Robert Brunn - VP, Corporate Strategy and IR Robert Sanchez - Chair of the Board and CEO Art Garcia - EVP and CFO Dennis Cooke - President, Global Fleet Management Solutions John Diez - President, Dedicated Transportation Solutions.

Todd Fowler - KeyBanc Capital Markets Inc. Matt Brooklier - Buckingham Research Scott Group - Wolfe Research LLC Casey Deak - Wells Fargo Securities LLC David Ross - Stifel, Nicolaus & Co., Inc., Justin Long - Stephens, Inc. Zach Rosenberg - Robert W. Baird & Co.

Inc., James Allen - JPMorgan Securities LLC Will Milby - Seaport Global Securities LLC John Cummings - Copeland Capital Management LLC.

Good morning and welcome to the Ryder System Third Quarter 2017 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, 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 2017 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'll 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 Diez, 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 2017 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 $1.33 for the third quarter of 2017, down 20% from the prior year.

Third quarter 2017 comparable results exclude $0.08 of non-operating pension cost, $0.06 of pension settlement cost, $0.05 for fees related to a cost savings program, and a $0.03 impact from a state law change, which increased the rate. Last year's comparable earnings excluded $0.08 of non-operating pension cost.

The pension settlement cost this quarter was related to our complete withdraw from the Central States' multiemployer pension plan. The withdraw liability payment and related expenses totaled $5.5 million, which generated an economic benefit for the company. All impacted employees were migrated into our 401(k) plan.

Our third quarter results were toward the high end of our forecast range of $1.25 to $1.35 due to better than expected performance in rental and used vehicle sales, partially offset by lower than forecast Supply Chain results.

In rental, we saw better than seasonal improvement in demand during the quarter and also benefited from hurricane-related activity in September. Used vehicle sales volumes were better than expected and allowed us to reduce inventory levels to our target range sooner than expected.

Supply Chain performed below expectations due to a particularly challenging new start-up account and below forecast results from one existing account. Operating revenue, which excludes fuel and subcontracted transportation, increased by 4% to a record $1.5 billion for the third quarter and was higher in all business segments.

Total revenue increased by 7%, reflecting higher operating revenue and increased subcontracted transportation, driven by new business and higher volumes. Page five includes some additional financial information for the third quarter.

The average number of diluted shares outstanding for the quarter declined by 500,000 shares -- year to 52.8 million shares. We began repurchasing shares under the current $2 million share antidilutive repurchase program in the second quarter of 2016.

The plan allows for the purchase of up to 1.5 million shares issued to employees after December 1st, 2015 and another 500,000 shares from the former plan that are not -- that were not repurchased prior to expiration. During the third quarter, we bought 105,000 shares at an average price of $72.36.

For the program to date, we've purchased 1.47 million shares at an average price of $70.17. Excluding pension costs and other items, the comparable tax rate was 36.2% for the third quarter of 2017, up 50 basis points from 35.7% in the prior year. Page six highlights key financial statistics on a year-to-date basis.

Operating revenue grew 3% to $4.5 billion. Comparable earnings per share from continuing operations were $3.16, down 27% from last year. The return on capital spread was negative 30 basis points, down from 100 basis points positive spread in the prior year, driven primarily by lower performance in used vehicle sales and commercial rental.

We expect the full year return on capital spread to be negative 20 basis points. I'll turn now to page seven and discuss some key trends that we saw in the business segments during the quarter.

Fleet Management Solutions operating revenue, which excludes fuel, was up 3% from the prior year, driven by growth in our contractual, ChoiceLease, and SelectCare products. Commercial rental revenue this quarter was flat on a year-over-year basis, but quarterly comparisons have trended positively as the year has progressed.

ChoiceLease revenue increased by 4% due to fleet growth and higher prices on replacement vehicles. The lease fleet, excluding U.K. trailers, was unchanged sequentially, but increased by 1,100 vehicles year-to-date.

Adjusting for a reduction this quarter in an elevated number of vehicles being prepared for sale, which provides a more relevant comparison to our forecast, the lease fleet grew by approximately 500 vehicles sequentially and 1,900 vehicles year-to-date.

Our full year lease fleet growth forecast remains at around 3,500 vehicles, with more significant growth expected in the fourth quarter due to the timing of net sales activity. 2017 will represent our sixth consecutive year of organic lease fleet growth.

ChoiceLease continues to benefit from favorable outsourcing trends as well as sales and marketing initiatives. So far this year, approximately 40% of our new lease sales came from customers new to outsourcing.

SelectCare revenue increased 3% as higher growth in our full service and -- our SelectCare full service and SelectCare preventative contract business was partially offset by lower billings for ancillary maintenance services, which is also reported in this line item.

We're pleased with the fleet growth we're seeing in our SelectCare full service and preventative product lines. The fleet grew by 5,400 vehicles year-to-date and increased by 2,700 vehicles sequentially, reflecting significant new customer wins. In SelectCare On-Demand, 8,700 vehicles were serviced during the quarter.

