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.

Benjamin Hartford - Baird Todd Fowler - KeyBanc Capital Markets Inc. Scott Group - Wolfe Research LLC Justin Long - Stephens, Inc. David Ross - Stifel, Nicolaus & Co., Inc. Casey Deak - Wells Fargo Securities LLC Brian Ossenbeck - J.P.

Morgan Matt Brooklier - Buckingham Research Kevin Sterling - Seaport Global John Cummings - Copeland Capital Management LLC.

Good morning and welcome to the Ryder System Fourth 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 begin..

Thank you. Good morning and welcome to Ryder's fourth quarter 2017 earnings and 2018 forecast 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. 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 fourth quarter 2017 results, review the asset management area, and discuss our outlook for 2018. Then we'll open up the call for questions. With that, let's turn to an overview of our fourth quarter results.

Comparable earnings per share from continuing operations were $1.37, up 28% from $1.07 in the prior year, driven primarily by improved results in used vehicle sales and commercial rental and continued strong ChoiceLease performance.

Comparable results were just above the midpoint of our forecast range of $1.31 to $1.41, as performance in our dedicated -- outperformance in our dedicated and benefits from a favorable tax rate, unrelated to tax reform, were offset by lower than expected FMS results.

In FMS, better rental performance was more than offset by lower than expected used vehicle sales results, primarily due to pricing, as well as additional accelerating depreciation and higher insurance cost related to prior year claims.

Baked in our near-term outlook for used vehicle pricing, we further accelerate depreciation of vehicles we expect to make available for sale to the mid-2019. Previously, we accelerate depreciation extended through mid-2018.

Used vehicle sales activity was strong during the quarter and we effectively executed our plan to reduce inventory levels to the bottom of our target range, better positioning us for 2018.

Our contractual businesses, ChoiceLease, Dedicated and Supply Chain, all grew during the quarter, continuing to benefit from secular trends that favor outsourcing, as well as our ongoing sales and marketing initiatives.

Fourth quarter comparable results exclude a significant one-time net tax benefit of $10.77, primarily due to a reduction in the deferred tax liabilities we will no longer expect to incur under the recently enacted Tax Cuts and Jobs Act.

The new tax provisions are expected to improve Ryder's earnings going forward due to a significant reduction in our effective tax rate. In connection with the benefits -- with these benefits we are anticipating from tax reform, we awarded a one-time bonus totaling $23 million to all non-incentive eligible employees in the U.S.

This one-time employee bonus was excluded from comparable results. We also increased our dividend by 13% as you saw in our press release on Monday. The new tax provisions also enhanced Ryder's typical leasing benefits versus ownership, further increasing the ChoiceLease value proposition.

Comparable results also exclude a $0.27 gain on property sale, a $0.24 restructuring charge and fees and $0.07 of non-operating pension costs. Restructuring costs are related to companywide workforce reduction taken in the fourth quarter, impacting approximately 260 employees.

These actions combined with additional cost savings initiatives are expected to generate $0.50 earnings per share benefit in 2018. Cost reductions and tax reform benefits support the funding of our strategic growth initiatives.

Comparable earnings from the prior year exclude $0.09 of non-operating pension cost and $0.06 of restructuring and other charges. Operating revenue, which excludes fuel and subcontracted transportation revenue, grew by 8% to a record $1.6 billion in the fourth quarter.

Revenue was higher in all three business segments, reflecting new business and higher volumes. I am also pleased to report that following strong fourth quarter of new sales, 2017 was a record sales year for the company. Page five include some additional financial information for the fourth quarter.

The average number of diluted shares outstanding increased to 53.1 million shares -- decreased to 53.1 million shares from 53.4 million shares last year. We began repurchasing shares under a $2 million share antidilutive repurchase program in the second quarter of 2016. During the quarter, you be bought 154,000 shares at an average price of $80.92.

For the full program, we purchased 1.62 million shares at an average price of $71.19, including 500,000 shares not purchased under the prior program. This program expired in December of 2017. Our Board approved a new two-year, 1.5 million share antidilutive repurchase program in December.

We expect to begin repurchasing shares under this new program shortly. Excluding pension costs and other items, the comparable tax rate was 30.4%, up slightly from the prior year's tax rate of 30.1% and was not impacted by tax reform. Page six highlights key financial statistics on a full year basis. Operating revenue grew 4% to $6 billion.

Comparable earnings per share from continuing operations were $4.53, down 16% from the prior year. The spread between adjusted return on capital and cost of capital declined to negative 20 basis points, down 70 basis points from the prior year driven by lower lease in rental margin as well as weaker used vehicle sales results.

I'll turn now to page seven and discuss key trends that we saw in the business segments during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, grew 7%, driven by growth in all product lines. ChoiceLease revenue increased 6% due to fleet growth and higher rates on replacement vehicles.

The lease fleet increased by 1,700 vehicles sequentially and by 2,800 vehicles year-over-year. Adjusted for higher number of vehicles being prepared for sale in the prior year's fleet count, which provides a more relevant comparison, the lease fleet increased by 2,100 vehicles sequentially and increased by 4,100 vehicles for the full year.

This is above our forecast of 3,500 vehicles and reflects robust sales activity. ChoiceLease continues to benefit from favorable outsourcing trends, as well as our sales and marketing initiatives. For the full year, approximately 40% of new sales came from customers due to outsourcing. Miles driven per vehicles per day in the U.S.

lease power units declined slightly versus the prior year, but we continue to run at the normal historical levels. SelectCare revenue was up 7%. The average SelectCare fleet grew by approximately 5,100 vehicles from the prior year, reflecting new customer wins. We've been very pleased with our growth in this asset light contractual product line.

