Q2 2021 Ryder System Inc Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to the Ryder system second quarter 'twenty.
And 1 earnings release conference call all lines are in a listen only mode until after the presentation.
Today's call is being recorded if.
If you have any objections. Please disconnect at this time.
I would now like to introduce Mr. Bob Brunn, Senior Vice President Investor Relations.
<unk> corporate strategy and new product strategy for Ryder, Mr. Brunn, you may begin.
Thanks, very much good morning, and welcome to Ryder second quarter, 2021, and earnings conference call I'd like to remind you that during this presentation, you'll hear some forward looking statements within the meaning of the private Securities Litigation Reform Act.
And in 2000.1995.
These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations due to changes and economic business competitive market political and regulatory factors.
More detailed information about these.
And a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release earnings call presentation, and and Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and John D.
And he is executive Vice President and Chief Financial Officer. Additionally.
Additionally, Tom Havens, President of Global Fleet management solutions, and Steve sensing President of global supply chain solutions and dedicated transportation.
On the call today and available for questions. Following the presentation at this time I'll turn the call over to Robert.
Factors and we wanted and thanks for joining us.
Before we begin I'd like to recognize John <unk>, who is joining this morning's call and his new role as CFO.
John was most recently president of fleet management solutions and brings a wealth of experience for the CFO role, having held various senior operational and financial roles during his.
Yeah.
Tenure at Ryder.
I'd also like to welcome Tom Hayes.
Who was recently appointed a president of fleet management solutions for his first earnings call.
Tom brings a great depth of experience to the leadership role at up my mess from his 28 year career at Ryder, having most recently served as senior Vice President.
President and global Chief of operations for the Fms business.
On today's call I'll begin with a strategic update followed by a discussion around the investments, we're making to accelerate growth and our supply chain and dedicated businesses.
John will take you through our second quarter results, which exceeded our expectations.
I'll then review our updated outlook for 2020, 1 discuss the significant progress, we're making on actions to achieve our ROE target and.
And review our initiatives to mitigate the impact on future cyclical downturns on our business.
Following our prepared remarks, we'll open the call for questions with that let's turn to our strategic.
T J D.
Secular trends continue to support our strategy to accelerate growth and our supply chain and dedicated businesses, while targeting moderate growth and increased returns and our fleet management business.
We're seeing strong sales and pipeline growth across all our businesses driven by secular trends that favor.
Outsourcing as well as increased focus by customers on supply chain resilience.
Resiliency and the use of innovative technology solutions.
Trends that we saw accelerate during the pandemic such as e-commerce and the demand for last mile delivery of big and bulky items.
<unk> strong and <unk>.
With strategic investments, we're making and these fast growing areas.
We remain focused we remain focus on increasing returns and are pleased with the significant progress were making to achieve our Roe target.
Multiple years of lease pricing increases that began with a focus on derisking our portfolio through.
Support for residual assumptions and cost updates are benefiting returns.
Most recently, we began implementing additional pricing actions to improve future lease returns using data analytics around customer segmentation application equipment type and other key drivers of lease returns.
Strong freight conditions combined with our initiatives resulted in better than expected results and used vehicle sales and rental.
We're seeing the benefits of dynamic pricing and used vehicle sales and rental as well as our prior investments to increase retail used vehicle sales capacity.
We now expect to achieve our ROE.
And the range of 16% to 17% this year above our long term target of 15%.
Later in the call will review additional enhancements, we're making to our playbook to improve returns over the cycle.
Moving on to cash flow our year to date for free cash flow was $602 million down 10 million from the prior year.
Here is higher vehicle capital spending was largely offset by higher proceeds from the sale of used vehicles and property.
We're increasing our full year free cash flow forecast for <unk>.
$6.50 million to $750 million up from 400, and $700 million primarily to reflect the anticipated impact from delays.
Our new vehicle deliveries from the Oems.
We're encouraged by our performance and by the markets the market trends, we're seeing and the areas that we're investing for future growth.
We continue to invest in technology and other areas to address industry disruption and in order to enhance our business model and position the company for long term success.
Slide 5 provides an overview of the investments, we're making to drive accelerated growth and our supply chain and dedicated business a key element and our strategy to generate higher returns and long term profitable growth.
Developing new and enhanced products, such as Ryder last mile E Commerce fulfillment.
And freight brokerage is critical for us to leverage growth trends and supply chain and dedicated.
Innovative technology enables us to deliver value added logistics solutions that are in high demand.
Ryder share our visibility and collaboration tool is a strategic differentiator for us and its capabilities and have moved.
And of our sales discussions.
Ryder view is our proprietary customer interface that supports self scheduling and delivery execution for Ryder last mile.
Enhanced order management and fulfillment software supports our growing presence and ecommerce fulfillment.
Sales and marketing.
To the effectiveness is key to our brand awareness and communicating the broad array of logistics and transportation solutions, we offer.
Our ever better campaign and increased digital marketing presence have driven an increase and qualified sales leads.
We're also expanding our sales force and investing and the capabilities and their capabilities.
And to drive additional growth opportunities.
Ryder ventures, our corporate venture capital fund.
Aims to invest 50 million over the next 5 years through direct investment and startups, primarily where we can partner to develop new products and services for our customers we've invested in areas, including E Commerce.
Micro fulfillment.
<unk> enables hub and spoke transportation network, and and AI enabled dispatch product for small to medium sized fleets.
In addition, we continue to evaluate strategic M&A opportunities focused on adding new capabilities geographies and our industry verticals, which we view.
You as another important way to accelerate growth, especially in our supply chain and dedicated business.
Slide 6 takes a closer look at Ryder last mile, which provides final mile delivery of big and bulky goods through a nationwide network of hub and agent locations that service every Zip code and the continental.
The U S.
The Ryder last mile operating was launched in 2018 as a result of a strategic acquisition.
Since then online purchases are big and bulky goods, such as furniture exercise equipment and home appliances and accelerated driving demand for a seamless home delivery experience.
We've been.
<unk> been pleased with the strong revenue growth and Ryder last mile.
Writer Ryder view is our proprietary customer facing technology and.
