Good morning, and welcome to the Ryder System Fourth Quarter 2019 Earnings Release Conference Call. [Operator Instructions]. 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..

Thanks very much. Good morning, and welcome to Ryder's Fourth Quarter 2019 Earnings and 2020 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 and the reconciliation of each non-GAAP financial measures to the nearest GAAP measures is contained in this morning's earnings call presentation and in Ryder's filings with the Securities and Exchange Commission which are available on Ryder's website.

Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer; and Scott Parker, Executive Vice President and Chief Financial Officer.

Additionally, John Diez, President of Global Fleet Management Solutions; and Steve Sensing, President of Global Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert..

Good morning, everyone, and thanks for joining us. This morning we will provide a brief overview of our fourth quarter results. We'll also provide our 2020 outlook including actions that we're taking to improve returns. Following our prepared remarks we'll open the call for questions. With that let's turn to an overview of our fourth quarter results.

Comparable earnings per share from continuing operations was the loss of a penny for the quarter as compared to a profit of a $1.87 in the prior year. The loss includes a $1.67 in higher depreciation related to previously announced residual value estimate changes.

Comparable results were at the lower end of our forecast range of a loss of $0.03 to a profit of $0.07 reflecting a modest increase in the depreciation impact of the residual value change as we trued up the estimates provided.

Operating revenue increased by 3% to a record $1.8 billion for the fourth quarter, driven by contractual revenue growth and Fleet Management and Dedicated partially offset by lower revenue as expected in Supply Chain. Page 5 includes some additional financial information for the fourth quarter.

Comparable EBITDA for the quarter was $564 million, up 1% from the prior year primarily reflecting earnings contributions from our contractual businesses and cost reductions partially offset by lower rental demand, higher insurance related costs and the impact from customer labor strikes.

Comparable EBITDA for the full year was a record $2.3 billion, up 11% from the prior year. The average number of diluted shares outstanding was 52.3 million, down slightly from the prior year.

Excluding pension costs and other items the comparable tax rate was a benefit of 98.7% in Q4, ‘19 as compared to an expense of 21% in the prior year reflecting the impact from residual value estimate changes.

Adjusted return on equity was 0.3, down from 12.7 in the prior year reflecting lower earnings from higher depreciation related to the previously announced residual value changes. I'll turn now to page six to discuss key trends that we saw in each business segment.

Fleet Management Solutions’ operating revenue increased 6% driven by growth in our contractual ChoiceLease products partially offset by lower rental revenue. ChoiceLease revenue increased 9% driven by fleet growth and to a lesser extent higher rates on replacement vehicles.

The lease lead increased by a record of 10,500 vehicles or 7% for the full year reflecting continued outsourcing trends. We expanded our lease customer base by 400 accounts last year.

These new customer relationships are expected to yield benefits for a very long time as we typically renew customer deals over successive lease terms and can expand many of these relationships into other services like Dedicated overtime.

Rental revenue was down 4% for the quarter, driven by lower demand for heavy-duty tractors partially offset by higher truck demand and increased pricing on all vehicle types. Rental utilization on power units was 76% down from the exceptionally high utilization levels we saw in the prior year.

Our ending commercial rental fleet declined by 6% sequentially from the prior quarter reflecting actions taken to align the rental fleet size with lower market demand.

FMS realized a loss of 80 million primarily reflecting higher depreciation of 118 million due to the impact from previously announced residual value changes as well as lower rental performance, higher insurance related costs and the cost to prepare a higher number of vehicles for sale. Result benefited from lease fleet growth and higher pricing.

Page 7 highlights used vehicle sales results. We sold 6,000 vehicles during the quarter, up 33% versus the prior year and up 13% sequentially. For the full year we sold 21,300 vehicles, an increase of 3800 or 22% from the prior year.

Used vehicle inventory held for sale with 9400 vehicles at quarter end slightly above the high end of our target range of 7000 to 9000 vehicles but in line with expectations.

Inventory increased by 2500 vehicles year-over-year and by 2100 vehicle sequentially reflecting a greater number of units coming off lease this year as expected and downsizing of the rental fleet. Proceeds for vehicles sold were down 25% for tractors and down 10% for trucks compared to a year ago reflecting significant and ongoing market weakness.

Sequentially tractor pricing was down 13% and truck pricing was down 5%. As a reminder as discussed in our last call we’ve revised our assumes used vehicle sales price levels for setting residuals from both policy and accelerated depreciation purposes.

Page 9 of the third quarter earnings call slide deck identified the assumptions we made for policy depreciation purposes for vehicles to be sold in the longer term.

The assumption we made for accelerated depreciation purposes for vehicles to be sold in the near term was significantly lower than that and near the trough level pricing that we saw back in 2002. Price levels that we saw in the quarter were in line with our expectations for the quarter. I'll turn now to Supply Chain on page 8.

Operating revenue decreased 5% reflecting previously announced lost business and customer labor strikes partially offset by higher pricing.

SCS pre-tax earnings were up 3% due to improved operating performance partially offset by the impact from the strikes and a $3 million impact from the change in residual value estimates for vehicles used in Supply Chain. Segment earnings before tax as a percent of operating revenue were 7% for the quarter, up 50 basis points from the prior year.

Turning to Dedicated on page 9. Operating revenue increase 4% reflecting higher pricing in new business. DTS earnings before tax increased due to improved operating performance and favorable development from prior year insurance clients.

These benefits were partially offset by a $6 million impact from the change and residual value estimates for vehicles used in DTS. Segment earnings before taxes as a percent of operating revenue were 7.5%, up 70 basis points from the prior year.

