. So we were at about 22,000,000 tons in the first half. If the framework holds, as Jim mentioned in his opening remarks, and we see the indices hold at 201100 or higher on the MET and the thermal index, you could see that same run rate prevail in the second half. So early to mid-40s would be probably a decent range for you.
Great. That's helpful. Thanks very much for your time. I appreciate it.
And next we'll go to Scott Group of Wolfe Research. Your line is open.
Hey, thanks. Good afternoon, guys. So wanted to follow-up on intermodal and what you've been talking about. Jim, maybe give us some perspective. Where is this OR relative to the rest of the business?
Are we 1,000 basis points behind, maybe 2,000 basis points behind? If you can maybe directionally give us some color there. And once you've got it all optimized the way you want to, how close do you think intermodal margins can be to the rest of the business?
Well, as I think I tried to portray, we have a lot of areas in intermodal where we can make improvements. And we don't ascribe the various business segments in great detail in terms of what's more profitable than the other. Even around this business, well, I don't know which ones are. I could tell you when we did this when I did this at CN then we got involved and did the same thing at CN. We fixed up merchandise business and then we went over started it and then we went over and started fixing the intermodal.
And intermodal at CN was a basket case. When we were done fixing it over a couple of year period, the average profitability of our intermodal business there was better than the corporate average. So we have we got a ton of work to do, and I couldn't be happier that Mark is here to do it. So and we'll just keep updating you. But it's going to be small, it's going to be gradual, and it's going to be a good process that works for our customers as well.
Okay.
That makes sense. And then just real quick, some number questions. The raise in the other revenue guidance, is that because customers are not changing behavior or are you rolling it out to more customers? And then do you have any way to $70,000,000 of real estate in the first half, any way to put a range on what you think is realistic for second half?
Hey, Scott. On other revenue, I'd say it's two things. 1, the behavioral changes that we're looking for, obviously, through the increases in the rates and the reduction of 3 days. It just isn't happening as quickly as maybe we thought it was 3 months ago, it was going to 3 months ago. So that's, I think, the answer on that.
When we did roll out some policies effective July 1. So that then bleeds into the run rate there. On the real estate side, yes, you're right. We had about 70,000,000 dollars in the first half. So we had a good first quarter, a good second quarter.
You all probably saw a line sale that was announced with OmniTrax a couple of weeks ago. That combined with some smaller transactions that we may close in the Q3, I'd say we'll have a good 3rd quarter, not unlike what we saw in Q1 and Q2.
Helpful, guys. Thank you.
And we will go to Brian Ossenbeck of JPMorgan. Your line is open.
Hey, good afternoon. Thanks for taking my question.
So I wanted to talk about the domestic coal side for just a bit. Obviously, the volumes are challenged. This quarter, the main challenge for the first half of the year. Are you seeing anything from structural competition from new gas fired power plants, gas pipelines going further down south, especially into Florida? And do you still have the confidence that there's going to be no material retirements of coal fired plants this year or through the next couple of years through 2020?
Brian, Frank. I think the utility story has largely stayed the same. Net gas is 2.75 ish, which isn't all that helpful to the environment, though stockpiles in the South have come down pretty significantly. The cooling degree days are up year over year. We're just not seeing the burn rates go up in cold quite yet, but a lengthy hot summer and a cold winter would certainly help those.
In terms of your structural competition, again, we don't know of any plant closures that are going to impact us significantly in the next couple of years that are new. Clearly, we have a couple that are going to roll off. We knew about those. We've adjusted our outlooks for those, but nothing new.
Okay. If you could give us a quick update on the lease and license, I guess, the wires and pipes, the other ancillary revenues, are those things that you're starting to be able to monetize it? Or is that something that will start to pick up in the back half or twenty nineteen?
Brian, both. We had an ongoing business of licenses and leases that utilize or cross over the quarter. Mark and his team have been increasing those over time, and we'll continue to deliver and are on track to deliver the $300,000,000 guidance that we gave you at the Investor Conference over 3
years. Our
next question comes from Matt Russell of Goldman Sachs.
Thanks for taking my question. You're obviously ahead of schedule on the network improvement and that's boosted the 2018 revenue outlook. Does that also raise the potential for revenue in 2019 2020? And I guess the real question is, does your 4% revenue CAGR target increase beyond the 2018 bump that you're guiding to now?
