csx (csx) earnings report: q2 2015 conference call...

CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion

EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

CSX(CSX)EarningsReport:Q22015ConferenceCallTranscriptThefollowingCSXconferencecalltookplaceonJuly15,2015,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DavidBaggs;CSXCorp.;VP,Treasurer,IROfficerMichaelWard;CSXCorp.;ChairmanCEOFredrikEliasson;CSXCorp.;CFOOscarMunoz;CSXCorp.;President,COOClarenceGooden;CSXCorp.;ChiefMarketingOfficer

OtherPart icipants

BrianOssenbeck;JPMorgan;AnalystChrisWetherbee;Citi;AnalystTomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystThomasKim;GoldmanSachs;AnalystBillGreene;MorganStanley;AnalystKenHoexter;MerrillLynch;AnalystBrandonOglenski;Barclays;AnalystJasonSeidl;CowenandCompany;AnalystMattTroy;Nomura;AnalystBenHartford;Baird;AnalystCherilynRadbourne;TDSecurities;AnalystDavidVernon;Bernstein;AnalystJohnLarkin;Stifel;AnalystBascomeMajors;SusquehannaFinancialGroup;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearch;AnalystDonaldBroughton;AvondalePartners;AnalystCleoZagrean;Macquarie;AnalystRickPaterson;TopekaCapitalMarkets;AnalystTylerBrown;RaymondJames;AnalystJohnBarnes;RBCCapitalMarkets;AnalystJustinLong;Stephens;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodmorning,ladiesandgentlemen,andwelcometotheCSXCorporationsecond-quarter2015earningscall.Asareminder,today'scallisbeingrecorded.

(OperatorInstructions)




Foropeningremarksandintroduction,IwouldliketoturnthecallovertoMr.DavidBaggs,VicePresident,Treasurer,andInvestorRelationsOfficerforCSXCorporation.

DavidBaggs (VP,Treasurer,IROfficer):

Thankyou,Shirley,andgoodmorning,everyone.Again,welcometoCSXCorporation'ssecond-quarter2015earningspresentation.

Thepresentationmaterialwe'llbereviewingthismorning,alongwithourquarterlyfinancialreportandoursafetyandservicemeasurements,areavailableonourWebsiteatCSX.comundertheinvestorssection.Inaddition,followingthepresentation,awebcastandpodcastreplaywillbeavailableonthatsameWebsite.

Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairmanandChiefExecutiveOfficer,andFredrikEliasson,ourChiefFinancialOfficer.

Inaddition,OscarMunoz,ourPresidentandChiefOperatingOfficer,andClarenceGooden,ourChiefMarketingOfficer,willbeavailableduringthequestion-and-answersession.

NowbeforeIturnthepresentationovertoMichael,letmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.

YouareencouragedtoreviewtheCompany'sdisclosuresandtheaccompanyingpresentationonslidetwo.Thedisclosureidentifiesforward-lookingstatementsaswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.

Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withapproximately30analystscoveringCSXtoday,andoutofrespectforeveryone'stime,includingourinvestors,Iwouldaskasacourtesyforyoutopleaselimityourinquiriestoonequestionand,ifnecessary,aclarifyingquestiononthatsametopic.

Withthat,letmeturnthepresentationovertoCSXCorporation'sChairmanandChiefExecutiveOfficer,MichaelWard.Michael?

MichaelWard (ChairmanCEO):

Well,thankyou,David.Goodmorning,everyone.IampleasedtoreportthatyesterdayCSXannouncedsecond-quarterfinancialresultsforitsshareholdersthatincludedall-timeCompanyrecordsforoperatingincomeandoperatingratioaswellasearningspersharewhichwere$0.56,upfrom$0.53reportedin2014.Overall,significantoperatingefficiencyhelpedoffsetyear-over-yeardeclinesinrevenueandvolume.

Startingwiththetopline,revenueinthequarterdeclined6%to$3.1billion.Pricinggainsweremorethanoffsetbylowerfuelrecovery,achangingbusinessmixanda1%volumedeclineaswecycledlastyear'sdemandsurge.

Atthesametime,wehavetheresourcesinplacetomeetcustomerdemandacrossthenetwork,supportingimprovedserviceperformanceandoperationalefficiency.Thatefficiency,coupledwithlowerfuelprices,helpeddecreaseexpensesby9%anddeliveredall-timerecordsinoperatingincomeat$1billionandanoperatingratioof66.8%forthequarter.

Weexpectservicemomentumtocontinueasweprogresstowardtherecordservicelevelswesawin2012and2013.Thatserviceisthefoundationfordrivinglong-termgrowthandvaluecreationforourshareholdersasitalsosupportsourabilitytopricetothevalueofrailtransportationandproduceever




moreefficientoperations.

NowI'llturnthepresentationovertoFredrik,whowilltakeusthroughthetop-andbottom-lineresultsinmoredetail.Fredrik?

FredrikEliasson (CFO):

Thankyou,Michael,andgoodmorning,everyone.Letmebeginbyprovidingsomemoredetailonoursecond-quarterresults.

Revenuewasdown6%versustheprioryear,drivenmainlyby$183millionoflowerfuelsurchargerecoveries.Atthesametime,theimpactofnegativebusinessmixandlowervolumewereessentiallyoffsetbycorepricinggains.

Volumedecreased1%fromlastyearwithlowcommoditypricesimpactingcoalandcrudevolumesandsomeofourmerchandisemarkets,particularlymetals,beingchallengedbythestrongUSdollar.Corepricingcontinuestoimprovesequentiallyandforthequarterwasup3.5%overalland3.9%excludingcoal.

Otherrevenueincreased$46millionversustheprioryear.Theprimarydriverwasacyclingofabout$20millionnegativeimpacttothein-transitreservelastyear,coupledwithapositiveimpactthisquarterfromasimilaramountasnetworkperformanceimprovedsignificantly.

Expensesdecreased9%versustheprioryear,drivenmainlybytheimpactoflowerfuelprices.Ourongoingfocusonefficiencydrove$45millioninproductivitygainsinthequarter,whilelowervolumeresultedin$32millionofcostreductionversuslastyear.Inaddition,werecordeda$17milliongaininthequarterassociatedwiththesaleofanoperatingrailcorridor.

Operatingincomeexceeded$1billionforthequarterforthefirsttimeinCSX'shistoryandwasup2%versustheprioryear.Lookingbelowtheline,interestexpensewassimilartolastyear,whileotherincomewasfavorableaswecycledenvironmentalchargesfornon-operatingactivitiesfromtheprior-yearperiod.

Andfinally,incometaxeswere$334millioninthequarter,reflectinghigherpretaxearnings.Theeffectivetaxratewasabout38%,whichisconsistentwithourexpectationgoingforward.

