Q3 2021 Ryder System Inc Earnings Call
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Good morning, and welcome to the Ryder system third quarter 2021 earnings release conference call.
All lines are in a listen only mode until after the presentation.
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I would now like to introduce the call to Mr.
Brown Senior Vice President Investor Relations corporate strategy, and new product strategy for Ryder, Mr. Barry you may now begin.
Thanks, very much good morning, and welcome to Ryder's third quarter 2021 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.
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 changing economic business competitive market political and regulatory factors.
Detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure.
And in this morning's earnings release earnings call presentation, and in Ryder's filings with the Securities and Exchange Commission, which are available on <unk> website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and John <unk> Executive Vice President and Chief Financial Officer. Additionally, Tom Hayden President of Global Fleet Management solutions, and Steve sensing President of global supply chain solutions, and dedicated transportation or on the call today and available for questions following that.
At this time I'll turn the call over to Robert.
Good morning, everyone and thanks for joining us.
On today's call I'll begin with a strategic update and then cover the investments that we're making in innovative technologies to accelerate growth in our supply chain and dedicated businesses.
I'll also discuss today's announcement of our plan to acquire Midwest warehouse and distribution system.
John will take you through our third quarter results, which exceeded our expectations again this quarter and review our disciplined capital allocation strategy focused on returns I'll, then discuss our updated 2021 outlook.
Let me start with some key highlights about the market and our results.
Long term transportation and logistics outsourcing trends continue to support our growth strategy and investments.
Trends in warehousing and distribution as well as an e-commerce fulfillment and last mile delivery.
Big and bulky items have continued to accelerate since the pandemic began.
Strategic investments remain focused on leveraging these favorable outsourcing trends.
Unprecedented challenges impacting labor supply chain and truck production are providing us with additional growth opportunities because they helped drive companies to make long term outsourcing decisions. We're.
We're seeing record new contract wins in supply chain and dedicated which we fully expect will contribute to long term profitable growth.
If a message is also benefiting as companies are looking to source truck capacity in this extremely tight market.
Consistent with our disciplined capital allocation strategy, we're investing in our higher return logistics businesses.
Our planned acquisition of Midwest warehouse, and distribution system, which adds multi client warehousing capabilities and supply chain and accelerates growth.
We also announced plans to return capital to shareholders over time through discretionary and anti dilutive share repurchase programs.
Use of the new discretionary program is anticipated to occur over time dependent on several factors, including balance sheet leverage the availability of quality acquisitions and the stock price.
We now expect to achieve ROE in the range of 18% to 19% for the full year.
The team has done an excellent job of leveraging favorable pricing trends in used vehicle sales and rental resulting an outperformance in both these areas.
In addition, we've continued to increase at least pricing, resulting in improved portfolio returns and a 4% increase in revenue per average active lease vehicle.
We expect additional benefits going forward as leases are renewed and re priced and as we utilize data analytics to further segment customer pricing based on application equipment type and other key drivers of lease returns move.
Moving to cash flow, we generated strong year to date free cash flow of over 800 million and have increased our full year free cash flow forecast to 1 billion. Two 1 billion one up from our prior forecast of $6 $50 million to $750 million.
Our full year forecast reflects an estimated cash flow benefit of 400 million from deferred capital expenditures due to OEM delivery delays as well as record proceeds from the sale of our used vehicles.
With balance sheet leverage currently well below our target range, we have additional capacity to enhance shareholder value by deploying capital consistent with our disciplined capital allocation strategy.
Slide five provides an overview of the investments, we're making to drive accelerated growth in supply chain and dedicated a key element of our strategy to generate higher returns.
Developing new and enhanced products, such as Ryder last mile E Commerce fulfillment and freight brokerage provides opportunities to leverage profitable growth areas.
Innovative technology enables us to deliver value added logistic solutions that are in high demand.
Last quarter I highlighted Ryder last mile offering.
This quarter I'll discuss Ryder share our real time freight visibility and collaboration tool that has proven to be a key differentiator in winning new business sale.
Sales and marketing are key to our brand awareness and ensuring customers are aware of our full array of supply chain capabilities.
Our ever better campaign, and the increased digital marketing presence have driven a significant increase in qualified sales leads were.
Also expanding our sales force and investing in their capabilities to drive additional growth opportunities.
Strategic M&A opportunities such as our planned acquisition of Midwest are focused on adding new capabilities geographies and our industry verticals.
These opportunities are an important way to accelerate growth, especially in supply chain and dedicated.
<unk> ventures, our corporate venture capital fund.
Aims to invest 50 million over five years through direct investment in startups.
Our investments here.
Advanced strategic relationships, where we typically are working together to develop new products and capabilities that benefit our customers and solidify our position as an industry leader.
We've made investments in numerous exciting areas such as ecommerce micro fulfillment and digital drive driver staffing and are working with these startups to address important customer needs.
We also recently announced strategic alliances with several autonomous.
Technology firms, which enables us to leverage our expertise in asset management maintenance and transportation.
