Q2 2020 Ryder System Inc Earnings Call
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Good morning, and welcome to the writer systems second quarter 2020 earnings release Conference call. All lines are in the 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 Brian Vice President Investor Relations corporate strategy in product strategy for writer Mr., Brian you may begin.
Thanks, very much good morning, and welcome to writer second quarter 2020 earnings conference call I like to remind you that during this presentation. There are some forward looking statements within the meaning that the private Securities Litigation Reform Act like 95.
These statements are based on managements current expectations and are subject to uncertainty 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 are contained.
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 and Exchange Commission, which are available on writers website.
Presenting on todays call, Robert Sanchez, Chairman and Chief Executive Officer.
Parker Executive Vice President and Chief Financial Officer. Additionally, John D. as President of Global Fleet Management solutions, and Steve something President of global supply chain solutions and dedicated transportation for 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 pretty stark like say that I hope you.
Family and friends are safe and healthy during this difficult period.
Water continues to work closely with our customers to keep the CLO goods and services moving throughout the economy and I'm extremely proud of our workforce has performed during this pandemic.
I don't call. This morning will provide an overview of our second quarter results any impacts we've seen as a result, with the cobot 19 pandemic.
We'll provide an update on our outlook.
Our capital allocation priorities and the actions that we're taking to improve returns overtime.
Following our prepared remarks, well open the call for questions with that let's turn to one brief overview of our second quarter results.
Operating revenue decreased by 10% to 1.6 billion in the second quarter versus the prior year, driven by Coburn related declines in commercial rental and our automotive supply chain business.
Comparable earnings per share from continuing operations was a loss of 95 cents in the second quarter as compared to a profit.
40 in the prior year.
Result included 119 billion of higher depreciation related to residual probably rustom it changes of which 70 million due to previously previously announced changes.
The remaining depreciation impact, resulting from a review of residual probably western Mitch triggered by Kogan, 19th expected impacts on used vehicle market conditions.
This review led to an increase accelerated and policy depreciation as well as valuation adjustments totaling 49 million in the quarter.
Based upon our view that a delay.
In the recovery of used vehicle market conditions is not likely.
Over 19 affects also negatively impacted results by approximately 45 million driven by 55 million from lower residual back and lower rental demand and 25 million from reduced automotive customer activity and supply chain, partially offset by covert 19 related cost savings and lower.
Medical costs totaling 35 million.
Page slide includes additional financial information for the second quarter.
Comparable EBITDA for the quarter was 549 billion down 5% from the prior year, driven primarily by lower commercial rental results.
The average number of diluted shares outstanding was 52.4 million down from 52.5 million the prior year.
Excluding pension costs and other items the comparable tax rate was a benefit.
42.8% in the quarter, that's compared to an expense of 26.9% in the prior year.
The current rate was impacted by higher depreciation related to residual value estimate changes and lower expected earnings due to cope with 19.
Adjusted return on equity was negative 9.8% down from a positive 11.9% in the prior year, reflecting lower earnings from our depreciation and coping 19 impacts, including lower rental performance and automotive activity.
I'll turn now to pay districts to discuss key trends that we saw in each business segment.
Fleet management solutions operating revenue decreased by 8% driven by declining commercial rental revenue, partially offset by higher choice lease revenue.
Rental revenue was down 33% in the quarter, reflecting lower demand due to cope coping 19 effects.
Rental utilization on power units was 56% down from 75% in the prior year.
Our ending commercial rental fleet decline declined by 19% compared to the prior year. It was down 7% sequentially, reflecting actions to align the rental fleet size, but lower expected market demands.
Choice lease revenue increased 1% driven by a larger average lease and higher pricing on new vehicles, partially offset by lower mileage based revenue.
Although our choice. These results have been not didn't materially impacted by Kogan 19.
We experienced lower sales activity in the quarter, which we expect to continue.
Electing weaker economic conditions.
Lower lease sales as well as the redeployment of rental vehicles to fulfill these contracts are expected to result in lower capital expenditures and free cash flow between billions and billions to in 2020.
That's a must realize a pre tax loss of 104 million primarily due to 100, its 54 million of additional depreciation expense, resulting from residual value estimate changes in 2019, and 2020, resulting in year over year earnings impact of 119 million.
Rental related Kogan 19 impacts reduced pre tax earnings by approximately 55 million.
These were partially offset by cold and related cost savings actions and lower medical costs totaling 20 million.
Opened 19 also triggered a review of residual value estimates, resulting in a 49 million dollar.
$89 million of additional depreciation and valuation adjustments during the quarter.
Based on our view that the recovery and used vehicle pricing will be delayed due to the coping 19 effects.
Primarily extended accelerated depreciation on vehicles expected to be sold by an additional year through mid 2022 and wrote down the values of some inventory held for sale together, resulting in a 31 million dollar impact in the second quarter.
In light of Coven, 19 effects as well as other factors impacting our longer term view of used vehicle proceeds we lowered residual value estimates for trucks into a much lesser extent for tractors as we expected that we expect to sell after mid 2022.
There was this resulted in 18 million of additional deplete policy depreciation for the quarter.
I'll now turn the call over to Scott to further discuss depreciation.
Thanks, Robert and good morning, the chart on page seven illustrates the level of residual value estimates on trucks per policy depreciation purposes.
Relative to historical sales prices because the percent of their original purchase cost.
We anticipate it impacted coded on our outlook for used vehicle market conditions triggered a review of residual value estimates.
Based on this review, we lowered estimated residuals for trucks and to a lesser extent trackers to reflect our updated outlook.
The change and that's to me to residuals will be recognized through higher depreciation over the remaining like on the vehicles.
He's done a resides residuals for policy depreciation purposes.
Over the next two years.
Let me tell me U.S. used vehicle pricing to improve from current levels and achieve an increase of at least approximately 30% for tractors and 10% for trucks in order to maintain currency current policy depreciation we take lessons.