At this point I'll turn the call over to our CFO, Scott Parker to cover several items starting with capital spending..

Thanks Robert. Turning to page 10 full-year gross capital expenditures were $3.6 billion, up approximately 500 million from the prior year. This increase reflects higher investments to grow and refresh the contractual lease fleet while rental CapEx declined.

Proceeds from sales were up about $120 million to $518 million including $43 million from the sale of property in the second quarter. Net capital expenditure is increased by approximately $300 million to $3.1 billion. Turning to the next page, we generated $2.7 billion of total cash for the year, up by around $500 million or 26% from the prior year.

Free cash flow was negative $1.1 billion reflecting capital spending to support record contractual lease sales. Debt equity at the end of 2019 increased to 320% reflecting capital spending and a reduction in equity for the residual value estimate change. At this point I'll turn it back to Robert to discuss the 2020 outlook..

Thank Scott. Page 13 and 14 highlights some of the key assumptions for our 2020 earnings forecast. Overall we expect a moderate growth macro environment and strong contractual sales activity and Supply Chain and Dedicated. We've added sales resources to support growth in these segments and leverage the secular trends that continue to favor outsourcing.

We expect lower ChoiceLease sales results reflecting lower OEM production and from actions taken to improve lease returns. In Fleet Management the total leased fleet count we've historically reported is expected to decline due to the progress made to reduce the number of vehicles being prepared for sale.

We've added a new metric for the active lease fleet count which excludes vehicles that are in the in service and out service process. The active lease fleet is expected to increase by up to a 1000 vehicles this year. The softer freight environment is expected to result in lower commercial rental demand particularly for heavy-duty tractors.

Increased rental pricing and higher year-over-year utilization in the second half should partially offset softer demand on the smaller fleet.

We are on track to substantially right-side the rental fleet by the end of the first quarter but we'll continue to make more modest sequential reductions for the balance of the year in order to allow the fleet with market conditions. The ending rental fleet is expected to be down 3,700 vehicle or 9% year-over-year.

Lower planned lease and rental capital spending is forecast to result in positive free cash flow of 350 million. With a modest growth strategy and FMS, we expect free cash flow to be positive over the cycle. Total cash generated is expected to be $2.6 billion.

We are expecting an EPS tailwind from a lower year-over-year impact from the policy depreciation change, accelerated depreciation and used vehicle losses. Comparisons are expected to be unfavorable however until the second half of the year when we catch the tail of the residual value estimate change which was effective as of July 2019.

We expect used vehicle pricing to remain soft with some recovery in the second half. We do plan to sell a higher number of vehicles of used vehicles as we expand our retail capacity. We expect continued benefits from our multi-year maintenance cost savings initiative and are increasing the total expected annual savings from 75 billion to 100 billion.

Incremental benefits from this initiative in 2020 will be partially offset by higher cost to prepare vehicles for sale. Turning to page 14, Supply Chain revenue growth will be slow during the first half due to previously announced lost business.

Revenue growth rates are expected to improve to target levels in the second half of the year as we move past this impact.

The earnings benefit from higher pricing and new business is expected to offset, to be offset by strategic investments, favorable prior year insurance claims development and residual value estimate changes for vehicles used in Supply Chains.

In DTS lower than expected sales activity and fewer large deals in the second half of last year will reduce our 2020 revenue growth. We are highly focused on building a quality sales pipeline and increasing sales results to address this issue.

DTS earnings will face headwinds from the unfavorable prior insurance claims development that are not currently forecast to recur in 2020, residual value estimate changes on vehicles used in Dedicated and strategic investments.

We expect continued savings from our zero based budgeting program that will offset inflationary employee compensation and benefit cost. We plan to fund strategic investments in sales and marketing, technology and new products such as RyderShare and COOP which are focused on driving long-term revenue and earnings growth.

Finally, our board approves a new two-year 1.5 million share anti diluted repurchase program which replaces our prior program that expired in December. Based on the assumptions I outlined we expect operating revenue to remain unchanged in 2020 reflecting revenue growth in ChoiceLease and Supply Chain offset by a slowdown in Rental and Dedicated.

Comparable earnings per share is forecast in the range of a $1.10 to a $1.15 in 2020 as compared to $1.0 last year. This reflects the lower impact from previously announced residual value estimate changes and growth in our contractual products.

These benefits are partially offset by lower expected rental performance, strategic investments, cost associated with actions to improve returns and a higher tax rate. Comparable EBITDA forecast to be between $2.2 billion and $2.3 billion consistent with the prior year. The comparable tax rate is forecast to be 31%.

The tax rate of 2020 is expected to be somewhat higher than a more normalized rate in the high 20s that we would expect going forward. Adjusted ROE is expected to increase 2.7% in 2020 from the 0.3% in the prior year. Page 16 outlines our revenue expectations by business segments.

In Fleet Management operating revenue is expected to be flat as slower growth in ChoiceLease revenue is offset by a decline in rental.

ChoiceLease revenue growth is forecast to slowed at 2% reflecting lower OEM production environment, the non renewal of lease business with lower returns and anticipated lost business related to the discontinuation of our liability insurance extension program for lease customers.

Commercial rental revenue is expected to decline by 7% reflecting lower demand partially offset by modestly higher pricing. The demand change is largely driven by heavy rental activity in 2019 for customers who were awaiting delivery for their new lease vehicles.

SCS operating revenue growth is expected to be 2% with revenue growth rates around target levels in the second half of the year. Dedicated operating revenue is forecast to decline 1% reflecting lower sales activity and fewer large deals signed in the second half of last year.