I would say at this point in time, no, for the two principal reasons that I talked about. 1 is one of the most significant reasons that we're looking at higher have looked at higher volume and revenue in the first half of the year was export coal. And one of the principal reasons we're talking about being more optimistic for the second half is because of export coal. And I don't know at this point in time if anybody could tell you what the future is beyond December 31 'eighteen, what export coal is going to do. It's a little premature for us to start saying that, that's going on.
And at the second time, I'm at because we are in the early stages of this network reconfiguration in intermodal, I don't know what implications that might have on revenue growth in intermodal at this time. So I just have to stick with, hey, here's what we where we are today, what we think the rest of this year looks like in terms of being mid single digits. And for now, we're in the same mode looking at 'nineteen and 'twenty about where we were 3 months ago. It was 3 years ago, but
it was only 3 months ago.
No, that makes a lot of sense. And second question, just still early days on trade and tariffs. But can you talk about high level where you see your business sensitive? Are you hearing or seeing anything with from your customers in terms of talking about adjustments relative to the tariffs? Any color on that is helpful.
Well, again, there's so much noise swirling around about tariffs. In terms of the specific impacts on CSX today from any kind of tariff activity, clearly, first, was steel. And from a steel standpoint, both finished steel out and or business in, we have seen some positive as a result of the U. S. Steel manufacturers kicking up production.
The second area where there have been some real activities involve export soybeans. Our export grain business in total is around $30,000,000 About onethree of that is soybean. And so in the grand scheme of things in terms of soybeans going to China, it's really not a factor at all for us. And then the 3rd area, which again has not had any real activity, but again, a lot of noise about it, is both NAFTA and Europe in terms of tariffs on imported autos. We are not impacted in terms of imported autos from Mexico.
We would clearly watch carefully if anything were to be put on imported vehicles from Canada, but nothing has happened there yet. And in terms of European imports coming in through the East Coast ports, normally they don't touch rail anyway. So not much of an impact at all right now. And our customers continue despite the fact, again, that there's much discussion that this could lead to an economic downturn, our customers seem to be continue to be very optimistic about the future.
Thank you. Very, very helpful. Thank you.
Our next question comes from Allison Landry of Credit Suisse. Your line is open.
Good afternoon. Thanks. Maybe that was a good segue into my somewhat pessimistic question. But how are you thinking about CSX's ability to turn what have historically been fixed costs into variable costs in a downturn? And is the network at a point where if volumes dried up tomorrow, you'd still be able to generate significant OR improvement?
Well, that is pessimistic. It's such a happy occasion for us here, but I'll try to deal with that. And it's not something that Frank and I don't talk about on a regular basis here. And having myself been through it a couple of times when all of a sudden, yes, your volumes just go away. And again, because of all the speculation just in the media about tariffs and trade wars and what could that.
So we're always doing recession scenarios here about what if this and what if that. Clearly, as we get better and as we get a better handle on our operations, we will be able to more quickly respond and make appropriate adjustments to our variable costs in the event of volume decline. And you always had the wherewithal at your fingertips to reduce your fixed cost to a degree, meaning fixed labor. It's just how much you need to do in order to do that. Depending upon what kind of economic decline scenario you came up with, I guess my thoughts are if we again, assuming a severe decline, if we were able to maintain our plan and at least our status quo, we would be able to we'd be doing a very good job.
If it's a minor thing, then it's probably a minor thing, and we continue to stick with the program and see what we could do to make our numbers.
Okay. That was helpful. And then as my follow-up, if you think about the disparity between your service metrics and your competitor and within the context of your earlier comments about pricing for a better service product. Do you expect to pull the growth lever perhaps earlier than what we saw at CP and or CN?
Again, we never pushed the growth lever the other direction. We're always in the growth mode. It was and again, through a lot of this, I wasn't a part of it here, but many of the people that worked here at Frank were, it was tough to grow when your railroad wasn't running in product that cars that should have been across your network in 3 to 4 days were taking 3 to 4 weeks. So that's difficult to say I'm in a growth mode at that period of time. Once the service has improved and where the service is today, we are always looking to get business from more business from current customers, business back from the former customers, all of that.
And but it is again, it is our philosophy that we want to be the premium service provider in the marketplace and get paid for it.
Okay, great. Thank you so much. Our next question comes from David Vernon of Sanford Bernstein. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question. Jim or Frank, could you help us you mentioned earlier in the call that coal would help you out a little bit here in the quarter. Is there any way you can help us to mention how much coal has contributed to the year over year sort of profit development of the company in the first half of this year. What I'm just wondering is how much of the very, very aggressive improvement in operating income due to chalk up to kind of PSR versus how much of it would you chalk up to help from the commodity markets?
