Jul 14, 2016
Executives
David Baggs - VP, Treasurer and IR Officer Michael Ward - Chairman and CEO Frank Lonegro - CFO Cindy Sanborn - COO Fredrik Eliasson - Chief Sales and Marketing Officer
Analysts
Rob Salmon - Deutsche Bank Ravi Shanker - Morgan Stanley Ken Hoexter - Merrill Lynch Brandon Oglenski - Barclays Capital Brian Ossenbeck - JPMorgan Allison Landry - Credit Suisse Chris Wetherbee - Citi Tom Wadewitz - UBS Jeff Kauffman - Buckingham Research Scott Group - Wolfe Research Jason Seidl - Cowen and Company Ben Hartford - Robert W. Baird Cherilyn Radbourne - TD Securities David Vernon - Bernstein John Larkin - Stifel Bascome Majors - Susquehanna Justin Long - Stephens Donald Broughton - Avondale Partners John Barnes - RBC Capital Keith Schoonmaker - Morningstar Scott Schneeberger - Oppenheimer
Presentation
Operator
Good morning, ladies and gentlemen and welcome to the CSX Corporation Second Quarter 2016 Earnings Call. As a reminder, today’s call is being recorded.
During this call, all participants will be in a listen-only mode. 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.
David Baggs
Thank you, Prima, and good morning, everyone and again welcome to CSX Corporation’s second quarter 2016 earnings presentation. The presentation material that we’ll be reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the Investor section.
In addition, following the presentation, the webcast replay will be available on that same website. This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer.
In addition, Cindy Sanborn, our Chief Operating Officer; and Fredrik Eliasson, our Chief Sales and Marketing Officer will be available during the question-and-answer session. Now, before I turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements.
You are encouraged to review the company’s disclosure and the accompanying presentation on Slide Two. The disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements.
In addition, at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX and out of respect for everyone’s time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on the same topic.
And with that, let me turn the presentation over to CSX Corporation’s Chairman, Chief Executive Officer, Michael Ward. Michael?
Michael Ward
Well thank you David. Good morning everyone.
Yesterday CSX reported second quarter earnings per share of $0.47, compared to $0.56 per share in the same period last year. Revenue declined 12% in the quarter; a strong pricing across nearly all markets, was more than offset by the impact of a 9% volume decline, which included a 34% decline in coal, as well as negative mix and lower fuel recovery.
Regarding operating performance CSX continued to deliver strong safety performance and service continued to meet and exceed customer expectations and drive further efficiency. In the quarter CSX continued to aggressively and successfully reduce its cost structure throughout the network, recognizing that this company's long term future is built on a fluid and efficient network, serving primarily intermodal and merchandized markets.
Despite these cost saving actions, operating income declined a $177 million to $840 million. At the same time, the operating ratio increased 210 basis points year-over-year to 68.9%.
Now I’ll turn the presentation over to Frank, who will take us through the second quarter results and third quarter outlook in more detail. Frank?
Frank Lonegro
Thank you, Michael and good morning, everyone. Let me begin by providing more detail on our second quarter results.
As Michael mentioned, revenue was down 12% or $360 million versus the prior year, driven primarily by lower volumes. Total volume decreased 9%, which impacted revenue by about $260 million.
In addition, fuel recoveries declined $98 million. We continue to see strong coal pricing from an improving service product, which for the second quarter was up 2.9% overall and 4.0% excluding coal.
However this was partially offset by negative business mix in the quarter. Other revenue decreased $29 million, driven mainly by lower incidental charges and coal related revenue from affiliate railroads.
Expenses decreased 9% versus the prior year, driven mainly by $96 million in efficiency gains, $86 million in lower volume related cost and $56 million in lower fuel prices. Operating income was $840 million in the second quarter, down 17% versus the prior year.
Looking below the line, interest expense was up slightly from last year with higher debt levels partially offset by lower rates, while other income was relatively flat to the prior year. And finally income taxes were $262 million in the quarter with an effective tax rate of about 37%.
Overall, net earnings were $445 million, down 20% versus the prior year, and EPS was $0.47 per share down 16% versus last year. Now let me turn to the market outlook for the third quarter.
Looking forward we expect year-over-year volumes to decline in the third quarter, in the mid to high single digit range. Despite some markets growing, the majority of our markets will be down with the most significant declines continuing to be concentrated in coal and crude oil.
Automotive is again expected to grow, as light vehicle production remains higher on a year-over-year basis. Minerals volume will be higher with a continued ramp up of the new fly ash remediation business and ongoing strength in construction, which drives demand for aggregates.
Agricultural products are expected to decline as the strong dollar and low commodity prices continue to pressure, both domestic and export shipments. Chemicals will be down due to the continued declines in share related products resulting from low crude oil and natural gas prices.
We expect crude oil volume to be moderately lower on a sequential basis. Domestic coal will continue to be unfavorably impacted by an excess supply of natural gas at a price point that favors gas burn over coal in the East.
In addition coal inventories remain high and year-over-year volume declines will continue to be significant although less severe than the second quarter due to softer comps in the back half of 2015. Export coal should be moderately lower in the second half of the year from the first half tonnage run rate, consistent with the seasonality we have seen in recent years.
Despite modest improvements in the met and thermal benchmarks, the export market will remain pressured by the strong U.S. dollar and global over supply.
That said, we saw more spot moves than anticipated in the second quarter. As such, we now expect full year export coal tonnage of around 20 million tons.
For the total coal market, we continue to expect full year tonnage declines of around 25% with third quarter coal tonnage roughly stable sequentially to what we've seen in the first half of this year or approximately 22 million to 23 million tons in the quarter. Intermodal is expected to be down, as we continue to cycle prior competitive losses in international through the remainder of 2016.
Domestic intermodal is anticipated to be roughly flat in light of difficult comps that reflected new business shifting to CSX in the third quarter of last year. Overall our business continues to reflect a market environment driven by low crude oil, natural gas and broader commodity prices as well as continued strength in the U.S.
dollar. Turning to the next slide, let me talk about our expectations for expenses in the third quarter.
Since last quarter, we've taken aggressive cost action which includes reducing headcount by about 4,500 versus the prior year. As a result, we have achieved about $230 million of efficiency gains in the first half of 2016 and now expect full year productivity savings to approach $350 million.
We expect third quarter expense to benefit on a year-over-year basis from our ongoing focus on driving efficiency gains and rightsizing resources. Looking first at labor and fringe, we expect third quarter average headcount to be down slightly on a sequential basis.
In addition we expect labor inflation to be around $30 million in the third quarter. Finally we expect a headwind in the third quarter of $25 million to $30 million versus the prior year driven by higher incentive compensation.
As a reminder, in 2015 we saw incentive compensation decrease in the second half of the year as market conditions drove CSXs financial results below our initial plan. Looking in MS&O expense, we expect efficiency gains and volume related savings to more than offset inflation.
