Q1 2020 Earnings Call
Please standby.
Good morning, and welcome to the writer systems first quarter 2020 earnings release Conference call.
All lines are not listen only mode until after the presentation. Today's call is being recorded if you have any objections. Please disconnect at this time.
I like to introduce Mr., Bob Brown, Vice President Investor Relations corporate strategy and product strategy for writer Mr., Brian you may begin.
Thanks, very much good morning, and welcome to waters first quarter 2020 earnings conference call I'd like to remind you that during this presentation, you'll hear some forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are based on managements current expectations are subject to uncertainties on changes in circumstances.
Actual results may differ materially from these expectations due to changes in economic business competitive market political and regulatory factors.
More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release earnings call presentation, and Ryder's filings with the Securities Exchange Commission, which are available on writers website.
Presenting on todays call or Robert Sanchez, Chairman, and Chief Executive Officer, and Scott Parker Executive Vice President and Chief Financial Officer.
Additionally, John D. as President of Global Fleet Management solutions, and Steve something President Global supply chain solutions dedicated transportation or on the call today and available for questions. Following the presentation at this time I'll turn the call over to Robert.
Good morning, everyone and thanks for joining US let me start by saying that I Hope you your family and friends are safe and healthy during this difficult period.
Safety has long been a key component of writers culture.
So very proud of our 40000 employees and the work you're doing to keep critical supplies flowing well putting safety first.
Personally thank them for their extraordinary contributions to serving our customers in our communities during this crisis.
On our call. This morning will provide an overview of our first quarter results and the impacts we've seen so far as a result with the cobot 19 pandemic will also provide an update on our outlook maybe actions that we're taking to improve returns in our business overtime.
Following our prepared remarks, well open the call for questions.
With that let's turn to an overview of our first quarter results.
Operating revenue increased by 1% to a record 1.8 billion for the first quarter driven by contractual revenue growth in fleet management solutions, partially offset by lower remedy when supply chain.
Comparable earnings per share from continuing operations was a loss of $1.38 for the first quarter, that's compared to a profit of $1.11.
The prior year.
Results included Dollarsthirteen apart depreciation expense related to previously announced residual value estimate changes.
And were negatively impacted by lower commercial rental performance.
An estimated pretax impact from Cobot 19, 70 million also negatively impacted results.
Page slide includes an additional financial information for the first quarter.
Comparable EBITDA for the quarter was 519 million down 3% from the prior year, primarily driven by lower commercial rental results, partially offset by earnings from contractual growth.
The average number of diluted shares outstanding was 52 point Threemillion down from 52.6 million in the prior year.
Began repurchasing shares under a new two year 1.5 million share anti dilutive share repurchase program.
You were at 2020.
During the period during period, we bought just over 300000 shares at an average price of 39.4.
Dollars.
39.3 $4.
You too uncertain economic conditions, resulting from Carbonite team, we have currently pause the anti dilutive share repurchases.
Excluding pension cost and other items the comparable tax rate was a benefit of 20.6% in Q1 2020, it's compared to one expense of 27.6% in the prior year.
Current rate was impacted by higher depreciation related to the residual value estimate change and lower expected earnings due to covert 19.
Adjusted return on equity was a negative 4.8% down from a positive 12.3% in the prior year.
Like the lower earnings from higher depreciation related to the previously announced residual value changes.
But 19 impacts and lower rental performance.
I'll turn now to page six to discuss key trends that we saw in each business segment.
Weight management solutions operating revenue increased by 2% driven by growth in our contractual choice these products.
Actually offset by lower rental Robin.
Choice lease revenue increased by 7% driven by fleet growth and to a lesser extent higher rate on replacement vehicles.
The active lease fleet increased by 5600 vehicles versus the prior year, reflecting outsourcing trends.
Rental revenue was down 13% for the first quarter.
Like the weaker demand conditions that were driven incrementally lower than expected late in the second quarter.
Lower demand was partially offset by higher rental pricing of 3%.
Rental utilization on power units was 64.4% down from 74.9% in the prior year.
Any commercial rental fleet declined by 5% sequentially from the prior quarter as planned reflecting actions we began in the second half of 29 team.
A line or rental fleet size with lower expected market demand.
Fms realized a pretax loss of 150 million, primarily reflecting higher noncash depreciation of 80 million due to the impacts from the previously announced residual value changes and estimated 60 million impact due to coping 19 effects and lower rental results.
Largest impact from Goldman 19 came from 48 million of higher depreciation consisting of 27 million in additional accelerated depreciation for vehicles, we expect to sell by mid 2021 and valuation adjustments of 21 million to reduce the value of the used vehicle inventory at quarter end.
Used vehicle prices in sales volumes in the first quarter were generally in line with our prior expectations. However, sales activity fell significantly late in the quarter as the impact of Golden 19 began to emerge.
As a result used vehicle inventory levels at writer and in the overall market are increasing.
Higher depreciation reflects our change outlook for used vehicle pricing in the second half 2020, which we now expect to be lower through year end versus our prior expectation of a moderate increase.
We experienced incrementally lower rental demand trends late in the quarter due to the slowdown and business activity related to covert 19, which resulted in a negative impact.
Estimated at 8 million.
We also increased our bad debt reserves due to slower payment activity from some of our customers.
Our choice lease business has not been significantly impacted today, although we are expecting lower lease sales activity due to weaker economic conditions lower lease sales as well as redeployment of rental vehicles to fulfill these contracts are expected to result in lower capital expenditures as well as full year free cash flow above our prior record.
600 million.
Page seven highlights used vehicle sales results.
We sold 5500 used vehicles during the quarter up 12% versus the prior year and down 8% sequentially.
Used vehicle inventory held for sale was 11600 vehicles at quarter end.
Oh from 7600 in the prior year and above our target range of seven to 9000 vehicles.
Inventory increased by 2200 vehicles sequentially, reflecting a greater number of units coming off lease as expected and downsizing of the rental fleet.
Proceeds for vehicles sold were down 26% for tractors and down 6% for trucks compared to a year ago, reflecting continued market weakness sequentially tractor pricing was up 1% and truck pricing was down 2%.
I'll turn now to supply chain on page eight.
Operating revenue decreased 2%, reflecting previously announced lost business and Kobin related volume reductions in the automotive sector, partially offset by higher pricing and increased volumes and non automotive customers.
