萊德系統 (R) 2015 Q2 法說會逐字稿

Good morning, and welcome to Ryder System Inc..' s second quarter 2015 earnings release conference call.

(Operator Instructions)

Today's call is being recorded. If you have any objections, please disconnect at this time. I would like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's second quarter 2015 earnings conference call. I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations, due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release, and in Ryder's filings with the Securities and Exchange Commission.

Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer, and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Dennis Cooke, President of Global Fleet Management Solutions, John Diez, President of Dedicated Transportation Solutions, and Steve Sensing, President of Global Supply Chain Solutions are on the call today, and available for questions following the presentation. With that, let me turn it over to Robert.

Good morning, everyone, and thanks for joining us. This morning, we'll recap our second quarter 2015 results, review the asset management area, and discuss the current outlook for our business. Then we'll open up the call for questions. With that, lets turn to an overview of our second quarter results.

Comparable earnings per share from continuing operations were a record $1.65 for the second quarter of 2015, up from $1.44 in the prior year. This is an improvement of $0.21 or 15%. Our results came in above our second quarter forecast range of $1.58 to $1.63. The beat was driven largely by better than expected supply chain results.

Second quarter comparable results exclude non-operating pension costs of $0.05 and professional fees of $0.02, which were partially offset by a $0.03 benefit from state tax law changes. Operating revenue which excludes fuel and subcontracted transportation revenue was up by 6% to a record $1.4 billion for the second quarter, and increased in all business segments. Excluding the impact of foreign exchange, operating revenue grew by 8% in the quarter. Total revenue declined primarily due to lower fuel costs passed through to customers, as well as foreign exchange.

Page 5 includes some additional information for the second quarter. The number of diluted shares outstanding for the quarter increased to 53.3 million shares, up from the 53 million shares in the prior year. In January, we temporarily paused share repurchase activity, because our balance sheet leverage was nearing the high end of our target range of 225% to 275%.

Because our leverage is still near the high end of our range, share repurchase activity remains temporarily paused. We'll evaluate resuming anti-dilutive share repurchases later in the year. Excluding pension costs and other items, the comparable tax rate was 37.2%, consistent with the prior year. The comparable tax rate was in line with our expectations for the quarter, and did not result in EPS outperformance during the quarter.

Page 6 highlights key financial statistics on a year-to-date basis. Operating revenue was up 5% to $2.7 billion. Comparable EPS from continuing operations were $2.73, up 16% from the prior year. The spread between adjusted return on capital and cost of capital widened to 140 basis points, up by 50 basis points from the prior year driven primarily by higher leverage. On a full year basis, we now expect this spread to be at least 150 basis points, up from our prior forecast of 140 to 150 basis points.

I'll turn now to page 7, and discuss some key trends we saw in the business segments during the quarter. Fleet management solutions operating revenue which excludes fuel grew 6%, driven mainly by the growth in full service lease and commercial rental. Excluding the impact of foreign exchange, FMS operating revenue was up 8%. Full service lease revenue increased 5%, or 7% excluding foreign exchange, due to fleet growth and higher rates on replacement vehicles reflecting the higher cost of new engine technology.

Excluding the planned reduction of 300 low margin trailers in the UK, the lease fleet grew organically by 6,000 vehicles year over year. Sequentially from the first quarter, the lease fleet increased by 1,300 vehicles excluding UK trailers. In addition, we had record lease sales for the third consecutive quarter, which provides us with continued momentum for lease fleet growth. Based on our strong sales activity and pipeline, we are now expecting full year lease fleet growth of 5,000 to 6,000 vehicles, above our prior forecast of 5,000 vehicles.

Miles driven per vehicle per day on US leased power units were unchanged versus the prior year, and continue to run at normal historical levels. Contract maintenance revenue increased 6%, reflecting strong sales activity last year. Our contract maintenance fleet grew organically approximately 2,300 vehicles from the prior year, but was down 1,400 vehicles sequentially due to a customer loss in the quarter. Looking ahead, we expect nice fleet growth in this product line, as we signed a significant new customer in July that will more than offset the customer lost during the second quarter.

Contract-related maintenance revenue was unchanged from the prior year. Included in contract-related maintenance are 8,300 vehicles serviced during the quarter under on-demand maintenance agreements, an increase of 28% both from the prior year and sequentially. We have now signed 50 on-demand customers, and have significant opportunity to increase volumes within these accounts, as well as add new customers.

Commercial rental revenue was up 8% for the quarter, or 10% excluding foreign exchange. The increase was driven by higher demand and pricing in North America. Rental revenue growth was particularly strong in the US, which was up 13% for the quarter. Rental revenue grew by 9% with our lease customers, and by 7% with our rental-only customers.

The average rental fleet grew by 6% from the prior year. Rental utilization on power units was 78.1% consistent with the prior year. Utilization increased by nearly 80 basis points in the US, but was offset by lower utilization in the UK due to some unusual vehicle replacement activity. Global pricing on power units was up 4%, in line with our expectations. To date, rental trends remain favorable for the month of July, with the majority of the growth units already placed into service.

In used vehicle sales, we saw strong demand in pricing. I'll discuss these results separately in a few minutes. Overall, FMS earnings increased year-over-year due to the higher full service lease results and strong rental performance. Better lease results reflect fleet growth and vehicle residual value benefits. Commercial rental performance benefited from strong demand and higher pricing on a larger fleet. These benefits were partially offset by strategic investments in sales and marketing and technology.

