Q4 2019 Earnings Call

Good morning, and welcome to the writer system fourth quarter 2019 earnings release Conference call. All lines are in listen only mode until after the presentation. Today's call is being recorded if you have any objections. Please disconnect at this time I would now like to introduce Mr., Bob Brown, Vice President Investor Relations.

Corporate strategy and product strategy for writer Mr. Brown, you may begin.

Thanks, very much good morning, and welcome to rise fourth quarter 2019 earnings since 2024 Cops conference call I like to remind you that during his presentation.

Looking at stake.

The private Securities Litigation Reform Act.

Hi.

These statements are based on managements current expectations that are subject to one certainty on changes in circumstances.

Actual results may differ materially.

Fixation.

Economic business competitive markets political and regulatory factors.

Information about these factors.

Non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release.

It's called presentations, and then Ryder's filings with Securities Exchange Commission.

Available on writers website.

I think on todays call, Robert Sanchez, Chairman and Chief Executive Officer, Scott Parker, Executive Vice President and Chief Financial Officer.

Additionally, John.

Well that's solution.

Steve something.

The supply chain solutions and dedicated transportation solutions.

Call today and available for questions following the presentation.

I will turn the call them.

Good morning, everyone and thanks for joining us.

Morning will provide a brief overview of our fourth quarter results.

We'll also provide or 2020 outlook, including actions that we're taking to improve returns.

Following our prepared remarks, well open the call for questions.

Let's turn to an overview of our fourth quarter results.

Earnings per share from continuing operations was a loss of a penny for the quarter, that's compared to a profit of $1.87 in the prior year.

The loss includes the dollar 67 in higher depreciation related to previously announced residual value estimate changes.

Probable results were at the lower end up our forecast range of a loss of three cents to a profit at seven cents, reflecting a modest increase the depreciation impact of the residual value change as we trued up the estimates provided.

Operating revenue increased by 3% to a record 1.8 billion for the fourth quarter.

Driven by contractual revenue growth in fleet management in dedicated.

Partially offset by lower revenue as expected in supply chain.

Page five include some additional financial information for the fourth quarter.

Comparable EBITDA for the quarter was 564 million up 1% from the prior year, primarily reflecting earnings contributions from our contractual businesses and cost reduction.

Partially offset by lower rental demand.

Higher insurance related costs, and the impact from customer labor strike.

Comparable EBITDA up for the full year was a record 2.3 billion up 11% from the prior year.

The average number of diluted shares outstanding was 52 point threemillion down slightly from the prior year.

Excluding pension costs and other items the comparable tax rate was a benefit of 98.7% in Q4 19 as compared to when expense of 21% in the prior year.

Flexing the impact from residual value estimate changes.

Adjusted return on equity was <unk> 0.3 down from 12.7 in the prior year, reflecting lower earnings from higher depreciation related to the previously announced residual value changes.

I'll turn now to page six to discuss key trends that we saw in each business segment.

Fleet management solutions operating revenue increased 6%.

And by growth in our contractual choice least products, partially offset by lower rental revenue.

Choicelease revenue increased 9% driven by bleak right and to a lesser extent higher rates on replacement vehicles.

Lease fleet increased by a record of 10500 vehicles were 7% for the full year.

Reflecting continued outsourcing trends.

We expanded our least customer base by 400 accounts last year.

These new customer relationships are expected to yield benefits for a very long time as we typically new customer deals over successive lease terms. It can expand many of these relationships into other services like dedicated overtime.

Rental revenue was down 4% for the quarter driven by lower demand for heavy duty tractors, partially offset by higher truck demand and increased pricing on all vehicle types.

Rental utilization on power units was 76% down from the exceptionally high utilization levels, we saw in the prior year.

Our ending commercial rental fleet declined by 6% sequentially from the prior quarter.

Reflecting actions taken to align the rental fleet size with lower market demands.

That's a much realized a lots of 80 million, primarily reflecting higher depreciation.

118 million due to the impact from previously announced residual value changes as well as lower rental performance higher insurance related costs and the cost to prepare a higher number of vehicles for sale.

Results benefited from lease fleet growth and higher pricing.

Page seven highlight.

Used vehicle sales results, we sold 6000 vehicles during the quarter up 33% versus the prior year end up 13% sequentially.

For the full year, we sold 41300 vehicles, an increase of 3800, 422% from the prior year.

Used vehicle inventory held for sale was 9400 vehicles at quarter end.

Lightly above the high end of our target rate of 79000 vehicles, but in line with expectations.

Inventory increased by 2500 vehicles year over year, and by 2100 vehicles sequentially, reflecting a greater number of units coming off lease this year as expected and downsizing of the rental fleet.

Proceeds for vehicles sold were down 25% for tractors and down 10% for trucks compared to a year ago, reflecting significant and ongoing market weakness.

Sequentially tractor pricing was down 13% and truck pricing was down 5%.

As a reminder.

As discussed in our last call, we revised our assumed used vehicle sales price levels for setting residuals for both policy and accelerated depreciation purposes.

Page nine of the third quarter earnings call slide deck identified the assumptions, we made for policy depreciation purposes for vehicles to be sold in the longer term.

You assumption, we made for accelerated depreciation purposes for vehicles to be sold in the near term was significantly lower than that and I need the trough near the trough level pricing that we saw back in 2002.

Price levels that we saw in the quarter were in line with our expectations for the quarter.

I'll turn now to supply chain on page eight.

Operating revenue decreased 5%, reflecting previously announced lost business and customer labor strikes, partially offset by higher pricing.

I see as pre tax earnings were up 3% due to improved operating performance, partially offset by the impact from the strikes and a 3 million dollar impact from the change of residual value estimates for vehicles used in supply chain.

Segment earnings before taxes as a percent of operating revenue was 7% for the quarter.

He basis points from the prior year.