Obviously, it's helped from a lot of different areas. Precision railroading is clearly 1. When you look at the levels of efficiency that you're seeing, the headcount reductions that you're seeing, the asset reductions that you're seeing, I mean, those producers build dollars and significant dollars. If you look at the point that Jim made around export coal, just to dimensionalize it, we moved a little over 11,000,000 tons in the Q2 of this year. And last year, we moved a little over 8,000,000 tons.
So you can get a feel for the uptick in export coal. At the same time, we saw some reduction in utility coal. So you got to net those two things out. They're both good pieces of business for us. We want to move them both.
But there's a whole lot more that's happening in our company other than coal.
I totally agree with that. And but I guess I was just wondering if there may be an indication you can give us for directionally how much export coal rates have moved up on a year over year basis in relation to domestic coal
rates? We generally follow the indices. We don't follow them 1 for 1. So when you see them you see the forward curves move up, generally speaking, our pricing is going to follow that, again, not 1 for 1. The highs on the benchmarks are going to be higher than our price and the lows on the benchmark are going to be lower than our price.
But we generally are going to follow those. When you look at it on an RPU basis, you can get a feel for what the export RPU is and what the domestic RPU is. There are times when the export is higher. There are times when the domestic is higher, but it's really going to depend on what those external benchmarks are. But again, there's a lot more happening here, and I don't want you to lose sight of that by focusing on coal.
Yes. And absolutely not losing sight on it. I'm just trying to get you
to tell us what happened to
the export coal RPU, which
we're not going to get to.
So maybe
just You're not going to get that from me and I'm going to get that from Frank.
Well, we can always get it from the guys at Parker host. But let me ask you a quick follow-up question, Frank. When you think about the gains you had in MS and L from idling some of the spare locomotives, is there a chunk of that that maybe snaps back as you start to run a little bit hotter and leaner? Or is it all just pure kind of run you should run rate these levels on the cost side going forward?
Well, remember, you got real estate in that line item. So be sure to hold out run rating real estate on a perfect basis. I'll try to give you some intel on Q3. But when you look at what we're doing, the smaller locomotive fleets clearly a driver. You've got contractor and consultant eliminations, which are rolling through that line.
You've got, as I mentioned in my opening remarks, less hotel and taxi costs. You've got G and A, fewer people, obviously, spend less money on the MS and O line. So as long as you're seeing those things stay the same, excluding the real estate piece, I think you can run rate those.
All
right. Thanks a lot for taking the questions.
You bet.
Our next question comes from Justin Long of Stephens. Your line is open.
Thanks and congrats on the quarter. I wanted to start and ask about headcount. Do you have any updated thoughts on where headcount will end this year? Just curious if your expectations have changed. And based on how the network has performed during the first half of twenty eighteen and what seems to be a better than expected start as it relates to volumes, is there any change to the expectation for headcount that you're targeting in 2020 as well?
No. In terms of this year, we're right on again, we're slightly ahead of where we the run rate to get to the 2,000 reduction. But that was planned for, as I said earlier, because of vacations and other purposes that we would have an accelerated pace in the first half of the year. So we're right on target to hit the number for this year, and nothing has changed in terms of the number for the 3 year plan.
Okay. That's helpful. And maybe to circle back on the increased revenue guidance for 2018 as well. Is there a way to help us think about how you would allocate this increase between, 1, a better outlook for export coal and 2, a better outlook for everything else? I'm just curious if that split is 75%, 25% or how you would quantify that?
Without getting into the specific volume details by the various commodity groups, I'm trying to come up with a more simplistic way to answer that. I think if you look at our coal business in the second quarter, And I think that's a relatively good run rate. Again, we had a great we just got to tell you, we had a great second quarter with strong export demand and weak utility demand. That's kind of a norm for us for this year, but we expect that kind of run rate to continue in the second half of the year. So that will give you some guidance in terms of volume from coal.
And the rest of it is going to come primarily from merchandise, which is, again, across the board. All of these various commodities that I talked about, metals, forest products, blah, blah, blah, blah, were all relatively strong in the Q2. That's just reflection of good markets and customers recognizing that we've got a good service product. And so that's kind of the I would say that, that will give you a better run rate view of what we think the top line is going to do. And then as both Frank and I mentioned, you layer in continued reasonable pricing environment, continued recognition of supplemental revenues from the demerge policies that we are now policies that were in existence for many, many years that now we're collecting on.
