CSX Corp (CSX) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation second-quarter 2017 earnings call. As a reminder, today's call is being recorded. (Operator Instructions)

For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

Thank you, Marcela, and good morning, everyone. On behalf of the management team, I would like to welcome you to our quarterly earnings call and also thank you for your interest in CSX Corporation.

Our presentation, our quarterly financial report, and our press release, which conveyed our results, expanded buyback program, and reaffirmed 2017 guidance, are all available on our website at csx.com in the investor section. In addition, later today, a webcast replay of this presentation as well as our 10-Q will be posted on that same website.

This morning, CSX is being represented by Chief Executive Officer Hunter Harrison; our Chief Operating Officer Cindy Sanborn; our Chief Marketing Officer Fredrik Eliasson; and our Chief Financial Officer Frank Lonegro.

On slide 2 is our forward-looking disclosure. Any statements about the future made during the presentation or during Q&A should be taken in the full context of this disclosure.

Turning to slide 3 is our non-GAAP disclosure. And while CSX files all of its financials in accordance with US GAAP, we are providing certain non-GAAP measures to give you a more fulsome understanding of the business. These measures should be taken in the full context of this disclosure and with the understanding that they are not a substitute for GAAP.

Finally, with close to 30 analysts covering CSX, I would encourage everyone to limit their questions to one primary and one secondary question.

And with that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison. Hunter?

Thank you, David. Welcome to everyone. It's nice to be here with you from beautiful downtown Jacksonville. I am going to limit my opening remarks this morning and let Frank and Fred and Cindy take the heavy load initially. I'm sure we are going to have a vigorous Q&A session and I will make most of my remarks or observations during that period.

I would say this: I trust that you read the press release. I hope we were reading the same one. I thought we had a hell of a quarter. Four months we've been after this, and a lot has been done, a lot has been accomplished. Directionally, I am very pleased with the direction the organization has taken.

Although, I think maybe certainly in some quarters -- and I understand that your expectations were pretty high. What used to be an all-star performance, you don't even make the cut anymore. So I'm going to be interested obviously in some of the Q&A.

And I do think that as a result of this to some degree, I think we're going to change the format of how we announce earnings in the future. And I think we'll go more to the conventional approach of releasing our earnings ahead and the call effectively simultaneously.

Because I think it does create some awkwardness in that some of you see numbers the night before. You have questions. We are not able to respond to some of those questions, or in my case, all of them. I didn't talk to anybody last night. I just mopped the tears up a little bit and moved on.

So I think it will put us in a situation where you're not having to make observations in the dark. And it will make all our work here much easier in distributing this information to the shareholder, which is really the important thing we are dealing with here.

So with that said, let me turn this over to conductor Frank and let him proceed with the presentation.

Good, thanks. Good morning, everyone. Thanks, Hunter. Slide 7 reviews our safety, service, and efficiency performance year over year. You can see our train accident performance improved slightly, while our personal injury frequency index rose to 1.14, reflecting a slight increase in injuries and a significant fewer number of man hours. The safety of our employees is paramount and our commitment to them is unwavering.

And let me jump in, Frank. Even though we express injury performance in numerical terms on this slide, safety is always about returning employees home at the end of their tour of duty. Tragically, we had two employees who were killed in an accident that occurred in Washington DC in the quarter. Our condolences go out to the family of Stephen Deal and Jake LaFave as we mourn the loss of two of our colleagues.

It is a stark reminder that even though railroads are one of the safest industries in North America, they can also be very unforgiving ones. And our commitment to safety remains.

Thank you, Cindy.

Service and efficiency measures are trending well year over year. Q2 train length reflects two initiatives that offset one another in the quarter. Both are integral to Precision Scheduled Railroading.

The first is balance. We have expanded the days of service on most trains to seven days per week, which is instrumental to improving cycle time and asset utilization, but negatively impacts train length.

The second is unit train conversions into the scheduled merchandise network, which reduces both asset and resource intensity and increases train length. Going forward, you should see train length increase sequentially.

Fuel and velocity have both improved and reflect the early success of Precision Scheduled Railroading. These improvements are particularly noteworthy, given the rapid pace of change we are driving.

Balancing the train plan, merging unit trains into the scheduled network, and converting to flat switching has reduced handlings, improved transit times, improved velocity, and allowed us to idle 26,000 freight cars and 900 engines. Hunter and Cindy can certainly provide more color during the Q&A on those items. Fuel efficiency has also improved year over year with 900 fewer engines in service and a more fuel-efficient active fleet.

Turning to slide 8, we are encouraged by the financial results driven by the early implementation of Precision Scheduled Railroading. Revenue was up 8%, driven primarily by core pricing gains of 3.7% all in and 2.2% excluding coal, volume growth of 2%, and higher fuel recoveries.

We also had liquidated damages of $58 million in the quarter, which reflects the resolution of a long-standing dispute. It is recorded in the other revenue line and drives the year-over-year variance. GAAP expenses were up 6% but down slightly, excluding the restructuring charge. Efficiency savings of $90 million more than offset the impact of inflation in the quarter.

Looking at the details, labor and fringe was favorable, reflecting 2,200 fewer resources. As Hunter discussed on the first-quarter call, we have also begun to address the size of our contractor workforce, with savings flowing through to the MS&O line. On that line, we also concluded a decade-plus condemnation proceeding resulting in $55 million of favorability.

Fuel expense was higher, reflecting a 15% price increase. Strong revenue gains combined with cost control drove very strong incremental margins. Reported EPS was $0.55 with a 67.4 operating ratio. Adjusting for the restructuring charge, EPS was $0.64 with a 63.2% operating ratio. The reconciliation of GAAP to non-GAAP is in the appendix of these materials.

Slide 9 illustrates that our free cash flow generation continues to improve, driven in large part by three things: strong top-line gains, cost control, and reduced capital intensity. Our success in generating free cash flow has enabled us to increase our shareholder distributions year over year with over $750 million of share buybacks year to date, including nearly $500 million in quarter 2. And you can also see the effect of our recent $0.02 dividend increase.

The Company's improved financial performance is reflected in our trailing 12-month ROIC of 10%, nearly a full point better than last year. Finally, our debt to EBITDA ratio remains stable as higher earnings offset the impact of additional debt.

Turning to slide 10, the third-quarter volume outlook shows nearly three-quarters of our business is expected to be favorable or neutral. Export coal demand remains strong, and we now expect to ship around 30 million tons for the year, though revenue per unit will moderate sequentially as the global benchmarks come down.

Consumer sentiment remains positive, driving Intermodal growth in the third quarter. As a reminder, in August, we will cycle the short-haul domestic interchange loss we've mentioned previously. We expect continued economic growth as well as a tightening truck market, which should support growth in several of our merchandise markets.

On the left side of the ledger, a few of our markets will experience year-over-year volume declines in the third quarter due to market-specific headwinds you are very familiar with. Auto shipments will be impacted by softening production, as reflected in the forward views of North American light vehicle production.

Crude oil trains have essentially gone to zero, more than offsetting the growth we expect in the core chemicals markets. And domestic coal remains challenged due in large part to the impact of the short-haul competitive loss as of January 1.

Before I wrap up on slide 11, two housekeeping items. One: our fiscal year will now tie to the calendar. As a result, the third quarter of 2017 will have one more day than the third quarter of 2016 and the fourth quarter of 2017 will have one more day than the comparable 13-week fourth quarter of 2016.

Also, as a result of a recent state tax law change, our effective tax rate for the third quarter will be between 39% and 40% as we revalue the deferred tax liability for that particular state.

Now to slide 11. We are off to a good start to 2017. Our first-half performance provides this team with continued confidence in our full-year expectations and we are reaffirming that guidance today.

Excluding restructuring and assuming no economic or coal-related disruptions, we are on track to deliver a mid-60%s operating ratio, record efficiency gains, EPS growth of around 25%, and free cash flow of around $1.5 billion. With that backdrop, the CSX Board of Directors has authorized a $500 million increase to the share repurchase program, bringing the total authorized program to $1.5 billion.

We are continuing to evaluate the optimal capital structure and cash deployment strategy for the Company and are committed to an investment grade profile. We are excited to host our 2017 investor conference on October 29 and 30 in Palm Beach and look forward to sharing with you our multi-year strategy and associated financial targets.

With that, we'd be delighted to take your questions.

(Operator Instructions) Brian Ossenbeck, JPMorgan.

Thanks for taking my question. So you mentioned in the press release that there's some impairments on PTC, about $10 million or so. So I just wanted to use it as an opportunity to talk more broadly about that system, how you stand right now, if you are seeing any implementation effects, why you took the impairment.

And overall, what sort of OpEx you are running through the P&L this year and how you expect that to progress over the next couple of years.

In terms of the impairments, about half of the $10 million impairments were in positive train control. The others were in literally a smattering of technology projects that aren't necessarily consistent with Precision Scheduled Railroading, and so we've stopped those.

Back to the PTC half of the equation, that was really divided into two parts. As we've reduced the locomotive fleets, and don't have plans to bring those back, some of the labor side work that we did on those engines for PTC won't be necessary. And therefore, we had to pull it out of the capital plan and roll it through the P&L.

The other part was some signal design work that we did on portions of the railroad based on the traffic flows that we anticipate as well as the TIH flows that we anticipate. We won't necessarily be upgrading those to PTC, so we had to roll those through as well.

We'll continue to look at things. Obviously, impairments are somewhat unusual. We don't have those on a routine basis. But as we look at the capital plan going forward, and as we look at the PTC footprint going forward, there may be some -- I don't know of any right now, but there may be some.

In terms of your OpEx question, I know there's been a lot of commentary on that recently based on some statements by the CN and the UP. Let me tell you where we are from an OpEx perspective.

Our OpEx on PTC has been ramping up for several years. Our full-year 2017 will be $150 million. Now, that is the cumulative impact of a ramp-up since about 2009 on the OpEx side. And the cash piece of that is about one-third, the depreciation piece of that is about two-thirds.