Turning to dedicated on page nine.

Operating revenue increased 4%, reflecting higher pricing in new business.

Dts earnings before tax increased due to improved operating performance and favorable development from prior year insurance claims.

These benefits were partially offset by a 6 million dollar impact from the change in residual value estimates for vehicles used in Dts.

Segment earnings before tax as a percent operating revenues were 7.5% up 70 basis points from the prior year.

At this point I'll turn the call Levered, our CFO Scott Parker to cover several items, starting with capital spending thanks, Robert turning to page 10 full year gross capital expenditures were $3.6 billion up approximately 500 million from the prior year.

This increase reflects higher investments to grow and refresh the contractual lease fleet.

While rental Capex decline.

Proceeds from sales were up.

About a $120 million to 518 million, including $43 million from the sale of property in the second quarter.

Net capital expenditures increased by approximately $300 million to $3.1 billion.

Turning to the next page, we generated $2.7 billion, a total cash for the year.

By around $500 million or 26% from the prior year.

Free cash flow was negative $1.1 billion, reflecting capital spending to support record contractually sales.

Debt to equity at the end of 2019 increased to 320%.

Like in capital spending and a reduction in equity for the residual value estimate change.

At this point I'll turn it back to Robert to discuss the 2020 outlook I Scott.

Page 13, and 14 highlight some of the key assumptions for our 2020 earnings forecast.

Overall, we expect a moderate growth macro environment and strong contractual sales activity and supply chain and dedicated.

We've added sales resources to support growth in these segments and leverage the secular trends that continue to favor outsourcing.

We expect lower choice lease sales results, reflecting lower OEM production and from actions taken to improve lease returns.

In fleet management, the total lease fleet count. We've historically reported is expected to decline due to the progress made to reduce the number of vehicles being prepared for sale.

We've added a new metric for the active lease fleet count, which excludes vehicles that are in the in service and out surface process.

The active lease fleet is expected to increase.

By up to a thousand vehicles this year.

Softer freight environment is expected to result in lower commercial rental demand.

Peculiarly for heavy duty tractors.

Increased rental pricing and higher year over year utilization in the second half should partially offset softer demand on the smaller fleets.

We are on track to substantially rightsize the rental fleet by the end of the first quarter, but we'll continue to make more modest sequential reductions for the balance of the year in order to a large.

But market conditions.

The ending rental fleet is expected to be down 3700 vehicles or 9% year over year.

Lower plant lease and rental capital spending is forecast to result in positive free cash flow of 350 million.

With a modest growth strategy in Fms.

We expect rekynda supposed to be positive over the cycle.

Total cash generator is expected to be 2.6 billion.

We are expecting any tailwind from a lower year over year impact from the policy depreciation change accelerated depreciation and used vehicle losses.

Comparisons are expected to be on favorable however, until the second half the year when we catch the tale of the residual value estimate change, which was effective as of July 2019.

We expect used vehicle pricing to remain soft with some recovery in the second half.

We do plan to sell a higher number of vehicles have used vehicles as we expand our retail capacity.

We expect continued benefits from our multi year maintenance cost savings initiatives and our increasing the total expected annual savings from 75 to 100 billion.

Incremental benefits from this initiative in 2020 will be partially offset by a hot by higher cost to prepare vehicles for sale.

Turning to page 14.

Supply to revenue growth will be slowed during the first half.

Due to previously announced lost business.

Revenue growth rates are expected to improve.

Target levels in the second half of the year as we move this impact.

The earnings benefit from higher pricing and new business is expected to offset to be offset by strategic investments favorable prior year insurance claims development and residual value doesn't mean changes for vehicles used in supply chain.

And Dts lower than expected sales activity and fewer large deals in the second half of the use of last year will reduce our 2020 revenue growth.

We are highly focused on building a quality sales pipeline and increasing sales results to address this issue.

Yes earnings will face headwinds from the unfavorable prior insurance claims development that are not currently forecast to recurrent 2020.

Residual value estimate changes on vehicles used in dedicated and strategic investments.

We expect continued savings from zero from our zero based budgeting program that will offset inflationary employee compensation and benefit cost.

We plan to fund strategic investments in sales and marketing technology, and new products, such as rider, Sharon COO, which are focused on driving long term revenue and earnings growth.

Finally, our board approved a new two year 1.5 million share anti dilutive repurchase program.

Which replaces our prior program that expired in December.

Based on the assumptions I outlined I expect we expect operating revenue to remain unchanged. The 2020, reflecting revenue growth in choice leasing supply chain offset by a slowdown in rental in dedicated.

Comparable earnings per share is forecast in the range of $1.10 to $1.15 2020, as compared to a dollar one last year.

This reflects the lower impact from previously announced residual value estimate changes and growth in our contractual products. These benefits are partially offset by lower expected rental performance strategic investments cost associated with actions to improve returns at a higher tax rate.

Comparable EBITDA is forecast to be between 2.2, and 2.3 billion consistent with the prior year.

Comparable tax rate is forecast to be 31% tax.

Tax rate of 2020 is expected to be somewhat higher than a more normalized rate in the high twentys that we would expect going forward.

Adjusted our OE, it's expected to increase of 2.7%.

2020 from the 0.3% in the prior year.

Hey, 16 outlines our revenue expectations by business segment.

In fleet management operating revenue is expected to be flat.

Slower growth in choice lease revenue is offset by a decline in rental.

Joist lease revenue growth is forecast to slow to 2%, reflecting lower OEM production environment.

Nonrenewal of lease business with lower returns in anticipated loss business related to the discontinuation of our liability insurance extension program for lease customers.

Commercial rental revenue is expected to be declined by 7%, reflecting lower demand, partially offset by modestly higher pricing.

Change is largely driven by heavy rental activity in 2019 for customers, who were awaiting delivery for their new lease vehicles.