This is an increase of 9% from the prior year, reflecting new customers signed up to the On-Demand product, but down sequentially 11% to lower -- due to lower activity with several current accounts.

In the quarter, commercial rental revenue was unchanged from the prior year, but year-over-year comparisons are significantly improved versus the 11% decline seen in the first quarter -- of the first half of 2017.

Global rental demand was down by 1%, but came in higher than forecast due to a better than seasonal demand environment as well as hurricane-related activity that occurred in September. Improved demand conditions, combined with our fleet rightsizing actions earlier in the year, resulted in strong rental utilization of 78%, up 130 basis points.

Global pricing was up 1% for the quarter, above our forecast of flat. The average rental fleet decline decreased 2% year-over-year and the ending rental fleet was down slightly by 1% or 200 vehicles year-over-year. Sequentially, the ending fleet was up 400 vehicles, reflecting fleet growth for the peak season.

Vehicles redeployed into other applications were up by 14% year-to-date. Redeployment activity reduced the amount of capital needed to fulfill new customer contracts, which benefited cash flow. Lease extensions increased by approximately 1,100 vehicles year-to-date, primarily reflecting activity earlier in the year with a large trailer customer.

Used vehicle results for the quarter were up modestly year-over-year. I'll discuss those results separately in a few minutes. Overall, FMS gross margins decreased by -- decreased due to $4 million of accelerated depreciation and higher maintenance costs on a more normalized level of vehicles being prepared for sale during the quarter.

Additionally, overheads increased due to the timing of incentive compensation and higher sales and marketing costs. These impacts were partially offset by improved performance across all product lines. Overall, earnings before tax in FMS decreased 11%. FMS earnings as a percent of operating revenue were 9.8%, down 150 basis points from the prior year.

I'll turn now to Dedicated Transportation Solutions on page eight. Total DTS segment revenue grew by -- grew 4%, while operating revenue grew by 1%, primarily reflecting new business, partially offset by one less work day in the quarter.

We're seeing stronger growth this year with dedicated services provided as part of a multiservice solutions, which is reported in our Supply Chain segment. Dedicated operating revenue within our reported Supply Chain segment grew by 5% for the third quarter and 8% year-to-date.

The sales pipeline in the standalone Dedicated segment has significantly grown during the year, reflecting our focus on improving revenue growth -- the revenue growth rates, with several sizable deals in the sales pipeline.

Earnings in the Dedicated segment decreased 22% this quarter, primarily due to higher insurance premiums, reflecting difficult insurance market conditions, increased maintenance cost on certain older model year vehicles and one less work day in the quarter.

Segment earnings before tax as a percent of operating revenue were 7%, down 190 basis points from the prior year. I'll turn now to Supply Chain Solutions on page nine. Total revenue grew 19%, and operating revenue grew 9% due primarily to new business.

Supply Chain earnings before tax, however, were down 29%, largely due to performance at two customer accounts. One account was a particularly challenging startup, where the startup volumes were significantly lower than forecast.

The other issue was with a large existing account where we experienced both lower than expected volumes and some operational issues. We expect improvement in both accounts starting in the fourth quarter as our teams work with these customers to better align our operations with changing volumes.

Supply Chain's earnings this quarter were also negatively impacted by higher planned IT and sales expense as we had expected coming into the quarter. Segment earnings before tax as a percent of operating revenue were 5.9% for the quarter, down 310 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 were nearly $1.4 billion, largely unchanged from the prior year. Lease spending was down, reflecting greater use of redeployed vehicles to fulfill lease contracts. Lower lease spending was offset by higher planned investments to refresh the rental fleet.

We realized proceeds primarily from the sale of revenue earning equipment of about $300 million, down $36 million from the prior year. The decrease reflects lower used vehicle pricing, partially offset by higher volumes. Net capital expenditures of just under $1.1 billion were largely unchanged from the prior year.

Full year 2017 gross capital expenditures are expected to be $1.9 billion, unchanged from our last forecast. Turning to the next page, we generated cash from operating activities of approximately $1.2 billion year-to-date, generally consistent with the prior year.

We generated over $1.5 billion of total cash year-to-date, down $62 million from the prior year. Cash payments for CapEx decreased by around $200 million to $1.3 billion year-to-date. The company's free cash flow was positive $210 million year-to-date versus the prior year of a positive $72 million, reflecting lower capital expenditures.

We are maintaining our full year 2017 forecast for free cash flow of positive $250 million. Page 12 addresses our debt to equity position. Total debt of approximately $5.3 billion is basically flat with year-end 2016.

Debt to equity at the end of the third quarter decreased to 246% from 263% at the end of 2016 and is now slightly below our target range of 250% to 300%. Our forecast for balance sheet leverage at year end remains unchanged at 240%, which would keep us below the target range.

