Q3 2020 Ryder System Inc Earnings Call
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Good morning, and welcome to the Ryder systems third quarter 2020, <unk> earnings release Conference call.
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I would now like to introduce Mr., Bob O'brien, Vice President Investor Relations corporate strategy and product strategy for Ryder Mr., Brian you may begin.
Thanks, very much good morning, and welcome to <unk> third quarter 2020 earnings conference call I'd like to remind you that during this presentation not near some forward looking statements within the meeting the private Securities Litigation Reform Act of 1995.
These statements are based on managements current expectations and are subject to uncertainty haven't changed circumstances.
Actual results may differ materially from these expectations due to changes in economic business competitive market political and regulatory factors.
For detailed information about these factors and a reconciliation of each non-GAAP financial measure. The nearest GAAP measure is contained in this morning's earnings release earnings call presentation.
Ryder's filings with the Securities Exchange Commission, which are available on writers website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and Scott Walker Executive Vice President and Chief Financial Officer. Additionally, job. He is president of Global Fleet management solutions, and Steve sensing, but global supply chain solutions and dedicated transportation.
On the call today are available for questions. Following the presentation with that I'll turn it over to Rob.
Good morning, everyone and thanks for joining us.
I'd like to start the call by thanking our employees, particularly our frontline associates or truck drivers or maintenance technicians warehouse workers and all the central broader personnel have worked tirelessly on behalf of our customers to ensure.
Flow of goods and services throughout the economy.
On our call. This morning will provide an overview of our third quarter results and an update on our outlook.
I will also review the progress, we're making on actions to achieve our targets over time.
Following our prepared remarks, well open the call for questions with that let's turn to a brief overview of our third quarter results.
Operating revenue of 1.8 billion in the third quarter was in line with the car year as higher revenues in supply chain and lease were offset by lower revenues the rental and dedicated.
Comparable earnings per share from continuing operations was $1.21 in the third quarter as compared to a loss of $1.49 in the prior year.
Results reflect a year over year earnings benefit of $108 million from a declining depreciation expects expense impacts related to prior residual probably got some <unk> changes and higher gains on sale of used vehicles.
Higher supply chain earnings and improved lease performance also contributed to increased results.
Page five includes some additional financial information from third quarter copper.
Comparable EBITDA for the quarter was 640 million up 8% from the prior year, driven primarily by improved operating performance Ics.
Excluding pension costs and other items the comparable tax rate was an expense of 17.9% in the quarter as compared to one expenses of 7% in the prior year.
Adjusted return on equity for the trailing 12 month period was a negative 4.4% as compared to a positive 5.3% in the prior year, reflecting lower earnings from depreciation expenses related to prior residual value changes and impacts related to cope in 19.
I'll now turn it over to Scott to discuss the key trends that we saw in each business and review overall capital spending cash flow and leverage.
Thanks, Robert Fleet management solutions operating revenue decreased by 3% due to a decline in rental revenue.
Actually offset by higher choice lease revenue.
Year over year rental revenue was down 16% in the third quarter, reflecting lower demand.
We are encouraged by the sequential recovery in rental from the second quarter, which reflects increased freight activity as well as benefits from our actions to downsize the fleet.
The man and utilization improves throughout the third quarter.
Tempur utilization above prior year levels.
Utilization of our power fleet was 71% in the quarter modestly below the prior year, 74%.
But up significantly from 56% in the second quarter.
Alright, ending rental fleet size was down 21% compared to prior year and down 4% sequentially. As we took timely actions to address the lower coated related demand.
[noise] choice lease revenue increased 2%, primarily due to higher pricing on leased vehicles, reflecting our pricing initiatives.
Hi are these pricing more than offset the impact of the lower activity due to reduced sales and renewal activity.
Lower lease sale as well as our initiatives to redeploy rental vehicles, just to fill new lease contracts.
Expected to result in significantly lower capital expenditures and higher free cash flow and 2020.
That's a that's realized pretax earnings of 16 million, which included 100 million of depreciation expense impact related to prior residual value estimate changes and gain on the sale of used vehicles.
This impact is lower than the prior year, resulting in a year over year earnings benefit of 100 gig.
Higher pricing on leased vehicles, and lower maintenance costs, including benefits from our cost saving initiatives also contributed to earnings improvement.
These benefits were partially offset by lower lots of results.
That's the math PBC as a percent of operating revenue was 1.4% for the quarter.
Although the company long term target of high single digits, reflecting depreciation expense the prior residual value estimate changes and lower rental appointment.
Page seven highlights global used vehicle sales results for the quarter.
And improving freight environment contributed to the stabilization of these difficult market conditions in the third quarter.
Resulting in record sales volume and higher sequential pricing.
Used vehicle sales results, but also resulted.
