Q2 2024 CSX Corp Earnings Call

Participants

Matthew Korn; Head of Investor Relations; CSX Corp

Joseph Hinrichs; President, Chief Executive Officer, Director; CSX Corp

Michael Cory; Chief Operating Officer, Executive Vice President; CSX Corp

Kevin Boone; Executive Vice President, Chief Commercial Officer; CSX Corp

Sean Pelkey; Chief Financial Officer, Executive Vice President; CSX Corp

Brian Patrick Ossenbeck; Analyst; JPMorgan Chase & Co

Scott H. Group; Analyst; Wolfe Research, LLC

Jonathan B. Chappell; Analyst; Evercore ISI Institutional Equities

Chris Wetherbee; Analyst; Wells Fargo

Thomas Richard Wadewitz; Analyst; UBS Investment Bank

Benjamin Nolan; Analyst; Stifel

Eric Morgan; Analyst; Barclays plc

Kenneth Scott Hoexter; Analyst; BofA Securities

Jason H. Seidl; Analyst; TD Cowen

Stephanie Moore; Analyst; Jefferies

Walter Noel Spracklin; Analyst; RBC Capital Markets

David Vernon; Analyst; Sanford Bernstein

Ravi Shanker; Analyst; Morgan Stanley

Jeffrey Asher Kauffman; Analyst; Vertical Research Partners, LLC

Presentation

Operator

Good afternoon, everyone. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation second-quarter 2024 earnings conference call. (Operator Instructions)
I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. You may begin your conference.

Matthew Korn

Thank you, [Jill]. Hello, everyone, and good afternoon, and welcome to our second-quarter earnings call. Joining me this afternoon are Joe Hinrichs, President and Chief Executive Officer; Mike Cory, Executive Vice President and Chief Operating Officer; Kevin Boone, Executive Vice President, Chief Commercial Officer; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In the presentation accompanying this call, you will find slides with our forward-looking disclosure and our non-GAAP disclosures for your review. Also please note that our 10-Q has been filed and is available on our website.
With that, it is now my pleasure to introduce Mr. Joe Hinrichs.

Joseph Hinrichs

Thank you, Matthew, and hello, everyone. Thank you for joining our second quarter call today. Before we start, I want to acknowledge and appreciate all our CSX employees who are out there working throughout the Southeast United States as we deal with weather effects from [Hurricane Debbie]. We are prioritizing the safety of our employees and our communities and everything we do and this was a strong quarter for CSX, I am pleased that our results reflect the momentum that we are building as a one CSX team, and I'm proud to see how teams all across our railroad are working together and better more and more effective ways than ever before.
Operationally, we are developing initiatives taken excellent scheduled railroading model and make it safer, leaner and more cost effective while providing the consistency and flexibility that our growing customer base demands. And commercially sales and marketing organization is creating new more targeted methods for us to go to market, create partnerships and use our leading value proposition to convert customers onto CSX rail.
But there's much we have accomplished so far this year, and we are eager to maintain and build on our momentum of the rest of the year. We keep reminding the entire one CSX team. So when we are aligned with each other and work together as one team, there's really nothing we could not achieve. Our employees, our customers and our shareholders are seeing how we are growing the business, controlling costs, leading customer service and leveraging our network capacity in ways we never could before the successful culture, we are building a CSX of delivering positive business outcomes.
Now, we can go over some of the highlights. Let's go to slide 1. On slide 1, we show that some of the key results from our second quarter compared to the revised results from past periods. Later on this call, Sean will provide more detail on the review of the accounting treatment for engineering, scrap and certain engineering support labour as described in our financial report.
Total volume grew by 2% with our intermodal franchise, again leading the unit growth of 5% versus last year, and we are proud to achieve this result, even with the constraints at the Port of Baltimore that impacted our coal shipments. Our coal team did an excellent job finding creative ways to respond to the key bridge collapse and deliver for our customers. Our operating margin reached 39.1%, which represents a 280 point basis point sequential improvement. Revenue of just over [$3.7 billion] was flat compared to the second quarter of 2023 and up modestly over last quarter as strong merchandise pricing and volume growth offset lower coal prices and decline in other revenue.
Operating income was 1% lower than last year, but up by 8% sequentially at our efficiency efforts help reduce expense. Our earnings per share were flat versus last year and up by 9% sequentially. Overall, this was a good quarter. There was right in line with our expectations. Had we not those sales in Baltimore. Our operating income would have been higher year-over-year. Our challenge now is to keep moving forward by focusing on our execution even as markets fluctuate and unexpected events occur as they always do.
Now I'll turn the call over to Mike Cory to discuss our operational performance.