Positioning us as an innovative leader in this emerging space.
Slide six takes a closer look at Ryder share and innovative digital product that combines riders nearly 90 years of logistics experience with best in class technology.
Wider share provides users with real time freight visibility throughout the lifecycle of an order as well as the opportunity to share information between suppliers carriers and shippers on one platform with writers team of supply chain experts managing exceptions.
Ryder share users benefit from improved service from their for their customers increased employee productivity and the ability to readily access information from one source for decision making.
70% of riders transportation volume and supply chain and dedicated now runs through Ryder share. The platform has processed over four 4 million transactions and has over 5300 users today.
We're also excited about our recent launch of Ryder share for warehousing.
This enhancement makes ryder share the only visibility platform that connects transportation with warehousing.
We expect this will be a key differentiator in winning new business.
I'll turn the call over to John now to briefly cover our third quarter results.
How about protection strategy.
Thanks, Robert total company results for the third quarter on page seven.
Operating revenue of 2 billion in the third quarter increased 11% from the prior year, reflecting revenue growth across all three of our business segments.
Comparable earnings per share from continuing operations.
It was $2.55 in the third quarter as compared to $1 21 in the prior year.
Higher earnings reflect improved performance in upper mass from higher rental used vehicle sales and lease results.
Well, it's a declining depreciation expense impact related to prior residual value estimate changes.
Return on equity our primary financial metric reached 15, 7% for the trailing 12 month period.
Oh, you can reflect higher earnings from rental and used vehicle sales and declining depreciation expense impact.
Improved lease performance also contributed to higher Ari.
And reflect the impact of our pricing initiatives.
Year to date free cash flow was strong at 829, knowing although down from the prior year when capital expenditures were unusually low due to COVID-19.
Yeah.
Turning to us unless results on page eight.
Fleet management solutions operating revenue increased 8%, reflecting 37% higher rental revenue driven by strong demand and higher pricing.
Rental pricing increased 9%, primarily due to higher rates across all vehicle classes.
That's the less realized pre tax earnings of $186 million up by $170 million from the prior year.
$93 million of this improvement is from higher gains on used vehicles sold and a lower depreciation expense related to prior residual value estimate changes.
Improved rental lease results also significantly contributed to increased depth of master hurdles.
Rental utilization on the power fleet was a record 83% in the quarter and well above the prior year, 71%.
Results also benefited from ongoing momentum from lease pricing initiatives.
Partially offset by a 3% smaller average active lease fleet.
That's M S E T as a percentage of operating revenue was 14, 9% in the third quarter.
And surpass the company's long term target of high single digits for.
For the trailing 12 month period. It was in line with the target at nine 7%.
Page nine highlights global used vehicle sales results for the quarter.
Used vehicle market conditions remained robust due to strong freight activity in planning supply from truck production constraints.
Higher sales proceeds reflect significantly improved market pricing.
Globally year over year.
Proceeds more than doubled for both tractors and trucks.
While sequentially tractor proceeds were up 32% and truck proceeds were up 27% versus the second quarter 2021.
As you May recall last year, we provided sensitivity, noting that a 10% price increase for trucks and a 30% price increase for tractors in the U S would be needed by 2022 in order to maintain current residual value estimates are.
Our current tractor and truck proceeds significantly exceed these levels.
Average comp pricing in the U S for tractors and trucks is well above our residual value estimates used for depreciation purposes.
As such we are comfortable with our residual value estimates and we do not anticipate the need for any significant adjustments at this time.
During the quarter, we sold 4900 used vehicles down 44% versus the prior year and down 18% sequentially.
Reflecting lower inventory levels.
Used vehicle inventory was 3500 vehicles at quarter and below our target range of 7000 to 9000 vehicles.
Turning to supply chain on page 10, operating revenue versus the prior year increased 14% due to new business higher volumes and increased pricing.
Growth was partially offset by the impact of supply chain disruptions and automotive production activity.
We expect this disruption to continue to impact our automotive customers until global supply chain has normalized.
And we continue to work with our customers to mitigate the impact.
We have included an estimated impact from potential shutdowns in our balance of year forecast. That's the situation remains fluid.
SCS pretax earnings decreased 62% and trailing FCA FCB T. As a percent of pop revenue of six 2% was below target.
This reflects lower automotive earnings higher labor costs and strategic investments.
Partially offset by positive earnings from new business.
We anticipate the pricing adjustments, we are implementing to improve perhaps the S. E T percentages in the first half of 2022.
And to move around the target range or moved to around the target range in the second half of next year.
Moving to dedicated on page 11.
Operating revenue increased 16% due to new business higher volumes and increased pricing.
New contract wins, and Etfs continued to be robust with year to date sales results already reaching full year record levels.
New contract wins are driven by ongoing secular outsourcing trends as well as current labor and supply chain challenges that are driving companies to make long term outsourcing decisions.
We're signing larger deals across a diversified industry base.
Our new contract wins are also benefiting from cross selling opportunities for map them out and that's yeah.