Page 17 provides a chart outlining the key changes from 2019 to reach the high end of our 2020 comparable EPS forecast. The year-over-year impact from lower residual values is expected to generate an additional $1.65, broken are contractual businesses of lease Supply Chain Dedicated and Dedicated our forecast to add $0.55 to EPS.

Rental is expected to negatively impact EPS by $0.62 primarily reflecting lower tractor demand partially offset by higher pricing and higher utilization in the second half of the year. We continue to make strategic investments to drive future revenue and earnings growth.

In 2020 we're planning a $0.45 increase in strategic spending focused primarily on sales and marketing, information technology, new product development and investments to achieve maintenance cost savings targets. Approximately half of these strategic investments are in FMS and focused on also improving returns.

In 2020 we expect to incur a negative $0.25 EPS impact related to initiatives that will position us to improve returns in future years. This includes items related to the discontinuation of the lease insurance product line as well as actions to address lower return accounts and assets.

Incremental savings from our zero based budgeting process will largely offset higher employee related expenses including compensation and benefit cost and net impact of these operational items would result in EPS of $1.45 to a $1.85.

A higher tax rate is expected to be an EPS headwind of $0.35 bringing the high-end of are comparable EPS forecast rates to a $1.50 with the range of a $1.10 to $1.50 forecast for the year. I'll turn it back over to Scott now to cover capital spending and cash flow..

Thanks Robert. Turning to page 18 we are forecasting total gross capital spending of approximately $2.1 billion, down significantly due to the lower spending in both lease and rental. Growth capital for ChoiceLease is expected to be down [900 billion] and ChoiceLease replacement spending is expected to be down around 200 million.

Rental spending is forecasted to decline by over 400 million to $130 million reflecting a below full replacement spend level due to the softness anticipated in the transactional market environment. Our investment spending and property and equipment is expected to remain consistent with last year at around 190 million.

Proceeds from sales are forecast to decline by nearly 90 million to 430 million. Prior year proceeds included $43 million from a property sale. As a result net capital expenditures are forecasted at around $1.7 billion, a decrease of around 1.4 billion from 2019.

Free cash flow is forecast to be positive $350 million, up by approximately $1.4 billion reflecting significantly lower net capital spending. Our debt to equity forecast is expected to decline to about 315% by the end of the year but remain above our target of 250% to 300% as we work through the impacts of the residual value policy change.

I'll turn it back over to Robert now to discuss our 2020 forecast as well as our long-term targets and actions to achieve them..

Turning to page 19 for forecasting comparable EPS of $1.10 to a $1.50 in 2020 versus the $1 last year.

We're also providing a first quarter comparable EPS forecasts of a loss of $0.65 to $0.80 versus a prior year profit of $1.11, year-over-year earnings comparisons in the first half will be unfavorable as higher appreciation from the July 2019 residential value estimate change did not impact the first half of last year.

However, we expect to return to profitability in the second quarter. Additionally please note that the first quarter is seasonally the lowest earnings quarter for the year. I'd like to turn now and discuss the progress we're making on actions and initiatives to support our strategy of moderate growth with improved returns.

We're continuing to implement meaningful ChoiceLease price increases in order to raise returns and de-risk the business in light of the volatility of the used truck market. Although higher pricing is likely to lower new sales from recent record levels we believe this is an appropriate trade-off in order to enhance returns.

In addition, we continue to evaluate underperforming accounts and implement appropriate rate increases at the time of renewal. We expect this will result in some higher levels of lost business and have factored those into our forecast.

With favorable result in 2019 from our multi-year maintenance cost initiative we're increasing our expected annual savings from 75 million to 100 million. During the fourth quarter we closed a number of underperforming locations in the U.S. and Canada.

With higher expected used vehicle sales volumes in 2020 we took action to increase retail sales capacity by adding sales location, locations leveraging our inside sales, capabilities and enhancing our used vehicle sales website.

In order to accelerate growth in Supply Chain and Dedicated we've made strategic investments in sales and marketing resources. We discontinued our liability insurance extension program on customer leased vehicles in order to reduce future exposure from escalating premiums and claim settlement cost.

Finally, in 2020, 2020 Awards under our executive compensation program will be more heavily weighted to cash flow and return based metrics and less weighted on revenue to align with our strategy.

Taken together these strategic initiatives create short-term earnings headwinds in 2020 but are expected to better prepare us to deliver improved returns in 2021 and beyond. Page 22 provides an overview of our financial model and our long-term targets which have been updated to reflect our current outlook for the business.

Our primary financial target going forward will be adjusted return on equity as we focus on improving returns in our business. ROE is a more widely used measure of returns and capital efficiency and return on capital spread and is more easily comparable across companies.

We plan to continue to report return on capital spread for some time as well for a reference. We're targeting an adjusted ROE of 11% to 15%. Our near-term goal to reach our cost of equity which is around 11%. Longer-term we believe we can push higher than that up to 15%.

It's important to note that we expect to be able to achieve these return levels with no games and used vehicle sales. The high end of our ROE target range is consistent with our prior ROC spread target.

The key components to realizing our return targets includes operating revenue growth, pre-tax earnings as a percent of operating revenue and balance sheet leverage. In Fleet Management, we're targeting operating revenue growth in the mid single digit range.

This is below our prior target consistent with moderate growth and reflects our focus on increasing pricing and improving lease returns. In Supply Chain and Dedicated we're targeting growth rates in the high single digits in line with our prior goals.

We believe these growth rates are achievable given the large addressable markets in which all three segments operate as well as secular trends that continue to favor outsourcing. We're targeting pre-tax earnings as a percent of operating revenue in the high single digit range for all three business segments.