Equity at the end of the quarter was about $2.2 billion, up $123 million from year end 2016, primarily due to earnings and foreign exchange, partially offset by 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 6,300 vehicles at quarter end. This excludes the elevated number of vehicles being prepared for sale that I mentioned earlier.

A more relevant comparison, which includes these vehicles, would result in used vehicle inventory of approximately 6,700 units, down 2,300 vehicles year-over-year and down 1,700 units sequentially. We sold 4,700 used vehicles during the quarter, up by 18% from the prior year and up 9% sequentially.

Based on a higher than expected number of vehicles sold, we were able to reduce inventory to just below the midpoint of our target range of 6,000 to 8,000 vehicles, one quarter earlier than expected. In addition, we significantly lowered the amount of age in inventory on hand.

Both outcomes better position the used inventory for the fourth quarter and as we enter 2018. Proceeds for vehicles sold were down 19% for tractors and down 15% for trucks compared to a year ago. From a sequential standpoint, tractor pricing was down 4% and truck pricing was up 1%.

As compared to peak prices realized in the second quarter of 2015, overall used prices were down 24%. Overall, we view pricing as stabilizing despite market inventories that are lower but still above historical levels. On a full year basis, we continue to expect pricing to be down 18% to 20%.

In the third quarter, the percentage of used vehicles sold through the retail channel of 62% remained below historical levels as we moved inventory within our target range. With inventory levels in the middle of our target range, we expect to move towards a more normalized level of retail volume beginning in the fourth quarter.

I'll turn now to page 16 to cover our outlook. During the third quarter, we saw an improving environment in the transactional used vehicle sales and rental businesses. Used vehicle pricing showed signs of stabilization and volumes were good, while rental demand was better than expected and improved as the quarter progressed.

Our contractual products, including ChoiceLease, Dedicated and Supply Chain, all grew during the quarter and will provide the majority of the company's earnings this year.

As these products generally represent three to seven-year contractual revenue streams, our strategic focus on growing this portfolio positions us well as our transactional businesses stabilize and start to recover.

Our overall earnings outlook for the fourth quarter remains on track with our prior expectations, as a modestly better outlook for FMS is offset by a somewhat lower expected results in Supply Chain. In ChoiceLease, we continue to expect to achieve our original full year fleet growth forecast of around 3,500 vehicles.

We continue to see solid penetration of the non-outsourced fleet market with around 40% of new lease vehicles coming from customers outsourcing for the first time. SelectCare full service and preventative also benefited from strong sales activity with fleet growth of 5,400 vehicles year-to-date.

In rental, year-over-year utilization and revenue growth comparisons improved significantly compared to the first half of 2017 as a result of a better than seasonal demand environment as well as hurricane-related activity late in the quarter.

Better demand conditions, combined with our actions earlier in the year to right-size the fleet, resulted in outperformance for rental during the quarter. For the fourth quarter, we're anticipating continued better than seasonal demand, including a full quarter of hurricane recovery activity.

We now plan that the rental fleet will be down 1% at year-end and that utilization will remain strong, with pricing up 1% for the fourth quarter. Both rental demand and utilization trends have been positive for the first few weeks of October.

In used vehicle sales, the pricing environment appears to be stabilizing, although some risk remains due to elevated level of Class 8 inventory in the market and other factors. We now expect market prices to be flat sequentially from the third quarter.

However, our price is forecast to be up mid-single-digits as the units to be sold in the fourth quarter will be newer. Although we expect our sales prices to be up sequentially, this will be offset by the newer age of the units sold, so overall used vehicle results should be approximately breakeven for the fourth quarter.

We now expect year-end inventory to be around the bottom end of our target range of 6,000 to 8,000 vehicles, below the prior forecast of 7,000 vehicles. This better positions the used vehicle inventory going into next year as it will allow us to reduce the use of wholesaling and benefit pricing.

In Supply Chain, we expect fourth quarter results to be below our prior expectations due to ongoing impact from the two accounts I mentioned earlier, although to a lesser extent that we saw in the third quarter.

As previously discussed, Dedicated is expected to see a continuing impact from higher insurance cost, reflecting insurance market conditions. Overall, Dedicated results are anticipated to be generally in line with our prior outlook.

With an improvement -- with an improved outlook in FMS, offset by a lower outlook in Supply Chain, overall, our fourth quarter forecast is largely unchanged. The fourth quarter comparable earnings per share forecast is $1.31 to $1.41 versus the prior year of $1.07.

As a result, our full year comparable earnings per share forecast range is now $4.46 to $4.56 as compared to the prior forecast of $4.38 to $4.58. On a GAAP basis, we expect EPS in the fourth quarter to include additional expenses related to a cost savings program.

We are currently undertaking a new zero-based budgeting process, which we expect will result in both cost savings and allow us to fund some strategic investments. We anticipate discussing the future benefits of this program during our fourth quarter earnings call. Finally, I want to highlight one item as we look ahead into 2018.