As a result MS&O costs are expected to be down moderately versus the prior year. Fuel expense in the third quarter will be driven by lower cost per gallon year-over-year reflecting the current price environment; volume related savings and continued focus on fuel efficiency.
We expect deprecation in the third quarter to increase around $20 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the third quarter are expected to be relatively flat to the prior year with a benefit of improved car cycle times offsetting higher freight car rates and the increase in volume related cost associated with automotive growth.
Now let me wrap up on the next slide. CSXs second quarter results reflect success in a challenging freight environment with macroeconomic and coal headwinds impacting most markets resulting in a 9% volume decline this quarter.
This success is driven by pricing for the relative value of rail service, driving efficiency gains and aligning resources to the softer demand environment, which partially offset those substantial volume headwinds. Looking ahead, let me first provide an update on our 2016 capital investment.
Project capital investment has increased $300 million from our initial plan as CSX now anticipates accelerating payments for locomotives delivered throughout 2016 under a long term commitment. We originally intended to pay for these locomotives in 2017.
As such 2016 capital investment is now expected to be $2.7 billion. By completing our locomotive purchase commitment this year we simultaneously clear the path in 2017, for CSX to begin returning to our long-term core capital investment guidance of around 16% to 17% of revenue.
As we think about market conditions for the remainder of the year, we expect macroeconomic and coal headwinds to continue, low commodity prices and strength in the U.S. dollar will continue to impact many of CSXs merchandised markets, while natural gas prices below $3.50 and elevated stock piles are driving significant headwinds in coal.
As a result, we continue to expect total coal tonnage to decline around 25% for the full year. Looking at our expectations for the third quarter and full year, we remain intensively focused on achieving strong pricing that reflects the value of CSXs service product, right sizing resources with lower demand and pursuing structural cost opportunities across the network.
As a result of these initiatives we now expect efficiency gains to approach $350 million in 2016. That said the impact of current market conditions on CSX's volume particularly in coal is expected to outweigh our positive momentum.
As a result, we continue to expect third quarter and full year 2016 earnings per share to be down from last year. Furthermore as a reminder, third quarter EPS is typically down sequentially from second quarter results reflecting the seasonality of our business.
With that, let me turn the presentation back to Michael for his closing remarks.
Michael Ward
Thank you. As Frank discussed, it's clear this continues to be a challenging freight environment with plenty of macroeconomic headwinds.
Thanks to the extraordinary work of our employees, CSX is delivering record levels of efficiency and rightsizing resources to the business demand of today. Looking longer term, the company has a bright future as the men and women of CSX are simultaneously positioning the company for growth, where we have the resource flexibility to serve future demand.
This will position CSX to maximize long-term opportunities in both our merchandize and intermodal markets. As a result, we continue to be enthusiastic about the core earning power of the company as the market headwinds subside.
As we work to transform this company into the CSX of tomorrow, we must grow and make more profitable the merchandize and intermodal markets, which represent our future. At the same time we will continue to preserve the business value of coal, recognizing that it will become a smaller but still important part of our company.
Our future evolves leveraging a premier highly efficient network that reaches diverse merchandize and intermodal markets and nearly two thirds of the American consumers. It requires consistent excellent service for customers, which in turn supports efficiency, profitable growth and pricing that allows us to continue investing for the future and includes technology solutions to drive an ever more safe, reliable and efficient railroad.
As we manage today's business environment to deliver on the future potential, we continue to focus on achieving a mid 60s operating ratio longer term to deliver compelling value for you, our shareholders. And now, we’re pleased to take your questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
Our first question comes from Rob Salmon of Deutsche Bank. Sir your line is now open.
Frank Lonegro
Good morning, Rob.
Rob Salmon
Hey good morning and thanks for taking the question. Frank, I think on the last call you had indicated that with regard to the earnings cadence, you thought the decline in Q2 would be the largest for the year.
As I think out to the back half of the year, with the puts and takes of holding a little bit stronger than what you had anticipated in Q2 cost actions being a little bit more, how should I think about that earnings cadence as I look out?
Frank Lonegro
Yes, I think as we look at Q3 earnings on a year-over-year basis, we had mentioned that they will be down. We haven’t sized that as you know.
We've got a challenging market environment that I know Fredrik will get into later in the call impacting the top line. There are comps that begin to ease as we get into the back half of the year.
Although as we mentioned, volumes in the third quarter will be down mid-to-high single digits, with crude down international intermodal losses in the coal as we mentioned on a year-over-year basis down as well. So we got some negative mix and as moderating productivity as we get throughout the year, obviously we've delivered about 230 million in productivity in the first half and that implies a certainly moderating productivity level as you get into the Q3 and Q4 and then we try to give you some clarity in the third quarter remarks about where incentive comp might be and certainly with fuel prices where they're going and cycling some of the fuel positives that we had in the third quarter of last year, we're going to have a net fuel headwind as well.
So we've got some challenges looking ahead of us in the third quarter, but as I’m sure Cindy will mention later in the call, everything is on the table on the productivity side and pricing continues to be favorable given the environment.
Rob Salmon
When I think about the mix that feels like it will be little bit less in the third quarter. Fuel is probably going to be little bit tougher.
Do those two net out or does fuel overwhelm the mix?
Frank Lonegro
Well, let me hit the fuel and then particularly hit the mix one. So when you look at fuel, we had about a $7 million in-quarter challenge in the second quarter.
You would anticipate given where the forward curves are, that the in-quarter challenge will likely be a little bit more difficult sequentially and then given the fact that we’re cycling about a $20 million favorable in the third quarter of last year, you're looking at a pretty big obstacle there.
Rob Salmon
Got it.
Michael Ward
In terms of the mix, I will say that obviously we're going to continue to have the overarching exchange between coal gone away and we're growing intermodal. We have indicated that we do think things will moderate in terms of overall volume decline as we move throughout the year.
However, third quarter is still going to be a challenging quarter and frankly, so will fourth quarter, but we do expect things to improve from a volume perspective as we move throughout the second half of the year.
Rob Salmon
Appreciate your time guys and I’m sure someone also hit on the efficiencies, but congrats on a good quarter.
Michael Ward
Thank you.
Operator
Thank you. The next question comes from Ravi Shanker of Morgan Stanley.
Sir, your line is now open.
Michael Ward
Good morning, Ravi.
Ravi Shanker
Thanks. Good morning everyone.
So I will hit on the efficiency, so obviously a pretty impressive phase so far this year. I am not surprised that you raised that target of $350 million.
This then raised the natural correction as to what innings we're in with the productivity gains here. So just how deep is that well that you can grow from?
Cindy Sanborn
Good morning. This is Cindy.
I'll respond to that one. I'll tell you when we think about productivity, we’ve generated some in our network performance as you’ve seen our service measurements improve.
We think about it structurally and streamlining and process within incentives. So those are the main categories that we look at.
When we look at what we’ve done so far, clearly we're lapping some of the big initiatives that we took late in 2015 and earlier this year, but we see -- we have a very long initiative base. We pulled some of those forward, but I think when we look out to the future, I think we’ll continue to drive results both in the back half of the year as Fredrick has -- as Frank has talked about.