When you look at the cash piece, it's really as the -- I will call it the phone bill goes up, because it's a very heavy communications type system, that phone bill keeps going up. So we've got some piece of that. And then hardware/software maintenance and support as we go forward would be the other part of the cash piece.

We likely will have a terminal run rate in 2020 of around $200 million to $250 million. And again, I think that split between depreciation and cash expenses would be roughly the same.

And Cindy can talk about where we are on the project.

Yes, we are about 40% of our PTC miles are in service at this point. We feel very comfortable that we'll have a majority of our -- certainly our commitment by 2018 to be hardware complete and continued implementation of subdivisions as we progress from this year and next year and on into 2020.

Okay. Thanks, Frank. I know you spent a lot of time on PTC in a prior role, so just to confirm that it's $200 million to $250 million annual run rate split between OpEx and D&A, so it's an all-in expense cost to run the network. (multiple speakers)

And Brian, that's a terminal run rate in 2020 or 2021.

Right, right. Okay. Great, and then just a quick follow-up on the high-level market view. We've seen the US dollar on a trade-weighted basis basically decline ever since the beginning of the year. I think it's down almost 7% or 8% as we stand right now year to date.

So Fred, what are you seeing in terms of the various puts and takes outside of the obvious in export coal? When does that decline start to become more of a benefit and start to show up in perhaps some more exports and probably fewer disruptive imports?

Yes, I think we've been encouraged this year by the fact that IDP, to begin with, is showing a little bit of a strength versus what we've seen the last couple years. And clearly, part of that is also the dollar has helped some of the US exporters.

You've hit on the export coal side. Clearly, a weaker dollar is helpful there. And I think as we look at some of the other markets, we will see some of those benefits. I don't think we've seen a lot of it yet, but any time we have a little bit a weaker dollar, it does help them. So I do expect to see this move forward.

Okay, thanks a lot for your time.

Chris Wetherbee, Citigroup.

Hunter, I wanted to touch a little bit on expectations and maybe cadence of improvement. Your points earlier were well received in terms of people's expectations about what we might see this quarter.

But maybe you could help us understand a little bit how some of the changes that you've been implementing early on in the process here ultimately play out in the physical world in terms of closing hump yards, obviously working with the employee group, and generating that productivity. Just wanted to get a sense of maybe how we can start thinking about that as we move into the second half of the year.

I appreciate your question, Chris. That's a good question I was going to raise if you hadn't raised the question. One: you should think about the sensitivity as [fine].

When we make a operating decision to reduce the expense or change the operation, say, maybe in early April, we might not see the benefit net in the P&L until August or September, depending on collective bargaining agreements, depending on the tax treatment, and all those various things that come into play.

So we can take certain actions. But to know exactly when those benefits will start kicking in is a little difficult. And for me here, it's a learning experience because it's different everywhere you go.

But the thrust of what we have talked about that we are trying to do hadn't changed at all. We are down -- and look, I'm not restricting my numbers to second quarter. This is just where we stand today, where do we see ourselves [until return].

We are down about 900 locomotives now. It's certainly not over. It will probably clearly go to 1,000. I'm not sure where it's going to stop. We are down -- depending on the way you look at it, whether you include stored cars or not, but the way I look at it if you look at the active inventory, we are down about 60,000 freight cars from where we were early on in the year of 200,000 down to 135,000 or 140,000.

I think that we have emphasized that we -- this is more of the team than me -- but I think from a hump standpoint, I think we started off somewhere I think 12 -- the number was kind of bouncing around -- humps. And I think we think we are going to end up -- probably within the next year we'll end up with three. It could be two or it could be four, but in that range, a significant drop in the number of humps.

And I would add to that is that look, those humps that we are taking out of service as humps doesn't mean we're going to sell all the land and scorch the earth. And I would hope one day post-Harrison that this Company is going to see some growth. We're going to see growth in the merchandise side, where we do need humps. And maybe there will be a time in the future.

So we are going to keep the whole garden. We're not having a garage sale here. I think that as a result of some of those things, the capital spend over the next several years, unless there's an opportunity to come up that I am at this point not aware of, will come down pretty significantly from what has been in the plan before. I think this year, we are going to be down $500 million or so capital.

Well, it'll be $100 million this year when you look at it on a year-over-year basis versus where we end up last year. It will be closer to $600 million.

Okay. Somewhere in the neighborhood. And I would expect the reason is we are going to be able to take all day, obviously, on locomotives, rolling stock, and a lot of those things that go to support that.

That's going to help obviously free cash flow pretty significantly, which I think -- I think, my personal view is [Permian] certainly had some influence on the Board when they made the decision to authorize the additional buyback, that it's -- some be done financed internally with operating expense reductions.

With basically one exception, all the operating metrics are trending and hitting in the right direction; very, very encouraging. If you are a headcount person, I think the headcount as we stand today -- I'm not doing just quarter over quarter -- but we stand at about 2,300. And that's not something we're trying to set some record with, but I wouldn't be surprised if before the year is out if a lot of these things come together that could be 3,000.

And I look at that -- I look at my past experience in this business and I am saying that's a hell of a quarter. I hate to disappoint some people, but I almost said that's all I got. But there's other opportunities that will come before us, and the team is coming together.

And clearly, you're going to ask this question, so I will go ahead and try to address it. What's the biggest challenges we have? One of the biggest challenges we have is what I've talked to you about before, and it's the change.

The change is the cultural change, and that's difficult for organizations to go through. And we are having a little bit of it ourselves. And at all levels you saw the -- this was right prior to my arrival, so I think I shouldn't be criticized or credited either way. I'm a neutral with 1,000 people.

But I did take note that they were, I think, effectively all management people. There were no Indians, if you will, in there. So we didn't take away from what was being done to the physical plant. And I think our view going forward will put us in a position that we don't have to replace them.

Now, on the operating side, do we have a few gaps? Yes. Is that being addressed? Yes. I think our human resource group, along with Cindy and others here in the team, are sensitive to that. I think we've recruited -- they know better than I -- but 15 or so people that we think are top-notch high-potential railroaders from various backgrounds and various locales. So I think that it's something we can solve and deal with.

And there's a lot of other things in the bucket. If I look at that and sit back and review as we look at second quarter, I've got to be pretty excited. I got to be excited about third and fourth and three or four years out.

The other plan, the last plan I did before this, you all said I couldn't get it done in four years. And now you are on me because I can't get it done in four months. So the bar is being raised here, but I'm ready for the challenge.

Fair enough. That's a very comprehensive and helpful answer. I appreciate that. The follow-up would just be in terms of initial customer reactions and how you might think about the business from a volume standpoint as you also progress through that cost and operational efficiency effort as we go through the rest of the year.

Have you been surprised? Has it been more negative or more expected in terms of the reaction from customers? And what you've been pushing off the network potentially as maybe some stuff has potentially moved competitively or otherwise. Just want to get a sense of how customers are viewing that initial changes at the Company.

Well, let me comment and then I'll let Fredrik comment. This is not a lot different than what I expected. Customers are like other people: a lot of them don't like change.

I've spent some time with them myself. It's hard fighting with them on the telephone and face-to-face. And I've tried to explain to them where were going, why we are going there, what's important about it. And to get there, we have to go through the change.

So there's going to be a little pain and suffering. I don't know, frankly, how to get there without some bumps in the road. This is not just something you can turn a switch on.

So I think most of them, by far the majority, are pretty sympathetic. I've had some nice dialogue with them that look, we look forward to the changes coming in. We're willing to suffer a couple bruises along the way. Just don't bruise us up too much.

And I think with a couple of exceptions, it has been typical of what you might think and expect. Look, nobody loves everybody, okay. So we're going to have people out there that are going to throw darts and second guesses.

But when the bottom line comes in, I don't think anybody's going to change businesses plus or minus based on that. They are going to do it -- if we provide this service that we've talked about, if we make the improvements that we've made, we will be rewarded. If we don't, we won't, and that's the way it ought to be.

I'm not asking -- we are not asking anybody to do this just because we need it. We are going to work hard to earn it and I think we can -- I don't think any of those issues are insurmountable.

Fredrik, you might have some --

I would say that because it's about transit time and it's about reliability. And if we look at transit time as an example, if I look at the scheduled merchandise network and our coal network and roll network, if I compare transit time here in the second quarter versus the first quarter, they all improved.

And clearly, we are going through a lot of change. Cindy and my team are working through that with customers who we are impacting them specifically and trying to fine-tune their operating model and making sure that ultimately we reach what Hunter has been very clear about. That we are going to get a better service product for our customers because not only is that better for the customers, but it's also better for CSX.

Great, thanks for the time. Appreciate it.

Tom Wadewitz, UBS.

So Hunter, I wanted to get a sense. You referred that I think all the metrics are moving the right way except one. I don't know if the one you are referring to is dwell time.

But when I look at the dwell times at some of the yards, I've seen numbers that are 40, 50 hours, which to me is unusual. I normally think 20 to 30 hours is typical dwell time. I know you've made pretty dramatic changes in converting hump yards to flat switching.

So how would you characterize the progression? April and May were really good. June seemed to be a little bit of a pause. Are the dwell time numbers a concern?

And how should we look at things in third quarter? Do those numbers come down? So if you could just help us with the forward look and also what's happening in the dwell time, I would appreciate it. Thank you.

Sure. Tom, a lot of people don't understand dwell time in my view. In this model of ours of scheduled precision railroad, the challenge is not to get the dwell time as low as you can go. It is a planned dwell time if you hit the plank.

So you don't hurry up and wait; you don't spend money you don't need to spend just to create some -- to dwell 18 hours instead of 20 if there's no real true savings opportunity there.

So this is not how low can you go. This is look, let's just say we are at 24 today or 25, and it was higher. But let's just say that as we run all this plan out and say how should the cars dwell at these various terminals that continue to exist, for example. And you say, well, what should dwell time be? Should it be 21 hours, should it be 19 hours, what is the dwell time?