Etfs pretax earnings decreased 54% and.
Trailing E T S E T as a percent of pop revenue was below target at five 3%.
This reflects the increased labor and insurance costs, partially offset by positive earnings from new business.
Although all president the labor challenges are affecting current results in Dts and SCS.
We're increasing our recruiting efforts and successfully working with our customers to implement price adjustments to address higher market costs.
We're encouraged by the early progress we're making on these price adjustments as we continued to deliver the superior service our customers expect.
We're confident that our new and expanded customer rate and pricing adjustments will improve D. P. F E V T percentages.
In the first half of 2022 with a moving to around our target range in the second half.
Yeah.
Turning to slide 12 lease capital spending of $807 million was above prior year's plan.
He knew increase lease sales activity in the year lease.
Lease returns are benefiting from pricing initiatives and support a more normalized lease capital investment.
Rental capital spending of $583 million increased significantly year over year, reflecting our higher planned investment in the rental fleet we.
We plan to grow the rental fleet by approximately 15% in 2020 one.
In order to capture the increased demand, we're seeing from strong ecommerce and overall freight activity.
Our full year 2021 forecast for gross capital expenditures $1 92 billion.
Is below our initial forecast range. This reflects the estimated impact of 400 million from deferred vehicle purchases due to OEM delivery delays that Robert highlighted further.
Yeah.
Turning to slide 13.
Our 2021 free cash flow forecast has increased the range of <unk> billion to 1.1 billion.
Up from our previous forecast of $650 million to $750 million.
The full year forecast reflects our strategy to balance moderate growth in the capital intensive Fms business.
While generating positive free cash flow over the cycle.
It also reflects the impact from delayed OEM deliveries and record proceeds from used vehicles sold and snow that order.
Balance sheet leverage declined to <unk> due to higher earnings and cash flow and is expected to remain below the low end up our target range. This year.
Accordingly, we now expect to achieve all Lee of 18% to 19% this year due to stronger than expected performance in SMS and.
In a declining depreciation impact.
Higher year to date comparable EBITDA, which excludes the impact of gains or losses on used vehicle sales reflects revenue growth and improved operating performance.
Yeah.
Turning to slide 14, I'd like to review, our capital allocation priorities, which are focused on creating long term shareholder value.
By investing in high return opportunities that generate positive free cash flow over the cycle.
Our first priority for capital is investing in high return organic growth opportunities, which includes moderate Fms lease fleet growth and accelerating growth in SCS and Dts.
And I'll have to let the business, we estimate investments of between one eight to 2.1 billion annually.
And that is the amount needed to replace leased vehicles as contracts are renewed.
To refresh the existing rental fleet.
We also estimate investing between 200 to 500 million in annual fleet growth, which.
Which represents lease fleet growth of approximately two to 4000 vehicles with commensurate growth in rental.
Returns in both Lise Russell are expected to continue to benefit from ongoing pricing initiatives.
Investments to accelerate growth in our higher return and less capital intensive supply chain and dedicated businesses.
As well as technology investments that expand or enhance our capabilities are also key priorities organic growth capital.
Targeted acquisitions, such as our planned acquisition of Midwest are focused on adding new services capability or industry verticals that provide us with important opportunities for long term profitable growth.
Accretive tuck in acquisitions that supplement our base business as well as investments by Ryder ventures provide additional opportunities for us.
Our capital allocation strategy is also focused on returning capital to shareholders.
Dividends and share repurchases.
Ryder has made in London interrupted quarterly dividend payments for more than 45 years, our dividend growth rate over the past 10 years to 7% and our current dividend yield is around 3%.
The new share repurchase programs discussed earlier allow for both anti dilutive and discretionary share repurchases.
We remain committed to offsetting dilution through the use of the anti dilutive program.
The discretionary program is planned to be utilized over time to manage leverage and a suite. It's usage will be dependent on several factors, including balance sheet leverage the availability of quality acquisitions and stock price.
Our capital allocation priorities are focused on achieving our we have 15% of Ohio over the cycle.
While generating positive free cash flow and maintaining target leverage.
I'll now turn the call back over to Robert to discuss our outlook.
Thanks, John.
Turning now to our EPS outlook on page 15.
We're raising our full year comparable EPS forecast to $8 40 to $8 50 up from our prior forecast of $720 to 750, and well above our loss of 27 cents in the prior year. We're also providing a fourth quarter comparable EPS forecast of $2 36 to $2 46.
It can be above or the prior year of 83.
Looking ahead to 2022, we expect both higher revenue and earnings record new contract wins in 'twenty, 'twenty, one and supply chain and dedicated are expected to benefit 2022 revenue growth.
Fly chain and dedicated margins are expected to improve in the first half of next year and move towards that target range in the second half.
Collecting price increases to address higher labor cost barring any further market disruptions.
We expect strong free conditions and truck production challenges to continue into 2022 benefiting Fms results <expletive>.
Declining depreciation expense impact is expected to benefit year over year earnings comparisons by $85 million. However, this is expected to be fully offset by higher book values on vehicles being sold next year.