Michael Cory

Thank you, Joe, and thanks to all of you for joining us today. Here's a rundown of our effort of our operating activities in the quarter. But before I do that, I'd just like to extend my sincere thanks to the one CSX operations team for their effort and the contribution day in and day out. We all hear truly appreciate everyone’s teamwork and efforts.
So let's go to slide 3. The first slide on safety. We saw positive trends on train accidents for the quarter and year-over-year. Reduction was driven mainly by fewer mechanical related derailments and a reduction in human human failure accidents. Although human failure remains our highest utilization factor. On injuries, we saw both an increase in transportation and engineering and play incidents. slips trips and falls remain the highest related cause for injury.
This is an area where increased attention to risk has tremendous potential to reduce personal injury. Much of our focus is on the development of heightened risk awareness for our less experienced employees who have the highest rate of accident and injury or currents. By working with our union colleagues were becoming better able to help our employees there. How to identify at risk situations and hazards that we have a long way to go through this collaboration.
We believe improvements in safety will take place. We've also embarked on an all-inclusive safe operations, cultural transformation. Transformation starts with my leadership team and I and will extend throughout to every leader at CSX. This three year initiative is the most extensive safety leadership program we have ever embarked on will support a culture of risk awareness and care for everyone knows they're valued and appreciated. Respected and included one CSX was the first phase of this effort to align the organization to our values and cultural principles.
This next initiative will be an extension of one CSX will have a strong focus on strengthening our safety leadership skills, while building engagement with our employees will be aggressively identifying and eliminating unacceptable risks in our operations, which benefits all our stakeholders. So going over the next slide.
Overall, our fluidity metrics have remained pretty consistent. Our train speed has improved. We have seen some variability and well effectively. Our drone metric reflects the combination of our team, focusing on keeping costs tightly in line while maintaining a level of service our customers require. And as we've dug deeply dug into train size, then local service. We found some cases where we were spending money to switch a customer when the services not necessarily required. This was reducing that dwell metric, but wasn't positively impacting the customer experience and a wasted precious train and engine resources as well as overall costs. We're eliminating these unproductive handlings, even though in some cases it will result in higher overall dwell.
On the flip side, we're spending a considerable amount of time evaluating our network infrastructure for identify opportunities that will increase the efficiency of certain yards and reduced while going forward. These valuation exercises start by analysing the present level of production against demand, ensuring proper standards are in place and that those standards are being met.
Then we aim to increase workload and reduce both handlings that other locations and a reduction of route miles when possible. This can entail simple self-funded improvements in the infrastructure at some of our switching yards to eliminate car handlings and route miles, effectively recruiting more mass where it makes sense, resulting in improved asset speed, service and reliability. As we identify physical improvements to the infrastructure.
We work with our supervisors to lead that process. So they understand how to extract intended value and more. This experience teaches them to continues to strive for both productive work and opportunities for service or growth potential. This initial exercise has been also been supported by a reduction in costs through better utilization of our mentioned major engineering gains as well. Throughout these exercises. Supervisors are the largest area of focus for us as we continue to develop the bench strength on CSX and position them to understand their overall operations better.
And we're supporting them through a variety of methods, which include increasing visibility of leading indicators, identify areas, and they get a lot of daily engagement with the senior leadership team. A great greater focus is to ensure they gain a far deeper understanding of the overall operational customer activities within their charge. We expect to continue improving these metrics as we go forward. Through the actions that were supervises, we will always weigh customer need and the cost required to do so.
Overall, I'm satisfied were on the right trajectory. We have opportunities and plans insight for our network infrastructure and as well our operations leaders ability to improve. Turning over the next slide, we continue to work with Kevin and the Sales and Marketing team to align our operations with the needs of our customers. Preferred service and cost discipline are always at the forefront. We strive to understand exactly how our customers work and what they need from us.
Having this information in hand, a field level supervisors and stressing connectivity with their customers allows us to provide a very high level of first and last-mile service. Our trip plan performance selected well metric reflects the same effect from a continuous focus on cost and customer needs. We've identified areas of opportunity to improve rely on more specific first mile and last mile metric, along with customer feedback and engagement to ensure we are delivering the needed service
You can see in our CSD numbers that are strong customer engagement level of service are taking place. In closing, we have much work to do as we always well. With that said, I'm really excited now that our operations leadership team has been together for close to six months. I can see the improvement being made to clarify the importance of our tasks and to increase our information visibility.
I can also see the deep thirst for learning from all our supervisors at all levels. And this to me is probably the most important factor going forward. This team fully believe that our approach to save balanced and efficient customer focused railroad has many opportunities for improvement ahead, and our plan is to deliver on everyone.
With that, over to you, Kevin.