Overall,netearningswere$553millionandEPSwas$0.56pershare,up5%and6%,respectively,versustheprior-yearperiod.Now,letmeturntothemarketoutlookforthethirdquarter.

Overall,weexpectvolumetodeclineslightlyinthethirdquarter.Althoughweexpectaslightdeclineofthehigher2014base,CSXportfolioremainsbalancedwithseveralgrowthmarketsoffsetbychallengingnear-termmarketdynamicsinother.Weareprojectingfavorableconditionsfor49%ofourvolumeinthethirdquarterandstabletounfavorableconditionsfortheremaining51%.

Strongintermodalperformancewillcontinueasourstrategicnetworkinvestmentssupporthighway-to-railconversionsandgrowthwithexistingcustomers.Increasedinfrastructuredevelopmentprojectscontinuetodriveafavorableoutlookforminerals.Agriculturalisneutralasstrengthindomesticgrainshipmentsclosingoutthepriorharvestisoffsetbyaweakerethanolmarketasaresultofhigherinventorylevels.

Automotivevolumeisexpectedtobesimilartothestronglevelwesawinthethirdquarterlastyear,reflectingNorthAmericanlightvehicleproduction.Chemicalsisexpectedtobeneutralduetolowerdrillingactivity,stemmingfromthecontinuedlowcommoditypriceenvironmentwhichwouldputadditionalpressureonvolumesinourcrudeandfracsandbusinesses.




Bothmarketsareexpectedtodeclinebyabout15%inthethirdquarter;however,strengthinplasticsandLPGwillkeepthechemicalsportfoliostable.

Intheunfavorablecategory,withsustainedlownaturalgaspricesunder$3andhighstockpilesgoingintotheheartofthesummerseason,domesticcoalvolumeswilldeclinecloseto15%inthethirdquarterandforthefullyearweexpectvolumetobedownapproximately10%.Exportcoalvolumeisexpectedtobelowerinthethirdquarter,reflectingglobaloversupplyandastrongUSdollar,althoughwestillexpectabout30milliontonsforthefullyear.

Forestproductswillbenefitfromsteadyhousinggainsasinventoriesareworkedoff,butpaperproductsremainchallengedduetotheseculartrendsinthatmarket.Themetalsmarketisexpectedtobeunfavorableassteelproductionremainsbelowprior-yearlevelswithastrongUSdollarencouraginghigherimports.Thephosphatemarketswilldrawdownonexistinginventoriesandweexpectbuyingbehaviortobecautiousgoingintothenewharvestseason.

Overall,onasequentialbasis,intermodalwillexperiencethetypicalthird-quarterincreasegoingintothepeakseason,whilethemerchandisesegmentwillremainessentiallyflatandcoalwillbedown.Turningtothenextslide,letmetalkaboutexpectationsforexpensesinthethirdquarter.

Beginningwithlaborandfringe,weexpectthird-quarteraverageheadcounttodeclinesequentiallybyapproximately1%aswealignemployeestothelowerdemandenvironment.Weexpectlaborinflationtobearound$25millioninthethirdquarter,whichisareductionfromthelevelsseeninthefirsthalfasunionwageinflationbecomeslessofaheadwind.

Inaddition,weexpectlaborandfringeexpensetobenefitfromfurthernetworkfluidityimprovementandefficiencyasweremainfocusedonincreasingtrainlengthandaligningcrewstarts.

LookingatMS&Oexpense,weexpectinflationtobeoffsetbyproductivitygains.WealsoexpecttoincurremediationcostsinthethirdquarterassociatedwiththerecentderailmentinMaryville,Tennessee.Fuelexpenseinthethirdquarterwillbedrivenmainlybylowercostpergallon,reflectingthecurrentpriceenvironmentandcontinuedfocusonfuelefficiency.Weexpectdepreciationinthethirdquartertoincrease$10millionto$15millionversustheprioryear,reflectingtheongoinginvestmentinthebusiness.

Finally,equipmentandotherrentsinthethirdquarterisexpectedtostayrelativelyflattolastyearwithhigherfreightcarratesoffsetbyimprovingcarcycletimes.Nowletmewrapituponthenextslide.

CSXdeliveredanotherstrongfinancialperformancethisquarterand,asMichaelmentioned,wesetnewall-timerecordsforoperatingincome,operatingratio,andearningspershare.Lookingaheadtothethirdquarter,whileserviceexcellencewillcontinuetodrivecontinuedefficiencygainsandstrongpricingtosupportlong-terminvestmentinthebusiness,weexpectthird-quarterEPStoberelativelyflattotheprioryear.IncludedinthisoutlookweexpecttoincuraleastapennyimpactrelatedtotheMaryville,Tennessee,derailment.

Inaddition,wewillbecyclingastrongdemandenvironmentlastyear,which,coupledwiththedynamicconditionswe'refacing,isexpectedtoimpactourvolumegrowth.Domesticcoalcontinuestobeasignificantheadwindandwenowexpectthatmarkettobedowncloseto15%inthethirdquarter.

Lookingatthefull-year2015earnings,wearestilltargetingmidtohighsingle-digitEPSgrowth.However,giventhecurrentenergyenvironment,achievingtheupperendofthatrangewillclearlybechallenging.

Thatsaid,westillexpecttomakemeaningfulimprovementtoourfull-yearoperatingratioandwithimprovingservicedrivingefficiencyandstrongcorepricingthatsupportsinvestmentinthebusiness,we




areconfidentintheCompany'sfutureandourprogressiontowardsamid-60%sfull-yearoperatingratio.

Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.


Thankyou,Fredrik.Asyou'veseentoday,CSXproducedexcellentresultsinthesecondquarterforitsshareholdersinachallengingmarketenvironmentbydrivingoperatingefficiencywiththecommittedeffortsofour32,000dedicatedemployees.Andwecontinuetofocusontheactionsthatarefoundationaltoourlong-termsuccess.

Deliveringexcellentservicesupportsgrowthandoperationalefficiency,which,inturn,createscustomervaluethatenablesstrongpricingforthevalueoftheserviceweprovideandallowsustocontinuedrivingearningsgrowthandmarginimprovement.Wearepursuingnewopportunitiesacrossourdiverseportfolioandfurtherimprovingnetworkperformancetoserveconsumersandproducersthroughouttheglobalsupplychainandtocreatevalueforyou,ourshareholders.

ThankyouforyourinterestinCSXandwe'renowgladtotakeyourquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

BrianOssenbeck,JPMorgan.

BrianOssenbeck(Analyst-JPMorgan):

Goodmorning,andthanksfortakingmycall.Soonethingthatstoodoutisthisisthefirsttimeinthequarterwhereyou'veputall-innumbersincoremerchandise,intermodal,same-storesalespricingresultsanywherereallyclosetooneanother,includingthelastquarter.