Vehicle serviced during the quarter under on-demand maintenance agreements increased by 4% from the prior year due to new business. Units were down sequentially due to lower seasonal activity. Commercial rental revenue was up 7% for the quarter, driven by higher demand in pricing. Local rental demand was up 4%, exceeding our expectations.

Local pricing was up 2% for the quarter. Rental utilization on power units was 81.2%, up nearly 400 basis points from the prior year, reflecting a stronger demand as well as fleet rightsizing actions taken earlier in the year. The average rental fleet was down sequentially -- was down slightly versus the prior year.

For the full year, the number of leased vehicles that were extended beyond their original lease term increased versus prior year by around 900 units, which was similar to the levels seen in the prior few years. The vehicles redeployed into other applications increased significantly to around 5,900 vehicles for the full year of 2017.

Early termination decreased by around 300 vehicles during the year. As mentioned earlier, used vehicle results in the quarter improved year-over-year to lower inventory valuation adjustments versus the prior year. I'll provide additional information regarding these results separately in a few minutes.

Overall, FMS earnings improved significantly due to improved used vehicle sales results, primarily due to lower used inventory valuation adjustment and higher commercial rental and lease performance. Earnings before tax in FMS increased 43%. FMS earnings as a percent of operating revenue were 8.7%, up 220 basis points from the prior year.

I'll turn now to Dedicated Transportation Solutions on page eight. Operating revenue grew 3% due to higher volumes. Total revenue was up 11%, reflecting increased purchase transportation and higher operating revenue. DTS earnings increased 1% due to favorable development of the prior year's self-insurance claims.

This was largely offset by higher driver cost due to increased turnover and seasonal volumes at select accounts, as well as higher equipment cost on certain older model year vehicles. Segment earnings before tax as a percent of operating revenue were 7.8%, down 10 basis points from the prior year. I'll turn now to Supply Chain Solutions on page nine.

Operating revenue grew 16% due to new business. Supply Chain Solutions earnings before tax were up 5%, primarily due to revenue growth, partially offset by lower operating performance in two customer accounts and higher planned investments in IT.

While we again saw year-over-year impact from the same two customer accounts that impacted the third quarter results, the performance improved sequentially as expected. Segment earnings before tax as a percent of operating revenue were 6.8% for the quarter, down 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 that one-time impact from tax reform as well as the full year capital spending, cash flow and leverage..

Thanks Robert. As everyone knows, the Tax Cuts and Jobs Act was signed into law in late December. Our team continues to work to fully assess the impacts of the many tax changes, which overall, are expected to be favorable for Ryder. There are several impacts that are one-time in nature.

First, in the fourth quarter of 2017, Ryder recognized a provisional non-cash net benefit of $586 million or $11.04 per share from a revaluation of the company's net deferred tax liabilities. The net benefit reflects lower U.S. corporate tax rates, partly offset by a one-time tax on unrepatriated foreign earnings.

The provisional amount of the repatriation tax is $33 million. Due to the increase in equity resulting from the revaluation of our deferred tax liabilities, the company's balance sheet leverage declined by 50 percentage points and was 191% as of year-end 2017.

Again, the impact here is non-cash and we don't anticipate a near-term change in our capital allocation. As a result, we've lowered our target leverage range from 250% to 300% to 200% to 250% debt to equity.

Finally, our return on capital spread is expected to be minimally impacted by tax reform as higher return on capital is expected to be offset by an increased cost of capital from the lower tax rate and leverage. Turning to page 11. Full year gross capital expenditures were $1.9 billion, up $178 million from the prior year.

This increase primarily reflects higher planned investments to refresh the rental fleet, partially offset by lower lease spending due to the greater use of used equipment to fulfill new lease contracts. We realized proceeds primarily from the sale of revenue earning equipment of $429 million, up $8 million from the prior year.

The increase reflects the Q4 sale of a Supply Chain property and was largely offset by lower used vehicle volumes and pricing. Full year net capital expenditures increased by $170 million to $1.5 billion. Turning to the next page, we generated cash from operating activities of $1.5 billion for 2017, down around 3% from the prior year.

We generated $2.1 billion of total cash during the year, down by around $50 million from the prior year. Cash payments for capital expenditures decreased by around $40 million to a little under $1.9 billion. Free cash flow for 2017 was $190 million, down slightly from the prior year. Page 13 addresses our debt to equity position.

Total debt of approximately $5.4 billion was substantially unchanged from year ended 2016. Debt to equity at the end of 2017 decreased to 191%, down from 263% at the end up 2016. As I mentioned earlier, leverage declined by 50 percentage points due to an increase in equity, resulting from tax reform.

Our accumulated pension equity charge decreased this year because of favorable asset returns, which more than offset a lower discount rate. The accumulated pension charge continues to impact leverage at 32 points as of year-end 2017, although down from a 61-point impact at year end 2016.

The decrease the impact reflects the higher equity base after-tax reform. Equity at the end of the quarter was around $2.8 billion, up almost $800 million from year end 2016, due primarily to earnings and including the revaluation of deferred tax liabilities.

At this point, I'll hand the call back over to Robert to provide the used vehicle sales update..

Thanks Art. Page 15 summarizes key results for used vehicle sales. Used vehicle inventory held for sale was 6,000 vehicles at quarter end. Adjusting the prior periods fleet counts for a higher number of vehicles being prepared for sale, which provides a more relevant comparison.

Used vehicle inventory declined by 2,700 vehicles versus the prior year, and by 700 vehicles sequentially. We effectively executed our plan this year to reduce inventory levels to the low end of our target range of 6,000 to 8,000 vehicles.

We sold 4,000 used vehicles during the quarter, down 11% versus the prior year, and down 15% sequentially, resulting from a lower inventory levels. For the full year, we sold 17,600 vehicles, down 4% from 2016. Proceeds per vehicles sold were up 2% for both trucks and tractors compared to a year ago.