And then thirdly, a little bit more fuel surcharge because price on fuel is going to get up. And I think the second quarter will give you a pretty good understanding of why we think that the second half of the year is going to be a little bit better than what we originally expected. 2nd
quarter was
a little bit better than we expected, kind of started talking about that early in the quarter when I said we're going to be a titch better. And then now we came in with a 6% growth. And so if things stay the way they are right now, I think that leads us down the road of giving you a pretty good way to get to a general view of how you get to mid single digit top line growth for the year.
Okay, great. That's helpful. Appreciate the time.
And our next question comes from Walter Spracklin of RBC Capital. Your line is open.
Thanks very much. Good afternoon, everyone. I want to come back, Jim, to your answer to a previous question with regards to exactly that your the trends you've been noting in the back half of the year have picked up. And I think what you said in the last just now is that it wasn't all just due to coal. There was other factors due to better pricing and better volume in other areas.
I'm just curious as to why that wouldn't change your view into 2019. Why would it all stop as of December 31? Wouldn't there be a carryover in the first half of next year, even if conditions remain that will lap easier comps that will give you a bit of better lift into next year. Just curious as to why you wouldn't expect it to continue more than just 6 months.
For the two reasons I said. 1, I don't have a clue what coal is going to be like in 'nineteen and 'twenty. And I don't know what the implications are to our intermodal franchise by some of the work we have to do there. So those the uncertainties surrounding those 2 big components of my business give me pause to say that, Oh, this is the new norm for 'nineteen and 'twenty. I need to get a little bit further down the road this year to have a better, more of a clearer view of the year after.
Okay. And just on the pricing environment, can you talk to us a bit about kind of the cadence in the negotiations you have now versus 1 month ago versus 3 months ago versus 6 months ago, particularly where trucking comes into play on your intermodal franchise or where you come head to head with your competitor. Are you finding that is there any capacity constraints that are allowing for the movement of price to come in a little bit not easy, but easier than it might have 1, 3 or 6 months ago?
Well, 6 months ago, we had our hand in our hand telling everybody, I'm sorry, we were for net run at a very good railroad. So the environment for us right now compared to where we were at the end of last year is dramatically different. In terms of the pricing environment and the capacity environment, it's a good time to be in the aero business. It's a good time to be in the transportation business. Price, it's no secret that the pricing environment is strong for everybody.
As I said and again but as I said earlier, we are in this to grow the top line through long term sustainable profitable growth. I don't play in the spot market. I'm not worried about volume. I'm not worried about highway for rail awards, that kind of stuff. Long term sustainable profitable growth where we provide value to our customers and our channel partners and everybody in the marketplace is our strategy.
And that is what's going to make CSX the best.
If I could sneak one last one here in terms of when you sit down with Mark now in his new role, what do you guys talk about as your kind of objective number 1? I think you alluded, is it the Intermodal franchise? Or is there something else that you want to kind of 0 in on as his number one objective as he starts the role?
Mark here is Mark's one of Mark's strengths and one of the reasons I'm so excited about Mark taking over the job besides the fact that he's a really bright guy. He's got great relationship skills. And we need to develop long term solid relationships, again, with our customers. There's been a lot of turnover here as senior management in this company. We hear this all the time.
We don't know who to call. We don't know who you guys are. You got a whole new team there. What am I supposed to do? Who do I call if something goes wrong?
So number 1, fix the intermodal. But 2, start to build back the long term relationships that CSX should have. And I'm totally confident that Mark's going to do an exceptional Not to say that the guy that runs our merchandise group, Michael Watford and his team are doing a phenomenal job in that area. But again, I know Mark, and I've been around it for a long time. And I think that's where he can do some great work for us.
Okay. Thank you very much.
And next we'll go to Ravi Shanker with Morgan Stanley. Your line is open.
Thanks. Ravi, I want to a couple of follow ups here. Just on the intermodal and your comments on the tons of work you still need there and eventually getting that up to an above average margin profile. Can you just help us understand how much of that is fairly basic blocking and tackling that can be achieved pretty easily versus maybe bigger longer term initiatives like yard automation or something?
This is blocking and tackling. This is just running a good railroad. I'd like to be in a position where we were running so well that we could start to look at ways to adopt new technologies to help us run things better. We're a long ways from that. This is just basic core fixing a bunch of broken windows.