In used vehicles, there are several components that play into overall results in this area. These include the impact of our annual residual value policy update on depreciation, accelerated depreciation, and the gains realized on sale of vehicles.

Assuming the gain on units sold next year are unchanged year-over-year and that we don't further extend accelerated depreciation past the middle of 2018, we anticipate an overall earnings per share headwind of approximately $0.20 at this time based on preliminary numbers.

We will be undertaking our normal asset review and update process during the fourth quarter and we'll provide a more refined outlook on our next earnings call. That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open 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 calls as we can..

Thank you. [Operator Instructions] We'll take our first question from Todd Fowler with KeyBanc Capital Markets. Please go ahead..

Great. Thanks and good morning..

Good morning..

Robert maybe just on the last comment that you made about the moving parts related to used vehicles going into 2018. Could you maybe just go over again? It sounds like that you're saying that if you don't have the accelerated depreciation and when you think about the residual impact that it would be a $0.20 headwind in the numbers.

Is that right? And if that's the case, what's the biggest driver of that? Is that the residuals or is there something else happening in the used truck market that's holding off on the gains?.

Yes. Todd, this is Art. Yes, you have it right. The impact we talked about was a net $0.20 from those assuming that used vehicle results were flat with the prior year and that there was no more accelerated depreciation.

So, the big driver there would be the residual value impacts that we're estimating right now based on the pricing we've seen over the last couple of years. How that bakes into the model results in a reduction in residuals..

Okay. That makes sense. And then maybe just to follow up on that, Art.

The expectation of used vehicle being flat, what will the assumption be? Would that assume that pricing is flat with where it's at right now as you move through 2018 to get to that $0.20 headwind?.

Yes, I think you have to probably have pricing flat to maybe help a slightly just in the nature of the type of vehicles being sold, but we really haven't finalized all that yet. But generally, it's a flat environment probably..

Okay. Good. That helps with that. And then maybe just to take a step back here in the quarter and some of the commentary on rental. If you give us some color, it sounds like that rental was seasonally strong prior to some of the storm activity. Just wondering if you could comment a little bit about what you think is driving that.

And as we look into the fourth quarter, how the rental activity is looking. It sounds like that there's -- the expectation there's going to be some benefit from carryover from the storm, but maybe just on the underlying contractual rental business and how that's shaping up as we move into the fourth quarter could be helpful..

Yes. Let me give you a little bit color and I'll hand it over to Dennis. But that is certainly a bright spot in the quarter. We did see -- I guess, I should say we finally have seen some life in rental. We saw it really pick up.

We saw a little bit of improvement in the second quarter and now some more improvement in the third and actually picking up during the quarter in the third quarter, with September really also being helped by the hurricanes and the recovery. So, I think that's a great sign.

It's consistent with probably what you're hearing with some of the other trucking companies that are seeing a better freight environment and it's now being reflected in the rental -- in our rental business. That usually is an indication not only that demand is going in the right direction, but also capacity has probably been constrained some.

And now we're seeing really across several industry sectors really customers coming in from rental demand. So, I know Dennis you can give them a little color on where we're seeing it..

Yes Todd. What I'd add to Robert's comments is October-to-date, we're seeing strength in demand, both year-over-year and sequentially. And the sectors where we're seeing strength is coming from transportation and warehousing. We're seeing a lot of demand there and a lot of improvement. Food and beverage also and finally, housing.

So, that's really where we're seeing the increase in demand coming from..

Okay. Good. And maybe just the last one. As you think about what that could mean for 2018, how do you think about additions or what you would do with the rental fleet? I know that it's moved around a lot in the past couple of years. It seems like you've got good utilization.

Would the anticipation be with what you're seeing right now that you plan on growing the rental fleet into 2018? Or would you just hold it at these levels and try and benefit from the utilization and the pricing on the market?.

Yes, we're going to clearly look to benefit from the utilization and pricing. But we -- our overall strategy is to grow our rental business consistent with our contractual growth. So, you would expect us to -- assuming the market firms up, you'd expect us to see some growth in our rental business..

Okay, that helps. Thanks for the time this morning..

Thank you, Todd..

[Operator Instructions] We'll now take our next question from Matthew Brooklier with Buckingham Research..

Hey, thanks. Good morning..

Good morning Matt..

Just a question on the DTS side of things. Can you just remind us of why revenue was expected to decelerate in the second half of this year? I think you had talked to that previously, but maybe a little bit more color in terms of if this is kind of in line with your expectations. And then I had a second question on DTS..

Yes. We had seen -- we started talking about this really at the beginning of the year. We saw a slowdown in sales, really in the second half of last year. And we certainly have added some resources and put more effort into sales to turn that around here in the first half.

We're seeing some good signs in the pipeline and certainly, big -- some big deals that we're working on. But that has not really translated yet into revenue. We expect that to really help us into 2018. So, that's been a lot of it. We've had some discussions about what may have driven that.