From a sequential standpoint, tractor pricing was up 11% and truck pricing was up 2% versus the third quarter. Higher proceeds per vehicle reflect a mix of vehicles sold versus the prior periods. We generally view to market as stabilizing during the fourth quarter.

Compared to fleet period, the fleet prices realized in the second quarter of 2015, tractor proceeds were down 25% and truck proceeds were down 16%. I'll turn now to page 17 to cover our outlook for 2018. Pages 17 and 18 highlight some of the key assumptions that underpin our 2018 earnings forecast.

We expect higher earnings in 2018, primarily due to robust contractual revenue growth across all business segments, following a record sales year in 2017 and a strong sales pipeline going into 2018. Earnings are also expected to benefit from cost reduction initiatives and improved commercial rental performance.

These benefits will be partially offset by strategic investments, ongoing headwinds in used vehicle sales, negative impact from depreciation, and higher maintenance cost on certain older year vehicles. The negative impacts from used vehicle sales will be lower in 2018 versus 2017.

Our 2018 forecast assumes moderate growth for the overall economy, a rising interest rate environment and a minimal impact from foreign exchange. In Fleet Management, we expect 2018 to be our seventh consecutive year of organic lease fleet growth.

We're forecasting lease fleet growth of 6,500 vehicles, up 60% in the prior year and well above the target we laid out at our Investor Day Conference almost two years ago. We also expect strong growth in our SelectCare maintenance products with an increase of 4,500 vehicles.

We're anticipating strong sales activity in this year, driven by secular trends that favor outsourcing, our ongoing sales and marketing initiatives, as well as a strengthening rate environment. We're also expecting improving commercial rental performance in light of an accelerating fleet environment.

Rental demand is expected to increase by a 6%, with pricing expected to increase by 3% with higher utilization. We plan to grow the average rental fleet by 2,100 vehicles or 6%. Higher capital spending to fund higher growth and replacement in both lease and rental will result in a negative free cash flow in 2018.

Used vehicle sales will be a headwind in 2018 due to the ongoing impact of the extended market downturn. Our forecast assumes a modestly improving outlook for used vehicles pricing in 2018. We expect proceeds for vehicles to be up approximately 7%, reflecting more vehicles sold through Ryder's retail network process wholesale channels.

Used vehicle sales are forecasted to generate a loss of $0.14 per share due to valuation adjustments, however, this represents a year-over-year EPS benefit of $0.06 versus 2017.

In order to reflect multiyear used vehicle pricing trends, we've lowered our residual value estimates for vehicles operating and operations resulting in a negative impact of $0.50 per share.

In addition, we extended accelerated depreciation of vehicles that we expect to make available for sale through mid-2019, whereas previously accelerated depreciation extended through mid-2019. Accelerated depreciation negatively impacted 2018 earnings by $0.23.

However, the impact of accelerated depreciation will be lower than the prior year, resulting in a year-over-year EPS benefit of $0.14. Turning to page 18. Strong 2017 a sales activity and a robust pipeline are expected to drive strong revenue growth in both DTS and SCS.

Dedicated's earning will benefit from revenue growth in cost savings initiatives, partially offset by a favorable insurance development realized in 2017 that are not currently forecast for 2018, as well as strategic investments.

Supply Chain earnings are expected to benefit from revenue growth, higher pricing, and a better operating performance, partially offset by strategic investments. We're planning for a lower effective tax rate due to tax reform, which will benefit earnings.

We're also expecting significant reductions in discretionary and overhead costs as a result of the new zero-based budgeting process we recently implemented. Cost savings and tax benefits will fund strategic investments in sales and marketing, new product development, and technology, which are focused on driving long-term revenue and earnings growth.

This level of growth and strategic spending for 2018 is higher than we would expect going forward. We also plan to purchase shares under our new two-year 1.5 million share antidilutive repurchase program. This program replaces our prior program that expired in December.

Page 19 provides a summary of key statistics in our 2018 forecast, which is based on the assumptions I just outlined. We expect operating revenue to grow 8%, with revenue up in all business segments. Comparable earnings per share is forecast to be in the range of $5.40 to $5.70 in 2018 as compared to $4.53 last year.

This reflects strong growth in our contractual product lines, a lower tax rate, cost savings initiatives, and increased rental results.

These benefits are partially offset by strategic investments, impacts from extended downturn in the used vehicle market, and higher maintenance cost from certain older model year vehicles that don't largely exit the fleet over the next 18 months.

Our share count is forecasted to remain unchanged at $53 million due to antidilutive share repurchase activity. We project the comparable tax rate of 26.1%, down significantly from last year's rate of 34.9% due to the impacts of tax reform.

The spread between our a return on capital in cost of capital is forecast to be breakeven, which is 20 basis points better than the prior year. Our 2018 return on equity forecast is about 10%. Page 20 outlines our revenue expectations by business segment.

Record sales results in 2017 and a strong pipeline support a strong revenue growth outlook for the year. In Fleet Management, operating revenue is expected to increase by 8% above our long-term target range, reflecting growth in all product lines.

ChoiceLease revenue is forecast to grow at 8%, significantly higher than the 4% growth last year, driven primarily -- largely by increased fleet growth. We're forecasting a 9% increase in commercial rental revenue due to an accelerating freight environment.

DTS operating revenue is also forecast to grow by 9% in 2018, in line with our long term revenue growth target and significantly better than last year. Supply Chain Solutions revenue growth is also expected to be a solid 6% from just below our long-term target.

Page 21 provides a chart outlining the key changes in our comparable earnings per share forecast from 2017 to 2018. We continue to make strategic investments to drive future earnings and growth.

In 2018, we're planning on higher than normal increase of $0.38 in strategic spending, focused primarily on sales and marketing, new product development, and IT. Sales and marketing investments include adding new sales people in product development.