Kevin Boone

Thank you, Mike. As Joe referenced, we are really seeing a lot of positive momentum, particularly around sales and marketing, collaborating with operations. Highlighting these initiatives are the market reviews where our teams come together to discuss and evaluate opportunities to collaborate on operational efficiencies while delivering new solutions to target profitable business.
Driving network efficiencies allows us to deliver a more competitive service product and expand the opportunity for growth. We are continue to be very aggressive in pushing forward on our truck conversions, new industrial development projects and creative solutions with the growing number of shippers who want to maximize their use of CSX rail.
As you've heard from a number of our peers and competitors across the transportation industry over these past weeks, the trucking market remains challenged and industrial markets are mixed. As we move into the second half of the year, accumulating effects of interest rates, including a sluggish housing market and fluctuating commodity prices, create headwinds for some of the markets we serve. It's a volatile environment, but we continue to drive initiatives to accelerate modal share and expand CSX's addressable market.
Let's turn to slide 7 and look at our merchandise performance. We had a great result with revenues up 5% on a 1% increase in volume. RPU was higher by 4%, even with fuel surcharge lower year-over-year as we continue to get pricing results that reflect the strong service that the team is delivering. Throughout the second quarter, our chemicals franchise has performed very well as momentum has persisted in plastics, Industrial Chemicals, waste and energy markets.
Minerals revenues also saw positive results driven by industrial development wins and our unique network access into the Southeast markets, including Florida, where we see a multiyear glide path for growth. Our forest products business began to accelerate, driven by demand and pulp board and recent wins in the northeast portion of our network.
We've been developing some very promising strategic partnerships in this market, take advantage of the capacity that our network has available, which puts us in a good position to gain more truck share as the housing market rebounds, our automotive business saw 4% revenue growth, leveraging our strong service product to deliver a competitive win with a key customer. Less favourable this quarter was metals were high inventories and expectations of weaker steel prices weighed on volumes.
This is probably the market with the most near-term uncertainty as we watch trends and coil plate and scrap prices for a recovery. Fertilizer volumes continue to be heard by phosphate production issues here in Florida. As in past quarters, volumes of this short haul of business does have a favourable mix effect on the total fertilizer RPU. [In ag] and food remains soft on unfavourable regional craft supply dynamics.
So we are very encouraged by the fundamentals into the back half of the year where we see a weaker South Eastern crop leading to incremental opportunities for growth for the remainder of the year. Despite a sluggish economy and persistently weak trucking market, we expect to capitalize on our best-in-class service to deliver growth. Chemicals should remain strong, supported by business wins, study plastics and healthy waste moves.
We also see opportunities in our Forest Products segment where we see operational focus differentiating us in the market. We're also anticipating a much better second half for our Ag and food business with demand supported by larger [hog and chicken herds] in the Southeast, which will feed, which will need feed grain supplies from the Midwest.
Turning to slide 8 in the coal business, first, I want to reiterate Joe's comments from the beginning of the call. Our team in Baltimore did a fantastic job of finding creative solutions to move coal after the key bridge collapse. Their efforts made a huge difference in reducing the negative impact that this incident had on CSX and the customers we serve. As we highlighted at a conference earlier this spring. Operations, Curtis Bay were up and running at the end of May several weeks ahead of our original projections.
For the quarter, revenues were down 12%. We estimate that without the key bridge collapse, the year-over-year decline would have been more in the range of 5%. Volume was down only 3% with the decline driven by domestic shipments largely to utilities. Key here is that our team was able to grow export volume by 8% year-over-year, which is an extraordinary result given the closure of the Port of Baltimore. RPU was 9% lower year-over-year to 6% lower sequentially, in line with our expectations and driven by export benchmark prices and unfavourable utility mix.
Looking ahead, the key benchmark for high quality Australian coal remains above $200 per metric ton. Given the lag in our export coal contracts, we expect a mid to high single digits. The sequential decline for all in coal RPU in the third quarter, but temporary idling of our recently opened export minor network should have little impact on our export volumes as we see strong production offsets at other CSX served mines.
Just as we did this last quarter, the team is already finding some creative ways to pivot towards other opportunities in the marketplace where we see strong demand for export capacity at our Curtis Bay terminal. On the domestic side, low natural gas prices continued to impact volumes, but we see some good signs from the hot summer, maximizing their coal units in response to very strong demand. We have also seen inventory levels moderate from the highs seen earlier in the year.
Finally, turning to intermodal and slide 9. Revenue increased 3% on 5% volume growth. RPU declined 2% as we felt the effects of lower fuel surcharge revenue and negative mix. Our international business drove our volume growth this quarter, supported by higher East Coast ports, import activity and favourable Ally payment with our steamship line partners. This has been the trend through the year, and we've been pleased to see customer activity remains solid so far in the third quarter and contrast momentum in our domestic intermodal business remains muted as weak trucking conditions persist.
The weak trucking market has continued much longer than what was expected coming into the year. But in the meantime, we'll keep pushing hard in a tough environment, leading with our best-in-class service. All in the collective team has been capitalizing on opportunities throughout the year, working together to win business and gain share for CSX with mixed conditions across end markets, we've been able to grow total volume by 3% year to date, while setting ourselves up for more profitable growth over the longer term by demonstrating to our customers I see expands apart for our service, creativity, efficiency and capacity.
Now let me turn it over to Sean.

Sean Pelkey

Thank you, Kevin, and good afternoon. As Mike and the operations team continue to drive efficiency with strong service, we're challenging ourselves to hold support costs in line and grow revenue through pricing gains and new business wins. As Joe noted, we've built momentum over the last several quarters, and we're looking ahead the strong year-over-year growth for the second half of the year as we finally cycle some of the discrete items that helped our results in prior years.
Revenue was flat in the second quarter, while operating income was down 1% when compared to revised prior year results. Merchandise and Intermodal revenue ex-fuel was up 5% and was partially offset by about $100 million of unfavourable impacts related to lower export coal benchmark pricing and the Francis Scott Key bridge collapse. Declines in other revenue, fuel recovery, and trucking drove an additional revenue headwind of nearly $60 million expenses were 1% higher, and I will discuss the line items in more detail on the next slide.
Interest and other expense was $11 million higher compared to the prior year, while income tax expense fell by $8 million. As a result, earnings per share was up 9% sequentially and stable year-over-year at $0.49. Let's now turn to the next slide and take a closer look at expenses.
As noted in the quarterly financial report, how review of the accounting treatment for engineering, scrap and certain engineering support labour drove immaterial adjustments to previously reported financial statements. Second quarter 2023 expense was revised up by $16 million and going forward, we expect a similar quarterly expense impact split between labour and PS&O.
The labour portion will result in lower capital expenditures and the adjustments for engineering, scrap and labour did not impact cash flow. Total second quarter expense increased by $20 million. Turning to the individual line items, labour and fringe was $18 million as costs from increased headcount and inflation were partly offset by lower incentive compensation and other items.
Head count declined slightly from first quarter and is expected to remain relatively stable through the remainder of the year. We expect to deliver labour efficiency gains in the second half, while continuing to ensure the training pipeline is stable to offset attrition and support future growth. Also, as a reminder, our union employees are receiving a 4.5%-wage increase effective on July 1, and that will be reflected in a higher sequential cost per employee.
Purchase services and other expense increased to $8 million as broad-based efficiency savings and a favourable insurance recovery. Mostly offset costs from inflation, a write-off of inventory in the quarter and other items. Depreciation was up $6 million due to a larger asset base. Fuel costs was down $11 million, driven by a lower gallon price and improved efficiency, partly offset by costs related to higher volume through a combination of operating initiatives and effectively leveraging fuel-saving technologies. We matched our best quarter of fuel efficiency over the last three calendar years.
Finally, equipment and rents decreased by $5 million, while property gains were unfavourable by $4 million. Now turning to cash flow and distributions on slide 13. Free cash flow year to date is $1.15 billion. This reflects lower net earnings and deferred tax payments made this year, partially offset by the prior year impact back wage pay-outs as expected capital expenditures or prioritize investments for the safety, reliability and long term growth of our railroad.
After fully funding these investments, we distributed nearly $1.3 billion to shareholders here to date, and we remain committed to our balanced and opportunistic approach to returning excess cash. A long-term focus on economic profit further aligns our interests with our shareholders. While economic profit is lower year to date, as we cycle prior year comparisons, the team is strategically focused on growing this measure over time. We expect second half economic profit to be up versus the prior year as profitable growth is paired with disciplined asset utilization and attractive returns on our capital investments.
With that, let me turn it back to Joe for his closing remarks.