Now, what some people on the outside looking in don't understand is they look and they say the dwell time is up an hour. God, that's a horrible trend. But wait a minute -- we are going through one terminal instead of three. So would you rather go through 3 terminals at 26 hours or 1 in 27. Well, and they said, well, I didn't get it. And I said well, I understand. That's why we are trying to answer the question.

Now, having said that, a lot of things affect dwell. If we have too many cars in inventory and if it's a slow period businesswise or if it's a holiday period, what happens to the cars? They dwell because there's not a need, a demand for them.

Now, that's a little bit our fault by having maybe too many cars in the supply chain, the pipeline, whatever you might want to call it. But all those things affect dwell. So look, there's going to be Fourth of July. Although we would like people to work 365, they don't do it. We do.

Can you imagine if the railroads said we are going to take every Saturday and Sunday off like normal people and we are going to have our time off, we are not going to work every day? The impact that it would have economically to this continent. I'm telling you, I've seen the numbers and it's enough to put us in a depression, I'll tell you that. So we're going to have periods with holidays.

So the dwell time as a gross number, we've gone from 26 to 25, doesn't concern me. Now, if I see, Tom, what you have mentioned, 40 or 50 hours, it's certainly worth a second look to be sure that we know why that is existing. Is it because of service failures? Is it because of operations that we're not doing what we need to do? And then we will get in with those terminals and correct them.

But we get these humps, the hump stop, that doesn't mean the whole yard is going to close down. But I mean, significantly maybe a place we are working 12 or 15 assignments we will go to 2 or 3. Plus the fact that we don't have to replace the equipment and all of things about the humping operation. You will see the dwell time come down, and that will be coming down because we can take the product down consistently.

So if we are given three-day service and we do those things, we can get to two. And then the dwell time will change to the standard of two, not what it was before. So that's a little commentary on dwell.

Okay, thank you. And second question would be on the -- I guess a full-year guidance when you consider the upside in second quarter, including the $0.64, it seems that it's a conservative expectation for second half. I mean, assuming, just kind of putting some revenue numbers in, I get a, call it, 67 OR in second half, maybe 66.5, 67, which seems that it implies you wouldn't have much sequential improvement.

I know there is seasonality, but I'm just wondering is it appropriate to say maybe there's some element of conservative in the full-year guide? Or is it appropriate to say, well, it just take some time to see the OR improve and don't expect a lot of sequential improvement in the second half.

Well, I think you have to be real sensitive to the timing. Now, I just made a case that a lot of the actions we took in the second quarter we hadn't seen come to the bottom lines yet. But they are going to come to the bottom line in third and fourth quarter and they are not in that headline.

So one of the things I think we are all doing, and I've done at every one of the turnarounds, is that, for lack of a better term, we are dealing with a leap of faith. Because I'm saying to the team we can do one thing and they're saying we've never done it before. Show me.

So we are going through that phase. I am pretty comfortable, and I know Frank is shifting hips over here on me as I start to say this. I'm very comfortable -- have I ever been wrong before? Yes, I've been wrong before. Not many times, but I've been there -- that we will -- I think if I know exactly what our guidance is that we are going to be somewhere around -- if you talk about a clean quarter and we can talk about all that -- we are going to be in the range of mid-60s, which could be 66, could be 64s.

I think we are going to be $1-billion-plus free cash flow. I think the earnings are going to be pretty damn good year over year. I think it's pretty realistic. What I do think is this: I think we are all -- and me included -- short selling ourselves a little bit.

Because we're really not saying that these recruits and some of this cultural change, we are not really giving a lot of credit there. We've brought a couple of people in, we think, into this organization. But I'm telling you, they have made huge differences, one individual, huge. Million dollars of difference.

Now, you don't run upon those every day. There is not a Michael Jordan on every street corner in Chicago or North Carolina. But if you can get one or two out there, it really helps things as opposed to just having a group of players.

Okay, great. Thank you for the time, Hunter. I appreciate it.

If you have a dull weekend, call me. We'll talk more about this if you want, Tom.

Allison Landry, Credit Suisse.

Thanks, good morning. I just wanted to follow up on the headcount. Hunter, you mentioned earlier you are taking -- today you stand at a reduction of about 2,300 employees. Does that include the 1,000 management positions that were --?

Yes. Yes.

Okay. And then Frank, on the contractors, could you -- how many do you guys currently have employed?

Well, we are -- we haven't published that number yet. But let me give you a sense of what we are going to do and then let me give you a sense of where we are.

What we are looking to do, and Hunter has given us some really good guidance on this one, is to look at what can be insourced economically and being able to absorb that over the existing employee population. Or do some sort of conversion factor, two to one, three to one, something like that, where we can take two or three contractors out for every employee that we might add.

So you'll obviously see that flow through on the MS&O line. And then you may also see -- I will call it a lesser degree of comp per employee takeout or comp per workforce takeout on the MS&O line than you might see on the labor line.

What Hunter said on the first-quarter call was we would be down an incremental 1,000 in addition to the 1,000 that we did through the management restructuring. And that second 1,000 that he mentioned was going to be a combination of management, union, and contractors.

I will tell you that we are through that. We have made great progress. And to Hunter's point around thinking about a 3,000 number by the end of the year against the 2,300 where we are now, we'll continue to work on all three of those elements through converting contractors. We will look at the resources that we need in the field to run the operating plan, and we will certainly look at continuing to manage attrition as tightly as we can.

So I think all of those things you will continue to see sequential improvement in headcount. And as we get to a point where we have good year-over-year comparables for you on the contractors and consultants, we will begin to publish that one. It could be as early as the investor conference, but certainly be as of the first of the year.

Okay.

Let in fact me add a little comment or context to that. And what I'm trying to encourage -- the organization is trying to absorb is this. If I go back, one of my proudest moments was at Illinois Central. And after some financial engineering and I became the CEO, we settled in and we had a little railroad that had 3,000 employees and a 80 operating ratio.

Two years later, we had 3,000 employees and we had an operating ratio of 62. Now, the issue is this. It's not [that this]. And then people said, well, how did you do that? What was the difference?

We allowed those 3,000 people to create value. We gave them opportunities. And that's a much better story; it's a much better bottom line if you can say, look, this is not about stripping heads out. It's taking valuable people and allowing them to add value to the organization in the most effective, efficient way it can be done by doing it with internal people. You don't have to get into buyouts and all this other stuff. So that's the road we are heading down.

Okay, that makes a lot of sense. Hunter, you also made some comments earlier, which I think were alluding to long-term share gains in merchandise. So I guess should we be thinking about that similar to where CP is now?

In other words, does CSX eventually shift from a cost improvement story to a top-line growth story? And do you expect those share gains to come primarily from truck or are there any opportunities that you see for CSX to take share in merchandise from your competitor?

That's a hell of a question. Number one, yes, we want to CSX [grow up]. Number two, one of the levers that will help us grow is low cost and efficiency. There's going to be a continual drive and hopefully a compatibility between those two numbers. Because if we lose a sense of our cost, we lose the ability then to be able to grow the business as effectively as we'd like.

Where can we gain the most share? Clearly, in my view, is off the highway. There's some from the competition, and these folks remember better than I know more about that.

But look, the focus is not, at least in my view at this point, not the rail competition. It's the highways, okay? Although we let jealousies get in here from time to time. You go to Canada and you say the C-word, depending on what part of the country you're in, and people just go nuts. They are emotional about it.

But the big opportunity is on the highway. We'll have I think what both of us have described as a [jumball] business with our competitors. They know how to railroad, they are good railroaders, they are tough competition, and we'll have uncompete. That's the way it always gets with capital systems thereabout.

But the key is that we hadn't really gotten is this service factor. We have to understand that; we have to appreciate that. We have to understand that it's difficult for people to change. And to some degree, it's going to take a while.

But that's where rail over the last 40 years has lost the biggest market share. That's the most probably all in some of the most profitable business we have. And I'm not trying to say to you that we are going to see some rapid growth over the next 15 or 16 months, and a lot of this will probably happen in the post-Harrison era. I think it will. If we do our job today in laying the foundation, there will be a lot of opportunity for growth.

Great, thank you.

Amit Mehrotra, Deutsche Bank.

Thanks for taking my question. Wanted to get a sense of the performance I guess in the quarter relative to your own expectations. You have kept full-year guidance unchanged. There's maybe over $100 million of benefit in the quarter that may be considered extraordinary in nature. If you could just talk a little bit about that in terms of maybe how your near-term assumptions have changed, if at all.

And then as it relates to the second half, it looks like the guidance implies something like $300 million of year-over-year incremental profit improvement in the second half year over year, despite revenue that looks to be flat or down. Can you just offer some color there in terms of one, your confidence in delivering that, and then maybe what the drivers are? Thanks a lot.

Sure. So a lot of the questions last night really asked us, at least implicitly, did we know about these things. And when you are dealing with a 10-year-plus condemnation litigation that's coming to a conclusion, you know about it. When you have a liquidated damages dispute that's coming to a conclusion, you know about it.

The exact timing, do we know which quarter was going to fall in? No. Did we know whether it was going to be 2017? We thought so, but we weren't 100% sure. So all of these were in contemplation.

We are probably experiencing a bit more inflation this year than we were originally expecting. The tax rate's probably a little higher than we were expecting. Fuel price, at least in the first half of the year, was probably higher than we were expecting.

So there's a bunch that's happening. Just like every quarter and every year, there's lots of moving parts. All of this was in contemplation as we thought about the guidance. And one of the reasons why we gave you a range of guidance was because you never know which way the pluses and the minuses are ultimately going to go.

Turning to the second half, I think what you're going to see is an improvement in sequential productivity. When you think about a $90 million number in Q2 and you look at the record productivity guidance that we've given you -- again, that's against the $427 million that we delivered in 2016.

When you do the math real quick, you realize that we've got to be at least as good in the second half if not better in order to hit that target. And obviously we have a lot of confidence in our ability to do that. So you should see sequential ramp in productivity between Q2 and Q3.