These targets are unchanged in Supply Chain and Dedicated but lower for FMS reflecting the impact from the recent residual value estimate change. Although we're lowering our FMS earnings target we expect to be able to achieve a similar overall return level for the company primarily due to the benefits of a lower tax rate.

Our target leverage range is 250% to 300% remains unchanged. We believe actions and initiatives we're executing will position Ryder well to achieve our return targets over time. We're looking at 2020 of the year to ensure that we're taking the appropriate actions to drive better returns beginning in 2021 and beyond.

As discussed some of these actions have a negative impact to revenue and earnings this year but we think is the right approach given that our primary focus is on driving higher returns in our business. That concludes our prepared remarks this morning.

Please note that we expect to file our 10-K late next week or early the following which will contain additional details for your review. We have a lot of material to cover today so please limit yourself to one question. If you have additional questions you're welcome to get back in the queue and we'll take as many as we can.

At this time I'll turn it over to operator to open up the line..

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

Hey thanks, good morning everyone. A lot in here.

Scot maybe just to ask it directly as you kind of come in and start to get acclimated with the model, some of the changes on slide 22 I think are pretty straightforward but as you think about what is the pathway in your mind kind of two questions here, what's your pathway to achieving that leverage ratio the debt equity target over the next several years? How do you think you'll get there and then in that same context in the meantime what is your attitude toward the current dividend policy? Thanks..

Yes, on the page 22 I think the path on the deleveraging is a combination of two things. So the lower growth and the free cash flow helps us lower the growth in the debt rate.

The second piece as the depreciation continues to run off as well as these are our own return on capital actions that we've talked about will build back the kind of the earnings which will improve our equity. So those are the two levers that will drive us to get down in 2021 back into our target range.

And the second question, what was what was the second question again?.

How are you thinking about dividend levels presently and then what's your approach to the dividend policy going forward?.

Yes, I think the dividend policy really was historically to kind of be in line with kind of the earnings growth rate. So we feel that different than is a kind of a good contributor to shareholder return and we'll continue to look at that going forward kind of relative to earnings expectations going forward..

Thank you..

[Operator Instructions] Our next question comes from Todd Fowler with KeyBanc Capital Markets..

Great. Thanks and good morning. Robert when you think about the pivot on the strategic initiatives how do we think about your position within the leasing market? It sounds like really the driver going forward is just slower lease growth.

Is that looking at the lease portfolio and just pruning out the low margin accounts and that's really what slows the growth? Are you taking a different approach to the market and how, you'll grow the lease fleet rolling forward? I mean the number 2 with the $0.25 of headwind from the strategic initiatives this year does that go away next year? How do we think about that headwind? Does that turn into a tailwind as you move into 2021? Thanks..

Okay. First on the lease side I'd say our approach there is look we have been lowering the residual values for our lease pricing for the last couple of years to reflect kind of the new normal for the used truck market. So we really continue doing that.

In addition to that I think given the volatility that we've seen in the used truck market the risk premium on the leases has gone up. So we're adjusting the pricing for that. So we're going to, we're looking to continue to increase the pricing to offset that. We don't know what that's going to give us in terms of growth.

We're assuming based on what we've seen in the market that it will curb some of the growth going forward and that's really what you've got built in here.

So we're not necessarily just back we're not backing off from the lease business and say we don't want to be in it or we just say we want to make sure we're getting the right return and I think given the fact that what's driven this change is market driven if the used truck market is down, any private owner who has their own truck is feeling the same pain.

I would expect it over time more people will continue to come to lease. So I just think you're going to see a lot more of the growth may be coming from the private fleet and for companies that have not outsourced before and we're looking to get a higher premium for that. So that's the first thing.

Around the strategic investments as I mentioned on the call about half of those investments are investments that we're making to improve our profitability in an FMS. A lot of these are maintenance initiatives we're going to get the benefits continue to get benefits this year and then more benefits next year.

So some of that will subside next year and then we're also opening up additional used truck centers that is part of that too with an FMS that once we think we've got to get our capacity up a little bit higher we think most of those investments will happen this year. So I think some of that will go away.

The other pieces which are really the investments in Supply Chain and Dedicated I don't necessarily see those going away because I think those will continue to make investments to help grow those more asset like businesses..

Okay. That's helpful. Let me jump back in line because I know there's a lot to cover. Thank you..

Hey, Todd just one other thing let me just clarify because you were asking about the return on capital actions. I just addressed the strategic initiatives. We've broken out in two buckets.

The return on capital actions, a big chunk of that in 2020 is really related to the fact that we're going to lose some accounts where we were providing, we were extending lease insurance to them, insurance services to them. So if we pull the insurance we may lose the account. So we've built that in. We expect that to be kind of a one-year.

Some of it will bleed into 2021 but the bulk of that will really impact this year. That's the chunk of it. The other piece is just low return accounts that we are not going to renew. So they may be contributing to the margin but when you look at the return on capital and return on equity they're certainly below the target that we want.

So there will be some I think ongoing headwind each year from that but as you'll see each year you'll get an improvement in returns on our invested capital and returns on our equity as a result of that..

Okay. So just to clarify the first half of the comments were related to the $0.45 bucket on the strategic investments.

The second piece of the comment that you just made on the insurance and the low margin accounts that was the $0.25 bucket and it sounds like at the $0.25 bucket some of that will continue but the order of magnitude would be less than the $0.25 going forward..

Right. That would be the expectation..

Okay. Thanks for the clarification on that. Thank you..

Thanks Todd..

And we'll take our next question from Scott Group with Wolfe Research..