Allows consumers to self schedule their deliveries and provide them providing them with real time delivery updates.
Our centralized customer support team is.
And the execution of a qualified delivery experience, we carefully monitor customer delivery feedback to ensure that service levels are maintained.
We're making strategic investments and in this area in order to continue to enhance the capabilities and customer experience for this important product offering.
We're enhancing ryder abuse capable.
Abilities and plan to launch version 2 point out later this year and.
Enhancements include easier and more convenient self scheduling and rescheduling of deliveries as well as the option to schedule the deliveries at the point of sale.
We're enhancing the software used for the for.
Delivery route optimization.
We're also rolling.
Rolling out a customer experience that is branded for our customers. The retailer. So so that Ryder view 2.0 serves as an extension of their brand.
We continue to expand our geographic footprint in order to places closer to the end customer and improve delivery speed and we recently announced.
The addition of 2 new fulfillment centers and Milwaukee and Philadelphia.
In addition to future geographic expansion.
We'll also look at opportunities to add new services capabilities or industry verticals through strategic M&A or Ryder ventures.
Or.
Confident that Ryder viewpoint O will be a market differentiator that will enhance the customer experience and propel further profitable growth for Ryder last mile.
Now I'll turn the call over to John to discuss second quarter results.
Thank you Robert total company and results for the second quarter on page 7.
Parison reflect COVID-19 effects and the prior year, which most significantly impacted second quarter, 2020 results and used vehicle sales rental and SCS automotives.
All which have recovered quite well since then.
Operating revenue of $1.9 billion in the second quarter increased 18% from.
And the prior year, reflecting double digit revenue growth across all 3 of our business segments.
Comparable earnings per share from continuing operations was $2.40, and the second quarter.
As compared to a loss of 95 and the prior year.
Higher earnings reflect improved performance and Fms.
And on the sales used vehicles a day.
Declining depreciation expense impact related to prior residual value estimate changes.
And improved rental and lease results.
Return on equity increase reflecting the declining depreciation impact higher gains and improved lease and rental results.
From <unk>, we expect continued improvement and our primary financial metric as we move past the earnings impacts from prior residual value estimate changes and Covid.
And contain a benefit from our actions to increase returns.
Year to date free cash flow was 602 million the low prior year.
Yep.
Yeah.
Turning to <unk> results on page 8.
Fleet management solutions operating revenue increased 14%, primarily reflecting higher rental and lease revenue.
Rental revenue increased 58% driven by higher demand and pricing.
Rental pricing increased by 13%, which is significantly higher than we've seen historically.
Reflecting pricing actions taken over the past year prior.
Prior year, Covid effects, and a larger mix of higher return pure rental business and the current quarter.
Choice lease revenue increased 5%.
And collecting higher pricing and miles driven partially offset a smaller fleet.
Fms realized pretax earnings of $158 million are up by 262 million from the prior year.
100.
Rental utilization on the power fleet was 80% on the quarter significantly above the prior year of 56%, which included Covid impact and was close to historical second quarter highs.
Fms EBT as a percentage of operating revenue was 12, 9% and the second quarter and surpassed the companies.
Long term target of high single digits for.
For the trailing 12 month period it was 6.3.
Primarily reflecting higher depreciation expense from prior residual value estimate changes.
Page 9 highlights global used vehicle sales results for the quarter.
Used vehicle market conditions continue to be robust with strong demand meeting tight supply globally.
Globally year over year proceeds were up 73% for tractors and 72% for trucks.
Sequentially tractor proceeds were up 22% and truck proceeds were up 27% versus the.
Quarter.
Higher sales proceeds primarily reflects significantly improved market pricing.
As you may recall in the second quarter of last year, we provided a sensitivity, noting that a 10%.
Rice increase for trucks, and a 30% price increase for tractors and the U S would be.
First by 2022 in order to maintain current policy depreciation residual estimates.
Since the second quarter 2020 U S truck proceeds were up 59% and tractor proceeds were up 67%.
Although these increases are not age or mix adjusted they are generally indicative.
Neither pricing improvements that have occurred since the second quarter of 2020.
As such with these improvements average pricing and the U S for trucks and tractors is above for residual values.
Slide for depreciation purposes.
During the quarter, we sold 6000 used vehicles down 5%.
For the prior year, reflecting lower trailer sales.
Sequentially sales volume declined due to lower inventory levels.
Used vehicle inventory held for sale was 4003 hundred vehicles at quarter end and is below our target range of 7000 to 9000 and vehicles.
Inventories down by 90.
Versus 700 vehicles from the prior year and down by 1900 vehicles sequentially.
Turning to supply chain on page 10, operating revenue versus the prior year increased 32% due to new business and increased volume.
And COVID-19 effects and the prior year.
<unk> growth was driven by double digit percentage increases in the automotive retail consumer packaged goods and industrial sectors.
S U S automotive business experienced intermittent customer plant shutdowns and the quarter due to a global shortage of parts.
We have included an estimated impact from potential shut.
<unk> balance of year forecast as the situation remains fluid.
Etsy has pretax earnings increased 11% benefiting from revenue growth, partially offset by strategic investments and marketing and technology as well as increased incentive compensation and medical costs.
S C S E T.
And as a percent of operating revenue was 7.7% for the quarter and below the company's long term target of high single digits. However.
However, it was 8.2% for the trailing 12 month period in line with our long term target of high single digits.
<unk>.
And our dedicated on page 11, operating revenue increased 12% due to new business and higher volume.
Revenue growth from new DTF business can be largely attributed to wins from competitors and private fleet conversions.
EPS earnings before tax decreased 38%, reflecting.
Moving to labor costs, and higher insurance expense and strategic investments.
Labor costs are being impacted by and exceptionally tight driver market driver.
Driver turnover is up significantly and open positions are taking longer to fill them.
We're working with customers to adjust rates where needed to recoup the incremental wage and other.
Increased this will take some time to address.
We're also continuing to implement automatic contract triggers that allow for more real time wage cost adjustments.
We've increased our recruiting head count and remain focused on maintaining a quality work environment, where most drivers get home every day, while providing competitive.