Some of the initiatives to increase retail sales capacity and online sell capabilities.
He sold an all time record 800 used vehicles during the quarter.
66% versus the prior year and up 40% sequentially.
Used vehicle inventories held for sale was 10700 vehicles at quarter end.
Awesome 7300, the prior year, but down 3300 vehicles sequentially, reflecting this record sales activity.
We expect used vehicle inventories to continue to decline and end the year within our target range of seven to 9000 vehicles.
In addition to strong sales by.
It's very encouraging that used vehicle proceeds for you on the increase sequentially.
Well believe tractor proceeds were up 14% and truck proceeds were up 8%.
In the U.S. tractor in truck proceeds were both up 9% sequentially.
As you may recall in the second quarter call, we provided the sensitivity, noting that a 30% price increase for tractors and a 10% price increase for trucks in the U.S.
You just by 2022 in order to maintain our current policy depreciation residual estimates.
Although the 9% sequential pricing increase not age mix adjusted.
Generally in because of the pricing a proven incident that occurred in the quarter. It brings us closer to the levels that don't require any additional policy residual value adjustments.
Now turning to supply chain on page eight.
Operating revenue was versus the prior year increased 9%.
And really get a new business higher volumes and increased pricing.
Are your volumes were partly due to increased automotive production support following recent shutdowns in company related freight increases in CPG and why the last mile.
That's the Es pretax earnings increased 57% didn't need business higher pricing and improved operating performance.
Yeah, maybe t. as a percent of operating revenues totaled 11.8% for the quarter.
Above the company's long term target of high single digits.
Moving to dedicated on page nine operating revenue versus prior year was down 6%, reflecting non renewed business and lower volumes.
Yes earnings before tax increased 34% due to a lower impact from prior residual value estimate changes the vehicles used by <unk>.
A onetime benefit from a customer contract termination.
An improved operating performance.
Yes. He has a percent of operating that was 10.6% for the quarter.
Well the company's long term target of high single digits.
I'll turn now to slide 10 to discuss capital expenditures cash flow and leverage.
Year to date gross capital expenditures.
Were just under 800 million down.
Down by more than 2.2 billion from the prior year.
This decrease primarily reflects lower investment at least impactful vehicles.
Weaker economic conditions as well as our strategic initiatives are resulting in lower lease sales activity and reduced capital spending.
Used to redeployed equipment, that's all newly contracted 20 twond.
Oh lower capital spending.
We now expect full year 2020 gross capital expenditures of one to 1.1 billion.
Although our previous forecast of one to one point recently.
We are now forecasting full year 2020 free cash flow of 1.4 to 1.5 billion up.
Oh from negative 1.1 billion in 2019.
Reflecting the countercyclical cash flow nature of our business model and.
In our strategic direction to limit growth capital in the <unk>.
Year to date proceeds from sale of $401 million were in line with prior years, which included a property sale.
Excluding any.
Christine solely from sales of used vehicles were up 47 million.
Net capital expenditures decreased by over 2.2 billion to 364 million year to date.
Turning to the next page.
We generated just under $2.1 billion, a total cash year to date.
<unk> percent from the prior year primary.
Primarily due to working capital management.
Free cash flow was positive 1.2 billion year to date.
Oh by approximately 2.2 billion in the prior year, reflecting significantly lower capital spending.
Yes, the equity at the end of the third quarter increased from the prior year to 346%.
So I think that reduction to equity due to higher depreciation expense impact related.
And they did the prior residual value estimate changes.
Higher than normal cash balance due to uncertain economic conditions.
Any pension equity charge.
We expect to use free cash flow in excess cash to de lever the balance sheet during the fourth quarter.
[laughter] charge was taken in conjunction with the recent cost action to curtail certain future pension benefits.
It's actually required to re measurement of our U.S. Canadian actually have to somebody adult.
A process that normally occurs it you're right.
It is a lower discount last year, that's remeasurement resulted in a reduction to equity approximately 68 million net of tax.
A higher than normal cash balance and the pension equity charge increased equity by approximately 25 percentage points and 10 percentage points respectively.
Debt to equity declined however, sequentially and 377% in the second quarter.
At this point I'll turn the call over to Robert to discuss our fourth quarter outlook as well as provide an update on our actions to increase returns.
Thanks Scott.
Looking ahead to the fourth quarter, we anticipate really anticipate supply chain and dedicated returns to moderate from the third quarter, reflecting seasonality seasonality and lower covered related activity.
This seasonal decline include the impact from holiday automotive production shutdowns reduced activity.
Certain customers as well as the timing of annual employee Merit increases.
For the full year, we expect EBITDA as a percent of operating revenue for both supply chain and dedicated to be within our long term target range of high single digits.
