Q2 2022 Ryder System Inc Earnings Call
[music].
Good morning, and welcome to the Ryder system second quarter 2022 earnings release Conference call. All lines are in a listen only mode until after the presentation.
Today's call is being recorded.
If you have any objections. Please disconnect at this time.
I would now like to introduce Mr. Bob Brunn, Senior Vice President Investor Relations and corporate strategy for Ryder, Mr. Brian You may begin.
Thanks, very much good morning, and welcome to Ryder's second quarter 2022 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 changes.
Competitive market political and regulatory factors.
More detailed information about these factors and a reconciliation of each non-GAAP financial measures to the nearest GAAP measures contained in this morning's earnings release.
Earnings call presentation, and in Ryder's filings with the Securities and Exchange Commission.
We are available on ryder's website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and John <unk>, Executive Vice President and Chief Financial Officer.
Italy, 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 the presentation at this time I'll turn the call over to Robert.
Good morning, everyone and thanks for joining us.
I'm very pleased with this quarter's results, which reflect higher earnings in all three business segments.
I'm also excited to update you on the significant progress we continue to make on our strategy to increase core earnings.
Create long term shareholder value as we outlined in our recent Investor day.
I'll begin the call by providing you with a strategic update John .
Ron will then take you through our record second quarter results, which exceeded our expectations again this quarter.
We'll then discuss our outlook and review, how we've positioned the business to deliver on our long term targets over the freight cycle.
Our two recent supply chain acquisitions, whiplash, and Midwest warehouse and distribution system.
Reformed above our expectations and continued to be accretive to earnings in the quarter.
These acquisitions support our strategy to accelerate growth.
Asset light supply chain business.
Flash significantly grows our E fulfillment network with scalable E Commerce, and Omnichannel fulfillment solutions and Midwest expands our multi client warehouse offerings.
Following record new contract wins in supply chain and dedicated in 2021, we realized record contractual sales year to date for the total company.
Challenges impacting labor supply chain and truck production continue to drive companies to pursue long term transportation and logistics outsourcing solutions.
<unk> also continues to benefit as companies look to source truck capacity in this tight market.
We generated record ROE of 28% for the trailing 12 month period.
Our high teens target, reflecting continued strong demand and pricing and used vehicle sales and rental as well as benefits from our multiyear lease pricing and maintenance cost savings initiatives.
Or are we also improved from a declining depreciation expense impact from prior residual value estimate changes.
We revised our full year 2022, ROE forecast to 25% to 26% from our most recent forecast of 24% to 26% and increased our full year comparable EPS forecast.
These increases reflect higher than expected results for the balance of the year and rental and supply chain.
Supply chain and dedicated are on track to achieve their high single digit target for <unk> as a percent of operating revenue in the second half of the year, reflecting pricing adjustments to recover higher labor costs as well as growth.
Earnings in both segments increased sequentially and dedicated already reached their high single digit target in the second quarter.
Our strong balance sheet continues to provide us with capacity to pursue targeted acquisitions and investments as well as return capital to shareholders.
We expect to complete our $300 million ASR no later than October .
Once complete and assuming market conditions remain favorable we anticipate executing under our other authorized share repurchase programs.
2 million share discretionary program and a $2 5 million share anti dilutive program.
Our board also recently approved a 7% increase in our quarterly dividend, which we have paid out without interruption.
We're over 46 years.
We increased our full year 2022 free cash flow forecast to $750 million to $850 million, primarily to reflect 200 million in lease capital expenditures that is now expected to be deferred due to OEM delivery delays.
Slide five provides an overview of the investments, we're making to drive accelerated growth in supply chain and dedicated.
Key element in our strategy to generate higher returns.
Developing new and enhanced capabilities in e-commerce fulfillment.
Last mile delivery and freight brokerage provide opportunities to leverage profitable growth areas in the market and cross sell services to our large customer base.
Innovative technology enables us to deliver value added logistics solutions that are in high demand and continue to influence a significant amount of new business Award it's a rider.
In previous quarters, I highlighted our Ryder last mile Ryder share in e-commerce fulfillment offerings.
This quarter I will discuss our brokerage offering which provides us with the opportunity to leverage our logistics expertise.
Our ability to secure capacity for our customers.
Sales and marketing are a key to our brand awareness and ensuring customers are aware of the full array of supply chain capabilities are.
Our ever better campaign and increased digital marketing presence have driven a significant increase in qualified sales leads.
