Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2022 CSX Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. Matthew Korn, Head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to our second quarter call. Joining me on today's call are Jim Foote, our President and Chief Executive Officer; Kevin Boone, our Executive Vice President, Sales and Marketing; Jamie Boychuk, Executive Vice President of Operations; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In our presentation, you will find our forward-looking disclosure on slide two, followed by our non-GAAP disclosures. And with that, it will be my pleasure to introduce our President and Chief Executive Officer, Jim Foote.

Thank you, Matthew and thank you, everyone, for joining us today. I'll start by expressing my thanks to all CSX's employees for their hard work during another quarter of tough operating conditions. And I am very pleased to welcome everyone from Pan Am who joined the CSX team in June. We look forward to working together to build new single-line service across our combined network. Our second quarter results were solid as we continue to benefit from strong customer demand and firm pricing. But our ability to hire and retain new workers, which is vital to improving our service and growing the business, remains challenged. We are not alone in facing this problem. The labor market is tight, prospective recruits have many job options and the pandemic has had a profound effect on employees' work and lifestyle preferences. Our truck hiring process has been steady, but slow. We will not let up in our efforts to grow our engineer and conductor headcount and improve network fluidity to pre-pandemic levels. Since the time of our last earnings call, our uncertainty and volatility have clearly increased in the financial markets and in parts of the economy. Inflationary pressures have moved higher and interest rates have risen. We're staying diligent by keeping in close touch with our customers, monitoring our order rates, and constantly updating our forecasts. But what remains constant is that right now, as we have seen this entire year, there is more demand for rail service than what we are able to satisfy. The efforts we are making now to grow our workforce and add capacity to our network are not just a status by current demand. We are investing because we see plentiful long-term opportunities for rail, driven by customer demand for more fuel-efficient, environmentally friendly transportation options, and growth in domestic manufacturing. We're excited about our potential, but to realize it, we must focus on near-term execution. Our entire team is aligned in our goals and I look forward to keeping you updated in our progress in the quarters ahead. Turning to our presentation. Let's start with Slide 4, which highlights our second quarter key financial results. We moved nearly 1.6 million carloads in the quarter and generated over $3.8 billion in revenue. Operating income was $1.7 billion, which includes a $122 million gain from our Virginia real estates sale. Recall that in the second quarter of 2021, we recognized a much larger $349 million gain from this transaction. Earnings per share increased 4% to $0.54 a share, which also includes a smaller contribution from the Virginia sale compared to a year ago. And our operating ratio was 55.4%, which includes a 320 basis point tailwind from the Virginia real estate gain but also includes combined headwinds of roughly 450 basis points from the impact of quality carriers, higher fuel prices and Pan Am acquisition costs. I'll now turn it over to Kevin, Jamie and Sean for details.

Thank you, Jim. Turning to Slide 5. Second quarter revenue increased 28% year-over-year with revenue growth across merchandise, coal and intermodal. Overall volumes were flat, where we saw strong demand across many of our markets, limited by resource constraints across the supply chain. Merchandise revenue increased 10% on flat volume, driven by price and higher fuel surcharge revenue. Looking at some of the highlights. We are encouraged by strength in automotive market, where revenues rose 24% on a 10% increase in volume. There are clear signs from auto manufacturers that semiconductor challenges are easing. Our minerals business benefited from improved shipments of aggregates in salt. Our ag and food segment saw growth from ethanol and export drains. Less favorable was our fertilizer business, where volumes and revenues declined year-over-year on reduced phosphate shipments. Volatile fertilizer prices, combined with some production issues, impacted volumes in the quarter. Forest products along with metals and equipment saw positive revenue growth, offset by modest declines in volumes, mainly driven by resource constraints. Intermodal revenue increased 18% on 1% higher volume as growth in the international business was partially offset by lower domestic shipments, driven by continued equipment challenges through the quarter. Intermodal demand remains strong and customers continue to recognize our industry-leading service product in a challenged market. Coal revenue increased 54% on 3% lower volume. As we have discussed, coal demand remains strong across our domestic and international markets. Volumes have been constrained by production issues at the mine, infrastructure constraints at the port, including Curtis Bay and general man power shortages, including crews. We still expect volumes to improve through the year as some of these constraints moderate. Other revenue increased primarily due to higher intermodal storage and equipment usage. Although macro uncertainty is clearly elevated as we enter into the second half, we still see positive drivers favoring rail, including environmental benefits as customers prioritize ESG, lack of truck capacity with driver shortages, onshoring of industrial production and inflation that will all benefit our growth opportunities. Currently, we are still seeing demand in many markets limited by the global shortage of labor. We believe this will continue to benefit rail's value proposition and the opportunity to increase mobile share over time. Going forward, we remain committed to making the investments needed to serve our customers and helping them grow their business. Let me now turn it over to Jamie to discuss operations.

