萊德系統 (R) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

Today's call is being recorded. If you have any objections, you may 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 third 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 third quarter 2015 results, review the asset management area, and discuss the current outlook for our business. Then we'll open the call for questions. With that, let's turn to an overview of our third quarter results.

Comparable earnings per share from continuing operations were a record $1.74 for the third quarter 2015, up from $1.63 in the prior year. This is an improvement of $0.11 or 7%. Comparable earnings per share excludes nonoperating pension costs of $0.05 in the third quarter of this year and $0.03 last year. Our results were below our initial forecast range of $1.82 to $1.87 but were in line with the top end of our revised forecast range announced early last week. Our forecast for the third quarter was revised recently to reflect a $0.06 impact from a temporary maintenance execution issue and a $0.05 impact from less robust supply/demand conditions in used vehicle sales.

We experienced a higher than planned number of out-of-service vehicles during the quarter. This occurred because maintenance technicians were supporting new levels of fleet growth across all product lines while at the same time we were continuing to drive further productivity within the maintenance organization. We've made significant progress on this issue and expect it to be fully resolved this month with no ongoing impact into 2016. In used vehicle sales we saw lower volumes and reduced pricing, particularly in September. I'll discuss used vehicle sales trends in more detail later in the call.

Operating revenue, which excludes fuel and subcontracted transportation revenue, grew by 6% to a record $1.4 billion for the third quarter and was higher in all business segments. Excluding the impact of foreign exchange, operating revenue grew by 8% for the quarter. Total revenue declined primarily due to lower fuel costs passed through to customers.

Page 5 includes some additional financial information for the third quarter. The average number of diluted shares outstanding for the quarter increased to 53.3 million shares, up from 53 million last year. In January, we temporarily paused repurchase activity because our balance sheet leverage was nearing the high end of our target range of 225% to 275%. Repurchase activity remains paused because our leverage is now just above the high end of our target. We'll continue to evaluate the appropriate timing to resume anti-dilutive share repurchases going forward. Excluding pension costs and other items, the comparable tax rate was 35.3%, generally in line with the prior year.

Page 6 highlights key financial statistics on a year-to-date basis. Operating revenue was up 6% to $4.1 billion. Comparable EPS from continuing operations were $4.47, up 12% from last year. The spread between adjusted return on capital and cost of capital widened to 140 basis points, up 50 basis points from the prior year driven primarily by higher leverage. On a full-year basis, we expect the spread to be 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 from foreign exchange, FMS operating revenue was up 8%. Full-service lease revenue increased by 6%, or 8% excluding FX, due to fleet growth and higher rates on replacement vehicles reflecting the higher cost of new vehicles. The lease fleet group grew organically by 7400 vehicles year over year. Sequentially, from the second quarter the lease fleet increased by 1900 vehicles. In addition, we had near-record new lease contract signings in the quarter. These continued strong sales levels later in the calendar year provide us with great fleet growth momentum into 2016 as these units get built and delivered to customers typically four to five months later.

Based on our strong contract signing activity and sales pipeline, we expect record lease fleet growth of 6000 to 6500 vehicles for the full year 2015, above our prior forecast of 5000 to 6000. Miles driven per vehicle per day on US lease power units declined 1% versus the prior year, but continued to run at normal historical levels. Contract maintenance revenue increased 4%. Our contract maintenance fleet grew by approximately 200 vehicles from the prior year, but was down 500 vehicles sequentially. Looking ahead, we expect sequential growth in this product line as we signed a significant new customer in July that will start up in the fourth quarter.

Contract-related maintenance revenue was up 5% from the prior year. Included in contract-related maintenance are 8200 vehicles serviced during the quarter under on-demand maintenance agreements, an increase of 32% from the prior year. During August, we also -- we more broadly launched this new product at our annual carrier conference and have geared up expanded sales efforts to respond to strong customer interest. We have significant opportunity to increase volumes within customers that have already signed up for the service and are engaged in discussions with multiple new prospects.

Commercial rental revenue was up 7% for the quarter, or 9% excluding FX. The increase was driven by higher demand and pricing in North America. Rental revenue was particularly strong in the US, which was up 12% for the quarter. Higher rental demand is being supported by growth in our lease and national rental customer base. The average rental fleet grew by 7% from the prior year.

Rental utilization on power units was 76.4%, down 160 basis points from the prior year but still at a strong level. This decline was due to the higher number of out-of-service rental vehicles discussed earlier as these unavailable units are included in the denominator of the utilization calculation. Global pricing on power units was up 2%, below the forecast of 3% for the quarter. Our market rates were in line with expectations. However, the overall realized price increase reflects a different fleet mix and a higher proportion of rental vehicles being used by lease customers at lower rates. Used vehicle results were negatively impacted by lower volumes, partially offset by higher year-over-year pricing. I'll discuss those results separately in a few minutes.

Overall, FMS earnings increased due to higher full-service lease results and strong rental performance, partially offset by lower used vehicle sales results. Better lease results reflect fleet growth and vehicle residual value benefits. Commercial rental performance benefited from higher demand in pricing on a larger fleet. These benefits were partially offset by used vehicle sales results.

Earnings before taxes and FMS increased 5%. Earnings as a percent of operating revenue were 12.8%, down 20 basis points from the prior year. Lower gains on used vehicles sales negatively impacted the growth in pretax earnings percent in FMS by 60 basis points. I'll turn now to dedicated transportation solutions on page 8.

Operating revenue grew 9% due to new business, higher volumes, and increased pricing. Total revenue was unchanged, reflecting lower fuel costs passed through to customers. DTS earnings increased 12% due to new business and increased pricing, partially offset by higher self-insurance costs. Segment earnings before taxes as a percent of operating revenue were 7.2%, up 20 basis points from the prior year. Higher self-insurance costs negatively impacted EBT margins by approximately 80 basis points. We expect improved margin comparisons in the fourth quarter driven by new business and as we move past the high self-insurance costs we experienced during the year.