SoIwaswondering:howmuchdidtheshiftinthebusinessmiximpactthosenumbers?Couldyouhavehadevenhigherpricingtrendsifthecommoditycarloadsdidn'tdropoffabout4%inthequarter?Anyothercoloronthatwouldbehelpful.Thankyou.


Brian,thisisFredEliasson.Thebigdriverhereisthatwe'recyclingtheactionswetooklastyearintheexportcoalmarkets,andasaresult,we'reseeingthosetwonumbersharmonizemorenow.Andweexpectthatgoingforwardaswell.

BrianOssenbeck(Analyst-JPMorgan):

Okay.Soyouexpectthemtobeharmonizedinthenearfutureatthesamelevelinthat3.5%to4%ballpark?


No,we--whatI'msayingisthatthegapbetweenthetwonumbers,betweenourall-inpricingandthenon-coalpricing,hasbeenexacerbatedbecauseoftheactionswe'vetakenoverthelastyearortwoinactualcoalmarkets.Wearenow,aswemoveintothethirdquarter,movingpastthoseactionsfromlastyear.

AndIthinkovertimewecontinuetoexpectstrongpricinginallourmarketsaswecontinuetopriceto




marketandensurereinvestmentinthebusiness.SoIthinkthatgapwillbemuch,muchmorenarrowgoingforward.

Operator :

ChrisWetherbee,Citi.

ChrisWetherbee (Analyst-Citi):

Goodmorning,guys.Thanks.Wantedtotalkaboutsortoftheproductivitygainsthatyouaregetting.You'veseenthecostfromefficienciespickup2Qto3Q.Presumably,asservicecontinuestoimprove,thosenumbersshouldgetabitbetterinthebackhalf,butjustwantedtogetsortofanupdateonhowyouthinkaboutthebackhalfintermsofproductivityandefficiencygainsfromacostperspective.


Yes,thisisFredrikagain.We'vegoneofftoagoodstartherethisyear.Obviously,$45millionhereinthesecondquarter;about$41millioninthefirstquarter.Wehavesaidthatwestillthinkwecanapproach$200millionforthefullyear,butprobablynotascloseasweoriginallyhadthoughtbecauseofwhatwesawinthefirstquarterbecauseofweatherandalsobecauseofthefactthatthevolumeenvironmentisnotasstrongaswehadoriginallyanticipated.

However,we'reverymuchfocusedondrivingefficiencygains.Andas--butjustimpliedbythefirst-halfperformanceandourguidanceforthefullyear,we'regoingtohaveastrongsecondhalfaswell.

ChrisWetherbee (Analyst-Citi):

Okay,great.Thanks,guys.

Operator :

TomWadewitz,UBS.

T omWadewitz (Analyst-UBS):

Goodmorning,Michael.Wantedtoaskyouaquestiononcoal.Iappreciatethecommentaryonthirdquarterandkindofhowtolookatthings.

Ifyoulookbeyondthirdquarter,howmightwethinkaboutwhencoalvolumesmightbottom,bothontheutilityandontheexportside?Doyouthinkthatkindofdown15%infourthquarterandthenmaybeyouareflatnextyear,or--?Howdowethinkaboutthat?

Becauseitjustseemslikethepressuresareinplace,bothutilityandexport,andit'shardto--lookingoutacouplequartersit'sjusthardtoknowhowtothinkabouthowcoalvolumesmightplayout.Thankyou.

ClarenceGooden (ChiefMarketingOfficer):

Well,Tom,thisisClarence.It'slookinglikethefourthquartercouldbe--easily,ifgaspricesremainwheretheyarenow,couldbearepeatofthethirdquarter.It'sprobablytoosoontotellaboutwhatexportisgoingtolooklikenextyear,butitcertainlywon'tbeasstrongasitis--hasbeenthisyear.

IftheAustralianbenchmarkstayswhereitisnow,theAustraliandollarstayswhereitisnow,whichisabout$0.74,andtheAPI2stayswhereitisnow,whichisinthehigh50s,nextyearwon'tbeagoodexportyear.





Butifyousaidthecurrentconditionspersist,doyouthinkcoalisdownnextyearfurtherordoyousay,well,it'salreadybeendownenoughthisyear,soit'sflat?


Well,there'scertainlymoreupsidethandownsidefornextyear,butcouldbedown.


SoalotdependsIguessontheweatherand…


Weatherandgaspricesare.


…wheregaspricesare,right?


Right,weatherandgasprices.


IthinkjusttoclarifywhatClarencesaid,Ithinkthere'sprobablymoredownsidetothecoalvolumenextyearthanthereisupside.


Right.


Ifthecurrent--ifgaspricesstayandtheexportmarketsare--kindofremainchallenging?


Yes.Basedonwhatwe'reseeingrightnow,bothbetweendomesticandexports,there'sprobablymoredownsidetoourvolumesfor2016thanthereisupsideinthosetwomarkets.


Okay.Yes,Iknowit'satoughmarkettofigureout,soIappreciatethecolor.

Operator :

AllisonLandry,CreditSuisse.

AllisonLandry(Analyst-CreditSuisse):

Goodmorning.Thanksfortakingmyquestion.Iwaswondering,intermsofthefourthquarter,doyouthinkthatyoucouldgrowearningsyearoveryear,evenifthevolumeenvironmentremainedsoft,justgiventheaccelerationinproductivitygains,gettingthenetworkbackinbalance,andthencontinuingtoseeaccelerationinthecorepricinggains?





Well,Ithink,Allison--thisisFredrikagain.Ithinkobviouslywehavetwoquartersbehindus.We'vegivenguidanceforthethirdquarterandwe'vegivenaguidanceforthefullyearthatrange,sothatrangereallydependsonwhatwe'reseeing--whatwe'regoingtoseeinthefourthquarter.

Sogreatmomentumintermsofwhatwedoontheproductivityside.Wecontinueto--weseeastrongpricingenvironmentaswell,butitreallydependsonhowmassivewillthiscoalheadwindbeinthesecondhalf.AndIthinkhowthose,thepositivesandnegatives,workoutwillallowustoseewhatwe'reultimatelygoingtobeproducing.

We'recertainlytargetingtoproduceearningsgrowth,butIthinkuntilwegetto--throughalittlebitmoreofthissummertoseeifthestockpilesstandupaswegointotheshoulderseasonit'shardtoexactlypinpointwherewe'regoingtoendup.


Okay.Soitseemslikecoalisreallythewildcardorquestionmarkfor4Q?


Yes,IthinkcoalisthewildcardandIalsothink,aswehaveindicatedinthepreparedremarks,thatwealsoexpectasequentialdeclineinourcrudevolumesbasedonwhatweseeinthespreadthere.AndIthinkwe'regoingtohavetofollowthataswelltoseewhattheimpactfromthatwillbeonourvolumesthere.