I think, as you saw, the driver market the end of last year started to improve a little bit. Maybe there was fewer companies out looking for outsourcing. Clearly, that's tightening up again now. So, I think some of that is reflective of what's going on in the market.

But John, why don't you add some color?.

Yes Matt, the only thing I would add is we are seeing sales activity pick up. Robert mentioned the timing environment, that's helping us.

But more importantly, we're seeing a good number of conversion opportunities with FMS and that may be a factor of the timing environment, but as well as companies are looking for help in really running their transportation activity. So, we expect the first half of 2018 to start picking up momentum to get back to 2016 levels..

Okay, that's good color.

And then my follow-up on DTS, is the driver side of things -- we know the markets gotten a little bit tighter here, has that provided any margin headwind within the DTS business? Or do you think those costs are mostly under control at this point?.

Yes. I would tell you what we're seeing over the last two quarters is we are seeing more activity on the driver side, but we've been able to mitigate those costs by and large. We have the ability to go back to customers and take up price opportunity wherever we can on an annual basis with our contracts.

So, we have taken advantage of the current environment. But overall, we are seeing a more challenging environment, which I think will translate into more growth opportunity for us..

Okay. Appreciate the time..

Thank you..

Thank you, Matt..

Thank you. We'll now take our next question from Scott Group with Wolfe Research..

Hey, thanks. Good morning guys..

Good morning Scott..

Why don't you just follow-up on the used vehicle side for 2018. So, just a couple of things. If -- it sounds like we'll have more retail versus wholesale next year. I would have thought that would have been a benefit. So, I guess I'm just struggling a little bit with the idea of used vehicle pricing being flat next year.

Maybe, Robert, you have some historical perspective. Have there been periods of time where the truck market's improving and the used truck market doesn't improve? Because it sounds like that's sort of what you're expecting for next year and I just want to understand that a little bit better..

Yes. And I don't want you to misunderstand what we're doing with this scenario. We're really trying to give you a sensitivity around a scenario. We're certainly not predicting that it's going to be flat or what it's going to be doing yet. That's still work to be done here in this -- in the next few months as we come up with our plan.

So, this was really -- we had given some guidance a few quarters ago. We talked about a $0.10 variation -- a $0.10 delta with that type of a scenario. We're really just updating it. So, you're right, I wouldn't -- don't take that as we're expecting used vehicle results to be flat because we haven't done that work yet.

If -- clearly, if the used truck market improves on pricing, we're going to get some benefit from that..

So, the change of $0.10 and now $0.20, is that just on residual value?.

Yes, yes..

Okay. And then -- but again, just from historical perspective, have there been periods when the truck market gets better and the used truck market doesn't get better? Because I think some people have that view right now that's what's going to be happening..

Yes. I don't have the data to tell you what that's been every quarter. They tend to move somewhat consistent, but clearly, you could be off by a year or two where there's maybe still some inventory in the used truck market while new vehicles are being pumped in. So, I don't think it's a perfect, perfect correlation, but they generally do correlate. .

Okay. And just last thing, just on this idea.

What is a fair expectation for the potential benefit of just having more retail versus wholesale next year? What -- if that's the only change, what sort of benefit is that?.

I mean you can do the math. I don't have the number. You can do the math. Retail tends to sell at 30% more than wholesale. So, that's just, I think it's algebra at that point, right? You just got to go through that..

And you think that the mix going forward will be what percent retail versus what you've been doing so far year-to-date?.

We've said it. We expect it to move to a more normalized level, which is about 70%. And this quarter, we were at 62%. We've been in the 65% to 62%, so call it maybe 5% improvement..

Very helpful guys. Thank you..

Okay. Thanks Scott..

Thank you. We'll now take our next question from Casey Deak with Wells Fargo. Please go ahead..

Hey good morning guys. Just wanted to, once again, just ask about the used vehicle market and kind of harp on that a little bit. But we're hearing some instances where they're saying the ELD implementation and the enforcement coming here in December will force some more vehicles into the market.

Just wanted your take on if you're seeing more inventory coming into the market as a result of that. And what you would think going forward if you see an influx of vehicles into the used market into 2018.

How competitive are those types of vehicles with a truck that's been serviced and maintained at Ryder?.

Yes, I would tell you, right now, what we saw in the quarter is almost initial signs of life. I mean we started to see really an improvement in volumes in the quarter and our volumes were up sequentially. It was at 9% sequentially, which is really a good sign because that tells you there's activity. There's buyers out there.

So there's people wanting -- and it was really up in retail, and it was up in wholesale. So, there are buyers out there, which I think is a meaningfully improved sign. The improvement in demand that that holds I think that's great. Because even if I get some additional inventory, I would say there seems to be demand out there able to absorb it.

So, it's still early to tell. I would say we've got an initial positive sign, which is great since we're in our third year of this used vehicle downturn. But hopefully, this is the beginning of what would later lead to some firming up on pricing, but we're not there yet.

