Good morning, and welcome to the Ryder System Second Quarter 2019 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, Investor Relations, Corporate Strategy and Product Strategy for Ryder. Mr. Brunn, you may begin sir..

Thanks very much. Good morning, and welcome to Ryder's second quarter 2019 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 measures to the nearest GAAP measure in the written presentation accompanying this call, which is available on our website at investor.ryder.com. Presenting on today's call are; Robert Sanchez, Chairman and Chief Executive Officer and Scott Parker, 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. This time, I'll turn the call over to Robert..

Good morning, everyone, and thanks for joining us. This morning, we'll recap our second quarter 2019 results, discuss the current outlook for our business, and highlight progress on some of our strategic initiatives then we'll open the call for questions. With that, let's turn to an overview of our second quarter results.

Comparable earnings per share from continuing operations were $1.40 for the second quarter of 2019, down 4% from the prior year, primarily reflecting lower used vehicle results, partially offset by improved operating performance.

Comparable results were slightly above the midpoint of our forecast range of $1.34 to $1.44, reflecting better than expected operating performance in our contractual businesses, largely offset by lower than expected demand conditions in used vehicle sales and rental that began late in the quarter.

Comparable pre-tax earnings were down 4%, reflecting depreciation headwinds of $8 million and higher valuation adjustments of $10 million related to lower used vehicle pricing. Sales activity remained solid and we delivered strong revenue growth in all segments, driven by secular outsourcing trends, as well as our sales and marketing initiatives.

Operating revenue, which excludes fuel and subcontracted transportation, increased by 11% to a record $1.8 billion for the second quarter. Page 5 includes additional financial information for the second quarter.

Comparable EBITDA was $579 million, up 14% from the prior year, reflecting the earnings contribution from our growing portfolio of contractual lease, dedicated and supply chain business. The average number of diluted shares outstanding for the quarter was 52.5 million,, down slightly from the prior year.

We began repurchasing shares under a two-year 1.5 million share anti-dilutive repurchase program in February of 2018. During the quarter, we brought approximately 119,000 shares at an average price of $59.20.

Excluding pension costs and other items, the comparable tax rate was 26.9% for the second quarter of 2019, down slightly from the prior year's rate. The return on capital spread was 20 basis points, down from 40 basis points spread in the prior year, primarily reflecting lower used vehicle sales results. Return on equity was approximately 13%.

I'll now turn to page 6 and discuss key trends that we saw in each business segment. Fleet Management Solutions operating revenue, which excludes fuel, increased 9% organically from the prior year, driven by growth in all product lines.

ChoiceLease revenue increased 9% primarily due to fleet growth and to a lesser extent higher rates on replacement vehicles. The lease fleet increased by 3,800 vehicles during the quarter. Growth in the lease fleet this quarter benefited from earlier than anticipated vehicle deliveries from the OEMs.

We continue to effectively penetrate the non-outsourced market with approximately 40% of year-to-date fleet growth coming from customers new to outsourcing. We also continue to see growth from customers expanding their fleet sizes.

We remain on track to achieve organic lease fleet growth this year of at least 11,000 vehicles, which would be a new record for the company. SelectCare revenue increased 9%, reflecting higher ancillary maintenance activity. The average SelectCare full service and preventive fleet grew by nearly 600 vehicles from the prior year.

Commercial rental revenue was up 9%, driven by higher demand and pricing. Global rental demand on power units was up 8% and pricing was up 2%. Rental utilization was 75.3%, down from 79.4% in the prior year, primarily reflecting lower than expected tractor demand on a 10% larger average fleet and very strong prior-year comparisons.

Our strategy to capture higher e-commerce driven demand, for medium-duty trucks remains on track. Late in the second quarter, however, we saw softer demand for heavy-duty tractors, which impacted utilization for the quarter against very strong prior-year comparisons. Used vehicle results for the quarter were down year-over-year.

I'll discuss those results separately in a minute. Overall, FMS earnings decreased, reflecting lower used vehicle results, including higher depreciation of $8 million from residual value changes and higher valuation adjustments of $10 million.

Results were also negatively impacted by higher overheads, including higher than normal levels of bad debt, and to a lesser extent the impact from the adoption of the new lease accounting standards. Results benefited from lease growth. And benefits from our maintenance cost initiative. Earnings before tax in FMS decreased 25%.

FMS earnings as a percent of operating revenue were 4.9%, down 220 basis points from the prior year, primarily reflecting lower used vehicle sales results. Page 7 summarizes key results for used vehicle sales.

Used vehicle results for the quarter were down, as increased pricing and volume were more than offset by higher valuation adjustments on larger inventory. We sold 5,100 used vehicles during the quarter, up 9% versus the prior year and up 3% sequentially.

Used vehicle inventory, totaled 8,300 vehicles at quarter end, which is within our target range of 7,000 vehicles to 9,000 vehicles. Inventory increased by 2,700 vehicles compared to the prior year. And increased 700 vehicles sequentially, reflecting a greater number of units coming off lease this year as expected.

Proceeds per vehicle sold, were up 19% for tractors and down 1% for trucks compared to a year ago. Year-over-year comparisons for tractors benefited, from market pricing improvements that began in the third quarter of 2018. Tractor pricing this quarter was in line with pricing levels we realized in the fourth quarter of last year.

Sequentially, tractor pricing was down 2% from the first quarter reflecting, weaker demand conditions late in the quarter, while truck pricing was up 3%. I'll turn now to Supply Chain Solutions on page 8. Total revenue grew 7%. And operating revenue grew 12%, driven by new business, higher pricing and increased volumes.