Joseph Hinrichs

All right. Thank you, Sean. Now we will wind up our prepared remarks by reviewing our guidance for the full year 2024. We look at slide 16. We expect total volume and total revenue growth in a low to mid-single digit range for the second half of the year. Total first half revenue was slightly below original expectations, largely due to lower fuel prices.
The macroeconomic environment does appear a little more uncertain than it did a few months ago. That said, as Kevin described, in merchandise, we see promise across chemicals, forest products, Ag and food and minerals market, supported by increasing customer activity, the ramp-up of new projects, and a growing portfolio of business wins.
On the other hand, metals and fertilizers at both lagged and appears likely to remain softer through the end of the year. We expect momentum to gradually build in intermodal, supported by strong port activity and the strength of our service performance, which is facilitating new ways of working together with our channel partners, is allowing us to drive small but meaningful modal conversions even as the truck market still remains soft.
The reopening of the Port of Baltimore returned to full operations at Curtis Bay and consistent domestic demand should lead to a modest pickup in coal shipments in the second half of the year. Continue to price according to our leading service work better together as a one CSX team and push forward on our efficiency initiatives.
As a result, we expect to deliver meaningful operating margin expansion on a year-over-year basis in the second half, supported by a very strong incremental margin on our revenues.
Our CapEx forecast of approximately $2.5 billion is unchanged, as does our balanced opportunistic approach to capital returns. We are encouraged by our accomplishments to accomplishments over the first half of the year. Now we are very focused on executing our plan or the rest of 2024 as we position ourselves for sustained profitable growth over the long term. We have the capacity, the operating model, leadership team and the culture we need to ensure that we were the best run railroad in North America. We look forward to sharing more details about our strategy at our upcoming Investor Day in November.
Thanks for your interest in our company. Matthew, we're ready to take questions.

Question and Answer Session

Matthew Korn

(Event Instructions)

Operator

Brian Ossenbeck, JPMorgan.

Brian Patrick Ossenbeck

Hey, Good afternoon. Thanks for taking my question. So maybe with Kevin, just wanted to see if you're feeling any impact you're seeing any impact from the potential East and Gulf Coast labor disruption doesn't sound like that's the case, but wanted to see if there's anything in particular that you're hearing from customers and maybe some points we've seen a lot international volume. You gave the reasons for that. But when you think some of that would start spill over into the domestic side?

Kevin Boone

Yeah, I guess that's the magic question, right. one of the domestic market recover on given what we've seen on the export or the import side of the business. I think on idle, we're still not hearing from customers of major shift them and their activity from the east to the west on if that were to occur, I think you probably presents maybe more opportunities than risks for our business on particular, especially as some things I want to move further into the East, the eastern part of our network where today that's truck.
So it's a watch item for us on will be because with Mike and his team and on April to capitalize on that as we see a shift, which the team is well prepared to capitalize on some. Yes, we all listen to the earnings calls from customers on the domestic side. And I think we all came into the year a little bit more optimistic on the recovery will come, but has been posted to the right, that's for sure. And I think hopefully on the import business will be a precursor to some better days ahead on the domestic side. But we're not yet seeing that uplift necessarily as you heard from a lot of our customers on their earnings calls.

Operator

Scott Group, Wolfe Research.

Scott H. Group

Hey, thanks, afternoon, guys. So I'm sure that the comments about meaningful margin improvement in the back half. Any directional colour what that means? And I know every quarter you gave us some thoughts on sort of the sequential puts and takes for margins and earnings to good quarter in a row with cost ex fuel coming down. Do you think that continues stuff like that? Thank you.

