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spk08: Good morning and welcome to the Rider System's 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 Rider. Mr. Brunn, you may begin.
spk02: Thanks very much. Good morning and welcome to Rider'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 meeting of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political, and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation, and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer, and John Diaz, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Global Fleet Management Solutions, and Steve Sensing, President of Global Supply Chain Solutions and Dedicated Transportation, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert.
spk13: 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 and 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 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, performed above our expectations and continued to be accretive to earnings in the quarter. These acquisitions support our strategy to accelerate growth in our asset-light supply chain business. Whiplash significantly grows our e-fulfillment network with scalable e-commerce and omni-channel 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 chains, and truck production continue to drive companies to pursue long-term transportation and logistics outsourcing solutions. FMS 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, above our high-teens target, reflecting continued strong demand and pricing in used vehicle sales and rental, as well as benefits from our multi-year lease pricing and maintenance cost savings initiatives. ROE 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 in rental and supply chain. Supply chain and dedicated are on track to achieve their high single digit target for EBT 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, a 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 for 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, a 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 awarded to Rider. In previous quarters, I highlighted our Rider Last Mile, Rider Share, and e-commerce fulfillment offerings. This quarter, I'll discuss our brokerage offering which provides us with the opportunity to leverage our logistics expertise and 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. 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. Rider Ventures, our corporate venture capital fund, aims to invest $50 million over five years through direct investment in startups. Our investments here advance 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 offerings. Rider 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. Brokerage is an opportunity for Rider to leverage our logistics expertise, asset-based dedicated transportation solutions, extensive care relationships, and significant buying power to create value for our customers. Rider's brokerage offering provides a concierge level service for all customers that 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 headcount is planned to more than double this year with support to support expected growth. Our brokerage offering will also be promoted as part of Rider's 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 Rider's 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.
spk10: Thanks, Robert. 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 in the 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 in FMF. Return on equity, our primary financial metric, reached a 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 returns. 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 and properties in the UK as part of the exit of that business. Turning to FMS results on page 8. Fleet 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. $84 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 FMS earnings. 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 initiative in line with our expectations. We expect to see incremental benefits going forward as we renew leases at a higher rate for approximately the next three years. Our maintenance cost initiative also contributed to higher earnings. FMS CBT 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 9 highlights used vehicle sales results for the quarter. Used vehicle market conditions remain strong, reflecting good freight activity and site supply conditions due to continued OEM production constraints. Higher year-over-year sales proceeds in North America reflect 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 10,500 used vehicles, of which 6,500 were related to the exit of our UK business. Excluding the UK exit-related sales, used vehicles sold were down 2,000 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 UK, was 4,200 vehicles at quarter end below our target range of 7,000 to 9,000 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%. SEF CBT increased 28%, reflecting revenue growth from new business pricing and acquisition, partially offset by customer accommodation charges, fat debt, and incentive-based compensations. SES-EBT as a percent of operating revenue of 6.6% increased sequentially and includes a 90 basis point impact from non-cash amortization expense related to recent acquisition. We continue to expect that SES-EBT percent will return to the high single digit target levels in the second half of the year, reflecting pricing action and profitable growth. Moving to dedicated on 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. DTS EBT as a percent of operating revenue of 7.6% was at the segment's high single-digit target for the quarter. We expect that DTS EBT percent will continue to generate returns at target levels in the second half reflecting pricing action and profitable growth. 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 expiring lease contracts. Year-to-day rental capital spending of $364 million declined slightly year-over-year, reflecting lower planned investments. Our full-year 2022 lease capex forecast of $1.8 to $1.9 billion reflects higher lease replacement and growth capital versus 2021. This forecast has been reduced by $200 million to reflect extended OEM vehicle delivery delays that will defer CapEx previously planned for late 2022. In North America, we now expect the year-end lease fleet to be up approximately 2,000 vehicles, with lease fleet growth expected to occur in late 2022. The 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 expected to grow by 2% or 1,000 vehicles. We expect the average rental fleet to be up by 10% or 3,700 vehicles on a full-year basis. Our full-year 2022 forecast for gross capital expenditures is $2.5 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 UK FMS business and higher proceeds from the sale of used vehicles versus prior year. Full year net capital expenditures are expected to be between $1.4 billion to $1.5 billion. Turning to slide 13, as mentioned earlier, we've increased our 2022 forecast for free cash flow and return on equity. Our increased 2022 free cash flow forecast of $750 to $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 250 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 ROEs expected to be between 25% and 26%, reflecting strength in FMS and a recovery of SES and DTS returns 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.