It will be a little bit less in terms of quarterly numbers, but it's going to be better than what we traditionally do on a quarterly basis. And as I look into 2017, I think we will able to overcome inflation and I think a big part of what is going to help us to do that is our CSX of Tomorrow initiatives around the network as well as automation and technology is going to allow us to continue to drive productivity and I would also want to mention that the actions that we're taking are not reactions.
They are actual actions that are driving our decision making relative to our coal portfolio getting much smaller and the importance of providing a safe and reliable service product in the merchandize and intermodal portions of our business. And that is part of our core CSX of Tomorrow strategy and we're executing on that and it well help us to be both service sensitive, more service sensitive company as well as a more efficient company.
Ravi Shanker
Got it. So just to clarify, the run rate that you expect to see for the second half of this year, is that a run rate to think of going into '17?
Frank Lonegro
Hey, Ravi its, Frank. I think what the numbers would imply in the second half would be about $60 million a quarter.
It never works out perfectly as you know, but that’s a general run rate in the second half of the year. As we get closure to the end of the year, we'll be able to give you a little bit more guidance on 2017, but like Cindy mentioned and I'll reiterate, our goal is always to offset inflation with productivity and depending on how those numbers play out as you get into forecasting next year’s inflation numbers, you should see us have confidence in our ability to continue to do that in 2017.
Ravi Shanker
Great. Thank you.
Operator
Thank you. The next question comes from Ken Hoexter of Merrill Lynch.
Sir, your line is now open.
Michael Ward
Good morning, Ken.
Ken Hoexter
Hey, good morning. Just wanted to follow up on Frank’s comment on the increasing CapEx and accelerating locomotives purchasing, just wondering why you're accelerating the CapEx?
Did you get better pricing on equipment and does that change your thoughts on cash flow buybacks and use of capital as we move forward?
Michael Ward
Hey Ken, honestly it was the avoidance of seller financing charges that we would have incurred if we had stuck with the original deal to pay off the engines next year. So, it’s just a timing over a couple of months.
No impact on cash flow. It’s kind of a one-time thing switch between 2017 and 2016.
Ken Hoexter
So it’s not a commentary on what you thought on pace of volumes or anything else, just financing to accelerate in a declining volume environment.
Michael Ward
Well, we either pay the financing charges or avoid them by pulling it forward and as Cindy is mentioning, every dollar is on the table and that seems like a good way to save a little bit of money as we look forward into 2017.
Ken Hoexter
All right. Great.
Thank you.
Operator
Thank you. The next question comes from Brandon Oglenski of Barclays.
Your line is now open.
Michael Ward
Good morning, Brandon.
Brandon Oglenski
Good morning, everyone. So I want to follow-up on Ken’s question on CapEx.
So you talked about the ability in 2017 to get back towards a core investment around 16% to 17% of revenue, but I’m assuming that excludes spending on things like PTCs. So, you might not be willing to tell us right now what you think the non-core items might be in '17, but may be if you could give us some context on what non-core investment has been for the past couple of years?
Michael Ward
Sure. So the only thing that we exclude from core investment is positive train control.
If you look at what we're doing this year, our all-in number of 2.7 has the $300 million increase for the engines that I just mentioned. It has $300 million for positive train control, which gets you down to the $2.1 billion of core capital that we had started the year talking about and as you might remember, that was a decline of over $100 million in core capital from 2015.
You will continue to see us focus hard on core capital and making sure that we’re making the right decisions in terms of infrastructure, equipment and return seeking investments. As you think about PTC going into 2017, that number should decline some from the levels that you see here in 2016 and should step down a little bit and then again between '17 and '18 as we set our sights toward being compliant with the FRAs and Congress’s mandate that would be hardware complete by the end of 2018.
And then it should let down even further between '17, excuse me, '18 and '19 and then hopefully all of that will go away as we get to full implementation in 2020 and then you won’t see us carry a positive train control CapEx line after that. It will just become embedded within the broader capital plan.
Brandon Oglenski
Okay. I appreciate that.
Operator
Thank you. The next question comes from Brian Ossenbeck of JPMorgan Chase.
Your line is now open.
Frank Lonegro
Good morning, Brian.
Brian Ossenbeck
Hey good morning, thanks for taking my question. So if you can just give us an update on the CCX projects.
Can you talk about CapEx, what type of CapEx you’re expecting there? Is that something we can do public-private partnership and how close are you to stripping out and finding a site for that investment?
Michael Ward
Yes this is Michael, we're really excited about the CCX opportunity. We're finding that we’re getting great cooperation from the state and local officials.
We're very encouraged that we will be able to work cooperatively with them. As you mentioned it's a public-private partnership with the State providing back half of the funds.
Us providing other half of the funds and we think it's going to be a tremendous economic development opportunity for the State of North Carolina and we're very excited about the progress we're making on it. The exact location hasn’t been finally determined at this point, but we're continuing to make good progress.
Brian Ossenbeck
Okay. Could you just remind me of the timing and the size of the extent it's going to be chasing?
Michael Ward
It's going to be roughly $150 million or ours, which is part of the long-term capital plan that Frank evaluated and the State is putting up close to a similar amount for the facility.
Brian Ossenbeck
Okay. Thanks for the time.
Operator
Thank you. The next question comes from Allison Landry of Credit Suisse.
Your line is now open.
Michael Ward
Good morning, Allison.
Allison Landry
Good morning, thanks. I was wondering if you could talk a little bit about the mix during the quarter, in particular it looks like maybe there was some positive mix within the coal segment.
So just wanted to see if you could help us understand if that was on the domestic side or export, what drove that and is that something we should expect to persist in the third quarter?
Michael Ward
Yes, so Allison on the coal RPU specifically, we did have some positive mix. Obviously we also had the help of fixed variable contract and continued pricing on the domestic side.
Offsetting that is of course fuel surcharge revenue coming down and then the actions that we've taken on the export coal market. I do think that it changes quarter-by-quarter, but it is a sustainable level and there will be quarters when it will be up and there will be quarters when it will down.
The focus on our part is to make sure that we continue to do core pricing appropriately and then let fuel and mix fall where it was going to fall.
Allison Landry
Okay. And were there any contracts on the domestic side that came up for renewal in the second quarter that maybe boosted that a little bit?
Michael Ward
Nothing specific that we have about a quarter, 20% to 25% of our contract coming up here by the end of the year, but nothing specifically here in the second quarter that would have changed RPU number.
Allison Landry
Okay. Great, thank you.
Operator
Thank you. The next question comes from Chris Wetherbee of Citi.
Your line is now open.
Michael Ward
Good morning, Chris.
Chris Wetherbee
Good morning, guys. Wanted to follow-up on the CapEx side and just kind of talk a little bit about locomotive spend.
So you pulled some forward into 2016, how should we think about the change in locomotive spend as we go into 2017 and 2018?