So, I don't really -- I have not seen -- I don't think we have seen any meaningful increase in inventory due to, as you said, the ELD mandate.

Clearly, there's a scenario there that you can come up with that would say if more of the owner operators decided to get out of business, you'd have more of their trucks in the market, but that is -- we certainly haven't seen it yet..

Okay.

And if that were the case, you think those owner operators would be more on the tractor side potentially? And what's the split right now of your used vehicle inventory? Do you have that in front of you?.

Yes, Dennis has that. That's actually a good point. There are -- if you remember, tractors have really been the bigger issue, and our tractor inventory last year was 40--.

47%..

47% of our inventory. And this year, it's--.

35%..

Now, we're at 35%, so that's come down..

Okay, very good. Thank you guys..

Thank you, Casey..

Thank you. We'll move on to Ross David with Stifel..

All right. Sanchez, Robert, I've got some questions for you..

I wonder who [Indiscernible]. Hey David..

But anyway, just wanted to talk on Supply Chain for a second in the two accounts that caused some issues in the quarter. You mentioned volumes being lower than forecast.

Were both of those accounts in the same industry? And what industry would that be?.

Yes -- no, we don't want to get into which industry. We'd just say, we do -- I would just put it in context. We do -- on any given year, we've got nearly 100 startups going on, especially with the kind of growth that we're seeing. So most of those startups go without a hitch.

But every once in a while, we run into one that becomes a little bit of a problem, and that's really what's happened with this one startup that we're talking about. We expect to have that resolved here in the next quarter or so.

And then the other one is an account that we've had for a long time and they've had some volume issues and then we also have been challenged as we adjusted for those volume changes..

And so when you talk about the accounts being fixed or at least the new one, is that the contract has been readjusted to reduce volume expectations? Or is there something that they're doing in the business to increase the volumes back to where they were originally forecast?.

It's really all of the above, right? It's we're working with the customers to understand the volume changes and then adjust our operations to meet those volume changes..

I guess I just wanted to see because these Supply Chain contracts tend to be maybe three-year deals.

If you're locked into kind of money-losing contract for a few years because they weren't coming up with the volumes or if there something you're able to change, so that you could check the profitability of the contract even if there are lower volumes..

Yes, it's the latter. We don't expect to be locked into a money losing contract..

Okay. And then last question on Supply Chain.

The increase in subcontracted transportation this year, was that due to a mix change? Was that customer-specific?.

Yes, it was really new sales. I'd say a combination of new business and expansion with existing customers. .

And was that focused on any one industry vertical?.

No, across verticals, pretty even..

Okay. Thank you..

Thanks David..

Thank you. We'll now tell take our next question from Justin Long with Stephens..

Thanks and good morning..

Good morning. Hey Justin..

Hey, just wanted to start with a question on CapEx. And I was curious if you could talk about replacement CapEx and potentially provide an early read on how things should trend in 2018. I know you've had some delayed replacement in rentals. So, just curious how we should be thinking about next year..

Well, without getting into the details, Art can give you little more color, we're clearly going to have some increased CapEx in rental. We've had two years of -- one year with almost no CapEx in rental and this year with certainly below replacements.

So, as we get into next year, I would -- you'd expect us to see a more meaningful replacement CapEx year in rental, plus maybe even some growth. So, that's what you see in rental.

Art, if you want to give broader?.

Yes. On the lease side, we're going to go through the cycle. We would expect the higher level of replacement activity in 2018, so that could drive a few thousand more units there that are going to be up for replacement.

So, generally, I think, Justin, if you think about it, you're going to -- we should expect higher -- obviously, higher CapEx next year..

Okay, that's helpful. And secondly I know the future used truck recovery is tough to call.

But if you had to guess today, at what point do you think you'll be able to get back to seeing a level of gains on sales that's in line with the historical average? And also do you need to see that occur in order to get the consolidated business back to that targeted return spread of 150 basis points or more?.

Well, I think to your point, we don't have to get -- we don't have to get back to the peak levels that we saw, but we do have to get back to more of an average of what we've seen in the past. In terms of where we see that, I think it's still too murky. I don't see it certainly right now in the next 12 months.

So, beyond that, it's a matter of what happens with the market. I mean if we do get -- I just look at macro indicators, we get strong GDP growth that certainly the government is trying to get us to or this administration. If we can get to higher GDP growth, that takes care of a lot of these issues.

Over time, that's just going to generate demand for these trucks that then get purchased and you'll see start pricing go up. So, that's why I say the volume improvement we saw in the quarter was promising. It's early.

It's still early to say is this a change or is this just a blip? But if it is the beginnings of this recovery of used truck pricing, it'll certainly be well received by us. We're now in our third year of this downturn and that's certainly taken longer than most of these downturns take. So, at some point, this thing should be coming back..

Okay, that's helpful. I appreciate the time..

Thank you..

Thank you. We'll now take our next question from Ben Hartford with Baird..