spk13: Thanks, John. I'll start on page 14. At 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 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 70s. First, I'd 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 and have contributed to record contract wins in supply chain and dedicated for the past year and a half. Over 85% of our revenue is contractual recurring revenue streams generated from our supply chain, dedicated, and leased businesses. Although proceeds and gains will fluctuate with changes in market prices for used vehicles, Our 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 balanced growth strategy have resulted in a higher level of core earnings. Our balance sheet remains strong with leverage below our 250% to 300% targets. Used vehicle sales and rental are the non-contractual parts of our business and are more cyclical. As a result of our return initiatives and freight cycle playbook actions, we believe we're positioning the business to achieve 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 soften. In 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 prolonging 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 950 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 to their 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 the business and grow it profitably, focused 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 it to allow us to return capital to shareholders through share repurchases 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 will 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 remains strong across all segments, reflecting ongoing secular trends as well as sales and marketing and new product initiatives. Ridershare 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 2.0 to support our fast-growing Rider 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. I'm 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're raising our full year comparable EPS forecast to 1430 to 1480 from our prior forecast of 1340 to 1440 and above the prior year of 958. We're also providing a third quarter comparable EPS forecast of 340 to 365 above the prior year of 255. 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 and 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 EBT 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 follow our 10Q this afternoon. 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'll turn it over to the operator.
spk08: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question. And 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 Allager with Goldman Sachs. Please go ahead.
spk00: Yeah, hi. Good morning. You mentioned just now that contractivity and 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 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, 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? If we do have a slower environment, is that something that we should expect once you fix the pricing relative to labor can hang in there even if things slow? Thanks.
spk13: Thanks, Jordan. Let me just answer briefly and 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 these secular trends that are making all this activity tougher. So it's less driven by the freight cycle and more driven by just the secular trend. So, um, I think the reason I'm giving you that information is, is really this, this shouldn't be, sales shouldn't be as impacted, uh, 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, yeah, 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 them a little more color?
spk07: Yeah, sure will, Jordan. On the pipeline activity, we're not seeing anything at this point slow down. I'd say we're off this year, first half of the year, off to a really good start, and activity is continuing on pace. From a margin standpoint, I believe that the work that the teams have done both on supply chain and dedicated to restructure contracts will help obviously protect us as we go forward. And a reminder that the majority of our warehousing business is cost plus, so we've got some insulation there. And then finally, just the continued interest, I think, from a pipeline perspective around our investment in Ridershare, the collaborative visibility tool, our Ever Better campaign. We're going to relaunch to TV here in a couple of weeks. I think they're really aiding in the supply chain activity.
spk08: Thank you. Thank you. We'll take our next question from Jeff Kaufman with Vertical Research Partners.
spk03: Thank you very much, and congratulations. Just tremendous results. I wanted to clarify two things. Number one, you said SCS DTS 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 corporate and other. Is this something that is tied to the growth that we're seeing in SCS, DTS, where we should assume some higher level of overhead going forward structurally as well?
spk13: Well, first, let me answer the first one. Supply chain dedicated, yeah, our expectation is for the second half. So it's not that it's just going to reach it. It's average for the second half will be in the high single digits. That's what we're expecting. And then, John, on the overheads, you've got any other additional info on that?
spk10: 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 line. But that we'll moderate as we get deeper into the year.
spk12: Okay, great. That's my one. Thanks, guys. Thanks, Jeff.
spk08: Thank you. And if you find that your question has been answered, you may move yourself from the queue by pressing the star key followed by the digit 2. We'll take our next question from Brian Hassenbeck with J.P. Morgan.
spk04: Hey, good morning. Thanks for taking the questions. So I appreciate all the details on brokerage at a couple of follow ups there. Give us a bigger picture perspective. You know, what would you define these tech enabled solutions? We get that quantified different ways. So we'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 here. Is it filling it back all the things you're working to build out? density and dedicated with the back of those moves, a lot of transactional. So maybe just some comments on contract versus spot and what type of offerings you have in this business.
spk13: Sure. I'll let Steve handle it. I just want to give you an idea of kind of why we focused on growing this. Obviously, it's a great return business. Given all the customer contacts that we have and 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 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 give them some color on the tech-enabled solutions and the services?
spk07: Yeah, sure, Will. So just kind of a couple of stats for you there. About 70% of our brokerage activity is either created or booked digitally. I think that's pretty competitive in the marketplace. About 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 You know, really where we focused, it's all of what you said, right? It's aiding our dedicated operation from a backhaul activity. It's giving head hauls for some of our customers. And it's continuing to build that density in key markets so that we can provide a more transactional service for our customer.
spk04: All right. Thank you, Steve. And, John, maybe you can just clarify. I think there's mention of some charge-offs or accommodation charges and in bad debt and SES, uh, some context around that.
spk12: Yeah.