Costs and benefits.
Our strategic investments are positively impacting sales performance and we expect this to provide accretive earnings and the future.
<unk> as a percentage of operating revenue was 5.1% for the quarter. It was 6.9% for the trailing 12.
Wagering for low or high single digit target.
Turning to slide 12.
Lease capital spending of $501 million was above prior year as planned due to increased lease sales activity.
Lease returns are benefiting from price pricing initiatives.
On pier Port and more normalized lease capital investment.
Rental capital spending of $397 million increased significantly year over year.
Reflecting higher planned investment and the rental fleet.
We plan to growth and rental fleet by approximately 13% in 2020, 1, mostly and light and medium duty.
And for Us.
In order to capture increased demand and expect it from strong e-commerce and frame market activity.
Our full year 2021 forecast for gross capital expenditures of $2.2 billion to $2.3 billion is at the high end of our initial forecast range and as shown in the chart at the bottom of page.
This is up from 2020, when spending was well below normalized replacement levels, primarily due to COVID-19.
Turning to slide 13, our 2021 free cash flow forecast is increased to a range of 650 to 700.
Vehicle million dollars from our previous forecast for $400 million to $700 million.
This reflects the expected impact from OEM vehicle delivery delayed due to the chip shortage.
2021 forecast and free cash flow was below prior year's record level under COVID-19 conditions, but it's well above our historic levels.
It also reflects our strategy to balance growth and the capital insensitive Fms business with generating positive free cash flow over the cycle.
Balance sheet leverage this year is expected to finish below 250%, which is the bottom end of our target range.
Importantly, as Robert mentioned, we now expect.
To achieve ROE of 16% to 17% this year with a declining depreciation impact and a stronger than expected recovery and the used vehicle sales market.
Rental demand recovery and lease pricing initiatives are also expected to contribute to our increased our forecast.
Higher year to day comparable EBITDA, which excludes the impact of gains and losses on used vehicle sales reflects revenue growth and improved operating performance.
I'll turn the call back over to Robert now to discuss our outlook. Thanks, Joe.
Turning now to our EPS outlook on page 14.
We're raising.
Our full year comparable EPS forecast to 7 and 20 to $7.50 from our prior forecast of $5.50 to $5.90, and well above our loss of 27 and the prior year, which included Covid effects.
We're also providing a third quarter comparable EPS forecast of $1.95 to 205.
Significantly above our prior year of $1.21.
And third quarter earnings are expected to be down sequentially, reflecting lower expected gains from fewer used vehicles sold due to lower inventory levels as well as.
The estimated impact on Ses automotive.
Chip shortage and plant retooling.
And our forecast assumes that strong freight and economic conditions continue into 2020, 2 and a continuation of the current tax policy.
Lease rental and used vehicle sales performance are the key drivers of higher expected results, we expect lease to benefit from our pricing actions increased.
Increased sales activity and improved operating performance, we also expect pricing and rental and used vehicle sales to remain strong we're forecasting quarterly gains around 35 billion for the balance of the year, reflecting higher pricing, partially offset by fewer vehicles sold due to low inventory levels.
And F M S.
Initiation and impact from private residual value estimate changes and is expected to continue to decline.
Resulting in a year over year benefit of approximately $40 million and the third quarter of 2021 and.
This benefit does not include any potential impact from gains or losses on sale or valuation adjustments.
The decelerating outsourcing trends and supply chain, including growth and e-commerce and last mile delivery support strategic investments and new products and technology aimed at driving future growth opportunities.
We expect labor markets to remain under pressure, particularly with drivers.
Private fleets are also experiencing this pain.
Which we expect will continue to drive additional sales opportunities for our dedicated offering.
We are focused on initiatives to attract and retain drivers and be the employer of choice and.
Supply chain and dedicated we're on track to meet or exceed our high single digit revenue growth targets.
Supply chain and dedicated.
Returns are also anticipated to be impacted by higher labor costs, as well as strategic investments and new technology and our brand awareness campaign.
We expect supply chain margins to decline and the back half for the year from the second quarter levels due to the impacts of ship chip shortages.
And plant retooling.
Point, certain OEM automotive automotive Oems.
Finally, the semiconductor shortage is expected to delay the delivery of some vehicles and Fms, we expect the impact of delivery delays to be offset by higher lease sales activity and the first half for the year as well as higher rental utilization and pricing.
Turning to slide 15.
To provide a brief reminder, regarding our planned actions to increase returns and achieve our ROE target.
As shown on the chart. The biggest driver is moving past higher levels of depreciation impact.
And to prior residual value estimate changes.
Slide.
<unk> 16, and highlight the progress we're making on the 5 key areas from the prior page.
Strong used vehicle market conditions are expected to continue in 2020, 1 and we're capitalizing on those rents on those trends and pricing actions and our expanded retail sales channel.
We expect the earnings benefit from the decline and depreciation.
<unk> and impact to continue.
And rental strong year to date performance and our planned rental fleet growth are supported by strong pricing and demand trends.
And Fms results continue to benefit from our lease pricing initiatives.
Revenue on leased vehicles increased year over year by mid.
Reflecting these pricing actions with additional opportunity going forward as we replace expiring leases at higher pricing levels.
Our multiyear maintenance cost initiative delivered more than $50 million and annual savings through the end of last year and we are on track to achieve an additional $30 million.
Single things in 2020.1.
Cost actions also include exiting underperforming assets and location and locations that we expect will can and will improve our long term returns.
We're investing and strategic initiatives to accelerate growth and our higher return and supply chain and dedicated businesses.
Slide.
Slide 17 provides an updated view of the expected performance of our lease portfolio as a result of the pricing actions taken.
Substantially all leases with the exception of those site and 2013 are expected to perform above our target return.
The leases signed in 2013 represent only 8% of.
Our lease fleet.
The majority of the power fleet and this cohort will be replaced and the balance of 2021at higher pricing.
As a result of our pricing and cost actions since 2014 as well as the analytics driven pricing changes we are incorporating now we expect the returns on our lease portfolio.
Folio to continue to increase as the portfolio turns over to more recent and higher returning vintage years.
