Robert S. Brunn - Ryder System, Inc. Robert E. Sanchez - Ryder System, Inc. Art A. Garcia - Ryder System, Inc. Dennis C. Cooke - Ryder System, Inc. J. Steven Sensing - Ryder System, Inc. John Diez - Ryder System, Inc..

Matt S. Brooklier - Longbow Research LLC David Ross - Stifel, Nicolaus & Co., Inc. Casey S. Deak - Wells Fargo Securities LLC Ben J. Hartford - Robert W. Baird & Co., Inc. (Broker) Scott H. Group - Wolfe Research LLC Justin Long - Stephens, Inc. Brian P. Ossenbeck - JPMorgan Securities LLC Todd C. Fowler - KeyBanc Capital Markets, Inc..

Good morning and welcome to Ryder System Incorporated Third Quarter 2016 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 like to introduce Mr.

Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may now begin..

Thanks very much. Good morning, and welcome to Ryder's third quarter 2016 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 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 is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission. This conference call also includes certain non-GAAP financial measures.

You may find reconciliations of each non-GAAP measure to the nearest GAAP measure in the written presentation accompanying this call, which is available on our website at investors.ryder.com. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer, and Art Garcia, Executive Vice President and Chief Financial Officer.

Additionally, Dennis Cooke, President of Global Fleet Management Solutions; John Diaz, President of Dedicated Transportation Solutions; and Steve Sensing, President of Global Supply Chain Solutions are on the call today and available for questions following the presentation. With that, let me turn it over to Robert..

Good morning everyone and thanks for joining us. This morning, we'll recap our third quarter 2016 results, review the asset management area and discuss the current outlook for our business, then we'll open the call for questions. With that let's turn to an overview of our third quarter results.

Comparable earnings per share from continuing operations were $1.67 for the third quarter 2016, down 4% from the prior year. Third quarter 2016 comparable results exclude $0.08 of non-operating pension cost. Last year's comparable earnings excluded $0.05 of non-operating pension cost and $0.01 in pension-related benefits.

Our Q3 results were within our comparable forecast range of $1.65 to $1.72, reflecting continued strength in our contractual businesses and commercial rental performance in line with our expectations for demand in pricing. In addition, favorable overhead performance helped to mitigate the impact of lower than expected used vehicle sales volumes.

Operating revenue which excludes fuel and subcontracted transportation revenue grew by 3% to a record $1.5 billion for third quarter and was higher in all business segments despite rental revenue being down 14%. Excluding the impact of foreign exchange, operating revenue increased by 4%.

Total revenue increased by 3% and was impacted by lower fuel costs passed through to customers. Page five includes some additional financial information for the third quarter. The average number of diluted shares outstanding for the quarter was unchanged versus last year at 53.3 million shares.

We began repurchasing shares under the current 2 million share anti-dilutive repurchase program in the second quarter. The plan allows for purchase of up to 1.5 million shares issued to employees after December 1, 2015, and another 500,000 shares from the former plan that were not repurchased prior to expiration.

During the quarter we bought approximately 58,000 shares at an average price of $64.59. For the program to date, we've purchased approximately 380,000 shares at an average price of $67.52. Excluding pension costs and other items, the comparable tax rate was 35.7% for the third quarter 2016, up 40 basis points from 35.3% in the prior year.

Page six highlights key financial statistics on a year-to-date basis. Operating revenue grew 5% to $4.3 billion. Comparable earnings per share from continuing operations were $4.35, down 3% from last year.

The spread between adjusted return on capital and cost of capital decreased to 100 basis points, down from 140 basis points in the prior year, driven primarily by lower performance in used vehicle sales and commercial rental.

For the full year 2016, we now expect this spread to be 90 basis points compared to our prior forecast of 100 basis points reflecting lower expected used vehicle sales performance. I'll turn now to page seven and discuss some key trends we saw in the business segments during the quarter.

Fleet Management Solutions' operating revenue, which excludes fuel, grew 1% as higher contractual revenue was larger offset by lower rental revenue. Lease revenue increased 7% due to fleet growth and higher rates on replacement vehicles, reflecting their higher cost.