spk10: So in the, in the quarter we did, uh, see in, in supply chain, we had some, uh, customer related items that came through, uh, along with bad debt. The bad debt was one that we're still pursuing to, to recover that, that charge off. But I would tell you that was about, uh, You know, if absent those items, I would tell you we would have been in line with the high single-digit targets that we set out for ourselves. So really the encouraging thing in the results is despite that, we had a good year-over-year improvement or sequential improvement in the business.
spk12: Okay, great. Thanks for the details. Appreciate it. Thanks, Brian.
spk08: Thank you. We'll take our next question from Scott Group with Wolf Research.
spk11: Hey, thanks. Good morning, guys. Can you talk about the trend in rental utilization and what you're seeing, what you're expecting for Q3 and any color on 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 want to just share, if anything on If there are any ongoing discussions at all with HDVORA, if you can comment.
spk13: Okay. Well, I'll start with that one. There's nothing new to report on HDVORA. As far as the trends in rental, I can tell you that we continue to see very, very strong rental utilization as recent as today. So we're not seeing a big slowdown there. As we said on the call, we did see tractor used truck pricing begin to come down from very, very high levels in this quarter. So we expect used truck prices to moderate in the second half, which obviously will 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 either one of those two.
spk14: Yeah, maybe the only additional color I'll give on rental is you remember last year we were coming off some record quarters in the third and fourth quarter from a rental utilization perspective. So we are forecasting that to be not quite at that peak utilization level, but we do have visibility to the reservations during the peak season through the holiday season. We are 60 days away from that now. based on those reservations and the demand we expect, uh, from those, um, we expect to have good solid utilization, uh, through the balance of the year.
spk11: Is there something about the mix of, of, of what's in rental today that that's changed that that's allowing it to stay so healthy in, in a, in a sort of a slower spot trucking environment, or maybe we're just connecting things that shouldn't be connected.
spk14: Yeah, we have, we have been, um, making a concerted effort to be less reliant on transports, particularly those transports playing in the spot market. So we certainly don't expect to see as large an impact based on the spot market declines in our rental business. And I think we're certainly seeing some of that now.
spk12: Thank you, guys. Thanks, Scott.
spk08: Thank you. We'll take our next question from Todd Fowler with KeyBank Capital Markets.
spk05: Hey, great. Thanks, and good morning. I think this builds a little bit maybe on the last line of questioning, but when I look at the third quarter guidance relative to the second quarter and then what's implied in the fourth quarter, we're seeing this deceleration in 3Q and then maybe a little bit more moderation into 4Q. 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.
spk13: Yeah, Todd, you hit it. It's primarily our expect, what we're assuming in terms of used truck pricing and the reduction in gains. So 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, deceleration. It's primarily that the used truck gains are really driving that because we're really seeing continued improvement in supply chain and dedicated.
spk05: Yeah. Okay. And it sounds like that even rental utilization is holding in pretty well here as well. So that's helpful. And then just for a quick follow-up, can you remind us, you know, you've got the core earnings number of $950,000 for this year. You know, what is the metric now that you're using for kind of a normalized level for both gains and for rental utilization in that $950,000? Thanks.
spk13: So gains of $75 million and rental utilization in the mid-70s. Mid-70s still, okay.
spk05: Mid to high 70s, mid to high 70s, yep.
spk12: Okay. Appreciate the time. That's helpful. Thank you. All right. Thanks, Todd. Thank you. We'll hear next from Justin Long with Stevens.
spk01: 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, you know, if we're mid-80s 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 used pricing through the end of the year?
spk13: Well, I'll tell you the answer to your utilization question is yes. We're still assuming we'd be above 80%. in the next couple quarters. And that's based on what we're seeing, but also based on the continued backlog of OEM production that is, in a lot of ways, is a driver of demand. Plus, as Tom said, our move away from some of these spot-type carriers to more, what I would call, more stable renters. So, yeah, that's really what our assumption is there. You know, around used truck pricing, I don't like to get into predicting that because 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, you know, historically high record high levels, and that continue to moderate over the balance of the year. We don't think it's something that falls off a cliff necessarily, but comes down over a several quarter period. And it's really in line with what we originally forecasted at the beginning of the year. 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, and it's dependent on supply and demand. We certainly don't drop prices unless we see demand really slow down and need to move the vehicle. 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 end up.
spk01: Okay, and as you think about where we were at the peak for used truck pricing versus current levels, would you say we're down 15%, 20%? Is there any kind of rough ballpark?
spk13: Yeah, 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 straight truck. The straight truck was still up.
spk14: Yeah, I think John mentioned it in the opening comments, but tractor pricing sequentially was down, I think, 5% sequentially. So I would call the peak from the first quarter, if you think about it sequentially, right? So we're just coming off the peak of tractor pricing.
spk12: Okay. Got it. I appreciate the time. All right. Thanks, Justin.
spk08: Thank you. We'll hear next from Bert Subin with Stifel.
spk12: Hey, good morning. Morning, Bert.
