Good afternoon ladies and gentlemen and welcome to the CSX Corporation’s Second Quarter 2019 Earnings Call. As a reminder, today’s call is being recorded. During this call, all participants will be on listen-only mode. Following the presentation, we will be conducting a question-and-answer session. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Chief Investor Relations Officer for CSX Corporation.

Thank you, Shirley and good afternoon everyone. Joining me on today’s call is Jim Foote, President and Chief Executive Officer; Kevin Boone, Interim Chief Financial Officer; and Mark Wallace, Executive Vice President of Sales and Marketing. On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Good afternoon and thanks a lot Bill. Before we get started with the presentation, I'd like to first thank all CSX employees whose hard work once again drove the company to new record operating levels this quarter. These records include operating income, free cash flow, and operating efficiency in the form of an all-time low operating ratio for our U.S. Class I railroad. Not only did we achieve record financial results, but we continued our industry leadership in safety with the best performance in terms of lowest personal injury rate and meaningfully reduced train accidents. During this quarter, we successfully completed PTC installation and activation across our network. We now operate nearly 13,000 PTC-equipped track miles and are on pace to have the system fully tested and operational with our tenant railroads ahead of the required deadline. Let's move on now to Slide 5 of the presentation and our financial results. Second quarter results were straightforward with only a few small and unique items that Kevin will discuss. Second quarter EPS increased 7% to $1.08 versus last year's figure of $1.01. Our second quarter operating ratio improved by 120 basis points to a record 57.4%. Turning to Slide 6, we are delivering better service to our customers, which is reflected in our merchandise volume as our improved reliability is leading to customers trusting us with more of their freight. This led to broad-based growth across the merchandise segment as customers are recognizing the value of our best-in-class service offering. This growth was offset by declines in coal, intermodal, and other revenue resulting in a 1% decline in total revenue to $3.1 billion. I remain encouraged by the performance of our core merchandise franchise during a softer-than-expected freight environment. We led Class I volume growth again this quarter, and grew volumes…

Thank you, Jim and good afternoon, everyone. Turning to slide 10. I'll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 1% in the second quarter, as the impact of lower volume, particularly in intermodal, more than offset pricing gains across most of our markets. Moving to expenses. Total operating expenses were 3% lower in the second quarter, reflecting continued strong efficiency gains. Labor and fringe expense was 3% lower, driven by a 5% reduction in headcount combined with favorable incentive compensation expense. These savings were partially offset by inflation and other items. The operating team continues to drive efficiencies in a number of areas highlighted by fewer crew starts, down 5%; and lower T&E over time. Re-crews were also down 77%, a significant improvement year-over-year. Active locomotive count declined more than 300 locomotives, down 11% year-over-year. Smaller fleet combined with fewer cars online and freight car repair efficiencies helped drive a 6% year-over-year reduction in our mechanical workforce. MS&O expense improved 3% versus the prior year. Lower active locomotive count drove savings in materials and contracted services. Train accident costs were also favorable in the quarter as the FRA train accident rate fell over 50%. Intermodal costs also saw year-over-year improvement with lower volumes combined with operating efficiencies, driving expense reductions. Partially offsetting these items was an unfavorable impact from casualty reserve adjustments unrelated to the improving trends and safety. Real estate and line sale gains were flat in the second quarter versus the prior year. We continue to see a strong pipeline of opportunities. Looking at the other expense items. Depreciation increased 2% due to the impact of a larger net asset base. Record fuel efficiency and a 6% decrease in diesel prices helped drive a 30% [ph] decline in…