I'll turn now to supply chain solutions on page 9. Operating revenue grew by 5% due to new business, higher pricing, and increased volumes. SCS operating revenue grew 9%, excluding the impact of FX. Total revenue was slightly down, reflecting lower third party purchase transportation costs and lower fuel costs passed through to customers. SCS earnings before taxes were up 9% due primarily to higher pricing and higher volumes. Segment earnings before taxes as a percent of operating revenue were 8.3% for the quarter, up 30 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 bottom-line results. Comparable year-to-date earnings from continuing operations were $239 million, up 12% from last year.

At this point, I'll turn the call over to our CFO, Art Garcia, to cover several items, including capital expenditures.

Thanks, Robert. Turning to Page 12, year-to-date gross capital expenditures were $2.1 billion, up nearly $370 million from the prior year. This increase reflects planned investments in our lease and rental fleets in light of new lease contracting activity and a strong rental demand environment. We realized proceeds primarily from the sale of revenue-earning equipment of $321 million, down $75 million from the prior year. The decrease primarily reflects planned lower volumes of vehicles sold. Net capital expenditures increased by about $440 million to nearly $1.8 billion.

Turning to the next page. We generated cash from operating activities of about $1.1 billion year to date, up by $90 million. The increase was driven primarily by higher cash-based earnings. We generated $1.4 billion of total cash year to date, up $19 million from the prior year. Cash payments for capital expenditures increased by about $350 million to just under $2.1 billion year to date. The Company's free cash flow was negative $644 million year to date, versus the prior year of negative $317 million, reflecting capital expenditures to grow our lease and rental fleets.

Page 14 addresses our debt-to-equity position. Total debt of approximately $5.5 billion increased by $720 million from year end 2014. As a reminder, last quarter we revived the accounting treatment for prior sale lease back transactions to reflect them as balance sheet debt rather than off-balance sheet financing. As such, we're eliminating the total obligations measure we previously used as balance sheet debt is now substantially the same as total obligations. Our primary leverage metric and target of 225% to 275% now refers to debt to equity. Debt to equity at the end of the quarter increased to 279%, that's up from 260% at the end of 2014.

Leverage increased primarily due to vehicle investments to fund growth, as well as foreign exchange. We expect leverage to be at the higher end of our target range at year end. Equity at the end of the quarter was $1.95 billion. That's up $133 million from year end 2014 primarily due to earnings, partially offset by foreign exchange and dividends.

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 for our asset management area. Used vehicle inventory held for sale was 6100 vehicles, up from 5800 vehicles in the prior year, and 200 vehicles above the second quarter. Used vehicle inventory was at the low end of our target range of 6000 to 8000 vehicles. The number of used vehicles sold during the quarter were 4400, down 12% from the prior year and down 6% sequentially. Year-to-date, we've sold 13,400 vehicles.

Used vehicle pricing growth moderated on a year-over-year basis, particularly in September when we lowered pricing as a result of somewhat slower sales volumes. Compared to the third quarter of 2014, proceeds from vehicles sold were up 5% for tractors and up 8% for trucks. From a sequential standpoint, tractor pricing was down 3% and truck pricing was down 4% versus the second quarter of 2015. With the heavy fleet replacement cycle that occurred in the overall market this year, there are significant number of 2011 and 2012 model year Class A tractors currently available. Prices on these units are under pressure due to the performance challenges with the newer engine technology. While we're not selling many of these model years ourselves, these price pressures are trickling down somewhat to the 7- to 8-year-old tractors we typically sell.

The number of leased vehicles that were extended beyond their original lease term decreased versus last year by around 620 units, or 13% year to date, and is well below recessionary levels. This reflects a lower number of leased contract expirations this year. Early terminations of leased vehicles decreased by 100 units year to date and remain well below recessionary levels.

I'll turn now to page 18 to cover our outlook and forecast. During the third quarter, we delivered solid year-over-year revenue and earnings improvement across all business segments. We're particularly encouraged by continued momentum in lease sales and fleet growth, strong rental demand, and solid performance in our dedicated and supply chain businesses. In full-service lease, we've realized strong sales activity throughout the year and have a robust new business pipeline. As mentioned earlier, for the full year we expect to achieve record lease fleet growth of 6000 to 6500 vehicles above our prior forecast range of 5000 to 6000 vehicles. We've continued to see around a third of our new truck leases coming from customers new to outsourcing. As a reminder, capital on leased trucks is only committed after the customer signs the contract with us and these contracts are generally for the full expected operating life of the vehicle.

As we look into next year, the strong lease sales, particularly those in the back half of 2015, provide nice year-over-year revenue and earnings momentum as we will realize a full year of revenue and earnings contribution in 2016 as opposed to partial year of contribution in 2015. In rental, we're pleased with the strong demand we've seen this year, which is being supported by growth in our lease and national rental customer base. Demand has been stronger in all vehicle classes, but relatively more in trucks and less so in tractors. We're seeing solid rental reservation requests from our seasonal shipping customers for November and December. We've made significant progress on our out-of-service issue and expect to fully return these vehicles to service this month with no ongoing impact into 2016. We now expect our full-year average fleet to grow -- rental fleet to grow 7% versus our prior forecast of 6%. Our outlook for rental pricing is a 3% increase for the full year.

In the fourth quarter, the average rental fleet is expected to grow by 8% with pricing up 2%. We expect year-over-year utilization comparisons in the fourth quarter to be similar to those that we saw in the third quarter, reflecting vehicles out of service in October and strong prior year-end results. We're planning for seasonal rental de-fleeting at year end, particularly for tractors, to prepare for the first quarter. We'll evaluate the demand conditions as we head into 2016 for next year's fleet planning.

We're pleased with the continued strong market interest in our new on-demand service and introduced the product to a significant number of prospects at a large carrier conference that we hosted in August. With the IT work to support the product behind us, we've expanded the sales team who can sell on demand. We also have significant opportunities to realize higher volumes within the fleets we've already signed.

In used vehicle sales we've adjusted our pricing due to less robust supply/demand conditions we saw late in the third quarter. We're in a good position to -- with lean inventories today and with a normal percent of lease expirations over the next couple years. While used vehicle prices across the board are being pressured by the supply of newer but less desirable units from a technology standpoint, prices on our older, well-maintained units are holding up relatively better.