Sean Pelkey

Sure, Scott. Yes, I mean, we're not going to give a pinpoint estimate on meaningful improvement in margins are probably would have done that, obviously, but dumb feel good about the setup for the second half of the year. And I think what's exciting is some of the sort of dust that's been in the year in terms of year-over-year comparisons starts to come here in the second half of the year.
And you'll see the core momentum that we continue to build, both on the cost side, but also that pricing action supportive of the service reflective of the service that we're delivering, as well as the growth that we're seeing in the business that will drop through at very attractive incremental margins. Sequentially, second to the third quarter, you got a couple of things going on that are probably worth remembering one is Kevin's guidance on the coal RPU, which will be down mid to high single digits. That will be a big impact.
We got the wage step up for us. That will be about 20 million fuel. We had positive lag in the second quarter. So depending on where prices go, that could be a headwind as well. That said, we're holding the line on expenses. The things that we can control, obviously, we can't control the wage increase or fuel prices. But outside of that, we feel good about the run rate that we're at in terms of second quarter for expenses. And our focus is on the growing year-over-year and delivering that growth at strong incremental.

Operator

Jonathan Chappell, Evercore ISI.

Jonathan B. Chappell

Thank you. Kevin and maybe looping, Mike, in here as well. Back on the opportunities, I think there's a lot of uncertainty around what could happen with the port. There's probably a perception that the East Coast rails are hit more directly. But as you mentioned, there's probably more kind of long haul as it relates to intermodal, et cetera.
Can you just tell us how you think about the US opportunities and risks of this because it gets closer and what it does have the network as far as keeping balance and resources that are required if there were to be a stoppage and you did have to kind of shift toward Chicago focus as opposed to some of the East Coast ports?

Kevin Boone

Yeah. I'll let Mike follow-up. But from a capacity standpoint, where we're working really close with our team. I think we're well positioned to adjust as we have in the past on when these events happen temporarily. But like you mentioned, there's opportunities probably for some longer-haul business, should we see a disruption on the East Coast and some more volumes that would traditionally move east local and think about the New York markets and maybe some of the South Eastern markets that are locally truck on that would have to move through the West Coast. That's an opportunity for all of us to participate and will be more than ready to do that.
But I'll hand it over to Mike to talk about capacity.

Michael Cory

Sure. Thanks, Kevin. Hi, John. [What's the] capacity John? we have the odd you had train train pair, let's say that's a higher rate of using capacity, but for the most part, our network can withstand whatever Kevin brings us. In terms of intermodal, we've done a lot of work at our terminals. Our intermodal team has is really dug in deeper over the last six, eight months to provide that great first mile last mile for the customer. But in terms of the capacity over the network, it's there for us to get that get the business.

Operator

Chris Wetherbee, Wells Fargo.

Chris Wetherbee

Hey, thanks. Good afternoon, guys. I guess real quick, I don't know if you gave it. I apologize if I could you give us the number the for the accounting change for the quarter, the impact on 2Q? And then I guess I was curious about how you think about pricing sort of going forward as you see service product continued to be very solid. There's some opportunities on the volume side. I know you do most of the repricing probably towards year end. Are you seeing any of that acceleration in terms of the year-over-year growth and able to capture on new contracts that are 2Q and into 3Q?

Sean Pelkey

Chris, it's Sean. I'll take the restatement first. So what I mentioned was that of $16 million impact in the prior year split between labour and PS&O some even though there was no restatement for Q2, obviously, because we're reporting Q2 results of this year for the first time, that impact was similar in the second quarter. And that's pretty similar to what we expect on a go-forward basis as well.
I'll turn it over to Kevin for pricing.

Kevin Boone

In the second question, clearly, no facing a truck market when you're trying to convert truck is not the most ideal backdrop on to do that. But we've had a lot of success. And then you have clearly see that that's really build and build momentum as that market comes back. So and on the intermodal side, not as strong of a pricing environment, which we've been pretty transparent about on the merchandise side, given our service, given the value we're providing to customers, given the efficiencies we're driving for them, we're having really good discussions around there.
And you're right, a lot of that repricing every year comes out of the end of the year in the first part of next year. But with inflation coming down, those things, those will be factors as well. But we still nothing's really changed from our from our strategy there. We want to go after volume and price and deliver the value to our customers. So they see the value and giving us more business along with it. Obviously covering the cost and inflation that we will have to absorb every year.

Operator

Tom Wadewitz, UBS.

Thomas Richard Wadewitz

Yes, good afternoon. Wanted to see, Mike, if you could offer some thoughts on how you think that the network is running. I think some of the metrics show a little bit of deterioration in terms of like on-time arrivals or carload trip plan compliance. I wonder if you think you know why you think that would be the case and whether you would expect those metrics to to rebound as you look into 3Q and 4Q?

Michael Cory

Sure. Thanks for the question . Look, we have we have really made a lot of changes here the last six months, most focused on two things won't safety first as though you can tell by our metrics on that, but service we whatever we do in terms of weather as we make changes to the operating plan, which in some cases has caused trains not to run on time right down to making sure that the assets that we have out there are being pushed.
So locomotives being stored, we're doing we're doing things right now just to test the railway. And yes, there's been there's been some drop in some of the metrics. And yes, they will improve as we go forward. But we have opportunities here, first of all, with a very young can partake in it. So the changes we're making and yet they're having some effect, nothing material that some effect on some of our some of our lagging indicators.
But what we're able to do from a cost perspective and still maintain that service is powerful. And really by focusing on the connectivity between our field people and their customers, we're starting to see even more benefits come up. Yes. We'll get our metrics back. But at the same time, we're not we're not running for a metric. We're running for service. We're running for a return, and that's very important.
And so Tom for me, just learning as I go, I've been here 10 months now. I'm not overly concerned. And trust me, it's a focus as we go through to improve those metrics. And prior to this storm we had going on we had a pretty good July. Those regards. So some metrics will improve but focuses on cost and service and safety. And that will figure out the right metrics from there.