And again, Fredrik and his team are doing everything on the customer side to bring in more business and to price it appropriately. Cindy and her team are going to run the railroad better and better on a quarter-over-quarter basis. So we are excited about the second half.

Right. But just quick follow-up on that. I guess the productivity, the way I think about it, is it shows up on the bottom line when revenue and volumes are a little bit more cooperative. They certainly were in the first half, partly due to easier comps and then some tailwinds on the coal side, too.

In the second half, you don't really have those tailwinds. Hopefully you will, but it doesn't seem like you will in the second half. So can those productivity savings actually drop to the bottom line when revenue growth is zero or negative in the second half?

Yes.

Okay. Okay, I will leave it there. One quick question on the capital structure. You have caveated your comment by saying that you want to keep the balance sheet investment grade. Can you just give us a sense on what actually constitutes investment grade? Is it 2 times growth or net debt to EBITDA?

So if we could get a sense of maybe the firepower the Company has, I guess, to optimize the balance sheet, which is I assume what you are trying to do for the benefit of shareholders. Thanks.

Sure. So obviously we go with the same Moody's and S&P ratings that you all follow very closely. You know where those ranges are. Really what we did was took a fresh look at the balance sheet. We took a fresh look at leverage and the implicit ratios based on the free cash flow for the year for a going-forward basis.

We've got obviously a new CEO in Hunter. We've got a reconstituted Board; we've got the shareholder vote behind us. So a lot of things really said hey, it's time to take a look at the capital structure. And we wanted to provide the maximum flexibility for the management team and the Board to weigh in on those issues. And so we felt like it was appropriate during this period of reevaluation to make sure that we weren't tied to anything specific.

Yes, but given the momentum you have on the profit growth and the cash flow growth, is there any -- have the rating agencies told you or given some guidance around what parameters -- maximum parameters they'd be willing to accept and still keep it investment grade?

They have.

Can you share those with us, please?

No. (laughter) You know where the ratios are; you know where the boundary lines are. And obviously we are currently rated BBB+, BAA1. You know what one step down looks like; you know what two steps down looked like. All those are in contemplation. So we will report back to you on that one as we make those decisions. And it could be as early as the investor conference or certainly as we turn the page into calendar 2018.

Got it. Okay, thanks for answering my questions. Appreciate it.

Ravi Shanker, Morgan Stanley.

If I can just maybe follow up to that last response. And Hunter, not to steal your thunder, but can you just help us frame the topics of discussion in terms of the broad agenda for the investor day? What can we expect to hear? What do you expect to learn or are going to progress through between now and then that you can share with us at [ahead]?

Well, what do you want to hear? We'll give you a menu. No, seriously, look, we'll spend a lot of time on this. I will tell you, it's not going to be a restatement of all the numbers you heard today.

We are going to peel back the onion a little bit. We are going to talk to you about why a hump yard doesn't work today like it used to 50 years. We are going to talk to you about the economy of scales, what's that. We are going to talk to you about why we are able to use locomotives more effectively than some others and some of the techniques.

And I guess it shines on hopefully a restatement of saying we happen to know a little bit about what we are doing here. We got a pretty good track record, and we're going to try and reinforce that with you. And at the same time have a little fun and enjoy ourselves, and that's the objective.

I'm sure that each time we've done this, I think they've been rather successful. Couple of presentations I would change a little bit, but too late for that. But I think they've been very helpful in letting you, representatives of our shareholders, know, for example, when they ask you I don't understand this why they closed hump yards that I ought to buy or that's a good deal or what, that you have some knowledge and understanding and appreciation for that.

So that's our intent. But I would certainly say to you that if you have requests that you'd like us to consider of addressing, we'd love to hear them. David, I'm sure, would love to hear it and we'll try to address those things.

But it sounds like a great event. But would you have made enough progress by then to give us like longer-term OR targets and balance sheet targets?

Yes, certain things. The trends will be there; you can see what we are doing. I don't know if you want to have a wait and say we are going to have a validation meeting. But you pick it then of when you all are going to be satisfied that everything is validated. It would be hard [as bleach].

Understood. Just as a follow-up, just an end-market question on autos. You guys clearly identified that as a market with a negative near-term outlook for obvious reasons. Can you just help us understand the puts and takes behind decremental margins? And what you can do on the order side if SAR were to decline sharply from here?

I think historically, we've been moving very much in line with what automotive production has done. And obviously, it's been a great seven or eight years here where we've been riding it up.

And here, we've seen a little bit of a softening, as expected. And we will monitor that very closely as we move forward. We do have the opportunity as is part of our scheduled merchandise network to monitor that and make appropriate changes to the plan if we see certain areas where train length gets impacted.

So like any other part of our business, Cindy and team and Hunter has an operating plan that is flexible enough to be able to address that to make sure we don't lose any of the productivity gains that we have gotten so far and that we're contemplating in the future.

Great, thank you.

Ken Hoexter, Merrill Lynch.

Hunter, I just want to clarify, or maybe it's Frank. Just by including the two gains, should we read this as you are reducing the second-half targets? Or Frank, were you suggesting before that this was in your original thoughts and the employee savings in the second half should continue to scale?

Yes and yes.

Okay. Yes, no, I got that. So when you say yes to that first one, you are reducing second half or you are not reducing second half?

So was it in what we were thinking at the beginning of the year? Yes. Does it change our internal views of the second half? No. Will we continue to see productivity accelerate and headcount gains, etc., continue in second half? Yes.

You can appreciate where we are here. I got here, I didn't know about them. So if you don't know about them, you can't figure them in. But this is what I call -- this is what gets into that leap of faith area, okay.

And look, I appreciate that Frank and the others in this organization, there needs to be some check and balances. I just don't want anybody checking me. But there are some issues internally of saying can we get there, can we make it?

And there is a tendency, and you all have accused us of this before and I didn't think we were guilty of being conservative or sandbagging or whatever. I'm telling you my numbers that you hear me talk about not official guidance, let's put in those terms.

We don't determine whether the quarter is clean or not. Generally speaking, there's principles, there's GAAP, there's rules and regs that says you get the check, you got a report the check. Now, it's not like we got a drawer down -- I used to accuse the CFOs of having a left-hand bottom drawer and they get down there anytime they needed it. And they could come up with miracles. You learn that life is not like that.

But I think that what I've said to you, and to one of the questions earlier, it's more to operating metrics. I'm not a big, well, it's easy comps. Well, the hell with the comps. The comp is gone and it's done. We got a number that says we ought to be at this gross ton miles available horsepower no matter what it was last year.

If it was horrible last year and we look 50% better but our standard says that it ought to be 100% better, I'm not being influenced, I'm not going to allow myself to be influenced by easy comps.

Now, whether you all let your customers be influenced that way, that's something else. But I think it's that there's a little bit of that land of unknown here. And look, if we get too precise and hit this thing right on the head every time, something's wrong. That's my opinion.

No, I appreciate that. Now, if I can follow up on maybe the competitive environment a little bit. You talked about your thoughts on where things stand. But any competitive response from your peers in response to your cost-cutting or maybe strength in the truck market? Are you seeing any strengthening in the pricing on Intermodal? Maybe you could talk about the competitive market response.

Let me comment and then I will allow Fredrik to be the expert here. My experience has been a little -- I've been all over this continent, and I go here and I get here. And I say, what's the competition doing? Oh, they're nuts. Kamikaze pricing. They're killing the market; they are putting us under.

Then I leave and I go over there and they said, what are those guys doing you left? Kamikaze pricing; they are giving business away. So I don't know where we are there.

I do know this. Back to my point about competition, look, they are not going to lay down to us; we are not going to lay down to them. We are going to be as aggressive as we could be. And I say as we can be, because we are going to be disciplined.

Because we are going to -- look, a lot of companies can get it to the top line; that's not the hard part. The hard part is getting it to the top line and there still be something there when you get to the bottom. So we are trying to fulfill both of those.

And Fredrik is much more qualified than I to talk specifically about those markets and competition. So Fredric, why don't you --?

So I mean, all our customers have options. So ultimately it goes back to the fundamental thing that we are trying to do: Precision Scheduled Railroading, which is to make sure we improve our transit time and improve our reliability. And we are in the early stages of that.

Specifically right now to competition, I think the key thing is it's been a tough gestation environment for several quarters now in terms of pricing to their market. And generally, this is about truck competition. There's a lot of excess truck competition.

Fortunately, though, as we look at the market here over the last few months and we've seen some signs of tightening capacity, and I think the combination of a tightening capacity environment does move into the second part of this year and early 2018. Coupled with what we are expected to do from a service perspective should lead to a 2018 that is good from a top-line perspective.

And as I said, ultimately this is all about providing a service product to our customers that they want to use day in and day out. But if we do that, I think it is less relevant to what our competition either on the rail side or the truck side is doing.

Great. Thanks, everybody, for the insight. Appreciate it.

Brandon Oglenski, Barclays Capital.

Thanks for getting my question on. Hunter, earlier in the call, you talked about challenges inside the organization to change and how you've seen that at your prior leadership positions.

Can you talk about how that progresses and how you've brought your team together? And how that plays out from a financial perspective as we go through over the next year or two?

One of the things it did is the group has convinced me -- and they did, not me -- that we got to do some [learning camp]. That people have really got to understand what we're trying to do. We are going awful fast and that's a very important component here.

To be very, very frank with you, we have just had to say to people you have to change. We've got a get things done that maybe you didn't think were doable in the past. But you've got to get with it. And if you can't get with it, then we got to do something different. And we will try to treat you in the most humane manner possible.

But look, we've got a responsibility to the shareholders, and our customers, and other employees that's this: we can't carry dead weight. Everybody has to do their job, everybody has to do their part, and that's a tough assignment for a leader to do.