Supply Chain earnings, before tax, were up 24%, driven by revenue growth and improved operating performance. Segment earnings before tax as a percent of operating revenue were 9.5% for the quarter, up 90 basis points from the prior year.

On page 9, our Dedicated business achieved strong revenue growth, with total revenue up 10%, and operating revenue up 16%. Revenue growth was driven by new business and expansion with existing customers. Favorable outsourcing trends including a very challenging driver market, contributed to strong DTS sales results, again this quarter.

We also continue to see lease customers expanding their relationship with Ryder, by adding outsourced driver services and moving into dedicated solutions. This continues to be a significant ongoing growth opportunity, for the Dedicated business. DTS Earnings Increased due to revenue growth, and improved operating performance.

Segment earnings before tax as a percent of operating revenue were 10.9% this quarter, up 230 basis points from the prior year. At this point, I'll turn the call over to our CFO, Scott Parker, he cover several items starting with capital spending..

Thanks, Robert. Turning to page 10, year-to-date gross capital expenditures, totaled approximately $2.2 billion, up around $750 million from the prior year. This increase reflects higher planned investments to grow and refresh the contractual lease fleet.

Proceeds of $256 million were up $54 million, primarily due to $43 million, from the sale of a property. Net capital expenditures increased by nearly $700 million, to just under $2 billion, reflecting contractual lease growth.

Turning to the next page, we generated cash from operating activities of over $1 billion year-to-date, up approximately $180 million or 21%. The increase was driven primarily by higher cash-based earnings. And lower working capital needs.

We generated about $1.3 billion of total cash, up approximately $230 million from the prior year, reflecting higher operating cash and proceeds from a property sale. Cash payments for capital expenditures increased by $790 million, to just over $2.2 billion.

Company's free cash flow, was negative $909 million year-to-date, down from the prior year of negative $354 million, primarily reflecting increased capital spending, to grow the lease fleet and a normalized level of lease and rental replacement spending.

Our full-year forecast for free cash flow remains unchanged at negative $1.1 billion, reflecting the significant growth capital spending. Debt to equity, at the end of the second quarter, increased to 294% from 262% at the end of 2018. And primarily reflects investment in our fleet growth.

Our balance sheet leverage is toward the top end of our range of 250% to 300%. Our leverage is expected to decline in the second half and our year-end forecast remains around 285%. At this point, I'll hand it back over to Robert to cover our current outlook..

Thanks, Scott. Overall, we continue to see a healthy demand environment across our contractual lease, Dedicated and Supply Chain businesses, despite a softer freight environment and we're encouraged by ongoing strength -- the ongoing strength at our contractual sales activity.

We're also pleased with the progress on longer-term strategic initiatives to drive higher revenue and earnings over time, as we launch new products in markets with strong growth potential. We expect continued strong operating performance in our Supply Chain and Dedicated businesses, resulting in pre-tax margins within their long-term target range.

In DTS, we expect revenue growth rate comparisons to remain favorable, although, below first half 2019 levels. We are also encouraged by a robust sales pipeline in Dedicated, that's only slightly below last year's record levels.

In Supply Chain Solutions, we expect year-over-year revenue comparisons to turn negative for the second half of the year, primarily due to previously-announced lost business, but expect pre-tax margins to remain within target range. In Commercial rental, our strategy to capture medium-duty truck demand, driven by e-commerce growth, is on track.

Heavy-duty tractor rental demand is somewhat softer than our prior forecast due primarily to lower activity with four higher carriers. However, we expect to largely mitigate this impact by leveraging our asset management capabilities and taking other cost actions.

During the second half of the year, we expect to fill more lease contracts with used rather than new equipment, which should result in lower-than-originally forecasted lease CapEx in the latter part of the year.

This should be offset by vehicles received earlier than anticipated from the OEMs at the beginning of the year, resulting in full year CapEx being around the original forecast.

In used vehicle sales, we saw lower tractor demand beginning in June and now expect tractor pricing to be below our previous forecast, primarily due to more vehicles being sold to the wholesale channel, as we manage inventory levels.

In light of these factors, we're revising our full year comparable EPS forecast to $5.50 to $5.80 versus our prior range of $6.05 to $6.35, primarily to reflect lower used vehicle sales results. Our third quarter comparable EPS forecast is $1.45 to $1.60 compared to $1.67 in the prior year.

Third quarter comparisons include a negative $0.09 to negative $0.14 year-over-year impact from lease accounting, reflecting an estimated negative $0.05 to negative $0.10 impact in the third quarter of 2019 compared to a positive $0.04 benefit in the prior year.

The negative impact from lease accounting in 2019 reflects an expected decline in lease fleet age. The full year 2019 impact from lease accounting is now expected to reduce earnings per share by approximately $0.05 to $0.10 as compared to the prior accounting method. Turning to slide 15.

I'd like to provide you with a brief update on the progress we're making on some of our strategic initiatives. First, we continue to focus on driving profitable contractual growth. We remain on track to meet or exceed our record lease fleet growth forecast of 11,000 vehicles this year.

As previously discussed, beginning in 2018, we made changes to our residual value assumptions to improve returns on new vehicles being leased and continue to evaluate additional steps to improve lease returns.

Additionally, we continue to see strong contractual sales activity in Dedicated and Supply Chain and expect 2019 to be the third highest year for total company sales of contractual lease Dedicated and Supply Chain deals.