Although we.
We are encouraged that we expect to exceed our target of 15% in 2020..1 we remain focused on taking action additional actions to position our business digitally.
And to generate long term returns of 15% Roe over the cycle.
As such we are implementing actions to mitigate the impact on returns from future cyclical downturns.
These actions include maintaining balance sheet flexibility through a disciplined capital allocation strategy that will enable us to pursue higher return on investments.
<unk> and strategic M&A opportunities as well as share repurchases.
And choice lease, we're replacing certain lease vehicles prior to contract expiration during an up cycle in order to reduce the number of used vehicles that we need to sell during a downturn.
And rental we're planning to shift our asset mix.
And for better returns by growing our light to medium duty truck fleet.
As we view this asset class is less susceptible and heavy duty tractors to the impacts of the freight downturn.
This quarter, we completed an analysis of our residual values and life expectancies of our entire fleet, which included.
Among other factors reviewing vehicles by class condition expected sales availability of equipment and technology changes.
As part of this review, we also factored in a potential future cyclical downturn on used vehicle prices.
As a reminder, in recent years, we significantly.
And we lowered the residual value estimates for our entire fleet to a level, where it used tractor pricing prices have only been below these estimates and.
For the last 21 years.
However, based on our most recent analysis, we made and additional modest reduction and residual values primarily for certain tractors.
This change is intended to further reduce the probability of losses or need for accelerated depreciation during a potential cyclical downturn, even if tractor pricing returns to historical trough levels like they did and the early 2 thousands and in 2020.
We expect these changes will increase depreciation expense in 2020.
And by $18 million, representing approximately 1% of total depreciation expense for the year.
That concludes our prepared remarks. This morning before we go to questions. Please note that we expect to file our 10-Q later today.
We had a lot of material to cover today. So please limit yourself to 1 question each if you.
You have additional questions you're welcome to get back in the queue and we'll take as many as we can and.
At this time I'll turn it over to the operator to open up the line for questions.
Yeah.
Thank you and he would like to ask a question. Please signal by pressing star 1 on your telephone keypad if you're on.
The other thing on speaker phone, please make sure youre on mute.
1 is turned off to allow your signals for each of our equipment again press star 1 to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll first hear from Scott Group with Wolfe Research.
Function Hey.
Thanks, Good morning, guys for.
And so help us I think and the beginning of the year you talked about a $4 tailwind to earnings this year from depreciation and gains where where are we now and I'm just trying to understand how much of the guidance is reflective of abused.
Pricing improvement and.
Much as is beyond that and then.
Maybe to that last point you were trying to make Robert if we assume that used prices fall next year not to trough levels, but just something a little bit more and more normal can you just talk about the puts and takes of.
Gains on sales probably down next year, but.
And how depreciation go up or would that still be going down next year as an offset I think we're just trying to understand that the ability to grow earnings again next year, if used prices start to normalize and thank you.
Let me answer the back half for that question and I'll, let John answer the first part of the question in.
In terms of where we are on used truck pricing and what happens what happens next year.
Obviously used truck pricing is.
<unk> has gone up this year and continues to go up so we would expect the we would expect that.
Pricing.
And the market to continue to go on through this year and into next year.
Here is whats driving.
That is certainly an improving economy with a limited number of new trucks being able to hit the market with among other things for semiconductor shortage hampering that so I don't see that getting resolved here and the next 6 months I think that's going to continue and it usually takes a while for that to bleed through so as we go into next year I would expect to still have.
Relatively strong used truck market.
But assuming that used truck pricing were to slow down at some point, which it will at some point.
And what the way you should look at it as that gains will come down right and so whatever the gains we get into next year It will come down.
But we.
The net.
Changes that we've made around our residual values and the likelihood of having to take any type of accelerated depreciation or any type of loss has been greatly reduced.
Talking about and we've lowered our residual values significantly and <unk> and 19 and again in 'twenty and now we've taken some additional.
And action that will reduce tractor residuals.
For certain tractors down to trough levels, so even at a trough level for those vehicles, we would not be taking losses or additional accelerated depreciation. So so if you think about this year of $150 million and gains.
$150 million and games.
This.
This year as.
As we go into next year Youre going to have a benefit of less depreciation expense from the from the residual value changes that we made of it was 100 million now were at $85 million. So it's gonna be $85 million of benefit next year on depreciation and so you could you can do the math on on what happens.
Additionally.
And if gains were to come down 85 million, you've got an offset of $85 million from the benefit that youre going to get on the roll off of depreciation and so your earnings and would be flat. So that would be cutting your that'd be cutting your your gains on about in half and you'd still be flat in terms of.
Year over year impact of depreciation and gains and let me hand, it over to John and I answered. The first part of your question, Yes. Its Scott Let me walk you back the guidance. We had provided at the beginning of the year was a roll off of the depreciation.
Residual value estimate.
And that changes that we have made up about a benefit of $220 million year over year in 2020.1.
And that number if you look at the tables for presenting we're projecting that benefit and out of the year over year about $180 million.
And so slightly below the beginning of year for cats, and and that's really attributed to changes and the fleet.
Fleet over the last 6.
6 months, so that gives you some perspective keep in mind our gains as you heard from Robert are significantly higher than what we had forecasted or baked into our beginning of year forecast.
Through the year, and and we're projecting that to to finish about 150 million.
For year.
Okay Super helpful can I, just clarify 1 thing that I think.
Help.
How long or how much how much of a decline and used prices next year would.
Equate to an $85 million drop and gains is there a good rule of thumb.
Okay.
Well Scott what you can look at is if you look at our proceeds levels, they're typically and that $500 million level were up to $600 million.
So a 20% drop there.
In and proceeds will give you kind of the equation there but for 80.
For the $1 Youre looking at a more severe drop right youre going to youre going to be looking at close to.
A 15% drop and and pros and that would be and just to be clear Scott that would be across all classes trucks and trucks and.
And on track as well you have more of the volatility historically is around the tractor class. So you assume that attractive.
5 and would have to drop.
Double that in order to make up to make up $85 million.
Okay.