As you've heard me say before riders drivers technicians warehouse workers and other essential personnel are critical to our success.
Baucus pandemic. These dedicated employees that continue to ensure the safe delivery of food health care goods and other supplies on behalf of our customers.
Appreciation for their efforts, we are awarding a special recognition and retention bonus. So these are non bonus.
On bonus of all employees.
This investment will result in a one time expenses of approximately $30 million in the fourth quarter.
These earnings headwinds are expected to be partially offset by the continued decline of depreciation expense impact from the prior residual value estimate changes.
And then prove rental performance.
Turn improvement in rental are expected to accelerate in the fourth quarter due to higher demand and improved utilization.
And lease we expect the fleet to continue to decline however, pricing is expected to be higher reflecting our pricing initiatives.
We're expecting record free cash flow of 1.4 to 1.5 billion 2020, driven by lower capital expenditures.
We are pleased to resume anti dilutive share repurchase activity in the fourth quarter. Following a temporary pause of the program earlier this year as a result of economic uncertainty due to cope with.
As a reminder, page 15 highlights are primarily long term financial target, 15% our lead over the cycle.
Segment operating revenue growth in pre tax earnings goals. We previously outlined and that are shown here are key components to achieving this target.
As I mentioned before reaching an adjusted or are we have 11% to match our cost of equity is only an interim target.
Slide 16 highlights the key drivers for reaching our long term ROI target.
As illustrated in the chart, we expect to make significant progress towards our target by moving past higher levels of depreciation and tax related to prior residual value estimate changes.
In addition, a cyclical improvement in rental demand and utilization is expected to provide additional earnings benefit.
The remaining improvement needed to reach our orally targets is expected to come primarily from initiatives that include lease pricing increases.
Cost actions, including our multi year maintenance cost savings initiatives.
And accelerated growth in our supply chain and dedicated businesses.
The climbing depreciation impact than higher leasing supply chain results were key drivers to the improvement in adjusted or a week from a negative 9.8% in the second quarter, which is shown on the page to a negative 4.4 in the third quarter.
Turning to slide 17, I'll share the progress, we're making on the five key areas I just outlined.
As expected earnings benefited from a decline in depreciation expense impact on residual value changes.
In addition, improving used vehicle market conditions contributor to the realization of gains on used vehicles sold in the third quarter.
We continue to increase our retail used vehicle sales capacity through the combination of digital investments and physical locations.
We recently launched a new website, which allows our users to access the site from any device.
Our new site offers improved search capabilities to enable users to better find research engage and make purchasing decisions.
The site also includes expanded inventories at additional locations that make it easier for customers to locate the best pre owned vehicle nears to them.
We've opened seven new rider used vehicle sales centers, so far in 2020 and plan to open two more by year end.
In rental we've aligned our fleet size with market conditions, and we're pleased to see utilization improved throughout the third quarter October.
October utilization today, it is trending higher sequentially from September and utilization for the fourth quarter is expected to be in line with the prior year.
In Fms results continue to benefit from our lease pricing initiatives.
Revenue on new leased vehicles increased year over year by mid single digits, reflecting these pricing actions.
We're also beginning to leverage data analytics to further refine portfolio pricing optimization and capital allocation decisions.
Turning to page 18, we're on track to achieve our expected annual savings of 40 million.
2020 from our multi year maintenance initiative, bringing program to date savings to over 50 million.
In July we implemented other cost actions that are expected to result in an estimated annual savings of 50 million.
We also.
Recently took cost actions to curtail future pension benefits for participants that were previously exempt when we froze our U.S. in Canadian pension plans. This.
This change is expected to result in savings of approximately 6 million 2021.
We've also taken various actions to support our strategic goals of accelerating growth in our higher return supply chain and dedicated businesses and are encouraged by the results so far.
We saw a significant increase in sales leads and online traffic writer Dot com following the third quarter launch of our brand awareness campaign.
The campaign highlighted writers broad range of logistics capabilities, including E Commerce fulfillment.
Last mile delivery, warehousing and transportation as well as our visibility technology solutions.
We're encouraged by the continued profitable performance of rider last mile, which provides home delivery and white glove installation for everything from furniture to large appliances.
Revenue has increased by nearly 30% in the quarter driven by new business as well as higher volumes.
We realize the leverage in the wider last mile network and deliver returns well above our overall target from supply chain.
Sales activity was strong as well.
We recently launched <unk> visibility and collaborate collaborative logistics platform writer share.
Is enabling customers to benefit from improvements in productivity.
Labor efficiency.
On time performance and customer service.
Expect demand for writers here to continue to grow driven in part by shippers expecting to increase their use of freight visibility software in a post cobot environments.
We're continuing to invest in our E fulfillment capabilities.
