Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation’s Second Quarter 2018 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] 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. Today -- with me on today's call is Jim Foote, Chief Executive Officer; and Frank Lonegro, 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 it's back to work tomorrow and 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. First, safety. We intend to be the safest railroad. In May, our new Chief Safety Officer, Jim Schwichtenberg joined the company. Schwich 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 an improvement in our safety performance. Also in May, we engaged DEKRA, 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. Second, we recently announced the appointment of Mark Wallace as Executive Vice President, Sales and Marketing. I have 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. Diana Sorfleet will take over most of Mark’s former portfolio, assuming increased responsibility as Executive Vice President and Chief Administrative Officer. Diana in her role at CSX’s Chief Human…

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 second 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 merchandising and intermodal contracts that renewed in the second quarter was strong, exceeding same store sales pricing growth. Other revenue was down year-over-year. Now, the benefit of higher demurrage and storage charges mostly offset the cycling of $58 million in liquidated damages from the prior year. Note that we now expect other revenue to remain in the $130 million to $140 million per quarter range for the remainder of the year. Moving to expenses, total operating expenses were 8% lower in the second quarter or 2% lower after normalizing for last year's restructuring charge. Overall, labor and fringe savings of 82 million or 11% year-over-year were driven by an 11% reduction in average headcount. This smaller labor footprint spans both the operating and G&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 with great car repair efficiencies helped drive an 18% decrease in our mechanical craft workforce. We recently aligned the engineering function to the…

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 problems so it does not repeat. I mentioned velocity and dwell earlier. Clearly, to be the best, we have more room to improve. Our train speed 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 on line continue to be a focus of this team. We’re 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 cars 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. [indiscernible] this quarter was $270 million in cost. So we're in the $1 billion run rate range for the full year. These are big dollars. For 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 in 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 will take questions.

[Operator Instructions] Our first question comes from Amit Mehrotra.

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. I fully understand the nuances of seasonality and the risk around the macro. But would it be fair to characterize the 2020 target as conservative based on what the team has achieved so far? And if so, what do you feel maybe is a structural limit of where you can take that OR over that time period? Thanks.

Well, over the time period, what we laid out just three months ago when I stood up there and said, we had a target of 60 in three 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 two 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 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 schedule railroading, that strategy on that particular business. If you can talk about some of the places where it's not represented and 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 the efficient part of our system that it needs to be and we're 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 does that -- should we be watching origin dwell time yields in that business? I mean, how should we monitor looking outside in terms of your progress there?

I mean, all of our – yeah, 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 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 the rail company, so we can achieve the benefits of operating more effectively and efficiently. So we are at very, very early stages, a lot of work to do in that area and every other area, as I said. Yeah. We had some great results and we did that. 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 EBITDA.

Yeah. Makes it seem just [indiscernible] so conservative. But I will – those are my two. So I will leave it there. Congrats again. I appreciate it.

Our next question comes from Ken Hoexter with Merrill Lynch.

Hey, great. Good afternoon and again congrats. It'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 and how everything's accelerated on the network?

We're pretty comfortable. Obviously, we'd like to be better on the originations. We depart our trains pretty close to on schedule. We don't get them across the network as effectively as we should. We depart, if we give ourselves, which we don't, but if you did from an accounting standpoint, give yourself a couple of hours of flexibility on either end, we depart 90% our trains to schedule and we get to destinations again with that two hour cushion over a three day operating period in the 80% range. That’s unacceptable. You know what, 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 that makes 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 for the train, see you later and the car runs a day later. So, it's culture and it's all kinds of changes that we need to take place in order to get better.

Wonderful. Thank you. 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, it, going 100 basis -- 200 basis points up on a sequential year-over-year basis from where you were.

Yeah. 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 coming 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 merchandising intermodal. What we can say is that we have seen sequential improvement every quarter since then in same store sales and the discretionary renewals in Q1 were better than that and the discretionary renewals in Q2 were better than that.

Our next question comes from Brandon Oglenski with Barclays Capital.

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 seeing, look, maybe, we'll get a little bit of growth in ’18, but obviously you're seeing a bit more now. Does that -- because of the changes you made in the network, is the market that much stronger and now with a 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 one, 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 six 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 to now on occasion even buying me a drink. So we 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 one and will continue into the future.

And next, we'll go to Tom Wadewitz of UBS.

Yeah. 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-60 in second quarter, it probably implies numbers ought to go up in the second half. Is it pretty reasonable to think sub 60 in second half as well or is there anything in terms of maybe no incentive comp, is it a tailwind, that 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 second quarter?

Sure, Tom. From a seasonality standpoint, the second quarter 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 one, the way we account for our vacations, we have 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 fourth quarter, which is a new phenomenon for me and Mark, where you've got a hurricane in Florida and the Gulf, while you're worrying about freezing rain in Atlanta and 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 third quarter and fourth, I mean it’s fourth quarter. 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 third and fourth quarter will be higher than the second. I can tell you that they will be lower than they were last year, how about that?