Hey, thanks. Morning guys. So I wanted to ask about the slide from last quarter with the access unused prices. So where are used prices today versus those access.

I'm wondering if there's any additional cushion left or if we've sort of worked through that now and then I'm wondering have you lowered the residual assumptions any further from what you told us last quarter and then maybe just with that can you just update us last quarter you told us what the depreciation tailwinds would be in ‘20 and ‘21.

Can you give us the updated numbers to the extent that those have changed at all?.

Let me let me address the question on the chart that we showed from last quarter and then I'll let Scott talk about the depreciation. To give you an idea where we're at, if you remember the slide I hate talking to slide from last quarter but I know this thing got a lot of press.

It was the slide that we had a 20-year look back on tractor pricing and then we showed a nexus to where our policy depreciation was but we did not share [indiscernible] as to where accelerator was just because it would not certainly not wanting to drive the market in that direction but what I just said on this call was that our accelerated depreciation number is towards the trough level that we saw in 2002.

So a 20-year low. That's where we've marked the accelerated depreciation at. Where we ended the quarter was in between the two numbers. So we were right in the middle between where the policy access and where the accelerated depreciation is which is right where we expect it to be. So you did see a decline in the quarter.

Used vehicle pricing continues to decline as we'd expect. We're expecting it to bottomed out in the middle of the year and then see some pick up in the second half of the year..

Scott on the second question we added a slide on page 26 of the deck that I'll kind of refer to your question about what change from the third quarter estimate. So if you go back there we had for the impact of the second half of 2019 just from the estimate change was $289 million.

We mentioned that there was a slight refinement and true-up as we push that down in the fourth quarter about $8 million. So the total impact from the change was $297 million. It will be more detailed in the [deck] for that. We also mentioned that there was some policy and depreciation that was effective 11 of 2019 that number was about 60 million.

So the total depreciation impact in 2019 was around $357 million and then we add the losses from new vehicle sales. So we had some additional in the fourth quarter than what we had in the third quarter. So total of all the depreciation and UVS losses for 2019 was around $415 million.

As you kind of go into 2020 and the chart we had last quarter had the impact from the estimate change at 250 million. The follow-through, some of the 11 2019 does trail into 2020. So that's about 25 million.

So the total impact from depreciation we are expecting at 275 and then when it comes to estimation for the used vehicles we expect that there are some assets that are not in our accelerated classification that on a monthly basis we do take back units that are outside of that definition that we will have some potentials slight losses in 2020 related to those assets.

So that get you 295 for total impact for 2020. So the year-over-year change is $120 million that we have on the chart which is about $1.65. So hopefully when you get to page 26 you kind of see the details of how that kind of relates to what we shared in the third quarter..

And I know it’s early with the 125 for ‘21 not changed..

The 125 for ‘21 you would have saw right now $120 million year-over-year benefit from 19 to 20. Right now we're expecting the impact from 2020 to 2021 to be around that or maybe a little bit higher maybe $125 million, $130 million impact of positive tailwind from 2021 or 2020 sorry..

Okay. And if I can ask one just on the strategic investments. So I went back and I think this is it's now nine years in a row where it's become an incremental year-over-year headwind. I guess two things in prior years though there's some cost actions and maintenance things that are offsets.

How come we don't see anything like that in the bridge this year and I guess why not a more meaningful sort of reduction in the future to these investments if the growth is slowing and maybe the payout hasn't been there..

Yes. There are couple of things. One is there are cost actions in that we talked about in the waterfall.

We didn't call it out but the cylinder of the item that has overheads has got it netted out with the cost [indiscernible] there's at least $20 million of zero based budgeting benefit built into that that is offsetting the compensation increases year-over-year. So they are in there.

In terms of why not pulled back on the strategic investors, remember half of that are investment that we're making to basically get improvements in the business.

So we need those in order to get the maintenance cost savings that you're going to see in contractual business and in rental and then also in order to get expand or used vehicle network so that we can sell more units. So we haven't come off of that. I think the issue is just continuing.

It's making sure that we're making the investments we need to get the savings along with the investments that we're making. The other investments are primarily related to growing the more asset light Supply Chain and Dedicated businesses..

Okay. Thank you guys..

All right. Thanks Scott. .

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

Thanks.

I wanted to follow up on the 2020 guidance just given some of their earnings volatility we're seeing obviously the first quarter outlook and Robert I think you mentioned you expect profitability in the second quarter but is there any additional color you can provide on the cadence of EPS from 2Q to 4Q this year as we try to model that out and maybe you answered that you could talk about how these strategic investments and the return improvement costs are going to flow through the model quarterly over the course of 2020?.

Yes. I think the key item number one is the first quarter is always the lowest quarter primarily driven by rental which is usually your lowest utilization quarter as there's less need for seasonal units to be used along with just less miles driven generally in transportation in the first quarter.

So as we get into a seasonal uptick in the second quarter you're going to see the benefit to that and that's why I mentioned that we expect to turn to profitability.

The big benefit in earnings really starts to kick in in the third and fourth quarter as the impact of the depreciation change really starts to subside and you start to get some earnings benefit there.

Along with that as I mentioned, the growth that we're really expecting to ramp back up in Supply Chain and Dedicated you start to see some benefits coming from that part of it. Along with on the rental side I would tell you rightsizing the rental fleet and getting the utilization levels back up to where they need to be in the second half of the year.

So, those are probably the biggest drivers. You're going to see some improvement in the second quarter. As I said we get them profitability. And then you see a bigger improvement in earnings in the second half of the year..