Thanks, Kevin. Safety remains our top priority at CSX, and operating safely is a critical foundation to achieving any of our operating goals. We work hard to instill a culture of safety across our railroad, and this begins with the moment that our employees enter our training facility. We focus not only on teaching employees the right way to work, but creating an environment that facilitates ongoing coaching and education our safety protocols. This is particularly important for the almost 700 new T&E employees that have completed training year-to-date. The coaching does not end with the training program. We have created new programs to significantly increase touch points with managers to ensure new employees are protecting both themselves and their fellow railroads. These efforts have helped drive another strong quarter of safety results. In the second quarter, injury rate increased modestly from the near record levels in the first quarter but remained flat year-over-year. Train accidents ticked up slightly in the prior quarter, but continued their positive trend as we focused on minimizing human factor accidents through proactive employee communications. Turning to slide 7. We remain committed to delivering strong service and we are taking action to improve network performance. We are seeing signs of this improved performance in our local service measures. This is our second consecutive quarter of improved results, and our best since exiting the pandemic downturn in 2020. We continue to actively coordinate with customers to further improve these metrics and are encouraged that we are seeing some of the largest improvement in some of the areas that were most challenged entering the year. Our intermodal trip plan performance remained strong and crossed back above the 90% threshold this quarter. Looking forward, we continue to focus on keeping terminals open and fluid during the ongoing supply…

Thank you, Jamie, and good afternoon. In the face of these challenging labor market conditions as well as ongoing supply chain issues, CSX delivered over $800 million in revenue growth with gains across all major markets. Expenses were also up over $800 million and as a result, reported operating income increased 1%. However, as I will explain in more detail on the next slide, costs were heavily impacted by lower real estate gains, the addition of Quality Carriers, and transaction costs and higher fuel. Interest expense was $10 million favorable to the prior year, while other income improved $6 million. The effective tax rate for the quarter was 24.4%. Turning to the next slide. Total costs increased $813 million. Nearly $500 million of the higher expense was due to the inclusion of Quality Carriers, lower gains on property dispositions, and Pan Am acquisition costs. Real estate gains were driven by the Virginia transaction, with a $122 million impact this quarter versus $349 million in the prior year. This represents our last significant gain from Virginia and we expect to receive the remaining $125 million of cash proceeds in the fourth quarter. Higher fuel prices were also a significant factor with fuel expense up over $200 million, excluding the Quality impact. Not surprisingly, inflation is running above historical levels. And the $56 million on this slide represents inflation across labor, purchased services, and rents. All other expenses increased by $50 million, with approximately $20 million higher depreciation, about $10 million lower incentive compensation expense, and nearly $40 million of higher operating costs. This $40 million reflects increased hiring and retention, the impact of a larger active locomotive fleet, intermodal terminal costs from supply chain disruptions, and slower car cycle times. As service levels normalize in the coming quarters, we would expect the opportunity set on the expense side to come first from these operating categories. Now, turning to cash flow on slide 11. On a year-to-date basis, free cash flow before dividends is down by approximately $125 million, but up about $75 million when adjusting for proceeds from the Virginia transaction in the prior year. Capital spending is up nearly $6 0 million and for the full year, we still expect to invest approximately $2 billion in our network. This ensures safety and reliability with roughly 8 0% of these investments going to the core infrastructure and a growing amount being allocated to strategic and return-based projects. After fully funding capital demands, year-to-date shareholder returns have exceeded $2.9 billion, including over $2.5 billion in buybacks and over $400 million in dividends. This brings our cash and short-term investment balance down to a more normalized $800 million. And as we go forward, we will remain both balanced and opportunistic in our commitment to return excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.

Great. Thanks, Sean. Let's conclude on Slide 12 with our outlook for the year. Having benefited from high export coal prices over the first half of the year and with fuel prices still elevated, we continue to expect double-digit revenue and operating income growth for the full year. As I mentioned in my opening remarks, our customer demand for rail freight remains greater than what we're currently able to supply. Export coal benchmarks have moderated over the last couple of months, but our guidance had already anticipated a correction over the second half of the year. Consistent with our commentary all year, we believe that increasing our train and engine employee headcount is the key factor necessary for improved service and network performance and our hiring efforts will continue. Our aim is still to reach an active transportation headcount of 7,000 as soon as possible. As Sean said, full year capital expenditures are planned at approximately $2 billion, which is also unchanged, as is our commitment to return excess capital to our shareholders. As we stressed last quarter, we are moving forward, but real progress takes time and is often challenging and gradual. There is plenty left to do, but the whole CSX family is committed to delivering on our goals, supporting our customers and growing this company. Thank you. And I'll turn it back to Matthew.

Thank you, Jim. Now as we start Q&A, in the interest of time, I’d ask that everyone, please limit yourselves to one and just one question. And with that, operator, we will now take questions.

[Operator Instructions] Your first question comes from Scott Group with Wolfe Research. Your line is open.

Hey, thanks. Good afternoon, guys. So if I look, headcount's down sequentially, excluding Pan Am. And you guys were the first rail to talk about ramping up hiring, but perhaps maybe struggling the most. Curious, why do you think that is? And then maybe just separately for Kevin, any thoughts on just guidance on other revenue and coal RPU in the third quarter? Thank you.