He's improved pricing levels are still similar to those that we've seen in 2018 and 19 for tractors and similar to levels seen at the beginning of 2020 for trucks.
Moving to the column on the right regarding accelerated depreciation.
The first quarter 2020.
The lower do you think you asking rents for vehicles, we expect to sell.
By mid 2021 to reflect weaker expected used vehicle conditions as a result kogan.
Residuals for accelerated depreciation purposes, where we used at the time to trough levels and resulted in additional accelerated depreciation.
The second quarter 20, Twond, we increased accelerated depreciation primarily by extending the pool of vehicles requiring accelerated depreciation by one here to include vehicles, we expect to sell by mid 2022.
And it could use residual values periodically based on current and expected market conditions. If medicine, you as market conditions change you make a just positively or negatively.
Vigil value estimates.
Hey, Jay detailed the impact from me good to value estimate changes made in the current quarter as well as the combined impact for changes made in the first quarter 2020, and in 2019 to both policy and accelerated depreciation.
As you can see you have to me that earnings headwind is not significant in 2020 and is expected to decline you see it each year thereafter.
As shown in the great box below the chart impact from depreciation changes is expected to result in a year over year earnings benefit of $250 million 2021.
Please note that is equal sales prices come in higher than our new residual values, we would show gain on sale of vehicles on the piano.
I'll hand, it back to Robert now to discuss used vehicle sales performed turned the corner.
Thanks, Scott page nine highlights global used vehicle sales results for the quarter.
We sold 6300 used vehicles during the quarter up 24% versus the prior year end up 15% sequentially.
Used vehicle inventory held for sale was 14000 vehicles at quarter end up from 83.
From 8300 in the prior year, an abrupt our target range of seven to 9000 vehicles.
We expect your in inventory array of around 10000 vehicles.
Inventory increased by 2400 vehicles sequentially, reflecting a greater number of units coming off lease downsizing of the rental fleet.
Proceeds per vehicle sold were down 33% for tractors and down 9% for trucks compared to a year ago, reflecting continued market weakness.
Actually tractor pricing was down 12% and truck pricing was unchanged.
When normalized for agent mileage of unit truck pricing in the U.S. was actually up by approximately 9%.
Which is reflected on the chart on slide seven.
As we sold a higher volume of older trucks in the quarter, which our adjusted for in the calculation on slide seven tractor proceeds in the current quarter, we're not materially impacted would normalize for age in mileage.
Turning to supply chain on page 10.
Operating revenue versus the prior year decreased 16%, primarily reflecting kobin related volume reductions the automotive sector.
As he has pretax earnings were down 19% due to what escalated kobin impacts of 25 million primarily related to automotive industry production shutdowns, partially offset by kobin related cost actions and lower medical expense totaling 13 million.
Earnings were also negatively impacted by lower residual value estimates on vehicles used and supply chain.
These impacts were partially offset by higher pricing and improved operating performance.
Yes, we began as a percent of operating revenue was 9.1% for the quarter consistent with segments with the segments long term target of high single digits.
Moving to dedicated on page 11.
Operating revenue versus the prior year was down 8%, reflecting lower sales activity.
Dts earnings before taxes decreased by 6 million, primarily due to seven 7 million dollar impact from residual value estimates.
For vehicles used in dedicated.
D.T.S.P. Beattie as a percent of operating revenue was 9.3% for the quarter consistent with the segments long term targets of high single digits.
Turning back the call back over to Scott to discuss capital and leverage.
Thanks, Robert turning to page 12 year to date gross capital expenditures were just under 600 million.
Down nearly 1.7 billion from the prior year.
This decrease reflects lower investment in lease and rental vehicles.
Weaker economic conditions to the coded are expected to result in lower lease sales activity and reduced capital spending 20 twond.
You said redeployed equipment, because they'll new lease contracts will also result in lower capital expenditures.
Our expected range of 2020 gross capital expenditures is now one to 1.3 billion.
Although our pickup and forecast of 2.1 billion and below prior year Threeq Onesix billing.
Well now expecting free cash flow and 2021 to 1.2 billion, reflecting the counter cyclical cash nature of our business model.
Proceeds from sales of 218 million well below prior year, primarily due to sell a property in 2019 for approximately $40 million.
Net capital expenditures increased by over 1.6 billion to $378 million.
Turning to the next page we generated.
Just over $1.3 billion total cash for the year up 1% from the prior year.
It's higher depreciation and lower working capital needs more than offset lower earnings.
Free cash flow was a positive $612 million up by approximately 1.5 billion prior year, reflecting lower capital spending.
[noise] debt to equity at the ended the second quarter increased to 377%.
Due to lower earnings reflecting.
A residual value estimate changes encoded related impacts.
We increased liquidity in response to coded and are carrying this higher cash balance increased debt to equity ratio by approximately 35 percentage points.
At this point I'll turn the call back over to Robert to discuss our outlook as well as provided an update on our actions to increase returns.
Thanks Scott.
Given the uncertainty from Kogan, 19, and the resulting economic impact rider is not providing financial guidance at this time.
We expect to resume issuing guidance when business conditions stabilize.
We expect to rent to reduce used vehicle inventory to around 10000 units at year end as a result of our initiatives to expand our retail sales capacity due to fewer rental vehicles expected to be out service in the second half of 20 Twond.
We will also continue to use the wholesale channel to address used vehicle inventory levels.
We're encouraged to see rental utilization and fruit each month during the quarter from trough levels in April we expect utilization that continue to improve but remained below typical seasonal levels.
For the balance of 2020.
Every percentage point change and utilization, we estimate a monthly pretax earnings impact of approximately $1 million until the fleet as rightsized to meet market demands.
Supply chain activities with automotive customers is expected to be at approximately pre cobot levels into third quarter, assuming no additional disruption.
First lease fleet is expected to be down by approximately 10000 vehicles in 2025.
Selecting customer de fleeting and lower sales activity.
We've lowered our capital expenditure for Caf 2 billion to a billion three.
No material impacts from covered 19 are expected for choice least dedicated for non automotive supply chain business for the balance of 2020.