Thanks Kevin. Turning to Slide 13, I want to wrap things up by discussing our guidance for the year. We started this year expecting revenue to be up approximately 1% to 2%. Both global and U.S. economic conditions had been unusual this year to say the least and have impacted our volumes. You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career. With natural gas prices expected to continue to impact both domestic and export coal, intermodal is showing little seasonal recovery and many of our industrial customers volumes continuing to show weakness with no concrete signs of these trends changing; and adding in the impact on crude-by-rail shipment of last month’s Philadelphia refiner explosion, we are now expecting revenues to be down 1% to 2% for the full year. We are not necessarily being pessimistic about the second half of the year. But in these launches we need to adjust guidance, we're just setting out the obvious. This outlook is based on a current business levels and there is upside to this forecast as conditions improve in the second half. We are seeing a range of conflicting data points and economic indicators and regularly speak with customers who despite the recent downtime -- slowdown, remain cautiously optimistic about the second half. Mark can add some color to this in the Q&A session. We feel it is most prudent to actively manage expenses today -- to today's volumes rather than take a wait-and-see approach. We still expect a sub-60 operating ratio for the year. Our planned cost reduction initiatives will not impact safety, service, and will ensure the business is positioned to handle any additional volumes when things pick up. Lastly, we are maintaining our $1.6 billion to $1.7 billion CapEx outlook for the year. Even though the year is off to a slower start than we had hoped, we still see significant opportunities ahead. We have a service product that is resonating with customers and a long list of opportunities to reduce expenses, decrease asset intensity, and improved efficiency by eliminating the unnecessary touches that had caused to slow us down. We are very proud of the progress to-date and there is still much more left to do. With that, thank you, and I'll turn it back to Bill.

Thank you, Jim. In the interest of time, I would ask everyone to limit themselves to one question and one follow-up only if necessary. Shirley, we’ll now take questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ken Hoexter with Bank of America Merrill Lynch. You may ask your question.

Great. Good afternoon and thanks for the discussion here. Jim, maybe just talk a little bit about the performance right. So, a phenomenal operating ratio. Yet when you show your data, the on-time arrivals continue to fall. Maybe just to understand how that's possible given -- are you tightening the timeframes to different levels or is that different than the improvements you're making on the performance?

Great. Well, the difference between on-time originations and on-time arrivals versus trip plan compliance, which is measuring the boxes that moves through the network. Our on-time departures as we report to the STB, we're close to 100%, high 90s now. And arrivals is in kind of in the high 80s – mid-to-high 80s just most recently here now. The trip plan compliance on the other hand, which is not measuring their train performance is measuring how the car moves through the network from the time we pick it up to the customer, and when we tell the customer, we'll have to his customer in 114 hours. How often do we make that 114-hour trip plan? And every time -- and when we started measuring this, we were maybe in the 30 -- high 30% of the time, we were making that trip plan to now we're in the high -- we're close to 90% in intermodal and high 70s for the carload business. And yes to your -- to answer your question, every time we start getting where we're producing really good results, Jamie and the operating team get in there and tighten-up the schedule and make it more difficult for everyone, because ultimately that results in a much better product for the customer.

Ken to give you a little perspective, last year in the second quarter of 2018, we had on average less -- we had early departures of about 16 -- 76 minutes early, whereas, if you look at this year we're departing them only 20 minutes early. So, we gave ourselves a lot of cushion last year, which obviously would translate in a lot more costs. So, we're tightening the windows and you can see it in that differential, which helps us manage our assets a lot better.

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

Thanks, Ken for that good opportunity. I think exclusive of the PES refinery explosion that Jim just talked about in Philadelphia that just happened a couple of weeks ago, our change in our revenue guidance is largely evenly attributable between our three segments of coal, merchandise, and intermodal. On the coal, export coal has been below our expectations, mostly driven by thermal and lower API2 benchmarks, which we think will likely continue into the second half. On the domestic utility side, our volumes are down relative to our expectations driven by continued lower natural gas prices. Going into the year, we were -- we thought Henry Hub was going to be somewhere around in our guidance, which for Henry Hub to be somewhere around 285. Now we're hovering between 240 and 250, which is now reflected in our guidance. On the merchandise, clearly as Jim mentioned, clearly there are signs of slowing economic conditions in both IDP and GDP for Q3 and Q4 pointing to a less robust economy in the second half. We've, obviously, seen evidence of this in our own business and now see a softer industrial environment with signs in our automotive, chemicals, and metals segment. But we're calling it as we see it, and the run rates we're seeing are based on the trends that we saw in June and coming into Q3. On the intermodal side, listen, we've clearly hoped for a more of a recovery, particularly in the fourth quarter of the year. But we're not immune from some of the pressures that the entire U.S. intermodal industry is facing right now with the weak trucking market coming off an exceptionally strong 2018. There's a lot of excess capacity in this market, and as a result of what we saw in 2018, a lot of trucks came into the market. That needs to be worked out. But listen, we’re staying disciplined on serving our customers and providing everyone with, as Jim mentioned, great service. Now what would help? Obviously, what would help in the back half would be a resolution or clarity on trade tariffs would obviously help, but that is obviously beyond our control. But what is within our control is providing a high-quality service product to our customers and covering new opportunities to use that service product for both new and existing customers and to make sure that we are extracting a fair value for the service that we provide. So, hopefully, that covers the – a little bit of the explanation on what we're seeing.