Well, hi, Scott, I'll take the first part of your question about the hiring. And yes. I don't know if we're struggling more than everybody else or not, I think everybody is struggling. We've hired over the last two years since we started talking about this issue, which we saw coming again a couple of years ago, 2,000 employees and our numbers haven't gone backwards. So the question has been not really as much as our ability to -- with employees into the pipeline and get them through the process, but a much, much higher attrition rate than we had expected from our current workforce. And a significantly higher attrition rate from the new people that we brought on. Unfortunately, after we get them through the classroom training part and the on-the-job training part and they actually go to work in the outdoor operating environment, we've seen a significantly higher attrition rate than what we had ever normally experienced or than what we had anticipated. So I think as we -- a couple of us, Jamie and myself, Sean mentioned during here, we've done a lot of work in terms of focusing on attrition now in terms of what we can do from a compensation standpoint to make sure that we keep the employees that we invest in. And so I think that is the -- I think that's the issue. I also what I said was we had a target out there of 7,000 people. And based upon where we stand today with the number of people that should be qualifying over the next two to three months, we certainly hope when we put that target out there, our employee -- number of employees off at that time was around 20 or so daily with COVID, it's now north of 80 to 90. So we hope that number comes down. And if those two factors come through as we expect and as we plan, we'll hit that 7,000 number. It's achievable by the end of the third quarter.

Yes. And then on the coal RPU, look, obviously, the met coal prices have come down, as everybody has seen. Our expectation right now, given where things are, is probably you'll look at the RPU in line with what we saw in the first quarter, so a little bit down from the second quarter. And then on the other revenue line, supplemental other revenue, probably something flattish versus this quarter outside of the market changing dramatically, which we don't see right now.

Thank you guys. I appreciate it.

Your next question is from the line of Bascome Majors from Susquehanna. Your line is open.

Thanks for taking my question. Sean, there's obviously some uncertainty as to what the actual union wage increases from 2024 will ultimately be. Can you talk about how CSX has managed that uncertainty with its accruals so far? And if the actual wage increases were to come in different than your expectations, when do you true that up retroactively communicated prospectively? Thanks.

Yes, Bascome, I can speak to that. So when we look at the union wage issue, we have been accruing for increased wages ever since the expiration of the last contract. When we do get to a settlement, we'll take a look back at that and see if an adjustment is necessary. If it is, we would take that all at once. And it's probably also worth noting that we've been accruing four back wages, which means that when we do get to a settlement, the employees who've been working with us for several years and not getting wage increases will likely get backpay. So there will be a cash impact around the time of whenever that settlement occurs.

In that accrual in this period where we don't have certainty, has that been consistent with historic rail inflation or different reflecting the environment we're in today?

Yes, Bascome. I'm not at liberty to give any specific insight in terms of what we, CSX, are accruing. That's sort of based on our best guess of where the negotiations come out.

Thank you.

Your next question is from the line of Tom Wadewitz with UBS. Your line is open.

Yes, good afternoon. I guess I want to go back to the headcount question a little bit in the network operation. You have made some progress on active T&E headcount and yet at the same time, it seems like the velocity metrics really haven't necessarily reflected that. So, I was wondering if you could offer thoughts maybe why that would be the case. And then also just like level of confidence that 7,000 is the right number. Is that pretty good visibility? I mean you talked about end of third quarter, if you achieve that, should we expect to see stronger volume and just a lot of confidence that, that's really the right number and you don't need to go beyond that. Thank you.

Thanks Tom. I'll first touch on our number. We feel quite comfortable that 7,000 gets us to a pre-pandemic level, which is where we were, but that doesn't mean we're stopping at 7,000. We're going to continue to hire, obviously, for growth that Kevin had mentioned that is still out there that is untapped really. So, 7,000 is a number that we feel comfortable that gets us to our metrics and our trains -- less train delay and everything else that's going out on the mainline and other locations. So, we're comfortable with that number for that reason, but we're not stopping there. I want to make that clear. We still got to make sure that we continue to hire for the anticipated growth over the next year or two. With respect to the numbers, you're right; we have seen an increase in our T&E quarter-over-quarter, if I look at my averages. And look at every week, we've got 20 to 30 folks who are qualifying in the conductor ranks, which in different areas is making a difference for us and helping us. But the last few months have really been a high peak for vacation for us. So, seasonably, our availability for our employees are usually 84%, 85%, but over the past couple of months, because of the seasonality of vacation, our availability really has dropped about 80% to 81%. So, every one percentage point equals somewhere close to 70 employees. So, if you start backing that out and thinking about what that means for the network, we're all feeling that vacation crunch, and we're going to be into that until probably Labor Day into September when the vacations start to back off. So, that's part of the reason why you're seeing numbers climbing, but yet our velocity and other areas of our railroad aren't seeing the benefits of it.

Tom, it's Jim, too. And we've learned a lot over the last 18 months in terms about -- what the current state of affairs are when it comes to hiring and the difficulties associated with that, which were not fair historically. And so there's a lot of -- at the end of this quarter, are we going to know what our attrition -- what our true long-term attrition rates are going to be, where we know -- are we going to be in a situation where we get hit with another surge of some variants, and we have another couple of hundred employees off at any given time. So, we're trying to get back to the number that we put out publicly is what we had in 2019 when the -- end of 2019, early 2020 when the railroad is really running at a record performance. And so that's -- it's kind of a starting point for us to have better visibility as to what we should really do going forward.

Great. Thanks for the perspective.

Your next question is from the line of David Vernon with Bernstein. Your line is open.