SCS operating revenue growth is expected to be 2% with revenue growth rates around target levels in the second half of the here.

Dedicated operating revenue is forecast to decline, 1%, reflecting lower sales activity and fewer large deals signed at the second half of last year.

Hey, 17 provide the chart outlining the key changes from 40 19 to reach the high end of our 2020 comparable EPS forecast.

A year over year impact from lower residual values is expected to generate an additional dollar 65.

Broken our contractual businesses of lease supply chain dedicated and dedicated are forecast to add 55 cents to eat yes.

Rental is expected to negatively impact dps by 62 cents, primarily reflecting lower tractor demand, partially offset by higher pricing and higher utilization in the second half of the year.

We continue to make strategic investments to drive future revenue and earnings growth in 2020, we're planning a 45% increase in strategic spending focused primarily on sales and marketing information technology, new product development and investments to achieve maintenance cost.

Savings targets.

Approximately half of our of these strategic investments aren't Fms and focused on also improving returns.

In 2020, we expect to incur a negative 25 cents EPS impact related to initiatives that will position us to improve returns in future years.

This includes items related to the discontinuation of the least insurance product line as well as actions to address lower return accounts in assets.

Incremental savings from our zero based budgeting process will largely offset higher employee related expenses, including compensation and benefit costs.

The net impact of these operational operational items would result in EPS of $1.45 to $1.85.

The higher tax rate higher tax rate is expected to be an EPS headwind of 35 cents.

During the high end of our comparable EPS forecast range to $1.50.

With the range of $1.10 to $1.50 forecast for the year I'll turn it back over to Scott now to cover capital spending and cash flow.

Thanks, Robert turning to page 18, we are forecasting total gross capital spending of approximately $2.1 billion down significantly due to the lower spending in both lease and rental.

Growth capital for choice lease business.

Is expected to be down 900 billion in choice leaves replacement spending is expected to be down around 200 million.

Mental spending is forecasted to declined by over 400 million to $130 million, reflecting it below full replacement spend level due to the softness anticipated in the transactional market environment.

Our investment spending and property and equipment is expected to remain consistent with last year at around 190 million.

Proceeds from sales are forecasted declined by nearly 90 million the 430 million.

Prior year proceeds included $43 million from a property sale.

As a result net capital expenditures are forecasted at around $1.7 billion, a decrease of around 1.4 billion from 2019.

Free cash flow is forecast to be positive $350 million.

By approximately $1.4 billion, reflecting significantly lower net capital spending.

Our debt to equity forecast.

Is expected to decline to about 315% by the end of year remain above our target of 250% to 300% as we work through the impacts of the residual value policy change.

Turn it back over to Robert now to discuss our 2020 forecast as well as our long term targets and actions to achieve them.

Turning to page 19 are forecasting comparable EPS of $1.10 to $1.50 in 2020.

The dollar one last year.

We're also providing a first quarter comparably vs forecasts of a loss of 65 to 80 cents versus the prior year profit of $1.11.

Year over year earnings comparisons in the first half will be unfavorable as higher depreciation from the July 2019 residual value estimate change.

Not impact the first half of last year.

However, we expect to return to profitability in the second quarter.

Additionally, please note that the first quarter seasonally the lowest earnings quarter for the year.

I'd like to turn now and discuss the progress, we're making on actions and initiatives to support our strategy of moderate growth with improved returns.

Continuing to implement meaningful choice lease price increases in order to raise returns and de risk the business in light of the volatility of the used truck market.

Although higher pricing is likely to lower new sales with recent rent from recent record levels. We believe this is an appropriate trade off in order to enhance returns.

In addition, we continue to evaluate underperforming accounts and implement appropriate rate increases at the time of renewal.

We expect this will result in some higher levels of lost business and affect those into our forecast.

Favorable results in 2019.

From our multi year maintenance cost initiatives, we're increasing our expected annual savings from 75 to 100 million.

During the fourth quarter, we closed a number of underperforming locations in the U.S. in Canada.

With higher expected used vehicle sales volumes in 2020, we took action to increased retail sales capacity by adding sales location.

Patients leveraging our inside sales capability and enhancing our used vehicle sales website.

In order to accelerate growth and supply chain and dedicated we've made strategic investments in sales and marketing resources.

We discontinued or liability insurance extension program on customer leased vehicles in order to reduce future exposure from escalating premiums and claims settlement costs.

Finally in 2020 2020 awards under our executive compensation program will be more heavily weighted to cash flow and return based metrics and less weighted on revenue to align with our strategy.

Taken together these strategic initiatives create short term earnings headwinds in 2020, but are expected to better prepare us to deliver improved returns and 2021 and beyond.

Hey, 20 to 22.

Provides an overview of our financial model and our long term targets, which had been updated to reflect our current outlook for the business.

Our primary financial targets going forward will be adjusted return on equity as we focus on improving returns in our business.

Our OE is.

As a more widely used measure of returns and capital efficiency and return on capital spread and is more easily comparable across companies. We plan to continue to revert report return on capital spread for some time as well for a reference.

We're targeting an adjusted ROE of 11% to 15%.

Our near term goal is to reach our cost of equity which is around 11%.

Longer term, we believe we can push higher than that up to 15%.

It's important to note that we expect to be able to achieve these return levels with no gains and used vehicle sales.

Hi end of our ROI or are we target range is consistent with our prior art will see spread target.

The key components to realizing our return targets include operating revenue growth pretax earnings as a percent of operating revenue and balance sheet leverage.

In fleet management, we're targeting operating revenue growth in the mid single digit range.

This is below our prior target consistent with moderate growth and reflects our focus on increasing pricing and improving lease returns.

Apply to dedicated we're targeting growth rate in the high single digits inline with our prior goals.

We believe these growth rates are achievable given the large addressable markets in which all three segments operate as well as secular trends to continue to favor outsourcing.