No. Truly appreciate it. Thanks Jim, Mark, Kevin, Bill, thank you for the time.

Thank you. Our next question comes from Allison Landry with Credit Suisse. You may ask your question.

Thanks. So, Jim, earlier you outlined a number of concerns in the freight environment and what you heard from customers. It sounds like maybe the risk is to the downside instead of an upside recovery. But, I guess, my question is, how much of a volume or revenue decline can the business model withstand, and you’ve still grown EBIT on a year-over-year basis in 2019?

I don't know that we've ever model how much we can actually take out. I think, we're doing – we think, this is not something we woke up yesterday and said, well, guess what; the things are going a little bit softer than we had expected. We've been watching this throughout the first half, hoping as everyone did that things would turn around and the business levels would start to pick up, instead of just kind of slow, lazy malaise-type drift down across, which, as Mark said, kind of then accelerated as we got into June. And -- but we've been planning for this and watching it and taking steps for months now to, first of all, obviously, focus on G&A, because like the one of the things we don't want to do in these situations is reduce cost in the transportation side of the business that could impact service. Then you impact service and then your business can get softer. And then it gets softer, so you cut more and then you impact service and you start this downward trend. It would be much easier for us to respond if suddenly business just dropped 10% today, because then we would know exactly how to right-size the business for it and we'd know exactly where we could and could not take out the expenses to be -- in order to handle the volumes. So, we are doing the best we can and have done -- I think, the team did an amazing job in the second quarter of getting a lot of things done, getting a lot of things right-sized based upon what we were anticipating, what we were seeing and not really going into any kind of cost reductions on the transportation side of the business where the majority…

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

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

Thank you, guys.

Thank you. And next question comes from Brian Ossenbeck with JPMorgan. You may ask your question.

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

Yeah. Brian thanks. I think on export coal, let me just start to a high level, I think we're still expecting export coal roughly around 40 million tons for the year. Thermal coal is as I talked about, obviously, some tough headwind there given the API2 numbers, but we're -- there's some tough things going on in Europe as Jim talked about with some low natural gas prices, the mild weather and low natural gas prices in Europe, so that's causing a little bit of headwind. On the met side, again, the benchmarks remain strong. They're about $190. We reprice those contracts quarterly. We're working with -- we're working now with all our export coal producers to look into next year. I’m not going to give you any guidance, but we're having some success there and trying to lock up some volumes and not anything hugely significant, but especially on the thermal side, which is encouraging. But we work with these guys everyday, our customers and everyone's incentivized to move a lot of coal and heading into -- getting into next year. And hopefully as we get closer to the end of next year, we'll give you maybe a little bit more clarity on what our expectations are for 2020.

All right. Thanks. Thanks, Mark. Appreciate that. Maybe if you -- I have follow-up on that PS refinery. Jim gave us the rough magnitude of that. I was curious if maybe we’ve seen some other headlines with U.S. Steel bringing down, I guess keeping down some blast furnaces. In the past you mentioned that the tariffs have actually helped domestic, steel production domestic met coal consumption, so I was wondering if that was or any other distinct advance reflected in the updated guidance?

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

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

It is.

All right. Okay. Thanks for your time, Mark. Appreciate it.

Thank you.

Thank you. The next question comes from Amit Mehrotra with Deutsche Bank. You may ask your question.