These contracts provide more stable revenue and earnings streams over multi-year periods delivering returns on new capital invested. We're also making strategic investments in new products to provide new avenues for long-term revenue and earnings growth.

Among these initiatives is our new e-commerce fulfillment solution that provides order fulfillment services for brands that want to sell directly to consumers. A rollout is on track with three fully operational facilities strategically located throughout the U.S., that are able to reach 95% of the U.S. and Canada with two-day delivery.

We expanded COOP by Ryder, the first commercial vehicle sharing platform of its kind, into the Florida market and are encouraged by the strong customer interest we continue to see with this platform.

Finally, we're on track to achieve the full year cost savings expected from our multi-year maintenance cost-reduction initiative and expect additional opportunities to lower cost and drive efficiencies in the future. Slide 16 provides our expectations for 2019 results as compared to the three-year financial targets we laid out in early 2018.

FMS and DTS are expected to beat their operating revenue growth targets, reflecting secular trends and other initiatives. SCS is expected to come in below their revenue target this year, primarily due to previously-announced lost business.

As we look ahead we expect to lap this issue beginning in the second half of 2020 and anticipate returning to more normalized growth rates at that time. Our three-year CAGR for operating revenue growth is expected to be 11% this year.

Given our pipeline of new business, we remain confident in our ability to meet or beat our long-term Supply Chain target of 7% to 8% revenue growth over time. FMS EBT is expected to remain below the target, primarily due to the ongoing impacts from used vehicle sales.

Supply Chain EBT percent is currently within the segment's 8% to 9% target range, is expected to remain in the target range over the balance of the year, reflecting the benefits from operational improvements in previously under performing accounts. We are raising our 2019 forecast for Dedicated's EBT percent from yellow to green status.

We've made operational improvements and addressed the challenging prior year start-up that have improved our return outlook for this business. Our return on capital spread is now expected to breakeven this year due to our revised used vehicle outlook. Finally, we expect leverage to remain within our target range of 250% to 300%.

That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open up the line for questions. In order to give everyone an opportunity, please limit yourself to one question each. If you have additional questions, you're welcome to get back in the queue and we'll take as many calls as we can.

Operator?.

Thank you [Operator Instructions] We will take our first question from Matt Brooklier with Buckingham Research. Please go ahead..

Yeah. Thanks and good morning.

Maybe if you could -- want to talk about the rental business and there is some deceleration there, but can you talk about your thoughts on the size of the fleet this year? Are the expectations that potentially you grow a little bit less than maybe how you're thinking about things in the first half? And then, I know, we're a little bit of a ways, but what are your thoughts on the rental fleet as we look into 2020?.

Yes. Let me just give you a high level overview of kind of what's changed from maybe a quarter ago. And it is a relatively contained area, where we saw really a slowdown in rental demand. It was really around tractors, primarily driven, I would say, by the for-hire carrier market, where there was just less demand for rental tractors.

So we would expect now in the second half, we're going to downsize the fleet and we'd expect less demand in that area. The rest of the business though, I would tell you on the truck side, especially around the medium-duty tractors, where we've upsized the fleet in order to capture more of that e-commerce driven demand, it's on track and going well.

So, Dennis, I don't know if you want to give him a little more color?.

Yeah. Matt, I'd just add, when you look at Q2, we had originally expected tractor demand to be up year -over -year about 13% and we realized 6%. So it is still growing just at a slower rate than we expected. Trucks actually were pretty robust. We realized 11% demand increase year-over-year.

We had expected even a little more, but we still feel good about what's happening from a truck point of view, but tractors are softer..

Okay.

So it sounds like this is -- this cycle is a little bit different in the fact that there are some secular tailwinds on the truck side that's potentially offsetting incremental softness on the tractor side, and you guys feel pretty good about I guess the fleet size for the year?.

Yes, right. Obviously, we're reducing the tractor fleet side, while on the truck front, we feel good. When you compare this to 2012 and Q1 was actually stronger this year than in 2012 when we saw that downturn, Q2 was a little weaker, but in the second half, we see the trucks remaining very strong..

Okay.

And what's the mix right now between tractors and trucks in the rental fleet?.

Yes. So, we have got 33% of the fleet is tractors and 52% is trucks..

Got it. Okay. I appreciate it..

So, I would add Matt too is that, it doesn't really change our long-term strategy though of, we've said, we view rental as really a complementary product line to lease and our goal is to really grow it at about the pace that we grow lease. So, I wouldn't say that -- I'd say that, that remains on track.

And again, the good news is, I think we've got some solid asset management policies and strategy that we're implementing, that will get the fleet right sized in a short period of time..

Okay. That's helpful. Robert. I appreciate the time..

Thanks, Matt..

[Operator Instructions] We'll take our next question from Scott Group with Wolfe Research. Please go ahead..

Hey. Thanks. Morning guys. So, I think last quarter you guys talked about a $0.40 headwind in '19, and then, again, in '20, from losses on sales and lower residual values.

Can you give the updated number now in the guidance for '19? And then, does this make the 2020 number worse as well? And then, I got that used truck pricing year-over-year, but I didn't hear sequentially so maybe if you can give us that too and what you're thinking about for back half of the year used truck price?.

Let me address the second half of the year. The majority of the reduction in guidance is really from the used truck side. So you can argue those – that's just incremental, whether it's accelerated depreciation, valuation, adjustments or losses that will be incremental to the $0.38 that we discussed at the beginning of the year.