Weve expanded the size or a Pennsylvania location.
Lamenting automation technology that will support the scalability of the operations.
We believe these investments will position us well to leverage trends towards increased E. Commerce activity and are encouraged by the strong sales activity for this offering.
Although economic uncertainty remains accelerating trends towards E commerce fulfillment.
Final mile delivery of big and bulky goods and onshoring of near shoring of manufacturing operations presents rider with a compelling opportunity that were strongly positioned to capitalize on.
That concludes our prepared remarks this morning before.
Before we go on to.
Questions. Please note that we expect to file our 10-Q later this week.
We had a lot of material to cover today. So please limit yourself to one question each.
Additional questions you're welcome to get back into queue, we'll take as many as we can.
At this time I'll turn it over to the operator open up the line for questions.
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Again press Star one to ask a question.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
Well take our first question from David Ross with Stifel.
Yes, good morning, gentlemen.
Hi, Good morning, David Yeah.
Yeah.
I want to focus on the supply chain solution segment first of all.
Last mile is obviously been a good area of growth for you guys and then has benefited this year on the volume side.
Wanted to get commentary run last mile pricing, because it's been a in area due to the fragmentation of the business where pricing really wasn't.
Good enough historically to allow for decent returns in that business.
And then that ties in a little bit to the margin on that Si es and you're you're maintaining the long term target of high single digits, but.
The 10% theoretically sustainable on the margin side to.
Kind of two parts to that one of the last mile pricing into on the <unk> margins.
Let me let me just give you a little bit of an overview and then I'll hand, it over to Steve first round around the broader last month, you know that we made this acquisition a few years ago and Amex day and it was really the reason we did that acquisition was because obviously, we wanted to get into this last mile delivery service and we also.
I really like the model, but I'm actually had which was you know in this environment I think very very efficient and a competitive and was it.
Model that was it was getting good returns.
As you might imagine we're very pleased with the results of that acquisition and especially now in this post go live in a world, where we saw a big increase in demand for this type of service.
The profitability of that business really increased pretty significantly certainly in this quarter, but as we mentioned on last quarter. We now expect that business to be in line with our supply chain earnings.
Earnings targets, which are you know as I know you know in the marketplace I think would probably be best of best in class. So you know it's one thing is the pricing I think the pricing is competitive in that business, but what we find is that with this model, we can be competitive and get good returns for our shareholders.
As far as the sustainability of the Oh, the profitability that we saw in supply chain I'll, Let me comment on that but I think we had we did have a you know some onetime pick ups in the quarter with auto production really coming back as strongly as it did there were no.
Shutdowns and in the <unk> during the summer, which we normally have so we had extra volume there and we also did see other cobot related increases volume increases, which the question is how how sustainable would those be going forward. So Steve why don't you want to add to that.
Yeah, So David back on the last mile piece.
It's Robert said I think the pricing and the market is it kind of stabilized Uh huh.
It was really in our topline growth in laptop a we had a good portion of my books is related to volume, but we had double digit new sales and last mile product.
From a profitability perspective, no as I said on the last couple of calls it.
It is about the continued density in the market.
Yeah, I think we've got a really great operating team that is optimizing our route utilization much better over the last couple of quarters, we didnt think that it's sustainable.
But as we continue to you know we've got to continue to expand our network and a an end game for the density.
Thank you. Your next question was let's see ads I think Robert hit it on the head you know typically it's best to look at our business on a full year run rate or a trailing 12 months Q2, and Q3, typically our best performing quarters, a little bit more color on Q3.
And auto this quarter, we had fewer plant shutdowns than we typically would end of Q3.
We've worked more Saturdays, a this quarter and we expect to see.
Some plant shutdown in Q4 for retooling and new model conversion as we look at the balance of the year. So hopefully that answered your questions.
That's great color. Thank you very much.
Oh, you said.
If you find that your question has been answered you may remember yourself from the queue by pressing the star key followed by the digit too.
Moving on we'll go to Stephanie Benjamin with true yes.
Hi, good morning.
One of the stuff.
[noise], it's kind of a follow up on the used truck.
Yeah based on what you Paul Please keep in October how that used truck market actually improve faster than you expected and if so what are the main drivers of that improvement and really in your view the sustainability of these factors.
Well I'll give you the the simple answer is yes. It did it through a quicker than we'd expected I'll, let John give you some color as to some of the drivers that we're saying in that in terms of the volume.
Mentioned and we mentioned in the release, we had record volume sales in a in the quarter along with with increasing in price and so John you want to get a little more color.
Sure Todd.
So stop somebody what we continue to see is we started seeing it at the tail end of Q2 and into Q3, the freight environment has really opened.
Opened up activity on the retail you'd be outside of what we're seeing as owner operators coming into the market and looking for.