Used vehicle sales volumes are expected to be flat to modestly higher.
Used truck pricing for the year is expected to be flat to modestly higher in 2022.
Remaining strong through at least the middle of the year and potentially declining in the second half if new truck production ramps up and used vehicle inventories in the overall market begin to normalize.
Free cash flow next year is expected to decline largely reflecting the 400 million dollar capital expenditure deferral from 'twenty to 'twenty, one into 2022 due to OEM delivery delays.
Given the unusual OEM production situation it would be appropriate to look at combined free cash flows in 2021 and 2022 overall.
Overall, we're pleased with the trends that favor outsourcing and our efforts in sales marketing and new product development.
We're confident in the actions, we're taking to increase returns, including higher pricing to offset labor challenges positioning us well for 2022.
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 one question. Each if you have additional questions you're welcome to get back in the queue and we'll take as many as we can.
At this time I will turn it over to the operator.
Thank you if you'd like to ask a question. Please save by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off till then your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
Pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
I want to ask about sort of high teens lease and you know obviously some margin pressure there.
Is there a way to kind of dissect that a little bit more breadth in terms of what was due to the automotive versus the higher labor costs certainly.
Improvement into next year, but just wanted to try to see kind of where those buckets are at this point.
Yeah. If you just look at that supply chain a lot of the challenge has really come from the auto group and it's primarily the semiconductor.
Shortages that are impacting production, therefore impacting the amount of revenue that we're getting from that side of the business and also some of the driver turnover and the driver shortage challenges that that really are affecting all of the.
Transportation related verticals, but significantly I would say around us around the automotive so Steve any anything else that you want to add there no I think those two Robert and then you know we did increase our investment both in Ryder sure.
Do you have a better campaign in a couple of other areas. So I think those three kind of sum it up.
Great. Thank you and I would I would just add Alex and the goal is for for us to through the price increases that were put in Peru to offset the labor.
Cost increases and our supply chain within automotive starts to hopefully stabilize as we get into the back half of next year, we do expect margins to improve in the first half.
And they get back towards our target range of high single digits in both supply chain and dedicated in the back half of next year.
Got it helpful. Thank you.
Right.
Thank you and if you're funding. Your question has been answered you may remove yourself from the queue by pressing the star key followed by the digit too will.
We will take our next question from Scott Group with Wolfe Research.
Hey, Thanks, Good morning, guys Hi, Rob.
Robert when you said.
You said that there was an $85 million.
Benefit from lower depreciation next year, but there was an offset I missed what that offset was if you could just.
Help us.
Yeah, the offset is the rising our residual values. If you remember this year the residual values that we have in place are at the accelerated level, which was much lower than when we made those changes back in 2019 and 2020.
As we go to next year. It goes back to the policy levels, which will be higher residual values. So what we're saying is that that 80, it's about $85 million.
Which is as the offset that.
That we see with the roll off of depreciation so really when you think about year over year. The real impact is going to be from what happens with pricing and volume.
Within within used vehicle sales and we think that's going to be flat to up.
As we look at next year certainly strong in the first half and then maybe pricing coming down in the second half as more as more inventory begins to get into the into the market, especially the truck really of the truck Oems can get their production levels back.
And just so I understand that so that the higher residual values. So that shows up in even if used prices stay the same gains on sales would just be lower next year by $85 million is that what you're trying to say.
Correct correct Haynesville, if pricing stays the same gains there'll be less by 85, but then you'll have a benefit in depreciation of $85 million.
Okay.
And in your view, though on the market is that well maybe just talk about your view on an OE production for next year and it sounds like you think used pricing stays firm through the first half and then maybe starts to moderate a little bit the second half.
Yeah, it's still it's still pretty early in the process, but yes argue right now is that what we're hearing from the Oems the semiconductor challenge and production challenge still sticks around through the first half of the year and then really improves in the second half.
So if the truck production is limited it is going to be hard to get used truck inventory into the market right. Because the inventory is created by a replacement with a new truck comes in the used truck goes into the market when it's replacing.
So without new trucks coming into the market youre going to have a constrained used truck market at least for a period of time I mean, there could be some seasonal adjustments in the first quarter, we may see a little bit, but I think overall, we'll continue to be pretty constrained and we get into the second half than the production ramps up you'll see certainly the year over year comps get a lot tougher, but you'll also.
See maybe some of the pricing coming down.
Thank you, we'll take our next but I would tell you that we've got that.
I'm sorry, let me just add that the net of that.
As prices have risen so much this year.
And there are at much higher levels now are the net of all that is on average we think pricing will be flat to up.
Because it it's coming from a very high level right now.
Thank you, we'll now take our next question from Stephanie more with trust.
Yeah.
Hi, good afternoon, and thank you for the question.
Hi, Stephanie.
I wanted to talk a little bit one of my longer term focus than the pricing opportunity with an F. On that I believe you know pricing initiatives successfully began really several years ago during admittedly a weaker freight environment. So we could assume right or kind of had historically been under pricing based on that level.