For the fourth quarter we're assuming a further modest decline in pricing as compared to what we realized in September. Overall for the fourth quarter, we expect year-over-year gains on used vehicle sales to be down by the same magnitude as the third quarter with improved volumes offsetting lower pricing.

As we look ahead into 2016, we're likely to see lower gains on sale due to pricing. However, we should see a benefit in depreciation due to higher residual values using our five-year rolling average methodology. We are currently conducting our annual residual value analysis and will provide an earnings benefit on this on our fourth quarter earnings call. In supply chain, we're expecting modest fourth quarter revenue growth due to lower volumes while strong earnings performance trends are expected to continue. In the dedicated segment, we expect strong earnings growth in the fourth quarter driven by new sales and lower self-insurance expense.

Looking ahead to next year, dedicated revenue growth is expected to remain in the high single-digit level and benefit from several large deals we anticipate closing by year end. Our fourth quarter comparable EPS forecast is $1.72 to $1.82 versus the prior year of $1.59 or an increase of 8% to 14%. While we expect rental and used vehicle results to be as I've described this morning, the low end of our forecast range contemplates the potential for a modestly weaker environment in these areas. Our full-year EPS forecast is $6.17 to $6.29, an 11% to 13% increase from our prior year of $5.58.

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

(Operator Instructions)

The first question for today is from Mr. David Ross from Stifel Nicolaus. Sir, your line is open.

Yes. Good morning, everyone.

Good morning, David.

Just to talk about fleet management solutions a bit. The average age of your lease fleet, is that still declining, or is that kind of bottomed out in the 40-plus month range?

Actually it's declined one month this quarter, so we're down to about 38 months I think now. I think the key point though, as we've been saying the last few quarters, is the benefit related to maintenance costs from the decline is really subsided. We're kind of at a point where you're not getting that benefit that we had seen. We were back in the 54 months down to 38. So it is -- it has declined, but that's basically because of the growth. We're about 38 months.

And then when you talk about miles per vehicle per day driven, the lease fleet down about 1% year-over-year, is that kind of reflective of what you're seeing in the overall economy or with your customers in terms of general growth out there is nonexistent or flat, sluggish, slightly down? And then you guys are just growing through that? Is there something else going on with the decline in the utilization of the lease fleet?

David, it's Dennis. No, I would say it's in a normal range. I wouldn't correlate it to anything in the economy.

And then when you look at the dedicated side, you mentioned that the self-insurance issues should go away. I guess those were some bad accidents that hit your deductible level. Where do you expect them to get? I mean, they would have been 8% in the quarter absent those SIR issues. So next year are we looking at kind of an 8% plus dedicated margin as a reasonable rate off of growth?

David, it's John. With regard to our long-term targets, I think they still remain the same. We're looking at that 8% to 9% range long-term, but to your point, I think in the near term, you'll see some improvement once we get past these insurance headwinds we've had the last two quarters.

And David, I would also mention it's not just accidents in period. It's also development of past claims year-over-year since we're self-insured. That's actually been probably the lion's share of it.

Okay. Excellent. Thank you.

Thanks, David.

Thank you, speakers. Next question comes from Mr. John Mims with FBR Capital Markets. Sir, your line is now open.

Great. Thank you. Thanks for taking my questions. So, Robert, let me ask you first on the maintenance side. I understand as the lease fleet grows, the demand for the maintenance tax increases. But when you look at the longer term growth story, so much of it is about on-demand maintenance and on-site maintenance and just you're being able to serve that market. Can you go into a little more depth here in terms of the overlap between those two products, the regular way lease and rental maintenance versus what you can offer customers on a stand-alone basis? And then in terms of what you've done to fix that now, kind of where are we in that process? Are you training a bunch of new guys that have to ramp up or are you buying more experienced techs? Just anything to help us kind of understand what's going on, on the maintenance side would be really helpful.

Okay. Well, first, as it relates to some of the new products on demand and some of the new things that we're coming up with versus our traditional full service leasing contract maintenance, the most important thing I think is that it is leveraging that same infrastructure that we have, 800 shops, 5500 technicians. The changes in all the work that we did the last couple years in prepping not only the billing system but also the techs and getting them used to the idea of give an estimate for on-demand and having to document the work more thoroughly I believe is behind us. So the way that those products work together, they really leverage the same expertise and capability that we have in full service lease and rental.

I think to address kind of what happened in the quarter as it related to some of our maintenance execution challenges is really it comes down to we added over 10,000 vehicles year-over-year, which is the most growth we've seen probably in the last couple decades at one time. At the same time, we've been adding technicians but, more importantly, at the same time Dennis and his team have really been trying to drive continued productivity. We have 5500 technicians. We spend over $900 million a year maintaining trucks. So any little bit of productivity that we can get in that operation is a lot of money and Dennis and his team have really paid dividends. I mean, it's really paid off over the last couple of years, the work they have done to drive productivity.

The only thing that happened in the third quarter was we got a little bit ahead of ourselves. We were trying to drive some additional productivity while the trucks were coming in and probably overshot it a little bit. You're really talking about a very small percentage of an overshoot. It's 0.5%, right? It's about a thousand units really that we started to sit. By the time -- we thought we were going to be able to get it done in August and September, it didn't get done. We've now worked on fixing it. It's very simple to fix. Obviously, you add techs but even simpler than that, just allowing the techs that we have to work more hours, having them come in on the weekends, work overtime gets those trucks back on the road.

The good news is that most of that work's already done. By the end of October, I'm confident we'll have it all finished, probably about 80% of the way there as we sit here today. So I'm confident we can do that. We're obviously learning from this one. Won't happen again. And we are ramping up getting more of the technicians on board so that we can handle the growth that we're seeing.

That's helpful. How long does it take a new tech on average to ramp up?

John, it's Dennis. I would say to become fully productive, you're looking three months to six months, in that range, depending on the technician. Put them through training and get them familiar with the Ryder processes and so forth. In that range, three months.