We're also expanding our sales force and investing in their capabilities to drive additional growth opportunities.
We expect to continue pursuing strategic M&A opportunities with a focus on adding new capabilities geographies and industry verticals.
These opportunities are an important way to accelerate growth, especially in supply chain and dedicated and we have a strong track record of success in this area.
Ryder ventures, our corporate venture capital fund aims to invest $50 million over five years.
Direct investment in startups or.
Our investments here advanced strategic relationships to support development of new products that benefit our customers and solidify our position as an industry leader.
We've made investments in numerous exciting areas such as autonomous vehicle technology.
E Commerce fulfillment and digital technologies that support freight optimization and are working with these startups to address important customer needs.
Slide six provides a closer look at riders brokerage offering.
Ryder has been in the brokerage business for a long time and in recent years, we began to focus on growing this profitable asset light business more aggressively.
This high return asset light offering expands the services, we offer and creates additional touch points for customers broker.
Brokerage is an opportunity for Ryder to leverage our logistics expertise asset base dedicated transportation solutions.
Extensive carrier relationships and significant buying power to create value for our customers.
Writers brokerage offering provides a concierge level service for all customers.
<unk> is supported by a single point of contact and tech enabled execution.
This model provides shippers and carriers with the confidence that their transaction will be executed as promised.
Our technology platform enables digital matching tracking and settlements, which drives efficiencies and provides customers with more solutions and flexibility.
Our growth initiatives are focused on building scale and density with existing offices in Novi, Michigan and Fort Worth, Texas. We recently opened a new office in Nashville with plans to open additional locations in 2023.
Our brokerage sales head count as planned to more than double this year with support to support expected growth.
Brokerage offering will also be promoted as part of riders ever better marketing campaign.
Adding shippers and private fleets and key geographies will continue to build density and investing in digitization visibility and automation will help us leverage increased scale and density.
More than a third of riders brokerage activity is from customers that use multiple services with rider, which provides us with significant opportunity to cross sell our existing customer base as well as add new customers.
I'll turn the call over to John now, who will cover second quarter results.
Thanks Robert.
Total total company results for the second quarter on page seven.
Operating revenue of $2 3 billion in the second quarter increased 20% from the prior year, reflecting revenue growth in all segments and the supply chain acquisition.
Comparable earnings per share from continuing operations were $4 43.
Second quarter up from $2 40 in the prior year.
Earnings increased across all three business segments with the largest impact from used vehicle sales and rental performance at that for now.
Return on equity our primary financial metric.
The record 28% for the trailing 12 month period, reflecting ongoing truck capacity constraints in the market as well as continued benefits from our initiatives to increase return.
Year to date free cash flow declined to $551 million from $602 million in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales proceeds.
Free cash flow in 2022 includes $205 million from the sale of vehicles some properties in the U K as part of the exited that.
Yeah.
Turning to <unk> results on page eight.
<unk> management solutions operating revenue increased 7%, reflecting 28% higher rental revenue driven by strong demand and higher pricing.
Rental pricing increased 6%, primarily due to higher rates across all vehicle classes.
Fleet management realized pre tax earnings of $285 million up by 127 million from the prior year.
<unk> 4 million of this improvement is from higher gains on used vehicles sold and a lower depreciation expense impact related to prior residual value estimate changes.
Improved rental performance also significantly contributed to increased out from that strong.
Rental utilization on the power fleet was a record 85% in the quarter and above the prior year of 80%.
Results also benefited from our lease pricing initiatives in line with our expectations.
We expect to see incremental benefits going forward as we renew leases at higher rates or approximately the next three years.
Our maintenance cost initiatives also contributed to higher earnings.
Absolutely CVT as a percentage of operating revenue was 21, 8% in the second quarter.
And 19% for the trailing 12 months well above the segment's long term target of low double digits.
Page nine highlights used vehicle sales results for the quarter.
Used vehicle market conditions remained strong reflecting good freight activity in tight supply conditions due to continued OEM production constraints.
Higher year over year sales proceeds, but north America reflects significantly increased market pricing.
Sequentially from the first quarter truck proceeds increased 9%, however, tractor prices decreased modestly by 5%.
From historic highs in line with our expectations.
During the quarter, we sold 10500 used vehicles of which 6500 were related to the exit of our U K business.
Excluding the UK exit related sales used vehicles sold were down 2000 vehicles versus the prior year due primarily to lower inventory levels and were down 300 vehicles sequentially from the first quarter.