Thanks, operator. Thanks, everybody, and congrats on the good operating performance. Jim, can you, I guess, maybe talk about the pricing environment. Is it harder to push pricing in the current volume and low-inflation environment? And can you just give us maybe a flavor of your ability to, just simply put, just charge a higher price for the better service that you guys are delivering?

Well, if you look at the – again, let's focus on there, there's two different business segments, there's intermodal and there's carload. Intermodal, our obligation there is to deliver a product that's as close as truck-like and to do so at a price that's cheaper than a truck, because of the service differentiation between the fact that the lift or the time in transit is going to take long. So as there's a very soft truck market out there right now and really marks a lot of excess capacity based upon some recent historical changes in the marketplace. It's a little more difficult for us. On the other hand, what we're really focusing on and as we talk a lot about, because it's two-thirds of our business and we – and very profitable long-term business for us is carload business. From a high-level perspective, in that situation we know that we're – that our customers are paying a 15% to 20% premium to move their product in a truck, because they want to buy service reliability. As we become more reliable in that supply chain, we should be able to get more and more of that business, and we should be able to do so at a premium price, because the customer is actually saving money by putting – taking the business off to highway and put it in a railcar. So that's where we focus intently on, leveraging the service product. Mark, do you want to add to that?

No. I think that's exactly right and as we become more reliable and persistent and as the market soften and customers are holding onto product and just in time deliveries become more important. Our service comes at a premium and I think customers recognize that. We do a good job for them, we get it there when we say we're going to get it. Our deliveries – our tip plan compliance is very good, and so they're willing to pay for their premium service.

Well, just as a quick follow-up to that. Why wouldn't we see that then those market share gains show up in the revenue? I mean, the revenue revision is not surprising, given all the headwinds you've discussed. But what if that would be improvements to the network on the carload side is the market share opportunity you just talked about. The realignment of the sales organization, those could translate to some market share gains. And so, maybe, it just takes a little longer than I appreciate, if you can just talk about where you are in kind of the evolution of capturing that market share. Because – it doesn't seem like it's showing up in the revenue numbers this year at least?

Well, again, as you -- I'd like to point out again, the carload is pretty -- the carload -- we are the most transparent industry in the world in as much as we report our sales volume on a weekly basis. And our merchandise business segment, even though everybody says, oh my god, something is wrong with CSX, the volumes are down 10%. Well, it's all intermodal, and we already told everybody in the world why our intermodal business was going to be down, nobody focus on the fact that our merchandise franchise was outperforming everybody else in the industry. And this is what exactly what we're talking about. So up until most recently, where we saw a couple of our industrial segments get much softer, we are very confident that the strategy of going -- having non-cyclical growth in our merchandise segment is achievable based upon our service product. And unfortunately, as I said, half of this -- or a significant portion of this merchandise business that we've now taken our guidance down on was associated with this one-time customer event and the rest of it is just kind of basically market-driven where in certain segments with our industrial customers, again, our grain business is doing really great. A lot of our segments of our business are doing really great. Not all grain moves in train, a lot of grain move in a boxcar -- individual boxcar that were taken for the truck and put in a boxcar. So, across the Board in this merchandise segment, we're seeing gains, we're seeing traffic come to us. And if you're a customer right now, it's kind of looking and saying like why maybe things are a little soft, maybe better where I continue to right-size my business to take control of my cost structure, how can I save money and one of my business. As you know, I can reduce my transportation spend overnight by taking the traffic off the road and putting it in the boxcar. 10 years ago, I wouldn't have done that because -- the product would have never got to where it was supposed to be. Nowadays, I'm willing to do that and I can save much. So, we're pretty confident on that and I think -- and we think that the numbers are beginning to prove us correct.

If I can just ask one follow-up for Kevin with respect to the cost opportunities you laid out. Kevin, do you expect to see OR improvement in the second half versus the stellar results you guys put up in the second quarter? 3Q typically looks a lot like 2Q, but I'm not sure, if there's any further opportunity given the cost items that you laid out?