Okay.Allright,thankyouforthetime.

Operator :

RobSalmon,DeutscheBank.

RobSalmon (Analyst-DeutscheBank):

Goodmorning.Asafollow-uptosomeoftheproductivitydiscussions,couldyoutalkalittlebitabout--ifwelookbackacoupleyears,theproductivitywasacouplemilesanhourstronger.Maybecouldyouspeaktooperationallykindofwhatadditionaladjustmentsneedtobemadeacrossthenetworktogetbacktothoselevels?

Andthen,Fredrik,perhapsfromafinancialperspective,whatthebottom-linetailwindwoulditbeifCSXachievesthose2milesanhourofroughlyofimprovedvelocity?

OscarMunoz (President,COO):

Rob,thisisOscarMunoz.Nicetomeetyou.Listen,withregardstotherecoveryaspectofthat,Ithinkwhatwe'vesaidforsometimeistheinitialpointofrecoverywasthisquarter,secondquarter,andthentheaccelerationandcontinuedperformanceingettingbacktothoserecordlevels.Ithinkthetimingofthatisrelatedtoalotoftheotheractivitiesthatwe'vebeentalkingabout,butIthinkthat'stheprogressionwe'remaking.


And,yes,westillhave,hereinthesecondquarter,obviouslyimprovedsignificantlyandsequentiallythroughoutthequarter,butwe'restillattheplacewherewestillhaveovertimelevelsthatwethink




wouldcomedown.Wehavere-crewlevelsthatcouldbeimproved.

Equipmentcycletimescanbeimprovedaswell,whichispartofwhyweseeaveryrobustopportunityset;notjustinthesecondhalfof2015,butalsogoinginto2016aswell.Andthatisgoingtobecriticalforusasweseeatop-lineenvironmentthatfromavolumeperspectiveperhapsnotasstrongandrobustaswewouldlikeit,atleastbasedonwhatwe'reseeingrightnow.

Sogoodmomentumonourproductivitysideanditshouldtranslateintosomegoodnumbersfromabottom-lineperspectiveaswell.


Andjustasaclarification,withtheproductivity,shouldwebeexpectinganotherelevatedproductivitygainslookingoutinto2016,giventhoseexpectedcontinuedimprovements?


Iliketothinkthatweshouldbeabletoexceedourhistoricalaverage,whichhasbeensomewherearound130,140aswemoveinto2016.


Perfect.Thankssomuch.

Operator :

ThomasKim,GoldmanSachs.

T homasKim(Analyst-GoldmanSachs):

Goodmorning.Thanksforyourtime.LastquarteryoudisposedofanoperatingassetandI'mcuriousifyoucouldsortofframeoutforusyouropportunitysettomonetizewhatmanagementmightdeemtobenon-coreorperhapsmaybelessstrategicgoingforward.


Yes,thisisFredrikagain.Sowedidhaveanoperatingpropertythatwemonetizedherethisquarter.Itwasadealthatwehadworkedonforanextendedperiodoftime,frankly.Andwedohavesomemorebothoperatingandnon-operatingpropertiesgoingforwardandwhentheyoccur,wewillbetransparentwiththoseand,ofcourse,youwillseethem,asIsaid,whentheyoccur.

Idon'tthinkthattheopportunitysetisbigenoughorisgoingtomakeahugedifferenceovertimeforus,becausewe'vedonealotofthisoverthelastcoupleofdecades,frankly.Butitissomethingthatweconstantlylookattoseeifthereareopportunitiestorationalizesomeoftheinfrastructurethatwehave,whetherit'soperatingornon-operating.


Great.AndifIcouldjustaskafollow-onquestionthatrelatestothat.Towhatextentdothese,forexample,themostrecentassetsale,improveyouroperatingexpense?


Onemoretime?





Withregardto,forexample,themostrecentassetsale,towhatextentisthesalebeneficialtoreducingtheoperatingexpense?Istheresomething(multiplespeakers)?


ThissalespecificallyIdon'tthinkisgoingtoimproveouroperatingexpense,becauseitwasessentiallyalinesegmentthatweweren'treallyoperatingmuchonatall,andsoitreallywon'thaveanimpact.Therecouldbeinstancesinthefuturewhereitwould,butthisonespecificallydidn't.


Okay.Thanksverymuch.

Operator :

BillGreene,MorganStanley.

BillGreene (Analyst-MorganStanley):

Goodmorning,Michael.Clarence,Ihaveaquestionforyouonpricing,becauseIgetaskedthisafairamount.Andthatis,whenwelookatsortofwhatCSXchosetodoinexportcoalasthingsgotweakerthere,whywouldyounottakeasimilarapproachinthedomesticmarket?

Couldyou--orisityourviewthatyoucanorcannotsortofpreservesomevolume,savesomeutilityplantsgiventhelownaturalgasprice?Howdoyouthinkaboutthepricinginthecoalmarket?Becausethat'ssomething,givenwhatyou'vedoneinexportthatfolkslooktoandsayhowsustainableisthepricingdynamicthere?


Bill,we'vetakenalookatitand,frankly,thegaspricesaresolowwejustcannotmateriallyimpactitenoughtomakeadifference.


Okay.Andthenontheexportside,isthere--wesaidwewouldlapthis;it'sdone.Isthereanyriskfurtherthatthemarketscauseyoutorethinkthatatalloratthispointhaveyoudonewhatyoucandoandthevolumeswilljusttakecareofthemselvesfromhere?


We'vedonewhatwecoulddoandthevolumeswilljusthavetotakecareofthemselves.


Yes,fairenough.Thanksforthetime.Appreciateit.

Operator :

KenHoexter,MerrillLynch.

KenHoexter (Analyst-MerrillLynch):

Great.Goodmorning,Michaelandteam.Justonthelaborcosthere,youdugintocostperemployee.Itwasflatthisquarterversusup5%lastquarter.JustyourthoughtsIguessonacouplethingsaroundthatandfurtheremployeecuts,Ithinkyounoticeddown1%.Butifvolumescontinuetofall,howdoyouthink




aboutthat,Oscar,maybeinadvance?Andthencostperemployee,whathappenstothataswegoforwardhereonyourproductivity?


Yes,andthisisFredrik.Letmetakethatone.So,yes,costperemployeedidfallhereversuswhatwesawinthefirstquarterandthatis--obviously,partofthatisthefactthatwenowhavecloseto600peopleinfurloughandthatreducesit,butalsoareductioninovertime.Wehadalittlebitofareductionintrainingcostaswell,sothathelped.