Used vehicle inventory inclusive of the U K was 4200 vehicles at quarter end below our targeted range of 7000 to 9000 vehicles.
Average used vehicle pricing is well above our residual value estimates used for depreciation purposes. We believe our residual value estimates are appropriate based on market conditions and our outlook.
Turning to supply chain on page 10.
Operating revenue versus the prior year increased 49% due to acquisitions and double digit revenue growth in all industry verticals, reflecting new business volumes and pricing.
Operating revenue, excluding acquisitions was up 23%.
<unk> increased 28%, reflecting our revenue growth from new business pricing and acquisition.
Actually offset by customer accommodation charges bad debt and incentive based compensation.
<unk> as a percent of operating revenue of six 6% increase sequentially and includes a 90 basis point impact from noncash amortization expense related to recent acquisitions.
We continue to expect that Fpl's EBT percent will return to the high single digit target levels in the second half of the year.
Reflecting pricing actions and profitable growth.
Yeah.
Moving to dedicate out page 11, operating revenue increased 19% due to new business pricing and volumes.
Dedicated EBT increased 76%, primarily due to pricing new business and gains on used vehicle sales.
These benefits were partially offset by strategic investments.
ETF pvt, as a percent of operating revenue of seven 6% was that the segment high single digit target for the quarter.
We expect that ETS EBT percent will continue to generate returns at target levels in the second half, reflecting pricing actions and profitable growth.
Yeah.
Yeah.
Turning to slide 12.
Year to date lease capital spending of $810 million was up year over year due to increased lease vehicle replacements for inspiring these contracts.
Year to date rental capital spending of $364 million declined slightly year over year, reflecting lower planned investments.
Our full year 2022 lease capex forecast of one eight to $1 9 billion.
Higher lease replacement and growth capital versus 2021.
This forecast has been reduced by 200 million to reflect the extended OEM vehicle delivery delays that will defer capex previously planned for late 2022.
In North America, we now expect the your lease fleet to be up approximately 2000 vehicles with lease fleet growth expected to occur in late 2022.
Associated revenue and earnings will primarily benefit next year.
Our full year 2022 rental capex forecast is unchanged at $500 million and remains below the prior year.
With our ending fleet I expect it to grow by 2% over a thousand vehicles.
We expect the average rental fleet to be up by 10% or 3700 vehicles on a full year basis.
Our full year 'twenty two forecast for gross capital expenditures is two five to $2 6 billion.
We expect proceeds from the sale of used vehicles of approximately $1 1 billion.
And this number includes approximately $350 million in proceeds related to the exit of our U K business and higher proceeds from the sale piece vehicles versus prior year.
Full year net capital expenditures are expected to be between $1 4 billion to $1 five below.
Yeah.
Turning to slide 13 as mentioned earlier, we think creased, our 2022 forecast for free cash flow and return on equity.
Our increased 2022 free cash flow forecast of 752 850 million reflects 200 million in deferred lease capital expenditures.
Balance sheet leverage is 233% at the end of the second quarter and is below our $2, 50% to 300% target range.
We expect leverage to remain below our target range for the balance of the year, which will provide capacity for additional acquisitions and share repurchases.
2022 are we expected to be between 25% and 26%, reflecting strengthen up the lab.
And a recovery of SCS and Dts returned to target levels in the second half of the year.
I'll now turn the call back over to Robert to provide an update on our plans to drive higher core earnings over the cycle and our increased 2022 EPS forecast.
Thanks, John I'll start on page 14.
Our recent Investor day, we reviewed the steps we've taken to generate higher core earnings in recent years and the actions underway to continue to drive core earnings higher over the cycle as.
As a reminder, core earnings assumes normalized gains of $75 million on used vehicle sales as well as rental performance that reflects historical utilization levels in the mid to high seventies.
First I would like to highlight various aspects of our business model that contribute to its strength and resiliency through the freight cycle.
Secular trends continue to favor outsourcing decisions.
Contributed to a record <unk> to record contract wins and supply chain and dedicated for the past year and a half.
Over 85% of our revenue is contractual and recurring revenue streams generated from our supply chain dedicated and lease businesses.
Although proceeds and gains will fluctuate with changes in market prices for used vehicles or vehicle residual value estimates are at historically low levels, which we expect to significantly reduce the likelihood of incurring losses on sale or the need for additional depreciation.