And in the camp when we've talk, and particularly about leadership, one of the things I talked about of the hardest part for a great leader to do and where they fail and what makes the real difference is the ability to make the tough decision. Nobody likes to call an employee in and say, hey, we can't use you anymore. I don't know of anybody that gets pleasure out of that, has enjoyed it. It's hard, it's difficult, somebody's got to do it.

So we have been very honest and straightforward with people about what the expectations are. We've tried to display and have the appropriate amount of patience with people, knowing that, look, I'm not saying which strategy this Company has had over the years was right or wrong. It has had a lot of different mergers. People have been exposed to a lot of different operating philosophies and all and it gets confusing to them.

So one of the things you have to do today, you got to be flexible. I learned that early on in my career. You got a new chief and a new leader and he comes in and says we're going to play this game different. You kind of bow up a little bit. And then it's put to you and if you can make that change, you get to stay and be a player.

Well, heard that, until you make a change. So I think we've tried to be honest with people. I think they know what's expected of them. But they also know and understand that it's difficult. And that's what I think is the difference in the organization.

Look, you look at the rail business, we all got the same locomotives and same gauge and the same signal apparatus -- all the same. And similar margins. Nobody's got some huge handle on the market.

What's different about an organization is people and leadership. And how they respond and how they lead people. And that's why, in spite of the fact that we have been criticized -- maybe I shouldn't say we then. I have been criticized for creating cultures of fear or whatever. And that's not what we're trying to do, but that's not part of the mission.

In spite of that, though, people are saying why are poaching all my people? And I'm saying, why do they want to come over here? If we have got this culture of fear and we're so demanding and unreasonable, why would they ever want to leave that lovely railroad of yours and come to mine? Maybe you ought to look at your [hole part]?

Now, I'm not being specific about anybody. I'm just saying that we have no one to my knowledge working at CSX that can't get released. If they got some handcuffs on I don't know about, I got the key to the handcuffs.

If it's they don't want to work here, I don't need them. If they want to go someplace else, that's where they ought to go. It's kind of a free market, that's what capitalism is about, except when you get into non-competes. And I'm an expert there if you need any advice. So that's kind of where we are there.

I appreciate that insight, Hunter. And if I can respectfully ask the question on top line. Because like it or not, there is a perception among investors and maybe some of your prior colleagues that you worked with that your focus is not really on the customer. And you've mentioned it a couple times today that post-Hunter era, you help CSX grows a little bit more.

But I'm trying to line that up with Fredrik's comments about next year, and you guys I think did win some contracts this quarter. How do we think about the focus on top line? Is that part of the plan over the next couple years, Hunter, or should we just be thinking we've got to get service and costs in the right place, then we can grow beyond?

I think Fredrik commented on it, and I'd like maybe Fredrik and Cindy, if she feels, to join in the difference here. To be successful, we've got to have top-line growth. You can't do all this with the cost.

When people that come benchmark with us in the late 1990s and said why was our operating ratio -- just happened to be here in Eastern Canada -- so low when they saw that we were taking price increase. And they said hell, you're cheating. I said, what you mean cheating? Well, operating ratio is just supposed to be about cost.

Well, I learned early on that this is a balancing act between cost and service. I've got scales in my office back in one of the places I still own, I think, that goes back to the days when I was first being taught about controlling costs. And it was a minor's field that shows one side service, one side cost. You got to keep that in balance.

If you spend too much time providing this premium service that the market doesn't want pay for, you don't make any money and vice versa. I have to be honest with you, I get a little sensitive about those remarks.

Go back and look at the track record. I went to CN; they didn't have a great reputation about service. They didn't have to pay the bills, but they didn't have a great reputation about service.

Look at what -- how the top line grew. I guess in spite of all my bad actions with customers, we grew the top line pretty good. I don't think there's anywhere we've been that we hadn't see top-line growth. And I look at some of the places that I've come to and I haven't seen anybody that's had any crazy outperformance of top-line growth.

I just think that's something that if they don't like you, they don't want to say anything nice, they say, well, what can I say. Well, saying that's sensitive to the customer. And I was talking to somebody about that yesterday and I said -- and I think this is right. I have never had anybody say who it was, when it was, where was. It's just the perception you just don't like customers. Now, I don't buy into that.

So I don't think any of that, in spite of the fact they might not like me, even in spite of the fact when this Company puts the best service out there at the right cost structure, we will get the business. This is not like the old days, and you can argue about this relationship spending and all that. I'll tell you where the relationship as: that almighty dollar, that's where it is.

So Fredrik --

I'll just add -- I think ultimately there's absolutely nothing inconsistent with Precision Scheduled Railroading and being customer-focused. What is challenging in the short term is just the change and that's what our team is out there selling right now.

Because there is a lot of change and it's not linear in terms of the improvements that we've seen. Albeit, though, we still have seen improvement in terms of transit time from first quarter to second quarter. And ultimately as we go through this change, we feel confident that we've seen some early signs of it that we'll have a superior service product to sell that we had before.

That's why -- I don't see -- and I've talked to a lot of customers over the last six months or so that have had Precision Scheduled Railroading experience. And ultimately the feedback is almost consistent from all of them, which is once you through the period of change, we get to a better service product.

And I think both Cindy and I are very much focused and aligned around that. And that's what our team is out there selling to our customers as well.

I would echo that and one of the core tenets of our model here is do what you say you're going to do. And that is 100% focused on the customer. I think Fredrik, he mentioned we are going through some transition here. That is problematic.

But looking at the model, how it works, I am extremely confident that this model will work well. It will work well for this Company and it will drive not just cost reduction, it will drive superior customer service.

Cherilyn Radbourne, TD Securities.

Wanted to dig into one of the changes to the train plan that's been mentioned, which is incorporating some of the unit train business into the carload network. Can you give us an example of what commodities that's been appropriate for? And talk about how that has influenced train length, service, and balance and so forth.

Let me go back a little bit to drive some context. So you recall (inaudible) variable train scheduling in our merchandise business. That was really just our scheduled network and we drove train length as a result of that.

And as Hunter came along and we talked about Precision Scheduled Railroading and we looked at opportunities where we had overlap on the same subdivisions, where we had a rock train, maybe a metals train, occupying that same territory. And generally speaking, the quarry or loading facility did not load a full train in a very few number of hours. They were loading a portion of the train in a different time.

And so as we looked at the opportunity to incorporate that in the merchandise network, then that allowed us to go to seven-day train operation, incorporate those commodities into that merchandise train, and drive train length that way with very consistent service. And then as you mentioned, on top of that, then look as another layer onto the concept of how do we make sure we have the same number of trains going east and west or north and south depending on where we are to allow even more efficiencies in terms of locomotives and full utilization of our people.

So that's an example of where and types of commodities that has worked for us. And we see pretty good progress with that and think it's driving some good efficiency.

And Fredrik can comment on the impact.

Yes, and I think there's certain places where we've been very successful at that and has actually improved the cycle time for the customer. And there's certain places where we have yet to improve the cycle time and we're still working through the customer to make sure we get the operating model -- I call it fine-tuning the operating model -- to make sure that we provide a level of service that is needed. And there are certain where we are not there yet. But we are relentless of trying to get there.

Great, that's helpful color. I wanted to ask a quick one on coal RPU, which was relatively stable versus the first quarter, notwithstanding some likely sequential moderation in the export coal rate. Can you just dig into some of the moving parts on coal RPU for us?

Yes, I think in the first quarter we mentioned it. We had a plethora of things that was all moving in the right direction, especially on the mix side, within both the domestic side and the export side that all created positive mix.

And so we think about the coal RPU components here in the second quarter (inaudible) export price is the biggest driver of there, albeit probably not to the same degree we saw it in the first quarter. And we don't have as much mix improvements as we saw. And that's just the luck of the draw, so to speak, in each and every quarter. It's different depending on which utility wants more coal and where do we go in terms of the different export terminals.

So it was really the key driver of our coal RPU this quarter was clearly the export pricing.

Thank you. That's all from me.

Scott Group, Wolfe Research.

Just a few quick ones. Frank, can you just clarify -- do you have any liquidated damages in the guidance for the back half of the year or anything else unusual?

No. If one comes up, we'll certainly let you know. But no.

Okay, yes. I would say always helpful to let us know in advance. That'd be great. Fredrik, just on that coal yield, do you have any view on how much of a sequential drop we should expect in the third quarter?

And then just on the merchandise Intermodal pricing number, do you think that continues to decelerate the back half of the year before I guess you say re-accelerate in 2018?

I want to look at my -- and our general counsel is here and I'm going to make sure that I state that we never forecast price. But more importantly, though, if you go to the coal side, clearly it is a commodity market and it's very volatile.

And we have made a decision strategically to align ourselves with the particulars to go up and down with that curve, partly because we want to level load the railroad as much as possible. Benchmarks have gone away in export markets, but as I said, there are a lot of indexes that are out there that our customers and we are using to determine what price we should use.

And I think you can follow those quite -- they are well publicized. So there's an opportunity to see what they will do. And there will be based on what we are seeing right now obviously some impact.

On the merchandise and Intermodal network, as I said before, it has been a tough market for numerous quarter or 1.5 to 2 years now in terms of pricing. And as I said, as I see the truck market tightening up, which there are clear signs that it is, and we go through this change period and really start improving the service product the way we expect, I think as you get to 2018 you'll have an opportunity on both merchandise and Intermodal to turn this sequential decline around.

Okay, that's helpful. And just lastly for Hunter, I know you've got the analyst day coming up, so I don't know if you want to get too specific. But it felt like last quarter, on last quarter's call, you blast a low 60%s operating ratio next year and a 50%s, maybe even mid-50% longer term. Anything three months later changed in your mind on that directionally, those kinds of numbers?

No. I felt very confident then. And I'm a four-month guy here, so -- but I feel even more confident than I did then, given I've seen these additional four months of potential we have.

Okay. Thank you, guys.

I think the numbers are still falling.

Jeff Kauffman, Aegis Capital.