As it relates to what the pricing assumptions that we've made to build that guidance, we believe we've made some prudent adjustments of the forecast. To put it into some context, it is really based on a slowdown in volume that we saw beginning late in the quarter, I mean June.

So, in June we saw, we had been clipping along at a pretty decent volume level with the pricing we had and in June, we really saw a drop off, which I think is what the broader markets also saw in June. So based on that and our assessment of the pricing environment for used trucks, we did take down our tractor pricing.

This is really a tractor issue, a class A tractor issue. We brought down our tractor pricing about 10% in July to align with where kind of we saw the market. So as we go into next – as we go into the second half of the year, that's built in.

In addition to that, we know we have more volume to sell in the second half, and we want to retail as much of that volume that we can, but given the softness that we saw in June, we assumed in the forecast that most of that is going to be wholesale. So, that's why you see maybe a more disproportionate impact from that.

So, that doesn't take away from the fact that we're doing everything we can based on the expanded sales force and inside sales to retail as much as we can, but we felt given that level – one month only of really seeing it and that level of uncertainty, we felt it was prudent to commit at that level.

As it relates to the 2020, I would tell you, it's still too early to tell. I think if used truck pricing does decline and the amount of wholesale that we have to do materializes, as we go into 2020, you probably – if that trend continues, should have more impact from either gains or losses or accelerated.

Policy probably wouldn't – the policy impact probably wouldn't change much as the five-year rolling average, but you would see that. So, still lot remains to be seen. Number one is does the decline really materialize, if it does materialize, how steep will it go, and then the duration of a slowdown if it does happen.

So it's kind of a challenging time for us to do a forecast really, because we only had really one month and now, maybe call it, month and a half of really seeing the impact of this.

So we try to give you the best view that we can based on the information that we have, but clearly, our goal is to try to again stays the same, our strategy is to retail as many vehicles as we possibly can..

Just so I understand, when you guys were originally talking about that $0.40 give or take headwind again in 2020, were you assuming additional accelerated depreciation next year? And then, I guess, does it now feel more likely that we'll have to do that?.

We were assuming more accelerated depreciation next year and then a larger policy adjustment was less accelerated in 2021. So if pricing comes down, there will be more accelerated, I would argue than what we had before, but again, Scott, I think that still remains to be seen.

If I have had three months of experience under my belt before we gave you this forecast, I'd be able to probably give you a little bit better color, but given it was such a short time frame, I think, we tried to take a prudent number here, but it's hard to tell exactly where the market will settle in the next several months..

Okay. Thank you..

Okay..

We'll take our next question from Brian Ossenbeck with JPMorgan. Please go ahead..

Hey. Good morning. Thanks for taking the question. Maybe just a follow-up on the last line of questioning on trends in the market, specifically tractors, you mentioned things particularly got softer in June.

I know, there's little bit of seasonality coming into July in the summer, but can you give us an update on how things trended from June into July so far, both in rental and in used vehicles, specifically on the tractor side?.

Yeah. I think on the rental side, specifically around tractors, we're seeing the trend behave seasonally the way you'd expect. So, I would say, tractor rental was consistent with what we saw in June, which was what we've got built into the forecast. Around used vehicle sales, again, it's still too early to talk.

A lot of the sales really come in at the end of the month, but with the changing in pricing, we have seen more activity, both in our inside sales and at our lots. So, more retail activity would obviously be good for the balance of year forecast, but again, I'd say, it's still too early to tell on that..

Okay. And then the export market I know it's not a huge factor here, but it can be a swing, specifically in North America.

What are you guys seeing so far year-to-date and expecting for the rest of the year?.

Yeah. During this cycle, it's been tough because with the strong dollar and what's going on outside the U.S. in some of the emerging markets, we haven't seen the same levels of demand that we've seen at other times. So it's still somewhat limited, I would say in terms of demand.

So I think it's kind of interesting because I think if you look at used vehicle sales it's pretty -- it's relatively easy to forecast the supply of used trucks that will be in the market based on what's been built over the last several years. The tough part is really forecasting demand.

And with what happened in the for-hire market over the last 12 months as you've seen for-hire rates come down, you've seen break begin -- volumes begin to soften the last several months. I think that all plays into just fewer -- less demand if you will for some of these vehicles.

But as everything goes the economy picks up, you start seeing more stuff moving around and you could see this thing flip the other way pretty quickly. So it's -- there's still a lot of I would say uncertainty around it.

But we're certainly seeing in the used truck market what I think you've heard from other companies that are in this space in terms of really what's volume softness in June and then we're trying to be prudent about what we expect for the balance of the year..

All right. Thanks. And I guess just one quick follow-up in the backlog.

Is there a big split -- when we're looking at tractor specifically is there a big split between speakers and day caps?.

That we have to sell?.

Yes.

What's held for sale? Is there a different mix now versus really in the year last year when you look at what's in there? Any material difference with speakers and day caps?.

Yes. No, it's about 50-50. About 50-50..

Okay. All right. Thank you for the time this morning..

All right. Brian..

We'll take our next question from Todd Fowler with KeyBanc Capital Markets. Please go ahead..

Great. Thanks and good morning..

Hey, Todd..

Robert, can you just talk a little – hey, good morning. Can you talk a little bit more about the lease pipeline? I mean obviously you had strong visibility coming into this year and you've been pretty confident around that 11,000 units. You booked a lot of that now in the first half.