S.U.S. pretax earnings were down 4% due to colder 19 impacts prior year insurance rebates and increased medical expenses. These impacts were mostly offset by higher pricing and increased volumes were non automotive customers.
Yes, the made at 10 million impact on supply chain from coping 19 was primarily due to 6 million impact from automotive industry production shutdowns.
Turning to dedicated on page nine.
Operating results.
Revenue was slight was up slightly reflecting higher volumes and pricing, mostly offset by losses.
Dts earnings before taxes decreased due to a 1 billion dollar impact from the previously announced changed and residual value estimates for vehicles used in Dts prior year insurance rebates increased medical expenses and bad debt reserves.
Impacts were partially offset by higher pricing and volumes.
Yes did not experience any material impact from Cobrand 19 during the quarter.
This point I'll turn the call over to our CFO, Scott Parker to cover several items, starting with capital spending.
Thanks, Robert turning to page 10 first quarter gross capital expenditures were just under $400 million down by about 700 million from the prior year.
This decrease reflects lower investments in lease and rental vehicles.
Weaker economic conditions due to co. Good are expected to result in lower lease sales activity in capital spending for the balance of the year.
Our expected range of 2020 gross capital expenditures is now 1 billion to 1.4 billion.
Although our 2.1 billion forecast prior to <unk> and.
And lower than the prior year 3.6 billion.
And now expecting record free cash flow in 2020, reflecting the counter cyclical cash flow nature of our business model.
Proceeds from sales of 103 million were in line with prior year.
Higher used vehicle volumes were offset by lower pricing.
Net capital expenditures decreased by over 700 million to 289 million.
Turning to the next page, we generated $542 million in total cash for the quarter.
Down 8% than the prior year, primarily due to higher working capital needs.
Free cash flow with a positive $111 million up by approximately 550 million from the prior year.
Lucky lawyer lower capital expenditures.
That's the equity at the end of 2019 increased to 364%.
Due to the lower earnings, reflecting residual value estimate changes co bid and the impact of foreign exchange.
The higher cash balance.
The higher cash balance as we increase liquidity in response to co that increased our debt equity ratio by approximately 15% points.
At this point I'll turn the call back over to Robert to discuss our outlook and potential impacts from coding.
As well as to provide an update on our actions to increased returns.
Thanks Scott.
Given the uncertainty from covert 19, and the resulting economic impact rider recently suspended providing financial guidance until visibility improves into the magnitude of duration of the crisis.
Equity position remains solid and was enhanced in April due to our execution of a 400 million dollar syndicated term loan completion of a 400 million dollar public bond offering and renewal of our 300 million dollar receivables backed financing facility.
As a result, we currently have 1.7 billion of available liquidity, including approximately a billion dollars in cash as of April 28, 20 Twond.
This liquidity positions us well because support operations and form 600 million remaining 2020 debt maturities.
We also expect to continue to pay our dividend, which we have long viewed as an important way to provide returns to shareholders.
In addition, given the economic slowdown due to the pandemic and the counter cyclical cash flow inherent in our business model, we anticipate generating record levels of free cash flow and 20 Twond.
As a result of lower expected used vehicle demand and pricing, we anticipate increased accelerated depreciation and 2020 for vehicles to be sold by mid 2021.
We've lowered the residual values, we are using on these vehicles to below historical trough levels.
Based on these lower residuals, we expect an accelerated depreciation in the second quarter of approximately 30 million above our original expectation.
This amount would decline throughout the remainder of the year. So that the full year impact will be approximately 80 million of additional accelerated depreciation.
As always the residual values to determine accelerated depreciation could be modified upward down as market conditions develop.
Additionally, at market prices do not fall as much as anticipated we could realize gains on these vehicles to be sold in the near term.
We're also taking actions to redeploy rental vehicles into contractual lease supply chain and dedicated applications. As we have seen rental demand decreased significantly you didn't substantial reduction in business activity. Following kobin 19.
<unk> rental utilization percentage for powered vehicles for April is estimated to be in the low fiftys compared to historical levels in the low seventies.
We estimate that every percentage point change and utilization impacts monthly pretax earnings by approximately $1 million until the rental fleet size can be aligned with market demand.
Due to production shutdowns SCS volumes with automotive customers declined significantly our automotive customers generally expect production to resume throughout may however, the timing and pace of a ramp up our subject to change.
Continued full production shutdowns in North America would impact supply chain early earnings by approximately 15 to 20 million per month, including fixed cost required to maintain production readiness.
Choice lease operations are not expected to be significantly impacted by the effects of Kogan dike gene.
We've seen slower payment activity with some customers in as a result increased our bad debt reserves.
We now expect comparable a comparable tax rate of approximately 20% for the full year 2020 below our prior forecast, reflecting lower expected results from cobot 19 effects.
We took action in early April to reduced discretionary spending and overhead cost by a total of 20 million in the second quarter, including employee furloughs.
Turning to page 14, we remain focused on achieving our long term return on equity a 15% over the cycle.
Segment operating revenue and pretax earnings goals, we outlined on our last call are key components to achieving this target.
I'd like to emphasize that reaching our adjusted return on equity of 11% is only an interim target and we expect to make significant progress towards that as we move past higher levels of depreciation related to the residual value estimate changes.
Turning to page 15, while the unprecedented challenges that we are currently facing presented a sent back to our earnings in the near term we continue to make progress on our strategic initiatives to increase returns over time.
Continuing to implement meaningful choice. These price increases in order to raise returns and de risk the business in light of the volatility of the used truck market.
Revenue per unit for new leased vehicles is up by mid single digits compared to new lease vehicles in the prior year as a result of price increases in 29 team.
In addition, we implemented a mid single digit price increase on our new choice lease capital in the first quarter of this year.
We're on track to achieve expected annual savings of 30 million in 2020 from our multi year maintenance initiative.
Bringing the program savings.
To date to over 60 million.
We expect that our previously announced a decision to discontinue the liability extension program on customer leased vehicles will benefit 2020 comparable results by approximately 37 million.
This action will also reduce our exposure going forward.
Please note that revenue for this product is no longer included in operating revenue for all the time periods as shown on page 25 in the appendix.
We discontinued the product warranty expenses related to this program are no longer reflected in comparable earnings effective January 120, 20, when we announced the discontinuation of the product line.