The lease fleet, excluding UK trailers, increased by 2,200 vehicles sequentially and by 5,200 vehicles year-to-date. Included in the lease fleet are a higher number of vehicles that are being prepared for sale.

Excluding these vehicles for a more relevant comparison to our forecast, the lease fleet grew by approximately 700 vehicles sequentially and 3,700 vehicles year-to-date, which keeps us on track to achieve our full year growth forecast of 4,000 vehicles.

Full service lease continues to benefit from favorable outsourcing trends as well as our sales and marketing initiatives. So far this year, approximately 40% of our new lease sales came from customers due to outsourcing, up from about a third last year. Contract maintenance revenue increased 3%.

The average contract maintenance fleet grew by 8,200 vehicles from the prior year, reflecting new customer wins, and decreased by 100 vehicles sequentially. Contract-related maintenance revenue was up 5% from the prior year. Included in contract-related maintenance are 8,000 vehicles serviced during the quarter under on-demand maintenance agreements.

This decrease of 2% from the prior year is due to lower volumes from trucking customers, but up sequentially 5%. Commercial rental revenue was down 14% for the quarter. Global rental demand was down by 13%, driven primarily by lower demand for tractors. Global pricing was flat for the quarter as expected.

Our centralized asset management team executed effectively on our plan to reduce the rental fleet in light of softer demand by both redeploying vehicles into lease contracts and making vehicles available for sale. As a result of these actions, the average fleet decreased by 13% year-over-year.

The ending rental fleet was down 2% sequentially from the second quarter and down 13%, or 5,800 vehicles year-over-year. Vehicles redeployed into other applications were up significantly year-to-date. Redeployment activity reduced the amount of capital needed to fulfill new customer contracts, which benefited cash flow.

Rental utilization on power units was 76.7%, up 30 basis points year-over-year. This is a significant improvement in year-over-year rental utilization comparisons versus those seen in the first half, reflecting actions that we took during the first half of the year to right-size the rental fleet.

Used vehicle results for the quarter were down year-over-year due to lower used vehicle pricing, primarily on tractors, and lower volumes. I'll discuss those results separately in a few minutes.

Overall, FMS earnings decreased due to lower used vehicle sales and commercial rental results, partially offset by higher full service lease results and reduced overhead spending. Earnings before taxes in FMS decreased 11%. FMS earnings as a percent of operating revenue were 11.3%, down 150 basis points from the prior year.

Used vehicle sales performance negatively impacted year-over-year EBT margin percent by 230 basis points. I'll turn now to Dedicated Transportation on page eight. Total revenue grew by 15% and operating revenue was up 7% due to increased volumes, new business, and higher pricing.

We continue to see strong revenue growth in Dedicated, driven primarily by up-selling our current lease customers, which represent about two-thirds of our Dedicated revenue growth. We're also seeing growth with customers that are new to outsourcing. In fact, over half of our new customers are outsourcing for the first time.

DTS earnings increased 32%, primarily due to revenue growth. Segment earnings before taxes as a percent of operating revenue were 8.9%, up 170 basis points from the prior year. I'll turn now to Supply Chain Solutions on page nine. Total and operating revenue growth both grew 8% due to new business and increased volumes.

SCS earnings before tax were up 16%, primarily resulting from this revenue growth. Segment earnings before tax as a percent of operating revenue were 9% for the quarter, up 70 basis points from the prior year. At this point, I'll turn the call over to our CFO, Art Garcia, to cover several items including capital spending..

Thanks, Robert. Turning to page 10, year-to-date gross capital expenditures totaled $1.4 billion, down $700 million from the prior year. This decrease primarily reflects lower planned investments in our rental fleet, lower expected lease fleet growth and the redeployment of used vehicles to fulfill lease contracts.

We realized proceeds primarily from the sale of revenue earning equipment of $338 million, up $17 million from the prior year. The increase primarily reflects 3% higher sales volumes, partially offset by 8% lower used vehicle pricing. Net capital expenditures decreased by about $700 million to $1.1 billion.