Hey, guys. Thanks for the time. So the last two quarters, you've been running whatever, high single-digits in -- of employees and training relative to your active T&E account. I'm just wondering, after we get past this more employees would be better than fewer, what's the right number do you think long term to be thinking about in terms of employees and training relative to the active headcount? I'm just assuming that you're incurring some additional expense for having a much of the 7.5% of your active T&E account on the payroll, but not necessarily haul and freight. I was just trying to figure out how the best way to normalize that. So any thoughts on that, Sean, would be really helpful.

David, let me answer that. It's kind of confused to what I just said a few moments ago. We're going to have to learn our way through this as we get into the end of this year and beginning of next year to have a better understanding of what these attrition rates are. It's been somewhat of a surprise to all of us, the number of people that have dropped out after again, going through all of the classroom training, all of the on-the-job training and then working a few months and deciding that they don't like railroading as a profession. And so these are all new things for us. So one thing we know, we can easily manage down just simply by taking advantage of attrition if that's what's necessary. What we do know it's a lot more -- what we have experienced anyway in the recent times here, it's a lot more difficult for us to manage up. So in the short term, we're going to learn about what we need to do differently and how we need to do it. And until that point in time, we're going to do everything we can to not run short.

Okay. So I get that it's probably too early to figure out what that number should settle at. But I guess if you think about kind of the -- what you're hearing from the folks that are bouncing out pretty quickly, is there some qualitative sort of assessment that you can share with us in terms of the rationale for why some of these folks are leaving what has historically been a pretty attractive job?

Well, we're trying to do analysis of every different type to try and figure out why, so we don't make the -- so if we can identify factors we don't bring people in because there's a lot of cost and time and effort associated with training somebody. So we're trying to -- we're trying to do a psychological union at whatever analytics we can do to try and help us better -- have a better understanding of the profile of worker that we need to hire upfront. And this is just new for us and -- but we're learning and we'll get it figured out, and then we'll be able to better manage on a more consistent basis, the headcount.

All right. Thanks very much for your time.

Your next question is from the line of Chris Wetherbee with Citi. Your line is open.

Hey, thanks. Good afternoon. Maybe could you help us a little bit with your expectations around volume in the second half of the year and sort of how you think that, that might play out? And then, I guess, maybe a little bit bigger picture. I think there's just a general sense that there's more demand out there than you guys are able to capture. So as you see operating performance and headcount improve, there's the ability to sort of lean into that. Can you sort of help us with your confidence around demand levels in the back half, what you're hearing from the customer? Are you seeing anything slow down? So just kind of curious about, generally speaking, the volume and demand dynamics as you go into the back half of the year?

Hey Chris, this is Kevin. As I mentioned and Jim mentioned it, I think, a couple of times, demand continues to outstrip supply chain. We're not alone. It's the supply chain in general, and we're part of that supply chain with the crew issue that we're having. Right now, if you look at the back half of the year, when you look on just a purely comp basis, we have easy comps on the auto business, and we clearly have seen that production start to pick up the here. So we're encouraged on what's happening there. We've had some disruption on the coal side of the business. So we think that will continue to improve in the back half of the year. So there are some things that just from a comparison point of view get better as we move into the back half of the year. And then as the crews come online, we'll go and get -- chase those opportunities that we know are out there in terms of market share and then the existing opportunities that we know that are out there in terms of order fill rates, things like that, that we're highly focused on as a team and see the opportunity going forward. So nothing has really changed from the last quarter when we see a pretty robust environment, but we're not -- we're also keeping an eye on what's going on. Clearly, the housing markets had some pressure out there, but we have exposure there, but there's other areas where, quite frankly, there's a lot of inventory restocking that still needs to happen.

Okay. So if operations get better, then the volume goes up, I think as simple as that as far as you guys are concerned, right?

Yes, that's our view, given the demand environment that we're seeing right now.

Got it. Thank you very much.

Your next question is from the line of Ari Rosa with Credit Suisse. Your line is open.

Hey good afternoon guys, and congrats on a solid result here. Jim, I was hoping I could just get your reaction to the announcement of a presidential emergency board in relation to the negotiations with the union. Do you see any risk around your ability to achieve margin targets based on that appointment or based on these negotiations? And alternatively, do you think that maybe some of these attrition issues could be solved if there's a resolution to some of these labor negotiations stand still that you've been facing?

Well, we're glad that the emergency board was appointed. It's unfortunately, as I've said quite often, that it took so long to -- for us to get to this point. But the wall has worked for a long, long time, and we're hopeful that the emergency board puts out a recommendation, it's a win-win for both sides. Do we hope that once the labor issue is resolved -- and our employees are not happy that they didn't get a raise for 2.5 years, let me tell you that. They tell me that all the time. And so we're hopeful that once this is resolved, and we're expecting that they'll get a very better rate is that that will help with morale and that might help with the retention. And then final, the Board are seasoned veterans of dealing with labor issues and they are going to make a recommendation based upon the inputs and hearing from both sides. And as I said, I hope it comes out that it's a reasonable win-win solution. And if that's the case, we're certainly able to accommodate that in our economics going forward.

Understood. Okay. Thank you.

Your next question is from the line of Jon Chappell with Evercore ISI. Your line is open.

Thank you. Good afternoon. Jamie, when we look at the weekly metrics, obviously, we've already addressed we're moving in the wrong direction, yet your intermodal trip plan performance back to 90%. Your volumes, which I'm sure you're disappointed with, but probably not as bad as some others or maybe what the metrics would be indicating. Can you speak a little bit to that apparent disconnect where velocity dwell moving one way, volumes kind of rebounding in other? And if you get to that velocity dwell that you're targeting with the right resources, how much free capacity that would free up for your network?