IT investments include new customer facing technology, which provides expanded capabilities for our customers. The net impact from used vehicle sales result in higher depreciation expense is expected to negatively impacted earnings by $0.30.

Higher depreciation from policy changes to reflect new vehicle -- used vehicle trends will be partially offset by lower accelerated depreciation and valuation adjustments versus the prior year. Higher compensation expense is expected to impact earnings by $0.27 of this year.

This includes the impact of planned bonus at target as well as standard merit releases. Higher interest rates and increased liabilities insurance premiums are forecasted to negatively impact earnings per share by $0.18. Turning to the positive earnings drivers. Growth in Dedicated revenue and increased margin should add $0.10.

Supply Chain, in Supply Chain, we expect $0.20 of earnings growth, driven primarily by higher revenue and better operating performance. Commercial rental is expected to increase earnings per share by $0.23 as higher demand drives better utilization on a larger fleet with higher pricing.

Workforce reduction and other cost-saving sections driven by our new zero-based budgeting process are expected to benefit EPS by $0.50 this year. We believe further opportunities for lower cost and driving efficiencies exist in the future.

The biggest operating contributor to higher earnings is expected to be FMS ChoiceLease and SelectCare, totaling an additional $0.60 of earnings per share this year. This is driven by strong fleet growth and higher pricing.

ChoiceLease results include higher maintenance cost on certain older model year vehicles that will largely exit the fleet over the next 18 months. The net impact of the operational items I've mentioned so far would be result in an earnings per share of $4.98. In addition, we're forecasting a $0.72 net tax benefit, driven by lower U.S.

federal income tax rate resulting from tax reform. This brings the high end of our comparable EPS to $5.70 with a forecast range of $5.40 to $5.70. I'll turn it back over to Art now to cover capital spending, cash flow, and ongoing impacts from tax reform..

Thanks Robert. Turning to page 22. We're forecasting total gross capital spending of nearly $3 billion, up about $960 million from last year, due to higher growth and replacements spending in both lease and rental.

Lease spending is up due to significantly higher fleet growth in a forecast, as well as an increased number of vehicles up for replacement of this year. We also expect to fill more replacements with new equipment this year.

In rental, we're planning to spend a total of $745 million in 2018, up almost $400 million year-over-year in order to refresh and grow into fleet. The average rental fleet is forecasted to increase by 6% or around 2,000 vehicles. Higher replacement spending in 2018 follows two years of below replacement level spending for rental.

Investment in operating property and equipment is expected to increase by around $50 million in 2018. These funds will be used primarily to add or expand FMS operating locations.

Proceeds from sales are forecasted to decrease by about 3% to $415 million, primarily because 2017 included proceeds from a sale -- property sale not a forecast to occur in 2018. Excluding this item, proceeds are expected to be up 6% as used vehicles sales volumes and pricing are forecasted to be higher than prior year.

Net capital expenditures are forecasted at around $2.5 billion. This represent an increase of almost $1 billion in 2017. Nearly three quarters of this capital will be used to support multiyear contractual lease agreements.

Free cash flow is forecasted at negative $600 million, down by about $800 million from the prior year, reflecting higher capital spending, partially offset by higher cash from operations.

With lower expected free cash flow, debt to equity is forecast to modestly increase to 199% at year end, just below the bottom end of our updated target range of 200% to 250%. We've talked in recent years about the impacts that higher growth capital spending has on the business.

Page 23 highlights of the amount of growth capital we've invested by year, driven from both fleet growth and higher vehicle investment cost per unit and its impact on cash flow.

For 2018, we expect to spend nearly $1.2 billion in growth capital, with $865 million to support contracted lease growth and $305 million to refresh and grow the rental fleet. The box on the right-hand side of the page breaks out the growth investment in the lease. Forecasted lease fleet growth of 6,500 units will require $610 million of capital.

Higher per unit cost on leased vehicles being replaced will require an additional $255 million. All of this capital drives higher future revenue and earnings in lease over the average six-year life of these vehicles. For 2018, free cash flow declined due this higher capital spending, partially offset by higher operating cash flow.

The bottom-line on the page highlights how operating cash flow has increased over time as a result of growth capital investments. Operating cash flow is projected to add a 10-year high of $1.8 billion, up almost $265 million from the prior year, reflecting returns from several years of fleet growth investments.

In addition to the one-time impacts from tax reform that I discussed earlier, several items related to tax reform will have ongoing impacts for Ryder. First, the lower U.S. corporate tax rate is expected to benefit reported earnings, but have no cash impact in the near-term.

Ryder's global effective GAAP tax rate is expected to decline to around 26% in 2018. This rate had ranged from 34% to 35% over the past five years. Second, Like-Kind Exchange program, which Ryder had regularly used, are no longer available.

The loss of the taxable gain referral on vehicles due to the repeal of this program will be more than offset by accelerated expensing at least in the near-term. Third, the limitation on net interest deductibility is not expected to impact Ryder through 2021, while the limitation is based on EBITDA.

Once the limitation becomes EBIT-based in 2022, Ryder's ability to deduct net interest expense will be dependent on various factors, including earnings, capital spending, depreciation, and net interest, among others. Any non-deductible interest can't be carried forward for use in future period.

Finally and importantly, the value proposition from ChoiceLease versus ownership, typically improves under the new tax regulations. This is because of the reduced tax yield from a lower federal tax rate more than offsets the incremental value of moving from current bonus depreciation rate to 100% expensing.

Let me also add that the historical key drivers of the ChoiceLease value advantage are unchanged by tax reform. These include Ryder's world-class maintenance expertise, which lowers operating costs, our vehicle purchasing power, and use of our retail used vehicle network for vehicle sales.

You can find more details about the impact of tax reform in Ryder's White Paper that is available on our IR website at investors.ryder.com. At this point, let me turn the call back over to Robert to recap our EPS forecast and discuss some changes to our longer term targets..