We continue to expect.
Comparable tax rate of approximately 20% for full year 2020, reflecting lower earnings due to depreciation and cobot impacts.
Slide 16 illustrates our capital allocation strategy.
As we discussed our primary financial focuses on improving returns and reaching our adjusted return on equity target of 15% over the cycle.
Disciplined approach to capital allocation plays a critical role in our ability to reach this target.
Going forward, our capital allocation strategy is to accelerate growth in our higher return supply chain and dedicated businesses.
Moderating growth and improving returns in our capital intensive Fms business.
Strategy is intended to achieve a balance of earnings growth and free cash flow.
Increased free cash flow is expected to allow us to pay down debt in order to bring our leverage into our target range.
Turning to pay our dividend invest in acquisitions, and new innovation initiatives and over time allow for discretionary share repurchases.
It's 17 shows our primary long term financial target of 15% or are we over the cycle.
Segment operating revenue growth and pretax earnings goals. We previously outlined as they are shown here are key components to achieving this target.
As we've mentioned before reaching our adjusted or are we have 11% to match our cost of equity is only an interim target.
Slide 18 highlights the key drivers for reaching our long term or are we target of 15%.
The illustrated on this chart, we expect to make significant progress towards our army target as we anticipate moving past higher levels of depreciation related to residual value estimate changes made in 2019 and 2020.
In addition, the cyclical improvement of rental demand and utilization is expected to provide additional support to achieving our target.
We expect the diminishing impact from 2019, and 2020 depreciation headwinds combined with the cyclical recovery of rental will increase our we buy between 15 and 18 percentage points over time.
The remaining seven to 10 percentage point improvements needed to reach our or are we target.
Actually to come primarily from several initiatives, including increasing lease pricing targeted to improve returns.
Results of our multiyear maintenance costs initiative, which had been on or ahead of plan since its inception.
And leveraging secular outsourcing trends to grow or higher return supply chain and dedicated businesses.
Turning to slide 19, while the unprecedented unprecedented challenges. We're currently facing present, a setback to earnings in the near term.
We're encouraged by the progress, we're making on our strategic initiatives to increase returns overtime as well as the secular trends that continue to favor logistics and transportation outsourcing.
We've taken various actions to support our strategic goals.
Salary and broken or higher return supply chain dedicated businesses.
We're about to launch National advertising campaign aimed at increasing market awareness of writers broad range of logistics capabilities, including near shoring ecommerce and transportation services.
The campaign will also promote our recently launched visibility in collaboration.
Logistics platform wider share.
Our customers are already benefiting from the platforms capabilities to track and managed drug as they move through the supply chain, while working together in real time to prevent costly delays and realize efficiency gains.
We're encouraged by the continued profitable performance of writer last mile, which provides home delivery and white glove installation for everything from furniture to large appliances.
This business continues to benefit from increasing demand for home delivery.
We've increased our outlook for expected pre tax earnings as a percent of operating revenue to the high single digit range for this business in line with our long term profitability target for the overall supply chain business.
In Fms, we remain focused on actions to increase returns and de risk the business.
These initiatives include choice lease price increases, resulting in mid single digit improvement in revenue per new lease unit compared to the prior year.
We're also making important progress on using data analytics to enhance our pricing segmentation and optimize capital allocation.
And used vehicle sales were on track to expand our retail sales capacity by adding 10, new locations. This year.
We're also continuing to grow our inside sales capability, including an initiative aimed at getting it's closer to used vehicle buyers by leveraging Fms shop locations as customer delivery sites.
We're also realizing better leads lead to sale conversion rates as a result of our digital investment and expansion of our online used vehicle sales capabilities.
We're on track to achieve our expected annual savings of 30 million in 2020 from our multiyear maintenance initiatives.
Bringing program to date savings to over 50 million.
In early April we took significant actually the temporarily furlough employees and reduced discretionary spending.
In addition, we incurred lower medical expenses in the quarter.
These items, resulting in a combined estimated savings of 35 million in the second quarter.
We did not anticipate that most of the lower discretionary spending in medical cost benefits will recur going forward.
And why we transition from temporary furloughs to permanent headcount reductions primarily in Fms, which are expected to result in an estimated headcount related savings at 12 million per quarter.
Although we expect them, we expect the month of had to remain challenging we believe the effects of the pandemic or accelerating trends towards E. Commerce fulfillment final mile delivery, a big and bulky goods and onshoring in near shoring of manufacturing and supply chain operations.
We believe this presents a compelling opportunity for transportation and logistics outsourcing to rider and that were strongly position to capitalize on this opportunity.
That concludes our prepared remarks. This morning before we go to questions. Please note that we expect to file our 10-Q later this week.
I'd also like to note that based on our Investor feedback we've added a new disclosure item select segment balance sheet items.
This is in addition to the segment BBT you just got metric, we began reporting last quarter.
These disclosures are intended to provide investors with additional transparency to segment performance and further insights into management's evaluations of such performance.
The disclosures and a further discussion of them is in the appendix on the slide presentation.
We had a lot of material that cover today. So please limit yourself to one question. Each do 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 open up the line for questions.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Well pause for just a moment to allow everyone in opportunity to signal for questions.
Well take our first question from Stephanie Benjamin with Suntrust.
Hi, good afternoon.
Hi, seven.
Oh, I want to I guess I'm back on to slide seven here and I wanted to clarify just on the depreciation changes.
Closed the clearly there's a lot of positive tailwind going.
And strategies in place right now pretty much improved here there are only and what it cost savings are greater focus on your supply chain solutions, but a big part of that step up it does assume that improvement in depreciation I guess, maybe just help us with.
I guess, it's the.
Footnote talking about the expectations with you for a 30% improvement and tractor and 10% of curve and truck pricing. So you know what kind of gives you confidence you know why did you change these levels and she Q. Yeah. This is kind of it from a.
Depreciation reduction you know why this would be comfortable that going forward, we're not going to see another step down maybe just walk through kind of your thought process when making that decision.