Andaswemoveforwardnow,aswecontinuetorunbetter,weprobablyhaveanopportunityperhapstohaveevengreaternumberoffurloughsandreducedovertimeandreducedthecrew,there-crewsaswell.

Ithinkthereareopportunitiestoseeefficiencygainstherebecauseobviouslythatisourbiggestexpensecomponentand,therefore,theonethatwefocusrelentlesslyaroundhowdowereducethenumberofpeople,howdowebecomemoreefficient,howdowebecomemoreefficientintermsofcostofemployee.Andsothatyoushouldseeacontinuedimprovementthere.Thankyou,Ken.

Operator :

BrandonOglenski,Barclays.

BrandonOglenski(Analyst-Barclays):

Goodmorning,Michael.Goodmorning,team.FredrikorMichael,Ithinkinthepastyou'vetalkedabouthowyoureallyneedcoaltostabilize,andIreallywantedtohoneinontheideathatthereismoredownsideriskto2016coalthanthereprobablyisupside.Wehaveplentyofshalegasinthiscountry,soIthinkwe'reresettingintothisnewrealitythatgasisjustalotcheaperthanitusedtobe.

Butyouaregettingpositiveprice;you'regettingproductivity;you'regettinggrowth,especiallyincorridorslikeIntermodal.SointhelongertermisitpossibletogetsustainableearningsgrowthandmarginexpansiontohitthatORtarget,evenifwe'refacingcontinuedsequentialcoaldeclines?Oristhatstillgoingtobetoomuchheadwindonthebusiness?

Andmaybewedon'tunderstandhowdifficultitistogetthecostoutofthecoalsystem.Maybethat'swherewe'vebeenunderestimating.


Well,obviously,coalisaveryprofitablebusinessofoursinourportfolio,butIdothinkthefactthatwewereabletoproducea66.8%operatingratiohereinthesecondquarterwithcoalbeingdownmorethan$100millionyearoveryearisagreattestamenttowhatourcorestrategyofserviceexcellencetoourcustomersisproviding.

Nowclearly,aswelookforward,theimpactofthecoaldeclineisgoingtoalsoimpactthepathofprogression.We'regoingtomakemeaningfulimprovementherein2015andwefeelveryconfidentthatovertimewecangettothatmid-60%soperatingratioandIthinkthisquarter,asIsaidearlier,isagreattestamenttothat.

Butifcoaliscooperating,wecangettherefasterandifcoalisgoingtonotcooperate,it'sgoingtotakeuslonger,whichiswhyatthispointIdon'tthinkwehaveenoughclarityaroundthecoalpicturetoreallyputaflagdowninthegroundonwhenweactuallygettothemid-60%soperatingratio.Thankyou.

Operator :




JasonSeidl,CowenandCompany.

JasonSeidl(Analyst-CowenandCompany):

Thankyou.Goodmorning,guys.Howiseverything?


Good.


Quickquestionhere.Obviouslyyoumentioneditalittlebitonfurloughsandyouhadsomeverygoodproductivitynumbersinthequarter.Isthenetworkrightsizedforthecurrentvolumes,oristherealittlebitmoreworktodoaswemovethroughoutthethirdquarter?


Jason,it'sOscar.Wearealways,alwaysreflectingonwhereourvolumeloadisandthecapacityis,soit'sneverperfectlyrightsized,butwe'reworkingtowardsthat.Wehavealotofcapacity.

Importantly,Ithinkourtrainsizeinitiativeshavebeenreallycreatingevenmorecapacityandmoreproductivity,sowe'llcontinuetoworkonthat.Theteamhasdoneagreatjobofit,butIthinkthereisstillopportunitytorightsize.


Okay.Appreciateit,guys.

Operator :

MattTroy,Nomura.

MattT roy(Analyst-Nomura):

Goodmorning.MyquestionwasonIntermodal,specificallyjustifyoucouldgiveusasense--intermsofthecompetitiveenvironmentyoureferencedinyourpressreleaseandcompetitiveshareloss,Iwaswonderingifyoujustputthatintocontext.

Andthenmorespecifically,justlookingattheratetrends,whetherwe'relookingatrevenuepercarloadorrevenuepertonmile,certainlywe'veseenastepdowninthosemetricsoverthelasttwoquarters.Obviously,fuelisabigcomponentofthattrafficcategory.Ijustwanttomakeitclearastowhat'sgoingonwiththerates.

Ifyoucouldjustanswerthosetwo,that'sallIgot.Thankyou.


Okay.Onthecompetitiveloss,asyouareaware,wedon'tmakeparticularcommentsper--onindividualcustomers.

Ontherevenuetonmiles,asyousurmise,itisallinfuel.Ontheratesthemselves,inthetruckingmarketwestillfindthattruckersarekeepingtheirratestructuresupthisyearinthe3%to5%rangeonthetruckingrenewalrates.Ourparticularspotmarketsinourtruckingpartofourdoor-to-doorproducthasbeenverystrongthisyear.




Ourtrans-conproducthasbeendownalittlebitbecausewe'restillrebuildingourowner-operatorbaseintheLAbasinfromthestrike,butthecorepartoftheIntermodalbusinessandthepricingthisyearhasremainedfairlystrong,aswebeenabletopriceforthevalueoftheservicethatwe'reoffering.Andthecompetitivemarketsforourinvestmentswe'vebeenverypleasedwiththat.


Clarence,maybeyouwanttocommentonthedomesticvolumes.


Well,you'veseenthedomesticintermodalvolumesthemselveshavebeenuparound9%inourintermodalbusiness,sothehighway-to-railconversionprogramsthatwe'vehadinplacehavebeenquitesuccessfulthisyear.

MattT roy(Analyst-Nomura):

Absolutely.That'swhatIwaspointingout.Thankyou.

Operator :

BenHartford,Baird.

BenHartf ord (Analyst-Baird):

Goodmorning.Clarence,maybejusttocontinuethatpoint.There'sbeenalotofdebateaboutthepaceofconversionsgoingforward.Asthetruckloadcapacitysituationsnormalizedabitin2015from2014,fuelpricesarelower;railservicehasnotfullybeenrestored.

Whatisyour--let'spickatimeframe--three-yearviewonthepaceofdomesticintermodalconversionsandtheopportunity?Whatareshipperssayinggivensomeofthedivergenttrendswithlowerdieselfuelprices,butsomeoftheseloomingcapacityconstraints?Hastheoutlookchangedatallmeaningfullyoverthepastseveralquarters?


Ben,Idon'tthinkithas.We--in2014,it'struethatwelostsomeintermodalbusinessbacktothehighwayduetotheserviceissues,butwe'veactuallyseensomeofthatvolumereturnin2015asservicehasimproved.

AsImentionedinthehighway-to-railconversions,ourestimatesthisyearwillbeinexcessof40,000newloadsonCSXorganically,inadditiontowhatourtruckingpartnersaregrowing;backtorailthatwillgrow.