Yes, Jon, look, it's a great question. It comes down to the hard work of those operating folks on the ground, right from the union folks who are working, Dan and Dale, for us that are working more than they ever have filling in some of those gaps. But the operating team is just doing a fantastic job from the network side to the guys out in the field, making tough decisions. And in this environment, look at intermodal has a priority on our railroad. We make sure that the intermodal trains get across within their schedule for the best that we can. We're in an environment where we have concerns to make sure that chickens get fed and then the utility and the lights stay on. So, there's times when we actually have to prioritize some of our bulk traffic, which we would never have done before because normally bulk traffic goes to a stockpile. So, when you are prioritizing different flows of traffic that you never really had before, it goes against a little bit of your principles of making sure you take care of that merchandise traffic. At times the merchandise traffic might take a 24-hour delay or something across the network getting from terminal-to-terminal. So, that's where you're seeing some of those areas where we're just not moving as quick as we could and some of the congestion that's out there. So, yes, you're absolutely right that when we can get back to a little bit normalized workforce with respect to being able to move every train and not having to make those tough decisions on this week. We're worried about the lights in the Southern Carolina area or we're worried about the chickens down in Alabama or different areas, yes, you're going to start to…

Yes. This is Jim. Just a follow-up to what Jamie said, where the railroad is running in 2019, which was at record phenomenal rates in terms of reliability, velocity dwell, et cetera. At that point in time, we always kind of talked about the fact that without doing much to the rail network, we had an additional 25% to 30% of capacity available that we have freed up over the prior two years with the changes that we've made. And during the last 2.5 years, 2020, 2021, we did not slow down on our capital program. We continue to invest in the road. We continue to extend sidings, all because it just makes -- we're preparing for normalcy to return plus it creates a lot of efficiency across the network. So we're in great shape to handle whatever traffic comes to us whenever we get. We only have one restriction on us right now and it's crews, and we're doing everything we can possibly do to hire as many people as we can.

Okay. Very helpful. Thanks, Jim. Thanks, Jamie.

Your next question is from the line of Justin Long with Stephens. Your line is open.

Thanks. I know previously, you had talked about volumes this year, outpacing GDP growth. I was curious if that's still your expectation. And Sean, last quarter, you gave some color on your expectations for operating expenses ex-fuel on a sequential basis. I was curious if you could do that again for the third quarter especially with Pan Am being layered in.

Hey, Justin, it's Kevin. Nothing has really changed with our outlook. Obviously, the GDP number is moving out around quite a bit, but that's -- a lot has changed since the beginning of the year. Clearly, inflation has moved up a lot more than what people believe coming into the year. And so we've -- that's probably been more reflected in price. And then on the volume side, probably not as quick of a recovery from a supply chain as we anticipated, but still given the favorable comp comparisons that we have in the back half of the year, we expect growth.

And Justin, on the second part of the question around OpEx, I think it's fair to assume that OpEx is going to be fairly stable quarter-over-quarter. We will begin accruing for higher wages, the compounding impact of higher wages that would reset at mid-year. So you should see a little bit of an increase sequentially in the labor line. And to your Pan Am question, recognized on a fully integrated basis, it's about 1% of revenue or a little less than that. Figure the operating ratio on that business today is a little worse than our average and then spread the cost similar to our current spread, and that will probably get you there in terms of the Pan Am impact. But everything else relatively stable and the hope would be as crews continue to mark up and become available towards the latter part of next quarter as the vacation peak subsides, the network begins spinning, we begin to take some of those $40 million or so of costs out.

Okay. That’s helpful. I appreciate the time.

Your next question is from the line of Amit Mehrotra with Deutsche Bank. Your line is open.

Thanks, operator. Hi, everybody. Kevin, I just wanted to ask about yields in the back half of the year relative to where they were in the second quarter. There's a few puts and takes. I mean, obviously, fuel is moderating off of a very high level. So maybe that's a little bit of a debit to yield. Then we're, obviously, still in a high inflationary environment, so maybe there's some pricing opportunity. So I understand mix is going to be what it is. So if we can just kind of hold that to the side for a minute. Could you just talk about maybe how you think back half yields would be relative to what you did in the second quarter? And then, Sean, that was really helpful on the cost comment, non-fuel costs. I guess with fuel moderating, that optically releases some pressure on EOR. So would you kind of expect EOR to continue sliding down in the back half of the year? Obviously, not as big of a jump improvement from 1Q to 2Q. But would you expect the sliding down of OR in the back half of the year as well? Thank you.

Hey, on the yields, I think you covered one of them. Obviously, the fuel surcharge and there's a bit of a lag there as we move from second quarter and third quarter. So that can move around quite a bit, but you understand how that works and we'll adjust as that moves around a bit on the diesel prices. The other one that I covered earlier was really on the export coal pricing. What we're seeing today is obviously some moderation of the really, really high prices. The environment is still very, really good for us. We would take these price levels any day. It's just that they're coming off the stream level. So we'll see some moderation there. But outside of that, clearly, when we're having contract negotiations with our customers, they understand the high inflation environment we're dealing with today. And obviously, on the labor side and other parts of our business, and we're having to recapture that value in those discussions. So as things reprice, we're or making sure we stay in line with what's happening out there in the market and what we're having to pay expense-wise. So we probably would still see some underlying momentum there as well. But outside of that, nothing really changes into the back half of the year.

