Good morning and welcome to the Ryder System Third Quarter 2022 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, Senior Vice President, Investor Relations and Corporate Strategy for Ryder. Mr. Brunn, you may begin..

Thanks very much. Good morning and welcome to Ryder's third quarter 2022 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 and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are all available on Ryder's website.

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

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

Good morning, everyone, and thanks for joining us. I'm very pleased with this quarter's record earnings, which reflects growth in all three business segments. I'm also excited to update you on the significant progress we continue to make on our strategy to increase core earnings and create long-term shareholder value.

I'll begin the call by providing you with a strategic update. John will then take you through our third quarter results, which exceeded our expectations again this quarter. We'll then discuss our outlook and review how we position the business to deliver on our targets over the long term. Let's start on Slide 4.

Secular trends, including recent supply chain disruptions and labor challenges, are continuing to drive companies to pursue long-term transportation and logistics outsourcing solutions.

As a result of these trends and our initiatives, strong sales momentum has continued and we've realized record contractual sales activity year-to-date, which positions us well for future revenue growth. We're also pleased to report that the lease fleet in North America returned to growth this quarter despite ongoing OEM delivery delays.

Our two recent supply chain acquisitions, Whiplash and Midwest Warehouse & Distribution System, continued to perform well and were accretive to earnings. These acquisitions support our strategy to accelerate growth in our asset-light supply chain business.

Whiplash significantly grows our e-fulfillment network with scalable e-commerce and omni-channel fulfillment solutions, and Midwest expands our multi-client warehousing offering. During the quarter, we also acquired Baton, a tech start-up which we initially invested in through RyderVentures, our corporate venture capital fund.

This acquisition is expected to enhance our product and technology development capabilities. We're excited about the value that this can create for Ryder customers as we build out a suite of products that focus on optimizing transportation and supply chain networks.

We generated strong return on equity of 30% for the trailing 12 months, which is above our target and reflects our initiatives and strong market conditions in FMS.

We successfully executed on our actions to return Supply Chain and Dedicated to their high single-digit earnings targets, resulting in segment earnings growth of approximately 190% and 150%, respectively.

These significant increases in earnings primarily reflect pricing adjustments to address unusually high labor costs that began in mid-2021 and the benefits from profitable new business. We increased our full year 2022 return on equity forecast by one percentage point to 26% to 27% and also increased our full year 2022 comparable EPS forecast.

These increases reflect higher results in used vehicle sales and rental. We completed our $300 million ASR in September, retiring 4 million shares at an average price of $74.7 and have existing Board authorization for a 2 million share discretionary program and a 2.5 million share anti-dilutive program.

Our strong balance sheet continues to provide us with the capacity to pursue targeted acquisitions and investments as well as return capital to shareholders. We increased our full year 2022 free cash flow forecast by $50 million to $800 million to $900 million to reflect higher expected used vehicle proceeds.

The cash flow forecast also includes deferred capital expenditures of approximately $200 million due to OEM delivery delays and $350 million in expected proceeds from the previously announced exit of our U.K. business. We continue to develop and implement customer-facing technologies to differentiate our services and drive profitable growth.

As we've been doing for some time now, we would like to highlight one of those technologies on today's call. This quarter, we're highlighting RyderGuide, an innovative customer-facing platform that is bringing significant value to our FMS customers.

RyderGuide is a proprietary platform that empowers fleet managers and drivers to engage with Ryder services in a fully digital way. We currently have more than 12,000 active users per month. We're seeing strong growth in usage with a 24% increase in active users compared to last year.

RyderGuide is focused on delivering a completely digital end-to-end experience for servicing vehicles from pre-scheduling appointments, self-check-in upon arrival at the maintenance shop and tracking the real-time progress of vehicles through service completion, all within the RyderGuide platform.

Bringing real-time and reliable visibility to our customers during two of the most critical customer touch points, namely the in-shop experience and the roadside service experience, has been a key area of focus for RyderGuide.

For example, our new digital roadside experience allows drivers to pinpoint their exact location for faster and more reliable deployment of service and enables interactive real-time progress updates for drivers and fleet managers as we get our customers back on the road. We believe RyderGuide creates a new standard for best-in-class fleet management.

Our ongoing investments in this technology, combined with our expertise in infrastructure, enables us to provide an industry-leading solution that makes it easier for customers to do business with Ryder. I'll turn the call over to John now to cover third quarter results..