We are targeting pre tax earnings as a percent of operating revenue into high single digit range for all three business segments.

These targets are unchanged and supply chain and dedicated but lower for Fms, reflecting the impact from the recent residual value estimate change.

Although we're lowering our Fms earnings target, we expect to be able to achieve a similar overall return level for the company primarily due to the benefits of a lower tax rate.

Our target leverage range is to 50% to 300% remains unchanged.

We believe actions and initiatives, we're executing what position rider well to achieve our return targets over time.

We're looking at 2020 of the year to ensure that we're taking the appropriate actions to drive better returns beginning in 2021 and beyond.

As discussed some of these actions have negative impact to revenue and earnings this year, but we think is the right approach to given that our primary focus is on driving higher returns in our business.

That concludes our prepared remarks. This morning. Please note that we expect to file our 10-K late next week or early the following which will can paint additional details for your review.

We had a lot of material to cover today. So please limit yourself to one question. If you have additional questions you're welcome to get back into queue and we'll take as many as we can.

At this time I'll turn it over the operator to open up the line.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure your immune function is turned off until your signal to reach our equipment again press star one to ask a question.

Pause for just a moment hello, everyone an opportunity to signal for questions.

And we'll take our first question Ben Hartford with Baird.

Hi, Thanks, Good morning, everyone lot in here, Scott, maybe just to ask it directly as you kind of come out and.

Start to.

To give that culminated with the model some of the changes I'm a thought on slide 22, I think are pretty straightforward, but as you think that but what does the pathway in your mind kinda two questions or what's your pathway to to achieving that.

Leverage ratio would that equity target over the next several years, how do you think you'll get there and then in that context in the meantime.

What is your attitude.

Toward the current dividend policy. Thanks.

Yes on the on page 22, I think the pass on the de leveraging.

The combination of two things so the lower growth in the free cash flow helps us.

Lower the.

The growth in the death rate.

Second piece as depreciation continues to run off.

Well as these are our return on capital actions that we've talked about built back the kind of the earnings which will improve our equity. So those are the two levers that will drive us to get down.

In 2021 back into the our target range.

The second second question what was one of the second question again.

How are you thinking about dividend levels presently I know, what's your approach to the dividend policy going forward.

I think that dividend policy really was historically the kind of be in line with kind of the earnings growth rate.

So we.

We feel the defendant is a kind of.

Good good contributor to shareholder return and we'll continue to look at that going forward kind of relative to earnings expectations going forward.

Thank you.

If you find that your question has been answered you may remove yourself from the Q by pressing the star Keith followed by the digit till our next question comes from Todd Fowler with Keybanc capital markets.

Great Thanks, and good morning.

Robert when you think about the pivot on the strategic initiatives, how do we think about your position within the leasing market. It sounds like really to driver going forward is just slower lease growth is that.

Looking at the lease portfolio would just pruning out the low margin accounts and that's really what what slows. The growth are you taking a different approach to the market in how do you know you'll grow the lease fleet going forward I'm and then number two with just a 25 cents of headwinds from a strategic initiatives. This year just go away next year or how do we think of.

About got headwinds that turn into a tailwind as you move into 2021. Thanks.

Okay first on the lease that I'd say.

There is what we've been lowering the residual values for our lease pricing for the last couple of years to reflect the kind of the new normal for the used truck market.

So were really continued doing that in addition to that I think given the volatility that we've seen in the used truck market. The written premium on the leases is going up so we're adjusting the pricing for that so we're going to we're looking to continue to increase the pricing to offset that.

We don't know what that's going to give us in terms of growth.

We're assuming based on what we've seen in the market the it'll it'll hurt some of the growth going forward and that's really what you've got built in here. So we're not necessarily just back we're not backing off from the lease business and say, we don't want to be in it or we just saying we want to make sure we're getting the right return.

I think.

Given the the fact that what's driven this.

This change is market driven as they used truck market is down.

Any private owner who has their own truck is feeling the same pain I would expect that over time.

You know more people will continue to become the lease. So I just think you're going to see a lot more of the growth maybe coming from the private fleet and for companies that have not outsource before and we're looking to get a higher premium for that so that's the first thing around the strategic.

Investments.

As I mentioned on the call about half that those investments our investments that we're making to.

Improve our our profitability and in Fms lot of is that maintenance initiatives that you're getting we're going to get the benefits.

We continue to get benefits this year and then more benefits next year. So that some of that will occur will subside next year.

And then we're also opening up additional used truck centers and as part of that to within Fms that once we think we've got to get our capacity up a little bit higher we think those investments will happen this year.

So I think something on a go away the other pieces, which are really the investments in supply chain and dedicated I don't necessarily see those going away because I think bill. So we'll continue to make investments to help grow those more asset light businesses.

Okay. That's helpful. Let me jump back in line side I know, there's a lot to cover thank you.

Hey, Todd just one other thing let me just let me just clarify because if you were asking about the return on capital actions up I just addressed the strategic initiatives, we've broken out in two buckets the return on.

Capital actions.

A big chunk of that in 2020 is really related to the fact that we're going to lose some accounts, where we were providing a we're extending lease insurance to them insurance.

Surfaces to them. So if we pull the insurance we may lose the account. So we built that in we expect that to be kind of a one year. Some of it will bleed into 2021, but the bulk of that are really impact. This year, that's a chunk of it the other piece is just.

Low return accounts that we are not going to renew so they may be contributing to the margin, but when you look at the return on capital and return on equity there certainly below the target that we want so there'll be some I think ongoing headwinds each year from that but as you will see each year, you'll get an improvement in returns on.

Our invested capital and returns on our equity as a result for that.

Okay. So just just to clarify the first half of the comments were related to the 45 cents bucket on the strategic investments.