To kill that'd be helpful. Thanks.
Yes definitely thank you.
I'll, let Scott give you more color, but just your number are.
The policy.
A residual estimate is our best estimate of what we think the long term.
Sales proceeds will be for these vehicles, so where we think they'll be sold pushing you can see on the chart that we gave on page seven.
That gives you kind of the 22 year look back.
At historical proceeds as a percent of operating as a percent of original investments.
Index. The 20 to 1999, so you can see that where we've now set the long term policy.
Really near the trough levels that we saw back in 2009. So gives you an idea that look if I just looked historically, we're we're setting up that historically lower pretty low levels, but I'll, let I'll, let 'em.
Scott gave you a little bit more color.
Yes, definitely thanks, Robert I think the <unk> with Robert just 19 was was clearly that we when we're projecting our long term policy levels, we need to take in consideration both historical as well as prospective and similarly built into the current policy.
In the second quarter was this extended kinda recovery into 2022 for our sales.
That that kind of gives you a little bit of a sense that.
We're expecting things to stay.
Hello trough levels so per truck.
Truck levels, where in 2009, our accelerated policy is at or below that level and tractors, which we showed.
In the third quarter. The trough was in 2002 and were at or below that for tractors.
So we factored those in and looking at the sensitivity. We wanted to give you context around what those improvement levels are like Robert's point. If you look at tractors were looking at kind of levels at the 2008, two or 2018, 2019 levels, which we which we saw and then for trial.
Kind of levels that we saw as we kind of started the year that gives you a little context too.
Expectations on a per policy over the next couple of years.
Okay. So Paulo, so in order for us.
Have anywhere policy pricing would need to get back to just where it will give the last couple of years I think for trucking tractors. So you know it's not a huge moves but it's again, there's been such a big drop here because it kogan in a couple other things that Ah that's what would have to happen.
Got it thank you so much.
Thank you Stephanie.
If you find that your question has been answered you may remember yourself from the Q by pressing the star key followed by the digit too.
Moving on we'll go to Todd Fowler with Keybanc capital markets.
Great. Thanks, and good morning, So I want to ask a very similar question on slide seven, but I'm going to ask him the accelerated depreciation side.
Hi, understanding that you know you're accelerating depreciation on vehicles coming off of lease signed extra year into mid 2022, what is your assumption for where those vehicles are being depreciated too is that at today's used truck value or is there any assumption that used truck pricing has been an improved from where we're at today over the next year and <unk>.
Nothing Robert your last comment the Stephanie it's kinda similar question you know.
What would we need to see to make sure. There is additional accelerated depreciation going forward. Thank you.
Okay well.
Well.
Just to be clear the the accelerated is for those via the you'd mentioned that or what are going to be sold between now and middle of 2022. So we're really extending routes and basically two year window. Those let those residuals are set to I would say at or below historical trough levels. So.
We haven't given how exactly where that is but it's lower it's lower than where the policy is so we're we're we're assuming that we're gonna stay at kind of the levels that we're at now we're going to stay at those for the next two years.
If there's any type of recovery will start to see gains. So that's what we've that's what we've set those that Scott is there anything else.
Ed.
I think that's clear.
Great. Thank you.
Thank you Todd.
The next well go to Ben Hartford with Baird.
Hi, Thanks for the time because.
Robert just interested in your perspective on on rental utilization improvement.
Through the quarter makes sense, but if we look at some broader spot.
Trucking data points I mean, the market's firmed up quite a bit a utilization is still.
Below historical levels as you said and you're expected to remain.
As such in the back half of a year. So with regard to rental utilization do you think it's more of a demand.
Or supply issue.
To what extent can you be fleets.
Get back to targeted levels here over the next several quarters.
The demand environment does remain.
As far as it has done from a spot perspective.
Yeah. That's a good question I'd look I think if you remember rents on the sort of our leading indicator of what's going on in and transportation market right. It's the first trucks that come back when things slow down and typically the first trucks to get picked up one thing speed up and it's been so many idle assets I guess in general.
During this call 19.
Shutdown that just getting the base units of most of our customers up and running is sort of in the first step when once they have that then you'll start to it you start to see rental pick up so there's a little bit of a lag here I think that's why you're seeing that a utilization is it's not at target levels.
I'll like I'll, let John give you some more color is what we saw during the month during the quarter, but we did see an increase in kind of see at a level off a little bit now.
In a certain level salt life, I'll, let John to do that color.
Okay. So just to give you a little bit color what happened during the quarter I think your question on demand, specifically, what we're seeing and attract or class.
We did see that track to class similar to the trough kind of behave.
The same in April and May.
And that with a lot down there was not much moving from a lot of point of view. So we saw March a utilization and below 68 boards, we match or was 61% so low safety.
They ticked up a little bit to 54%.
And then what we finished young we were just above 60%.
A good portion of that you are seeing but the tractors come on up so similar to what you're seeing in the spot market, but I would tell you. We're you know in July we're in the mid to high Sixtys and.
And we expect that to level off 'cause that's evolving where we expect.
In the third quarter. So we have seen a pick up we have seen a pick up on the tractor side driving some of that improvement, but I just called out on the utilization from but we expect that to kind of level off.
Over the next couple of months.
Sorry, I think it I think Ben if you see the if you see things really pick up in the economy, we don't have any boarding shutdowns or as a we had.
You could get some benefit there more than we expect it's just difficult to say right now based on what's going on it so.
Some parts of the country, where you're seeing things begin to slow down a little bit.
That's helpful. If I can get a quick just follow up related to that Robert.
There's a lot of gifts around the demand side.
What can you do from.
From a supply perspective within that rental fleet to work the denominator down to to help improve utilization above and beyond any hope on demand remaining stable or even improving from here.
Yes, good when there is really redeploying vehicles are more rental fleet into lease applications and you saw that we got the John and his team did a really good job in the quarter Gotta down we got the play down 7% and what's been a difficult quarter just in general a as there wasn't a lot activity, but they're able to get it down because that's weeks down 19% year over year. So we.