And used vehicle sales were focused on directing as much volume as possible through retail channels, where we generate higher proceeds than other channels.
So far this year, we increased headcount in our inside sales team and opened a new retail loan sales location.
Three additional locations planned in the second quarter.
In addition, we're launching a remote delivery program for used vehicles that will expand or geographic reach beyond our existing retail locations and get us closer to our customers by leveraging our shop network.
Colin 19 pandemic is heightened awareness of the importance of a reliable and efficient supply chain.
New trends than opportunities will emerge as a result, including an increase in near shoring and growth in E Commerce and last mile services.
I expect increased demand for the sophisticated north American logistics operations provided by our supply chain and dedicated businesses as well as an elevated level of visibility transparency and collaboration across the supply chain provided by a writer share visibility and collaboration tool.
I also believe rider will find many new opportunities to provide even greater levels of products and services in a post cold in 19 environments.
Make no mistake the months ahead will remain challenging.
Confident in the ability of the men and women of rider to come together in support of our customers our shareholders in our communities and each other.
That concludes our prepared remarks. This morning before we go to questions. Please note that we expect to file our 10-K later this week, but.
I'd also like to know that based on our Investor feedback we've added a new disclosure item EBIT by business segment.
Disclosure will provide you with additional insights on our business and can be found in the appendix of the earnings call slide presentation.
A lot of material converts maybe some 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.
This time I'll turn it over to the operated open up the line for questions.
Okay ill ask.
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Pitch at one on your Touchtone phone and also make sure. Your mute button is turned off till I say no to reach or.
Okay and that is star.
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And we will kick that for.
Extra from David.
Well.
Yes, good morning, gentlemen.
Morning.
Well first quarter, either 70 million estimated pretax impact from covert 19, given what you've seen in April so far.
Do you expect that can be a greater impact for the second quarter.
Ah, Yes, I would I would expect certainly it's dependent on what happens obviously in May and June.
But those things that we saw in ER in April and starting in March. We expect for example in rental we expect that to be a bigger impact and in Q2, you all had a couple of weeks about.
The accelerated depreciation impact that we had in in Q1 I would expect about the same in Q2.
We really started accelerating that depreciation in Q1 for the lower residual so I would expect that you're going to have.
We had 27 in Q1 Thats starting to preaching you'll have another 27 30 in Q2, and then really drops off in the second after the year as those units are really starting to sell off.
And then the last thing is really on the supply chain auto piece.
I do expect that we're going to have obviously, we haven't you talked about April pretty much having a full shut down because we get into May I would expect to see it starts to come back in and then start to see some of that in the cover.
And do you think early terminations are going to play any part in that because they didnt pick up much in the first quarter I don't know if you're seeing an uptick finally in April that's going to lead to more.
Cost issues.
Yeah, I'll, let I'll, let John use answer that in more detail, but yeah, we did not see a whole lot happened in Q1.
As you know, we've got a pretty diversified portfolio or lose customers. So with that you're not going to have an overwhelming a headwind from that but you could have some public money handed over to John chemical.
Yeah, David with regards to our lease portfolio on what you're seeing an early terminations.
If you look at the appendix, we didn't see a significant tick up in March and and in Q1.
But if you look at what is gonna be the lasting impact with cold it on the business I would say luck.
Primarily our small customers, making an impact our big accounts, which represent a good portion of the business, we're not seeing that much of an impact on on many of those.
But we are monitoring that we have seen request for a payment deferrals, but on the early termination side, we haven't seen much thus far so.
Right now, we're pretty confident that the lease portfolio is holding up pretty well.
Hi, Bob good.
Thank you.
Okay. Thank you David Thank you David Operator, we'll take the next question.
Yes, and as a reminder to everyone. If you do have a question. Please press star one at this time.
Well now go to guest along with Stephens.
Thanks, and good morning.
Just because things are changing so rapidly I was wondering if you could comment on they use.
Pricing environment in the last month, and a half or so I'm curious what you're seeing as we think about that accelerated depreciation assumption could you provide some more color on what that as soon as for used truck pricing is that assuming it didn't decline we've seen in the last month and a half hauled did it it seems.
Things are getting worse, and then finally I would love to get your thoughts on policy depreciation and any changes we could see on that front. Thanks.
Okay. Thank you just as a good question first of all we did not see any pricing decline in the first quarter in used truck so well the adjustment that we did to our residual values is really based on our expectation that since volumes were down came down in the back half for the quarter that we would then.
See some pricing pressure in the second half.
So that I'll, let I'll, let John maybe give you a little more color anything we're seeing in April.
Second thing is how far we've we've lowered those residual values I think it's important to note that we lowered now those are below our historical trough levels. So so for tractors were below the trough, which is back in 2002.
In terms of pricing and for trucks were below the trough that that we hit in 2009 I think it was during the great recession. So we have brought those levels down pretty significantly if we come in better as I mentioned, you'll start to see some gains.
And obviously, we would adjust it if we saw it come in any difference. So I think those are those hopefully gives you a little bit of an idea of what we're doing obviously with my number one goal over time just to try to get this used truck issue behind us and I think by certainly by.
Taking on the depreciation certainly starting in Q1 is helping us do that in.
In terms of policy I'll, let Scott gave you a little bit more color on that too in a second after John talks, but obviously, we go through our normal process, we would now pick up.
Policy adjustments or as we go into next year. It all depends on what happens with pricing really over the next year and what our view is remember we changed our policy process to now take on not just a rolling look back a five years Rex incorporating our view of the next year. So that's going to be an important component to this process. So.
Let me, let me handed over to John first to give you.
Some some color on what we're seeing in April.
Hi, Justin yet just just to reiterate what Robert said during Q1, we did see sequentially a meaningful difference in pricing both for trucks and tracks or sequentially, but as you get into April on its so little bit soon to tell with with people even yeah. What we are seeing it is.
The significant decline in volumes, what I would tell you would be a wholesale marketing for the most part is dried up.
Our seem that retail activity and pricing remained.
Fairly stable, but it is declining relative to what we saw in Q1, and we expect that declined to.
She continued throughout the year now previously were expecting that decline.
To reverse course in Q3 in Q4, but now we're expecting with rising inventory levels that continued to balance of the year.
Yeah.
Yeah, Justin on your question about policy is remember policy depreciation as a longer term outlook on there we think.