Piece of the comments that you just made on the insurance in the low margin accounts that was the 25 cents bucket and it sounds like of the 25 cents bucket. Some of that will continue but the order of magnitude would be less than the 25 cents going forward.

That would be the expectation.

Okay. Thanks for the clarification on that thank you. Thanks Todd.

And we'll take our next question from Scott Group with Wolfe Research.

Hey, Thanks morning, guys.

So I want to ask about the slide from last quarter, what the with the axes on used prices. So so where are used prices today versus those axes. I'm wondering if there's any additional cushion left or if we sort of work through that now and then I'm wondering I view lower.

The residual assumptions any further from what you told us last quarter and then maybe just with that can you just update us last quarter, you told us what the depreciation Tailwinds would be in 20 and 21 can you give us.

The updated numbers to the extent that does it change at all.

Let me, let me address the the a question on the on them on the chart that we show from last quarter, and then I'll I'll, let Scott talked about the depreciation.

Give you an idea where we're at if you remember that the slide I hate talking to slide from last quarter, but I know this and got a lot of press. It was a slide that we had we had a 20 year look back on a tractor pricing.

And then we showed a next as to where our policy depreciation was what we did not share next as to where accelerator was just because of.

That's certainly not wanting to drive to market in that direction, but what I. Just said on this call was that art accelerated depreciation number is towards the.

Trough level that we saw in 2002, so a 20 year low that's where we marked the accelerated depreciation that where we ended the quarter was in between the two numbers. So we're right in the metal between the where the policy access and where the.

Accelerated depreciation is which is right where we expected to be so you did see a decline in the quarter.

Vehicle pricing continues to decline as we'd expect we're expecting it to bottom out in the middle to year, and then see some pickup in the second half of the year.

Not in the second question, we added a slide on page 26 of the deck that I'll kind to kind of refer to your question about what change from the third quarter estimate.

So if you go back there we had for the impact to the second half of 2019, just from the estimate change was $289 million.

We mentioned that there was a slight refinement and true up as we push that down in the fourth quarter of about $8 million total impact.

From the change was $297 million will be more detailed indicate for that.

We also mentioned that there was some policy and depreciation that was effective one.

2019 that number was about 60 million so the total depreciation.

Impact in 2019 was around $357 million.

And then we add losses from used vehicle sales. So we had some additional in the fourth quarter.

Then what we had in the third quarter, so total evolve the depreciation and.

Losses for 2019 was around $415 million.

As you kind of go into 2020 the chart we had.

Last quarter had the impact from the estimate change at 250 million.

A follow through some at the 112019 does travel into 2020, so that's about 25 million so to.

The total impact from depreciation we are expecting it to 75.

And then.

When it comes to estimation for the used vehicles.

We expect that there are some assets that are not in our accelerated.

Last occasion.

On a monthly basis, we do take back units that are outside of that definition that we will have some potential slight losses.

In 2020 related to those assets. So that gets you to 95 for total impact for 2020, so the year over year changes on $120 million than we have on the chart, which is about $1.65.

So hopefully when you get disappointed if the kind of see the details of how that kind of relates to what we shared in the third quarter.

And I know, it's a different than what the 120 fives for 21 I've changed.

The 125 for 21.

You want to solve right now like 120 million dollar year over year benefit from 19 to 20.

Right now we're expecting.

The impact from 20, 20% 2021 to be.

Around that maybe a little bit higher.

Maybe 120 530 million dollar intact.

ER positive.

Tailwind from from 2021 2020, sorry.

Okay.

I can't ask one more just on this on the strategic investments. So I went back and I think it's now nine years and era, where it's become a year or incremental year over year.

When.

I guess two thing in prior years out there some cost actions and maintenance things that are offsets how come we don't see anything like that and the breaks this year and.

I guess.

Why not more.

Meaningful sort of reduction in the future to these investments if the growth is slowing and maybe the pay on hasn't.

Now since we've been there.

Yes, although although a couple of things one is our cost actions that we talked about in the and the waterfall. We didn't we didn't call it out but were the the.

The cylinder the the.

Item that has.

Overhead is has got it netted out with the cost that was a couple there's at least $20 million of zero based budgeting benefit built into that said as offsetting the compensation increases year over year. So they are in there in terms of in terms of why not pull back on the strategic.

Investors rubber happy that our investments that we're making to basically get improvements in the in the business. So we need those in order to get the maintenance cost savings that you're going to see and contractual business and then rental and then also in order to get expand our used vehicle networks that we can sell more units. So we havent come off of that I think.

The issue is just continuing.

It's making sure that we're making the investments we need to get the savings along with the investments that we're making.

The other investments are really relate primarily related to growing to more asset light supply chain and dedicated businesses.

Okay. Thank you guys.

Hi, Thanks, Scott.

And we'll take our next question from Justin long with Stephens.

I wanted to follow up on that on the 2020 guidance just given some of their earnings volatility we're seeing.

The first quarter outlook and Robert I think you mentioned you expect profitability in the second quarter is there any additional color you can provide on the cadence that EPS from Twoq to Fourq you. This year, it's as we try to model that out and maybe even consider that you could talk about how these strategic.

Investment and the return improvement cost.

Flowed through the model quarterly.

And of course in 2020.

Yeah I think.

The key items number one is the first quarter is always the lowest quarter, primarily driven by rental.

Just a which is usually your lowest utilization quarter as as a there's less need for seasonal units to be used along with just less miles driven generally and transportation in the first quarter. So as we get into a seasonal uptick in and the second quarter, you're going to see the benefit to that and that's why I mentioned that we expect.

To turn to profitability.

The big benefit in earnings really starts to kick in in and that's the third and fourth quarter as the impact of the depreciation change really starts to to subside and you start to get some.

Earnings benefit there.