Awesome. Great. Thanks, Dennis. Then as a quick followup, when I look at the supply chain revenue, big deceleration in the high tech that's been running in the high teens this quarter, the revenue growth was down in the low single digits. Is that a -- and I know you said some moderating revenue in fourth quarter, but is there anything particular that's going on in high tech that's something we should be modeling different going into 2016, or should -- is that still a kind of teens type of growing segment and there's something going on in the short-term? Thanks.

No, I think as you look back into last year, we did some network optimization, rationalization for customers, so you're seeing some of that benefit this year to that customer base, but nothing that we're seeing in the technology sector.

Great. So you're looking at just kind of mid single-digit revenue growth for the whole suite of services and supply chain?

Yes.

Great. All right. Thanks a lot.

Thank you, speakers. Our next question comes from Mr. John Barnes with RBC Capital Markets. Sir, your line is now open.

Thank you. Thanks for taking the question. A couple things here. Number one, going back along what John just asked in terms of getting the technician side of it corrected, could you provide us a little color as to how you got behind and why? You kind of have been ramping up the growth forecast all year. I think if I go back and look, every call it's been a little bit more growth on the lease fleet. Knowing that that was coming through and knowing that you've done this for as many years as you've done it, what part of the process broke down that allowed you to get this far behind and why was it so easy to correct?

Well, I think the issue was we knew we were somewhat behind for a few months. However, we felt pretty comfortable that we were going to be able to get the productivity out of the techs in August and September and get the vehicles fixed. It didn't happen. I think what we're learning is, remember, we're trying to manage productivity for 5500 techs who are maintaining new technology vehicles. And the team has over the last several years really driven more and more productivity, which has helped us offset some of these higher maintenance costs that you see in the technology. We got to a ceiling, if you will. We got to a point we realized, wait a minute, that's it. It's not going any further.

To give you an idea of what we're talking about, you're talking about one half of 1%. You're talking 1000 vehicles on over 200,000 vehicles that we maintain. And we really thought that we could squeeze a little bit more out of the team and get it done. It didn't work out. So we know now this is the limit of what we're going to based on the mix of vehicles that we have, and we're making that correction. And the reason why it was easy to maintain is once you realize that doesn't work, you just open up --

Over time.

-- over time and allow them to do maintenance in other ways. So, I don't want Dennis and the team to take their foot off the pedal when it comes to continuing to drive productivity, but clearly we got to a point here with all the initiatives that we got going on, that we got a little bit ahead of ourselves.

Okay, and I guess we've gotten a lot of questions around the ability to grow the on-demand product maybe as quickly as you want. Is there any limitation there? Look, if you're existing techs are fully productive, you're having to open overtime, is the opportunity as profitable if they are having to do it via overtime or do you see having to maybe -- where we thought before this on-demand rollout was leveraging the existing technician base, is there going -- have to be a step up in the technician base in order to handle whatever you do on the on-demand side?

Well, remember, the strategy around on-demand isn't so much to leverage the technician base, it's to leverage the infrastructure, the management, the locations, all of the infrastructure that supports them. For every -- the rule of thumb is for every 35 or so vehicles you add in full-service lease or rental, you're going to add a technician. That's just the productivity and the capacity. So I expect that to continue. We've been adding techs, a lot of techs over the last few years. As we continue to grow, we expect to continue to add techs. I think that's a good thing because at the end of the day, that's really our product.

Those guys are great at what they do and leveraging their expertise in an environment that has gotten much tougher for folks that are trying to do this on their own is very important. And I think it's important also to say that the issues we're having are not related to an inability to find techs. We can find them. It's just -- this was just a real drive to get more productivity as we've been doing year after year after year and gotten to a point we realize we've got to back off a little bit. Dennis, I don't know if you want to add--

John, I would add to that. Obviously it is more profitable to serve these customers without having to use the overtime. So what we're looking at is what's the technician model that we need for all the growth that we're staring in the face of and that's changing as we put out in the press release, we're looking at that and looking at how many techs we need because we want to serve those customers without having to use an exorbitant amount of overtime. So, that's exactly what we're looking at right now.

Okay. Alright. That makes sense. Lastly, the more -- I guess the pieces of business that are viewed as more economically sensitive between the rental piece and the used equipment, could you talk a little bit about -- have you been able to parse out between how much of your rental growth has been with existing customers or lease customers that are coming on line that you're having to backfill until the lease equipment comes in and then can you talk -- have you been able to parse that out? And what percentage of it is coming from just a pure lease customer -- I'm sorry, rental customer and what are you seeing in those trends? And then maybe the same on used equipment. Is it more of a macro issue or is this a Ryder-specific equipment mix, less equipment available, just how do you parse it out between the macro implications and what's Ryder-specific?

I'll let Dennis elaborate a second, but I think to answer broadly the growth that we're seeing in rental, a lot of it is coming from national rental customers and also additional lease customers as we add more customers to our portfolio, and I would think not only lease but on demand and these other products that we're bringing out. So we're seeing that. We're certainly seeing more of the demand growth. I mentioned in my statements from -- right now from straight trucks versus tractors but in the third quarter really they both grew. But I think that's really what's driving, what's driving that demand. I don't think that is a Ryder-specific phenomena. I think if you look at other companies that are renting the same types of vehicles as we are, you're going to hear some of the same things.

On the used truck side, it is clearly not just a Ryder issue. I think what you have there is an oversupply of a certain number of vehicles -- a certain type of vehicle. Primarily it's the 2011s and 2012 tractors that have had some more challenges around technology, a little less desirable. So other companies that are selling those, we don't have a lot of those that we're selling at this point. We're selling mostly 2009 and 2010, but as they have lowered the prices to try to move those vehicles, they have had some trickle-down effect on our vehicles. And we've made those adjustments to our pricing in the third quarter that we expect now to see us get some additional volumes in the fourth quarter. So Dennis, I don't know if you want to add?