Structural changes to the business and execution on our on our balanced growth strategy resulted in a higher level of core earnings.
Our balance sheet remains strong with leverage below our $2, 50% to 300% target.
Used vehicle sales and rental are the non contractual parts of our business and our more cyclical.
As a result of our return initiatives and freight cycle playbook actions, we believe we're positioning the business to achieve long term.
Our long term target of high teens Roe over the cycle with trough Roe of approximately 15%.
Current used vehicle inventory is at historically low levels, reducing the market risk when conditions softened and.
And rental our focus for growth is on trucks, rather than tractors as trucks have been less volatile during prior downturns and are supported by e-commerce growth trends.
For both used vehicle sales and rental we believe the ongoing extended OEM truck lead times are prolonged demand for these products relative to prior cycles.
In addition, our asset management playbook provides us with various levers to help mitigate the impact from a downturn. We can also leverage our expanded retail used vehicle sales capacity up by 50% since 2019 in order to maximize sales proceeds while also managing inventory levels.
Record contractual sales provides us with significant opportunities to reduce rental assets in a down market. We can also extend lease contracts for vehicles with remaining operating life, which defers capex and limits the inflow to used truck centers during a downturn.
We can also reduce discretionary spending.
As such we believe the business is well positioned to execute successfully throughout the freight cycle and generate higher earnings than in prior cycles.
Turning to slide 15, we believe we have considerable opportunity to continue to grow core earnings, which we now forecast at $9 50 at the midpoint of comparable EPS.
Up from 925 at our recent Investor day, primarily due to supply chain performance.
Key drivers of higher core earnings include supply chain and dedicated EBT percent too.
Two there.
High single digit targets in the second half of 2022, which will provide us with an earnings tailwind next year.
Next we have incremental opportunity from our multi year lease pricing initiative as we renew the remaining leases at higher returns with a full benefit of 125 million expected by 2025.
Next we plan to continue to grow.
To grow the business and grow it profitably.
<unk> on our asset light supply chain and dedicated businesses.
Finally, our strong balance sheet provides us with the capacity to pursue strategic acquisitions that provide us with the long term value creation.
We also expect.
To allow us to return capital to shareholders through share repurchases and an increase and an increasing dividend.
Slide 16 highlights the progress we continue to make on our key drivers of higher core earnings.
We expect supply chain and dedicated EBT percent, we'll be at their high single digit targets in the second half of 2022, reflecting pricing actions.
To address unusually high labor costs, which we have largely completed as well as the impacts from profitable new business.
With lease pricing approximately 50% of the portfolio through mid 2022 has been priced at higher returns with an additional 20% contracted at the new prices and expected to be in service over the next 12 months or so.
Sales activity remained strong across all segments reflect the ongoing secular trends as well as sales and marketing and new product initiatives.
Ridership continues to be a key differentiator in winning new business and is credited for influencing approximately 35% of supply chain and dedicated new business wins in 2021.
We recently launched rider view to point out to support our fast growing Ryder last mile business and continue to expand our product offerings, such as brokerage as discussed earlier in order to create sources for long term revenue and earnings growth.
Our recent supply chain acquisitions are performing better than expected and continue to be accretive in the quarter.
We expect to complete our $300 million ASR no later than October and anticipate executing on our other authorized programs afterwards, assuming market conditions remain favorable.
Proud of the team's execution on these key drivers of higher core earnings and fully expect these initiatives to generate incremental benefits in the future and position us for higher earnings and stronger free cash flow relative to prior cycles.
Finally, turning to page 17, we are raising our full year comparable EPS forecast to 14 $30 to $40 80 up from our prior forecast of $30 $40 to $14 40 and above the prior year of $9 58.
We're also providing a third quarter comparable EPS forecast of $3 40 to $3 65 above the prior year of $2 55.
Rental and supply chain performance are the key drivers to our increased full year forecast.
Our forecast continues to assume that the very strong used vehicle in rental environment will moderate in the second half of the year with slower market freight demand, partially offset by ongoing vehicle production constraints.
Revenue and earnings growth in supply chain and dedicated are benefiting from record new contract wins in 2021 and strong new contract activity in the first half of 2022 as well as recent accretive supply chain acquisitions.
We're confident supply chain and dedicated will be at their high single digit target range for <unk> as a percent of operating revenue in the second half of the year, reflecting price actions and growth.