Primarily tractors, but also straight trucks as you continue to see the E commerce space to take off.
Oh, you're seeing a lot of buyers that are coming in and and gobbling up not just one but multiple assets out of time, we did see balint go up to record level as you heard we were up sequentially 40%.
In the quarter I don't expect that to continue at these high levels since we start eating into our inventory and our inventory is expected to be down.
Sequentially from Q3 to Q4, but what I am pretty encouraged by is we're going to see good demand.
With the freight cycle moving forward. So I expect in the short term I expect good pricing activity for both our trucks and tractor pieces and that I expect will carry us into 2021. So overall, we're seeing good activity, primarily driven by the freight cycle and that some of these E commerce activities that are driving higher demand.
Thank you so much.
Hey, Thanks Duffy.
And moving on we'll go to Scott group with Wolfe.
Hey, Thanks morning, guys. So just a couple of follow up on the used side can you just remind us what the depreciation tailwind is for fourth quarter and then for for next year do you have any sense a good run rate for gains on sales going forward and then.
With the improvement in used prices, how closer are pricing today relative to that threshold, where you won't need to cut residuals again. Thank you.
Okay. Let me, let me turn it over to Scott for the can give you the in the depreciation a year over year. It's your depreciation year over year impact a question and then we can get into the used vehicle pricing.
No. Scott this is Scott I appreciate the question well, we put money or last time, there was an expectation for the fourth quarter of 2022 not depreciation.
Of about 100 million, that's that is exclusive of any you'd be up games. So we gave those numbers. It was it was Ah without people, yes, a year ago that number was 148 on a sequential basis.
We're expecting third quarter to come in at 115.
You'd be asking if we came in closer to 100 or so.
That started at the piece that we're not going to be providing guidance on me you'd be up for the fourth quarter, but at least that's what we accelerated in policy expectations are for the fourth quarter.
And then I think I think your second question was what.
Was about how close we are to to not having to make any more adjustments, but the numbers that we had talked about last call about 30%, we needed to improve 30% for tractors and and we needed to improve 10% for trucks.
One of the things that we mentioned on the call or in the prepared remarks is that even though they're not it's not a perfect correlation is it because we do make some adjustments for fleet age and mix, but sequentially pricing was up 9% for both of those so it kind of gives you directionally. We're certainly made some good progress in the quarter in turn.
Getting to those levels or we will no longer have to make any more just and then again, we got two years to get there. So I think it's a it's a it's a pretty strong move in just one quarter.
Okay I'll get back in queue. Thank you.
Alright, thanks, guys.
And next we'll go to Justin long with Stephens.
Thanks, and good morning.
So maybe to just follow up on that question Scott in terms of 2021 has there been any update.
The impact you expect to depreciation from residual value changes and then looking at returns in the targets that you laid out Robert do you have any.
Thoughts about when you could achieve that interim target in the longer term target of 15% or a week.
That's exactly right.
Ours too.
Yeah, well, what what we provided last quarter. So we have not updated that still kind of where we are and what the true that up as we go.
Into 2021, but the expected depreciation policy and accelerated to 2021, well is expected to be 270 million.
And when we gave that and number for 2020 that number was 520, but that was that the second quarter. So was that the improvements that we've made in the in the third quarter. The 2020 number but that would be expected to be lower than what we had provided them the second quarter.
Yeah, and then and then just sit on the timing I think obviously with all the uncertainty of the BARDA right now it's hard to it's hard to pin that down because we remember the waterfall that we show on the earnings deck shows you that the two big drivers are the depreciation be subsiding of the depreciation a hired.
Precision impacts from the residual value changes that's a big.
Contributor to us getting back into that stuff is happening already so we're seeing that continue the snapped back of rental and really having rental come back to more normalized levels and then the initiatives that we're taking around pricing and lease around maintenance costs and around growing our supply chain and dedicated so so those were already see.
Better some of the benefits of that but depending on how quickly. The economy comes back that'll probably dictate how quickly we get there we do still have even as you go into next year.
We're going to see as Scott mentioned, a reduction in the impact of that depreciation from residual probably changes that we're going to get we're going to get a tailwind from that but we're still going to be carrying some pretty significant depreciation expenses out I would call out of period. So as we get into the 2022 is when you.
That that stuff really starts to lighten up some more and then we get into a you know an environment, where you have less impact from that.
So hopefully that helps you.
It does I appreciate the time.
Thanks, Justin.
And next well go to Todd Fowler with Keybanc capital markets.
Hi, great. Thanks, and good morning, what a difference a quarter makes I guess.
Robert I wanted to ask you know on the lease fleets you know I kind of understand the trends that we're seeing near term, but yeah. We're seeing truck orders pick up and I think directionally they spend so correlation with.