Turning to the next page, we generated cash from operating activities of almost $1.2 billion year-to-date, up 11%. The increase was driven primarily by higher cash-based earnings and lower working capital requirements, partially offset by higher pension contributions.

We generated about $1.6 billion of total cash year-to-date, up $140 million from the prior year. Cash payments for capital expenditures decreased by $600 million to $1.5 billion year-to-date.

The company's free cash flow was positive $72 million year-to-date versus the prior year of negative $644 million, reflecting lower capital expenditures and higher operating cash flow. We are maintaining our full year 2016 forecast for free cash flow of positive $200 million. Page 12 addresses our debt-to-equity position.

Total debt of $5.5 billion is basically flat with year-end 2015. Debt-to-equity at the end of the third quarter decreased to 263% from 277% at the end of 2015, and is within our target range of 225% to 275%.

Despite a stronger free cash flow outlook versus prior year, year-end debt-to-equity is expected to be higher than previously forecast due to the continuing pension impact to equity from lower interest rates. We now anticipate year-end debt-to-equity of 265%, up 10 percentage points higher than our most recent forecast.

The table highlights the expected pension impact at year-end. We now estimate that pension will increase leverage by 64 percentage points, the largest impact in recent years. Equity at the end of the quarter was just under $2.1 billion, up $110 million from year-end 2015, primarily due to earnings, partially offset by foreign exchange and dividends.

At this point, I'll hand the call back over to Robert to provide an asset management update..

Thanks, Art. Page 14 summarizes key results for our asset management area. Used vehicle inventory held for sale was 7,500 vehicles at quarter end. This excludes the increased number of lease vehicles being prepared for sale that I mentioned earlier.

Including these vehicles for comparison purposes would increase our used vehicle inventory to approximately 9,000 units, which is up 2,900 vehicles year-over-year and down 100 vehicles sequentially. This is above our normal target of 6,000 used vehicles to 8,000 used vehicles.

We sold 4,000 used vehicles during the quarter, down by 9% from the prior year and down 22% sequentially. While we were able to maintain price, sales volumes were short of our target for the quarter. Proceeds per vehicle sold were down 13% for tractors and up 2% for trucks compared to a year ago.

From a sequential standpoint, tractor pricing was only down 1% and truck pricing was up 2%. As compared to peak prices realized in the second quarter of 2015, overall used prices were down 11%. This was driven primarily by used tractor pricing which was down 16% and to a much lesser extent truck pricing which was down 2%.

The number of leased vehicles that were extended beyond their original lease term increased versus last year by around 730 units year-to-date, but was similar to the levels in the prior few years. Vehicles redeployed into other applications increased significantly to almost 4,000 units year-to-date.

This reflects our actions to place excess rental vehicles into lease and Dedicated contracts as we downsized our rental fleet. Early termination of leased vehicles increased by about a 1,000 units this year, primarily reflecting a couple of significant customer bankruptcies. I'll now turn to page 16 to cover our outlook for the fourth quarter of 2016.

During the third quarter we continued to focus on mitigating the impact of a challenging environment in rental and used vehicle sales, while growing our contractual businesses and managing overhead costs. Our contractual products, full service lease, Dedicated and Supply Chain, all generated revenue growth of 7% or more in the quarter.

Rental performance improved as a result of the fleet right-sizing work we did earlier in the year, while favorable overhead performance helped us to offset the impact of lower than expected used vehicle sales volumes.

In full service lease, we grew the fleet by approximately 3,700 vehicles year-to-date after adjusting for an increased number of vehicles being prepared for sale, as mentioned earlier. As such, we're on track to achieve our full year lease fleet growth forecast of 4,000 vehicles.

We're also pleased that around 40% of our new lease vehicles added this year have come from customers outsourcing for the first time. In rental, utilization comparisons improved significantly versus those realized in the first half of the year.

This reflects the actions that we took in the first half to right-size the rental fleet and the fact that demand was in line with our expectations for the third quarter. Rental pricing was stable and generally in line with our expectations. Looking ahead, we continue to expect rental demand to be down 9% for the full year.