Earnings before taxes and FMS increased 8%. FMS earnings as a percent of operating revenue were 12.8%, up 30 basis points from the prior year. Foreign exchange negatively impacted pretax earnings percent in FMS by 20 basis points.

I'll turn now to dedicated transportation solutions on page 8. Operating revenue grew by 6% due to new business, higher volumes and increased pricing. Total revenue was down 4% due to lower fuel costs passed through to customers. DTS earnings decreased during the quarter, primarily due to higher self-insurance costs partially offset by new business.

Segment earnings before taxes as a percent of operating revenue were 7%, down 80 basis points from the prior year. Self insurance costs negatively impacted EBT margins by approximately 140 basis points. We expect improved margin comparisons in the second half of the year, driven by new business as we move past the high self-insurance costs we experienced during the first half of 2015.

I'll turn now to supply chain solutions on page 9. Operating revenue grew by 6% due to higher volumes and new business, especially in the consumer package goods and technology sectors, as well as higher pricing. Partially offsetting these benefits was lost business from the prior year in the automotive industry and foreign exchange. SCS operating revenue grew 9% excluding FX. SCS earnings before taxes were up 56%.

The increase was due primarily to higher pricing, lower start-up costs which normalizes compared to the prior year, and higher volumes. These benefits were partially offset by higher compensation costs. While we expect supply chain's year-over-year earnings to be up in the second half, we don't anticipate the same magnitude of an increase, as comparisons will have moved past last year's start-up cost issues. Segment earnings before tax as a percent of operating revenue were 8.7% in the quarter, up 280 basis points from the prior year.

Page 10 shows the business segment view of the income statement I just discussed, and is included here for your reference. Page 11 reflects our year-to-date results by business segment. In the interest of time, I won't review these results in detail, but I'll just highlight some bottom line results. Comparable year-to-date earnings from continuing operations were $145.6 million, up 16% from the prior year. At this point, I'll turn the call over to our CFO, Art Garcia, to cover several items including capital spending.

Thanks, Robert. Turning to page 12, year-to-date gross capital expenditures were approximately $1.5 billion, up nearly $200 million from the prior year. This increase reflects planned investments in our lease and commercial rental fleets, in light of new lease sales activity, and a strong rental demand environment. We realized proceeds primarily from the sale of revenue earning equipment of $212 million, down $63 million from the prior year. The decrease reflects expected lower volume of vehicles sold with a smaller inventory, and a change in mix of units sold.

Pricing by vehicle class has remained strong. We also executed a $156 million sale-leaseback transaction during the quarter. Net capital expenditures increased by 11% to $1.1 billion. As outlined in the press release, we're evaluating whether the structure of both the second quarter and prior year sale-leaseback transactions qualify for off-balance sheet treatment as currently reported.

If they don't, we would add back approximately $365 million of revenue earning equipment and debt onto the balance sheet. If made, the change in treatment would not be material to our reported financials including net earnings, in any individual period, and would not materially impact our total obligations, or total obligations to equity metrics as off-balance sheet leases were always included in these measures. Most importantly, the accounting treatment does not change the economic benefit to Ryder's funding costs from these transactions. We expect to finalize the accounting treatment for inclusion in our second quarter 10-Q, which will be filed on or before August 10.

Turning to the next page, we generated cash from operating activities of around $650 million during the first half of the year, up by $109 million. The increase was driven primarily by the timing of pension contributions and higher cash-based earnings. We generated just over $1 billion of total cash year-to-date, up $200 million from the prior year, as the sale-leaseback and higher operating cash flow more than offset lower used vehicle sales proceeds. Cash payments for capital expenditures increased by $74 million to $1.3 billion year to date.

The Company's free cash flow was negative $281 million year to date, above the prior year of negative $410 million. If we determine that the sale-leaseback transactions do not qualify for off-balance sheet treatment, reported free cash flow would be approximately $430 million negative year to date. Additionally, our full year free cash flow forecast would move to negative $630 million, as compared with the prior forecast of negative $380 million.

Page 14 addresses our debt to equity position. Total obligations of $5.2 billion increased by around $470 million from year-end 2014. Total obligations as a percent to equity at the end of the quarter increased to 270%, up from 259% at the end of 2014. Leverage increased primarily due to vehicle investments, as well as foreign exchange. Equity at the end of the quarter was $1.9 billion, up $95 million from year-end 2014 primarily due to earnings. At this point, I'll hand the call back over to Robert to provide an asset management update.

Thanks, Art. Page 16 summarizes key results from our asset management area. Used vehicle inventory held for sale was 5,900 vehicles, down from 6,300 vehicles in the prior year, and 100 vehicles above the first quarter. Used vehicle inventory is at the low end of our target range of 6,000 to 8,000 vehicles. Pricing from used vehicles was strong for both tractors and trucks. Compared with the second quarter of 2014, proceeds from vehicles sold were up 10% for tractors, and up 11% for trucks. From a sequential standpoint tractor pricing was up 5%, and truck pricing was up 4% versus the first quarter of 2015.

We saw improved pricing in all vehicle sales channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by around 765 units or 23% year to date, and is well below recessionary levels. This reflect a lower number of lease contract expirations this year. Early terminations of lease vehicles increased by about 120 units year to date, but remains well below recessionary levels.