Order activity and what you see in the lease fleet and as you look out into 21 and you know how do you think about you know.
Lots around potentially growing the lease fleet persistently initiatives, you're doing on the pricing side, but maybe could tie in some capex comment. It sounds like that you are still expecting you know lower Capex do you have kind of a baseline for capex as we think about 21 with how you're strategically thinking about the lease fleet.
Yeah, I think look it's it's a Todd it's a it's still it's still early in terms of understanding where the economy is going to go but as you've seen orders pick up for Oems. We are seeing some more activity on the lease side, but remember we've said that we're going to moderate the growth of lease going forward. So.
So.
What that means is that we you shouldn't expect to see even in a in a robust environment us growing 10000 units in a year I think you're going to see a more moderate growth rate in a in a in a robust, but if there's a robust environment.
You know we are we are really focused on holding on our pricing initiative and making sure that we're getting the returns that we need in that business in order to two make.
Make those investments so I'll, let John give you a little bit more color.
On what we're seeing now in terms of lease sales and and what we're seeing from the from the market.
Yeah. So Todd what we continue to see is during the quarter. We saw sequentially from Q2 to Q3, a better activity on these sales as you recall in second quarter. We did see a number of customers that really had a tougher decisions as they were evaluating their business condition.
Since going forward when we stepped into Q3, we saw a better environment I think that's reflected in some of the classic numbers that you're seeing and hearing from the Oems.
We expect that freight cycle to move up a as we get into Q4, because we are seeing momentum picking.
Picking up for new vehicle orders on our side as well with regards to next year I think Robert hit I think its still little bit early for us to start signaling towards next year, but right. Now we continue to see is a good momentum from very low levels that we saw in Q2, and we saw that pick up from.
From Q2 to Q3.
Okay. So it's not that you are opposed to grow thats, maybe just more moderate relative to what we've seen in the last cycle. I mean do you have any directional thoughts on capex at this point were 21.
No not yet thought I think remember we set our long term goal for Fms is at least as kind of a mid single digit.
Top line growth. So if you just if you think about it long term it's that would be you know maybe maybe three to 4000 units a year over the over the cycle those what we're probably looking at but no. We don't have any anything pin down yet for next year.
Okay sounds good thanks for the time this morning, I'll jump back in <unk>.
Yeah. Thanks, Doug.
[music].
And next we'll hear from Brian Ossenbeck with J.P. Morgan.
Hi, Brian Thanks for taking the question good.
Good morning.
Just say I guess, a couple of follow ups on the whole the talked about already I know, you're not giving guidance to used vehicle sales gains in the fourth quarter, but it seems like if you strip, we should think that moderates a bit coming off the record level from here, obviously pricing dependent so just wanted to make sure that was a reasonable expectation and then just more on the pricing just talked about.
Give us some sense of how those initiatives are going in the market how they've been received if there's any competitive response you know as you look to maybe segment some of the pricing opportunities optimize the portfolio.
And hold the line on that mid single digit on renewal.
Yeah, I guess you know your first question around used vehicle sales I think the.
The pricing.
That's kind of been holding up in terms of just because I saw a nice increase sequentially. So as we go into the fourth quarter. We don't have any indication right now that's going to change I would expect that to continue volume's, however will be lower.
I would expect as we where our inventories are low we had our inventories were at pretty high levels going into the third quarter. They are coming down and by the end of the third quarter, we should be within our target range. So I would expect you know we'll be selling fewer vehicles, probably in this quarter than we did in the third but still a pretty healthy level and I guess more importantly, I would expect this to we're gonna be selling more through retail unless.
The wholesale so that mix is going to help us overall so on the on the used vehicle results in terms of lease pricing I think it's still too early to tell you know we have done a lot of redeployments and John and his team have got a lot of redeployments. This year oh of vehicles coming out of rental and idle vehicle.
Those are so new capital goods and very limited as you can see from our Capex numbers.
In this in the deals that we have gone after and site you know we've been able to get the pricing, but I think as we get into next year is going to be a better test of how that goes and and we do play in a pretty rational markets. All respect the market over time is also going to move in that direction.
All right. Thanks, Robert I appreciate it [noise] sites.
That's right.
And next we'll hear from Jeff Kauffman with <unk> capital markets.
Thank you very much well congratulations just terrific to see a turn around like this in the markets.
I want to follow up a little on top sellers, a capex question and I know, it's early to think about 2021, but maybe if we could think about it this way.
If you decided just to hold the fleet today.
Before we think about the growth of 3000 to 4000 units that you would want to do you know.
Normally in a cycle in Fms.
And we just looked at replacing and holding fleet count study what kind of capital.
Pending would that be.
Thanks, Jeff for the question a replacement Capex I believe is about a billion billion five.