Yes. And just adding to that, in terms of the operating ratio, I think the two things that are non-core or less inside our control, we had about $85 million in real estate gains last year. We're, obviously, always working on potential deals, but we'll see whether we have a similar number that materialize in the second half. And then fuel, if prices tail down and continue to go down, we'll have that favorable lag benefit that will help the OR. But if you set both of those items aside, we have sequential volumes gains into the second half of the year and expenses are relatively flat, excluding PanAm [ph] and the wage increase impact. And I think it would be fair to assume that we'll continue to have some good momentum on the margin side.

Right. Okay. Very good. Thanks for the help. I appreciate it.

Your next question is from the line of Brian Ossenbeck with JPMorgan. Your line is open.

Hey, thanks. Good afternoon. I just wanted to go back to the comments on -- Jim, I think you made a comment about offering a little bit more incentives or compensation for some of the folks that are coming on to the network? Or are there any other things you can do to break down that rate of attrition with other things, or you do have to wait on the official agreement to get settled? And where do you think that might be? And then for Jamie, are there any other things you would consider, we saw one of the Western rails put in embargo, which is pretty disruptive, but I seem to get them a little bit of relief. Is that something that you would consider at this point? Or would that be unnecessary?

Well, we're working on a unionized environment, and we're not able to do too much without an agreement with the unions, including increasing their pay, but we have tried many options, and we'll continue to work -- to do whatever we can to try and change the working environment so that people feel -- like Dave, really want to work here, simple as that. And so it's an ongoing process like everything is. And so we don't have any silver bullets. We're making it up, but to a large degree, as we go along because these are all uncertain times and experiences that we've never had before, including myself, I've been doing this all my life. But we'll continue to innovate. We'll continue to come up with ideas and try to make this the place where everybody wants to work. In terms of embargoes, in my opinion, an embargo was a pretty draconian step that one would not take without a lot, a lot, a lot of forethought and so we would only do embargoes if it was absolutely, absolutely necessary. And that's my position on it and that's where we're going to stay.

And then timing of the labor resolution, do you have any ideas on that? Or is it still too early to tell?

Timing in terms of the outcome of the current negotiations?

Yes.

Sometime in the next -- that will be done in the next 60 days is like -- well, you're in the second -- you got three 30-day cooling off period. You got one has expired, one encompasses the period of time where the emergency board hears, meets and my belief is they are not going to delay that. So, they will be done in a little less than 30 days, 28 days or whatever time is left for that. And then after that, there's another 30-day cooling off period where the parties will meet to either accept the recommendations of the emergency board. And if history plays that shows us what the outcome will likely be, if the parties don't agree, the government has stepped in and impose findings on the parties. That will be done.

All right. Thank you, Jim. Appreciate it.

Your next question is from the line of Walter Spracklin with RBC Capital Markets. Your line is open.

Yes, thanks very much. Good afternoon. I guess you've had a chance to have at least an early look at an assessment of quality and have a sense of how it's fitting in with your network? And my question, I guess, from an acquisition standpoint, strategically, do you think, Jim, you need more of that type of business? Are you impressed enough about by what you've seen with quality that you would ask for -- or you would look for more opportunities like that in the, call it, trucking space or the specialized trucking space? Or do you think with what you got with quality is enough and you're happy with what you have and focused on more organic opportunities going forward?

Well, first of all, we're extremely impressed with Quality Carriers. They're a great company. They have great people. They do a great job. They're industry leaders, and that's what piqued our interest when they became available. But that's not the only reason that we pursued that. It was a fact that it aligned so well with our existing core business in the road and what comes first is our existing core business. So I don't see us necessarily going out and doing something along the lines of another quality of that size, unless it met those same criteria. And if it met those same criteria, then, of course, we'd be interested in it. But we're going to continue to try and expand our footprint through everything we've talked about on the trans flow and on the reloads and on the warehousing and everything we can do in those spaces that brings greater connectivity to the core rail network to our customers. So oftentimes, we don't go all the way to the door where there's a gap. And so whatever we can do to try and fill that gap between connecting the core railroad to a bigger base of customers, that's what intrigues us, and we'll continue to pursue that.

I appreciate that color, Jim. Thank you.

Your next question is from the line of Ken Hoexter with Bank of America. Your line is open.

Great. Good evening. Jim and team, I guess, on-time performance down at 50% originations, 62% last seen since well before PSR rollout at CSX and I think even before Hunter got there in 2017. So you don't think that this starts to affect your ability to win business on to the railroad with the service levels here? And I guess, if, Kevin, you're talking about the demand is there and you're turning it away, maybe talk about where your -- is that localized your specific parts of the network where it's harder to hire where you're seeing some of that push away? And then, Jim, can you just clarify the lift. You mentioned lift pay for newly qualified conductors. But you just said you can't -- to Brian, you said you can't do things without the union agreement. Maybe you can just clarify what you meant by that statement then.