Services, that's fast low right now and just given this freight environment, where we're seeing you know really strong pricing as well. So it's kind of a long long winded way of asking is right are catching up for maybe on your pricing in the past or is this just a function of the current environment.
Really what is the opportunity in pricing as we get out of this current environment whenever that might be.
Yeah. Thanks for the question look I think when you look at when did we start raising prices at least as it was in 2018 as we started to see the used truck market really take a pretty significant decline starting in the end of 15 through really that lasted through 2020, so really to account for that additional rig.
<unk>, we realize we've got to get the pricing up. So we've had some good success with that I think our customers and the market has recognized the importance of this and the value that we bring.
So the good news is that each year when a vehicle terms out its being repriced at the higher prices. We're about halfway through if you think back in 18 1920 were in the fourth year now maybe a six year cycle, but we're also continuing to evaluate and look for.
Opportunities to adjust pricing, especially.
Especially as we.
Implement more data analytics around understanding which applications, which vehicle types really are costing us maybe more money than we thought and we need to adjust the pricing there. So.
I think it's an ongoing.
Benefit to the returns and it's something that we still have just on what we've done so far we still have a couple more years of benefit to go and I think theres ongoing process, but let me, let me hand, it over to Tom and he can give you a little more color about kind of what we're seeing in the market and in the acceptance of that of those price increases.
Yeah, we do we do continue to have more opportunity in the pricing segmentation that Robert mentioned so.
That has been ongoing since 2018, we've continued to refine that.
That process and I would tell you that.
<unk> seen a nice increase in the rates and the lease fleets on a per unit basis, thus far that's reflected in our in the P&L the numbers you're seeing today.
But we have had also a very strong sales year this year.
At the new pricing levels.
And.
Because of the OEM delays the majority of that equipment hasn't yet arrived in that new pricing isn't reflected in the P&L. Yet. So we're really encouraged with what that's going to look like in future years and as Robert mentioned, we're still you know about halfway through it.
Continue to see expansion in the margins as we work through the entire replacement of the of the fleet and we have from an acceptance standpoint are we like I said, we have seen a solid sales results.
This year, so we haven't seen a customer.
Customers, leaving us through this cycle and through the pricing through the pricing increases.
So we expect to retain that business and add new business at the new pricing as we as we move forward.
So this environment is certainly helping but we don't we don't think that this pricing is dependent on this robust environment, we see the pricing acceptance really began prior to us getting into this.
Environment that we're in this year. So we see this as an opportunity going forward.
Thank you, we'll now move onto our next question from Jordan Alger with Goldman Sachs.
Yeah, Hi, just a question you know you gave some color on F. C. S E T S N and the margins progression, obviously Fms has had fantastic margins and I'm just sort of curious all things considered with your outlook for used trucks in the depreciation impact et cetera, I mean.
How do you how do you think about F M S.
Margin as we look forward from here. Thanks.
Yeah, John we've we've targeted Fms margins at high single digits, obviously, we're going to exceed that this year with the strong.
The performance on the gains in rental side and and you know longer term you know do we think that that that the high single digit really target can go up absolutely. It's just if you recall, we still have a lot of depreciation going through the P&L as a result of the residual value changes that we made a couple of years ago.
And last year, and that's going to put a little bit more pressure on margins.
Then we would normally expect but once we get over the next year or two that normalizes completely and certainly I see an opportunity for us to to revisit those those target margins, but in the short term definitely the environment of strong gains and strong rental is going to keep us.
Above that high single digit target.
Thank you we'll take our next question from Jeff Kauffman with vertical research partners.
Thank you very much good morning, and congratulations.
Just a quick thank you just wanted to clarify I should know this but it's escaping me right now.
You're looking like you're generating about 26% higher revenue per vehicle in rental.
But rate change your broadcasting is nine 3%. So can you help me.
Kind of disaggregate, what's driving that differential.
Yeah, I think what you're missing there is the improvement in utilization right. So utilization is up from the low seventy's to the low eighty's. So that's obviously given us higher revenue per unit beyond just the pricing.
Alright, so theres no mixed differential now that you are largely sold out or or any kind of changes in services or fees. That's driving that is just strictly utilization.
Well, let me ask Tom to that but I don't believe so Tom.
No I don't I don't I don't think so Robert that say they think it's the utilization driver I think going into next year, we may see a mix.
Mix in the fleet change so more trucks less tractors, but we havent seen that we haven't seen that yet.
Just a quick follow up you know autonomous seems to be the hot word. These days you got 11.
Public some of which you're partnering with.
And I just wanted to take a step back and understand riders opportunity here and kind of where let's say autonomous catches on and its a few years out, but let's say it's going to happen.
You know you're committing to partnerships with a lot of companies where can that come to benefit rider in there or are there any new business opportunities that might arise.
As autonomous vehicles become.
More established on the highway.