I'll turn now to page 18 and cover our outlook and forecast. We're pleased with the performance this quarter and year to date. We're particularly encouraged by continued momentum in lease sales and fleet growth, strong rental demand and pricing trends, and improved performance in our supply chain business. In full service fleets, we've had three consecutive record sales quarters, and with a robust pipeline expected to grow by 5,000 to 6,000 vehicles this year, above our prior forecast of 5,000 vehicles.

We've continued to see around a third of new truck leases coming from customers new to outsourcing, and are now also seeing nice growth from further penetration within current customer accounts. In rental, we're please with strong demand and pricing trends that have continued into July. We now expect our full year average fleet to grow 6% versus the prior forecast of 5%, while our outlook for rental pricing remains at 4% -- a 4% increase for the year.

Rental is benefiting from new customers. We're adding in lease and on-demand, as most of those new customers are now renting trucks from us. We have also increased our penetration into large national rental-only accounts which provide good demand, as well as better visibility into future rental needs. Finally we're seeing some private fleets renting a greater proportion of their overall fleet needs, due to capital constraints stemming from higher purchase vehicle costs, and a desire for increased flexibility. We're pleased with the continued strong market receptivity for our new on-demand maintenance service.

We have completed the IT work to support expansion of the products. We're increasing the sales team who can sell on-demand, and we'll be introducing it to a significant prospect pool at a large carrier conference we're holding next month. We also have significant opportunities to realize higher volumes within the 50 fleets already signed to date. We're pleased with the progress we've made on our maintenance productivity initiatives, and continue to find ways to mitigate higher maintenance costs associated with the new engine technology.

In used vehicle sales, we continue to see solid demand conditions for most vehicle types, and strong pricing across all sales channels. In supply chain, we're expecting revenue and earnings growth rates to slow in the second half, reflecting network redesigns at some customers and some lost business. In the dedicated segment, we expect single-digit revenue growth -- high single-digit revenue growth, and improved earnings comparison in the second half, driven by new sales and improved self-insurance expense.

Our third quarter comparable EPS forecast is $1.82 to $1.87, versus the prior year of $1.63. Based on our second quarter performance, we're raising the low end of our full year comparable EPS forecast range. The new range is $1.64 to $1.55 per share, compared to the previous range of $1.40 to -- $6.40 to $6.55 a share. This represents a year-over-year increase of 16% to 17%.

Let me correct that. The new range is $6.45 to $6.55 per share, compared to the previous range of $6.40 to $6.55 a share. This represents a year-over-year increase of 16% to 17%.

That concludes our prepared remarks for this morning. At this time, I'll turn it over to the operator to open up the line for questions. In order to give everyone an opportunity, I'd ask that you'd limit yourself to one question and one related follow-up, if clarification is needed. If you have additional questions, you are welcome to get back in the queue, and we'll take as many calls as we can.

Thank you.

(Operator Instructions)

The first question today is from Ben Hartford from Baird.

Hey, good morning, guys. I guess, Robert, why don't we just start conceptually. The growth is obviously positive, with full service lease fleet growth accelerating. How do you first reconcile what we're seeing with regard to class 8 order activity moderating, obviously a weaker spot market activity on a year-over-year basis, with the accelerating trends that you're seeing both on a full service lease fleet side? And I guess, on a related note, within the rental -- within rental utilization, that I have a related follow-up on that.

Okay, I think that, I guess, a very high level, Class 8 orders have moderated, but production is still strong. And the orders -- some of the moderation of orders was maybe a lot of the OEMs are already sold out for the balance of the year. We, because of the way we procure, and the way that we have slot dates reserved, we are still, we still have a lot of slot dates left. We have -- we're about 100 days out on a new order right now. So there's plenty of room available with us. So I don't believe necessarily that drop in orders is a drop in demand for trucks.

In addition to that, we're certainly benefiting from some of the macro trends that we've been talking about, of more people moving to outsourcing, and moving to leasing. And we think we're seeing benefits of that, especially as we leverage some of the new tools that we have in place around total cost of ownership. So I think that is really what's driving what we're seeing in our Company and in our industry.

As it relates to rental, I think there is a lot of different things. Rental continues to be very strong. It has continued strong through July. A lot of that is coming from some of the new lease, and on-demand customers that we're seeing.

We're also seeing some customers who are looking at leveraging rental a little better, as the cost of vehicles has gone up so significantly. If you go back to a time when vehicles cost a lot less, some would have extra vehicles sitting around, for when they needed them. And I think they've -- because of the new -- because of the higher costs, now they are rationalizing those, and they are really counting on rental as a way of supplementing, and really meeting that peak demand.

Okay. And then I guess, in the context of accelerating growth, some might point to FMS margins and the leverage or expansion this quarter as being a little more muted than expected. So in the context of the growth, both pull-through with lease fleet growth accelerating, rental demand remaining healthy, the introduction of this on-demand maintenance product, how should we think about FMS margins over the course of the next several quarters, and even several years, in the context of what appears to be an improving structural growth outlook for the Company?

Okay. I'll let Dennis answer that?

Yes, Ben. If you look at first quarter, our EBT went up 17%, and obviously was 8% in the second quarter. Really what impacted first quarter when you compare them was what we discussed previously, which was fuel. You had the precipitous decline in fuel pricing or the fuel cost. And the retail price at the pump came down a little slower, so we benefited from that as we said. So that was the big difference between Q1 and Q2.