Thanks, Robert. Total company results for the third quarter on Page 6. Operating revenue of $2.3 billion in the third quarter increased 18% from the prior year, reflecting revenue growth in all segments and the supply chain acquisitions.

Comparable earnings per share from continuing operations were $4.45 in the third quarter, up from $2.55 in the prior year and reflected higher earnings in all three business segments.

Return on equity, our primary financial metric, reached a record 30% for the trailing 12-month period, reflecting ongoing truck capacity constraints in the market as well as continued benefits from our initiatives to increase returns.

Year-to-date free cash flow increased to $887 million from $829 million in the prior year, reflecting higher used vehicle sales proceeds, partially offset by higher planned capital expenditures. Year-to-date free cash flow in '22 includes $326 million from the sale of vehicles and properties in the U.K. part of the exit of business.

Turning to FMS results on Page 7. Fleet Management Solutions operating revenue increased 4%, reflecting 16% higher rental revenue driven by higher pricing and demand. FMS operating revenue increased globally despite a 4% negative impact from the wind-down of the U.K. business.

Rental pricing increased 7% primarily due to higher rates across all vehicle classes. Fleet Management realized pretax earnings of $265 million, up by $79 million from the prior year. $55 million of this improvement is from higher gains on used vehicles sold and lower depreciation expense impact related to prior residual value estimate changes.

Improved rental performance also significantly contributed to increased FMS earnings. Rental utilization on the power fleet was strong at 83% on a larger fleet. FMS EBT as a percent of operating revenue was 20.4% in the third quarter and 20.3% for the trailing 12 months, both well above the segment's long-term target of low double digits.

Excluding all used vehicle gains in the quarter, FMS EBT percent was still in the segment's low double-digit target range. Page 8 highlights used vehicle sales results for the quarter. Used vehicle market conditions remained strong, reflecting solid freight activity and tight vehicle availability due to continued OEM production constraints.

Used vehicle sales proceeds in North America increased versus the prior year and remain above historical averages. On a sequential basis, as anticipated, used vehicle proceeds declined. Tractor proceeds decreased 22% and truck proceeds decreased 11%. During the quarter, we sold 7,500 used vehicles, of which 2,500 were related to the exit of our U.K.

business. Excluding the U.K. exit-related sales, used vehicles sold were up approximately 300 vehicles versus the prior year and up 1,000 vehicles sequentially from the second quarter. Used vehicle inventory inclusive of the U.K. was 4,700 vehicles at quarter end, below our target range of 7,000 to 9,000 vehicles. The majority of the 1,100 U.K.

used vehicles and inventory at the end of the third quarter were sold in the month of October. Although used vehicle pricing declined sequentially, it remains well above residual value estimates used for depreciation purposes. Turning to Supply Chain on Page 9.

Operating revenue versus the prior year increased 49% due to the acquisitions and double-digit revenue growth in all industry verticals, reflecting new business volumes and pricing. Operating revenue excluding acquisitions was up 23%.

SCS EBT increased 189%, primarily reflecting higher pricing and cost-recovery initiatives as well as profitable new business. The impact of automotive supply chain disruptions in the prior year and acquisitions also benefited earnings comparisons.

SCS EBT as a percent of operating revenue was 7.7% in the quarter, returning to the segment's high single-digit target range. We expect SCS results to continue to benefit from pricing actions, profitable growth and acquisitions going forward. Moving to Dedicated on Page 10.

Operating revenue increased 17% due to higher pricing, increased volumes and new business. Dedicated EBT increased 149% primarily due to pricing adjustments to address unusually high labor costs as well as new business.

DTS EBT as a percent of operating revenue of 8.9% was in line with the segment's high single-digit target and up sequentially from the second quarter. We expect DTS to continue to benefit from pricing actions and profitable growth going forward. Turning to Slide 11.

Year-to-date, lease capital spending of $1.3 billion was up year-over-year due to increased lease vehicle replacements for expiring lease contracts. Year-to-date, rental capital spending of $492 million declined versus prior year, reflecting lower planned investments.

Our full year 2022 lease CapEx forecast is unchanged at $1.8 billion to $1.9 billion and reflects higher lease replacement and growth capital versus 2021. This forecast also reflects a $200 million reduction in capital expenditures due to the extended OEM vehicle delivery delays that is expected to defer CapEx from 2022 into 2023.