Michael Ward
Sure. So if you take just a year or two view of that and you look at where we are from a locomotive storage perspective, we got about 350 engines in storage and then as you look towards the back half of the year as Cindy gets the deliveries of about 60, 65 of the remaining engines from the purchase commitment that we had started in 2014, I think you should expect in the volume environment that will continue to store engines through that period.
As you look forward in the '17 and '18 assuming volumes stay essentially where they are, I doubt you would see us in the market for new locomotives. At the same time we do believe that continuing to reinvest in our four axle, so our yard and switcher engines, is the long-term right thing to do.
So you might see a little bit of capital going toward rebuilding the four actual engines, but again no -- probably no big purchases in that time period. Cindy, anything you want to do add to that?
Cindy Sanborn
No I would say, as we as we look ahead in the engines that we have stored, the 350 that Frank mentioned are readily able to brought back to service if we need them. In addition to that, we have as we take locomotives out this year, some have gone into recommended retire status, which would not be in our store count.
So when you look at GTM is down about 10%, our active fleet is also down about 10% and going forward, I would echo Frank's comments.
Chris Wetherbee
So is that the right way to think about it on a GTM basis? I guess it's a tough question because of mix, but when you think about potential volume growth, how much weight and capacity you have on the locomotive side for the next year or two?
Is it roughly 10% when you think about it in GTM terms?
Cindy Sanborn
When I think about it, GTMs is how we think about our workload demands, but we're obviously cycling a very different type of commodity mix with coal being reduced in lesser GTM intensive business growing hopefully. So we will look at GTMs in terms of workload, but when I think about what's available to bring back it's really and what's in our store status not in the total that we have taken out this year, we're going to recommend to retire some of the locomotives that are -- that we've taken out this year and there's also leases that we've returned to I might add.
Chris Wetherbee
Okay. So probably a little less than that number, I guess ultimately is what you're saying.
Cindy Sanborn
Less than 10% is what's available to bring back.
Chris Wetherbee
Okay. That's helpful.
Thank you very much for the time.
Operator
Thank you. Then next question comes from Tom Wadewitz of UBS.
Your line is now open.
Michael Ward
Good morning, Tom.
Tom Wadewitz
Hey, good morning. Wanted to ask a question I think it's for Frederick it’s on the domestic intermodal side, you guys have done a good job of realizing volume growth despite a difficult market, difficult backdrop in truck.
I think you were up 5% in second quarter domestic intermodal, but then you’re saying flat in third. Is that just the kind of impact from that one contract or is there some slowing that you're seeing in the market.
I just wondered if you could talk on that domestic intermodal a bit, thanks.
Michael Ward
Sure Tom. Really is impact from the fact that last year in the third quarter we had a significant ramp-up in our domestic intermodal business and as we move in here to the third quarter, we're going to start laughing that which is going to make the volume compares a lot more difficult than it's been in the first part of the year and that's really the key driver.
The market out there is obviously continues to be challenged with a fair amount of excess capacity. From our perspective though, the intermodal store is broader than that and we continue to have good success in converting traffic off from the highway and partnership with the trucking industry.
And we also continue to get some pricing even in this tough environment, which is bodes well for the long term.
Tom Wadewitz
Do you have any thought on inventories and whether high inventories are coming down somewhat or is that still an issue this year from shippers?
Fredrik Eliasson
Inventory is still at the high level, has been a sequential decline just a little bit, but it's still high versus historical basis. So that’s certainly impacting the international part of our intermodal business more perhaps than it does on the domestic side, which is also why you're seeing the steamship line continuing to struggle quite significant than demand on that side is very week at the moment.
Tom Wadewitz
Right. Okay.
Thank you.
Operator
Thank you. The next question comes from Jeff Kauffman of Buckingham Research.
Your line is now open.
Michael Ward
Good morning, Jeff.
Jeff Kauffman
Hey good morning Mike. Congratulations.
Michael Ward
Thank you.
Jeff Kauffman
Question for Frank. Frank there's been a lot asked about the CapEx and I understand what you're doing locomotive CapEx, but that is going to create a little bit more of a cash shortfall since it's just really borrowing from '17, do we fund that shortfall with debt and continue repurchasing shares at these levels or do we focus on maintaining cash and maybe slow the repurchase until the cash flow gets a little bigger next year?
Frank Lonegro
Hey thanks, Jeff. In terms of the buybacks, you know we're in the midst of the two year $2 billion program that we announced in April of last year you've seen us essentially ratably buy throughout the period about a $1.2 that we’ve repurchased so far throughout that program, about $800 million or so left.
I think absent a recession you should see us continue to do that ratably from now through the end of the first quarter of next year and then revaluate where we are from a cash and a ratings perspective as well as with a forward view of earnings might be at that time.
Jeff Kauffman
Okay. Thank you.
And one detail follow-up, you never mentioned, what are coal inventory days in your northern and southern service regions?
Michael Ward
Sure. So right now where we are, we are in the south and we use an external source for this.
We're at about 98 days on forward burn in the south and about 71 in the north and just to give you kind of the average benchmark, I think we’ve in the past in the south we expect average to be about 70 and in the north 55. So whether you look at days burn or tons, we're up about 5% year-over-year using that same source.
So we’re still at a pretty elevated level as we sit here today. Clearly the warm weather is helping, but it's highly unlikely that by the end of the year we’ll get to normalized level is our best prediction at this point.
Jeff Kauffman
Okay. Thank you everyone.
Operator
Thank you. The next question comes from Scott Group of Wolfe Research.
Your line is now open.
Michael Ward
Good morning, Scott.
Scott Group
Hey thanks. Good morning, guys.
So wanted to ask one more on the CapEx. If we are not buying locomotives for a few years and PTP spending is starting to come down, it sounds like given volumes that maybe growth CapEx in general should be coming down.
I would think that there is an opportunity to cut the CapEx below that historical 16% to 17% of revenue and then you guys can really get a good free cash flow story going which I think would probably help the multiple here. How do you think about that and is that a realistic opportunity?
Frank Lonegro
Hey, Scott its Frank. Certainly we’re in our planning process for 2017.
It's really too early for us comment on what we think next year's core CapEx is going to be. I think what’s you’re hearing us say is that we're committed to returning to that about 16% to 17% of revenue from a CapEx perspective within that and any given year there is going to be differences between how much is in infrastructure, how much is an equipment, how much is an return seeking investments.
And as I think I've mentioned in the conferences back in June, we’re also committed to making sure that the CSXs tomorrow initiatives are part of that capital guidance. So, it’s not something that you’re going to see as take that guidance.
Because of the CSXs tomorrow initiative, we're going to take all the right tradeoffs within that framework in order to be able to deliver on the CSX of tomorrow, which is a very important part of our future as Michael mentioned in his remarks.
Scott Group
Yeah, I guess I’m just saying if historical that 16% to 17% of revenue historically has included locomotive, so if we’re not buying as many locomotives, I would think that there is an opportunity to get close at historical level or is that realistic or are using not?