Overall, we're pleased with the trends that favor outsourcing and the results of our efforts in sales marketing and new product development.
We're confident that the actions, we're taking to increase returns and drive core earnings higher will position us to achieve our long term targets over the cycle.
That concludes our prepared remarks. This morning. Please note that we expect to file our 10-Q this afternoon.
We had a lot of material to cover today. So please limit yourself to one question. Each if you have additional questions Youre 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 signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure that your mute function is turned off to let your signal to reach our equipment. Once again that is star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from Jordan, Alex <unk> with Goldman Sachs. Please go ahead.
Yeah, Hi, good morning.
You mentioned, just now that contract activity in dedicated and supply chain was strong in the first half I'm just curious as we go we've been going into maybe what could be a slower environment.
Is the pipeline activity or or request for proposals et cetera.
Does that continue at the same strong rate or do you see some ebbing of people, making inquiries and then also following that.
You know supply chain margin, let's say it gets to that high single digit in the back half can you talk to perhaps the stickiness of that you know if we do have a slower environment is that something that we should expect once you fix the pricing relative to labor can can hang in there even if things slow thanks.
Thanks, Jordan, let me just answer it briefly and I'll, let I'll, let Steve give you. Some color look I think the thing to remember is on the supply chain and dedicated these are long term contracts. These are.
Companies, making decisions to outsource a function that is really being driven by the secular trends that are making all of this activity tougher. So it's less driven by the freight cycle and more driven by just the secular trend so.
I think the.
The reason I'm, giving you that information is really this this shouldnt be sales shouldn't be as impacted.
If you will by the freight cycle as you might expect from other more transactional type businesses and then as it relates to the supply chain margins, yes, those those those targets are really.
On the contractual business and that contractual business as I mentioned is less prone to some of these cycles, but Steve why don't you give him a little more color.
Sure Jordan.
On the pipeline activity, we're not seeing anything at this point slowdown.
Okay.
This year first half of the year after a really good start and our.
Activity is continuing on pace.
From a margin standpoint, I believe that the <unk>.
Work that the teams have done best on supply chain and dedicated to restructure contracts will help obviously protects us as we go forward and a reminder, that the majority of our warehousing business is cost plus so we've got some inflation there.
And then finally, just the continued interest I think from a pipeline perspective around our investment in Ryder sure, but the collaborative visibility to our ever better campaign, we're going to relaunch to TD here in a couple of weeks.
I think a really aiding in the supply chain activity.
Yeah.
Thank you.
Thank you we'll take our next question from Jeff Kauffman with vertical research partners.
Thank you very much and congratulations just tremendous results.
I wanted to clarify.
Two things.
Number one you said, our CSD Etfs should be high single digit in the second half does that mean for the second half or does that mean at some point in the second half you should hit that high single digit.
Margin level, and then associated with that it looked like there was a big jump in.
And the other is this something that is tied to the growth that we're seeing in FCS Dts, where we should assume some higher level of overhead going forward structurally as well.
Well first let me answer the first one supply chain dedicated yes, our expectation is for the second half. So it's not that it's just going to reach it.
Average for the second half will be in the high single digits. That's our that's what we're expecting.
And then John on the on the overheads, you've got any other additional info on that.
Yeah. There were I would tell you you should expect that to grow not at the same level year over year for the balance of year. We did have some added project related costs tied to growth activity and then you did have higher incentive based comp go through that that line will moderate as we get deeper into the year.
Okay, Great. That's my one thanks guys.
Thanks, Jeff.
Yeah.
Thank you and if you find that your question has been answered you may receive move yourself from the queue by pressing the star key followed by the digit too we will take our next question from Brian Hoffman Beck with J P. Morgan.
Hey, good morning, Thanks for taking the questions.
So I appreciate all the details on brokerage had a couple of follow ups. There do you think of as a bigger picture perspective, what would you define these tech enabled solutions, we get that.
Quantify a different way so I'd love to hear what your view is on the role of technology, there and how much is automated and where you think you are in that journey and then just.
What type of.
Service, you're offering or is it filling in backhaul lanes, you working to build out.
Density in dedicated with the back of back of those moves.
A lot of transactional so maybe just some comments on.
Contract versus spot what type of offerings you have in this business.
Sure I'll, let Steve handle it I just wanted to just get a.
Ill give you an idea of kind of what why we focused on growing. This obviously, it's a it's a great return business given all the the customer.