Would it continued to do that I can't really the leasing out of our rental fleet to get the fleet down it's probably the biggest driver, but God is there anything else there are there any bad.
No I think that's right I think we're going to continue with our redeployment afterwards, we seen a good amount of acceptance on the part of our lead customers.
That are looking for shorter term flexible equipment. So we've been able to redeploy on ground equipment for shorter terms that at good rates and we expect that to continue.
I think the important thing also benefit that we do believe it just you know whether its rental or automotive or or some of the other areas, but worst is behind us. We believe in terms of just activity April was definitely the most challenging month and that we saw things really inquiry.
We would expect that improvement to continue barring any type of other disruption if we.
I have to go backwards. So we think it's just hard to tell the pace at which that improvement is going to happen.
It's really the the unknown here and really went up one of the reasons why we're we're having a tough time being able to provide guidance.
Understood. Thanks.
Okay. Thanks, then.
And next well go to Scott group with Wolfe Research.
Hey, Thanks morning, guys. So when can I can we go back to slide seven just because I'm still pretty confused here I apologize.
So.
The Black line, which I thought was kartik.
Places means.
It's like it's moving up and is above the policy assumption, but.
I'm confused is that right well, let me just started or is that right. That's the way to think about the black line.
Yes got you're right on that one that's the second quarter, where Robert mentioned, the second quarter, we had seen a decline in second quarter [noise].
I think John mentioned.
In the last call that the wholesale marketing kind of people neighbors, who is very low. So we had a higher than normal level of retail sales in the quarter, which which led to be the pick up there and our expectation for the remainder the years, we kind of go back to normal life block.
Who knows how we count wholesale mix given the inventories that we have that's the assumption.
Yeah, I guess, yeah, so we're not clients.
Go ahead, Robert Sir.
Now that you asked the Black line did go up in the quarter as Scott mentioned, but it's primarily due to the fact that meet the retail wholesale mix for trucks was was higher than what we normally expect some got so we the wholesale market kind of shutdown in April. So we did a lot more retail overtime. So the good news I would tell you the good news overall and you'd be axes volumes have been strong.
So the volumes being strong is definitely a good indication that overtime could lead to price increases we're not assuming that that continues in the analysis. We've done here. So if pricing were to continue that trajectory. Obviously, we would have gains and these numbers and and residuals would be below that but this is what we've done here.
As we actually had at lower and we're assuming over the next several quarters that pricing won't continue that trajectory that'll that'll come back to Allison.
Just one I understand where is then where would you call sort of underlying used prices relative to the blue axis out of you're saying as new cards. These prices are 30% give or take below that blue acts.
No no not 30%, but we're saying we're seeing current used prices are going to be somewhat below that blue acts.
Not 30%.
Okay.
And targets, but I think I guess like you're below normal normalize for normal rental and and furniture normal retail wholesale mix.
Right Okay.
Okay, and then just last thing so, let's say hypothetically used truck pricing gets 10% better so it doesn't get 30% better but it gets 10% better when you start reporting gains on sales.
Yes, I guess, how much how much can use lead to improved to start reporting gains on sales.
In order to report gain on sale Scott If your current currently looking at that would be the accelerated pool right. The assets that were expecting to sell in the next couple of quarters that levels below the black that's on the stage so our.
The vigilant, we're setting for accelerated at that trough levels.
So is it pricing came up in the in the short term.
You would see a gain on those assets that we're selling currently if they're up from current levels.
Do we see any improvement in used truck pricing from here, let's start reporting gains on sales.
Well, yes. The answer is yes, it's a little bit on timing based on some of the depreciation. So just the achieved a timing issue, but generally the answer would be us.
Okay. So hopefully we get back again, starting in the third quarter. Okay. All right. Thank you guys. Appreciate the time, Thank you Scott.
Next we'll hear from Brian Ossenbeck with JP Morgan.
Hey, Thanks for taking the question good morning.
Just want to ramp on me.
My Robert just kind of residual index again, just to be clear. It does sound like there is yeah mix mix effect I'm not only from the class type attractive, but also how you're selling it. So recognizing you had a bit of a shift in wholesale retail for for truck last quarter. This can normalize New York Cushing is it.
Sure there into more retail channels. So just wanted to.
The career, if he increases you're looking at the 10 and 30% mentioned on slide seven does that include a bigger shift towards retail, which should be aware of it a little tailwind or are you not kind of counting on that when you look over the next couple of years not making his assumptions.
Yes, so we're really not mechanisms either way, what we're saying is the overall proceeds the combination obviously by retail more that's gonna help me get to the number quicker. So so it would have certainly so if we were able to increase the percentage of vehicles that were selling through the retail channel than the overall pricing. If you will reach I wouldn't have to go.
Up as much probably because you're the blended would be higher but just to be clear those the the.
Sensitivity, we gave a 30% to 10% is.
As for the long term that's for the next within the next two years has to go up that much in the short term I think that was Scott's earlier question in a short term work. We're our residual values are very close to what we're pricing what we're seeing in the marketplace. Now so if it goes up you're gonna start to see you should start to see games, we just need.
No that yet because we know we have a lot of inventory as we show and got 14000 units and inventory. So we'd have to move a lot of vehicles in the balance of the year, we know that overall in the market. There's a lot of vehicles to move. So we're gonna have to we're gonna have to wholesale some more units and we know there that could create some pressure on pricing. So that's really why we've made these assumptions with fixed.
Come in bigger and we continue to see a lot to strengthen volume.
That could go the other way and we could see you could see gains.
Okay. Another clarification, we can make on the chart you can get a clarification is yes is it this is normalized for age and for mileage. So when you're looking at the you know the impact than piano on a quarterly Jason there's the mix between retail and wholesale but also be.
The age and miles of the units were selling.
So this is trying to give a directional kinda index around how the market's doing but on a quarter to quarter basis. It will be impacted by kinda as we age in miles will be units were selling and that's part of that spread incorporated into our accelerated depreciation.