As we look at the second half of the year, we feel really good. Growth is really being driven by both lease growth along with rental following it. We also see fuel coming with that. So we feel good about top line growth, and we feel like we're going to return to double-digit growth in the second half. And as we look forward, we don't think that's going to stop based on the trends that we're seeing.

Okay, thanks. I'll jump back in.

Thanks, Ben.

Our next question or comment is from David Ross from Stifel Nicolaus.

Yes. Good morning, gentlemen.

Hi, David.

I am going to focus more on supply chain, new record margin in supply chain solutions. Was there any gain sharing in there or other one-time items?

Go ahead, Steve.

Yes, there's -- we've got a little bit in there, also some one-time projects that we have for a couple of key customers in the quarter.

Okay. And that's one of the reasons that the growth should decelerate in the back half? You don't have those anymore?

Correct.

And then, a lot of times we hear new business on the supply chain side is negative for margins due to start-up costs. But it sounds like the new business you got on this kind, might have had start-up costs, but there were even more start up costs a year ago? Is that true?

Yes, if you remember, David last year is when we had some of the challenges in the -- a start-up at a high-tech account, and we talked about that last year as really negatively impacting the second quarter. So we're now getting start-up costs have gone back to a more normalized rate, and we're getting the benefit of that on the year-over-year basis.

Okay. So it's not that there were no start-up costs with the new business (multiple speakers)?

Right, correct. Just a more normal run rate.

Okay. And then last question on the SCS, is the better pricing that you mentioned, was that due to kind of contract renewals? And as contracts came up, you were able to get better pricing because you're doing something different for them or sticky? Or is it just a better mix, where you had the higher growth at accounts that just had better pricing?

Yes, I would say that it's a combination of the two, right? Some that come up for renewal, and a handful that we need to improve our pricing structure, as well as some more integrated accounts that we have that allow us to change our pricing there.

Thank you.

All right. Thanks, David.

Thank you. Our next question or comment is from Justin Long from Stephens Inc.

Thanks, and good morning, guys.

Good morning.

First question, I wanted to ask, there is potential to get a final rule on [ELDs] in the back half of the year. It looks like the schedule is for September now. Could you talk about how that could impact your business? Is the main benefit you could see from this an impact on rental pricing, or do you think this could even be a catalyst that drives increased outsourcing as well?

Yes, I think - anything that tightens the market, in terms of the supply side, which this would do, because obviously some folks would drop off I think is good. It's good for the equipment side, on the FMS side rental, and as companies --some of these may have to add fleet in order to offset some of the capacity that goes away. And clearly, on the dedicated side, I think as companies struggle with dealing with more complexity, and a more tight capacity market, I see some additional opportunities on the dedicated side.

Okay, great. That's helpful. And secondly, I know there's several puts and takes when we think about the impact of a rising interest rate environment on your business. But could you walk through your take on what you think the net tailwind or headwind you expect to see at Ryder from a rising interest rate environment?

Sure, I'll let Art take that.

Sure. Yes, Justin, it can hit us in a couple different ways, I guess. One is in the shorter end of the curve, if interest rates rise, we will get impacted by that. We have a component of our portfolio is variable rate debt. Estimate that at typically, at a100 basis point move, and the short end would probably increase our expenses by $10 million, $11 million. Think on the longer end, as our-- as rates rise, we actually price that into business that we're quoting to our lease customers. So we think we should be able to pass that through as it occurs. And then we'll go out to the market, and actually fund the debt at those rates.

We think a overall a rising environment will help us on the lease end. We think as the cost of borrowing moves up, it actually makes the outsourcing proposition a little more attractive to customers. Also on the longer end, we do have some unfunded pension liabilities that will benefit from a rising discount rate. So we see that probably as a net-net positive.

Okay, great. That's all really helpful color. I appreciate the time this morning.

Thank you.

Thank you. Our next question or comment comes from Scott Group from Wolfe Research.

Hey, thanks. Morning, guys.

Good morning, Scott.

So can you give a little bit more color on the strategic investments that you talked about in the release on FMS, and just how big that was? And is that an ongoing number to think about,[ or if that's kind of more one-time-ish that starts to go away in the back half?

Yes, Dennis?

Yes, Scott, we're investing significantly in sales. We have also invested in marketing, and yes, we'll continue to invest in it, as we continue to see the growth opportunities. I think some of those investments will start to slow. As you look at comparables with last year, we are investing pretty heavily in the second half of last year, so you won't see the same growth rate. But we see an opportunity, and we are going to keep investing in sales and marketing going forward.

I'd also say IT. As we look at IT and what we've done to prepare for on-demand and what we needed to do in that arena, you'll continue to see those investments as we prepare for that growth and refresh our legacy systems. But that same growth rate that you saw in the first half here, that will begin to slow a little bit.

Okay. And then, just going back to rental for a second. The comments were helpful, but there's clearly a lot of concern in the market about what could happen to rental. Do you think about selling that piece of growth there, or even stopping the growth on the fleet there? Just maybe you'll leave something off the table now, but to protect yourself in case the rental market eventually slows, as maybe some other indicators are indicating?

Yes, we tend to manage our rental fleet pretty conservatively. We have a lot of indicators that we look at on a real-time basis, and obviously we'll try to model out as best we can, but been with the Company long enough to know that it can sneak up on you. So we do, we do watch it very closely, we watch it daily.