Okay. So it sounds like you think the net of it is it's still likely that we'll have a used a net use tailwind in.
And 22.
Net sales, Brian well early.
Trackless help it from where we sit today, yes.
Okay. Thank you guys appreciate it.
Thank you for Scott.
And if I and your questions have been answered you may remove yourself from the queue by pressing the star key followed by the digit too.
Early the next we'll hear from Todd Fowler of Keybanc capital markets.
All right great. Thanks, and good morning, Rob.
Robert at the end of your prepared remarks, if I understand correctly, it sounds like that youre, saying that theres, a additional $18 million of depreciation coming and this year and it sounds like that that's the policy depreciation.
And I guess number 1 did I get that right and the number 2 kind of building on what Scott was asking about if we follow that through into 2022 is there additional policy depreciation that's coming in next year that offset some of the $85 million benefit on the on.
On the accelerated side.
Yeah, that's the plan and your way to think about it and.
The ATM, though and you can think about it as policy, it's more of our longer term view and again, it's really we've talked about what other things that we could do to mitigate future.
Accelerated and losses and this was on additional steps that we've taken based on our ability to for you now have more visibility around cycles.
But to answer.
Additionally, as an additional headwind. It is included in the 85 million estimate and I. Just gave you. So if you think of what we had originally set 100 million now it's $85 million.
Okay perfect. Yeah. So that's the bridge there so that helps okay. Good. Thank you and then just on the.
And the strength here and rental and the quarter the 80% utilized.
Answer your question.
Is there a way to kind of tease out how much of that you think is cyclical demand versus how much of that is either.
Either customers waiting for for lease vehicles due to some of the constraints on the OEM side and what are your expectations for utilization and lease pricing and guidance as you move into the third and fourth quarter. Thanks.
Yeah, I'll, let Bob give you a little bit more color on that and the second but I'll tell you the rental and rental demand is very hot right now.
If you think about it and the economy has picked up there.
And there's a shortage of capacity and the and the freight market plus ecommerce really continuing to ramp up so there's just not enough trucks to handle all the demand that's out there.
<unk>, it's kind of a great environment for rental.
To your question on how much of it is coming for customers waiting for lease trucks. It is actually more of it is coming from as you heard and John statements coming from just pure rental customers that are coming in and writing our vehicles.
To meet their demand and so very.
Army saw the pricing power that we have and how much pricing has gone up 13%. So we had a quarter of 80 I guess it was 80% utilization this quarter, which for second quarter I think it's our second highest ever.
So we expect that utilization and continue to stay very high for the balance of the year.
Good and I'm not going to call it red light, but certainly at a very good clip.
And we are going to be bringing some additional vehicles in the second half for the year that are that are being delivered so Tom you want on you want to add anything to that.
Yes, just to be clear and not tied to customers waiting for lease it's really.
Demand primarily in.
2 key places on the.
External freight environment.
I think everyone understands what's going on there and along with E. Commerce, when we think about the coming quarters. We expect the rental fleet to continue to increase we haven't received our full rental orders are.
Our fleet is expected to.
The increase and the third quarter.
We're also expecting those pricing trends to continue as well so as Robert mentioned, we're up 13% year over year, we also expect pricing to be up.
Double digits year over year on both the third quarter and the fourth quarter. So the demand out there is strong.
I'll just mention 2 other things, there's there's still a.
Opportunity, we believe and the events and the event type companies that are out there. They typically run from US. This time of year. They haven't completely come back for the demand levels that we've typically seen in the past so we're expecting hopefully and the third quarter.
The event companies will largely come come back as well so theres still.
Maybe some opportunity and demand thats out there.
We haven't fully gotten past the impacts of Covid.
Yeah, that's great.
And Robert.
We're very pleased with the demand for C&I.
For the light and medium duty trucks, which is the area, we've been making more investments in our.
E Commerce, and and those types of companies I have really ramped.
Ramped up and the good news is that historically that into less tied to the freight cycle that demand tends to be less cyclical than than the class 8 tractor.
And so we're very pleased with what we're seeing on that on that side of it also.
Okay that sounds good and I might be helping you guys for some of that event demand here and the third quarter. So thanks, thanks for the time.
Alright.
And that's a good deal for us.
[laughter] I'm I'm I'm, just and stuff on the attending not actually renting for.
Demand for Robert.
Hi.
And next we'll hear from Justin long of Stephens.
Thanks, and good morning.
And maybe I'll follow up to that last topic on rental and thinking about the percentage of that fleet.
For it but they are light and medium duty today would you mind sharing what that number is and and where that could potentially go and I definitely understand the point that it for cyclical, but maybe you could comment on the impact this could have to margins from a mix perspective, if at all.
Yeah.
And I and I'll, let I'll, let the team get you the number on the percentage, but you know this is something as we've looked at you know, making investments and right on the part of our you know.
As we talked about our disciplined capital allocation strategy. We you know if you look you look when you look underneath the covers on.
On a rental product line we've found.
You know the the.
Truck rental side versus the tractor rental side, and we've been seeing more consistent demand and e-commerce and and there's it's a pretty broad industry that really rank those trucks industry groups, our rental trucks versus you know on.
For class 8 tractors are typically rented to transfer.
And that works and trucking companies and are more cyclical so just from a return on capital and return and.
On equity standpoint, the investments on the truck side, certainly have been historically better and higher and that's why we've we've looked to increase.
Our investments there so so.
Do you have that number in terms of the percentage and yeah. So just to give you an idea of our rental fleet mix about 50% is trucks versus the rest of the fleet, but as you heard from Tom a little bit earlier, we haven't received the full.
The capital that we that we put on order.
John This year. So we expect the truck count to continue to move up and we're looking to move that 50% up to 50, 253% over the next 12 to 18 months as we continue to make those investments. So that will give you an idea of kind of the fleet mix and then as we move forward into into future periods. That's the level.
For for activity, we're going to continue to grow it by going forward.
Yeah.
Okay. That's that's helpful and maybe just a quick follow up and any initial thoughts on capex for 'twenty 'twenty 2.