Got it. Understood. And Ayn, just a follow-up on I'm When you think of autos in the end market, is that primarily in your autos volumes? Or do you also have smaller auto components or something running through it to model?
We have auto parts. We have auto parts in our intermodal. Especially imported parts, and we have auto parts in boxcars and merchandise service, racks, frames, etcetera. But the primary volumes are in finished vehicles that are moving in tri levels and bilevels.
Got it. Is there any way to quantify your overall orders exposure in terms of volumes kind of combined across segments?
We could not off the top of my head. But if you get there with Kevin, we can see if we can try to come up with some way for you to some percentage. For every vehicle, how much moves in kind of a general percentage? For every finished vehicle, how much what's the percentage of a car kind of a thing. We might be able to come up with something to give you guidance on that.
Wonderful. Follow-up. Thank you.
Sure.
Our next question comes from Benjamin Hartford of Robert W. Baird. Your line is open.
Thanks. Jim, what are in the context of intermodal and the work that needs to be done there, as you think about the back half of twenty eighteen and through twenty nineteen, whatever the plan may end up being in terms of volume growth, what do you think the box count needs within UMAX specifically are going to be to support growth? Will it grow in line with volumes or is there enough opportunity as you work through that network and improve velocity that perhaps that fleet size does not need to grow to be able to satisfy volume growth targets? Yes. Under the current scenario, I don't anticipate us making any investment in boxes for
Nick. Our next question comes from Bascome Majors of Susquehanna International. Your line is open.
Yes. Thanks for taking my question. Frank, years ago in the prior regime, you guys used to make some directional comments around the profitability of different commodity groups. I know putting hard numbers to that was declined earlier on this call. But I am curious with the overall profitability of the franchise moving up 12, 13 points in less than 2 years here.
Has the directional
sort of
contribution of the various revenue groups that you do? Has that changed dramatically? I'm just curious if we're kind of in any game as to versus the historic playbook of what's the best business for you and what's not?
So, Bascome, the riding tide lifts almost clearly in a good pricing environment and a good efficiency environment, you're going to expand your margins. When we look at the rack and stack of profitability, I could show you intermodal moves that are at the top and I could show you cold moves that are more toward the bottom and merchandise runs the spectrum. So we've got a good portfolio of business. Obviously, when you see a 58.6 operating ratio across, that portfolio must be pretty good, and we're going to continue to optimize it and drive that long term profitable growth with JimNexus.
And this question comes from Cherilyn Radbourne of TD Securities. Your line is open.
Thanks very much and good afternoon. Just wondering if you could speak to some of the mix dynamics in the quarter. RTMs up 7% versus 2%, Carload growth would suggest a pretty big shift. So maybe you can just give us some color there.
Ton miles up 7. Frank?
Yes. So I think what you're seeing is when we did some of the network changes last year as we closed terminals, etcetera, we probably introduced some outer route miles and we're now pulling those down pretty significantly. Ed and his team are working on that. I think you'll see that continue to come down and that disparity that you mentioned, I think we'll get a lot closer as we go forward.
Okay. And then maybe just a quick follow-up on the whole intermodal discussions. As you continue to reposition that network, do you continue to be able to leverage the benefits of a hot trucking market from a volume and a pricing standpoint?
It's a good time to be in the railroad business, and it's even better time to be in the railroad intermodal business. So yes, just take a look at it. As I said earlier, we took 7% of our business off the network last year and we're flat today. So people are looking for capacity. We want to be able to provide that service and capacity to our customers.
We just want to make sure that we have a rational footprint of an intermodal network when we are going into the marketplace and selling a product to our customers. And that's just going to take us some time to straighten that out. And then we are going to be back there doing whatever we can to help out the again, our channel partners principally who work with us to who want to use intermodal to reduce their costs as well as the growth that's coming with some of our other partners as their volumes grow enormously e commerce. So this is a good time for us to be here. We just need to make sure we fix it, and that's what we're embarking upon doing.
And look at what we've done already with the company in terms of making improvements, And this is just one more area where we're going to take all of our efforts and initiatives and tap into the brainpower of guys like Wallace and Harris and make Intermodal a huge franchise. Great. Yes. Amber, I think that wraps up the queue. And I would like thank everybody for joining the call, and I'm available for calls afterwards.
Thanks. Thank you very much.
This concludes today's conference. Thank you for your participation in today's call. You may disconnect your lines.