Brandon Oglenski: Hey. Good afternoon, and thanks for taking my question. Kevin, I was wondering if you could follow-up on the commentary around merchandise pricing reflecting service and a higher inflationary environment, but maybe contrasting that with the loss coal revenue and intermodal surcharges, if you could?
Kevin Boone: Yes. I mean when you look at our coal market, and particularly the export market, it moves with the benchmark prices. So that’s something that as a swing producer keeps the producers here in the U.S. in the market, and it’s worked very, very well and it’s a great mechanism. We participate, obviously, when the pricing is very good. I mean it remains very, very supportive. We just had extraordinary prices last year that nobody expected would continue. But again, we participated in that. When you look across our — the rest of our portfolio, particularly on the merchandise side, it remains supportive of the inflationary environment out there. And our customers are getting price in the market and they’re not surprised that our ability to go and have those discussions are similar to what they’re having with their customers.
So the alignment is there. Certainly, I think the market would be — people are looking for inflation to come down a little bit, and we’ll see how the market continues. But market from a pricing perspective, both in merchandise and maybe a little bit less so in the spot market on the intermodal side, obviously, that’s been a little bit softer, but still very, very healthy and will carry forward into next year.
Operator: Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Scott Group: Hey, thanks. Afternoon, guys. Sorry about my voice. Hopefully, you can hear me. So the coal RPU guidance was helpful. How should we think about the fuel impact in the third quarter? What are the other puts and takes as I think about operating ratio, profit Q2 to Q3? And then just like bigger picture, it feels like there’s still a pretty good gap between underlying pricing and some really elevated inflation. Like, when does that normalize in your mind?
Sean Pelkey: Scott, it’s Sean. Yes, so in terms of Q3 versus Q2, I mean I think step back just a minute and think about what are we ultimately trying to achieve here. We’ve got a service product that’s — it’s well in excess of where it’s been and certainly one of the best, if not the best in the industry. That’s ultimately going to translate into the ability to win business off the highway and we’re seeing those. We’re seeing a number of those opportunities present themselves. Over time, that’s going to have a really positive impact not just on margins, but also on obviously being able to grow the top and bottom line of the company. When we look at the third quarter specifically relative to the second, we’ve got the headwinds that Kevin talked about on coal pricing.
We’ve had positive fuel lag all year long. We’re seeing fuel prices settle a little bit here so that could be a little bit of a headwind into the third quarter. And then as I mentioned, we’ve got the union wage rate increases of 4%. So that will add some costs. In terms of the second-half of your question, the gap between pricing and inflation. We’re seeing mid-single-digit inflation across both labor and fringe and purchase services and other. That’s going to persist here for the balance of the year. We’ve got a clean line of sight into the labor line. And most of the PS&O is essentially set for the year from a rate perspective. I would also say, and Kevin can chime in if there’s additional info, but I think most of the pricing for the year has been done.
We’ll start to get into pricing for next year as we get towards the end of the year. And so far, conversations have been — continue to be very supportive.
Kevin Boone: Yeah, I think that’s right. We’ve seen the pricing reflect the inflationary environment. And there’s multiyear contracts that we’ll still have to touch at the back half of this year that probably need a little bit of catch-up. But beyond that, I think it’s well in line with what the inflationary market is out there, particularly on the merchandise business today.
Operator: Your next question comes from the line of Ken Hoexter with Bank of America. Your line is open.
Ken Hoexter: Hey. Great. Good afternoon. So just to understand this environment, Joe or maybe Kevin, as you move into the third quarter, you’re targeting — still targeting low-single-digit revenue ton-mile growth. I guess you’re running about 2% or so year-to-date. So do you think that moves negative based on the current weak volumes that we’re seeing so far right now? And then if we do get that weak environment that we’re talking about, can you still improve operating ratio as we move into the third quarter if you’re looking at revenue stay above cost of inflation? Thanks.
Kevin Boone: Yes. I think, Ken, you’ll remember, I think as you move into the back half of the year and as you enter into the fourth quarter, we’re also going to lap a lot of easier comps, whether it’s the international intermodal market or some of the markets that we saw. Some order softness begin in September and really carry through the fourth quarter. So I would say things will probably trend positively through the quarter, which will be helpful from a revenue — RTM growth perspective. Coal is a dynamic market right now. Look, two weeks, three weeks ago before this hot summer started probably a little bit lower outlook for domestic coal business. But just recently, we’re getting a lot more interest and a lot more inbounds on what we can do given some of the heatwaves we’re having.
In fact, I think we got a heat warning here in Jacksonville this afternoon. So things have been hot. Obviously, that’s supportive of that market. And so things can change — are very dynamic and can change quickly. The destocking, I think, I mentioned it in my prepared remarks. We’ve seen destocking for a while in some of these markets. I don’t — I can’t call the month or the quarter of when that stops, but there’s many markets right now where we’re underrunning I think, the demand that’s out there in the business. So once that normalizes to the underlying demand in the economy, I think that’s an opportunity for us, too. And I’m hopeful that as we move into the fourth quarter, we’ll see some of those dynamics play out. And then as Joe pointed out, there’s — the team has been doing a fantastic job.
And some of the efforts and some of the collaboration that we’ve had with Jamie and his team on the operations side is resulting in wins and those start to layer in as we move through the year and into next year, and you’ll start to see that in our business as well.
Sean Pelkey: Yes. And Ken, just on the second part of your question, I think the commentary you heard from Kevin suggests we’re not calling a pullback in volumes. But to the extent that the macro presents something like that, there’s things that we can do, there’s levers that we can pull. And certainly, we would look to do that but not to jeopardize the ability to continue to gain momentum and gain share off of the truck, which is the ultimate goal here to kind of grow the pie and grow our profitability.
Operator: Your next question comes from the line of Brian Ossenbeck with J.P. Morgan. Your line is now open.