In North America, we continue to expect the lease fleet to be up by approximately 2,000 vehicles by year-end, and we're pleased to see the lease fleet return to growth in the third quarter, up by 300 vehicles versus prior year.

With the majority of expected lease fleet growth occurring towards the end of 2022, the associated revenue and earnings will primarily benefit next year. Our full year 2022 rental CapEx forecast remains at $500 million, below the prior year with our ending fleet expected to grow by 2% or 700 vehicles.

We expect the average rental fleet to be up by 9% or 3,600 vehicles on a full year basis. Gross capital expenditures are expected to be between $2.6 billion to $2.7 billion. We expect proceeds from the sale of used vehicles of approximately $1.2 billion. This number includes $350 million in proceeds related to the exit of our U.K.

FMS business and higher proceeds from the sale of used vehicles versus the prior year. Full year net capital expenditures are expected to be between $1.4 billion and $1.5 billion. Turning to Slide 12. We increased our 2022 free cash flow forecast by $50 million to $800 million to $900 million range to reflect higher expected sales proceeds.

The forecast also reflects $350 million in expected proceeds from the U.K. exit and $200 million in deferred lease capital expenditures. Our balance sheet leverage is 210% at the end of the third quarter and is below our 250% to 300% target range.

We expect leverage to remain below our target range for the balance of the year, providing capacity for targeted acquisitions and share repurchases. We increased our 2022 ROE forecast to a range of 26% to 27%, up from our prior forecast of 25% to 26%.

ROE is expected to benefit from continued strength in FMS as well as realizing higher SCS and DTS returns in the second half. I'll turn the call back over to Robert to provide an update on our plans to drive higher core earnings over the cycle and our increased 2022 EPS forecast..

Thanks, John. Turning to Slide 13. At our Investor Day in June, we discussed Ryder's core earnings and the actions we've taken to deliver significantly higher core earnings relative to the prior cycle peak. We also reviewed the initiatives we have underway that we expect will drive core earnings even higher in the future.

As a reminder, core earnings excludes outsized gains and rental results that have benefited earnings in this historically strong freight environment.

In a more normalized market environment, we expect gains of approximately $75 million versus the estimated $375 million forecasted for 2022 and also expect rental utilization to return to the mid- to high 70s in line with historical averages. As such, we have incorporated these assumptions into our estimate for core earnings.

The left side of the slide illustrates the actions we've taken since the prior cycle peak in 2018 to increase core earnings. A key driver of this profitable growth has been the profitable growth in Supply Chain and Dedicated, which has accelerated during this period.

In FMS, our maintenance cost-savings initiative continues to generate significant benefit, and we expect to achieve our target $100 million in annualized savings this year.

Our lease pricing initiative also continues to drive substantial value, and we expect to achieve an estimated annual benefit of approximately $65 million by the end of 2022 with more to come as the remaining lease portfolio is renewed at higher returns.

The right side of the slide describes the actions underway that we expect will increase core earnings in the future. For the past several quarters, we have discussed the pricing and contractual adjustments the team has been implementing to address unusually high labor costs we began to see in mid-2021.

As a result of these actions and consistent with our forecast, Supply Chain and Dedicated EBT percent returned to the high single-digit target this quarter. We expect the impact from these pricing actions to carry over into next year with this carryover effect expected to benefit results in the first half of 2023.

Profitable new business is also benefiting Supply Chain and Dedicated margins. In FMS, approximately 55% of our lease portfolio has been renewed to date under our lease pricing initiative. An additional 20% has been contracted under the new pricing model and is expected to be in service over the next 12 months or so.

We expect an incremental earnings benefit as the remaining portfolio has renewed at higher returns. This initiative is expected to be fully implemented by the end of 2025 with an estimated total annual benefit of $125 million upon completion. Profitable revenue growth is another key driver of higher core earnings.

During the third quarter, Supply Chain and Dedicated had double-digit organic revenue growth driven by secular trends in our sales and marketing initiatives, including new products and capabilities. Our strong balance sheet provides us with the capacity to pursue targeted acquisitions and return capital to shareholders.

We're pleased with the performance of our two recent supply chain acquisitions, which have contributed to core earnings. We also recently completed a $300 million accelerated share repurchase program.

I'm proud of the team's execution on these key drivers of higher core earnings and fully expect these initiatives to generate incremental benefits in the future and position us for higher earnings and stronger free cash flow relative to prior cycles. Turning to Slide 14.