Well, that means what I said. We obviously got a labor -- we obviously got the labor leadership to agree that we could pay the employees more. And so we couldn't just do that. I guess I would be concerned that we had slipped back to the points before to the metrics or operating performance metrics before we've done so much hard work over 2017, 2018 and 2019 in order to get this company running at spectacular rates. I find hard to believe that with our measurements that we are -- we're still doing an extremely good job under very difficult circumstances. It's clearly not like everybody else in the world is doing fantastic, and everybody is running at 100% on time and we're running at 62%. This is an issue that affects everybody in the logistics chain because it affects the truckers. This affects this kinship companies, this affects the terminal operators. This affects everybody. Everybody has slowed down, everybody is struggling and it's not just the railroad industry. As I was saying earlier today, I don't think Heathrow Airport ever thought they'd have to put an embargo because they can't handle air traffic through the facility. So it's a global phenomena. We're continuing to improve. As we said, we're continuing to do better. I can say one thing, we're the only railroad that I know of in North America that never shut a terminal down because we were congested so -- because we're intensely focused on the fact that everybody wanted to use e-commerce, and we were going to make sure we were there for the country when they needed us. So I'm very proud of the job this year that everybody did. So our other metrics, clearly, our velocity has stabilized. Our dwell has stabilized. We're beginning to turn the corner. I said, we're going to get to 60 -- 700 -- 7,000 employees when we said we would. And that's the plan, and that's what CSX is always done here in the last 4.5 years, and that's what we're going to do this time.

Great. Thanks Jim. Appreciate it.

Your next question is from the line of Jason Seidl with Cowen. Your line is open.

Thanks, operator. Good afternoon, gentlemen. I wanted to just clarify a little bit on the operating ratio. You talked about some of the puts and takes going forward. Obviously, the Pan Am costs aren't going to continue into the second half of the year. Just how much of that 450 basis point headwind was Pan Am in the quarter?

Yes, Jason, about 50 basis points was Pan Am.

Okay. Just 50 basis points for Pan Am. And then if I could just follow-up really quick. You talked about how much demand, sort of, pent-up demand for rail that there is. And then if we just assume that you do start improving even more on the operational side, is it really intermodal and maybe boxcar that a lot of these gains are going to jump out in terms of where you can open up and take on business?

I think it goes beyond just the intermodal and boxcar. You think about the coal network. And look, some of this is on the coal mines and some of the export facilities that have had a lot of issues as well. So it's -- we're part of that puzzle piece with the crew issue on that side of the business. But I would say it's a limited just the boxcar intermodal. When I think about some of the other markets like auto and we're playing a little bit of catch-up there as well. So there's opportunities across almost every market that we serve today.

Fair enough. Appreciate the time as always.

Your next question is from the line of Ben Nolan with Stifel. Your line is open.

Yes, thanks. Hey guys. I had a sort of a big picture question. Just given all of the uncertainty with respect to the economy, as you guys have mentioned, if we do move into a little bit more of a challenging environment or a recession, do you think that the railroad is positioned any differently than it had been historically or not? And if so, how would that be?

Big pictures. Everybody looks at me for that -- to answer that question. Well, I guess, by big picture, I mean, from an economy standpoint because I don't know what the next thing they can throw at us that we haven't seen in the last 2.5 years here. So I think the railroads are in CSX and the railroad industry in general is well-positioned right now with everything that's going on in terms of issues associated with congestion, issues associated with highway congestion, issues concerning the environment. More and more and more customers every single day are asking us about what it is we can do for them to help them with their ESG targets. My experience in the railroad business is when you -- if there is a bigger downturn or a downturn in the economy, to the extent that our service gets back to where the reliability we had pre pandemic. We're a great option for companies when they need to reduce their costs, and they need to reduce their transportation spend and people who are making decisions based on, I don't care what it costs to get it there, just get it there. And we're going to pay 25 times the historical average rate to move a container from A to B. What they want to do is save money, that's where our -- that's where we really get to play more in the game because we're always substantially cheaper than a truck. So, everything winds up for us to the -- but it's all based upon our ability given number of employees in here that we need so that we can prove to the customer that we're reliable. As Kevin just said, it's across the board. People that historically always move grain by rail or trucking it. People -- the supply chains are completely disrupted and to -- in some areas, completely dysfunctional. So, things will return to normal. We will get back to where we were, and we'll continue to grow share, principally by competing with and beginning to convert more and more traffic off the highway all the time.

All right. Appreciate it. Thanks for that.

Your next question is from the line of Eric Morgan with Barclays. Your line is open.

Hi, thanks for taking my question. I just wanted to ask about capacity of the network outside labor. I think you talked about how much additional capacity has been freed up to PSR. And looking at things now, does that kind of still exist today? Or are there bottlenecks that you think need to be resolved with additional capital once your labor situation is on their footing?

No, Eric, it's purely labors what's -- people is what's holding us back. Our network is -- as if anything, our network has improved over the past three years. As you heard Jim, we put just as much tie rail and ballast and as we have. We've done siding extensions in areas we've invested. And we've got more locomotives than we need. We're really in a great spot if we had the folks that we need to move the business. So, our terminals, as a matter of fact, 90% of our home terminals are running very well. Our flat switching terminals are running well. Where we get congestion a little bit of bottleneck is different crew change points where we don't have crews to keep those trains moving and we got to make a decision on which train moves quicker than a different train. So, very confident that the network is better than probably what it was in 2019 and we're ready to go once we get the folks trained up.