Along with that as I mentioned the growth that we're really expecting to ramp back up in supply chain and dedicated you start to see some benefits coming from that part of big along with a on the rental side I would tell you right sizing the rental fleet and getting the utilization levels back up to where they need to be in the second half a year. So those are probably the biggest driver.

You can see some improvement in the second quarters. They said, we get them to profitability and then you see a bigger improvement in earnings in the and the second half for the year.

And just to follow up on that rental piece, what's your assumption for rental demand first half versus versus second half I know, it's down 10% for the full year, but what is the cadence look like.

John You got that Sir you had suggested we we let you know that.

Back to the a decline in revenue in that range of 7% for the full year and you could expect the first quarter, which had some tougher comps to be the biggest.

Decline year over year, you're looking at near double digits, and then also start trailing off from there.

Once we get the fleet rightsized and demand levels kind of balance out and really you're looking at Q3 Q4 for that to balance out.

Okay, Great I'll leave it there thanks for the time.

Thanks, Jeff.

And we'll take our next question from Brian Ossenbeck with JP Morgan.

Hey, good morning, Thanks for taking my question Hey, Brian.

Hey, I, just wanted to expand a little bit more on that.

Hospice and maybe event.

On line of the I guess footprints your shrinking some locations. If you could just give us some context in terms, how many coming in that was.

Mr own and is any sort of follow on financial impact.

Whether impairments or gain on sale or anything like that.

Embedded in that guidance, so maybe a little bit if the detail and then just bigger picture. How you think this how have you how long you think this.

Rightsizing like last and to what degree.

Now, let I'll, let John gave you a little bit of color, but I would tell you. That's just part of our kind of our pruning process as we looked at the network.

We found some locations that were.

Underperforming we do this on a regular basis. It was probably a few more that we picked up this year.

So we've made some adjustments there I think there's there in terms of ongoing efforts I think you're going to still see some of it as we continue to look at either accounts or customers that are underperforming.

But.

It was a it was a little bit more than usual, but again not a not a significant number I'll let.

I'll give you little bit more color just to provide a little bit of color I think what do you heard on that on the closures is really a consolidation.

So we are we looking at improving the health of the business and when we looked at a number of our facilities.

We were looking at those that were underperforming, but also we got to take an eye towards.

The customer impact as was the employee impact and we just saw opportunities to consolidate a number of these smaller.

Facilities into our larger shop.

Total we impacted about 30 facility.

I would tell you I think.

The large portion is behind US we may do some selective consolidation as we move forward, but overall as we look forward, where we're trying to improve the overall health of the business.

I think I think an important thing Brian is that a lot of our capital is really tied up in the asset to the actual trucks. So reducing the infrastructure does give you some improvement but the important thing is to make sure that we're getting the right return each of the vehicles and that's just that's the work that we're doing it and I think the key is.

A lot of these decisions really happened at time of renewal, we've got six year leases you can't just in the middle of the lease typically it's not it's not good for the customer good for rider to break those leases, but as each year as you get renewals certainly taking a.

Harder look at each of them.

Raising the pricing going forward is going to help us accelerate getting through our target returns.

Okay. So it sounds like this is maybe a little bit above average in terms of the normal pruning process, given this strategic initiatives or you're going through site.

Sounds like we shouldn't assume that theres any material.

Packed in terms of impairments or segments or.

Or things like that embedded in the numbers.

No that's that's not.

That's correct I wouldn't assume though.

Okay.

Thank you for the time.

Thank you.

And we'll take our next question kind of Stephanie Benjamin with Suntrust.

Hi, good afternoon.

Hi, Stephanie.

I was hoping you could you give a little bit color on some of the investments you're making could build out the dedicated and supply chain segment, you mentioned sales and marketing and IP, maybe some examples of what that entails when you really start to.

That does investments and when we should expect to see some of the returns and the benefits would be helpful. Thank you.

Yeah, I would tell you the the simple one is certainly adding more sales resources and marketing dollars to really get after those accounts that we think we could win a as you know a big opportunity for US continues to be leveraging our Fms sales force to sell into dedicated so adding more resources to help.

Facilitate that is is oh.

Part of that investment.

Adequate resources in the supply chain side, not only on the sales side, but also on the startup teams are really get these accounts to get into higher growth rates. I think is is a is another part of it also.

A big part of the spend I would tell you from from what we're doing here is really around two significant strategic.

Initiatives, one is rider share, which is our visibility and collaboration tool.

And I'll let.

Steve give a little more color on that.

Citing thing about that is that really does we think provide us a competitive advantage in the marketplace as we go out and.

Prospect for new business.

Our ability to provider customers would have visibility in collaboration across their supply chain is going to.

Is a differentiator.

And I think thats going to continue to be a big part of what we do in the second pieces around her E fulfillment network.

You know we bought a writer last mile we bought a few years.

A few years ago, we bought it makes state.

Turning to rider last mile. So we want to continue to see how we expand that ER and really grow that part of it but we also want to develop the ski fulfillment network, which allows us to handle not just thinking ball keep it allows us to handle.

Product with customers I want to go direct to their consumer.

And that goes when he retailer so building out of that network. We've got now facilities on the west Central and East coast of the U.S. and really starting to build that out. So I mean, let me also let Steve give a little more color, yes that me Steve on the back to write your share think of it as a collaborative supply chain disability tool as Robert said.

We have.

Began the rollout across our Dts organization earlier this year should be complete midyear 2020.

We started our transportation management service, that's where we kinda operations the traffic department for our customers, we've again that roll out here in Q1.

Really focused on getting that fully rolled out to our customer base about Q1 of next year and then we'll begin to expand into the warehousing and E fulfillment side of the business. So.

It's really allows our operators customers our carrier partners.

The view the same information in real time.

Make decisions that will improve the service to the in consumer.

I'll touch real quick on on E. Com, we are up and running now and three locations.