As you look out over into the second half I guess how do we think about the cadence of additions? And I think you've talked about kind of 3,500 as a baseline into 2020 can you just talk a little bit about what you're seeing on the lease side and expectations going forward?.

Well, I'll tell you the lease sale I would say it's a statement across all of our contractual businesses and it remains very strong. Now for all of them versus last year, we're down from last year because last year was a record year in terms of sales.

But if you look at where we're going to end the year I would say for contractual businesses and even in our ChoiceLease business it should be third best sales here in the history of the company.

So still a very healthy pipeline lot of demand more companies wanting to outsource truck lease wanting to outsource, the Dedicated wanting to outsource logistics. So those secular trends are in full swing and we don't see them necessarily slowing down.

Obviously there's the level of overall economic activity is less than it was last year but we still see those going forward as good trends for growth. Now I would expect this year's growth we're looking at now maybe 11,000 or so. Last year was about 10,000.

Next year given the OEM production information and forecast that we have which a lot of folks expect to be down maybe 20%. I would expect our growth will be down also just relative to this fewer if you will.

I also -- based on the asset management actions that we're taking to reduce our rental fleet and redeploy equipment, I would expect more of our lease sales to be fulfilled with used equipment versus new.

That will mostly impact late in this year as a lot of our new leases are already locked in or scheduled through end of October beginning in November. But I would expect as we go into next year we'll still continue to have more of that redeployment activity and that should reduce some reduction in CapEx as we get into 2020 in addition to less growth..

Okay. That's helpful. And then just a follow-up as you've seen that shift in rental to the shrink that you're seeing in medium duty versus the tractor market is there an impact on profitability? I mean is the margin profile different? I would think that the revenue per units are meaningfully different between those two classes or the breakout there.

How do we think about the profitability if we see kind of that continued secular demand on the medium duty side relative to the tractor side?.

Yes. I think if you look at it if you step back and look at the profitability overall. The returns overall on the trucks will be better than on the tractors. So it's not that I think necessarily but tractors are part of, obviously, our portfolio part of the lease portfolio.

So you're going to see that tractor demand move up and down in rental just like truck demand at some point. But also -- but over the cycle both of them will provide good returns for us. So that's really the way I would characterize. And I'd say, I'd say, the move from tractors to truck is not a bad thing for returns..

Okay. For returns, it makes sense, but maybe some impact to tell you where we're at in the cycle from a margin standpoint..

Correct. Correct..

That’s helpful. I’ll get back in line. Thank for the time..

Thanks, Todd..

We will take our next question from Jeff Kauffman with Loop Capital Markets. Please go ahead..

Thank you. Good morning, everybody. Good morning, Scott. I want to go a different direction and talk about some of the growth initiatives on the table particularly on the alternative fuel side. In particular a company called Nikola was coming out with their fuel cell product.

You’re one of a number of companies partnering not just in the leasing of this product to their initial customers, but also the build-out of their hydrogen fueling stations over the next couple of years.

Can you talk a little bit about this project and what kind of expectations there might be on capital or returns? My understanding is these fuel cell trucks are going to be fairly expensive and you're going to be leasing them to the customers?.

Right. We are -- we announced our partnership with Nikola now a couple of years ago..

Correct..

And we've gone out and looked for companies that are start-ups and innovators in new engine technology and alternative fuels. So our goal and our partnership with Nikola is really their sales and service arm or sales and service network if you will here in North America.

So as they move through their development phase and into production once they're in production and at a point where they can deliver, they're going to be delivering trucks. That's when Ryder really will start to play a bigger role in terms of us being to provide a sales avenue for them and also a maintenance and service avenue for them.

But I think we're still early innings, if you will in that process. I think we're still looking at a earliest roll-out still several years from now. So it's an interesting technology. We're encouraged by it, but still a lot of work to do to get into production..

I think just to follow-up. They had given a presentation at the ACT Expo, and I think they said, their first trucks are going to be delivered to customers later this year, with a larger roll out probably by 2022.

But will you be owning those trucks, purchasing them and then leasing them out to the customers and will you be bearing risk in the marketplace when those leases expire?.

Yeah. No, we will be partnering with them on that piece. A lot of the details around exactly how that will be put together is still to be worked out, but clearly on these types of vehicles, there is a significant upfront capital expenditure that we will be working with Nikola on how to address those. I would say….

All right. It’s so exciting, yeah..

It's still early, it's still early..

Okay. That's what I wanted to know. Thank you..

Thank you..

Our next question will come from Stephanie Benjamin with SunTrust. Please go ahead. .

Hi. Good afternoon. I wanted to circle back on just the used truck pricing environment and the guidance reduction. Can you give a little bit of color, still kind a broad range with your expectations for the full year for EPS, what's baked in? I know you mentioned that you took pricing down about 10% kind of based on what you saw in June.

Can you walk through the levers of what happens to get to the low end of your guidance and then conversely at the high end of your guidance? Thanks..

Yes, Stephanie. I wanted to give you a little bit of color with that 10% and then the fact that we're going to wholesale more, but given still a lot of uncertainty in the market, I certainly don't want to be totally prescriptive about exactly what's built in, only because we don't know yet.

And we've tried to give a range that gives you some indication of where things could go. And it could be that I -- the range was built on 10% decline in retail that we already put in place and then the incremental amount of vehicles we have to wholesale, tractors we have to wholesale, we have to sell will be wholesale.

That may not be the way we get there. Hopefully, we do retail more. We don't know what the retail price is going to be. So I think this gives you a good view of where the results would be or could be, and then we think we've made the right adjustments and the prudent adjustments.