Scott you got that number.
Replacement Capex.
None of those yeah, yeah, I'm not calling for and then you had a jump you would have a little bit on on the rental side. So rental quarterly expenses of the de fleeting not to be a historical level. So we would expect to have a little bit of increase.
You every year in some of the rental capex.
Yeah, No I would agree with that I I was just thinking if if we're still de fleeting and the first part of the year and may be re fleeting and the second part of the year. If I just decided to call. It flat you know what would you be spending and that's a gross figure right. That's not that of any sales of equipment or is that in that figure a billion five.
But that's a gross number.
Okay. That's what I thought it's that's that's my one question. Thank you [laughter] okay.
Okay. Thank you.
And Stephanie Benjamin with Trust has a follow up.
Hi, Thank you on the commercial rental side. He said in the past that this has been a leading indicator on the demand side, So would love to hear a little bit about what you're seeing as that business has improved and October existing fueled by some of the ecommerce driven highly customized or are you seeing.
And broader improvement.
Well, that's a great question spoke there when they when they let John give you some color on what we're seeing which sectors were seeing a pick up in Ah but.
But it is typically a leading indicator because as the economy starts to come back customers will come in rent trucks before they go out by at least a and as there's more uncertainty you're going to see rental also do well because.
You know customers aren't willing to put down the capital yet so they're going to run initiatives. So John I'll, let you give us some color on that.
Yeah, what we what we've seen during the third quarter and that's picked up but going into Q4. It is you are seeing certainly the freight environment pick up so our tractor classes.
Our back to a normal utilization levels and demand continues to.
To be strong they're now from September into October I think the one industry that you are seeing a pick up then up without a doubt is it the parcel space with E Commerce, which you mentioned Stephanie that's driving a lot of activity for the light duty space to balance that I will say, we still see.
A little bit of a drag on the event side. So some of the straight truck market is still being impacted by co with.
You're seeing also the restaurant side of the house with refrigerated straight trucks also lagging, but I would tell you E commerce the freight environment, what we saw in the auto during the quarter and then some of some of the other segments that have picked up sequentially from Q2 to Q3 and and really during the quarter it kind of sequentially.
Picked up through the quarter. So I'm very encouraged by that I think are for Q4 is going to be a good demand environment. As we mentioned, we expect our utilization to be back in line with prior year.
And then again, we'll see what what 2021 friends forward as we get deeper into the core.
Great. Thank you.
Hi, good stuff.
Well return to Scott group with Wolfe for a follow up.
Hey, Thanks for the follow up on I was wondering Robert if maybe that's some directional thoughts on some of the the broader puts and takes for next year. So it feels like used and rentals should be tailwinds.
Well, maybe I'm just thinking about some of the other parts.
The contractual business more broadly do you think about that as a tailwind or headwind next year, and then anything either good or bad on the cost side I know, we've had some figures and strategic investments that should we expect another year of that next year does that start to go away just any thoughts and some of the other parts here. Thank you.
Yeah, I think you hit the two big ones rental and used vehicle sales I would expect as we get into next year. If we if we keep on this trend will be we'll certainly be tailwinds or are under contractual side supply chain dedicated a certainly a continuing to grow and provide some some tailwind also.
On the lease side it depends how much we grow but lease will well be you'll see a benefit outside of the depreciation piece, you'll see a benefit based on the amount of growth we get but then we've got initiatives around maintenance cost and and other cost initiatives that are going to help us.
On the on the headwind side, I think you're going to see obviously, we will continue to have investment, especially in around our supply chain business as we invest in things like rider share a and some of the technologies that we need to make sure that we continue to have a leadership position there.
And then also you're going to have just a normal inflation.
Inflationary type costs that we come across a within the businesses each year, a you'll have back.
That as we go into next year I mean, those are kind of the big picture items as we go into a 2021 that we're going to see but again, it's it's still too early I think with everything going on we've got an election coming up we've got a lot of uncertainty going into next year. You know we'll be in a much better position to talk about that in February.
Okay very helpful. Just one just really quick one just as we're back to sort of positive earnings, but what's the right tax rate going forward.
Scott you got a [laughter], yeah give me given kind of.
The uncertainty that we're going through.
You know if you look at our tax rate would have had a tax benefit on a year to date basis tax expenses third quarter.
So this year, it's kind of hard to kind.
Kinda give you that precision without without providing guidance.
Think about what Weve talked about in the past you know we that the tax rate has been you know over the last couple of years needed a little bit because of the depreciation charges that we've been taking but on a on a kind of a normalized basis.
You know how kind of kind of where we are this year on a normalized basis, you've talked about being in the high Twentys low thirtys.
Based on you know the income levels for the company.
Okay. Thank you.
Hey, Scott one other thing I would add is that.