Asyouknow,theelectronicreportingthatwillberequirednextyearandthelegislationwillkickin,andwethinkthatthat'sgoingtoputmorestressonparticularlythesmallertruckloadcarriersthatwillmakeintermodalmoreattractive.

Nothing'schangedinthehighwayissuesthatarearoundcongestionthat'sinthehighway,thehighwaysinAmerica.Westillhavethedriverissuesandshortagesthatarefacingthetruckingcompaniesaswegoforward.

Ifyoulookatwhat'shappeninginCongresstoday,westilldon'thaveahighwaytransportationbill;probablywillbepassedwithacontinuingresolution,sononewinfusionofmoneytorebuildthehighwaysandtheinfrastructureinthiscountry.Soalltheissuesthatwe'vetalkedaboutoverthepastfewyears




stillremain,sointermodal,tome,looks--isaverypositivethinggoingforwardforthenexttwoorthreeyears.

BenHartf ord (Analyst-Baird):

Great,thankyou.

Operator :

CherilynRadbourne,TDSecurities.

CherilynRadbourne (Analyst-TDSecurities):

Thanksverymuchandgoodmorning.Yousawgood,sequentialimprovementinbothon-timeoriginationsandarrivals,buttherewasmuchmoreimprovementinoriginationsthanarrivals,whichIthinkisthenormalorderofthingsasnetworkvelocityincreases.Maybeyoucanjusttalkaboutthatandwhenweshouldexpecttoseethegapbetweenthosetwometricsnarrow.


Cherilyn,thanks;it'sOscar.Historically,asyouprobablyknow,there'salwaysbeenasmallgapbetweenthearrivalsandtheoriginations,andwehaveseenbothmeasuresimproveasweworktorestoreourservicelevel.

Wewouldexpecttheimprovementinarrivalstoslightlylagthatoforiginations,againasthatcontinuityofserviceimproves.Thekeythingforusistofocusonhowlatetheaveragetrainisandthatisametricwe'veseensubstantialimprovementoverthelastseveralmonths,soineffectspan.

Sowhileyou'llstillseethe[optic]onarrivalsalittlelagging,andwhenweactuallylookatmoreinternallythenumberofhoursthatarelateisimproving.SoIthinkoverthenextquarterandtwoandcertainlyintonextyearIthinkyou'llseethatgapnarrowedtoitshistoricalaverage.

CherilynRadbourne (Analyst-TDSecurities):

Thankyou.That'smyone.

Operator :

DavidVernon,Bernstein.

DavidVernon (Analyst-Bernstein):

Goodmorning.Thanksfortakingthequestion.Fredrik,maybejustabiggerpicturehere.AsthevolumegrowthismoderatingandyourGPMsaredownalittlebit,doyouseeanyopportunitytopullintheCapExbudget?Andthenlongerterm,doyouthinkweshouldbe--howshouldwebethinkingabouttheimpactofthereducedutilizationofthecoalnetworkondepreciationgoingforward?


Yes,intermsofcapital,Ithinkwe're--wehavethe$2.5billionnumberoutthere.We'relookingatthat,seeifitmakessense,butgenerallyalotofthoseproductshavealreadybeensortedsoI'mnotsurethereismanyopportunitiesshortterm.

Wehaveaself-correctingmechanisminthatwe--tiesittorevenueandIthinkthatwillbecorrectingit.Ultimately,thatisaproxyforgrosstonmilesbecause80%ofwhatwespendisareflectionofhowmuchwerunoverthenetwork.Andsoasthat--ifthatcomesdown,thenourcapitalwillcomedown,sowe'll




lookatthataswegetintotheplanningfor2016.

Thenintermsofthecoalnetwork,Icanassureyouwehadaveryconcertedeffortin2012toseewhatwecoulddotodriveourcoststhere.Wewereexcellentattakingouttrainstartsandcrewbasetomorethanreflectthedeclinewesawinvolume.

Andherenowin2015and2016thereisarenewedfocusagain,becauseofthestepfunctionchangethatwe'veseen,tofurtherlooknotjustattrainstartsandlookatthecrewbaseandthelocomotiveassetswehavedeployed,butalsothefixedinfrastructurethatisupthereandtoseewhatwecando.

Itisnotasblackandwhiteasyouwouldlike,becausewedohavegrowthupthereaswellandwerunothertrafficaroundthere.We'veseenalotofgrowthinLPGandfracsandinthosesameareas,butthereshouldbemorethanwecandoandourteamisverymuchfocusedonthoseefforts.Thankyou.

DavidVernon (Analyst-Bernstein):

Appreciateit.Thanks.

Operator :

JohnLarkin,Stifel.

JohnLarkin (Analyst-Stifel):

Goodmorning,gentlemen.Clarencewasveryadamantonthefirst-quartercallabouthowpricingwasacceleratingfromthelaterstagesofthefirstquarterintothesecondquarter.Isthatgoingtocontinueintothethirdandfourthquarter,orarewegoingtoplateauatthisrelativelyhighlevelwheremerchandiseandintermodalsame-storepricingisupsay3.9%yearoveryear?


Well,John,asyoucanseeinthepastseveralquarters,we'veimprovedthepricingsequentially.Andhereinthesecondquarteryoucanseethatwehada3.5%all-inanda3.9%inthemerchandiseandinourintermodal.

AsIlookforward,weremainfocusedonthatstrongpricing,reflectingthevalueoftheserviceweprovideacrossallthesecompetitivemarkets,whichjustifiesthereinvestmentinourbusinessthatdrivesthelong-termvalueofourshareholders.Sothat'swhatyou'llsee.


Gotit.Anypushbackfromcustomersgiventhatservicelevelshaven'tfullyrecovered?Aretheywillingtoabsorbthoseever-higherpriceincreasesgivenwhereservicecurrentlystands?


Ithinkthattheyseethattheservicethatwe'reprovidingrightnowisjustifyingthatpricelevelsforthereinvestmentthattheyseethatwe'redoing.


Gotit.Thankyou.

Operator :

BascomeMajors,SusquehannaFinancialGroup.




BascomeMajors (Analyst-SusquehannaFinancialGroup):

Goodmorning.Socoalminers'financialsituationhascontinuedtodeterioratehereandwe'veseenrecentreportsthatoneofyoursmallercustomersisgoingtofileforbankruptcythisweek.Andotherlargerminersarestillworkingonrestructuringshere.

Canyoujusttalkalittlebitabouthowyoumanageyourriskinthisbusinessgivenfinancialsituationonthatside?Maybealittlebitonthebusinessside,suchaspricingpressure,whichyouaddressedalittlebitalready,butcounterpartyriskaswell?