Yes, I think Jim addressed that previously. I don't think we're going to get into back half versus first half dynamics in terms of OR. What I can tell you is there's a number of initiatives that we've been working on over the last month that are new to our plan to react to this downward guidance in our topline. So, yes, we're reacting quickly not only across G&A, it's across all aspects of our business. Jamie, Ed, Bob, and Brian are on Board and new ideas are coming to us everyday. And it’s our job to identify those and go after them, but we're not going to get the nuance of second half versus first half.

Okay. I’ll try, but I appreciate the response. Thanks everybody.

Yes.

Thank you. Your next question comes from Brandon Oglenski with Barclays. Your line is open. You may ask your question.

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

I mentioned intermodal versus carload business reflect the major of two different kinds of businesses. The intermodal is terminal-to-terminal, point-to-point and it's much easier to have those high trip plan compliance numbers versus carload. A lot of things we can do there on the terminal side in order to improve that customer experience and I'll have Mark tell you about some of the great stuff we're doing on the technology side on intermodal that we think is going to differentiate ourselves as well.

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

Thanks Mark.

Thank you. Our next question comes from Chris Wetherbee with Citigroup. You may ask your question.

Hey, thanks, good afternoon. Wanted to ask about the guidance and maybe specifically, can you help us break out what you think the volume expectations are for the back half of the year. I don't know if you want to sort of handle that on a merchandise versus intermodal type of dynamic is clearly there's some company specific initiatives on the intermodal side that are reducing volume, but just any help there to think about that mix of what's yields and what's volume in the back half?

Chris, I mean, we're expecting that the volume in the second half is going to -- at this point in time is probably -- we're going to have to work really hard to make the volume equal to or better than what we had in the first half. And that's the challenge as I said. Again we came into the year expecting to be up 1% to 2% in the first quarter. But under the circumstances with a lot of noise going on, we still have a pretty good quarter. But there's a lot of the segments especially intermodal just didn't bounce back with the way everybody expected it to be. And so what we’re seeing right now is kind of take today as the run rate. And hopefully, we can do a little bit better than we did in the first half even with the pretty strong quarter. But that's -- we don't have a big hockey stick anymore here, anymore to work with relatively flat, we should get a tick up in the second -- in the fourth quarter of the year, just simply because of intermodal start to over -- we start to get out of some of this -- de-marketing of certain lands. But on an absolute numbers basis, this is pretty much a pretty good -- for planning purposes for our guidance right now and I'm pleased that I hope I'm proven wrong and we do see things that are turning stronger in the later part of the year, but we're just assuming that this is kind of the new norm for guidance purposes.

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

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

I think so. I think so, Chris. Listen, again, as you look at the RPUs in coal, as you know in any given quarter always lots of moving parts there. Q2 coal RPUs was down obviously, but that was really a reflection of some gains that we got in shorter haul business and in our utilities business to the north, which is generating lower RPUs than the utility business to the south. And then as I talked about in an earlier question, some of the steel industry growth that we saw, saw some strong volumes there, which is again some lower RPU than typically we see on the whole book of coal. But no, I think, going forward sort of what you see is what you get for and what you should probably think about as we plan out the back half of the year.

Okay, great. Thanks for the time. I appreciate it.

Thank you. Our next question comes from Tom Wadewitz with UBS. You may ask your question.

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

So, hey, Tom. We should be, again, Jim mentioned what we're going to do on the volume side and we're going to take it as it comes and we're going to be -- we've got a long pipeline of initiatives of things that I talked about in the past, whether it’s on the marketing side, whether it's on the -- the business that we do with our short-line partners, whether it's stuff that we’re doing on a regional sales, whether it's a whole host of industrial projects -- industrial development projects that we've got going on. I mean, clearly, a long list of initiatives that we're working on, and so we're going to convert that volume as it comes to us and we're working hard everyday to bring more volume under the railroad. But let's be very clear, we're still achieving very strong value on the renewals and the momentum that I spoke about in Q1 on pricing continued into Q2. Every contract that we have it still needs to come across my desk for approval. And I can tell you that I'm extremely pleased with the discipline that our team is bringing. And so we're working hard to pull on both levers, and we're taking a disciplined approach.

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

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

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

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

Yes, right, right.