All right. Thanks Art. Turning to page 25, we're forecasting comparable earnings per share of $5.40 to $5.70 versus $4.53 last year. This represent an increase of 19% to 26%. 2018's EPS includes a $0.72 year-over-year favorable impact from a lower tax rate driven by tax reform.

We're also providing a first quarter comparable EPS forecast of $0.83 to $0.90 versus the prior year of $0.82. The first quarter represents the most challenging year-over-year comparisons.

This is due to the timing of FMS overhead spending, including commissions expense and investments in sales, marketing and technology to fund growth, as well as increased vehicle depreciation. Additionally, first quarter 2017 results included an unusually strong quarter for SCS for as we expect some challenges in the first quarter 2018.

SCS results from one of the two accounts that we've discussed previously. These first quarter headwinds are expected to be partially offset by earnings growth in rental and lease as well as benefits from tax reform.

Turning to page 27, as many of you will recall, we've laid out a number of three-year financial targets at our Investor Day almost two years ago back in May of 2016. As we articulated at the time, these targets are based on stable conditions in the transactional rental and used vehicle markets.

Since then, however, the market environment for used vehicles has, in particular, has materially changed. As a result, we believe it's appropriate to revise some of our three-year targets to reflect the changed markets for used vehicle sales.

Our operating revenue growth targets remained unchanged as the secular trends that favor outsourcing remains strong and we continue to see positive results from our sales and marketing initiatives focused on penetrating a large non-outsourced markets in all three of our business segments.

We've lowered our three-year target for FMS pretax earnings as a percent of operating revenue to 10% to 12% from 12% to 13% to reflect the ongoing impact from lower used vehicle residuals. Earnings targets in Dedicated and Supply Chain remain unchanged.

Due to the change in the FMS earnings target, we've also correspondingly lowered our target for ROC spread by 50 basis points to 100 to 150 basis points. And finally, as mentioned earlier, we lowered our target leverage range 200%, to reflect the non-cash impact to equity from tax reform. That concludes our prepared remarks this morning.

Please note that our 10-K will be filed this afternoon and contains additional details for your review. We had a lot of material to cover today, with both fourth quarter results and 2018 outlook. As a result, I'd ask that you that you limit yourself to one question each.

If you have additional questions, you're welcome to get back in the queue and we'll take as many questions as we can in the time allotted. At this time, I'll turn the call over to the operator to open up the lines for questions..

Thank you. [Operator Instructions] And we'll take our first question from Ben Hartford with Baird..

Hey, everybody good morning. Robert, maybe we'll come back to that final slide, the three-year financial targets. Obviously, you introduced those and what May 2016 in the Investor Day. So, you implied kind of three-year target at that point in time was roughly 2019, 2020.

The updates here and maintaining the three-year financial target language, are we to read these revised targets as 2019 targets or are they three-year targets from this point forward?.

Right. Ben, the three-year targets from this point forward..

Okay..

[Indiscernible] targets..

Okay. As it stands today from a used equipment point of view, I mean, there are a lot of moving pieces here in 2019, the division to accelerate the depreciation in here this year.

If your current assumptions hold, would you expect the loss that you had talked about from used vehicle sales in 2018 to return to a gain in 2019?.

Yes, Ben, it's hard to tell, I think, at this point. I think if you look at what we're assuming here is that the pricing really stabilized and maybe picks up slightly during the year. But really doesn't have a comeback yet, which as the year progresses, we'll see if the comeback begins in 2018 or is pushed off to 2019..

Okay. And then I'll circle back real quick, just to follow-up on that three-year targets. So, three years from here, you've got 10% to 12% EBT margin target in FMS.

What's the sensitivity to the bottom end of the top end of that range, that 10% to 12% range? Is it all UVS and gains on sale? Or is there an element in our control that can allow some of the variance between that 200 basis points range?.

Well, it clearly requires some -- an improvement in the used vehicle environment, right. I think that's kind of given. The top to the bottom, I think, is more driven by the growth that we can drive in contractual business. Obviously, rental doing well and then our ability to really manage cost and get the cost pull through..

Okay. Thank you. I'll turn it over to someone else..

[Operator Instructions] We'll take our next question from Todd Fowler with KeyBanc Capital Markets. .

Great. Thanks and good morning..

Good morning..

Robert, just on the -- good morning everyone. Just on the used vehicle outlook, I think about some of the indications, even that you're seeing with your own business, your inventories are the lower end of the range. It looks like the pricing both on tractors and trucks was up year-over-year here in the fourth quarter.

What is it that's driving the change in residuals? Any additional depreciation that you're taking? Is there something specific with the [Indiscernible] of equipment that you're seeing? Or is the expectation as you look out into supply is coming into, potentially coming to the market here into 2018? If you can just give us a sense of maybe why some of the fundamental seem a little better, but you still are dealing with the change in the residuals in the incremental depreciation?.

Yes, I think, Todd, it's consistent with what we've said earlier in the year that our concern is that as it relates to the used truck that OEM production is going up, there's a lot -- there's going to be some units that will be hitting the used truck market. And really that could put pressure -- additional pressure on pricing.

Obviously, we don't know yet, but the pricing seems to bottomed out here. But we're certainly mindful of that. I think the other piece to note is that for us to be able to lead depreciation where it is, we need pricing to come up. So, we need used vehicle market pricing to come up.

Remember, we used a five-year rolling average to do our depreciation analysis. And we need that pricing to really start to pick back up. And that -- we've really haven't seen a big move in that yet, but I think until we see that, you'll see us still have to look at this and have some additional depreciation.

I don't know if Art, if there's any other color around what happens in 2019 if the pricing comes in [Indiscernible]?.

Yes, if it comes in at [technical difficulty].