There is obviously upside if we do better, but I don't want to get too prescriptive of exactly the numbers because truth is we don't know and we certainly don't want to impact the market with precise assumptions that we're making..

No. Understood. I think that makes lot of sense. And then just a follow-up to that. In terms of other initiatives, I know you've been pretty vocal on what you've been doing to build out your retail sales force internally to switch from that wholesale to retail.

Is there anything else from just a cost perspective or overall cost reduction programs that you might be able to either accelerate or to offset some of this decline as well? Just kind of maybe walk through some of the levers you have to pull?.

Yeah. I think, look, cost reduction, we talked about the maintenance cost initiatives. We're really encouraged by that, making very good progress and we're on target for this year and really seeing good progress for the ongoing components of that. So we're very encouraged by that.

Zero based budgeting continues to be as a foundation of our budgeting process. So those are levers that we could continue to the pull. We also -- I would tell you that, beyond that, we're also looking at within our used vehicle sales operation continuing to find efficiencies with more of our inside sales and drawing board leads into inside sales.

We are making continued enhancements on our website to really attract more buyers and make it easier for people to buy online.

So we've got some changes coming in now and we've got some changes coming in at the end of the year that could really help us facilitate bringing more people to our website and then making it easier for them to transact with us which we're encouraged about. So, I think those are the big things that we're going to work on.

We also, I would tell you, are also looking at continue to de-risk our leases right? We talked about last year -- beginning of last year, we started -- we really reduce the residual value assumptions on all of our leases to really improve the -- or reduce the risk associated with that final residual value, which obviously we've been impacted with over the last few years.

So we feel very good about the new leases that we're putting on. But we're going to continue to look for more ways to reduce that risk, right? Whether it's continue to reduce the residuals maybe getting more granular about the returns of our leases by industry sector.

So, which are the industries that we maybe have better returns and don't have better returns. So, we're going to continue to refine that. I think capital allocation is extremely important in our business with the amount of capital that we deploy.

And really being able to not only have this growth also be able to now be more precise and more targeted about where that capital goes to make sure over time we're getting improved returns..

Great. Really appreciate the color. Thanks so much..

Thank you, Stephanie..

We'll take our next question from David Ross with Stifel. Please go ahead..

Yes. Good morning, everyone..

Good morning, David..

Bob, you made a quick comment at the end of one of those answers there about a bigger policy adjustment in 2021.

Can you just explain what you're talking about there?.

Yeah. No.

What I meant is we gave some guidance at the beginning of this year, where we said, if used truck pricing remained at the 2018 levels that we would have similar impacts from used vehicle sales with the combination of policy accelerated and gains and losses that we would have a similar impact in 2020 and 2021 as we saw in 2019 or we originally forecasted in 2019, which is $0.38.

So, what I was trying to explain is that obviously if used truck pricing were to drop below those levels, I would expect us in 2020 to have more, whether you call it losses or accelerated depreciation.

And then as I get into 2021, if it remained at that level, which still a big if, and really getting ahead of ourselves if we're making that assumption.

I would say that then your five-year rolling average, you would be adding probably a lower year in 2020 than we had originally forecast somewhat lower, which would mean that the five-year rolling average would be -- it would have more depreciation headwind from that.

But again that's hypothetical, and there's still a lot of things that need to happen between now and then. But I just wanted to put a little bit of context to say, hey, used truck pricing were to come down and stay down? Yeah, there would be more pressure on used vehicle sales in 2020 and 2021 than we had originally forecast..

And then the FMS target range for the margin at 10% to 12%, it's only been achieved I think three of the last 10 years.

So, why do you think that the realistic long-term target range? And what would you see in the odds of falling in that range in 2020 be?.

Yeah. I think the way we've modeled this out, used truck pricing stays where it was in 2020 stayed for average is to where it was in 2018. I think you can start getting to the bottom end of that range by 2021. Clearly with used truck pricing going down, I think it puts pressure on that and it pushes it -- it push it out some more.

So, there's a certain amount of used vehicle returns that we would normally expect on average. And unfortunately over the last several years we've been below that number that's what's put pressure on our earnings. Our five-year rolling average methodology is now beginning to get us down to what we're currently seeing.

And I think once you get there, then you start to see the returns of the new business coming in. So, we're able to step back we've been in business a long time and we've been doing this lease business for a long time.

And during that entire period of time, there has been numerous -- countless numbers of used vehicle cycles where demand goes up, demand goes down, suppliers go up and down and the pricing should move. That pricing change does an impact to our earnings.

And in good years, you're going to have better returns, and in bad years you're going to suffer from losses and accelerated depreciation in this case. I think what's happened over the last few years, as there was a pretty significant drop in 2015 that has kind of brought us down to a more -- a new normal, if you will that we're adjusting to.

And we're going to get to that new normal using our normal methodology in the next couple of years. And whether it's a little bit more or a little bit less, might need just where we are in the cycle. But ultimately our depreciation policy will stabilize here over the next couple of years.

And then what you're going to see is more accelerated during times when the market is down, and then better gains when the market is up. And that's really the way that the model should work. And again, we can't decide. This has really been a tractor issue. So, we really honed in on making sure that we get this thing stabilized going forward.

But once that's done, I think that's the time when you get, you start to see up back to those levels..

Great. Thank you..

Our next question will come from Amit Mehrotra with Deutsche Bank. Please go ahead..

Thanks. Hey Robert, just a quick follow-up, if I could on used values.