Yes. There's a -- again, there’s a certain amount -- obviously, there is a certain amount -- the two variables that -- with two variables, that we obviously need to work with are volume and inflation on the operating side. And to the extent that -- to the extent that we do get some cost reduction associated with volume reductions or increases, if it goes the other way, our challenge each and every year is to offset whatever the inflation number is. And hopefully, if we are providing a high-quality product as Mark said and we're pricing appropriately that should help us a lot to get us going in the right direction from the cost -- which would help on the operating ratio side in addition to keep finding ways to improve efficiency. We have long ways to go and along with the initiatives this work on. We're far -- in all of these various categories, we're far from best-in-class. We like to brag, but we benchmark against it just about everything that everybody else does not even -- not just in the railroad industry to try and figure out where we can improve. But we have a long ways to go and just about every segment of the way we do business.

Okay, great. Thanks for the perspective, Jim. Appreciate it.

Thank you. Our next question comes from Justin Long with Stephens. You may ask your question.

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

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

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

Well, to tell you what the economy is going to do in the back half of the year, I'll tell you what intermodal is going to do. Listen, I think there's a lot of -- as we talked about the excess supply that's out there, truck supply, capacity, we hopefully are flattish intermodal. We think there's going to be a good peak, but it's probably going to be somewhat muted versus the extremely strong peak that we saw in 2018. So, I think, volume levels are going to pick up a little bit, but probably not as peak issues we saw -- as we have historically seen. Listen, longer term, domestic intermodal, my view is there's no reason why this franchise should not able to grow on an annualized basis whatever GDP gives us plus two or three points.

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

No, including our rationalization. So, again, we lap -- officially lap the end of the rationalizations in January of next year. We took off again January of this year of 2019, a 5%. So overall, since we began this journey in December of 2017, we have rationalized over 15% of the intermodal network. Most of that -- a lot of that lapse in October and then the final bit lapse in December -- in January, excuse me.

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

Thank you. Your next question comes from Scott Group with Wolfe Research. You may ask your question.

Hey, thanks. Good afternoon guys. Kevin, I don't know if I missed it, but you guys usually give some guidance on the other revenue expectations. Any color you can give us there?

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

Okay, helpful. And then so with a more cautious volume revenue outlook, does this change the way you guys think about target leverage ratios? Does it change the way you think about CapEx? I mean, do you some flexibility on the $1.6 billion? And then, I guess just following up on that headcount piece, why not do more on headcount if the volumes are coming in worse?

I certainly think if we continue to see downward pressure on volumes, which is not our expectation that you probably see some more opportunity there. There is variable cost in our business and then we would take a look at some other things as well. On the balance sheet right now, we're sitting on $1.6 billion in cash. We expect to generate a lot of cash in the second half of the year, kind of, give us significant flexibility to be proactive and opportunistic if the market gives us an opportunity. We're well within our 2.5, 2.75 times leverage targets, debt to EBITDA. I think, we're comfortable living in that area. We're at the bottom end of that today. So it gives us a lot of flexibility going forward. But again, with our cash balance, just we even have today and what we expect to generate through the back half of the year gives a lot of opportunity to be opportunistic here.

Okay. Thank you for the time guys.

Thank you. Your next question comes from Ben Hartford with Baird. You may ask your question. Ben, please check your mute feature.

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

Yes, a great question. We're obviously working and talking to our customers. I'll be visiting with a lot of the international steamship guys here in the next month or so, where I know that's going to be a huge topic of discussion. We're -- clearly early indications, we don't think it will have a material change for our business. I know they're working on these issues as we speak. But where we stand right now and, again, maybe a little premature, maybe remind me to bring that question back up on the Q3 call and I'll give you maybe a little bit more color. But it's a topic of discussion coming up and -- but clearly, I think, right now we feel pretty comfortable that we're not going to see any material change.