In light of this, we continue to expect our rental fleet to decline by 11% year-over-year at year-end, and by 8% on average. Since we've right-sized the fleet for the current environment, we anticipate that utilization will remain within our long-term targeted range, and the global rental pricing will remain generally flat in the fourth quarter.

In used vehicle sales, the overall environment continues to be very challenging. Pricing has been in line with our expectation, but volumes have been lower than anticipated. Going forward, we'll continue to balance price and volume in order to maximize sales proceeds at the same time managing inventory levels to be near our target range.

In Supply Chain, we continue to expect mid-single digit operating revenue growth with generally stable margins in the fourth quarter. In Dedicated, operating revenue is expected to grow by high-single digits for the full year, although we expect a somewhat lower year-over-year growth rate in the fourth quarter, due to the timing of new sales.

We also expect favorable year-over-year margin comparisons to continue in Dedicated. Given these factors, we're reducing our full year comparable earnings per share forecast to $5.70 to $5.85 from $5.90 to $6.05, primarily to reflect our reduced outlook for used vehicle sales results.

Given the shortfall in used vehicle sales volumes in the third quarter, we're expanding the range of our fourth quarter estimate to account for some additional wholesaling activity which may be necessary to maintain inventories near our target range.

The fourth quarter comparable earnings per share forecast is $1.35 to $1.50 versus the prior year of $1.66. That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open up the line for questions.

In order to give everyone an opportunity, please limit yourself to one question and one related follow-up if clarification is needed. If you have additional questions, you're welcome to get back in the queue, and we'll take as many questions as we can..

Thank you. First question is from Matt Brooklier of Longbow Research. Sir, your line is now open..

Hey, thanks and good morning. So I just wanted to get a little bit more color on used vehicle sales in 4Q.

If maybe you could talk to the expected volume, the amount of trucks and tractors you're looking to sell in the fourth quarter, what are the expectations for proceeds? And then I guess what I'm looking for is, how should we be thinking about gains on sales all-in for 4Q?.

Well, Matt, if you look at in terms of volumes, and let's talk about tractors, that's primarily where the challenge is.

We're looking to be up a little bit from what we sold in the third quarter in terms of total volumes, maybe a couple of hundred units, if you look at the high-end of the range that we gave you, we're looking to be up slightly in terms of volume.

In terms of how to look at it for the fourth quarter, if you look at the net gains for used vehicle sales in the third quarter, we're probably looking at a couple million dollars in the quarter, so we're looking to be somewhere around that to flattish in the fourth quarter. I'm sorry, in the high-end of the scenario.

So, the range that we've given you is depending on how much volume we could move in the fourth quarter. And if we see an opportunity to move more volume, we're going to look to wholesale some more units possibly, and that will get us down to the lower end of the range. In that case, we would be moving more units than the 4,300 units..

Okay, but I guess the all-in targeted gains through increased wholesaling activity, the all-in numbers maybe something similar to what you did in 3Q, I think you did like $2 million?.

Well – or worse, right? If we do more wholesaling, you're going to see that number come down. So, if we do more wholesaling, you could see that number go negative..

Okay, I got you. Okay. And then my second question, you have some seasonality in terms of your commercial rental business. I'm curious to hear your thoughts on what your customers are telling you about peach shipping season, if you're seeing some activity already starting to ramp.

And if maybe you could talk to your expectations in terms of the magnitude of the seasonality that you do in your rental business during fourth quarter..

Yeah, I'll let Dennis answer some more of that. We are seeing kind of normal activity for this time of the year..

Yeah, Matt, I would say it's very similar to what we saw in 2015, where we saw people delivering parcels that were about a month later than we had experienced in 2014. We're seeing the same thing this year, very similar behavior to 2015..

Okay. It's good to hear. Appreciate the time..

All right. Thanks, Matt..

Thank you. The next question is coming from David Ross of Stifel. Your line is now open..

Yes, good morning, gentlemen..

Hey, David..

Good morning..

Just a little bit about the Supply Chain Solutions segment. Strong growth in the auto and industrial sectors.

How much there came from new business wins versus just more volume from existing customers?.