Operator

Ben Nolan, Stifel.

Benjamin Nolan

Hey, I appreciate it. Thank you, guys. At the half is going to ask a little bit on the chemical side. It is that has been working pretty well for you guys. A was curious how you had if you think it is just fundamentally there's just a lot more chemicals removed or is this share gains maybe relative to the trucking side of the business or maybe competitors and a framing that you can talk to you on the chemical side would be helpful.

Kevin Boone

Yes. I mean, I think you've first got to start with last year. Obviously, that was a difficult backdrop for our chemical market, but we have seen some wins on the industrial development side of that are really starting to help us there. And so that's been positive in the plastics market. So we really capitalize on those opportunities.
And I think it's all the valve that you mentioned. We obviously have count quality carriers and that alignment with them that have that understanding of the market has helped us in our conversations with customers, common factors, risks and customer, where we're kind of bundling that opportunity together and allows us for us to work together and whiteboarding sessions to really look at their total network and how we can make that rail more rail centric over time.
So those are exciting things. Some of the things that we've been working on for a long time that are really picking up momentum. But it's really all of the above. It starts with the leading service and the in the East. And we're really on delivering on that and the but allows us to have a really different conversation with our customers. And we were able to a year or two ago.

Operator

Eric Morgan, Barclays.

Eric Morgan

Hey, good afternoon and thanks for taking my question. I wanted to ask on industrial development was just wondering if you could offer any update on some of those projects. I don't think the merchandise slide called out the on that 1% contribution to the merchandise volumes you called out last quarter. So just wondering if that's still a target. And I'm curious as to any other progress you've made since last quarter, the incremental that might have to be tracking closer to the high end of that 1% to 2% range you've talked about for, I think, '25 or '26.

Michael Cory

Yes. I mean, Joe mentioned an Investor Day in November, and we're certainly going to put probably more of a vote on this. The story and kind of open up a lot more of the details and and share with on with all of you. But we are seeing that acceleration of this year-over-year in that range that I mentioned. And when you look at full run rate and some of these projects can take a year or two to really get up to full run rate volume. But the pickup in terms of things that we're seeing and put in place this year has certainly accelerated this year, and we anticipate that will accelerate next year and then the following year.
So that means for several years of growth as those projects really come up to full rate production on average, a lot of these projects are $1 million or $2 million. So it's a lot of small things that add up to a fairly large number. And we do have the larger projects in there as well. But it's a very diverse set of projects, opportunities that are coming online across number of our merchandise network of segments. So that's exciting. Um, we still see the momentum out there. I think it's going to be fun to talk about it in November. And I'm sure that some share more of those details with you.

Operator

Ken Hoexter, Bank of America.

Kenneth Scott Hoexter

Hey, great. Good afternoon. And Sean can you just I guess can you clarify when you say come in for improvement in January? Answering Scott's question, but you didn't say if you're going to see sequential improvement or decline, I just want to clarify if you if you were suggesting you're going to see improvement sequentially. And then when you mentioned labour, flattish, do you still see opportunities to cut costs there or can we see progress on that or is it kind of the risk fine level you expect to run it? Thanks.

Sean Pelkey

Yes, Ken, I'll take the sequential part first. We're not going to guide specifically to sequential. I did lay out a couple of factors there that are be somewhat challenging from 2Q to acute into tick 3Q in terms of the wage step up, the net fuel and the on the coal RPU. That being said, core expenses, we should trend pretty similarly take Q2, and we'll see what happens in terms of the demand side of the equation. But again, feel good about low to mid single digit volume and revenue growth year-over-year in the second half.
And then in terms of the labour opportunities, I think there's always continued opportunities to do. I've efficiencies on labour mix makes clearly focused on overtime reductions out there on what we're seeing momentum across many of the graphs. These also got a team working very closely at how do we increase retention across the craft workforce, T&E in particular, there's there's significant costs and training those employees. Every time option is extraordinarily important, not just from a, you know, an operating standpoint, but also from a cost and efficiency standpoint. So definitely opportunities going forward.
On the labour side, even if it's not headcount, I think head count will be pretty stable. And we will drive year-over-year improvements and headcount efficiencies where we do expect volume to grow more than headcount in the second half.

Operator

Daniel Imbro, Stephens

Okay, great. Thanks. This is Brendan on for Danielle. I wanted to ask, as we've gone through earnings season, we've heard some anecdotes about the truck market, maybe moving a little closer to balanced than it has been over the last couple of years and maybe even showing some signs of seasonality. Again, I wanted to ask, have you seen or heard any anecdotes from customers to suggest truck to rail conversions are picking up sequentially or could pick up in the back half? Thanks.

Kevin Boone

Yes. Listen to the same calls you did. I think they're obviously a lot closer to it on a day-to-day basis on than we are. I think the environment's persisted longer than what we expected than everyone expected. Quite frankly, we're just setting ourselves up for the recovery, and I think we're well positioned there. But I don't have any additional antidotes the to add to what we've all heard on. I'm hopeful that we're further along in this cycle than the knot. And I think we're set up with what Mike mentioned on our intermodal upside for from a capacity standpoint, we're better positioned than we ever have to bring on the volume.

Operator

Jason Seidl, TD Cowen.

Jason H. Seidl

I wanted to dig a little bit deeper, Joe, to a comment you made. You talked about it now there appears there or was that comment more related to what we've seen sort of over the past two weeks with PMI being negative again in the job number that we saw last week? Or was this from what your customers might be telling you what if it is from the customers? Maybe you could elaborate or give us more colour on that .