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

Well, it's a great question. Listen; again, as Jim said earlier, we're outperforming the U.S. rail industry today on our merchandise volume growth. We're up after the second quarter, over 2%. The others are down for the year on merchandise. So, clearly, the initiatives that we're working on, the changes to our service plan and the service that we're delivering are clearly having a lot of big impact. Now we're facing reality and the industrial economy is kind of slowing down here. And we've got a few headwinds going into the second half, which we have to live with. And obviously, PES explosion was a major factor to us revising this. But, as I said earlier, we have a number of initiatives going on and the team that Kevin used to lead in the marketing department before he became an interim CFO here is doing some great work analysis. Those are the -- we got a team of data analytic people downstairs that are doing some great research and exposing a lot of opportunities for this organization. We're excited by that. There's some -- obviously, some big opportunities and we're going after everything methodically and we're looking to grow this organization. We're not just taking what we can get. We’re going out there, we're being proactive and this is about growing CSX, it's not just taking what the customer gives us. We’re going to find opportunities to grow convert truck traffic and we're doing just that.

Appreciate it.

Thank you. The next question comes from Bascome Majors with Susquehanna. You may ask your question.

Yes. Thanks for taking my question here. You made a few changes in the C-suite in the second quarter. I'm not sure if Farrukh’s in the call, but if he has I was hoping you could help us understand responsibilities of this new role of Strategy Officer and anything about the long-term or mid-term vision that might entail realizing he's six weeks into the job here. And Kevin, anything if you want to highlight your priorities for the finance organization your leadership that will be helpful? Thank you.

Sure. I've known Farrukh for many, many years, we go way, way back -- all the way back to the privatization of the Canadian National where we worked together on that initiative. At that time we kept up with his career as I moved around the industry as well. So, I just felt that we're embarking on a significant transformation of CSX and a lot of things that we want to do differently, a lot of them in the area that Mark spoke of in terms of expanding our reach and our interface with our customers. And Farrukh instantly came to mind, because I felt that he had a great experience and working in that area. So, it's all about what it is we can do to make our service offering, our core rail product offering better to our customers. And to me that involves a significant amount of new thought, a new direction, a new vision from what has historically been done in the railroad industry and that's what Farrukh is going to work on with me and make it happen. And Kevin, Kevin's phenomenal is doing a great job. We all appreciate that he was here and his skill set and his ability to step right in. And pick up where Frank left off. Frank did an amazing job for CSX and we're all happy that Kevin was here to help as we worked through the transition. And we are -- I am in the process as Kevin well knows. He is looking at the kind of sheepishly as you all know, we’re doing an external search to see if we can find the right person to fill this role and as part of that process, Kevin is going to be considered.

Thank you.

Thank you. Your next question comes from Jordan Alliger with Goldman Sachs. You may ask your question.

Yeah. Hi, guys. Thanks. Just a little pushing on the intermodal, the trip plan compliance looks really strong. And I'm just wondering the de-marketing is going to lap by the end of the third quarter. So let's just say the economy sort of gets back to a 2.5% GDP type number 2%, 2.5% as we move into 2020. Do you feel comfortable that at that point you’ll be able to start more aggressively re-marketing the intermodal and do that GDP plus two to three points or is it premature?

As I said, longer term, I think that would be our goal. Clearly, I'm not going to sit here in July of 2019 and provide you 2020 guidance. But longer term, as we think about the intermodal business, yeah that would be my hope and expectation given our franchise, the strength of our franchise, and the service that we provide to customers, which we're pretty proud of, that we would able to do whatever the economy give us plus two to three points above that. So that's my wish, that's my goal, that's we're going to work on. We're settling in on our footprint. We’re doing really well on the lanes that we -- that we're in now. We're showing our customers what we're made of, and when the growth comes we're ready to handle and got excess capacity and we're ready for the growth when it comes.