And just a follow-up on that rental piece. What's your assumption for rental demand first half versus second half, I know it's down 10% for the full-year.

But what does the cadence look like?.

Hey John, you got that there?.

Yes. So Justin, we'll let you know that we expected a decline in revenue in that range of 7% for the full-year. And you could expect the first quarter which has the toughest comps to be the biggest decline year-over-year. You're looking at near double digits.

And then they'll start trailing off from there once we get the fleet right sized and demand levels kind of balance out. Really, you're looking at Q3, Q4 for that amount of time..

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

Thanks, Justin..

And we'll take our next question from Brian Ossenbeck with JPMorgan..

Hey good morning, thanks for taking the question..

Hey, Brian..

Hey. I just wonder if you could expand a little bit more on the thought process and maybe the timeline of the I guess footprints, maybe you're shrinking some locations, if you can just give us some context in terms of how many of that was in our at least leased or owned.

Then you sort of follow-on from the actual impact, whether impairments or say or anything like that embedded in the guidance.

So, maybe a little bit of the detail and then just bigger picture how you think is or how you how long do you think this rightsizing might last and to what degree?.

I'll let John give you a little bit of color. But I would tell you that just part of our kind of our pruning process. As we looked at the network, we found some locations that were underperforming. We do this on a regular basis, it was probably a few more that we picked up this year. So, we made some adjustments there.

I think there's there in terms of ongoing efforts, I think we're going to still see some of it as we continue to look at either accounts or customers that are underperforming. But it was a little bit more than usual but again not a significant number. I'll let John give you a little bit more color..

Okay..

Yes. Just to provide a little bit of color, I think what you've heard on the closures, it's really a consolidation.

So, we're always looking at improving the health of the business and when we look at a number of our facilities, we were looking at those that were underperforming but also we kind of taken an eye towards the customer impact as well as the employee impact.

And we just saw opportunities to consolidate a number of these smaller facilities into our larger shop. In total, we impacted about 30 facilities. So, I would tell you I think the large portion is behind us.

We may do some selective consolidation as we move forward but overall as we look forward, we're trying to improve the overall health of the business..

I think an important thing Brian is that a lot of our capital is really tied up in the assets, the actual trucks. So, reducing the infrastructure does give you some improvement but and the important thing is to make sure that we're getting the right return in each of the vehicles and that's the work that we're doing.

And I think the key is a lot of the decisions really happened that time of renewal. We've got six year leases you can't just in the middle of the lease typically it's not good for the customer, good for Ryder to break those leases.

But as each year as you get renewals, certainly taking a harder look at each of them, raising the pricing going forward, it's going to help us accelerate getting to our target returns..

Okay. So, it sounds like this is maybe a little bit above average in terms of the normal pruning process given the strategic initiatives here you're going through site. It sounds like we shouldn't assume that there is any immaterial impact in terms of impairments or severance or things like that embedded in the numbers..

No, that's not. That's correct, I wouldn't assume that..

Okay. Thank you for the time..

Thank you..

And we'll take our next question from Stephanie Benjamin with SunTrust..

Hi, good afternoon..

Hi, Stephanie..

I was hoping you could give a little bit of color on some of the investments you're making to build out the Dedicate and Supply Chain segments, you've mentioned sales and marketing, IT, just maybe some examples of what that entails when you really start to step up those investments and when we should expect to see some of the returns and the benefits.

That'd be helpful, thank you..

Yes. I would tell you that the simple one is certainly adding more sales resources in marketing dollars to really get after those accounts that we think we could win. As you know a big opportunity for us continues to be leveraging our FMS salesforce to sell into Dedicated.

So, adding more resource is to help facilitate, that is a part of that investment. Adding more resources in the supply chain side, not only on the sales side but also on the startup teams and really get these accounts to get us to higher growth rates, I think is another part of it also.

A big part of the spend I would tell you from what we're doing here is really around two significant strategic initiatives. One is RyderShare which is our visibility and collaboration tool. And I'll let Steve give a little more color on that.

The exciting thing about that is that really does we think provide us a competitive advantage in the marketplace as we go out and prospect for new business. Our ability to provide our customers without visibility and collaboration across their supply chain is going to is a differentiator.

And I think that's going to continue to be a big part of what we do. And then in the second pieces around our e-fulfillment network. As you know we bought Ryder Last Mile, we bought XPO a few years ago. We bought MXD. And turning into Ryder Last Mile, so we want to continue to see how we expand that and really grow that part of the business.

But we also want to develop this e-fulfillment network which allows us to hit and not just speaking ball, you could allow us to handle a product for customers that want to go direct to their consumer and not going through any retailer. So, building out of that network we've got now facilities on the West Central and East Coast in the U.S.

and really starting to build that out. So, let me also let Steve give a little more color..

Yes Stephanie, Steve. On back to RyderShare, think of it as a collaborative supply chain visibility to as Robert said. We have begun to roll out across our DTS organization earlier this year, should be complete mid-year of 2020.

We started our transportation management service, that's where we kind of operate as the traffic department for our customers. We've began that rollout here in Q1. Really focused on getting that fully rolled out to our customer base by about Q1 of next year. And then we'll begin to expand into the warehousing and e-fulfillment side of the business.

So, it really allows our operators, customers, our carrier partners to view the same information in real-time and make decisions that will improve the service to the end consumer. I'll touch real quick on e-com. We are up and running now in three locations. We are putting automation into the three locations as well.

Really as the volumes comes in because it's a cost benefit analysis so we get good traction there. The pipeline continues to increase with new opportunities though investing sales and marketing in e-com e-fulfillment as well.