[technical difficulty] like a $0.25 pick up into 2019 as that tails off?.

Well, yes, clearly [technical difficulty].

[technical difficulty] year-over-year tailwinds into next year?.

Yes, we had to see at the end, let's just see how that all plays out, right, Todd? It's dependent on what the used vehicle sales results are in everything. But to your point, it would be reduced headwind also..

Got it. Okay, I know that you covered a lot material. I'll turn it over at this point. Thanks for the time..

Thanks Todd..

We'll move to our next question from Scott Group with Wolfe Research..

Hey, thanks. Good morning guys..

Good morning Scott..

So, the Dedicated and Supply Chain margins that you're leaving at 8% to 9%, do you think you can do that in 2019 since that guidance hasn't changed or is that not realistic?.

Well, we're looking -- I would tell you, we're either -- we think we can either be in that range, we're certainly approaching it in 2018 and 2019..

Okay. And then can you say how much extra maintenance are you seeing in the numbers in 2018 that goes away in your mind? I guess back half of 2019 and then, I guess, fully year 2020 what it sounds like.

How much maintenance is this year?.

Yes, it's really the maintenance associated some of these aged units. We're probably looking at this year headwind as a result of that of about $30 million. So, as we get into next year, that's going to be less and then as we get into the late 2019, 2020, it really becomes more of a tailwind..

And just so I'm clear, is that $30 million that's year-over-year or is that the cumulative headwind because I'm guessing this has been building for a couple of years..

That's year-over-year. That's year-over-year..

Do you have any sense what the cumulative headwind is from these bad vintage trucks that goes away?.

Yes, it gets complicated because you've got all the newer stuff that's coming in really much better. So, this will turn into a really more of a tailwind into late 2019 and 2020..

Okay, all right. I've got a bunch more, but I'll get out and get back in queue..

All right Scott. Thank you..

We'll take our next question from Justin Long with Stephens..

Thanks and good morning..

Good morning..

I wanted to ask about the incremental margins and rental. So, you're guiding for rental demand to be up 6%. You're increasing the size of that fleet by 6%. But if I look at the EPS bridge, rental is only expected to add about $0.23 to EPS? So, when I run the math on all that, the incremental margins seem lower versus what we've seen historically.

Could you just provide some more color around why that might be the case?.

Yes, Justin, this is Dennis. It really gets down to maintenance cost, and I'll put it into two buckets. First is out-servicing of more units. Our rental fleet has aged as a result of not investing as much in the prior two years. And so we've got to outservice several units. And that's -- it's almost two times our normal run rate of outservicing of units.

And then you've got some of these aged units, the model years that we struggled with that, are still aging in the fleet. And so it's really though two.

It's the aging of the rental fleet, which is occurring, and then the outservicing of several units, like you said, 2x what we normally outservice giving us a drag that you normally see with margins into rental..

And after some of the replacement that's planned for 2018, is this a situation that improves in 2019 and we see something that's more normalized from an incremental margin standpoint?.

That's right. That's exactly right. As we outservice these units, which, again, it was a lower number in 2017, it's 2x that number in 2018. You've got to put that pause into the vehicles and then get rid of some of these vehicles that have higher costs and that's in the middle of 2019 when we start to see that get better..

Okay. Thanks. I'll hop back in queue..

All right. Thanks..

We'll go to our next question from David Ross with Stifel..

Yes, good morning everyone..

Good morning..

Just wanted to follow-up on Ben's question, maybe ask it a little bit differently.

What do you need to do to get back to 11% to 12% operating margins in FMS? Not even double-digit in 2018 from looking at it correctly, although growth is back in rental volumes and pricing growth continues in full service leads and maintenance, the used market is improving.

So, it's still what we're missing to get back to where historically the segment operated..

Yes, look, the key drivers are growth in the lease business, growth in the contractual lease, which we're expecting to really hit that hard this year. So, that's a good guide and heading on. Rental is coming back, which is coming back. As Dennis mentioned, we do have some headwind as we have higher than normal amount of replacement going on in rental.

But the demand is there and that's coming back in now in 2018. The other piece is around the maintenance cost on these aged units. We're really having those units kind of get out the system. And as we mentioned, a lot of that will be behind us this year in 2018, just little less in 2019.

But after that, we will have a fleet of vehicles that is primarily with a more -- with a lower cost maintenance technology. And then finally, used vehicles sales. Used vehicle sales have bottomed out. We need the used vehicle to comeback.

I mean we need used vehicles gains are still going to be -- the used vehicle impact this year will still be negative. That has to turn around positive to really help the margins get back into that range..

Okay, I'll get back in queue. Thanks..

All right. Thanks Dave..

We'll go to next question from Casey Deak with Wells Fargo..

Thank you.

Yes are you there?.

Yes..

All right. Just wanted to touch the strong growth in the lease fleet that you put out for 2018. Can you talk about where that is relative to the clients and what you're seeing, where the strength is basically on an end market.

If that is additional -- mainly coming from additional tractors, from existing clients, new clients? If you can just give a little more color on what you're seeing there and how you're extrapolating that growth? Thanks..

Yes. Thanks Casey. Look, I'll tell you. We're now seeing a very robust market in the freight environment. It's really helping each of our businesses. I will tell you, it's helping FMS on the ChoiceLease side, we've got very strong sales, especially in the fourth quarter. I would tell you, even in January in each of the businesses.

Dedicated is being helped significantly as customers are struggling with finding not only trucks, but also finding drivers, so we're seeing a big improvement and a big pickup in sales, as you're seeing in some of the growth that we're forecasting and in Supply Chain. So, I'll tell you it's a very robust environment across the Board.

We are seeing on the transport side, certainly seeing over the last couple of months, more of a pick up even with transports as you've seen a transport market tighten. We're seeing customers that are coming for leasing vehicles there. Rental market is extremely high. I mean the fourth quarter was, as we mention, record utilization levels.