Yes,thisisFredrik.Obviously,fromacreditperspective,wedomonitoritveryclosely.Manytimesit'sactuallyutilitiesthatpaythebill,so--butwedohavesomeexposuretosomeoftheseproducersthataregoingthroughverydifficulttimes,sowe'vealreadyseensomeofthosegothroughrestructuring.

Generally,we'rewell-protectedthroughavarietyofmeansthroughthatprocessandoneofthemostimportantthingsisthatifyoudowanttorestructureoutofit,you'regoingtoneedtherailservicethatweprovideinordertobesuccessfulintransformingthecompany.

Andoverall,fromabroaderperspective,clearlywe'realsolookingatourcapitaldeploymentandyouheardinapreviousquestion,we'rereallytryingtomakesurethataswelookatreinvestmentincoal-relatedassetsthatwe'rereallytakingalongandhardlookatwhatevercapitalweputintheretomakesurethatwe'renotleavingcapitalstrandedfor40years,whichisessentiallythelifeofassetsthatwe'reputtingin.Soweworkvery,veryhardacrossoursystemtomakesurethatwearemakingaprudentdecisionaroundthat.

Greatquestion.Thankyou.


Doyouhaveasenseforhowmuchispaidtothe--orthispercentageofyourbusinesswhereyouarepayingtheminersversusutilities?Woulditjustbalancewithexportversusutilitymix,orisitmorecomplexthanthat?


Well,Ithink--onthedomesticside,IthinkthemajorityisclearlypaidbytheutilitiesandontheexportsideIthinkit'salittlebitofamoremixandmore,perhaps,theproducer.


Allright.Thankyou.

Operator :

JeffKauffman,BuckinghamResearch.

Jef f Kauf fman (Analyst-BuckinghamResearch):

Thankyou.Goodmorning,everyone.Thanksfortakingmyquestion.

Withtherevenue--Ishouldn'tsayrevenue,butthevolumeoutlooktakinganotherstepdown,haveyourethoughtthecapitalprogramatall?Andcanyoutalkalittlebitaboutwherethecapitalisgoingtohelpintermsoftheproductivityrecoveryandgetthesystembacktofluidity?





Sure.Intermsofthecapital,$2.5billionisourcapitalplanherefor2015.Wearelookingtoseeiftherearesomethingsthatwewouldmoveoutofthisyear,butas[we're]sofarintotheyearit'shardtoaffectthecurrentyearbecausealotofthesethingsarewellunderwayatthispoint.

Butwearelookingatnextyearandwedohavethatkindofself-adjustingmechanismthatit'stiedtopercentageofrevenuetowherewetalkaboutitpublicly,butinternallywelookatitfromagrosstonmileperspectivemoreperhaps.

80%ofwhatwespendisonthemaintenancesideand20%isproductivity,andclearly,thisyearourmainfocushasbeentoacquireadditionallocomotives.We'reacquiringabout200locomotivesnewandrebuildingabout150,andthathasbeenthenumberonepriorityforus.

Alreadystartinglasttimethisyear--lastyearthistimewherethathasbeenafocusofourstomakesure,becausethathasbeenthelinchpininorderforustogetbacktothesortofserviceexcellencelevelsthatwe'vebeenlookingfor.

Otherproductivityinitiatives,wehaveplentyofthemthat--notjustiscapitaldriven,butisspecificallyoncapitalislocomotivefueloptimizer,forexample,tomakesurewedrivefuelefficiency.

Wehaveavarietyofothertechnologyproductsthatwe'reworkingonandalsoautomationofsomeoftheotherback-officefunctions.Sothereisawidevarietyofthingsthatweputcapitaltowardstodriveproductivity.Thankyou.

Operator :

ScottGroup,WolfeResearch.

Scott Group(Analyst-WolfeResearch):

Morning,guys.Wantedtofollow-up,Oscar,yourcomment,aboutmoretogointermsofrightsizingthenetwork.Justgiventhevolumesandnowtheservicelevelisimproving,isitpossibleaheadtostartseeingsomemorematerialheadcountreductions,Idon'tknow,3%,5%,10%?Idon'tknow.Isthatpossible?


Scott,IthinkIwouldansweritbythefactthatwealwaysmakethoseadjustmentscommensuratewithwhereweseethevolumeforecastandsoit'shardtopickspecificallyanumber.Butwe'll,asyou'veseenusdobefore,taketheappropriatemeasures.


AndtoaddtoOscar'sanswer,wedoexpect,andIsaidthatinpreparedremarks,abouta1%declinesequentiallyinheadcountandwealreadyhave600peopleinfurlough.

Itisourlargestexpensebasesowe'regoingtobevery,veryprudentandvery,verythoughtfulaboutwhatwe'redoingthere,becausewedoneedtoreduceourlaborexpenseinordertocreatetheproductivitysavingsthatwe'veoutlined.

Scott Group(Analyst-WolfeResearch):

Sojustwiththat,maybeFredrik,thevolumeenvironmentchangedmostnotablyinthesecondquarter.Howmuchofthecostresponsefromyouguysdidweseeinthesecondquarterversushowmucharewegoingtoseeahead?Ifthereisawaytokindofbucketitout.





Iguessit'saprettyhardquestiontoanswer.Idosay,though,fromanoverallproductivity,knowingourguidanceforthefullyearandthefactthatwe'vedonehereabout$86millionforthefirsthalf,clearlywehaveatleastasmuchinthesecondhalforsomewherearoundthere.Andsothere'salotofopportunitystill.

Wehavedonealotofstructuralthingsthatwehaveworkedonforaperiodoftimeintermsoftrainlengthandofcoursesomeoftheotherongoinginitiativesaswell.Andwhilewehavemadesomeinroadsintermsofdrivingthefluidityofthenetworkback,itwasonlypartlythroughthesecondquarterthatwereallygottractionaroundthat,soaswemoveintothesecondhalfweshouldexpectmoreofthat.

Andsowe're--onceagain,wefeelverystrongandwefeelverybullishabouttheopportunitysetgoingforwardonproductivityside.Thankyou,Scott.

Operator :

DonaldBroughton,AvondalePartners.

DonaldBroughton (Analyst-AvondalePartners):

Goodmorning,gentlemen.Helpmebetterunderstandyourguidanceofexpectingmeaningfulfull-yearORimprovementbecause,throughthefirsthalf,thegrosscostofdieselisdownabout$325million,soyou'reatarunrateoflet'scallit$650million.

IfIjustassumethatthecostofdieselisdownby$650millionforthefullyearandthefuelsurchargeisdownby$650millionandallofyourotheroperatingcostsremainconstantonayear-over-yearbasis,thatalonewouldcreate150basispointsoftheORimprovement.Soismeaningfulfull-yearORimprovementlessthanorgreaterthan150basispoints?