And then last Mile, this would be our first year of full comps and I'll tell you that we're coming up with really good sales year this past year. So, it's really going to be a bad execution implementation as we look at 2020..

Great. And I'll leave it at that, thank you..

Thank you, Stephanie..

And we'll take our next question from David Ross with Stifel..

Good morning, gentlemen..

Hi, David..

A question on Slide 18. Scott when you look at the CapEx year-over-year and you're breaking that through growth in replacement. Replacement CapEx looks lower on a bigger lease fleet to lead like 1.5 billion versus 1.7 billion and then rental replacements down significantly from about 560 to 130.

What's the good run rate for I know there is difference in timing and annual trade cycles and both at good run rate for replacement CapEx for both the rental and lease fleet..

Yes, I'll address the rental first. I mean the rental I think kind of normal level replacement not in the mark that we are. It's probably more in the 400 million range. And the replacement I think part of this is kind of as we're going through these ROC actions that Robert mentioned, it's kind of get too much further out.

We have to kind of see how well that plays out in regards to the renewal, the price increases were implementing how that impacts that David. But that's something we can kind of think about as we go forward giving more clarity.

But right now we were kind of on the early stages of that, so I don’t want to get too far and to kind of predicting that level..

And then just I guess a quick follow-up on Slide 22, why is growth necessary for the ROE targets and not just improved earnings for tax margins..

Why is topline growth necessary?.

Yes, I mean why can't the business just cycle through, some of the depreciation challenges, you meet this truck challenges. Even if you had the same fleet, in theory I would think you would be able to get in the range.

So, I guess, why does that need to be a bigger revenue base to get to those financial targets?.

Well remember, some of the revenue increase is going to come from just improved pricing on the new stuff coming in. but with some revenue growth, I'm sorry some fleet growth will help drive some of that earnings.

Again, if the fleet growth is coming in at good returns which we feel confident, that's what we're doing with the pricing that we put in or continue to put in. That's going to help us get to the return level sooner..

Okay, thank you..

Okay..

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

Hi, thanks for taking the question. I just want to ask a follow-up question on the dividend. You mentioned moving dividend over time with earnings.

So, with earnings down significantly now, I mean how are you thinking about the current dividend level?.

Yes. I think on that where dividends have historically been for us really an indication of long-term earnings potential. So, if you look at our long-term earnings potential, we don’t see a change in that at this point. So, our BU rounded, it's a long-term indication of where we're going.

And we don’t see that as having changed significantly here with this depreciation change that we made..

Okay. So, then I guess at what point would you consider, I mean would you still consider raising the dividend to this point or holding it flat, I'm just kind of trying to understand the philosophy here given the challenges you're facing..

Yes. No look, I think that's the decision we'll make with the board here this year in terms of whether we raise it or not. But I think again this the dividend policy overall is really a tied to our long-term earnings expectation. Right now based on the earnings we're producing obviously the yield is pretty significant.

But we see that changing over the next several years as depreciation impact starts to subside. And we get back to a more normalized earnings level. So, our view is to really keep it consistent with where we think we're going which would kind of keep us in the range that we're in right now..

Okay, thanks.

And then I just wanted to ask one more question on the ROE targets and just if you can that comment on when you would expect to get back into that target range?.

Yes. If you look at the ROE targets we've laid out, we're saying that if you get as we get to the bottom end of that range, it's really covering our cost of equity. So, we would expect to be certainly in that range over the next three to five years getting to our cost of equity within the next three years and then expanding beyond that.

And again, an important comment there is that we're not expecting any UVS skills as we come up with these targets. So, if we if the used truck market were to come back higher than the levels that we've expect here or above the levels we've expected, we would get there sooner.

We are expecting a stable rental market too which is another part of the environment. The timing will be driven by certainly the execution on our initiatives and then those economic and market factors that impact these vehicle sales in rental.

But certainly take away I give you that are moderate growth strategy in choice lease should lead a significantly better free cash flow over the cycle. And you're seeing some of that this year, as we get into next year and we get some more normalized rental property replacement.

Some of that free cash flow may come down from where we are today but still certainly looking to be positive over the cycle and going forward..

Okay, thank you..

Okay..

And we'll take our next question from Ben Hartford with Baird..

Okay, thanks for taking me back in. can I just give Robert a little bit of context behind determination of the lease insurance program. I mean, we understand the dynamics obviously in the market at this point-in-time.

But how big of a drag has it been in recent quarters and what does it do how does it change anything from a go-to market standpoint as you think about 2020 and beyond not having that program in place?.

Yes, look I think Ben it's a program we've had in place for many years. It was really convenient for some of our customers. We're extending our insurance to those customers. So, the short-term impact is really for a select number of customers when we think that by pulling that away they're not going to renew with us or they may go away.

I think longer-term is I don’t see it as a significant drag on our growth because still the vast majority of our lease customers do take who have their own insurance through their own programs and do not take our lease insurance program.

But over the last several years it has been a headwind in FMS and we think that that headwind that risk is not worth the benefit that we're getting. Therefore we're moving to move out of that, that part of the business..

Okay, thanks. You guys were putting relatively the calendar. Can you provide, obviously you don’t have as much Asian outbound export exposure that's been to some but to what extent can you provide any context as to what's going on now that or beyond February 10th and it just still seems like factor here but its constrained.

What are you hearing from an inbound freight standpoint what are your customers saying supply chain might provide a little bit of insight into that, particularly if it's from an automotive or an electronics protocol. Any context real-time that you can provide as to what the impact will be in coming weeks from a freight standpoint..