To be a tailwind next year, we can't forget is temporary cost savings from Covance.
That we had in this in the second quarter primarily.
Primarily but you know were a lot of people are thinking through the benefits of co. But they're also work you know, whether it's travel or or a medical expenses that as that begins to maybe not go back to where it was pre covert that just starts to lift up a little bit next year I I see that as another item that we could we could be facing.
Okay. Thank you.
Okay, all right Scott Thank you.
Well return to Justin long with Stephens par I follow up.
Hey, Thanks for taking the follow up I had one on dedicated I know you called out the one time gain from a customer contract termination could you help us quantify what that impact was in Threeq you, maybe some more color around what happened there and any impact from.
That going forward.
Yeah that that was a customer that we had in dedicated who changed modes. They went from dedicated to a different mode of transportation more of an LTL pricing model and as a result of that we sold the equipment to the follow on provider and there was a gain on sale.
Ill about equipment. So that's sort of what that is and it was really not a change that other dedicated provide a bit more of a change in in both for that for that customer.
Gain on sale, but it was a couple of million dollars.
Okay. That's helpful and I know, you're not giving specific guidance for the fourth quarter, but you know when you kind of put together all the different moving pieces you discussed.
On the call is your expectation that adjusted earnings are down sequentially in the in the fourth quarter, just maybe some directional commentary might be helpful.
Yeah, Directionally I would expect it to be down somewhat the degree of which it will be dependent on a lot of different things that are still you know depending what happens to the economy, but we would do we would expect it to be down some in the fourth quarter, but then as we go into next year I think the important thing is as we start to continue to get the.
Tailwinds from depreciation and <unk> and the benefits from the used vehicle market continuing to be solid and and rental you're going to start to see that a you know over over a year period, you'll see already talking about starting to come back up so some seasonal decline in the fourth quarter, but then you know as we go into next.
Sure, we'll feel we're feeling really good about where earnings are growing.
Great very helpful. Thanks again.
Thank you Justin.
And well go back to Todd Fowler with Keybanc capital markets for a follow up.
Great. Thank you. So just just two last quick ones for me on.
You share with us in the past that every 100 basis points or frankly utilization is about a million dollars pretax there's definitely out still hold if we think about the utilization increase instead of fourth quarter, given the size or whether the rental fleets out right now.
Yes, good solid minutes, but.
Right.
Hi, John Todd Todd. This is John just a yeah I think the 100 basis points still works and as I mentioned earlier, we do expect Q.
Q3 going into Q4, we expect that Q4 utilization could be at <unk> last year or.
So youre going to see a pickup there sequentially from Q3 to Q1 the rental performance.
Okay that helps and then just one kind of theoretical one I guess you know in the past the policy depreciation adjustment. It seemed like it was something that was done more annually now you kind of had this you know to your bogey out 30% price increase from where you were in the middle of this year.
What would kind of trigger the potential did you have to look at the policy depreciation again, I mean is it as long as the used equipment values are moving towards that that 30% mark on the tractor side or be able to stop and take a step back I guess, how do we think about the potential for a policy agenda, that's where at some point in 2022.
Okay 23 on the job.
Scott you want to play sometimes you're [laughter], yeah, you're correct, it's normally a.
No process, we had a couple of them adjustments because of some of the circumstances. The one last year was based on me looking kind of the trends and then this year. It was really based on Cobi. So I. You know you mentioned doesn't see we're encouraged by the trends we were seeing from a perspective of sequential pricing improvement, especially.
Actually on the tractor side.
So that is.
I'm getting that that the gap between the 30% we've talked about in the second quarter and kind of where its trending. So I think those are all positive factors as we think about going.
Going forward.
Our expectations around policy.
So we will do that easily due at the end of this year well continue to do that going into the following years, but the trends are looking at now encouraging from that perspective.
Okay. So it sounds like maybe we'd have to be something significantly different in the trends or what your expectations were.
Correct.
Great. Okay. Thanks for the time and the follow up.
Hey, Let me let me let me just add to what are the Justin's question on the fourth quarter forgot to mention which I mentioned in the script that we do have the 30 million dollar expenses for the bonus to the non bonus civil frontline employees. So that's a key contributor to why we look at Oh, why we think.
Earnings will be down in the fourth quarter versus the third I get it's a onetime item.
And at this time there are no additional questions I'd like to turn the call back over to Mr., Robert Sanchez for closing remarks.
Okay, well. Thank you everybody. Thanks for being on the call again were excited on number one is a return to profitability and and really seeing the benefits of a of them not only an improving environment, but also the actions that we that we've been taking a conservative take so thanks, everyone look forward to speaking with you guys and so.
Stay safe.
And that concludes today's conference. Thank you all for your participation.
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