spk09: Hey, Robert. If we look at core EPA projection, you know, now at 950, that assumes about a 60% improvement from your pre-pandemic peak years. How much of that would you attribute to the residual value changes versus maybe some of the M&A and changes in SCS? The reason I ask is your share count is
spk13: pretty similar to then yet i guess you're saying the the earnings power has substantially expanded so i'm just curious how you think about that thank you yeah well actually if you think about it we lowered our residual values which means that's not helping us that's hurting us because it really you have to wait till you sell the vehicle to get those earnings so um the residual value is more of a of a headwind to getting to the 950. the the move from our previous peak of around $6 to the $9.50 is all driven by improvements in our maintenance costs, our lease pricing, and then significant improvement and growth in our supply chain and dedicated businesses. Those are really the primary drivers of that change in our core earnings. The other thing I'd add is the core earnings at $9.50 is for 2022. As you think about 2023, we would expect to have growth in core earnings as supply chain and dedicated we catch the tail on the improvement in the margins, EBT to 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'd expect that number to move up as each year goes by.
spk09: Yeah, 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.
spk13: Well, we've given the least pricing number so to date is about going to be about 50 million. So, you know, 50 million is going to give you simple math is going to give you a little bit less than a dollar of that. So the balance of it is these other items.
spk10: Yeah, and I would just add to that, just a reminder, our multi-year maintenance cost savings initiative, that's playing a big part in that progression that you've seen in the core earnings supporting that FMS.
spk12: Yeah, that's over $100 million. Got it. Thanks, Robert. Thanks, John. Thanks, Bert.
spk08: Okay, we'll take a follow-up from Scott Group with Wolf Research.
spk11: Hey, thanks for the follow-up, guys. So, As supply chains are improving and OEM production is improving, I'm 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?
spk13: Yeah, well, we mentioned that there's probably a couple hundred million dollars of CapEx that is rolling over from this year to next year based on OEM delays, production delays. So you'd expect that to, 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'd expect next year we're probably, we would be on the high end of our targets when that 4,000, maybe even above slightly above the 4,000 with some of this rollover. So, uh, it's still early and we got to, we also have to make sure we've finalized our discussion with the OEMs as to how much production they're going to have, uh, and make sure that we're getting our fair share of that. But, uh, Yeah, I would expect us to see an increase in CapEx as we go into next year with the additional growth that's rolling over, at least from this year.
spk11: And as you go from the low end of fleet growth to the high end of fleet growth, does that have any implications on the ability to keep pushing that pricing?
spk13: No, no. I mean, our target is still the same. And, you know, as I mentioned, we feel that we at the pricing that we have, the target pricing that we have, we can get in that two to four thousand range of growth and and continue to, you know, to 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.
spk11: And you think sorry, just for one last just clarification that you think. Even with that sort of elevated cap back sum being deferred, you think you'll still have positive free cash flow next year?
spk13: Yeah, 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, you know, with the $200 million that's rolling over, probably break even and 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 and continue to see growth in that area.
spk11: Makes sense. All right. Thank you, guys. Thanks, Scott.
spk08: Thank you. We'll take another follow-up from Bert Subin as well from Stifel.
spk09: Hey, thanks for the follow-up. Just a question on the SCS business. You guys provided some pretty bullish commentary on that segment in your presentation, your prepared remarks. It looks like, I mean, in general, e-commerce sales have sort of slowed this year, 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 distribution changed in that? Like, were you seeing more strength in warehousing earlier in the year, and that's switched over to dedicated, or how are you looking at sort of these segments of SCS and where the strength is?
spk13: Steve, you want to take that?
spk07: Yeah, I'll take it. Bert, look, I think we see a continued kind of an even keel sales pipeline, a good healthy mix of both warehousing, standalone dedicated, and integrated solutions. Certainly the acquisition of Whiplash is is off and running. We've exceeded our sales target at mid-year. They've added two new buildings, almost a million square feet already online, one in California, one in Ohio. Those 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. Haven't really seen any shift in the pipeline or what we're selling to customers.
spk13: You know, we also shouldn't lose sight of the fact that we've got a lot of pent-up auto production demand, too. So as the semiconductor issue starts to get resolved here hopefully over the next year, we should have a pretty long runway of ongoing auto production and support in our auto business, which, again, is also an important component of our supply chain business.
spk12: Great. Thanks for the follow-up.
spk08: Thank you. At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.
spk13: Okay. Well, thanks, everyone. Thanks for the questions. Listen, we're excited about what's going on here. Obviously, a great quarter for us. ROE of 28%, strong free cash flow, and we're seeing really strong organic growth in our supply chain and dedicated businesses. FMS is, yeah, we're benefiting from strong UBS and run-up, 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 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 roadshows and conferences.
spk08: Thank you. That concludes today's conference. Thank you all for your participation.
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