Sure. That's fair. I appreciate the color on that. Let me ask you also, you made a comment on the intermodal network. 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. [indiscernible] changed the philosophy and got rid of the hub and spoke, that 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 railroads. So if it takes a little longer, then a quarter or two, I’m fine with that.

Our next question comes from Chris Wetherbee of Citigroup.

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 seeing 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. Did that open up new opportunities? Do you see some of that in the second half? How do 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, 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 and we can grow business at the extent of truck, which we already know the customer is paying 15% to 20% more for, 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 an opportunity there on the volume side, that's helpful. And then getting a little bit more specifically, you think about export coal as you look out into the back half of the year, I know this is the tough commodity to predict, but you’ve given us some help in the past and you don’t expect any changes to sort of that high 30 million ton number that we’ve talked about for 2018 as we look out into the second half?

Yeah. On the second half, I mean, clearly, one of the reasons that we have talked now about higher volume 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 some further comment on that.

Yes. So we were at about 22 million tons in the first half. If the framework holds as Jim mentioned in his opening remarks and we see the indices hold at 200 and 100 or higher on the met and the thermal index, you can see that same run rate prevail in the second half. So early to mid-40s would be probably a decent range for it.

And next, we’ll go to Scott Group of Wolfe Research.

So wanted to follow up on the 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 1000 basis points behind, maybe 2000 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 describe the various business segments in great detail in terms of what's more profitable than the other, even around this business moving up, which ones are. I can tell you when we did this, when I did this at CN, and we got involved and did the same thing at GM, we fixed the merchandise business and then we went over and started it and then we went over and started fixing the intermodal. And intermodal at GM 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’ve 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 slow, it’s going to be gradual and it's going to be a good process that works for our customers as well.

And then just real quick, some number questions. The raise in the other revenue guidance, is that because customers are not changing behavior or you're rolling it out to more customers and then do you have any way to – 70 million 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. One, the behavioral changes that we're looking for obviously through the increases in the rates of the reduction of free days, it just isn't happening as quickly as maybe we thought it was three months ago, it was going two, three months ago. So that's, I think, the answer on that, we did roll out some additional policies effective July 1, so that then bleeds into the run rate there. On the real estate side, yeah, you're right, we had about 70 million 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 third quarter, I’d say will have a good third quarter, not unlike what we saw in Q1 and Q2.

And we will go to Brian Ossenbeck of JPMorgan.

So wanted to talk about the domestic coal side for just a bit. I would say, the volumes or challenges remain a 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 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.

Hey, Brian, it’s Frank. I think the utility story has largely stayed the same. Nat gas is 275-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 coal quite yet, but a lengthy autumn and a cold winter will 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.

Could you 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 2019? Thank you.

Brian, both. We’ve 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 will continue to deliver and are on track to deliver the $300 million guidance that we gave you at the Investor Conference over three years.

Our next question comes from Matt Reustle of Goldman Sachs.

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 ’19 and ’20 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 reason that I talked about. One 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 that anybody could tell you what the future is beyond December 31 of ’18, what export coal is going to do. So it's a little premature for us to start saying that that's going on. And at the second time, I am 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’ll 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 ’19 and ’20, about where we were three months ago. Three years ago, but it was only three months ago.

And the 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 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 US steel manufacturers kicking up production. The second area where there have been some real activities involved export soybeans. Our export grain business in total is around 30 million bucks. About a third of that is soybeans. 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 third 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 is much discussion that this could lead to an economic downturn, our customers seem to be -- continue to be very optimistic about the future.

Our next question comes from Allison Landry of Credit Suisse.

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. And it’s such a big 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. Having myself been through with a couple of times, but all of a sudden, yeah, 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 declines. And you obviously have the wherewithal at your fingertips to reduce your fixed costs 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 they're at least the status quo, we would be able to be -- we would be doing a very good job. If it's a minor thing, then it’s probably a minor thing and continue to stick with the program and see what we could do to make our numbers.

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 CPE and OCN?

Again, we never push the growth lever the other direction. We are always in the growth mode. It was – and again to a lot of this, I wasn't present here, but many people that work here, Frank were, it was tough to grow when your railroad wasn’t running in product and cars that should have been across your network in three to four days, we're taking three to four weeks. So that's difficult to say I'm in a growth mode at that period of time. Once the service is improved and where the service is today, we're 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.

Our next question comes from David Vernon of Sanford Bernstein.

Jim or Frank, could you help us -- you mentioned earlier in the call that coal helped 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 in 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 railroad is clearly one. When you look at the levels of efficiencies that you're seeing, the headcount reductions that you're seeing, the asset reductions that you're seeing, 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 million tons in the second quarter of this year. And last year, moved a little over 8 million tons. So you can get a feel for the uptick in export coal. At the same time, we saw some reduction in utility coals. 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 was maybe 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 on one for one. So when you see them, you see the forward curves move up. Generally speaking, our pricing is going to follow that -- again that one to one. 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 our view basis, you can get a feel for what the export RPU is and what the domestic RPU is. There are times when the exports are higher. There are times when the domestics are 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.