The important thing is, we have a lot of different avenues of how to downsize the fleet pretty quickly. Not only just selling vehicles, but also redeploying vehicles pretty rapidly. As you know we started a rental lease program several years ago that we've kept in place. So we've got a lot of different avenues but to redeploy equipment. But I can tell you the demand has been very healthy, and it continues to be very healthy. We have not seen a slow down. We've been looking for it, as we've seen some of the data that's out there. But I think the only explanation I can see is that, it does kind of tie into everything else we're seeing around more outsourcing.

We're growing the lease. We're growing on-demand. Those customers need additional trucks. We have been -- we tried to be very disciplined about growing the fleet, relative to what we're seeing on the lease side and the contract side, and we're still within all those parameters. Lease will --rental will still be within that 20% to 25% of revenue for FMS, which has always been our target. So our goal is to stay disciplined, stay in that range. And the minute we see something slow down, if we do see that, we'll respond quickly.

Okay. Thank you, guys.

Thank you.

Our next question comes from Matt Brooklier from Longbow Research.

Hey, thanks, and good morning. I just wanted to go back to the FMS division. I know there has been a couple of questions on margins. But I am trying to get my arms around if -- arms around revenue accelerating, you did have margin expansion, but it didn't -- maybe wasn't at the rate that we would have anticipated. I am trying to get my arms around if there was anything else in the quarter that was one-time in nature, that maybe was a headwind in terms of FMS margins?

Yes, I'll let Dennis elaborate a little bit. The one item to keep in mind versus last year is UVS. Clearly, used vehicle sales, we have fewer units that we are selling. And that's creating some headwind versus last year which we expected, but that is being offset on the earnings line by the improvements that we've seen in depreciation expense also.

But if you look at margin percent, that will create some headwind for it. But we are expecting year-over-year earnings in FMS, as Dennis mentioned to really kick back up into that double-digit range in the second half of the year. Dennis, anything else on that?

No, I'd just reiterate what I said before is, also in the second half we continue to expect the top line to continue to accelerate year-over-year, and a lot of that is going to fall through. So growth is really going to drive some of the bottom line. And Robert mentioned in his opening comments, our productivity initiatives that we're seeing on the maintenance side. We're getting a lot of traction on the cost side, and that's obviously going to help margins also going forward.

Yes., I want to make sure we don't lose sight of the fact that we -- we're seeing fleet growth in FMS, on the FSL side of 6,000 vehicles. I mean, that's a number that we really had not contemplated getting to that level when we started the year, certainly not a couple years ago. So I think it's very encouraging that we're beginning to really see the type of growth that we had thought of and dreamed of several years ago, in terms of seeing more customers coming into outsourcing, and more customers looking at full service fleets as a solution.

So in that type of environment, I think we had always talked about, we would get back to the 12% to13% earnings leverage in FMS. We're getting to the high end of that -- the high 12%s maybe 13% this year. With that type of growth, I would expect us now to see even go past that high end, and continue to grow. So I think we're in a pretty good place right now, in terms of having the contractual part of the business really beginning to pick up steam, which is really what we've always strived for.

Okay. Good to hear. And then, maybe for Art. What are you guys looking for, in terms of gains on vehicle sales, in the second half of this year?

Well, as we said, we started the year, we thought gains would be less year-over-year. That hasn't really changed. You saw that play out a little bit in the second quarter. We think that will continue in the fourth quarter, so it should be down year-over-year, but probably more even in the fourth quarter.

Okay. Appreciate the time.

You got it.

Thank you. Our next question is from John Barnes from RBC Capital Markets.

Hey, thanks, guys. A couple of questions here on -- one on rental, just going back to that. Is -- given the concerns just around freight volumes and the spot market, and this goes a little bit off of Scott's earlier question -- given the robust amount of rental that you're doing right now, are you seeing any customers that maybe are hesitant on the lease side? Because they just -- maybe there is a little uncertainty around there, that are choosing to go the rental route, that if they get an indication one way or the other, as the way the economic backdrop plays out, could lead to maybe a little bit more demand on the lease side? Or are you seeing anything that worries you there, that a customer is making a decision that maybe -- suggests that the economy is not quite as good as hoped for?

I don't think there's a large amount of customers that we're seeing make any decision like that. I think if you look at our lease pipeline, it's as big as it has been in a long time. We've had three consecutive quarters of record lease sales, so customers are signing up to long-term leases.

I think some of that has to do with the newer technology that's come out for trucks even though it's more expensive, you are getting more fuel efficiency which customers are seeing a good pay back on that. And then, customers have also held off for a long time to make some of these decisions around capital, are now to the point where they are ready to make them. So no, I don't think that we are seeing a large number of customers saying, I'm going to rent for much longer instead of leasing.

But I think what we are seeing, is some customers are looking at the whole fleet and saying, where I historically would have a couple old units sitting on the sidelines in case I needed one during a peak period. Now with the new cost of equipment, it's a lot more expensive. There's less of that to go around. There is less units that are sitting around. So they are relying more on rental, as opposed to surplus units within their own fleet in order to meet that peak demand. I think that's one of the nuances that we've seen over the last quarter. But Dennis, anything else on that?

Yes, John, I would just add that, again when you're looking at lease fleet growth like what we're seeing now, rental is a key support for that growth. And so, as we continue to see the lease fleet growth, you're going to continue to see the demand on rental increase, in addition to the customers who are just looking to take care of surge capacity with rental, and doing that rather than carrying these very expensive vehicles in their fleet. So you've got that.