Thank you use a pricing and music, which will be for the book that matures greater than you know kind of right now 22 and beyond.
So we well given the uncertainty about the cobot, we will be looking at our policy depreciation in the second quarter.
And a lot to run different scenarios, the kind of be what you know kind of the future as John and Robert just mentioned, what the expectations and some of the analysis around a 21 and 22 kind of expectations for the market.
So we'll take that into consideration in the second quarter and we'll update you as we get through that process.
Okay, Great I appreciate everyone. Thanks their time.
Okay. Thanks again.
Okay. That's it next question.
I'm at this time there are no additional questions I'd like to turn it back over to Mr., Robert Sanchez I'm, sorry, we did have a couple of people desktop and the kids. So let me go to David Ross again. Please go ahead.
Yes, I'm trying to restrain my questioning activity earlier, but.
But I get another shot so.
When I talk about just the competitive dynamics in the industry given this unusual situation we're in and.
Writers fortunate to have a broader portfolio.
Are you expecting industry consolidation to come out of this there's a lot of the smaller regional leasing companies have a diversified portfolio.
What do you see it on the competitive landscape and there'd be any acquisition opportunities in the next few quarters.
Yeah.
David I guess the floor is yours.
The question so yes, the answer is.
As you know there was a lot of industry consolidation, maybe about 10 years ago. So one of them kind of the more regional players. We're consolidating Muslim came into the writer I think as we go forward you might see some of the smaller ones looking to move out depends on how much pressure they get with particularly around the used truck market.
But again as you know a lot of those transitions our family.
Businesses are looking for generational transition. So it really depends on that but are you know, we're always open and looking for opportunities in that area that makes sense for us a that could bring value. So we'll continue to continue to look for those opportunities.
And then given such a sharp downturn and rental activity.
Are you seeing any competitive issues, there with rental rates being scurry.
Yes.
That's a good question, David we haven't seen a whole lot yet you recall during the last the great recession, we're fortunate that rental rates really did not takes much of a steep decline. So it really just depends on how the market behaves here over the next.
Several quarters and what happens with demand too. So we have not seen a big decline at this point as you saw in the first quarter. We had we were up a 3% on pricing and rental so John I don't know if there's anything you want to add to that.
No I think I think that's right. So far we haven't seen anything that is out of the norm.
On the market place.
Matt starts popping back up and that's why we expect that we'll see a more competitive landscape.
But then the short term, we haven't seen anything meaningful and pricing activity.
Robin Scott with such strong free cash flow expected this year.
Once we get through this uncertain period.
Which will happen at some point how are you thinking about share buybacks, especially if the stock remains down it is depressed levels.
<unk> debt Paydown and further reducing leverage.
Yeah, Yeah, yeah there.
Yeah, David what I'd say, it's you know clearly.
We are a little bit above <unk> as you know our target lover leverage ratio or some of that is because somebody excess cash. We had we also had a little bit of an impact.
From currency or kind of movements with the U.S. dollar strengthening which impacted some of the currency adjustments in our equity I, but I think as we as we look forward.
I'm very focus is going to be you know the kind of get our leverage back in line with kind of where are we were planning on work. When we started the year to get it back down into the close to the 300% level.
Then you know if there's more certainty that comes through.
Through through the rest of the remainder of the year. It is an item there that we would kind of look at more as a broader kind of conversation around.
You know kind of the.
Activities going forward versus kind of just because of.
You know given all the different things that what kind of working through right now.
And then lastly, maybe a question for Steve on the last mile business any update on how that's.
Fair through this.
A corner of ours period.
Yes, Steve you want to you've got a any update on that.
Yeah I can take it yeah. Thank you know if you look at Q1 had a really good Q1 by in the new sales were up you know right at the low end of our range around 10%.
We do have a good diverse set of customers and I'd say you know here in the month of April.
Volumes have been kinda up and down a really tied to some of the shelter in place restrictions, where some of our customers were deemed non essential but then in other locations. We've seen volume increases like in a you know bedding and exercise equipment. So all in all I think held pretty steady in the month of April we expect.
The pipeline to continue to be healthy.
As we look at a Q2 in Q3 and and a more customers looking for the capabilities.
Thank you Robert excellent.
Thank you very much.
Hey, David the one thing I'd add to that and I think supply change of seasons.
You know as we mentioned very strong performing segment along with dedicated a in spite of these challenges that we're seeing <unk> and temporarily hearing and.
Automotive.
But we did I get mentioned it on the call I wanted to just reiterate that we have provided some additional transparency.
Around the segment.
Finally around EBITDA to really help all of you with the valuation of the segment and therefore, the valuation of the company, a which I think when you apply some of the market multiples you'll see the value that we have in in that supply chain dedicated business and and really valuable company. So I just wanted to make sure that you guys took a look at that.
And we will now go to.
Ben Hartford with.
Ed.
But can you guess every okay.
Yep I heard about sure. Thanks.
The new Robert could we just kind of start with you or will that final comment about the value of inter company as you're thinking about Fms in this environment given whats changed.
Some of these additional price increases.
In choice Louise and some of the interim and longer term return targets you discussed.
How do you think about intrinsic value with regard.
That's a mess given what has changed here and.
And maybe you can talk a little bit about the pathway to get to that interim target of 11% or are we.
And the longer term, 15% or are we target given.
Given what has changed and seems like that's the focal point here is just about what up unless it was worth.
Yeah, I think Ben I'm, I'm actually very bullish on on Fms and what's going on if you could do you think about the vintage chart that we showed up in.
In the third quarter, you know, what we're really suffering through right now is the those vintages of 22012 13, where we've had no significant challenges with the maintenance costs and now have significant challenges with the residual values as we get out of those and you start even in this environment that we're in today as we get out of those.
And you start to see the drop off of depreciation from those vehicles.
And the accelerated depreciation we get into the next couple of years, you're going to really get a significant benefit on returns in Fms, a and also returns and writer. So the some of this stuff just happens naturally as those vintages kind of roll off and the other part that really gets me I'm very excited about what's going on there.
A mass is the fact that the new business coming in it's coming in at a at a much better rates and a much better return level or even with some more a conservative assumption so.