Thank you very much. Just one brief question. Hunter, as you've gotten deeper into the details, what have you found that you've been able to make greater traction on maybe than you had anticipated coming in? And what have you found is going to be a bit of a longer haul or a more complex process in terms of getting done the things you are looking to do?

Clearly, Jeff, I think it's probably pretty obvious to you. But clearly this cultural change or call it what you want of a shift in strategy. And at the same time, I don't want to avoid, turn my back on the obvious, there's some people that weren't pleased with this change. And weren't pleased with what we went through with the [pricy fight].

I tried to plead with people during that time that it's hard to fight one day or one week and then be all for one and one for all the next week. So we didn't come in here with the best chemistry [free to core], we are all in this together type thing.

So we've got some open wounds there. So that's a key, because if we don't have the right leadership driven the right way, we are not going to get these things done.

The first part of the question was more of the opportunities that are even more than I thought initially. Well, obviously, I didn't think or obviously I didn't -- there was more opportunities with the hump yards than I thought. I just had this general feeling about railroads as I have bit associated with a lot of them in North America, that had too many humps.

So I think that that opportunity, although it's not real easy to get to, was more than I thought. We have an opportunity, and I hadn't had a chance to spend a lot of time on this personally, but we need to improve our engineering productivity, particularly on the capital side, which impacts the capital spend even more, which people don't recognize. But I'd rather put another tie in than I would have inefficiencies and not productivity and labor.

And I guess the other one that was not on my list at all, because I just was not familiar with the collective bargaining issues and so forth, was going from the nine dispatching officers to one central location.

And I think Cindy can comment on this in a minute. But I think the plan is to have that done by first quarter of 2018.

That's correct.

Which is -- that's all gravy from my bowl of stew. And so I guess that's some observations there, Jeff.

Cindy, Hunter, thank you. And we'll see you in October.

David Vernon, Bernstein.

Good morning and thanks for taking the time. Fredrik, are there any metrics on customer satisfaction around service availability that you can share to help us dimension this? And are there any segments in particular that stand out as either being more or less happy with some of the changes that are happening at the customer touch points that are enabling some of these changes in the schedule?

I think we are trying to work through all parts of our network here in a very rapid phase in terms of making sure that we provide the service we want with a cost structure that we want long term.

So as we are encountering challenges from one customer group or from one specific customer, we are trying to be as responsive as we possibly can as quickly as we can with Cindy. We use JD Power to look at customer service and customer responsiveness and we continue to monitor that. We normally don't talk too much about that externally, but that is a gauge for us.

But ultimately, this comes down to reliability and transit time. And that's what we're trying to go through right now, and there will be pain points, we know that. We've communicated that to our customer. But the key thing for the responsiveness from Cindy and team to try to address whatever challenges that we see as quickly as we possibly can.

Can you help us dimension some of the change in these metrics? Obviously, I know you're not going to share your internal customer satisfaction scores. But I'm just kind of struggling with trying to dimension how unhappy or unhappy this could be and where the source of revenue risk could be within the top line.

There's specific competitive information; we've tried to stay away from talking about that. But clearly [what's the strange thing] is somebody's service from the unit train to a scheduled merchandise or when you go out and you have changed the network as significant as we changed in a very short period of time, whether it's Intermodal or merchandise customers, there's going to be pain points.

And the key thing the key thing is that we are asking our customers to hang with us and see what is ultimately on the horizon. We look at the new schedules that should allow for better transit time, better reliability. But in the short term, we are out there on a daily basis out to our customer working through this changes and make sure they see where the light is at the end of the tunnel.

All right, I guess thanks for that. And Hunter, one of the broader questions we get asked a lot is what does the Company need to do to make this precision railroading less of just a Hunter-Harrison competency and more of a CSX competency?

If you think about the next sort of couple years on the contract that you have with the Company and what you are going to be doing, what are the two or three tangible things that you think you need to do to make sure that this precision railroading model becomes a CSX competency and is not as tied to you as it seems to be at the early going?

Well, let me make this observation first. This is not the first place that scheduled precision railroad has been tried or exercised. It has a pretty good -- not me, it -- scheduled precision railroading -- has a pretty good track record and it's left a pretty good path.

If you look at Illinois Central, prior to bankruptcy, doing whatever now, that was just a little small regional that ran down here with coal, so we don't count that. When we go to Canada, the product does, not me, I also went along. But it had a big positive influence on Canadian National.

And I would say this. It's still hanging on. Because I think to the best my knowledge, they've still stopped at that model certainly from an operating side. They're looked by a lot of people, rightfully so, as maybe still the top railroad out there. Then it went CP and things went pretty well at CP. And I think they've continued to go pretty well from what I read. So this is not the first place that it's being tried.

Now, I think what I'd say to you is the key is this is how well we teach it, if you will, here. And so the better job we do of teaching, coaching, mentoring, developing, letting people understand it, and understand really the whys and the ins and outs. Which a lot of people just don't -- I don't mean this disrespectfully - just don't have an appreciation for it.

Some of you have probably heard your whole career about unit train efficiency. And I can tell you that unit train efficiency was the biggest fallacy that ever, ever hit the railroads. Unit trains are on average way more costly.

If you run balanced in a lane, which is what you want to do, because if you don't have balance, you don't know when that imbalance is coming and there's a lot of costs associated with it. And you're balanced, and here comes grain, a grain train.

So you have to deadhead, because you don't have a source of supply there to get the loaded train. You get the loaded train after you deadhead it and you run the train to the port. Well, they dump it, but it takes three or four days and so there's no empties to move back. So you deadhead the crew back because there is nothing for them to do.

Well, three or four days later, now the train is empty and it's time to run it back. So you run four trains instead of two and everybody says what a beautiful operation. And we don't do that like that.

And I think it was to maybe Cheryl's (sic - Cherilyn) question earlier about the changes with the rock trains and the merchandise and so forth. We had grain trains that we were running with 56 cars, unit grain train. Other railroads are running 130. We were running some at 115.

Can you imagine that the incremental cost, the difference, is basically fuel? If you're making money at 56 cars a unit and you double it to 112, which is a very -- then you'll really make a lot of money. So there's real questions raised there.

So I think that I'm amazed that I sit down with people and start to go through this thing like that. And they kind of look at me like, God, why haven't I heard that before? Why do we run a unit train. Well, because somebody one day who tossed some statistics said that's the way to do it.

And so everybody evolved into their system. So the more time -- and we are going to get a good feel for this next week with the first camp. Because the people that are going this time are a little different than what we've done before. These are going to be operating people; these are going to be basically transportation operating people, which is where we need the help the quickest.

So it's going to be a specialized force with handpicked individuals from the existing team. Because people have said to me here we just don't have people ready or able. I don't believe that. A railroad this size has got a lot of smart people that want to be successful, that want to do well. It's just our job to find them.

So I think that will be the key as to how well we do in this development at every level. And that we are consistent [from flys room] to the flash yard. We used to talk, when I was coming up early in my career, we come in for a staff meeting and we talk about three things: cost, service, (inaudible). And they would just beat us over the head with all of them.

And we would leave to go home, and every morning, they would talk to us about costs. The only time they talked about service and safety was when we came back for another quarterly meeting and they talked about service, cost, and safety.

What do you think we reacted to? Cost, because that's what we heard. So those people understanding what you want will give it to you if they understand. But if they don't know, and if you just say knock down target one and they don't know why or whatever if that's not the right strategy they don't know the alternatives of what to do.

So the better I do, we do, collectively as a group developing these people, the more successful it's going to be and get ahead of some of the competition. Now, whether that's on the highway or wherever, but competition.

John Larkin, Stifel.

Thank you for taking my question. We haven't talked a lot about Intermodal today, but I thought it was a good topic to bring up, especially given that CSX historically has had a relatively unique Intermodal strategy with what I will call the regional sortation centers, like the one in Northwest Ohio, the one that may be planned in North Carolina. Perhaps there is a third one in the long-term plan for somewhere in the Alabama area.

That allows you to serve a much larger number of origin destination payers, but does take a little away from the truckload-like service potential. Just wondering how that plan looks relative to the overall precision railroading emphasis. And whether that will survive as envisioned or whether you plan to adjust that to make it more compatible with the overall precision railroading operating strategy.

Fred and I will both comment. Look, I think it is a case of whatever works. The challenge that we have with Intermodal is price; there's no doubt about it. But at the same time, I would say to you that we are pretty -- this Company that I am new to has been pretty disciplined in their approach to cost control.

So I don't think we are out there right now hauling Intermodal for practice. And if you believe any of our numbers of what we have improved on, and so we're going to see our margins improve another 8%, 10%. And it really gives us the opportunity to be even more aggressive in going after growth.

That's where I think, John, some people miss it, that cost control or controlling expenses is so paramount in this effort to grow the business. My last episode like this with CSX, the last time I did this, the group invited me in. And the week before I got there, you took our largest customer and find a 10-year deal and it said there ain't no way you can make money out of this business. Now, that's tough to face.

So they were down about 267 on margin rank, which meant there was no free cash flow. But I'm proud to report to you that 18 months later, they were in the top 5. They were in the top 5 because the team had been able to take the number of sets, which was 29, down to 17 and haul 10% more coal.

And now what was a dog -- no price difference to the customer, just internal controls -- made us be able to play in that market. So I think to some degree, that will offer some opportunities for us to continue -- and I'm sure I totally understand the recent strategy -- but that strategy and others that Fredrik and his team might want to pursue.

And I think the key thing here is to (technical difficulty)

Technical difficulties; please stand by

And I think the key thing here is that -- and you heard Hunter talk about the opportunity to continue to grow the business because that's ultimately what you do. Traditionally Intermodal has been a key growth market for us. We've been able to grow at this pace domestically 5% to 10% and we don't see any reason why that should change.

But it's always about converting traffic off the highway system. And what Hunter is focused on in addition to Intermodal is also to convert things off the highway into our merchandise network by significantly improving that service product.