I'd also add that we're looking at turn downs. So as we look at customers who are coming and asking for units, and when we're running -- approaching 80% utilization, a lot of times, we're having to turn customers away, and that can get a real customer dissatisfier, and that's just unacceptable. So that's something that we're monitoring all the time, and we're not going to allow that to happen. So we're just not seeing a slowdown in rental.

Yes, you just -- there has been a couple other rental companies out there, obviously put up results that have scared -- even scared everybody. That's why I asked the question. I mean, it's great (multiple speakers).

(Multiple speakers) it's not about some of the -- in other industries?

Yes, yes, and I think that's the problem, is you get -- you guys are kind of right -- you're the truck leasing, but the only one out there that anybody can really analyze. And so, you get this rental business and other industries that are clearly under pressure, and there's that -- trying to extrapolate one out to the other.

Yes, I'm not sure that would be true -- that's true in our industry in general. I think in our industry in general, you'd probably still be seeing some of the same strength that we see.

Got you. Okay. And then, my follow-up is, on the sale-leaseback discussion you had in your press release, can you just elaborate a little bit, as to what caused you having to go back in and look at these things? I mean, you have done sale-leasebacks as long as I've been covering the Company. What popped up now? Was there some change in the rules that you're having to go back and look at? Did you get a new auditor? I mean, what flared this issue up?

John, no. It's -- the structure is the same. I think, the rules are fairly consistent with what they have been. I think it's kind of what you're saying, to a certain extent, you get a new set of eyes looking at it. We haven't changed auditors or anything like that. But you look at it, and different people look at things different ways. And so, some good points have been raised, and that's what we are going to spend the next couple weeks addressing.

All right, very good. Thanks for your time, guys. Appreciate it.

Thanks, John.

Thank you. Our next question is from Jeff Kauffman from Buckingham Research.

Thank you very much. Hey, guys.

Hey, Jeff.

I heard your commentary on on-demand maintenance, and I guess I'm just a little surprised with the ramp-up that I haven't seen the top line grow a little bit more year to date. So is this something, kind of based on the customer growth you were citing, what kind of rate do you think this could grow at in the second half?

Yes, well, let me just say, we always talked about a launch in the middle of the year. So that's -- you really haven't seen that in the second quarter numbers yet. We're expecting it, we're expecting to really get more of that benefit in the second half of the year. As I mentioned, we have a carrier conference now next month, where we are going to be -- talking about 200 large carriers that do business with us on the supply chain side, about offering this service to them.

So we feel pretty good about that. And I think there's still plenty opportunity to get with the 50 accounts we've had to date, get additional penetration within those accounts. So in terms of growth rates, I think we talked about -- remember at the beginning of the year we talked about ODM, the on-demand maintenance potential providing the bulk of $0.10 to $0.15 a share. So we still think we're in that range, and a lot coming more in the second half now. But Dennis, anything else on that?

No, I would just say, as we stated, the number of unique vehicles that we touched was up 28%, both sequentially and year-over-year, and Jeff, we expect to see that accelerate in the second half. The product is being received well. Customers are getting a quality repair, they are getting consistency for their fleet across North America. It's an exciting product. There's a lot of interest in the 50 customers we have signed up. There's real opportunity to penetrate those fleets, and that's exactly what we are focused on. So I think you are going to see the number of touches accelerate here in the second half.

I think the key thing for this product is that we're -- FMS is a multi-billion dollar segment. So it will be awhile before it becomes a meaningful part of the whole revenue story. However, if you look at revenue growth and earnings growth, it can certainly be a meaningful part of that story over the next couple -- a year to two years.

Okay, understood. And then the follow-up, if I look at the type of vehicle that you're seeing more of the demand in -- because not all of your lease fleet are the same types of vehicles -- is there a difference in terms of whether customers are asking more for kind of large over the road trucks, more straight trucks, or kind of medium duty product versus say a trailer? Could you just give us an idea if there's a difference in the type of equipment you're seeing demanded now?

Dennis?

Yes, but for on-demand, it just varies, Jim.

No, not for on-demand. I'm sorry, for FMS.

Oh, overall.

Yes.

No, we're seeing -- it's increasing across the board. I really can't point to -- straight trucks are up, tractors are up, trailers. I mean, we're seeing an increase on lease fleet across-the-board.

Yes, if you look at the increase on the lease fleet, it's coming from customers that are new to outsourcing and new to leasing. And then, it's coming from customers that are currently doing business with us, but maybe have part of their fleet with either another provider, or doing it themselves, and we're seeing more of that business coming our way also. So we're really seeing this move towards more outsourcing, even within our existing customer base.

Yes, I'd just -- I'd add to that, Jeff, it's interesting. We tend to find that we're say, 18 months ahead of what others are seeing, just because it's the size of our fleet. We touch, what, 215,000 vehicles now. And so, what we were telling you about a year and a half, two years ago around the complexities with the new technology, is really being seen by everybody else now. And you have got a lot of folks who are saying, hey, this new technology is difficult, and we need help, which is really accelerating this trend towards outsourcing.

Okay, guys. Thanks, and congratulations.

Thank you, Jeff.

The next question is from Todd Fowler from KeyBanc Capital Market.

Great, thanks. Good morning, and congratulations on a nice quarter.

Thanks, Todd.