Contacts that we have in all the different businesses, we do business with we thought this was a great additional service that we could provide and what we're finding is as we've been growing it we've been having great acceptance from from our customers and outside customers. So.
We're excited about it as an opportunity to continue to help bring more services to our customers and better returns for our shareholders. So Steve you want to.
Giving some color on the tech enabled solutions and the services, yes, sure. So just kind of a couple of stats for you. There are about 70% of our brokerage activity is either created or digitally.
It gets pretty competitive in the marketplace that 30% right now is matched digitally so that's a key focus area for US right now as we continue to build that density of not only.
Shippers, but also carriers, we expect that to increase as we look over the next couple of years.
Your question around really where we focused it's all of what you said right. It's it's aiding our dedicated operation from a backhaul activity.
It's giving head haul for some of our customers and it's building continuing to build that density in key markets.
So that we can provide a more transactional service for our customer.
Alright, Thank you, Steve and John maybe you can just clarify I think there was mention of.
Some charge offs or accommodation charges.
Bad debt in SCS.
Extra on that.
Yeah. So in the in the quarter, we did see and in supply chain, we had some customer related items that came through.
Along with that that the bad debt was one that we're still pursuing two to recover that.
That charge off but I would tell you that was about.
If we if absent those items I would tell you we would've been in line with the high single digit targets that we set out for ourselves. So really the encouraging thing in the results is the spike that we had a good.
Year over year improvement in average sequential improvement in the business.
Okay, great. Thanks for the detail I appreciate it thanks, Brian .
Thank you we'll take our next question from Scott Group with Wolfe Research.
Hey, Thanks. Good morning, guys can you talk about that can.
Can you talk about the trend in rental utilization and what youre seeing what youre expecting for Q3 and any color on what's what's embedded in the guidance for gains in the second half and then maybe just I don't know Robert I don't know if you can comment at all but.
Anything you wanted to share is if anything on.
If there are any ongoing discussions at all with with HG vora, if you can comment.
Okay, well I'll start with that one.
There's nothing new to report on an H D Bora.
As far as the the trends in rent all I can tell you that we continue to see very very strong.
Rental utilization.
As.
Recent is today, so we're not seeing a big slowdown there as we as we said on the call. We did see tractor used truck pricing began to.
To come down from very very high levels.
In this quarter. So we expect we expect used truck pricing your stock prices to moderate in the second half.
Obviously, we'll bring down gains with rental we expect some softening, but not a whole lot based on what we're seeing but Tom I don't know if you want to give any additional color on how neither one of those two.
Yeah, maybe the only additional color I would give on rental as you remember last year, where we were coming off some record record quarters in the third and fourth quarter from our rental utilization perspective. So we do we are forecasting that to be not quite at that.
Peak utilization level, but we.
We do have visibility to the reservations during the peak season through the holiday season, we are 60 days away from that now so based on.
Based on those reservations and the demand we expect.
From those we expect to have good solid utilization.
Through the balance of the year.
Yes.
Is there something about the mix of what's.
What's in rental today, that's changed that's allowing it to stay.
So healthy and in a sort of a slower spot trucking environment are or maybe we're just.
Connecting things that shouldn't be connected yeah, we have we have been.
We're making a concerted effort to be less reliant on transports, particularly those transports playing in the spot market.
So we are we certainly don't expect to see as large an impact based on the spot market declines in our rental business Tonight, I think where we're certainly seeing some of that now.
Thank you guys.
Thanks Scott.
Thank you we'll take our next question from Todd Fowler with Keybanc capital markets.
Hey, great Thanks, and good morning.
I think this builds a little bit maybe on the last kind of line of questioning but when I look at the third quarter guidance relative to the second quarter, and then kind of what's implied in the fourth quarter, we're kind of seeing this deceleration in <unk> and then maybe a little bit more moderation into <unk>. So.
I guess is that mostly the cadence of gains through the back half of the year because it seems like the Dts and SCS. The margin profile. There is going to improve so maybe at a high level. If you can help us think about the sequential change in earnings off of where we're at in the second quarter. Thanks.
Yeah, Todd you you hit it it's primarily.
Our expect what we're what we're assuming in terms of used truck pricing and the reduction in gains.
It's obviously tough to pinpoint exactly what that number is going to be but we've taken what we think is a prudent estimate on that and that's what's driving the sequential if you will.
A deceleration.
It's primarily that the used truck gains are really driving that because you're really seeing continued improvement in supply chain and dedicated.