Joseph Hinrichs

Thanks, Jason. I think covenants highlight a number of the areas where area we didn't talk about was automotive. And while we had a strong performance in the first half of the year, I think you've seen the shipments over the last few weeks have been down a little bit coming out of their shutdown period. So that's one we watch very carefully from the consumer side of things. Interest rate sensitivity, you think about it, how is the market auto market are two big growth areas in our business that are very rate sensitive.
So we're watching it very carefully. But my comment was, you know, so that's in addition to all that stuff. It's Kevin talked about earlier in my comment was more in general. I think I mean, we are thinking about this call is even before today's events in the marketplace. I think there's just a little more uncertainty about where the economy really is. And we see a number of areas that we're excited about one-half of the year. But clearly, we're watching what happens with the Fed were watching what happens in the general economy.
And so I think you could say where we are today versus two months ago, the economy seems to be a little bit more fragile, and we're optimistic that the you know, I can pick itself up, but we're watching very carefully.

Operator

Stephanie Moore, Jefferies.

Stephanie Moore

Hi, good afternoon and thank you. I mean, the tenant community and the same love to hear maybe some color that you're seeing from maybe some picked up infrastructure, general industrial investments that we've seen across the southeast of any commentary that would potentially be a slowdown in that activity or acceleration Canada like for it and kind of thought because we cannot afford. Thank you.

Kevin Boone

Yes, I'm not really any on slowdown. And I think we presented of the slide last time that we do have a really, very diverse portfolio. And there was a lot of focus on the EV market. And certainly we've seen some of that be pushed to the right, but our portfolio is much, much larger than just the UV segment. So other areas, we continue to stay on trend on pace, and we'll obviously have a ramp-up period over time. But we have we are pretty clear line of sight. A lot of construction is already underway.
So a lot of some capital out there with these projects needing to be finished. And so we feel pretty good that, um, you know, despite maybe on even if the macro scene a little bit weaker in the back half that these projects are large in large part will continue on and be a positive factor for us in the back half and into the next year in the following year.

Operator

Walter Spracklin, RBC Capital.

Walter Noel Spracklin

Yes. Thanks very much. Good afternoon, everyone. I was wondering I don't know if this is a question more for Mike or for Sean. With regard to long term or where your or could go. I know that you and I'm a number of your peers, we're able to achieve a 55 or at least on a quarterly basis in the past. But now with with cost inflation, new work rules and I'm talking really just your rail operation, if you would exclude your trucking from this conversation.
If we look at the cost inflation and work rules and the other factors that have come to play here in the current environment, do you still see your efforts? And like you mentioned, you're making great efforts on cost efficiency on service and on and on safety. Can they translate into 55 again? Or is 60 the new 55 or something else? Maybe if you could talk a little bit conceptually about that so much the top target itself, but if these are real impediments to you achieving the run rate you've had in the past?

Michael Cory

Well, I'll start off, Walter and nice to hear you that you're on the call. I look no different than any other time with the margin is not what we're aiming for. We do see a pipeline in terms of efficiencies, and that's again, this is going to take time, but it's happening as we speak. We're developing supervisors to see these things, giving them the tools to be able to to relate to them better. And I see a lot of the things I saw my previous career. There's just opportunity here to connect people and activities where we get rid of waste. And that's our focus.
And I'll turn it over to my financial [friend] here.

Sean Pelkey

Thanks, Mike. I agree. I mean, margin, obviously, as an indicator of financial health and it in our industry, it helps that helps us to understand how our efficient were running the railroad. And clearly, as we're able to grow the business as well and do that at strong incremental, that's going to help the margin. But the margin really isn't the destination. The goal is to grow earnings to grow economic profit and be disciplined around the way that we spend capital and look for opportunities to invest in things that have a high return, whether those are growth oriented projects or projects that help us to drive further efficiency gains, technology investments, capacity investments across the railroad.
That's our primary focus. We think that's the quickest surest way to grow the value of the company. And in terms of things changing versus previously, I think you make a good point in terms of the impact of inflation on the rail operating ratio, operating margin equation. That being said, I don't see any reason why we can't continue to see improvement in that metric as we expect across many other metrics in our financial performance over time. If the formula of the equation that we have going for us right now is able to continue and we've got confidence that we'll be able to do that.

Joseph Hinrichs

So this is Joe. Last comment to add to that. I appreciate you recognizing quality carriers as part of our equation when it comes to margins. If you look at our second quarter performance, even with now accounting for scrap in the release, labour from according to our policies, even looking at he will fuel being down, we had over 39% margin in our corporate results. But if you look at the as we've said in the past, the effect of quality cares about 280 basis point effect on our total margin.
So our rail operations that and if you just do that simple math, had over 41% margin in this second quarter. In a clean quarter with not a lot of exceptional things going on or like a lot of those quarters that you're referencing in the past had high fuel surcharge or had brought a demerger storage charges or even had record export coal prices and other things like that, we're at a pretty stable quarter, even with the Baltimore bridge collapse and with our rail operations, even with the inflation that we've had over the last couple of years capable of delivering that kind of performance.
And as we've noted, we are optimistic about how we continue to run this as forward. We're very excited about the margin potential of this business and recognizing that that service and and our operating efficiency go hand in hand. Having said all of that, if the pursuit is just only to optimize the margin number, this industry or even this company has the potential to turn away. Good business, I mean, I think it has in the past, we had a 41%-plus percent operating margin for our rail business last quarter and a 35% margin opportunity presented itself. Do we turn it down and some, you know what our cost of capital as a whole lot lower than that. And those businesses don't have that kind of margin in really good business. And so that's was John's points very valid. We're going to grow earnings grow to cash.
So we can return that to shareholders and reinvest in the business for profitable growth. And that's kind of way we looked at it. Efficiency matters. There's no question about sort of safety sort of the service. But the big opportunity at these margins is to create growth, profitable growth, which has strong intermodal, more incremental margins. I mean that's what we're excited about.