Yes, Jeff I look that's a great question I think we're certainly early days in this technology. So there's there isn't full clarity yet on exactly how this is going to evolve, but I do believe that Ryder is well positioned in many ways to to participate in this market.
As an asset management company that knows how to how to own and manage and maintain trucks and as a transportation provider with our dedicated and supply chain businesses that does final mile delivery you know most of the autonomous <unk>.
Technology, that's being.
Tested today is really on highway kind of hub to hub, which the final mile would actually be done by a driver. So Ryder has the capability to handle that very well just even within our current network and think about the facility of networks that we have we have 804.
Facilities across North America, some of which could be used as hubs for for this type of activity. So.
We're in the R&D phase I would tell you we're excited about it though because we see the technology beginning to evolve and we think that we certainly are well positioned to play a part of that.
Thank you we'll take our next question from Todd Fowler with Keybanc capital markets.
Great. Thanks, and good morning, Robert I, just wanted to first follow up on your response to an earlier question. So based on your fourth quarter comments. It seems like that gains are going to be about 200 million. This year is your expectation for 2022 that that gains will be at that same 200 million level, but the cadence will be different starting off stronger and then slowing tour.
The back half of the year or is that 200 million a different number for 2020 two.
No. The games, if you just really again to learn to probably be down by $85 million because our by at least 85 million cars or the book value of our vehicles is gonna be up $85 million. So if you just only look at games.
Are we going to be down about 85 million, however, that 85 million will be offset by lower depreciation expense.
As as more of that those vehicles that we had to adjust residual values for as those roll off or are disproportionate depreciation expense rolls off. So so net net it's what we're saying is flat assuming flat to up pricing and flat to up volume your gains would be down a notch.
More than 85 million, but offset by a benefit of 85 million and depreciation expense.
Thank you we'll take our next question from Brian Austin deck with J P. Morgan.
Hey, Thanks for taking the question.
Okay.
Just wanted to ask about the overall pace of outsourcing new business wins are you seeing in SCS and Dts.
Often hear that this might be the peak of those decisions, but I would tend to think that events like we're seeing now would actually create a longer tail for some of those opportunities. So maybe you can just elaborate on that and then your confidence in getting some of these projects back to profitability.
Profitability, I guess more broadly and the entire segment you were talking about improving in the first half getting back to target in the second half.
But that assumes no further disruption so.
You can also elaborate on flexibility to kind of move along with any other disruptions you might see to try to keep those closer to where you expect them to be.
Thank you.
Yes, Brian.
Brian listen I'll, just I'll hand, it over to Steve in a minute to give you more color, but I'll just tell you that whenever we hear on the news supply chain disruption and people talking about the importance of supply chain. That's really good news for Ryder because that means companies are really focusing on this capability and dysfunction and theyre looking for companies that can help them.
Just look the immediate issues that they are facing today, but how do they avoid that in the future right. How did they design their supply chains and run them differently. So they don't run into these issues two years from now and those are the a lot of the conversations that we're having are companies that are redesigning their supply chain and really looking at this so I do think I agree with you I think it is a long.
Retail issue.
And we're certainly seeing the benefits of that in some of the sales. These again. These are contracts that are multiyear contracts. So all the contracts we're selling now they're starting now are going to pay dividends for our.
For a long period of time, so Steve why don't you give him a little more color.
Yeah, Brian Thanks for the question.
On the growth side of it we're seeing historical pipeline I.
I think those are attributed to a couple of things like you know are our continued investment in the ever better campaign. We started that I guess it was mid year last year and we've run it through Q4 of this year. So that continue into two helped us not only in the top of the funnel, but also converting new wins and in profitable wind.
The investment in Ryder share you know it is a differentiator in the market as Robert said, the Dts sales, we've already we've already hit our full year plan.
At the end of Q3, so that continues.
To allow us not only need to win but to win larger deals as well and we're seeing that on the on the SCS side.
S C S by the end of the year to be at a record level as well I don't see anything slowing down at this point and are.
Comfortable there I think on your question on the profitability. Just one reminder, Q3 of last year was really a record EBT percentage for both Dts and SCS, you know really hitting on all cylinders low turnover.
Lower open spot volume was steady.
And then Conversely, this year, it's kind of the opposite of that so are we.
I haven't really good discussions with the customers both on Dts and SCS on the right issues.
We expect to start solving that Q4, but really in the back half of next year.
Okay.
Alright, thanks very much.
Thank you we'll take our next question from Justin long with Stephens.
Thanks, I wanted to follow up on the rental market, obviously that utilization rate in the third quarter was at an extremely high level any updated thoughts around utilization in the fourth quarter I'm curious, what's getting baked into the guidance there and then Robert as you talk about earnings grew.
Both in 2022, what's the assumption for rental.
Alright, let me, let me hand over the first part of that question to Tom and then we can talk about the second.
Yeah. We're we're like we said we delivered a record utilization in Q3 and were expecting.
Similar performance in Q4, so we're expecting utilization in the mid eighties again.
Going into Q4, which are which will be at or near another record quarter.
Yeah. So so continued strong.