So just on clear, based on the new pricing assumptions I guess very simply when does the accounting loss become I guess neutralized against the rolling 5-year policy and higher depreciation? I guess -- I think it was 2021 kind of related to what you said before in this hypothetical scenario.

But now does that get pushed out to 2022 or beyond based on the revisions you're making to the pricing?.

Yes. Remember it depends on what happens with used vehicle pricing over the next couple of years, right? If used vehicle pricing normalizes to what we saw at the end of last year -- I mean during last year you get through by the end of 2021. If it goes up you're going to get there sooner. If it goes down, it's going to take a little longer.

So the issue is just the timing of what happens with the used vehicle market over the next couple of years. You can't say the next six months are going to dictate the next two years.

So you've got to really look at it over a longer period of time to really understand where -- when it is that the book values will normalize with what -- where the market is..

Right. Right. I guess with this revision down though kind of that into 2021 based on your best guess gets pushed out to 2022. And then you just kind of this multiyear headwind that you've been facing kind of at that point neutralizes. Could even….

What you said Amit with -- if it stayed down during that period of time. If it comes back up like it's -- vicious cycle, you could end up where you were before you could end up better than you were before. I mean it all depends. It depends on what happens with the cycle.

I think most people are looking at the next couple of years saying hey, there might be a pressure of oversupply in the next few months or in the next year, but then there's going to be a shortage of supply certainly in the model years that we sell because that's when the 2016 to 2017's come in which there was fewer units built during that period of time.

So....

No. No. Sorry. Then we'll have to take a cycle of gains I guess..

Looking forward to that, looking forward to that..

Yes exactly. Me too. Me too. Me too. Let me ask one positive question on Dedicated. But obviously you saw a big step-up in profitability.

I just wanted you to talk about the net impact of the contract that you brought on at the end of last year that are ramping up obviously quite nicely and then the initial investments needed to bring kind of new business online. So if I'm not mistaken, you'd expect that kind of lower end of that 8% to 9% pretax margin this year.

I mean, I assume that would be better just given the 2Q strong pretax margin performance, could you just talk about kind of the margin profile in the back half and where you guys are tracking relative to the full year?.

So Amit, John Diez here. Just to give you a little bit perspective on the second half. We do expect to be elevated from prior year. If you recall last year we did have some headwinds around some of the new start-ups. But really second quarter was a really clean quarter from an operating performance for the business.

We had the start-ups and the new business that we brought online performed quite well. We also saw the base portfolio also get better and back to the kind of historical levels with regards to -- we reduced the age of our vehicle fleet which improved the returns.

We've also seen candidly, an improvement in the labor market which has obviously been a drag on margins over the last 18 months and that's also starting to recover. So as we see the prospects going into the second half to next year into this year and into next year, the labor market is better.

We refreshed the fleet we're seeing good activity and good leverage from the new business we brought online and we're seeing good sales momentum to help us get there. So overall, I think like you heard from Robert ,we're going to be in line with the long-term plans this year.

And then next year, we should be kind of delivering at that 8% to 9% level again..

I don't mean to be….

Go ahead, go ahead..

I don't mean to be like overly specific on this, but I mean year-to-date you're above the high-end of your plan and I'm just trying to understand the back half of the year. I mean, should we expect kind of more 9-ish percent for the full year i.e.

the high end of that 8% to 9% just given the success from the first half I guess?.

Yes. I think that's a fair assessment based on where we're at mid-year. And just keep in mind, second quarter it's typically our strongest quarter second and third quarter. So you will see third quarter also perform very well. And then fourth quarter it will taper off..

Okay. All right guys. Thanks for taking my questions. I appreciate it..

All right, Amit. Thank you..

Our next question will come from Justin Long with Stephens. Please go ahead..

Thanks. And wanted to follow-up with a question on rental.

So I'm sorry, if I missed it, but could you talk specifically about what you're assuming for the year-over-year change in rental demand in the second half? And also as we think about the potential for rental to decline, what's your view on the decremental margin profile of the business? I'm just curious, how much you can adjust the business and reallocate equipment to help offset a weaker demand environment..

Let me -- I'll let Dennis give you some color on that. But just the last part of your question what I would tell you is we have offset the vast majority of this decline that we're expecting between asset management actions and reducing the fleet and also cost actions that we took.

So I would -- rental is a very small part of the overall takedown on the balance of the year forecast. It's primarily used vehicle story. But I'll let Dennis tell you more specifics around what we're expecting to happen with rental..

Yes. So Justin, we're expecting in Q3 demand for power to be up 3% year-over-year. It'll be really trucks driving that. And then in Q4, we expect it to be flat year-over-year. And you got the mix, you got trucks that are going to be doing well and you got tractors that have headwinds..

Okay. That's really helpful. And then certainly back on used, you've talked about wholesaling more units in the back half of the year.

But can you help us understand what you were previously assuming for the split of sales between retail and wholesale what that looks like in the updated guidance for this year? And then maybe where you think that normalizes as we get into 2020?.

Yes. Again, so we put forward with the -- a scenario to kind of estimate where we think things are going to end up. I don't want to again get too prescriptive, but our original forecast was that we were going to retail about 70% of what we sell.

Obviously, what's currently in the balance of the year forecast is really the wholesale more of the incremental units. So I won't get into exact point with this, but again my belief is that we'll probably end up retailing more than that, the unknown is just what the price is going to be in that market.

And we're in a bit of a price discovery process here as we go into the back half of the year on the retail side. But our push is to retail as much as we can..