John, let me just provide a little quantification for what Robert described earlier. So when you look at our rental revenue in the third quarter, 40% of it was for lease support, 40% of it was for national customers, and 20% was for local customers. So you've got 60% that's for what we call pure rental where it's not associated with a lease support customer, and when you look at what's growing, frankly national and local are growing. So you got lease support that's growing double digit. You've got national that's growing double digit. And you've got local that was growing high single digits. Now, that's with the US. Just gave you US growth. Globally, the growth was a little less what globally ex-FX we are at 9% in the US, we're up 12%. So, to answer your question, national's growing nicely. Local's growing as is lease support as the lease fleet grows.

Okay, alright. That's great color. Thanks so much for your time today.

Thanks, John.

Thank you. Our next question comes from Ben Hartford from Baird. Your line is now open.

Hi, good morning, guys. Robert, maybe thinking about next year FMS margins, I think the last quarter you had talked about confidence in exceeding prior peak margins in FMS given the growth that you had seen. With used truck pricing and values taking a step down in the third quarter and probably this baseline being the appropriate one that we should think about for the foreseeable futures until we lap those comps, obviously full service lease fleet growth is growing above expectations, you've got the offsets you talked about with regard to residuals next year so a lot to be determined, but how should we think about your confidence or what is your confidence as it relates to exceeding prior peak margins in FMS given the growth, given some of the takes that we have this quarter?

Yes, if you think about margin percent, the EBT percent, we're going to have some headwinds from gains because obviously gains impact the bottom line down without changing the top line. But let me -- without giving you a forecast or guidance for 2016, let me just maybe go through a few of the puts and takes as I see them today for 2016 just to kind of put things in perspective.

First, I want to make sure we're clear that we have not seen any change in all of those secular trends that we've talked about for the last several years about outsourcing really being in favor, the fact that we're in the outsourcing business for fleet and supply chain which are two things that are becoming more complex due to regulation and the search for cleaner air and safer roads. I don't see that changing and it is getting a lot tougher for those do-it-yourselfers, that 90% of the market. Our lease fleet growth was 7400 units in the quarter. That's the most in at least the last couple decades. We expect as we get into 2016, I would tell you I would expect that even with a declining OEM production I would expect us to continue to grow our lease fleet.

Why is that? Well, because of the secular trends that we just talked about. I see -- I think we're in a time where the relationship between lease sales and OEM production is changing and it's going to decouple. And if you think about that in terms of for next year, tail wind, if we're able to grow 5000 to 6000 units, if you just do the simple math on that in terms of margin at a 30%, you're looking at about $30 million of incremental profit just on the growth side. We continue to see good success in upselling customers to dedicated. Remember, that adds four to five times revenue, two to three times the profit. I expect to see that top line growth that you saw this quarter to continue to be there, maybe even increase.

Pipeline is very strong both in lease and in dedicated and in on demand. If you look at the sales that we're seeing in lease today, those units are probably not going to hit us until the beginning of next year. So you're going to have a full year of revenue for those. In all the units that we've serviced in the last two quarters, you're going to have a half a year, so we already have a lot of this stuff somewhere on the lease side. And again we still have a very strong pipeline. A lot of customers that are coming to us looking for solutions to some of their fleet headaches.

On the rental demand side, I think we still are seeing good year-over-year growth, especially around the trucks. We're seasonally de-fleeting in the fourth quarter to prepare ourselves for what is always a lower, seasonally lower first quarter. If the demand does soften, we are well positioned to down size the fleet quickly as we did in 2012. You've got low used truck inventories. We've got our centralized asset management process that we've added this rental to lease program, which by the way we have already stepped up in case things do soften. And we also can limit our rental CapEx for next year.

I think it's clear we're going to spend less on rental this year than we did last year. You should see us be able to make that decision here over the next couple of months. Again, we have levers that we can pull to adjust if that does happen.

Okay. That's good. So you addressed a lot in there. The second part of the question was just about your confidence to growth next year and going forward if we're in a declining market. I guess if we go back to the prior cycle of 7, build was down, but you guys still grew the fleet. That was probably a function of some of the wins later in the cycle layering on, but the point is you feel confident that this environment can be a little bit different, you have traction with new customers that can support a decoupling of that growth? I just want to clarify that remark.

Absolutely. Absolutely. We -- I do feel that. I do feel -- just based on what I'm seeing and the conversations we're having with customers, I don't see that slowing down because I think that this secular trend that's really helping us is going to continue.

I think on the flip side, I would tell you that clearly the used truck side we've seen some sequential softening. I believe that's more, like I mentioned earlier, a rise in the supply. We're forecasting now for the fourth quarter about a 7% drop in proceeds, in pricing relative to our Q2 peak, if you will. That's probably consistent with what you're hearing from some of the industry research firms. So just to put that in context, we sell about $400 million. If you look at our cash flow statement, we're doing about $400 million in proceeds. So, 7% puts you around $28 million, $30 million.

As I look at that and I say, alright, I'm going to absorb some of that this year in the third and in the fourth quarter, I'm probably looking at $20 million next year of some headwind just if the pricing is there. If it goes down more, maybe $30 million. As I look at that, even though we have not finalized, I got to caveat this, we haven't finalized our depreciation policy analysis, looking at a five-year rolling average I think it's reasonable to assume that our depreciation policy benefit would mostly offset something of that magnitude, right. So you would -- the benefit in depreciation expense should mostly offset a reduction of that range, 7%, I would say even 5% to 10% mostly or partially offset.

So the question then is the headwind that we have in UVS, which again even if it got a little bit worse, the rental uncertainty, and then the positives around the rest of our business, the net of all of that I still think is going to be good revenue and earnings growth in 2016. We're not ready to say how much, but I think especially given our ability to also be able to manage overheads, that's really the way I would see the business going into 2016, again without giving you all the numbers. We'll be ready to do that in February.

Got it. That's helpful. Thank you.

Okay.

Thank you, speakers. Our next question comes from Scott Group with Wolfe Research. Your line is now open.

Hi, guys. Good morning, thanks. So I think those last couple questions were the crux of what we need to know. So I just want to make sure I'm understanding everything. You're saying that you think based on what you're seeing in used truck pricing right now, gains on sales down in the order of magnitude of $30 million seems fair for next year and you think you can offset most of that with residual value benefit?