The key thing for us at Intermodal has been and will continue to be to make sure we drive productivity. And we have always been focused on that at terminal, train length, making sure we are pricing appropriately. And clearly with the new balanced train plan, we've taken train length to an even greater level and that's going to be helpful.

In the short haul area that we are in, being able to connect the dots in a way that we can do with-- more to as to how has really allowed us to grow that part of our network in a way that we haven't been able to do historically. So I think being able to connect the dots efficiently like we have is critical.

So every piece of business have to carry its own weight. And when we look at Northwest Ohio and what we do there, it is carrying its own weight and it's been a great success. And we've posted on it several times and I think that's a business model that we think will continue and makes sense.

Thank you. Maybe just a quick question on the international side of Intermodal now that the third set of locks has been open for quite some time in Panama. Have you noticed any increased volumes along the East Coast ports? And now with the Bayonne Bridge completed, do you see that as an opportunity for for incremental business?

If you go back to 2010, 70% of our international Intermodal business came through the East Coast. Today it is 80% and even slightly higher than that. So we've seen this go on for the better part of a decade in terms of more and more of our traffic coming into the East Coast port.

And if you just look at the raw growth numbers by the East Coast port versus the West Coast ports, you see that that trend generally seems to be continuing. So the good news is that we have infrastructure in place to be able to (inaudible). And I know it's very hard on the sort of thing that you said that the New York is doing. Savannah is expanding their capabilities; Charleston is expanding their capabilities. Norfolk has always been at the forefront of that as well.

So all of the ports -- and as is Jacksonville all -- of the ports are preparing for additional growth. And we are well positioned to capture that as we see additional cargo coming into the East Coast ports.

That's terrific. Thanks very much.

Bascome Majors, Susquehanna.

So Frank, you gave us considerable detail on the restructuring charges that you brokered out of the labor expense line in the quarter. But is there a way you can help us quantify some of the other costs you incurred during the quarter related to the closing of hump yards and other changes to the operating plan?

Net-net, just trying to get at what a reasonable run rate expectation could be for the nonlabor variable expense lines, like MS&O and rents look like, as we head into the second half of the year.

In terms of the restructuring charge, the only thing that we are putting in there are things associated with the management restructuring that we did as well as some of the dialogue that we were having between Mantle Ridge as an activist shareholder and the Company. And so those are the things that we are putting in there.

In terms of the restructuring charges going forward, you should see very minimal restructuring charges in Q3 and Q4. Now, to your point about run rate expenses, if you want to just take it down the labor and fringe side, obviously you saw significant efficiencies there, offset by inflation, incentive comp, and things of that nature.

If you were thinking about looking forward on labor and fringe your year over year should be favorable on labor and fringe for both Q3 and Q4. If you want to talk about MS&O, obviously we were down $29 million year over year and down $77 million sequentially or $22 million if you want to back out the condemnation gain.

And so if you look at Q2 versus Q3 sequentially ex condemnation, you should see MS&O lower. And then just as you know, Q4 had a real estate gain in Q4 of last year, so you got to pull that one out as you think about run rates for MS&O.

Fuel; let me jump to fuel real quick. If you think about where we were in fuel, price is the big driver of the year-over-year change in expense in Q2. I think you should probably think about Q3 as a set of brackets depending were price ends up going. It's probably on the expense side up year over year due to price, but likely down sequentially because of continued improvement on the efficiency side. So that ought to give you a range there.

On the rents, that line doesn't move a heckuva lot. You saw the reclass that we called out in that particular line. And so I don't think you're going to see a lot of movement in that particular line. Car hire should come down as part of that line as your days per load or cycle times improve in the second half of the year.

I appreciate all that detail there. Just one follow-up for Cindy or Hunter here. You mentioned some of the talent gaps you are having some success filling on the operating team. Where are those left and when do you expect to fill them? Just curious where you're finding these people that you seem pretty excited about to add to the CSX team. Thanks.

Well, I think as we change operating model and the culture that goes with that that Hunter has pulled upon, I think it is a big part, maybe the biggest part, of implementing what we are working on implementing. So we've pretty much gone external in terms of attracting people through our normal channels to attract people.

And they're coming from other railroads. Excited about the opportunity here. I think we have a huge opportunity here and I think the folks that are coming in do as well.

Thank you.

Jason Seidl, Cowen.

Given -- Fredrik, first question for you. Given that we have seen some strength in the truckload marketplace and the looming ELD mandate, have customers on the Intermodal and maybe some of the competitive merchandise lanes come to you guys and talked about capacity on the railroad for next year?

Well, I think this sort of conversation is we are in the early stages of having. It's been pretty recent that we've seen the spot market move up in a sustained fashion. We have some fits and starts from the past, but the spot market is moving up.

So as people are trying to get into planning for their transportation needs for 2018, I expect those dialogues to occur much more frequently. That's where some of our encouragement is coming from.

Okay, fair enough. And I guess the next one is for Hunter. Hunter, you talked a little bit about how there's changes obviously when you come to this organization. And some people are happy about it and some people might not be.

Could you talk a little bit about the changes and how you are handling them, even for the people that are happy that they are there. And does the dynamic change much between operations and sales? Any communication gaps that there may? And should we see I guess a ramp-up of things just running smoothly as we run throughout the year?

Well, I don't want to necessarily present all the in bucket of problems, but clearly we are trying to take a team approach with this. We are into a freelance offense here where we don't really have set plays.

We are kind of feeling ourselves along. I think that there is a lot to be determined yet on how the organization will eventually end up, and I'm not sure what that's going to be. Frank and Cindy and Fredrik and others will have a big part to play in where we end up there.

I think some of that is creating some anxiety with people that we have tried to say that's not an issue, it's not something that you should necessarily worry about. We are going to try to do -- I know Fredrik -- I've tried this before and hadn't been real successful in making it work. But I think they're talking about maybe doing some commission sales in certain areas. I would certainly encourage that, that we do some things differently, that we post some load on the wall differently.

I think Cindy has given her comments. Clearly, I think she's got certainly a grasp on where we are strong and where we are a little weak, where we need help, and the various ways to deal with it. We created different places. Although I'm not a big advocate of consultants, we have two or three people that I've worked with over the years that are in retired capacity that are out doing some basic work today, where we have some very hard-working constant managers, but we can prop them up a little more by giving them some help.

So I think all those things are very important to us going forward. You can go in a room of team players and it doesn't take you long when you walk in that room to get a sense of are they for me, are they against me, are they with me, are they mad or are they happy.

No matter what their mask is, we've got some people that have the prettiest smiles, but if you pull them back, they've got the ugliest growl underneath the smile. And we got to be able to read some of that.

So trying to put that chemistry, that [redecor], getting everybody to pull together, and it's tough enough of pulling together. When you pull it apart, it really makes it difficult. And hopefully I can be -- as I told you, my first time on the -- before you -- look, I am a short timer here.

I am an interim person that's been to try to get this Company to the next step, to that foundation. I am an active shareholder. I want to see this organization do well and I don't want to be viewed as getting in people's way and their careers. That's not my role, that's not my purpose.

I had some very fascinating dialogue with some of the Board members about what I felt like I could do or couldn't do for the organization. I think that is clearly spelled out. I think most of the team here knows pretty well where I'm coming from and understand the agenda.

And so far, we have been successful. People haven't been running for the door to get out. We have to lock it. And so I feel pretty good about what's taking place here.

Thank you for the color and thank you for the time.

Keith Schoonmaker, Morningstar.

Hunter, some investors have questioned the ability to achieve results on par with the Canadian rails due to CSX operating in more populated regions and configured in a less linear design. What structural obstacles have you found that could constrain some aspects of performance -- maybe velocity, operating ratio, or customer service, or some other aspect of performance? Asking about structural obstacles, I guess.

I don't know that there are any. Look, there are some, but we have to deal with them. I can tell you a quick story that answers it this way. When I went to Canada and CN had made some pretty bold changes, mostly around science and engineering and taken lots of people out.

One of their statements was -- public -- was don't ever expect a Canadian railroad to be able to compete with US numbers. It's just not structurally in the cards. Except, when CN became the lowest operating ratio, the US roads said don't ever expect -- we are going to improve in the US, but don't ever expect us to get to CN Canadian standards. It's just not in the cards.

Well, I've been on both sides of the border. And I vote for CSX headquarters over Calgary with CP. That's one vote. Look, healthcare is an issue that's obviously -- fringe and healthcare costs and all that makes it much better to be in Canada. But then we got some weather in Canada. It doesn't make it so pleasant to be there.

And some mountains. Although we got some mountains down here, too, and people forget about the Smokies in Tennessee and so forth.

So I don't think there's any structural issues. I think we got a playing field that if we do our job, we've got plenty of opportunity. And you won't hear any excuses out of me about the density or [beginning development].

I think some people lay awake at night and say what could I come up with that makes some sense. I don't know what it is. I hadn't heard a good answer yet. First four years, I didn't hear anything about structural, and all of a sudden it was a big impediment, structural, but that went away, particularly when we found out -- I won't say much more about this except the two competing forces had the same consultant working against each other to develop and disturb the problem. That creates a structural issue.

So let me -- I think there's maybe no more questions. Let me wrap something up and -- okay, sorry, there's going to be a couple more. But let me (inaudible).

There's been -- obviously we have talked a lot today and around this issue of clean quarter and where are we going to be. Let me say this to you. This is going to be challenging going forward because one of the things we hadn't talked about is we are in a position that this organization is going to develop, in my view, a whole lot of free cash from the real estate market. Not unlike what we experienced at my last employer.

For example, I am not an expert on this, but I think I'm right about. We were in seven different locations in Jacksonville. Next year, we will be in two. So five locations will either be sold or we will get out of the lease or whatever the case might be.

We moved out of our training center in Atlanta, off a pretty expensive piece of property there. You add all those up, there's a lot of money in there. Now, we've debated internally how much. And I'm always -- I get criticized internally for the all high side. I think $1-billion-plus.