Yeah. Absolutely not I’m losing sight on, I'm just trying to get you to tell us what happened to the export coal RPU? We’re not going to do. So maybe –

You’re going to get that for me and I’m going to get that for Frank.

Let me ask a quick follow-up question, Frank. When you think about the gains you had at MS&O 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.

Remember, you got real data in that line item. So be careful not run rating real estate on that basis. I’ll try to give you some detail on Q3. But when you look at what we're doing, the smaller locomotive fleet is 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&A. Fewer people obviously spend less money on the MS&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.

Our next question comes from Justin Long of Stephens.

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 2018 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, again, we're slightly ahead of where we -- the run rate to get to the 2000 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 year 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 three year plan.

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 one, a better outlook for export coal and two, a better outlook for everything out? 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 and -- but we expect that kind of run rate to continue in the second half of the year. So I’ll now 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 metal, forest products, blah, blah, blah, were all relatively strong in the second quarter. That's just a reflection of good markets and customers recognizing that we've got a good service product. And so that's kind of, 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’d layer in continued reasonable pricing environment, continued recognition of supplemental revenues from the demurrage policies that we are now -- policies that were in existence for many, many years, but now, we're collecting on. And then thirdly, a little bit more fuel surcharge because for instance, 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. Second quarter was a little bit better than we expected, kind of started talking about that earlier in the quarter when I said we're going to be a touch better and then now, we came in with 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.

And our next question comes from Walter Spracklin of RBC Capital.

I want to come back, Jim, to your answer to a previous question with regards to exactly that 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 commissions remain that will lap easier comps that would 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 six months.

For the two reasons, I said. One, I don't have a clue what coal is going to be like in ’19 and ‘20. 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 two big components of my business give me pause to say that out of the new norm for ’19 and ’20, I need to get a little bit further down the road this year to have a better -- more -- 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 one month ago, versus three months ago, versus six 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 one, three or six months ago?

Well, six months ago, we had our – and telling everybody how sorry we were for not running 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 railroad business. It's a good time to be in transportation business, 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 stock market. I'm not worried about volume. I’m not worried about timing to 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 one, I think you alluded to is it the Intermodal franchise or is there something else that you want to kind of zero in on as his number one objective as he starts the role?

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 with our customers. There has been a lot of turnover here at the senior management of 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 to hold the team there, what am I supposed to do, who do I call if something goes wrong. So number one, fix intermodal, but two, start build back the long-term relationship that CSX should have and I’m totally confident that Mark's going to do an exceptional job in that area. Not to say that the guy that runs our merchandise group, Michael Rutherford and his team are doing a phenomenal job in that area. But again, I know Mark and I’ve been around for a long time and I think that's where he can do some great work for us.

And next, we’ll go to Ravi Shanker, Morgan Stanley.

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 will run it so well that we could start to look at ways to adopt new technologies to help us run things better. We’re long ways from that. This is just basic core – fixed, bunch of broken windows.

And just a follow up, when you think of auto as an end market, is that primarily in your autos volumes or do you also have smaller auto components or something running through intermodal?

We have auto parts. We have auto parts in our intermodal. Basically, imported parts. And we have auto parts in large cars and merchandise service. Racks, frames, et cetera. But the primary volumes are in finished vehicles that are moving in tri levels and bi levels.

Is there any way to quantify your overall auto’s exposure in terms of volumes kind of combined across segments?

We could -- not off the top of my head, but if you give dates 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 kind of a general percentage. For every finished vehicle, what the percentage of a car kind of a thing, we might be able to come up with something that gives you guidance on that.

Our next question comes from Benjamin Hartford of Robert W. Baird.

Real quick, 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 ’18 and through ’19, 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.

Yeah. Under the current scenario, I don’t anticipate us making any investment in boxes for UMAX.

Our next question comes from Bascome Majors of Susquehanna International.

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 two 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 a new game as to versus the historic playbook of what's the best business for you and what's not?

So Bascome, a rising tide lifts all boats clearly. In a good pricing environment and a good efficiency environment, you're going to expand your margins. When we look at the profitability, I could show you intermodal moves that are at the top, and I could show you coal moves that are more towards the bottom and merchandise runs at the same 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 that Jim mentioned.

And next question comes from Cherilyn Radbourne of TD Securities.

Just wondering if you could speak to some of the mixed dynamics in the quarter. RTM is up 7% versus 2%, carload growth would suggest a pretty big shift. So maybe you could just give us some color there.

Ton miles up 7. Frank?

Yeah. So I think what you're seeing is, when we did some of the network changes last year, as we closed terminals, et cetera, we probably introduced some auto rack 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 will get a lot closer as we go forward.

Okay. And then maybe just a quick follow-up on the whole intermodal discussion. 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?

A good time to be in the railroad business and it’s even a 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 sometime 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, 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 with the growth of 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.

Amber, I think that wraps up the queue. And I would like to thank everybody for joining the call and I'm available for callers 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.