We'll take a look at where our current accounting residual value estimates are set relative to historical used vehicle sales proceeds index. As many of you know, in 2019 and 2020, we reduced our accounting residuals by approximately 30% in order to address used vehicle market volatility risk.

The left side of the slide shows our historical truck proceeds, and the right side shows our historical tractor proceeds. Both charts show where our accounting residuals are set relative to historical and current sales proceeds. For trucks, residual estimates for accounting are set at trough levels.

For tractors, residual estimates for accounting are set at historically low levels. We also incorporated a freight cycle downturn shown by the range here, which impacted about 15% of our tractors.

As the chart shows and as we've expected, used vehicle pricing has begun to decline from peak levels, but our residual value estimates for accounting purposes are well below the current pricing levels.

Used vehicle pricing would also need to -- would be to decline 35% from Q3 '22 levels in order to get $75 million of annualized gains and 42% to get zero annualized gains, all else constant. Finally, turning to Page 15.

We're raising our full year comparable EPS forecast to $15.65 to $15.85, up from the prior forecast of $14.30 to $14.80 and above the prior year of $9.58. We're also providing a fourth quarter comparable EPS forecast of $3.18 to $3.38, below the prior year of $3.52, reflecting an expected decline in used vehicle pricing.

Used vehicle sales and rental performance are the key drivers of our current full year forecast. Our forecast continues to assume that the historically strong used vehicle sales environment will decline near term.

Rental market conditions remained strong in October to date and are expected to remain strong throughout the fourth quarter due to OEM production constraints. Record 2022 year-to-date contractual wins and acquisitions are benefiting revenue and earnings growth.

2022 lease fleet growth is expected to primarily benefit 2023 earnings as this growth is occurring late in the year. Overall, we're pleased with the trends that favorable outsourcing and the results of our efforts in sales and marketing and new product development.

We're confident that the actions we're taking to increase returns and drive higher core earnings will position us to achieve our long-term targets over the cycle. That concludes our prepared remarks this morning. Please note that we expect to file our 10-Q this afternoon.

We had a lot of material to cover today, so 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 as we can. At this time, I'll turn it over to the operator..

[Operator Instructions] We'll take our first question from Jordan Alliger with Goldman Sachs. Please go ahead..

Curious, now that you have your margins on Supply Chain and Dedicated to the ranges that you'd like to see them or your targeted range, can you maybe talk a little bit about the stickiness of those margins should the economy continue to falter or turn down a little bit? Thank you..

Yes. Listen, that's a good question. On the Supply Chain side, as you know, and Dedicated, these are contractual businesses where we have long-term contracts with our customers. So even when there's some volatility in the market, really the margins hold up very well, if you look historically.

The one area that we've had some challenges in the past has been around automotive. But I would tell you with the backlog of automotive production that still exists, I would expect, certainly in the near term, that volume to still be pretty strong as we go well into 2023.

So, I guess, to answer your question, I expect them to really hold up pretty well even during a slowdown..

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

So used prices started to fall, but earnings 3Q to 2Q were pretty flat. But now you've got a pretty big drop in the guidance from 3Q to 4Q.

So maybe just help explain what's driving 3Q to 4Q? And then is anything changing with that $950 million of normalized earnings if we're raising guidance for this year, does the $950 million come up in your mind?.

Yes. No, the $950 million for this year stays the same. It would go up for next year. But this year, really, the beat in the quarter was primarily used trucks and rental. But if you look at the sequential decline in earnings from Q3 to Q4, I'll tell you used trucks, is the biggest driver. Used trucks and rental is more than half of that decline.

Then there's also Europe. As we get out of Europe, as you know, we're getting towards the tail end of that. So right now, we've got more cost there than we have the revenue coming in. So, that's a headwind in Q4. And then the rest is really just seasonal declines, I would call it, that are there.

But the vast majority of that is used vehicles and a little bit of rental..

And then, Robert, I know -- I don't know that there's much if anything you could say, but we have the HG Vora stuff earlier. There was talk about Apollo couple of months ago or a month ago.

Where do we stand on all this, if you have anything you want to say or can say?.

Yes. Scott, as a matter of policy, we don't comment on rumors and speculation. As you know, on the HG Vora letter, we determined that the price was not indicative of the value of the Company. And that's really all I have to say on that..

We'll take our next question from Allison Poliniak with Wells Fargo. Please go ahead..