Well,thatislefttobeseen.It'sagoodquestion.Wehavetakenoutinthefirsthalf,ifyoujustlookatourquarterlyflash,we'vegonefromabout72%,73%lastyearinthefirsthalfto69.5%sothat'sobviouslyverymeaningfulimprovementinjustoneyeartimeframe.

Aswethinkaboutthisquarterspecifically,themajorityofourgainwasactuallynotfuelrelated,becausefuelthisquarter,whileitcamedown,weactuallyhadanegativeimpactyearoveryearbecauseofthenegativelagandthespreaddifferentialthatwesaw.SoI'mnotgoingtopinpointexactlywherewe'regoingtoendup,butwedoclearlyexpectmeaningfulimprovementdespitethefactthatthevolumeenvironmentislessthanstellar.Thankyou.

Operator :

CleoZagrean,Macquarie.

CleoZagrean (Analyst-Macquarie):

Goodmorning.Iwouldlikealittlebitofhelpwithframingtheutilitycoalvolumedownsideforthenextyear.Wheredoyouseethatcomingfrom?We'repotentiallyhopingforsomereversalofgasswitchingandinventorieshavingnormalize,sothatisentitlementdriven?Whatareyouhearingfromyourcustomersthatdrivesyourcautiousnessondomesticutility?Thankyou.





Well,thestockpilesare,bothintheNorthandtheSouth,arehigherthannormalsothereissomeinventoryhang.Westillexpectthatthegaspriceswillberelativelylow;wouldbethesecondpoint.Andthethirdisthereissomeresearchthatwouldindicatetheinstallationofmoregaspeakersintheregionthatweservethanarecurrentlyinservice.

Sothecombinationofthosethreewouldleadustobelievethattherecouldbeapossibilitythattheutilitiesconsumptionofcoalinourareawouldbeslightlylessthanitisthisyear.


Okay.Andthenjustasaquickclarifyingfollow-up,whenyougiveguidancefordomesticcoal,doyouincludethedomesticmetorthatreferstoutility?


Itincludesboth,everything.


Thankyouverymuch.Thankyou.

Operator :

RickPaterson,TopekaCapitalMarkets.

RickPaterson (Analyst-TopekaCapitalMarkets):

Goodmorning,guys.Oscar,youputoutaserviceupdateinMaythatlistedyourT&Etraineesat1,235.What'sthatnumbertoday?


Thepeoplein--bytheway,Rick,nicetohearyou;welcomeback.


Thankyou.


Thenumberintrainingwehaveapproximatelyisabout800rightnow.


Beautiful.Excellent.

Operator :

TylerBrown,RaymondJames.

T ylerBrown (Analyst-RaymondJames):

Goodmorning.Iwasjustcuriousifwecouldgetalittlemoredetailontheaccelerationofthenon-coalpricing.AndIappreciatethismightbeabitofsemantics,but,Clarence,wasthesequentialaccelerationfairlybroad-basedorwasitmorehousedin,say,intermodalthantheothermerchandise?Justmaybesomebroadcommentsthere.





No,itwasverybroad-basedacrossalmostallofourcommoditylines.

T ylerBrown (Analyst-RaymondJames):

Perfect.Thankyou.

Operator :

JohnBarnes,RBCCapitalMarkets.

JohnBarnes (Analyst-RBCCapitalMarkets):

Goodmorning.GoingbacktotheCapExquestion--Ihatetobeatthistodeath,buthowquicklycanyoureprioritizetheprojectlistandreallocatethecapital?Andthen,ifvolumescontinuetobeweaker,howaggressiveareyouwillingtobeon,say,maintenanceCapEx?Isthereanygiveandtakethere?


Ithinkfromamaintenanceperspective,there'salotofthingsthatyoucandothatshorttermwouldsaveyoumoneybutlongtermwouldhurtyou.Forexample,shuttingoffourteamsthatareouttherereplacingtherailrightnowissomethingthatyoucoulddo,butlongtermdoesn'tmakesensebecauseit--mobilizinganddemobilizingsomethingismoreexpensivethantakingadvantageofthefactthatyouhavetheteamsoutthererightnow.

Sotherearethingsyoucando,butthekeythingisthatyoudothingsthataresmart.Andsothat'swhyIthinkthatmakingsignificantchangestothein-yearcapitalbudgetisnotnecessarilytherightthingtodofromalong-termeconomicperspective.

Butaswethinkaboutnextyearwewillalways--wealwayslookatwhatthegrosstonmileswillbe.Welookatthelinesegmentsandsoforththatweneedtoallocatecapitaltoandthat'swhereIthinkthecoalexampleisagoodplace.

Wereallyarelookinglongandhardtomakesurethatwhatweareputtingintheremakessense,ofcourse,withoutsacrificingsafetyinanyway,shape,orform.

Soweconstantlylookatthatandwewilltakealookatwhatnextyearcapitalbudgetwillbeinthecontextofwhatthegrosstonmilepicturewouldlooklike.

JohnBarnes (Analyst-RBCCapitalMarkets):

Thankyou.

Operator :

JustinLong,Stephens.

Just inLong (Analyst-Stephens):

Goodmorning,thankyou.Iwaswonderingifyoucouldcommentonthefinaltankcarregulationsthatwegotduringthesecondquarter.Assumingeverythinginthisregulationwithstandslegalpushback,howshouldwethinkabouttheimpactthesechangescouldhaveonyourbusinessgoingforward?





Justin,Ithinkwewere,byandlarge,verypleasedwiththenewtankcarstandardstheycameoutwith.Wethinkit'samuchsafervehicle.Wewerealittlebitsurprisedthatthethermalblanketwasnotincludedandwewillcontinuetopushforthatasanindustry,becausewethinkitgivesanextralayerofsafetyatnotagreatexpense.

Asfarasalong-termimpactonthebusiness,obviously,asyouknow,wedon'townthetankcars.Thecustomersorleasingcompaniesdo.Ourearlyreadisthatmostplantoretrofittheircarsorbuynewcarsthatmeetthosestandards.

Obviously,itimpactstheeconomicsofthemovementsomewhat,andasClarencealludedtoearlier,there'salreadyalittlebitofpressureonthecrewmovejustbecauseofthecurrentspreadsbetweenBakkenandBrent.

Butwethinklongertermthiscarisabettercar,asafercar,andIthinkwe'llcontinuetoseethemovementsinthecrudeaswegoforward.

Just inLong (Analyst-Stephens):

Okay,great.Thanksforthetime.


Thankyou.Thankyou,everybody.We'llseeyounextquarter.

Operator :

Thisconcludestoday'steleconference.Thanksforyourparticipationintoday'scall.Youmaydisconnectyourline.

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