Theres still lot of work to do obviously, we've got work to do around the maintenance initiatives that they're working on a in in a in that sector make sure that we'd have the enough retail sales capacity to get out of the used trucks that we have coming out of so John and the team or or putting a lot of work in the that piece of it we are looking at.
Certain geography, certain accounts, where we're not getting the appropriate return and we're pulling back on spending capital in those areas, which I think over time also will help get us to the get us to our target returns over time. So the key thing here is that we we have oh.
Line of sight to get us to a 15% return on equity over the cycle or on an ongoing basis. So that is the number one focus everything we're doing it rider right now is really consistent with us we've got 15% or away. So we're making decisions on a daily basis to understand took to figure out this decision.
Help me get to the our 15% or they're going to hurt me and really a using gotten any type of either operational decision, we make or capital decision we make.
Comment about April utilization.
Helpful can you talk.
About what the plan looks like right now to get utilization rates back into the seventies at more normalized levels.
So the demand environment, some sort of.
I think I've heard of comments about the wholesale channel having dried up so interested in how you guys are evaluating redeployment of assets into perhaps leases versus just idling equipment to help improve.
Solution into that context, as well can you provide a little bit of sort of perspective on that walk back to normalized levels.
Yeah, we've got a lot obviously would that level of a gap and utilization. That's a lot of vehicles that we have to move so overtime, we do need some help from the from the demand side, which I feel pretty confident we're going to get you think about in April as.
The month of complete shutdown across most most of our markets as they start opening up now.
We expect to see pickup in demand, which is gonna be a big help.
Oh, we're actually seeing even the rate of decline.
Over the last week or so really start to come down so still coming down, but certainly not at the same cliff, so which which kinda indicates that we're we're getting to a bottom here on demand. So we should see some pickup in demand in the meantime, we are are really looking to fulfill just about every lease.
Customer demand that we get with redeployed rental equipment. So the salesforce is completely focused on that effort.
Got a great salesforce with a lot of a great relationships with customers. So really looking to leverage that investment we've made in the rental fleet and bringing it over into into at least customers were also well, we have to replace dedicated or or supply chain or growth in those areas. We're using redeployed rental equipment wherever we can there so that's where do.
You're going to see a big drop off in Capex per lease because we're in the in in this time period at a we expect to be able to fulfill most of that lose the manager with rental so that should help us get that that lease fleet down we're probably looking at <unk>. You know are based on historical we typically can move.
Five to 600 vehicles, a month through that process, we may do a little bit more here in this time varied, but we'll give you an idea that's how much we moved that way than the rest of it we moved to do used truck channel.
Okay.
Are you managing the lease termination.
<unk> process any differently given.
I have different this environment as versus other down in terms I know, we're getting toward loved and so there's cash cholesterol concerns or focus.
And Oh, we even see that the sharp uptick and terminations or would you.
To let me.
<unk>.
Yeah, let me hand that over to John him because he he's doing a great job with his team on doing that I think the key thing to remember is that in most cases number one we have a pretty good credit process that we take our customers through even during the great recession. We did not have a lot of vehicles really come back prematurely or bad debt.
And that's because of that credit process, you're right, there's a little different extraordinary situation, but what we find is that most of our customers do do paper than truck leases because they know that without that they can't get there there are companies restarted.
There is there is some obvious and some more request over the last several weeks of people wanting to make.
Adjustments to there to their payment and maybe some deferral solid I'll, let John give you a little bit more color on that process.
Yeah Ben.
As Robert mentioned that he looked at our underwriting practices, even historically from a leads perspective, our default rate is very very low.
Even in this environment, we think the faults will be manageable.
With regards to what we're seeing from our customer base. The majority of the discussions we're having with customers today, it's kind of short term liquidity.
Pressures that they're seeing in their business out so they're looking for either or some sort of cash flow or payment deferral short term.
As far as commitment to their existing leases, where we continue to be from our customer bases.
There.
There are committed to those leases they do expect their business to come back.
And right now, we don't expect bits lease portfolio to T equate number up.
Terminations and in the next couple of quarters. So.
A lot of what we're seeing is just short term.
Payment cash flow Oh deferral issues that we expect that to come back by the end of the here.
Okay, that's great and then for the last one if I could just.
Scott in your commitment to the dividends is understood and then another major the free cash flow this year as well.
Under what circumstances.
Would it would you think that you'd be forced to reconsider the level of the quarterly dividends, obviously weather.
Stream environment at the moment in the commitments there under what circumstances do think that would need to change.
Scott.
Yeah, Ben I would say that you know I think it's probably too early to kind of <unk>.
<unk> kind of do that report book I think what we think about clearly is as Robert mentioned see that given it is they are very important piece of our overall shareholder.
The current strategy.
We look you know primarily at our kind of cash flow you know liquidity, which is paramount right now for us to support our customer's going to run the operations.
Clearly another important aspect that we do look at it kind of our credit rating.
You know in regards to it staying.
In in that strong triple B rating.
And so I think when you think about what could change yeah, I would be the you know that kind of the depth and longevity.
The impacts of the cold it.
I'm kind of situation.
That we would have to take into consideration you know kind of relative to how long that is and if it gets more severe we'll constantly have to reevaluate our land through you know kind of cash liquidity business performance.
In our credit rating.
That's helpful. Appreciate the time to surface.
Thank you Ben you too.
Operator next question real quick.
Yes, what kind of Stephanie Benjamin with Suntrust.
Hi, Good afternoon, I just had a question on the supply chain business.
Thank you know looking at this quarter, it's a little messing. It sounds a lot business that was known and I think I smell expected given your exposure to the automotive space, you know that impacts and how that all yeah continue into Q, but I wasn't any can you talk about some of your other again customer vertical concentrations and what you're seeing from them either a pick up or slowed.
Now, but more importantly, maybe some conversations you're having now with prospective customers that are looking at that impact of the virus that might actually drive incremental demand for your services. That's we kind of gets through that's just love to get any color that you have on I guess, how they keep dropping committees within supply chain. Thank you.
Stephanie you know I've always said that the tougher what we do becomes a better is for wider and I am I going to tell you supply chain.
Ah because it comes in 19 has become a lot tougher for everybody you've probably heard a on the news in the media a lot of discussion about supply chain and logistics, whether it's for a hospitals or for ventilators, a grocery stores. There's just some real focus on it and I think most companies have.
I've really gotten a heightened awareness.