Just want to go back to the conversation on RyderGuide. It certainly seems like a clear efficiency case for Ryder.

Is there -- I know it's kind of early days, but as we think through that penetration, is there a way to think about it maybe on a transactional basis, sort of the productivity or the efficiencies that you can accrue over time? Just any thoughts there?.

Yes. Look, we're really excited about it because it's something we've been working on for a while. And we're -- we've gotten a lot of feedback from customers, and we're making the enhancements and adjustments to it. But I think it just makes it easier for customers to do business with Ryder and makes that relationship stickier.

But let me hand it over to Tommy to give you a little bit more color on how we see that helping us from an efficiency and customer standpoint. Tom, I think you're on mute..

Sorry, turned the wrong device off. Sorry about that..

There you go..

big benefit for the customer in terms of visibility; and certainly, from an efficiency standpoint in the back office at Ryder, we think will help us as well..

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

Just wanted to ask more broadly about pipeline for contracts in SCS and Dedicated, where that stands right now? Obviously, there's a lot of uncertainty in the broader marketplace. There's probably a bit of catch-up given all the constraints on OEM equipment and labor and the like.

But rates are going up, as you mentioned, to kind of cover some of those costs. Where does that all stand? Maybe you can comment a little bit more on the competition. Because I feel like from time to time, we get some of these competitive contracts that go one way or the other.

Are you seeing any of that right now as the demand outlook starts to soften a bit?.

Yes. Brian, well, let me -- I'll also include in our ChoiceLease sales. ChoiceLease sales are strong. We have currently and already signed a lease business that takes us through certainly into the third quarter of next year. So a lot of that business is already locked in and waiting for the trucks to come in.

On the Supply Chain and Dedicated side, as we mentioned on the call, we have record contractual sales year-to-date in those businesses. So it continues to be a very strong pipeline. But let me hand it over to Steve to give you a little bit more color on the pipeline there..

Yes. Brian, as Robert said, I think we had historical pipelines both year-over-year and sequentially this quarter versus Q3. So we're not seeing any softening there. Deal size is up in both Dedicated and Supply Chain, so not seeing any softness right there.

I think one key call-out is all industry verticals within Supply Chain grew in the double-digit level. So, team is really hitting it on all cylinders right now..

Okay. And I guess a follow-up for maybe John.

What does that mean for CapEx and free cash flow next year as you get a little bit more growth just waiting for the trucks to show up? Do you think this is going to be a flat CapEx -- I'm sorry, flat free cash flow year next year? What are your initial thoughts on that given the visibility you already have to some of this demand?.

Yes. Brian, obviously, the visibility we have, especially on the FMS side, we do expect, as we laid out, $200 million of the CapEx to spill into 2023. So we do expect higher level of CapEx going into next year, if you think about the lease replacement and growth activity that's happening in FMS.

And what we have said previously, although we haven't really given any guidance for next year yet, we have kind of signaled towards a flattish free cash flow environment for next year, but it's still a little bit early to call that. So that's the direction we have..

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

John, just a follow-up on that comment. When you say flattish free cash flow next year, are you talking with flat to the $800 million to $900 million of guidance this year or something different? I would think with proceeds coming down -- yes, sorry, go ahead..

Yes. So just to clarify, the flattish environment, we're talking kind of a break-even free cash flow when we say flattish there. So, we do expect used vehicle proceeds to come down, as you said, from the record levels we're enjoying this year.

And then you're going to have some uptick in the CapEx spend level, which is going to compress that free cash flow number..

Right. We would expect next year to be back in a growth mode in lease, plus you've got the carryover of some of the CapEx from this year. So yes, I think a breakeven of around zero free cash flow is probably the best estimate right now..

Okay. That helps. And I apologize, that wasn't my original question, so I get another one, just to follow up to the response there. When you think about the lease fleet growth being back-end loaded and also the pricing initiatives on the lease side, and Robert, I think you gave some quantification for kind of the annual target.

But is there a way to sensitize what the lease fleet growth that's already been booked in '22 and the contracted pricing actions could equate to as we get into '23? Kind of where are you starting off just with kind of already EPS contribution that you have visibility to from the lease signings and the contract pricing?.

Yes. If you think about it, we're starting with 2,000-unit fleet growth in the fourth quarter, right? So the benefits of that are going to go into next year. Plus, we're expecting growth next year.