We are putting automation into those relocations as well really as the volume comes in because it's a cost benefit analysis. So we'll get the traction there. The pipeline continues to increase with new opportunities, so investing sales and marketing in E commerce fulfillment as well and then last mile. This this we are.

First year of full.

And I'll tell you that we're coming off a really good sales here. This past year. So it's really going be about execution implementation as we look at 2020.

Great and I'll leave it at that thank you.

Thank you Stephanie.

And we'll take our next question from David Ross with Stifel.

Hi, good morning, gentlemen.

David a question on that question on slide 18.

When you look at the Capex year over year on your break out to growth and replacement replacement Capex looks lower or on a bigger lease fleet to the 1.5 billion versus 1.7 billion and then rental replacement down significantly from about 560 to 130, what's a good run.

On rate for I know Theres difference in timing and annual trade cycles.

What's a good run rate for replacement Capex for both the rental and lease fleet.

Yeah, I'll address the rental for them in the rental.

I think on.

You know normal level replacement not in the market, we are probably more in the 400 million range.

On the replacement I think part of this is.

It is we're going through these RC actions as Robert mentioned.

It's kind of kind of get too much further out we have the kind of see how that plays out or make ours to the renewal price increases were implementing how that impact that David.

But that's something we can.

Yes, I think about as we go forward, giving more clarity, but right now we were kind of in the early stages of that so I don't want to get too far into kind of predicting that level.

And then just quick follow up.

On slide 22, why is growth necessary for the RMB targets and not just improved earnings.

Earnings before tax margin.

Why is growth wise topline growth necessary.

Yeah, well I cant the businesses cycle through somebody that depreciation talented used truck challenges even if he had the same fleet in theory, I would think you'd be able to get in the range second why did that need to be a bigger revenue base to get to those financial targets.

Well remember some of the revenue increases going to come from just improved pricing on the new stuff coming in.

Clear, but some some revenue growth I'm, sorry, some fleet growth will help drive some of that earnings again, the fleet growth is coming in at a good returns, which we feel confident that's what we're doing with the pricing that we've put in it will continue to put in a that's going to help with gets to the return level sooner.

Okay. Thank you.

Okay.

And we'll take our next question from John Cummings This Copeland capital.

Hi, Thanks for taking the question I just wanted to ask a follow up question on the dividend you mentioned moving dividend over time with earnings So with earnings down significantly now I mean, how are you thinking about the.

Current dividend level.

Yeah, I think on that were were dividends have historically been for us really an indication of long term.

Earnings potential. So if you look at our long term earnings potential we don't see a change in that at this point. So art ours are view around it. It's a long term indication of where we're going and we don't see that is having changed significantly here with this depreciation change that we made.

Okay. So then I guess I will point would you consider I mean, it would you still consider raising the dividend at this point or are holding flat I'm, just going on or trying to understand the the philosophy here given the challenges you're facing.

Yeah, No look I think that's a decision which will make what the board here this year.

In terms of whether we raised that or not.

But I think again this the dividend policy overall is an indicator is really a tied to our long term earnings.

Expectation right now based on the earnings, but we're producing obviously the yield is pretty significant.

We see that changing over the next several years as depreciation impact starts to subside and we get back to more normalized earnings level. So our view is to really keep it consistent where we were with where we think we're going.

Which would kind of keep us in the range that we're in right now.

Okay. Thanks, and then I just wanted to ask one more question on on the are are we targets and just if you can dot com and on.

When you would expect to get back into that target range.

Yeah. If you look at the ROI targets, we've laid out you know, we're we're saying that.

That if you get as we get to.

The bottom end to that range is really covering our cost of of equity. So we would expect to be certainly in that range. The next three to five years getting.

Getting to our cost of equity within the next three years, and then expanding beyond that and again an important comment there is that we're not expecting any you'd be AFS gains.

As as we come up with these targets. So if we have used used truck market were to come back higher than the levels that weve Ics expect here or above the levels, we've expected or we would get there sooner.

We are expecting a stable rental market too, which is another part of the environment. So timing will be driven by by certainly the execution on our initiatives and then those economic and market factors that impact used vehicle sales and rental.

But certainly.

Take away I give you that are moderate growth strategy change in choice fleet should lead to significantly better free cash flow over the cycle.

And you'll see it you're seeing some of that this year as we get into next year.

And we get to more normalized rental probably replacement some of that free cash let me come down from where we are today, but still certainly looking to be positive over the cycle and and so going forward.

Okay. Thank you.

Okay.

And we'll take our next question from Ben Hartford with Baird.

Hi, Thanks for talking about Ken can I, just get rubber and for a little bit of context behind determination of the with Suntrust program I'm going to be understands dynamics, obviously in the market at this point of time, but.

How big of a drag has it been and recent quarters and what does it do how does it change anything from a go to market standpoint, as you think about 2020, <unk> and beyond not having about program in place.

Yes look I think.

Ben It it's a program we've had in place for many years. It was really convenience for some of our customers, we're extending our insurance to those customers.

So the short term impact is really for a select number of customers, where we think that by pulling that away, they're not going to renew with us or they may go away.

I think last longer term I don't see it has a significant drag on our growth because still the vast majority of our lease customers do take to have their own insurance.

Through their own programs and do not take our least insurance program.

Over the last several years it has been a headwind in Fms and.

And we think that that that headwind that that risk is not worse.

The benefit that we're getting therefore, we're moving to to move out of that that part of the business.

Okay. Thanks.

You guys are reporting relatively late in the calendar can you provide that obviously you don't have as much.

Asia about export exposure.

But to what extent can you provide any context as to what's going on now the could be on February.

Still seems like factory outputs constrained what are you hearing from.

An inbound freight standpoint, what are your customers, saying.

Supply chain might provide a little bit of other insight into that particular somewhat automotive and electronics vertical or any any context real time that you can provide as to what.