Right. Scott, I think what we're saying is that if you think about a price decline in that 5% to 10% range, gains are going to drop let's say roughly $30 million. Some of that we've absorbed already in the second half of this year. The remainder will be absorbed next year. And what we're saying is that in that environment we would expect our residual value uptick to probably offset the decline that's going to occur in 2016. Some of the $30 million has been realized obviously in the takedown in UVS in the third quarter and fourth quarter. The remainder would come through in 2016.

I think if you look at the numbers would be this year, we had a residual or depreciation policy benefit of about $40 million. It's not going to be $40 million next year.

And the year before was $25 million.

And the year before it was $25 million. So you start to think about a $20 million, $25 million benefit, I think that's reasonable. We haven't finalized it get though, so I can't commit to anything. It's really what we're seeing this sort of likely to play out.

And, Robert, are you still of the belief that you can get back to that 13% kind of past peak margin or better than that or given the changes in the used truck market, is that unrealistic now?

I think we can get back. I think the timing of it is going to change. I think it's going -- certainly going to be tougher to get back next year if we have a headwind of call it $20 million, $30 million in used vehicle sales because if you think about it, the total revenue for FMS is probably $4 billion next year, probably somewhere in that range. So if you've got headwind of $20 million, that's 50 basis points right there.

Yes. Just last thing. On the leasing fleet for next year, you said we can grow 5000 to 6000 units. Is that kind of a good ballpark or bogey to be thinking about for next year on the leasing fleet based on what you see in the sales side right now?

It's probably early. I'm using that as what kind of what we started this year, but, yes, what I will tell you I would expect those to continue to grow even in an environment that is declining.

Scott, this is Dennis. I would just add to that. When you look at our term outs heading into next year, they are actually down and we're not pulling back on our sales and marketing as we may have historically. In fact, we're going to increase it. So, what's going to happen is we're going to free up people to do more hunting, so we're driving for more fleet growth.

Got you. Alright. Thank you, guys.

Thank you, speakers. Our next question comes from Jeff Kauffman with Buckingham Research. Your line is now open.

Thank you very much. Hi, guys. I mean, first of all, congratulations. It is a tough environment out there and you got hit by some odd things. I want to go back to the larger question here. You're growing and you're signing new contracts yet cash flow year-to-date isn't any better than last year. I'm starting to see mileage per unit on your rental side down, I think 1% year on year you're talking about, and I'm looking and a couple years ago the rental fleet relative to the lease fleet was about 31% yet today that's up to 34%. So the rental fleet's grown in relation to lease fleet and I know you said some of that is -- a fair amount of that is full service lease support, but is the disconnect here that the vehicles are more expensive and we're not necessarily pricing those vehicles so that cash flow is up the way our capital spending up or should I think of it more as you guys see what's in the pipeline, we don't and we're going to see that cash flow start to catch up to the spending?

I'll let Art address it in more detail. But I think, Jeff, I think the key thing is that we have a rising rate of growth in our fleet. So we grew -- remember, two years ago we grew our lease fleet 1700 units.

Right.

Last year we grew at 3200 units. This year we're growing 6000 to 6500, so double. So, the issue is every one of those additional vehicles I buy is another call it $90,000 to $100,000 of CapEx. So, the earnings being generated, the cash earnings being generated get offset pretty quickly by the growth that we're seeing. So, that's the big -- I think the biggest part of the story.

I think also clearly, you know, you can't lose sight of the fact that over the last several years we have had some headwind from maintenance costs that has put pressure on earnings, earnings from that standpoint. The offset has been we've also been selling vehicles for a lot less than what we had expected. So net-net there -- they have been offsetting each other. I would expect that for more than we expected, for more than we expected. So I would expect that even with the slowing UVS environment that's still going to continue relative to what those vehicles used to go for before. So, I think the net of all of that is you're getting the free cash flow. The timing of it might be a little bit different, but the biggest headwind that we have on free cash flow is the growth. And if the growth were really to temper down, you would see that improve.

Right. So if I kind of read between the lines on what you're saying, I should probably see that ratio of rental vehicles to lease vehicles start to slide back down again and you mentioned rental CapEx will be a little lower next year. Should I in theory see total capital spending start to pull back a little bit then even though the full service lease fleet is still going to be growing at a good clip?

It depends how much we -- how much growth we're able to get, right? If we're able to get more growth than we did today, I think it's reasonable to assume that rental spending will probably be less. Now, if I end up growing lease the same clip that I grew at this year, yes, net will be less because you won't have an offset. If I grow it more, then it could offset what I'm going to save in rental.

What I would tell you though on that rental growth outpacing lease, we have -- what we monitor is rental revenue as a percent of total FMS revenue and we've always talked about we keep it in a range of 20% to 25%. What you're pointing out is true. We're now in the high end of the 25% but we don't have any intent, never had an intention of going beyond that. So anything over time that number will start to come down.

Alright. Go ahead.

Jeff, I would keep in mind, try to highlight to everyone that operating cash flow is a good metric. That really shows that we're getting the cash back from this gross spending. You can see that's grown substantially over the last five to six years. It's going to be up again this year. You look at our EBITDA, that's also up. That's reflecting the earnings or the cash flow that the business does generate. It goes back to Robert's point. We're growing faster every year the last few years and that really impacts that free cash flow metric. If you think about this year, we got growth capital the way we measure it at $1.1 billion, $1.2 billion and that's really what's driving that negative free cash flow.

Guys, thank you.

Thank you.

Thank you, speakers. Our next question comes from Kevin Sterling with BB&T Capital Markets. Your line is now open.

Thank you. Good morning, gentlemen.

Good morning.

Robert, you talk about the technicians and you're ramping up. Where do you hire your technicians from? Do you hire within the industry or can you go outside of the industry to bring on technicians?

Kevin, it's Dennis. I'll take that one. There's really three sources that we look at. First is obviously the trade schools where we have good relationships. We've got a great relationship also with the military. We've had great success there in bringing our folks home and giving civilian jobs. And then we promote from within.