So if you think about our target lease fleet growth levels, we're going to be probably at or above the high end of that next year just because we've had such a delay in getting those lease vehicles. So I guess I would give you just a broader view, Todd, on next year without giving you a forecast.

I'd say the biggest driver next year that we're seeing for improved earnings is improved core earnings, right? So we expect our core earnings to increase next year from the $950 million that we talked about today. And that's going to be driven by Supply Chain and Dedicated having a full year of target margins.

Remember, we're only going to get half a year this year. That's a significant driver of earnings. The share repurchase that we did, the ASR, is going to give us some benefit also next year as we -- as that wasn't a full year benefit.

Then you're going to have growth in lease, growth in Supply Chain and growth in Dedicated, which are all going to contribute to higher core earnings next year. We have the lease pricing initiative that you mentioned, I would say, is also going to be a contributor.

And then there'll be a partial -- there'll be some partial offset with overheads and maybe some strategic investments. But you got to think about next year as core earnings will be up from the $950 million.

Now earnings -- the overall earnings will likely be down because you expect used vehicle prices to continue to come down next year and probably bottom out at some time in the back half of the year. And then you expect rental to slow down at some point also.

So we would expect some headwinds from that, although, as I mentioned, we still haven't seen rental slow down because there is such a need for vehicles still in the marketplace..

Yes. Robert, that's helpful. And that's really what I was getting at is kind of how we think about that $950 million moving into '23. And I think that those were the big buckets. So, all of that commentary was helpful..

We'll take our next question from Bert Subin with Stifel. Please go ahead..

So, we've talked a fair amount about Supply Chain, and the SCS story has been really positive for Ryder. But there's been an increase, I would say, in private equity and VC activity just across that arena.

Can you talk about what you're seeing on the competitive landscape across SCS? And do you think the barriers to entry that you have there will remain in place?.

Yes. Look, just as a quick answer to that, I would tell you, our -- the barrier to entry for us in that business is our capabilities. And it is not an easy business, and we've had many years of really working our capabilities and tuning our capabilities in what we do there, and that's really what customers are looking for.

And I would say that's not as easy to replicate. Add to that the technology that we've now added, and it really has become a pretty compelling and value prop.

But Steve, why don't you give him a little bit more color?.

Yes. Robert, I'll just add to, Bert, the technology piece. The announcement of the acquisition of Baton is a key investment for us. You've seen us build out RyderShare over the years. That's a key differentiator in the marketplace. Our technology stack with Whiplash is a differentiator. We have RyderView 2.0 and Last Mile.

So technology is a key differentiator. But at the end of the day, it comes down to the people. We've got great people, long tenure, and they deliver on the promise to the customer..

Just as a clarification question on a previous comment earlier about all of the industry verticals. You guys had talked about autos being a tailwind coming to your end, and I guess it's starting to show that with double digits.

Is there a runway for that to stay sort of the strongest segment as you go into '23, no matter really what happens?.

Yes. We believe so because just what we're seeing with our customers, the backlog of production that is still needed in that industry just to meet the replacement demand that's out there. So, we see the auto business staying strong, at least through the first half of the year as you get that demand filled in.

And again -- and historically, it's -- we almost forgot about this since COVID. Historically, auto has been relatively stable in terms of -- typically, in the U.S., are producing 15 million to 17 million autos a year. And that was relatively steady with the exception of the Great Recession and then now during COVID.

So, I would expect going forward, we'll go back into that mode. And even as we transition to more electric, Ryder still has a very key role to play in the logistics of that assembly..

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

Yes. Just wanted to clarify one thing here. In terms of Baton, I know they had started off maybe working a little bit more on a, I think, final mile with delivery and sort of the drayage side and maybe talking about how they linked into autonomous, which I know you're also invested in. But I think they've pivoted from that since then.

So maybe you can talk about exactly what you see in that industry. And then, I guess, separately, just one more on UVS. We've seen some divergence in some of the vintages they are getting a little bit stronger, some a little bit weaker.

Does that have really any material impact on how you view the UVS market? Or is that just a little too early and the downward trend is still very much in place?.

Let me answer the first one, and then I'll hand it over to Steve to give you a little more color on Baton and what we're really excited about there. On the UVS side, as you know, we're selling typically six- to seven-year vintage vehicles. So that's the vintage that we typically track.