Thank you.

Your next question is from the line of Jordan Alliger with Goldman Sachs. Your line is open.

Yes. Just sort of following up a little on the last operational related question. I mean you guys are -- seem to be pretty close or moving closer on the headcount front and the network, you say is in good shape. But -- and it's just a matter of getting those extra employees, but is there anything that needs to be done like reconfiguring schedules? I mean I know you mentioned you're making decisions on which trains to run? I mean is there any wider scale changes either the intermodal network, the carload network needed in addition to the employees? Or is it simply that? And then when you hit that 7,000 target, I mean how quickly does all this volume and service react? I mean it just doesn't seem that we're that far away. I'm just trying to understand how that gap in the service, how it reacts and how quickly to react. Thanks.

Jordan, it's -- where we're sitting right now with respect to our terminals and everything else, we are in much better shape than we have been in a long time. So we design -- we review and analyze the railroad every single day, every single week. As a matter of fact, I made an org change just a month ago or so that service design reports directly to me. So then I can work closer with them so we can continue to design things every day. When I say we make a decision, it's the unscheduled network of coal and grain that has become a much higher priority than it ever has been. And that unscheduled network is where those decisions come in with the crew availability. And of course, Kevin and I and our teams are working all the time to make sure that when there's a location that -- at a shortened rain and needs to feed chickens or anything else, we'll make sure we get it there. It's just on-time service and it never was before. The same thing with coal for the Southern utilities. This was all stockpile and it's turned into just on-time service. So that's changed for us, and it's very difficult for us to schedule unit trains, not knowing when they're going to be released to come out.

Yes, Jordan, it's Jim, too. We're grinding here every day, and we're doing all of this with hand to mouth and trying to make sure that we serve every customer that we possibly can, the best we can. And yes, our velocity is down, our dwell is up but we still move more carloads in the second quarter of this year than we did in 2019 when we were running lights out. So it's not like, oh my god, what are these guys or velocity is down 21%. Their volumes must be down 21%. We're still moving more freight than we did. So yes, that's why we're confident that when we get volumes back to where we get the velocity back to where they were and things are -- and key from a customer standpoint is reliability. That's why velocity dwell, first mile, last mile, that's why these metrics are so important because this is what the customer looks at to determine whether or not they're going to ship by rail or truck. If we get that back, that's where we have a reasonably solid base to believe that the volumes will grow in the second half and continue to grow into the future. But we're moving more freight this quarter than we did in 2019.

Yes. It's interesting on the unit train and just-in-time comment actually. I'm curious though, does that mean that there are issues separate from what you as a rail could do and more related to the customer on this whole just-in-time thing that that may make it a challenge or not?

Well, Kevin might want to weigh in, but as I said, it's everybody in the supply chain when we're talking about moving coal trains from a mine to a utility or from a mine to an export terminal. It's not just the railroad. We need everybody in the supply chain to work, when you're talking about moving international boxes from a port to a warehouse on the south side of Chicago, we need the terminal to work, you need the railroad to work. You need the inland terminal to work, you need to have chassis there. You need to have packers there. You need to have somebody there that can unload the box when it gets to the warehouse and get it off the chassis and can get it back. There are billion moving parts, we play a role in that in many respects. And each one of those key elements in the supply chain is challenged. So we need to get better. Everybody needs to get better. And you get a sense, generally, the things are gradually improving. And again, you see that in every industry, that is not working properly because of the issues associated with the shortage of employees.

Thanks so much.

Your next question is from the line of Jeff Kauffman with Vertical Research Partners. Your line is open.

Thank you very much and thanks for taking my question. Jim, I'd like to go big picture on you here. You talked about, okay, if we could just get to 7,000 and get our trains where we need to be, everything comes down quickly, we start running well. And then you said, well, it's not really that simple, right? Because we've got shippers that need to accommodate. We've got ports that need to accommodate. I guess my thought is if you had all the crew you needed tomorrow, or a year from now, right? You pick your target. How long would it take you to get the network running the way you want to run it? And then I guess, on the tail end of that, the worlds changed a lot in the last year. Has your thought about what kind of returns this business can generate changed at all as part of that macro?

Big picture question. Thanks a lot, Jeff, following up with an easy one, soft ball. I might -- no. As I said before, I think the railroad industry is extremely well-positioned, not just for the short-term, for the long-term with everything that's going on in the world, globally, United States, you name it, reshoring, issues associated with this and the other thing, highway congestion, you name it. I think the railroad industry is extremely well-positioned to be a much more relevant and key player in the transportation network and shipment of customers' goods going forward. And so if we're more relevant, if we provide a better service in your -- a key component that should be good for our markets, not bad for our margins. We're in much more sought after product service as opposed to just a transportation commodity. So that is -- so that's good. Can I fix the global hunger? No. Can I solve the pandemic? No. Can I fix CSX and his team, do I have 100% confidence in the people that work for CSX to get this railroad back and running than what it was and then even better? Yes. So, I can't fix the chassis shortage problems. I can't fix -- I can't invest in coal mines. I can't move this. I can't move that. But that will all correct itself over time. And we will be a much bigger participant in that. And like I said, I think we've got a great future ahead of us.

Okay. Thank you very much.

There are no further questions at this time. Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.