Yeah, if you look, David, at – this is Steve. If you look at auto, it was primarily new business. We did see some volume. As you know, we deal with the majority of the OEMs here in the U.S. and focused on North America, so we see that continuing here for the short-term..

And on the industrial side?.

Industrial, really the same message, majority new business, and got a good healthy pipeline right now, working on closing some contracts and should carry on here for the next short-term..

And then just a follow-up on the SCS business, do lower truck rates, because truck pricing in general, specifically in the truckload, market has been very soft this year.

Does that help SCS margins at all? Does it hurt SCS margins? How do you think about that?.

I would say right now, what we're seeing is some new growth in our transportation management service offering. We are seeing some growth as well in Dedicated, but not really a direct correlation in the used truck pricing..

Thank you..

Yeah, I think, David, on that I would just add that truckload rates for example that we manage for transportation management is typically passed through. The lower rates would be passed through the customer, we're getting the management fee on it..

I was just thinking, if you got a percentage fee and it's a lower rate, then you're going to get less income..

There's maybe a little bit of that, but some of them are flat management fees also. So, I would say it's not a big driver one way or the other..

Okay. Helpful. Thanks..

Okay..

Thank you. Our next question is from Casey Deak of Wells Fargo. Your line is now open..

Hey, good morning..

Good morning, Casey..

Good morning..

I had a quick question on Dedicated. 50% of new customers in there are coming from – are new customers that are new to outsourcing.

Can you talk a little bit about the profile? Are those typical Dedicated accounts? What size fleets are you looking at and the like?.

Yeah, this is John. The typical customer we're seeing that's new to outsourcing, many of which are existing FMS private fleet operators, right? That they lease equipment from us. So if you look at where the growth has been coming, it has been coming from up-selling from lease into Dedicated.

And then when you look at the profile of that customer base, they're typically in that 15 trucks to 20 plus trucks that are operating their own fleet, and are finding it challenging to keep up with the rising cost of equipment, also finding it tough to outfit their fleets with the right drivers and deliver for their customers.

So, a lot of the success we continue to see is through up-selling from our FMS accounts and lease accounts into Dedicated..

Okay. So, to make sure I understand that correctly, if – so I'm thinking about it as they're new to outsourcing as they're not currently in the Ryder System, not FMS customers.

Is that incorrect?.

No. Yeah, no. New to outsourcing means they haven't outsourced their private fleet operations. So, they might be leasing trucks from us, but they still have their own drivers and manage their own private fleet on their own. That's considered still to be insourced, if you will, from a private fleet or Dedicated standpoint..

Okay..

Okay?.

Understood. Yeah. Thank you..

Thank you. The next question is from Ben Hartford of Baird. Your line is now open..

Hey, good morning, guys. Robert, the discussion around the gains in the fourth quarter make sense, but maybe you could talk about 2017, or just the risk to that line item turning negative, turning into a loss.

What is the likelihood of that as, perhaps, as you see the current environment playing out, what is the likelihood that we can see that line item turn into a loss on sales this cycle?.

Yeah, Ben, it's still probably a little early to tell. We're in the process of putting together our business plan and our forecast, so we still got a lot of work to do to get to that. But clearly, we've had a lot of headwind this year in used vehicle sales.

I mean, we had $100 million in gains last year and this year we're probably looking at $30 million, $30 million something by the time it's all said and done. So what I can tell you is that, I would expect next year's headwind's going to be meaningfully less. But, is it going to be break even or is it going to be somewhat negative? We still don't know.

It really depends on how the market here evolves over the next quarter, this next several quarters. And also some decisions we've got to make here in the fourth quarter of what we want to do with the vehicles that we have in inventory, are we going to look to maybe wholesale some additional units to get the inventory down a little bit.

So that's still work to be done..

Okay. And I guess in that same vein, understanding that you're still in the process of putting the budget together for 2017, the used equivalent prices headwinds should abate, I would imagine full service lease fleet growth will decelerate, but remain positive. You've got momentum on the contract side.

We've got to think about residual values and the impact in D&A. I guess that's all a setup for thinking about 2017 EPS.