I would tell you that it's behaving as we expected, certainly on the tractor side. I think trucks are holding up a little better than we originally expected. But as we go into next year, I think those are the vintages that we really -- if you want to monitor kind of where it's going on with our markets, those are the vintages to look for.

Steve, do you want to give him more color on Baton?.

Yes. Brian, I think the key for us is that we still are buying technology off the shelf. But to stay ahead of the competition, we really needed to develop technology in-house. Our key here is to eliminate friction, eliminate waste in our customer supply chain and in our operations.

So yes, their base business was around more of a kind of a dray-type model. I think we can build on that, and they're going to be focused on transportation and supply chain optimization. So a great addition to the team, and we look forward to them really keeping us ahead of the competition as we move forward..

Our last question comes from Scott Group with Wolfe Research. Please go ahead..

Robert, can you just walk through that -- the math on the sensitivity with used pricing and gains that you were just talking about in the prepared comments again? And then separately, just your thoughts on why the rental utilization is sort of holding up so much better in -- given the freight environment and why maybe that can continue and maybe we don't go back to the mid-70s?.

I'm sorry, Scott, can you repeat the second part of your question?.

Yes. So I mean -- so rental utilization is holding up really well given the -- despite the freight environment.

Is there a chance we just don't go back to that mid-70s that you think is more normal?.

Right. Well, look, I think -- I'll answer that part, and then I'll hand it over to John to answer the used vehicle piece. On the rental utilization side, clearly, demand is helping us get to this 80-plus percent.

But there's also things that we've done internally around process, around how we keep our rental trucks on the road and having fewer of them out of service that we have really made some changes over the last couple of years, which we think are going to help us keep it higher.

Will it stay in the low 80s throughout the whole year? Probably not, but we think certainly towards that higher 70s level, we think, is achievable. So, I would tell you part of it is the market will come down, but part of it is also some of the things that we're doing internally to keep our rental trucks on the road.

John, do you want to answer the used truck question?.

Yes. Scott, so what we laid out on Page 14 of the deck there, one of the commentaries you heard from us is we gave a sensitivity relative to the core earnings, which contemplates $75 million in annualized gains.

So looking at where we're at in Q3, you would need to see a 35% drop across all vehicle classes to get to an annualized level of $75 million in gains. And then, we also provided to get to zero gains, you would need a 42% drop from where we sit in Q3.

So, that was the sensitivity we gave relative to kind of where we're sitting today, which are at elevated levels. I would say right now, we're still at pre-pandemic highs. So, there's still quite a bit of distance before we get to that core earnings-level number..

Can I -- I just -- I'm not sure I fully understand -- go ahead, sorry..

That's on an annualized basis. So think about -- it has to stay there for a full year to get to zero gains for the year..

Yes. I guess what I'm not really following is -- so you had like $100 million of gains in the quarter, and so -- or to go from -- if used pricing drops 35%, we go from like an annual of $400 million to $75 million. But then if it drops another from down 5% to down 42%, it only goes from $75 million to zero. So just the proportions just seem off.

Maybe it's a better question off-line, I don't know, or maybe I'm missing something..

Yes. The delta could be that the additional depreciation that we set on those tractors that we have 50% of the fleet where we've already taken further depreciation down to trough levels on the tractor side. So that also helps to buoy that delta between the $75 million and the zero..

Yes. Just to help you with the sensitivities there, I would tell you, if you take our second quarter proceeds for North America and you annualize that, you're elevated above $900 million. You're in the mid-$900 level. And you apply seven points to that that gets you to roughly that $75 million that gets eroded in that sensitivity.

So, that's the level that we're talking about, but that's a simplified math that I just did for you. But we could certainly follow up with you on that..

We'll take our next question from Justin Long, Stephens. Please go ahead..

I wanted to follow-up on some of the earlier use commentary. Robert, you mentioned used being one of the key drivers to upside in the quarter, but it's also one of the key drivers to sequential pressure in earnings from 3Q to 4Q.

So could you share what you're assuming for the decline in used truck pricing as we go from third quarter to fourth quarter?.

Yes. Look, we're -- as you saw, truck pricing was down -- or truck and tractor pricing were down in the quarter. Tractors were down 22%, trucks were down 11%. So, we're expecting kind of that trend to continue, maybe at a little bit slower clip, but we're expecting that to continue.

It's a little hard to pinpoint that exactly quarter-to-quarter nor do we want to signal the market exactly where it's going to go. The market is going to dictate that. But yes, we're expecting just more of that level of decline, kind of a double-digit decline..