This important if they didn't have it already and really there are looking for more sophisticated and nimble supply chain, which is exactly what we do a rider is one of the leading threepl in North America. The other thing I think which which is important is that clearly with what what's happening now with Kogan 19, what happened with the trade.
Dispute, if you're well with China has certainly down a lot of companies thinking more towards near shoring versus being a in Asia and I think that's also very good for rider because we made the decision years ago to be primarily in North American logistics provider, it's where our core competency is were expertise is.
Which is U.S., Canada, Mexico, and we see more companies as a result of this cobot 19.
Looking to make that move, which I think would bode well for the services. We provide there. So it just gives a little to an overview of kind of what we're seeing in supply chain longer term, but I'll let.
I'll, let Steve give you some more color as to what.
He see and and the more medium.
<unk>.
Yes definitely.
Give me a little bit of color here, but you know across some of the other verticals you know certainly in CPG, a we've seen an uptick over the last three or four weeks in volume shift I think one of the nuances. There is that typically we were shipping.
On a multi skew pallets into the retail store network and with Covidien, we flip more to a full pallet direct ship to store. So while it is incremental volume it kind of takes less head count.
To operate that so I think maybe a little little mix given take there.
You know retail certainly we've seen some of the nonessentials slow down a little bit but in addition to the near shoring and Onshoring. A you know I think one of the things that we're seeing right now is a visibility and with our writer share a platform that we launched a couple of years ago. We've got plans right now to roll that out.
So all of our dedicated customers here in the first half of the year. We began our first transportation management customer a couple of weeks ago, we've seen a really a request from our current customers to get that rolled out quicker and we've seen a new demand from new customers that are very interested in the platform. So our sales team.
It's been going through extensive training and their proactively going out to their targets.
To push that I would also say that E. Commerce, you know why we opened up our third node up in Pennsylvania here over the last couple of weeks or we have seen a spike in volume there as you would imagine.
Remember we're in the early stages, we had a handful of customers there a in the three locations, but the volume has been up about 100%. So still very small part of the revenue stream.
But we would believes that you know customers would look for E. Commerce, just like they will last mile Nike Robert.
Hi, Thank you see.
Operator, I actually Washington.
Yes look out its Scott group with Wolfe research.
Alright. Thanks morning, guys. So a couple of things I just wanted to clarify on or do you side. If I can so your comment a accelerated 80 million above prior plan was that a full year comment or just rest of year and then.
Can you give the 21 impact on an accelerated relative to prior plan.
Okay 80 million is for the full year. So that in that includes the amount that we took in the first quarter up 27 million. So that leaves me with just about 53 million to the balance of the year.
In terms of what it means for for 2021, we really Havent had any additional changes you know we were depreciating all the vehicles that we think we're going to sell through the middle of 2021, where depreciating all those vehicles through the end of this year. So we have not made a pick yet on the vehicles beyond that.
Those vehicles those vehicles that are going to sell after the middle its way 21 are currently depreciating to a policy, where our new updated policy level. So that's what will be part of the the process. We go through in the next quarter.
Scott Scott is there anything else that I need to have Scott park or anything else you need to add to that.
No I think Robert you covered it still be easy, but we provided was exactly what Robert mentioned regards to a 2020 impact.
As it was asked earlier by just in a in the second quarter, we'll be looking at the longer period, both on the policy side and to your question about the units that would be a beginning to be sold late in 2021 going into 2022.
Okay. The sensitivity on the I guess, the decremental earnings it that rental was helpful would you think that the incremental earnings as utilization recovers is any different than the decremental you laid out.
Yeah, John or whatever you want to give a little color I don't believe southern John you got to me.
Additional stuff on them.
Yeah, what I would say two that it's a bit of sleep state.
Constant then you would expect or kind of a similar recovery.
But we are looking at continuing to redeploy units from our rental sleep to eat applications as you heard from all the earlier so as you see.
Demand start coming back online we are going to continue to rightsize, our sleep up through the balance of the year and and hopefully gain some some incremental margin from from those actions.
Oh.
So in the short term the million down is also a million up and in a short term to million down can also be in rolling it out there if it goes the other way.
Okay and then just last question on this EBITDA a breakout for the segments Robert.
Do you think you're capturing the value of supply chain and I'm sure you've gotten this question some recently, but.
Do you think about opportunities to potentially sell or spin supply chain.
That's something you guys are considered that look I think.
Supply chain is an important part of a wider and and it's an important part about future.
I think the first step is making sure that we're giving all of you the transparency to be able to appropriately value that and also propylene valley. The whole company. So that's really what we're doing here as we're we're increasing the transparency. So you have the tools in the numbers that you need to run the valuations I think given an appropriate valuation of the whole company. That's it's obviously.
Much higher number than what the stops and trading up so what we're trying to do here just give you the tools you need in order to appropriately value each of the components.
Do you think it could be sold or would it have to be sun.
There's there's different ways to do it could be it could be either one but as I mentioned I think right now it's it's clearly an important part of our company and our future we always look at.
What our options are from a portfolio standpoint.
If we if we were to sell it could be more to tax still the pay.
Versus a spin but again, we're we're currently looking at how do we continue to grow this thing or how do we make it even more valuable overtime.
Thank you for the time guys appreciate it.
Thank you Scott.
And they will now take quite different from Brian Ossenbeck with JP Morgan.
Okay.
Hey, Thanks. Good morning, appreciate getting me on the call just a couple smaller ones on the.
The broader used truck industry.
Robert actually going to some context on inventory levels. As you see then you know across the broader space not trusted writers. So maybe you can give us some color there as to where they stand now.
Now either in April or at the end of end of the quarter.
Then just specific to trends in pricing did you see anything any sort of impact from the celadon liquidation feels like it was long time ago every show things are happening out, but that that pull forward they need demand in your view.
In the last part really was just on the weekends given what's happened in the energy industry. No. You don't have direct exposure there, but these are still utilized in the application and just remind us what the split of they cabs is within that inventory balance versus sleepers.
Yes, Brian I guess, what we'll all I'll, let John to give you a little color, but what I can tell you about they use tractor pricing, which is what you're talking about is that it wouldn't be paving prior to this covert 19, we were seeing it behaving actually slightly a little bit better than what we had expected coming into this this last month.