Michael Ward
I’m not commenting one way or another to be honest Scott. I’m telling that we'll give you some guidance on 2017 as we get closer to the end of the year and then as we begin to talk about the CSXs of tomorrow and the associated financial parameters of that, we'll give you some guidance longer term.
Scott Group
Okay. And then if I can just ask one more just kind of detailed question.
Just on coal, can you give us the mix of your coal by basin App coal, Illinois and PRB and where do you see the switching points?
Fredrik Eliasson
Sure so, here in the second quarter, we saw an increase in our basin coal off to about 37% of our overall utility portfolio and really that’s what's relevant I think just looking at the utility portfolio. So 37% thereabout for Illinois, PRB about 20%.
So we had about 57% of our coal was at Illinois basin or part of the basin and the rest was Appalachia and that is up little bit from what we saw in the first quarter and frankly we expect Illinois Basin to continue to do well longer term as part of our utility mix.
Michael Ward
Thank you, Scott.
Scott Group
Thank you guys.
Operator
Thank you. The next question comes from Jason Seidl of Cowen.
Your line is now open.
Michael Ward
Good morning, Jason.
Jason Seidl
Good morning, Michael. Good morning, team.
I wanted to focus a little bit on the mineral line, obviously the new fly ash contract is ramping up and that’s distorting the yields a little bit here. How should we look at yields going forward for the remainder of the year as the contract ramps up.
Michael Ward
Are you talking about yields overall or specifically in minerals?
Jason Seidl
Specifically in minerals.
Michael Ward
I think overall it’s -- I don’t think you’re going to see a much different picture in terms of the yields. Clearly the fly ash is a big initiative on our side.
We're also seeing strength in other parts of our minerals business, but I don’t think you -- that that RPU is significantly different than any other part of our minerals business. So I think those drivers are similar within the other parts of that portfolio as well.
Jason Seidl
Okay. And just a follow-up question on coal, you guys talked about being 98 days in the South, 71 days in the North, how should we think about earning that through?
If we get a normalized summer and a normal winter, at what point are we going to get back to those levels you talked about 70 in the South and 55 in the North?
Michael Ward
Well most of the external sources we use and all the discussions with utilities would indicate on average that we'll get there sometime in 2017 hopefully in the first half of 2017. Clearly as I said earlier, this summer is helping.
Clearly there are utilities that are below where they want to be and frankly we have seen additional calls here over the last month or so and that’s a pretty low bar because the phone certainly wasn’t ringing and for several months. But it is helping, but you have some of our utilities that we serve have an awful lot of coal on the ground at this point and it’s going to take more than just really hot summer to get it back to where it needs on average.
Jason Seidl
And so as we think about coal for next year, I’m assuming we should think at least the first half should be still continued to be pressured?
Fredrik Eliasson
I think that there is a high likelihood of that. As I said, we will have a much better feel for that as we get through here the summer to see where we end up usually not just in coal, but in all of our markets we go out and really work closely with our customers to get a sense of what the plan for '17 should look like.
And at that point as we get into third quarter definitely the fourth quarter is initially is we have a much better sense of what we are, but overall I think it’s important to say two things. One what is happening here right now in coal in terms of the hot weather and the fact that natural gas prices have recovered a little bit, is really more of an impact for '17 than it is short term in '16.
And then I think it’s also important and we’re probably the most vocal on this, from our perspective right now, we're planning for a secular decline in our coal business, we would love to be wrong about that, but in terms of how we approached our business and how we approach our planning, we continue to see a secular decline. Doesn’t mean that you can have a year or so where it goes up, but overall we think that the trend is pretty clear where it's heading.
Jason Seidl
Fredrik that’s fantastic color. Listen Fredrik, Michael, team I appreciate the time as always.
Michael Ward
Thank you.
Operator
Thank you. The next question comes from Ben Hartford of Robert W.
Baird. Your line is now open.
Michael Ward
Good morning, Ben.
Ben Hartford
Hey, good morning, guys. Cindy just some perspective on current service levels, pick your measure whether it's real time or velocity, are those measures have somewhat stagnated over the past few quarters still above 2013's peak level.
Any thought or hope of being able to return those measures back to 2013 levels or should we for the time being kind of ignore what you’re able to do in '13 and look for improvement, but the likelihood of returning those levels, I would be interested in any perspective there?
Cindy Sanborn
Great, well Ben we've improved our service levels both sequentially and year-over-year as you can see from the charts. We were actually a little ahead of where we have planned to be for this year and obviously improved network performance does provide some efficiency gains for us and we are committed to provide a service product that meets or exceeds our customer's expectations, helps for price for the value of the service that we provide.
We have to balance that always with some efficiency initiatives and I think we’re doing that. I think we're pretty happy with where we are, where there is always opportunity to improve and we will do that.
I think I have also highlighted before and you've probably heard Frank talk about it before where we have installed our train link initiatives that is more problematic for us in terms of the velocity let's say is on the southern part of our network, which is mostly single track. So we think that's the right mix.
We've made the right decision there. We're seeing over time down, re-cruise down and other measures that give us confidence that we're improving, but it's I think we're pleased with where we are and we will work to improve and Frank…
Frank Lonegro
Yeah, let me just speak from a sales and marketing perspective. I would say that the efforts here this year has been to really focus on the most service sensitive part of our business specifically intermodal businesses to drive that service up and that's where we made those gains and it is markedly different and it's really helping our pricing efforts.
Also one of the key things for us is to reduce the spend around the mean and that is also improving significantly because there's also as we look at a broader portfolio it is about being able to be there each and every day at a reliable way. Our local service has improved significantly as well and really as we look at the customer facing measurements, not so much the measurements that you're seeing in terms of what we disclosed certainly has improved significant as well.
So from our perspective, I think we're making the right tradeoffs between productivity and service and as Cindy said on the productivity side, we’ve never done and the same thing holds true on the service side. We always want to do better for our customers and I think we're seeing that cooperation from operations and we feel very good about where we are.
Ben Hartford
Okay. That makes sense.
So from the metrics that we can see, that 2013 high watermark, are those targets that are credible, do you feel like that you can get back those levels over time and potentially exceed them?
Cindy Sanborn
I think everything is on the table, in terms of the pace and cadence at which we may get there, it's probably a longer term type of aspiration. But again there's nothing that we're satisfied with.
I'm not satisfied with the service measurements nor the efficiencies and we will continue to work on both, but I think that's a longer term initiative.
Ben Hartford
Okay. Thank you.
Operator
Thank you. The next question comes from Cherilyn Radbourne of TD Securities.
Your line is now open.
Michael Ward
Good morning, Cherilyn.
Cherilyn Radbourne
Thanks very much and good morning. I wanted to ask a question on productivity, which I think was a highlight again this quarter and you always do a very good job of disclosing productivity versus the volume related cost reduction.
I just wondered if you could talk about the rigor with which you track that internally and make sure that you're holding people accountable.