Okay got it thanks, and just a quick follow up for you just got on mentioned to.
Listen we're chart for tractors I think it's a couple of quarters pulled down but if you can just give us a little bit of context as to where that where that stands.
Understanding celebrated as Balu residual.
We didn't make too much change for that so I think there's something you're seeing seeing there even over the last quarter was a little bit softer with what the impact.
On realized.
[noise] realize value for tractor what do you what are you seeing when you look at that trend that gives you a little more confident it's not a need to make as big an adjustment on on the tractor site.
Yeah, I think it's a little bit about what John mentioned, so I'm on the second quarter action was predominantly on on the Oh.
But one that on the truck cycle and so on the tractor side a week, we pick the action in the third quarterly say you mentioned that we were kind of tracking you know kind of.
Most of the assumptions we made there so the change really was on the accelerated site.
We did do a slight modification on the on the on the policy side.
For tractors that.
They have been kind of stable for the last couple of quarters.
Okay got it thanks for that.
Our next question comes on line, Jeff Kauffman with <unk> capital markets.
Thank you very much I just wanted to ask a detailed question and then more of a kind of longer term outlook question. You mentioned that at the end of the year you'd love to get the choice lease fleet down by 10000 vehicles.
Where are you on the progress of that so far in can you give us kind of a view of where you think the commercial rental fleet needs to be as we approach here and just trying to get an idea for vehicle cafs to Threeq and Fourq you.
Yeah, I'll, let I'll, let John give you some color on that we do expect that choice lease fleet to be down 10000 news, that's primarily a reflection of our customers de fleeting during the softer economic period, and there's been definitely been slower sales activities companies have been kind of holding off to make.
Those types of investments so that's really the natural flow down of vehicles.
I'll, let John I give you some color as I mentioned, our rental fleets already down 19% year over year, probably going to give you a little more color on the balance of the year.
John.
Yeah, so looking at the vital sleep.
Down 19% as we highlighted in the remarks I.
I would expect that to continue to decline one to two percentage points sequentially. Each of the next couple of quarters and probably looking at.
Other thousand two 2000 units in that range has the potential adjustment that we need to make obviously.
We're going to continue to monitor demand side and it's the demand comes back as we approach the fourth quarter.
We may pull back on that but that's kind of the range that we're looking at right now that's needed.
I want to switch gears, thank you for that answer.
There was a announcement that you had reached an agreement to bring some workforce electric stepped fans into the fleet.
I know, there's a company Nicola that made a big splash coming public and you were going to provide maintenance exclusively for those vehicles, but not exclusively <unk>.
Can we take a step back and kinda give us your view on this emerging.
Oh alternative power technology, and kind of where writer strategy is and what your expectations are for customer demand in those areas.
Sure I think I think Jeff were pretty uniquely.
Position to really be able to evaluate and understand where that technology is going.
We think going forward. We you know we we can certainly continue to play an important role and its leading our customers with those types of vehicles are based on that on the breadth of contacts and and presence that we have here in North America.
So we had been early adopters and getting into some of these vehicles and relationships a different startups along with them more traditional Oems.
So we see we do see progress I, just want a money being put in a globally for.
Research and investment in.
That type of technology.
We had been working with numerous customers you mentioned recently a workforce is one of them before they are bringing to market more of a smaller.
Lighter duty type stepped van and vehicle, which we think is probably where you see that technology first really taking off so we're excited about the the progress we've seen there specifically with workforce and that we have vehicles with at least customer already another we're bringing some additional vehicles of their their newer.
Generation into our rental fleet, but again, we see that progressing I don't think it's gonna be a light switch that's going to turn on one day and everybody's going to convert but I think it's gonna be a slow migration over time, starting with probably the lighter duty vehicles, where the technologies more advanced.
Okay, well, thank you very much.
Thank you Jeff.
Yeah.
The next well go to David Ross with Stifel.
Good morning, gentlemen.
Oh, well good morning to ever talk back, but yeah I wanted to follow up on the rental.
Fleet and.
Coming down significantly utilization, so only being in the sixties.
What percentage of your rental business is typically what I would call trade show conference event business. Because there are no conferences. There are no concerts Arnaud stadium events, probably happening rest of this year. So it's kind of 15% of your normal business. It doesn't exist until 2021 is that really well we have two.
Prepare for.
Yeah, I'll, let John to give you some cars that hasn't been the biggest driver. It is one of the one other drivers for I'll, let John give you some color on the decline and by industry type by customer end customer.
Huh.
Yes, so David just to address your question with regards to be viable levels, you're absolutely right back that group for that segment of our customer base.
So we felt the impact and continue to feel the impact.
That's specific category represents mid single digits for us.
In the rental portfolio.
I would tell you I think we have seen be impact across both food and service food service customers as well as the bat rental.
Customers.
And they're coming back online, but foodservice folks have figured out a way to kind of reinvent themselves and they're coming back online now.
And Charlie we expect that to continue to progress it's gonna be a gradual improvement.
Yeah, that's folks I think it's gonna be longer term as you suggested in your remarks.
Then just quickly on the writer last mile business, you mentioned that.
Maybe due to increased demand the outlook.
Rate to high single digit margin business.
Why the I guess.
We're optimistic outlook on profitability better pricing change in operations other.
Yeah, all David I tell you that a couple of things one is definitely the growth and and the the prospects for same for continued growth there, but I think the more important item has just been the overall performance of the business when we got a great team there.
That's really performing extremely well, we're seeing profitability certain better than what he we had originally expected I'll, let Steve get a little bit more color were seeing there, but clearly activity that we're seeing with the impacts of co bid and even in a post Tobin World I think the prospects look very positive for that business Sixtyv, you've got to give some color there.
Yes, David So we went through some cost control measures back earlier in the air So I think where you know certainly benefiting from that at this point as Robert said pipeline is very very strong sales team is really hitting it on all cylinders. So we've got a lot of new business coming into the pipeline.