Yeah, we haven't given a guidance for 2020.1 thing I will tell you. This.
And our and our forecast.
<unk> forecast for this year, we did talk about delays and OEM deliveries. So you probably got a 100 and $200 million from this year that are being pushed into next year.
As.
The capital will be spent really next because that's when we're going to get the vehicles, and that's just delays and and and Oem's getting.
And it goes out because of the semiconductor challenges. So yeah. You would expect Capex will go up next year not only from the 200 million that are going to cross, but also as we grow our lease fleet next year, we expect to.
I have some growth next year, and our lease fleet and make some rental investments. So capex will be up next year.
And the V shear.
Okay I'll leave it there and thanks for the time.
Thank you Justin.
Stephanie more of trust.
Hi, good afternoon, and thank you for the question.
Hi, Stephanie.
I was hoping you could talk a little bit more about.
EBIT margins across segments.
SMS actually coming in above long term target, but the supply chain and dedicated businesses are slightly below maybe if you could walk through what you view are more temporary factors during the quarter really across across the segments and then taking a longer term view and.
You know why you remain confident and some of these long term targets, including why do you think Fms shouldn't actually be higher just based on the 2 key performance and and really the pricing actions that have been put into place and I think you called out 2014, so any color there would be helpful. Thank you.
Let me start off with SMS, because I think it's a great question.
And.
We set a target for us and a mess of.
A high single digit margins, partially driven by the fact that we know we've got a lot of depreciation.
Depreciation and impacts from these recent residual value changes that we made that rolls off but it takes multiple years for that to happen.
And that look, though obviously with a number that we posted this quarter of over 12% and we're very encouraged by that.
And $50 million plus of gains are included in that number so we can't lose sight of that.
But you know as we as we performed well and the next.
Performed well over.
Supporters and we go into next year, obviously, we'll continue to reevaluate those targets and see if there's opportunities to to move those up certainly is as the depreciation rolls off the likelihood of being at the high end of that or above that increase as long as the rest of the business continues to perform the way. It is we're also very encouraged by.
The next day the benefits of the lease pricing changes that we've made so there is certainly there is we continue to evaluate that and there's a there's a possibility of increasing that at some point.
In terms of supply chain and dedicated.
As you mentioned our supply chain is above for the quarter, but.
Uh huh.
It's a buck year, just for the 12 months, but is below and the quarter, it's primarily driven by the automotive.
Shutdowns that are impacting that part of the business due.
Due to the semiconductor challenges.
And also some retooling and that's going on.
And also some.
Some of the driver wage issues, we expect those both of those to be transitory, they're not going to be here forever.
So we expect our supply chain and be able to get back into that high single digit range along with dedicated dedicated is primarily.
Driver a wage issue along with some insurance headwinds.
And that we had and some investments that we're making and growth. So again all all 3 of those I think are transitory and they're transitory because as driver wages have to go up we have to go back to our customers and recapture that in the and the rate, which we feel confident and our ability to do it sometimes just especially on some day.
And that's happened as quickly as what we've seen and the last 6 months. It takes us a few quarters to get that done and that's what we're in the middle of so we still feel really good about the targets that we've got out there for both supply chain and dedicated.
Yeah.
Great. That's really helpful. Thank you so much.
Thank you Stephanie.
Next we hear from Brian on some back of J P. Morgan.
Hey, good morning, Thanks for taking the questions.
Hey, Robert Hey, just a quick follow up on the dedicated side things are really tight and should get a little bit looser overtime. Just wanted to see if you could give us some additional color on your confidence and getting those.
Driver wages pass through and and also if youre seeing anything on I guess more on the warehousing side to the extent that's affecting.
FCS and then secondly can you just give us your updated thoughts on the lease size or when you think about.
Oh.
Sorry, I missed that last part of your question Brian.
And we might have lost and it looks like Brexit and may have disconnected his line.
Let me let me it's time for my answer.
Go ahead.
Okay. Let me let me answer the question around what we're seeing around driver wage actually let me hand.
I'm, Steve Steve can give you color on the driver.
Wages and also we're seeing around warehousing.
Yeah, Brian from a driver wage standpoint, I think some of the key things that we've done in the quarter working with the customers have began to stabilize the turnover, we did see an increase of about $20 to 25%.
And it over to snow across key areas and the country, but I think the team has done a done a really nice job and working with the customers as Robert said.
And it will take US a couple of quarters to call all of it back, but I think most of our customers understand the challenge that we're up against a key piece for us is about 85% of our jobs.
Our home every night or home every other night, so very attractive we are seeing applications are on the increase here. The last couple of weeks. So that's a positive sign.
And as well and then on the warehousing side, we started seeing it around the end of Q1 into Q2, we are in those.
Discussions as well about 50% of our business on the warehousing side is cost plus and we have that structured and the contract with our customers and the other transactional business we're working on.
You know account by account to get those covered as well, but I would expect it to continue certainly through the end of the year.
Brian and you back.
Alright, let's let's move on them and when he gets back and get back on it.
And make sure we don't Miss the second part of that question Alright operating go to the next question.
Jordan allergy share of Goldman Sachs.
Yeah, Hi, I'm just following up on an earlier question and I know you haven't.
And giving guidance for 2020.2 obviously this year's results are quite excellent.
<unk> is the key to getting profit growth on top of this year and for.
And for 2022 going to be drawn.
Driven or need to be driven by dedicated and supply chain getting to those target levels.
Well.
Not necessarily I think certainly as we go into next year. There's there's a lot of if you think about each of the areas.
Supply chain should see improvement.
Barry.
Continued or more severe and you'd say.
Semiconductor shortages, which I don't think anybody's forecast do you think most people are forecast and we.
And on that certainly as we get into next year.
So that's the improvement in supply chain, along with growth that we're getting and.
Seeing really strong sales and both supply chain and dedicated and that'll start to produce earnings next year.
On the dedicated side same thing as we are able to negotiate these wage increases into our.
Our rates are going to see margins improve and we're gonna have a bang up year in terms of sales on the dedicated side. So I'm expecting really strong sales from both supply chain.
Very strong revenue growth if you will next year for them, both supply chain and dedicated.