Hey good morning. This is actually Zach Rosenberg on for Ben..

Hey Zach..

Just a question on ChoiceLease, you talked about -- I mean, first, reiterating the fleet count growth for 2017 and then the comments around CapEx and Dedicated pipeline being strong.

Just wondering if you can talk a little bit about 2018 and kind of the expectations for demand and any comments around customer interest given the truckload capacity tightening..

Art, you want to -- I mean, Dennis, I'm sorry, you can give them some color?.

Yes, Zach. I mean, We're seeing strength. We're seeing the outsourcing trends continue. And frankly, when you look at the complexity that ELD's are bringing, that could bring even more momentum to the outsourcing trends that we're seeing. You probably saw that 40% of our lease customers are from those who are new to outsourcing, which is a great story.

So, as you look at 2018, we see the secular trends continuing..

And just to follow-up on that comment. That 40% seems like it's been somewhat stable the past few quarters.

Is that a rate from new customers you expect to accelerate? Or are you seeing equal levels of growth maybe on the existing business from your lease customers as well?.

We have a target of getting to maybe half of our customers coming from outsourcing, so we do expect that to continue to creep up over time..

Great. Thanks for the color..

Thank you. We'll now take our next question from Brian Ossenbeck with JPMorgan..

Hey guys. It's James Allen for Brian..

Okay. go ahead..

[Indiscernible]. So, I had another question on ELDs and what you think about the lease market. I'm wondering if there's attendance [ph] from your customers is like pent-up demand for vehicles people holding off from new leases until they see how the ELD mandate plays out and whether that could [Indiscernible] incremental demand [Indiscernible]--.

James, this is Robert. I'm sorry, we're having trouble hearing you.

Are you on a speakerphone?.

How's that? Better?.

That's better..

Yes.

Just to reiterate, say, we're just wondering with the ELD market, if you think people are deferring decision to start a new lease or buy used vehicle until they see how it plays out? And if that could drive the pickup in 2018?.

Yes. I don't think so. I think if you look at our lease sales, we haven't really seen a pullback in that. And I think most of the customers that we deal with have some type of electronic logging device already. So, we are putting ELDs in all of our rental trucks now in the fourth quarter.

So, we'll be prepared as we get into next year our rental fleet will be prepared with ELD devices for any of our customers. And we're seeing customers really moving towards doing that. So, we're not seeing, I think, a hesitation on part of lease customers to sign up to new leases..

Cool. Thank you very much..

Thank you. We'll now take a follow-up question from Scott Group with Wolfe Research..

Hey. Thanks guys.

The property loss that you mentioned in the release, which segment was that showing up in?.

I think it was mostly FMS, right? It was in FMS..

And then so a lot of talk about driver pressures.

Does that historically, in any way, limit rental demand from fleets, meaning if fleets are struggling to seek their own tractors, have you seen periods where that caused them to do less rental activity?.

Yes. It's a hard question to answer as we don't always know exactly why the demand goes down. But clearly, if you don't have drivers, you're not going to be able to rent a truck. But as I said in the quarter, what we've seen is -- we know the driver market is tight, yet we've seen rental really have a nice pickup.

So, I would tell you, in this case, it's probably -- it doesn't seem to be impacting it..

Okay. That makes sense. And then just last question.

So, as you are getting trucks back from customers, to the extent that you have the ability to see this, are you seeing any difference in the total mileage on trucks that have ELDs versus ones that don't have ELDs? I'm trying to get a sense, maybe you have some unique perspective into the trucks without ELDs are coming back with significantly more miles that implies that ELDs could have a big impact going forward once you can't run those extra miles? Maybe you have some unique insights there, so I figured I would ask..

We really haven't done that analysis. And we don't really -- since -- a lot of times, or not ELDs, but the automatic recording devices are put in by the customer. We don't really have always record of which ones are running ELD with the paper logs versus electronic logs. So, we don't have that analysis..

Okay. All right. Thank you guys..

Okay..

Thank you. And we have another follow-up from Todd Fowler with KeyBanc Capital Markets..

Great. Thanks for taking the follow-up. Just on the accelerated depreciation. Can you remind us what the expectation was this year? And then I think that the original comments are that when you talked about the taking the accelerated depreciation, it was going to run through mid-2018.

Is that still the expectation at this point based on where the inventory levels are?.

Yes, right now, we -- our accounting reflects an assumption that will accelerate through the first half of 2018, Todd, as you said. So, that's something that we're going to look at and finalize in the fourth quarter as we head into 2018. Really haven't made a decision yet on should we extend that or not..

And Art, how much was the -- or how much do you expect the accelerated depreciation to be this year end 2017?.

It's about $24 million, something like that, $25 million. And there'll be a little bit of that into 2018 also, obviously. So, the delta is around $20 million year-over-year..

Okay, great. And then Robert you'd made a comment about the budgeting process going into 2018. And I know that we'll get more color on that when you do the formal outlook at the end of the fourth quarter.