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

Well, I think yesterday, Jamie once said, they were pretty excited about the second half of the year. I think it was about two weeks ago on the front page of the newspaper, General Motors was talking about how great things were and on and on and on. Not necessarily our customers per se, but I think Jamie Dimon said this morning, it shouldn't stop being so pessimistic, things aren't that bad. All we're doing and saying that there's been -- as I said the slow drip since the beginning of the year, where everyone has expressed concern, I think all of our customers mark interfaces we've done more than I do on a daily basis, and maybe he wants to comment as well, but I think all of them have said from the very beginning, yes, 2019 is expected to be -- was expected to be a slower year than last year, and as he went into the year with all the confusion and chaos more driven by governmental issues than anything. But if we didn't, once government shutdowns you name it on and on and on tariffs, this tariffs that, if we didn't bring the calmness noise down in the marketplace, we could begin to do things to damage the economy. So, and nothing really has changed to make everyone feel different over the first six months. And so, we're looking at, is this the new norm for the rest of the year. Now, we're talking about another government shutdown, maybe as early as September or October. And so, as I said, unfortunately in this day and age, I'm obligated, we're obligated to update guidance when it changed. And we were trying to figure out where to put the peg in. And so we said, let's pretty much take -- let’s assume that what we have today continues for the rest of the year. And let's hope that we're wrong and if things pick up as opposed to say, well, we don't really know, let’s not take a realistic view. We can always just take our guidance down again next quarter. You don't want to get into that situation. So, we think this is a realistic look at the state of the economy and where we fit in. And we're confident with that, plus it gives us the ability internally to say, hey guys, this is the new norm, let’s tighten our shoes, let's get to work and we're going to achieve our targets.

Okay. Thank you.

Your next question comes from David Vernon with Bernstein. You may ask your question.

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

David, as you know the math, if I give you EBIT growth, you would know the OR. So by default, we're going to give the OR ratio into the back half, but probably kind of…

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

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

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

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

But the volumes from 1Q to 2Q were flat?

Pardon me?

The 1Q to 2Q, the sequential volume was kind of flattish and you’re going from like 168 to 124, I was just trying to understand, did you see a really big pickup in the yard performance or was this just…

This is -- most of this is international intermodal and this is where these kinds of the guys have said, they can't have offsite storage. They must store their box in our terminal. Well guess what, when you start charging them suddenly they find ways and they move their boxes to container storage facilities located near our intermodal terminals. That's just the nature of the beast. So, yeah, volume on the international side was -- overall volume was down in intermodal, volume on international side was relatively flat, but to be a customer behavior that Mark just alluded to, these are the first guy to take advantage of that and get him out of it.

All right. Thank you.

Thank you. Our next question comes from Jason Seidl with Cowen. You may ask your question.

Thank you, operator. Jim and team thanks for squeezing me in here. I just got -- I have one question. Looking out in intermodal obviously you guys de-marketed some of the business, because there wasn't enough on some of the lines and the profitability just wasn't there. It's clearly important to raise the profitability of intermodal. How much of that is improving service and how much of that is going to be -- you guys going after higher prices?

Yes. A lot of the work that we're working on right now is changing the footprint and working on taking out all the unnecessary touches and switching that we used to do with intermodal that was crazy changing this hub and spoke system that we inherited when we joined the railroad, which caused a lot of inefficiencies in the -- in our intermodal product and in our service and drove up our intermodal cost significantly. And so, we have changed that model. We have gotten out of a lot of the lanes that were clearly very unprofitable for us. We're focusing on what we do well and the lanes that we do well in our in our contracts, we have a longer term contract. So, it's not -- we're not susceptible to the very well sort of mid to high to single-digit exposure to the spot market. So, doesn't really affect us too much. But most of our pricing is under a long-term contracts with rate escalators, so annual rates escalator. But we're working there and we're doing a good job and we're going to see the profitability of that business segment improve over time.

Okay. Thanks for the time as always.

All right.

Thank you. Our next question comes from Walter Spracklin with RBC Capital Markets. You may ask your question.

Yes. Thanks very much. Good afternoon, everyone I'll keep it to one as well just again on the intermodal side and your effort. I think Mark you were saying targeting trucking your one of your peers obviously in Canada is taking a little different approach to that. They're not only targeting the trucking market, but investing in and buying intermodal assets within that market to kind of jump start and accelerate that conversion that truck-to-rail conversion. Is that something you would consider? Is that something you've looked at? What's your overall view on that strategy?

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

Keep looking at it. We're watching what they're doing.

Yes.

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

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

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

Okay. That's it. Thank you very much.

Great. Thank you very much for calling us.

Thank you. At this time, I turn the call back over to the speakers.

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

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