We're seeing every truck that we've got in rental is being utilized. So, we've seen a strong fourth quarter, we're seeing a strong January. And again, a great environment, I think, for our business and our business model. The only downside we're seeing is still the used vehicle side. And that part is obviously creating some pressure.

But overall, it's been a good environment and I think with an improving economy and strengthening freight environment, I think we've got -- we should have a very good year this year in 2018 and we're kind of working through that.

In terms of exactly what we're seeing some of the growth and what the customer industries and types, I don't know, if Dennis you want to add some color there?.

A couple of things I'd add. One is, remember, 40% of our growth, Casey, is still coming from customers who were new outsourcing. We talked about the high maintenance cost and downtime that we've seen from some of these model years.

As customers have experienced that, although it's painful in our P&L, the reality is it's painful for our customers and they're outsourcing more. So, that secular trend continues and then I'll just add to what Robert said, that it's a transport.

We're seeing a lot of -- a lot more growth coming from the transports, although there were other verticals we were seeing outsourcing occurring. So, strength across the Board..

Okay, great.

And kind of along those lines, with the rental and the strength that you're seeing there with utilization, is that -- can you talk -- is that a similar break down? Are you seeing that it's grabbing another truck for an existing lease client? Are you seeing it more kind of in -- kind of that spot rental market?.

This is Dennis again. Both. One, you've got customers who were leasing from us for the first time who want as we call it in the wait new lease of rental vehicle. So, that is certainly increasing as our lease sales go up. But in addition, we call it pure market. We're seeing it increasing also.

So, we're seeing strength both on the lease support side and on the pure side..

Okay. And I guess just to finish that.

Is that normal relative to what you see historically? Is that different? Or have it changed at all over the last few months?.

I would say it's even stronger than we've seen historically. It's what we're seeing, as Robert said, utilization that are at 10-year highs..

I think we were operating outside in the last few years. We've been operating in the environment where there was too many trucks and not enough freight. We're now in an environment with a lot of freight and not enough trucks. So, that this very good for rental. And I think that's only -- we see that continuing for now.

And again, that is leading to also a significant improvement on the lease and Dedicated and Supply Chain side..

All right. Thanks for the time..

Thank you..

And we'll take our next question from Brian Ossenbeck with J.P. Morgan..

Hey, good morning. Thanks for taking my question..

Good morning Brian..

Good morning..

So, I just wanted to go back to the Investor Day, again, for a second, and then specifically on the lease fleet growth and sort of an upside scenario, which I think was about 5,000 vehicles, which it looks like 2018 will be above that. In that analysis, you're still expecting to be a little bit free cash flow positive or flat.

And clearly a couple of things have changed in the fourth guidance, sounds like mostly on the used vehicle side.

But when do you think that scenario could be realistic, again, as you kind of reset and look out over the next couple of years?.

Yes, I think what we need, Brian, on a free cash flow side is what you need is you need multiple years of a steady growth rate, right. Because when you get a steady growth rate now the cash from the vehicles that you've just sold the previous year are paying for same growth that you're getting the next year.

Obviously, we're going to here is significant increasing the growth rates, it's probably doubling. So, where you have these spikes or pickups in growth rates, you're going to go to negative free cash flow. So, -- but wanted to -- we're taking the growth every time we can get it.

And we know, over the long run, that's really what drives -- what's going to drive earnings and what's going to drive value for the shareholders. So, we're expecting a strong year this year, it's going to result in a negative free cash flow this year.

But if you can put a string of these higher growth rate years together, you'll see positive free cash flow. If the growth rate were to drop some, you'll also see positive free cash flow..

Okay.

So, it sounds like it's just a bigger step-up and you're going to have to cycle through that for a few years before you can expect that to level off?.

Right. What we were looking for is 6,500 units of growth for the next several years. You're right, it will take a few years..

Brian, this year is impacted, too. We're refreshing rental. That's kind of probably not exactly how it was in the Investor Day..

Yes. Right. Right, of course. But even if you strip out that from a 600, then it gets a little bit lower than I would have thought, but I understand the moving parts.

Can you just real quickly go through overhead cost reductions, that's been a big part of EPS waterfall for 2017 and 2018? If you can maybe just touch on how 2017 came in versus your expectations? And then what are some of the bigger pieces for 2018? I realize there are some adjustments, but anything else you that could add around that would be helpful.

Thank you..

Yes, I guess, the first thing on 2017, we hit the number, I think, we had $0.30, $0.35 in last year's waterfall and we came in on that number. This year, it's $0.50, as I mentioned as a result of the zero-based budgeting initiative that we've started.

A good chunk of that is a result of some headcount actions that we've taken as we look to expand the layers in the organization across the organization. There's some other items around just managing indirect costs, which we are in the midst of. We've got a pretty robust process in place to make sure we hit that.

So, we feel confident in our ability to hit that $0.50. But again, we'll help us fund some of the strategic investments.

And we haven't had a chance to talk much about that, but it's investments and things that are important to drive growth and, for example, in our Supply Chain business, our visibility, and optimization tool, RyderShare, we're going to be spending a good amount of money on that this year. It's important for our contractual Supply Chain customers.

And really, it's going to give us a competitive advantage, I think, against the other players in that space. So, these are investments that are important, important to our future growth. And this year is an important year to make that happen. So, we're going to be doing that, we're going also be spending money on more salespeople.

So, to increase of the growth rate, we have added some salespeople, which are already paying dividends. So, we're investing in that. And then also investing in some other technology tools that will impact FMS and Dedicated, which you'll hear about here in the next several months..

All right. Thanks for all the details..

Thank you..

We'll go to our next question from Matt Brooklier from Buckingham Research..