Frank Lonegro
Hi Cherilyn it’s Frank and absolutely we have a lot of rigor within finance organization, which in some respects is the score keeper here. What we do in terms of tracking productivity, we make sure that we normalize for volume first.
So to the extent that there are volume variable expenses then those don't count for productivity and what you've seen this year is that in the first half for about $150 million of what we call right sizing or volume variable cost reductions and then $230 million of structural cost efficiencies, there is a lot of accountability around productivity and again that is the way that we take costs out long term. Let me give you just a simplistic example that may help illustrate it so that coal, just because coal volume have come down, so if a coal train ran last year, but doesn't run this year then the cost associated with locomotives and crews and fuel and car costs would come out of volume variable expenses and so you would hear us talk about those in terms of right sizing.
Yes, for example and we have instances of this where you have two coal trains than ran last year and this year through the train length initiative and network routing we've actually put those two trains together and run in 200 car trains to 100 car trains, the efficiencies associated with less locomotive intensity crew intensity, fuel intensity etcetera would be allocated toward productivity.
Cherilyn Radbourne
Great, that's helpful. Thank you.
That’s all for me.
Operator
Thank you. The next question comes from David Vernon of Bernstein.
Your line is now open.
Michael Ward
Good morning, David.
David Vernon
Great, thanks for taking the question. Frank, this is kind of a great set up to what I wanted to ask you in terms of the size of the absolute productivity number.
As we've gone through the year, it does seem like that number is growing at the same time that our expectations for forward volume are getting worse. Is it right to believe that you guys are finding more opportunities to drive that productivity because there's less traffic on the network and then that productivity pool is kind of expanding in relation to the volume decline, that’s kind of the first question I wanted to ask you.
Michael Ward
I think what you'll see us do in a environmental like this where we realized that the revenue portfolio is in transition and the volume especially on the coal sides coming down as we turn over every rock, and you heard Cindy talk a lot about all the things that she is doing on the operating side, and not to the exclusion of the G&A side. The G&A side every department is also looking for ways, the challenge every cost dollar.
So, I think what you are seeing is really an across the board focus in our company to be disciplined on cost. We've always been disciplined on cost.
We’ve always tried to offset inflation with productivity but just given where we know the business is going we’re really looking at the structural things in a way to reduce the overall cost intensity of the business. And when volumes inflect positively obviously, we will be able to grow with that both on the earnings and the margin side and to the extent the growth comes in, you know the batch merchandized business or the intermodal business or the automotive business, you should see us grow with - of the incremental margin.
So, I think what you are seeing is the company focused on cost given the environment.
David Vernon
I guess the second part of the question is as you are taking that in your example the two 100 car trains and making a 200 car train, I guess when volume does inflect how do you think the cost structure will react? Do you think that the variable cost might go up and you should probably just shouldn't care because the contribution is so high?
Or do you think you can actually sustain this lower level of variable unit cost that you've been able to engineer given the extra space on the network?
Michael Ward
Sure, it depends in large part on how the volumes come back and where the volumes come back. We have engineered a lot of flexibility into the network through the train life in variable scheduling initiatives that you heard us talk about.
Again as I mentioned, if volumes come back in class traffic and part of the scheduled network, you should see us be able to grow volumes without adding back variable costs. If the volumes come back in both traffic, where you're adding a new train start for a new bulk train, then you should see us bring that back but again that - the resource is back but again that would be a nice margin so, you would want us to do that.
David Vernon
That's kind of what it seems like. Well, those are my two.
Thanks very much for the time.
Operator
Thank you. The next question comes from John Larkin of Stifel.
Your line is now open.
John Larkin
Hi, good morning and thanks for taking the question. Just wanted to see how much granularity on the accelerated productivity targets you are willing to share with us.
There are a lot of initiatives obviously underway, coal network rationalization, longer trains, closing down some excess facilities, eliminating duplicate overhead, all of those are very admirable initiatives. Are there any two or three of those that have really been the primary reason why you've almost achieved your entire former productivity target in the first six months that had originally been established for the entire year?
Cindy Sanborn
John, I think some of the – what we've been able to do is put a serious of initiatives together mostly structural with the closure of facilities like late year in the coal network and moving forward into this year where we also closed Russell Yard, and also consolidated our Huntington division headquarters. But it's not just in the coal space.
We’ve also announced publically and probably right it where we’ve consolidated facilities and set in Central Florida with Winston Yard in Tampa, a consolidation actually in Tampa and also streamlining on mechanical facilities and shops that are aligned more with our outer triangle in the core network that we have. Our job is to really become less resource intensive so between train length and so the density of the train, as well as the density of the - the route that we route the train has also allowed us significant savings across the board.
So I think there is really no one thing, I think that we’ve accelerated that – we’ve really answered your question but we are able - as we’re able to put initiatives in places we are doing so and continuously looking for more. We have great momentum here, everyone is over delivering and I think, technologies are big help for us and also some of are working with the labor organization is also a big help for us.
John Larkin
Thank you for that very detailed answer. And then maybe has a follow-on, I understand there's a fairly big initiative internally given that intermodal is going to be a bigger part of the puzzle going forward to make intermodal more consistently profitable going forward.
And it occurs to me that some of the initiatives to achieve that goal come from the marketing side. And I was wondering if Fredrik could talk about some of the initiatives that perhaps sales and marketing has underway within intermodal to normalize the volume so that you are running full trains every day of the week every week of the year.
That's an obviously very difficult mountain to climb, but can you talk a little bit about what you are doing there perhaps in working with third parties to fill all the trains up every day to really leverage that productivity?
Fredrik Eliasson
Yes, there is a variety of things there that we all working on there, that's absolutely right John and some of them are - I think at this point ready for public consumption, some of them are not but overall you're absolutely right, in an environment where the RPU is so much lower, one of the key things that you can do to drive up margins is to make sure that you have a much more leveled workload and the team is certainly working on that and thinking through how we can do that longer term that is a pretty significant structural change. In the meantime what we are doing do is work on terminal productivity.
We have a variety of initiatives in place there that has deal that are lot of results here. We continue to work on train lengths in our intermodal space to make sure just as we do elsewhere in our business to allow for the leverage that occurs there.
Of course double stack clearance is important and you know we already - we didn't have any tunnel by the end of this year, we should be able to be double stack clear there as well. And then the hub and spoke strategy that we have lined out for all of you for a long time has allowed for a significant amount of efficiency being able to penetrate some of these smaller markets with the lot more density that we otherwise could and of course overall speed of the network itself which I alluded to before which has been a priority as we think about the service improvement there in 2016 because the turn time on the equipment is critical.
And then to your point and then there is little more longer-term, how do you structurally ensure that the day or the weak balancing as a little bit better than what it is today but that is I think a little bit longer term initiative from our perspective.
John Larkin
Got it. Thanks very much.
Operator
Thank you. The next question comes from Bascome Majors of Susquehanna.
Your line is now open.