So pricing was still declining, but certainly not as quickly because we had originally expected trucks was actually a little bit worse than the unexpected. So those are the that was kind of the only be offset so as I as I look at that going into into April certainly we saw was a volume decline and that volume declined would assume overtime.
Could turn into you know more of an acceleration in price decline. However, I can tell you that we are certainly at historical troughs are we are heading towards historical troughs in terms of pricing. So there is a price at which I think it just bottoms out and if you don't need of tractor you don't need a tractor. So I think we're getting.
Certainly what we put in these residual.
He's updated residuals and that's exactly what I believe that those levels. So I'll, let John they'll give you a little bit more color on what he's sitting and and pricing certainly posted celadon stuff and also overall inventory.
Inventory levels John.
Yeah, Brian to be a tractor side, which I think it's for your question is geared at.
If you look at pulls sales was retail pricing throughout the quarter.
Kind of remain fairly steady so we saw both on the retail side and the wholesale side, which is kind of where you would assume the transaction impact there, although as I looked at the split our inventory is up 50% tractors, 35% twox and about 15% trailers.
Look at that 50% on the tractor side day cabs is about 30% of safety and and sleepers is about 20%.
That hasn't really changed much sequentially, but if you look at year over year take cabs has grown a little bit more went up from 20% of inventory up to 30%, but over the last couple months, we haven't seen much change in our inventory mix with regards to KCAP sleeper. So what I would tell you it throughout the month, it's Rob.
I would mention pricing and.
I'm trying to be activity, we were seeing was fairly fairly consistent with our expectations now you get into April.
We are seeing that wholesale market kind of dry up and that we expect that hopefully start recovering once we get deeper into the quarter and into the second quarter here. So hopefully I give you color around.
Yeah, typically youre looking for Robert.
Hey, Brian It does help operator next fall.
Operating yes.
Kauffman, but yes, we've got a check with <unk> capital. Please go ahead.
Thank you very much I everybody agreed to.
Hey, Jeff what take I, just wanted to try to get some some detailed numbers right here I don't know pitch, where signing in problem, but I can't seem to download the presentation.
Did you say you were going up.
You do the rental fleet, 5% sequentially and the guidance was for the rental fleet to finish the year down.
Eight or 9% I got my gut those numbers right or wrong.
Yeah, I know, what we said if we reduced it sequentially, 5% in the first quarter.
Okay in first quarter eye care now [laughter] right right. So now we're going to reduce that we're looking to reduce it further obviously, what we're seeing any demand but again.
We're going to start reducing the rental fleet as demand hopefully starts to come up here over the next several months and at some point goes to meet him to get back to where target utilization. So that's the unknown is how is the pace at which that demand comes back I I do believe that April is a trough simply because that's where a everything were shut down.
And we'll start to come back.
[noise], what do you think I understanding that this isn't unusual trough and we'd probably finish the year in a better place than the second quarter. What do you believe the right size of the rental fleet is relative to the deferral of surface grizzly.
Yes, the way, we typically run it is 20% to 25%.
Oh the leap.
The revenue coming from a from rental.
So it's about 25 20, 25%.
Clearly as as.
The more we can bring that down to less was you had in the portfolio. So we had been looking to keep going into low end. However, when the economy comes back we tend to naturally move initially towards more rental rental is typically a leading indicator.
[laughter] like rental decline pretty sharply here in March and April as things start to pick up I would expect rental bill will be the first place from start to see so.
Again, I think it's in that I think it's in that 20% to 25% is typically the sweet spot of what we're looking for and as things pick up right now maybe on the low end.
Selling below the low end and its things pick up you'll start to move backing up the other way.
Okay, and I I, let me just follow up with a depreciation and amortization question here. It looks like the gross was about 525 million in the quarter.
And I'm, assuming that includes the latest adjustments.
So as I seem to about.
2020 were probably assume no additional changes at this point, what kind of gross depreciation rate are we running as as we get to 2021.
Well I think we got a lot after happened between now and then all depends on what happens also with a rental fleet and how much wounds themselves.
Let me hand over to Scott, maybe there's a little bit more color starting on.
Thank you.
Yeah, Jeff I mean, what you said 500 million girls depreciation.
Well it looks like about 525, I think I saw 523 as appreciation that 2 million an amortization.
Yeah. So if you kind of think about.
The the.
Overall.
Here, we said we had about to you for cold and when we started the year, we had about 295 million.
Additional depreciation how from last year's actions in the third quarter.
And if you kind of look at the actions. We just took in the first quarter.
Between the $21 million a inventory reserve that we took.
Plus the additional 80 for the full year you about a $100 million you know added that to 95 based on where we are so overall and additional kind of 400 million dollar depreciation above our you know kind of existing depreciation run me.
<unk>.
But do you think about 20 to 21 I kick up in the early to kinda talk about that as we've mentioned, we you know given where we are with the uncertainty we will be re looking you know ballpark policy and accelerated.
Policies in the second quarter based on new information, we've learned over the next couple months.
Related to both the outlook for you know kind of.
Pricing and expectation because the economy that will factor into that kind of conversation.
Okay and final question can you talk about the targeted rental utilization rate for.
For the commercial rental business.
Is it could you remind us what that ranges.
Yeah. It's all utilization for runs was simply a mid seventys for the full year mid to high Seventys.
So we said was that in April it's typically low seventies as things start to ramp ups Bill.
And we were a little too so those are the most of the two.
Data points again.
Okay. Thank you.
Alright, Thanks, Jeff.
And now I'm momentarily turn the call back to pop Brian go ahead Mr. Brian.
Thanks, Operator, we are having trouble getting Todd Fowler from Keybanc in the queue. So I'm asking a few questions on behalf of Todd.
Oh, there's actually three the first one of us he'd like to ask about the least pipeline like to know what our expectations are for lease growth. This year, given our focus on moving profitability office and improving the portfolio as well as the softer environment for lower Capex.
Second as I can we comment on what percent of lease customers approximately or deemed essential versus non essential he's thinking that given our higher temperature controlled exposure or we may have more higher a central type customers than than average.
And then thirdly, or whether we have any thoughts on the cash proceeds from used vehicle sales, which was previously a forecast for $400 million on whether we have any updated thoughts on what that number would be.
Okay. Thank you Bob and fraud.
In terms of elite pipeline I think.
We started off the year with looking for.