And then volume here over the last.
Three or four months. So yeah. This business is all about density.
And as we continue to build that dancing and optimize a each one of these trucks, we continue to see that that profitability grow. So operations team is executing as well so just a really in a good spot now.
Good to hear you know what I would add it David.
You look beyond even just beyond writer last Mobbing you look at all of the supply chain business dedicated and even in our choice lease business. The the level of performance even during this extremely extraordinarily difficult quarter.
Has been very high I mean, the kind of showed the resiliency of our contractual business because the headwinds that we got were really around rental the automotive business, which had a whole shutdown, which I don't think anybody expects an entire industry to shut down like the way it said so.
Those were extraordinary circumstances there.
And then ultimately it's this continued used vehicle.
Challenging and depreciation, which I really you know if you look at the charts that we've laid out I think we've taken a a prudent position on these residual values. Even now Additionally, with this cobot 19, but the if you look at the charge this stuff a big strengthened as gifts behind us. This year. Another chunk gets behind next year and then.
Well look at much more normalized earnings coming from from that part of the business. So its overall I think you've got to step back and just look at how well the for the business performed when you take out those kogan related items.
Excellent. Thanks.
Thanks, David.
And next well go to Justin long with Stephens.
Thanks, Robert I wanted to take it back and ask you a bigger picture question. If I think about rider historically, it's been a counter cyclical cash flow model, we can see big swings based on where we are in the cycle.
Is there a focus on managing the business.
I mean going forward and instead of having it okay. Historically that's been on growth.
Shifting to a strategy that more focused on maintaining positive cash flow through the cycle and if he answered it added yet when lumpiness them into changes you're implementing to incentivize fat.
Yeah, I think it a it's a good question are we had a page in the presentation, we talk about kind of our adjustment to our capital allocation strategy and it's it's precisely first of all of the number one.
Goal for the company is to achieve our 15% or away. So that's where we're really hyper focused on on getting there. Some of that is going to require growth you can't and you're not going to get there just like broken out cost, but we feel that the growth we want more of their growth coming from our supply chain and dedicated business is where you have a higher return on the lease.
Side of the business, which is more capital intensive we're really looking at improving returns.
Nice increases maintenance cost reductions or other other ways of driving efficiencies and that business.
And and maybe limiting some of the growth we had a couple of years there with very large capex years, very negative free cash flow, which ultimately I think really from a public company standpoint creates some some challenges for investor So what a moderate that grow some so we're going to have some broke but not clearly not at the 10 through.
Alan 11000 unit level that would seem to last few years.
And with by doing that you're going to be able to we're going to be able to get to the 15% our away and have positive free cash flow over the cycle certainly more positive.
Free cash flow in each of the years I'm not saying every week every single use gonna have to be positive, but most years are gonna be positive and certainly not seeing the big negative free cash flow years that that we've seen so we haven't we we've got a clear path to get there.
As you see with that would that waterfall, Oh, we're making good progress on those initiatives.
As we said at the beginning of the this quarter even free Cobrand. We said, we think we can get to our cost of capital by 2022, even post go but I would tell you I think we can get to our cost of capital of 11%.
In 2022, and if Something's go our way, we could get above that by 2022, but again a lot. There's still a lot of uncertainty, but I think just getting a lot of this depreciation behind us which is really what we've been trying to do here over the last several quarters.
It's going to is going to create that path to get to get to our return on equity and 15%.
Great and just one quick follow up on that that 15% target does that add three you're targeting five year target is there any kind of timeframe you can put around it.
No. It's our long term target over the cycle right. So so you know depending on the on how the economy goes you couldn't get there sooner or later, but again what I do think is by 2022. So in two years, we think we could get to a we can get to our cost of capital and then from that point ought to be able to move up in that.
And to that 15% range. So again, it's just a lot of there's still a lot of unknowns between down there, but if I just look at the amount of depreciation that we're going to get behind us over this year in next year, we should be in a position to really be able to make really strong progress starting in 2022.
Okay. Thanks, I appreciate the time.
Thank you.
Moving on we'll go to David Mac with J. Goldman.
Hey, guys. Thanks for the time.
I I just I just wanted to clarify a few things because the the whole discussion about the risk of additional charges has to factor into pricing and then into your 15% returns.
What I think I've heard so far is.
On trucks that you're selling for the next few years if used values go up from where they are you're going to recognize gains.
Games.
The confusion seems to be though.
For 2000 trucks that you'd be selling beyond that timeframe you need a significant improvement from here in U.S values in order to not take any charges.
One is that correct and then if that is correct how does that factor into your 15% targets. Because if you have to take further charges I would assume that's going to impact your returns and Additionally, how are you pricing long term leases.
With this great uncertainty that you need a 30% move up in U.S values.
I would think that that has to create a greater residual risk when you're going out into the market pricing leases.
Yeah, well first I'll tell Ya David used values are historically trough levels today right. So that's the starting point if you look whether its trucks are tracking where we're at trough levels for for trucks are close to trough levels from trucks, which were all nine levels and where a trough levels for tractors, which will 2002.
So we're assuming that it stays at those trough levels for the next two years.
Then we're assuming that trucks will improve by 10% from those trough levels, which is basically the pricing we had at the beginning of this year. So it isn't that big improvement, it's a relatively small improving when you look at the volatility that they used vehicle prices have for tractors were assuming it stays at these trough levels for the next two years.
And then over that period of time it gets back to the pricing that we had in 18 and 19, which again was not peak pricing. It was just you know more moderate type pricing level. So that's what we're assuming in terms of the pricing that we have out there were at or below those levels on the on what we're assuming on pricing at the leases. So so that can.
Yeah, I don't give you some some oh I understand where that's out so we're not assuming just to be clear, we're not assuming twice the state that trough levels forever.
I think that would be it'd be kind of a difficult to say even explain.
So we believe this will continue to be a cyclical.
Market and we're coming off of low lows here and we expect it to move up over the next couple of years.