We take people who are on the fuel island who want to become technicians and we take them through our training program and bring them in as what we call our first level technician and give them an opportunity to grow from there. Those are our three sources and we do pretty well at recruiting folks. As Robert said earlier, we haven't had a problem staffing and we don't anticipate seeing that. It's just a matter of us balancing the productivity we're going to get with the fleet growth we're going to get and then bringing the technicians on at the right time.

Great. Okay. Thank you, Dennis. And, Robert, a lot of talk about the used truck market. I think it was a couple years ago you had to move some of your, I think some of your rental inventory into the wholesale market and the wholesale channel. And do you envision -- do you think you have to do that this time if the used truck market continues to slow or kind of you're at a balance with your inventory where you can continue to sell through the retail channel?

Obviously, with low inventory levels, we have a lot more options in terms of being able to sell more, continue to tell sell more through retail. The period you're talking about was probably the time we had 9000 to 10,000 vehicles in inventory. Think about it, we only have about 6000 now. And in that environment, yes, you had to find other channels. But I think the combination of low inventory levels in used trucks and all of the asset management programs that we have in place, particularly our ability to lease trucks out of our rental fleet and really ramping that up really can help us adjust the size of the rental fleet pretty quickly and without having to maybe leverage the wholesale market.

Okay, Robert. Thanks so much. Gentlemen, thanks so much for your time today.

Thank you, Kevin.

Thank you, speakers. Our next question comes from Tom Kim with Goldman Sachs. Your line is now open.

Good morning, gentlemen. Thanks for the time here. I wanted to ask with regard to the leverage, you're obviously at the high end of your target and I'm wondering to what extent does the balance sheet become an inhibitor to growth? I guess how much -- how willing are you to let the load sort of -- debt load sort of exceed the sort of target range?

Well, Tom, I would tell you, our business just tends to de-lever over time. This year is a little bit of an anomaly because it impacted by FX, which is an unusual item. We don't expect that to continue. And even pension has worked against us to a certain extent. So for our business, really negative free cash flow is almost needed to require the business to maintain current leverage at 250 to 275. So that's why over time, you've seen us go down well below target.

So I think right now, really not concerned. We can more than handle the kind of growth that we've been talking about. This year, we've grown the lease fleet 6000, 6500 units, grew rental 2000 plus. So, we'll be able to handle that still within target range.

That's helpful. I guess just with regard to M&A, how should we think about your potential opportunities to seize on anything that does come along that would be interesting? What sort of ways would you be considering opportunistic M&A that were to come along?

I think if you look at the type of M&A we do in FMS is really more of a roll-up and tuck-in of smaller competitors, companies. I would see us being able to continue to do that without a hitch. Around supply chain, again, it's been more around and dedicated, going to be more around new capabilities or new verticals that we may want to get into. Again, not very large acquisitions. So, I don't see us really being inhibited there.

Obviously, if we found something great that was extremely compelling, we could always issue equity if you needed to. I don't see us doing that. I think the majority of the acquisitions that we do are smaller tuck-ins and roll-ups that we can handle.

Just a follow on to that, obviously there's -- you've been really focused on organic growth and you've been growing very nicely to this point. Is that -- has this been more of a deliberate sort of approach, just a focus on organic growth opportunities as opposed to letting some of the opportunities sort of pass, or is it just there haven't been as many opportunities for you?

No, it hasn't been one or the other, it's just been what's available, but I got to tell you what's exciting about our business is that we're not relying on acquisitions, right. We're in an environment that is really healthy for sales and for growth and I'll take that all day. That's actually I think the easiest and best way to do it, but we also have the capacity if acquisitions come up, we're going to do them. But, as you know, there hasn't been anything, especially in the FMS side, there really has been no M&A activity. If something does come up, we're certainly going to be in the game.

And on the logistics and dedicated side, anything that we are looking for hasn't come up either. So that's really the environment. That's really why I think we're fortunate to have the organic growth environment that we're in.

That's great. Thanks, guys.

Thanks, Tom.

Thank you. Our next question comes from Todd Fowler of KeyBanc Capital Markets. Your line is now open.

Great. Thanks and good morning. I just wanted to follow up I guess on the leverage question. I guess realistically, how much do you -- how much would you expect to be able to deleverage maybe going into 2016, assuming maybe 2015 is kind of the peak from a lease writing activity and the lease growth starts to slow a little bit. How much can you deleverage just by seeing less CapEx? And then what level of leverage would you need to give back to resume the anti-dilutive share repurchase?

Todd, it's hard to say exactly probably. Similar kind of free cash flow. We would expect to de-lever because you don't expect the FX headwinds and hopefully not the pension headwinds. You may go down 15, 20 points I would say at most in one year. Over a period of time, our business would de-lever much more than that.

So I think relative to your question about share repurchases and the like, typically that's not going to happen until we're well under our target leverage range to do any kind of discretionary. I think on the anti-dilutive we're going to look at that. Every quarter we've been looking at that on whether to reinstate that. I would expect once we're within our target ranges we would probably turn that back on.

Okay. That's helpful, Art. One quick followup, if I could. Did you give an estimate of what you think the impact of the out-of-service vehicles were on rental utilization in the quarter, so the 76.4, if you didn't have the out of service issues, do you have an idea of where rental utilization would have been excluding that?

Well, look, the way I would look at it, if you look at the combined number of units that are out of service is close to 1000. So 1000 units on our fleet of 35,000 is probably about 3 percentage points.

Okay. I can work into some of that math. Seems like you would have been maybe up a little bit from a utilization standpoint versus the third quarter of last year then?

Yes. It gets a little tricky because some of those lease units in a are being substituted, it's actually helping utilization -- it's in the utilization number. It would be right around where we were last year. I would say flat with last year.

Okay. That helps, Robert. Thanks for the time this morning.

Okay. Thanks.

Thank you, speakers. Our next question is from Matt Brooklier with Longbow Research. Your line is now open.