Yes, thanks and good morning. So, a question on the commercial rental side.

The 6% fleet growth, can you roughly talk to how much of that 6% just reflects increased growth in terms of leased units expect to add in 2018? And how much of that growth is a result of just, I guess, a stronger spot rental market?.

Matt, it's Dennis. I would estimate 40% of it for supporting lease growth and about 60% based on just rental demand increasing in the spot market..

And that's somewhat similar to the past years, is that right?.

Yes..

Yes, I mean, we're reforecasting 9% rental growth and 8% ChoiceLease growth. So, yes, they're kind of growing consistent..

Okay. And then just a quick one on rental pricing. I think the guide was for 3% growth.

If you look back to prior peak, like how far are we off or maybe we're not, but how does your expectations for 2018 pricing, I guess, on a rental absolute basis? How does that compare to the prior peak that I think we hit in 2014 or 2015?.

Yes, I don't have the side-by-side here, but I would expect we're not too far off and maybe a little higher. And as you might imagine, the input costs are higher. So, I would expect that number to continue to rise as the vehicles that are coming into the fleet are more expensive..

Okay. And then where can you talk to rental pricing in January? That's my last one..

Rental pricing in January?.

Yes..

We're on track with the 2018 forecast we're giving here. We had a strong January. And as I mentioned, strong sales also across the contractual businesses..

Okay, appreciate it..

Okay, thanks Matt..

We'll go to our next question from Kevin Sterling with Seaport Global Securities..

Thank you. Good morning gentlemen..

Good morning Kevin..

So, Robert, you guys done a fabulous job with all that information you've given us and lay it out. So, we appreciate the level of detail. But you talked about -- just another question in the used vehicle market. You said you need used vehicle sales to come back this year to, I guess, to slow or stop accelerated depreciation.

Can you quantify how much of an increase will we need to see to kind of extend that tie, is it 1%, 2% increase in used vehicle prices? Is it 5%, 10%? Is there a way to kind of help quantify that?.

It's probably, Kevin, about 10% to 15% up from what we are now. And that's adjusting for inflation. So, it was a percent of our vehicles investment. So, yes, we need this thing to turnaround and really start moving back up. This is an extended downturn.

We certainly wouldn't have expected used truck pricing to remain depressed this long, but we're trying to work -- we're really, I think, executing well on the things we can control, keeping our inventory levels down, trying to retail as many of the units as we can.

So, you're going to see in 2018 an improvement on the percentage of units that will be retailed versus wholesale. And if we can do better than that, obviously, we're going to do that. So, with the things within our control, we're executing well. The issue is just getting the market rate kind of move in the right direction..

Yes.

And just follow-up, what, from your perspective, what's one or two things you need to see in your mind to kind of get those rates really moving back? What's one or two keys things that you think really need to happen to kind of really get that jump in used vehicle prices?.

I'd say -- that's a good question. I think the things that I want to see happening are happening, right. The economy is picking up, the freight environment is hot. This historical downturn -- this leads to an improved used vehicle pricing. Usually more buyers in the marketplace, they need trucks to move stuff and that should be good.

We haven't seen it yet. We've seen the leveling off, but we haven't really seen a big turnaround yet. But the environment is right for a turnaround. The only headwind you have right now is how many more units are going to hit the used truck market in the next six months. And that remains to be seen. And the ability to digest those.

But I'll tell you the market -- the freight market being strong, which is I think the most important thing, we're seeing that..

Thank you very much. I appreciate you telling. Thanks for your thought plan..

Thank you, Kevin..

And we'll take our final question from John Cummings with Copeland Capital..

[technical difficulty].

[technical difficulty] electric vehicle startup companies. We actually have some electric vehicles in the fleet as we speak. Mostly the smaller delivery type vehicles that we have some of our rental fleet and we also have some that we're beginning to lease to customers.

So, [technical difficulty] to provide the vehicles and the maintenance for those vehicles, as these startups, for examples, don't -- typically are looking for a network that can provide them to maintenance that commercial vehicles need. I think Ryder is uniquely positioned to be able to do that.

So, we view our position in that and that becomes a larger part of the market as we'll be well-positioned for that. The other thing I would add is I think it still has a long way to go. I mean, we're still in the initial phase of getting some of these vehicles out in the market. Technology is evolving.

So, there's still a lot of things that need to happen. But we're excited, we think it's a good opportunity for some of our customers and it's a good opportunity for Ryder to continue to provide our expertise and our maintenance on these vehicles..

Okay. Thanks.

And then just -- I know [Indiscernible] more speculative at this point, but I'd just love to hear your thoughts you have on the potential for autonomous driving? And how that trend might affect your business?.

Yes, that -- obviously, that would have an impact on our Dedicated and Supply Chain business. We've actually had a few partnerships out there also with some of the autonomous vehicles startup companies. I know the OEMs are all working on something also. We see the technology evolving pretty rapidly.

But probably still a ways away in terms of an implementation that would impact our business and that would impact freight in general. But I think, clearly making some good progress. I think what's most exciting for us is it's all translating into safer trucks.

And safety technology on commercial vehicles today is significantly greater than it was just a few years ago and that is good for Ryder. As, obviously, insurance cost come down over time, it's good for carriers and good for the driving public. So, we're excited about that.

I think that you're going to continue to see that in the vehicles that we're purchasing certainly for our use. We're purchasing with the latest Collision Avoidance Technology that's out there. And also many of our lease customers are really looking at it as a great investment in safety in their fleets..

Okay, great. Thanks..

Thanks John..

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. I know it's been a long call to you, we had lot to cover, so I appreciate everybody's patience. We certainly look forward to getting out here over the next few weeks and months and get a chance to meet with all of you, and again, continue to review some of the great things we got going on here. So, thank you everyone..

That concludes today's conference. Thank you all for your participation..