So it's just so I understand the volatility news.
Really we've been talking about decline and used values for a number of years now and I'm guessing like five years or so I'm you know first it was the ones with the new engines, you know that just to 20 Twelves and you know it's it's.
Hasn't gotten any better so.
He is there any risk in your mind that.
We are in a just.
Deflationary environment for trucks due to how many trucks were built and potentially.
Greater fuel economy, and technological advances that are.
Shortening the period of obsolescence on older equipment.
Yeah, I think if you looked at the if you look at the buyer for a vehicle that we set we're selling to track for for example, a we're selling I assume you're you're probably talking more specifically around tractors and trackers were selling a vehicle that is seven to eight years old.
Person the buyer body one of our vehicles is there's going to pay 20 to $25000 in this environment for that vehicle.
So that is not to say bar that can go on and by a vehicle for a new one for 120000 or can go up by three year old for 60000. So there is a segment of the market.
Which is typically an owner operator.
Who is going to go out and by our vintage of vehicle and and fuel efficiency and all that is nice within a day, it's what vehicle can I afford to buy so I don't believe and if you look at the if you look at this cycle over the last few years. It hasn't just been the older vintage vehicles, where pricing has gone down pricing.
Has gone down across the board on used equipment.
And and that's really been to snakes. So it really you know we do believe it said, it's like every market to supply and demand market.
And when demand has gone up because a lot of vehicles were built seven years earlier, you do get some pressure and when.
The economy slows down you also get pressure when the economy picks up you're gonna see things improve and its supply goes down you have you'll see things improve also so this is more of a sub we do believe this is more of a supply demand issue not so much and a secular technology ish.
And and just just to put.
A finer point on it so if we get to a point in two years, where value is having CCOP and really if you're saying, 30% from 25000, it's really not a lot of dollars, we're talking about here, but if that doesn't happen.
Is there then risk to that 15% or are there are offsetting variables that would.
Still allow you to reach that 15%.
Yeah, there's like there's always offsetting barrels right. That's what we've been talking about with all these initiatives right the $100 million a maintenance initiatives that we got out there that we've been making really good progress on cost cutting we can do.
There's always other things in the business that can offset and that's what that's what we focus on so yeah. You. If we got to the point edit take more we would continue we're going to continue to look for improvement opportunities and efficiencies that we can bring a that we can bring into the business. So that's what that's what all this is about that's why I told me hobbies and she gave you think about that Vince.
The chart that we showed on the on the third quarter call, you say well now with trucks with.
I think we've used vehicle values going down there should be pressure on that chart. There is some pressure on my chart. However that pressure is offset by the fact that maintenance is coming in better.
And all these initiatives that we have around maybe it's a really helping out that numbers and so that chart is still pretty valid to exactly what it looked like in the third quarter. So that's the way it's not it's not just one variable and then the equation. It's it's multiple variables one of the variables in this used vehicle price, but again, it's not the only once.
Okay and this is my last one that I'd just like just a hammer in this.
For the next two years.
If you use values and I know, there's a mix issue, but for the next two years if used values do not decline further.
You should start recognizing gains. So this discussion that we're gonna have and we're going to have again and again or what's going to happen in two years.
That's about two years.
Anything that you're selling now if we see any kinda noticeable uptick in used values you should start reporting gains on those units.
Yes, yes, it won't again, the only other variable is the retail wholesale mix, but as long as there's not a big move there years that you're exactly right actually the retails and there's more towards retail you can actually go through even without a lot of improvement but yes.
That's a fair so okay.
Okay.
Thank you for the time and hope to speak soon.
Thank you there.
And our final question will be a follow up from Stephanie Benjamin with Suntrust.
Hi, Thank you can follow up I, just wanted to see and you talked about this wasn't in the last call, but anything any additional demand for our near supply chain are dedicated to everything because the code that need to customers that have seen a pretty big disruption in their supply chain to trying to see if there's any positive, but I've been able to come from those could you guys.
Segments. Thanks.
Yeah, let I'll, let Steve give you some color on that but I'd tell you what I. What is what is very encouraging for us is that with Colgate, There's a new focus on supply chains in general with all the disruption that happened in April.
I think the move between the the tariff awards last year and this issue in cold weather I think the onshore Oregon near shoring.
Activity is going to increase and you know rider is really focused primarily in North America. So all of our expertise here, which I think bodes very well for the onshoring of near shoring, especially when you think about the capabilities. We have in Mexico, along with the stuff we have here in the U.S. and in Canada or ecommerce you're seeing.
We're going to see more of that and I think the initiatives. We have rowdy fulfillment of right last mile are going to benefit from that also so I'll, let I'll, let Steve give you some color on what he's hearing to customers real time.
Yes, Stephanie Steve Yeah, I think just kind of dig deeper on the areas at Robert highlighted a you know certainly E. Com is up significantly over the last two or three months.
Sequentially quarter over quarter and over last year. So.
Hi, good mix of opportunities there and Oh volumes continue to increase so a lot of interest from new and existing customers on that front talked on there earlier about last mile. We expect that to continue.
To grow and a and so you know quarter over quarter.
<unk> versus last year, we were up mid double digits. So I think that's that's a good side and then you know it's a marketing campaign that Robert talked about going to launch and the next week or so we expect that you know to help build the pipeline and our pipeline and supply chain is it historical rack.
Occurred levels. So that's only going to be more on top and new opportunities that we can we can grow in so things very excited and focus.
That's why that's why we're we're launching this national AD campaign as we think it's really a great opportunity for us to get the word out on the on the capabilities that we have in supply chain and how we can help companies.
Got it thanks, so much.
Thanks, Stephanie.
I'd like to turn the call back over to Mr., Robert Sanchez for closing remarks.
Alright, Thank you were a little bit past the top 30 hours. So thank you all for joining and hopefully all continue to stay safe and we look forward to see and you're not in person will see a virtually at.
Some of the conferences. Thank you.
That concludes today's conference. Thank you all for your participation.
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