Along with the on the F and med side I think you're still we.
We expect to see some good rental demand next year as it will take a while for capacity to catch up with EMEA and on the on the E Commerce and freight side.
Lease I think about it we've had leased declined the last 2 years this year and last year will start to see lease come back, which should help us from a return standpoint.
And then the net net of what we just talked about of used vehicle gains.
With the with the depreciation benefit probably being on.
For sure a plus.
Along with you know forget for maintenance cost initiatives that we've got in place. So a lot of positives going into next year I would say, although I'll tell you.
We still like early right. We're in we're in July and wish.
I've got a few more months to wrap up this year and will be and a and a better position to give you guidance for next year here later into this year and and into 2020.2.
Just as a quick follow up on dedicated and you know with the driver issues presumably.
While the pipeline.
And our strong there has been delays and getting things going would that suggest that as the drivers loosen up and we go into next year, there could be and additional surge from projects that had to be held off this year.
Yeah, we haven't really I don't think we've had an issue with holding off projects because okay.
Driver shortages and we've been able to get them started at Ryder and employs over 10000 professional drivers and so we're a very large and Florida and we've got a great recruiting networks. So we're typically able to find drivers where others can't.
Obviously, and some cases, we have to pay more than what we had expected it or.
The market's moves, but that's when we go back for the customers and make sure we have those discussions and get the adjustments may So no I wouldn't say necessarily being held back by that I think it's just been the timing of when deals are happening, but we're certainly looking at for the balance of this year for the full year really seeing dedicated Rev.
Revenue growth and.
And that high single digit to double digit levels.
Thank you.
Yeah.
And we'll hear from Brian OS and back of J P. Morgan.
Hey, Brian Hey, sorry about that.
And I'm talking about let's read the transcript for the first first part but.
The second 1 was really just.
Going back to your point there on these Robert do you have a sense of your ballpark how big do you think you you want to grow there.
And these fleet next year, especially easier working more on on the pricing and getting some strong pricing right now and and maybe some of the initial.
Initiatives are working.
On for some of the differentiation you know to the extent that it affects the lease fleet and what's the what's the rough ballpark you have in mind for for next year for lease fleet growth.
Yeah, we said moderate growth, we're looking for it out for a mess over and over the cycle. So you think moderate growth for us I would define it as.
And 4 to 6000.
And units maybe so after a couple of years of not having growth will probably be on the high end of that.
Because we got a lot of we got a lot of deals that were ranking this year that are being pushed off into next year because of the OEM delays.
But the important thing to note. There is those are deals that are being signed at.
Good returns with low reserve historically low residual assumption so not a lot you know much less risk and then in the past and a good solid returns. So we feel good about them and where we're focused on making sure that that we bring that that we bring that brings us to the table.
And again continue to provide good long term earnings growth and and returns for the company for for years to come.
Okay. So it seems like the pricing.
Initiatives or at least the high residual values and I'm, sorry, low residual values higher pricing, that's being put into market and that's still there's.
And they're still being.
Born and given the level of demand and what's happening on the competitive for them.
Yes, yes, we are we are experiencing very good sales and lease this year.
For the balance of the year and we expect that to continue for for.
And for the for.
For the balance of the year, so year to date.
Sales and we expect it to continue for the balance of the year. So so yes, the driver of the pricing changes that we've made.
We're seeing them being accepted and the marketplace.
And we are.
Signing up to those those are deals as the customers are willing to pay them.
We've had and alright. Thank you for your time.
Thank you.
Next we'll hear from Jeff Kauffman of vertical research partners.
Thank you very much and John Congratulations on your new role.
Okay I got to tell you I, just I'm fuzzy with all of these.
Unpacking of changes here, so I just want to make sure I understand what's going on for modeling here.
So.
Yeah.
Did you lower or.
Or I guess raise your depreciation number on a policy basis by the $18 million and Thats why you only.
Only have the 85 incremental benefit next year or are you talking about we made a small adjustment now, but maybe there is an adjustment next year, because our our price realizations are well above what's being implied by our depreciation schedules can you help clarify kind of what's changed to the permanent depreciation.
It would be kind of a short term adjustment I'm trying to sort all this out.
Yeah.
Over to Jonathan.
Step back for a minute, we made an adjustment and we lowered the residuals on a certain group of tractors that really further de risk those tractors from <unk>.
Inc.
What my leading accelerated depreciation or losses, and the case of a severe downturn.
Used truck pricing and where to go back to trough levels that we've seen and 22 years. Those vehicles. We would still have we would still be at breakeven we'd have any losses, and we wouldn't need accelerated depreciation and so you can view those as just further de risking if.
You will of those and what that amounted to was $18 million of depreciation expense additional depreciation expenses here, which is built into our forecast and then as you go into next year. Some of that continues to roll forward. So what was 100 million of benefit next year is now only going to be $85 million. That's that's really the.
The way those numbers, Robert Let me, let me hand, it over to John to you and then.
And then Conversely, I guess, what that implies is let's say used vehicle prices miraculously don't change for.
From where they are now we've got another year of larger gains on sale because we're depreciating. These vehicles more aggressively is that another.
About it.
And the future because it's the timing of that and these vehicles are expected to come out but in the few right and we'll have more yes.
Yes, yes, okay.
Okay.
Okay.
And Jeff just clarity I think generally you have it correct with your look at the for 180 that we discussed from the $2.
<unk>.
That that shortfall relative to the 20th and part the $18 million from the residual.
Estimate changes that we disclosed and and then you had changes and the fleet that also drove some of the movement there, but generally speaking the majority of it was.
And what you highlighted in your remarks and.
The way to think and so I think that gives you. The color you were looking for.
And just a philosophical question on on how we think about this though so a lot of investors right or wrong treat gains as onetime things right. So they don't want to give you credit for that and the earnings whereas and your business gains are really just and adjustment of.
What we didn't depreciate correctly.
Over the life for the vehicle I shouldn't use the word correctly, because the market jumps all over but I guess, why why do that and not.
Lower your depreciation and structurally to raise the residual value and so that you're not reporting.