And my point is this: I can't tell you how the real estate market is going to move over the next two or three years. I can't tell you exactly what the interest rates are going to do. I can't exactly tell you what the timing of some of these issues are. But when they are concluded, they are concluded. And you can call them nonrecurring.

Although they had 44 straight months, all we can do is do our job at running a railroad and operating. And then abide by the accounting rules when we do something with real estate or other assets that are made available as a result of these operating changes. So that's something that we should think about; I think you should think about it and consider as we go forward.

I thought back last night -- not the first time I've done this -- and I've been a CEO for, I don't know, 20 years or close. Maybe longer, time flies. A little interim break in there, but you don't count this. And I said have you ever seen a clean quarter? I mean, clean clean quarter, squeaky clean quarter? No. Well, somebody is going to have to describe a clean quarter.

But I looked at these results and I looked back to some degree at earnings and I looked at operating trends, productivity improvements, those types things, to say what this organization has potentially in the future. And I am excited. So sorry; I didn't want to cut the two questions (inaudible).

Walter Spracklin, RBC.

Yes, thanks for squeezing me in there. I guess, Hunter, when I talk to investors about the opportunity you are proposing, I think no one questions really that there will be significant change. I think really the question comes around how fast and how significant.

So my two questions are around that. You've kind of addressed both, but we'll start with the how fast. When you did what you did at CN, it was a little bit over a longer period of time. I think you were building a team; you were applying a precision railroad model that you'd used once before but over a larger network.

When you went to CP, it was much faster. And I think part was you brought over a team that knew in-depth how precision railroading worked. Are you building, rebuilding a team at CSX? I know you said you are pulling people in, you are using a few experienced -- those experienced in precision railroad.

But overall, is this a longer process because you are rebuilding the team? Or is this something you've done now three or four times and you can hit the ground much quicker than before?

Well, I think we can hit the ground a little faster than -- in each case, it was kind of a stairstep. Because the team here had read a lot about this. Good, bad, indifferent, they got to see every day the results of the Friday night fights and what they were and what it might be and do a little research.

I think maybe some of what we're saying is this might be a good opportunity; maybe others were looking at it a different way. But I quickly came to the conclusion here that we have, at the senior level, I don't think we have near any efficiencies like I maybe described at this middle manager level.

So as I've told you, I'm kind of the interim step there, and then the Board, which I'm part of now, and with my and others' assistance will make the selection for who's going to lead this Company in the future after I'm out. And that's important.

I think that I give the internal team credit for this. I think once they heard a little bit from me, and the more they heard, they understood to some degree this was a good match. And we had some polite people at the wrong spots without the appropriate amount of expertise and knowledge. Some of that was their fault and some of it wasn't.

So that's when we went after the -- we brought a couple of people in that were -- basically kind of the rock star attached to them. And then we brought these other -- bringing, I guess, [kind of] we're bringing in, about 15 more.

And I think that maybe that's all there is to do, given what we do in the camps and given that things fall into place. But if it's not, we know what to do next. So I don't think that's going to be -- and I really take this as a compliment. We got some restrictions from my last employer who I just left at the retirement party they gave me, but at the same time they told me I could hire anybody from them. I said, well, why would I want to hire your people? Well, that's another story.

So there's all kind of restrictions out there about who can hire who and so forth. And I'm just proud to say that we don't have any handcuffs on anybody. One of the things that Cindy encouraged and we've done is that we really -- from a market standpoint, we are behind the times (technical difficulty) transportation supervisor.

I don't believe the Indians ought to make more than the chiefs and that's what we had. We had good and have good conductors and engineers that didn't want to take a supervisor job because they would take the cut in pay. And that's wrong. That's wrong; that's people that don't know how to value a good car mover or a good railroader. They just look at a railroader as a railroader.

So I don't think that's going forward will be a continuing issue. I just think the issue will be -- to your question -- how critical it would be if it existed. Now, if we go through -- I've never been through a time where this country is like it is politically ever. I've never dreamed of a time like this.

So I don't know what's going to happen in Washington, and the scary thing is I don't think they have a clue either. So we thought one time that whatever you think about Trump, he's been good for railroaders selfishly, if for no other reason. Trade and made in American, and a lot of things, infrastructure.

Well, I don't know where it's going now. But if we have a -- if there is such a saying as the normal without any geopolitical interruptions, I think it's very reasonable to say that we can get this done in the timeframe we've talked about, which is -- I guess 2020 my contract is up and we'll have it done by then. I think that's very reasonable.

But if we miss three or four months, you going to shoot us? Are the shareholders not going to love us? God damn, it's a pretty good run anyway. So I think we are going to get there. I haven't missed one yet. I sure as hell don't want to miss the last one. Because I'll hear about it, and you all were right about it, and I won't have any way to get back at you. I'll sit home frustrated saying they're just not being fair.

So on the second question, then, the impact, I don't think -- again, I don't think many doubt your ability to drive the OR lower and down to the range that you mentioned. The question would be is what revenue are we shoving through that OR.

There's views out there and they were espoused on this call that perhaps there will be some service disruptions. My question to you is -- and when we look at the data, we do see a contraction in -- or we see your volume level tracking below peers.

Now, there could be individual reasons for that, and I'll let you touch on that. But we are also seeing our pricing come down on the rate of growth. My question is are you right now seeing volume share losses on account of those disruptions?

Or are you having to price lower to keep that volume because of the perceived volume disruptions -- service disruptions? I guess your view is to when that will smoothen out if it is happening.

Walter, the service disruption has been way overplayed. Of all our customers, of which we have many -- I forgot the numbers the other day, but it's like 400 or 500 customers do 90% of the business or what. There's a lot of customers.

We have had two that might make the case they had quote major disruption. And in one case, the major disruption was back to where they were before they had any proof. And it was a result of some labor actions, a little pushback by some of the troops. And we had to take a few names and apply some other pressures.

So that has really not in my view affected any top line. I don't know that there's been anything pricing-wise that's affected the bottom that we've made any desperate moves in. \

Now, we've got a couple of -- you all know, this is no secret, I'm not a big contract advocate. I think it's not in anybody's interest, but others see it differently. They go out and do three- and five-year contracts and so forth. But we've got a couple big ones over the next 18 months that are coming up.

Look, as far as the honeymoon you get here is when you walk in and they say you're the new guy on the block. If you don't give me a cut, if you don't do this for me, I'm going to say you are not sensitive to the customer and I'll get you. And you just have to -- and when I get criticized about this, I'm not worried about it.

Somebody said are you the one that learned to say no. Well, I did, and that's some discipline we have to apply. I don't think that, and to Cindy's point earlier, what we've said to the customer is we are going to do what we say we're going to do.

Now, you go to one railroad and they say you don't have any schedule. Okay, so you got bad service. You go to another railroad and you put schedules in and now you're not being sensitive to the customer. How would you like to go and call somebody to book a flight on United and they said what time you want to leave. Anybody that doesn't get to leave at their time files a service complaint. Well, I don't think that the people of United would think that's fair, necessarily.

All that being said, the service and the operating metrics and all these things, to Fredrik's point earlier, is only going to improve service. When you improve service, it happens to lower cost. And you get a double effect here. You got a domino effect.

So I don't see anyhow -- you know what I'd love? I'd love for somebody to set up a public debate. Get Ralph Nader to represent the shippers and I will debate him in the town square and about this issue of who, where, when, why, and how this came about. So I think that's all a positive.

Fair enough. Just a housekeeping for Fred and maybe for Frank as well. Frank, did you say 39% was the tax rate for the rest of the year or is that the new tax rate going forward?

What I said was 39% to 40% in Q3. I think it'd probably be somewhere in the 38% to 38.5% in Q4. And then obviously we'll take a look at next year next year.

Okay. And Fredrik, did you update on the export coal? I don't know if I missed it, but did you give any update to your guidance on the export coal? I think you were at 30 million tons or high 20s million.

Yes, Frank did in his prepared remarks. We said around 30 million tons in export coal market for the year, with a declining rate structured most likely based on what we are seeing in terms of indexes.

Okay, thank you very much for your time.

Justin Long, Stephens.

Good morning and thanks for fitting me in. So Hunter, maybe to follow up on the point you made a little bit earlier on real estate. Are you factoring in those real estate gains when you talk about the potential for a low 60%s OR and something in the 50%s longer term? Or would the real estate gains the incremental to those OR objectives?

If it's incremental, it's gravy.

Okay, great. And then --

We don't do -- we don't have anything in real estate we feel achieves these numbers.

Okay, that's helpful to clarify. And then secondly, I wanted to ask about coal and how that's influencing some of the changes you are making in the network today. When you think about your coal business, what's your assumption on how that looks three to four years from now as you start to implement various structural and operational changes in the network as a whole?

Well, I'll comment and Fredrik has other comments. Look, I'm not going to buy a locomotive for coal. I'm not buying an asset that has got 40 years of life. My personal view -- I'm not an expert on this; people have made that point. Almost got run out of Canada -- that fossil fuels are dead.

Now, that's a long-term view. It's not going to happen overnight, it's not going to be two or three years, but it's going away in my view. With all the issues --- environmental and so forth, natural gas and all the other pressure -- coal is not a long-term issue. And we'll see what Trump does with his commitment to coal and so forth.

So look, having said that, the last carload of coal that's shipped out of this country, I want to be the carrier that shipped it. Now, I don't know if that's 2020, 2030, or when, but we're not going to make long range. Unless something changes drastically in the market, we're not going to go out and put a double track in or buy locomotives or anything [propelling].

And just to build on what Hunter just said, I think we've been pretty clear that over the long term we think it will decline. And there will be periods, like we are saying right now, where coal will be going up and we're going to try to capture that value economically and serve our customers as their needs are increasing or decreasing. But overall, it's a good business for us, and to Hunter's point, we want to be there to serve the last carload that is there.

Okay, makes sense. I know it's been a long call. We really appreciate the time.

Thanks, everybody, for joining us. We appreciate it and I can't hardly wait until the third-quarter call. Have a good day.

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