I'll let Steve mention or comment on any of stuff that we're seeing on the supply chain side more broadly. But I would tell you on the rental side which is typically are leading indicator of what's going on with freight. We are continuing to see softness there. That is not surprising considering the imbalance between freight and trucks right now.

You've got a lot of trucks on the road for the amount of freight that's moving. That's it, that's something we expect just on normal cycles to get back in line in the second half of this year is you're hearing from other folks in the industry. So, we are seeing that I would tell you we saw that in January.

We did build that into our full-year forecast that you're getting. So, again some really softness around the freight environment I think would be what we but I tell you we saw in January.

Steve, if you want to mention anything what you're saying?.

Yes. Ben, I mean we're we shut down our Asia operations, so we're no longer in the region. But I'd tell you in working across primarily the auto and industrial industries right now. We're not really seeing any short-term impact.

I think many of our customers are looking at alternative plans in kind of kicking in disaster recovery plan and switching suppliers where they can. So, nothing really coming from the customer base at this point. So, just more to comment, more to watch..

Okay, thank you..

Alright, thanks..

And we'll take our net question from Todd Fowler with KeyBanc Capital Markets..

Todd?.

He might be muted..

Can you guys hear me?.

We can hear you now..

Okay. Sorry about that. Yes, I did have it on mute. I just wanted to ask Scott on Slide 26 that you referenced.

Can you help us understand, it sounds like that pricing was within your expectations for the fourth quarter but there was a little bit of movement in the depreciation? So, what contributes to the variability and specifically we think about the $65 you're expecting in 2020. What factors would make that different from your forecast.

And is it you know you struck pricing but again it sounds like it was within your range.

I'm just trying to figure out how the depreciation tailwind could move, how it moved in the fourth quarter and then how to move into 2020?.

Yes, Todd. So, I think with the size of the chains that we made, I think the through what that we did is kind of not kind of it shouldn’t be read into there. If there's any change in the assumptions or what we did, it was just kind of a minor modification to that.

As you think about going forward as Robert mentioned, in the fourth quarter pricing was within line with where our expectations are. We have forecasted at outdoor and the remainder of 2020. So, what the factors that would impact that is really comes down to kind of our forecast versus kind of what happens in the marketplace.

And so, we view it as the best information in what we've been seeing for the last six months to kind of inform us on that on what we're doing. But if -- as Robert mentioned, we're kind of on the accelerating side work kind of add that kind of draws level.

So, anything that's beyond that would be something that would be something we would need to kind of address. As it comes in a little bit better than that, that will be kind of open news..

Okay.

And then can you just speak to in your forecast, is that just staying at the trough level, it sounds like maybe a little bit of improvement in the back half of the year and not looking for specifics but maybe just directionally kind of what you have in your forecast?.

Correct. As we mentioned in the prepared remarks is we have it continue to go down and at a modest recovery in the back half of the year based on what we've seen and heard in regards to some of the research out there about some of the supply that we're in imbalanced kind of stabilizing as we get through this year..

Great, okay.

And then just lastly, can you share how much in the 2020 guidance is the cost to prep vehicles for sale?.

Yes, I don’t think on that one Todd, we haven’t been specific. The timing was really around the fact we have more vehicles that we have to out service. So, because of that, we're going to be spending more money doing those out servicing and really getting those vehicles prepared for sale. That's really that it's.

It's not a specific number that we get into..

Okay, that's fair..

Right..

I think that and Robert I think we're trying to just put together some of the pieces that won't be in the 2021 number. So, that's what I was looking for there but we can follow up, thanks..

Right, well. What I would tell you those is you'll see, you're going to have that increase this year. As you get into next year though you will still have a significant number. You'll start with similar number of units to out-service and to get in again to sell is that similar number of units will be terming out.

So, I wouldn’t expect it to be a good guidance, next year nor bag and maybe flattish next the for the following year..

Got it, okay. Thanks again for the time..

Okay..

And we'll take out last question from Scott Group with Wolfe Research..

Hey, thanks. I just got a real quick one. What is the tax rate for this year and then is that the new normal, does that go back down next year.

Can you help us out?.

Yes, thanks for the question. I know that the given what we're going through, I would just first start off in the first quarter as we talked about that we expect to have negative earnings.

So, when you think about the tax rate that we put out for 2020, the first quarter we're going where we'll have a tax benefit and then as you get through the year, we'll get the kind of the tax rate that we provided guidance around.

In the real challenge or working through Scott is that there would be a kind of a statutory tax rate but when you have lower earnings and we also have a fair number of discreet items, and there was one as came in the fourth quarter in regards to a true percent of our state tax returns that we don’t expect to repeat in 2020.

So, as there's a low pre-tax number and having a discrete item that doesn't repeat, that's why the rate is higher in 2020 versus 2019.

But if you think about it going forward, as we look at 2021 and 2022, just because of the impact of the lower earnings from the depreciation we're taking, I think would be more applicable to kind of use kind of a high-20s kind of tax rate.

And so, we're kind of get back to what I'll call more normalized earnings levels which would then effectively make the rate go down because you have more pre-tax with kind of similar tax expense. So, that's what brings us down the REIT. But I think for the next couple of years, it'd stay in the high-20..

Alright, so we've got in the forecast as 31, and then going forward stay in the high-20s?.

So, it's kind of come down as we get that depreciation on winding over the next couple of years, that would kind of marginally reduce the rate that you would be seeing from the 31 in 2020..

Okay, thank you there..

I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks..

All right thanks everyone, five minutes past the company hour, but I think we got all questions that were in queue, so thank you all for your interest and we certainly look forward to see you in over the next few months..

That concludes today’s conference, thank you all for your participation..