Robert, I wanted to ask on the guidance -- and I know you that had some comments in your prepared remarks, but I just want to make sure I understand about how you are thinking about the full year. The second quarter here was a little bit above the high end of the range, and it seems like some of that was some special project work in the supply chain business. But you're expecting the lease fleet to be a little bit larger, the rental fleet to be a little bit larger. It sounds like rental demand trends are good. What's the thought process in just tightening the bottom end, and why didn't the top end of the guidance move up, with what you're seeing right now in the lease and rental side?

Yes, it was a $0.02 beat off the top end, so wasn't -- I would say, a meaningful beat. I think as you mentioned, some of it was some special stuff in supply chain. We are expecting the full service lease fleet to grow higher than what we had a quarter ago.

But a lot of that is going to be in the tail end of the year, which doesn't impact the earnings this much this year. And then you've got some tailwind from less anti-dilutive share repurchase that we are going to do that kind of offsets that $0.02 beat. So I still felt we're -- the prudent thing to do was to raise the bottom end, and keep the top end where it is, and allow the year to continue to progress.

But nothing in underlying demand trends, or anything like that? It's more on the magnitude of the beat here, and the current quarter not being significant, and then you have some other things on the share side. It's not that you're seeing something different in the business trends in the back half of the year?

No. I mean, think about it. We're still expecting year-over-year increases of 16% to 17% in our full year guidance. So we're expecting double-digit earnings growth, continued double-digit earnings growth in the second half of the year, and really seeing each of the business segments continue to grow nicely.

We will have a little bit of a slowdown in supply chain, but dedicated really kicking back in after we get past some of the self-insurance challenges we've had at the first half of the year. And then, FMS really continuing to see earnings growth, and really picking up the earnings growth in the second half.

Good. Okay, that's helpful. And then, just for a follow-up, I think in past you've talked about the percent of rental revenue that comes from your lease business. Can you remind us what that is, and can you also maybe help us understand how much of the rental revenue comes from national accounts, where you've got some visibility into the fourth quarter, maybe related to omni-channel or e-commerce? And then, kind of how much of the rental revenue do you think is more consistent, I guess, in nature versus transactional?

Yes, hey, Todd, this is Dennis. Our lease support from rental is about 40% of our rental demand. That fluctuates quarter to quarter, but in the neighborhood of 40%. And then, from our -- what we call pure rental or customers just renting, is about 60% of the demand is in that range.

Okay, that helps. Thanks a lot for the time this morning, guys. Thanks a lot.

Thank you.

Thank you. Our next question is from Kevin Sterling from BB&T Capital Market.

Thank you. Good morning, gentlemen.

Good morning.

The increase you're talking about for the lease fleet, about 5,000 or 6,000 vehicles, are you keeping your CapEx guidance for the full year of $2.6 billion? Or should we -- or should that increase of -- if you could just touch base on what job CapEx guidance for the full year should be, is it still $2.6 billion?

Yes, yes, Kevin, it's still in that same range we gave before.

Okay, thank you. And Robert, you touched on the lease vehicle growth of 5,000 to 6,000 units. And I think you said, maybe a third is coming from new customers, you're expanding with existing customers. But I mean, it really sounds to me, like you're knocking down some of the doors and walls of customers who had never leased before, and you're really getting nice penetration.

So maybe could you put in context for us, 6,000 lease vehicles today -- in the history of your Company, my guess is we haven't seen that since -- probably prior to the Great Recession. And I'm -- also love to hear your perspective -- I'm guessing you probably feel as you've knocked down some of these doors of customers have not leased in the past, that 6,000 is not the ceiling. So maybe could kind of put into perspective, 6,000, where it has been in the past with your Company, and maybe where it could go?

Well, I'd put the 6,000 in perspective, I have been with the Company 22 years. And in the 22 years I've been here, we haven't had 6,000 unit fleet -- full service lease growth. So this is new, unchartered territory for us. It is clearly, I think coming from -- being driven by this macro trend of things getting much more complex in the industry. Along with many of the sales and marketing changes that we've made over the years, and this push really to get after that 90% of the market that does not outsource and doesn't lease.

And if you think about, we play in a very small percentage of the market in full service lease and rental. Now we're really trying to expand to that 90%. So the 6,000 as exciting as it is for us I think is still -- we're still in the early innings. And I think there's still a lot of room to continue to find ways to grow. I think we had talked about over time, really leveraging all the infrastructure that we have in maintenance at our 800 shops. And as we get past that, we're going to -- you are going to see us then continue to add locations if we need to, as we continue to grow. So it is a very exciting time, I think for us here.

Just even -- only looking at full service lease, but then you look at what we're doing around on-demand. You look at the growth that we're driving in dedicated, and you look at the new things that we're doing around supply chain. This trend towards outsourcing in -- on the fleet side and on the supply chain side, I think is really beginning to catch its stride, and we are very well-positioned to play into it. And we've got -- and I think we've got the right organization, the right sales and marketing group to get after it. So Dennis, anything else?

Yes, Robert, I'd just add to that as exciting as the top line is, which you mentioned earlier about productivity initiatives and our focus on training on this new technology, and being able to really accelerate that productivity is incredibly important. Because it's not only the top line, it's also Kevin, as you look at it, it's with that complexity of the new technology, it's being able to expand the margins. And that's why the productivity initiatives are so important, and we're really focused on that also is, being as productive as we can with this new technology.

No, clearly, that's a big part of the story, yes. Art?