Bascome Majors
Good morning. We talk a lot about rising competition and its impact on intermodal but I wanted to focus on how it's hit your carload merchandise business.
Do you have a sense of how much share loss to truck has been a drag on overall volumes and I guess, more importantly, when you begin to cycle the worse of that drug on what's called a year-over-year basis?
Michael Ward
You know one of the key things that we are focused on right now within our sales and marketing team is to sell through this cycle of excess capacity and there is excess capacity in the truck market and that is probably impacting our volume to some degree but one of the key things for us is to continue to be able to reinvest in our business and not necessarily chase that down too much, when we see these temporary changes because we do have to be able to be there for our customers day-in and day-out and that is one of the things that we sell with our customers that we got to work through the downturn that we’re seeing right now and we want to be able to be there for you not just today but also tomorrow when capacity is tighter. So we are seeing in certain other markets beyond intermodal where there has been probably some share loss to truck.
We look at that each and every deal as the marketplace and we always try to estimate what the second best alternative is and try to match that. And in certain places where that is below what we think is long-term re-investible for us at that point we probably don't participate because we don’t want to do anything unofficially.
The pricing level is critical with the service improvements that we have gotten here we have been able to sustain and allow customers to see the long-term value that access to our network provides but in certain places if we have seen some traffic or way back to truck.
Bascome Majors
Understood. And I just had a quick housekeeping one on one of your expense guidance items.
On MS&O, it implies what you guided that it could be up as much as 10% sequentially from the second quarter in 3Q. Looking back it's been eight or nine years since we've seen a magnitude of that rise from Q2 to 3Q.
Can you just give us a little color on what's driving that expectation, that big increase?
Frank Lonegro
Yes Bascome, it's Frank. I’m not commenting on the numbers that you threw out there.
As you know MS&O is awfully difficult to predict in any given year and in any given quarter I think what we said was it will be down moderately versus the prior year which does has some implications sequentially. I think what you’re going to see is we had the timing item on the $10 million casualty reserves, so that's generally what we do in the second quarter, in the fourth quarter of each year we relook at the probability and severity of casualty.
And we had a favorable one time item you shouldn't think about that on a sequential basis in the third quarter and then in any given quarter again you have timing items and small onetime items that are going to impact the sequential comparisons. So I think you're directionally accurate although again not commenting on your numbers specifically.
Bascome Majors
Thank you for the time this morning.
Operator
Thank you. The next question comes from Justin Long of Stephens.
Your line is now open.
Q – Justin Long
Thanks, good morning. So I wanted to start by asking about the point to point pricing initiative in coal.
Could you provide an update on how far along you are in that process, and do you think this will be a tailwind or a headwind to the core price numbers you're putting out today?
Fredrik Eliasson
So we have implemented the point to point pricing across our coal network. And overall I would say that process has gone very well.
The reason for doing that is to make sure we better match to true cost of service some of the locations that are further away from so called our core routes to reflect a maintenance cost and operating cost that is associated with moving that. I don't think that that will be material in any way shape perform to our same store sales measure.
That is really is more about ensuring that as we try to rationalize the infrastructure in the coalfields, that we from the sales and marketing perspective help operations to do that by truly reflecting what it cost to move some coal from sort of the mines that are further away from some of our core routes. That's really all it's about is not, so much about the same store sales changing because of it.
Even though I think overall I would say probably it's slightly helpful.
Michael Ward
So Fred did you put in place on the tariffs that will take some time to go through all the contracts.
Fredrik Eliasson
That is correct as well. We've put it in place in terms of the tariffs, we adjusted one or two contracts, but it will probably take one or two or three years frankly to get it completely implemented across our whole book of business.
Q – Justin Long
Got it. That's helpful and maybe as a quick follow-up, so the 4% increase in core price excluding coal is a pretty strong number in this environment.
It's also above what we've seen from some of the other rails here to date. Do you think this level of price increases is sustainable as we get into the back half of the year or is there risk we see some moderation given truckload capacity is pretty loose right now?
Fredrik Eliasson
Well. So first of all a great testament to both what our sales and marketing team has done in this tough environment to your point about the strong results and also clearly a critical part of this has been the service improvements that we have seen.
We don't really forecast what pricing will do over time. We will obviously disclose it each and every quarter in terms of our quarterly flash, but I think you know from my statements before on hand we know value accretion for CSX pricing is a critical component of that.
But I've also alluded to the fact that I think short term meaning for the next 12 months or so we see a period of excess capacity out there that certainly is impacting things but overall you have a chance to see it where it comes each and every quarter.
Justin Long
Okay. I'll leave it at that.
Thanks so much for the time.
Operator
Thank you. The next question comes from Donald Broughton of Avondale Partners.
Your line is now open.
Donald Broughton
Good morning. Thank you for taking this call or the questions gentlemen.
Help me think about this strategically or help me understand how you think. I understand how the strength of the U.S.
dollar is affecting, negatively affecting ag exports and exports of other commodities. I understand why crude being under 70 is affecting negatively chemical volume and everything related to fracking and nat gas obviously under 4 is going to continue to be a headwind for coal.
So what's your crystal ball? Not that your crystal ball is any better than anyone else's but you have to have a plan, what do you plan?
Do you expect the dollar to stay strong, crude to stay above under 70 and nat gas to stay under 4 for the foreseeable future? Is that your expectation or are you planning for the dollar to get weaker, for crude to go back up and nat gas to go back up?
Frank Lonegro
That's where the flexibility I think in our resource planning is critical because to your point earlier, there is a lot of crystal balls out there but I’m not sure which crystal ball is better than the other, what we do as I said earlier, we do go out to our customers in the fall to tried to get a sense of what they're seeing in the different markets that we serve and then from there, we take their best input and triangulate with other things to put together our perspective on 2017. And it is a very volatile marketplace right now where it's very hard to predict.
We have laid out that overall from a coal perspective. We do think that there is a secular decline that we're heading towards and certainly we’ve seen the vast majority of that already.
The U.S dollar it is impossible for me to sit here and predict with U.S dollar is probably much better than look at forward curve than me speculating on that but the key thing for us is that we continue to have flexibility in our resource planning and right now the best predictor of tomorrow's today, the dollar is strong and the locomotive prices are there so that’s kind of how we approach there.
Michael Ward
Donald, what does your crystal ball say?
Donald Broughton
My crystal ball says is that crude is going to stay under 70 and nat gas is going to stay under 4 for the foreseeable future and that there's nothing to indicate that the dollar is going to get weaker anytime soon. But, again, whose crystal ball is better than the other?
I just wondered what you are planning against. What is your best guess?
Because obviously I understand you're triangulating your expectations to your customers but you have to have your own internal gauge as to where you are going, as well.
Fredrik Eliasson
And I think that goes back to the point of flexibility. It is so hard to plan these days but I think Cindy and team has done a fabulous job of really variablizing in our cost structure.