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

Thanks Justin..

We'll now take a follow-up from Scott Group with Wolfe Research. Please go ahead..

Hey, thanks for the follow-up. So, Robert just philosophically I wanted to ask you a question. We've got visibility that these continued used headwinds for several more years.

Why don't we do just a more aggressive write-down, more aggressive accelerated depreciation to just get through this and stop having this same discussion every single quarter?.

Yes, I feel your pain Scott and I think the challenge for us is just the accounts and the way that accounting rules work right? It is -- you really can't write down a vehicle that's in operation. And as those residuals change, you have to take it over time as part of your new residual valuation and then depreciation expense.

So, that's really been the challenge and that's obviously you're right every time we have bad news our goal is to get it out as soon as possible and get it behind us. This one as we go into the fourth year, we haven't been able to because of the way that you've got to treat vehicles and you've got to treat these residual assumptions.

These residual assumptions are nothing more than an estimate of what we think the vehicle will sell for over time. Some of these vehicles are going to be sold in the next years some are going to be sold seven years from now. So this methodology of rolling five-year averages has really helped Ryder to get set for many years.

The challenge that we brought into is the precipitous drop in tractor pricing that happened in 2015. And the first and precipitous increase as used vehicle pricing really went up between 2011 and 2015 and in the big drop after that.

That increase after the Great Recession really drifted up our residual values forward then obviously now we would like them to have gone. Never went up to the pricing it was at they had a little bit drift a little too high I would say.

Now, we're working through the process of with this elongated now what appears to be a more new normal we're on our way to drifting them down. And all the math we do says that this stuff if we just continue with the methodology and this is a new normal, we'll be done with this by 2021.

If there's way to get through that quicker, we're going to continue to look at them and try to get that done. But to this point Scott, the answer has been that this is the way to really get through it..

Okay.

And then just a couple of other just quick things, the bad debt expense you talked about in the second quarter is that some customer bankruptcies? And do you think that continues? And then along those lines, are you seeing a spike in early terminations, cancellations? Anything like that that tells you that we're really starting to see capacity exit the market here..

Yes. No, I mean it was an unusual quarter in terms of we had. It wasn't just one it was a group of them I would say it's a handful of them that we had challenges with.

They actually happen to be for-hire carriers, but we don't expect that to be an ongoing trend or credit standards and our credit ratings -- credit profiles of our customers have really changed. It was just an unusual quarter in terms of that..

Okay. All right. Thank you..

And we'll take another follow-up from Brian Ossenbeck with JPMorgan..

Hey thanks for the additional time. I just wanted to get your thoughts on two quick things if I could please.

Just the competition in the current market with a little bit softer activity and more uncertainty, obviously, Dedicated is still pretty good in terms of the pipeline but you have seen some competition on the Supply Chain that's going to show up in the back half of the year.

So just want to get your thoughts on that as you look into the rest of this year and into next year?.

I think, Brian, all of our businesses, our three contractual business -- main contractual businesses are all benefiting from this secular trend of more outsourcing. And I think you talk to us, you talk to any competitor, they will probably tell you the same thing.

I don't think competition has gotten necessarily more intense, there are more players, but I think there's only a certain number of players that can do the large type outsourcing that we do in any of these groups. So I would say that, we continue to see a good market in terms of growth opportunities. It's a relatively rational market.

I think over the last -- especially, on the Supply Chain side, over the last couple of decades I think the market has learned how to really add value and do these deals in a way where they are good for the customer and also good for the provider.

And we're encouraged about what we're seeing really in new opportunities across the different industry sectors in Supply Chain and really across both the ChoiceLease and Dedicated..

Okay, got it. And then on the e-commerce fulfillment side, it looks like you've got some scale now with three facilities. I know you have typically put that in final mile when you talk about the size and the run rate. Clearly, shipping speeds are increasing across the industry.

So how do you feel like you're positioned there, what's the customer reception been like and if you could give us an update on the relative size inclusive of Ryder final mile, which I think is how you've characterized it in the past?.

Yeah. Remember, there is two components, there is the Ryder Last Mile, which is the big and bulky home delivery business, and then there is the e-commerce fulfillment initiative, which is really getting after more parcel type business, targeting companies that want to go direct to consumer without going through an e-retailer.

So the last mile is going very well, we're encouraged by the cross-selling opportunities that we're seeing, we're ramping up -- we've ramped up really our sales activity of leveraging our supply chain sales force to also cross sell into Ryder Last Mile, well operated business. We see more and more companies looking for that as an option.

So we're encouraged by what's going on there. On the e-fulfillment, we're really in the more early innings, got a pipeline that's growing, but I'll let Steve give you a little bit more color around e-fulfillment..

Yeah I'd say that, right now, as Robert said, we've stood up the three buildings and they are up and operational, fully functional. Pipeline is healthy, so we're seeing a lot of attention through our marketing efforts, and also inside sales across FMS and DTS. We have signed a few customers here recently.

So, we'll begin operations for them in the back half of the year, but I would say that the team is excited about having the solutions. Our customers are continuing to have discussions. So, we look forward to really getting through the implementation this year and really executing on the strong pipeline as we go into 2020..

Okay. Thanks for extra details. Appreciate it..

Thanks, Brian..

And 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. Well, thanks everyone and we’re at the end of July, so we look forward to seeing you guys as we get out in the market here certainly at the end of August, I think, as when things ramp up again. So take care. And have a safe day. .

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