But you'd mentioned something about zero budgeting and I'm just curious if you could share a little bit more with us at a high level what you're implying or what you're thinking with that..

Sure. Well, as you know, every year, we have targets of cost take-outs. And if you look at the last several years, it's ranged from 30 to -- $0.25 to $0.35, each year of benefit from cost take-outs. This year, we're probably taking -- we're seeing is we're going to take a more surgical approach to that.

We're really implementing a more formal zero-based budgeting program. We're expecting that, that is going to provide for, obviously, for cost take-out benefits for 2018. We'd expect something at least what we've done in the past, if not higher and that's really what we're working on now.

And that money would be used either find additional investments in the business or to just improve earnings year-over-year..

Okay. So, that's the line item. When we look at the waterfall chart, it's just kind of bucketed in overhead actions. And it sounds like there's going to be more of a specific focus on costs as we move into 2018 at kind of high level or just to paraphrase it..

That's correct..

Okay, that's helpful. We'll look for more color in a couple months. Thanks for the time..

Thanks Todd..

Thank you. We'll now take our next question from Kevin Sterling with Seaport Global Securities..

Good morning guys. This is actually Will on for Kevin. I just wanted to touch on rental and lease real quick. With the pickup in the rental business, are you seeing more customers may be willing to, I guess, the overall demand environment.

Are you seeing customers be more willing to sign a long-term lease after dealing with you all on rental side? I just kind of wanted to get a feel of what you're seeing in that conversion from short-term to long-term business..

Yes, Will, this is Dennis. What I would say is that the pipelines are robust for lease. And certainly, as we look at people who are renting, those conversions continue at a similar rate to we've seen historically is what I would say. But again, ChoiceLease, we're bullish on it.

It continues -- we're going to hit the numbers we talked about before and 2018 looks strong also..

All right. That's it for me. Thanks for the time..

Thanks Will..

Thank you. We'll take our next question from John Cummings with Copeland Capital..

Hey good morning. One question on DTS and the margins there. I think you gave targets back at your Investor Day for maybe 8% to 9%. And obviously, this year's been a step back on the margin side.

But do you think the target is still achievable? And I guess, are there any leverage you can pull internally to get there? Or is it more dependent on improvement in the insurance pricing or other outside factors?.

Yes, John. Just to highlight, the 8% to 9% range that we gave, we performed at that level last year. I think in the near-term, there's a few things that we're working on. One is centralizing some of the administrative functions and taking out cost out of the business.

We're also looking at refreshing the fleet, which we're looking to introduce new trucks at the beginning of next year, which will start helping the results in the first half of 2018. Longer term, when you look at the insurance headwinds that we've been talking about, I think two things there.

Number one, we've made investments in technology, which are driving better safety performance. Over time, we expect that safety performance to continue and mitigate the headwinds we're seeing on the insurance side. So, I would tell you, short-term, there are some levers we could execute against.

And then longer term, we're expecting the safety performance to mitigate some of that insurance headwinds that we're looking at..

Okay. Thanks.

And does the used vehicle pricing declines that you've seen recently affect that -- the margin there at all?.

It does impact some of the margins and we call it out to a degree if its material and we have seen a little bit of a drag there, but nothing meaningful on the results..

Okay. Thanks..

Thank you. We'll now take our final question with a follow-up from Justin Long with Stephens..

Thanks for squeezing in the follow-up. I just wanted to ask a question on the competitive dynamics in the commercial rental industry and how that's evolved recently. Obviously, the market is picking back up and that helps everyone. But I'm curious if your competitors have been pretty rational as it relates to capacity additions.

And maybe you can address that question on both the heavy-duty and medium-duty side in case the dynamics are any different..

Yes, I'll just give you a high level. I think as a general statement, I think it is a rational market. I think if you look at some of the competitors that are privately owned, probably have a little more stomach for taking some of the volatility that you see quarter-to-quarter than we might have a different strategy.

So, there are several competitors who, I would say, are more focused on growing rental and more focused on rental is really being the core product that they're going to grow. Therefore, you may see them more aggressively in the market with more equipment and newer equipment.

But overall, I would say though it is still a relatively rational market and as you can see with the pricing that we're seeing is relatively stable.

But is there anything else?.

Yes, Robert, I would just -- Justin, this is Dennis. I would just add that as Robert said at the beginning of the call, we view rental to be primarily a support product line for our contractual products.

So, as we continue to grow our contractual products, you'll see us grow our rental fleet because it needs to be there to support the contractual products. But also, it is a rational market. That's what we're seeing. Its rational competitors..

Okay, great. I'll leave at that. Thanks again for the time..

Thank you, Justin..

Thank you. And that concludes the question-and-answer session. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks..

All right. Thanks everyone. I think we got to everybody's call and follow-up call. We're at the top of the hour. So, everybody have a great week. Thanks for your interest in the company..

Thank you. And that concludes today's conference. Thank you for your participation..