Now I'm almost willing to say we are red lines I mean, our utilization is about as high as it is as high as it's ever been and I would expect that to continue certainly through.
Through the fourth quarter as we look at next year I think you can assume especially especially in the first half of the year, but I would say, even most likely still either the second half so a very robust rental market.
We are we do plan on adding vehicles, we're gonna be adding vehicles to the fleet to take advantage of some of that.
But we expect still a very tight truck market as OEM production is still continues to be.
Just to be somewhat hampered and not really seeing relief of that until the second half of the year. So even as they begin to ramp up in the second half I would expect rental to continue to be a rental rebate. It continue to be very strong remember also we are shifting some of our investments there to more straight trucks to be able to take advantage of the E.
Commerce demand, which is really strong so some of that I would say is even outside of the unusual truck tightness right now I think demand for straight trucks for the rise in e-commerce as a longer term secular trend that we plan on being able to capitalize on.
And just to follow up on that Robert I know rental growth. This year is expected to be around 15% any initial thoughts on what the growth in our fleet could look like next year I'm sure you're having to plan ahead, a little bit more given the constraints.
Yeah, I don't have I can't give you a number just yet because we haven't finalized that yet, but certainly expect it to be up.
From these levels.
Understood I appreciate the time.
Thanks, Jeff.
Thank you we'll take our next question from Bert <unk> with Stifel.
Hey, good morning.
Good morning Bert.
Question on supply chain side of things was operating income in the supply chain in line with your expectations for the quarter or was auto ultimately softer than inflation higher than than than expected and maybe just to add onto that what should we expect the long term trajectory for supply chain to be this year.
Largest segment five years from now.
Yeah, I'll I'll, let let me let Steve answer. The first question is on versus our expectation because it was slightly below what we had expected. So go ahead, Steve why don't you give him some color on that.
But he was really in the quarter there were more chip shortages than we expected.
Earlier in the year, certainly and that continues to linger and then you had the driver.
Kind of turnover pay issue that they continue to go through the quarter. So we've seen that kind of flattened out a little bit, but still cautious as we go through the back half of the year.
Yeah.
So.
I see.
To your your the second part of your question, Yes, we do expect supply chain and dedicated certainly at this accelerated growth rate too.
To continue to become a larger part of the overall rider story.
If you depending on what acquisitions, we're able to do and how much organic growth we get over time, yes, it could become more than 50% of the overall revenues.
But that's we're probably looking at.
At least five years out before we start to see that but you know higher return businesses, we want to make sure we're doing the right acquisitions and we're growing it.
And getting the right returns, which we've got line of sight to getting our.
Our margins back to where they need to be in both of those segments.
And feel really good about about the prospects for it going forward.
Great. Thanks for that just just a clarification question is the Midwest acquisition contemplated in your <unk> guidance I Didnt know with some uncertainty around when that gets completed.
No yeah, it's not remember what we're going to close it by the plan here is the is to close it.
Here at the beginning of November.
So you've only got a couple of months anyway, but no it's not built in.
Thanks for the time.
Okay.
Thank you we'll hear next from Scott Group with Wolfe Research.
Hey, guys. Thanks for the follow ups I apologize if I missed this did you give the the margin or expected earnings accretion from the acquisition for next year.
No we have not we have no we expect it to be accretive certainly, but we didn't we have not.
Fully flushed out yet and you are giving us.
Or or some sense of what the margin that they're operating it now is.
Yeah, no we haven't given that we haven't given it out but clearly in alignment with what we see in supply chain.
Okay, and then just I want to make sure I've got some of the pieces right for.
Depreciation that the 85 million next year reduction is that just from the accelerated rolling off is there any incremental tailwind from depreciation just from the annual studies that you guys do every year.
No. That's just from accelerating some of the policy rolling off there, we don't expect to make any changes to residual value estimates.
This year.
Okay and then just as we go forward. The next few years I think you said, there's still a bunch of excess depreciation.
As that rolls off the next few years do we see the same sort of offset with the fair values getting reset higher where sort of the net impact going forward is a push or is there still some net.
Benefit in the out years.
Yeah, No I believe let me hand, it over to John but I believe that the residual values.
Next year on our set at policy. So theyre not there is no increase in residual values going forward. After next year. So any benefit that we get from depreciation policy does not have that offset Jon is that is that correct.
So generally speaking that is correct you should expect that we're going to see a tail off of that depreciation benefit continued to impact even beyond 2022.
And then as Robert mentioned, we do expect that the net book values or what kind of subtle went to kind of where we expect them to rise to next year over time because of the accelerated impact is largely behind us in 2022, so that should give you an indication of what we expect going forward.
Okay. So next year is a push but we could get back to a tailwind in 'twenty three.
So it won't be it won't be significant though Scott just to.
To set expectations.
Yeah, the 85 very much less in the following year got it got it got it okay. Thank you guys appreciate it.
Thanks Scott.
Thank you, we'll hear next from Stephanie more interest.
Hi, Thanks for the follow up.