Yeah, Okay, and it sounds like that you know rental utilization is holding in pretty well here as well. So that's helpful.
And then just just for a quick follow up can you remind US you know you've got the core earnings number of of $9 50 for this year.
What is the metric now that youre using for kind of a normalized level for both gains and for rental utilization in that 950. Thanks.
So gains of $75 million.
Rental utilization in the mid <unk> mid seventies mid.
Mid 70 still a mid to high <unk> mid to high seventies Yep.
Okay. Appreciate the time that's helpful. Thank you.
Alright, Thanks Scott.
Thank you, we'll hear next from Justin long with Stephens.
Thanks, and good morning.
Maybe to follow up on rental it sounds like you're expecting some moderation in the back half, but not a lot just given the strength you're continuing to see today. So.
The mid eighties utilization right now is your expectation that we're still above 80% utilization in the back half and then following up on used pricing any way you can kind of give us the order of magnitude in terms of the pullback we've seen so far and what you're assuming.
Is incremental to use pricing through the end of the year.
Well I'd tell you on the answer to your utilization was yes, we're still assuming we'd be above the 80.
Next couple of quarters and that's based on what we're seeing but also based on the continued backlog of OEM production.
And a lot of ways is a driver of demand plus as Tom said our move away.
From some of the spot type carriers to more what I would call more stable renters. So yeah. That's that's really what our assumption is there around used truck pricing.
To get into predicting that.
I don't want to I don't want a self fulfilling prophecy of what's going to happen with pricing based on what we say, but yeah. We expect.
Used truck pricing to come down from these.
Historically high record high levels and that continue to moderate over the balance of the year. We don't think it's something that it falls off a cliff necessarily but comes down over over a several quarter period and it's really in line with what we originally forecasted at the beginning of the year, where we're seeing it turn.
When we expected it to turn and we now expect it to continue to come down over the next several quarters, but it is very much real time.
On supply and demand, we certainly don't drop prices, unless we see demand really slowed down and need to move vehicles. So.
That's kind of where we're at we're sort of.
At the same place we were at the beginning of the year in terms of where we expected used truck pricing to trend up.
Okay, and then as you think about where we were at the peak for used truck pricing versus current levels would you say were down 15%, 20% is there any kind of rough ballpark.
Yes, John or Tom do you have anything on that in terms of where we are and we're talking about used tractor pricing I assume not correct right took a straight trucks will still up.
Yes, I think John John mentioned it in the in the opening comments, but attractive pricing sequentially was down I think five 5% sequentially. So I would call the peak from the.
The first quarter.
If you think about it sequentially right. So we just we're just coming off the peak of tractor pricing.
Okay got it I appreciate the time.
Alright, thanks, guys.
Thank you, we'll hear next from Bruce <unk> with Stifel.
Hey, good morning.
Good morning Bert.
Robert.
We look at core EPS projection, you know now at $9 50.
That assumes about a 60% improvement from your pre pandemic peak years, how much of that would you attribute to the residual value changes.
Maybe some of the M&A and changes in SCS I. The reason I ask is your share count is pretty similar to then yet I guess you are saying that the earnings power has substantially expanded and so I'm. Just curious how you think about that thank you yeah I actually heard if you think about it we lowered our residual values, which means that.
Not helping us that's hurting us because it really you have to wait till you sell the vehicle to get those earnings.
So.
The residual value is more of a of a headwind to getting to the 950.
Move from our previous.
Peak of around six Bucks to the 950 is all driven by improvements in our maintenance cost or at least pricing and then significant improvement and growth in our supply chain and dedicated businesses. Those are really the primary drivers of that change in.
And our core earnings.
That is the core earnings of $950 for 2020.
Two as you think about 2023, we would expect to have growth in core earnings is supply chain and dedicated gets we get catch the tail on the improvement in the.
The margins maybe to the high single digits, along with the growth that we're expecting both in supply chain and dedicated as well as the lease business. So you would expect that number to move up as we as each year goes by.
Yes, just a clarification I guess, what I meant was sort of the lease pricing that you get from factoring in that additional depreciation I assume that is at least a pretty substantial component of how you think about the core EPS number.
Well, we've given the lease pricing number so to date is about going to be about $50 million.
So $50 million is going to give you.
Simple math.
To give you a little bit less than a dollar of that so the balance of it is these other items.
Yes, and I would I would just add to that.