Active fleet to be slightly up obviously with this with what's happened to covert 19, I would expect US now we're going to be down the extent to that don't know because it all depends on how quickly. This thing comes back and how quickly demand come back to which sectors come back or so I really can't give me a more color, but not until we start to go.
In an idea of how this recovery is gonna look I can tell you that was certainly working hard to fill a every lease them a request that's out there.
And again, while maintaining certainly on any new capital maintaining pricing discipline that we talked about.
In terms of essential versus non essential customers, let me ask John so.
And color on that it has got I'm not sure we've broken it out from a lease standpoint, or we do a little work around rental but John do you have any insights on lease customers a central versus non essential.
Yeah, what I can what I can share certainly the central component of our rental portfolio.
Is larger than the non essential as indicated in the question.
But what we have seen from a rental point of view, the central and non essential business since in April.
Based on just what we've seen from a from somebody economy as both have been impacted or about the same.
We do expect the central businesses.
To continue to.
Come up come online quicker.
In the non essential just because of the prolonged impact.
Network, we are expecting on non essential business. It's so essential nonessential from a rental point of view is it's probably more in the range of 60% to 70% or compared to two the non essential. So 60, 40, 70, 30 split there and where we're seeing kind of a proportional.
The amount of decline on both sides on the lead side as I mentioned, we really haven't seen.
Significant impact on our lease portfolio. So looking at a central versus non essential I think the biggest impact will see which wont get clarity to at the end of the quarter is the miles wrong on the lease fleet and with regards to that I don't have any in April and sites with regards to that but.
You are seeing a better at least portfolios.
It's sustaining good activity throughout throughout the process.
Robert.
Yeah My last question around.
Cash proceeds are clearly you know there's a lot of.
Scenarios that sit to answer that question Todd.
So I think that we talked about that we expect lower pricing.
Oh I would just kind of you know I expect that proceeds will be lower based on what we know today and our expectations of booking additional depreciation for goes units that are coming in and marking down our existing inventory.
But at this time will be difficult to give you kind of a precise number around that.
And we will take our next question from just kinda along with Stephens. Please go ahead.
Thanks for taking that follow up I, just wanted to circle back to the Capex guidance given that reduction of about 900 million at the midpoint. It's it's a pretty significant number and I was wondering if you could help us think through how much of that is firing replacement birth is Robert.
He said on reallocating equipment in country came that the rental fleet I, mainly wanted to understand how you're thinking about differing replacement in general during a downturn and balancing that occasion with what it could mean for maintenance and potential can catch up of Capex down the line.
Yeah, I'll, Oh, I'll kick it off and then John if you want to kind of fill and I think overall, what I just kind of make sure you understand what kind of debt reduction in capex.
Does it assume.
A combination of both hobby placement as well as new new lease Capex as we kind of game.
Pretty good insights around the $2.1 billion and if you think about that with the lower kinda lease volume that we will be doing that we'll have a impacts and regards the you know earnings that we expected to get on that but there isn't as Robert mentioned, there is that fair amount of lead.
You know kind of though these capex that is.
Being fulfilled the used vehicles are used inventory versus a new equipment, but but also some of this is also picking up some of the orders where people want that equipment. That's really just pushing it back later in the production schedule I'm, because there's a need there just given the uncertainty.
We've been working with me I'm, the Oems to to make sure that you know we had those slots available in a things kind of get better or those customers are able to take the the unit does they would like to.
Yeah Justin.
Okay, guys not backing on sorry about that stops.
Justin just to add to what Scott just highlighted what we are seeing is that the majority of the capex is related to that replacement cycle.
We did a signal coming into the year growth capex in the range of about 300 million. So the majority of that is a replacement activity. What we are seeing already some customers is some of them have decided to extend their existing equipment. So you saw already in Q1.
Extensions or on the higher end of our normal levels, we expect that to continue for the balance a year. We did see a break number of customers also pulled back.
On a replacement activity and and and not go with new capital, but look to take on ground equipment and sign up for used equipment. So as you heard from Robert earlier, we are looking to sign more and more customers with used equipment, rather than new capital going forward. So you should expect.
Back a lot of that replacement activity to be number one so filled with used equipment versus new and then secondarily, you're gonna see a great amount of extensions relative to historical levels.
Robert I don't know if you have something else to out there.
No. It sounds like you guys you got to handle that well sorry about that I dropped off this new coal did really hope it environment a call set up as a little different so I'm back on.
Probably more than any other are definitely.
We're all in that can buy it just one quick one before.
Hi, Scott could you give that total debt balance as of today and maybe that the balance for revenue, earning equipment as well I know there and it's been a lot of moving pieces and wanted to make sure we had to knows updated numbers.
All right Scott.
Yes, the girls that it is just.
Just a little bit over <unk> billion dollars.
As it in a quarter I think I mentioned that we're carrying you know some excess you know cat cash if given the current environment.
And that revenue or any equipment around 10 billion.
And I was thinking more and as that today, the numbers change materially quarter to date.
Oh, well on the on the debt side clearly, we didn't issue medium to long term note or after the quarter end.
The other facilities that we also extended our accounts receivable facility, but that was in place you know prior to be a ended the month. So I think the big driver would be the you know kind of the note that we issued 400 million hours that we issued in the beginning in the month.
We do have an expected.
Definitely purity and in early May have 300 million that you know what would put those proceeds would be used to pay that down.
So I don't think as material change from where we ended that ended the month.
Okay, great just that over the last year.
Yeah, we have more cash now than we had any my friend.
Correct. So our cash balance went up we had ended the quarter like around $370 million, a cash and we mentioned on the call we're up to about a billion dollars attack.
But we have for liquidity.
Okay, great that helps thanks again for the time.
Thank you Justin.
Operator are there any other calls.
Operator.
I think the operator dropped off.
Right.
Okay.
Bob you don't can you tell just any other call anybody else weight in Q.
That's it.
Okay. I think we handled all the calls were 15 minutes past the the a hours. So thank you everyone for getting on this call and thanks for all the good questions.
I'm really looking forward to getting back to something even it's going be a new normal I think we're going to be doing some conferences virtually here over the next few months, so that'll be a a new experience for all of us but again. Thank you hope you guys. All remain states. During this time and we're certainly looking forward to Ah things start to creep back to something more north.
Well here over the next couple of months. Thank you guys.
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