I mean, what is the likelihood that we should see growth in 2017 EPS, as it stands today, given kind of a preliminary take on some of the headwinds and tailwinds?.

Yeah, you're kind of reeling me in here, but, yeah, I think if you look at the negatives that we had this year, the headwinds we had this year, will be less. There'll still be probably headwinds. I expect rental to be a headwind in the first half and then get a little bit – get better in the second half, because of the right-sizing of the fleet.

Used vehicle sales should be less headwind, but again it'll still be headwind next year unless the market turns, and I think right now most people are seeing this used truck market is going to be around for a little bit, a little bit longer certainly. The positives, we're going to have growth.

I'm still expecting growth across all the contractual businesses. The growth is probably going to be less than what we had this year, primarily in FSL and FMS is primarily the headwind on less OEM production that's being forecasted now. And in Dedicated and Supply Chain, a little bit of the timing of new sales.

But, I still expect positive contributions from each of those. We are not going to have the same depreciation benefit that we had this year. We are not going to have – we don't expect to have a depreciation benefit at all. So, that was $40 million of tailwind that we had this year that we shouldn't have next year.

So that's kind of how it's all coming together as we start to look at it, but again there's still a lot of work to be done around overhead cost actions that we're going to look at and take, and some of the other things around new products and things that could also help us.

So the cake is not baked yet, and obviously our goal is always to try to make as much of the headwind up as we can. But there's still going to be some meaningful headwind going into 2017..

Okay. That's helpful. Thanks, Robert..

Okay, thanks, Ben..

Thank you. The next question is from Scott Group of Wolfe Research. Your line is now open..

So, that last question, that was helpful, just a couple just follow-ups on that, Robert.

So are you thinking that residual value is a push next year or could it actually be a headwind next year? And then just on the idea of less leasing fleet growth, maybe can you just put some, like, sensitivity around, like, let's say we have a thousand fewer units of leasing fleet growth, what that means for free cash flow?.

Tell me the first part of the question now? What was....

So on residual value I think you said that you're not expecting any benefit, but is there a risk that that could be a headwind next year?.

Yeah, I would tell you, Scott, as we sit here today, we see it at best, like we said, a push for next year, I guess it's possible. It would depend on, I guess, some significant pricing declines in the Q4, which we were not really contemplating right now. So my thought is, we're kind of right around that push.

I mean, you may be a little bit negative at worst, I guess as we sit here today, that would be our view on that. The other area around free cash flow, 1,000 units of lease fleet growth that – obviously if we don't buy 1,000 units, that's going to be $80 million to $100 million of lower CapEx..

Okay. Okay. Yeah, I just think that sensitivity is helpful. Okay. And then just last question, if I look in the back of the deck on the redeployments and extensions and all that, some pretty big increases there versus trend.

What's that telling you about the market relative kind of how you've been thinking about it?.

Yeah, I think if you – let's start with redeployments. Redeployments are up. We talked about that in the prepared remarks. It's up primarily due to all the redeployment of rental equipment, as we had the strategy to take rental units and redeploy them into lease and Dedicated applications. That's really the majority of that increase.

Around the extensions, you have some increase, but again it's not outside of our normal historical rates. That is a lever that we may pull going into 2017, and do more extensions in order to keep units from coming to the – more units from coming to the UTC, so there could be some marginal increase in that going into next year.

And then early terminations as I mentioned was really primarily a couple of bankruptcies that we had, customer bankruptcies or credit pulls that we had to take vehicles back. These were primarily customers that were in trucking related business or the for-hire carriers, and we took those units back, and also those units got redeployed.

So that's really what's driving that..

Okay. All right, thank you, guys..

Okay..

Thank you. The next question is from Justin Long of Stephens. Your line is now open..

Thank you. First question I had, last quarter you talked about your guidance assuming $1.30 EPS headwind this year from a combination of used vehicle sales and commercial rental. And I think you said the headwind was split roughly half and half between those two categories..

Right..

Could you update what that number is as it relates to the new guidance?.

Sure. Yeah, it's about $1.50 now, and I'm thinking about the high-end of the range is about $1.50. And it's a little bit more weighted now towards used vehicle sales..