Just a reminder, our multiyear maintenance cost savings initiative that that's playing a big part in that progression that you've seen in the Corning supporting that up on myself.
That's over $100 million.
Got it thanks, Robert Thanks, Chuck.
Thanks Bert.
And we'll take a follow up from Scott Group with Wolfe Research.
Hey, Thanks for the follow up guys. So as supply chains are improving in OEM production is improving just curious how are you guys thinking about fleet growth elevated replacement and maybe just overall sort of capex for next year I know, it's early but any initial thoughts.
Yes, well, we mentioned that Theres, probably a couple of hundred million dollars of Capex that is rolling over from this year to next year.
Just on.
OEM delays production delays.
So you would expect that to roll over into next year. Our growth. This year at least is going to be probably on the more like the 2000 unit range. So I would expect next year, we're probably we would be on the high end of our targets on that 4000, maybe even above slightly above the 4000 with some of this rollover. So.
Still early and we got we also have to make sure we finalize our discussion with the Oems as to how much production theyre going to have.
And make sure that we're getting our fair share of that but yes, I would expect us to see an increase in capex as we go into next year with the additional growth.
Rolling over at least from this year.
And as you go from the low end of fleet growth to the high end. If we grew up does that have any implications on the ability to keep pushing that pricing.
No no I mean, our target is still the same.
And.
As I mentioned, we feel we feel that we at the pricing that we have the target pricing that we have we can get in that two to 4000 range.
Growth and and continue to you know to grow earnings while while also making sure we're delivering on free cash flow. So that's the that's the key part of our balanced growth strategy.
Okay, and you think sorry, sorry, just for one last just clarification that you think even with that sort of elevated capex I'm being deferred you think you'll still have positive free cash flow next year.
Yes, it's going to be look I think it'll be close next year, we still don't have a final number so that all depends on exactly how much growth, we get but I would expect with the $200 million, it's rolling over probably breakeven at flattish around.
Free cash flow, but again, it's a really important part of our story is to make sure that through the cycle. We're still getting strong free cash flow you may have some years, where you're going to be around flattish, but generally we're going to be positive in and continuing to see growth in that area.
It makes it makes sense all right. Thank you guys.
Thanks Scott.
Thank you, we'll take another follow up from Bert Susan as well from Stifel.
Hey, thanks for the follow up.
Just a question on the SEC SCS business you guys provided some pretty bullish commentary on that segment in your.
Our presentation in your prepared remarks.
It looks like I mean in general E Commerce sales at the sort of slowed this year yet.
Yet your SCS business, obviously, moving in the right direction and you sort of highlighted that all of the segments are doing well.
Has the disc didnt changed in that like where you're seeing strong more strength in warehousing earlier in the year and Thats.
Switched over to dedicated or how are you looking at sort of the segments of SCS and where the strength is.
Steve you want to take that yeah, I'll take it Bert.
I think we see a continued kind.
Kind of an even keel sales pipeline a good healthy mix of both.
Housing standalone dedicated and integrate integrated solutions.
The acquisition of Whiplash.
Was is often running with it.
Exceeded our sales targets.
At midyear.
<unk> added two new buildings, almost 1 million square feet already owned land one in California, one in Ohio that will be filled up here.
Within the next 12 months and then we have Atlanta coming online here.
Back half of the year. So I'd say, it's really an even keel I haven't really seen any shift in the pipeline or what or what we're selling to customers.
We also shouldn't lose sight of the fact that we've got a lot of pent up auto production demand too.
So as semiconductor issue starts to get resolved here hopefully over the next year, we should have a pretty long runway of of ongoing auto production to support in our auto business, which again is also a unimportant component of our supply chain business.
Great. Thanks for the follow up.
Okay.
Thanks, Brian No additional questions I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.
Okay, well thanks, everyone. Thanks for the question listen we're excited about what's going on here, obviously, a great quarter for us.
ROE of 28% a strong free cash flow and we're seeing really strong organic growth in our supply chain and dedicated businesses. Fms is yes, we're benefiting from strong UBS and run off but the most important thing is that that core leasing business is really.
Generating some good returns and we still have some good runway there so feeling good about where we're going in and and.
And then the balance sheet.
Flexibility that we have going forward around.
Share buybacks, increasing the dividend and continue to do some acquisitions. So thank you all for your interest look forward to seeing you in the future as we do some more road shows and conferences.
Thank you that concludes today's conference. Thank you all for your participation.
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