Okay. Got it. That's helpful. And then getting your thoughts on 2023 just directionally was helpful. But I was wondering, if you could talk about the interest rate sensitivity moving into next year as well just given what we've seen with rates here recently..

John?.

Yes. So as you look forward, we are projecting, even in Q4, rates to keep moving up. If you look at what's coming up for refinancing, we probably got about just over $1 billion. So that's going to be refinanced next year. Obviously, the free cash flow this year has been tremendous. So, we haven't had to be in the debt markets that much.

We are projecting right now if we were to go and -- go into the market. You're looking at interest rates for -- in the neighborhood of 6%-plus. So, it's a healthy increase in the interest rate environment. The good thing is from our balanced approach, we only got over $1 billion that's up for refinancing next year..

Our last question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead..

First of all, congratulations. It's just fantastic results. I kind of want to think bigger picture on what you're seeing between your Supply Chain business, and I know you mentioned rental fleet utilization still very strong on a larger fleet.

So, we're not really seeing that economic canary in the coal mine, but the rest of the world seems to be nervous about happening.

And I've got a lot of different industries and truckers that are saying, "Okay, things are slowing down." So what are you seeing in vehicle demand on the rental leasing side that different? Is this just hitting us later? Or are you seeing cracks in the dam? And then what are you seeing on the supply chain side? If I back out the acquisitive growth and I just kind of look at the organic growth, what's changing on the periphery?.

Well, on the rental side, I think you're seeing there's a shortage of vehicles still in the marketplace, right? So that -- we're certainly benefiting from that as the OEMs are trying to get caught up on all the delays in production.

There's also, I would say, we've seen certainly, we've talked about this in the past, the benefits of e-commerce and seeing that on the truck demand side. So, there's definitely a significant amount of demand for rental on the truck side. On the supply chain side, Steve, let me hand it over to you.

We're seeing a lot of interest from companies that have had to focus on supply chain over the last couple of years and really looking for help. And I think that's why you're seeing organic growth in the mid- to high 20s in an environment that is really ripe for companies that want to improve their supply chain, and they're companies like Ryder.

But Steve, why don't you give him a little more color?.

Yes. Jeff, in the quarter, organic growth was 23%, again, just reiterating that we were double digit across all industry verticals. I think it's a couple of things. Our continued Ever better campaign, we pushed that again. This is the third year of that. We'll continue that in '23.

It's getting our brand awareness out there, creating historical pipelines both on the Dedicated and Supply Chain side. And as Robert said before, it's a difficult business. And I think a lot of companies found that during 2020, 2021.

And our ability to hire drivers, to hire warehouse workers, we've really invested in the recruiting side of the business, too. So, it's not easy business. And then, I'll just close with the technology. We've got differentiated technology that our customers don't have and in some situations, our competition doesn't have either..

Thank you. And just one follow-up, if I can. Robert, I'm thinking back to the middle of the last decade when the rest of the world was slowing down and you guys were growing because your customers were demanding it. And then 1.5 years later, demand just evaporated.

What feels different to you about what you're seeing right now? And kind of how do we manage growth to avoid that trap again this time around?.

Yes. Look, I think the -- remember, the business that we have that is contractual, which is about 90% of our revenue, is going to be there even in a slowdown, right? You're going to -- in Supply Chain, Dedicated, customers continue to need to move their core products and in lease, the same. The more of a -- what we buy on spec is more around rental.

And as you know, over the last couple of years, even though we've grown the rental fleet, we've certainly been prudent about not growing it too much because of that. And then also making the investments on the truck side where we see less volatility than you would otherwise -- than you're going to see on the tractor side. So we feel good about that.

We feel good about the investments that we're making there are going to ride out through the cycle well and the changes we've made and how we manage our ability to adjust the rental fleet quickly by taking trucks from rental and putting them in lease applications, putting them in dedicated applications. So, we feel really prepared for that.

We're preparing for a slowdown in a recession. I think just like every company is running those scenarios, we're doing the same thing. And we feel really good about where we're headed. And this idea that our core earnings will continue to grow even in a slowing economic environment, I think, will be testament to that..

At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks..

Okay. Thanks, everyone. Thanks for the interest. Thanks for being on the call and the questions, and I look forward to seeing you over the next several months. Take care..

Ladies and gentlemen, that concludes today's conference. Thank you all for your participation..