Okay..

So, as you know, used vehicles sales, in the forecast I mentioned, got worse than from our previous forecast and we also took a little bit extra gas in terms of less volume in Q3..

Okay, great. That's helpful. And then, I also wanted to ask about rental utilization. If you look at the sequential trend, we saw an improvement, and that's different than what we've seen in the past few years where rental utilization has declined sequentially in the third quarter.

Could you just talk about how you're thinking about the trend in utilization going forward, and also how this could impact margins, given rental tends to be a higher margin business?.

Yeah, I think – that's really a positive part of the story. The good work that Dennis and his team did in the first half of the year and really rapidly right-sizing that fleet to get utilization levels really back up to the levels that we like to see them, back up over 76%.

So, I think as you look at the margin impact of a dropping demand, we probably saw the worst of it in Q2, where really we still had too many units in the fleet during the middle of that quarter and we had lost the revenue. Now, we've right-sized the fleet, so basically the pull-through, the negative pull-through, has been minimized.

It's going to be at that – that leased rental margin percentage somewhere in the 30% plus level where you're going to get negative pull-through on the loss revenue. That should catch the tail sometime in the middle of next year, we start to see then some year-over-year improvement..

Okay. Great. That's helpful. I'll leave it at that. I appreciate the time..

All right, thank you, Justin..

Thank you. The next question is from Brian Ossenbeck of JPMorgan. Your line is now open..

Hey, good morning. Thanks for getting me on the call here..

Good morning, Brian..

Just on the expense side, Robert, you mentioned the lower than expected overhead spend. Could you characterize what that was and perhaps quantify some of the offset here in the quarter.

It sounds like it's perhaps structural, so any more details on that and what you could see in that area going forward to offset some of the weakness here in the transactional side of the business?.

Yeah, do you remember at the beginning of the year we had a – in our waterfall chart, we had $0.38 of overhead actions that we took in January of this year to really help offset some of the earnings shortfall. So we are realizing all of that and that's helping us on a year-over-year comparison.

In the third quarter, we had a little additional – we had some additional benefit from – it was kind of numerous things such as commissions and bonus and a few other things that really made it a little bit more than what we had expected, so that's really what makes up that delta.

We don't expect those items necessarily to recur in the fourth quarter, so that's why there is some of that decline in the guidance, obviously, along with the reduced expectations, the lowered expectations around used vehicle sales..

Okay.

So a little bit north of $0.38 on a full year basis sounds about what you're implying here?.

Yeah, Brian, it's north of that, but I wouldn't call these related to those cost actions that Robert was referring to. I think these were just general items that came in lower than what we had forecasted at the beginning..

bonus would actually fall into the bucket that we call compensation, so compensation is going to be less of a headwind than what we had originally expected, because we're paying out less bonus..

Right..

Okay, got it. Thanks. That helps.

And just on the free cash flow side, maintaining the guidance for $200 million this year, does that imply reduction of CapEx actually if you look at what that implies for the fourth quarter to be a pretty substantial setup – step up, rather, to finish off the year here?.

Well, no. Our guidance had been around $200 million. It really hasn't changed..

Original....

Well, we started the year at $100 million....

Right..

...we upped it last quarter to $200 million, and we're kind of sticking with that. So we're in that range of cash CapEx of around $1.9 billion for the full year is what's embedded in that guidance..

Okay. Just to clarify, I was looking at the $72 million of free cash year-to-date, and so that would be a pretty substantial increase into the fourth quarter. So I was just looking for a little more clarity around that..

Yeah. No, it's pretty much in line with that – we generate over $400 million cash flow from Ops, still should generate close to $100 million in proceeds from used truck sales, and then the cash CapEx is around $400 million for the....

And, I guess the other thing is, remember, we spent $90 million this year on rental, and that's done at the beginning of the year..

That's right. Yeah..

So you get that headwind in the first half of the year in terms of free cash flow and now in the second half is when you generate more..

Right..

So, some of that's just normal seasonality, I would say..

Right. Okay. Thanks for your time..

Okay..

Thanks, Brian..