The impact will be in coming weeks from a freight standpoint.

I'll, let I'll, let Steve mentioned or comment on any of the stuff that we're seeing on the supply chain side more broadly, but I would tell you on the rental side, which is typically our leading indicator of what's going on with freight we are continuing to see softness there.

That is not surprising considering the imbalance between freight and trucks right now you've got a lot of trucks on the road for the amount of freight that's moving.

That's it that's something we expect just a normal cycles to get back in line in the second half of this years, you're hearing from other folks in the industry. So we are seeing that I would tell you. We saw that in January we did build that into our full year forecast that you're getting.

So against some really softness around the freight environment I think would be Oh, we what I'd tell you we saw in and.

In January Steve you want to mention anything we've seen yeah bands, where we shut down or age operation. So we're no longer in that in the region and I'll tell you in working across primarily the auto and industrial industries right now, we're not really seeing any.

Short term impact I think many of our customers are looking at alternative plans.

You know kind of kicking in disaster recovery plans in switching suppliers, where they where they can so nothing really coming from the customer base at this point just more to come on board to watch.

Thank you.

Hi, Thanks.

And we'll take our next question from Todd Fowler with Keybanc capital markets.

Todd.

You might be needed.

Can you guys Jeremy.

Well again here now.

Okay, sorry about that yeah, I just haven't on mute.

I just wanted to ask Scott on slide 26 that you referenced.

You can you help us understand you it sounds like that pricing was within your expectations for the fourth quarter, but there was a little bit of movement into depreciation.

So what contributes to the variability and specifically, we think about $1.65 that you're expecting in 2020, what factors would make that different from your forecast.

Hi.

Is it used truck pricing, but it sounds like it was within your range Im just trying to figure out how the depreciation.

Hi, tailwind could move how it moved in the fourth quarter than how to move into 2020.

Yes, it's not so I think you know with with the size of the change that we need I think the true up than we did as kind of not kind of shouldn't be read into those any change in the assumptions are what we did it was just.

Kind of a minor modification to that as you think about going forward as Robert mentioned in the fourth quarter.

Pricing was was in line with what our expectations are.

We have forecasted at outdoor and the remainder of 2020. So what you know the factors that would impact that is is really comes down to kind.

Kind of our forecast versus kind of what happens in the marketplace.

So if you just the best information and what we've been seeing for the last six months to kinda inform us on that on what we're doing but if you know as Robert mentioned, we're kinda.

The accelerated side, we're kind of at that.

Trough level.

So anything that beyond that would be something that.

It wouldn't be something we would be that kind of addressed.

Comes in a little bit better than that that would be kind of welcome news.

Okay, and then can you just speak to in your forecast is that just staying at the trough level since maybe a little bit improvement the back half of the year and not looking for specifics, but maybe just directionally kind of what you have in your forecast.

Correct as we mentioned in the prepared remarks.

We had in Feeney go down and then.

Modest recovery in the back half of the year based on what we.

Scene and heard in regards to some of the research out there about some of the supply demand imbalance kind of stabilizing as we get through this year.

Great. Okay, and then just lastly can you share how much into 2020 guidance is the cost to perhaps vehicles for sale.

Yeah.

Yeah, I don't I don't think on that when can we haven't been specific.

The comment was really around the fact that we have more vehicles that we have to out service.

So because of that we're going to be spending more money.

Doing those out servicing and really getting those vehicles prepared for sale. So that's really it it's not a specific number that we get into.

Okay. That's fair I think that Robert I think we're trying to just put together some of the pieces that won't be in that 2021 number. So that's when I was looking for there, but we can follow up thanks.

Right well, what I would tell you, though is you'll see you're going to have that.

<unk> increased this year as you get into next year, though you will still have a significant number you'll sort of a similar number of units to out service and to get in get to sell is some real number of units will be will be terming out. So I wouldnt expect it to be a good guide next year, nor bag. It maybe flattish next the for the following year.

Got it okay. Thanks again for this time.

Okay.

And we'll take our last question from Scott Group with Wolfe Research.

Hey, Thanks, I, just got a real quick what the what is the tax rate for this year and then is that the new normal does that go back next year.

Thanks for the question I know.

That's it given what we're going through I would just first start off in the first quarters, we talked about that we expect.

To to have negative earnings. So when you think about the tax rate that we put out.

Or.

20, 2020, the first quarter, we're going where we will have a a tax benefit and then as you get through the year, we'll get to kind of the tax rate that we provided guidance around.

And the real challenge that we're working through Scott is that.

There's the kind of the statutory tax rate.

But when you have lower earnings and we also had a fair number of discrete items and there was one as.

Came in the fourth quarter regards to a true up for some of our our state tax returns that we don't expect repeat in 2000 2020, so as with a low pretax number and having.

Discrete item that doesn't repeat that's why the rate.

Is higher in 2020 versus 2019.

If you think about it going forward as as we look at 2021 and 2022, just because of the impact of the lower earnings from the depreciation were taking I think a deed.

More applicable to kind of use kind of a high twentys.

Kind of tax rate.

Until we kind of get back to called more normalized earnings levels, which would then effectively make a rate go down because you have more pre tax with kind of similar tax tax expense.

Thats, what brings us down the rate, but I think for the next couple of years I'd stay in the high Twentys right. So so we've got to forecast is 31, and then going forward stay in the high Twentys young so just kind of come down as we get that that depreciation unwinding over the next couple of years that what kind of.

Largely reduce the rate.

That you would be seeing from the 31 in 2020.

Okay. Thank you.

I'd like to turn the call back over to Mr., Robert Sanchez for closing remarks.

Alright, Thanks that were about five minutes past the top of the out when I think we got all the questions that were in the queue. So thank you all for your interest that we'd certainly look forward to Sunni over the next few months.

That concludes today's conference. Thank you all finger participation.

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