We talked about that for a long time and then we do whatever we can to forecast even on a monthly basis and try to flow their around the network so we can make very timely changes to a network based on the best information we had but it's hard to see much beyond a month or three month at this point.
Donald Broughton
Very good, very fair. Thank you, gentlemen.
Operator
Thank you. The next question comes from John Barnes of RBC Capital.
Your line is now open.
John Barnes
Hi, good morning. Thanks for taking my question.
Two things. One, you indicated that you saw more spot-load activity on coal volumes in the quarter.
Fredrik, I think you alluded to a few more phone calls. Do you have a sense for how much volume moved in the quarter, was it on a spot basis versus on a normal contractual basis?
Fredrik Eliasson
On the export side?
John Barnes
Overall…
Fredrik Eliasson
Overall, and as you well know in export side pretty much everything is spot these days. So also that to the great example of the previous question around the - things change very fast in terms of how much we move and then we did see a pick up on the export side in the second quarter beyond what we had originally anticipated which is why we increased the guidance on the export side to about $20 million tons for the year.
On a domestic side really the cost that we received is really come in here over the last - I would say three to four weeks and really we haven’t had a chance to move a lot of that yet but we do expect a little bit of a sequential uptick on a domestic coal which is embedded in the guidance as we expect, export coal to be weaker in the second half, we expect the domestic coal to be slightly stronger within that $22 million to $23 million to 22 to 23 million tons for the quarter.
John Barnes
Okay, all right. And then my second question, and this is a little bit longer term more strategic in nature.
I recognize both of these things have only occurred since July 1, but you have got be expanded Panama Canal is now open, the bookings are pretty solid thus far and then you had the SOLAS rules go into effect on July 1, as well. Have you seen any impact of either and what do you think are the longer-term impacts?
What do you think it means? Is there a stairstep in volume as a result of one or both or is this just moving, this is just changing where the freight, how the freight gets to you but no real stairstep?
Fredrik Eliasson
On the SOLAS, first of all we really haven’t seen any impact at all. We’ve spoken to our international customers and it seems likes the capabilities have been there either by the port or some of the other type orders or somebody else providing that information as required.
So we have not heard anything or and we don’t anticipate any impact on our international volumes because of SOLAS. In terms of Panama Canal obviously it is very recent, as little too early to tell, we have said this for a while that there is so many different drivers that comes into play here, that is very difficult to predict exactly what’s going to happen.
The good news is that we have a flexible network. We will be able to handle additional volume coming into the East Coast.
If that happens and we’re working very closely both with international customers and with the ports to make sure we have the capability that we need if it is a bigger shift that we’re currently anticipating.
John Barnes
Very good. On the ports, how far behind are the ports of being prepared for this?
Michael Ward
I don’t think that is my place to comment John. I think overall we work very well with the ports.
Certain of the ports have better infrastructures than others of course, but overall it’s a great relationship and I think the East Coast ports are certainly seeing this as an opportunity and have spent a fair amount of capital the last decade to prepare for this so.
John Barnes
Okay. All right, thanks for the time.
I appreciate it.
Operator
Thank you. The next question comes from Keith Schoonmaker of Morningstar.
Your line is now open.
Michael Ward
Good morning, Keith.
Keith Schoonmaker
Good morning, Michael and this is probably a question for Fredrik related to your last answer, could you comment on the possibility that significant potential Panama Canal diversions from the historical land bridge road could be simply truckable when they arrive by ship?
Fredrik Eliasson
Yes, so our view of this has been is that as you -- if you do see a major shift over to the East Coast ports, we might lose some traffic that goes into the coastal regions that will be trucked to those markets. However, we also see then the opportunity to pick up some traffic into the Ohio Valley into more kind of the Southeast that is further away from the ports including potentially also going all the way back up to Chicago and we’ve seen a fair amount of shift already as the Suez Canal has taken up a bigger shift.
We have seen as production in Asia has moved to more to the Southeast that we've seen additional volume coming into the ports. So we have the capability, but and it could be a little bit of a mixed change but overall we feel that we’re very well positioned to capture whatever happens.
Keith Schoonmaker
Okay. Thanks.
Maybe just one more on truck competition. In the commentary I think that was issued last night, if I am remembering correctly, there was a remark about forest products experiencing some competition from trucking and yet you managed to grow domestic intermodal an impressive 5%.
It's sort of a contrast there, losing in one area. Is this just pretty route specific with the forestry?
Fredrik Eliasson
Well and the reason why the intermodal domestic has been as strong as it's been has been the fact that we on-boarded significant amount of new traffic from one specific customer last fall and we’re starting to lap the peers as we get to the third quarter, hence the guidance for not the same sort of growth and probably close to flat on the domestic side as we get to the third quarter. And obviously long-term we think we can grow the domestic intermodal business kind of about 5% to 10%, but we are in a period here on the domestic side and on some of the merchandize side where we see some temporary weakness because of excess capacity, but we fully expect that to be worked out over time and allow us to get back to more normalized growth rate as we move into hopefully the second half of '17 or so.
Keith Schoonmaker
Okay. Great.
Thank you, Fredrik.
Operator
Thank you. The last question comes from Scott Schneeberger of Oppenheimer.
Sir your line is now open.
Michael Ward
Good morning, Scott.
Scott Schneeberger
Hey good morning. Thanks.
I was going to ask on a couple smaller segments since we are at the end here. But with regard to metals, could you give us an update on what you are seeing there, in particular the steel?
And is there a chance that it could swim to positive volume growth within a matter of quarters?
Michael Ward
I think steel production year-to-date is relatively flat year-over-year and part of what has helped that has been that the countervailing peers and so forth has been very helpful to stem the flow of imports into the United States. Our volumes are down a little bit more than that and the reason for that is on one hand no closures that has affected us specifically.
We have one mill that we both have inbound and outbound too that has closed down. That is really a big driver for our volume decline and we also are seeing the impact in the metal side from little bit more truck competition that we’ve seen before.
And so as we think about the second half, I think it's little too early. I think we're going to have some of these specific -- specific CSX related issues that is going to hurt us as we get into the second half of the year.
So I think the second half will be pretty challenging still, but the key thing for us is to continue to work with our customers on the deal side, provide a better service product and continue to make sure we can reinvest in the business and that's what we're focusing on.
Scott Schneeberger
Great, thanks. And just as a follow-up, and again a small segment, but waste and equipment, a nice lift from revenue per unit in the quarter.
Is that something that's going to persist or was that a one-time event?
Frank Lonegro
There's a lot of changes depending on what you move in that, because a lot of that equipment are some high winds that have very high revenue per unit, because it's a very specific service, specific unit train and so that varies quite a lot from quarter-to-quarter, but overall positive pricing continues but we’ll probably see more volatility in that line item than any of the other line items.
Scott Schneeberger
Okay. Thanks again and congratulations.
Michael Ward
Thank you. And thank everyone for joining us and we will talk to you again next quarter.
Thank you.
Operator
This concludes today’s teleconference. Thank you for your participation in today’s call.
You may disconnect your lines.