Thank you. The next question is from Todd Fowler of KeyBanc. Your line is now open..

Great. Thank you and good morning..

Good morning, Todd..

I guess – good morning, Robert – in the guidance, and maybe you said this, just for clarification if I missed it.

What would the expectation be for the used vehicle inventory at the end of the year based on your guidance range? Is it – that you get down to, or that you get to the high-end of the range, so 9,000 units now comes down to 8,000 units? Or do you get into like the mid-part of the range? I'm just trying to get a sense of where the inventory would be at the end of the year.

Go ahead. Then I have a follow-up (41:27)..

So we don't have – I can't put down exact numbers, until we have the range on the earnings guidance, but we'll probably end up still above the target range, above the 8,000 units. It's just a matter of we don't want to get too far above it.

So we ended up – if you really looked at comparable numbers, we ended the quarter, the third quarter at 9,000 units..

Right..

So that was down 100 units from the second quarter. So what we're going to do is probably be in that range, maybe a little bit lower. Depending on how much we are able to or decide to wholesale. So what we're trying to do is make sure we don't get too far above where we're at right now.

We want to stay within striking distance of that 8,000 units, and that's really the game plan as we go into Q4. Again, unless the market changes and we have an opportunity to do more..

Yeah, what I was thinking about it a little bit is going into 2017 and how much inventory you were going have to on hand and if it makes more sense to move it now versus waiting into next year. And this gets into the second part of the question.

When do you take the write-downs? I mean, so the 1,500 trucks in the third quarter that were sitting in the lease fleet, when you mark those down to what you think the sale value is.

Did you do that in the third quarter or is that something that won't happen until the fourth quarter, if you need to do that?.

Yeah, we expect that higher level of units being prepared for sale to continue for several quarters, because we're really not in a hurry to go out and get these units out to the UTC. We've got plenty of units to sell. So, I don't see that necessarily as a fourth quarter item. That will probably bleed in over the next several quarters.

But to your earlier point on the opportunity to bring the inventory down, we're in agreement with that. The issue just becomes what's the tradeoff of....

Sure..

...price versus volume. And there's times when no matter how much you lower, you're not going to get the volume. So what we have been doing is just trying to keep that balance. And if we can – if we see an opportunity and we see that the market is there, you're going to see us try to move more units and get into the range.

It's just we're trying to be prudent about what that opportunity might be at this point..

Okay. That's helpful. And all that make sense. Just one quick follow-up.

Do you have the age of the lease fleet in months here in the third quarter? Maybe how that compares to where it was a year ago at this time?.

Yeah, we're at 37 months, which is – versus last year was three months....

Last year one month down. So Todd, this is Dennis. Versus last year, that's one month improvement and sequentially it's flat..

Okay.

So a year ago, Dennis, it was at 38 months and in the second quarter it was 37 months?.

Correct..

Okay. Thanks for the time this morning..

Thanks, Todd..

Thank you. And our last question is from David Ross of Stifel. Your line is open..

Yes. Thanks for taking the question. Just got a little quick follow-up.

What's the tax rate assumed for 4Q?.

It's generally going to be around what you saw in the third quarter. So it's going to – low 35% range, in that same area, that's typical for us for the second half of the year..

Okay. And then margins in FMS have been flat from 2Q to 3Q in the last couple years. Historically, though, there were modestly to significantly better from 2Q to 3Q.

Is there anything changing about business seasonality or is that just a reflection of the timing of when the used car market cracked and when rental got soft?.

Hey, David, it's Dennis. There's really no change. It's just reflective of what's happening with used trucks..

Excellent. And then, last question.

Any impact to earnings from the drop in the value of the British pound?.

I mean FX is impacting us, it's been impacting us the whole year, about 1% of revenue this quarter and 1% of earnings. So we expect that to continue here over the balance of the year..

Okay. Thanks..

Yep..

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..

Okay, thanks everyone. Thanks for taking the time to be on the call and thanks for your interest in Ryder. I'm sure we'll be seeing you over the next several months as we get out to some conferences and road shows. So thanks everyone. Have a great day..

Thank you for participating in today's conference. You may now disconnect..