Such large gains and it's showing up as pre tax earnings.
Yes.
That's a great question look I understand that some investors may look and gains as not being core to our business, but the way that especially after we went through the last couple of years, we know we don't ever want to be in a situation where we're selling.
And we're selling.
And our used trucks for less than our residual values for an extended period of time that was that was not a good experience I certainly don't want it and we limit. So our philosophy is really to have our residuals and a way and where youre going to be getting gained if not all the time the vast majority of the time and.
And so a portion as you model out the business you have.
And that there will be gains and there'll be some level of gains always.
In the P&L and that's what we're that's what we're targeting and so we're trying to get to so that's the activity that were taking that.
And that we've just taken I don't want to talk about depreciation on.
And these calls and I wanted to not no longer be a point of discussion I wanted to talk.
And with the operations of the business and all the great things, we're doing and and and Fms.
Fms business and our supply chain and dedicated businesses and I think the only way to do that is to have those residuals at a level, where the likelihood of having losses or accelerated depreciation is very very low and that's really what we're doing here.
And then the point is this all rolls up and our pre tax earnings anyway, regardless of whether it goes up as depreciation or gains correct.
Correct correct.
Great.
That's my 1 extended question. Thank you.
Thank you Joe.
Our next to line of Stifel.
Talk about hey, good afternoon, and congrats on the quarter.
So if you could.
Can you walk us through what you see as the Bull and bear cases for supply chain. It seems like you're you're on attractive steady revenue growth. Excluding some of these temporary auto headwinds just curious to know what factor do you expect to drive margin expansion.
And what you see at the top line runway for that segment, maybe on a longer term basis.
Yes and top.
Top line, we've really.
We've really obviously a core part of our strategy is really accelerating growth and supply chain and dedicated vs. Or these are good return higher return businesses less capital intensive.
So.
We make and making significant investments and sales and marketing and technology and you heard us talk about Ryder share and he will continue to talk about that because that tool and that product has become a key part of our sales and <unk>.
Supply chain and dedicated as our customers and prospects have seen what that tool can do.
Relative to.
Some of the competitors that we are winning a lot of business as a result of that so I'd expect the top line organically and supply chain and dedicated to really be pushing it that high single digit level, maybe maybe flirting with double digit a few years.
And over time.
But in addition to that I would tell you where we're also looking to make investments.
Acquisition standpoint that are going to bring new capabilities.
And expand R. R.
Our capabilities in the in those areas E Commerce as an example.
Some of the big and bulky stuff that we're doing.
Even adding new industries to supply chain.
Areas, where.
From a dedicated business can become more competitive as we look at different ways of providing dedicated we think theres some opportunities to bring on some strategic acquisitions. There. So Steve let me hand, it over to you and you want to add any any additional points.
I think Robert just hitting again on the continued investments it is.
Our goal for us and I think it's shown how we can grow the top line the ever better campaign as most of you may have seen it earlier and the year were going to be re launching that here mid August into September and that's adding a great deal to our top line pipeline growth. So we expect that to continue to help dedicated.
Dedicated and supply chain as well as Robert said I think when we hit on all cylinders youre looking at that.
Flirting with the with the double digit numbers.
As we try to remind you of our business is very cyclical and we were spread across a number of different vertical so teams continuing to focus on it and and always trying to prove.
The bottom the bottom line.
Just 1 clarification on that you guys put a slide and the data that last mile and Thats certainly been sort of a core focus.
Where does that fit into the whole paradigm here is that going to be sort of a margin accelerant and going forward or is that just sort of taking advantage of where trends and E. Commerce on right now.
Thanks for the time.
Yeah, I think I think what we're doing there.
If you look at what we're doing there we've made an investment and Eric it's clearly on a secular trend.
And it's taking advantage of secular trend as more and more people are comfortable with buying things online and and having things like furniture and appliances and fitness equipment delivered.
Liberty to their home.
The capabilities that we have in.
And dedicated and the capabilities that we havent transportation and equipment really allows us to play.
And important role and that and that market. So we do see that as an opportunity to get into that space, obviously because of the secular trends.
Growth accelerator so it will.
Grow and a higher clip for the average and over time, we see margins. They are certainly being within the range of what.
And what we have for supply chain and dedicated maybe over time, even getting to the high end of that range. So really on overall overall a good business I think the business that we purchased a few years ago.
The acquisition of MST, which became Ryder last mile really is a very well run business. We've continued to enhance the capabilities there with some of the technology investments that we just discussed around Ryder view and we have a great operating team there.
Runs that business very well.
Thank you.
And our final question for today and will come from Scott Group of Wolfe Research.
Hey, guys. Thanks for the quick follow up so I noticed the and.
The number of lease extensions picked up quite a bit and the quarter is this just delayed new trucks coming in and what's the financial impact.
Longer.
Longer leases I guess, yeah, Yeah, I think that's primarily.
And as there is.
There's a delay and trucks coming in.
So trucks that have a life remaining we've always had the philosophy of the truck has good life remaining then we're going to extend and that you get a nice return.
On those vehicles, but I'll, let I'll, let Tom give you a.
Color Bob.
Yeah, we actually we actually saw 2 things I think I think you've all heard about the.
And what's going on and the trailer market and how tight trailers are but we saw on unusually high number of trailer extensions and our and our fleet. This this quarter more than we've ever seen it was almost triple what we saw on.
Little bit more too.
Last year, and then secondarily with the OEM delays and we do have a number of short term leases that are on our books and they typically expire and the and the second quarter and we saw a large number of those vehicles.
And extend it even more than what we've seen in prior quarters.
And she was really those 2 things that drove the numbers.
Okay. Thank you guys I appreciate it.
At this time, there and no additional questions I'd like to turn the call back over to Robert Sanchez for closing comments.
Okay no. Thank you everyone.
So the top of the hour. So I appreciate everybody getting on the call and and staying on a little longer. Thank you for the questions I think but it was a there were some great questions and hopefully get a good picture of what's going on here. So look forward to see and all of you and.
The coming weeks as we get out to some conferences and road shows.
Sure.
Yeah.
Pat.
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