Thanks. Good morning. So a question on your seasonal rental business. How much visibility do you have there on the portion of the business that's more transactional, I guess the national account and the local accounts versus the rental trucks that go to support the lease business?

I think -- I mentioned it in the script. We are seeing strong rental reservations from our seasonal customers as you might imagine, the guys that are ramping up for the holiday, the parcel-type companies, for November and December. So as we get into that season, the units are available, we would expect to have those units rented out to those folks. So I would tell you what we're seeing is good, strong reservation activity from those customers. If anything, it might have been -- the only thing maybe different from last year, some of it might be a little bit later than we saw last year but -- which last year they picked them up sooner in the quarter, but we're looking at November and December.

Okay, and any thoughts -- it sounds like the straight truck portion of the market is feeling stronger versus the tractor portion. I think that runs also into your rental business you saw similar trends. Any thoughts as to what's driving I guess greater demand or less supply in the straight truck portion of your business versus the class 8's?

Some of it is seasonal. Like this time of year you got the parcel company that's going to pick up more of the straight trucks than the tractors but it could be various things. I think what we're doing is we're kind of viewing it as an opportunity to really de-fleet and get ourselves prepared for the first quarter. So we're in the process of doing that with the rental lease program and then also with some of the things that we're doing around out servicing vehicles and putting them at the used truck lots.

Okay. Appreciate the time.

Thank you.

Thank you, speakers. Our next question comes from Justin Long with Stephens. Your line is now open.

Thanks, and good morning, guys.

Good morning.

You've talked about some longer-term objectives for revenue growth by segment, some targeted annual improvement in margins. When you put together all the pieces, it seems to imply double-digit earnings growth. Over the longer term, do you still think that's a good framework for thinking about the business even if you take a more pessimistic view on the used truck market the next couple of years?

Yes, I do. I think we've said high single-digit generally on the top line and I would expect to get some leverage and get double-digit growth on the bottom line. Obviously, if you've got some headwind on the gains line, that's going to put some pressure, maybe bring it down, maybe bring it down to the low end of the double digit, maybe even high single digit, but I would expect over the cycle clearly to have double-digit earnings growth along with that high single-digit top line growth.

Okay. That's helpful. I know it's been a long call, but the last question, I was wondering if you could talk about the role you think Ryder can play in the eCommerce trend. Maybe you could talk about the exposure you have to eCommerce today and looking ahead, you know, what opportunities you see across your businesses?

I think there's -- I'll let Steve kind of elaborate on that a little bit but I think clearly on the -- wherever there's trucks needed, we can play a role on the FMS side and with all the different product offerings that we have which eCommerce, certainly all the deliveries to homes is a big part of that. On the logistics side, I think there's a lot of stuff. If you think about the offerings that we have running distribution centers, our ability to manage orders from customers and really what is called the omni-channel, our ability to actually execute that for customers that need it, we've got great expertise and capabilities there, but I'll let Steve elaborate a little more on that.

I would just add, we do that today for many of our customers across multiple verticals. We have the capability to not only deliver into retail DCs but into store fronts through (inaudible) networks and last mile as well as to consumers' homes. So, I think we've got a really good model right now for our key customers and we're going to continue to focus on additional capabilities to expand that.

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

Thanks, Justin.

Thank you. Our next question comes from the line of Casey Deak with Wells Fargo. Your line is now open.

Thank you. Good afternoon, guys.

Hello.

Just wanted to go back. When you talked about the rule of thumb, Robert, of 35 vehicles to one tech being hired, have you seen that compress over time as you've rolled out on-demand maintenance and more transactional businesses? And then more strategically when you're looking at that transactional piece of the business, how are you modeling out the staffing needs there? I would think that that would be a lot harder to know how many techs you would need within the uncertainty of how many trips those trucks are going to be making to your shop.

Well, the -- what I would tell you is the number over the last several years has actually grown as we've improved productivity. You're getting more trucks per technician on our base fleet. On the on-demand stuff, you're right. It's a little trickier, but you have a general idea of where the trucks are. And you also -- the amount of work that a technician does in an on-demand truck is typically a lot -- significantly less. So that's where you're able to leverage some of the capabilities.

When we get a large on-demand customer though, we have an idea -- we'll have a contract and we'll know where the vehicles reside and when we need to staff up, then we staff up and we can adjust that as needed. Dennis, do you want to add anything to that?

Yes, I would just add that as we're viewing it, as we bring a technician on, if the on-demand revenue, if the truck doesn't come in, we're looking at the technician running more road calls, which our customers like versus using a third party. We're looking at rather than sending work down the road to a vendor keeping it in-house. We're looking at increasing our PM currency even more. We're looking at lowering overtime. So the point, is you can bring the technician on. There's a lot of work to be done, which then you can free that up if the on-demand truck comes in.

You have other ways of flexing.

Right.

To be able to utilize the tech.

Okay. I guess what I was -- that's helpful. I was just thinking if this business really does ramp as you would expect it to with the full rollout and continues over the next few years, is this something that three or four quarters down the road you get more of a backup in your maintenance as you did in this quarter or do you feel much more comfortable with where you are and your level of staffing and ability to flex that? Thanks.

Yes, I think obviously this quarter has taught us a lesson, so we're obviously looking at the modeling, but I don't see an issue with where we're going of maintaining the staffing and the work is there to flex as more on-demand comes in. So we see real opportunity to continue growing this product line.

Okay. Thank you, guys.

Thank you.

Thank you. Our next question comes from [Nicole Grine] of [Talk Point]. Your line is now open.

Okay. Is Nicole on?

Yes, but his or her line isn't speaking right now. Sir, at this time, I would like to hand the call over to Mr. Robert Sanchez.

Okay. Well, sorry about that, Nicole. Maybe we'll pick up your question later. Well, listen, I think that concludes the call. We're about 15 minutes past the top of the hour. I wanted to make sure we got everybody's call -- everybody's question in considering the type of quarter that we had. So look forward to our call again in a few months as we discuss 2016. Anyway, have a safe day and we'll see you on the road.

Thank you, speakers. And that concludes today's conference. Thank you all for joining. You may now disconnect.