And that's the supply chain and dedicated segment and in terms of being able to pass through higher labor costs is this just based on the contracts.
Something that's a function of you know I've.
Done annually or a contract by contract or is it based on regional inflation levels with maybe true up just any color you can provide on passing those through that would be helpful.
Yeah, let me.
Yeah, well, Stephanie let me, let me talk first of all in our dedicated business. We have annual CPI increases what we're seeing right. Now is those wage increases are higher than than what's priced then we are having those conversations and we've.
We're gonna and I'd say, the majority of our customers within D. T. S by the end of the year.
Our SCS business I think it's kind of a mix.
A large percentage of our warehousing business about half of that is cost plus so that is kind of real time when those things happen. We just go with the customers and make those adjustments and then in some of the other segments.
And our dedicated that's in the supply chain, we do that both annually and in some of our new contract with really all of our new contracts going forward, we have put a more frequent opener in those contracts. So that we can deal with any future changes that come upon us pretty quickly.
Great. Thank you.
Thanks, Doug.
And we'll hear next from Todd Fowler with Keybanc capital markets.
Oh, great. Thanks for the follow up Robert on the the asset management update slide lease extensions are up pretty significantly which makes sense given some of the delivery delays I think in the past as the lease fleet has aged the warranty or the maintenance expense excuse me starts to ramp up can you talk a little bit about either the reprice.
That youre doing on the extensions of your ability to kind of buffer any higher costs with running an older lease fleet at this point.
Yeah, I'll hand that over to Tom, but let me just say that some of that the spike in extensions is driven by a.
A couple of large trailer fleets that we extended.
That really you know disproportionately impact the count, but let me hand, it over to Tom. So he can talk about you know what that means for rate and and cost.
Yeah, if I were to kind of split that bar up and the power and trailers. The vast majority of it is actually in trailers.
But you're right our our running costs do go up and if you look at the if you look at the lease fleet I think our average fleet age is up five or six months.
And that does drive cost, but I can tell you that all of our expansions we are more than recovering that that cost and the new rate too.
Two customers. So we absolutely have that that's running cost risk covered in the new rate extensions as we as we go forward.
Okay, Todd I know you've been following the cabinet for a while so I would also add that remember we changed with the change in lease accounting, we changed our revenue recognition on maintenance costs.
So that impact that we used to see as the fleet age that margins would deteriorate, we don't expect to see that as the fleet ages and this go around because the way revenue recognition works is as the fleet ages, you get to recognize more revenue to offset those costs.
Okay Robert.
I'm a stable margin Oh, yeah.
Yeah. Okay. So then just to kind of follow through as we think about you know some of the lumpiness in the deliveries as you know as you go into next year, you know that the tradeoff would maybe be that we can see the lease fleet actually move up a little bit. My guess is that rental utilization that was benefited from people renting if they don't have a truck. So you kind of pushed you know some of the delay this year in kind of balance.
Out into next year, how does that kind of come through from a margin standpoint, it seems like it it it it's maybe a net neutral or not a big negative or positive one way or another.
Yeah, I mean, if you think about it on rental it should be a positive because we still expect strong rental demand next year.
Lease as their lease fleet, if you think about margin being relatively stable margin percent because of the way.
The revenue recognition works on the maintenance on the maintenance revenue.
Even if the fleet ages the margin stays the same so your to the extent we grow the lease fleet you should see a benefit in <unk>.
And the overall lease margin dollars or for lease.
And then on the used truck side, we said, we'd expect to be flat to up.
On pricing for the year again strong in the first half potentially pricing slowing down in the second half.
For the full year, certainly flat to up because we're at such a high level now.
Relative to the average of where we were this year.
Yeah, Okay. They're all all of that helps now we just need to see the year coming together the way you've got it mapped out so unlike the last couple of interesting right. So okay. Thanks, a lot for the follow up appreciate it.
Alright. Thanks.
And we'll hear next from Bert <unk> with Stifel.
Hey, Thanks for the follow up outside of the commercial side of things. It seems like Fms revenues sort of moderated this quarter. How much of that is just limited ability to get new trucks versus you know the strategy you guys have put in place to improve profitability there.
Yeah, I'd say, it's a combination of the two but Tom why don't you.
Give him some color on that yeah, I think if you look at Bo.
Both the lease fleet.
And the rental fleet or bulk underpinning both are the supply chain disruption, so even and if you look at our rental fleet.
There's still about 1000 units that had not been delivered had not been delivered from our initial order.
So.
As good as the results where are they they could've been better and it's a it's a similar story with lease we typically have a lag from when a deal is signed to when a new unit arrives and certainly that has been elongated so.
I think underpinning both of those fleets are the the supplies supply chain disruptions.
Great. Thanks, Thanks for the color.
Thank you 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. Thank you listen thank you. Thanks, everyone for your continued interest in Ryder.
And the great questions and we look forward to seeing you in the in the coming weeks have a safe day.
Thank you that does conclude today's conference. We do thank you all for your participation you may now disconnect.
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