Operator

David Vernon, Sanford Bernstein.

David Vernon

Hey, guys. Thanks for taking the question. John, I wanted to ask that the incremental sort of operating leverage question a little bit differently. If you look at the first half of the year, volumes are up 2% operating profit down for I know the bridges in there. But if you think about what's been missing in the equation for for operating leverage to drop down to the bottom line on that volume, what's going to change in the second half of the year?

Sean Pelkey

Yes. No, good question, David. If you look at the first half, I mean, I get to about $300 million of kind of a unique year-over-year challenges between the Baltimore collapse, the lower export coal pricing decline in other revenue, net fuel, that's $300 million. Second half is not going to be anywhere near that signal. Second, we will have coal pricing headwinds, but the rest is pretty clean.
And then the other thing that's different and we are in the first half of the year, we were still cycling and some of the labour additions that came on over the course of last year. So our labour productivity was negative in the first half of the year. That's going to turn positive. We've in the second half of the year on our volume growth and keeping headcount essentially flat from where we are right now. So those are the two big factors there.

Operator

Ravi Shanker, Morgan Stanley.

Ravi Shanker

Thanks, everyone. So maybe also piggybacking on that operating leverage question. I mean just to kind of summarize the call a little bit into feels like a little bit of a mixed message from you guys on cycle sentiment of the one hand, you did say that the it appears the kind of inflation is kind of pushed out a little bit in the economy is a little more fragile. The other hand you are guiding to is some pretty strong operating leverage in the back half.
You're just trying to get a sense of how much visibility you have on that operating leverage? Because general commentary indicated that's driven a lot by volume and price and in a fragile market and have that maybe to the hard to come by, especially given some of the puts and takes on the end markets that are just trying to get a sense of how much confidence and visibility you have on that operating leverage in the back half?

Sean Pelkey

There's been a lot of puts and takes. This is Sean on and on a year-to-date basis, but we're pretty much right on our plan in terms of both total volume and revenue, which is which is great. We had a stretch plan in place across the teams. And we do we've done a good job when there have been challenges, figure out ways to offset them given the good job of describing that with the Key Bridge outage in Baltimore and what we did to adjust there.
And we think we'll be able to continue to do that as the year goes forward. And I think I think we also talked about a number of the opportunities. There are some markets that are setting up quite well for us in the second half of the year. It's not it's not guaranteed until we actually move the freight, but we've got a couple of areas of strength between Ag and food and minerals and chemicals continuing to show nice year-over-year growth. There's some headwinds and some uncertainties out there as well.
So nothing's ever a given, but we're not only focused on on growing the volumes were also focused on getting the price that we need to get in the marketplace. A lot of that price for this year has already been locked in and then driving efficiency and the cost base. And we've already seen pretty significant improvements from where we entered the year to where we're exiting the first half of the year. That gives us confidence we'll be able to hold the line there into the second half.
So if the macro is not as supportive and maybe we don't see as much growth as we expect, well, we still be able to deliver margin improvement in the I think we will.

Operator

Jeff Kauffman, Vertical Research.

Jeffrey Asher Kauffman

Thank you very much for squeezing me in. Mike, just a quick question. You talked about some excess capacity actually might have been. Kevin had mentioned that we have plenty of capacity on the line, and I noticed that the well was up a little bit. So I guess my question is, are there opportunities you said you're testing the railroad here and they're seeing what it can do to run with fewer locomotives or fewer cars or maybe technology can help you drive efficiency on the asset side.
I'm not talking so much about the people side here because you mentioned that earlier. But I was just kind of wondering because cars online were up about 3,000 cars sequentially. I don't know if that seasonal or not, but what kinds of opportunities do you see for improved asset utilization on the rail?

Michael Cory

Thanks, Jeff. Just to clarify, what I've been speaking about before was in intermodal shift. So obviously the heat and I'm speaking specifically about season in our intermodal trains and the capacity that we have in that network. But everything you you've talked about, the answer is yes, to be one to run with fewer locomotives. Will there be technology that enhances what it is? We're doing?
Absolutely. The biggest thing we're focused on right now is outside of outside of the day-to-day, sweeping the corners, making sure people understand what the standards are and how to go about achieving them further looking at infrastructure that we have. And so there's some opportunities to reduce out of route miles reduced a lot of handlings essentially create mass where we don't have it today. This railroad has customers everywhere versus it being linear, where you can accumulate all your traffic, you switch it out and it runs.
So we're going to try, John's going to try. We are looking at our network to see areas where we can bring and create mass in certain places and eliminate all those touches that we do. We do a lot of work online and road with trains block swapping because we just don't have the mass at the at the origin terminal. So there's opportunities there. And at our in our Investor Day or when we get together will lay out a far more than just me talking, but it will show you what we're talking about there.

Operator

Thank you. No further questions. This concludes our Q&A session and conference call. You may now disconnect.