Kevin, one thing I wanted to get back to you -- obviously, on just so I was clear on that. Around the upper end of the range on vehicle count, when we factor in current views around vehicle mix for CapEx, as well as trueing up for foreign exchange and the like, doesn't -- it kind of brings down some of the CapEx that would be required for the 6,000 units. So it's not a marginal change after that. That's why we haven't changed our guidance around that.

Okay, great. No, it's very helpful, and I really appreciate your thoughts and perspective. Thank you.

All right, thanks, Kevin.

Our next question is from Tom Kim from Goldman Sachs.

Hey, good morning, guys. This is Tom Daniels on for Tom Kim. I just had one question regarding used vehicle sales pricing, up again 11% and 10% year-over-year, respectively. How much of the mix shift from retail towards wholesale has played out here? And what should we be thinking about in terms of risk to pricing going forward?

Yes, I think I'll let Dennis give you some more detail. But I think what you are seeing is, we have now gravitated to more of our traditional mix of retail versus wholesale. I think on a global basis, we're about 70% retail, in the US about 75%. So we're at the right mix right now. And really what we're seeing has continued price increases, as demand for used trucks continues to be relatively strong. And also, you're beginning to see some inflationary increases, because we're now beginning to sell the 2007 technology that actually costs more.

So some of that is just -- you would expect it, because the vehicles -- the original cost of the vehicle was higher. So I would expect that to continue, as long as demand continues to be reasonable, and we're getting into a period where we have tight supply. Because you're selling vehicles from 2007 and 2008, which not a lot of vehicles were built or we have in our fleet. So I would expect a tight supply. And as long as we have a moderate demand for it, we are going to be in pretty good shape. But anything else on that?

No, the only thing I'd add is, we continue to work our export channels also, taking vehicles offshore. And Tom, the other thing I'd say is the post-2007 technology in the quarter, we had about 40% of our sales were post-2007, and approaching a little over 50% of our inventory is post-2007, and we're seeing the proceeds that we expected from that technology. So we feel good about things in general going forward.

Can you just remind me, the post-2007 technology, how much more expensive is that than the prior?

That was a 10% to 15% increase in price.

Got it. That's all. Thanks, guys.

Thank you.

Our next question is from Casey Deak from Wells Fargo.

Thank you. I wanted to look at asset management for a minute. I know there has been a lot of focus on early terminations and that number still appears to be good. But looking at redeployments and extensions going down considerably from the year ago period, is that just your customers appetite for the new technologies? Is it on the redeployment side especially, is it -- or are those vehicles mainly going into rental, and not included in that? If you could --?

Yes. I think it's the fact that you have customers willing to sign up for the new stuff, it's very attractive, and also we have fewer units terming out this year. We have fewer units that are getting to the end of their lease term. So fewer units are available I guess, to be redeployed also. So I think those are really the two big drivers.

Okay. And along those lines with the -- staying with the fleet -- dedicated, on the fleet count, it looks like it ended the quarter and the average was about the same. So were sales muted in the quarter in dedicated, as you were looking at that, do you have a better sense and outlook for the rest of the year? Kind of how did those numbers come to equal out?

John?

Yes, with regards to the dedicated numbers you saw, the fleet was up 400 units, about 6%. So that's consistent with the revenue growth we saw in the quarter. You heard in Robert's prepared remarks, we are looking to accelerate that, as we get further into the year. We did have a nice quarter of sales. So we're encouraged by the second quarter sales, and that's going to help accelerate the sales growth in the second half.

Yes, I think it's just important to note, really the self-insurance challenges in the quarter were really the big headwind in dedicated. But once we get past those, we should return to pretty meaningful earnings growth there.

Okay. Thank you.

Thank you. Our final question for today comes from Scott Group from Wolfe Research.

Hey, guys. Thanks for taking the follow-up. Appreciate it. Just a couple things. On the on-demand, can you give some color on the large customer that you lost? And then, should we expect any start-up costs with the new customer, or start-ups in general as you ramp up this business?

Dennis? Yes. First the, the large customer was a customer from the early days, and we don't expect to see that going forward, Scott. So like I said before, we expect to see continued acceleration in the product.

Okay. And Robert, I think your commentary on margins was important, in that you can get maybe to a new upper end, a new upper end of the range. That comment about getting above 13%, do you think that's realistic for next year?

Well, we're not going to give guidance for next year yet. So I'm really talking about over the next several years. I just think, looks, it's simple math, right? If we could grow the top line across the businesses as we have been doing, leverage some of the infrastructure, particularly in FMS. And with really the contractual part of our business growing at the clip we're seeing, there is no reason why we shouldn't be able to really expand those margins, and get them above historical levels. Dennis?

Yes, and Scott, I wanted to come back to your question, because you asked about an on-demand customer. We didn't lose an on-demand customer. It was a contract maintenance customer that we mentioned early on. And so, we haven't lost on-demand, and on-demand will fluctuate based on the need. I mean, it is on-demand. It is a contract product, but it is consumed at an on-demand basis. And we expect to continue to penetrate these 50 customers, and we expect to sign up more going forward, because of the attractiveness of the product.

Yes, and there aren't -- so just to be clear -- there really aren't meaningful start-up costs associated with getting a customer up and running.

Okay thank you guys.

Okay, thank you.

I would now like to turn the call back over to Mr. Robert Sanchez for closing remarks.

Okay. Well, we're at the top of the hour. So I want to thank everyone for their continued interest in Ryder. Have. a safe day.

Thank you that concludes today's conference call. Thank you for your participation. You may disconnect at this time.